<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 (No Fee Required) for the fiscal year ended December 29, 1996
or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 (No Fee Required) for the transition period
from __________ to ________.
Commission File No. 1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0816060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 24600, Nashville, TN (mailing address) 37202-4600
7100 Service Merchandise Drive, Brentwood, TN 37027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (615) 660-6000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Exchange on
Title of Class Which Registered
- -------------- ----------------
<S> <C>
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
-----
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on February 28, 1997 (based upon the average of the high and low
sales prices of such stock as of such date) was $335,121,582. This calculation
assumes that all shares of Common Stock beneficially held by officers and
members of the Board of Directors of the Registrant are owned by "affiliates," a
status which each of the officers and directors individually disclaims.
<TABLE>
<CAPTION>
Class Outstanding at February 28, 1997
----- --------------------------------
<S> <C>
Common Stock ($.50 Par Value) 99,757,757
<CAPTION>
Parts in Form 10-K Where Documents
Documents Incorporated by Reference Are Incorporated by Reference
- ----------------------------------- -----------------------------
<S> <C>
Portions of Registrant's Proxy Statement dated March 11, 1997 Part III
Portions of Registrant's Annual Report to Shareholders for the
fiscal year ended December 29, 1996 Parts II and IV
</TABLE>
Exhibit Index located on Pages 13-18
<PAGE> 2
TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Page
No.
----
<S> <C> <C>
PART I ......................................................................... 3
Item 1. Business............................................................ 3-5
Item 2. Properties.......................................................... 6-8
Item 3. Legal Proceedings................................................... 9
Item 4. Submission of Matters to a Vote of Security-Holders................. 9
Executive Officers of the Registrant................................ 9-10
PART II ....................................................................... 10
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters......................................... 10-11
Item 6. Selected Financial Data Page 4 of the Registrant's 1996 Annual Report to
Shareholders for the year ended December 29, 1996
which is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Pages 5 through 8 of the Registrant's 1996 Annual
Financial Condition and Results of Report to Shareholders for the year ended
Operations December 29, 1996 which are incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Pages 9 through 27 of the Registrant's 1996 Annual
Data Report to Shareholders for the year ended
December 29, 1996 which are incorporated herein by
reference.
Item 9. Changes in and Disagreements With
Independent Auditors on Accounting
and Financial Disclosure............................................ 11
PART III ....................................................................... 12
Item 10. Directors and Executive Officers of the Pages 2 through 5 of the Registrant's Proxy
Registrant Statement dated March 11, 1997 which are
incorporated herein by reference.
Item 11. Executive Compensation Pages 8 through 17 of the Registrant's Proxy
Statement dated March 11, 1997 which are
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Pages 6 and 7 of the Registrant's Proxy Statement
Owners and Management dated March 11, 1997 which are incorporated
herein by reference.
Item 13. Certain Relationships and Related Page 19 of the Registrant's Proxy Statement dated
Transactions March 11, 1997 which is incorporated herein by
reference.
PART IV ........................................................................ 13
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K ................................................ 13-18
SIGNATURES ..................................................................... 19
</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,
Inc. as a separate corporate entity and does not refer to the subsidiaries. The
information included in this 10-K, unless indicated to be given as of a
specified date or for a specified period, is given as of the date of this
report, which is December 29, 1996.
PART I
Item 1. Business
Service Merchandise, with 400 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 for the kitchen
and tabletop, ready-to-assemble furniture, small appliances, giftware,
silverware, cameras, luggage, radios, televisions, and other home electronics,
patio, 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 the early fall each year. The fall catalog is supplemented by a
spring catalog, a gift registry guide, and a combination of direct mail flyers
and newspaper inserts distributed approximately every two weeks 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 once a year, with selling prices of merchandise adjusted
periodically through the direct mail flyers and newspaper inserts to reflect
changes in merchandise costs or to provide clearance or sales pricing. Although
merchandise is advertised in catalogs, flyers and newspaper inserts, purchases
usually take place in a Company store where the customer has physical access to
the merchandise. Customers may also purchase goods through mail order, telephone
order or via the internet, although these represent 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 items to the customers and
accept payment. In the self-service department, customers select merchandise
from a shelf or display and take it to a check-out counter to finalize the
purchase. In the remainder of the store, a sample of the merchandise is
displayed and order forms are available at various locations. After a customer
completes a merchandise order form, a store cashier is paid and merchandise is
delivered to a pick-up station. The general showroom format permits presentation
of a broad assortment of merchandise with limited inventory investment, since
only one sample 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 a central information system at the Company's home office. In
addition, by use of the computer, the customers may be provided with alternate
suggestion items, back-order information, on-line mail orders, 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. The
raw data feeds the Company's inventory replenishment system which tracks
inventory positions, sales data and sales forecasts and generates either
suggested transfers from distribution centers or suggested purchase order
quantities. The inventory system also records all sales information to produce
daily margin reports, complete with historical comparisons.
The Company's information systems enhance the effectiveness of the catalog
mailings and advertising 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 the Company 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 41.5% of total net sales in fiscal 1996.
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's 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 1,700 suppliers, most of
which are manufacturers. In fiscal 1996, the largest vendor accounted for
approximately 4.8% of total disbursements for inventory items. The Company
believes it would experience no difficulty in obtaining quality merchandise from
alternate sources. Most merchandise is shipped to the Company's regional
distribution centers 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 $287 million in fiscal 1996 (compared to $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 contract fabricators 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 29, 1996, the number of active employees varied from
approximately 27,500 to approximately 46,800 including both permanent and
temporary employees. As of December 29, 1996, the Company had 26,261 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 liquidity, capital resources and results of operations may be
affected from time to time by a number of factors and risks, including without
limitation:
(a) trends in the economy as a whole, which may affect 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 which may affect the
nature and viability of the Company's business strategy;
(c) availability and cost of labor employed and goods purchased by
the Company;
(d) costs associated with governmental regulation and legislation;
(e) real estate occupancy and development costs, including the
substantial fixed investment costs associated with opening,
maintaining or closing a Company store;
(f) advertising costs, including the cost of paper and postage;
(g) availability, costs and terms of financing, including the risk
of rising interest rates;
(h) the Company's use of substantial financial leverage and the
potential impact of such leverage on the Company's ability to
execute its operating strategies, to withstand significant
economic downturns and to repay its indebtedness;
(i) costs associated with efforts to improve customer service and
maintain an appropriate level of in-stock merchandise;
(j) the seasonal nature of the Company's business and the ability
of the Company to predict consumer demand as a whole, as well
as demand for specific goods;
(k) 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;
(l) costs associated with the shipping, handling and control of
inventory; and
(m) potential adverse publicity.
This report includes, and other reports and statements issued on behalf of the
Company may include, certain forward-looking information that is based upon
management's beliefs as well as on assumptions made by and data currently
available to management. This information, which has been or in the future may
be, included in reliance on the "safe harbor" provisions of the Private
Litigation Reform Act of 1995, is subject to a number of risks and
uncertainties, including but not limited to the factors identified above. Actual
results may differ materially from those anticipated in any such forward-looking
statements.
-5-
<PAGE> 6
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 29, 1996. 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:
<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 29, 1996, the Company operated 400 retail stores (typically
consisting of approximately 50,000 square feet) as follows:
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Owned land and building 105
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 265
Stores which have been subleased (17)
---
Total 400
===
</TABLE>
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<PAGE> 7
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 1996 Annual Report to Shareholders, for information concerning
the Company's lease commitments.
For a listing of store locations, see page 8. 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.
-7-
<PAGE> 8
Item 2. Properties (continued)
SERVICE MERCHANDISE COMPANY, INC.
