<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 (Fee Required) for the fiscal year ended
January 1, 1994 or
- ----- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) 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 (mailing address) 37202-4600
7100 Service Merchandise Drive, Brentwood, TN 37027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (615) 660-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Class Which Registered
- -------------- -------------------
Common Stock ($.50 Par Value) New York Stock Exchange
Series A Junior Preferred Stock Purchase Rights New York Stock Exchange
9% Senior Subordinated Debentures New York Stock Exchange
8 3/8% Senior Notes New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference Part III of this Form 10-K or an amendment to this
Form 10-K. X
------
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
----- -----
State the aggregate market value (based on the closing price as reported on the
New York Stock Exchange) of the voting stock held by non-affiliates of the
registrant as of February 25, 1994: $740,831,098. This calculation assumes
that all shares of Common Stock beneficially held by officers and members of
the Board of Directors of the Registrant are owned by "affiliates," a status
which each of the officers and directors individually disclaims.
<TABLE>
<CAPTION>
Class Outstanding at February 25, 1994
----- --------------------------------
<S> <C>
Common Stock ($.50 Par Value) 99,367,064
Parts in Form 10-K Where Documents
Documents Incorporated by Reference Are Incorporated by Reference
- ----------------------------------- -----------------------------
Portions of Registrant's Proxy Statement dated March 18, 1994 Part III
Portions of Registrant's Annual Report to Shareholders for the
fiscal year ended January 1, 1994 Parts II and IV
This document contains 50 pages. Exhibit index begins on page 12.
</TABLE>
<PAGE> 2
TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
------
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 8
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-------
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Selected Financial Data Page 12 of the Registrant's 1993 Annual Report to
Shareholders for the year ended January 1, 1994 which
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Pages 13 through 15 of the Registrant's 1993 Annual
Financial Condition and Results of Report to Shareholders for the year ended January 1,
Operations 1994 which are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Pages 16 through 31 of the Registrant's 1993 Annual
Data Report to Shareholders for the year ended January 1,
1994 which are incorporated herein by reference.
Item 9. Changes in and Disagreements With
Independent Auditors on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
--------
Item 10. Directors and Executive Officers of the Pages 2 through 4 of the Registrant's Proxy Statement
Registrant dated March 18, 1994 which are incorporated herein by
reference.
Item 11. Executive Compensation Pages 7 through 14 of the Registrant's Proxy Statement
dated March 18, 1994 which are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Pages 5 and 6 of the Registrant's Proxy Statement
Owners and Management dated March 18, 1994 which are incorporated herein by
reference.
Item 13. Certain Relationships and Related Pages 14 and 15 of the Registrant's Proxy Statement
Transactions dated March 18, 1994 which is incorporated herein by
reference.
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-------
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
-2-
<PAGE> 3
INTRODUCTORY
Except where the context indicates otherwise, the "Company" is a term used to
refer to the overall operations of Service Merchandise Company, Inc. and its
past and present subsidiaries and the "Registrant" means Service Merchandise
Company, Inc. as a separate corporate entity and does not refer to
subsidiaries. The information included in this Form 10-K is, unless indicated
to be given as of a specified date or for a specified period, given as of the
date of this report, which is January 1, 1994.
PART I
Item 1. Business
Service Merchandise, with 391 catalog stores in 37 states, is one of the
nation's largest retailers of jewelry, and offers a wide selection of
brand-name hardgoods in its other product lines. The major categories of goods
offered by the Company are fine jewelry (including diamonds), housewares, small
appliances, giftware, silverware, cameras, luggage, radios, televisions and
other home electronics, patio, lawn and garden accessories, sporting goods and
toys.
Catalog and Store Operations
The Company's franchise is built around selling nationally advertised
brand-name hardgoods and quality jewelry at low prices. The Company's customer
typically pre-selects merchandise from the Company's annual catalog which is
distributed in early fall each year. The catalog, which had 604 pages in 1993,
is supplemented by a spring catalog of 164 pages, a Christmas catalog of 108
pages and a combination of direct mail flyers and newspaper inserts distributed
approximately every other week of the year. The catalogs, flyers and newspaper
inserts describe the majority of merchandise offered for sale by the Company
and list the Company's selling price and a reference price. The reference
price is either the selling price suggested by the manufacturer, or is
determined by comparison shopping and/or the application of a standard markup
to the cost of an item. The Company's fall, spring and Christmas catalogs are
printed only once a year, with selling prices adjusted periodically through
flyers and newspaper inserts to reflect changes in merchandise costs or to
provide clearance pricing. The typical customer pre-selects merchandise from a
catalog, flyer or newspaper insert, but the actual purchase usually takes place
in a Company store, where the customer has physical access to the merchandise.
Customers may also purchase goods through mail or telephone order, although
this represents a small part of the Company's total sales. In the fourth
quarter of 1993, the Company initiated a broadcast campaign featuring Bill
Cosby. According to a 1993 customer opinion survey, the Company's typical
customers are married with children, living in a two-earner household and
looking for well-made, durable products they can purchase quickly.
The typical Service Merchandise store consists of approximately 50,000 square
feet of total space and is situated on a stand-alone lot or as an anchor in a
suburban mall or strip center. The Company's stores are divided into several
departments, including jewelry, sight and sound, self-service and general
showroom. Only the jewelry and sight and sound departments require personnel
for customer assistance. In those departments, merchandise is displayed in
showcases, and sales associates deliver it to the customer and accept payment.
In the self-service department, customers select merchandise from a shelf and
take it to a check-out counter to finalize the purchase. In the remainder of
the store, only a sample of the merchandise is displayed and order forms are
available at various locations. After the customer orders the merchandise by
filling out a form, a store cashier is paid and the merchandise is delivered to
a pick-up station. Management believes that this format reduces selling space
requirements, handling and payroll costs, and provides greater control over
customer-related inventory shrinkage. The general showroom format also permits
presentation of a broad assortment of merchandise with limited inventory
investment, since only one item is actually on display.
Most of the Company's stores display and maintain an inventory (in warehouse
space contiguous to the sales area) of substantially all of the catalog items
and a limited amount of merchandise not described in the published catalogs.
Each store is equipped with a computer which coordinates the inventory tracking
and point of sale functions.
-3-
<PAGE> 4
Item 1. Business (continued)
Virtually every action in the store that involves payment, customer information
or inventory is recorded and transmitted, on a daily basis, via satellite to
the central database at the Company's home office. In addition, by use of the
computer, customers are provided with alternate suggestion items, back-order
information, on-line mail orders, a gift registry, special orders and layaway
information. Most of the Company's stores are equipped with "Silent Sam," a
user-friendly computer which allows customers to verify item availability,
place their order and tender payment via credit card.
The Company's computerized daily inventory system tracks the status (on hand,
on order, in transit), location and history of inventory in the retail network.
This raw data feeds the Company's merchandise replenishment system which tracks
inventory positions, sales data and sales forecasts and generates either
suggested transfers from the distribution centers or suggested purchase order
quantities. The inventory system also records all sales information to produce
daily margin reports, complete with a historical comparison for each item.
The Company's information systems enhance the effectiveness of its catalog
mailings and advertising campaigns by tracking customers' purchases and
tailoring the Company's mailing lists to meet specific objectives. The Company
maintains a database of customer household information with each purchase.
This database allows management to target customers based on specific criteria,
including seasonal purchasing behavior and promotional references.
Seasonality and Competition
The Company's business is highly seasonal, with the Christmas season being the
largest volume selling period of the year. In preparation for the Christmas
season, the Company significantly increases its merchandise inventories, which
are financed by internally generated funds and short-term borrowings.
The Company is engaged in a highly competitive business and competes with all
nationally known retail merchandisers, including department stores, general
merchandise, specialty and discount stores. Many of these competitors are
larger and have greater financial resources than the Company. The Company
believes its pricing policies on the brand-name hardgoods merchandise it offers
are a significant factor in the operation of its business. The Company
operates on high volume, low profit margin principles. Its profitability is
dependent upon the large sales volume generated during the fourth quarter of
its fiscal year.
Suppliers
The Company purchases merchandise from approximately 2,500 suppliers, most of
which are manufacturers. In 1993, purchases from the largest vendor
approximated 3.8% of total purchases; however, the Company believes it would
experience no difficulty in obtaining comparable quality merchandise from
alternate sources. Most merchandise is initially shipped to the Company's
central distribution facilities which are used to store merchandise in advance
of selling seasons to take advantage of favorable terms offered to the Company.
Merchandise is transported to the stores from these central facilities by
commercial contract carriers.
The Company's direct import program is responsible for sourcing and repackaging
many promotional and seasonal items from abroad. Direct imports, which totaled
approximately $236 million in fiscal 1993, allow the Company to reduce many
traditional cost factors, thereby lowering the cost of merchandise sold in
several product lines. In addition to its direct import program, the Company
imports diamonds, gemstones and gold which are used by suppliers in the
manufacture of jewelry items.
-4-
<PAGE> 5
Item 1. Business (continued)
Employees
The number of persons employed by the Company fluctuates seasonally. During
the fiscal year ended January 1, 1994, the number of employees varied from
approximately 24,500 to approximately 43,200, including both permanent and
temporary employees. As of January 1, 1994, the Company had 22,879 permanent
employees, of whom 81% were hourly-paid personnel engaged in non-supervisory
activities; the balance was administrative, executive, distribution center and
store management personnel. None of the Company's employees are covered by a
collective bargaining agreement. The Company has never experienced a work
stoppage due to a labor disagreement and regards its employee relations as
satisfactory.
Item 2. Properties
The Company leases and owns retail store facilities, warehouses and office
space. The Company has financed a number of its owned facilities out of
internally generated funds. Most of these properties secure borrowings under
the Credit Agreement. Some owned facilities have ground leases on a long-term
basis, some are financed through industrial development financing under which
the Company either has ownership or a right to obtain ownership and others are
financed by real estate mortgages. The Company occupies office space in two
locations in greater Nashville, Tennessee, both of which are owned by the
Company.
The Company operated five major distribution centers as of January 1, 1994.
These distribution centers are located in Florida, New York, Tennessee, Texas
and Nevada and contain an aggregate of approximately 3,401,000 square feet, as
set forth below:
<TABLE>
<CAPTION>
Center Location Sq. Feet Owned/Leased Lease Term
--------------- -------- ------------ ----------
<S> <C> <C> <C>
Orlando, FL 460,000 Leased renewal options through 6/30/98
Montgomery, NY 800,000 Owned not applicable
Nashville, TN
(1) Owned 588,000 Owned not applicable
(2) Owned satellite 268,000 Owned not applicable
(3) Leased satellite 391,000 Leased primary through 4/30/96; no renewal options
Dallas, TX 594,000 Leased renewal options through 1/31/96
Henderson, NV 300,000 Leased renewal options through 12/31/95
</TABLE>
The Company anticipates that it would be able to obtain suitable replacement
facilities should it not be able to renew the above leases.
-5-
<PAGE> 6
Item 2. Properties (continued)
As of January 1, 1994, the Company operated 391 retail catalog stores
(typically consisting of approximately 50,000 square feet), and 3 specialty
retail stores, as follows:
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Owned land and building 95
Long-term ground lease with an owned building 40
Owned land with industrial development financing under which the Company had ownership or
a right to obtain ownership of the building 3
Leased 274
Stores which have been subleased (18)
------
Total 394
===
</TABLE>
Most of the leases contain renewal or purchase options. See the Notes to
Consolidated Financial Statements, which are incorporated herein by reference
to the Registrant's 1993 Annual Report to Shareholders, for information
concerning the Company's lease commitments.
For a listing of store locations, see page 7. The numbers in parentheses show
the number of stores per state and where there is more than one store in any
city, the number of stores in such city.
-6-
<PAGE> 7
Item 2. Properties (continued)
SERVICE MERCHANDISE CO., INC.
