<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1999.
Commission File No.1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Debtor-in-Possession as of March 27, 1999)
(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 (MAILING ADDRESS)
7100 SERVICE MERCHANDISE DRIVE, BRENTWOOD, TN 37202-4600
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 660-6000
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 [ ].
As of October 31, 1999, there were 100,022,105 shares of the
Registrant's common stock, $.50 par value, outstanding.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
<S> <C>
PART I FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited) - Three and Nine
Periods Ended October 3, 1999 and September 27, 1998.........................................................3
Consolidated Balance Sheets - October 3, 1999 (Unaudited), September 27,
1998 (Unaudited) and January 3, 1999.........................................................................4
Consolidated Statements of Cash Flows (Unaudited) - Nine Periods Ended
October 3, 1999 and September 27, 1998.......................................................................5
Notes to Consolidated Financial Statements (Unaudited).........................................................6
Management's Discussion and Analysis of Financial Condition and Results of Operations.........................14
Quantitative and Qualitative Disclosure about Market Risk.....................................................23
PART II OTHER INFORMATION
Legal Proceedings.............................................................................................24
Defaults Upon Senior Securities...............................................................................24
Exhibits and Reports on Form 8-K..............................................................................24
SIGNATURES ..............................................................................................................25
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited)
(Debtor-In-Possession)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Periods Ended Nine Periods Ended
--------------------------- ---------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales:
Operations excluding closed facilities as a result
of restructuring and remerchandising activities $ 364,547 $ 425,256 $ 1,135,372 $ 1,325,052
Closed facilities as a result of restructuring and
remerchandising activities 1,938 179,731 259,886 559,229
----------- ----------- ----------- -----------
366,485 604,987 1,395,258 1,884,281
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of merchandise sold and buying and occupancy expenses:
Operations excluding closed facilities as a result
of restructuring and remerchandising activities 282,477 321,512 872,575 987,929
Closed facilities as a result of restructuring and
remerchandising activities 3,609 145,221 258,264 451,433
----------- ----------- ----------- -----------
286,086 466,733 1,130,839 1,439,362
----------- ----------- ----------- -----------
Gross margin (loss) after cost of merchandise sold and
buying and occupancy expenses:
Operations excluding closed facilities as a result of
restructuring and remerchandising activities 82,070 103,744 262,797 337,123
Closed facilities as a result of restructuring and
remerchandising activities (1,671) 34,510 1,622 107,796
----------- ----------- ----------- -----------
80,399 138,254 264,419 444,919
----------- ----------- ----------- -----------
Selling, general and administrative expenses:
Operations excluding closed facilities as a result of
restructuring and remerchandising activities 97,694 127,144 318,945 363,662
Closed facilities as a result of restructuring and
remerchandising activities 5,880 39,640 91,045 100,967
----------- ----------- ----------- -----------
103,574 166,784 409,990 464,629
----------- ----------- ----------- -----------
Other income, net (39,726) (831) (47,192) (11,120)
Restructuring (credit) charge (14,153) -- 83,407 --
Depreciation and amortization:
Operations excluding closed facilities as a result of
restructuring and remerchandising activities 9,720 10,518 30,429 32,026
Closed facilities as a result of restructuring and
remerchandising activities 89 3,390 2,482 10,575
----------- ----------- ----------- -----------
9,809 13,908 32,911 42,601
----------- ----------- ----------- -----------
Reorganization items (See Footnote E) 4,370 -- (8,002) --
----------- ----------- ----------- -----------
Earnings (loss) before interest, income tax and
extraordinary item 16,525 (41,607) (206,695) (51,191)
Interest expense - debt (contractual interest $18,308
and $61,882 for the three and nine periods ended
October 3, 1999, respectively) 11,290 17,709 46,378 53,352
Interest expense - capitalized leases 1,268 1,642 4,041 5,115
----------- ----------- ----------- -----------
Earnings (loss) before income tax and extraordinary item 3,967 (60,958) (257,114) (109,658)
Income tax benefit -- (22,860) -- (41,122)
----------- ----------- ----------- -----------
Net earnings (loss) before extraordinary item 3,967 (38,098) (257,114) (68,536)
Extraordinary loss from early extinguishment of debt -- -- (7,851) --
----------- ----------- ----------- -----------
Net earnings (loss) $ 3,967 $ (38,098) $ (264,965) $ (68,536)
=========== =========== =========== ===========
Weighted average common shares - basic and diluted 99,724 99,701 99,720 99,702
=========== =========== =========== ===========
Per common share:
Net earnings (loss) before extraordinary item $ 0.04 $ (0.38) $ (2.58) $ (0.69)
Extraordinary loss from early extinguishment of debt $ -- $ -- $ (0.08) $ --
----------- ----------- ----------- -----------
Net earnings (loss) - basic and diluted $ 0.04 $ (0.38) $ (2.66) $ (0.69)
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Debtor-In-Possession)
(in thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
--------------------------
October 3, September 27, January 3,
1999 1998 1999
----------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 36,923 $ 54,452 $ 133,749
Accounts receivable, net of allowance of $19,090
(See Footnote I), $2,144 and $2,999 respectively 18,742 48,767 38,098
Refundable income taxes -- 27,311 10,769
Inventories 772,299 1,044,170 896,303
Prepaid expenses and other assets (See Footnote H) 78,666 18,282 24,379
Deferred income taxes -- 22,478 --
----------- ----------- -----------
TOTAL CURRENT ASSETS 906,630 1,215,460 1,103,298
=========== =========== ===========
Property and Equipment:
Owned assets, net of accumulated depreciation 359,057 476,964 439,710
Capitalized leases, net of accumulated amortization 14,012 27,819 21,297
----------- ----------- -----------
TOTAL PROPERTY AND EQUIPMENT 373,069 504,783 461,007
----------- ----------- -----------
Other Assets and Deferred Charges 62,281 59,205 62,590
----------- ----------- -----------
TOTAL ASSETS $ 1,341,980 $ 1,779,448 $ 1,626,895
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Liabilities Not Subject to Compromise
Current Liabilities:
Notes payable to banks $ 203,633 $ 65,000 $ 156,000
Accounts payable 112,833 398,454 228,373
Accrued expenses 166,404 202,099 224,813
State and local sales taxes 16,008 21,362 1,726
Accrued restructuring costs - current -- 12,581 7,864
Current maturities of long-term debt 1,000 21,281 220,041
Current maturities of capitalized lease obligations -- 8,545 8,501
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 499,878 729,322 847,318
----------- ----------- -----------
Long-term Liabilities:
Accrued restructuring costs -- 52,834 45,297
Long-term debt 98,500 685,486 467,192
Capitalized lease obligations -- 43,417 41,193
----------- ----------- -----------
TOTAL LONG-TERM LIABILITIES 98,500 781,737 553,682
----------- ----------- -----------
Liabilities Subject to Compromise (See Footnote D) 784,371 -- --
----------- ----------- -----------
TOTAL LIABILITIES 1,382,749 1,511,059 1,401,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (See Footnote I)
SHAREHOLDERS' (DEFICIT) 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 1,100 shares, none issued -- -- --
Common stock, $.50 par value, authorized 500,000 shares, issued and
outstanding 100,022, 100,356 and 100,340 shares, respectively 50,011 50,178 50,170
Additional paid-in capital 4,965 7,721 7,680
Deferred compensation (800) (2,170) (1,975)
Accumulated other comprehensive loss (869) -- (869)
Retained (deficit) earnings (94,076) 212,660 170,889
----------- ----------- -----------
TOTAL SHAREHOLDERS' (DEFICIT) EQUITY (40,769) 268,389 225,895
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY $ 1,341,980 $ 1,779,448 $ 1,626,895
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Debtor-In-Possession)
(in thousands)
<TABLE>
<CAPTION>
Nine Periods Ended
-------------------------
October 3, September 27,
1999 1998
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(264,965) $ (68,536)
Adjustments to reconcile net loss to net cash used in operating activities:
Extraordinary loss from early extinguishment of debt 7,851 --
Depreciation and amortization 41,777 46,931
Provision for bad debts 16,091 (1,312)
Gain on sale of property and equipment (28,357) (11,120)
Provision for restricted cash 8,819 --
Write-down of property and equipment due to restructuring 16,809 --
Reorganization items (8,002) --
Changes in assets and liabilities, net of special items:
Accounts receivable - net 465 (4,325)
Inventories 119,804 (114,352)
Prepaid expenses and other assets (46,349) (1,453)
Accounts payable 75,209 (83,781)
Accrued expenses and state and local sales taxes (4,146) (39,322)
Accrued restructuring costs 48,175 (10,827)
Income taxes 10,769 (27,311)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (6,050) (315,408)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (10,540) (30,653)
Proceeds from sale of property and equipment 47,978 31,045
Proceeds from sale of property and equipment - reorganization 4,592 --
Restricted cash and other assets, net (2,709) (23,955)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 39,321 (23,563)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 47,633 65,000
Repayment of long-term debt (148,175) (28,468)
Repayment of capitalized lease obligations (5,244) (6,390)
Debt issuance costs (18,574) (846)
Debt issuance costs - reorganization (3,750) --
Exercise of stock options (forfeiture of restricted stock), net (1,987) (42)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (130,097) 29,254
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (96,826) (309,717)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 133,749 364,169
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 36,923 $ 54,452
========= =========
SUPPLEMENTAL DATA:
Cash paid (received) during the period for:
Interest $ 38,687 $ 52,600
Income taxes $ (18,903) $ (17,300)
Reorganization items - professional fees and administrative items $ 14,970 $ --
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE PERIODS ENDED OCTOBER 3, 1999
A. BASIS OF PRESENTATION
The consolidated financial statements, except for the consolidated
balance sheet as of January 3, 1999, 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 consolidated financial
position and consolidated results of operations for the interim periods
presented. Certain prior period amounts have been reclassified to conform to the
current period presentation. These consolidated financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1999.
