<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 December 31,
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, 1996: $466,370,708. This calculation assumes that all
shares of Common Stock beneficially held by officers and members of the Board of
Directors of the Registrant are owned by "affiliates," a status which each of
the officers and directors individually disclaims.
<TABLE>
<S> <C>
Class Outstanding at March 1, 1996
----- ----------------------------
Common Stock($.50 Par Value) 99,718,813
Parts in Form 10-K Where Documents
Documents Incorporated by Reference Are Incorporated by Reference
- ----------------------------------- -----------------------------
Portions of Registrant's Proxy Statement dated March 11, 1996 Part III
Portions of Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1995 Parts II and IV
</TABLE>
Exhibit Index located on Pages 12-15
<PAGE> 2
<TABLE>
TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
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<CAPTION>
Page
No.
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<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 1995 Annual Report to
Shareholders for the year ended December 31, 1995 which
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Pages 11 through 14 of the Registrant's 1995 Annual
Financial Condition and Results of Report to Shareholders for the year ended
Operations December 31, 1995 which are incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Pages 15 through 31 of the Registrant's 1995 Annual
Data Report to Shareholders for the year ended
December 31, 1995 which are incorporated herein by
reference.
Item 9. Changes in and Disagreements With
Independent Auditors on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
- --------
Item 10. Directors and Executive Officers of the Pages 2 through 5 of the Registrant's Proxy Statement
Registrant dated March 11, 1996 which are incorporated herein by
reference.
Item 11. Executive Compensation Pages 7 through 16 of the Registrant's Proxy Statement
dated March 11, 1996 which are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Pages 5 and 6 of the Registrant's Proxy Statement dated
Owners and Management March 11, 1996 which are incorporated
herein by reference.
Item 13. Certain Relationships and Related Page 18 of the Registrant's Proxy Statement dated March
Transactions 11, 1996 which is incorporated herein by reference.
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
- -------
Item 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-15
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 December 31, 1995.
PART I
------
Item 1. Business
- ------- --------
Service Merchandise, with 409 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.
General
The Company's franchise is built around selling nationally advertised brand-name
hardgoods and quality jewelry at value prices. The customer has the opportunity
to pre-select merchandise from the Company's annual catalog which is distributed
in early fall each year. The catalog, which had 632 pages in 1995, is
supplemented by a spring catalog of 176 pages, a gift registry guide of 48 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 and spring 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.
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.
-3-
<PAGE> 4
Item 1. Business (continued)
- ------- --------------------
Virtually every transaction 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, tender payment via credit card, update their
address and designate an item as a gift registry purchase.
The Company's computerized daily inventory system tracks the status (on hand, on
order, in transit), location and history of inventory in the retail network.
This raw data feeds the Company's merchandise replenishment system which tracks
inventory positions, sales data and sales forecasts and generates either
suggested transfers from the distribution centers or suggested purchase order
quantities. The inventory system also records all sales information to produce
daily margin reports, complete with a historical comparison for each item.
The Company's information systems enhance the effectiveness of its catalog
mailings and advertising campaigns by tracking customers' purchases and
tailoring the Company's mailing lists to meet specific objectives. The Company
maintains a 24-million customer database of household information which is
updated with each purchase. This database allows management to target customers
based on specific criteria, including the categories purchased, the frequency of
purchases and the value of those purchases.
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. Fourth
quarter net sales accounted for 42.0% of total net sales in fiscal 1995.
The Company is engaged in a highly competitive business and competes with most
nationally known jewelry and hardline retail merchandisers, including
department, general merchandise, specialty and discount stores. Many of these
competitors are larger and have greater financial resources than the Company.
The Company considers quality, value, merchandise mix, service and location to
be the most significant competitive factors in its retailing business. The
Company operates on high volume, low profit margin principles. Its profitability
is primarily dependent upon the large sales volume generated during the fourth
quarter of its fiscal year.
Suppliers
The Company purchases merchandise from approximately 1,721 suppliers, most of
which are manufacturers. In fiscal 1995, the largest vendor accounted for
approximately 4.0% of total disbursements for inventory items; however, the
Company believes it would experience no difficulty in obtaining comparable
quality merchandise from alternate sources. Most merchandise is shipped to the
Company's central distribution facilities and transported to the stores 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 $276 million in fiscal 1995, allow the Company to reduce many
traditional cost factors, thereby lowering the cost of merchandise sold in
several product lines. In addition to its direct import program, the Company
imports diamonds, gemstones and gold which are used by suppliers in the
manufacture of jewelry items.
-4-
<PAGE> 5
Item 1. Business (continued)
- ------- --------------------
Employees
The number of persons employed by the Company fluctuates seasonally. During the
fiscal year ended December 31, 1995, the number of active employees varied from
approximately 26,850 to approximately 48,500, including both permanent and
temporary employees. As of December 31, 1995, the Company had 26,824 permanent
employees, of whom 83% were hourly-paid personnel engaged in non-supervisory
activities; the balance consisted of administrative, executive, distribution
center and store management personnel. None of the Company's employees are
covered by a collective bargaining agreement. The Company has never experienced
a work stoppage due to a labor disagreement and regards its employee relations
as satisfactory.
Certain Factors that may affect Operating Results
The Company's results of operations may be affected from time to time by a
number of factors, including without limitation:
(a) trends in the economy as a whole, which may effect consumer confidence
and consumer demand for the types of goods sold by the Company;
(b) competitive pressures from other retailers, including specialized
retailers and discount stores;
(c) labor costs;
(d) costs of goods purchased by the Company;
(e) real estate occupancy and development costs;
(f) advertising costs, including the cost of paper and postage;
(g) financing costs;
(h) costs associated with efforts to improve customer service and maintain
an appropriate level of in-stock merchandise;
(i) the ability of the Company to predict consumer demand as a whole, as
well as demand for specific goods;
(j) the ability of the Company to attract and retain customers by defining
the Company's image within the marketplace and providing a positive
shopping experience; and
(k) costs associated with shipping, handling and inventory control.
These factors, among others, have affected the Company's results of operations
in the past and could in the future cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of the Company.
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 and one return center
(Bowling Green, KY) as of December 31, 1995. These distribution centers are
located in Florida, New York, Tennessee, Texas and Nevada and contain an
aggregate of approximately 3,493,000 square feet as set forth below:
-5-
<PAGE> 6
Item 2. Properties (continued)
- ------- ----------------------
<TABLE>
<CAPTION>
Center Location Sq. Feet Owned/Leased Lease Term
--------------- -------- ------------ ----------
<S> <C> <C> <C>
Orlando, FL 460,000 Leased Primary term extends through 6/30/98 with
renewal options through 6/30/22
Montgomery, NY 800,000 Sale/Leaseback Primary term extends through 12/31/24
Nashville, TN
(1) Owned 588,000 Owned Not applicable
(2) Owned satellite 268,000 Owned Not applicable
(3) Leased satellite 392,000 Leased Primary term extends through 1/31/01 with
renewal options through 1/31/05
Dallas, TX 594,000 Leased Primary term extends through 1/31/01 with a
renewal option through 1/31/06
Henderson, NV 391,000 Leased Primary term extends through 12/31/00
Bowling Green, KY (Return center) 180,000 Leased Primary term extends through 12/31/00 with
renewal options through 12/31/25
</TABLE>
The Company anticipates that it would be able to obtain suitable replacement
facilities should it not be able to renew the above leases.
As of December 31, 1995, the Company operated 409 retail stores (typically
consisting of approximately 50,000 square feet) as follows:
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Owned land and building 103
Long-term ground lease with an owned building 44
Owned land with industrial development financing under which the Company has ownership or a
right to obtain ownership of the building 3
Leased 276
Stores which have been subleased (17)
---
Total 409
===
</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 1995 Annual Report to Shareholders, for information concerning
the Company's lease commitments.
For a listing of store locations, see page 7. The numbers in parentheses show
the number of stores per state and where there is more than one store in any
city, the number of stores in such city.
-6-
<PAGE> 7
Item 2. Properties (continued)
- ------ ----------------------
<TABLE>
<CAPTION>
SERVICE MERCHANDISE COMPANY, INC.
