<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, 1995 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)
<TABLE>
<S> <C>
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
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate 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 in Part III of this Form 10-K or any amendment to
this Form 10-K. X
---
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 March 1, 1995: $448,321,400. This calculation assumes that
all shares of Common Stock beneficially held by officers and members of the
Board of Directors of the Registrant are owned by "affiliates," a status which
each of the officers and directors individually disclaims.
<TABLE>
<S> <C>
Class Outstanding at March 1, 1995
----- ----------------------------
Common Stock ($.50 Par Value) 99,646,443
Parts in Form 10-K Where Documents
Documents Incorporated by Reference Are Incorporated by Reference
- ----------------------------------- -----------------------------
Portions of Registrant's Proxy Statement dated March 16, 1995 Part III
Portions of Registrant's Annual Report to Shareholders for the
fiscal year ended January 1, 1995 Parts II and IV
</TABLE>
<PAGE> 2
<TABLE>
TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
<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 . . . . . . . . . . . . . . . . . . . . . 8-9
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
- -------
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 9-10
Item 6. Selected Financial Data Page 10 of the Registrant's 1994 Annual
Report to Shareholders for the year
ended January 1, 1995 which is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Pages 11 through 14 of the Registrant's
Financial Condition and Results of 1994 Annual Report to Shareholders for
Operations the year ended January 1, 1995 which
are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Pages 15 through 31 of the Registrant's
Data 1994 Annual Report to Shareholders for
the year ended January 1, 1995 which
are incorporated herein by reference.
Item 9. Changes in and Disagreements With
Independent Auditors on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
- --------
Item 10. Directors and Executive Officers of the Pages 2 through 5 of the Registrant's Proxy
Registrant Statement dated March 16, 1995 which are
incorporated herein by reference.
Item 11. Executive Compensation Pages 8 through 18 of the Registrant's Proxy
Statement dated March 16, 1995 which are
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Pages 6 and 7 of the Registrant's Proxy
Owners and Management Statement dated March 16, 1995 which are
incorporated herein by reference.
Item 13. Certain Relationships and Related Page 19 of the Registrant's Proxy Statement
Transactions dated March 16, 1995 which is incorporated
herein by reference.
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
- -------
Item 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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<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, 1995.
PART I
Item 1. Business
Service Merchandise, with 406 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 560 pages in 1994,
is supplemented by a spring catalog of 176 pages, a Christmas catalog of 160
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. Although the typical customer pre-selects
merchandise from a catalog, flyer or newspaper insert, 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 portion of the Company's
total sales. According to a 1994 customer opinion survey, the Company's
typical customer is well-educated, married and lives in a two-earner household
and looks 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. In the jewelry and sight and sound 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.
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<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 "Service Express,"
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. In
fiscal 1994, store inventory levels were increased to achieve a consistently
high in-stock position, particularly on promotional merchandise.
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 preferences.
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 most
nationally known jewelry and hardline 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 2,150 suppliers, most of
which are manufacturers. In fiscal 1994, purchases from the largest vendor
approximated 4.0% 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 $326 million in fiscal 1994, 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.
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<PAGE> 5
Item 1. Business (continued)
Employees
The number of persons employed by the Company fluctuates seasonally. During
the fiscal year ended January 1, 1995, the number of employees varied from
approximately 26,100 to approximately 51,700, including both permanent and
temporary employees. As of January 1, 1995, the Company had 28,836 permanent
employees, of whom 83% were hourly-paid personnel engaged in non-supervisory
activities; the balance was administrative, executive, distribution center and
store management personnel. The number of permanent employees increased in
fiscal 1994 due to an increased emphasis on customer service and the opening of
a net 15 stores. 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. 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, 1995.
These distribution centers are located in Florida, New York, Tennessee, Texas
and Nevada and contain an aggregate of approximately 3,492,000 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 Renewal options through 1/31/05
Dallas, TX 594,000 Leased Renewal options through 1/31/96
Henderson, NV 391,000 Leased Renewal options through 12/31/95
</TABLE>
Subsequent to year-end, the Company had completed an extension of the renewal
option for the Henderson, NV distribution center and is currently negotiating
the extension of the renewal option of the Dallas, TX location. 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, 1995, the Company operated 406 retail catalog stores
(typically consisting of approximately 50,000 square feet) as follows:
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Owned land and building 102
Long-term ground lease with an owned building 43
Owned land with industrial development financing under which the Company had ownership or
a right to obtain ownership of the building 3
Leased 276
Stores which have been subleased (18)
---
Total 406
===
</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 1994 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.
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<PAGE> 7
Item 2. Properties (continued)
<TABLE>
SERVICE MERCHANDISE CO., INC.
STORE LOCATIONS
<S> <C> <C> <C> <C>
ALABAMA (8) GEORGIA (16) MARYLAND (5) NEW YORK (23) SOUTH CAROLINA (7)
BIRMINGHAM (2) ATLANTA (12) COLUMBIA ALBANY CHARLESTON (2)
HUNTSVILLE (2) AUGUSTA FORESTVILLE BINGHAMTON COLUMBIA (2)
MOBILE COLUMBUS FREDERICK BUFFALO (2) GREENVILLE
MONTGOMERY (2) MACON SALISBURY EAST MEADOW GREENWOOD
TUSCALOOSA SAVANNAH WALDORF FISHKILL SUMTER
ARIZONA (4) ILLINOIS (24) MASSACHUSETTS (11) HARTSDALE TENNESSEE (18)
GLENDALE CHAMPAIGN AUBURN HUNTINGTON CHATTANOOGA (2)
MESA (2) CHICAGO (23) BOSTON (7) LAKE GROVE JACKSON
SCOTTSDALE INDIANA (16) HOLYOKE LAWRENCE KINGSPORT
ARKANSAS (3) BLOOMINGTON LANESBORO/PITTSFIELD MASSAPEQUA KNOXVILLE (2)
FORT SMITH CLARKSVILLE SWANSEA MIDDLETOWN MEMPHIS (5)
LITTLE ROCK (2) EVANSVILLE MICHIGAN (14) NANUET NASHVILLE (7)
CALIFORNIA (22) FORT WAYNE (2) ANN ARBOR PATCHOQUE TEXAS (48)
LOS ANGELES (11) GRIFFITH DETROIT (9) PLATTSBURGH ABILENE
MONTEBELLO INDIANAPOLIS (5) FLINT POUGHKEEPSIE AMARILLO
MURRIETA KOKOMO LANSING (2) QUEENS ARLINGTON (2)
SALINAS LAFAYETTE WATERFORD ROCHESTER (2) AUSTIN (2)
SAN FRANCISCO/OAKLAND (6) MERRILLVILLE MINNESOTA (1) SARATOGA SPRINGS BEAUMONT
SAN JOSE (2) SOUTH BEND MINNEAPOLIS SYRACUSE (2) COLLEGE STATION
COLORADO (7) TERRE HAUTE MISSISSIPPI (6) YORKTOWN HEIGHTS CORPUS CHRISTI
COLORADO SPRINGS IOWA (1) GAUTIER NORTH CAROLINA (9) DALLAS (8)
DENVER (5) DES MOINES GULFPORT CHARLOTTE (3) DENTON
PUEBLO KANSAS (4) HATTIESBURG DURHAM EL PASO (2)
CONNECTICUT (8) HUTCHINSON JACKSON (2) FAYETTEVILLE FT. WORTH (3)
DANBURY OVERLAND PARK MERIDIAN GASTONIA HARLINGEN
DERBY WICHITA (2) MISSOURI (7) GREENSBORO HOUSTON (10)
ENFIELD KENTUCKY (7) INDEPENDENCE RALEIGH (2) LAKE JACKSON
HARTFORD (3) FLORENCE SPRINGFIELD OHIO (16) LAREDO
ORANGE LEXINGTON ST. LOUIS (5) AKRON LONGVIEW
WATERBURY LOUISVILLE (3) NEBRASKA (3) CINCINNATI (4) LUBBOCK
DELAWARE (3) OWENSBORO LINCOLN COLUMBUS (4) MCALLEN (2)
DOVER PADUCAH OMAHA (2) LIMA MIDLAND
WILMINGTON (2) LOUISIANA (14) NEVADA (3) MANSFIELD SAN ANGELO
FLORIDA (48) ALEXANDRIA LAS VEGAS (2) SANDUSKY SAN ANTONIO (3)
BOCA RATON BATON ROUGE (2) RENO SPRINGFIELD TEMPLE
BOYNTON BEACH HOUMA NEW HAMPSHIRE (5) TOLEDO (2) TYLER
CORAL SPRINGS LAFAYETTE (2) DOVER YOUNGSTOWN WACO
DAVIE LAKE CHARLES MANCHESTER OKLAHOMA (8) VERMONT (1)
DAYTONA BEACH MONROE NASHUA ENID BURLINGTON
FT. MYERS NEW ORLEANS (3) PLAISTOW NORMAN VIRGINIA (11)
FT. PIERCE SHREVEPORT (2) SALEM OKLAHOMA CITY (3) ALEXANDRIA (2)
GAINESVILLE SLIDELL NEW JERSEY (6) TULSA (3) CHANTILLY
JACKSONVILLE (3) MAINE (5) HAZLET PENNSYLVANIA (12) CHESAPEAKE
LAKELAND AUBURN PARAMUS ALLENTOWN DALE CITY
LEESBURG AUGUSTA TURNERSVILLE HARRISBURG FREDERICKSBURG
MELBOURNE BANGOR VOORHEES LANCASTER HAMPTON
MIAMI/FT. LAUDERDALE (12) BRUNSWICK WAYNE PHILADELPHIA MANASSAS
NAPLES PORTLAND WOODBRIDGE PITTSBURGH (6) NORFOLK
OCALA NEW MEXICO (2) READING RICHMOND (2)
ORLANDO (5) ALBUQUERQUE SCRANTON
PENSACOLA LAS CRUCES
PORT CHARLOTTE
SARASOTA
STUART
TALLAHASSEE (2)
TAMPA/CLEARWATER/
ST. PETERSBURG (8)
W. PALM BEACH
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</TABLE>
<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>
Name, Age and Position
- ----------------------
<S> <C>
Raymond Zimmerman, 62 Chairman of the Board and Chief Executive Officer since October 1981;
Chairman of the Board and Chief Executive President from July 1984 to November 1994 and from 1981 to October
Officer 1983. Board member of The Limited Stores, Columbus, Ohio.
Gary M. Witkin, 46 President and Chief Operating Officer since November 1994; Vice
President, Chief Operating Officer and Chairman and Board member, Saks Fifth Avenue from October 1992 to
Director November 1994; Executive Vice-President of Dayton Hudson Corp. from
June 1991 to October 1992; President of the Marshall Fields & Co.,
division of Dayton Hudson Corp. from June 1990 to June 1991;
Executive Vice President of Stores for Marshall Fields & Co., from
October 1983 to June 1990.
Glen A. Bodzy, 42 Secretary since July 1987; Vice President and General Counsel since
Vice President, General Counsel and Secretary May 1985.
S. Cusano, 41 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, 34 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.
Robert C. Eimers, 47 Senior Vice President, Human Resources since February 1995. Vice
Senior Vice President, Human Resources President, Human Resources of Sonoco Products Company from June 1988
to January 1995.
-8-
</TABLE>
<PAGE> 9
<TABLE>
<S> <C>
Charles Septer, 43 Divisional Senior Vice President, Jewelry Merchandising since April
Divisional Senior Vice President, Jewelry 1988; Group Vice President, Jewelry Merchandising from January 1985.
Merchandising
Steven F. McCann, 42 Operational Vice President of Finance and Corporate Controller since
Operational Vice President of Finance, June 1994. Vice President, Controller of Robinsons-May division of
Corporate Controller the May Department Store Company from February 1993 to June 1994.
Vice President, Controller of the May Company division of the May
Department Store Company from April 1992 to February 1993.
Divisional Vice President, Divisional Controller of the May Company
division of the May Department Store Company from May 1989 to April
1992.
______________________
(1) All Executive Officers serve at the pleasure of the Board of Directors.
</TABLE>
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 March 1, 1995
was 6,442 and at February 28, 1994 was 5,800.
High and low closing sales prices as reported by the NYSE for fiscal 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
1994 High Low
- ---- ---- ---
<S> <C> <C>
First Quarter 10 7 5/8
Second Quarter 8 6
Third Quarter 6 7/8 5
Fourth Quarter 6 1/2 4 1/4
1993 High Low
- ---- ---- ----
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
</TABLE>
The Company's new Reducing Revolving Credit Facility contains various financial
and other covenants, including a restricted payments basket (as defined in the
Agreement) to allow for dividends. The Company has not declared any cash
dividends to shareholders for fiscal 1994 and 1993, respectively.
Effective February 15, 1995, the Board of Directors approved an amendment to
its Shareholders Rights Plan. The amendment effects a reduction of the Rights
Plan's "flip-in" trigger from 30% to 15%. As amended, the Rights Plan provides
that if any person becomes the beneficial owner of 15% or more of the Company's
Common Stock, each Right not owned by such 15% holder
-9-
<PAGE> 10
will enable its holder to purchase, at the Right's then current exercise
price, units of the Company's Series A Junior Preferred Stock or the Company's
Common Stock having a value of twice the Right's exercise price. The Board of
Directors may, upon the triggering of the Rights Plan, redeem the rights and
prevent their exercise by shareholders. In addition, the Rights Plan was
amended to provide that the "Distribution Date" for the Rights shall occur upon
the earlier of (i) the tenth day after any person becomes the beneficial owner
of 15% or more of the Company's Common Stock or (ii) the tenth day after a
tender or exchange offer is commenced for 15% or more of the outstanding shares
of Company Common Stock.
Item 6. Selected Financial Data
Page 10 under the caption "Selected Financial Information" of the Registrant's
1994 Annual Report to Shareholders for the year ended January 1, 1995 is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 11 through 14 of the Registrant's 1994 Annual Report to Shareholders for
the year ended January 1, 1995 under the caption "Management's Discussion and
Analysis" are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
As set forth in the Registrant's 1994 Annual Report to Shareholders for the
year ended January 1, 1995, the following are incorporated herein by reference:
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . 15
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . 17
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 18
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 19-30
Quarterly Financial Information (Unaudited). . . . . . . . . . . . . . . . 29-30
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
Item 9. Changes in and Disagreements With Independent Auditors on Accounting
and Financial Disclosure
No reportable items.
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<PAGE> 11
PART III
Item 10. Directors and Executive Officers of the Registrant
Pages 2 through 5 under the caption "Election of Directors" of the Registrant's
definitive proxy statement dated March 16, 1995 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 8 through 18 of the Registrant's
definitive proxy statement dated March 16, 1995 filed with the Commission
pursuant to Rule 14a-6(b), concerning executive compensation, which is herein
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information on pages 6 and 7 of the Registrant's
definitive proxy statement dated March 16, 1995 filed with the Commission
pursuant to Rule 14a-6(b), 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 page 19 of the Registrant's definitive
proxy statement dated March 16, 1995 filed with the Commission pursuant to Rule
14a-6(b), concerning certain relationships and related transactions, which is
herein incorporated by reference.
PART IV
<TABLE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<S> <C> <C> <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 1994 Annual Report to Shareholders for the year
ended January 1, 1995.
(a) 2. Financial Statement Schedule:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . 17
Schedule
II. Valuation and Qualifying Accounts and Reserves. . . . . . . . 18
All other schedules are not applicable and have been
omitted.
-11-
</TABLE>
<PAGE> 12
(a) 3. Exhibits and Index to Exhibits
<TABLE>
Exhibits filed with this Form 10-K:
<CAPTION>
Exhibit No. Under
Item 601 of
Regulation S-K Brief Description
-------------- -----------------
<S> <C> <C>
4 Amendment No. 2 to Rights Agreement effective as of
February 15, 1995.
* 10.1 Employment agreement dated November 2, 1994 regarding
Gary M. Witkin, President and Chief Operating Officer.
* 10.2 Amended and Restated 1989 Employee Stock Incentive Plan.
11 Statement re Computation of Earnings Per Common Share
for fiscal years ended January 1, 1995,
January 1, 1994 and January 2, 1993.
13 Portions of Service Merchandise Company, Inc. 1994
Annual Report to Shareholders for the fiscal year ended
January 1, 1995.
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, 1995.
27 Financial Data Schedule for the fiscal year ended
January 1, 1995 (for SEC use only).
* Executive Compensation Plans and Arrangements
</TABLE>
<TABLE>
Exhibits incorporated herein by reference:
<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).
</TABLE>
-12-
<PAGE> 13
(a) 3. Exhibits and Index to Exhibits (continued):
<TABLE>
Exhibits incorporated herein by reference (continued):
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
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 Shareholders' Rights Agreement which is 4(c)
incorporated herein by reference from Registrant's Current
Report on Form 8-K dated May 5, 1989.
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 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.
4.6 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.