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 three and nine periods ended October 3, 1999 and September
27, 1998 are not necessarily indicative of the operating results for an entire
fiscal year.
The Company's consolidated statements of operations presentation
changed in fiscal 1997 to disclose the financial statement impact of the
inventory liquidations associated with the results of restructuring and
remerchandising activities. The line item "Closed facilities as a result of
restructuring and remerchandising activities" represents activity specifically
identifiable to closed or closing facilities and to inventory liquidations
conducted in conjunction with the Company's restructuring plans. Prior year
amounts reflect operating results for these same facilities and merchandise
classifications. Selling, general and administrative expenses for closed
facilities as a result of restructuring and remerchandising activities does not
include any allocation of corporate overhead.
B. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On March 15, 1999, five of the Company's vendors filed an involuntary
petition for reorganization under Chapter 11 ("Chapter 11") of title 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Middle District of Tennessee (the "Bankruptcy Court")
seeking court supervision of the Company's restructuring efforts. On March 27,
1999, the Company and 31 of its subsidiaries (collectively, the "Debtors") filed
voluntary petitions with the Bankruptcy Court for reorganization under Chapter
11 under case numbers 399-02649 through 399-02680 (the "Chapter 11 Cases") and
orders for relief were entered by the Bankruptcy Court. The Chapter 11 Cases
have been consolidated for the purpose of joint administration under Case No.
399-02649. The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code.
The accompanying consolidated financial statements have been prepared
on a going concern basis of accounting and in accordance with AICPA Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code." The accompanying consolidated financial statements do not
reflect any adjustments that might result if the Company is unable to continue
as a going concern. The Company's recent losses and the Chapter 11 Cases raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to submit a plan for reorganization to the Bankruptcy Court.
The ability of the Company to continue as a going concern and appropriateness of
using the going concern basis is dependent upon, among other things, (i) the
Company's ability to comply with debtor-in-possession financing agreements, (ii)
confirmation of a plan of reorganization under the Bankruptcy Code, (iii) the
Company's ability to achieve profitable operations after such confirmation, and
(iv) the Company's ability to generate sufficient cash from operations to meet
its obligations.
6
<PAGE> 7
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
are stayed and other contractual obligations against the Debtors may not be
enforced. In addition, under the Bankruptcy Code the Debtors may assume or
reject executory contracts, including lease obligations. Parties affected by
these rejections may file claims with the Bankruptcy Court in accordance with
the reorganization process. Substantially all pre-petition liabilities are
subject to settlement under a plan of reorganization to be voted upon by
creditors and equity holders and approved by the Bankruptcy Court. Although the
Debtors expect to file a reorganization plan or plans that provide for emergence
from bankruptcy in 2000 or 2001, there can be no assurance that a reorganization
plan or plans will be proposed by the Debtors or confirmed by the Bankruptcy
Court, or that any such plan(s) will be consummated. As provided by the
Bankruptcy Code, the Debtors initially had the exclusive right to submit a plan
of reorganization for 120 days. On May 25, 1999, the Company received Court
approval to extend the period in which the Company has the exclusive right to
file or advance a plan of reorganization in its Chapter 11 case. The order
extended the Company's exclusive right to file a plan from July 23, 1999 to
February 29, 2000, and extended the Company's exclusive right to solicit
acceptances of its plan from September 21, 1999 to May 1, 2000. The Company has
advised the Bankruptcy Court that it anticipates filing a plan of reorganization
during 2000 or 2001. Accordingly, the Company expects to seek an extension of
the exclusivity period prior to its expiration. If the Debtors fail to file a
plan of reorganization during such period or extension thereof or if such plan
is not accepted by the required number of creditors and equity holders, any
party in interest may subsequently file its own plan of reorganization for the
Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court,
upon certain findings being made by the Bankruptcy Court which are required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity security
holders if certain requirements of the Bankruptcy Code are met. A plan of
reorganization could also result in holders of the Common Stock receiving no
value for their interests. Because of such possibilities, the value of the
Common Stock is highly speculative.
A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. The consolidated financial
statements do not give effect to any adjustment to the carrying value of assets
or amounts and classifications of liabilities that might be necessary as a
result of the Chapter 11 Cases.
C. RESTRUCTURING PLANS
1997 RESTRUCTURING PLAN
On March 25, 1997, the Company adopted a business restructuring plan to
close up to 60 under performing stores and one distribution center (the "1997
Restructuring Plan"). As a result, a pre-tax charge of $129.5 million for
restructuring costs was recorded in the first quarter of fiscal 1997. The
components of the restructuring charge and an analysis of the amounts charged
against the accrual through the nine periods ended October 3, 1999 are outlined
in the following table:
<TABLE>
<CAPTION>
ACTIVITY TO DATE
----------------------------------------
ACCRUED
RESTRUCTURING ACCRUED
COSTS AS OF RESTRUCTURING
JANUARY 3, RESTRUCTURING ASSET CHANGE IN COSTS AS OF
(in thousands) 1999 COSTS PAID WRITE-DOWNS ESTIMATE OCTOBER 3, 1999
------------- ------------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Lease termination and other real estate
costs $ 53,161 $ (1,718) $ -- $ (43,334) $ 8,109
Property and equipment write-downs -- -- 2,489 (2,489) --
---------- ---------- --------- --------- ----------
Total $ 53,161 $ (1,718) $ 2,489 $ (45,823) $ 8,109
========== ========== ========= ========= ===========
</TABLE>
Note: The Accrued Restructuring Costs as of October 3, 1999 are included in
liabilities subject to compromise.
The closing of nine stores during the first half of fiscal 1998 brought
the total number of closures, in accordance with the 1997 Restructuring Plan, to
53 stores and one distribution center. Store closures were
7
<PAGE> 8
completed as of May 1998. The Company closed less than 60 stores primarily due
to the inability to negotiate acceptable exit terms from the related lessors.
Restructuring costs paid during the nine periods ended October 3, 1999,
relate primarily to lease termination and other real estate costs. The Company
incurred $1.1 million in contractual rent payments and lease termination fees
and $0.6 million in other real estate costs primarily related to utilities,
common area maintenance fees, real estate taxes and brokerage costs.
In connection with the Chapter 11 Cases, an initial change in estimate
of $46.0 million was made to reflect the reduction allowed under Section
502(b)(6) of the Bankruptcy Code and recorded as a reorganization item. Amounts
had been accrued according to the remaining leasehold obligations. Section
502(b)(6) limits a lessor's claim to the rent reserved by such lease, without
acceleration, for the greater of one year, or 15 percent, not to exceed three
years, of such lease, plus any unpaid rent. Partially offsetting this reduction
is a $2.7 million increase in estimate, resulting in a net change in estimate at
October 3, 1999, of $43.3 million related to lease termination and other real
estate costs.
The leases remaining on closed locations as of October 3, 1999 vary in
length with expiration dates ranging from December 1999 to October 2018.
As of October 3, 1999, property and equipment associated with the 1997
Restructuring Plan have been written-down to reflect their estimated fair value.
The Company anticipates selling or abandoning substantially all remaining owned
property and equipment associated with the 1997 Restructuring Plan.
Approximately 3,000 employees were terminated pursuant to the 1997 Restructuring
Plan. All such terminations were completed as of May 1998.
