-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MK2ydIqoj207qxLGcUljo2aoiG1PrNFtfBx8TST0V2AvA9EyZJbgJn4ffMUIem1M EF+CTXp8OGzQ/SzjET4HXQ== 0000089107-97-000002.txt : 19970515 0000089107-97-000002.hdr.sgml : 19970515 ACCESSION NUMBER: 0000089107-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970330 FILED AS OF DATE: 19970514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE MERCHANDISE CO INC CENTRAL INDEX KEY: 0000089107 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISC GENERAL MERCHANDISE STORES [5399] IRS NUMBER: 620816060 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09223 FILM NUMBER: 97605047 BUSINESS ADDRESS: STREET 1: 7100 SERVICE MERCHANDISE DR CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6156606000 MAIL ADDRESS: STREET 1: PO BOX 24600 CITY: NASHVILLE STATE: TN ZIP: 37202 10-Q 1 SERVICE MERCHANDISE COMPANY, INC. FORM 10-Q 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 30, 1997 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 27, 1997, there were 99,780,351 shares of Service Merchandise Company, Inc. common stock outstanding. SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES TABLE OF CONTENTS
Page No. PART I - FINANCIAL INFORMATION Consolidated Statements of Operations (Unaudited) - First Quarter Ended March 30, 1997 and March 31, 1996 . . . . . . . . . . . . . . . . . . . 3 Consolidated Balance Sheets - March 30, 1997 (Unaudited), March 31, 1996 (Unaudited) and December 29, 1996 . . . . . . . . . . . 4 Consolidated Statements of Cash Flows (Unaudited) - First Quarter Ended March 30, 1997 and March 31, 1996 . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-12 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
-2- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)
First Quarter Ended ------------------------------------- March 30, March 31, ---------------- -------------- 1997 1996 ---------------- -------------- Net sales $686,400 $715,628 Costs and expenses: Cost of merchandise sold and buying and occupancy expenses 531,640 554,870 ---------------- -------------- Gross margin after cost of merchandise sold and buying and occupancy expenses 154,760 160,758 Selling, general and administrative expenses 165,024 168,674 Restructuring charge 129,510 - Depreciation and amortization 14,812 15,609 ---------------- -------------- Loss before interest and income taxes (154,586) (23,525) Interest expense-debt 14,973 14,113 Interest expense-capitalized leases 1,989 2,225 ---------------- -------------- Loss before income tax benefit (171,548) (39,863) Income tax benefit (64,331) (15,148) ---------------- -------------- Net loss ($107,217) ($24,715) ================ ============== Weighted average common shares and common share equivalents outstanding 100,127 101,366 ================ ============== Per common share: Net loss per common share ($1.07) ($0.24) ================ ============== See Notes to Consolidated Financial Statements.
-3- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data)
(Unaudited) -------------------------------- March 30, March 31, December 29, 1997 1996 1996 (1) -------------- -------------- --------------- ASSETS Current Assets: Cash and cash equivalents $29,168 $27,248 $285,368 Accounts receivable, net of allowance of $3,409, $3,074 and $4,593, respectively 45,592 42,926 61,454 Income taxes 50,912 2,898 - Inventories 1,078,051 1,101,390 1,052,969 Prepaid expenses 21,221 31,978 15,461 -------------- -------------- --------------- TOTAL CURRENT ASSETS 1,224,944 1,206,440 1,415,252 Property and equipment: Owned assets, net of accumulated depreciation of $540,681, $502,503 and $530,170, respectively 522,975 573,577 567,056 Capitalized leases, net of accumulated amortization of $79,778, $83,492 and $86,710 respectively 36,481 42,909 37,701 Other assets and deferred charges 25,814 20,074 22,818 -------------- -------------- --------------- TOTAL ASSETS $1,810,214 $1,843,000 $2,042,827 ============== ============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $101,000 $185,000 - Accounts payable 389,031 463,260 $595,262 Accrued expenses 166,262 156,212 212,223 State and local sales taxes 25,177 29,430 62,690 Accrued restructuring costs - current 27,066 - - Income taxes - - 33,898 Current maturities of long-term debt 7,116 1,932 6,842 Current maturities of capitalized lease obligations 7,445 8,066 7,303 Deferred income taxes 7,437 11,715 7,437 -------------- -------------- --------------- TOTAL CURRENT LIABILITIES 730,534 855,615 925,655 Accrued restructuring costs 67,301 - - Long-term debt 628,331 556,401 623,615 Capitalized lease obligations 56,034 63,838 58,541 Deferred income taxes 7,922 4,888 7,922 -------------- -------------- --------------- TOTAL LIABILITIES 1,490,122 1,480,742 1,615,733 -------------- -------------- --------------- 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 99,758, 99,722 and 99,758 shares, respectively 49,879 49,861 49,879 Additional paid-in capital 5,653 5,591 5,670 Deferred compensation (1,019) (1,945) (1,251) Retained earnings 265,579 308,751 372,796 -------------- -------------- --------------- TOTAL SHAREHOLDERS' EQUITY 320,092 362,258 427,094 -------------- -------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,810,214 $1,843,000 $2,042,827 ============== ============== =============== (1) Derived from fiscal year ended December 29, 1996 audited consolidated financial statements. See Notes to Consolidated Financial Statements.