STORE LOCATIONS
<TABLE>
<S> <C> <C> <C> <C>
ALABAMA (8) GEORGIA (14) MARYLAND (6) NEW YORK (23) SOUTH CAROLINA (6)
BIRMINGHAM (2) ATLANTA (10) BALTIMORE ALBANY CHARLESTON
HUNTSVILLE (2) AUGUSTA COLUMBIA BINGHAMTON COLUMBIA (2)
MOBILE COLUMBUS FORESTVILLE BUFFALO (2) GREENVILLE
MONTGOMERY (2) MACON FREDERICK EAST MEADOW GREENWOOD
TUSCALOOSA SAVANNAH SALISBURY HARTSDALE SUMTER
ARIZONA (4) ILLINOIS (24) WALDORF HUNTINGTON TENNESSEE (16)
GLENDALE CHICAGO (24) MASSACHUSETTS (11) LAKE GROVE CHATTANOOGA (2)
MESA (2) INDIANA (15) AUBURN LAWRENCE JACKSON
SCOTTSDALE BLOOMINGTON BOSTON (7) MASSAPEQUA KINGSPORT
ARKANSAS (4) CLARKSVILLE HOLYOKE MIDDLETOWN KNOXVILLE (2)
FAYETTEVILLE EVANSVILLE LANESBORO/PITTSFIELD NANUET MEMPHIS (5)
FORT SMITH FORT WAYNE (2) SWANSEA PATCHOQUE NASHVILLE (5)
LITTLE ROCK (2) GRIFFITH MICHIGAN (14) PLATTSBURGH TEXAS (48)
CALIFORNIA (20) INDIANAPOLIS (4) ANN ARBOR POUGHKEEPSIE ABILENE
LOS ANGELES (9) KOKOMO DETROIT (9) QUEENS AMARILLO
MONTEBELLO LAFAYETTE FLINT ROCHESTER (2) ARLINGTON (2)
MURRIETA MERRILLVILLE LANSING (2) SARATOGA SPRINGS AUSTIN
SALINAS SOUTH BEND WATERFORD SYRACUSE (2) BEAUMONT
SAN FRANCISCO/OAKLAND (6) TERRE HAUTE MINNESOTA (1) UTICA COLLEGE STATION
SAN JOSE (2) IOWA (1) MINNEAPOLIS YORKTOWN HEIGHTS CORPUS CHRISTI
COLORADO (6) DES MOINES MISSISSIPPI (6) NORTH CAROLINA (9) DALLAS (8)
COLORADO SPRINGS KANSAS (3) GAUTIER CHARLOTTE (3) DENTON
DENVER (4) OVERLAND PARK GULFPORT DURHAM EL PASO (2)
PUEBLO WICHITA (2) HATTIESBURG FAYETTEVILLE FT. WORTH (3)
CONNECTICUT (8) KENTUCKY (7) JACKSON (2) GASTONIA HARLINGEN
DANBURY FLORENCE MERIDIAN GREENSBORO HOUSTON (11)
DERBY LEXINGTON MISSOURI (7) RALEIGH (2) LAKE JACKSON
ENFIELD LOUISVILLE (3) INDEPENDENCE OHIO (16) LAREDO
HARTFORD (3) OWENSBORO SPRINGFIELD AKRON LONGVIEW
ORANGE PADUCAH ST. LOUIS (5) CINCINNATI (4) LUBBOCK
WATERBURY LOUISIANA (14) NEBRASKA (2) COLUMBUS (4) MCALLEN (2)
DELAWARE (3) ALEXANDRIA LINCOLN LIMA MIDLAND
DOVER BATON ROUGE (2) OMAHA MANSFIELD SAN ANGELO
WILMINGTON (2) HOUMA NEVADA (3) SANDUSKY SAN ANTONIO (3)
FLORIDA (50) LAFAYETTE (2) LAS VEGAS (2) SPRINGFIELD TEMPLE
BOCA RATON LAKE CHARLES RENO TOLEDO (2) TYLER
BOYNTON BEACH MONROE NEW HAMPSHIRE (5) YOUNGSTOWN WACO
CORAL SPRINGS NEW ORLEANS (3) DOVER OKLAHOMA (7) VERMONT (1)
DAVIE SHREVEPORT (2) MANCHESTER NORMAN BURLINGTON
DAYTONA BEACH SLIDELL NASHUA OKLAHOMA CITY (3) VIRGINIA (11)
FT. MYERS MAINE (5) PLAISTOW TULSA (3) ALEXANDRIA
GAINESVILLE AUBURN SALEM PENNSYLVANIA (14) BAILEY'S CROSSROADS
JACKSONVILLE (3) AUGUSTA NEW JERSEY (6) ALLENTOWN CHANTILLY
LAKELAND BANGOR HAZLET HARRISBURG CHESAPEAKE
LEESBURG BRUNSWICK PARAMUS LANCASTER DALE CITY
MELBOURNE PORTLAND TURNERSVILLE PHILADELPHIA (2) FREDERICKSBURG
MIAMI/FT. LAUDERDALE (14) VOORHEES PITTSBURGH (6) HAMPTON
NAPLES WAYNE READING MANASSAS
OCALA WOODBRIDGE SCRANTON NORFOLK
ORLANDO (6) NEW MEXICO (2) WILKES-BARRE RICHMOND (2)
PENSACOLA ALBUQUERQUE
PORT CHARLOTTE LAS CRUCES
SARASOTA
STUART
TALLAHASSEE (2)
TAMPA/CLEARWATER/
ST. PETERSBURG (8)
W. PALM BEACH
</TABLE>
-8-
<PAGE> 9
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. Claims
against Sunrise Mills Limited Partnership and Western Sawgrass Mills Corp. were
settled before the case went to trial; therefore, Service Merchandise was 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 has
settled this matter for an amount in 1997 which is not material to the financial
position or results of operations of the Company.
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, 64 Chairman of the Board and Chief Executive Officer since
Chairman of the Board and Chief October 1981; President from July 1984 to November 1994 and
Executive Officer from 1981 to October 1983. Board member of The Limited
Stores, Columbus, Ohio.
Gary M. Witkin, 48 President and Chief Operating Officer since November 1994;
President, Chief Operating Officer Vice Chairman and Board member, Saks Fifth Avenue from
and Director October 1992 to November 1994; Executive Vice-President of
Dayton Hudson Corp. from June 1991 to October 1992.
S. Cusano, 43 Vice President and Chief Financial Officer since July 1993; Group
Vice President and Chief Financial Officer Vice President - Finance from December 1991.
Thomas L. Garrett, Jr., 43 Vice President and Treasurer since July 1996; Treasurer, Magma
Vice President and Treasurer Copper Company from July 1992 to May 1996; Director of
Treasury, Goodyear Tire & Rubber Company from June 1990 to
June 1992.
C. Steven Moore, 34 Corporate Secretary since August 1996; Vice President and
Vice President, Managing Attorney, and Managing Attorney since August 1996; Senior Corporate
Corporate Secretary Attorney from November 1994 to August 1996; Corporate
Attorney from May 1992 to November 1994; Attorney with Boult,
Cummings, Conners & Berry from June 1988 to May 1992.
</TABLE>
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<PAGE> 10
<TABLE>
<S> <C>
Kenneth Brame, 49 Senior Vice President, Information Services and Chief
Senior Vice President, Information Services, Information Officer since February 1996; Vice President,
and Chief Information Officer Systems Development, American Stores Company from May
1994 to February 1996; Director of Systems Development, Belk
Stores Services from April 1989 to April 1994.
Robert C. Eimers, 49 Senior Vice President, Human Resources since February 1995;
Senior Vice President, Human Resources Vice President, Human Resources of Sonoco Products Company
from June 1988 to January 1995.
Harold Mulet, 45 Senior Vice President, Stores Organization since August 1995;
Senior Vice President, Stores Regional Vice President of Target division of the Dayton Hudson
Corp. from December 1988 to August 1995.
Gary Sease, 53 Senior Vice President, Logistics since September 1996; Senior
Senior Vice President, Logistics Vice President, Operations Services of American National Can
Company from September 1992 to September 1996; Vice President,
Inventory Control and MIS of Servistar Corp. from September 1989 to
September 1992.
Charles Septer, 45 Senior Vice President, Jewelry Merchandising since April 1988.
Senior Vice President, Jewelry
Merchandising
Steven F. McCann, 44 Vice President, Corporate Controller since June 1994. Vice President,
Vice President, Corporate Controller Controller of Robinsons-May division of the May Department Store Company
from February 1993 to June 1994. Vice President, Controller of the May
Company division of the May Department Store Company from April 1992 to
February 1993. Divisional Vice President, Divisional Controller of the May
Company division of the May Department Store Company from May 1989 to
April 1992.
</TABLE>
- ------------------------------
(1) All Executive Officers serve at the pleasure of the Board of Directors.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock trades on the New York Stock Exchange (NYSE) under
the symbol SME. The number of record holders of Common Stock at February 28,
1997 and March 1, 1996 were 6,076 and 6,387, respectively.
High and low closing sales prices as reported by the NYSE for fiscal 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1996 High Low
- ---- ---- ---
<S> <C> <C>
First Quarter 6 4 1/2
Second Quarter 6 1/4 4 5/8
Third Quarter 5 3/4 4 1/2
Fourth Quarter 6 3/8 4 1/4
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
1995 High Low
- ---- ---- ---
<S> <C> <C>
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
</TABLE>
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 1996 and
1995, respectively.
Item 6. Selected Financial Data
Page 4 under the caption "Selected Financial Information" of the Registrant's
1996 Annual Report to Shareholders for the year ended December 29, 1996 is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 5 through 8 of the Registrant's 1996 Annual Report to Shareholders for the
year ended December 29, 1996 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 1996 Annual Report to Shareholders for the year
ended December 29, 1996, the following are incorporated herein by reference:
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Consolidated Statements of Operations.................................... 9
Consolidated Balance Sheets ............................................. 10
Consolidated Statements of Changes in Shareholders' Equity .............. 11
Consolidated Statements of Cash Flows.................................... 12
Notes to Consolidated Financial Statements ............................. 13-26
Quarterly Financial Information (Unaudited) ........................... 26
Independent Auditors' Report ........................................... 27
</TABLE>
Item 9. Changes in and Disagreements With Independent Auditors on Accounting
and Financial Disclosure
No reportable items.