RATIONALIZATION PLAN
In February 1999, the Company announced a rationalization plan to close
up to 132 stores, up to four distribution centers and to reduce corporate
overhead (the "Rationalization Plan"). On March 8, 1999, as part of the
Rationalization Plan and prior to the filing of the involuntary bankruptcy
petition, the Board of Directors approved the adoption of a business
restructuring plan to close 106 stores, to close the Dallas distribution center
and to reduce the Company's workforce at its Nashville corporate offices by 150
employees. As a result, a pre-tax charge of $99.5 million for restructuring
costs was recorded in the first quarter of 1999. On March 29, 1999 and in
connection with the Chapter 11 Cases, store leases under this plan were approved
for rejection by the Bankruptcy Court. The components of the restructuring
charge and the amounts charged against the accrual through the nine periods
ended October 3, 1999 are outlined in the following table.
<TABLE>
<CAPTION>
ACTIVITY TO DATE
----------------------------------------
INITIAL
CHARGE ACCRUED
RECORDED IN COSTS ASSET CHANGE IN COSTS AS OF
(in thousands) MARCH 1999 PAID WRITE-DOWNS ESTIMATE OCTOBER 3, 1999
----------- ---------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Lease termination and other real estate
costs $ 62,469 $ (8,031) $ -- $ (9,690) $ 44,748
Property and equipment write-downs 24,452 -- (19,298) (5,154) --
Employee severance 12,533 (8,675) (1,360) 2,498
----------- ---------- ----------- --------- ----------
Total $ 99,454 $ (16,706) $ (19,298) $ (16,204) $ 47,246
=========== ========== =========== ========= ==========
</TABLE>
Note: The Accrued Costs as of October 3, 1999 are included in liabilities
subject to compromise.
The stores planned for closure include both owned and leased
properties. Lease termination and other real estate costs consist principally of
the remaining rental payments required under the closing stores' and
distribution center lease agreements under Section 502(b)(6) of the Bankruptcy
Code, net of any actual or reasonably probable sublease income. Section
502(b)(6) limits the lessor's claim to the rent reserved by such lease, without
acceleration, for the greater of one year, or 15 percent, not to exceed three
years, of such lease, plus
8
<PAGE> 9
any unpaid rent. The Company experienced lower than expected expenses in lease
terminations, dispositions of closed stores and severance payments during the
three periods ended October 3, 1999. As a result, in September the Company
reduced its estimate for these costs by $16.2 million.
Restructuring costs paid during the nine periods ended October 3, 1999,
relate primarily to lease termination and other real estate costs. The Company
incurred $2.3 million in contractual rent payments and lease termination fees,
$5.7 million in other real estate costs primarily related to utilities, common
area maintenance fees, real estate taxes and brokerage costs, and $8.7 million
in severance costs.
After taking into effect the above asset write-downs, the Company's
carrying value of the property and equipment associated with the Rationalization
Plan closures is $1.8 million as of October 3, 1999. All of this amount is
classified as available for sale as all store closures are now complete. Assets
available for sale are considered current assets and are included with "Prepaid
expenses and other assets". The Company anticipates selling substantially all
owned property and equipment associated with the closures.
The employee severance provision was recorded for the planned
termination of approximately 4,389 employees associated with the closures, as
well as the reduction of corporate overhead.
D. LIABILITIES SUBJECT TO COMPROMISE
"Liabilities subject to compromise" refers to liabilities incurred
prior to the commencement of the Chapter 11 Cases. These liabilities consist
primarily of amounts outstanding under long-term debt and also include accounts
payable, accrued interest, accrued restructuring costs, and other accrued
expenses. These amounts represent the Company's estimate of known or potential
claims to be resolved in connection with the Chapter 11 Cases. Such claims
remain subject to future adjustments based on negotiations, actions of the
Bankruptcy Court, further development with respect to disputed claims, future
rejection of additional executory contracts or unexpired leases, and
determination as to the value of any collateral securing claims or other events.
Payment terms for these amounts, which are considered long-term liabilities at
this time, will be established in connection with the Chapter 11 Cases.
The Company has received approval from the Bankruptcy Court to pay
certain pre-petition and post-petition employee wages, salaries, benefits and
other employee obligations, to pay vendors and other providers in the ordinary
course for goods and services received after March 15, 1999, and to honor
customer service programs, including warranties, returns, layaways and gift
certificates.
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below.
(in thousands) OCTOBER 3, 1999
---------------
Accounts payable $190,749
Accrued expenses 67,376
Accrued restructuring costs:
1997 Restructuring Plan 8,109
1999 Rationalization Plan 47,246
Long-term debt 439,558
Capitalized lease obligations 31,333
---------------
Total $784,371
===============
Contractual interest expense not recorded on certain pre-petition debt
totaled $7.0 million and $15.5 million for the three and nine periods ended
October 3, 1999, respectively.
9
<PAGE> 10
E. REORGANIZATION ITEMS
Expenses and income directly incurred or realized as a result of the
Chapter 11 Cases have been segregated from the normal operations and are
disclosed separately. The major components are as follows:
THREE NINE
PERIODS ENDED PERIODS ENDED
(in thousands) OCTOBER 3, 1999 OCTOBER 3, 1999
--------------- ---------------
Reduction of accrued rent for rejected leases $ -- $(45,981)
Store closing costs (2,536) 11,487
(Gain) loss on disposal of assets (270) 10,019
Professional fees and administrative items 7,176 16,473
======== ========
Total reorganization items expense (income) $ 4,370 $ (8,002)
======== ========
REDUCTION OF ACCRUED RENT FOR REJECTED LEASES:
In connection with the Chapter 11 Cases, the 1997 Restructuring Plan
was adjusted to reflect the reduction allowed under Section 502(b)(6) of the
Bankruptcy Code. An amount had been accrued according to the remaining leasehold
obligation. Section 502(b)(6) limits the lessor's claim to the rent reserved by
such leases, without acceleration, for the greater of one year, or 15 percent,
not to exceed three years, of such leases, plus any unpaid rent.
STORE CLOSING COSTS:
Subsequent to the announcement of the Rationalization Plan and
commencement of the Chapter 11 Cases, the Company identified an additional 16
stores for closure. The costs associated with these closing stores include rent,
common area maintenance, utilities, asset write-downs and severance. The rent
amount has been adjusted to reflect the reduction allowed under Section
502(b)(6) of the Bankruptcy Code. Income was recorded for a change in the
estimated closing costs as a result of the Company's favorable experience
disposing of selected stores in the three periods ended October 3, 1999.
(GAIN) LOSS ON DISPOSAL OF ASSETS:
"(Gain) loss on disposal of assets" consists of losses associated with
the sale of real property and the sale of certain assets of one of the Company's
subsidiaries, B.A. Pargh Co., Inc.
PROFESSIONAL FEES AND ADMINISTRATIVE ITEMS:
"Professional fees and administrative items" relates to legal,
accounting and other professional costs, as well as administrative items,
directly attributable to the Chapter 11 Cases.
F. BORROWINGS
From September 1997 through January 20, 1999, the Company had a
five-year, $900.0 million, fully committed asset-based credit facility (the
"Amended and Restated Credit Facility"). The Amended and Restated Credit
Facility included $200.0 million in term loans and up to a maximum of $700.0
million in revolving loans including a $175.0 million sub-facility for letters
of credit. The Amended and Restated Credit Facility was set to mature on
September 10, 2002. Interest rates on the Amended and Restated Credit Facility
were subject to change based on a financial performance-based grid and could not
exceed a rate of LIBOR + 2.25% on revolving loans and LIBOR + 2.50% on the term
loan. There was a commitment fee of 0.375% on the undrawn portion of the
revolving loans. There were no outstanding loans under the Amended and Restated
Credit Facility as of October 3, 1999.
10
<PAGE> 11
On January 20, 1999, the Company completed a $750.0 million, 30-month
asset-based credit facility (the "Second Amended and Restated Credit Facility")
which replaced the Amended and Restated Credit Facility. The Second Amended and
Restated Credit Facility included $150.0 million in term loans and a maximum of
$600.0 million in revolving loans. The Second Amended and Restated Credit
Facility included a $200.0 million sub-facility for standby and trade letters of
credit. Interest rates on the Second Amended and Restated Facility were based on
either Prime Rate + 1.5% or LIBOR + 2.75%.
On March 29, 1999, the Company entered into a 27-month, $750.0 million,
fully committed asset-based debtor-in-possession credit facility (the "DIP
Facility") which replaced the Second Amended and Restated Credit Facility. The
Bankruptcy Court approved the DIP Facility on an interim basis on March 29, 1999
and granted final approval on April 27, 1999. The DIP Facility, which matures on
June 30, 2001, includes $100.0 million in term loans and up to a maximum of
$650.0 million in revolving loans including a $200.0 million sub-facility for
letters of credit. Interest rate spreads on the DIP Facility are LIBOR + 2.25%
on Eurodollar loans and Prime Rate + 1.25% on Alternate Base Rate loans.