</TABLE>
-13-
<PAGE> 14
(a) 3. Exhibits and Index to Exhibits (continued):
<TABLE>
Exhibits incorporated herein by reference (continued):
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.7 Form of Debenture, regarding the Registrant's $300,000,000 of 9% 4.3
Senior Subordinated Debentures due 2004, which is incorporated
herein by reference from Form 8-K dated February 17, 1993.
4.8 Indenture, dated as of October 15, 1993, between the Registrant 4.1
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.
4.9 First Supplemental Indenture, dated as of October 15, 1993, 4.2
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.
4.10 Form of Notes, regarding the Registrant's $100,000,000 of 8 3/8% 4.3
Senior Notes due 2001, which is incorporated herein by references
from the Registrant's Form 8-K dated October 26, 1993.
4.11 Credit Agreement dated as of June 8, 1994 among the Service 4.1
Merchandise Company, Inc. various Banks and Chemical Bank as
Administrative Agent which is incorporated herein by reference
from the Registrant's Form 10-Q filed for the second quarter
ended July 3, 1994.
10.1 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.
</TABLE>
<TABLE>
Executive Compensation Plans and Arrangements:
<S> <C> <C>
10.2 Form of Indemnification Agreement between the Registrant and Exhibit A
each of Messrs. Zimmerman, Witkin, Crane, Poole, Holt, Moore,
Roitenberg, Bodzy, Cusano and Hogrefe which is incorporated
herein by reference from the Registrant's Proxy Statement
dated April 19, 1989.
</TABLE>
-14-
<PAGE> 15
(a) 3. Exhibits and Index to Exhibits (continued):
<TABLE>
Executive Compensation Plans and Arrangements (continued):
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
10.3 Directors' Deferred Compensation Plan, which is incorporated 10.1
herein by reference from the Registrant's Form 10-K for the
fiscal year ended December 29, 1990.
10.4 Directors' Equity Plan which is incorporated herein by reference Exhibit B
from the Registrant's Proxy Statement dated March 16, 1992.
10.5 Key Executive Severance Plan Agreement for execution by certain 10
key executives in replacement of employment contracts which is
incorporated herein by reference from the Registrant's Form 10-Q
filed for the third quarter ended October 2, 1994.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fiscal year ended
January 1, 1995.
-15-
</TABLE>
<PAGE> 16
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 16, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Raymond Zimmerman /s/ Gary M. Witkin
- ----------------------- --------------------
Raymond Zimmerman Gary M. Witkin
Chairman of the Board, President, Chief Operating
Chief Executive Officer, Officer and Director
and Director (Principal Operating Officer)
(Principal Executive Officer) March 16, 1995
March 16, 1995
<TABLE>
<S> <C> <C> <C>
/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 16, 1995 March 16, 1995 March 16, 1995 March 16, 1995
/s/ Harold Roitenberg /s/ S. Cusano
- --------------------- -----------------------------------------------------
Harold Roitenberg S. Cusano, Vice President and Chief Financial Officer
Director (Principal Financial Officer)
March 16, 1995 (Principal Accounting Officer)
March 16, 1995
</TABLE>
-16-
<PAGE> 17
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, 1995 and 1994, and for each of
the three years in the period ended January 1, 1995, and have issued our report
thereon dated January 26, 1995; such financial statements and report are
included in your 1994 Annual Report to Shareholders and are incorporated herein
by reference. Our audits also included the consolidated financial statement
schedule of Service Merchandise Company, Inc., listed in Item 14. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Nashville, Tennessee
January 26, 1995
-17-
<PAGE> 18
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<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, 1995 (A) $2,894 $1,017 - ($694) $3,217
Year ended January 1, 1994 (A) $3,079 $ 577 - ($762) $2,894
Year ended January 2, 1993 (A) $2,673 $ 424 - ($18) $3,079
(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.
-18-
</TABLE>
<PAGE> 1
Exhibit 4
AMENDMENT N0. 2 TO RIGHTS AGREEMENT
Pursuant to Section 26 of the Rights Agreement (the "Rights Agreement"), dated
February 8, 1988 as amended by Amendment No.1 thereto between Service
Merchandise Company, Inc. (the "Company") and Harris Trust and Savings Bank as
successor rights agent (the "Rights Agent"), the Rights Agent is hereby notified
and directed that the Rights Agreement is hereby amended (this "Amendment No.
2") to provide that the definition of Acquiring Person in Section 1 shall be
amended and restated as follows:
(a) "Acquiring Person" shall mean any Person (other than the Company,
any Subsidiary of the Company, any employee benefit plan maintained by
the Company or any of its Subsidiaries or any trustee or fiduciary
with respect to such plan acting in such capacity) which shall be the
Beneficial Owner of 15% or more of the shares of Company Common Stock
then outstanding.
and further the definition of Distribution Date in Section 3 is amended and
restated to read as follows:
(a) Until the earlier of (i) the Close of Business on the tenth day
after the stock Acquisition Date, and (ii) the Close of Business on
the tenth day after the date that a tender or exchange offer by any
Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan maintained by the Company or any of its
Subsidiaries or any trustee or fiduciary with respect to such plan
acting in such capacity) is first published or sent or given within
the meaning of Rule 14d-4(a) of the Exchange Act Regulations, if upon
consummation thereof such Person would be the Beneficial Owner of 15%
or more of the shares of Company Common Stock then outstanding (the
earlier of (i) and (ii) above being the "Distribution Date"),
and further Section 11(a)(ii)(B) is amended and restated to read as
follows:
(B) any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan maintained by the Company or any of
its Subsidiaries or any trustee or fiduciary with respect to such plan
acting in such capacity) shall become the Beneficial Owner of 15% or
more of the shares of Company Common Stock then outstanding, other
than pursuant to any transaction set forth in Section 13(a) hereof; or
This Amendment No. 2 is effective as of February 15, 1995 and all references to
the Rights Agreement shall, as of such date, be deemed to be references to the
rights Agreement as amended by Amendment No. 1 and this Amendment No. 2.
<PAGE> 1
Exhibit 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into between
Service Merchandise Company, Inc., a Tennessee corporation (the "Company"), and
Gary M. Witkin, a resident of New Canaan, Connecticut (the "Executive"),
effective as of November 1, 1994. The Company and the Executive are sometimes
referred to herein as the "parties."
ARTICLE I
EMPLOYMENT
The Company hereby employs the Executive and the Executive hereby
accepts employment with the Company upon the terms and conditions set forth
herein.
ARTICLE II
DUTIES AND RESPONSIBILITIES
2.1 Scope of Service. The Executive shall, during the term of
this Agreement, devote all of his business time and attention and exert his
best efforts in the performance of his duties hereunder and, in performing such
duties, shall promote the profit, benefit and advantage of the Company and its
business. The Executive shall not, during the term of this Agreement, engage in
any other business activity (whether or not such business activity is pursued
for gain, profit or other pecuniary advantage) if such business activity would
impair the Executive's ability to carry out his duties hereunder; provided,
however, that this paragraph shall not be construed to prevent the Executive
from investing his personal assets as a passive investor.
2.2 Position and Duties. Subject to the power of the Board of
Directors of the Company (the "Board") to elect and remove officers, the
Executive shall, during the term of this Agreement, serve as President and
Chief Operating Officer or in any other comparable position as the Board of
Directors may from time to time determine, shall report directly to the
Chairman and Chief Executive Officer of the Company, and shall have such powers
and duties as may be prescribed by the Board. Subject to the power of the
Board to designate and define the powers and duties of officers of the Company,
the Executive's initial areas of responsibility at the Company shall include
responsibility for the following areas: Merchandising, Marketing, Advertising,
Store Operations and Human Resources. The Executive agrees to serve without
additional compensation in one or more offices or as a director of any of the
Company's subsidiaries or affiliates. The Executive shall faithfully and
diligently perform the services and functions relating to his office (or
reasonably incident thereto) as may be designated from time to time by the
Board. It is acknowledged that a condition to the effectiveness of this
Agreement is that, as of the Executive's Employment Date, the Board shall have
acted to create a vacancy on the Board of Directors and shall have appointed
the Executive to fill that vacancy.
2.3 Term of Employment. The Executive's employment with the
Company hereunder shall commence on the date of first employment indicated on
the records of the Company, but no later than November 21, 1994 (the
"Employment Date") and shall continue until terminated by either of the parties
upon ninety (90) days' written notice to the other in accordance with Section
5.5 of this Agreement.
<PAGE> 2
2.4 Resignation as Director. If the Executive's employment with
the Company is terminated for any reason, whether such termination is voluntary
or involuntary, the Executive shall resign his position as a director of the
Company, such resignation to be effective no later than the date of termination
of the Executive's employment with the Company.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 Base Annual Salary. As compensation for services performed by
the Executive during the term of his employment hereunder, the Company agrees
to pay and the Executive agrees to accept an annual base salary ("Base
Salary"), payable in accordance with the then current payroll policies of the
Company (currently, on a weekly basis), of not less than seven hundred thousand
dollars ($700,000), subject to applicable withholding taxes. Such Base Salary
shall be subject to annual review by the Board of Directors (or by the
Compensation Committee or such other appropriate committee of the Board as the
Board may from time to time determine) at the meeting of the Board held in
April of each year, with the first such review to occur at the 1996 April Board
meeting. The Board (or the appropriate committee thereof) may determine, as a
result of any annual review, to provide an increase in the Executive's Base
Salary.
3.2 Incentive Compensation. During the term of his employment
hereunder, the Executive shall be entitled to receive the following incentive
compensation in addition to his Base Salary:
(a) Bonus Plan. The Executive shall be entitled to
participate in the Company's Key Management Incentive Plan (the
"Incentive Plan") (a copy of which is attached hereto as Exhibit A),
subject to shareholder approval of such Plan, under which the
Executive may receive an annual bonus amount, based upon a percentage
of the Executive's Base Salary and contingent upon the Company's
attainment of certain goals as described in the Incentive Plan. The
Executive's eligibility for such bonus shall be subject to, and
determined in accordance with, the terms and conditions of the
Incentive Plan, with the following exceptions:
(i) Substitution of Performance Grid. In
determining the Executive's bonus in any given year, the
following performance grid shall be substituted in lieu of the
performance grid provided in the Incentive Plan:
Company
Achievement 100% 110% 125% 140% 150%
Bonus Percentage
Base Pay 20% 25% 35% 50% 60%
(ii) Minimum Bonus. With respect to fiscal years
1994 through 1996, the Executive shall be entitled to a
minimum bonus of not less than fifteen percent (15%) of his
Base Salary for such year ("Minimum Bonus"), which Minimum
Bonus shall be payable to the Executive at such time as
bonuses are generally paid to executives of the Company. Any
bonus earned in accordance with the performance grid with
respect to any year for which a Minimum Bonus is payable shall
be offset by such Minimum Bonus.
(iii) No Proration for 1994 Bonus. The bonus payable
to the Executive with respect to the 1994 fiscal year shall
not be prorated to reflect only a partial year of service by
the Executive during such year.
<PAGE> 3
(b) Employee Stock Incentive Plan. The Executive shall
be entitled to participate in the Company's 1989 Employee Stock
Incentive Plan (the "Stock Incentive Plan") (a copy of which is
attached hereto as Exhibit B) and, pursuant to and in accordance with
the terms and conditions of the Stock Incentive Plan, the Company
shall grant to the Executive the awards described below:
(i) Restricted Stock.
(A) Grant of Stock. Pursuant to and in
accordance with the terms of the Stock Incentive
Plan, the Company shall grant to the Executive, on
the Executive's Employment Date, the following shares
of Restricted Stock (defined in the Stock Incentive
Plan as Common Stock, $.50 par value per share, of
the Company, that is subject to restrictions under
Section 7 of such Plan):
(I) Shares of Restricted Stock with
a market value of $2.1 million as of the date
of execution of this Agreement by the last
party to execute the Agreement. The
Executive shall make a current and timely
election under Section 83(b) of the Internal
Revenue Code of 1986, as amended (the
"Code"), with respect to the Restricted Stock
granted to the Executive under this
subparagraph (I); and
(II) One hundred twenty-five thousand
(125,000) shares of Restricted Stock.
(B) Terms and Conditions of Grant. In
addition to applicable terms and conditions of the
Stock Incentive Plan with respect to the Company's
grant of Restricted Stock to the Executive hereunder,
such grant shall be subject to the following terms
and conditions:
(I) The applicable "Restriction
Period" referenced in the Stock Incentive
Plan with respect to a grant of Restricted
Stock shall (1) with respect to the grant of
Restricted Stock to the Executive under
subparagraph (b)(i)(A)(I) above, commence on
the Executive's Employment Date and end on
the third anniversary thereof (the
"Three-Year Restriction Period"), at which
time the Restricted Stock shall immediately
vest in the Executive and the restrictions
thereon shall immediately lapse; and (2) with
respect to the grant of Restricted Stock to
the Executive under subparagraph
(b)(i)(A)(II) above, commence on the
Executive's Employment Date and end in
installments ("Installment Restriction
Periods"), as follows:
<TABLE>
<CAPTION>
Expiration Date of Installment Restriction Period Number of Shares
------------------------------------------------- ----------------
<S> <C>
First Anniversary of Executive's Employment Date 12,500 shares
Second Anniversary of Executive's Employment Date 12,500 shares
Third Anniversary of Executive's Employment Date 12,500 shares
Fourth Anniversary of Executive's Employment Date 17,500 shares
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Fifth Anniversary of Executive's Employment Date 25,000 shares
Sixth Anniversary of Executive's Employment Date 45,000 shares
</TABLE>
At the end of each Installment Restriction
Period, the Restricted Stock subject to such
Period shall immediately vest in the
Executive and the restrictions thereon shall
immediately lapse.
(II) Upon the occurrence of a Trigger
Date (as defined in subparagraph (b) of
Section 4.2 of this Agreement) prior to
expiration of the Three-Year Restriction
Period, the Executive's Restricted Stock
described in subparagraph (b)(i)(A)(I) shall
immediately vest in the Executive and the
restrictions thereon shall immediately lapse.
If the Executive's employment with the Company
is terminated for any reason prior to
expiration of the Three-Year Restriction
Period, and such termination does not cause a
Trigger Date to occur, all rights to the
Executive's Restricted Stock described in
subparagraph (b)(i)(A)(I) shall be forfeited
by the Executive as of the date of termination
of his employment.
(III) If the Executive's employment
with the Company is terminated for any reason
prior to expiration of any Installment
Restriction Period, whether or not such
termination causes a Trigger Date (as defined
in subparagraph (b) of Section 4.2 of this
Agreement) to occur, all rights to the
Executive's Restricted Stock described in
subparagraph (b)(i)(A)(II) shall be forfeited
by the Executive as of the date of
termination of his employment.
(C) Payment of Taxes. In accordance
with and subject to the conditions provided in
subparagraph (a) of Section 3.7 of this Agreement,
the Company shall pay certain taxes actually payable
by the Executive with respect to the Restricted Stock
granted to the Executive pursuant to subparagraph
(b)(i)(A)(I) of this Section 3.2 but shall not pay
any taxes payable with respect to the Restricted
Stock granted to the Executive pursuant to
subparagraph (b)(i)(A)(II) of this Section 3.2.
(ii) Non-Qualified Stock Options.
(A) Grant of Option. Pursuant to and in
accordance with the terms of the Stock Incentive
Plan, the Company shall grant to the Executive, as of
the Executive's Employment Date, a Non-Qualified
Stock Option (as that term is defined in the Stock
Incentive Plan) to purchase one hundred twenty-five
thousand (125,000) shares of Common Stock, $.50 par
value per share, of the Company.
(B) Terms and Conditions of Grant. In
addition to applicable terms and conditions of the
Stock Incentive Plan with respect to the Company's
grant of a Non-Qualified Stock Option to the
Executive, such grant shall be subject to the
following terms and conditions:
<PAGE> 5
(I) The Option Price (as defined in
the Stock Incentive Plan) per share of the
Common Stock purchasable under the
Executive's Non-Qualified Stock Option shall
be the Fair Market Value (defined in the
Stock Incentive Plan) of such stock as of the
date of execution of this Agreement by the
last party to execute the Agreement.
(II) Except as provided in
subparagraph (III) below, the Executive's
Non-Qualified Stock Option shall be
exercisable in installments, as follows:
<TABLE>
<CAPTION>
Earliest Date Exercisable Number of Shares
------------------------- ----------------
<S> <C>
First Anniversary of Executive's Employment Date 12,500 shares
Second Anniversary of Executive's Employment Date 12,500 shares
Third Anniversary of Executive's Employment Date 12,500 shares
Fourth Anniversary of Executive's Employment Date 17,500 shares
Fifth Anniversary of Executive's Employment Date 25,000 shares
Sixth Anniversary of Executive's Employment Date 45,000 shares
</TABLE>
(III) No portion of the Executive's
Non-Qualified Stock Option shall be
exercisable more than ten (10) years after
the date such option was granted to the
Executive.
3.3 Other Compensation. The Company shall pay the Executive
additional compensation in the amount of thirty thousand dollars ($30,000)
during each year of his employment hereunder, which amount shall be treated as
paid under a "nonaccountable plan" pursuant to Section 1.62-2(c)(3) of the
Treasury Regulations.
