-----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, PBfjfuyNdA0NuEZ26BMZ8W6f7/1b76KPYcEInMAHQ7Ych8QWlzzxk3kSBYx9aYtB u34UIEMoXpV6Mqg6bwEjjg== 0000089107-98-000016.txt : 19981113 0000089107-98-000016.hdr.sgml : 19981113 ACCESSION NUMBER: 0000089107-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 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: SEC FILE NUMBER: 001-09223 FILM NUMBER: 98745577 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 September 27, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---- ---- Commission File No. 1-9223 SERVICE MERCHANDISE COMPANY, INC. (Exact name of registrant as specified in its charter) TENNESSEE 62-0816060 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. Box 24600, Nashville, TN 37202-4600 (Mailing Address) 7100 Service Merchandise Drive, Brentwood, TN (Address of principal executive offices) 37027 (Zip code) (615) 660-6000 (Registrant's telephone number including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of the latest practicable date. As of October 25, 1998, there were 100,354,902 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) - Three and Nine Periods Ended September 27, 1998 and September 28, 1997 . . . . 3 Consolidated Balance Sheets - September 27, 1998 (Unaudited), September 28, 1997 (Unaudited) and December 28, 1997 . . . . . . . . . 4 Consolidated Statements of Cash Flows (Unaudited) - Nine Periods Ended September 27, 1998 and September 28, 1997 . . . . . . . . 5 Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . 6-10 Management's Discussion and Analysis of Financial Condition and Results of Operations . .. . . . . . . . . . . . . . . . . . . . . . 11-19 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
-2- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)
Three Periods Ended Nine Periods Ended -------------------------- -------------------------- September 27 September 28 September 27 September 28 -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ -------------------------- Net sales Operations excluding closing facilities as a result of restructuring and remerchandising activities $ 604,715 $ 635,483 $ 1,874,164 $ 1,990,696 Closing facilities as a result of restructuring and remerchandising activities 272 20,661 10,117 229,209 --------- --------- ------------ ----------- 604,987 656,144 1,884,281 2,219,905 Costs and expenses: Cost of merchandise sold and buying and occupancy expenses Operations excluding closing facilities as a result of restructuring and remerchandising activities 463,541 486,062 1,420,873 1,512,721 Closing facilities as a result of restructuring and remerchandising activities 3,192 18,892 18,489 218,166 -------- -------- ---------- ----------- 466,733 504,954 1,439,362 1,730,887 Gross margin after cost of merchandise sold and buying and occupancy expenses Operations excluding closing facilities as a result of restructuring and remerchandising activities 141,174 149,421 453,291 477,975 Closing facilities as a result of restructuring and remerchandising activities (2,920) 1,769 (8,372) 11,043 --------- -------- --------- -------- 138,254 151,190 444,919 489,018 Selling, general and administrative expenses Operations excluding closing facilities as a result of restructuring and remerchandising activities 166,732 152,028 462,277 459,260 Closing facilities as a result of restructuring and remerchandising activities 52 2,231 2,352 38,705 -------- -------- -------- --------- 166,784 154,259 464,629 497,965 Restructuring charge - - - 129,510 Depreciation and amortization Operations excluding closing facilities as a result of restructuring and remerchandising activities 13,908 13,212 42,514 40,842 Closing facilities as a result of restructuring and remerchandising activities - 155 87 2,981 -------- -------- -------- --------- 13,908 13,367 42,601 43,823 Loss from operations (42,438) (16,436) (62,311) (182,280) Other income, net 831 67 11,120 2,531 -------- -------- -------- --------- Loss before interest and income taxes (41,607) (16,369) (51,191) (179,749) Interest expense-debt 17,709 17,525 53,352 49,616 Interest expense-capitalized leases 1,642 1,883 5,115 6,034 -------- -------- --------- -------- Loss before income taxes (60,958) (35,777) (109,658) (235,399) Income taxes benefit (22,860) (13,417) (41,122) (88,275) -------- -------- -------- -------- Loss before extraordinary item (38,098) (22,360) (68,536) (147,124) Extraordinary loss from early extinguishment of debt, net of $1,585 tax benefit - (2,643) - (2,643) --------- -------- -------- -------- Net loss $ (38,098) $ (25,003) $ (68,536) $ (149,767) ========= ======== ======== ======== Weighted average common shares - basic and diluted 99,701 99,316 99,702 99,290 ========= ======== ======== ======== Per common share: Loss before extraordinary item $ (0.38) $ (0.22) $ (0.69) $ (1.48) Extraordinary loss from early extinguishment of debt - (0.03) - (0.03) -------- -------- -------- -------- Net loss $ (0.38) $ (0.25) $ (0.69) $ (1.51) ======== ======== ======== ======== See Notes to Consolidated Financial Statements. -3-
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data)
(Unaudited) ----------------------------- September 27 September 28 December 28 1998 1997 1997 (1) ------------- ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $54,452 $45,900 $364,169 Accounts receivable, net of allowance of $2,144, $2,541 and $3,456, respectively 48,767 39,969 43,130 Income taxes 27,311 77,640 - Inventories 1,044,170 1,165,586 929,818 Prepaid expenses 18,282 31,809 25,276 Deferred income taxes 22,478 - 22,478 ------------ ------------- ----------- TOTAL CURRENT ASSETS 1,215,460 1,360,904 1,384,871 Property and equipment: Owned assets, net of accumulated depreciation of $537,053, $546,399 and $517,629, respectively 476,964 500,327 490,345 Capitalized leases, net of accumulated amortization of $74,977, $76,740 and $76,735, respectively 27,819 35,207 33,289 Other assets and deferred finance charges 59,205 38,378 42,956 ------------ ------------- ----------- TOTAL ASSETS $1,779,448 $1,934,816 $1,951,461 ============ ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 65,000 $ 125,400 $ - Accounts payable 398,454 447,356 482,235 Accrued expenses 202,099 163,884 214,451 State and local sales taxes 21,362 25,190 48,331 Accrued restructuring costs - current 12,581 29,149 21,178 Current maturities of long-term debt 21,281 20,641 23,723 Current maturities of capitalized lease obligations 8,545 8,267 8,452 Deferred income taxes - 7,437 - ---------- ------------- ----------- TOTAL CURRENT LIABILITIES 729,322 827,324 798,370 Accrued restructuring costs 52,834 53,483 55,064 Long-term debt 685,486 715,470 711,512 Capitalized lease obligations 43,417 52,564 50,010 Deferred income taxes - 7,922 - ---------- ------------- ----------- TOTAL LIABILITIES 1,511,059 1,656,763 1,614,956 ---------- ------------- ----------- 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 1,100 shares, none issued Common stock, $.50 par value, authorized 500,000 shares, issued and outstanding 100,356, 99,800 and 100,376 shares, respectively 50,178 49,900 50,188 Additional paid-in capital 7,721 5,680 7,908 Deferred compensation (2,170) (558) (2,787) Retained earnings 212,660 223,031 281,196 ------------ ------------- ------------ TOTAL SHAREHOLDERS' EQUITY 268,389 278,053 336,505 ------------ ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,779,448 $1,934,816 $1,951,461 ============ ============= ============ (1) Derived from fiscal year ended December 28, 1997 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)