STORE LOCATIONS
<TABLE>
<S> <C> <C> <C> <C>
ALABAMA (8) GEORGIA (17) MARYLAND (5) NEW YORK (24) TENNESSEE (18)
BIRMINGHAM (2) ATLANTA (13) COLUMBIA ALBANY CHATTANOOGA (2)
HUNTSVILLE (2) AUGUSTA FORESTVILLE BINGHAMTON JACKSON
MOBILE COLUMBUS FREDERICK BUFFALO (2) KINGSPORT
MONTGOMERY (2) MACON SALISBURY EAST MEADOW KNOXVILLE (2)
TUSCALOOSA SAVANNAH WALDORF FISHKILL MEMPHIS (5)
HARTSDALE NASHVILLE (7)
ARIZONA (4) ILLINOIS (25) MASSACHUSETTS (10) HUNTINGTON
GLENDALE CHAMPAIGN AUBURN LAKE GROVE TEXAS (43)
MESA (2) CHICAGO (24) BOSTON (6) LAWRENCE ABILENE
SCOTTSDALE HOLYOKE MASSAPEQUA AMARILLO
INDIANA (16) LANESBORO/PITTSFIELD MIDDLETOWN AUSTIN (2)
ARKANSAS (3) BLOOMINGTON SWANSEA NANUET BEAUMONT
FORT SMITH CLARKSVILLE PATCHOQUE COLLEGE STATION
LITTLE ROCK (2) EVANSVILLE MICHIGAN (13) PLATTSBURGH CORPUS CHRISTI
FORT WAYNE (2) ANN ARBOR POUGHKEEPSIE DALLAS (7)
CALIFORNIA (21) GRIFFITH DETROIT (8) QUEENS DENTON
LOS ANGELES (10) INDIANAPOLIS (5) FLINT ROCHESTER (3) EL PASO (2)
MONTEBELLO KOKOMO LANSING (2) SARATOGA SPRINGS FT. WORTH (3)
MURRIETA LAFAYETTE WATERFORD SYRACUSE (2) HARLINGEN
SALINAS MERRILLVILLE YORKTOWN HEIGHTS HOUSTON (8)
SAN FRANCISCO/OAKLAND (6) SOUTH BEND MINNESOTA (1) LAKE JACKSON
SAN JOSE (2) TERRE HAUTE MINNEAPOLIS NORTH CAROLINA (7) LAREDO
CHARLOTTE (2) LONGVIEW
COLORADO (8) IOWA (1) MISSISSIPPI (6) DURHAM LUBBOCK
COLORADO SPRINGS (2) DES MOINES GAUTIER FAYETTEVILLE MCALLEN (2)
DENVER (5) GULFPORT RALEIGH MIDLAND
PUEBLO KANSAS (4) HATTIESBURG GASTONIA SAN ANGELO
HUTCHINSON JACKSON (2) GREENSBORO SAN ANTONIO (3)
CONNECTICUT (7) OVERLAND PARK MERIDIAN TEMPLE
DANBURY WICHITA (2) OHIO (15) TYLER
DERBY MISSOURI (7) CINCINNATI (4) WACO
ENFIELD KENTUCKY (7) INDEPENDENCE COLUMBUS (4)
HARTFORD (2) FLORENCE SPRINGFIELD LIMA VERMONT (1)
ORANGE LEXINGTON ST. LOUIS (5) MANSFIELD BURLINGTON
WATERBURY LOUISVILLE (3) SANDUSKY
OWENSBORO NEBRASKA (3) SPRINGFIELD VIRGINIA (9)
DELAWARE (3) PADUCAH LINCOLN TOLEDO (2) ALEXANDRIA
DOVER OMAHA (2) YOUNGSTOWN CHANTILLY
WILMINGTON (2) LOUISIANA (14) CHESAPEAKE
ALEXANDRIA NEVADA (3) OKLAHOMA (8) DALE CITY
FLORIDA (44) BATON ROUGE (2) LAS VEGAS (2) ENID FREDERICKSBURG
BOCA RATON HOUMA RENO NORMAN HAMPTON
BOYNTON BEACH LAFAYETTE (2) OKLAHOMA CITY (3) MANASSAS
CORAL SPRINGS LAKE CHARLES NEW HAMPSHIRE (5) TULSA (3) RICHMOND (2)
DAVIE MONROE DOVER
DAYTONA BEACH NEW ORLEANS (3) MANCHESTER PENNSYLVANIA (11)
FT. MYERS SHREVEPORT (2) NASHUA ALLENTOWN
FT. PIERCE SLIDELL PLAISTOW HARRISBURG KIDS CENTRAL USA (3)
GAINESVILLE SALEM LANCASTER DULUTH, GA
JACKSONVILLE (2) MAINE (6) PITTSBURGH (6) FRANKLIN, TN
LAKELAND AUBURN NEW JERSEY (5) READING MCALLEN, TX
LEESBURG AUGUSTA HAZLET SCRANTON
MELBOURNE BANGOR PARAMUS
MIAMI/FT. LAUDERDALE (9) BRUNSWICK TURNERSVILLE SOUTH CAROLINA (7)
OCALA PORTLAND WAYNE CHARLESTON (2)
ORLANDO (5) PRESQUE ISLE WOODBRIDGE COLUMBIA (2)
PENSACOLA GREENVILLE
PORT CHARLOTTE NEW MEXICO (2) GREENWOOD
SARASOTA ALBUQUERQUE SUMTER
STUART LAS CRUCES
TALLAHASSEE (2)
TAMPA/CLEARWATER/
ST. PETERSBURG (9)
W. PALM BEACH
</TABLE>
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<PAGE> 8
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable items during the Company's fourth quarter.
Executive Officers of the Registrant (1)
The following is a list of executive officers, their ages, positions and
business experience during the past five years as of the date hereof:
<TABLE>
<CAPTION>
Name, Age and Position
- ----------------------
<S> <C>
Raymond Zimmerman, 61 Chairman of the Board and Chief Executive Officer since October 1981;
Chairman of the Board, President since July 1984 and from 1981 to October 1983.
President and Chief Executive Officer
Frank X. Bisceglia, 47 Divisional Senior Vice President, Hardlines Merchandising since
Divisional Senior Vice President, Hardlines January 1985.
Merchandising
Glen A. Bodzy, 41 Secretary since July 1987; Vice President and General Counsel since
Vice President, General Counsel and Secretary May 1985.
Sam Cusano, 40 Vice President and Chief Financial Officer since July 1993; Group
Vice President and Chief Financial Officer Vice President - Finance from December 1991. Vice President and
Corporate Controller of Revco D.S. Inc., a drugstore chain based in
Cleveland, Ohio, from January 1990 to November 1991 and Controller,
Finance from January 1989 to January 1990.
Michael E. Hogrefe, 33 Treasurer since July 1993; Assistant Treasurer from March 1990.
Treasurer Assistant Treasurer/Director of Financial Management for Equitable
HCA Corporation of New York, New York, a financial services
corporation, from March 1988 to March 1990.
Charles Septer, 42 Divisional Senior Vice President, Jewelry Merchandising since April
Divisional Senior Vice President, Jewelry 1988; Group Vice President, Jewelry Merchandising from January 1985.
Merchandising
Ronald J. Williams, 45 Divisional Senior Vice President, Store Operations since February
Divisional Senior Vice President, Store 1987.
Operations
</TABLE>
___________________
(1) All Executive Officers serve at the pleasure of the Board of Directors.
-8-
<PAGE> 9
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock trades on the New York Stock Exchange (NYSE) under
the symbol SME. The number of record holders of common shares at February 28,
1994 and 1993 was 5,800 and 5,637, respectively.
High and low closing sales prices as reported by the NYSE for fiscal 1993 and
1992 were as follows.
<TABLE>
<CAPTION>
1993 High Low
---- ---- ---
<S> <C> <C>
First Quarter 15 1/4 10 1/2
Second Quarter 11 3/4 10
Third Quarter 12 5/8 10 1/4
Fourth Quarter 11 3/8 9 3/4
1992 High Low
---- ---- ----
First Quarter 10 7/12 6 2/3
Second Quarter 11 3/4 9 1/12
Third Quarter 10 7/8 8 1/8
Fourth Quarter 14 1/2 8 7/8
</TABLE>
All per share data has been restated for the three for two stock split in 1992.
The Company's bank Credit Agreement includes certain restrictive covenants
which, among other things, prohibit (with certain limited exceptions) further
distributions and dividends by the Company. Certain of the Company's other
debt agreements also limit the payment of dividends.
Item 6. Selected Financial Data
Page 12 under the caption "Selected Financial Information" of the Registrant's
1993 Annual Report to Shareholders for the year ended January 1, 1994 is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 13 through 15 of the Registrant's 1993 Annual Report to Shareholders for
the year ended January 1, 1994 under the caption "Management's Discussion and
Analysis" are herein incorporated by reference.
-9-
<PAGE> 10
Item 8. Financial Statements and Supplementary Data
As set forth in the Registrant's 1993 Annual Report to Shareholders for the
year ended January 1, 1994, the following are incorporated herein by reference:
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-30
Quarterly Financial Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
Item 9. Changes in and Disagreements With Independent Auditors on Accounting
and Financial Disclosure
No reportable items.
PART III
Item 10. Directors and Executive Officers of the Registrant
Pages 2 through 4 under the caption "Election of Directors" of the Registrant's
definitive proxy statement dated March 18, 1994 filed with the Commission
pursuant to Rule 14a-6(b) are incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning Executive Officers
of the Registrant is included in Part I, Item 4, under the caption "Executive
Officers of the Registrant" of this Form 10-K.
Item 11. Executive Compensation
Reference is made to the information on pages 7 through 14 of the Registrant's
definitive proxy statement dated March 18, 1994 filed with the Commission
pursuant to Rule 14a-6(b) concerning executive compensation which is herein
incorporated by reference.
-10-
<PAGE> 11
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information on pages 5 and 6 of the Registrant's
definitive proxy statement dated March 18, 1994 filed with the Commission
pursuant to Rule 14a-6(c) concerning the beneficial ownership of Registrant's
common stock which is herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information on pages 14 and 15 of the Registrant's
definitive proxy statement dated March 18, 1994 filed with the Commission
pursuant to Rule 14a-6(c) concerning certain relationships and related
transactions which is herein incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<S> <C>
(a) 1. Financial Statements:
Reference is made to Part II, Item 8, captioned "Financial Statements and Supplementary Data" (and accompanying
index) which have been incorporated by reference from the Registrant's 1993 Annual Report to Shareholders for the
year ended January 1, 1994.
(a) 2. Financial Statement Schedules:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Schedules
---------
V. Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . 19-21
VI. Accumulated Depreciation, Depletion and Amortization of Property, Plant
and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-24
VIII. Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . 25
IX. Short-Term Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
X. Supplementary Income Statement Information . . . . . . . . . . . . . . . . . . 27
</TABLE>
All other schedules are not applicable and have been omitted.
-11-
<PAGE> 12
(a) 3. Exhibits and Index to Exhibits
Exhibits filed with this Form 10-K:
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
11 Statement re Computation of Earnings Per Common Share for
fiscal years ended January 1, 1994, January 2, 1993 and
December 28, 1991.
13 Portions of Service Merchandise Company, Inc. 1993 Annual
Report to Shareholders for the fiscal year ended
January 1, 1994.
21 Subsidiaries of the Registrant.
23 Independent Auditors' consent relative to report on
consolidated financial statements of Service Merchandise
Company, Inc. for the fiscal year ended January 1, 1994.
</TABLE>
Exhibits incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
3.1 Registrant's Charter - State of Tennessee, as restated 3.1
May 1, 1989, as further amended on November 7, 1990 and
April 15, 1992 which is incorporated herein by reference
from the Registrant's Form S-8 filed on September 8, 1993
(Registration No. 33-50185).
3.2 Registrant's By-Laws, as amended and restated as of April 3.2
19, 1989, which are incorporated herein by reference from
Registrant's Form 10-Q filed for the first quarter ended
March 31, 1989.
4.1 Shareholders Rights Agreement which is incorporated 4(c)
herein by reference from Registrant's Form 8-K dated
February 8, 1988.
4.2 Amendment No. 1 to Shareholder Rights Agreement which is 4(c)
incorporated herein by reference from Registrant's
Current Report on Form 8-K dated May 5, 1989.
</TABLE>
-12-
<PAGE> 13
(a) 3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.3 Note Purchase Agreement dated as of June 28, 1990 4.2a
concerning the refinancing of $90 million of the Real
Estate Bridge Loan under the Credit Agreement dated as of
July 24, 1989 among the Registrant, Various Banks and
Chemical Bank as Agent, which is incorporated herein by
reference from the Registrant's Form 10-Q filed for the
second quarter ended June 30, 1990.
4.4 Trust Indenture dated as of June 28, 1990 concerning the 4.2b
refinancing of $90 million of the Real Estate Bridge Loan
under the Credit Agreement dated as of July 24, 1989
among the Registrant, Various Banks and Chemical Bank as
Agent, which is incorporated herein by reference from the
Registrant's Form 10-Q filed for the second quarter ended
June 30, 1990.