3.4 Other Benefits.
(a) Standard Benefit Plans. During the term of his
employment hereunder, the Executive shall be entitled to participate
in all standard benefit plans of the Company (including without
limitation any life, accident, medical, hospitalization, disability,
pension or profit sharing plan afforded by the Company to its
employees generally), if and to the extent that the Executive is
eligible to so participate in accordance with the terms of any such
plan, provided, however, that both parties understand and agree that
the termination benefits provided under the terms of this Agreement
are in lieu of any severance benefits to which the Executive may
otherwise be entitled under the Company's Severance Pay Plan.
Notwithstanding any of the above, nothing herein is intended, or shall
be construed, to affect the Company's right to amend or terminate any
of its standard benefit plans or to require the Company to institute
any particular plan or benefit except as otherwise specifically
required in this Agreement. The benefit plans that the Company
currently provides for its employees generally and in which the
Executive shall be entitled to participate include, without
limitation, the following:
<PAGE> 6
SMC Health Care Plan
Business Travel Accident Plan
Group Life Insurance Plan (currently provides life
insurance equal to two (2) times Base Salary)
Long-Term Disability Plan
Restated Retirement Plan
Savings and Investment Plan (which is a 401(k) plan)
(b) Additional Benefits. In addition to participation in
the benefit plans described in subparagraph (a) above, the Company
shall provide the Executive with the following benefits during the
term of the Executive's employment hereunder:
(i) Participation in the Company's Executive
Medical Plan, subject to and in accordance with the terms of
such Plan (which, generally, provides an annual ten thousand
dollar ($10,000) family benefit to cover deductibles and
co-payments under the SMC Health Care Plan referenced in
subparagraph (a) above and any other medical, dental or vision
expenses that are not covered by the SMC Health Care Plan or
any other health plan sponsored by the Company, but only to
the extent any such expenses are deductible under Section 213
of the Code);
(ii) Payment of all premiums for individual and
dependent coverage under the SMC Health Care Plan;
(iii) Reimbursement of any premiums payable by the
Executive for coverage of the Executive and/or his eligible
dependents pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), to the
extent such coverage is required in order to continue the
Executive's prior health care coverage from the date of the
Executive's termination of employment with his current
employer through the first ninety (90) days of his employment
with the Company hereunder;
(iv) In accordance with and subject to the
conditions provided in subparagraph (a) of Section 3.7 of this
Agreement, payment by the Company of certain taxes actually
payable by the Executive with respect to any premium payment
or reimbursement provided to the Executive under subparagraphs
(ii) and (iii) above;
(v) Four weeks' paid vacation granted on the
Employment Date, and accrued thereafter at the rate of four
(4) weeks per year, subject to the terms of the Company's
currently existing vacation policy, as from time to time
amended; and
(vi) The use of a vehicle to be provided by the
Company, which vehicle shall be an American brand of the
Executive's choice with a fair market value no greater than
forty-five thousand dollars ($45,000), subject to and in
accordance with the terms of the Company's currently existing
policy, as from time to time amended, with respect to
executive use of Company vehicles, including without
limitation the terms of such policy relating to the Company's
periodic replacement of such vehicles with new vehicles.
3.5 Reimbursement of Relocation Expenses. The Company shall
reimburse the Executive for expenses in connection with the Executive's move
from Connecticut to Tennessee as described below, with the exception that
certain real estate expenses may be provided through the services of a third
party relocation service, the cost of which shall be borne by the Company. The
choice between the foregoing alternatives as to certain real estate expenses
shall be at the sole option of the Company.
<PAGE> 7
(a) Temporary Housing. The Company shall provide the
Executive with a two-bedroom condominium of the Executive's choice,
with maid service, for a period beginning on the Employment Date and
ending no later than nine (9) months thereafter, provided, however,
that the amount paid by the Company for any temporary housing provided
hereunder (including any amount paid for maid service) shall not
exceed three thousand dollars ($3,000) per month.
(b) Duplicate Mortgage Payments. In the event that and
so long as the Executive owns both a new residence and his old
residence during the transition period following his Employment Date,
the Company shall reimburse the Executive for the lesser of (i) his
monthly mortgage payment for his new residence in Tennessee or (ii)
his monthly mortgage payment for his former residence in Connecticut,
provided, however, that the Company shall reimburse the Executive only
for one such mortgage payment each month during the transition period,
which period shall commence with the first month during which the
Executive is required to make duplicate mortgage payments (one for his
new residence in Tennessee and one for his old residence in
Connecticut) and shall end with the earlier of (i) the month during
which the Executive sells his old residence in Connecticut or (ii) the
fourth month during which the Executive is required to make the
duplicate mortgage payments described above.
(c) Real Estate Expenses. The Company shall reimburse
the Executive for the following real estate expenses associated with
the sale of his current residence and the acquisition of a new
residence:
(i) Normal and customary closing costs, up to one
percent (1%) of the sale price, on the sale of the Executive's
current residence and also on his acquisition of a new
residence;
(ii) Any sales commission paid by the Executive, up
to five percent (5%) of the sale price, upon the sale of the
Executive's current residence; and
(iii) The excess, if any, of
(A) the original purchase price plus capital
improvements for the Executive's current residence
(subject to a maximum amount of $1.85 million), over
(B) the amount received by the Executive upon
the sale of such residence as the gross sale price
therefor,
such excess amount to be paid to the Executive as soon as
reasonably practicable after the closing of the sale of such
residence; provided, however, that receipt of such amount by
the Executive from the Company is contingent upon receipt by
the Company from the Executive of documentation, satisfactory
to the Company, substantiating the amount of the original
purchase price and capital improvements for such residence,
and is subject to the right of the Company to approve any
sales contract for the sale of such residence and to elect to
purchase such residence itself or to provide a third party
buyer (approved by the Company) to purchase such residence.
Notwithstanding any of the above, nothing in this subparagraph
(c) shall be construed to require the Company to purchase, or
to provide a third party purchaser for, the Executive's
current residence.
<PAGE> 8
(d) Moving Expenses. The Company shall reimburse the
Executive for all reasonable expenses related to moving the
Executive's household and personal items, including any expenses
incurred to move antique cars, boats or other collectibles.
(e) Commuting Expenses. The Company shall reimburse the
Executive for reasonable travel expenses consistent with current
Company policy necessary for the Executive to return to his home in
Connecticut each weekend until his relocation is complete, for a
period beginning on the Employment Date and ending as soon as his
relocation is complete (but, in any event, no later than nine (9)
months after his Employment Date).
(f) Payment of Taxes. In accordance with and subject to
the conditions provided in subparagraph (a) of Section 3.7 of this
Agreement, the Company shall pay certain taxes actually payable by the
Executive with respect to any reimbursed relocation expenses provided
to the Executive under this Section 3.5, if and to the extent such
relocation expenses are considered to be taxable income.
3.6 Legal Fees. The Company shall reimburse the Executive for any
reasonable legal fees incurred by the Executive for review and negotiation of
this Agreement, provided, however, that such reimbursement is contingent upon
receipt by the Company from the Executive (or his attorney) of documentation,
satisfactory to the Company, substantiating such fees and itemizing the
services rendered therefor, and provided further, that such reimbursement shall
not exceed five thousand dollars ($5,000).
3.7 Payment of Taxes.
(a) In accordance with and subject to the following terms
and conditions, the Company shall pay certain taxes actually payable
by the Executive with respect to certain amounts paid to the Executive
under this Agreement:
(i) Provided that the Executive makes a current
and timely election under Section 83(b) of the Code, the
Company shall pay any federal income and payroll withholding
taxes and, provided that the Executive complies with
subparagraph (v) below, any Connecticut state and local income
taxes, to the extent such federal and state and local taxes
are actually payable by the Executive with respect to the
Restricted Stock granted to the Executive pursuant to
subparagraph (b)(i)(A)(I) of Section 3.2 of this Agreement
and also with respect to the amount of taxes paid hereunder,
computed in the manner described in subparagraph (iv) below.
(ii) The Company shall pay any federal income and
payroll withholding taxes and, provided that the Executive
complies with subparagraph (v) below, any Connecticut state
and local income taxes, to the extent such federal and state
and local taxes are actually payable by the Executive with
respect to any premium payment or reimbursement provided to
the Executive under subparagraphs (b)(ii) and (b)(iii) of
Section 3.4 of this Agreement and also with respect to the
amount of taxes paid hereunder, computed in the manner
described in subparagraph (iv) below.
(iii) The Company shall pay any federal income and
payroll withholding taxes and, provided that the Executive
complies with subparagraph (v) below, any Connecticut state
and local income taxes, to the extent such federal and state
and local taxes are actually payable by the Executive with
respect to any reimbursed relocation expenses provided to the
Executive under Section 3.5 of
<PAGE> 9
this Agreement and also with respect to the amount of taxes
paid hereunder, if and to the extent such relocation expenses
are considered to be taxable income, computed in the manner
described in subparagraph (iv) below.
(iv) Any calculation of taxes payable by the
Company under this Agreement shall be computed at the marginal
rate of tax applicable to the Executive (currently 39.6% for
federal income tax on taxable income in excess of $250,000,
1.45% for payroll tax on wages in excess of $135,000, and 4.5%
for Connecticut state and local income tax on all taxable
income); provided, however, that any calculation of taxes
payable by the Company under this Agreement shall assume the
full deductibility of state and local income taxes for
purposes of computing federal income tax liability.
(v) The Executive shall take such reasonable
steps as may be necessary to minimize the applicability of
Connecticut state and local income taxes to any amounts
payable to the Executive under this Agreement, including
without limitation such reasonable steps as may be necessary
to enable the Executive to claim Tennessee residency for the
Executive and his family as promptly as practicable following
his termination of employment with his current employer. The
Executive shall also permit the Company to review any
Connecticut state or local tax return, prior to the time it is
filed by the Executive, to the extent such return relates to
any amounts paid to the Executive under this Agreement.
(b) To the extent required by law, federal, state and
local income and payroll withholding taxes shall be withheld on all
cash and in-kind payments made by the Company to the Executive.
ARTICLE IV
TERMINATION OF EMPLOYMENT
4.1 Termination of Agreement. All of the terms of this Agreement
shall cease upon termination of the Executive's employment, except to the
extent otherwise provided by the terms of this Agreement or any benefit plan
documents and policies described herein.
4.2 Rights of Executive Upon a Trigger Date.
(a) Upon the occurrence of a Trigger Date (as defined in
subparagraph (b) below), in addition to any Standard Termination
Amounts (as defined in subparagraph (c) below), the Executive shall be
entitled to the following termination benefits, provided, however,
that the Executive's right to any such benefits is expressly
conditioned upon his compliance in all respects with Section 4.5
(Non-Competition) and Section 4.6 (Unauthorized Disclosure; Adverse
Statements) of this Agreement at all times prior to each payment of a
benefit (or, in the case of the vesting of Restricted Stock, at all
times prior to the Trigger Date):
(i) as salary continuation, payment of (A) an
amount equal to two (2) times the Executive's Base Salary in
effect immediately prior to the Trigger Date, plus (B) an
amount equal to any unpaid Minimum Bonus that would otherwise
be payable to the Executive pursuant to and in accordance with
subparagraph (a)(ii) of Section 3.2 of this Agreement (in the
aggregate, the "salary continuation payment"), which salary
continuation payment shall be payable, at the Company's
option, either in a lump sum or over a thirteen (13) month
period commencing on the Trigger Date and ending on the
thirteenth monthly anniversary thereof (the "severance
period"),
<PAGE> 10
with one half of such salary continuation payment payable in
equal monthly installments over the first twelve (12) months
of the severance period, and the remaining one half payable
on the thirteenth monthly anniversary of the Trigger Date;
(ii) reimbursement for the premium paid by the
Executive for continued coverage for the Executive (and any
dependents of the Executive covered by the Company's health
care plans as of the Trigger Date) under the Company's health
care plan pursuant to COBRA (or any other mandatory health
care continuation law then in effect), such coverage then
being substantially similar to that provided by the Company to
its senior executives and their eligible dependents, subject
to the following terms and conditions:
(A) The Executive will be entitled to
the reimbursement provided hereunder for the period
commencing with the Trigger Date and ending on the
earlier of (I) the second anniversary of the Trigger
Date, or (II) the date the Executive becomes eligible
to receive any health care coverage from another
employer of the Executive or his spouse that does not
contain any exclusion or limitation with respect to
any pre-existing condition of the Executive or his
covered dependents;
(B) If the Executive (or his dependents
covered by the Company's health care plans as of the
Trigger Date) elects not to continue coverage under
COBRA (or any other mandatory health care
continuation law then in effect) or is not eligible
to continue coverage under such law and is otherwise
eligible for the benefits provided under this
subparagraph (a)(ii), the Company will reimburse the
Executive for the cost of purchasing substantially
similar coverage or a supplement required to achieve
substantially similar coverage under another
arrangement approved by the Company for the period
described in subparagraph (A) above; provided,
however, that such reimbursement shall be limited to
the then current premium charged by the Company to
others for substantially similar coverage under COBRA
(or any other mandatory health care continuation law
then in effect); and
(C) Any amount payable to the Executive
hereunder shall be subject to withholding of
applicable taxes as provided in Section 3.7 of this
Agreement; and
(iii) the immediate vesting of, and the lapse of any
restrictions on, any Restricted Stock granted to the Executive
in accordance with subparagraph (b)(i)(A)(I) of Section 3.2 of
this Agreement.
(b) For purposes of this Agreement, "Trigger Date" shall
be the date upon which any of the following events occurs:
(i) termination of the Executive's employment
hereunder by the Company for any reason other than for Cause
or Disability (each of which is defined in Section 4.3 below)
or as a result of the Executive's death; or
(ii) termination of the Executive's employment
hereunder by the Executive for Good Reason (as hereinafter
defined) pursuant to a Notice of Termination (as hereinafter
defined). For purposes of this subparagraph (ii), "Good
Reason" shall mean the occurrence, without the Executive's
express written consent, of any of the following circumstances
unless, in the case of subparagraph (A) or (B), such
circumstances are fully corrected prior to the Date of
<PAGE> 11
Termination (as defined below) specified in the Notice of
Termination (defined below) given in respect thereof:
(A) other than for Cause or Disability
(each of which is defined in Section 4.3 below), or
by reason of his election as Chief Executive Officer
of the Company, (I) assignment by the Company to the
Executive of any duties that are materially
inconsistent with the customary powers and duties of
a president and chief operating officer of a company
of the size, type and nature of the Company; (II) the
Company's removal of the Executive from his position
as President and Chief Operating Officer of the
Company; or (III) any material diminution by the
Company in the nature of the Executive's
responsibilities as President and Chief Operating
Officer of the Company;
(B) failure of the Company, prior to the
effectiveness of any acquisition of the Company or
substantially all of the Company's assets, to obtain
an agreement from the successor to assume and agree
to perform this Agreement in the same manner and to
the same extent that the Company would be required to
perform it if no such acquisition had taken place;
(C) any material breach of this Agreement by
the Company which is not cured within thirty (30)
days after delivery to the Company of the Notice of
Termination (as defined below); or
(D) failure of the Board of Directors to
elect the Executive as its Chief Executive Officer
within ninety (90) days following the earlier of the
following dates:
(I) the date of resignation,
retirement or termination of Raymond
Zimmerman from his position as Chief
Executive Officer of the Company, or
(II) April 30, 1998.
Any purported termination of the Executive's employment
hereunder by the Executive for Good Reason (as defined above)
shall be pursuant to a written Notice of Termination delivered
to the Company in accordance with Section 5.5 of this
Agreement. For purposes of this subparagraph (ii), a "Notice
of Termination" shall mean a notice which shall expressly
indicate the specific termination provisions in this Agreement
upon which the Executive is relying; shall set forth in
reasonable detail the facts and circumstances claimed by the
Executive to provide a basis for termination of the
Executive's employment under the provisions so indicated; and
shall specify a Date of Termination (which shall not be less
than ninety (90) days from the date such Notice of Termination
is given).
(c) For purposes of this Agreement, "Standard Termination
Amounts" shall mean, as of the date of termination of the Executive's
employment hereunder, prorated as appropriate, the following: (i) any
earned but unpaid installments of the Executive's Base Salary (as then
in effect) that would otherwise be due through the date of his
termination; (ii) any earned but unpaid installments of the additional
compensation provided under Section 3.3 of this Agreement to the
extent such installments would otherwise be due through the
Executive's date of termination; and (iii) any payments or benefits
otherwise due to the Executive under and in accordance with the terms
of any benefit plan documents and policies described in this Agreement.
<PAGE> 12
4.3 Rights of Executive Upon Other Voluntary Termination or
Termination for Cause, Disability or Death.
(a) Except as otherwise provided in Section 4.2, above,
if (i) the Company terminates the Executive's employment hereunder for
Cause or Disability (each of which is defined below), (ii) the
Executive voluntarily resigns for any reason (other than termination
under subparagraph (b)(ii) of Section 4.2 above), or (iii) the
Executive dies, then, in each case, the Executive (or his estate or
beneficiaries, as the case may be) shall be entitled to receive only
any Standard Termination Amounts (as defined in subparagraph (c) of
Section 4.2 above) payable to the Executive. The Company shall then
have no further obligations to the Executive under this Agreement.