STORE LOCATIONS
<S> <C> <C> <C> <C>
ALABAMA (8) GEORGIA (16) MARYLAND (5) NEW YORK (24) SOUTH CAROLINA (6)
BIRMINGHAM (2) ATLANTA (12) COLUMBIA ALBANY CHARLESTON
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 (16)
GLENDALE CHICAGO (24) AUBURN HUNTINGTON CHATTANOOGA (2)
MESA (2) INDIANA (16) BOSTON (7) LAKE GROVE JACKSON
SCOTTSDALE BLOOMINGTON HOLYOKE LAWRENCE KINGSPORT
ARKANSAS (4) CLARKSVILLE LANESBORO/PITTSFIELD MASSAPEQUA KNOXVILLE (2)
FAYETTEVILLE EVANSVILLE SWANSEA MIDDLETOWN MEMPHIS (5)
FORT SMITH FORT WAYNE (2) MICHIGAN (14) NANUET NASHVILLE (5)
LITTLE ROCK (2) GRIFFITH ANN ARBOR PATCHOQUE TEXAS (48)
CALIFORNIA (23) INDIANAPOLIS (5) DETROIT (9) PLATTSBURGH ABILENE
LOS ANGELES (11) KOKOMO FLINT POUGHKEEPSIE AMARILLO
MONTEBELLO LAFAYETTE LANSING (2) QUEENS ARLINGTON (2)
MURRIETA MERRILLVILLE WATERFORD ROCHESTER (2) AUSTIN
SALINAS SOUTH BEND MINNESOTA (1) SARATOGA SPRINGS BEAUMONT
SAN FRANCISCO/OAKLAND (7) TERRE HAUTE MINNEAPOLIS SYRACUSE (2) COLLEGE STATION
SAN JOSE (2) IOWA (1) MISSISSIPPI (6) UTICA CORPUS CHRISTI
COLORADO (6) DES MOINES GAUTIER YORKTOWN HEIGHTS DALLAS (8)
COLORADO SPRINGS KANSAS (4) GULFPORT NORTH CAROLINA (9) DENTON
DENVER (4) HUTCHINSON HATTIESBURG CHARLOTTE (3) EL PASO (2)
PUEBLO OVERLAND PARK JACKSON (2) DURHAM FT. WORTH (3)
CONNECTICUT (8) WICHITA (2) MERIDIAN FAYETTEVILLE HARLINGEN
DANBURY KENTUCKY (7) MISSOURI (7) GASTONIA HOUSTON (11)
DERBY FLORENCE INDEPENDENCE GREENSBORO LAKE JACKSON
ENFIELD LEXINGTON SPRINGFIELD RALEIGH (2) LAREDO
HARTFORD (3) LOUISVILLE (3) ST. LOUIS (5) OHIO (16) LONGVIEW
ORANGE OWENSBORO NEBRASKA (3) AKRON LUBBOCK
WATERBURY PADUCAH LINCOLN CINCINNATI (4) MCALLEN (2)
DELAWARE (3) LOUISIANA (14) OMAHA (2) COLUMBUS (4) MIDLAND
DOVER ALEXANDRIA NEVADA (3) LIMA SAN ANGELO
WILMINGTON (2) BATON ROUGE (2) LAS VEGAS (2) MANSFIELD SAN ANTONIO (3)
FLORIDA (51) HOUMA RENO SANDUSKY TEMPLE
BOCA RATON LAFAYETTE (2) NEW HAMPSHIRE (5) SPRINGFIELD TYLER
BOYNTON BEACH LAKE CHARLES DOVER TOLEDO (2) WACO
CORAL SPRINGS MONROE MANCHESTER YOUNGSTOWN VERMONT (1)
DAVIE NEW ORLEANS (3) NASHUA OKLAHOMA (8) BURLINGTON
DAYTONA BEACH SHREVEPORT (2) PLAISTOW ENID VIRGINIA (11)
FT. MYERS SLIDELL SALEM NORMAN ALEXANDRIA (2)
FT. PIERCE MAINE (5) NEW JERSEY (6) OKLAHOMA CITY (3) CHANTILLY
GAINESVILLE AUBURN HAZLET TULSA (3) CHESAPEAKE
JACKSONVILLE (3) AUGUSTA PARAMUS PENNSYLVANIA (13) DALE CITY
LAKELAND BANGOR TURNERSVILLE ALLENTOWN FREDERICKSBURG
LEESBURG BRUNSWICK VOORHEES HARRISBURG HAMPTON
MELBOURNE PORTLAND WAYNE LANCASTER MANASSAS
MIAMI/FT. LAUDERDALE (14) WOODBRIDGE PHILADELPHIA (2) NORFOLK
NAPLES NEW MEXICO (2) PITTSBURGH (6) RICHMOND (2)
OCALA ALBUQUERQUE READING
ORLANDO (6) LAS CRUCES SCRANTON
PENSACOLA
PORT CHARLOTTE
SARASOTA
STUART
TALLAHASSEE (2)
TAMPA/CLEARWATER/
ST. PETERSBURG (8)
W. PALM BEACH
</TABLE>
-7-
<PAGE> 8
Item 3. Legal Proceedings
- ------- -----------------
L. Luria and Son, Inc. v. Sunrise Mills Limited Partnership, Western Sawgrass
Mills Corp., and Service Merchandise Company, Inc. was filed on June 15, 1993 in
the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. Sunrise
Mills Limited Partnership and Western Sawgrass Mills Corp. have settled the
claims against them; therefore, Service Merchandise is the only remaining
defendant. In November 1995, a Florida state court returned a verdict of $13.8
million against the Company based on an allegation that the Company interfered
with a competitor's right to lease property. The Company intends to appeal the
decision as it believes that the facts and law presented at the trial do not
support the verdict. It is the opinion of management based on discussions with
legal counsel that it is reasonably possible that 1) the Company will be
successful in its appeal and 2) the outcome will not have a material effect on
the Company's results of operations or financial position.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------- ---------------------------------------------------
There were no reportable items during the Company's fourth quarter.
Executive Officers of the Registrant (1)
- ------------------------------------
The following is a list of executive officers, their ages, positions and
business experience during the past five years as of the date hereof:
<TABLE>
<CAPTION>
Name, Age and Position
- ----------------------
<S> <C>
Raymond Zimmerman, 63 Chairman of the Board and Chief Executive Officer since October 1981;
Chairman of the Board and Chief President from July 1984 to November 1994 and from 1981 to October
Executive Officer 1983. Board member of The Limited Stores, Columbus, Ohio.
Gary M. Witkin, 47 President and Chief Operating Officer since November 1994; Vice
President, Chief Operating Officer Chairman and Board member, Saks Fifth Avenue from October 1992 to
and 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.
Glen A. Bodzy, 43 Secretary since July 1987; Vice President and General Counsel since May
Vice President, General Counsel and Secretary 1985.
S. Cusano, 42 Vice President and Chief Financial Officer since July 1993; Group Vice
Vice President and Chief Financial Officer 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.
Robert C. Eimers, 48 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.
</TABLE>
-8-
<PAGE> 9
<TABLE>
<S> <C>
Harold Mulet, 44 Senior Vice President, Stores Organization since August 1995;
Senior Vice President, Stores Organization Regional Vice President of Target division of the Dayton Hudson Corp.
from December 1988 to August 1995.
Richard Sellers, 51 Senior Vice President, Marketing and Advertising since May 1995; Vice
Senior Vice President, Marketing and Advertising President, General Manager of Playtex Limited from February 1992 to May
1995; Vice President, Business Manager of Playtex Products, Inc. from
February 1989 to January 1992.
Charles Septer, 44 Senior Vice President, Jewelry Merchandising since April 1988.
Senior Vice President, Jewelry Merchandising
Steven F. McCann, 43 Operating Vice President of Finance and Corporate Controller since June
Operating Vice President of Finance, 1994. Vice President, Controller of Robinsons-May division of the May
Corporate Controller 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
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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, 1996
and 1995 were 6,387 and 6,442, respectively.