-4- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands) First Quarter Ended --------------------------------------- March 30, March 31, --------------------------------------- 1997 1996 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($107,217) ($24,715) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 15,645 16,307 Gain on disposal of property and equipment (2,511) (2,789) Write down of property and equipment due to restructuring 32,915 - Changes in assets and liabilities (net of disposition): Accounts receivable, net 15,862 10,695 Inventories (25,082) (66,923) Prepaid expenses (5,760) (6,701) Accounts payable (206,231) (157,409) Accrued expenses and state and local sales taxes (83,049) (68,598) Accrued restructuring costs 94,367 - Income taxes (84,810) (32,107) --------------- --------------- NET CASH USED BY OPERATING ACTIVITIES (355,871) (332,240) --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment - owned (4,388) (5,441) Proceeds from the disposal of property and equipment 3,626 4,249 Other, net (3,473) 1,246 --------------- --------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (4,235) 54 --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings 101,000 185,000 Proceeds from long-term debt 6,560 - Repayment of long-term debt (1,583) (1,008) Repayment of capitalized lease obligations (1,945) (1,875) Debt issuance costs (108) - Exercise of stock options (forfeiture of restricted stock), net (18) 3 --------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 103,906 182,120 --------------- --------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (256,200) (150,066) CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 285,368 177,314 --------------- --------------- CASH AND CASH EQUIVALENTS-END OF PERIOD $29,168 $27,248 =============== =============== See Notes to Consolidated Financial Statements.
-5- 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 29, 1996, 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. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996. 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 30, 1997 and March 31, 1996 are not necessarily indicative of the operating results for the entire fiscal year. B. On March 25, 1997, the Company adopted a business restructuring plan to close 60 underperforming stores and one distribution center. As a result, a pre-tax charge of $129.5 million for restructuring costs was taken in the first quarter of 1997. Management anticipates that a majority of these stores and the distribution center will be closed by the end of the third quarter of 1997, with the remaining closures completed by early 1998. In addition to the restructuring charge, reduced margins will be reflected in the Company's operating results as affected inventory associated with the closing stores is liquidated. The components of the restructuring charge and an analysis of the amounts charged against the accrual through March 30, 1997 are outlined in the following table:
Activity to Date ------------------------------------------- Accrued Original Restructuring Charge Restructuring Asset Costs as of (In thousands) Recorded Costs Paid Write-downs March 30, 1997 ------------------ ------------------- ----------------------- ------------------- Lease termination and other real estate costs $ 83,225 $ - $ - $ 83,225 Property and equipment write-downs 32,915 - (32,915) - Employee severance 4,869 (701) - 4,168 Other exit costs 8,501 (1,527) - 6,974 ------------------ ------------------- ----------------------- ------------------- Total $ 129,510 $ (2,228) $ (32,915) 94,367 ================== =================== ======================= Less: Current portion (27,066) ------------------- $ 67,301 ===================
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' lease agreements, net of any actual or reasonably probable sublease income. -6- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) After taking into effect the above asset write-downs, the Company's carrying value of the property and equipment associated with the closures is $31.3 million as of March 30, 1997. Management anticipates selling substantially all owned property and equipment associated with the closures. The employee severance provision was recorded for the planned termination of approximately 4,100 employees associated with the closures, as well as the overall restructuring of store staffing levels at the remaining stores. Other exit costs consist