Short-term borrowings related to the DIP Facility were $203.6 million as of
October 3, 1999. Short-term borrowings were $65.0 million under the Amended and
Restated Credit Facility at September 27, 1998. Outstanding borrowings under the
term loan of the DIP Facility were $99.5 million as of October 3, 1999. Term
loan borrowings under the Amended and Restated Credit Facility were $197.0
million as of September 27, 1998. There is a commitment fee of 0.375% on the
undrawn portion of the revolving loans under the DIP Facility.
The DIP Facility is secured by all material unencumbered assets of the
Company and its subsidiaries, including inventory, but excluding previously
mortgaged property. Borrowings under the DIP Facility are limited based on a
borrowing base formula which considers eligible inventories, eligible accounts
receivable, mortgage values on eligible real properties, eligible leasehold
interests, available cash equivalents and in-transit cash. The DIP Facility had
an initial borrowing base reserve of $125.0 million which was reduced by $75.0
million on April 27, 1999, the date of final approval by the DIP Facility
lenders. The remaining borrowing base reserve of $50.0 million was eliminated
during the third quarter upon adoption of financial covenants for the DIP
Facility. Availability under the facility continues unless the Company breaches
both the minimum EBITDA and the minimum availability thresholds.
As of October 3, 1999, the Company was in compliance with its financial
covenants, as set forth in the table below:
<TABLE>
<CAPTION>
COVENANT THRESHOLD ACTUAL
--------------------------------------------------------------- --------------------- ------------------
<S> <C> <C>
A. 1999 Capital Expenditures $ 50.0 million $ 10.5 million
B. Minimum Availability (October 28, 1999) $ 50.0 million $180.7 million
OR
Minimum EBITDA (Period ended October 3, 1999) $(16.0) million $ 3.2 million
</TABLE>
Note: EBITDA is calculated as defined in the Second Amendment to the DIP
Facility.
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<PAGE> 12
An extraordinary loss on the early extinguishment of debt was recorded
in the amount of $7.9 million during the three periods ended April 4, 1999. This
charge related to the write-off of deferred financing charges paid in
conjunction with the Company's Credit Facilities.
G. EARNINGS PER SHARE
Basic earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted-average number of common shares outstanding
during the reported period. Diluted net earnings (loss) per common share is
computed by dividing net earnings (loss) by the weighted-average number of
common shares outstanding during the period plus incremental shares that would
have been outstanding upon the assumed vesting of dilutive restricted stock and
the assumed exercise of dilutive stock options.
The components of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
THREE PERIODS ENDED NINE PERIODS ENDED
-------------------------- --------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1999 1998 1999 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Shares:
Basic 99,724 99,701 99,720 99,702
Effect of dilutive securities:
Restricted stock 323 -- -- --
Options outstanding 17 -- -- --
--------- --------- --------- ---------
Diluted 100,064 99,701 99,720 99,702
Net Earnings (loss) before extraordinary item: $ 3,967 $ (38,098) $(257,114) $ (68,536)
Extraordinary item: -- -- $ (7,851) --
Net Earnings (loss): $ 3,967 $ (38,098) $(264,965) $ (68,536)
Earnings Per Share (basic and diluted):
Earnings (loss) before extraordinary item $ 0.04 $ (0.38) $ (2.58) $ (0.69)
Extraordinary loss from early extinguishment of debt -- -- $ (0.08) --
--------- --------- --------- ---------
Net earnings (loss) $ 0.04 $ (0.38) $ (2.66) $ (0.69)
========= ========= ========= =========
</TABLE>
H. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets for the Company were $78.7 million as
of October 3, 1999 compared to $18.3 million as of September 27, 1998. The
increase was primarily due to cash in advance payments for inventory of
approximately $40.0 million, advance payments for advertising of approximately
$13.7 million, and assets available for sale of approximately $5.2 million.
I. OTHER COMMITMENTS AND CONTINGENCIES
On January 28, 1997, the Company and Service Credit Corp. (the
"Subsidiary"), a wholly-owned subsidiary, entered into an agreement with World
Financial Network National Bank ("WFNNB") for the purpose of providing a private
label credit card to the Company's customers. The contract requires the
Subsidiary to maintain a 3.0% credit risk reserve for the outstanding balances,
which are owned by WFNNB. The purpose of this reserve is to offset future
potential negative spreads and portfolio losses. The negative spreads or losses
may result from potential increased reimbursable contractual program costs. The
3.0% credit risk reserve is held by the Subsidiary, which is not in Chapter 11,
in the form of cash and cash-equivalents. On April 28, 1999, WFNNB advised the
Company that WFNNB has projected that such portfolio losses and negative spreads
will be at least approximately $9.0 million. The Company does not have in its
possession sufficient information to determine the accuracy or validity of
WFNNB's projection. Pending confirmation of the accuracy of WFNNB's projection
12
<PAGE> 13
and a resolution of the Company's rights and remedies, the Company has made
provision for such potential liability as of October 3, 1999 by maintaining an
allowance on the 3.0% credit risk reserve of $9.0 million.
On July 16, 1999, the Company filed a complaint against WFNNB in the
Bankruptcy Court alleging, among other things, breach of contract and violation
of the automatic stay provisions of the Bankruptcy Code by WFNNB with respect to
and in connection with the January 1997 private label credit card program
agreement between the Company, the Subsidiary and WFNNB (the "World Financial
Agreement"). Under the World Financial Agreement, a program was established
pursuant to which, among other things, WFNNB agreed to issue credit cards to
qualifying Company customers for the purchase of goods and services from the
Company. While the ultimate result of this litigation cannot be determined or
predicted with any accuracy at this time, the Company intends to pursue
available remedies against WFNNB.
On August 20, 1999, over the objection of WFNNB, the Bankruptcy Court
authorized the Company to enter into an agreement with Household Bank (SB), N.A.
("Household") for the purpose of offering new private label credit cards to
those customers of the Company who meet Household's credit standards. The
Company's prior private label credit card program with WFNNB was suspended in
March of 1999, and the rights and liabilities of WFNNB, the Company and the
Subsidiary are the subject of the litigation referred to in the preceding
paragraph.
On September 23, 1999, WFNNB filed a motion to dismiss the Company's
complaint and a separate motion seeking to have the complaint litigated in the
United States District Court for the Middle District of Tennessee (the "District
Court"), rather than the Bankruptcy Court. The Company filed timely oppositions
to both motions, and, on October 27, 1999, the District Court denied WFNNB's
motion to have the complaint litigated in the District Court. The Bankruptcy
Court has scheduled a hearing on December 7, 1999, to consider WFNNB's motion to
dismiss and the Company's opposition thereto.
The Company was involved in litigation, investigations and various
legal matters during the nine periods ended October 3, 1999, which are being
defended and handled in the ordinary course of business. While the ultimate
results of these matters cannot be determined or predicted, management believes
that they will not have a material adverse effect on the Company's results of
operations or financial position. Any potential liability may be affected by the
Chapter 11 Cases.
J. SEGMENT REPORTING
The Company manages its business on the basis of one reportable
segment. As of October 3, 1999, all of the Company's operations are located
within the United States. The following data is presented in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information", for all periods presented.
<TABLE>
<CAPTION>
CLASSES OF SIMILAR PRODUCTS: THREE PERIODS ENDED NINE PERIODS ENDED
---------------------------- ----------------------------------- -----------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1999 1998 1999 1998
------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net Sales (in thousands):
Hardlines $ 242,546 $ 416,607 $ 930,930 $1,327,712
Jewelry 123,939 188,380 464,328 556,569
============= ================ ============== ================
Total Net Sales $ 366,485 $ 604,987 $1,395,258 $1,884,281
============= ================ ============== ================
</TABLE>
K. BENEFIT PLANS
On August 31, 1999, the Bankruptcy Court approved a motion by the
Company to amend the Restated Retirement Plan and the Executive Security Plan.
The amendment to the Restated Retirement Plan ceased the
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<PAGE> 14
accrual of benefits, disallowed new enrollments to the Plan and vested benefits
already accrued under the Plan effective September 30, 1999. The amendment to
the Executive Security Plan, covering approximately 165 former and current
management associates, ceased the accrual of benefits and suspended payments
effective September 30, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q includes certain forward-looking
statements (statements other than with respect to historical fact) based upon
management's beliefs, as well as assumptions made by and data currently
available to management. This information has been, or in the future may be,
included in reliance on the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The projections with respect to the Company's
three-month borrowing base and borrowing availability projections under the DIP
Facility, while presented with numerical specificity, are forward-looking
statements which are based on a variety of assumptions regarding the Company's
operating performance that may not be realized and are subject to significant
business, economic, political and competitive uncertainties and potential
contingencies, including those set forth below, many of which are beyond the
Company's control. Consequently, such forward-looking information should not be
regarded as a representation or warranty by the Company that such projections
will be realized. Actual results may differ materially from those anticipated in
any such forward-looking statements. The Company undertakes no obligation to
update or revise any such forward-looking statements.
