1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission File No. 1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0816060
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 24600, Nashville, TN
37202-4600
(Mailing Address)
7100 Service Merchandise Drive, Brentwood, TN
(Address of principal executive offices)
37027
(Zip code)
(615) 660-6000
(Registrant's telephone number including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock as of the latest practicable date.
As of July 28, 1996, there were 99,735,416 shares of
Service Merchandise Company, Inc. common stock outstanding.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited) - Three and Six
Periods Ended June 30, 1996 and July 2, 1995 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - June 30, 1996 (Unaudited), July 2, 1995
(Unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) - Six Periods Ended
June 30, 1996 and July 2, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-10
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-12
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Three Periods Ended Six Periods Ended
------------------------------------------------------------
June 30, July 2, June 30, July 2,
------------ ------------ ------------ ------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Net sales $859,984 $864,875 $1,575,612 $1,602,004
Costs and expenses:
Cost of merchandise sold and buying and occupancy expenses 652,133 650,571 1,207,003 1,218,416
------------ ------------ ------------ ------------
Gross margin after cost of merchandise sold and buying and
occupancy expenses 207,851 214,304 368,609 383,588
Selling, general and administrative expenses 178,155 177,287 346,829 351,457
Depreciation and amortization 15,032 16,011 30,641 31,883
------------ ------------ ------------ ------------
Earnings (loss) before interest and income taxes 14,664 21,006 (8,861) 248
Interest expense-debt 15,402 17,242 29,514 31,782
Interest expense-capitalized leases 2,201 2,372 4,427 4,794
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (benefit) (2,939) 1,392 (42,802) (36,328)
Income tax (benefit) (1,117) 543 (16,265) (14,168)
------------ ------------ ------------ ------------
Net earnings (loss) ($1,822) $849 ($26,537) ($22,160)
============ ============ ============ ============
Weighted average common shares and common
share equivalents outstanding 101,527 101,032 101,433 101,074
============ ============ ============ ============
Per common share:
Net earnings (loss) per common share ($0.02) $0.01 ($0.26) ($0.22)
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
--------------------------
June 30, July 2, December 31,
1996 1995 1995 (1)
------------ ----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $28,479 $23,565 $177,314
Accounts receivable, net of allowance of
$2,824, $3,213 and $2,763, respectively 44,244 45,361 53,621
Refundable income taxes 4,297 4,688 -
Inventories 1,057,589 1,125,064 1,034,467
Prepaid expenses 34,185 36,342 25,277
------------ ----------- ------------
TOTAL CURRENT ASSETS 1,168,794 1,235,020 1,290,679
Property and Equipment:
Owned assets, net of accumulated depreciation of
$507,507, $481,310 and $505,429, respectively 559,662 579,374 583,290
Capitalized leases, net of accumulated amortization of
$85,483, $77,720 and $81,579, respectively 41,537 48,095 44,823
Other assets and deferred charges 20,292 23,811 21,778
------------ ----------- ------------
TOTAL ASSETS $1,790,285 $1,886,300 $1,940,570
============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $190,000 $315,300 -
Accounts payable 400,276 421,243 $620,669
Accrued expenses 159,954 170,674 193,016
State and local sales taxes 32,153 30,138 61,224
Income taxes - - 29,209
Current maturities of long-term debt 4,621 1,714 1,936
Current maturities of capitalized lease obligations 7,753 7,395 7,885
Deferred income taxes 11,715 2,286 11,715
------------ ----------- ------------
TOTAL CURRENT LIABILITIES 806,472 948,750 925,654
Long-term debt 556,019 551,340 557,392
Capitalized lease obligations 62,221 70,124 65,894
Deferred income taxes 4,888 2,341 4,888
------------ ----------- ------------
TOTAL LIABILITIES 1,429,600 1,572,555 1,553,828
------------ ----------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, authorized 4,600,000 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 500,000,000 shares,
issued and outstanding 99,732,000, 99,654,000 and 99,686,000
shares, respectively 49,866 49,827 49,843
Additional paid-in capital 5,607 5,432 5,483
Deferred compensation (1,717) (2,495) (2,050)
Retained earnings 306,929 260,981 333,466
------------ ----------- ------------
TOTAL SHAREHOLDERS' EQUITY 360,685 313,745 386,742
------------ ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,790,285 $1,886,300 $1,940,570
============ =========== ============
(1) Derived from fiscal year ended December 31, 1995 audited financial statements.