Nine Periods Ended -------------------------------- September 27 September 28 --------------------------------- 1998 1997 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($68,536) ($149,767) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 46,931 46,391 Gain on disposal of property and equipment (11,120) (2,531) Write down of property and equipment due to restructuring - 32,915 Write-off of debt issuance costs - 2,111 Changes in assets and liabilities (net of disposition): Accounts receivable, net (5,637) 21,485 Inventories (114,352) (112,617) Prepaid expenses (1,453) (16,348) Accounts payable (83,781) (192,531) Accrued expenses and state and local sales taxes (39,322) (83,570) Accrued restructuring costs (10,827) 82,632 Income taxes (27,311) (111,538) ------------- ------------- NET CASH USED BY OPERATING ACTIVITIES (315,408) (483,368) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment - owned (30,653) (23,576) Proceeds from sale of property and equipment 31,045 17,431 Other assets, net (23,955) (2,555) ------------- -------------- NET CASH USED BY INVESTING ACTIVITIES (23,563) (8,700) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings 65,000 125,400 Proceeds from long-term debt - 206,560 Repayment of long-term debt (28,468) (101,122) Repayment of capitalized lease obligations (6,390) (6,124) Debt issuance costs (846) (16,806) Exercise of stock options (forfeiture of restricted stock), net (42) 67 ------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 29,254 207,975 ------------- -------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (309,717) (284,093) CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 364,169 329,993 ------------- -------------- CASH AND CASH EQUIVALENTS-END OF PERIOD $54,452 $45,900 ============= ============== 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 28, 1997, 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 year's 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 December 28, 1997. 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 quarters ended September 27, 1998 and September 28, 1997 are not necessarily indicative of the operating results for an entire fiscal year. B. The Company's consolidated statements of operations presentation changed beginning with the second quarter of 1997. This change was made to disclose the financial statement impact of the inventory liquidations associated with the closing facilities and remerchandising activities. The line item "Closing facilities as a result of restructuring and remerchandising activities" represents activity specifically identifiable to inventory liquidations conducted in conjunction with (1) the Company's Restructuring Plan announced in the first quarter of 1997 and (2) exiting the computer, infant, pet supply and other merchandise categories and certain components of the wireless communication and sporting goods categories as part of a remerchandising program. As of September 27, 1998, 53 stores, one distribution center and primarily all of the aforementioned merchandise categories have been liquidated. All activity for these items is classified in "Closing facilities as a result of restructuring and remerchandising activities." Prior year amounts reflect operating results for these same facilities and merchandise classifications. Selling, general and administrative expenses for closing facilities as a result of restructuring and remerchandising activities does not include any allocation of corporate overhead. C. On March 25, 1997, the Company adopted a business restructuring plan to close 60 stores and one distribution center (the "Restructuring Plan"). As a result, a pre-tax charge of $129.5 million for restructuring costs was taken in the first quarter of 1997. The components of the restructuring charge and the amounts charged against the accrual from March 25, 1997 to September 27, 1998 and from December 28, 1997 through September 27, 1998 are outlined, respectively, in the following tables: -6- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Activity to Date ----------------------------------------- Accrued Accrued Restructuring Costs Restructuring Costs as of Restructuring Asset Change In as of (In thousands) March 25, 1997 Costs Paid Write-downs Estimate September 27, 1998 ------------------ -------------- -------------- ----------- -------------------- Lease termination and other real estate costs $ 83,225 $ (24,303) $ - $ 4,293 $ 63,215 Property and equipment write-downs 32,915 - (32,096) (819) - Employee severance 4,869 (3,624) - (1,245) - Other exit costs 8,501 (4,072) - (2,229) 2,200 ------------------ -------------- -------------- ----------- -------------------- Total $ 129,510 $ (31,999) $ (32,096) $ - 65,415 ================== ============== ============== =========== Less: Current portion (12,581) ---------------- $ 52,834 ================ 1998 Activity ----------------------------------------- Accrued Accrued Restructuring Costs Restructuring Costs as of Restructuring Asset Change In as of (In thousands) December 28, 1997 Costs Paid Write-downs Estimate September 27, 1998 ------------------ -------------- -------------- ----------- -------------------- Lease termination and other real estate costs $ 73,511 $ (11,491) $ - $ 1,195 $ 63,215 Property and equipment write-downs - - 819 (819) - Employee severance 531 (155) - (376) - Other exit costs 2,200 - - - 2,200 ------------------ -------------- -------------- ----------- -------------------- Total $ 76,242 $ (11,646) $ 819 $ - 65,415 ================== ============== ============== =========== Less: Current portion (12,581) ---------------- $ 52,834 ================