4.5 Amended and Restated Credit Agreement dated as of May 20, 4.1
1992 among the Registrant, certain of its Subsidiaries,
Various Banks and Chemical Bank as Agent, which is
incorporated by reference from the Registrant's Form 10-Q
filed for the second quarter ended June 30, 1992.
4.6 Indenture, dated as of February 15, 1993, between the 4.1
Registrant and First American National Bank, as Trustee,
regarding the Registrant's $300,000,000 of 9% Senior
Subordinated Debentures due 2004, which is incorporated
herein by reference from Form 8-K dated February 17,
1993.
4.7 First Supplemental Indenture, dated as of February 15, 4.2
1993, between the Registrant and First American National
Bank, as trustee, regarding the Registrant's $300,000,000
of 9% Senior Subordinated Debentures due 2004, which is
incorporated herein by reference from Form 8-K dated
February 17, 1993.
4.8 Form of Debenture, regarding the Registrant's 4.3
$300,000,000 of 9% Senior Subordinated Debentures due
2004, which is incorporated herein by reference from Form
8-K dated February 17, 1993.
</TABLE>
-13-
<PAGE> 14
(a) 3. Exhibits and Index to Exhibits (Continued):
Exhibits incorporated herein by reference (Continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.9 First Amendment dated as of November 17, 1992 to Amended 4.1
and Restated Credit Agreement dated as of May 20, 1992,
among the Registrant, certain of its Subsidiaries,
Various Banks and Chemical Bank as Agent, which is
incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended January 2, 1993.
4.10 Second Amendment dated as of January 28, 1993 to Amended 4.2
and Restated Credit Agreement dated as of May 20, 1992,
among the Registrant, certain of its Subsidiaries,
Various Banks and Chemical Bank as Agent, which is
incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended January 2, 1993.
4.11 Third Amendment dated as of April 12, 1993 to Amended and 4.1
Restated Credit Agreement dated as of May 20, 1992, among
Service Merchandise Company, Inc., certain of its
Subsidiaries, Various Banks and Chemical Bank as Agent,
which is incorporated herein by reference from the
Registrant's Form 10-Q filed for the first quarter ended
March 31, 1993.
4.12 Fourth Amendment dated as of September 21, 1993 to the 4.1
Amended and Restated Credit Agreement dated as of May 20,
1992, among Service Merchandise Company, Inc., certain of
its Subsidiaries, Various Banks and Chemical Bank as
Agent, which is incorporated herein by reference from the
Registrant's Form 10-Q filed for the third quarter ended
September 30, 1993.
4.13 Indenture, dated as of October 15, 1993, between the 4.1
Registrant and The First National Bank of Boston, as
trustee, regarding the Registrant's $100,000,000 in
principal amount of 8 3/8% Senior Notes due 2001, which
is incorporated herein by reference from the Registrant's
Form 8-K dated October 26, 1993.
4.14 First Supplemental Indenture, dated as of October 15, 4.2
1993, between the Registrant and The First National Bank
of Boston, as trustee, regarding the Registrant's
$100,000,000 in principal amount of 8 3/8% Senior Notes
due 2001, which is incorporated herein by reference from
the Registrant's Form 8-K dated October 26, 1993.
</TABLE>
-14-
<PAGE> 15
(a) 3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.15 Form of Notes, regarding the Registrant's $100,000,000 of 4.3
8 3/8% Senior Notes due 2001, which is incorporated
herein by references from the Registrant's Form 8-K dated
October 26, 1993.
Executive Compensation Plans and Arrangements:
10.1 Employment agreement dated November 28, 1988 regarding 10.1
Raymond Zimmerman, Chairman of the Board, President and
Chief Executive Officer and Director, which is
incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended December 31, 1988.
10.2 Employment agreement dated November 28, 1988 regarding 10.5
Glen Bodzy, Vice President, General Counsel and
Secretary, which is incorporated herein by reference from
the Registrant's Form 10-K for the fiscal year ended
December 31, 1988.
10.3 Employment agreement dated November 28, 1988 regarding 10.4
Frank Bisceglia, Divisional Senior Vice President, which
is incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended December 31, 1988.
10.4 Employment agreement dated November 28, 1988 regarding 10.6
Charles Septer, Divisional Senior Vice President, which
is incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended December 31, 1988.
10.5 Employment agreement dated November 28, 1988 regarding 10.7
Ronald Williams, Divisional Senior Vice President, which
is incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended December 31, 1988.
10.6 1989 Employee Stock Incentive Plan which is incorporated Exhibit B
herein by reference from the Registrant's Proxy Statement
dated April 19, 1989.
</TABLE>
-15-
<PAGE> 16
(a) 3.Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
Executive Compensation Plans and Arrangements (continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
10.7 Incentive Stock Option Plan which is incorporated herein by Appendix II
reference to the Registrant's Registration Statement on
Form S-8, Commission File No. 33-7079.
10.8 Amendment No. 1 to Incentive Stock Option Plan which is Exhibit C
incorporated herein by reference from the Registrant's
Proxy Statement dated April 19, 1989.
10.9 1983 Non-Qualified Stock Option Plan which is incorporated Appendix I
herein by reference from the Registrant's Registration
Statement on Form S-8, Commission File No. 33-7079.
10.10 Form of Indemnification Agreement between the Registrant Exhibit A
and each of Messrs. Zimmerman, Crane, Poole, Holt, Moore,
Roitenberg, Bodzy and Braud which is incorporated herein by
reference from the Registrant's Proxy Statement dated April
19, 1989.
10.11 Amendment No. 1 to 1983 Non-Qualified Stock Option Plan, 10.12
which is incorporated herein by reference from the
Registrant's Form 10-K for the fiscal year ended December
30, 1989.
10.12 Directors' Deferred Compensation Plan, which is 10.1
incorporated herein by reference from the Registrant's Form
10-K for the fiscal year ended December 29, 1990.
10.13 Stock Option Pledge Agreement between Service Merchandise 10.2
Company, Inc. and the Service Merchandise Foundation dated
October 15, 1990, which is incorporated herein by reference
from the Registrant's Form 10-K for the fiscal year ended
December 29, 1990.
10.14 Directors' Equity Plan which is incorporated herein by Exhibit B
reference from the Registrant's Proxy Statement dated March
16, 1992.
</TABLE>
(b) Reports on Form 8-K
As reported on Form 8-K dated October 26, 1993, the Registrant indicated
it issued $100,000,000 in principal amount of 8 3/8% Senior Notes due
2001. Initially, the net proceeds were used for general corporate
purposes, including the Registrant's opening of new stores and other
capital expenditures, and will be used to prepay approximately $27.2
million of certain high coupon mortgage indebtedness during the first
half of 1994.
-16-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ S. Cusano
-----------------------
S. Cusano
Vice President and
Chief Financial Officer
March 18, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
/s/ Raymond Zimmerman
- ----------------------
Raymond Zimmerman
President, Chairman of the Board
and Director
(Principal Executive Officer)
March 18, 1994
/s/ Richard P. Crane, Jr. /s/ Charles V. Moore /s/ James E. Poole /s/ R. Maynard Holt
- -------------------------- --------------------- ------------------- --------------------
Richard P. Crane, Jr. Charles V. Moore James E. Poole R. Maynard Holt
Director Director Director Director
March 18, 1994 March 18, 1994 March 18, 1994 March 18, 1994
/s/ Harold Roitenberg /s/ S. Cusano
- ---------------------- --------------
Harold Roitenberg S. Cusano, Vice President and Chief Financial Officer
Director (Principal Financial Officer)
March 18, 1994 (Principal Accounting Officer)
March 18, 1994
</TABLE>
-17-
<PAGE> 18
(DELOITTE & TOUCHE LETTERHEAD)
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Service Merchandise Company, Inc.
Nashville, Tennessee
We have audited the consolidated financial statements of Service Merchandise
Company, Inc. and subsidiaries as of January 1, 1994 and January 2, 1993, and
for each of the three years in the period ended January 1, 1994, and our report
thereon appears on Page 48. Our audits also included the consolidated
financial statement schedules of Service Merchandise Company, Inc., listed in
Item 14. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE
/s/ Deloitte & Touche
Nashville, Tennessee
January 26, 1994
-18-
<PAGE> 19
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ----------------------------------------------------------------------------------------------------------------------
Balance at Other Changes Balance
Beginning Additions Add (Deduct)- at End of
CLASSIFICATION of Period at Cost Retirements(B) Describe(C) Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended January 1, 1994
Capitalized leases: (A)
Real estate $117,847 - ($1,378) - $116,469
Furniture, fixtures
and equipment 22,277 1,052 (11,425) - 11,904
----------- -------- --------- -------- ----------
140,124 1,052 (12,803) - 128,373
----------- -------- --------- -------- ----------
Owned assets: (A)
Land 91,594 22,792 - ($111) 114,275
Buildings 360,644 20,129 (2,014) 29,278 408,037
Furniture, fixtures
and equipment 296,699 28,455 (8,964) 9,212 325,402
Leasehold improvements 107,911 6,049 (3,764) 2,695 112,891
Construction in progress 6,418 37,956 (39) (41,439) 2,896
Other 20,712 629 (434) - 20,907
----------- -------- --------- -------- ----------
883,978 116,010 (15,215) (365) 984,408
----------- -------- --------- -------- ----------
$1,024,102 $117,062 ($28,018) ($365) $1,112,781
=========== ======== ========= ======== ==========
</TABLE>
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for more information concerning methods of amortization and
depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.
-19-
<PAGE> 20
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -------------------------------------------------------------------------------------------------------------------
Balance at Other Changes Balance
Beginning Additions Add (Deduct)- at End of
CLASSIFICATION of Period at Cost Retirements(B) Describe (C) Period
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended January 2, 1993
Capitalized leases: (A)
Real estate $126,433 - ($8,586) - $117,847
Furniture, fixtures
and equipment 17,293 4,984 - - 22,277
--------- ------- -------- --------- ------------
143,726 4,984 (8,586) - 140,124
--------- ------- -------- --------- ------------
Owned assets: (A)
Land 81,820 9,228 (875) $1,421 91,594
Buildings 350,697 4,892 (3,645) 8,700 360,644
Furniture, fixtures
and equipment 279,767 15,759 (4,255) 5,428 296,699
Leasehold improvements 103,626 4,637 (2,056) 1,704 107,911
Construction in progress 5,163 18,875 - (17,620) 6,418
Other 13,222 11,355 (3,865) - 20,712
--------- ------- -------- --------- ------------
834,295 64,746 (14,696) (367) 883,978
--------- ------- -------- --------- ------------
$978,021 $69,730 ($23,282) ($367) $1,024,102
========= ======= ======== ========= ============
</TABLE>
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for more information concerning methods of amortization and
depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.
-20-
<PAGE> 1
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ----------------------------------------------------------------------------------------------------------------------------
Balance at Other Changes Balance
Beginning Additions Add (Deduct)- at End of
CLASSIFICATION of Period at Cost Retirements(B) Describe(C) Period
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1991
Capitalized leases: (A)
Real estate $128,685 - ($2,252) - $126,433
Furniture, fixtures
and equipment 11,857 5,436 - - 17,293
---------- -------- -------- -------- ----------
140,542 5,436 (2,252) - 143,726
---------- -------- -------- -------- ----------
Owned assets: (A)
Land 76,047 6,188 - ($415) 81,820
Buildings 327,529 10,081 (2,848) 15,935 350,697
Furniture, fixtures
and equipment 263,798 14,498 (4,559) 6,030 279,767
Leasehold improvements 103,229 4,311 (3,043) (871) 103,626
Construction in progress 3,066 22,064 (59) (19,908) 5,163
Other 13,103 767 (648) - 13,222
---------- -------- -------- -------- ----------
786,772 57,909 (11,157) 771 834,295
---------- -------- -------- -------- ----------
$927,314 $63,345 ($13,409) $771 $978,021
========== ======== ======== ======== ==========
</TABLE>
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for more information concerning methods of amortization and
depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.