See Notes to Consolidated Financial Statements.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Periods Ended
------------------------------------
June 30, July 2,
------------------------------------
1996 1995
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($26,537) ($22,160)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 32,073 33,291
(Gain) loss on disposal of property and equipment (4,490) 72
Changes in assets and liabilities (net of disposition):
Accounts receivable, net 9,377 9,773
Inventories (23,122) (120,782)
Prepaid expenses (8,908) (8,564)
Accounts payable (220,393) (218,523)
Accrued expenses and state and local sales taxes (62,133) (66,559)
Income taxes (33,506) (44,052)
------------- --------------
NET CASH USED BY OPERATING ACTIVITIES (337,639) (437,504)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (8,186) (12,874)
Proceeds from the disposal of property and equipment 9,571 148
Other assets, net 1,452 (4,869)
------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 2,837 (17,595)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 190,000 315,300
Proceeds from long-term debt 2,600 -
Repayment of long-term debt (1,314) (4,877)
Repayment of capitalized lease obligations (4,424) (3,967)
Debt issuance costs (914) (105)
Exercise of stock options and forfeiture of restricted stock, net 19 (951)
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 185,967 305,400
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (148,835) (149,699)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 177,314 173,264
------------- --------------
CASH AND CASH EQUIVALENTS-END OF PERIOD $28,479 $23,565
============= ==============
See Notes to Consolidated Financial Statements.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. The consolidated financial statements, except for the consolidated balance
sheet as of December 31, 1995, have been prepared by the Company without
audit.
In management's opinion, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of the financial position
and results of operations for the interim periods presented. Certain
prior period amounts have been reclassified to conform to the current
year's presentation. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
The Company has historically incurred a net loss for the first half of the
year due to the seasonality of its business. The results of operations
for the second quarter ended June 30, 1996 and July 2, 1995 are not
necessarily indicative of the operating results for the entire fiscal year.
B. The second quarter ended June 30, 1996 and July 2, 1995 each contained 90
selling days. Year to date ended June 30, 1996 and July 2, 1995 each
contained 181 selling days.
C. The net earnings (loss) per common share is computed by dividing the net
earnings (loss) by the weighted average number of common shares and common
share equivalents outstanding.
D. Cash payments for interest for the six periods ended June 30, 1996 and
July 2, 1995 were $31.4 million and $35.4 million, respectively. Cash
payments for income taxes for the six periods ended June 30, 1996 and
July 2, 1995 were $17.1 million and $29.9 million, respectively. The
Company considers all highly liquid investments purchased as part of its
daily cash management activities to be cash equivalents. Such investments
are generally made for periods covering 1 to 30 days.
E. The Company has available a Reducing Revolving Credit Facility. The
maximum commitment level for the facility reduces $25 million annually
until reaching $475 million at December 31, 1998. Currently, the maximum
commitment level is $550 million. The Reducing Revolving Credit Facility
matures on June 8, 1999 and currently has an interest rate of LIBOR + 5/8%
on the borrowed amount and a 3/8% facility fee on the entire committed
amount. On May 23, 1996, the Company amended the existing Reducing
Revolving Credit Facility to allow for increased operating flexibility in
the future. Short-term borrowings related to the Credit Facility were
$190 million and $315.3 million as of June 30, 1996 and July 2, 1995,
respectively.
F. Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and determined that
no material impairment exists which would require recognition under the
provisions of this standard.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
For comparative purposes, interim balance sheets are more meaningful when
compared to the balance sheets at the same point in time of the prior year.
Comparisons to balance sheets of the most recent fiscal year end may not be
meaningful due to the seasonal nature of the Company's business.
RESULTS OF OPERATIONS
The nature of the Company's business is highly seasonal. Historically, sales
in the fourth quarter have been substantially higher than sales achieved in
each of the first three quarters of the fiscal year. Thus expenses and, to a
greater extent, operating income vary greatly by quarter. Caution, therefore,
is advised when appraising results for a period shorter than a full year, or
when comparing any period other than to the same period of the previous year.