-11-
<PAGE> 12
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, 1997 filed with the Commission pursuant to Rule
14a-6(b) are incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning Executive Officers
of the Registrant is included in Part I, Item 4, under the caption "Executive
Officers of the Registrant" of this Form 10-K.
Item 11. Executive Compensation
Reference is made to the information on pages 8 through 17 of the Registrant's
Proxy Statement dated March 11, 1997 filed with the Commission pursuant to Rule
14a-6(b), concerning executive compensation, which is herein incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information on pages 6 and 7 of the Registrant's Proxy
Statement dated March 11, 1997 filed with the Commission pursuant to Rule
14a-6(b), concerning the beneficial ownership of Registrant's common stock,
which is herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information on page 19 of the Registrant's Proxy
Statement dated March 11, 1997 filed with the Commission pursuant to Rule
14a-6(b), concerning certain relationships and related transactions, which is
herein incorporated by reference.
-12-
<PAGE> 13
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(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 1996 Annual Report to Shareholders for the year
ended December 29, 1996.
2. Financial Statement Schedule
Independent Auditors' Report ............................. 20
Schedule
II. Valuation and Qualifying Accounts and Reserves ...... 21
All other schedules are not applicable and have been omitted.
3. Exhibits and Index to Exhibits
Exhibits filed with this Form 10-K:
<TABLE>
<CAPTION>
Exhibit No. Under
Item 601 of
Regulation S-K Brief Description
-------------- -----------------
<S> <C>
4.19 Amendment No. 1 to Loan Agreement dated as
of November 7, 1996 concerning the $75
million Real Estate Mortgage Financing among
SMC-SPE-2, Inc., and First Union National
Bank of North Carolina.
4.20 Amendment No.2 to Loan Agreement dated as of
December 20, 1996 concerning the $75 million
Real Estate Mortgage Financing among
SMC-SPE-2, Inc., and First Union National
Bank of North Carolina.
4.21 Amendment No. 4 to Credit Agreement
effective January 15, 1997 among Service
Merchandise Company, Inc., various Banks and
The Chase Manhattan Bank (as successor to
Chemical Bank) as Administrative Agent.
</TABLE>
-13-
<PAGE> 14
3. Exhibits and Index to Exhibits (continued):
Exhibits filed with this Form 10-K (continued):
<TABLE>
<CAPTION>
Exhibit No. Under
Item 601 of
Regulation S-K Brief Description
-------------- -----------------
<S> <C>
4.22 Amendment No. 3 to Loan Agreement dated as
of January 16, 1997 concerning the $75
million Real Estate Mortgage Financing among
SMC-SPE-2, Inc., and First Union National
Bank of North Carolina.
11 Statement re: Computation of Earnings Per
Common Share for fiscal years ended December
29, 1996, December 31, 1995 and January 1,
1995.
13 Portions of Service Merchandise Company,
Inc. 1996 Annual Report to Shareholders for
the fiscal year ended December 29, 1996.
21 Subsidiaries of the Registrant.
23 Independent Auditors' consent.
27 Financial Data Schedule for the fiscal year
ended December 29, 1996. (for SEC use only).
</TABLE>
Exhibits incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
3.1 Registrant's Charter - State of Tennessee, 3.1
as restated 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 3.2
restated as of 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 4 (c)
incorporated 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.
</TABLE>
-14-
<PAGE> 15
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.3 Amendment No. 2 to Shareholders' Rights Agreement 4
which is 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 4.2b
concerning the refinancing of $90 million of
the Real Estate Bridge Loan under the Credit
Agreement dated as of July 24, 1989 among
the Registrant, Various Banks and Chemical
Bank as Agent, which is incorporated herein
by reference from the Registrant's Form 10-Q
filed for the second quarter ended June 30,
1990.
4.6 Indenture, dated as of February 15, 1993, 4.1
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.
4.7 First Supplemental Indenture, dated as of 4.2
February 15, 1993, between the Registrant
and First American National Bank, as
trustee, regarding the Registrant's
$300,000,000 of 9% Senior Subordinated
Debentures due 2004, which is incorporated
herein by reference from Form 8-K dated
February 17, 1993.
4.8 Form of Debenture, regarding the Registrant's 4.3
$300,000,000 of 9% Senior Subordinated
Debentures due 2004, which is incorporated
herein by reference from Form 8-K dated
February 17, 1993.
</TABLE>
-15-
<PAGE> 16
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.9 Indenture, dated as of October 15, 1993, 4.1
between the Registrant and The First
National Bank of Boston, as trustee,
regarding the Registrant's $100,000,000 in
principal amount of 8 3/8% Senior Notes due
2001, which is incorporated herein by
reference from the Registrant's Form 8-K
dated October 26, 1993.
4.10 First Supplemental Indenture, dated as of 4.2
October 15, 1993, between the Registrant and
The First National Bank of Boston, as
trustee, regarding the Registrant's
$100,000,000 in principal amount of 8 3/8%
Senior Notes due 2001, which is incorporated
herein by reference from the Registrant's
Form 8-K dated October 26, 1993.
4.11 Form of Notes, regarding the Registrant's 4.3
$100,000,000 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.
4.12 Credit Agreement dated as of June 8, 1994 4.1
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 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.
4.14 Amendment No. 2 to Credit Agreement effective 4
May 23, 1996 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/A filed for the second
quarter ended June 30, 1996.
</TABLE>
-16-
<PAGE> 17
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.15 Amendment No. 3 to Credit Agreement effective 4.1
September 16, 1996 among Service Merchandise
Company, Inc., various Banks and The Chase
Manhattan Bank (as successor to Chemical
Bank) as Administrative Agent which is
incorporated herein by reference from the
Registrant's Form 10-Q filed for the third
quarter ended September 29, 1996.
4.16 Conditional Loan Commitment dated as of 4.2
September 9, 1996, concerning the $75
million Real Estate Mortgage Financing among
Service Merchandise Company, Inc., and First
Union National Bank of North Carolina which
is incorporated herein by reference from the
Registrant's Form 10-Q filed for the third
quarter ended September 29, 1996.
4.17 Loan Agreement dated as of October 4, 1996 4.2a
concerning the $75 million Real Estate
Mortgage Financing among SMC-SPE-1, Inc.,
and First Union National Bank of North
Carolina which is incorporated herein by
reference from the Registrant's Form 10-Q
filed for the third quarter ended September
29, 1996.
4.18 Loan Agreement dated as of October 4, 1996 4.2b
concerning the $75 million Real Estate
Mortgage Financing among SMC-SPE-2, Inc.,
and First Union National Bank of North
Carolina which is incorporated herein by
reference from the Registrant's Form 10-Q
filed for the third quarter ended September
29, 1996.
10.1 Stock Option Pledge Agreement between Service 10.2
Merchandise 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.
Executive Compensation Plans and Arrangements:
10.2 Form of Indemnification Agreement between the Exhibit A
Registrant and each of Messrs. Zimmerman,
Witkin, Crane, Poole, Holt, Moore,
Roitenberg, Cusano, Mulet and Septer which
is incorporated herein by reference from the
Registrant's Proxy Statement dated April 19,
1989.
</TABLE>
-17-
<PAGE> 18
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
10.3 Directors' Deferred Compensation Plan, which 10.1
is incorporated herein by reference from the
Registrant's Form 10-K for the fiscal year
ended December 29, 1990.
10.4 Directors' Equity Plan which is incorporated Exhibit B
herein by reference from the Registrant's
Proxy Statement dated March 16, 1992.
10.5 Key Executive Severance Plan Agreement for 10
execution by certain key executives in
replacement of employment contracts which is
incorporated herein by reference from the
Registrant's Form 10-Q filed for the third
quarter ended October 2, 1994.
10.6 Employment agreement dated November 2, 1994 10.1
regarding Gary 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 10.2
Incentive Plan which is incorporated herein
by reference from the Registrant's Form 10-K
for the fiscal year ended January 1, 1995.
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fiscal year ended December
29, 1996.
-18-
<PAGE> 19
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, 1997
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, 1997 March 18, 1997
<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, 1997 March 18, 1997 March 18, 1997 March 18, 1997
</TABLE>
/s/ Harold Roitenberg /s/ S. Cusano
- --------------------- -----------------------------------------------------
Harold Roitenberg S. Cusano, Vice President and Chief Financial Officer
Director (Principal Financial Officer)
March 18, 1997 (Principal Accounting Officer)
March 18, 1997
-19-
<PAGE> 20
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 29, 1996 and December 31, 1995,
and for each of the three years in the period ended December 29, 1996, and have
issued our report thereon dated January 28, 1997; such financial statements and
report are included in your 1996 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 consolidated 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 consolidated financial statement schedule,
when considered in relation to the basic consolidated 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 28, 1997
-20-
<PAGE> 21
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other Accounts Deductions at End of
DESCRIPTION of Period Expenses (Describe) (Describe) (B) Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 29, 1996 (A) $2,763 $2,183 -- $(353) $4,593
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
</TABLE>
(A) The amounts represent transactions for Accounts Receivable Allowance for
Doubtful Accounts.
(B) The Allowance for Doubtful Accounts was reduced for accounts written-off
against the reserve.