-21-
<PAGE> 2
SCHEDULE VI - ACCUMULATED DEPRECIATION,
DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------------------------------------------------------------------------------------------
Additions
Balance Charged to Other Changes Balance
at Beginning Costs and Add (Deduct)- at End of
DESCRIPTION of Period Expenses(A) Retirements(B) Describe(C) Period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended January 1, 1994
Capitalized leases: (A)
Real estate $59,543 $5,821 ($877) - $64,487
Furniture, fixtures and equipment 11,635 3,548 (11,425) - 3,758
-------- -------- --------- ----- --------
71,178 9,369 (12,302) - 68,245
-------- -------- --------- ----- --------
Owned assets: (A)
Buildings 111,873 16,746 (1,002) - 127,617
Furniture, fixtures and equipment 194,133 25,479 (8,403) - 211,209
Leasehold improvements 57,591 6,912 (3,104) ($7) 61,392
Other 5,564 3,252 (338) - 8,478
-------- -------- --------- ----- --------
369,161 52,389 (12,847) (7) 408,696
-------- -------- --------- ----- --------
$440,339 $61,758 ($25,149) ($7) $476,941
======== ======== ========= ===== ========
</TABLE>
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for more information concerning methods of amortization and
depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.
-22-
<PAGE> 3
SCHEDULE VI - ACCUMULATED DEPRECIATION,
DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------------------------------------------------------
Additions
Balance Charged to Other Changes Balance
at Beginning Costs and Add (Deduct)- at End of
DESCRIPTION of Period Expenses(A) Retirements(B) Describe(C) Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended January 2, 1993
Capitalized leases: (A)
Real estate $61,437 $5,983 ($7,877) - $59,543
Furniture, fixtures and equipment 8,818 2,817 - - 11,635
---------- -------- -------- ------ ---------
70,255 8,800 (7,877) - 71,178
---------- -------- -------- ------ ---------
Owned assets: (A)
Buildings 96,579 16,012 (1,248) $530 111,873
Furniture, fixtures and equipment 173,363 24,393 (3,733) 110 194,133
Leasehold improvements 52,838 7,031 (1,617) (661) 57,591
Other 6,902 2,464 (3,802) - 5,564
---------- -------- -------- ------ ---------
329,682 49,900 (10,400) (21) 369,161
---------- -------- -------- ------ ---------
$399,937 $58,700 ($18,277) ($21) $440,339
========== ======== ======== ====== =========
</TABLE>
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for more information concerning methods of amortization and
depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.
-23-
<PAGE> 4
SCHEDULE VI - ACCUMULATED DEPRECIATION,
DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------------------------------------------------------------------------------------------------
Additions
Balance Charged to Other Changes Balance
at Beginning Costs and Add (Deduct)- at End of
DESCRIPTION of Period Expenses Retirements(B) Describe(C) Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1991
Capitalized leases: (A)
Real estate $56,489 $6,436 ($1,488) - $61,437
Furniture, fixtures and equipment 6,909 1,909 - - 8,818
Leasehold improvements - - - - -
-------- ------- ------- ------- --------
63,398 8,345 (1,488) - 70,255
-------- ------- ------- ------- --------
Owned assets: (A)
Buildings 80,931 15,570 (1,569) $1,647 96,579
Furniture, fixtures and equipment 153,909 23,407 (3,925) (28) 173,363
Leasehold improvements 49,619 7,184 (2,425) (1,540) 52,838
Other 5,794 1,648 (540) - 6,902
-------- ------- ------- ------- --------
290,253 47,809 (8,459) 79 329,682
-------- ------- ------- ------- --------
$353,651 $56,154 ($9,947) $79 $399,937
======== ======= ======= ======= ========
</TABLE>
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this Form 10-K
for more information concerning methods of amortization and depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.
-24-
<PAGE> 5
SCHEDULE VIII - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES (IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------
ADDITIONS
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other Accounts Deductions at End of
DESCRIPTION of Period Expenses (Describe) (Describe)(B) Period
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended January 1, 1994 (A) $3,079 $577 - ($762) $2,894
Year ended January 2, 1993 (A) $2,673 $424 - ($18) $3,079
Year ended December 28, 1991 (A) $2,926 $106 - ($359) $2,673
</TABLE>
(A) The amounts represent transactions for Accounts Receivable Allowance for
Doubtful Accounts.
(B) The Allowance for Doubtful Accounts was reduced for accounts written-
off against the reserve.
-25-
<PAGE> 6
SCHEDULE IX - SHORT-TERM BORROWINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ----------------------------------------------------------------------------------------------------------------------------
Balance at Weighted Maximum Amount Average Amount Weighted Average
Category of Aggregate End of Average Outstanding During Outstanding During Interest Rate
Short-Term Borrowings Period Interest Rate the Period the Period(A) During the Period(B)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 1, 1994
Notes payable to banks - N/A $354,300 $176,982 4.97%
January 2, 1993
Notes payable to banks - N/A $377,600 $132,953 6.90%
December 28, 1991
Notes payable to banks - N/A $360,800 $132,710 8.80%
</TABLE>
(A) The average amount outstanding (Column E) was computed based on the
daily average balance outstanding and 365 days per year.
(B) The weighted average interest rate (Column F) was computed by
dividing related interest expense by the average of short-term
borrowings outstanding during the period (Column E).
-26-
<PAGE> 7
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COLUMN A COLUMN B
- --------------------------------------------------------------------------------
ITEM CHARGED TO COSTS AND EXPENSES
Fiscal Year Ended:
---------------------------------------------
January 1, January 2, December 28,
1994 1993 1991
---------- ---------- ------------
<S> <C> <C> <C>
Net Advertising Costs $137,359 $108,589 $99,594
</TABLE>
NOTE: The remaining items specified by Regulation S-X, Rule 12-11, are not
presented because such amounts do not exceed one percent of net
sales as shown in the related Consolidated Statements of Operations on
page 16 of the Registrant's 1993 Annual Report to Shareholders herein
incorporated by reference.
10
-27-
<PAGE> 8
EXHIBIT 11
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
January 1 January 2 December 28
1994 1993 1991
--------- --------- -----------
<S> <C> <C> <C>
Primary
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $82,315 $84,495 $76,080
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $4,982 (7,474) - -
Cumulative effect of change in accounting principle 7,742 - -
------- ------- -------
Net earnings $82,583 $84,495 $76,080
======= ======= =======
Shares:
Weighted average common shares outstanding 98,294 97,483 96,600
Weighted average shares of restricted
stock outstanding 948 1,128 1,504
Additional shares assuming exercise of stock options 2,836 2,991 2,372
------- ------- -------
Weighted average common shares and common
share equivalents outstanding - primary 102,078 101,602 100,476
======= ======= =======
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $0.80 $0.83 $0.76
Extraordinary loss from early extinguishment of debt,
net of tax benefit (0.07) - -
Cumulative effect of change in accounting principle 0.08 - -
------- ------- -------
Primary net earnings per common share $0.81 $0.83 $0.76
======= ======= =======
Assuming Full Dilution
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $82,315 $84,495 $76,080
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $4,982 (7,474) - -
Cumulative effect of change in accounting principle 7,742 - -
------- ------- -------
Net earnings $82,583 $84,495 $76,080
======= ======= =======
Shares:
Weighted average common shares outstanding 98,294 97,483 96,600
Weighted average shares of restricted
stock outstanding 948 1,128 1,504
Additional shares assuming exercise of stock options 2,858 3,066 2,538
------- ------- -------
Weighted average common shares and common
share equivalents outstanding - fully diluted 102,100 101,677 100,642
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $0.80 $0.83 $0.76
Extraordinary loss from early extinguishment of debt,
net of tax benefit (0.07) - -
Cumulative effect of change in accounting principle 0.08 - -
------- ------- -------
Fully diluted net earnings per common share $0.81 $0.83 $0.76
======= ======= =======
</TABLE>
11
-28-
<PAGE> 1
Service Merchandise Company, Inc. and Subsidiaries EXHIBIT 13
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Year
(In thousands, except per share and ratio data) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $3,814,618 $3,712,790 $3,399,752 $3,435,037 $3,307,110
Earnings before interest and income taxes 210,434 231,202 233,595 224,382 212,813
Interest expense - debt and
capitalized leases 73,243 92,685 108,874 126,459 102,057
Net earnings 82,583 84,495 76,080 60,712 71,991
Ratios & Rates
Gross margin to net sales 24.8% 24.4% 25.8% 25.1% 24.8%
Selling, general and administrative
expenses to net sales (a) 17.7% 16.6% 17.3% 16.9% 16.7%
Effective tax rate 40.0% 39.0% 39.0% 38.0% 35.0%
Net earnings to net sales 2.2% 2.3% 2.2% 1.8% 2.2%
PER COMMON SHARE (b)
Earnings per share $ 0.81 $ 0.83 $ 0.76 $ 0.62 $ 0.74
Cash dividends per share (c) - - - - 5.35
Weighted average common shares and
common share equivalents outstanding 102,078 101,602 100,476 98,528 97,437
FINANCIAL POSITION
Inventories $ 939,259 $ 857,640 $ 793,311 $ 747,697 $ 761,764
Accounts payable 630,723 496,946 370,434 407,791 443,061
Working capital 314,715 289,599 221,613 252,922 292,412
Total assets (a) 2,011,575 1,707,460 1,570,783 1,651,132 1,662,093
Long-term obligations (d) 698,521 696,911 714,696 826,602 930,437
Shareholders' equity (deficit) 279,538 194,207 104,315 25,374 (41,957)
Ratios
Inventory turnover 3.2 x 3.4 x 3.3 x 3.4 x 3.4 x
Current ratio 1.3 x 1.4 x 1.3 x 1.3 x 1.4 x
Long-term obligations to total capitalization 0.7 x 0.8 x 0.9 x 1.0 x 1.0 x
OTHER INFORMATION
Total net sales increase (decrease) 2.7% 9.2% (1.0%) 3.9% 6.9%
Comparable stores net sales increase (decrease) (e) 0.3% 5.2% (4.8%) 0.9% 3.7%
Number of catalog stores 391 371 359 346 334
</TABLE>
(a) Certain prior period amounts have been reclassified for comparative
purposes.
(b) Restated for stock splits in 1992, 1991 and 1989.
(c) Cash dividends in 1989 included the special $5.33 per share
dividend paid in connection with the recapitalization.
(d) Includes both long-term debt and capitalized lease obligations.
(e) Adjusted to reflect a comparable number of selling days.
<TABLE>
<CAPTION>
Fiscal Year
(In thousands, except ratio data) 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBITDA data:
EBITDA (f) $280,075 $300,033 $299,183 $294,778 $278,459
EBITDA to net sales 7.3% 8.1% 8.8% 8.6% 8.4%
</TABLE>
(f) EBITDA consists of net earnings before interest, income taxes,
depreciation and amortization and other non-cash charges and credits. Also
included in EBITDA is other amortization classified as selling, general and
administrative expenses in the following amounts: 1993 - $7,884; 1992 - $10,131;
1991 - $9,434; 1990 - $15,709; 1989 - $11,429. EBITDA is not intended to
represent net income, cash flow or any other measures of performance in
accordance with generally accepted accounting principles, but is included
because management believes certain investors find it to be a useful tool for
measuring creditworthiness.
12
-29-
<PAGE> 2
Service Merchandise Company, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Fiscal Year Ended January 1, 1994 Compared to Fiscal Year Ended January 2, 1993
Net earnings for the fiscal year ended January 1, 1994 (fiscal 1993)
were $82.6 million, or $.81 per share, compared to net earnings of $84.5
million, or $.83 per share, for the fiscal year ended January 2, 1993 (fiscal
1992). The decrease in net earnings reflects a $4.5 million pre-tax charge
($2.7 million after-tax or $.03 per share) associated with closing the
Company's three store Kids Central USA operations, a test specialty store
concept initiated in 1992. The decision to discontinue the concept reflects
the Company's efforts to focus on its core business.
The Company's business is highly seasonal, with a significant portion of
its sales occurring in the fourth quarter. Fourth quarter sales accounted for
42.9% and 42.2% of total net sales, in fiscal 1993 and 1992, respectively.
Fourth quarter sales for fiscal 1993 increased 4.2% as compared to the fourth
quarter of fiscal 1992.
For fiscal 1993, net sales were $3.8 billion compared to $3.7 billion
for fiscal 1992, an increase of $101.8 million or 2.7%. The Company opened a
net of 20 new catalog stores during fiscal 1993. Comparable stores sales,
adjusted for the five fewer selling days in fiscal 1993, increased 0.3% over
last year. Jewelry sales increased at a pace exceeding that experienced by the
Company as a whole. The relatively flat comparable store sales performance is
attributable to several factors. The Company was not as price promotional as
it was in the prior year while many other retailers continued heavy price
promotional programs to attract sales volume in a highly competitive retail
environment. While retail sales, in general, reported moderate increases,
consumer demand was strongly focused on durable goods in the home improvement
area, principally furnishings and major appliances, which are not significant
product offerings for the Company. Competition was also particularly intense
in consumer electronics, specifically in certain geographic markets where
competitors opened a significant number of new stores. Additionally, in the
southern Florida market, sales comparisons to last year were adversely impacted
by the additional sales volume generated in 1992 by Hurricane Andrew.