The closing of nine stores during the first half of 1998 brought the total number of closures in accordance with the Restructuring Plan to 53 stores and one distribution center. Store closures related to the Restructure Plan were completed as of May 1998. Impairment charges recognized on the nine stores closed in 1998 were $4.2 million. 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 first three quarters of 1998 relate primarily to lease termination and other real estate costs. 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, as well as early termination costs. The Company will pay lease termination fees as the Company is able to obtain such terminations. The leases remaining on closed locations as of September 27, 1998 vary in length with expiration dates ranging from February 1999 to December 2030. The ultimate timing of lease payments will depend on the Company's ability to negotiate acceptable lease exit terms. As of September 27, 1998, property and equipment associated with the Restructuring Plan closures have been written-down to reflect their estimated fair value. Management anticipates selling or abandoning substantially all remaining owned property and equipment associated with the Restructuring Plan. Approximately 3,000 employees were terminated pursuant to the Restructuring Plan. All such terminations were completed as of May 1998. -7- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Changes in estimates are representative of conditions existing as of September 27, 1998. Due to unfavorable sublease and termination experience during 1998, the Company increased the estimate for lease termination and other real estate costs. These unfavorable results have been offset by favorable experience related to the sale of property and equipment associated with the store closures and employee severance. In the third quarter of 1998, the Company completed the remerchandising portion of its restructuring and repositioning plan announced in March 1997. D. The third quarter ended September 27, 1998 and September 28, 1997 each contained 91 selling days. The nine periods ended September 27, 1998 and September 28, 1997 each contained 272 selling days. E. Other income reflects the Company's gain or loss incurred from the sale of fixed assets. This activity was previously recorded as a part of selling, general and administrative expenses. The amounts reclassified were $0.1 million for the three periods ended September 28, 1997 and $2.5 million for the nine periods ended September 28, 1997. The sale of these assets were not related to the Restructuring Plan. F. In July 1998, Service Plus Assurance Company Ltd., a wholly-owned insurance company incorporated under the laws of Bermuda, was established to provide coverage for the retained loss portion of the Company's workers' compensation and general liability coverage. Additionally, this subsidiary will share underwriting, limited risk and investment income with the administrators and insurers of its products warranty program and the Company's credit life program. G. Basic net earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding during the year. 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 year plus incremental shares that would have been outstanding upon the assumed vesting of dilutive restricted stock and the assumed exercise of dilutive stock options. H. Cash payments for interest for the nine periods ended September 27, 1998 and September 28, 1997 were $52.6 million and $51.0 million, respectively. Cash payments (refunds) for income taxes for the nine periods ended September 27, 1998 and September 28, 1997 were ($17.3) million and $21.7 million, respectively. The net income tax refund for 1998 resulted primarily from the net operating loss ("NOL") recognized for the year ended December 28, 1997. -8- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) I. In September 1997, the Company completed a five-year, $900 million, fully-committed, asset-based credit facility ("Amended and Restated Credit Facility"). The Amended and Restated Credit Facility currently includes $197 million in term loans and up to a maximum of $700 million in revolving loans including a $175 million sub-facility for letters of credit. The Amended and Restated Credit Facility matures on September 10, 2002. Interest rates on the Amended and Restated Credit Facility are subject to change based on a financial performance-based grid and cannot exceed a rate of LIBOR + 2.25% on revolving loans and LIBOR + 2.50% on the term loan. As of September 27, 1998, the revolving loans and the term loan carried a rate of LIBOR + 2.00%, or 7.62%, and LIBOR + 2.25%, or 7.87%, respectively. There is a commitment fee of 3/8% on the undrawn portion of the revolving loans. Short-term borrowings related to the Amended and Restated Credit Facility were $65.0 million and $125.4 million as of September 27, 1998 and September 28, 1997, respectively. On October 28, 1998, the Company amended the Amended and Restated Credit Facility to reduce the fixed charge coverage requirement (the ratio of earnings before interest, taxes, depreciation, amortization and rents to cash interest plus rents) from 1.25:1.0 to 1.05:1.0 for the fourth quarter of 1998. The Amended and Restated Credit Facility is secured by all material unencumbered assets of the Company and its subsidiaries, including inventory but excluding previously mortgaged property and leasehold interests. These security interests will automatically terminate when the Company's senior debt (or implied senior debt) achieves an investment grade credit rating or the Company meets certain operating performance targets. Borrowings under the Amended and Restated Credit Facility are limited based on (1) a borrowing base formula which considers eligible inventories, eligible accounts receivable and mortgage values on eligible real properties and (2) limitations contained in the Company's public senior subordinated debt indenture. Approximately $276.1 million of borrowings were unused and available under the Amended and Restated Credit Facility as of September 27, 1998. J. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the first quarter of 1998. The Company's comprehensive loss and net loss for the three periods and nine periods ended September 27, 1998 and September 28, 1997 were equal. -9- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) K. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These pronouncements will be effective for financial statements beginning after December 15, 1997. In March 1998, the FASB issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This pronouncement will be effective for financial statements beginning after December 15, 1998. The Company anticipates that the adoption of these Statements will not have a material impact on its operating results or financial position. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is still in the process of analyzing the impact of the adoption of this Statement. -10- 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 The Company's liquidity, capital resources and results of operations may be affected from time to time by a number of factors and risks, including, but not limited to, continuing availability of trade credit; terms with vendors and floor planning arrangements; the Company's use of substantial financial leverage and the potential impact of such leverage on the Company's ability to execute its operating strategies; to withstand significant economic downturns and to repay its indebtedness; the Company's ability to fund, and its success in implementing plans regarding the Company's alternative store formats; the ability to fund and execute a strategic repositioning of the Company; competitive pressures from other retailers, including specialized 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; availability, costs and terms of financing, including the risk of rising interest rates; 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 by executing the Company's remerchandising strategy and improving customer service; 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 and the ability to effect conversions to new technological systems, including becoming year 2000 compliant. This report includes, and other reports and statements issued on behalf of the Company, may include certain forward-looking statements in reliance on the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are subject to a number of risks and uncertainties, including but not limited to the factors identified above. 