-21-
<PAGE> 1
Exhibit 4.19
FIRST AMENDMENT TO LOAN AGREEMENT
DATED AS OF NOVEMBER 7, 1996
BY AND BETWEEN
SMC-SPE-2, INC., A DELAWARE CORPORATION,
AS BORROWER
AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
A NATIONAL BANKING ASSOCIATION,
AS LENDER
<PAGE> 2
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as
of November 7, 1996, by and between FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, a national banking association, having an address at One First Union
Center, DC6, Charlotte, North Carolina 28288-0166 (together with its
successors and assigns, "Lender"), and SMC-SPE-2, INC., a Delaware corporation,
having an address at c/o Service Merchandise Company, Inc., 7100 Service
Merchandise Drive, Brentwood, Tennessee 37027 ("Borrower"). All capitalized
terms used herein shall have the respective meanings set forth in Section 1.1
hereof.
WITNESSETH:
WHEREAS, Borrower obtained mortgage loan financing in the
aggregate principal amount of FIVE MILLION ONE HUNDRED SEVENTY THOUSAND
AND 00/100 DOLLARS ($5,170,000.00) (collectively, the "Original Loans") in
connection with the acquisition or financing of two (2) Service Merchandise
locations pursuant to and in accordance with the terms of that certain Loan
Agreement between Lender and Borrower dated as of October 4, 1996 (the
"Original Loan Agreement"); and
WHEREAS, the Original Loans are evidenced by two (2) Promissory
Notes and secured by two (2) Mortgages;
WHEREAS, Borrower desires to obtain additional mortgage loan
financing in the aggregate principal amount of FIVE MILLION EIGHT
HUNDRED TWELVE THOUSAND FIVE HUNDRED AND 00/100 DOLLARS ($5,812,500.00)
(collectively, the "New Loans") in connection with the acquisition or financing
of two (2) Service Merchandise locations (collectively, the "New Properties"),
each as more specifically described in the corresponding deed to secure debt
and security agreement encumbering such New Property, dated as of the date
hereof, executed and delivered by Borrower as security for the New Loans
(collectively, the "New Mortgages").
WHEREAS, Lender is willing to make the New Loans to Borrower,
subject to and in accordance with the terms of the Original Loan
Agreement, as hereby amended, and the other Loan Documents.
NOW, THEREFORE, in consideration of the covenants, agreements,
representations and warranties set forth in Original Loan Agreement, as hereby
amended, and other good and valuable consideration, the parties hereto hereby
covenant, agree, represent and warrant as follows:
I. DEFINITIONS.
SECTION 1.1 DEFINITIONS.
All capitalized terms not defined in this Amendment shall have
their respective meanings set forth in the Original Loan Agreement:
1. Definitions. (a) All references in the Original Loan Agreement,
as hereby amended, to "Loans" shall be deemed to include the New Loans.
(b) All references in the Original Loan Agreement, as hereby
amended, to "Properties" shall be deemed to include the New Properties.
(c) All references in the Original Loan Agreement, as hereby
amended, to "Maturity Date" shall, with respect to the New Loans only,
be deemed to be references to December 1, 2011.
(d) All references in the Original Loan Agreement, as hereby
amended, to "Note" or "Notes" shall be deemed to include the two (2)
promissory notes evidencing the New Loans.
(e) All references in the Original Loan Agreement, as hereby
amended, to "Mortgage" or "Mortgages" shall be deemed to include the
New Mortgages.
(f) All references in the Original Loan Agreement, as hereby
amended, to "Assignment of Leases" shall be deemed to include the two
(2) first priority Assignment of Leases and Rents, each dated as of the date
hereof, executed
<PAGE> 3
and delivered by Borrower to Lender with respect to each New Property, as the
same may be amended, restated, replaced, supplemented or otherwise modified
from time to time.
(g) All references in the Original Loan Agreement, as hereby
amended, to "Closing Date" shall mean, with respect to the New Loans, the date
hereof.
(h) All references in the Original Loan Agreement, as hereby
amended, to "Initial Allocated Amount" shall mean, with respect to each New
Loan, the principal amount of the applicable promissory note evidencing such
new loan, as set forth on Exhibit A attached hereto and by this reference a
part hereof.
2. Exhibit A. Exhibit A to the Original Loan Agreement is hereby
deleted in its entirety and replaced with Exhibit A attached hereto. All
references in the Original Loan Agreement to "Exhibit A" shall be deemed to be
references to Exhibit A attached hereto.
3. Ratification. Except as hereinabove set forth, all terms,
covenants and provisions of the Original Loan Agreement remain unaltered and in
full force and effect, and Borrower hereby expressly ratifies the Original Loan
Agreement, as modified and amended herein.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be effective upon delivery and thereafter
shall be deemed an original, and all of which shall be taken to be one and the
same instrument, for the same effect as if all parties hereto had signed the
same signature page. Any signature page of this Amendment may be detached from
any counterpart of this Amendment without impairing the legal effect of any
signatures thereon and may be attached to another counterpart of this Amendment
identical in form hereto but having attached to it one or more additional
signature pages.
2
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their duly authorized representatives, all as of the day
and year first above written.
LENDER:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ Barry P. Reiner
----------------------------------------
Name: Barry P. Reiner
Title: Vice President
BORROWER:
SMC-SPE-2, a Delaware corporation,
By:
----------------------------------------
Name:
Title:
<PAGE> 5
IN WITNESS WHEREOF, the undersigned has executed the foregoing this
7th day of November, 1996.
SMC-SPE-2, a Delaware corporation,
By: /s/ Wade Smith
----------------------------------------
Name: Wade L. Smith
Title: Vice President
<PAGE> 6
EXHIBIT A
INITIAL ALLOCATED LOAN AMOUNTS
Store #249 = $3,712,500.00
Store #252 = $2,100,000.00
Store #349 = $2,885,000.00
Store #344 = $2,285,000.00
<PAGE> 7
Exhibit 4.20
SECOND AMENDMENT TO LOAN AGREEMENT
DATED AS OF DECEMBER 20, 1996
BY AND BETWEEN
SMC-SPE-2, INC., A DELAWARE CORPORATION,
AS BORROWER
AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
A NATIONAL BANKING ASSOCIATION,
AS LENDER
<PAGE> 1
SECOND AMENDMENT TO LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as
of December 20, 1996, by and between FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, a national banking association, having an address at One First Union
Center, DC6, Charlotte, North Carolina 28288-0166 (together with its
successors and assigns, "Lender"), and SMC-SPE-2, INC., a Delaware corporation,
having an address at c/o Service Merchandise Company, Inc., 7100 Service
Merchandise Drive, Brentwood, Tennessee 37027 ("Borrower"). All capitalized
terms used herein shall have the respective meanings set forth in Section 1.1
hereof.
WITNESSETH:
WHEREAS, Borrower obtained mortgage loan financing in the
aggregate principal amount of TEN MILLION NINE HUNDRED EIGHTY-TWO THOUSAND FIVE
HUNDRED AND 00/100 DOLLARS ($10,982,500.00) (collectively, the "Original
Loans") in connection with the acquisition or financing of four (4) Service
Merchandise locations pursuant to and in accordance with the terms of that
certain Loan Agreement between Lender and Borrower dated as of October 4, 1996
(the "Original Loan Agreement"), as amended by that certain First Amendment to
Loan Agreement between Lender and Borrower dated as of November 7, 1996 (the
First Amendment"); and
WHEREAS, the Original Loans are evidenced by four (4)
Promissory Notes and secured by four (4) Mortgages;
WHEREAS, Borrower desires to obtain additional mortgage loan
financing in the aggregate principal amount of FOUR MILLION FOUR HUNDRED
THOUSAND AND 00/100 DOLLARS ($4,400,000.00) (the "New Loan") in connection with
the acquisition or financing of one (1) Service Merchandise location (the "New
Property"), as more specifically described in the deed of trust and security
agreement encumbering such New Property, dated as of the date hereof, executed
and delivered by Borrower as security for the New Loan (the "New Mortgage").
WHEREAS, Lender is willing to make the New Loan to Borrower,
subject to and in accordance with the terms of the Original Loan Agreement, as
amended by the First Amendment and as hereby further amended, and the other
Loan Documents.
NOW, THEREFORE, in consideration of the covenants, agreements,
representations and warranties set forth in Original Loan Agreement, as amended
by the First Amendment and as hereby further amended, and other good and
valuable consideration, the parties hereto hereby covenant, agree, represent
and warrant as follows:
I. DEFINITIONS.
SECTION 1.1 DEFINITIONS.
All capitalized terms not defined in this Amendment shall have
their respective meanings set forth in the Original Loan Agreement, as amended
by the First Amendment:
1. Definitions. (a) All references in the Original Loan Agreement,
as amended by the First Amendment and as hereby further amended, to "Loans"
shall be deemed to include the New Loan.
(b) All references in the Original Loan Agreement, as amended
by the First Amendment and as hereby further amended, to "Properties" shall be
deemed to include the New Property.