High and low closing sales prices as reported by the NYSE for fiscal 1995 and
1994 were as follows:
1995 High Low
- ---- ---- ---
First Quarter 5 1/4 4 1/8
Second Quarter 5 1/4 4 1/4
Third Quarter 7 7/8 5 3/8
Fourth Quarter 7 1/8 4 1/2
1994 High Low
- ---- ---- ---
First Quarter 10 7 5/8
Second Quarter 8 6
Third Quarter 6 7/8 5
Fourth Quarter 6 1/2 4 1/4
-9-
<PAGE> 10
The Company's Reducing Revolving Credit Facility contains various financial and
other covenants, including limitations on the ability to pay dividends. The
Company has not declared any cash dividends to shareholders for fiscal 1995 and
1994, 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 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
1995 Annual Report to Shareholders for the year ended December 31, 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 1995 Annual Report to Shareholders for
the year ended December 31, 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 1995 Annual Report to Shareholders for the year
ended December 31, 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>
-10-
<PAGE> 11
Item 9. Changes in and Disagreements With Independent Auditors on Accounting and
- ------- ------------------------------------------------------------------------
Financial Disclosure
--------------------
No reportable items.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Pages 2 through 5 under the caption "Election of Directors" of the Registrant's
Proxy Statement dated March 11, 1996 filed with the Commission pursuant to Rule
14a-6(b) are incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning Executive Officers
of the Registrant is included in Part I, Item 4, under the caption "Executive
Officers of the Registrant" of this Form 10-K.
Item 11. Executive Compensation
- -------- ----------------------
Reference is made to the information on pages 7 through 16 of the Registrant's
Proxy Statement dated March 11, 1996 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 5 and 6 of the Registrant's Proxy
Statement dated March 11, 1996 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 18 of the Registrant's Proxy
Statement dated March 11, 1996 filed with the Commission pursuant to Rule
14a-6(b), concerning certain relationships and related transactions, which is
herein incorporated by reference.
-11-
<PAGE> 12
PART IV
-------
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
<S> <C> <C>
(a) Documents filed as a part of this report.
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 1995 Annual Report to Shareholders for the year
ended December 31, 1995.
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.
</TABLE>
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>
11 Statement re Computation of Earnings Per Common Share for
fiscal years ended December 31, 1995,
January 1, 1995 and January 1, 1994.
13 Portions of Service Merchandise Company, Inc. 1995 Annual
Report to Shareholders for the fiscal year ended December
31, 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 December 31, 1995.
27 Financial Data Schedule for the fiscal year ended December
31, 1995.
</TABLE>
-12-
<PAGE> 13
3. Exhibits and Index to Exhibits (continued):
<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).
3.2 Registrant's By-Laws, as amended and restated as of 3.2
April 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 4(c)
which is incorporated herein by reference from
Registrant's Current Report on Form 8-K dated
May 5, 1989.
4.3 Amendment No. 2 to Shareholders' Rights Agreement which is 4
incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended January 1, 1995.
4.4 Note Purchase Agreement dated as of June 28, 1990 4.2a
concerning the refinancing of $90 million of the Real
Estate Bridge Loan under 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 Trust Indenture dated as of June 28, 1990 concerning 4.2b
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.
4.6 Indenture, dated as of February 15, 1993, between the 4.1
Registrant and First American National Bank, as
Trustee, regarding the Registrant's $300,000,000 of 9%
Senior Subordinated Debentures due 2004, which is
incorporated herein by reference from Form 8-K dated
February 17, 1993.
</TABLE>
-13-
<PAGE> 14
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 First Supplemental Indenture, dated as of February 15, 1993, 4.2
between the Registrant and First American National Bank, as
trustee, regarding the Registrant's $300,000,000 of 9% Senior
Subordinated Debentures due 2004, which is incorporated herein
by reference from Form 8-K dated February 17, 1993.
4.8 Form of Debenture, regarding the Registrant's $300,000,000 of 4.3
9% Senior Subordinated Debentures due 2004, which is
incorporated herein by reference from Form 8-K dated
February 17, 1993.
4.9 Indenture, dated as of October 15, 1993, between the Registrant and 4.1
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 First Supplemental Indenture, dated as of October 15, 1993, between 4.2
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.
4.11 Form of Notes, regarding the Registrant's $100,000,000 of 4.3
8 3/8% Senior Notes due 2001, which is incorporated herein by
reference from the Registrant's Form 8-K dated
October 26, 1993.
4.12 Credit Agreement dated as of June 8, 1994 among Service Merchandise 4.1
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.
4.13 Amendment No. 1 to Credit Agreement effective 4.1
April 13, 1995 among Service 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 first quarter ended April 2, 1995.
</TABLE>
-14-
<PAGE> 15
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>
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 and Cusano which is incorporated
herein by reference from the Registrant's Proxy Statement dated
April 19, 1989.
10.3 Directors' Deferred Compensation Plan, which is incorporated herein 10.1
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 key 10
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.
10.6 Employment agreement dated November 2, 1994 regarding Gary 10.1
M. Witkin, President and Chief Operating Officer which is
incorporated herein by reference from the Registrant's Form
10-K for the fiscal year ended January 1, 1995.
10.7 Amended and Restated 1989 Employee Stock Incentive Plan 10.2
which is incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended January 1, 1995.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fiscal year ended December 31, 1995.
</TABLE>
-15-
<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 18, 1996
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, Chief President, Chief Operating Officer
Executive Officer and Director and Director
(Principal Executive Officer) (Principal Operating Officer)
March 18, 1996 March 18, 1996
<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 18, 1996 March 18, 1996 March 18, 1996 March 18, 1996
/s/ Harold Roitenberg /s/ S. Cusano
- --------------------- -------------
Harold Roitenberg S. Cusano, Vice President and Chief Financial Officer
Director (Principal Financial Officer)
March 18, 1996 (Principal Accounting Officer)
March 18, 1996
</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 December 31, 1995 and January 1, 1995, and
for each of the three years in the period ended December 31, 1995, and have
issued our report thereon dated January 25, 1996; such financial statements and
report are included in your 1995 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 25, 1996
-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 December 31, 1995 (A) $3,217 ($207) - ($247) $2,763
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
(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> 19
<TABLE>
EXHIBIT 11
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share (Unaudited)
(In thousands, except per share data)
<CAPTION>
December 31 January 1 January 1
1995 1995 1994
---------------- ----------------- ----------------
Primary
- -------
<S> <C> <C> <C>
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $50,325 $61,570 $82,315
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $3,462 and $4,982 in fiscal
1994 and 1993, respectively - (5,415) (7,474)
Cumulative effect of change in accounting principle - - 7,742
--------------- ----------------- ----------------
Net earnings $50,325 $56,155 $82,583
=============== ================= ================
Shares:
- -------
Weighted average common shares outstanding 99,059 98,549 98,294
Weighted average shares of restricted
stock outstanding 627 883 948
Additional shares assuming exercise of stock options 1,771 1,941 2,836
--------------- ----------------- ----------------
Weighted average common shares and common shares
equivalents outstanding - primary 101,457 101,373 102,078
=============== ================= ================
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $0.50 $0.61 $0.80
Extraordinary loss from early extinguishment of debt,
net of tax benefit - (0.06) (0.07)
Cumulative effect of change in accounting principle - - 0.08
--------------- ----------------- ----------------
Primary net earnings per common share $0.50 $0.55 $0.81
=============== ================= ================
Assuming Full Dilution
- ----------------------
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $50,325 $61,570 $82,315
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $3,462 and $4,982 in fiscal
1994 and 1993, respectively - (5,415) (7,474)