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. -11- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RESULTS OF OPERATIONS OVERVIEW The Company has embarked on a plan to establish itself as a fresh new competitive fine jewelry and home specialty retailer. As anticipated, the execution of this plan during the first two months of this quarter resulted in significant expense to the Company, thus negatively impacting the third quarter results. The nature of the Company's business is highly seasonal. Historically, sales in the fourth quarter have been substantially higher than sales achieved in each of the first three quarters of the fiscal year. Thus expenses and, to a greater extent, operating income vary greatly by quarter. Caution, therefore, is advised when appraising results for a period shorter than a full year, or when comparing any period other than to the same period of the previous year. THIRD QUARTER ENDED SEPTEMBER 27, 1998 VS. THIRD QUARTER ENDED SEPTEMBER 28, 1997 NET SALES Net sales for the Company were $605.0 million for the third quarter of 1998 compared to $656.1 million for the third quarter of 1997. The $51.1 million decrease reflects the $20.4 million loss in sales associated with closed facilities as a result of restructuring and remerchandising activities and a 5.2% decrease in comparable store sales. Net sales from operations excluding closing facilities as a result of restructuring and remerchandising activities for the third quarter of 1998 were $604.7 million versus $635.5 million for the same period in 1997. This represents a net sales decrease of $30.8 million, or 4.8%, with comparable store sales decreasing 5.2%. Jewelry comparable store sales increased 8.4%, while hardline comparable store sales were down 10.0%. Contributing to the overall comparable store sales decline was the disruption caused by both the reformatting of the store selling floor and the clearance of discontinued merchandise in connection with the new format conversion. Additionally, the Company's mail order sales contributed to approximately 17% of the overall comparable store sales decline. The negative impact is believed to be the result of the elimination of the Fall Catalog. Net sales from closing facilities as a result of restructuring and remerchandising activities were $0.3 million for the third quarter of 1998 versus $20.7 million for these same facilities and merchandise classifications for the same period last year. GROSS MARGIN Gross margin, after buying and occupancy expenses, for the Company for the third quarter of 1998 was $138.3 million, or 22.9% of net sales compared to $151.2 million, or 23.0% of net sales for the prior year quarter. -12- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gross margin, after buying and occupancy expenses, excluding closing facilities as a result of restructuring and remerchandising activities, was $141.2 million, or 23.3% of net sales for the third quarter of 1998 compared to $149.4 million, or 23.5% of net sales for the prior year quarter. The relatively flat gross margin rate reflects the clearance markdowns prevalent during the quarter, offset by the transition to an assortment of merchandise that has higher margins than previously sold by the Company in prior quarters. Gross margin, after buying and occupancy expenses, from closing facilities as a result of restructuring and remerchandising activities was ($2.9) million for the third quarter of 1998 compared to $1.8 million for the prior year quarter. The impact on gross margin recognized in the third quarter of 1998 is due to the clearance of certain discontinued merchandise and the recognition of a $2.9 million write-down in order to reduce discontinued inventory items to their net realizable value. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the third quarter of 1998 were $166.8 million, or 27.6% of net sales, versus $154.3 million, or 23.5% of net sales for the third quarter of 1997. The $12.5 million increase is primarily attributable to increased expenses associated with operations excluding closing facilities as a result of restructuring and remerchandising activities. Selling, general and administrative expenses, excluding closing facilities as a result of restructuring and remerchandising activities, increased $14.7 million to $166.7 million, or 27.6% of net sales, as compared to $152.0 million, or 23.9% of net sales for the third quarter last year. The increase is primarily attributable to an increase in advertising, promotional programs and employment as part of the transition effort and Labor Day kick-off of the new store format. This increase was partially offset by $3.6 million in income from the Company's private label credit card program. Selling, general and administrative expenses of closing facilities as a result of restructuring and remerchandising activities were $0.1 million, or 19.1% of sales from closing facilities as a result of restructuring and remerchandising activities for the third quarter of 1998 compared to $2.2 million, or 10.8% of sales from closing facilities as a result of restructuring and remerchandising activities for the prior year quarter. OTHER INCOME In the third quarter of 1998, other income increased to $0.8 million from $0.1 million in the third quarter 1997. This increase was primarily due to a gain on the disposal of a property not included in the Restructuring Plan. INTEREST EXPENSE Interest expense was $19.4 million for both the third quarter of 1998 and 1997. Interest expense remained flat as the term loan was outstanding for the entire quarter in 1998 offset by lower average borrowings against the revolver under the Company's Amended and Restated Credit Facility. -13- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) INCOME TAXES The Company recognized an income tax benefit of $22.9 million and $13.4 million for the third quarter ended September 27, 1998 and September 28, 1997, respectively. The effective tax rate for the third quarter ended September 27, 1998 and September 28, 1997 was 37.5%. For the fiscal year ended December 28, 1997 the effective income tax rate was 37.5%. NINE PERIODS ENDED SEPTEMBER 27, 1998 VS. NINE PERIODS ENDED SEPTEMBER 28, 1997 NET SALES Net sales for the Company were $1,884.3 million for the first nine periods of 1998 compared to $2,219.9 million for the first nine periods of 1997. The decrease of $335.6 