(c) All references in the Original Loan Agreement, as amended
by the First Amendment and as hereby further amended, to "Maturity Date" shall,
with respect to the New Loan only, be deemed to be references to January 1,
2012.
(d) All references in the Original Loan Agreement, as amended
by the First Amendment and as hereby further amended, to "Note" or "Notes"
shall be deemed to include the two (2) promissory notes evidencing the New
Loan.
(e) All references in the Original Loan Agreement, as amended
by the First Amendment and as hereby further amended, to "Mortgage" or
"Mortgages" shall be deemed to include the New Mortgage.
<PAGE> 2
(f) All references in the Original Loan Agreement, as amended
by the First Amendment and as hereby further amended, to "Assignment of Leases"
shall be deemed to include the first priority Assignment of Leases and Rents,
dated as of the date hereof, executed and delivered by Borrower to Lender with
respect to the New Property, as the same may be amended, restated, replaced,
supplemented or otherwise modified from time to time.
(g) All references in the Original Loan Agreement, as
amended by the First Amendment and as hereby further amended, to "Closing Date"
shall mean, with respect to the New Loan, the date hereof.
(h) All references in the Original Loan Agreement, as
amended by the First Amendment and as hereby further amended, to "Initial
Allocated Amount" shall mean, with respect to the New Loan, the principal
amount of the promissory note evidencing such new loan, as set forth on Exhibit
A attached hereto and by this reference a part hereof.
2. Exhibit A. Exhibit A to the Original Loan Agreement is hereby
deleted in its entirety and replaced with Exhibit A attached hereto. All
references in the Original Loan Agreement to "Exhibit A" shall be deemed to be
references to Exhibit A attached hereto.
3. Ratification. Except as hereinabove set forth, all terms,
covenants and provisions of the Original Loan Agreement, as amended by the
First Amendment, remain unaltered and in full force and effect, and Borrower
hereby expressly ratifies the Original Loan Agreement, as amended by the First
Amendment and as further modified and amended herein.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be effective upon delivery and thereafter
shall be deemed an original, and all of which shall be taken to be one and the
same instrument, for the same effect as if all parties hereto had signed the
same signature page. Any signature page of this Amendment may be detached from
any counterpart of this Amendment without impairing the legal effect of any
signatures thereon and may be attached to another counterpart of this Amendment
identical in form hereto but having attached to it one or more additional
signature pages.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their duly authorized representatives, all as of the day
and year first above written.
LENDER:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ Michael D. Cohen
----------------------------------------
Name: Michael D. Cohen
Title: Vice President
BORROWER:
SMC-SPE-2, a Delaware corporation,
By: /s/ Wade L. Smith
----------------------------------------
Wade L. Smith
Vice President
<PAGE> 4
EXHIBIT A
INITIAL ALLOCATED LOAN AMOUNTS
Store #249 = $3,712,500.00
Store #252 = $2,100,000.00
Store #349 = $2,885,000.00
Store #344 = $2,285,000.00
Store #410 = $4,400,000.00
<PAGE> 1
Exhibit 4.21
FOURTH AMENDMENT
FOURTH AMENDMENT (this "Amendment"), dated as of January 15, 1997,
among SERVICE MERCHANDISE COMPANY, INC. (the "Borrower"), the various lending
institutions party to the Credit Agreement referred to below (the "Banks"), and
THE CHASE MANHATTAN BANK (as successor to CHEMICAL BANK), as Administrative
Agent (in such capacity, the "Administrative Agent"). All capitalized terms
used herein and not otherwise defined shall have the respective meanings
provided such terms in the Credit Agreement referred to below.
WITNESSETH:
WHEREAS, the Borrower, the Banks and the Administrative Agent are
parties to a Credit Agreement, dated as of June 8, 1994 and amended by the
First Amendment thereto dated as of April 13, 1995, the Second Amendment
thereto dated May 23, 1996 and the Third Amendment thereto dated as of
September 16, 1996 (as so amended, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as
herein provided;
NOW, THEREFORE, it is agreed that as of the Fourth Amendment Effective
Date (as defined below):
1. Section 9.01 of the Credit Agreement is hereby amended by (a)
deleting clause (xvi) and inserting in lieu thereof the following new clause
(xvi) and (b) inserting the following new clause (xvii) at the end thereof:
"(xvi) Liens arising from UCC-1 securities filings and grants of
security interests covering receivables and related assets owned by the
Borrower and its Subsidiaries in connection with the Credit Card Program; and
(xvii) Liens arising from offsets, deposits or restricted assets
granted by any Credit Card Subsidiary in respect of the Credit Card Program."
2. Section 9.02 of the Credit Agreement is hereby amended by (a)
deleting the "and" at the end of clause (xiii), (b) deleting the period at the
end of clause (xiv) and inserting in lieu thereof"; "and (c) adding the
following new clause (xv) at the end thereof:
"(xv) The Credit Card Subsidiaries may purchase receivables and
related assets in connection with the Credit Card Program."
3. The definition of "Contingent Obligation" in Section 11.01 of
the Credit Agreement is hereby amended by adding the following proviso at the
end thereof:
"provided further, that the term Contingent Obligation shall not
include obligations of any Credit Card Subsidiary to the Credit Card Issuer
with respect to the Credit Card Program to the
<PAGE> 2
extent the amount of such Contingent Obligations is less than or equal to the
capitalization of the Credit Card Subsidiary"
4. Section 11 of the Credit Agreement is hereby amended by
inserting the following new definition in the appropriate alphabetical order:
"Credit Card Issuer" shall mean any bank or other financial
institution and its affiliates which issues credit cards and extends credit to
cardholders in connection with the Credit Card Program."
5. The definition of "Credit Card Subsidiaries" in Section 11.01
of the Credit Agreement is hereby amended by deleting said definition in its
entirety and substituting the following in lieu thereof:
"Credit Card Subsidiaries" shall mean any direct or indirect
Subsidiary of the Borrower, and any wholly-owned Subsidiaries of such
Subsidiary, created in connection with the Credit Card Program, so long as (i)
they engage in no business or transactions other than (x) the issuance of
credit cards, the extension of credit to cardholders pursuant thereto and all
other customary transactions incident thereto (including the sale or transfer
of receivables pursuant to asset backed financing transactions) and (y) the
entering into and performance of agreements with a Credit Card Issuer that
facilitate the Credit Card Issuer's doing business in connection with a Credit
Card Program and (ii) the liabilities of the Credit Card Subsidiaries are
without recourse to the Borrower and its Subsidiaries (other than the Credit
Card Subsidiaries); provided that the Borrower and its Subsidiaries may enter
into customary commitments and/or underwriting agreements on behalf of the
Credit Card Subsidiaries for the purpose of customary securities law
indemnifications."
6. In order to induce the undersigned Banks to enter into this
Amendment, the Borrower hereby represents and warrants that (x) no Default or
Event of Default exists on the Fourth Amendment Effective Date both before and
after giving effect to this Amendment and (y) all of the representations and
warranties contained in the Credit Agreement shall be true and correct in all
material respects as of the Fourth Amendment Effective Date both before and
after giving effect to this Amendment, with the same effect as though such
representations and warranties had been made on and as of the Fourth Amendment
Effective Date (it being understood that any representation or warranty made as
of a specified date shall be required to be true and correct in all material
respects only as of such specific date).
7. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
8. This Amendment may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Administrative Agent.
<PAGE> 3
9. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK.
10. This Amendment shall become effective on the date (the "Fourth
Amendment Effective Date") when the Borrower and the Required Banks (i) shall
have signed a counterpart hereof (whether the same or different counterparts)
and (ii) shall have delivered (including by way of telecopier) the same to the
Administrative Agent at the Notice Office.
11. From and after the Fourth Amendment Effective Date all
references in the Credit Agreement and the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
<PAGE> 4
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
Address:
7100 Service Merchandise Drive SERVICE MERCHANDISE COMPANY,
Brentwood, TN 37027 INC.
Attn: Thomas L. Garrett, Jr.
Telephone: (615) 660-6000
Telecopy: (615) 660-3667 By: /s/ Thomas L. Garrett, Jr.
------------------------------
270 Park Avenue THE CHASE MANHATTAN BANK
9th Floor Individually, and as
New York, NY 10017 Administrative Agent
Attn: Christopher C. Wardell
Telephone: (212) 270-2053 By: /s/
Telecopy: (212) 270-6125 ------------------------------
Title: Attorney-in-fact
With a copy to:
Chase Securities Inc.