(b) For purposes of this Agreement, the following
definitions of "Cause" and "Disability" shall apply:
(i) "Cause" shall include the following:
(A) a felony conviction of the
Executive, the failure of the Executive to contest
prosecution for a felony, or the Executive's willful
misconduct or dishonesty, any of which is directly
and materially harmful to the business or reputation
of the Company or its Subsidiaries or Affiliates (as
defined in the Stock Incentive Plan); for this
purpose, no act, or failure to act, on the part of
the Executive shall be considered "willful" unless
done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that such
action or omission was in the best interest of the
Company;
(B) any violation by the Executive of
Section 4.5 (Non-Competition) of this Agreement; or
(C) any material breach of this
Agreement by the Executive which is not cured within
thirty (30) days after delivery to the Executive of
written notice of such breach provided in accordance
with Section 5.5 of this Agreement, which notice
shall set forth in reasonable detail the facts and
circumstances claimed by the Company to constitute a
material breach of this Agreement by the Executive.
(ii) "Disability" shall have the same meaning as
is provided under the Company's long-term disability plan.
4.4 Employment Rights. Nothing expressed or implied in this
Agreement shall create any right or duty on the part of the Company or the
Executive to employ the Executive or to have the Executive remain in the
employment of the Company. If this Agreement or the employment of the
Executive is terminated under circumstances in which the Executive is not
entitled to the termination benefits provided in Section 4.2 of this Agreement,
and except for any right or employee benefit that the Executive may have
pursuant to the terms of any other agreement, policy, plan, program or
arrangement of the Company, including any right to indemnification provided by
contract, state law or the charter or by-laws of the Company, neither the
Company nor the Executive shall have any further obligation or liability to
the other hereunder or otherwise with respect to the Executive's prior or
future employment by the Company.
4.5 Non-Competition. During the period in which the Executive is
employed by the Company hereunder and during the severance period (as defined
in subparagraph (a)(i) of Section 4.2 above), the Executive will not:
<PAGE> 13
(a) directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control of, or
be connected as an officer, employee, partner, director or otherwise
with, or have any financial interest in, or aid or assist anyone else
in the conduct of, any of the following types of businesses: catalog
showroom retail business, national jewelry-only specialty business,
national electronics-only specialty business, or national
houseware/giftware-only retail business, in any area where such
business is being conducted at the time of such termination (provided
that ownership of five percent (5%) or less of the voting stock of any
publicly held corporation shall not constitute a violation hereof); or
(b) directly or indirectly employ, solicit for employment, or
advise or recommend to any other persons that they employ or solicit
for employment, any person who, at the time of such employment,
solicitation, advice or recommendation, is an employee of the Company
or any of its subsidiaries or affiliates, provided, however, that this
subparagraph (b) shall not be construed to prevent the Executive from
engaging in generic nontargeted advertising for employees generally.
4.6 Unauthorized Disclosure; Adverse Statements.
(a) During the period in which the Executive is employed
by the Company hereunder, the Executive shall not, without the prior
written consent of the Board of Directors, or a person authorized
thereby, disclose to any person, other than a person to whom
disclosure is necessary or appropriate in connection with the
performance by the Executive of his duties as an officer of the
Company, or its subsidiaries or its affiliates, any confidential
information obtained by him while in the employ of the Company with
respect to any of the Company's products, improvements, formulae,
designs or styles, processes, customers, methods of marketing or
distribution, systems, procedures, plans, proposals, policies or
methods of manufacture, the disclosure of which he knows, or should
have reason to know, will be damaging to the Company or its
subsidiaries or its affiliates; provided, however, that confidential
information shall not include any information known generally to the
public (other than as a result of unauthorized disclosures by the
Executive) or any information of a type not otherwise considered
confidential by persons engaged in the same business or a business
similar to that conducted by the Company. Following the termination
of the Executive's employment with the Company for any reason, the
Executive shall not disclose any confidential information of the type
described above except as may be required in the opinion of the
Executive's counsel in connection with any judicial or administrative
proceeding or inquiry.
(b) During the period in which the Executive is employed
by the Company hereunder and thereafter, the Executive shall not make
any false statements regarding the Company or its subsidiaries or its
affiliates, or make any statement or take any other action which he
knows, or should have reason to know, will be damaging to the Company
or its subsidiaries or its affiliates.
(c) The provisions of this Section 4.6 shall be binding
upon the Executive's heirs, successors and legal representatives.
4.7 Specific Performance. The Executive acknowledges and agrees
that, in the event of a breach of Section 4.5 or Section 4.6 hereof by the
Executive, the Company would be irreparably harmed and that monetary damages
would be an inadequate remedy in favor of the Company. Accordingly, the
Executive and the Company agree that, in the event of such a breach, the
Company shall be entitled to injunctive relief against the Executive.
<PAGE> 14
ARTICLE V
MISCELLANEOUS
5.1 Construction and Amendment. This Agreement contains all the
material terms and conditions governing the Company's continued employment of
the Executive, and shall supersede any and all prior oral and written
understandings and agreements and all contemporaneous oral understandings and
agreements between the Company and the Executive. In this respect, the
Executive acknowledges and agrees that the Company's sole obligations to the
Executive with respect to the future termination of the Executive's employment
by the Company (for whatever reason and under whatever circumstances) are set
forth in this Agreement. No amendment of the terms and conditions of this
Agreement shall be effective unless agreed to in writing by the Company and the
Executive.
5.2 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
5.3 Governing Law. The validity, interpretation, construction,
and performance of this Agreement shall be governed by the laws of the State of
Tennessee.
5.4 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and its successors and assigns, and the
Executive and his heirs, executors, administrators and legal representatives.
The Executive's rights and benefits under this Agreement are personal and,
except as otherwise provided herein, no such right or benefit shall be subject
to voluntary or involuntary alienation, assignment or transfer without the
prior written consent of the Company.
5.5 Notice. Any notice or other communication required or
permitted under, or given by reason of, this Agreement shall be in writing and
shall be deemed to have been duly given when delivered in person or when
mailed, by certified mail (return receipt requested), postage prepaid,
addressed as follows (or to such other address as the party may specify by
notice pursuant to this provision, except that notices of change of address
shall be effective only upon receipt):
(a) To the Company:
Service Merchandise Company
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
(b) To the Executive:
Gary M. Witkin
416 Greenley Road
New Canaan, CT 06840
5.6 Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled by arbitration in Nashville,
Tennessee. In the proceeding, the Executive shall select one arbitrator, the
Company shall select one arbitrator, and the two arbitrators so selected shall
select a third arbitrator. The decision of a majority of the arbitrators shall
be binding on the Executive and on the Company. Should one party fail to select
an arbitrator within five days after notice of the appointment of an arbitrator
by the other party or should the two arbitrators selected by the Executive and
the Company fail to select a third arbitrator within ten days after the date of
the appointment of the last of such two arbitrators, any person sitting as a
judge of the United States District Court for the Middle District of Tennessee,
Nashville Division, upon application of the Executive or the Company, shall
appoint an arbitrator to fill such space with the same
<PAGE> 15
force and effect as though such arbitrator had been appointed in accordance
with the first sentence of this paragraph. Any arbitration proceeding
pursuant to this paragraph shall be conducted in accordance with the rules of
the American Arbitration Association. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. Each of the parties
hereto shall pay its own expenses of arbitration and one half of the expenses
of the arbitrators. If any position by either party hereunder, or any defense
or objection thereto, is deemed by the arbitrators to have been unreasonable,
the arbitrators shall assess, as part of their award against the unreasonable
party or reduce the award to the unreasonable party, all or part of the
arbitration expenses (including reasonable attorneys' fees) of the other party
and of the arbitrators.
5.7 Additional Instruments. The parties shall execute and deliver
any and all additional instruments and agreements that may be necessary or
proper to carry out the purposes of this Agreement.
5.8 Execution. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
5.9 Waiver of Breach. No waiver at any time by either party
hereto of any breach by the other of, or compliance by the other with, any
condition or provision of this Agreement to be performed by such other party
shall operate or be construed as a waiver of similar or dissimilar provisions
at the same or at any prior or subsequent time.
5.10 Condition Subsequent. Within ten (10) days following
execution of this Agreement by both the Executive and the Company, (a) the
Company shall have the opportunity to obtain certain background information
about the Executive, including without limitation information from the
Executive's former and current employers; and (b) if the Company discovers any
material adverse information about the Executive of which the Company was not
aware prior to its execution of this Agreement and which adverse information
relates to activities of the Executive while an employee or director of Saks &
Company ("Saks") constituting one or more of the following:
(i) conduct in violation of law reasonably related to the
Executive's ability to perform his duties to Saks; or
(ii) gross negligence or gross misconduct in the performance of
the Executive's duties, or a documented record of
incompetent performance, as an employee or director of
Saks;
the Company shall have the right, at its sole option, to rescind this Agreement
and, if so rescinded by the Company, this Agreement shall have no force or
effect.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates indicated below.
SERVICE MERCHANDISE COMPANY
Date: 11/2/94 By: /s/ Raymond Zimmerman
--------------------- -----------------------
Raymond Zimmerman
Name:
Title:
EXECUTIVE
Date: 11/2/94 /s/ Gary M. Witkin
--------------------- ---------------------
Gary M. Witkin
<PAGE> 1
Exhibit 10.2
SERVICE MERCHANDISE COMPANY, INC.
AMENDED AND RESTATED
1989 EMPLOYEE STOCK INCENTIVE PLAN
SECTION 1. Purpose; Definitions.
The purpose of the Service Merchandise Company, Inc. Amended and
Restated 1989 Employee Stock Incentive Plan (the "Plan") is to enable Service
Merchandise Company, Inc. (the "Company") to attract, retain and reward key
employees of the Company and its Subsidiaries and Affiliates, and strengthen
the mutuality of interests between such key employees and the Company's
shareholders, by offering such key employees performance-based stock incentives
and/or other equity interests or equity-based incentives in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
a. "Affiliate" means any entity other than the Company
and its Subsidiaries that is designated by the Board as a
participating employer under the Plan, provided that the Company
directly or indirectly owns at least 20% of the combined voting power
of all classes of stock of such entity or at least 20% of the
ownership interests in such entity.
b. "Board" means the Board of Directors of the Company.
c. "Book Value" means, as of any given date, on a per
share basis (i) the Stockholders' Equity in the Company as of the end
of the immediately preceding fiscal year as reflected in the Company's
consolidated balance sheet, subject to such adjustments as the
Committee shall specify at or after grant, divided by (ii) the number
of then outstanding shares of Stock as of such year-end date (as
adjusted by the Committee for subsequent events).
d. "Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor thereto.
e. "Committee" means the Committee referred to in
Section 2 of the Plan. If at any time no Committee shall be in
office, then the functions of the Committee specified in the Plan
shall be exercised by the Board.
f. "Company" means Service Merchandise Company, Inc., a
corporation organized under the laws of the State of Tennessee or any
successor corporation.
g. "Disability" means disability as determined under
procedures established by the Committee for purposes of this Plan.
h. "Disinterested Person" shall have the meaning set
forth in Rule 16b-3(c)(2)(i) as promulgated by the Securities and
Exchange Commission under the
<PAGE> 2
Securities Exchange Act of 1934, or any successor definition adopted
by the Commission.
i. "Early Retirement" means retirement, with the express
consent for purposes of this Plan of the Company at or before the time
of such retirement, from active employment with the Company and any
Subsidiary or Affiliate pursuant to the early retirement provisions of
the applicable pension plan of such entity.
j. "Fair Market Value" means, as of any given date,
unless otherwise determined by the Committee in good faith, the mean
between the highest and lowest quoted selling price, regular way, of
the Stock on the New York Stock Exchange or, if no such sale of Stock
occurs on the New York Stock Exchange on such date, the fair market
value of the Stock as determined by the Committee in good faith.
k. "Incentive Stock Option" means any Stock Option
intended to be and designated as an "Incentive Stock Option" within
the meaning of Section 422 of the Code.
l. "Non-Qualified Stock Option" means any Stock Option
that is not an Incentive Stock Option.
m. "Normal Retirement" means retirement from active
employment with the Company and any Subsidiary or Affiliate on or
after age 65.
n. "Other Stock-Based Award" means an award under
Section 9 below that is valued in whole or in part by reference to, or
is otherwise based on, Stock.
o. "Plan" means this Service Merchandise Company, Inc.
1989 Employee Stock Incentive Plan, as amended from time to time.
p. "Restricted Stock" means an award of shares of Stock
that is subject to restrictions under Section 7 below.
q. "Retirement" means Normal or Early Retirement.
r. "Stock" means the Common Stock, $.50 par value per
share, of the Company.
s. "Stock Appreciation Right" means the right pursuant
to an award granted under Section 6 below to surrender to the Company
all (or a portion) of a Stock Option in exchange for an amount equal
to the difference between (i) the Fair Market Value, as of the date
such Stock Option (or such portion thereof) is surrendered, of the
shares of Stock covered by such Stock Option (or such portion
thereof), subject, where applicable, to the pricing provisions in
Section 6(b)(ii); and (ii) the aggregate exercise price of such Stock
Option (or such portion thereof).
<PAGE> 3
t. "Stock Option" or "Option" means any option to
purchase shares of Stock (including Restricted Stock, if the Committee
so determines) granted pursuant to Section 5 below.
u. "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the
Company if each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in the chain.
In addition, the terms "Change in Control", "Potential Change in
Control" and "Change in Control Price" shall have meanings set forth,
respectively, in Sections 9(b), (c) and (d) below and the term "Cause" shall
have the meaning set forth in Section 5(i) below.
SECTION 2. Administration.
The Plan shall be administered by a Committee of not less than three
Disinterested Persons, who shall be appointed by the Board of Directors of the
Company (the "Board") and who shall serve at the pleasure of the Board. The
functions of the Committee specified in the Plan shall be exercised by the
Board, if and to the extent that no Committee exists which has the authority to
so administer the Plan.
The Committee shall have full authority to grant, pursuant to the
terms of the Plan, to officers and other key employees eligible under Section
4: (i) Stock Options, (ii) Stock and Appreciation Rights, (iii) Restricted
Stock and (iv) Other Stock-Based Awards.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the
Company and its Subsidiaries and Affiliates to whom Stock Options,
Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based
Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive
Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights,
Restricted Stock, and/or Other Stock-Based Awards, or any combination
thereof, are to be granted hereunder to one or more eligible
employees;
(iii) to determine the number of shares to be covered by
each such award granted hereunder;
(iv) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted
hereunder (including, but not limited to, the share price and any
restriction or limitation, or any vesting acceleration or waiver of
forfeiture restrictions regarding any Stock Option or other award
and/or the shares of Stock relating thereto, based in each case on
such factors as the Committee shall determine, in its sole
discretion);
<PAGE> 4
(v) to determine whether and under what circumstances a
Stock Option may be settled in cash, Restricted Stock and/or under
Section 5(k) or (1), as applicable, instead of Stock;
(vi) to determine whether, to what extent and under what
circumstances Option grants and/or other awards under the Plan made by
the Company are to be made, and operate, on a tandem basis vis-a-vis
other awards under the Plan or on an additive basis;
(vii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or at
the election of the participant (including providing for and
determining the amount (if any) of any deemed earnings on any deferred
amount during any deferral period);
(viii) to determine whether to require payment of any
withholding taxes in shares of Common Stock.
The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 8,437,500 shares. Such shares may
consist, in whole or in part, of authorized and unissued shares or treasury
shares.
Subject to Section 6(b)(iv) below, if any shares of Stock that have
been optioned cease to be subject to a Stock Option, or if any such shares of
Stock that are subject to any Restricted Stock award, or Other Stock-Based
Award granted hereunder are forfeited or any such award otherwise terminates
without a payment being made to the participant in the form of Stock, such
shares shall again be available for distribution in connection with future
awards under the Plan, unless dividends have already been paid with respect to
such shares.
In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, Stock split or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan, and in the number of shares subject to other outstanding awards
granted under the Plan as may be determined to be appropriate by the Committee,
in its sole discretion, provided that the number of shares subject to any award
shall always be a
<PAGE> 5
whole number. Such adjusted option price shall also be used to determine the
amount payable by the Company upon the exercise of any Stock Appreciation
Right associated with any Stock Option.
SECTION 4. Eligibility.
Officers and other key employees of the Company and its Subsidiaries
and Affiliates (but excluding members of the Committee and any person who
serves only as a director) who are responsible for or contribute to the
management, growth and/or profitability of the business of the Company and/or
its Subsidiaries and Affiliates are eligible to be granted awards under the
Plan.
SECTION 5. Stock Options.
Stock Options may be granted alone, in addition to or in tandem with
other awards granted under the Plan and/or cash awards made outside of the
Plan. Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.