principally of professional fees and other costs associated with closing the stores and distribution center. Net sales associated with the closing stores were approximately $68.6 million and $73.4 million for the three periods ended March 30, 1997 and March 31, 1996, respectively. The pre-tax operating losses associated with the closing stores, excluding corporate allocations, were approximately ($3.3) million and ($4.4) million for the three periods ended March 30, 1997 and March 31, 1996, respectively. Net sales associated with the closing stores were approximately $391.0 million and $405.4 million for fiscal years 1996 and 1995, respectively. The pre-tax operating income associated with the closing stores, excluding corporate allocations, was approximately $2.0 million and $6.4 million for fiscal years 1996 and 1995, respectively. C. The first quarter ended March 30, 1997 contained 90 selling days versus the first quarter ended March 31, 1996 which contained 91 selling days. D. 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. E. Cash payments for interest for the first quarter ended March 30, 1997 and March 31, 1996 were $13.4 million and $10.1 million, respectively. Cash payments for income taxes for the first quarter ended March 30, 1997 and March 31, 1996 were $19.9 million and $17.0 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. F. The Company has available a Reducing Revolving Credit Facility ("Credit Facility") with a maximum commitment level which reduces $25 million annually until reaching $475 million at December 31, 1998. Currently, the maximum commitment level is $525 million. Short-term borrowings related to the Credit Facility were $101 million and $185 million as of March 30, 1997 and March 31, 1996, respectively. The Credit Facility matures on June 8, 1999. -7- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The Company completed an amendment to the Credit Facility on March 25, 1997 which is expected to provide the Company with the flexibility to effect the store closings and other strategic initiatives. The amendment excludes from financial covenant calculations the impact of up to $175 million in pre-tax charges and costs related to certain strategic initiatives such as the store closing restructuring. The amendment also provides increased operating flexibility with respect to certain financial covenants. Under the amended Credit Facility, the effective interest rate increased to LIBOR + 1 3/8% from LIBOR + 1%. Subsequent changes in the Company's public debt rating have further increased the effective interest rate on borrowings under the amended Credit Facility to LIBOR + 1 3/4%. The interest rate is subject to further change based on the Company's public debt rating. The facility fee on the Credit Facility increased to 1/2% from 3/8% on the entire committed amount. Additionally, the Company's bank group has obtained security interests in the majority of unencumbered property and assets (excluding inventory) of the Company. Certain other changes limit the Company's level of capital spending, dividend payments and indebtedness. -8- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES 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 report includes certain forward-looking information that is based upon management's beliefs as well as on assumptions made by and data currently available to management. This information, which 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, is subject to a number of risks and uncertainties, including but not limited to the factors identified in the Company's Form 10-K for the fiscal year ended December 29, 1996 filed with the Securities and Exchange Commission. Actual results may differ materially from those anticipated in such forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein may not be realized. The Company disclaims any obligation to update any information contained herein. 