The Company's liquidity, capital resources and results of operations
are subject to a number of risks and uncertainties including, but not limited
to, the following: the ability of the Company to continue as a going concern;
the ability of the company to achieve planned sales; the ability of the Company
to operate pursuant to the terms of the DIP Facility; the ability of the Company
to operate successfully under a Chapter 11 proceeding; approval of plans and
activities by the Bankruptcy Court; risks associated with operating a business
in Chapter 11; the ability of the Company to create and have approved a
reorganization plan in the Chapter 11 Cases; adverse developments with respect
to the Company's liquidity or results of operations; the ability of the Company
to obtain shipments, negotiate and maintain terms with vendors and service
providers for current orders; the ability to develop, fund and execute an
operating plan for the Company; the ability of the Company to attract and retain
key executives and associates; competitive pressures from other retailers,
including specialty retailers and discount stores, which may affect the nature
and viability of the Company's business strategy; trends in the economy as a
whole which may affect consumer confidence and consumer demand for the types of
goods sold by the Company; the ability to maintain gross profit margins; the
seasonal nature of the Company's business and the ability of the Company to
predict consumer demand as a whole, as well as demand for specific goods; the
ability of the Company to attract and retain customers; costs associated with
the shipping, handling and control of inventory and the Company's ability to
optimize its supply chain; potential adverse publicity; availability and cost of
management and labor employed; real estate occupancy and development costs,
including the substantial fixed investment costs associated with opening,
maintaining or closing a Company store; the potential delisting of the Company's
securities and the absence of an active public trading market; and the ability
to effect conversions to new technological systems, including becoming Year 2000
compliant.
Actual results may differ materially from those anticipated in any such
forward-looking statements. The Company undertakes no obligation to update or
revise any forward-looking statements to reflect subsequent events or
circumstances.
14
<PAGE> 15
OVERVIEW
The Company, with 223 stores in 32 states at October 3, 1999, is one of
the nation's largest retailers of jewelry and offers a large selection of
brand-name hardlines and other product lines.
As a result of the Company's decreased net sales in the fourth quarter
of fiscal 1998 and the resulting negative cash flows from operations, in January
1999 the Company began an effort to effect an out-of-court restructuring plan.
Before the Company was able to effect an out-of-court restructuring, on March
15, 1999, five of the Company's vendors filed an involuntary petition for
reorganization under Chapter 11 of title 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the Middle District of Tennessee
seeking court supervision of the Company's restructuring efforts. On March 27,
1999, the Company and 31 of its subsidiaries filed voluntary petitions with the
Bankruptcy Court for reorganization under Chapter 11 under case numbers
399-02649 through 399-02680 and orders for relief were entered by the Bankruptcy
Court. The Chapter 11 Cases have been consolidated for the purpose of joint
administration under Case No. 399-02649. The Debtors are currently operating
their businesses as debtors-in-possession pursuant to the Bankruptcy Code.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
are stayed and other contractual obligations against the Debtors may not be
enforced. In addition, under the Bankruptcy Code the Debtors may assume or
reject executory contracts, including lease obligations. Parties affected by
these rejections may file claims with the Bankruptcy Court in accordance with
the reorganization process. Substantially all pre-petition liabilities are
subject to settlement under a plan of reorganization to be voted upon by
creditors and equity holders and approved by the Bankruptcy Court. Although the
Debtors expect to file a reorganization plan or plans that provide for emergence
from bankruptcy in 2000 or 2001, there can be no assurance that a reorganization
plan or plans will be proposed by the Debtors or confirmed by the Bankruptcy
Court, or that any such plan(s) will be consummated. As provided by the
Bankruptcy Code, the Debtors initially had the exclusive right to submit a plan
of reorganization for 120 days. On May 25, 1999, the Company received Court
approval to extend the period in which the Company has the exclusive right to
file or advance a plan of reorganization in its Chapter 11 case. The order
extended the Company's exclusive right to file a plan from July 23, 1999 to
February 29, 2000, and extended the Company's exclusive right to solicit
acceptances of its plan from September 21, 1999 to May 1, 2000. The Company has
advised the Bankruptcy Court that it anticipates filing a plan of reorganization
during 2000 or 2001. Accordingly, the Company expects to seek an extension of
the exclusivity period prior to its expiration. If the Debtors fail to file a
plan of reorganization during such period or extension thereof or if such plan
is not accepted by the required number of creditors and equity holders, any
party in interest may subsequently file its own plan of reorganization for the
Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court,
upon certain findings being made by the Bankruptcy Court which are required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity security
holders if certain requirements of the Bankruptcy Code are met. A plan of
reorganization could also result in holders of the Common Stock receiving no
value for their interests. Because of such possibilities, the value of the
Common Stock is highly speculative.
At the first day hearing held on March 29, 1999 before Judge George C.
Paine, the Bankruptcy Court entered first day orders granting authority to the
Debtors, among other things, to pay certain pre-petition and post-petition
employee wages, salaries, benefits and other employee obligations, to pay
vendors and other providers in the ordinary course for goods and services
received from March 15, 1999 and to honor customer service programs, including
warranties, returns, layaways and gift certificates.
On March 29, 1999, the Company entered into a 27-month, $750.0 million,
fully committed asset-based debtor-in-possession credit facility (the "DIP
Facility") which replaced the Second Amended and Restated Credit Facility. The
Bankruptcy Court approved the DIP Facility on an interim basis on March 29, 1999
and granted final approval on April 27, 1999. The DIP Facility, which matures on
June 30, 2001, includes $100.0 million in term loans and up to a maximum of
$650.0 million in revolving loans including a $200.0 million sub-facility for
letters of credit. Interest rate spreads on the DIP Facility are LIBOR + 2.25%
on Eurodollar loans and Prime Rate
15
<PAGE> 16
+ 1.25% on Alternate Base Rate loans. Short-term borrowings related to the DIP
Facility were $203.6 million as of October 3, 1999. Short-term borrowings were
$65.0 million under the Amended and Restated Credit Facility at September 27,
1998. Outstanding borrowings under the term loan of the DIP Facility were $99.5
million as of October 3, 1999. Term loan borrowings under the Amended and
Restated Credit Facility were $197.0 million as of September 27, 1998. There is
a commitment fee of 0.375% on the undrawn portion of the revolving loans under
the DIP Facility.
The DIP Facility is secured by all material unencumbered assets of the
Company and its subsidiaries, including inventory, but excluding previously
mortgaged property. Borrowings under the DIP Facility are limited based on a
borrowing base formula which considers eligible inventories, eligible accounts
receivable, mortgage values on eligible real properties, eligible leasehold
interests, available cash equivalents and in-transit cash. The DIP Facility had
an initial borrowing base reserve of $125.0 million which was reduced by $75.0
million on April 27, 1999, the date of final approval by the DIP Facility
lenders. The remaining borrowing base reserve of $50.0 million was eliminated
during the third quarter upon adoption of financial covenants for the DIP
Facility. Availability under the facility continues unless the Company breaches
both the minimum EBITDA and the minimum availability requirements. As of October
3, 1999, the Company was in compliance with its covenants under the DIP
Facility.
On April 27, 1999, the Bankruptcy Court gave final approval to the DIP
Facility. The Company believes the DIP Facility should provide it with adequate
liquidity to conduct its operations while it prepares a reorganization plan.
The Company's Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The filing of the involuntary and voluntary petitions referred to
above, the related circumstances and the losses from operations raise
substantial doubt with respect to the Company's ability to continue as a going
concern. The appropriateness of using the going concern basis is dependent upon,
among other things, confirmation of a plan or plans of reorganization, future
profitable operations and the ability to generate cash from operations and
financing sources sufficient to meet obligations. As a result of the filing of
the Chapter 11 Cases and related circumstances, realization of assets and
liquidation of liabilities is subject to significant uncertainty. While under
the protection of Chapter 11, the Debtors may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the Consolidated Financial Statements. Further, a plan or plans of
reorganization could materially change the amounts reported in the accompanying
Consolidated Financial Statements. The Consolidated Financial Statements do not
include any adjustments relating to recoverability of the value of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary as a consequence of a plan of reorganization.