The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined by the Committee
at the time of grant but shall be not less than 100% (or, in the case
of an employee who owns stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Company or
of any of its subsidiary or parent corporations, not less than 110%)
of the Fair Market Value of the Stock at grant, in the case of
Incentive Stock Options, and not less than 50% of the Fair Market
Value of the Stock at grant, in the case of Non-Qualified Stock
Options.
(b) Option Term. The term of each Stock Option shall be
fixed by the Committee, but no Stock Option shall be exercisable more
than ten years (or, in the case of Incentive Stock Options granted to
an employee who owns stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Company or
any of its subsidiary or parent corporations, more than five years)
after the date the Option is granted.
(c) Exercisability. Stock Options shall be exercisable
at such time or times and subject to such terms and conditions as
shall be determined by the Committee at
<PAGE> 6
or after grant; provided, however, that, except as provided in
Section 5(f) and (g) and Section 9, unless otherwise determined by
the Committee at or after grant, no Stock Option shall be exercisable
prior to the first anniversary date of the granting of the Option.
If the Committee provides, in its sole discretion, that any Stock
Option is exercisable only in installments, the Committee may
waive such installment exercise provisions at any time at or after
grant in whole or in part, based on such factors as the Committee
shall determine, in its sole discretion.
(d) Method of Exercise. Subject to whatever installment
exercise provisions apply under Section 5(c), Stock Options may be
exercised in whole or in part at any time during the option period, by
giving written notice of exercise to the Company specifying the number
of shares to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price, either by check, note or such other instrument as the Committee may
accept. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of unrestricted
Stock already owned by the optionee or, in the case of the exercise of a
Non-Qualified Stock Option or Restricted Stock subject to an award hereunder
(based, in each case, on the Fair Market Value of the Stock on the date the
Option is exercised, as determined by the Committee).
If payment of the option exercise price of a Non-Qualified Stock
Option is made in whole or in part in the form of Restricted Stock, such
Restricted Stock (and any replacement shares relating thereto) shall remain (or
be) restricted in accordance with the original terms of the Restricted Stock
award in question, and any additional Stock received upon the exercise shall be
subject to the same forfeiture provisions and other restrictions, unless
otherwise determined by the Committee, in its sole discretion, at or after
grant.
No shares of Stock shall be issued until full payment therefor has
been made. An optionee shall generally have the rights to dividends or other
rights of a shareholder with respect to shares subject to the Option when the
optionee has given written notice of exercise, has paid in full for such
shares, and, if requested, has given the representation described in Section
14(a).
(e) Non-Transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
(f) Termination by Death. Subject to Section 5(j), if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of death, any Stock Option held by such optionee may thereafter be
exercised, to the extent such option was exercisable at the time of death or on
such accelerated basis as the Committee may determine at or after grant (or as
may be determined in accordance with procedures established by the Committee),
by the legal representative of the estate or by the legatee of the optionee
under the will of the optionee, for a period of one year (or such other period
as the Committee may specify at grant) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
<PAGE> 7
(g) Termination by Reason of Disability. Subject to Section
5(j), if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in
accordance with procedures established by the Committee), for a period of
three years (or such other period as the Committee may specify at grant) from
the date of such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the shorter; provided,
however, that, if the optionee dies within such three-year period (or such
other period as the Committee shall specify at grant), any unexercised Stock
Option held by such optionee shall thereafter be exercisable to the extent to
which it was exercisable at the time of death for a period of twelve months
from the date of such death or until the expiration of the stated term of such
Stock Option, whichever period is the shorter. In the event of termination of
employment by reason of Disability, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of
Section 422 of the Code, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. Subject to Section
5(j), if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates by reason of Normal or Early Retirement, any Stock Option
held by such optionee may thereafter be exercised by the optionee to the extent
it was exercisable at the time of such Retirement or on such accelerated basis
as the Committee may determine at or after grant (or as may be determined in
accordance with procedures established by the Committee), for a period of three
years (or such other period as Committee may specify at grant) from the date of
such termination of employment or the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided, however, that, if the
optionee dies within such three-year period (or such other period as the
Committee may specify at grant), any unexercised Stock Option held by such
optionee shall thereafter be exercisable, to the extent to which it was
exercisable at the time of death, for a period of twelve months from the date
of such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of termination of employment by
reason of Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of
the Code, the option will thereafter be treated as a Non-Qualified Stock
Option.
(i) Other Termination. Unless otherwise determined by the
Committee (or pursuant to procedures established by the Committee) at or after
grant, if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates for any reason other than death, Disability or Normal or
Early Retirement, the Stock Option shall thereupon terminate, except that such
Stock Option may be exercised, to the extent otherwise then exercisable, for
the lesser of three months or the balance of such Stock Option's term if the
optionee is involuntarily terminated by the Company and any Subsidiary or
Affiliate without Cause. For purposes of this Plan, "Cause" means a felony
conviction of a participant or the failure of a participant to contest
prosecution for a felony, or a participant's willful misconduct or dishonesty,
any of which is directly and materially harmful to the business or reputation
of the Company or any Subsidiary or Affiliate.
<PAGE> 8
(j) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term of this Plan relating to Incentive Stock
Options shall be interpreted, amended or altered, nor shall any discretion or
authority granted under the Plan be so exercised, so as to disqualify the Plan
under Section 422 of the Code, or, without the consent of the optionee (s)
affected, to disqualify any Incentive Stock Option under such Section 422.
To the extent permitted under Section 422 of the Code or the
applicable regulations thereunder or any applicable Internal Revenue Service
pronouncement:
(i) if (x) a participant's employment is terminated by
reason of death, Disability or Retirement and (y) the portion of any
Incentive Stock Option that is otherwise exercisable during the
post-termination period specified under Section 5(f), (g) or (h),
applied without regard to the $ 100,000 limitation contained in
Section 422(d) of the Code, is greater than the portion of such option
that is immediately exercisable as an "incentive stock option" during
such post- termination period under Section 422, such excess shall be
treated as a Non-Qualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is
accelerated by reason of a Change in Control, any portion of such
option that is not exercisable as an Incentive Stock Option by reason
of the $100,000 limitation contained in Section 422(d) of the Code
shall be treated as a Non-Qualified Stock Option.
(k) Buyout Provisions. The Committee may at any time offer to
buy out for a payment in cash, Stock, Deferred Stock or Restricted Stock an
option previously granted, based on such terms and conditions as the Committee
shall establish and communicate to the optionee at the time that such offer is
made.
(1) Settlement Provisions. If the option agreement so provides
at grant or is amended after grant and prior to exercise to so provide (with
the optionee's consent), the Committee may require that all or part of the
shares to be issued with respect to the spread value of an exercised Option
take the form of Restricted Stock, which shall be valued on the date of
exercise on the basis of the Fair Market Value (as determined by the Committee)
of such Restricted Stock determined without regard to the deferral limitations
and/or forfeiture restrictions involved.
SECTION 6. Stock Appreciation Rights.
(a) Grant and Exercise. Stock Appreciation Rights may be
granted in conjunction with all or part of any Stock Option granted under the
Plan. In the case of a Non-Qualified Stock Option, such rights may be granted
either at or after the time of the grant of such Stock Option. In the case of
an Incentive Stock Option, such rights may be granted only at the time of the
grant of such Stock Option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant
<PAGE> 9
where a Stock Appreciation Right is granted with respect to less than the
full number of shares covered by a related Stock Option.
A Stock Appreciation Right may be exercised by an optionee, subject to
Section 6(b), in accordance with the procedures established by the Committee
for such purpose. Upon such exercise, the optionee shall be entitled to
receive an amount determined in the manner prescribed in Section 6(b). Stock
Options relating to exercised Stock Appreciation Rights shall no longer be
exercisable to the extent that the related Stock Appreciation Rights have been
exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the provisions of
the Plan, as shall be determined from time to time by the Committee, including
the following:
(i) Stock Appreciation Rights shall be exercisable only
at such time or times and to the extent that the Stock Options to
which they relate shall be exercisable in accordance with the
provisions of Section 5 and this Section 6 of the Plan; provided,
however, that any Stock Appreciation Right granted to an optionee
subject to Section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") subsequent to the grant of the related Stock Option
shall not be exercisable during the first six months of its term. The
exercise of Stock Appreciation Rights held by optionees who are
subject to Section 16(b) of the Exchange Act shall comply with Rule
16(b)-3 thereunder, to the extent applicable.
(ii) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive an amount in cash and/or shares
of Stock equal in value to the excess of the Fair Market Value of one
share of Stock over the option price per share specified in the
related Stock Option multiplied by the number of shares in respect of
which the Stock Appreciation Right shall have been exercised, with the
Committee having the right to determine the form of payment. When
payment is to be made in shares, the number of shares to be paid shall
be calculated on the basis of the Fair Market Value of the shares on
the date of exercise. When payment is to be made in cash, such amount
shall be calculated on the basis of the average of the highest and
lowest quoted selling price, regular way, of the Stock on the New York
Stock Exchange during the applicable period referred to in Rule
16b-3(e) under the Exchange Act.
(iii) Stock Appreciation Rights shall be
transferable only when and to the extent that the underlying Stock
Option would be transferable under Section 5(e) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 of the Plan on the number of shares
of Stock to be issued under the Plan, but only to the extent of the
number of shares issued under the Stock Appreciation Right at the time
of exercise based on the value of the Stock Appreciation Right at such
time.
<PAGE> 10
(v) In its sole discretion, the Committee may grant
"Limited" Stock Appreciation Rights under this Section 6, i.e., Stock
Appreciation Rights that become exercisable only in the event of a
Change in Control and/or a Potential Change in Control, subject to
such terms and conditions as the Committee may specify at grant. Such
Limited Stock Appreciation Rights shall be settled solely in cash.
Limited Stock Appreciation Rights granted to persons subject to
Section 16(b) of the Exchange Act shall not be exercisable if the
exercise thereof would create a liability on the part of the grantee
to the Company under Section 16(a) of the Exchange Act.
(vi) The Committee, in its sole discretion, may also
provide that, in the event of a Change in Control and/or a Potential
Change in Control, the amount to be paid upon the exercise of a Stock
Appreciation Right or Limited Stock Appreciation Right shall be based
on the Change in Control Price, subject to such terms and conditions
as the Committee may specify at grant.
SECTION 7. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued
either alone, in addition to or in tandem with other awards granted under the
Plan and/or cash awards made outside the Plan. The Committee shall determine
the eligible persons to whom, and the time or times at which, grants of
Restricted Stock will be made, the number of shares to be awarded, the price
(if any) to be paid by the recipient of Restricted Stock (subject to Section
7(b)), the time or times within which such awards may be subject to forfeiture,
and all other terms and conditions of the awards.
The Committee may condition the grant of Restricted Stock upon the
attainment of specified performance goals or such other factors as the
Committee may determine, in its sole discretion.
The provisions of Restricted Stock awards need not be the same with
respect to each recipient.
(b) Awards and Certificates. The prospective recipient of a
Restricted Stock award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of Restricted Stock
shall be equal to or less than their par value and may be zero.
(ii) Awards of Restricted Stock must be accepted within a
period of 60 days (or such shorter period as the Committee may specify
at grant) after the award date, by executing a Restricted Stock Award
Agreement and paying whatever price (if any) is required under Section
7(b)(i).
<PAGE> 11
(iii) Each participant receiving a Restricted Stock
award shall be issued a stock certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in the name of
such participant, and shall bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such award.
(iv) The Committee shall require that the stock
certificates evidencing such shares be held in custody by the Company
until the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock award, the participant shall have
delivered a stock power, endorsed in blank, relating to the Stock
covered by such award.
(c) Restrictions and Conditions. The shares of Restricted
Stock awarded pursuant to this Section 7 shall be subject to the following
restrictions and conditions:
(i) Subject to the provisions of this Plan and the award
agreement, during a period set by the Committee commencing with the
date of such award (the "Restriction Period"), the participant shall
not be permitted to sell, transfer, pledge or assign shares of
Restricted Stock awarded under the Plan. Within these limits, the
Committee, in its sole discretion, may provide for the lapse of such
restrictions in installments and may accelerate or waive such
restrictions in whole or in part, based on service, performance and/or
such other factors or criteria as the Committee may determine, in its
sole discretion.
(ii) Except as provided in this paragraph (ii) and
Section 7(c)(i), the participant shall have, with respect to the
shares of Restricted Stock, all of the rights of a shareholder of the
Company, including the right to vote the shares, and the right to
receive any cash dividends. The Committee, in its sole discretion, as
determined at the time of award, may permit or require the payment of
cash dividends to be deferred and, if the Committee so determines,
reinvested, subject to Section 14(e), in additional Restricted Stock
to the extent shares are available under Section 3, or otherwise
reinvested. Pursuant to Section 3 above, Stock dividends issued with
respect to Restricted Stock shall be treated as additional shares of
Restricted Stock that are subject to the same restrictions and other
terms and conditions that apply to the shares with respect to which
such dividends are issued.
(iii) Subject to the applicable provisions of the
award agreement and this Section 7, upon termination of a
participant's employment with the Company and any Subsidiary or
Affiliate for any reason during the Restriction Period, all shares
still subject to restriction will vest, or be forfeited, in accordance
with the terms and conditions established by the Committee at or after
grant.
(iv) If and when the Restriction Period expires
without a prior forfeiture of the Restricted Stock subject to such
Restriction Period, certificates for an appropriate number of
unrestricted shares shall be delivered to the participant promptly.
(d) Minimum Value Provisions. In order to better ensure that
award payments actually reflect the performance of the Company and service of
the participant, the Committee
<PAGE> 12
may provide, in its sole discretion, for a tandem performance-based or other
award designed to guarantee a minimum value, payable in cash or Stock to the
recipient of a Restricted Stock award, subject to such performance, future
service, deferral and other terms and conditions as may be specified by the
Committee.
SECTION 8. Other Stock-Based Awards.
(a) Administration. Other awards of Stock and other awards
that are valued in whole or in part by reference to, or are otherwise based on,
Stock ("Other Stock-Based Awards"), including, without limitation, performance
shares, convertible preferred stock, convertible debentures, exchangeable
securities and Stock awards or options valued by reference to Book Value or
subsidiary performance, may be granted either alone or in addition to or in
tandem with Stock Options, Stock Appreciation Rights or Restricted Stock
granted under the Plan.
Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
awards shall be made, the number of shares of Stock to be awarded pursuant to
such awards, and all other conditions of the awards. The Committee may also
provide for the grant of Stock upon the completion of a specified performance
period.
The provisions of other Stock-Based Awards need not be the same with
respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards made
pursuant to this Section 8 shall be subject to the following terms and
conditions:
(i) Subject to the provisions of this Plan and the award
agreement referred to in Section 10(b)(v) below, shares subject to awards made
under this Section 8 may not be sold, assigned, transferred, pledged or
otherwise encumbered prior to the date on which the shares are issued, or, if
later, the date on which any applicable restriction, performance or deferral
period lapses.
(ii) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee at grant, the
recipient of an award under this Section 8 shall be entitled to receive,
currently or on a deferred basis, interest or dividends or interest or dividend
equivalents with respect to the number of shares covered by the award, as
determined at the time of the award by the Committee, in its sole discretion,
and the Committee may provide that such amounts (if any) shall be deemed to
have been reinvested in additional Stock or otherwise reinvested.
(iii) Any award under Section 8 and any Stock covered by any such
award shall vest or be forfeited to the extent so provided in the award
agreement, as determined by the Committee, in its sole discretion.
(iv) In the event of the participant's Retirement, Disability or
death, or in cases of special circumstances, the Committee may, in its sole
discretion, waive in whole or in part any
<PAGE> 13
or all of the remaining limitations imposed hereunder (if any) with respect to
any or all of an award under this Section 8.
(v) Each award under this Section 8 shall be confirmed by, and
subject to the terms of, an agreement or other instrument by the Company and by
the participant.
(vi) Stock (including securities convertible into Stock) issued
on a bonus basis under this Section 8 may be issued for no cash consideration.
Stock (including securities convertible into Stock) purchased pursuant to a
purchase right awarded under this Section 8 shall be priced at least 50% of the
Fair Market Value of the Stock on the date of grant.
SECTION 9. Change in Control Provisions.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 9(b) or
(2) a "Potential Change in Control" as defined in Section 9(c),
but only if and to the extent so determined by the Committee or the Board at or
after grant (subject to any right of approval expressly reserved by the
Committee or the Board at the time of such determination), the following
acceleration and valuation provisions shall apply:
(i) Any Stock Appreciation Rights (including, without
limitation, any Limited Stock Appreciation Rights) outstanding for at
least six months and any Stock Option awarded under the Plan not
previously exercisable and vested shall become fully exercisable and
vested.
(ii) The restrictions and deferral limitations applicable
to any Restricted Stock, and Other Stock-Based Awards, in each case to
the extent not already vested under the Plan, shall lapse and such
shares and awards shall be deemed fully vested.