SECOND QUARTER ENDED JUNE 30, 1996 VS. SECOND QUARTER ENDED
JULY 2, 1995
NET SALES
Net sales for the second quarter of 1996 were $860.0 million compared to $864.9
million for the comparable quarter of 1995, representing a decrease of $4.9
million or 0.6%. Comparable store sales decreased 1.2% in the quarter as
compared to the same quarter a year ago. This decline in comparable store
sales for the quarter was essentially consistent between jewelry and hardlines.
At the end of the second quarter, Service Merchandise was operating 409 stores,
a net increase of 4 stores from a year ago.
GROSS MARGIN
Gross margin, after buying and occupancy expenses, for the second quarter of
1996 was $207.9 million, or 24.2% of net sales, compared to $214.3 million, or
24.8% of net sales, a year ago. The decrease in gross margin dollars and rate
are the result of increased promotional and inventory clearance related sales
and increased transportation costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter were $178.2
million, or 20.7% of net sales, versus $177.3 million, or 20.5% of net sales,
in the comparable quarter a year ago. This increase reflects slightly higher
employment costs offset primarily by a gain on the sale of property and
equipment.
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Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
INTEREST EXPENSE
Interest expense decreased to $17.6 million in the quarter as compared to $19.6
million in the second quarter of 1995. The decrease in interest expense is
primarily attributable to a decline in short-term borrowings resulting from
significantly lower inventory levels, as planned.
TAXES ON INCOME
The Company recognized an income tax benefit of $1.1 million and income tax
expense of $0.5 million for the second quarter ended June 30, 1996 and July 2,
1995, respectively. The effective tax rates for the quarter ended June 30, 1996
and July 2, 1995 were 38% and 39%, respectively. For the fiscal year ended
December 31, 1995 the effective income tax rate was 38%.
SIX PERIODS ENDED JUNE 30, 1996 VS. SIX PERIODS ENDED JULY 2, 1995
NET SALES
Net sales for the first half of 1996 were $1,575.6 million as compared to
$1,602.0 million for the first half of 1995, a decrease of 1.6%. For the first
half of 1996, hardline comparable store sales decreased. This decrease was less
significant in the second quarter as compared to the first quarter. Sales early
in the year were impacted by the adverse weather conditions experienced in the
middle and eastern areas of the country and a reduction in advertising. Jewelry
comparable store sales improved for the first half of 1996 over the same period
in 1995.
GROSS MARGIN
Gross margin, after taking into account buying and occupancy expenses, for the
six periods ended June 30, 1996 was $368.6 million, or 23.4% of net sales, as
compared to $383.6 million, or 23.9% of net sales, for the same period a year
ago. The decline in gross margin dollars and rate results primarily from
increased transportation costs and to a lesser extent occupancy costs.
Merchandise margin rates decreased slightly for the first half of 1996 primarily
due to increased promotional and inventory clearance related sales.
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Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $346.8 million, or
22.0% of net sales, for the six periods ended June 30, 1996 as compared to
$351.5 million, or 21.9% of net sales, for the same sales period a year ago.
The decrease in selling, general and administrative dollars is primarily
attributable to decreased advertising expenses resulting primarily from the
elimination of less effective publications and a gain on the sale of property
and equipment.
INTEREST EXPENSE
Interest expense for the first half of 1996 was $33.9 million as compared to
$36.6 million for the same period a year ago. The decrease in interest expense
is primarily attributable to a decline in short-term borrowings resulting from
significantly lower inventory levels, as planned.
TAXES ON INCOME
The Company recognized an income tax benefit of $16.3 million for the six
periods ended June 30, 1996 compared to an income tax benefit of $14.2 million
for the same period a year ago. The estimated annual effective tax rates for
the six periods ended June 30, 1996 and July 2, 1995 were 38% and 39%,
respectively. For the fiscal year ended December 31, 1995 the effective income
tax rate was 38%.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital investment (current assets less current liabilities) totaled
$362.3 million at the end of the second quarter of 1996, representing an
increase of 26.6% from the July 2, 1995 level of $286.3 million. The net
working capital increase was primarily due to a reduction of $125.3 million of
short-term borrowings which totaled $190.0 million ($337.5 million available for
borrowing) at June 30, 1996 compared to $315.3 million ($244.1 million available
for borrowing) at July 2, 1995. The current ratio at June 30, 1996 was 1.4:1
compared to the current ratio at July 2, 1995 of 1.3:1. This increase is
primarily the result of additional operating cash flow and reduced capital
expenditures over the past year.