10 South LaSalle Street
Suite 2300
Chicago, IL 60603
Attn: Paul Doran
Telephone: (312) 807-4089
Telecopy: (312) 346-9310
<PAGE> 5
One Ravinia Drive ABN AMRO BANK N.V., ATLANTA
Suite 1200 AGENCY
Atlanta, GA 30346-2103
Attn: Linda Davis By
-------------------------------
Title:
Telephone: (770) 399-7378 By
Telecopy: (770) 395-9188 -------------------------------
Title:
277 Park Avenue ARAB BANKING CORPORATION
New York, NY 10172
Attn: Louise Bilbro
Telephone: (212) 583-4720 By /s/ Louise Bilbro
Telecopy: (212) 583-0921 -------------------------------
Title: Louise Bilbro
Vice President
100 Federal Street THE FIRST NATIONAL BANK OF BOSTON
Boston, MA 02110
Attn: Peter Griswold
Telephone: (617) 434-8312 By /s/ Peter Griswold
Telecopy: (617) 434-6685 -------------------------------
Title: Director
430 Park Avenue THE BANK OF MONTREAL
New York, NY 10022
Attn: Tom Peer
Telephone: (212) 605-1460 By /s/ Tom Peer
Telecopy: (212) 605-1455 -------------------------------
Title: Director
<PAGE> 6
One Wall Street THE BANK OF NEW YORK
22nd Floor
New York, NY 10286
Attn: Paul DiPonzio By /s/ Paula M. DiPonzio
-------------------------------
Title: Vice President
Telephone: (212) 635-7867
Telecopy: (212) 635-1483
Structured Finance Department THE BANK OF TOKYO-MISUBISHI, LTD.
1251 Avenue of the Americas
New York, NY 10020
Attn: Paul P. Malecki By /s/ Paul P. Malecki
-------------------------------
Telephone: (212) 782-4343 Title: Paul P. Malecki
Telecopy: (212) 782-6445 Vice President
Structured Finance Department THE BANK OF TOKYO-MISUBISHI
1251 Avenue of the Americas TRUST COMPANY
New York, NY 10022
Attn: Paul P.Malecki By /s/ Paul P. Malecki
-------------------------------
Title: Paul P. Malecki
Vice President
787 7th Avenue BANQUE PARIBAS
New York, NY 10019
Attn: Mary Finnegan
Telephone: (212) 841-2551 By /s/ Mary Finnegan
Telecopy: (212) 841-2333 -------------------------------
Mary Finnegan
Group Vice President
By /s/ Heather Zimmermann
-------------------------------
Heather Zimmermann
Assistant Vice President
<PAGE> 7
Two Paces West CANADIAN IMPERIAL BANK OF
2727 Paces Ferry Road COMMERCE
Atlanta, GA 30339
Attn: Kathryn W. Sax
By /s/ Kathryn Sax
-------------------------------
Telephone: (770) 319-4903 Title: Authorized Signatory
Telecopy: (770) 319-4954
75 Wall Street DRESDNER BANK AG, NEW YORK BRANCH
New York, NY 10005
Attn: Richard Conroy
Telephone: (212) 429-2206
Telecopy: (212) 574-0129 By /s/ Richard W. Conroy
-------------------------------
Title: Richard W. Conroy
Vice President
By /s/ Nicholas Kalogeropoulos
-------------------------------
Title: Nicholas Kalogeropoulos
Assistant Treasurer
Marquis One Tower THE FUJI BANK, LTD.
Suite 2100
245 Peachtree Center Ave., NE
Atlanta, GA 30303-1208
Attn: Brett Johnson By /s/
-------------------------------
Title: Vice President and
Manager
Telephone: (404) 653-2100
Telecopy: (404) 653-2119
<PAGE> 8
Two World Trade Center THE HOKKAIDO TAKUSHOKU BANK,
99th Floor LTD.
New York, NY 10048
Attn: Scott D. Winston
Telephone: (212) 912-6914 By: /s/
Telecopy: (212) 466-6079 ------------------------------
Title: Deputy General Manager
245 Park Avenue THE INDUSTRIAL BANK OF JAPAN,
New York, NY 10167 LIMITED - NEW YORK BRANCH
Attn: Jim Welch
Telephone: (212) 309-6577 By /s/ Takuya Houjo
Telecopy: (212) 682-2870 -------------------------------
Title: Senior Vice President
245 Peachtree Center Ave, NE LTCB TRUST COMPANY
Suite 2801 Atlanta, GA 30303
Attn: Rebecca Silbert By /s/
-------------------------------
Title: Executive V. Pres.
Telephone: (404) 659-7210
Telecopy: (404) 658-9751
140 Broadway MIDLAND BANK PLC
New York, NY 10005
Attn: Karen Wold
Telephone: (212) 658-2750 By
Telecopy: (212) 658-2586 -------------------------------
Title:
<PAGE> 9
500 West Jefferson St. PNC BANK, KENTUCKY, INC.
Louisville, Kentucky 40202
Attn: Ralph Phillips
By:
------------------------------
Telephone: (502) 581-4543 Title:
Telecopy: (502) 581-2302
520 Madison Avenue THE MITSUBISHI TRUST AND BANKING
25th Floor CORPORATION
New York, NY 10022
Attn: Susan LeFevre
Telephone: (212) 891-8454 By /s/
Telecopy: (212) 755-2349 -------------------------------
(212) 486-0970 Title: Senior Vice President
One NationsBank Plaza M-5 NATIONSBANK, N.A.
311 Union Street
Nashville, TN 37239-1697
Attn: Kimberly Dupuy
By
-------------------------------
Telephone: (615) 749-3174 Title:
Telecopy: (615) 749-4640
245 Park Avenue THE NIPPON CREDIT BANK, LTD.
30th Floor
New York, NY 10167
Attn: Barry Fein
By /s/ Barry S. Fein
-------------------------------
Telephone: (212) 984-1261 Title: Assistant Vice President
Telecopy: (212) 490-3895
<PAGE> 10
Marquis One Tower THE SAKURA BANK, LIMITED
Suite 2703
245 Peachtree Center Ave., N.E.
Atlanta, GA 30303 By /s/
Attn: Chad Zimmerman -------------------------------
Title: Vice President and
Senior Manager
Telephone: (404) 521-3111
Telecopy: (404) 521-1133
Georgia Pacific Center THE SUMITOMO BANK, LIMITED
Suite 3210
133 Peachtree Street, N.E.
Atlanta, GA 30303
Attn: Tom Lawson By /s/
-------------------------------
Title: General Manager
Telephone: (404) 526-8513
Telecopy: (404) 521-1187
55 East 52nd Street THE TOKAI BANK, LTD. NEW YORK
New York, NY 10055 BRANCH
Attn: Bill Struckell
Telephone: (212) 339-1123 By
Telecopy: (212) 754-2170 -------------------------------
Title:
One Detroit Center COMMERCIA BANK
500 Woodward Avenue, MC 3281
9th Floor
Detroit, MI 48226
Attn: Kristine L. Andersen By /s/ John M. Costa
-------------------------------
Title: John M. Costa, Vice
President
Telephone: (313) 222-3648
Telecopy: (313) 222-3330
<PAGE> 11
640 5th Avenue BANK OF IRELAND, CAYMAN ISLAND
New York, NY 10019 BRANCH
Attn: John Cusack
Telephone: (212) 397-1712 By /s/ John Cusack
Telecopy: (212) 586-7752 -------------------------------
Title: A.V.P.
1211 Avenue of the Americas WESTDEUTSCHE LANDESBANK
New York, NY 10036 GIROZENTRALE, NEW YORK AND
Attn: Alan Bookspan CAYMAN ISLAND BRANCHES
Telephone: (212) 852-6000
Telecopy: (212) 852-6300 By /s/ Alan S. Bookspan
-------------------------------
Title: Alan S. Bookspan
Vice President
By /s/
-------------------------------
Title: Associate
1 Parkview Plaza VAN KAMPEN AMERICAN CAPITAL
Oakbrook Terrace, IL 60181 PRIME RATE INCOME TRUST
Attn: Jeffrey W. Maillet
Telephone: (630) 684-6438 By /s/ Jeffrey W. Maillet
Telecopy: (630) 684-6740 -------------------------------
Title: Jeffrey W. Maillet
Senior Vice President
& Director
285 Peachtree Center Ave., Suite 2104 THE YASUDA TRUST AND BANKING
Atlanta, GA 30303 COMPANY, LTD.
Attn: Sanjay Sinha
Telephone: (404) 584-8230 By /s/ M. Tagawa
Telcopy: (404) 584-7816 -------------------------------
Title: Makoto Tagawa
Deputy General Manager
<PAGE> 1
Exhibit 4.22
THIRD AMENDMENT TO LOAN AGREEMENT
DATED AS OF JANUARY 16, 1997
BY AND BETWEEN
SMC-SPE-2, INC., A DELAWARE CORPORATION,
AS BORROWER
AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
A NATIONAL BANKING ASSOCIATION,
AS LENDER
<PAGE> 2
THIRD AMENDMENT TO LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as
of January 16, 1997, by and between FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, a national banking association, having an address at One First Union
Center, DC6, Charlotte, North Carolina 28288-0166 (together with its
successors and assigns, "Lender"), and SMC-SPE-2, INC., a Delaware corporation,
having an address at c/o Service Merchandise Company, Inc., 7100 Service
Merchandise Drive, Brentwood, Tennessee 37027 ("Borrower"). All capitalized
terms used herein shall have the respective meanings set forth in Section 1.1
hereof.