Gross margin, after taking into account buying and occupancy expenses,
increased to 24.8% in fiscal 1993 from 24.4% in fiscal 1992. The increase in
gross margin rate reflects less reliance on promotional pricing, improvements
in the jewelry and hardlines margin rates and a shift in sales mix toward
jewelry sales, partially offset by an increase in inventory loss, an increase
in transportation costs and an increase in rent and occupancy costs associated
with the new store openings during fiscal 1993.
Selling, general and administrative expenses for fiscal 1993 increased
as a percentage of net sales to 17.7% from 16.6%. Of the increase,
approximately $28.8 million relates to planned increases in advertising
expenditures. A significant portion of the advertising expense increase
relates to the Company's fourth quarter broadcast campaign featuring Bill
Cosby. While this campaign generated strong customer awareness, it did not
translate into the sales increases originally anticipated. The Company is in
the process of evaluating its 1994 advertising campaign. The remainder of the
increase in advertising expense relates to increases in household circulation
and page quantities of the Company's traditional advertising vehicles of
catalogs, newspaper inserts and flyers to support expansion of the Company's
customer base. Additional increases in selling, general and administrative
expenses relate to the growth in employment and other overhead expenses
associated with the net 20 new catalog store openings during 1993 which were
not totally offset by growth in sales volume. Selling, general and
administrative expenses in fiscal 1993 also reflect $3.3 million of the total
charge relating to the closing of the three Kids Central USA stores.
Depreciation and amortization on owned and leased property and equipment
was $61.8 million for fiscal 1993, a 5.3% increase over the $58.7 million
recorded in fiscal 1992. Increased depreciation was attributable to capital
expenditures, including increased new store ownership. The Company experienced
significant growth in fiscal 1993 with the opening of a net 20 new catalog
stores, the most the Company has opened in any one year since 1985. Capital
expenditures for property and equipment were $115.6 million and $64.4 million
for fiscal 1993 and 1992, respectively.
Interest expense on debt and capitalized leases decreased $19.4 million,
or 21.0% as compared to fiscal 1992. The lower interest expense is
attributable to the first quarter refinancing of $300 million senior
subordinated debt at a substantially lower rate and the second quarter
successful renegotiation of lower rates on the Company's Credit Agreement.
Partially offsetting these interest savings was the incremental interest
expense associated with the $100 million Senior Notes issued in October 1993.
These notes were issued to provide additional long-term financing for general
corporate purposes, including funding of planned store openings and prepayment
of certain high coupon mortgages.
In connection with the refinancing of the $300 million senior
subordinated debt in fiscal 1993, the Company recorded an extraordinary loss
due to early extinguishment of debt of $7.5 million, net of tax benefit of $5.0
million.
The effective income tax rate increased to 40% for fiscal 1993 as
compared to 39% in fiscal 1992. The increase relates to an increase in the
statutory federal income tax rate from 34% to 35% as enacted by the Omnibus
Budget Reconciliation Act of 1993. Also, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
effective January 3, 1993. The cumulative effect of this change in accounting
principle was a benefit of $7.7 million.
13
-30-
<PAGE> 3
Service Merchandise Company, Inc. and Subsidiaries
Fiscal Year Ended January 2, 1993 Compared to Fiscal Year Ended December 28,
1991
Net earnings for fiscal 1992 increased $8.4 million to $84.5 million, or
$.83 per share, compared to net earnings of $76.1 million, or $.76 per share,
for the prior year. The increase in net earnings for the year was due
primarily to reduced interest expense and reduced selling, general and
administrative expenses as a percentage of net sales.
For fiscal 1992, net sales were $3.7 billion compared to $3.4 billion
for the fiscal year ended December 28, 1991 (fiscal 1991), an increase of
$313.0 million or 9.2%. With the fiscal year ending January 2, 1993 versus
December 28, 1991, fiscal 1992 had six additional selling days. Adjusting for
the additional selling days to a comparable 52 week basis, comparable store
sales increased 5.2%. The Company believes the growth in comparable stores
sales was attributable to the early stages of a recovery in consumer spending.
The Company opened a net 14 new stores, including 2 Kids Central USA stores,
during fiscal 1992.
Gross margin, after taking into account buying and occupancy expenses,
decreased to 24.4% of net sales as compared to 25.8% for fiscal 1991. The
decrease in gross margin rate was a result of the combination of customers'
strong favorable response to the Company's more aggressive pricing on selected
categories of merchandise and greater sales increases in hardlines as compared
to higher margin jewelry. The decrease in gross margin rate also reflects
lower than anticipated inventory loss levels in 1991. Inventory losses in 1992
more closely matched accrued levels.
Selling, general and administrative expenses as a percentage of net
sales decreased to 16.6% for fiscal 1992 as compared to 17.3% for fiscal 1991.
The decrease was attributable to the Company's continued efforts to control
expenses.
Depreciation and amortization on owned and leased property and equipment
was $58.7 million for fiscal 1992, a 4.5% increase over the $56.2 million
recorded in fiscal 1991. Increased depreciation was due primarily to capital
expenditures for store expansion. Capital expenditures for property and
equipment were $64.4 million and $58.6 million for fiscal 1992 and 1991,
respectively.
Interest expense on debt and capitalized leases decreased $16.2 million,
or 14.9%, as compared to fiscal 1991. The lower interest expense was due to
the favorable impact of lower interest rates on variable rate debt and the
reduction of recapitalization debt, which included a prepayment of $27.6
million in the first quarter of fiscal 1992.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's business is highly seasonal, with the Company's investment
in inventories reaching a peak prior to the Christmas season. These
requirements are financed by internally generated funds and short-term
borrowings. Cash flow from operations is principally generated in the fourth
quarter of each fiscal year, reflecting the seasonal nature of the Company's
retail business. Cash flow during the fourth quarter has been more than
sufficient to allow the Company to repay all short-term borrowings under its
$475 million Revolving Credit Facility prior to the end of each fiscal year.
Working capital increased $25.1 million to $314.7 million at January 1,
1994 as compared to $289.6 million at January 2, 1993. The increase is
primarily attributable to an increase in cash and cash equivalents and an
increase in inventories, partially offset by increases in accounts payable and
current maturities of long-term debt. The $159.8 million increase in cash and
cash equivalents reflects the increased accounts payable leverage and issuance
of the $100 million Senior Notes in October 1993. Inventory levels increased
$81.6 million due principally to the addition of a net 20 new catalog stores
during fiscal 1993. The increase in accounts payable of $133.8 million relates
to the increase in inventories as well as a shift in the timing of inventory
purchases to later in the fourth quarter of fiscal 1993. The increase in
current maturities of long-term debt reflects an increase in scheduled
principal payments for the Secured Term Loan of $60 million due in 1994 from
$35 million which was paid in December 1993 and classified as current at
January 2, 1993. Also, the Company intends to prepay approximately $27.2
million of certain high coupon mortgages during the first half of 1994;
accordingly, these mortgages have been classified as current at January 1,
1994.
Short-term borrowings under the $475 million Revolving Credit Facility
reached a maximum of $354.3 million during fiscal 1993 as compared to $377.6
and $360.8 million in fiscal 1992 and 1991, respectively. The decrease was
attributable to the application of the net proceeds from the $100 million
Senior Notes to pay down the Revolving Credit Facility by $97.9 million during
October 1993.
14
-31-
<PAGE> 4
Service Merchandise Company, Inc. and Subsidiaries
Liquidity
The Company's senior credit facility is provided under the Company's
Credit Agreement originally dated July 24, 1989 and amended and restated as of
May 20, 1992. The Credit Agreement provides for a $122 million Secured Term
Loan as of January 1, 1994 and a $475 million Revolving Credit Facility. The
Secured Term Loan has scheduled payments of $60 million in December 1994 and
$62 million in December 1995. All amounts are subject to prepayment without
penalty at the Company's option. The Company believes the Credit Agreement
provides adequate working capital financing capability and operating
flexibility.
In April 1993, the Company amended the existing Credit Agreement to
reduce the contractual rate for the Secured Term Loan to LIBOR plus 1 1/2%,
or Prime Rate plus 1/2%, and for the Revolving Credit Facility to LIBOR plus
1 1/8%, or Prime Rate plus 1/8%, plus a facility fee of 3/8% on the total
commitment.
In February 1993, the Company issued $300 million of 9% Senior
Subordinated Debentures due 2004. Net proceeds of $294 million, together with
cash on hand, were used to redeem the existing $300 million of 11 3/4% Senior
Subordinated Notes due 1996 at a premium of 101.68% plus accrued interest. The
Company recorded an extraordinary loss of $7.5 million, net of tax benefit of
$5.0 million, in connection with the early extinguishment of this debt.
In October 1993, the Company issued $100 million of 8 3/8% Senior Notes
due 2001, priced at 99.621% to yield 8.45%. The proceeds were intended for
general corporate purposes, including the Company's planned opening of new
stores, other capital expenditures and prepayment of approximately $27.2
million of certain high coupon mortgage indebtedness during the first half of
fiscal 1994. The net proceeds were initially applied to reduce the Company's
borrowings under the Revolving Credit Facility. In connection with the
prepayment of these mortgages during the first half of fiscal 1994, the Company
anticipates recording an extraordinary loss of approximately $1.4 million, net
of tax benefit of $0.9 million, or approximately $0.01 per share.
During fiscal 1993, the Company's sales growth rate was slower than
anticipated and its selling, general and administrative expenses trended
upward, partly as a result of the opening of a net 20 new catalog stores. See
"Fiscal Year Ended January 1, 1994 Compared to Fiscal Year Ended January 2,
1993." The Company's earnings before interest, income taxes, depreciation and
amortization and other non-cash charges (EBITDA) accordingly declined by $20
million to 7.3% of net sales in fiscal 1993 as compared to 8.1% of net sales in
fiscal 1992. The Company believes that its cash on hand, additional cash from
operations and available credit will be sufficient to fund its plans for
expansion as well as its other capital needs.
Capital Expenditures
Capital expenditures in 1993 were $115.6 million, compared to $64.4
million in fiscal 1992 and $58.6 million in fiscal 1991. The majority of the
Company's capital expenditures relate to the opening of new stores, a
significant portion of which were fee- based properties where the Company owns
the land and property. In fiscal 1993, the Company opened 27 new catalog
stores (7 existing stores were closed) and 1 new Kids Central USA store.
During fiscal 1992, 17 new catalog stores were opened (5 existing stores were
closed) along with 2 new Kids Central USA stores.
The Company plans to open approximately a net of 20 to 23 new catalog
stores in 1994. The Company expects to fund future capital expenditures
through cash on hand together with cash flow from operations and temporary
borrowings under the Revolving Credit Facility.
Effect of New Accounting Pronouncements
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting
for Post Employment Benefits." This pronouncement is effective for fiscal
years beginning after December 15, 1993 and requires employers to accrue
certain post employment benefits granted to former or inactive employees. The
adoption of this standard will not have a material impact on the Company's
financial statements.
Inflation
The Company does not believe inflation has had a material impact on the
Company's net sales or net earnings during the last three fiscal years.