million, or 15.1% reflects the $219.1 million loss in sales associated with closed facilities as a result of restructuring and a 6.4% decrease in comparable store sales. Jewelry comparable store sales increased 2.9% while hardline comparable store sales were down 9.7%. Contributing to the overall comparable store sales decline was the conversion of the Company's traditional store format and merchandise selections into a new business design during both the second and third quarters of 1998. GROSS MARGIN Gross margin, after buying and occupancy expenses, for the first nine periods of 1998 was $444.9 million, or 23.6% of net sales compared to $489.0 million, or 22.0% of net sales for the same period last year. The improved gross margin rate reflects the Company's focus on higher margin categories and a shift in sales mix towards jewelry offset by a $7.9 million write-down reducing discontinued inventory items to their net realizable value. Additionally, the gross margin rate for the first nine periods of 1997 was impacted by significant merchandise discounts associated with inventory liquidations. The decline in gross margin dollars reflects the closure of 53 stores under the Restructuring Plan. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased to $464.6 million, or 24.7% of net sales, for the first nine months of 1998 compared to $498.0 million, or 22.4% of net sales for the same period a year ago. The decrease in selling, general and administrative dollars is primarily attributable to the lower operating expenses resulting from the closure of 53 stores under the Restructuring Plan and income of $16.7 million recognized from the Company's private label credit card program. This decrease was partially offset by increased advertising and employment expenses of operations excluding closing facilities as a result of restructuring and remerchandising activities incurred primarily in the third quarter of 1998. -14- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) OTHER INCOME In the nine periods ended September 27, 1998, other income increased $8.6 million to $11.1 million from $2.5 million for the same period last year. The increase was primarily the result of a $6.0 million gain recognized from the sale/leaseback of its corporate aircraft and $2.6 million gain recorded on the disposal of two vacant properties. INTEREST EXPENSE Interest expense for the first nine periods of 1998 was $58.5 million as compared to $55.7 million for the same period a year ago. Interest expense for the year increased primarily due to the addition of the term loan being outstanding for the entire nine periods partially offset by lower average borrowings against the revolver under the Company's Amended and Restated Credit Facility. INCOME TAXES The Company recognized an income tax benefit of $41.1 million for the first nine months of 1998 compared to $88.3 million for the same period a year ago. The decrease in the benefit is primarily due to the $129.5 million restructuring charge recorded in the first quarter of 1997. The estimated annual effective tax rate for the nine periods ended September 27, 1998 and September 28, 1997 was 37.5%. For the fiscal year ended December 28, 1997, the effective income tax rate was 37.5%. RESTRUCTURING CHARGE, STORE LIQUIDATION AND REMERCHANDISING PROGRAM On March 25, 1997, the Company adopted the Restructuring Plan to close 60 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. The components of the restructuring charge and the amounts charged against the accrual from March 25, 1997 to September 27, 1998 and from December28, 1997 through September 27, 1998 are outlined, respectively, in the following tables:
Activity to Date ----------------------------------------- Accrued Accrued Restructuring Costs Restructuring Costs as of Restructuring Asset Change In as of (In thousands) March 25, 1997 Costs Paid Write-downs Estimate September 27, 1998 ------------------ -------------- -------------- ----------- -------------------- Lease termination and other real estate costs $ 83,225 $ (24,303) $ - $ 4,293 $ 63,215 Property and equipment write-downs 32,915 - (32,096) (819) - Employee severance 4,869 (3,624) - (1,245) - Other exit costs 8,501 (4,072) - (2,229) 2,200 ------------------ -------------- -------------- ----------- -------------------- Total $ 129,510 $ (31,999) $ (32,096) $ - 65,415 ================== ============== ============== =========== Less: Current portion (12,581) ---------------- $ 52,834 ================ -15-
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
1998 Activity ----------------------------------------- Accrued Accrued Restructuring Costs Restructuring Costs as of Restructuring Asset Change In as of (In thousands) December 28, 1997 Costs Paid Write-downs Estimate September 27, 1998 ------------------ -------------- -------------- ----------- -------------------- Lease termination and other real estate costs $ 73,511 $ (11,491) $ - $ 1,195 $ 63,215 Property and equipment write-downs - - 819 (819) - Employee severance 531 (155) - (376) - Other exit costs 2,200 - - - 2,200 ------------------ -------------- -------------- ----------- -------------------- Total $ 76,242 $ (11,646) $ 819 $ - 65,415 ================== ============== ============== =========== Less: Current portion (12,581) ---------------- $ 52,834 ================
The closing of nine stores during the first half of 1998 brought the total number of closures in accordance with the Restructuring Plan to 53 stores and one distribution center. Store closures related to the Restructure Plan were completed as of May 1998. Impairment charges recognized on the nine stores closed in 1998 were $4.2 million. 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 first three quarters of 1998 relate primarily to lease termination and other real estate costs. 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, as well as early termination costs. The Company will pay lease termination fees as the Company is able to obtain such terminations. The leases remaining on closed locations as of September 27, 1998 vary in length with expiration dates ranging from February 1999 to December 2030. The ultimate timing of lease payments will depend on the Company's ability to negotiate acceptable lease exit terms. Changes in estimates are representative of conditions existing as of September 27, 1998. Due to unfavorable sublease and termination experience during 1998, the Company increased the estimate for lease termination and other real estate costs. These unfavorable results have been offset by favorable experience related to the sale of property and equipment associated with the store closures and employee severance. The Restructuring Plan 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. After the effect of charges and costs related specifically to the closings, the immediate ongoing impact of the closings on net income was insignificant as the stores closed were near break-even contributors. During the second quarter of 1997, the Company also began implementing