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. RESTRUCTURING CHARGE On March 25, 1997, the Company adopted a business restructuring plan to close 60 underperforming stores and one distribution center. As a result, a pre-tax charge of $129.5 million for restructuring costs was taken in the first quarter of 1997. Management anticipates that a majority of these stores and the distribution center will be closed by the end of the third quarter of 1997, with the remaining closures completed by early 1998. In addition to the restructuring charge, reduced margins will be reflected in the Company's operating results as affected inventory associated with the closing stores is liquidated. The components of the restructuring charge are outlined in a table in Note B of the Notes to Consolidated Financial Statements. -9- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The restructuring was based on an analysis of individual store performance based on cash flow return on committed capital, fit within marketing demographic profiles and strategic geographic positioning. The Company anticipates that some transfer sales may be attracted by other Service Merchandise stores operating in the same geographic markets as some of the closed stores. After the effect of charges and costs related specifically to the closings, the immediate ongoing impact of the closings on net income will be immaterial because the stores to be closed are near break-even contributors. The major benefit of the store closings will be the freeing up of capital associated with these operations, rather than a short-term opportunity to improve earnings. This capital will be redirected in an effort to produce more appropriate returns. Additionally, the Company is proceeding with a strategic assessment of its business including merchandising strategies, product offerings and shopping format. The net loss for the first quarter of 1997, including the impact of the $129.5 million pre-tax ($80.9 million after tax) restructuring charge, was $107.2 million, or $1.07 per share. Excluding the restructuring charge, net loss was $26.3 million, or $0.26 per share, compared to a net loss of $24.7 million, or $0.24 per share, for the first quarter of 1996. FIRST QUARTER ENDED MARCH 30, 1997 VS. FIRST QUARTER ENDED MARCH 31, 1996 NET SALES Net sales for the first quarter of 1997 were $686.4 million compared to $715.6 million for the first quarter of 1996. This represents a net sales decrease of $29.2 million or 4.1% with comp store sales (adjusted for the shift in Easter) decreasing 2.5%. Affecting the total sales decrease was the fact that the Company operated 399 stores during the first quarter of 1997 compared to 409 stores during the first quarter of 1996. The comparable store sales decrease was driven primarily by a storewide sales event in the first quarter of 1996 which was not repeated in the first quarter of 1997. Jewelry sales and hardline sales were both off in the low single digit percentages for the quarter. GROSS MARGIN Gross margin, after buying and occupancy expenses, was $154.8 million, or 22.5% of net sales for the first quarter of 1997 compared to $160.8 million, or 22.5% for the first quarter of 1996. The decrease in gross margin dollars was primarily due to a higher inventory shrinkage expense accrual and lower cash discounts on lower purchases. -10- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the first quarter of 1997 were $165.0 million, or 24.0% of net sales compared to $168.7 million, or 23.6% of net sales for the first quarter of 1996. Reduced employment costs and other selling, general and administrative expenses contributed to the decrease of $3.7 million, although these reductions were partially offset by higher advertising expenses. The increase as a percentage of net sales was attributable to lower sales. INTEREST EXPENSE Interest expense for the first quarter of 1997 was $17.0 million as compared to $16.3 million for the first quarter of 1996. Interest expense for the quarter increased due to the issuance of $74.8 million in mortgage financing notes primarily in the fourth quarter of 1996. This expense was partially offset by lower borrowings against the Company's Credit Facility. TAXES ON INCOME The Company recognized an income tax benefit of $64.3 million and $15.1 million for the first quarter ended March 30, 1997 and March 31, 1996, respectively. This increase is primarily due to the restructuring charge outlined above. The effective tax rates for the quarter ended March 30, 1997 and March 31, 1996 were 37.5% and 38%, respectively. For the fiscal year ended December 29, 1996 the effective income tax rate was 37.5%. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $494.4 million at the end of the first quarter of 1997 from $350.8 million at March 31, 1996, an increase of $143.6 million or 40.9%. Short-term borrowings totaled $101 million ($402.6 million available for borrowing) at March 30, 1997 compared to $185.0 million ($350.1 million available for borrowing) at March 31, 1996, a decrease of $84.0 million. The issuance of $74.8 million in mortgage financing notes primarily in the fourth quarter of 1996 led to the decrease in short-term borrowings and had a significant impact on increased working capital as payment obligations were shifted from short-term to long-term. Additionally, reduced purchases contributed to the decline in trade accounts payable. Furthermore, income taxes classified as a current asset increased by $48.0 million primarily due to the $129.5 million restructuring charge taken in the quarter. Partially offsetting these items include accrued restructuring costs of $27.1 million classified as short-term liabilities. 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, short-term borrowings and long-term financing. The current ratio at March 30, 1997 and March 31, 1996 was 1.7:1 and 1.4:1, respectively. -11- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Company has available a Reducing Revolving Credit Facility ("Credit Facility") with a maximum commitment level which reduces $25 million annually until reaching $475 million at December 31, 1998. Currently, the maximum commitment level is $525 million. The Credit Facility matures on June 8, 1999. The Company completed an amendment to the Credit Facility on March 25, 1997 which is expected to provide the Company with the flexibility to effect the store closings and other strategic initiatives. The amendment excludes from financial covenant calculations the impact of up to $175 million in pre-tax charges and costs related to certain strategic initiatives such as the store closing restructuring. The amendment also provides increased operating flexibility with respect to certain financial covenants. Under the amended Credit Facility, the effective interest rate increased to LIBOR + 1 3/8% from LIBOR + 1%. Subsequent changes in the Company's public debt rating have further increased the effective interest rate on borrowings under the amended Credit Facility to LIBOR + 1 3/4%. The interest rate is subject to further change based on the Company's public debt rating. The facility fee on the Credit Facility increased to 1/2% from 3/8% on the entire committed amount. Additionally, the Company's bank group has obtained security interests in the majority of unencumbered property and assets (excluding inventory) of the Company. Certain other changes limit the Company's level of capital spending, dividend payments and indebtedness. Total long-term debt, including current maturities and capitalized leases, increased to $698.9 million at March 30, 1997 from $630.2 million at March 31, 1996. The increase in total long-term debt was primarily attributable to the issuance of $74.8 million in mortgage financing notes slightly offset by scheduled payments for capitalized lease obligations, mortgages and Industrial Revenue Bonds. Additions to owned property and equipment were $4.4 million for the first quarter ended March 30, 1997 compared to $5.4 million for the same quarter last year. The Company operated 399 stores as of March 30, 1997, a net decrease of 10 stores from March 31, 1996. 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 flows from operations and borrowings under the Credit Facility. ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This pronouncement will be effective for financial statements for both interim and annual periods ending after December 15, 1997. The Company anticipates that this Statement will not have a material impact on its financial statements. -12- PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in the Rights of the Company's Security Holders The Company's amended Credit Facility permits the payment of dividends in an aggregate amount not to exceed (i) 25% of the Company's cumulative consolidated net income (as defined) commencing March 31, 1997 less (ii) the amount of investments made in Credit Card subsidiaries on or after March 25, 1997. Item 3. Defaults by the Company on Its Senior Securities Not applicable. Item 4. Results of Votes of Security Holders Not applicable. Item 5. Other Information Not applicable. -13- 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 ---------------------- ----------------- 4 Amendment No. 5 to Credit Agreement effective March 25, 1997 among Service Merchandise Company, Inc., various Banks and The Chase Manhattan Bank as Administrative Agent 11 Statement re: Computation of Net Loss Per Common