Cumulative effect of change in accounting principle - - 7,742
---------------- ----------------- ----------------
Net earnings $50,325 $56,155 $82,583
================ ================= ================
Shares:
- -------
Weighted average common shares outstanding 99,059 98,549 98,294
Weighted average shares of restricted
stock outstanding 627 883 948
Additional shares assuming exercise of stock options 1,798 1,954 2,858
---------------- ----------------- ----------------
Weighted average common shares and common
share equivalents outstanding - fully diluted 101,484 101,386 102,100
================ ================= ================
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $0.50 $0.61 $0.80
Extraordinary loss from early extinguishment of debt,
net of tax benefit - (0.06) (0.07)
Cumulative effect of change in accounting principle - - 0.08
---------------- ----------------- ----------------
Fully diluted net earnings per common share $0.50 $0.55 $0.81
================ ================= ================
</TABLE>
<PAGE> 20
<TABLE>
EXHIBIT 13
selected financial information
<CAPTION>
Fiscal Year
(In thousands, except per share, store and ratio data) 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $4,018,525 $4,050,381 $3,814,618 $3,712,790 $3,399,752
Earnings before interest and income taxes 160,299 175,697 210,434 231,202 233,595
Interest expense - debt and capitalized leases 79,129 74,762 73,243 92,685 108,874
Earnings before extraordinary loss and
cumulative effect of change in accounting
principle 50,325 61,570 82,315 84,495 76,080
Net earnings 50,325 56,155 82,583 84,495 76,080
Ratios & Rates
Gross margin to net sales 24.3% 24.0% 24.8% 24.4% 25.8%
Selling, general and administrative
expenses to net sales (a) 18.8% 18.1% 17.7% 16.6% 17.3%
Effective tax rate 38.0% 39.0% 40.0% 39.0% 39.0%
Earnings before extraordinary loss and
cumulative effect of change in accounting
principle to net sales 1.3% 1.5% 2.2% 2.3% 2.2%
Net earnings to net sales 1.3% 1.4% 2.2% 2.3% 2.2%
PER COMMON SHARE (b)
Earnings per share before extraordinary loss
and cumulative effect of change in accounting
principle $0.50 $0.61 $0.80 $0.83 $0.76
Net earnings per share $0.50 $0.55 $0.81 $0.83 $0.76
Weighted average common shares and
common share equivalents outstanding 101,457 101,373 102,078 101,602 100,476
FINANCIAL POSITION
Inventories $1,034,467 $1,004,282 $939,259 $857,640 $793,311
Accounts payable 620,669 639,766 630,723 496,946 370,434
Working capital (a) 365,025 290,696 310,622 289,599 221,613
Total assets (a) 1,940,570 1,926,902 2,014,700 1,707,460 1,570,783
Long-term obligations (c) 623,286 618,423 698,521 696,911 714,696
Shareholders' equity 386,742 336,376 279,538 194,207 104,315
Ratios
Inventory turnover 3.0x 3.2x 3.2x 3.4x 3.3x
Current ratio 1.4x 1.3x 1.3x 1.4x 1.3x
Long-term obligations to total capitalization 61.7% 64.8% 71.4% 78.2% 87.3%
OTHER INFORMATION
Total net sales increase (decrease) (0.8%) 6.2% 2.7% 9.2% (1.0%)
Comparable store net sales increase (decrease) (d) (3.3%) 1.3% 0.3% 5.2% (4.8%)
Number of stores 409 406 391 371 359
EBITDA DATA
EBITDA (e) $224,816 $242,495 $280,075 $300,033 $299,183
EBITDA to net sales 5.6% 6.0% 7.3% 8.1% 8.8%
(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 long-term portion of 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: 1995 - $2,743; 1994 - $4,263; 1993 - $7,884; 1992 - $10,131; 1991 - $9,434.
EBITDA is not intended to represent net earnings, cash flow or any other measure 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> 21
management's discussion and analysis
Results of Operations
Fiscal Year Ended December 31, 1995 Compared to
Fiscal Year Ended January 1, 1995
Net earnings for the year ended December 31, 1995 (fiscal 1995) were $50.3
million, or $0.50 per share, compared to net earnings of $56.2 million, or $0.55
per share, for the year ended January 1, 1995 (fiscal 1994). The fiscal 1994 net
earnings include extraordinary charges ($5.4 million, net of tax benefit, or
$0.06 per share) attributable to the early extinguishment of debt. The decrease
in earnings is primarily the result of lower sales as well as increased
advertising and employment costs. In fiscal 1995, the Company's transition
continued as it assembled a new management team. Successful senior executives
joined the Company to lead stores, marketing, advertising and human resources.
This transition began in fiscal 1994 focusing on customer service as well as all
aspects of merchandising including concentration on profit improvement of core
merchandise lines. Other priorities established by the Company in fiscal 1995
included concentration on marketing and expense control.
For fiscal 1995, net sales were $4.0 billion compared to $4.1 billion for
fiscal 1994, a decrease of $31.9 million or 0.8%. Comparable store sales,
adjusted for the one less selling day in fiscal 1995, decreased 3.3%. The
decrease in comparable store sales was primarily due to decreased hardline sales
resulting from generally weak consumer spending and increased competition from
other retailers, especially in the hardlines categories. Jewelry comparable
store sales remained essentially unchanged from fiscal 1994.
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
42.0% and 42.5% of total net sales in fiscal 1995 and 1994, respectively. Fourth
quarter net sales for fiscal 1995 decreased 2.1% when compared to the fourth
quarter of fiscal 1994. Comparable store sales decreased 3.3% for the fourth
quarter of 1995.
Gross margin, after cost of merchandise sold and buying and occupancy
expenses, increased as a percentage of net sales to 24.3% in fiscal 1995 from
24.0% in fiscal 1994. The improvement in the margin rate was the result of
increased jewelry sales penetration as well as increased margins in both jewelry
and hardlines. This improvement resulted from the Company's initiative to
improve profits on core merchandise lines by promoting higher margin categories.
Selling, general and administrative expenses for fiscal 1995 increased as a
percentage of net sales to 18.8% from 18.1% in fiscal 1994. The increase is a
result of higher advertising paper and postage costs combined with additional
store payroll incurred primarily in the first half of the year to support the
Company's focus on sales and customer service which began in fiscal 1994. The
second half of the year reflected a 1.5% decrease in selling, general and
administrative expenses which was indicative of the Company's focus on
increasing the productivity of the expense structure.
Depreciation and amortization on owned and leased property and equipment
was $61.8 million for fiscal 1995 as compared to $62.5 million for fiscal 1994,
a decrease of 1.2%. This slight reduction reflects the Company's efforts to
reduce the number of store openings in order to concentrate its efforts on
increasing the profitability of existing stores. As a result, the Company's
capital expenditures excluding capitalized leases decreased to $45.8 million in
fiscal 1995, a 44.3% reduction from $82.1 million in fiscal 1994. The Company
opened a net 3 stores in fiscal 1995 as compared to a net 15 stores in fiscal
1994.
Interest expense on debt and capitalized leases increased to $79.1 million
in fiscal 1995 from $74.8 million in fiscal 1994. The increase is primarily
attributable to higher variable interest rates on existing debt and higher
average balances. These rates increased over the prior year levels despite a
lower interest rate environment as the Company's interest rates were favorable
in fiscal 1994 due to locking in of lower rates in early fiscal 1994.
The effective income tax rate decreased to 38% in fiscal 1995 from 39% in
fiscal 1994 as a result of a reduction in the effective rates of state income
taxes.
Fiscal Year Ended January 1, 1995 Compared to
Fiscal Year Ended January 1, 1994
Net earnings for the 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 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 Capital Resources") and a benefit in
fiscal 1993 related to the cumulative effect of adopting a new accounting
standard for income taxes. The decrease in earnings
-11-
<PAGE> 22
was 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.
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% when compared to the fourth quarter of fiscal 1993. Comparable
store sales increased 2.2% in the fourth quarter of 1994.
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 reflected 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% in fiscal 1994 from
24.8% in fiscal 1993. The decreased margin rate resulted from more competitive
pricing in most product categories. This decrease was 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 was 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 was 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 was
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 and Capital Resources").
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.
Liquidity and Capital Resources
Working Capital and Liquidity
The Company's business is highly seasonal with the Company's investment in
inventories reaching a peak prior to the Christmas season. These investment
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 enabled the Company to
repay all short-term borrowings under its Reducing Revolving Credit Facility
prior to the end of each fiscal year.