15
-32-
<PAGE> 5
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Fiscal Year Ended
January 1, January 2, December 28,
(In thousands, except per share data) 1994 1993 1991
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $3,814,618 $3,712,790 $3,399,752
Cost of merchandise sold and buying and occupancy expenses 2,868,683 2,805,822 2,521,967
---------- ---------- ----------
Gross margin after cost of merchandise sold and
buying and occupancy expenses 945,935 906,968 877,785
Selling, general and administrative expenses 673,744 617,066 588,036
Depreciation and amortization 61,757 58,700 56,154
---------- ---------- ----------
Earnings before interest and income taxes 210,434 231,202 233,595
Interest expense - debt 62,102 80,856 96,278
Interest expense - capitalized leases 11,141 11,829 12,596
---------- ---------- ----------
Earnings before income taxes 137,191 138,517 124,721
Income taxes 54,876 54,022 48,641
---------- ---------- ----------
Earnings before extraordinary loss and cumulative effect
of change in accounting principle 82,315 84,495 76,080
Extraordinary loss from early extinguishment of debt, net
of tax benefit of $4,982 (7,474) - -
Cumulative effect of change in accounting principle 7,742 - -
---------- ---------- ----------
Net earnings $ 82,583 $ 84,495 $ 76,080
========== ========== ==========
Per common share:
Earnings before extraordinary loss and cumulative effect
of change in accounting principle $0.80 $0.83 $0.76
Extraordinary loss from early extinguishment of debt, net
of tax benefit (0.07) - -
Cumulative effect of change in accounting principle 0.08 - -
---------- ---------- ----------
Net earnings per common share $0.81 $0.83 $0.76
========== ========== ==========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
16
-33-
<PAGE> 6
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 1, January 2,
(In thousands, except per share data) 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $325,092 $165,317
Accounts receivable, net of allowance of
$2,894 and $3,079, respectively 53,014 53,311
Inventories 939,259 857,640
Prepaid expenses 29,898 20,454
---------- ----------
TOTAL CURRENT ASSETS 1,347,263 1,096,722
Net property and equipment - owned 575,712 514,817
Net property and equipment - capitalized leases 60,128 68,946
Other assets and deferred charges 28,472 26,975
---------- ----------
TOTAL ASSETS $2,011,575 $1,707,460
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $630,723 $496,946
Accrued expenses 188,050 151,374
State and local sales tax 59,035 55,285
Income taxes 54,914 52,560
Current maturities of long-term debt 91,751 41,029
Current maturities of capitalized lease obligations 8,075 9,929
---------- ----------
TOTAL CURRENT LIABILITIES 1,032,548 807,123
Long-term debt 616,752 607,386
Capitalized lease obligations 81,769 89,525
Deferred income taxes 968 9,219
---------- ----------
TOTAL LIABILITIES 1,732,037 1,513,253
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, cumulative, 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 99,368 and 99,010 shares, respectively 49,684 49,505
Additional paid-in capital 4,055 2,846
Deferred compensation (1,187) (2,547)
Retained earnings 226,986 144,403
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 279,538 194,207
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,011,575 $1,707,460
========== ==========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
17
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<PAGE> 7
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------ Additional Retained
Common Par Paid-in Deferred Earnings
(In thousands) Shares Value Capital Compensation (Deficit) Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 29, 1990 52,232 $26,116 $15,312 ($7,225) ($8,829) $25,374
Net earnings - - - - 76,080 76,080
Five-for-four stock split 13,062 6,531 (6,531) - - -
Exercise of stock options, net 394 197 1,292 - - 1,489
Amortization of deferred
compensation - - - 2,060 - 2,060
Cancellation of restricted stock (88) (44) (911) 955 - -
Other (68) (34) (590) (64) - (688)
------ ------- ------ ------ ------- --------
BALANCE DECEMBER 28, 1991 65,532 32,766 8,572 (4,274) 67,251 104,315
Net earnings - - - - 84,495 84,495
Three-for-two stock split 32,836 16,418 (9,075) - (7,343) -
Exercise of stock options, net 738 369 4,187 - - 4,556
Amortization of deferred
compensation - - - 1,227 - 1,227
Cancellation of restricted stock (66) (33) (483) 516 - -
Other (30) (15) (355) (16) - (386)
------ ------- ------ ------ -------- --------
BALANCE JANUARY 2, 1993 99,010 49,505 2,846 (2,547) 144,403 194,207
Net earnings - - - - 82,583 82,583
Exercise of stock options, net 454 227 1,794 - - 2,021
Amortization of deferred
compensation - - - 727 - 727
Cancellation of restricted stock (96) (48) (594) 642 - -
Other - - 9 (9) - -
------ ------- ------ ------- -------- --------
BALANCE JANUARY 1, 1994 99,368 $49,684 $4,055 ($1,187) $226,986 $279,538
====== ======= ====== ======= ======== ========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
18
-35-
<PAGE> 8
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Year Ended
January 1, January 2, December 28,
(In thousands) 1994 1993 1991
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $82,583 $84,495 $76,080
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization (a) 69,711 69,278 66,035
Deferred income taxes (8,251) 790 (3,653)
Loss on sale of property and equipment 1,509 543 518
Write-off of bond issue cost/bond discount 5,094 - -
Changes in assets and liabilities:
Accounts receivable 297 (9,236) 9,350
Inventories (81,619) (64,329) (45,614)
Prepaid expenses (9,444) (5,035) 13,495
Accounts payable 133,777 126,512 (34,789)
Accrued expenses and state and local sales taxes 40,426 (6,800) (11,464)
Income taxes 2,354 (3,269) 5,225
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 236,437 192,949 75,183
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (115,645) (64,400) (58,601)
Proceeds from sale of property and equipment 644 3,239 1,968
Other, net (2,033) 2,357 2,059
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (117,034) (58,804) (54,574)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 354,300 377,600 360,800
Repayment of short-term borrowings (354,300) (377,600) (360,800)
Proceeds from long-term debt 399,621 1,485 3,680
Repayment of long-term debt (341,219) (67,827) (115,716)
Repayment of capitalized lease obligations (9,953) (8,313) (7,482)
Debt issuance costs (10,098) (9,445) (26)
Exercise of stock options 2,021 4,556 1,489
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 40,372 (79,544) (118,055)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 159,775 54,601 (97,446)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 165,317 110,716 208,162
-------- -------- --------
CASH AND CASH EQUIVALENTS - END OF YEAR $325,092 $165,317 $110,716
======== ======== ========
</TABLE>
(a) Includes other amortization classified as selling, general and
administrative expenses of $7,884 for fiscal 1993, $10,131 for fiscal 1992,
$9,434 for fiscal 1991 and $70, $447 and $447 of discount amortization
classified as interest expense in fiscal 1993, 1992 and 1991, respectively.
See Notes to Consolidated Financial Statements.
19
-36-
<PAGE> 9
Service Merchandise Company, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JANUARY 1, 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned. All significant intercompany transactions and balances have
been eliminated.
Fiscal year: The Company's fiscal year ends on the Saturday closest to
the end of the calendar year. There were 52 weeks in the fiscal year ended
January 1, 1994 (fiscal 1993), 53 weeks in the fiscal year ended January 2,
1993 (fiscal 1992) and 52 weeks in the fiscal year ended December 28, 1991
(fiscal 1991).
Cash and cash equivalents: Cash and cash equivalents include cash on
hand and short-term, highly liquid investments which generally include
certificates of deposit, commercial paper, time deposits, securities under
agreements to repurchase and institutional money market funds. Such
investments are generally made for periods covering 1 to 30 days. These
investments are valued at cost, which approximates market, and have a
weighted average interest rate of 3.3% and 3.4% as of January 1, 1994 and
January 2, 1993, respectively.
Accounts receivable: Accounts receivable include trade accounts,
vendor advertising allowances and customer layaway receivables.
Inventories: Inventories are valued at the lower of cost or market,
utilizing the first-in, first-out method.
Property and equipment - owned: Owned property and equipment are
stated at cost. Depreciation and amortization are provided principally on
the straight-line method over a period of 5 to 10 years for furniture,
fixtures and equipment and 30 years for buildings. Leasehold improvements
are depreciated over the lesser of the life of the asset or the real estate
lease term. Accelerated depreciation methods are used for income tax
purposes.
Property and equipment - capitalized leases: Capitalized leases are
recorded at the lower of fair value of the leased property or the present
value of the minimum lease payments at the inception of the lease.
Amortization of leased property is computed using the straight-line method
over the term of the lease.
Deferred charges: Deferred charges consist primarily of debt issuance
costs and deferred finance charges which are amortized over the life of the
related debt.
Income taxes: In fiscal 1992 and 1991, income taxes were accounted for
in accordance with Accounting Principles Board Opinion ("APB") No. 11,
"Accounting for Income Taxes." Effective the first day of fiscal 1993, the
Company implemented Financial Accounting Standards Board Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which superseded APB No. 11. Under SFAS 109, the asset and
liability method is used for computing future tax consequences of events
which have been recognized in the Company's financial statements or tax
returns. Deferred tax expense or benefit is the change during the year in
the Company's deferred tax assets and liabilities.
Reclassifications: Certain prior period amounts have been reclassified
for comparative purposes.
Business segment: Substantially all of the Company's assets, revenue
and operating income are employed in or generated from the retail catalog
store industry within the United States.
Net earnings per common share: Net earnings per common share is
computed by dividing net earnings by the weighted average number of common
shares and common share equivalents which consist of outstanding stock
options and restricted shares (Note G). All 1992 and 1991 share data has
been restated for the three-for-two stock split in fiscal 1992 and the
five-for-four stock split in fiscal 1991.
20
-37-
<PAGE> 10
Service Merchandise Company, Inc. and Subsidiaries
B. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
January 1, January 2,
(In thousands) 1994 1993
-----------------------------------------------------------------------------------
<S> <C> <C>
Owned assets:
Land $ 114,275 $ 91,594
Buildings 408,037 360,644
Furniture, fixtures and equipment 325,402 296,699
Leasehold improvements 112,891 107,911
Construction in progress 2,896 6,418
Other 20,907 20,712
---------- -----------
984,408 883,978
Less: accumulated depreciation and
amortization (408,696) (369,161)
---------- -----------
Owned assets, net $ 575,712 $ 514,817
========== ===========
Capitalized leases:
Real estate $ 116,469 $ 117,847
Furniture, fixtures and equipment 11,904 22,277
---------- -----------
128,373 140,124
Less: accumulated amortization (68,245) (71,178)
---------- -----------
Capitalized leases, net $ 60,128 $ 68,946
========== ===========
-----------------------------------------------------------------------------------
</TABLE>
C. REVOLVING CREDIT FACILITY
The Company's senior credit facility is the Credit Agreement, which
consists of a $475 million Revolving Credit Facility and a Secured Term
Loan (Note D). The Revolving Credit Facility matures on December 31,
1995. At January 1, 1994 and January 2, 1993, there were no borrowings
outstanding under the Revolving Credit Facility.
Loans under the Revolving Credit Facility bear interest, at the
Company's option of either the contractual rate of LIBOR plus 1 1/8% or
Prime Rate plus 1/8%, as defined. A facility fee of 3/8% per annum is
payable quarterly on the total commitment. The Revolving Credit Facility
includes a $250 million competitive bid facility which allows the Company
to solicit bids from its lenders to borrow at interest rates below the
contractual rate. The Revolving Credit Facility is subject to the
restrictive covenants and security requirements contained in the Credit
Agreement (Note D) and requires no borrowings be outstanding for a 30 day
consecutive period each year.
21
-38-
<PAGE> 11
Service Merchandise Company, Inc. and Subsidiaries
D. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(In thousands) January 1, 1994 January 2, 1993
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Secured Term Loan $ 122,026 $ 157,026
11 3/4% Senior Subordinated Notes due 1996, net
of unamortized discount of $1,677 - 298,323
9% Senior Subordinated Debentures, payable in
equal installments in 2003 and 2004 300,000 -
8 3/8% Senior Notes due 2001, net of unamortized
discount of $369 99,631 -
First Mortgage Secured Notes, weighted average
variable interest rate at January 1, 1994 of 4.3%,
payable in three equal installments from 1998 to 2000 90,000 90,000
Mortgage notes payable, weighted average fixed
interest rate at January 1, 1994 of 11.1%, payable
in varying amounts to 2022 56,131 61,173
Industrial Revenue Bonds, fixed and variable interest
rates, weighted average interest rate at January 1,
1994 of 3.6%, payable in varying amounts to 2024 40,485 41,385
Other 230 508
----------- ----------
708,503 648,415
Less: current maturities (91,751) (41,029)
----------- ----------
Long-term debt $ 616,752 $ 607,386
=========== ==========
--------------------------------------------------------------------------------------------------
</TABLE>
The Credit Agreement includes a Secured Term Loan in original
principal of $360 million. At January 1, 1994, the outstanding principal
balance of the Secured Term Loan was $122 million. The Secured Term Loan
matures on December 31, 1995 and requires scheduled principal payments of
$60 million in December 1994 and $62 million in December 1995.
Obligations under the Secured Term Loan bear interest, at the Company's
option of either LIBOR plus 1 1/2% or Prime Rate plus 1/2%, as defined.
The Credit Agreement contains various financial and other covenants,
including: (a) restrictions on incurrence of indebtedness, leases, liens
and contingent obligations; (b) restrictions on mergers, acquisitions,
sales of assets, investments and transactions with affiliates; (c) a
prohibition, with certain limited exceptions, on distributions, dividends
and repurchases of capital stock by the Company; (d) requirements to make
certain prepayments out of excess cash flow and (e) financial tests,
including requirements to maintain specified levels of consolidated
current ratio, leverage ratio, interest coverage ratio, cash expense
coverage and tangible net worth, as defined. At January 1, 1994, the
Company was in compliance with these covenants.