At this time, it is not possible to predict the outcome of the Chapter
11 Cases or their effect on the Company's business. Unsecured claims may be
satisfied at less than 100 percent of their face value and the equity interests
of the Company's shareholders may have no value. The Company believes the DIP
Facility should provide the Company with adequate liquidity to conduct its
business while it prepares a reorganization plan. However, the Company's
liquidity, capital resources, results of operations and ability to continue as a
going concern are subject to known and unknown risks and uncertainties,
including those set forth above under "Safe Harbor Statement Under The Private
Securities Litigation Reform Act of 1995."
16
<PAGE> 17
RESULTS OF OPERATIONS
THIRD QUARTER ENDED OCTOBER 3, 1999 COMPARED TO THIRD QUARTER ENDED
SEPTEMBER 27, 1998
NET SALES
Net sales for the Company were $366.5 million for the third quarter of
1999 compared to $605.0 million for the third quarter of 1998. The $238.5
million decrease reflects a $60.7 million decline in sales from the operations
excluding closing facilities as a result of restructuring and remerchandising
activities and a reduction of $177.8 million in sales from liquidating stores.
Net sales from operations excluding results of restructuring and
remerchandising activities for the third quarter of 1999 were $364.5 million
versus $425.3 million for the same period in 1998. This represents a comparable
store sales decrease of $39.0 million or 9.8% as well as a sales decrease of
$21.7 million in the remaining stores included in operations excluding closed
facilities as a result of restructuring and remerchandising activities. Jewelry
comparable store sales decreased 1.8%, while hardline comparable store sales
decreased 13.5%. The Company believes decreased advertising and out of stock
levels associated with product procurement difficulties encountered during the
third quarter of 1999 adversely impacted comparable store sales.
GROSS MARGIN
In the third quarter of 1999, gross margin was $80.4 million as
compared to $138.3 million in the third quarter of 1998. The decrease was
primarily due to a $238.5 million decline in sales, partially offset by a $160.9
million or 39.3% decrease in cost of goods sold during the quarter.
Gross margin after cost of merchandise sold and buying and occupancy
expenses excluding closed facilities as a result of restructuring and
remerchandising was $82.1 million or 22.5% of net sales for the third quarter of
1999, compared to $103.7 million or 24.4% of net sales for the third quarter of
1998. The margin decrease was primarily the result of changes in product mix,
additional markdowns and lower hardlines sales.
Gross margin after cost of merchandise sold and buying and occupancy
expenses for closed facilities as a result of restructuring and remerchandising
activities was $(1.7) million, or (86.2)% of net sales for the third quarter of
1999 compared to $34.5 million, or 19.2% of net sales for the third quarter of
1998. The margin decrease was primarily a result of additional markdowns
associated with inventory liquidations at the closing stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $63.2 million in
the third quarter of 1999 to $103.6 million from $166.8 million in the third
quarter of 1998. The decrease was primarily attributable to a $38.9 million
decrease in employment costs and a $24.3 million decrease in other selling,
general and administrative expenses primarily due to store closures.
OTHER INCOME, NET
The net gain on dispositions of property and leases recorded for the
third quarter of 1999 was $39.7 million, as compared to $0.8 million in 1998.
The gain included amounts realized from the Company's July 8, 1999 auction. As
of October 3, 1999, the Company had completed the auction sale of 16 owned
properties for proceeds of $39.0 million, resulting in a $15.3 million net gain,
as well as the auction sale of 33 leased properties for proceeds of $16.1
million, resulting in a $13.9 million net loss. There are 26 auction property
sales pending completion, including 12 owned and 14 leased properties, which the
Company had received proceeds as of October 3, 1999 of
17
<PAGE> 18
$22.0 million. The balance of the $39.7 million net gain equals $10.5 million,
which includes the dispositions of the Company's closed stores outside of the
auction.
INTEREST EXPENSE
Interest expense for the third quarter of 1999 was $12.6 million as
compared to $19.4 million for the third quarter of 1998. The decrease in
interest expense reflects the contractual interest expense not recorded on
unsecured pre-petition debt totaling $7.0 million.
INCOME TAXES
The Company did not recognize an income tax benefit due to the
recording of a deferred tax asset valuation allowance. Deferred taxes are
recognized to reflect the estimated future utilization of temporary book/tax
differences. The Company has recorded a full valuation allowance on net deferred
tax assets as realization of such assets in future years is uncertain.
Management does not believe it is more likely than not that the Company will
realize the deferred tax assets.
NINE PERIODS ENDED OCTOBER 3, 1999 COMPARED TO NINE PERIODS ENDED
SEPTEMBER 27, 1998
NET SALES
Net sales for the Company were $1,395.3 million for the first nine
periods of 1999 compared to $1,884.3 million for the first nine periods of 1998.
The $489.0 million decrease reflects the $189.7 million loss in sales from the
operations excluding closed facilities as a result of restructuring and
remerchandising activities and a reduction of $299.3 million in sales from
liquidating stores. The Company believes decreased advertising and out of stock
levels associated with product procurement difficulties encountered during the
first three quarters of 1999 adversely impacted comparable store sales.
Net sales from operations excluding results of restructuring and
remerchandising activities for the first nine periods of 1999 were $1,135.4
million versus $1,325.1 million for the same period in 1998. This represents a
comparable store sales decrease of $106.9 million or 8.9% as well as a sales
decrease of $82.8 million in the remaining stores included in operations
excluding closed facilities as a result of restructuring and remerchandising
activities. Jewelry comparable store sales increased 2.4%, while hardline
comparable store sales decreased 13.6%.
GROSS MARGIN
In the first nine periods of 1999, gross margin was $264.4 million as
compared to $444.9 million in the first nine periods of 1998. The decrease was
primarily due to a $489.0 million decline in sales, partially offset by a $294.9
million or 23.3% decrease in cost of goods sold.
Gross margin after cost of merchandise sold and buying and occupancy
expenses and excluding closed facilities as a result of restructuring and
remerchandising was $262.8 million or 23.1% of net sales for the first nine
periods of 1999, compared to $337.1 million or 25.4% of net sales for the first
nine periods of 1998. The margin decrease was primarily the result of changes in
product mix, additional markdowns and lower hardlines sales.
18
<PAGE> 19
Gross margin after cost of merchandise sold and buying and occupancy
expenses for closed facilities as a result of restructuring and remerchandising
activities was $1.6 million, or 0.6% of net sales for the first nine periods of
1999 compared to $107.8 million, or 19.3% of net sales for the first nine
periods of 1998. The margin decrease was primarily a result of additional
markdowns associated with inventory liquidations at the closing stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $54.6 million in
the first nine periods of 1999 to $410.0 million from $464.6 million in the
first nine periods of 1998. The decrease was primarily attributable to a $61.4
million decrease in employment costs and a $26.6 million decrease in other
selling, general and administrative expenses primarily due to store closures.
These savings were partially offset by a $9.0 million charge to offset future
potential negative spreads or portfolio losses on the private label credit card
program and a $24.4 million increase in expense related to the reduction in
private label credit card program income.
INTEREST EXPENSE
Interest expense for the first nine periods of 1999 was $50.4 million
as compared to $58.5 million for the first nine periods of 1998. This decrease
was caused by contractual interest expense not recorded on certain pre-petition
debt totaling $15.5 million, partially offset by an increase due to higher
average borrowings under the Company's various Credit Facilities in 1999 than
1998.
INCOME TAXES
The Company did not recognize an income tax benefit due to the
recording of a deferred tax asset valuation allowance. Deferred taxes are
recognized to reflect the estimated future utilization of temporary book/tax
differences. The Company has recorded a full valuation allowance on net deferred
tax assets as realization of such assets in future years is uncertain.
Management does not believe it is more likely than not that the Company will
realize the deferred tax assets.
1997 RESTRUCTURING PLAN
On March 25, 1997, the Company adopted a business restructuring plan to
close up to 60 under performing stores and one distribution center. As a result,
a pre-tax charge of $129.5 million for restructuring costs was recorded in the
first quarter of fiscal 1997. The components of the restructuring charge and an
analysis of the amounts charged against the accrual through the nine periods
ended October 3, 1999 are outlined in the following table:
<TABLE>
<CAPTION>
ACTIVITY TO DATE
---------------------------------------
ACCRUED ACCRUED
RESTRUCTURING RESTRUCTURING
COSTS AS OF RESTRUCTURING ASSET CHANGE IN COSTS AS OF
(in thousands) JANUARY 3, 1999 COSTS PAID WRITE-DOWNS ESTIMATE OCTOBER 3, 1999
----------- ---------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Lease termination and other real estate
costs $ 53,161 $ (1,718) $ -- $ (43,334) $ 8,109
Property and equipment write-downs -- -- 2,489 (2,489) --
----------- ---------- --------- --------- ----------
Total $ 53,161 $ (1,718) $ 2,489 $ (45,823) $ 8,109
=========== ========== ========= ========= ==========
</TABLE>
Note: The Accrued Restructuring Costs as of October 3, 1999 are included in
liabilities subject to compromise.