(iii) Except as otherwise provided in Section
9(a)(iv) below, the value of all outstanding Stock Options, Stock
Appreciation Rights, Restricted Stock, and Other Stock-Based Awards,
in each case to the extent vested, shall, unless otherwise determined
by the Committee in its sole discretion at or (except in the case of
an Incentive Stock Option) after grant but prior to any Change in
Control, be cashed out on the basis of the "Change in Control Price"
as defined in Section 9(d) as of the date such Change in Control or
such Potential Change in Control is determined to have occurred or
such other date as the Committee may determine prior to the Change in
Control.
(iv) In the case of any Options, Stock Appreciation
Rights, Restricted Stock and Other Stock-Based Awards held by any
person subject to Section 16(b) of the Exchange Act, the value of all
such Options, Stock Appreciation Rights, Restricted Stock or Other
Stock-Based Awards, in each case to the extent that they have been
held for at least six months, shall, unless otherwise determined by
the Committee in its sole discretion, be cashed out on the basis of
the Change in Control Price as of the date of
<PAGE> 14
such Change in Control or such Potential Change in Control is
determined to have occurred. The Committee shall have the right (a)
to cause any right to receive the Change in Control Price to be
cancelled with respect to all or any grantee(s) who are subject to
Section 16(b) of the Exchange Act if payment of the Change in Control
Price to such grantee(s) would cause liability under Section 16 of
the Exchange Act, and (B) to determine whether the Change in Control
Price shall be paid in cash or in shares of capital stock to grantees
who are subject to Section 16(b) of the Exchange Act.
(b) Definition of "Change in Control". For purposes of Section
9(a), a. "Change in Control" means the happening of any of the following:
(i) any person or entity, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, other than
the Company or a wholly-owned subsidiary thereof or any employee
benefit plan of the Company or any of its Subsidiaries, becomes the
beneficial owner of the Company's securities having 20% or more of the
combined voting power of the then outstanding securities of the
Company that may be cast for the election of directors of the Company
(other than as a result of an issuance of securities initiated by the
Company in the ordinary course of business); or
(ii) as the result of, or in connection with, any cash
tender or exchange offer, merger or other business combination, sale
of assets or contested election, or any combination of the foregoing
transactions less than a majority of the combined voting power of the
then outstanding securities of the Company or any successor
corporation or entity entitled to vote generally in the election of
the directors of the Company or such other corporation or entity after
such transaction are held in the aggregate by the holders of the
Company's securities entitled to vote generally in the election of
directors of the Company immediately prior to such transaction; or
(iii) during any period of two consecutive years,
individuals who at the beginning of any such period constitute the
Board cease for any reason to constitute at least a majority thereof,
unless the election, or the nomination for election by the Company's
shareholders, of each director of the Company first elected during
such period was approved by a vote of at least two-thirds of the
directors of the Company then still in office who were directors of
the Company at the beginning of any such period.
(c) Definition of Potential Change in Control. For purposes of
Section 9(a), a "Potential Change in Control" means the happening of any one of
the following:
(i) The approval by shareholders of an agreement by the
Company, the consummation of which would result in a Change in Control
of the Company as defined in Section 9(b); or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or
a Subsidiary or any Company employee benefit plan (including any
trustee of such plan acting as such trustee)) of
<PAGE> 15
securities of the Company representing 5% or more of the combined
voting power of the Company's outstanding securities and the adoption
by the Board of Directors of a resolution to the effect that a
Potential Change in Control of the Company has occurred for purposes
of this Plan.
(d) Change in Control Price. For purposes of this Section 9,
"Change in Control Price" means the highest price per share paid in any
transaction reported on the New York Stock Exchange Composite Index, or paid or
offered in any bona fide transaction related to a potential or actual Change in
Control of the Company at any time during the 60 day period immediately
preceding the occurrence of the Change in Control (or, where applicable, the
occurrence of the Potential Change in Control event), in each case as
determined by the Committee except that, in the case of Incentive Stock Options
and Stock Appreciation Rights relating to Incentive Stock Options, such price
shall be based only on transactions reported for the date on which the optionee
exercises such Stock Appreciation Rights (or Limited Stock Appreciation Rights)
or, where applicable, the date on which a cashout occurs under Section 9 (a)
(iii) or Section 9(a)(iv), as applicable.
SECTION 10. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of
an optionee or participant under a Stock Option, Stock Appreciation Right (or
Limited Stock Appreciation Right), Restricted Stock award or Other Stock-Based
Award theretofore granted, without the optionee's or participant's consent, or
which, without the approval of the Company's stockholders, would:
(a) except as expressly provided in this Plan, increase
the total number of shares reserved for the purpose
of the Plan;
(b) change the pricing terms of Sections 5(a) or 9(a);
(c) change the employees or class of employees eligible
to participate in the Plan; or
(d) extend the maximum option period under Section 5(b)
of the Plan.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices.
Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
<PAGE> 16
SECTION 11. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a
general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards hereunder; provided, however, that, unless the Committee otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 12. General Provisions.
(a) The Committee may require each person purchasing shares
pursuant to a Stock Option or other award under the Plan to represent to and
agree with the Company in writing that the optionee or participant is acquiring
the shares without a view to distribution thereof. The certificates for such
shares may include any legend which the Committee deems appropriate to reflect
any restrictions on transfer.
All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Stock is then listed, and any applicable Federal or
state securities law, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee
of the Company or any Subsidiary or Affiliate any right to continued employment
with the Company or a Subsidiary or Affiliate, as the case may be, nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
to terminate the employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includable in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to
be withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations may be settled with Stock, including Stock
that is part of the award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditional on such payment
or arrangements and the Company and
<PAGE> 17
its Subsidiaries or Affiliates shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to
the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or other types of Plan awards) at
the time of any dividend payment shall only be permissible if sufficient shares
of Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options, Stock Purchase Rights and other Plan
awards).
(f) In addition to any other restrictions on transfer that may
be applicable under this Plan or the applicable award agreement, no Option,
Stock Appreciation Right, Restricted Stock award (while the shares remain
restricted), Other Stock-Based Award or other right issued under the Plan is
transferrable by the participant other than by will or by the laws of descent
and distribution.
(g) The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Tennessee.
SECTION 13. Effective Date of Amended and Restated Plan.
The Plan as amended and restated shall be effective upon adoption by
the Board.
SECTION 14. Term of Plan.
No Stock Option, Stock Appreciation Right, Restricted Stock award or
Other Stock-Based Award shall be granted pursuant to the Plan on or after the
tenth anniversary of the earlier of the date of Board approval or the date of
shareholder approval of the Plan, as amended and restated, but awards granted
prior to such tenth anniversary may extend beyond that date.
<PAGE> 1
<TABLE>
EXHIBIT 11
Service Merchandise Company, Inc. and Subsidiaries
COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
January 1 January 1 January 2
1995 1994 1993
--------- --------- ---------
PRIMARY
- -------
<S> <C> <C> <C>
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $ 61,570 $ 82,315 $ 84,495
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $3,462 and $4,982, respectively (5,415) (7,474) -
Cumulative effect of change in accounting principle - 7,742 -
-------- -------- --------
Net earnings $ 56,155 $ 82,583 $ 84,495
======== ======== ========
Shares:
- ------
Weighted average common shares outstanding 98,549 98,294 97,483
Weighted average shares of restricted
stock outstanding 883 948 1,128
Additional shares assuming exercise of stock options 1,941 2,836 2,991
-------- -------- --------
Weighted average common shares and common
share equivalents outstanding - primary 101,373 102,078 101,602
======== ======== ========
Earnings per commmon share before extraordinary loss
and cumulative effect of change in accounting principle $ 0.61 $ 0.80 $ 0.83
Extraordinary loss per common share from early extinguishment
of debt, net of tax benefit (0.06) (0.07) -
Cumulative effect per common share of change in accounting
principle - 0.08 -
-------- -------- --------
Primary net earnings per common share $ 0.55 $ 0.81 $ 0.83
======== ======== ========
ASSUMING FULL DILUTION
- ----------------------
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $ 61,570 $ 82,315 $ 84,495
Extraordinary loss before from early extinguishment of debt,
net of tax benefit of $3,462 and $4,982, respectively (5,415) (7,474) -
Cumulative effect before of change in accounting principle - 7,742 -
-------- -------- --------
Net earnings $ 56,155 $ 82,583 $ 84,495
======== ======== ========
Shares:
- ------
Weighted average common shares outstanding 98,549 98,294 97,483
Weighted average shares of restricted
stock outstanding 883 948 1,128
Additional shares assuming exercise of stock options 1,954 2,858 3,066
-------- -------- --------
Weighted average common shares and common
share equivalents outstanding - fully diluted 101,386 102,100 101,677
======== ======== ========
Earnings per common share before extraordinary loss
and cumulative effect of change in accounting principle $ 0.61 $ 0.80 $ 0.83
Extraordinary loss per common share from early extinguishment
of debt, net of tax benefit (0.06) (0.07) -
Cumulative effect per common share of change in
accounting principle - 0.08 -
-------- -------- --------
Fully diluted net earnings per common share $ 0.55 $ 0.81 $ 0.83
======== ======== ========
</TABLE>
<PAGE> 1
<TABLE>
EXHIBIT 13
Service Merchandise Company, Inc. and Subsidiaries
SELECTED FINANCIAL INFORMATION
<CAPTION>
Fiscal Year
(In thousands, except per share, store and ratio data) 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $4,050,381 $3,814,618 $3,712,790 $3,399,752 $3,435,037
Earnings before interest and income taxes 175,697 210,434 231,202 233,595 224,382
Interest expense - debt and
capitalized leases 74,762 73,243 92,685 108,874 126,459
Earnings before extraordinary loss
and cumulative effect of change in accounting
principle 61,570 82,315 84,495 76,080 60,712
Net earnings 56,155 82,583 84,495 76,080 60,712
Ratios & Rates
Gross margin to net sales 24.0% 24.8% 24.4% 25.8% 25.1%
Selling, general and administrative
expenses to net sales (a) 18.1% 17.7% 16.6% 17.3% 16.9%
Effective tax rate 39.0% 40.0% 39.0% 39.0% 38.0%
Earnings before extraordinary loss and
cumulative effect of change in accounting
principle to net sales 1.5% 2.2% 2.3% 2.2% 1.8%
Net earnings to net sales 1.4% 2.2% 2.3% 2.2% 1.8%
PER COMMON SHARE (b)
Earnings per share before extraordinary loss
and cumulative effect of change in accounting
principle $ 0.61 $ 0.80 $ 0.83 $ 0.76 $ 0.62
Net earnings per share $ 0.55 $ 0.81 $ 0.83 $ 0.76 $ 0.62
Weighted average common shares and
common share equivalents outstanding 101,373 102,078 101,602 100,476 98,528
FINANCIAL POSITION
Inventories $1,004,282 $ 939,259 $ 857,640 $ 793,311 $ 747,697
Accounts payable 639,766 630,723 496,946 370,434 407,791
Working capital 292,982 314,715 289,599 221,613 252,922
Total assets (a) 1,926,902 2,011,575 1,707,460 1,570,783 1,651,132
Long-term obligations (c) 618,423 698,521 696,911 714,696 826,602
Shareholders' equity 336,376 279,538 194,207 104,315 25,374
Ratios
Inventory turnover 3.2x 3.2x 3.4x 3.3x 3.4x
Current ratio 1.3x 1.3x 1.4x 1.3x 1.3x
Long-term obligations to total capitalization 64.8% 71.4% 78.2% 87.3% 97.0%
OTHER INFORMATION
Total net sales increase (decrease) 6.2% 2.7% 9.2% (1.0%) 3.9%
Comparable stores net sales increase (decrease) (d) 1.3% 0.3% 5.2% (4.8%) 0.9%
Number of catalog stores 406 391 371 359 346
EBITDA DATA
EBITDA (e) $ 242,495 $ 280,075 $ 300,033 $ 299,183 $ 294,778
EBITDA to net sales 6.0% 7.3% 8.1% 8.8% 8.6%
(a) Certain prior period amounts have been reclassified for comparative purposes.
(b) Restated for stock splits in 1992 and 1991.
(c) Includes both long-term debt and capitalized lease obligations.
(d) Adjusted to reflect a comparable number of selling days.
(e) 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: 1994 - $4,263; 1993 - $7,884; 1992 - $10,131; 1991 - $9,434; 1990 - $15,709. EBITDA is not intended to
represent net earnings, 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.
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-10-
</TABLE>
<PAGE> 2
Service Merchandise Company, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 1, 1995 COMPARED TO FISCAL YEAR ENDED JANUARY 1, 1994
Net earnings for the fiscal year ended January 1, 1995 (fiscal 1994) were $56.2
million, or $0.55 per share, compared to net earnings of $82.6 million, or
$0.81 per share, for the fiscal year ended January 1, 1994 (fiscal 1993).
These amounts include extraordinary charges attributable to the early
extinguishment of debt incurred in both years (See "Liquidity") and a benefit
in fiscal 1993 related to the cumulative effect of adopting the new accounting
standard for income taxes. The decrease in earnings is primarily attributable
to additional store payroll costs resulting from an increased emphasis on
customer service and to lower gross margin rates. Fiscal 1994 marked the
beginning of a transition for Service Merchandise. The initial steps to this
process included recognition of the importance of sales and service by
improving the shopping experience for customers and increasing store inventory
levels to achieve a consistently high in-stock position, particularly on
promotional merchandise. This transition required higher payroll and inventory
carrying costs which have adversely affected earnings.
The transition begun in fiscal 1994 will continue into fiscal 1995. The
Company will focus on all aspects of merchandising, looking for opportunities
to improve the profitability of its core merchandise lines and addressing those
areas of underperformance. In addition, the Company remains committed to the
customer service initiatives undertaken in fiscal 1994, but will focus on ways
to increase the productivity of the Company's expense structure. The Company
intends to reduce the number of store openings in order to concentrate its
efforts on increasing the profitability of existing stores.
The Company's business is highly seasonal, with a significant portion of its
sales occurring in the fourth quarter. Fourth quarter net sales accounted for
42.5% and 42.8% of total net sales, in fiscal 1994 and 1993, respectively.
Fourth quarter net sales for fiscal 1994 increased 5.4% as compared to the
fourth quarter of fiscal 1993.
For fiscal 1994, net sales were $4.1 billion compared to $3.8 billion for
fiscal 1993, an increase of $235.8 million or 6.2%. Comparable store sales,
adjusted for the one additional selling day in fiscal 1994, increased 1.3%.
The increase in comparable store sales reflects the initiatives undertaken in
fiscal 1994 to provide higher levels of customer service, more competitive
pricing and a better inventory in-stock position. Comparable store sales for
the second half of fiscal 1994 increased 2.7% over the year-earlier period
which was a significant improvement over the comparable store sales decrease of
0.8% for the first half of fiscal 1994.
Gross margin, after cost of merchandise sold and buying and occupancy expenses,
decreased, as a percentage of net sales, to 24.0% from 24.8% in fiscal 1993.
The decreased margin rate is a result of more competitive pricing in most
product categories. This decrease is partially offset by a shift in the sales
mix towards jewelry products. The decrease in the gross margin rate was less
significant in the fourth quarter than the decline in either the second or
third quarters.
Selling, general and administrative expenses for fiscal 1994 increased as a
percentage of net sales to 18.1% from 17.7% in fiscal 1993. The increase is a
result of additional payroll costs, as discussed earlier, associated with the
renewed emphasis on customer service, offset in part by a decrease in
advertising expense.
Depreciation and amortization on owned and leased property and equipment was
$62.5 million for fiscal 1994 compared to $61.8 million for fiscal 1993, an
increase of 1.3%. The increase is a result of additional capital expenditures
associated with the opening of a net 15 stores. Capital expenditures
(excluding capitalized leases) decreased to $82.1 million in fiscal 1994 from
$115.6 million in fiscal 1993.
Interest expense on debt and capitalized leases increased slightly to $74.8
million in fiscal 1994 from $73.2 million in fiscal 1993. The increase is
primarily a result of the rising interest rate environment in general, offset
in part by the lower effective interest rate on the $600 million Reducing
Revolving Credit Facility, better interest rate management and the prepayment
of high coupon mortgages totaling $27.1 million (See "Liquidity").
The effective income tax rate decreased to 39% in fiscal 1994 from 40% in
fiscal 1993 as a result of a reduction in the effective rates of state income
taxes.
-11-
<PAGE> 3
Service Merchandise Company, Inc. and Subsidiaries
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 $0.81 per share, compared to net earnings of $84.5 million, or
$0.83 per share, for the fiscal year ended January 2, 1993 (fiscal 1992). The
decrease in net earnings reflected a $4.5 million pre-tax charge ($2.7 million
after-tax or $0.03 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 reflected 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 net sales accounted for
42.8% and 42.2% of total net sales, in fiscal 1993 and 1992, respectively.
Fourth quarter net 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 catalog stores during fiscal 1993. Comparable store sales, adjusted for
the five fewer selling days in fiscal 1993, increased 0.3% over fiscal 1992.