Share for the First Quarter Ended March 30, 1997 and March 31, 1996 27 Financial Data Schedule for the First Quarter Ended March 30, 1997 6(b) Reports on Form 8-K There were no reports on Form 8-K during the first quarter ended March 30, 1997. -14- 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 12, 1997 /s/ Gary M. Witkin ------------------------- Gary M. Witkin President (Chief Executive Officer) Date: May 12, 1997 /s/ S. Cusano ------------------------- S. Cusano Executive Vice President and Chief Financial Officer (Chief Financial Officer) (Chief Accounting Officer) -15- EX-4 2 AMENDMENT NO. 5 TO CREDIT AGREEMENT FIFTH AMENDMENT --------------- FIFTH AMENDMENT (this "Amendment"), dated as of March 25, 1997, among SERVICE MERCHANDISE COMPANY, INC. (the "Borrower"), the various lending institutions party to the Credit Agreement referred to below (the "Banks"), and THE CHASE MANHATTAN BANK (formerly known as CHEMICAL BANK), as Administrative Agent (in such capacity, the "Administrative Agent"). All capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Borrower, the Banks and the Administrative Agent are parties to a Credit Agreement, dated as of June 8, 1994 and amended by the First Amendment thereto dated as of April 13, 1995, the Second Amendment thereto dated May 23, 1996, the Third Amendment thereto dated as of September 16, 1996 and the Fourth Amendment thereto dated as of January 15, 1997 (as so amended, the "Credit Agreement"); and WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: 1. (a) On the Fifth Amendment Effective Date (as defined hereinbelow), the Credit Agreement shall be amended to read as set forth in Exhibit A hereto (as so amended, the "Amended Credit Agreement"), with the same effect as if each of the parties hereto had executed and delivered to the Administrative Agent a counterpart of the Amended Credit Agreement. (b) Notwithstanding anything herein to the contrary, this Amendment shall terminate and be of no force and effect if the Fifth Amendment Effective Date shall not have occurred on or prior to March 31, 1997. 2. In order to induce the undersigned Banks to enter into this Amendment, the Borrower hereby represents and warrants that (x) no Default or Event of Default exists on the Fifth Amendment Effective Date both before and after giving effect to this Amendment and (y) all of the representations and warranties contained in the Amended Credit Agreement shall be true and correct in all material respects as of the Fifth Amendment Effective Date both before and after giving effect to this Amendment, with the same effect as though such representations and warranties had been made on and as of the Fifth Amendment Effective Date (it being understood that any representation or warranty made as of a specified date shall be required to be true and correct in all material respects only as of such specific date). 3. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 4. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent. 5. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 6. This Amendment shall become effective on the date (the "Fifth Amendment Effective Date") when the Borrower and the Required Banks (i) shall have signed a counterpart hereof (whether the same or different counterparts) and (ii) shall have delivered (including by way of telecopier) the same to the Administrative Agent at the Notice Office. 7. From and after the Fifth Amendment Effective Date all references in the Credit Agreement and the other Credit Documents to the Credit Agreement shall be deemed to be references to the Amended Credit Agreement. -2- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. Address: - ------- 7100 Service Merchandise Drive SERVICE MERCHANDISE Brentwood, TN 37027 COMPANY, INC. Attn: Thomas L. Garrett, Jr. Telephone: (615) 660-6000 By /s/ Wade Smith Telecopy: (615) 660-3667 -------------------------- Title: Vice President and Assistant Treasurer 270 Park Avenue THE CHASE MANHATTAN BANK 10th Floor Individually, and as New York, NY 10017 Administrative Agent Attn: William P. Rindfuss Telephone: (212) 270-4565 By _________________________ Telecopy: (212) 270-1474 Title: IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. Address: 7100 Service Merchandise Drive SERVICE MERCHANDISE Brentwood, TN 37027 COMPANY, INC. Attn: Thomas L. Garrett, Jr. Telephone: (615) 660-6000 By__________________________ Telecopy: (615) 660-3667 Title: 270 Park Avenue THE CHASE MANHATTAN