Amounts borrowed under the Credit Agreement are secured by a lien on
substantially all of the assets of the Company, other than inventory and
certain property securing other debt, principally mortgages.
22
-39-
<PAGE> 12
Service Merchandise Company, Inc. and Subsidiaries
On February 17, 1993, the Company issued $300 million of 9% Senior
Subordinated Debentures (the "Debentures"), due in equal installments in
2003 and 2004. Net proceeds of $294 million, together with cash on hand,
were used to redeem the existing $300 million of 11 3/4% Senior
Subordinated Notes due 1996 at a premium of 101.68% plus accrued interest.
The Company recorded an extraordinary loss of $7.5 million, net of tax
benefit of $5.0 million, in connection with the early extinguishment of
this debt. Interest on the Debentures is payable semiannually in June and
December. The Debentures are subordinated to all senior indebtedness of
the Company, as defined, and are callable, at the Company's option,
beginning December 1997 at a premium of 104.5% which decreases annually
until reaching par in December 2000.
On October 26, 1993, the Company issued $100 million of 8 3/8% Senior
Notes (the "Notes") due 2001, priced at 99.621% to yield 8.45%. The
proceeds were used for general corporate purposes, including the Company's
opening of new stores and other capital expenditures, and will be used to
prepay approximately $27.2 million of certain high coupon mortgage
indebtedness during the first half of 1994. Initially, the net proceeds
were applied to reduce borrowings under the Company's Revolving Credit
Facility. Interest on the Notes is payable semi-annually in January and
July.
Long-term debt maturities are as follows:
<TABLE>
<CAPTION>
(In thousands)
Fiscal year
----------------------------------
<S> <C>
1994 $ 91,751
1995 75,366
1996 1,810
1997 4,456
1998 33,560
Thereafter 501,560
--------
Total $708,503
========
----------------------------------
</TABLE>
Mortgage notes payable and Industrial Revenue Bonds are collateralized
by property and equipment having a net book value at January 1, 1994 of
approximately $142.0 million and $28.9 million, respectively. The
Industrial Revenue Bonds are primarily floating rate demand obligations.
The Company utilizes interest rate cap agreements to reduce the risk
of unfavorable interest rate fluctuations on its variable interest rate
long-term debt. At January 1, 1994, the Company had an 11.5%, three month
LIBOR interest rate cap agreement on $45 million of its variable interest
rate First Mortgage Notes. The interest rate cap agreement matures on
June 30, 1998. The Company is exposed to credit loss in the event of
nonperformance by a counterparty to the interest rate cap agreement;
however, the Company does not anticipate nonperformance by the
counterparty.
Cash payments for interest were $72.2 million, $109.2 million and
$113.5 million for fiscal 1993, 1992 and 1991, respectively.
23
-40-
<PAGE> 13
Service Merchandise Company, Inc. and Subsidiaries
E. LEASE COMMITMENTS
The Company has both capital and operating lease agreements for
store and other facilities as well as for certain furniture, fixtures and
equipment. Under most of these lease agreements, the Company pays taxes,
insurance and maintenance costs. Lease terms for stores generally range
from 10 to 25 years with renewal periods for an additional 5 to 10 years.
Certain store leases provide for additional contingent rental payments
based on a percentage of sales in excess of specified minimum amounts.
Future minimum lease payments as of January 1, 1994 are as follows:
<TABLE>
<CAPTION>
Capitalized Lease Obligations
------------------------------
(In thousands) Real Furniture, Fixtures Operating
Fiscal year Estate and Equipment Leases
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1994 $15,291 $ 2,966 $ 69,945
1995 14,484 2,966 66,205
1996 14,224 2,540 63,322
1997 13,764 1,230 56,362
1998 13,821 176 50,731
Thereafter 81,971 - 410,183
------- -------- --------
Total minimum payments 153,555 9,878 $716,748
========
Less: imputed interest (72,341) (1,248)
------- --------
Present value of net minimum lease
payments 81,214 8,630
Less: current maturities (5,623) (2,452)
------- --------
Capitalized lease obligations $75,591 $ 6,178
======= ========
</TABLE>
Minimum sublease rentals, not deducted from above, to be received in
the future under noncancellable operating subleases, aggregated $77.8
million at January 1, 1994.
Capitalized real estate and equipment leases are at effective rates
of approximately 12.3% and 5.9%, respectively, as of January 1, 1994.
Additions to capitalized leases for fiscal 1993, 1992 and 1991 were $1.1
million, $5.0 million and $5.4 million, respectively.
Rental expense consists of the following:
<TABLE>
<CAPTION>
Fiscal year
(In thousands) 1993 1992 1991
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $66,807 $ 62,425 $ 57,146
Contingent rentals 1,833 2,234 1,905
Sublease rental income (9,034) (9,335) (9,753)
------- -------- ---------
Net rental expense $59,606 $ 55,324 $ 49,298
======= ======== =========
</TABLE>
24
-41-
<PAGE> 14
Service Merchandise Company, Inc. and Subsidiaries
F. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial
instruments as of January 1, 1994 and January 2, 1993 is made in
accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by
the Company using available market information as of January 1, 1994 and
January 2, 1993 and valuation methodologies considered appropriate to the
circumstances. The estimates presented are not necessarily indicative of
amounts the Company could realize in a current market exchange.
<TABLE>
<CAPTION>
January 1, 1994 January 2, 1993
--------------- ---------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $325,092 $325,092 $165,317 $165,317
Liabilities:
Secured Term Loan 122,026 122,235 157,026 158,725
11 3/4% Senior Subordinated
Notes, net of discount - - 298,323 305,035
9% Senior Subordinated Debentures 300,000 302,250 - -
8 3/8% Senior Notes, net of
discount 99,631 100,005 - -
Mortgages 146,131 145,417 151,173 153,813
Industrial Revenue Bonds 40,485 40,485 41,385 41,385
-----------------------------------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents: The carrying amount approximates fair
value due to the short maturity of these instruments (less than three
months).
Secured Term Loan and mortgages: Fair value is based on management's
estimate of the present value of estimated future cash flows discounted at
the current market rate for financial instruments with similar
characteristics and maturity.
11 3/4% Senior Subordinated Notes: Fair value is based on quoted
market prices from the American Stock Exchange at December 31, 1992.
9% Senior Subordinated Debentures and 8 3/8% Senior Notes: Fair value
is based on quoted market prices from the New York Stock Exchange at
December 31, 1993.
Industrial Revenue Bonds: The carrying value approximates the fair
value. Due to the variable rate nature of the instruments, the interest
rate paid by the Company is equivalent to the current market rate demanded
by investors; therefore, the instruments trade at par.
Interest rate cap agreement: The Company utilizes an interest rate
cap agreement to reduce the risk of unfavorable interest rate
fluctuations. The carrying value of the interest rate cap agreement was
$0.4 million at January 1, 1994 and January 2, 1993. The fair value is
estimated to be approximately $0.1 million at January 1, 1994 and January
2, 1993 as derived from quoted market prices from an institution making a
market in these instruments.
Letters of credit: The Company also has commercial and standby
letters of credit used to secure corporate obligations. The commercial
letters of credit have contractual amounts totaling $37.1 million and
$35.0 million at January 1, 1994 and January 2, 1993, respectively, and
fair values of $0.8 million at January 1, 1994 and January 2, 1993.
The standby letters of credit have contractual amounts totaling $39.8
million and $39.0 million at January 1, 1994 and January 2, 1993,
respectively, and fair values of $0.8 million and $1.0 million at January
1, 1994 and January 2, 1993, respectively. The fair value is estimated to
be equivalent to fees currently charged for similar arrangements, which
approximate the fees paid by the Company due to the short-term nature
(less than one year) of the Company's commitments.
25
-42-
<PAGE> 15
Service Merchandise Company, Inc. and Subsidiaries
G. STOCK OPTIONS AND AWARDS
Under the Company's employee stock incentive plans, the Compensation
Committee of the Board of Directors (the "Compensation Committee") has
authority to grant the following types of awards: (a) stock options; (b)
stock appreciation rights; (c) restricted stock; (d) deferred stock; (e)
stock purchase rights and/or (f) other stock-based awards. Incentive
stock options are granted at not less than 100% of the fair market value
as of date of grant, and non-qualified options are granted at not less
than 50% of the fair market value as of date of grant. Awards are
exercisable subject to terms and conditions as determined by the
Compensation Committee, with no term to exceed ten years after date of
grant.
In 1991, the Board of Directors adopted the 1991 Directors' Equity
Plan (the "Directors' Plan") for non-employee directors. Under the
Directors' Plan, eligible directors annually receive 188 restricted shares
and stock options for 750 shares of the Company's common stock. Vesting
of the restricted shares occurs one year from date of grant. The stock
options are granted with an exercise price equal to the fair market value
of the Company's common stock as of date of grant, are exercisable in 20%
installments beginning one year from date of grant and expire ten years
from grant date. An aggregate of 46,875 shares of the Company's common
stock is authorized to be issued under this plan.
At January 1, 1994, there were approximately 3.4 million shares of
unissued common stock reserved for issuance under the Company's various
stock incentive plans.
Stock options: Stock option activity for these plans during the last
three fiscal years was as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) Incentive Non-Qualified
----------------------------------------------------------------------------------
<S> <C> <C>
Balance December 29, 1990 1,265 2,893
Granted at $2.20 to $6.90 per share - 39
Exercised (467) (136)
Cancelled (63) (169)
------ ------
Balance December 28, 1991 735 2,627
Granted at $10.08 per share - 193
Exercised (327) (506)
Cancelled (9) (110)
------ ------
Balance January 2, 1993 399 2,204
Granted at $10.13 to $10.38 per share - 1,111
Exercised (119) (349)
Cancelled (6) (150)
------ ------
Balance January 1, 1994 274 2,816
====== ======
----------------------------------------------------------------------------------
</TABLE>
Outstanding stock options at January 1, 1994 have exercise prices
ranging from $1.85 to $9.97 per share for incentive stock options and
$2.20 to $10.38 per share for non-qualified stock options. Of the options
outstanding at January 1, 1994, approximately 1.5 million were available
for exercise.
26
-43-
<PAGE> 16
Service Merchandise Company, Inc. and Subsidiaries
Restricted stock awards: During fiscal 1989, the Company issued
restricted shares under provisions of the 1989 Employee Stock Incentive
Plan. The shares are restricted until February 1995 unless otherwise
determined by the Compensation Committee. During that period, none of
such shares may be sold, transferred, pledged or assigned. If a holder of
restricted stock ceases to be employed by the Company, shares of
restricted stock held will be forfeited. During the restriction period,
holders of the shares may exercise full voting rights and receive all
dividends with respect to those shares.
Restricted stock activity for the last three fiscal years was as
follows:
<TABLE>
<CAPTION>
(In thousands)
-----------------------------------------------------
<S> <C>
Balance December 29, 1990 1,818
Cancelled (142)
Vested (480)
Granted 9
------
Balance December 28, 1991 1,205
Cancelled (76)
Vested (131)
Granted 2
------
Balance January 2, 1993 1,000
Cancelled (96)
Vested (2)
Granted 1
------
Balance January 1, 1994 903
======
-----------------------------------------------------
</TABLE>
Deferred compensation of $24.4 million was recognized during 1989 in
connection with the restricted stock awards. Amortization of $0.7
million, $1.2 million and $2.1 million was charged to operations in fiscal
1993, 1992 and 1991, respectively.
Service Merchandise Foundation option: The Service Merchandise
Foundation (the "Foundation"), a private charitable foundation, was formed
in 1990. As a charitable contribution, the Company granted the Foundation
an option to purchase approximately 1.9 million shares of common stock at
$2.20 per share, the then current market price. The option is exercisable
in whole or in part from date of grant until October 15, 2000. Under
applicable Internal Revenue Service rulings, the stock option may not be
exercised directly by the Foundation. The Foundation may sell all or a
part of the option to unrelated not-for-profit entities, which may then
exercise the option directly.
H. SHAREHOLDERS' RIGHTS PLAN
In February 1988, the Company issued Series A Junior Preferred Stock
Purchase Rights to common shareholders. Each right entitles the holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Preferred Stock, $1 par value. The rights are not and will not become
exercisable unless certain change of control events occur. Authorized are
400,000 shares, none of which have been issued as of January 1, 1994.