Jewelry sales increased at a pace exceeding that experienced by the Company as
a whole. The relatively flat comparable store sales performance was
attributable to several factors. The Company was not as price promotional as
it was in fiscal 1992 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 fiscal 1992 by Hurricane Andrew.
Gross margin, after cost of merchandise sold and buying and occupancy expenses,
increased, as a percentage of net sales, to 24.8% in fiscal 1993 from 24.4% in
fiscal 1992. The increase in gross margin rate reflected 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
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% in fiscal 1992. Of the increase,
approximately $28.8 million related to planned increases in advertising
expenditures. A significant portion of the advertising expense increase
related 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 remainder of
the increase in advertising expense related 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 related to the growth in employment and other overhead
expenses associated with the net 20 catalog store openings during 1993 which
were not totally offset by growth in sales volume. Selling, general and
administrative expenses in fiscal 1993 also reflected $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 5.2% 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 catalog stores,
the most the Company had 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 was 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 (See "Liquidity"). Partially
offsetting these inter-
-12-
<PAGE> 4
Service Merchandise Company, Inc. and Subsidiaries
est 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, or
$0.07 per share.
The effective income tax rate increased to 40% for fiscal 1993 as compared to
39% in fiscal 1992. The increase related to an increase in the statutory
federal income tax rate from 34% to 35% as enacted by the Omnibus Budget
Reconciliation Act of 1993. In addition, 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 or $0.08 per share.
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 Reducing Revolving Credit
Facility prior to the end of each fiscal year (See "Liquidity").
Working capital decreased $21.7 million to $293.0 million at January 1, 1995 as
compared to $314.7 million at January 1, 1994. Working capital at January 2,
1993 was $289.6 million. The current ratio at both January 1, 1995 and 1994
was 1.3 to 1 as compared to 1.4 to 1 at January 2, 1993. Working capital
decreased in fiscal 1994 primarily as a result of the prepayment of
approximately $150 million of long-term debt which enhanced the Company's
capital structure (See "Liquidity"). Current maturities of long-term debt
decreased to $13.1 million at January 1, 1995 from $91.8 million at January 1,
1994 as a result of these prepayments.
Short-term borrowings under the new $600 million Reducing Revolving Credit
Facility reached a maximum of $527.2 million during fiscal 1994 as compared to
$354.3 million and $377.6 million in fiscal 1993 and 1992, respectively. The
increase was primarily attributable to the refinancing of the Secured Term Loan
(See "Liquidity").
LIQUIDITY
FISCAL 1994
On June 8, 1994, the Company completed a new $600 million Reducing Revolving
Credit Facility which replaced its Amended and Restated Credit Agreement
originally dated May 20, 1992. The new Reducing Revolving Credit Facility
replaced the $475 million Revolving Credit Facility and allowed for the
prepayment of the remaining $122 million outstanding under the Secured Term
Loan. The Company believes the new Reducing Revolving Credit Facility will be
sufficient to meet its needs over the life of the agreement. The new Credit
Facility extends the maturity of the Company's working capital facility from
December 31, 1995 to June 8, 1999, reduces the effective interest rate on those
borrowings to LIBOR +1.0% from LIBOR + 1.5% (both rates include a 3/8% facility
fee on the committed amount), releases the security interests held in
connection with the prior facility and provides for generally less restrictive
covenants. The Reducing Revolving Credit Facility includes a $400 million
competitive bid facility which allows the Company to solicit bids from its
lenders to borrow at interest rates below the contractual rate. The maximum
commitment level for the new facility reduces $25 million annually until
reaching $475 million at December 31, 1998. At January 1, 1995, the maximum
commitment level for the new facility was $575 million, and there were no
outstanding borrowings at that time.
As discussed earlier, current maturities of long-term debt decreased in fiscal
1994 as compared to fiscal 1993 as a result of the prepayment of the Secured
Term Loan and high coupon mortgages. In connection with these prepayments, an
extraordinary loss of $5.4 million, net of tax benefit of $3.5 million, or
$0.06 per share was recorded during fiscal 1994.
-13-
<PAGE> 5
Service Merchandise, Company, Inc. and Subsididaries
Cash provided from operations was $83.5 million for fiscal 1994 as compared to
$236.4 million for fiscal 1993. In addition to the decrease in earnings for
fiscal 1994, the decrease in cash flow from operations in fiscal 1994 is also a
result of a less significant increase in trade payables as compared to the
increases in fiscal 1993 and 1992. The cash generated from operations in
fiscal 1994, supplemented with our existing Credit Facility, was used to
finance capital expenditures of $82.1 million (excluding capitalized leases)
for land, buildings, fixtures and equipment, the prepayment of the $122 million
outstanding under the Secured Term Loan and to provide for general working
capital needs associated with the opening of a net 15 stores. The Company
believes that its existing debt structure and additional cash from operations
will continue to fund future operations and capital expansion.
FISCAL 1993
In February 1993, the Company issued $300 million of 9% Senior Subordinated
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 in 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, or $0.07 per share, in
connection with the early extinguishment of this debt.
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. This
Credit Agreement was replaced with the $600 million Reducing Revolving Credit
Facility in fiscal 1994.
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 used for general
corporate purposes, including the Company's planned opening of new stores,
other capital expenditures and prepayment of high coupon mortgages totaling
$27.1 million during the first half of fiscal 1994.
Cash provided from operations was $236.4 million for fiscal 1993 as compared to
$192.9 million for fiscal 1992. These funds combined with short-term and
long-term borrowings were used to finance capital expenditures of $115.6
million (excluding capitalized leases) for land, buildings, fixtures and
equipment and to provide for general working capital needs associated with the
opening of a net 20 catalog stores.
CAPITAL EXPENDITURES
Capital expenditures (excluding capitalized leases) in fiscal 1994 were $82.1
million, as compared to $115.6 million in fiscal 1993 and $64.4 million in
fiscal 1992. The majority of the Company's capital expenditures related to the
opening of new stores although a significant portion of the fiscal 1994
openings were operating lease properties. In fiscal 1994, the Company opened
23 stores (8 existing stores were closed) as compared to the opening of 27
catalog stores (7 existing catalog stores were closed) and 1 new Kids' Central
USA store during fiscal 1993 and 17 catalog stores (5 existing stores were
closed) along with 2 Kids' Central USA stores during fiscal 1992.
The Company expects the new store growth rate in fiscal 1995 to slow to an
annual rate of approximately 3%, down from the 4% to 5% rate of the past two
fiscal years. This decrease will allow the Company to focus its efforts on
increasing the profitability of its existing stores. The Company expects to
fund future capital expenditures through cash on hand together with cash flow
from operations and temporary borrowings under the Reducing Revolving Credit
Facility.
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.
-14-
<PAGE> 6
<TABLE>
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the Fiscal Year Ended
January 1, January 1, January 2,
(In thousands, except per share data) 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $4,050,381 $3,814,618 $3,712,790
Cost of merchandise sold and buying and occupancy expenses 3,079,350 2,868,482 2,805,979
---------- ---------- ----------
Gross margin after cost of merchandise sold and
buying and occupancy expenses 971,031 946,136 906,811
Selling, general and administrative expenses 732,799 673,945 616,909
Depreciation and amortization 62,535 61,757 58,700
---------- ---------- ----------
Earnings before interest and income taxes 175,697 210,434 231,202
Interest expense - debt 64,531 62,102 80,856
Interest expense - capitalized leases 10,231 11,141 11,829
---------- ---------- ----------
Earnings before income taxes 100,935 137,191 138,517
Income taxes 39,365 54,876 54,022
---------- ---------- ----------
Earnings before extraordinary loss and cumulative effect
of change in accounting principle 61,570 82,315 84,495
Extraordinary loss from early extinguishment of debt, net
of tax benefit of $3,462 and $4,982, respectively (5,415) (7,474) -
Cumulative effect of change in accounting principle - 7,742 -
---------- ---------- ----------
Net earnings $ 56,155 $ 82,583 $ 84,495
========== ========== ==========
Per common share:
Earnings before extraordinary loss and cumulative effect
of change in accounting principle $ 0.61 $ 0.80 $ 0.83
Extraordinary loss from early extinguishment of debt, net
of tax benefit (0.06) (0.07) -
Cumulative effect of change in accounting principle - 0.08 -
---------- ----------- ----------
Net earnings per common share $ 0.55 $ 0.81 $ 0.83
========== =========== ==========
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-15-
</TABLE>
<PAGE> 7
<TABLE>
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<CAPTION>
January 1, January 1,
(In thousands, except per share data) 1995 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 173,264 $ 325,092
Accounts receivable, net of allowance of
$3,217 and $2,894, respectively 55,134 53,014
Inventories 1,004,282 939,259
Prepaid expenses 27,778 29,898
---------- ----------
TOTAL CURRENT ASSETS 1,260,458 1,347,263
Net property and equipment - owned 594,772 575,712
Net property and equipment - capitalized leases 51,932 60,128
Other assets and deferred charges 19,740 28,472
---------- ----------
TOTAL ASSETS $1,926,902 $2,011,575
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 639,766 $ 630,723
Accrued expenses 205,709 188,050
State and local sales tax 61,668 59,035
Income taxes 39,364 54,914
Current maturities of long-term debt 13,098 91,751
Current maturities of capitalized lease
obligations 7,871 8,075
---------- ----------
TOTAL CURRENT LIABILITIES 967,476 1,032,548
Long-term debt 544,808 616,752
Capitalized lease obligations 73,615 81,769
Deferred income taxes 4,627 968
---------- ----------
TOTAL LIABILITIES 1,590,526 1,732,037
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, authorized 4,600 shares
undesignated as to rate and other rights, none issued
Series A Junior Preferred Stock, $1 par value, authorized
400 shares, none issued
Common stock, $.50 par value, authorized 500,000 shares, issued
and outstanding 99,818 and 99,368 shares, respectively 49,909 49,684
Additional paid-in capital 6,115 4,055
Deferred compensation (2,789) (1,187)
Retained earnings 283,141 226,986
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 336,376 279,538
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,926,902 $2,011,575
========== ==========
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-16-
</TABLE>
<PAGE> 8
<TABLE>
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock
------------------ Additional
Common Par Paid-in Deferred Retained
(In thousands) Shares Value Capital Compensation Earnings Total
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Net earnings - - - - 56,155 56,155
Exercise of stock options, net 112 56 363 - - 419
Shares issued under restricted
stock awards 480 240 2,579 (2,819) - -
Amortization of deferred
compensation - - - 264 - 264
Cancellation of restricted stock (142) (71) (882) 953 - -
------- ------- ------- ------- -------- --------
Balance January 1, 1995 99,818 $49,909 $ 6,115 $(2,789) $283,141 $336,376
======= ======= ======= ======= ======== ========
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-17-
</TABLE>
<PAGE> 9
<TABLE>
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Fiscal Year Ended
January 1, January 1, January 2,
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 56,155 $ 82,583 $ 84,495
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization (a) 66,850 69,711 69,278
Deferred income taxes 3,659 (8,251) 790
(Gain) loss on sale of property and equipment (1,107) 1,509 543
Write-off of bond discount and debt issue costs 6,830 5,094 -
Changes in assets and liabilities
(net of disposition)(b) :
Accounts receivable (2,120) 297 (9,236)
Inventories (65,023) (81,619) (64,329)
Prepaid expenses 2,120 (9,444) (5,035)
Accounts payable 9,043 133,777 126,512
Accrued expenses 22,615 40,426 (6,800)
Income taxes (15,550) 2,354 (3,269)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 83,472 236,437 192,949
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (82,108) (115,645) (64,400)
Proceeds from sales of property and equipment 7,269 644 3,239
Other, net (327) (2,033) 2,357
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (75,166) (117,034) (58,804)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 527,200 354,300 377,600
Repayment of short-term borrowings (527,200) (354,300) (377,600)
Proceeds from long-term debt 3,200 399,621 1,485
Repayment of long-term debt (153,849) (341,219) (67,827)
Repayment of capitalized lease obligations (8,133) (9,953) (8,313)
Debt issuance costs (1,771) (10,098) (9,445)
Exercise of stock options 419 2,021 4,556
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (160,134) 40,372 (79,544)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (151,828) 159,775 54,601
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 325,092 165,317 110,716
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 173,264 $ 325,092 $ 165,317
========= ========= =========
(a) Includes other amortization classified as selling, general and administrative expenses of $4,263 for fiscal 1994, $7,884 for
fiscal 1993, $10,131 for fiscal 1992 and $52, $70 and $447 of discount amortization classified as interest expense in fiscal
1994, 1993, and 1992, respectively.
(b) Includes disposition costs previously accrued which were associated with the closing of the three Kids' Central USA stores.
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-18-
</TABLE>
<PAGE> 10
Service Merchandise Company, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JANUARY 1, 1995
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.
Business segment: Substantially all of the Company's assets, revenue
and operating income are employed in or generated from the retail store
industry within the United States.
Fiscal year: Effective January 2, 1994, the Company began reporting
quarterly results as 13 weeks (two four-week periods and one five-week
period) instead of three calendar months. Under the new reporting method,
the Company's fiscal year ends on the Sunday closest to the end of the
calendar year instead of the closest Saturday as in the last two fiscal
years. The effect of the change to the new reporting method was
immaterial to the comparability of the Company's financial results. There
were 52 weeks in the fiscal years ended January 1, 1995 and 1994 and 53
weeks in the fiscal year ended January 2, 1993.
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
repurchase agreements 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 6.0% and 3.3% as of January 1, 1995 and
1994, 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, 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 No. 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.
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 (See Note G). All 1992 per share data has
been restated for the three-for-two stock split in fiscal 1992.
Reclassifications: Certain prior period amounts have been reclassified
for comparative purposes.
-19-
<PAGE> 11
Service Merchandise Company, Inc. and Subsidiaries
B. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 1, January 1,
(In thousands) 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C>
Owned assets:
Land $ 119,555 $ 114,275
Buildings 433,587 408,037
Furniture, fixtures and equipment 351,410 325,402
Leasehold improvements 119,234 112,891
Construction in progress 6,631 2,896
Other 20,944 20,907
---------- ----------
1,051,361 984,408
Less: accumulated depreciation and amortization (456,589) (408,696)
---------- ----------
Owned assets, net $ 594,772 $ 575,712
========== ==========
Capitalized leases:
Real estate $ 116,049 $ 116,469
Furniture, fixtures and equipment 11,916 11,904
---------- ----------
127,965 128,373
Less: accumulated amortization (76,033) (68,245)
---------- ----------
Capitalized leases, net $ 51,932 $ 60,128
========== ==========
-------------------------------------------------------------------------------------------
</TABLE>
C. REDUCING REVOLVING CREDIT FACILITY
On June 8, 1994, the Company completed a new $600 million Reducing
Revolving Credit Facility which replaced its existing $475 million
Revolving Credit Facility and $122 million outstanding under the Secured
Term Loan (See Note D). The new $600 million Reducing Revolving Credit
Facility extends the maturity of the Company's working capital facility
from December 31, 1995 to June 8, 1999, reduces the effective interest
rate on those borrowings to LIBOR + 1.0% from LIBOR + 1.5% (both rates
include a 3/8% facility fee on the committed amount), releases the
security interests held in connection with the prior facility and provides
for generally less restrictive covenants. The Reducing Revolving Credit
Facility includes a $400 million competitive bid facility which allows the
Company to solicit bids from its lenders to borrow at interest rates below
the contractual rate. The maximum commitment level for the new facility
reduces $25 million annually until reaching $475 million as of December
31, 1998. As of January 1, 1995, the maximum commitment level was $575
million.
The Reducing Revolving Credit Facility contains various financial and
other covenants, including: (a) certain restrictions on mergers,
consolidation and sale of assets; (b) a restricted payments basket (as
defined) to allow for dividends, debt and stock buyback under certain
circumstances in an aggregate amount not to exceed a defined amount; (c)
certain restrictions on incurring and assuming liens on non-permitted
property or assets; and (d) financial tests including requirements to
maintain levels of tangible net worth, leverage ratios, interest coverage
ratio and fixed charge coverage, as defined. At January 1, 1995, the
Company was in compliance with these covenants.
The Reducing Revolving Credit Facility requires borrowings outstanding
to be less than a defined amount for a period of 30 consecutive days each
year. At January 1, 1995, there were no borrowings outstanding under this
Credit Facility.
-20-
<PAGE> 12
Service Merchandise Company, Inc. and Subsidiaries
D. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 1, January 1,
(In thousands) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
9% Senior Subordinated Debentures, payable in
equal installments in 2003 and 2004 $300,000 $300,000
Secured Term Loan - 122,026
8 3/8% Senior Notes due 2001, net of unamortized
discount of $317 and $369, respectively 99,683 99,631
First Mortgage Secured Notes, weighted average
variable interest rate at January 1, 1995 of 6.2%,
payable in three equal installments from 1998 to 2000 90,000 90,000
Mortgage notes payable, weighted average fixed
interest rate at January 1, 1995 of 10.1%, payable
in varying amounts to 2022 27,664 56,131
Industrial Revenue Bonds, fixed and variable interest
rates, weighted average interest rate at January 1, 1995
of 4.9%, payable in varying amounts to 2024 40,485 40,485
Other 74 230
-------- --------
557,906 708,503
Less: current maturities (13,098) (91,751)
-------- --------
Long-term debt $544,808 $616,752
======== ========
---------------------------------------------------------------------------------------------------
</TABLE>
During fiscal 1994, the Company prepaid high coupon mortgages of $27.1
million with interest rates ranging from 10% to 12.5%. Additionally, the
Company prepaid the remaining $122 million outstanding under the Secured
Term Loan as a result of the completion of the new Reducing Revolving
Credit Facility (See Note C). In connection with these prepayments, the
Company recorded an extraordinary loss of $5.4 million, net of tax benefit
of $3.5 million, or $0.06 per share.