Working capital increased $74.3 million to $365.0 million at December 31,
1995 as compared to $290.7 million at January 1, 1995. Working capital at
January 1, 1994 was $310.6 million. The current ratio at December 31, 1995 was
1.4 to 1 as compared to 1.3 to 1 in the two previous fiscal years. In addition
to decreased capital expenditures, the increase in working capital during fiscal
1995 is primarily attributable to increases in inventory levels as a result of
the opening of a net 3 stores and decreased accounts payable. The Company's cash
position at year-end allowed for the decrease in accounts payable with a $4.1
million increase in cash as compared to last year. The remaining increase in
working capital resulted as current maturities of long-term debt decreased to
$1.9 million
-12-
<PAGE> 23
in fiscal 1995 from $13.1 million in fiscal 1994 due to scheduled payments and
the refinancing of a $7.8 million mortgage effecting a reclassification from
current maturities to long-term debt.
Short-term borrowings under the Reducing Revolving Credit Facility reached
a maximum of $518.6 million during fiscal 1995 as compared to $527.2 million in
fiscal 1994. The peak of borrowings was lower than the peak in fiscal 1994 due
to the Company's emphasis on improved working capital and inventory management.
The maximum of short-term borrowings increased by $172.9 million to $527.2
million in fiscal 1994 from $354.3 million in fiscal 1993 due primarily to the
refinancing of the Secured Term Loan.
During fiscal 1993, the Company issued $100 million of 8 3/8% Senior Notes
(the "Senior Notes") due 2001, priced at 99.621% to yield 8.45% as well as $300
million of 9% Senior Subordinated Debentures (the "Debentures") due in equal
installments in 2003 and 2004. The proceeds from the Senior Notes were used for
general corporate purposes as well as the prepayment of $27.1 million of certain
high coupon mortgages. The proceeds from the Debentures 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.
During fiscal 1994, the Company completed a $600 million Reducing Revolving
Credit Facility which replaced its Amended and Restated Credit Agreement
originally dated May 20, 1992. The 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 Reducing Revolving Credit Facility provides adequate working
capital financing capability and operating flexibility. The $600 million
Reducing Revolving Credit Facility extended the maturity of the Company's
working capital facility from December 31, 1995 to June 8, 1999, reduced 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), released the
security interests held in connection with the prior facility and provided 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 facility reduces $25 million annually
until reaching $475 million as of December 31, 1998. At December 31, 1995, the
maximum commitment level for the facility was $550 million, and there were no
outstanding borrowings at that time. The Company was in compliance with the
various financial and other covenants contained in the Reducing Revolving Credit
Facility at December 31, 1995.
During fiscal 1995, the Company amended the existing Reducing Revolving
Credit Facility to allow for increased operating flexibility with certain
financial covenants and the potential for an increase in the applicable interest
to LIBOR + 1.25% from LIBOR + 1.00% should the Company's senior unsecured debt
rating decrease to BB- and Ba3 as rated by Standard & Poor's and Moody's,
respectively. During fiscal 1995, the effective interest rate was LIBOR + 1.00%.
Fiscal 1995
Cash provided from operations was $59.9 million for fiscal 1995 as compared
to $83.5 million for fiscal 1994. In addition to the decrease in earnings for
fiscal 1995, the decrease in cash flow from operations in fiscal 1995 is also a
result of a decrease in accrued expenses and the Company's decision to reduce
accounts payable balances at year-end. The cash generated from operations in
fiscal 1995 was used to finance capital expenditures of $45.8 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 3 stores
during the year. The Company believes that its existing debt structure and
additional cash flow from operations will continue to fund future operations and
capital expansion.
Long-term debt excluding current maturities increased in fiscal 1995 as a
result of two new mortgages totaling $6.8 million and the refinancing of a $7.8
million mortgage effecting a reclassification from current maturities to
long-term debt.
-13-
<PAGE> 24
Fiscal 1994
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
increase in fiscal 1993. The cash generated from operations in fiscal 1994,
supplemented with the 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 $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.
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.
Capital Expenditures
Capital expenditures excluding capitalized leases in fiscal 1995 were $45.8
million, as compared to $82.1 million in fiscal 1994 and $115.6 million in
fiscal 1993. Substantially all of the Company's capital expenditures relate to
the opening of new stores. In fiscal 1995, the Company opened 9 stores (6
existing stores were closed) as compared to the opening of 23 stores (8 existing
stores were closed) in fiscal 1994 and 27 stores (7 existing stores were closed)
along with 1 Kids' Central USA store in fiscal 1993.
The Company expects the new store growth rate in fiscal 1996 to be
approximately 3%, some of which will replace existing stores which will be
closed. 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.
Effect of New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This pronouncement is effective for fiscal years beginning after December
15, 1995 and requires the Company to evaluate its long-term assets against
certain impairment indicators. The Company has not yet determined the impact of
adopting this standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployee transactions entered into
after December 15, 1995. Pursuant to the new standard, companies are encouraged,
but are not required, to adopt the fair value method of accounting for employee
stock-based transactions. The Company expects to adopt only the disclosure
provisions relative to SFAS No. 123 and to continue to account for stock
transactions under Accounting Principles Board Opinion No. 25.
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> 25
<TABLE>
consolidated statements of operations
<CAPTION>
For the Fiscal Year Ended
December 31, January 1, January 1,
(In thousands, except per share data) 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $4,018,525 $4,050,381 $3,814,618
Cost of merchandise sold and buying and occupancy expenses 3,042,103 3,079,350 2,868,482
----------- ----------- -----------
Gross margin after cost of merchandise sold and
buying and occupancy expenses 976,422 971,031 946,136
Selling, general and administrative expenses 754,349 732,799 673,945
Depreciation and amortization 61,774 62,535 61,757
----------- ----------- -----------
Earnings before interest and income taxes 160,299 175,697 210,434
Interest expense - debt 69,722 64,531 62,102
Interest expense - capitalized leases 9,407 10,231 11,141
----------- ----------- -----------
Earnings before income taxes 81,170 100,935 137,191
Income taxes 30,845 39,365 54,876
----------- ----------- -----------
Earnings before extraordinary loss and cumulative effect
of change in accounting principle 50,325 61,570 82,315
Extraordinary loss from early extinguishment of debt, net of tax
benefit of $3,462 and $4,982 in fiscal 1994 and 1993, respectively - (5,415) (7,474)
Cumulative effect of change in accounting principle - - 7,742
----------- ----------- -----------
Net earnings $50,325 $56,155 $82,583
=========== =========== ===========
Per common share:
Earnings before extraordinary loss and cumulative effect
of change in accounting principle $0.50 $0.61 $0.80
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 $0.50 $0.55 $0.81
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-15-
</TABLE>
<PAGE> 26
<TABLE>
consolidated balance sheets
<CAPTION>
December 31, January 1,
(In thousands, except per share data) 1995 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 177,314 $ 173,264
Accounts receivable, net of allowance of
$2,763 and $3,217, respectively 53,621 55,134
Inventories 1,034,467 1,004,282
Prepaid expenses 25,277 27,778
---------- ----------
TOTAL CURRENT ASSETS 1,290,679 1,260,458
Net property and equipment - owned 583,290 594,772
Net property and equipment - capitalized leases 44,823 51,932
Other assets and deferred charges 21,778 19,740
---------- ----------
TOTAL ASSETS $1,940,570 $1,926,902
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 620,669 $ 639,766
Accrued expenses 193,016 205,709
State and local sales taxes 61,224 61,668
Income taxes 29,209 39,364
Current maturities of long-term debt 1,936 13,098
Current maturities of capitalized lease obligations 7,885 7,871
Deferred income taxes 11,715 2,286
---------- ----------
TOTAL CURRENT LIABILITIES 925,654 969,762
Long-term debt 557,392 544,808
Capitalized lease obligations 65,894 73,615
Deferred income taxes 4,888 2,341
---------- ----------
TOTAL LIABILITIES 1,553,828 1,590,526
---------- ----------
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 99,686 and 99,818 shares, respectively 49,843 49,909
Additional paid-in capital 5,483 6,115
Deferred compensation (2,050) (2,789)
Retained earnings 333,466 283,141
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 386,742 336,376
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,940,570 $1,926,902
========== ==========
- ------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-16-
</TABLE>
<PAGE> 27
<TABLE>
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 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 / forfeiture 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 / forfeiture of restricted stock (142) (71) (882) 953 - -
-------- ----------- --------- ---------- ------------ -----------
Balance January 1, 1995 99,818 49,909 6,115 (2,789) 283,141 336,376