BANK 10th Floor Individually, and as New York, NY 10017 Administrative Agent Attn: William P. Rindfuss Telephone: (212) 270-4565 By /s/ William P. Rindfuss Telecopy: (212) 270-1474 -------------------------- Title: William P. Rindfuss Vice President 277 Park Avenue ARAB BANKING CORPORATION 32nd Floor New York, NY 10172 Attn: Louise Bilbro Telephone: (212) 583-4758 By /s/ Louise Bilbro Telecopy: (212) 583-0921 -------------------------- Title: Louise Bilbro Vice President 100 Federal Street, 01-09-05 THE FIRST NATIONAL BANK OF Boston, MA 02110 BOSTON Attn: Peter L. Griswold Telephone: (617) 434-8312 By__________________________ Telecopy: (617) 434-6685 Title: 700 Louisiana THE BANK OF MONTREAL Suite 4400 Houston, TX 77002 Attn: Tom McGraw Telephone: (713) 546-9781 By__________________________ Telecopy: (713) 223-5551 Title: One Wall Street THE BANK OF NEW YORK New York, NY 10286 Attn: Paula DiPonzio Telephone: (212) 635-7867 By /s/ Paula DiPonzio Telecopy: (212) 635-1483 -------------------------- Title: Vice President 1251 Avenue of the Americas THE BANK OF TOKYO- 12th Floor MITSUBISHI, LTD. New York, NY 10020 Attn: Paul P. Malecki Telephone: (212) 782-4343 By /s/ Paul P. Malecki Telecopy: (212) 782-4981 -------------------------- Title: PAUL P. MALECKI Vice President 1251 Avenue of the Americas THE BANK OF TOKYO- 12th Floor MITSUBISHI TRUST COMPANY New York, NY 10020 Attn: Paul P. Malecki Telephone: (212) 782-4343 By /s/ Paul P. Malecki Telecopy: (212) 782-4981 -------------------------- Title: PAUL P. MALECKI Vice President 787 7th Avenue BANQUE PARIBAS 32nd Floor New York, NY 10019 Attn: Mary Finnegan Telephone: (212) 841-2551 By /s/ Mary T. Finnegan Telecopy: (212) 841-2333 -------------------------- Title: Mary T. Finnegan Group Vice President By /s/ Robert G. Carino -------------------------- Title: Robert G. Carino Vice President 425 Lexington Avenue CIBC Inc. 8th Floor New York, NY 10017 Attn: Christopher Kleczkowski Telephone: (212) 856-3560 By /s/ Christopher P. Kleczkowski Telecopy: (212) 856-3991 -------------------------- Title: Director, CIBC Wood Gundy Securities Corp., AS AGENT 75 Wall Street DRESDNER BANK AG, 25th Floor NEW YORK BRANCH New York, NY 10005 Attn: Anthony Berti Telephone: (212) 429-2247 By__________________________ Telecopy: (212) 429-2781 Title: By__________________________ Title: Marquis One Tower THE FUJI BANK, LTD. Suite 2100 245 Peachtree Center Ave., NE Atlanta, GA 30303 Attn: David Hart Telephone: (404) 215-3314 By /s/ Toshihiro Mitsui Telecopy: (404) 653-2119 -------------------------- Title: Vice-President and Manager Two World Trade Center THE HOKKAIDO TAKUSHOKU 99th Floor BANK, LTD. New York, NY 10048 Attn: Scott D. Winston Telephone: (212) 912-6914 By /s/ Kathleen M. Sweeney Telecopy: (212) 466-6079 -------------------------- Title: SVP and Manager 1251 Avenue of the Americas THE INDUSTRIAL BANK OF JAPAN, New York, NY 10020 LIMITED - NEW YORK BRANCH Attn: James Welch Telephone: (212) 282-3690 By /s/ Takuya Honjo Telecopy: (212) 282-4250 -------------------------- Title: TAKUYA HONJO SENIOR VICE PRESIDENT 165 Broadway LTCB TRUST COMPANY New York, NY 10006 Attn: Edna Astuto Telephone: (212) 335-4560 By /s/ John J. Sullivan Telecopy: (212) 608-2371 -------------------------- Title: Executive Vice President 140 Broadway HSBC AMERICAS, INC. 5th Floor New York, NY 10005 Attn: Gina Sidorsky Telephone: (212) 658-2750 By /s/ J.B. Lyons Telecopy: (212) 658-2586 -------------------------- Title: SENIOR VICE PRESIDENT 500 West Jefferson St. PNC BANK, KENTUCKY, INC. Louisville, Kentucky 40202 Attn: Ralph Phillips Telephone: (502) 581-4543 By /s/ Ralph M. Bowman Telecopy: (502) 581-2302 -------------------------- Title: Vice President 520 Madison Avenue THE MITSUBISHI TRUST AND 25th Floor BANKING CORPORATION New York, NY 10022 Attn: Susan LeFevre Telephone: (212) 891-8454 By /s/ Patricia Loret de Mola Telecopy: (212) 644-6825 -------------------------- Title: Senior Vice President One NationsBank Plaza NATIONSBANK, N.A. 5th Floor Nashville, TN 37239-1697 Attn: Kimberly Dupuy Telephone: (615) 749-3174 By__________________________ Telecopy: (615) 749-4640 Title: 245 Park Avenue THE NIPPON CREDIT BANK, LTD. 30th Floor New York, NY 10167 Attn: Barry Fein Telephone: (212) 984-1261 By /s/ Barry S. Fein Telecopy: (212) 490-3895 -------------------------- Title: Assistant Vice President Marquis One Tower THE SAKURA BANK, LIMITED Suite 2703 245 Peachtree Center Ave., N.E. Atlanta, GA 