certain remerchandising strategies, including the exit of the low margin computer business and certain components of the wireless communication business. Additional remerchandising decisions were executed in the first quarter of 1998 with the exit of infant and pet supply categories and certain components of the sporting goods business. In the third quarter of 1998, the Company completed the remerchandising portion of its restructuring and repositioning plan announced in March 1997. -16- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY AND CAPITAL RESOURCES Working capital decreased to $486.1 million at the end of the third quarter of 1998 from $533.6 million at September 28, 1997, a decrease of $47.5 million or 8.9%. Short-term borrowings totaled $65.0 million outstanding ($276.1 million available for borrowing) at September 27, 1998 compared to $125.4 million outstanding ($327.7 million available for borrowing) at September 28, 1997. Inventory balances at the end of the third quarter of 1998 decreased by $121.4 million primarily due to the transition of the merchandise selections and supply chain initiatives. Accounts payable decreased by $48.9 million to $398.5 million compared to the third quarter of 1997 primarily due to decreased purchase volumes. Additionally, accrued expenses increased $38.2 million primarily due to an increase in accrued advertising primarily related to the Labor Day kickoff and an increase in other miscellaneous accruals. Working capital requirements fluctuate significantly during the year due to the seasonal nature of the Company's business. These requirements are financed through a combination of internally generated cash flow from operating activities, short-term seasonal borrowings, long-term financing, trade credit, terms with vendors and floor planning arrangements. The current ratio at September 27, 1998 and September 28, 1997 was 1.7:1 and 1.6:1, respectively. The Company's liquidity and capital resources may be affected by a number of factors and risks (many of which are beyond the control of the Company), including, but not limited to, the availability of cash flows from operations and the availability of trade credit, terms with vendors and floor planning arrangements, each of which may fluctuate from time to time and are subject to change or terminations on short notice. If any such sources of liquidity were unavailable or substantially reduced, the Company would explore other sources of liquidity. There can be no assurance other sources of liquidity would be available or available on terms acceptable to the Company. The Company may need additional capital to implement its strategy relating to alternative store formats. While the Company intends to explore various alternatives for additional capital, if needed, there can be no assurance such capital would be available or available on terms acceptable to the Company. In September 1997, the Company completed a five-year, $900 million, fully-committed, asset-based credit facility ("Amended and Restated Credit Facility"). The Amended and Restated Credit Facility currently includes $197 million in term loans and up to a maximum of $700 million in revolving loans including a $175 million sub-facility for letters of credit. The Amended and Restated Credit Facility matures on September 10, 2002. Interest rates on the Amended and Restated Credit Facility are subject to change based on a financial performance-based grid and cannot exceed a rate of LIBOR + 2.25% on revolving loans and LIBOR + 2.50% on the term loan. As of September 27, 1998, the revolving loans and term loan carried a rate of LIBOR + 2.00%, or 7.62%, and LIBOR + 2.25%, or 7.87%, respectively. There is a commitment fee of 3/8% on the undrawn portion of the revolving loans. On October 28, 1998, the Company amended the Amended and Restated Credit Facility to reduce the fixed charge coverage requirement (the ratio of earnings before interest, taxes, depreciation, amortization and rents to cash interest plus rents) from 1.25:1.0 to 1.05:1.0 for the fourth quarter of 1998. The Company paid a fee of $1.3 million in connection with this amendment. -17- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Amended and Restated Credit Facility is secured by all material unencumbered assets of the Company and its subsidiaries, including inventory but excluding previously mortgaged property and leasehold interests. These security interests will automatically terminate when the Company's senior debt (or implied senior debt) achieves an investment grade credit rating or the Company meets certain operating performance targets. Borrowings under the Amended and Restated Credit Facility are limited based on (1) a borrowing base formula which considers eligible inventories, eligible accounts receivable and mortgage values on eligible real properties and (2) limitations contained in the Company's public senior subordinated debt indenture. Total long-term debt, including current maturities and capitalized leases, decreased to $758.7 million at September 27, 1998 from $796.9 million at September 28, 1997. The decrease in total long-term debt was primarily attributable to scheduled payments on mortgages, industrial revenue bonds and capitalized leases. Additions to owned property and equipment were $30.7 million for the nine periods ended September 27, 1998 compared to $23.6 million for the same period last year. The Company operated 354 stores as of September 27, 1998, a net decrease of 5 stores from September 28, 1997. The Company expects to incur capital expenditures of approximately $54 million during fiscal 1998 and plans to fund these expenditures through a combination of cash flows from operations and borrowings under the Amended and Restated Credit Facility. Additionally, the Company has allocated $12.4 million of restricted cash to fund its credit card program as of September 27, 1998. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These pronouncements will be effective for financial statements beginning after December 15, 1997. In March 1998, the FASB issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This pronouncement will be effective for financial statements beginning after December 15, 1998. The Company anticipates that the adoption of these Statements will not have a material impact on its operating results or financial position. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is still in the process of analyzing the impact of the adoption of this Statement. -18- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 ("Y2K") compliant. In all categories the awareness and assessment phases are complete. The renovation, validation (including testing) and implementation phases are currently in progress. As of September 27, 1998, Information Technology supported systems are approximately 80% complete. Non-information Technology systems (end user systems) are approximately 85% complete. It is expected that Information Technology supported systems will be completed by the end of the second quarter of 1999 and end user systems will be completed in the first quarter of 1999. In the course of our preparation for Y2K, we have corresponded with all software vendors, financial institutions, and our top 1,000 merchandise vendors and we are monitoring their 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 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 Y2K compliant in a timely manner, the major risk factor associated with Y2K pertains to our 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 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 our locations, there is no contingency plan in place and our business would be at risk. -19- PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities and Use of Proceeds On October 28, 1998, the Company amended the Amended and Restated Credit Facility to reduce the fixed charge coverage requirement (the ratio of earnings before interest, taxes, depreciation, amortization and rents to cash interest plus rents) from 1.25:1.0 to 1.05:1.0 for the fourth quarter of 1998. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K 6(a) Exhibits filed with this Form 10-Q Exhibit No. Under Items 601 of Regulation S-K Brief Description ----------------------- ----------------- 10.1 Retirement benefits agreement dated June 25,1998 regarding Raymond Zimmerman, former Chief Executive Officer. 27.1 Financial Data Schedule for the Third Quarter Ended September 27, 1998. 27.2 Financial Data Schedule for the Third Quarter Ended September 28, 1997. 6(b) Reports on Form 8-K There were no reports on Form 8-K during the third quarter ended September 27, 1998. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SERVICE MERCHANDISE COMPANY, INC. Date: November 10, 1998 /s/ Gary M. Witkin ------------------- Gary M. Witkin President (Chief Executive Officer) Date: November 10, 1998 /s/ S. Cusano -------------- S. Cusano Executive Vice President and Chief Financial Officer (Chief Financial Officer) Date: November 10, 1998 /s/ Steven F. McCann --------------------- Steven F. McCann Senior Vice President, Finance (Chief Accounting Officer) -21- EX-10.1 2 RETIREMENT BENEFITS AGREEMENT JUNE 25, 1998 Mr. Raymond Zimmerman 27 Northumberland Nashville, TN 37215 RE: Retirement Benefits Dear Raymond: Effective April 15, 1998, you retired as an employee of Service Merchandise Company, Inc. (the "Company"). On behalf of the Company, I write to express our deepest appreciation for the many valuable contributions you have made to the Company over the years and to confirm to you our obligations to you in connection with your retirement. In recognition of your service of over 40 years to the Company and for your undertaking of the obligations hereunder, the Company hereby agrees as follows: 1. Retirement Bonus. The Company shall pay to you promptly after the execution of this letter agreement a retirement bonus of $750,000. 2. Stock Options. The Compensation Committee of the Board of Directors of the Company has taken action which provides that, as of April 15, 1998, all of the options to purchase shares of the Company's common stock granted to you pursuant to the Company's Amended and Restated 1989 Employee Stock Incentive Plan (the "Plan") shall immediately vest and be exercisable in accordance with the terms and conditions of the Plan during the remainder of their respective ten year periods. The Company, in lieu of issuing shares of common stock to you upon your exercise of any options granted under the Plans, shall have the right, at its option, to pay to you, in cash, the amount by which the closing price of the common stock on the date of your exercise of any such options, exceeds the option price of such options. 3. Medical Benefits. The Company will provide at its expense continued coverage for you (and any dependents of yours covered by the Company's healthcare plans at the time of your retirement) under the Company's healthcare plan pursuant to "COBRA" (or any other mandatory healthcare continuation law then in effect), such coverage then being substantially similar to that provided by the Company to its senior executives and their eligible dependents. You will be entitled to such coverage for the period commencing with the date of your retirement and ending on the earlier of (i) the fifth anniversary of your retirement, or (ii) the date you become eligible to receive comparable healthcare coverage from another employer of you or your spouse that does not contain any exclusion or limitation with respect to any pre-existing condition of you or your covered dependents. If you (or your dependents covered at the time of your retirement) elect not to continue coverage under COBRA (or any other mandatory healthcare continuation law then in effect) or are not eligible to continue coverage under such healthcare continuation law, the company will provide substantially similar coverage. 4. Life Insurance. You may direct the Company to assign to you (or to a trust established by you or otherwise) any insurance policies on your life owned by it and so assignable, other than the split dollar life insurance discussed below in this paragraph. If so directed, the Company shall promptly thereafter assign its entire interest in such policies in the manner directed by you. In addition, the Company shall continue for your life to pay the premium on the split dollar life insurance policies owned by the Company on your life, and in the event the Company fails to meet this obligation either by operation of law or otherwise, you should have the right to continue coverage under the policies subject to rights of the Company relating to payments previously made by the Company. 5. Automobile. You shall retain the Company automobile currently being provided to you. As promptly as practical after the date hereof, the Company shall convey title to such automobile to you, free of encumbrances. From and after April 15, 1998, you shall be responsible for all costs and expenses (including, without limitation, all insurance responsibility and expenses) associated with such automobile and shall assume all liability arising from the use of such automobile. 6. Moving Expense Allowance. The Company shall provide you a moving expense allowance of $25,000 from which you shall pay all expenses incurred by you in connection with relocating your principal residence away from Nashville, Tennessee, including (i) travel and lodging expenses incurred by you in connection with relocating your principal residence away from Nashville, Tennessee, and (ii) the costs reasonably incurred by you to have your personal belongings packed and moved from your current principal residence to your new principal residence. 