Net earnings - - - - 50,325 50,325
Exercise of stock options, net 48 24 77 - - 101
Shares issued under restricted stock awards 48 24 190 (214) - -
Amortization of deferred compensation - - - 925 - 925
Cancellation / forfeiture of restricted stock (228) (114) (899) 28 - (985)
-------- ----------- --------- ---------- ------------ -----------
Balance December 31, 1995 99,686 $ 49,843 $ 5,483 $ (2,050) $ 333,466 $ 386,742
======== =========== ========= ========== ============ ===========
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-17-
</TABLE>
<PAGE> 28
<TABLE>
consolidated statements of cash flows
<CAPTION>
For the Fiscal Year Ended
December 31, January 1, January 1,
(In thousands) 1995 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 50,325 $ 56,155 $ 82,583
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization (a) 64,569 66,850 69,711
Deferred income taxes 11,976 3,659 (8,251)
(Gain) loss on sale of property and equipment 166 (1,107) 1,509
Write-off of bond discount and debt issue costs - 6,830 5,094
Changes in assets and liabilities (net of disposition) (b):
Accounts receivable 1,513 (2,120) 297
Inventories (30,185) (65,023) (81,619)
Prepaid expenses 2,501 2,120 (9,444)
Accounts payable (19,097) 9,043 133,777
Accrued expenses (11,690) 22,615 40,426
Income taxes (10,155) (15,550) 2,354
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,923 83,472 236,437
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (45,763) (82,108) (115,645)
Proceeds from sale of property and equipment 1,554 7,269 644
Other, net (3,569) (327) (2,033)
-------------- -------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (47,778) (75,166) (117,034)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 518,600 527,200 354,300
Repayment of short-term borrowings (518,600) (527,200) (354,300)
Proceeds from long-term debt 6,800 3,200 399,621
Repayment of long-term debt (5,430) (153,849) (341,219)
Repayment of capitalized lease obligations (8,294) (8,133) (9,953)
Debt issuance costs (287) (1,771) (10,098)
Exercise of stock options (forfeiture of restricted stock), net (884) 419 2,021
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (8,095) (160,134) 40,372
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,050 (151,828) 159,775
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 173,264 325,092 165,317
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 177,314 $ 173,264 $ 325,092
============== ============== ==============
(a) Includes other amortization classified as selling, general and administrative expenses of $2,743
for fiscal 1995, $4,263 for fiscal 1994, $7,884 for fiscal 1993 and $52, $52 and $70 of discount
amortization classified as interest expense in fiscal 1995, 1994 and 1993, respectively.
(b) Includes disposition costs previously accrued which were associated with the closing of various store locations.
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-18-
</TABLE>
<PAGE> 29
notes to consolidated financial statements
for the three years ended december 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: Service Merchandise Company, Inc., with 409 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. Purchases typically take place in a
Service Merchandise store. The customer has the opportunity to pre-select
merchandise from the Company's annual catalog which is distributed in early
fall. The Company is engaged in a highly competitive business and competes with
most nationally known jewelry and hardline retail merchandisers, including
department, general merchandise, specialty and discount stores.
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 this reporting method, the Company's
fiscal year ends on the Sunday closest to the end of the calendar year. The
effect of the change to this reporting method was immaterial to the
comparability of the Company's financial statements. There were 52 weeks in the
fiscal years ended December 31, 1995 (fiscal 1995), January 1, 1995 (fiscal
1994) and January 1, 1994 (fiscal 1993).
Use of estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
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 5.8% and
6.0% as of December 31, 1995 and January 1, 1995, respectively.
Accounts receivable: Accounts receivable include trade accounts, vendor
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.
Store opening costs: Costs of opening new stores are charged to operations
as incurred.
Income taxes: The Company reports income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." 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 include outstanding stock options and restricted shares
(See Note G).
Reclassifications: Certain prior period amounts have been reclassified for
comparative purposes.
-19-
<PAGE> 30
B.PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, January 1,
(In thousands) 1995 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Owned assets:
Land $ 121,932 $ 119,555
Buildings 445,782 433,587
Furniture, fixtures and equipment 369,689 351,410
Leasehold improvements 122,838 119,234
Construction in progress 7,406 6,631
Other 21,072 20,944
---------- ----------
1,088,719 1,051,361
Less: Accumulated depreciation and amortization (505,429) (456,589)
---------- ----------
Owned assets, net $ 583,290 $ 594,772
========== ==========
Capitalized leases:
Real estate $ 113,899 $ 116,049
Furniture, fixtures and equipment 12,503 11,916
---------- ----------
126,402 127,965
Less: Accumulated amortization (81,579) (76,033)
---------- ----------
Capitalized leases, net $ 44,823 $ 51,932
========== ==========
---------------------------------------------------------------------------------------------------------
</TABLE>
C.REDUCING REVOLVING CREDIT FACILITY
On June 8, 1994, the Company completed a $600 million Reducing Revolving
Credit Facility which replaced its existing $475 million Revolving Credit
Facility and $122 million outstanding under the Secured Term Loan. The $600
million Reducing Revolving Credit Facility extended the maturity of the
Company's working capital facility from December 31, 1995 to June 8, 1999,
reduced 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),
released the security interests held in connection with the prior facility and
provided 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 facility reduces $25
million annually until reaching $475 million as of December 31, 1998. As of
December 31, 1995, the maximum commitment level was $550 million.
On April 13, 1995, the Company amended the existing Reducing Revolving
Credit Facility to allow for increased operating flexibility with certain
financial covenants and the potential for an increase in the applicable interest
rate to LIBOR + 1.25% from LIBOR + 1.00% should the Company's senior unsecured
debt rating decrease to BB- and Ba3 as rated by Standard & Poor's and Moody's,
respectively. During fiscal 1995, the effective interest rate was LIBOR + 1.00%.
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 approximately $145.6 million as of December 31, 1995; (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. 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 December 31, 1995 and January 1, 1995, the Company was in
compliance with these covenants and there were no borrowings outstanding under
this Credit Facility.
-20-
<PAGE> 31
D.LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, January 1,
(In thousands) 1995 1995
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
9% Senior Subordinated Debentures, payable in equal
installments in 2003 and 2004 $ 300,000 $ 300,000
8 3/8% Senior Notes due 2001, net of unamortized
discount of $265 and $317, respectively 99,735 99,683
First Mortgage Secured Notes, variable interest rate
at December 31, 1995 of 6.7%, payable
in three equal installments from 1998 to 2000 90,000 90,000
Mortgage notes payable, weighted average fixed interest
rate at December 31, 1995 of 8.8%, payable in varying
amounts to 2022 29,808 27,664
Industrial Revenue Bonds, fixed and variable interest
rates, weighted average interest rate at December 31, 1995
of 4.7%, payable in varying amounts to 2024 39,785 40,485
Other - 74
--------- ---------
559,328 557,906
Less: Current maturities (1,936) (13,098)
--------- ---------
Long-term debt $ 557,392 $ 544,808
========= =========
----------------------------------------------------------------------------------------------------------------
</TABLE>
Long-term debt increased in fiscal 1995 primarily as a result of two new
mortgages totaling $6.8 million and the refinancing of a $7.8 million mortgage
effecting a reclassification from current maturities to long-term debt. These
increases were offset by scheduled payments.
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 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 semiannually in June and December. The Debentures are
subordinated to all senior indebtedness of the Company, as defined, and are
callable, at the Company's option, beginning December 1997 at a premium of
104.5% which decreases annually until reaching par in December 2000.
-21-
<PAGE> 32
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 1994. Interest on the
Notes is payable semiannually in January and July.
Long-term debt maturities are as follows:
<TABLE>
<CAPTION>
(In thousands)
Fiscal Year
---------------------------------------
<S> <C>
1996 $ 1,936
1997 4,585
1998 33,700
1999 35,982
2000 31,822
Thereafter 451,303
--------
Total $559,328
========
----------------------------------------
</TABLE>
Mortgages and Industrial Revenue Bonds are collateralized by property and
equipment having a net book value of approximately $98.5 million and $27.2
million, respectively, at December 31, 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 December 31, 1995, the Company had an
11.5%, three month LIBOR interest rate cap agreement on $45 million of its
variable interest rate First Mortgage Secured 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 related to debt and capitalized leases were
$79.6 million, $73.6 million and $72.2 million for fiscal 1995, 1994 and 1993,
respectively.