30303 Attn: Chad Zimmerman Telephone: (404) 521-3111 By /s/ Hiroyasu Imanishi Telecopy: (404) 521-1133 -------------------------- Title: HIROYASU IMANISHI V.P. & SENIOR MANAGER Georgia Pacific Center THE SUMITOMO BANK, LIMITED 133 Peachtree Street, N.E. Suite 3210 Atlanta, GA 30303 Attn: Thomas Lawson Telephone: (404) 526-8513 By /s/ Masayuki Fukushima Telecopy: (404) 521-1187 -------------------------- Title: JOINT GENERAL MANAGER MASAYUKI FUKUSHIMA 55 East 52nd Street THE TOKAI BANK, LTD. New York, NY 10055 NEW YORK BRANCH Attn: Haruyo Niki Telephone: (212) 339-1123 By__________________________ Telecopy: (212) 832-1428 Title: One Detroit Center COMERICA BANK 500 Woodward Avenue, MC 3280 Detroit, MI 48226 Attn: Kristine L. Andersen Telephone: (313) 222-3648 By /s/ Kristine L. Andersen Telecopy: (313) 222-3330 -------------------------- Title: Kristine L. Andersen, Account Officer 640 5th Avenue BANK OF IRELAND, CAYMAN 2nd Floor ISLAND BRANCH New York, NY 10019 Attn: Roger Burns Telephone: (212) 397-1712 By /s/ Roger Burns Telecopy: (212) 586-7752 -------------------------- Title: Vice President 1211 Avenue of the Americas WESTDEUTSCHE LANDESBANK 23rd Floor GIROZENTRALE, NEW YORK AND New York, NY 10036 CAYMAN ISLAND BRANCHES Attn: Alan Bookspan Telephone: (212) 852-6023 By__________________________ Telecopy: (212) 852-6307 Title: By__________________________ Title: 1 Parkview Plaza VAN KAMPEN AMERICAN CAPITAL Oakbrook Terrace, IL 60181 PRIME RATE INCOME TRUST Attn: Jeffrey W. Maillet Telephone: (630) 684-6436 By /s/ Jeffrey W. Maillet Telecopy: (630) 684-6740 -------------------------- Title: JEFFREY W. MAILLET Sr. Vice Pres. - Portfolio Mgr. 285 Peachtree Center Ave., N.E. THE YASUDA TRUST AND Suite 2104 BANKING COMPANY, LTD. Atlanta, GA 30303 Attn: Sanjay Sinha Telephone: (404) 584-8230 By /s/ Morikazu Kimura Telecopy: (404) 584-7816 -------------------------- Title: MORIKAZU KIMURA CHIEF REPRESENTATIVE One Ravinia Drive ABN AMRO BANK N.V., Suite 1200 ATLANTA AGENCY Atlanta, GA 30346-2103 Attn: Linda Davis Telephone: (770) 396-0066 By /s/ Steven L. Hipsman Telecopy: (770) 395-9188 -------------------------- Title: VICE PRESIDENT By /s/ Larry K. Kelley -------------------------- Title: GROUP VICE PRESIDENT EX-11 3 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Computation of Net Loss Per Common Share (Unaudited) (In thousands, except per share data)
First Quarter Ended ------------------------------------------------ March 30 March 31 1997 1996 -------------------- -------------------- Primary - ------- Net loss ($107,217) ($24,715) ==================== ==================== Shares: Weighted average common shares outstanding 99,259 99,184 Weighted average shares of restricted stock outstanding 499 520 Additional shares assuming exercise of stock options 369 1,662 -------------------- -------------------- Weighted average common shares and common share equivalents outstanding - primary 100,127 101,366 ==================== ==================== Primary net loss per common share ($1.07) ($0.24) ==================== ==================== Assuming Full Dilution - ---------------------- Net loss ($107,217) ($24,715) ==================== ==================== Shares: Weighted average common shares outstanding 99,259 99,184 Weighted average shares of restricted stock outstanding 499 520 Additional shares assuming exercise of stock options 369 1,674 -------------------- -------------------- Weighted average common shares and common share equivalents outstanding - fully diluted 100,127 101,378 ==================== ==================== Fully diluted net loss per common share ($1.07) ($0.24) ==================== ====================
EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Service Merchandise Company, Inc. Form 10-Q for the quarterly period ended March 30, 1997 and is qualified in its entirety by reference to such financial statements detailed in Part I of the Form 10-Q. 1,000 3-MOS DEC-28-1997 DEC-30-1996 MAR-30-1997 29,168 0 49,001 3,409 1,078,051 1,224,944 1,179,915 620,459 1,810,214 730,534 684,365 0 0 99,758 270,213 1,810,214 686,400 686,400 531,640 531,640 179,836 0 16,962 (171,548) (64,331) (107,217) 0 0 0 (107,217) (1.07) (1.07) Amount represents the number of shares of $0.50 par value common stock issued and outstanding. Amount includes I) depreciation and amortization and II) selling, general and administrative expenses.
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