WITNESSETH:
WHEREAS, Borrower obtained mortgage loan financing in the
aggregate principal amount of FIFTEEN MILLION THREE HUNDRED EIGHTY TWO THOUSAND
FIVE HUNDRED AND 00/100 DOLLARS ($15,382,500.00) (collectively, the "Original
Loans") in connection with the acquisition or financing of five (5) Service
Merchandise locations pursuant to and in accordance with the terms of that
certain Loan Agreement between Lender and Borrower dated as of October 4, 1996
(the "Original Loan Agreement"), as amended by that certain First Amendment to
Loan Agreement between Lender and Borrower dated as of November 7, 1996 (the
"First Amendment"), as further amended by that certain Second Amendment to Loan
Agreement between Lender and Borrower dated as of December 20, 1996 (the "Second
Amendment"); and
WHEREAS, the Original Loans are evidenced by five (5)
Promissory Notes and secured by five (5) Mortgages;
WHEREAS, Borrower desires to obtain additional mortgage loan
financing in the aggregate principal amount of SIX MILLION FIVE HUNDRED SIXTY
THOUSAND AND 00/100 DOLLARS ($6,560,000.00) (the "New Loan") in connection with
the acquisition or financing of one (1) Service Merchandise location (the "New
Property"), as more specifically described in the multiple indebtedness
mortgage and security agreement encumbering such New Property, dated as of the
date hereof, executed and delivered by Borrower as security for the New Loan
(the "New Mortgage").
WHEREAS, Lender is willing to make the New Loan to Borrower,
subject to and in accordance with the terms of the Original Loan Agreement, as
amended by the First Amendment and as hereby further amended, and the other
Loan Documents.
NOW, THEREFORE, in consideration of the covenants, agreements,
representations and warranties set forth in Original Loan Agreement, as amended
by the First Amendment, the Second Amendment and as hereby further amended, and
other good and valuable consideration, the parties hereto hereby covenant,
agree, represent and warrant as follows:
I. DEFINITIONS.
SECTION 1.1 DEFINITIONS.
All capitalized terms not defined in this Amendment shall have
their respective meanings set forth in the Original Loan Agreement, as amended
by the First Amendment and the Second Amendment:
1. Definitions. (a) All references in the Original Loan Agreement,
as amended by the First Amendment, the Second Amendment and as hereby further
amended, to "Loans" shall be deemed to include the New Loan.
(b) All references in the Original Loan Agreement, as amended
by the First Amendment, the Second Amendment and as hereby further amended, to
"Properties" shall be deemed to include the New Property.
(c) All references in the Original Loan Agreement, as amended
by the First Amendment, the Second Amendment and as hereby further amended, to
"Maturity Date" shall, with respect to the New Loan only, be deemed to be
references to February 1, 2012.
<PAGE> 3
(d) All references in the Original Loan Agreement, as amended
by the First Amendment, the Second Amendment and as hereby further amended, to
"Note" or "Notes" shall be deemed to include the promissory note evidencing the
New Loan.
(e) All references in the Original Loan Agreement, as amended
by the First Amendment, the Second Amendment and as hereby further amended, to
"Mortgage" or "Mortgages" shall be deemed to include the New Mortgage.
(f) All references in the Original Loan Agreement, as amended
by the First Amendment, the Second Amendment and as hereby further amended, to
"Assignment of Leases" shall be deemed to include the first priority Assignment
of Leases and Rents, dated as of the date hereof, executed and delivered by
Borrower to Lender with respect to the New Property, as the same may be
amended, restated, replaced, supplemented or otherwise modified from time to
time.
(g) All references in the Original Loan Agreement, as
amended by the First Amendment, the Second Amendment and as hereby further
amended, to "Closing Date" shall mean, with respect to the New Loan, the date
hereof.
(h) All references in the Original Loan Agreement, as
amended by the First Amendment, the Second Amendment and as hereby further
amended, to "Initial Allocated Amount" shall mean, with respect to the New
Loan, the principal amount of the promissory note evidencing such new loan, as
set forth on Exhibit A attached hereto and by this reference a part hereof.
2. Exhibit A. Exhibit A to the Original Loan Agreement is hereby
deleted in its entirety and replaced with Exhibit A attached hereto. All
references in the Original Loan Agreement to "Exhibit A" shall be deemed to be
references to Exhibit A attached hereto.
3. Ratification. Except as hereinabove set forth, all terms,
covenants and provisions of the Original Loan Agreement, as amended by the
First Amendment and the Second Amendment, remain unaltered and in full force
and effect, and Borrower hereby expressly ratifies the Original Loan Agreement,
as amended by the First Amendment, the Second Amendment and as further modified
and amended herein.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be effective upon delivery and thereafter
shall be deemed an original, and all of which shall be taken to be one and the
same instrument, for the same effect as if all parties hereto had signed the
same signature page. Any signature page of this Amendment may be detached from
any counterpart of this Amendment without impairing the legal effect of any
signatures thereon and may be attached to another counterpart of this Amendment
identical in form hereto but having attached to it one or more additional
signature pages.
2
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their duly authorized representatives, all as
of the day and year first above written.
LENDER:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ Michael D. Cohen
----------------------------------------
Name: Michael D. Cohen
Title: Vice President
BORROWER:
SMC-SPE-2, a Delaware corporation,
By: /s/ Wade L. Smith
----------------------------------------
Wade L. Smith
Vice President
<PAGE> 5
EXHIBIT A
INITIAL ALLOCATED LOAN AMOUNTS
Store #249 = $3,712,500.00
Store #252 = $2,100,000.00
Store #349 = $2,885,000.00
Store #344 = $2,285,000.00
Store #408 = $6,560,000.00
Store #410 = $4,400,000.00
<PAGE> 1
EXHIBIT 11
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 29 DECEMBER 31 JANUARY 1
1996 1995 1995
----------- ----------- ---------
<S> <C> <C> <C>
PRIMARY
Earnings before extraordinary loss $ 39,330 $ 50,325 $ 61,570
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $3,462 in fiscal 1994 -- -- (5,415)
-------- -------- ---------
Net earnings $ 39,330 $ 50,325 $ 56,155
======== ======== =========
Shares:
Weighted average common shares outstanding 99,209 99,059 98,549
Weighted average shares of restricted
stock outstanding 521 627 883
Additional shares assuming exercise of stock options 596 1,771 1,941
-------- -------- ---------
Weighted average common shares and common
share equivalents outstanding - primary 100,326 101,457 101,373
======== ======== =========
Earnings before extraordinary loss $ 0.39 $ 0.50 $ 0.61
Extraordinary loss from early extinguishment of debt,
net of tax benefit -- -- (0.06)
-------- -------- ---------
Primary net earnings per common share $ 0.39 $ 0.50 $ 0.55
======== ======== =========
ASSUMING FULL DILUTION
Earnings before extraordinary loss $ 39,330 $ 50,325 $ 61,570
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $3,462 in fiscal 1994 -- -- (5,415)
-------- -------- ---------
Net earnings $ 39,330 $ 50,325 $ 56,155
======== ======== =========
Shares:
Weighted average common shares outstanding 99,209 99,059 98,549
Weighted average shares of restricted
stock outstanding 521 627 883
Additional shares assuming exercise of stock options 625 1,798 1,954
-------- -------- ---------
Weighted average common shares and common
share equivalents outstanding - fully diluted 100,355 101,484 101,386
======== ======== =========
Earnings before extraordinary loss $ 0.39 $ 0.50 $ 0.61
Extraordinary loss from early extinguishment of debt,
net of tax benefit -- -- (0.06)
-------- -------- ---------
Fully diluted net earnings per common share $ 0.39 $ 0.50 $ 0.55
======== ======== =========
</TABLE>
<PAGE> 1
EXHIBIT 13
Selected Financial Information
<TABLE>
<CAPTION>
Fiscal Year
(In thousands, except per share,
store, ratio and rate data) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $3,955,016 $4,018,525 $4,050,381 $3,814,618 $3,712,790
Earnings before interest and income taxes 136,558 160,299 175,697 210,434 231,202
Interest expense - debt and
capitalized leases 73,630 79,129 74,762 73,243 92,685
Earnings before extraordinary loss and
cumulative effect of change in accounting
principle 39,330 50,325 61,570 82,315 84,495
Net earnings 39,330 50,325 56,155 82,583 84,495
Ratios & Rates
Gross margin to net sales 24.2 % 24.3 % 24.0 % 24.8 % 24.4 %
Selling, general and administrative
expenses to net sales 19.2 % 18.8 % 18.1 % 17.7 % 16.6 %
Effective tax rate 37.5 % 38.0 % 39.0 % 40.0 % 39.0 %
Earnings before extraordinary loss and
cumulative effect of change in accounting
principle to net sales 1.0 % 1.3 % 1.5 % 2.2 % 2.3 %
Net earnings to net sales 1.0 % 1.3 % 1.4 % 2.2 % 2.3 %
PER COMMON SHARE (a)
Earnings per share before extraordinary loss
and cumulative effect of change in accounting
principle $ 0.39 $ 0.50 $ 0.61 $ 0.80 $ 0.83
Net earnings per share $ 0.39 $ 0.50 $ 0.55 $ 0.81 $ 0.83
Weighted-average common shares and
common share equivalents outstanding 100,326 101,457 101,373 102,078 101,602
FINANCIAL POSITION
Inventories $1,052,969 $1,034,467 $1,004,282 $ 939,259 $ 857,640
Accounts payable 595,262 620,669 639,766 630,723 496,946
Working capital 489,597 365,025 290,696 310,622 289,599
Total assets 2,042,827 1,940,570 1,926,902 2,014,700 1,707,460
Long-term obligations (b) 682,156 623,286 618,423 698,521 696,911
Shareholders' equity 427,094 386,742 336,376 279,538 194,207
Ratios
Inventory turnover 2.9 x 3.0 x 3.2 x 3.2 x 3.4 x
Current ratio 1.5 x 1.4 x 1.3 x 1.3 x 1.4 x
Long-term debt to long-term debt + equity 61.5 % 61.7 % 64.8 % 71.4 % 78.2 %
OTHER INFORMATION
Total net sales increase (decrease) (1.6)% (0.8)% 6.2 % 2.7 % 9.2 %
Comparable store net sales increase (decrease) (c) (1.9)% (3.3)% 1.3 % 0.3 % 5.2 %
Number of stores 400 409 406 391 371
EBITDA DATA
EBITDA (d) $ 199,189 $224,816 $ 242,495 $ 280,075 $ 300,033
EBITDA to net sales 5.0 % 5.6 % 6.0 % 7.3 % 8.1 %
</TABLE>
(a) Restated for stock split in 1992.