-22-
<PAGE> 33
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 December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Capitalized Lease
Obligations
----------------------------------
(In thousands) Real Furniture, Fixtures Operating
Fiscal Year Estate and Equipment Leases
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 14,064 $ 2,892 $ 73,198
1997 13,957 997 66,635
1998 13,758 107 61,197
1999 12,759 - 57,685
2000 12,109 - 55,166
Thereafter 57,077 - 428,305
--------- -------- ---------
Total minimum payments 123,724 3,996 $ 742,186
=========
Less: Imputed interest and executory costs (53,729) (212)
--------- --------
Present value of net minimum
lease payments 69,995 3,784
Less: Current maturities (5,191) (2,694)
--------- --------
Capitalized lease obligations $ 64,804 $ 1,090
========= ========
---------------------------------------------------------------------------------------------------
</TABLE>
Minimum sublease rentals, not deducted from above, to be received in the
future under noncancellable operating subleases, aggregated $78.5 million at
December 31, 1995.
Capitalized real estate and equipment leases are at effective rates of
approximately 12.4% and 5.9%, respectively, as of December 31, 1995. Additions
to capitalized leases were the following amounts: fiscal 1995 - $0.6 million;
fiscal 1994 - $0; fiscal 1993 - $1.1 million.
Rental expense consists of the following:
<TABLE>
<CAPTION>
Fiscal Year
(In thousands) 1995 1994 1993
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $81,926 $75,193 $66,807
Contingent rentals 1,379 1,898 1,833
Sublease rental income (8,788) (9,557) (9,034)
------- ------- -------
Net rental expense $74,517 $67,534 $59,606
======= ======= =======
-------------------------------------------------------------------------------------------------
</TABLE>
-23-
<PAGE> 34
F.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments
as of December 31, 1995 and January 1, 1995 is made in accordance with SFAS No.
107, "Disclosures about Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company using available market
information as of December 31, 1995 and January 1, 1995 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>
December 31, 1995 January 1, 1995
----------------------- ----------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $177,314 $177,314 $173,264 $173,264
Liabilities:
9% Senior Subordinated Debentures 300,000 246,000 300,000 232,500
8 3/8% Senior Notes, net of discount 99,735 96,245 99,683 85,727
Mortgages 119,808 111,601 117,664 106,932
Industrial Revenue Bonds 39,785 39,785 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 29,
1995 and December 30, 1994.
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 $0.2 million and $0.3
million at December 31, 1995 and January 1, 1995, 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 a de minimus amount at December 31,
1995 as compared to $0.1 million at January 1, 1995. Fair values are 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 $31.7 million and $44.7 million at December
31, 1995 and January 1, 1995, respectively, and a fair value of $0.1 million at
December 31, 1995 and January 1, 1995, respectively. The standby letters of
credit have contractual amounts totaling $49.1 million and $51.8 million at
December 31, 1995 and January 1, 1995, respectively, and fair values of $0.4
million and $0.7 million at December 31, 1995 and January 1, 1995, 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> 35
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 for stock option grants as the value at the date of
grant equals the fair market value in accordance with Accounting Principles
Board Opinion No. 25. 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 fiscal 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.
During fiscal 1995, the Company amended the Amended and Restated 1989
Employee Stock Incentive Plan (the "Stock Incentive Plan") to increase the
number of shares issuable, extend the term during which awards may be made under
the Stock Incentive Plan and to limit the amount of stock-based awards that may
be granted to any single officer or key employee under that plan. At December
31, 1995, there were approximately 4.8 million shares of unissued common stock
reserved for issuance under the Company's various stock incentive plans.
Stock options: Stock option activity for these plans during the last three
fiscal years was as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) Incentive Non-Qualified
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance 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
Granted at $4.69 to $7.13 per share - 2,091
Exercised at $1.85 to $10.13 per share (13) (35)
Cancelled (6) (665)
---- -----
Balance December 31, 1995 178 5,343
==== =====
------------------------------------------------------------------------------------------------------
</TABLE>
Outstanding stock options at December 31, 1995 have exercise prices ranging
from $1.85 to $5.77 per share for incentive stock options and $2.20 to $10.38
per share for non-qualified stock options. Of the options outstanding at
December 31, 1995, approximately 2.1 million were available for exercise.
-25-
<PAGE> 36
G.STOCK OPTIONS AND AWARDS (continued)
Restricted stock awards: Periodically, the Company issues shares of
restricted stock under provisions of the Stock Incentive Plan. A total of
515,125 restricted shares remained outstanding at December 31, 1995. These
remaining shares will vest at various rates through the year 2000. During fiscal
1995, a total of 507,425 restricted shares vested, a majority of which were
granted in 1989.
During the vesting periods, 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 January 2, 1993 1,000
Cancelled / forfeited (96)
Vested (2)
Granted 1
-----
Balance January 1, 1994 903
Cancelled / forfeited (142)
Vested (39)
Granted 480
-----
Balance January 1, 1995 1,202
Cancelled / forfeited (228)
Vested (507)
Granted 48
-----
Balance December 31, 1995 515
=====
-----------------------------------------------------------------
</TABLE>
Deferred compensation of $0.2 million was recorded during fiscal 1995 in
connection with restricted stock awards. Deferred compensation amortization of
$0.9 million, $0.3 million and $0.7 million was charged to operations in fiscal
1995, 1994 and 1993, 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. During
fiscal 1995, the Rights Agreement was amended to lower the threshold at which
the rights become exercisable. There are 400,000 shares of Series A Junior
Preferred Stock authorized, none of which have been issued as of December 31,
1995.
Also authorized are 4.6 million shares of $1 par value preferred stock,
none of which have been issued as of December 31, 1995.
-26-
<PAGE> 37
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 1995, 1994 and 1993, the Company made contributions
of approximately $8.8 million, $8.9 million and $8.4 million, respectively, to
the pension plan.
The following table sets forth the funded status of the pension plan and
net pension expense:
<TABLE>
<CAPTION>
December 31, January 1,
(In thousands) 1995 1995
-------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation (includes
$55,285 and $47,279 of vested benefit
obligation, respectively) $ 57,269 $ 49,501
========== =========
Projected benefit obligation $ 62,448 $ 53,412
Plan assets at fair value, primarily
listed corporate stocks and bonds 61,496 46,678
---------- ---------
Projected benefit obligation in
excess of plan assets 952 6,734
Unrecognized net loss (9,855) (13,342)
Unrecognized transitional liability, net of amortization 3,035 3,414
Unrecognized prior service cost 3,411 4,031
Additional minimum liability - 1,985
---------- ---------
Accrued (prepaid) pension liability $ (2,457) $ 2,822
========== =========
Service cost $ 6,660 $ 6,748
Interest on projected benefit obligation 4,197 3,944
Actual return on plan assets (13,550) 1,710
Net amortization and deferrals 8,170 (7,170)
---------- ---------
Net pension expense $ 5,477 $ 5,232
========== =========
-------------------------------------------------------------------------------------------
Net pension expense was $5.8 million for fiscal 1993.
</TABLE>
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows: weighted average discount rates
for fiscal 1995 and 1994 were 7.3% and 8.0%, respectively; expected long-term
rate of return on pension plan assets for both fiscal 1995 and 1994 was 9.5%;
and rate of increase in future compensation levels for both fiscal 1995 and 1994
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 $2.1 million, $3.6 million and $3.6
million for fiscal 1995, 1994 and 1993, respectively, as the Company match
percentage equaled 30% in fiscal 1995 as compared to 50% in both fiscal 1994 and
1993.
-27-
<PAGE> 38
K.INCOME TAXES
On January 3, 1993, the Company adopted SFAS No. 109 which resulted in a
benefit of $7.7 million. This benefit was reflected in net income for the first
quarter of fiscal 1993 as a cumulative effect of change in accounting principle.