Working capital requirements fluctuate significantly during the year due to the
seasonal nature of the jewelry, gift and home business. These requirements are
financed through a combination of internally generated cash flow from operating
activities and short-term seasonal borrowings. Short-term borrowings declined
as purchases were reduced to manage inventory more effectively. These reduced
purchases contributed to the decline in trade accounts payable.
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Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
The Company has available a Reducing Revolving Credit Facility. The maximum
commitment level for the facility reduces $25 million annually until reaching
$475 million at December 31, 1998. Currently, the maximum commitment level is
$550 million. The Reducing Revolving Credit Facility matures on June 8, 1999
and currently has an interest rate of LIBOR + 5.8% on the borrowed amount and a
3/8% facility fee on the entire committed amount. On May 23, 1996, the Company
amended the existing Reducing Revolving Credit Facility to allow for increased
operating flexibility in the future.
Total long-term debt, including current maturities and capitalized leases, was
$630.6 million at June 30, 1996 and July 2, 1995. Long-term debt remained
consistent as scheduled payments for capitalized lease obligations, mortgages
and Industrial Revenue Bonds were offset by new mortgages obtained by the
Company.
Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and determined that no material
impairment exists which would require recognition under the provisions of this
standard.
Additions to owned property and equipment were $8.2 million for the six periods
ended June 30, 1996 compared to $12.9 million for the same period last year.
The Company operated 409 catalog stores as of June 30, 1996, a net increase of 4
stores from a year ago. New store openings are anticipated to be approximately
2% for fiscal 1996. This figure does not take into account store closings for
such period. The Company expects to incur capital expenditures of approximately
$50 million during fiscal 1996 related primarily to store growth and
improvements to exisiting stores. The Company plans to fund these expenditures
through a combination of cash flow from operations and borrowings under the
Reducing Revolving Credit Facility.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in the Rights of the Company's Security Holders
On May 23, 1996, the Company amended the existing Reducing Revolving
Credit Facility to allow for increased operating flexibility in the
future.
Item 3. Defaults by the Company on Its Senior Securities
Not applicable.
Item 4. Results of Votes of Security Holders
At the Company's Annual Meeting of Shareholders which was held on
April 17, 1996, the following proposals were approved:
1) The election of two Class I directors to serve for a term of
three years and until their successors are duly elected and
qualified. The persons nominated for election to the Board of
Directors received the number of votes shown opposite their
respective names:
For Against Withheld
---------- ------- --------
Richard P. Crane, Jr. 89,405,652 452,971 318,190
Charles V. Moore 89,454,342 435,759 286,712
2) The selection of Deloitte & Touche LLP as the Company's
Independent Public Accountants for fiscal year 1996.
For Against Withheld
---------- ------- --------
89,771,258 195,173 210,382
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PART II - OTHER INFORMATION (continued)
Current Directors whose terms have not expired and who were
therefore not up for re-election:
Year Term to Expire In
----------------------
R. Maynard Holt 1997
James E. Poole 1997
Raymond Zimmerman 1998
Harold Roitenberg 1998
Gary M. Witkin 1998
Item 5. Other Information
Not applicable.
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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 Items
601 of Regulation S-K Brief Description
--------------------- -----------------
4 Amendment No. 2 to Credit
Agreement effective May 23, 1996
among Service Merchandise Company, Inc.,
Various Banks and Chemical Bank as
Administrative Agent.
11 Statement re:
Computation of Net Earnings (Loss)
Per Common Share for the Three
Periods Ended and Six Periods Ended
June 30, 1996 and July 2, 1995.
27 Financial Data Schedule for the
Six Periods Ended June 30, 1996.
6(b) Reports on Form 8-K
There were no reports on Form 8-K during the three periods
ended June 30, 1996.
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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: August 8, 1996 /s/ Raymond Zimmerman
------------------------
Raymond Zimmerman
Chairman of the Board
(Chief Executive Officer)
Date: August 8, 1996 /s/ Gary M. Witkin
------------------------
Gary M. Witkin
President
(Chief Operating Officer)
Date: August 8, 1996 /s/ S. Cusano
------------------------
S. Cusano
Vice President and Chief Financial
Officer (Chief Financial Officer)
(Chief Accounting Officer)
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