Also authorized are 4.6 million shares of cumulative, $1 par value,
preferred stock, none of which have been issued as of January 1, 1994.
27
-44-
<PAGE> 17
Service Merchandise Company, Inc. and Subsidiaries
I. RETIREMENT PLAN
The Company has a defined benefit pension plan; all employees of the
Company are eligible to participate upon reaching age 21 and completing
one year of qualified service, as defined in the Plan. Benefits are based
on years of service and employee compensation. Contributions to the plan
are intended to provide not only for benefits attributed to service to
date, but also for benefits expected to be earned in the future. The
Company's funding policy has been to contribute at least the amount
required by the Employee Retirement Income Security Act of 1974, but no
more than the maximum tax deductible amount. In fiscal 1993, 1992 and
1991, the Company made contributions of approximately $8.4 million, $8.5
million and $1.3 million, respectively, to the pension plan.
The following table sets forth the funded status of the pension plan
and net pension expense:
<TABLE>
<CAPTION>
January 1, January 2,
(In thousands) 1994 1993
--------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation (includes
$47,693 and $39,443 of vested benefit
obligation, respectively) $ 49,997 $ 41,902
======== ========
Projected benefit obligation $ 55,301 $ 44,679
Plan assets at fair value, primarily
listed corporate stocks and bonds 49,522 41,945
-------- --------
Projected benefit obligation in
excess of plan assets 5,779 2,734
Unrecognized net loss (8,785) (4,024)
Unrecognized transitional asset, net of amortization 3,793 4,172
Unrecognized prior service cost 3,750 4,280
-------- --------
Accrued pension liability $ 4,537 $ 7,162
======== ========
Service cost $ 7,355 $ 6,849
Interest on projected benefit obligation 3,602 2,968
Actual return on plan assets (4,435) (3,320)
Net amortization and deferrals (719) (1,513)
-------- --------
Net pension expense $ 5,803 $ 4,984
======== ========
--------------------------------------------------------------------------------------
</TABLE>
Net pension expense was $3.7 million for fiscal 1991.
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows: weighted average discount
rate for fiscal 1993 and fiscal 1992 were 7.5% and 8%, respectively;
expected long-term rate of return on pension plan assets for fiscal 1993
and fiscal 1992 were 10.5% and 11%, respectively; and rate of increase in
future compensation levels for fiscal 1993 and fiscal 1992 were 5% and 6%,
respectively.
J. EMPLOYEE SAVINGS PLAN
The Service Merchandise Company, Inc. Savings and Investment Plan (the
"Plan") is a voluntary compensation deferral plan under Section 401(k) of
the Internal Revenue Code. All employees of the Company are eligible to
participate upon reaching age 21 and completing one year of qualified
service, as defined in the Plan. Eligible employees may elect to defer
from 1% to 15% of their compensation. The Company will match, based on
earnings performance, up to 50% of the first 6% of employees' salary
deferral. Deferrals are invested in Company common stock and/or in other
securities and investments as permitted by the Plan and directed by each
employee.
Company contributions to the Plan were $3.6 million, $3.8 million and
$3.1 million for fiscal 1993, 1992 and 1991, respectively.
28
-45-
<PAGE> 18
Service Merchandise Company, Inc. and Subsidiaries
K. INCOME TAXES
The Company adopted SFAS 109, "Accounting for Income Taxes," effective
the first day of fiscal 1993. The adoption of SFAS 109 changed the
Company's method of accounting for income taxes from the deferred method
(APB 11) to an asset and liability approach. The asset and liability
approach requires recognition of deferred tax assets and liabilities for
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
The adjustment to the January 3, 1993 consolidated balance sheet to
adopt SFAS 109 was a benefit of $7.7 million. This benefit is reflected
in net income for the first quarter of 1993 as the cumulative effect of a
change in accounting principle. The adjustment primarily represents the
impact of adjusting deferred taxes to reflect the 34% federal income tax
rate at the time of the change as opposed to the higher income tax rates
in effect when the temporary differences originated. There was no
material impact to the deferred tax liability resulting from the statutory
federal income tax rate increase enacted by the Omnibus Budget
Reconciliation Act of 1993.
The provision for income taxes, net of the $5 million tax benefit in
fiscal 1993 on the extraordinary loss from early extinguishment of debt
consists of the following:
<TABLE>
<CAPTION>
Fiscal year
(In thousands) 1993 1992 1991
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ 42,802 $ 45,191 $ 45,418
State and local 7,021 8,041 6,876
--------- --------- ----------
49,823 53,232 52,294
Deferred income taxes 71 790 (3,653)
--------- --------- ----------
Total income taxes $ 49,894 $ 54,022 $ 48,641
========= ========= ==========
------------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets (liabilities) at January 1, 1994 are comprised of the
following:
<TABLE>
<CAPTION>
(In thousands) January 1, 1994
---------------------------------------------------------------------
<S> <C>
Financial accruals without economic performance $ 19,571
Capitalized leases 12,131
Deferred compensation 2,132
Pension liability 1,582
Other 6,247
----------
Deferred tax asset 41,663
----------
Depreciation (36,589)
Layaway sales (3,840)
Other (2,202)
----------
Deferred tax liability (42,631)
----------
Net deferred tax liability $ (968)
==========
---------------------------------------------------------------------
</TABLE>
Prior to the change in accounting method, the source of deferred tax items
and the corresponding tax effects were as follows:
<TABLE>
<CAPTION>
Fiscal year
(In thousands) 1992 1991
-------------------------------------------------------------------
<S> <C> <C>
Depreciation $ (1,170) $ (1,476)
Deferred compensation 1,386 581
Other 574 (2,758)
--------- ---------
Total provision for deferred
taxes $ 790 $ (3,653)
========= =========
</TABLE>
29
-46-
<PAGE> 19
Service Merchandise Company, Inc. and Subsidiaries
A reconciliation of the provision for income taxes to the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
Fiscal year
1993 1992 1991
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 34.0% 34.0%
State and local income taxes, net of federal benefit 3.7% 3.9% 3.2%
Other 1.3% 1.1% 1.8%
----- ----- -----
Effective tax rate 40.0% 39.0% 39.0%
===== ===== =====
---------------------------------------------------------------------------------------
</TABLE>
Cash payments for income taxes were $48.0 million, $55.4 million, and
$47.6 million for fiscal 1993, 1992 and 1991, respectively.
L. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
<TABLE>
<CAPTION>
(In thousands, except per share data)
March 31, June 30, September 30, January 1,
THREE MONTHS ENDED: 1993 1993 1993 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 672,863 $ 803,112 $ 704,080 $ 1,634,563
========== =========== ============ ===========
Gross margin (a) $ 154,516 $ 201,429 $ 169,260 $ 420,730
========== =========== ============ ===========
Earnings (loss) before extraordinary
loss and cumulative effect of
change in accounting principle $ (10,858) $ 8,420 $ (4,303) $ 89,056
=========== =========== ============ ===========
Extraordinary loss from early
extinguishment of debt, net of tax
benefit of $4,982 $ (7,598) $ - $ 124 $ -
=========== =========== ============ ===========
Cumulative effect of change in
accounting principle $ 7,742 $ - $ - $ -
=========== =========== ============ ===========
Net earnings (loss) $ (10,714) $ 8,420 $ (4,179) $ 89,056
=========== =========== ============ ===========
Per common share:
Earnings (loss) before extraordinary
loss and cumulative effect of
change in accounting principle $ (0.11) $ 0.08 $ (0.04) $ 0.87
=========== =========== ============ ===========
Extraordinary loss from early
extinguishment of debt, net of tax
benefit $ (0.07) $ - $ - $ -
=========== =========== ============ ===========
Cumulative effect of change in
accounting principle $ 0.08 $ - $ - $ -
=========== =========== ============ ===========
Net earnings (loss) per common
share $ (0.10) $ 0.08 $ (0.04) $ 0.87
=========== =========== ============ ===========
---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, January 2,
THREE MONTHS ENDED: 1992 1992 1992 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 664,654 $ 781,497 $ 698,214 $1,568,425
========= ========== ========== ==========
Gross margin (a) $ 157,099 $ 187,982 $ 169,911 $ 391,976
========= ========== ========== ==========
Net earnings (loss) $ (9,392) $ 6,035 $ (1,718) $ 89,570
========= ========== ========== ==========
Net earnings (loss) per share $ (0.09) $ 0.06 $ (0.02) $ 0.88
========= ========== ========== ==========
---------------------------------------------------------------------------------------------------
</TABLE>
(a) Gross margin after cost of merchandise sold and buying and occupancy
expenses.
30
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<PAGE> 20
Service Merchandise Company, Inc. and Subsidiaries
STATEMENT OF RESPONSIBILITY
The Company is responsible for the information presented in this
Annual Report. The financial statements have been prepared in accordance
with generally accepted accounting principles and present fairly in all
material respects the Company's Consolidated Balance Sheets, Statements of
Operations, Changes in Shareholders' Equity and Cash Flows. Certain amounts
included in the financial statements are estimated based on currently
available information and judgment regarding the outcome of future
conditions and circumstances. Financial information presented elsewhere in
this Annual Report is consistent with that in the financial statements.
Management developed and maintains a system of accounting and
controls, including an extensive internal audit program, designed to provide
reasonable assurance that the Company's assets are protected from improper
use and accounting records provide a reliable basis for the preparation of
financial statements. This system is continually reviewed, improved and
modified in response to changing business conditions and operations and to
recommendations made by the independent and internal auditors. Management
believes the accounting and control systems provide reasonable assurance
that assets are safeguarded and financial information is reliable.
Raymond Zimmerman S. Cusano
Chairman of the Board, President and Vice President and
and Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Service Merchandise Company, Inc.
We have audited the accompanying consolidated balance sheets of
Service Merchandise Company, Inc. and subsidiaries as of January 1, 1994 and
January 2, 1993 and the related statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the
period ended January 1, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Service Merchandise
Company, Inc. and subsidiaries at January 1, 1994 and January 2, 1993, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended January 1, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note K to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective January
3, 1993 to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
January 26, 1994
Nashville, Tennessee
31
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<PAGE> 1
EXHIBIT NO. 21
Subsidiaries of the Registrant
The following is a list of subsidiaries of the Registrant, as of January 1,
1994, all of which are wholly-owned.
<TABLE>
<CAPTION>
State of
Parent Incorporation
------ -------------
<S> <C>
Service Merchandise Company, Inc. Tennessee
Subsidiaries
------------
Service Merchandise Co. Broad, Inc. Tennessee
Service Merchandise Co. No. 34, Inc. Tennessee
Service Merchandise Co. No. 35, Inc. Tennessee
Service Merchandise Co. No. 51, Inc. Tennessee
Service Merchandise Co. No. 93, Inc. Tennessee
Service Merchandise Co. No. 30, Inc. Tennessee
Service Merchandise Company of Iowa, Inc. Tennessee
Service Merchandise Company of Kansas, Inc. Tennessee
The Toy Store, Inc. Tennessee
B. A. Pargh Co., Inc. Tennessee
Cherry-Tolleson, Inc. Tennessee
Service Merchandise Showrooms, Inc. Tennessee
Wholesale Supply Company, Inc. Tennessee
Homeowners Warehouse, Inc. Florida
The Lingerie Store, Inc. Tennessee
The McNally Supply Company Tennessee
SMC Aviation, Inc. New Hampshire
Porta-File, Inc. Tennessee
H. J. Wilson Co., Inc. Louisiana
Service Merchandise Co. of New York, Inc. Tennessee
Travel Management Consultants, Inc. Tennessee
Service Merchandise of West Virginia, Inc. (Co.) Tennessee
A. F. S. Marketing Services, Inc. Tennessee
Service Merchandise Co., Inc. (Financial) Tennessee
Service Merchandise Indiana Partners Indiana
Service Merchandise of Pennsylvania Business Trust Pennsylvania
Service Merchandise of Texas, Limited Partnership Delaware
</TABLE>
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<PAGE> 1
(DELOITTE & TOUCHE LETTERHEAD) EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Annual Report on Form 10-K
and previously filed Registration Statement Nos. 33- 7079, 33-11340, 33-30983
and 33-50185 on Form S-8 of our report dated January 26, 1994 accompanying the
consolidated financial statements of Service Merchandise Company, Inc. for the
fiscal year ended January 1, 1994.
DELOITTE & TOUCHE
/s/ Deloitte & Touche
- ----------------------
Nashville, Tennessee
March 27, 1994
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