In accordance with SFAS No. 109, deferred income taxes represent the net tax
effects of temporary differences between financial reporting and income tax
reporting of assets and liabilities.
Deferred income tax assets and liabilities at December 31, 1995 and January
1, 1995 are comprised of the following:
<TABLE>
<CAPTION>
December 31, January 1,
(In thousands) 1995 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Financial accruals $15,356 $21,081
Capitalized leases 11,974 12,077
Deferred compensation - 1,181
Other 4,261 6,491
------- -------
Deferred income tax asset 31,591 40,830
------- -------
Deferred income tax liabilities:
Depreciation 39,662 38,924
Layaway sales 4,153 3,733
Deferred compensation 447 -
Pension liability 2,602 728
Other 1,330 2,072
------- -------
Deferred income tax liability 48,194 45,457
------- -------
Net deferred tax income liability $16,603 $ 4,627
======= =======
Net current deferred income tax liability $11,715 $ 2,286
Net long-term deferred income tax liability 4,888 2,341
------- -------
Net deferred income tax liability $16,603 $ 4,627
======= =======
---------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes, net of tax benefit of $3.5 million 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) 1995 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ 19,185 $ 28,159 $ 42,802
State and local 1,050 4,813 7,021
-------- -------- --------
20,235 32,972 49,823
Deferred income taxes 10,610 2,931 71
-------- -------- --------
Total income taxes $ 30,845 $ 35,903 $ 49,894
======== ======== ========
-----------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year
1995 1994 1993
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal benefit 2.0% 3.4% 3.7%
Other 1.0% 0.6% 1.3%
---- ---- ----
Effective tax rate 38.0% 39.0% 40.0%
==== ==== ====
--------------------------------------------------------------------------------------------------
</TABLE>
Cash payments for income taxes were $28.7 million, $47.4 million and $48.0
million for fiscal 1995, 1994 and 1993, respectively.
-28-
<PAGE> 39
L.OTHER COMMITMENTS AND CONTINGENCIES
In November 1995, a Florida state court returned a verdict of $13.8 million
against the Company based on an allegation that the Company interfered with a
competitor's right to lease property. The Company intends to appeal the decision
as it believes that the facts and law presented at the trial do not support the
verdict. It is the opinion of management based on discussions with legal counsel
that it is reasonably possible that 1) the Company will be successful in its
appeal and 2) the outcome will not have a material effect on the Company's
results of operations or financial position.
The Company was also involved in other litigation, investigations of a
routine nature and various legal matters during fiscal 1995 which are being
defended and handled in the ordinary course of business. While the ultimate
results of these matters described above cannot be determined or predicted,
management does not believe that they will have a material adverse effect on the
Company's results of operations or financial position.
M.QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The Company has historically incurred a net loss throughout the first three
quarters of the year due to the seasonality of its business. The results of
operations for the first three quarters are not necessarily indicative of the
operating results for the entire fiscal year.
<TABLE>
<CAPTION>
(In thousands, except per share data)
April 2, July 2, October 1, December 31,
THREE PERIODS ENDED (See Note A): 1995 1995 1995 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 737,129 $ 864,875 $ 730,031 $1,686,490
========= ========= ========= ==========
Gross margin (a) $ 169,284 $ 214,304 $ 176,163 $ 416,671
========= ========= ========= ==========
Earnings (loss) before
extraordinary item $ (23,009) $ 849 $ (8,540) $ 81,025
Extraordinary loss from early
extinguishment of debt, net of tax
benefit - - - -
--------- --------- --------- ----------
Net earnings (loss) $ (23,009) $ 849 $ (8,540) $ 81,025
========= ========= ========= ==========
Per common share:
Earnings (loss) before
extraordinary item $ (0.23) $ 0.01 $ (0.08) $ 0.80
Extraordinary loss from early
extinguishment of debt, net of tax
benefit - - - -
--------- --------- --------- ----------
Net earnings (loss) per
common share $ (0.23) $ 0.01 $ (0.08) $ 0.80
========= ========= ========= ==========
--------------------------------------------------------------------------------------------------------
(a) Gross margin after cost of merchandise sold and buying and occupancy expenses.
</TABLE>
-29-
<PAGE> 40
M.QUARTERLY FINANCIAL INFORMATION - UNAUDITED (continued)
<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 item $ (12,821) $ (1,274) $ (10,329) $ 85,994
Extraordinary loss from early
extinguishment of debt, net of tax
benefit (1,265) (4,061) - (89)
----------- ----------- ----------- -----------
Net earnings (loss) $ (14,086) $ (5,335) $ (10,329) $ 85,905
=========== =========== =========== ===========
Per common share:
Earnings (loss) before
extraordinary item $ (0.13) $ (0.01) $ (0.10) $ 0.85
Extraordinary loss from early
extinguishment of debt, net of tax
benefit (0.01) (0.04) - -
----------- ----------- ----------- -----------
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.
</TABLE>
-30-
<PAGE> 41
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>
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 December 31, 1995 and January
1, 1995 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 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 December 31, 1995 and January 1, 1995, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 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 25, 1996
Nashville, Tennessee
-31-
<PAGE> 42
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of the Registrant as of December 31,
1995 all of which are wholly-owned:
STATE OF
PARENT INCORPORATION
- ------ -------------
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. Illinois
Service Merchandise Co. No. 93, Inc. Tennessee
Service Merchandise Co. No. 30, Inc. Tennessee
Service Merchandise Co. No. 99, Inc. Nevada
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
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 Hamphshire
H. J. Wilson Co., Inc. Louisiana
Service Merchandise Co. of New York, Inc. Tennessee
Travel Management Consultants, Inc. Tennessee
A. F. S. Marketing Services, Inc. Tennessee
Service Merchandise Financial Co., Inc. Tennessee
Service Merchandise Indiana Partners Indiana
Service Merchandise of Tennessee, Limited Partnership Delaware
Service Merchandise of Texas, Limited Partnership Delaware
<PAGE> 43
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. 33-60201, 33-7079, 33-11340,
33-30983 and 33-50185 on Form S-8 of our report dated January 25, 1996
accompanying the consolidated financial statements of Service Merchandise
Company, Inc. for the fiscal year ended December 31, 1995.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 25, 1996
<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 December 31, 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> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 JAN-01-1995
<PERIOD-START> JAN-02-1995 JAN-02-1994
<PERIOD-END> DEC-31-1995 JAN-01-1995
<CASH> 177,314 173,264
<SECURITIES> 0 0
<RECEIVABLES> 56,384 58,351
<ALLOWANCES> 2,763 3,217
<INVENTORY> 1,034,467 1,004,282
<CURRENT-ASSETS> 1,290,679 1,260,458
<PP&E> 1,215,121 1,179,326
<DEPRECIATION> 587,008 532,622
<TOTAL-ASSETS> 1,940,570 1,926,902
<CURRENT-LIABILITIES> 925,654 969,762<F1>
<BONDS> 623,286 618,423
0 0
0 0
<COMMON> 99,686<F2> 99,818<F2>
<OTHER-SE> 336,899 286,467
<TOTAL-LIABILITY-AND-EQUITY> 1,940,570 1,926,902
<SALES> 4,018,525 4,050,381
<TOTAL-REVENUES> 4,108,525 4,050,381
<CGS> 3,042,103 3,079,350
<TOTAL-COSTS> 3,042,103 3,079,350
<OTHER-EXPENSES> 816,123<F3> 795,334<F3>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 79,129 74,762
<INCOME-PRETAX> 81,170 100,935
<INCOME-TAX> 30,845 39,365
<INCOME-CONTINUING> 50,325 61,570
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (5,415)
<CHANGES> 0 0
<NET-INCOME> 50,325 56,155
<EPS-PRIMARY> 0.50 0.55
<EPS-DILUTED> 0.50 0.55
<FN>
<F1>Certain prior period amounts have been reclassified for comparative purposes.
<F2>Amount represents the number of shares of $0.50 par value common stock issued
and outstanding.
<F3>Amount includes I) depreciation and amortization and II) selling, general and
administrative expenses.
</FN>
</TABLE>