Restructuring costs paid through the nine periods ended October 3,
1999, relate primarily to lease termination and other real estate costs. The
Company incurred $1.1 million in contractual rent payments and lease
19
<PAGE> 20
termination fees and $0.6 million in other real estate costs primarily related
to utilities, common area maintenance fees, real estate taxes and brokerage
costs.
In connection with the Chapter 11 Cases, an initial change in estimate
of $46.0 million was made to reflect the reduction allowed under Section
502(b)(6) of the Bankruptcy Code and recorded as a Reorganization item. Amounts
had been accrued according to the remaining leasehold obligations. Section
502(b)(6) limits a lessor's claim to the rent reserved by such lease, without
acceleration, for the greater of one year, or 15 percent, not to exceed three
years, of such lease, plus any unpaid rent. Partially offsetting this reduction
is a $2.7 million increase in estimate, resulting in a net change in estimate at
October 3, 1999, of $43.3 million related to lease termination and other real
estate costs.
The leases remaining on closed locations as of October 3, 1999 vary in
length with expiration dates ranging from December 1999 to October 2018.
As of October 3, 1999, property and equipment associated with the 1997
Restructuring Plan have been written-down to reflect their estimated fair value.
The Company anticipates selling or abandoning substantially all remaining owned
property and equipment associated with the 1997 Restructuring Plan.
Approximately 3,000 employees were terminated pursuant to the 1997 Restructuring
Plan. All such terminations were completed as of May 1998 for the 1997
Restructuring Plan.
RATIONALIZATION PLAN
In February 1999, the Company announced a rationalization plan to close
up to 132 stores, up to four distribution centers and to reduce corporate
overhead (the "Rationalization Plan"). On March 8, 1999 as part of the
Rationalization Plan and prior to the filing of the involuntary bankruptcy
petition, the Board of Directors approved the adoption of a business
restructuring plan to close 106 stores, to close the Dallas distribution center
and to reduce the Company's workforce at its Nashville corporate offices by 150
employees. As a result, a pre-tax charge of $99.5 million for restructuring
costs was recorded in the first quarter of 1999. On March 29, 1999 and in
connection with the Chapter 11 Cases, store leases under this plan were approved
for rejection by the Bankruptcy Court. The components of the restructuring
charge and the amounts charged against the accrual through the nine periods
ended October 3, 1999 are outlined in the following table.
<TABLE>
<CAPTION>
ACTIVITY TO DATE
--------------------------------
INITIAL
CHARGE ACCRUED
RECORDED IN COSTS ASSET CHANGE IN COSTS AS OF
(in thousands) MARCH 1999 PAID WRITE-DOWNS ESTIMATE OCTOBER 3, 1999
----------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Lease termination and other real estate
costs $ 62,469 $ (8,031) $ -- $ (9,690) $ 44,748
Property and equipment write-downs 24,452 -- (19,298) (5,154) --
Employee severance 12,533 (8,675) -- (1,360) 2,498
-------- -------- -------- -------- ----------
Total $ 99,454 $(16,706) $(19,298) $(16,204) $ 47,246
======== ======== ======== ======== ==========
</TABLE>
Note: The Accrued Costs as of October 3, 1999 are included in liabilities
subject to compromise.
The stores planned for closure include both owned and leased
properties. Lease termination and other real estate costs consist principally of
the remaining rental payments required under the closing stores' and
distribution center lease agreements under Section 502(b)(6) of the Bankruptcy
Code, net of any actual or reasonably probable sublease income. Section
502(b)(6) limits the lessor's claim to the rent reserved by such lease, without
acceleration, for the greater of one year, or 15 percent, not to exceed three
years, of such lease, plus any unpaid rent. The Company experienced lower than
expected expenses in lease terminations, dispositions of closed stores and
severance payments during the three periods ended October 3, 1999. As a result,
in September the Company reduced its estimate for these costs by $16.2 million.
20
<PAGE> 21
Restructuring costs paid during the nine periods ended October 3, 1999,
relate primarily to lease termination and other real estate costs. The Company
incurred $2.3 million in contractual rent payments and lease termination fees,
$5.7 million in other real estate costs primarily related to utilities, common
area maintenance fees, real estate taxes and brokerage costs, and $8.7 million
in severance costs.
After taking into effect the above asset write-downs, the Company's
carrying value of the property and equipment associated with the closures is
$1.8 million as of October 3, 1999. All of this amount is classified as
available for sale as all store closures are now complete. Assets available for
sale are considered current assets and are included with "Prepaid expenses and
other assets". The Company anticipates selling substantially all owned property
and equipment associated with the closures.
The employee severance provision was recorded for the planned
termination of approximately 4,389 employees associated with the closures, as
well as the reduction of corporate overhead.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1999, the Debtors filed the Chapter 11 Cases, which will
affect the Company's liquidity and capital resources in fiscal 1999. See Note B
of Notes to Consolidated Financial Statements (Unaudited)- "Proceedings Under
Chapter 11 of the Bankruptcy Code."
From September 1997 through January 20, 1999, the Company had a
five-year, $900.0 million, fully committed asset-based credit facility (the
"Amended and Restated Credit Facility"). The Amended and Restated Credit
Facility included $200.0 million in term loans and up to a maximum of $700.0
million in revolving loans including a $175.0 million sub-facility for letters
of credit. The Amended and Restated Credit Facility was set to mature on
September 10, 2002. Interest rates on the Amended and Restated Credit Facility
were subject to change based on a financial performance-based grid and could not
exceed a rate of LIBOR + 2.25% on revolving loans and LIBOR + 2.50% on the term
loan. There was a commitment fee of 3/8% on the undrawn portion of the revolving
loans. There were no outstanding loans under the Amended and Restated Credit
Facility as of October 3, 1999.
On January 20, 1999, the Company completed a $750.0 million, 30-month
asset-based credit facility (the "Second Amended and Restated Credit Facility")
which replaced the Amended and Restated Credit Facility. The Second Amended and
Restated Credit Facility included $150.0 million in term loans and a maximum of
$600.0 million in revolving loans. The Second Amended and Restated Credit
Facility included a $200.0 million sub-facility for standby and trade letters of
credit. Interest rates on the Second Amended and Restated Facility were based on
either Prime Rate + 1.5% or LIBOR + 2.75%.
On March 29, 1999, the Company entered into a 27-month, $750.0 million,
fully committed asset-based debtor-in-possession credit facility (the "DIP
Facility") which replaced the Second Amended and Restated Credit Facility. The
Bankruptcy Court approved the DIP Facility on an interim basis on March 29, 1999
and granted final approval on April 27, 1999. The DIP Facility includes $100.0
million in term loans and up to a maximum of $650.0 million in revolving loans,
including a $200.0 million sub-facility for letters of credit. The DIP Facility
matures on June 30, 2001. Interest rates on the DIP Facility are either Prime
Rate + 1.25% or LIBOR + 2.25% for the revolving loans and the term loan. There
is a commitment fee of 0.375% on the undrawn portion of the revolving loans. The
Company had $203.6 million in short-term borrowings outstanding under the DIP
Facility as of October 3, 1999. Other extensions of credit under the DIP
Facility, as of October 3, 1999, included $99.5 million in term loans and $100.9
million in both trade and standby letters of credit.
The DIP Facility is secured by all material unencumbered assets of the
Company and its subsidiaries, including inventory but excluding previously
mortgaged property and leasehold interests. Borrowings under the DIP Facility
are limited based on a borrowing base formula that takes into account eligible
inventories, eligible accounts receivable, trade letters of credit, mortgage
values on eligible real properties, eligible leasehold interests, and in-transit
cash. The Company had $183.0 million of unused borrowing availability under the
DIP Facility as
21
<PAGE> 22
of October 3, 1999. The DIP Facility had an initial borrowing base reserve of
$125.0 million which was reduced by $75.0 million on April 27, 1999, the date of
final approval by the Bankruptcy Court. The remaining borrowing base reserve of
$50.0 million was eliminated during the third quarter upon adoption of financial
covenants for the DIP facility. As of October 3, 1999, the Company was in
compliance with its financial covenants.
The following table sets forth the Company's borrowing base and
borrowing availability projections for the remainder of 1999 under the DIP
Facility. The forecast projects a borrowing base which ranges from $547.7
million to $750.0 million over the period from November 28, 1999 to January 2,
2000, and unused borrowing availability which ranges from $175.6 million to
$287.2 million. These forward-looking statements are subject to assumptions,
known and unknown risks and uncertainties including the Company's ability to
achieve planned sales, obtain shipments and maintain negotiated terms with
vendors and service providers. See "Safe Harbor Statement Under The Private
Securities Litigation Reform Act of 1995."