7. Other Benefits. You shall be entitled to receive all benefits that have accrued to you prior to April 15, 1998 pursuant to the Company's Restated Retirement Plan, the Company's Savings and Investment Plan and the Company's Executive Security Plan, all in accordance with the terms of those respective plans. The annual benefit for the first ten (10) years following your retirement will be $124,078 from the Retirement Plan and $154,500 under the Executive Security Plan. In recognition of your years of service to the Company and of the maximum amount of retirement benefits permitted to be paid pursuant to the Company's Restated Retirement Plan, the Company agrees to pay to you an additional retirement payment of $2,361,837, which, together with the amounts payable to you under the Executive Security Plan, approximates on a discounted basis the amount of retirement benefits which would have been payable to you under the Restated Retirement Plan if such Plan did not contain maximum payment limits. You will be provided with $160,000 promptly after the execution of this Agreement as an office and secretarial allowance for you. You shall be entitled for life to such discounts as are generally available to members of the Company's Board of Directors and the Governance Committee has confirmed that the age 70 term limitation for directors will be waived for you and that the Nominating Committee will nominate you as a director nominee to be submitted to the shareholders for approval so long as you beneficially own more than 3,000,000 shares of the Company's common stock. 8. Withholding Tax Payments. To the extent required by law, federal, state and local income and payroll withholding taxes shall be withheld on all amounts payable to you pursuant to this letter agreement. 9. Restrictive Covenant. You hereby agree that for a period of eighteen (18) months from April 15, 1998, you shall not, acting alone or in conjunction with others, (a) directly or indirectly, engage in business of being a national or regional chain selling jewelry or home products in competition with the business being conducted by the Company ("Covered Business"), whether as an individual or sole proprietor or as owner, partner, shareholder (except for 1% or less of any class of outstanding securities listed on any national securities exchange or actively traded in over-the-counter market), officer, director, employee, member, manager, agent, consultant, formal or informal advisor, or by or through the lending of any form of assistance; (b) induce any customer of the Company, directly or indirectly, to curtail or cancel Covered Business with the Company, or solicit or canvass Covered Business from any person who is a customer of the Company; (c) induce or attempt to influence, directly or indirectly, any employee of the Company to terminate his or her employment with the Company; or (d) divulge or furnish any information that is not generally available to the public regarding Covered Business including the intellectual property, trade secrets or any other confidential information concerning Covered Business or the assets, plans or customers of the Company, to any entity or other person, or use any such information, trade secret or other confidential information, directly or indirectly, for your own benefit or for the benefit of any entity or other person. 10. Enforcement. You acknowledge that any violation by you of Section 10 of this Agreement will cause irreparable harm to the Company, that money damages for such harm will be incapable of precise measurement and that, as a result, the Company will not have an adequate remedy at law to redress the harm caused by such violation. Therefore, in the event of any such violation, you agree that, in addition to its other remedies, the Company shall be entitled to injunctive relief, including but not limited to, temporary restraining orders and/or preliminary or permanent injunctions to restrain or enjoin any such violation. You agree to and hereby submit to jurisdiction before any state or federal court of record in Davidson County, Tennessee, or in the state and county in which such violation may occur, at the Company's election, for that purpose, and you hereby waive any right to raise the questions of jurisdiction and venue in any action that the Company may bring in any such court against you. 11. Severability; Interpretation. (a) Should any clause, portion or paragraph of this letter agreement be unenforceable or invalid for any reason, such unenforceability or invalidity shall not affect the enforceability or validity of the remainder of this letter agreement. Should any particular covenant or restriction, including but not limited to the covenants and restrictions of Section 10, be held to be unreasonable or unenforceable for any reason, including without limitation the time period, geographical area and scope of activity covered by such covenant, then such covenant or restriction shall be given effect and enforced to whatever extent would be reasonable and enforceable. (b) You and the Company represent that each has been represented by independent legal counsel in connection with this letter agreement and that this letter agreement is the result of negotiations between the parties. Accordingly, the parties agree that neither party shall be deemed to be the drafter of this letter agreement and that the language of all parts of this letter agreement in all cases shall be construed according to its fair meaning, and not strictly for or against either party. We wish you well in your retirement and look forward to continuing to receive the benefit of your advice and experience through your role as director of the Company. Very truly yours, /s/ Gary Witkin --------------- Gary Witkin GMW:eav Accepted and agreed: /s/ Raymond Zimmerman - --------------------- Raymond Zimmerman Date: ---------------- EX-27.1 3 FDS --
5 This schedule contains summary financial information extracted from the Service Merchandise Company, Inc. Form 10-Q for the nine periods ended September 27, 1998 and is qualified in its entirety by reference to such financial statements detailed in Part I of the Form 10-Q. 1,000 $ 9-MOS JAN-03-1999 DEC-28-1997 SEP-27-1998 1 54,452 0 50,911 2,144 1,044,170 1,215,460 1,116,813 612,030 1,779,448 729,322 728,903 0 0 100,356 218,211 1,779,448 1,884,281 1,884,281 1,439,362 1,439,362 507,230 0 58,467 (109,658) (41,122) (68,536) 0 0 0 (68,536) (0.69) (0.69) 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.
EX-27.2 4 FDS --
5 This schedule contains summary financial information extracted from the Service Merchandise Company, Inc. Form 10-Q for the nine periods ended September 28, 1997 and is qualified in its entirety by reference to such financial statements detailed in Part I of the Form 10-Q. 1,000 $ 9-MOS DEC-28-1997 DEC-29-1996 SEP-28-1997 1 45,900 0 42,510 2,541 1,165,586 1,360,904 1,158,673 623,139 1,934,816 827,324 768,034 0 0 99,800 228,153 1,934,816 2,219,905 2,219,905 1,730,887 1,730,887 671,298 0 55,650 (235,399) (88,275) (147,124) 0 (2,643) 0 (149,767) (1.51) (1.51) AMOUNT REPRESENTS THE NUMBER OF SHARES OF $0.50 PAR VALUE COMMON STOCK ISSUED AND OUTSTANDING. AMOUNT INCLUDES I) DEPRECIATION AND AMORTIZATION II) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND III) RESTRUCTURING CHARGE INCURRED IN THE FIRST QUARTER OF 1997.
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