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 in 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, or $0.07 per share, in connection
with the early extinguishment of this debt. Interest on the Debentures is
payable semi-annually 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.
-21-
<PAGE> 13
Service Merchandise Company, Inc. and Subsidiaries
D. LONG-TERM DEBT (continued)
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, as well as the
prepayment of $27.1 million of certain high coupon mortgages during the
first half of fiscal 1994. 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>
1995 $ 13,098
1996 1,545
1997 4,159
1998 33,235
1999 35,475
Thereafter 470,394
--------
Total $557,906
========
----------------------------------
</TABLE>
Mortgages and Industrial Revenue Bonds are collateralized by property
and equipment having a net book value of approximately $111.5 million and
$28.7 million, respectively, at January 1, 1995. The Industrial Revenue
Bonds are primarily floating rate demand obligations.
In the past, the Company has entered into interest rate protection
agreements to reduce the risk of unfavorable interest rate fluctuations on
its variable interest rate long-term debt. At January 1, 1995, the
Company had an 11.5%, three month LIBOR interest rate cap agreement on $45
million of its variable interest rate First Secured Mortgage Notes. The
interest rate cap agreement matures on June 30, 1998. The Company is
exposed to a minimal 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 $73.6 million, $72.2 million and
$109.2 million for fiscal years 1994, 1993 and 1992, respectively.
-22-
<PAGE> 14
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, 1995 are as follows:
<TABLE>
<CAPTION>
Capitalized Lease
Obligations
----------------------------
Furniture,
(In thousands) Real Fixtures Operating
Fiscal year Estate and Equipment Leases
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 $ 14,492 $ 2,864 $ 72,604
1996 14,126 2,572 70,090
1997 13,954 974 63,337
1998 13,671 175 58,218
1999 12,759 -- 54,781
Thereafter 69,186 -- 450,992
-------- ------- --------
Total minimum payments 138,188 6,585 $770,022
========
Less: imputed interest and
executory costs (62,800) (487)
-------- -------
Present value of net minimum lease
payments 75,388 6,098
Less: current maturities (5,392) (2,479)
-------- -------
Capitalized lease obligations $ 69,996 $ 3,619
======== =======
-------------------------------------------------------------------------------------
</TABLE>
Minimum sublease rentals, not deducted from above, to be received in
the future under noncancellable operating subleases, aggregated $72.0
million at January 1, 1995.
Capitalized real estate and equipment leases are at effective rates of
approximately 12.3% and 5.8%, respectively, as of January 1, 1995. There
were no significant additions to capitalized leases in fiscal 1994 as
compared to $1.1 million and $5.0 million in fiscal 1993 and 1992,
respectively.
Rental expense consists of the following:
<TABLE>
<CAPTION>
Fiscal year
(In thousands) 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $75,193 $66,807 $62,425
Contingent rentals 1,898 1,833 2,234
Sublease rental income (9,557) (9,034) (9,335)
------- ------- -------
Net rental expense $67,534 $59,606 $55,324
======= ======= =======
------------------------------------------------------------------------------
</TABLE>
-23-
<PAGE> 15
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, 1995 and 1994 is made in accordance with SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments" and SFAS
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments." The Company has limited involvement with
derivatives and does not use them for trading purposes.
The estimated fair value amounts have been determined by the Company
using available market information as of January 1, 1995 and 1994 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, 1995 January 1, 1994
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $173,264 $173,264 $325,092 $325,092
Liabilities:
9% Senior Subordinated Debentures 300,000 232,500 300,000 302,250
Secured Term Loan -- -- 122,026 122,235
8 3/8% Senior Notes, net of discount 99,683 85,727 99,631 100,005
Mortgages 117,664 106,932 146,131 145,417
Industrial Revenue Bonds 40,485 40,485 40,485 40,485
-----------------------------------------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents: The carrying amount approximates fair
value due to the short maturity of these instruments (less than three
months).
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 30, 1994 and December 31, 1993.
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.
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 has an interest rate cap
agreement in order to reduce the risk of unfavorable interest rate
fluctuations. The carrying value of the interest rate cap agreement was
$0.3 million and $0.4 million at January 1, 1995 and 1994, respectively,
as compared to the initial cost of $0.6 million which is being amortized
over the term of the agreement. The fair value is estimated to be
approximately $0.1 million at January 1, 1995 and 1994 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 $44.7 million and
$37.1 million at January 1, 1995 and 1994, respectively, and a fair value
of $0.1 million at January 1, 1995 and 1994. The standby letters of
credit have a contractual amount totaling $51.8 million at both January 1,
1995 and 1994, respectively, and fair values of $0.7 million and $0.8
million at January 1, 1995 and 1994, 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.
-24-
<PAGE> 16
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. Generally, no
deferred compensation is recorded due to stock option grants, as the value
at the date of grant equals the fair market value. Awards are exercisable
subject to terms and conditions as determined by the Compensation
Committee, with no awards exercisable ten years after the 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 shares of
restricted stock and stock options exercisable for 750 shares of the
Company's common stock. Vesting of the restricted stock occurs one year
from the 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
the date of grant, are exercisable in 20% installments beginning one year
from the date of grant and expire ten years from the 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, 1995, there were approximately 1.3 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>
Non-
(In thousands, except per share data) Incentive Qualified
-----------------------------------------------------------------------------------
<S> <C> <C>
Balance December 28, 1991 735 2,627
Granted at $10.08 per share -- 193
Exercised at $1.85 to $7.64 per share (327) (506)
Cancelled (9) (110)
----- -----
Balance January 2, 1993 399 2,204
Granted at $10.13 to $10.38 per share -- 1,111
Exercised at $1.67 to $10.08 per share (119) (349)
Cancelled (6) (150)
----- -----
Balance January 1, 1994 274 2,816
Granted At $5.94 To $7.06 per share -- 1,742
Exercised At $1.85 To $6.73 per share (70) (42)
Cancelled (7) (564)
----- -----
Balance January 1, 1995 197 3,952
===== =====
-----------------------------------------------------------------------------------
</TABLE>
Outstanding stock options at January 1, 1995 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, 1995, approximately 1.8 million were available
for exercise.
-25-
<PAGE> 17
Service Merchandise Company, Inc. and Subsidiaries
G. STOCK OPTIONS AND AWARDS (continued)
Restricted stock awards: During fiscal 1989 and 1994, the Company
issued shares of restricted stock under provisions of the 1989 Employee
Stock Incentive Plan. The shares granted in 1989 are restricted until
February 1995 unless otherwise determined by the Compensation Committee.
A total of 478,685 restricted shares (excluding Directors' Plan shares)
were issued in 1994. A portion of these shares were granted with
restrictions terminating on November 21, 1997, and the remaining shares'
restrictions terminating over a six year period ending November 21, 2000.
During the vesting periods described above, 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
generally 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 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
Cancelled (142)
Vested (39)
Granted 480
-----
Balance January 1, 1995 1,202
=====
----------------------------------------------
</TABLE>
Deferred compensation of $2.8 million was recorded during 1994 in
connection with the restricted stock awards. Deferred compensation
amortization of $0.3 million, $0.7 million and $1.2 million was charged to
operations in fiscal 1994, 1993 and 1992, 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 the 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 holders of its common stock. 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 except upon certain events such as a change of control.
There are 400,000 shares of Series A Junior Preferred Stock authorized,
none of which have been issued as of January 1, 1995.
Also authorized are 4.6 million shares of $1 par value preferred
stock, none of which have been issued as of January 1, 1995.
-26-
<PAGE> 18
Service Merchandise Company, Inc. and Subsidiaries
I. RETIREMENT PLAN
The Company has a defined benefit pension plan in which all employees of
the Company are eligible to participate upon reaching age 21 and completing
one year of qualified service, as defined in the pension 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 years 1994, 1993 and 1992, the
Company made contributions of approximately $8.9 million, $8.4 million and
$8.5 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 1,
(In thousands) 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation (includes
$47,279 and $47,693 of vested benefit
obligation, respectively) $ 49,501 $ 49,997
========= ========
Projected benefit obligation 53,412 $ 55,301
Plan assets at fair value, primarily
listed corporate stocks and bonds 46,678 49,522
--------- --------
Projected benefit obligation in
excess of plan assets 6,734 5,779
Unrecognized net loss (13,342) (8,785)
Unrecognized transitional asset, net of amortization 3,414 3,793
Unrecognized prior service cost 4,031 3,750
Additional minimum liability 1,985 --
--------- --------
Accrued pension liability 2,822 $ 4,537
========= ========
Service cost $ 6,748 $ 7,355
Interest on projected benefit obligation 3,944 3,602
Actual return on plan assets 1,710 (4,435)
Net amortization and deferrals (7,170) (719)
--------- --------
Net pension expense $ 5,232 $ 5,803
========= ========
------------------------------------------------------------------------------------------
Net pension expense was $5.0 million for fiscal 1992.
</TABLE>
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows: weighted average discount rates
for fiscal 1994 and 1993 were 8.0% and 7.5%, respectively; expected long-term
rates of return on pension plan assets for fiscal 1994 and 1993 were 9.5% and
10.5%, respectively; and rate of increase in future compensation levels for
both fiscal 1994 and 1993 was 5%.
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, $3.6 million and
$3.8 million for fiscal 1994, 1993 and 1992, respectively.
-27-
<PAGE> 19
Service Merchandise Company, Inc. and Subsidiaries
K. INCOME TAXES
The adjustment to the January 3, 1993 consolidated balance sheet to
adopt SFAS No. 109 was a benefit of $7.7 million. This benefit was
reflected in net income for the first quarter of fiscal 1993 as the
cumulative effect of 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 tax benefit of $3.5 and $5.0
million in fiscal 1994 and 1993, respectively, on the extraordinary loss
from early extinguishment of debt, consists of the following:
<TABLE>
<CAPTION>
Fiscal year
(In thousands) 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $28,159 $42,802 $45,191
State and local 4,813 7,021 8,041
------- ------- -------
32,972 49,823 53,232
Deferred income taxes 2,931 71 790
------- ------- -------
Total income taxes $35,903 $49,894 $54,022
======= ======= =======
-----------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities at January 1, 1995 and 1994 are
comprised of the following:
<TABLE>
<CAPTION>
January 1, January 1,
(In thousands) 1995 1994
---------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Financial accruals without
economic performance $21,081 $19,571
Capitalized leases 12,077 12,131
Deferred compensation 1,181 2,132
Pension liability -- 1,582
Other 6,491 6,247
------- -------
Deferred tax asset 40,830 41,663
------- -------
Deferred Tax Liabilities:
Depreciation 38,924 36,589
Layaway sales 3,733 3,840
Pension liability 728 --
Other 2,072 2,202
------- -------
Deferred tax liability 45,457 42,631
------- -------
Net deferred tax liability $ 4,627 $ 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
-----------------------------------------------------------------
<S> <C>
Depreciation $(1,170)
Deferred compensation 1,386
Other 574
-------
Total provision for deferred taxes $ 790
=======
-----------------------------------------------------------------
</TABLE>
-28-
<PAGE> 20
Service Merchandise and Company, Inc. and Subsidiaries
K. INCOME TAXES (continued)
A reconciliation of the provision for income taxes to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
Fiscal year
1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 34.0%
State and local income taxes, net of federal benefit 3.4% 3.7% 3.9%
Other 0.6% 1.3% 1.1%
---- ---- ----
Effective tax rate 39.0% 40.0% 39.0%
==== ==== ====
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash payments for income taxes were $47.4 million, $48.0 million and
$55.4 million for fiscal 1994, 1993 and 1992, respectively.
L. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
<TABLE>
<CAPTION>
(In thousands, except per share data) April 3, July 3, October 2, January 1,
THREE PERIODS ENDED (See Note A): 1994 1994 1994 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 724,209 $ 845,934 $ 757,662 $1,722,576
========= ========= ========= ==========
Gross margin (a) $ 166,598 $ 200,232 $ 175,248 $ 428,953
========= ========= ========= ==========
Earnings (loss) before extraordinary
loss and cumulative effect of
change in accounting principle $ (12,821) $ (1,274) $ (10,329) $ 85,994
Extraordinary loss from early
extinguishment of debt, net of tax
benefit (1,265) (4,061) -- (89)
Cumulative effect of change in
accounting principle -- -- -- --
--------- --------- --------- ----------
Net earnings (loss) $ (14,086) $ (5,335) $ (10,329) $ 85,905
========= ========= ========= ==========
Per common share:
Earnings (loss) before extraordinary
loss and cumulative effect of
change in accounting principle $ (0.13) $ (0.01) $ (0.10) $ 0.85
Extraordinary loss from early
extinguishment of debt, net of tax benefit (0.01) (0.04) -- --
Cumulative effect of change in
accounting principle -- -- -- --
---------- --------- --------- ----------
Net earnings (loss) per
common share $ (0.14) $ (0.05) $ (0.10) $ 0.85
========== ========= ========= ==========
-----------------------------------------------------------------------------------------------------------------------
(a) Gross margin after cost of merchandise sold and buying and occupancy expenses.
-29-
</TABLE>
<PAGE> 21
Service Merchandise Company, Inc. and Subsidiaries
L. QUARTERLY FINANCIAL INFORMATION - UNAUDITED (continued)
<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) $ 154,471 $ 201,423 $ 169,421 $ 420,821
========= ========= ========= ==========
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 (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
========= ========= ========= ==========
- --------------------------------------------------------------------------------------------------------------------------
(a) Gross margin after cost of merchandise sold and buying and occupancy expenses.
-30-
</TABLE>
<PAGE> 22
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.
<TABLE>
<S> <C> <C>
/s/ Raymond Zimmerman /s/ Gary M. Witkin /s/ S. Cusano
------------------------ ------------------- ----------------
Raymond Zimmerman Gary M. Witkin S. Cusano
Chairman of the Board and President and Chief Vice President and
Chief Executive Officer Operating Officer Chief Financial Officer
</TABLE>
<PAGE> 23
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, 1995 and 1994 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, 1995. 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, 1995 and 1994, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended January 1, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note K to the consolidated financial statements, Service
Merchandise Company, Inc. and subsidiaries changed their method of accounting
for income taxes effective January 3, 1993 to conform with Statement of
Financial Accounting Standards No. 109.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
January 26, 1995
Nashville, Tennessee
-31-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of the Registrant as of January 1, 1995
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 Tennessee
H. J. Wilson Co., Inc. Louisiana
Service Merchandise 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 Financial Co., Inc. Tennessee
Service Merchandise Indiana Partners Indiana
Service Merchandise of Texas, Limited Partnership Delaware
</TABLE>
<PAGE> 1
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, 1995 accompanying the
consolidated financial statements of Service Merchandise Company, Inc. for the
fiscal year ended January 1, 1995.
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 24, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Service
Merchandise Company Inc. Form 10-K for the year ended January 1, 1995 and is
qualified in its entirety by reference to such financial statements and
accompanying notes to the financial statements detailed in Exhibit 13 of the
Form 10-K which is incorporated by reference in Part II of the Form 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-1995
<PERIOD-START> JAN-02-1994
<PERIOD-END> JAN-01-1995
<CASH> 173,264
<SECURITIES> 0
<RECEIVABLES> 58,351
<ALLOWANCES> 3,217
<INVENTORY> 1,004,282
<CURRENT-ASSETS> 1,260,458
<PP&E> 1,179,326
<DEPRECIATION> 532,622
<TOTAL-ASSETS> 1,926,902
<CURRENT-LIABILITIES> 967,476
<BONDS> 618,423
<COMMON> 99,818<F1>
0
0
<OTHER-SE> 286,467
<TOTAL-LIABILITY-AND-EQUITY> 1,926,902
<SALES> 4,050,381
<TOTAL-REVENUES> 4,050,381
<CGS> 3,079,350
<TOTAL-COSTS> 3,079,350
<OTHER-EXPENSES> 795,334<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,762
<INCOME-PRETAX> 100,935
<INCOME-TAX> 39,365
<INCOME-CONTINUING> 61,570
<DISCONTINUED> 0
<EXTRAORDINARY> (5,415)
<CHANGES> 0
<NET-INCOME> 56,155
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
<FN>
<F1>Amount represents the number of shares of $.50 par value common stock issued
and outstanding.
<F2>Amount includes I) depreciation and amortization and II) selling, general and
administrative expenses.
</FN>
</TABLE>