BORROWING BASE AND BORROWING AVAILABILITY PROJECTION
<TABLE>
<CAPTION>
ACTUAL ACTUAL FORECAST FORECAST
OCTOBER 31, NOVEMBER 7, NOVEMBER 28, JANUARY 2,
1999 1999 1999 2000
----------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
(in millions)
Ending Total Revolver Balance $ 326.2 $ 350.3 $ 400.0 $ 93.8
Term Loan 99.5 99.5 99.5 99.5
Standby Letters of Credit 27.6 27.6 27.6 27.6
Trade Letters of Credit 61.3 57.6 47.3 39.6
-------- -------- --------- --------
Total Extensions of Credit $ 514.6 $ 535.0 $ 574.4 $ 260.5
-------- -------- --------- --------
Borrowing Base $ 681.0 $ 701.1 $ 750.0 $ 547.7
Borrowing Availability $ 166.4 $ 166.1 $ 175.6 $ 287.2
</TABLE>
The anticipated increase in revolver borrowings and decrease in
availability in October, November, and December reflects, among other things,
seasonal inventory increases relating to the fall selling season.
Accounts payable have grown to $112.8 million during the three periods
ended October 3, 1999, providing the Company with additional liquidity.
CAPITAL STRUCTURE
During the nine periods ended October 3, 1999, the Company's principal
sources of liquidity were its successive credit facilities: (1) the Amended and
Restated Credit Facility, which included a $200.0 million term loan and a
revolving credit facility with a maximum commitment level of $700.0 million; (2)
the Second Amended and Restated Credit Facility, which included a $150.0 million
term loan and a revolving credit facility with a maximum commitment level of
$600.0 million; (3) the DIP Facility, which includes a $100.0 million term loan
and a revolving credit facility with a maximum commitment level of $650.0
million.
At October 3, 1999, the Company had total extensions of credit of
$303.1 million under the DIP Facility. At September 27, 1998, the Company had
total extensions of credit of $262.0 million under the Amended and Restated
Credit Facility.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133",
22
<PAGE> 23
which extended the effective date of SFAS No. 133 to all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is still in the process
of analyzing the impact of the adoption of this Statement. The Company
anticipates that the adoption of this statement will not have a material impact
on its operating results or financial position.
YEAR 2000 COMPLIANCE
The Company is currently conducting an organization wide program to
ensure that all the systems critical to the operation of the Company are Year
2000 compliant. In all categories the awareness and assessment phases are
complete. The renovation, validation (including testing) and implementation
phases are nearing completion. As of October 3, 1999, information technology
supported systems are approximately 99 percent complete and non-information
technology systems (end user systems) are approximately 100 percent complete. It
is expected that information technology supported systems will be completed by
the end of December 1999. In the course of the Company's preparation for the
Year 2000, the Company has corresponded with all software vendors, financial
institutions, and its top 1,000 merchandise vendors and the Company is
monitoring their progress. Additional follow-up with the top 100 most critical
merchandise vendors is in progress.
Replacement, conversion and testing of hardware and systems
applications are expected to cost between $2.5 million and $3.0 million. To
date, approximately $2.5 million of costs have been incurred. These costs are
being expensed as incurred.
Given that there can be no assurance that the systems of other entities
on which the Company relies will be Year 2000 compliant in a timely manner, the
major risk factor associated with Year 2000 pertains to third party
relationships. The Company is currently developing contingency plans to address
a potential worst case scenario involving difficulties experienced by the U.S.
Postal Service in the distribution of direct mailings and other publications. If
such an event occurs, the Company would have to insert a majority of its
publications into local newspapers and other publications in lieu of mailing
them. If local utility companies are unable to provide services to any of the
Company's locations, there is no contingency plan in place and the Company's
business would be at risk. The Company is unable to determine the impact, if
any, of the Chapter 11 Cases on the Company's Year 2000 program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's operations are subject to market risks primarily from
changes in interest rates. The Company had interest rate swaps at October 3,
1999, with a notional amount of $125.0 million. The Company has immaterial
exposure to exchange rate risk.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 15, 1999, five of the Company's vendors filed an involuntary
petition for reorganization under Chapter 11 in the Bankruptcy Court seeking
court supervision of the Company's restructuring efforts. On March 27, 1999, the
Company and 31 of its subsidiaries filed voluntary petitions with the Bankruptcy
Court for reorganization under Chapter 11 of the Bankruptcy Code. The Debtors
are currently operating their businesses as debtors-in-possession. The Chapter
11 Cases have been consolidated for the purpose of joint administration under
Case No. 399-02649.
At this time, it is not possible to predict the outcome of the Chapter
11 Cases or their effect on the Company's business. Additional information
regarding the Chapter 11 Cases is set forth elsewhere in this Quarterly report
on Form 10-Q and in Item 1. "Business -- Proceedings Under Chapter 11 of the
Bankruptcy Code," Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Note B of Notes to Consolidated Financial
Statements (Unaudited) and the Report of Independent Auditors included in the
Company's Annual Report on Form 10-K filed on April 5, 1999, which includes an
explanatory paragraph concerning a substantial doubt as to the Company's ability
to continue as a going concern. If it is determined that the liabilities subject
to compromise in the Chapter 11 Cases exceed the fair value of the assets,
unsecured claims may be satisfied at less than 100% of their face value and the
equity interests of the Company's shareholders may have no value.
ITEM 2. DEFAULTS UPON SENIOR SECURITIES.
The Company commenced the Chapter 11 Cases on March 27, 1999. As a
result of filing the Chapter 11 Cases, no principal or interest payments will be
made on certain indebtedness incurred by the Company prior to March 27, 1999,
including the 9.0% Senior Subordinated Debentures and 8 3/8% Senior Notes, until
a plan of reorganization defining the payment terms has been approved by the
Bankruptcy Court.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits filed with this Form 10-Q.
27 Financial Data Schedule for the Nine Periods ended
October 3, 1999.
(b) Reports on Form 8-K.
During the third quarter ended October 3, 1999, the Company filed the
following four reports on Form 8-K: (i) dated July 27, 1999 attaching the
Monthly Operating Report filed with the Bankruptcy Court for the period ending
July 4, 1999; (ii) dated August 10, 1999 attaching the Service Merchandise
Company, Inc. 1999 Operating Plan; (iii) dated August 26, 1999 attaching the
Monthly Operating Report filed with the Bankruptcy Court for the period ending
August 1, 1999; and (iv) dated September 22, 1999 attaching the Monthly
Operating Report filed with the Bankruptcy Court for the period ending August
29, 1999.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ S. Cusano
- ------------------------------------
S. Cusano
Director and Chief Executive Officer
(Principal Executive Officer)
November 17, 1999
/s/ Thomas L. Garrett, Jr.
- ------------------------------------
Thomas L. Garrett, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
November 17, 1999
/s/ Kenneth A. Conway
- ------------------------------------
Kenneth A. Conway
Vice President - Controller and Chief Accounting Officer
(Principal Accounting Officer)
November 17, 1999
25
<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 OCTOBER 3,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 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-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 36,923
<SECURITIES> 0
<RECEIVABLES> 37,832
<ALLOWANCES> 19,090
<INVENTORY> 772,299
<CURRENT-ASSETS> 906,630
<PP&E> 833,470
<DEPRECIATION> 460,401
<TOTAL-ASSETS> 1,341,980
<CURRENT-LIABILITIES> 499,878
<BONDS> 539,058
0
0
<COMMON> 100,022<F1>
<OTHER-SE> (90,780)
<TOTAL-LIABILITY-AND-EQUITY> 1,341,980
<SALES> 1,395,258
<TOTAL-REVENUES> 1,395,258
<CGS> 1,130,839
<TOTAL-COSTS> 1,130,839
<OTHER-EXPENSES> 455,023<F2>
<LOSS-PROVISION> 16,091
<INTEREST-EXPENSE> 50,419
<INCOME-PRETAX> (257,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (257,114)
<DISCONTINUED> 0
<EXTRAORDINARY> (7,851)
<CHANGES> 0
<NET-INCOME> (264,965)
<EPS-BASIC> (2.66)
<EPS-DILUTED> (2.66)
<FN>
<F1>AMOUNT REPRESENTS THE NUMBER OF SHARES OF $0.50 PAR VALUE COMMON STOCK ISSUED
AND OUTSTANDING.
<F2>AMOUNT INCLUDES I.) DEPRECIATION AND AMORTIZATION II.) SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (LESS LOSS PROVISION) III) OTHER INCOME, NET IV.)
RESTRUCTURING CHARGE AND V.) REORGANIZATION ITEMS
</FN>
</TABLE>