(b) Includes both long-term debt and long-term portion of capitalized lease
obligations.
(c) Adjusted to reflect a comparable number of selling days.
(d) EBITDA consists of net earnings before interest, income taxes,
depreciation and amortization. Also included in EBITDA is other
amortization classified as selling, general and administrative expenses
in the following amounts: 1996 - $2,972; 1995 - $2,743; 1994 - $4,263;
1993 - $7,884; 1992 - $10,131. 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 operating performance.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
With the exception of historical information, the items discussed in
this section are forward-looking statements involving risks and uncertainties
including, but not limited to, competitive pressures from other retailers,
financing costs, availability of products, economic conditions, real estate
occupancy and development costs, inventory risks, advertising costs, including
the cost of paper and postage, labor costs and other risks disclosed in filings
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Fiscal Year Ended December 29, 1996 Compared to
Fiscal Year Ended December 31, 1995
Net earnings for the year ended December 29, 1996 (fiscal 1996) were
$39.3 million, or $0.39 per share, compared to net earnings of $50.3 million, or
$0.50 per share, for the year ended December 31, 1995 (fiscal 1995). The
decrease in earnings was primarily attributable to lower sales and increased
selling, general and administrative expenses, partially offset by lower interest
expense related to lower average short-term borrowings. Several operational
improvements were implemented during 1996, including improving advertising
efficiency, introducing a new television ad campaign and upgrading the
merchandise assortment and display. However, these improvements did not create a
sufficient customer response in the form of higher sales, and as a result, the
Company experienced a disappointing holiday shopping season. During the latter
part of 1996, management began a broad and fundamental analysis of the Company's
business design and retail format focused on improving returns on invested
capital. This strategic analysis and the identification of related action plans
is expected to be completed in the first half of 1997.
For fiscal 1996, net sales were $3.96 billion compared to $4.02 billion
for fiscal 1995, a decrease of $63.5 million or 1.6%. Comparable store sales
decreased 1.9%. For the year, comparable store sales of jewelry were essentially
flat, with the overall decrease in comparable store sales attributable primarily
to hardlines. Management believes that the loss of five shopping days between
Thanksgiving and Christmas resulted in a delayed and shortened shopping season
which adversely affected sales.
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 41.5% and 42.0% of total net sales in fiscal 1996 and 1995, respectively.
Fourth quarter net sales for fiscal 1996 decreased 2.7% when compared to the
fourth quarter of fiscal 1995. Comparable store sales decreased 2.8% for the
fourth quarter of 1996 when compared to the fourth quarter of 1995.
Gross margin, after cost of merchandise sold and buying and occupancy
expenses, decreased as a percentage of net sales to 24.2% in fiscal 1996 from
24.3% in fiscal 1995. Lower net sales affected the gross margin dollar
performance while higher inventory shrinkage and an increase in freight and
occupancy expenses suppressed both overall gross margin dollars and gross margin
rates.
Selling, general and administrative expenses for fiscal 1996 increased
as a percentage of net sales to 19.2% from 18.8% in fiscal 1995. The increase
was primarily attributable to an increase in employment expenses, which was
partially offset by a decrease in net advertising expenses and gains on the sale
of property and equipment.
The higher employment expenses incurred in the third and fourth
quarters were attributable to the extensive transitioning of the merchandising
assortments and displays and a higher expectation of sales than was achieved in
the fourth quarter. Lower net advertising expense was achieved by improved
efficiencies. The Company recognized a $4.7 million net gain on the sale of
property and equipment, including a $2.8 million gain on the disposal of
corporate aircraft and a $1.8 million gain on the disposal of two owned stores.
In fiscal 1995, the Company incurred a $0.2 million net loss on the disposal of
property and equipment.
Depreciation and amortization on owned and leased property and
equipment was $59.7 million for fiscal 1996 as compared to $61.8 million for
fiscal 1995, a decrease of 3.4%. The Company's capital expenditures, excluding
capitalized leases, decreased to $40.7 million in fiscal 1996, an 11.0%
reduction from $45.8 million in fiscal 1995. This reduction reflects fewer store
openings resulting from the
<PAGE> 3
Company's concentration on improving the performance of existing stores. The
Company closed a net 9 stores in fiscal 1996 as compared to opening a net 3
stores in fiscal 1995.
Interest expense on debt and capitalized leases decreased to $73.6
million in fiscal 1996 from $79.1 million in fiscal 1995. Lower average
borrowings related to prior year positive operating cash flow, lower working
capital investment and lower capital expenditures contributed to the decline in
interest expense.
The effective income tax rate decreased to 37.5% in fiscal 1996 from
38.0% in fiscal 1995 as a result of a reduction in the effective rates of state
income taxes.
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 included 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 was primarily the result of lower sales as well as
increased advertising and employment costs.
For fiscal 1995, net sales were $4.02 billion compared to $4.05 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
was 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. 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 reflected 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 38.0% in fiscal 1995 from
39.0% in fiscal 1994 as a result of a reduction in the effective rates of state
income taxes.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash provided from operating activities, funds available under the
Company's Reducing Revolving Credit Facility ("Credit Facility") and long-term
financing provided the resources required to support operations, seasonal
working capital requirements and capital expenditures. The Company's business is
highly seasonal with the Company's inventory investment and related short-term
borrowing requirements reaching a peak prior to the Christmas season. Positive
cash flow from operations is generated principally in the fourth quarter of each
fiscal year, reflecting the seasonal nature of the Company's business. The
significant fourth quarter cash flows enabled the Company to repay all
short-term borrowings under its Credit Facility prior to both 1996 and 1995
fiscal year ends.
Cash provided from operations was $79.5 million for fiscal 1996 as
compared to $59.9 million for fiscal 1995 and $83.5 million for fiscal 1994.
Cash flow from operations increased for fiscal 1996 compared to fiscal 1995
primarily as a result of a less significant increase in working capital
investment. The decrease in fiscal 1995 was the result of a decrease in
earnings, a decrease in accrued expenses and the Company's decision to reduce
accounts payable balances at year end. Although the Company has experienced a
negative operating trend with respect to earnings performance, it continues to
generate positive cash flows from operating activities. The Company believes
that its existing debt structure and future operating cash flows will provide
adequate liquidity for future operations. In order to accommodate the
implementation of strategic initiatives under consideration and to provide
increased operating flexibility, the Company is presently seeking to modify
certain terms of the Credit Facility.
Net cash provided by (used for) financing activities was $58.4 million,
$(8.1) million and $(160.1) million for fiscal 1996, 1995 and 1994,
respectively. Cash provided in fiscal 1996 from financing activities reflected
$73.6 million in mortgage financings, which primarily consisted of a single
15-year financing at a weighted-average rate of 9.2%. The proceeds of these
financings are to be used to bolster liquidity and may eventually be directed to
fund future capital investments. In fiscal 1995, long-term debt, excluding
current maturities, increased as a result of two new mortgages totaling $6.8
million and the refinancing of a $7.8 million mortgage which resulted in a
reclassification from current maturities to long-term debt. In fiscal 1994, the
Company prepaid $149.1 million of a secured term loan and mortgages as a result
of the completion of the Credit Facility.
Capital Expenditures
Net cash used for investing activities was $29.9 million, $47.8 million
and $75.2 million in fiscal 1996, 1995 and 1994, respectively. Proceeds from the
sale of property and equipment of $9.9 million in fiscal 1996 relate primarily
to the disposal of corporate aircraft and certain real estate. Capital
expenditures, excluding capitalized leases, in fiscal 1996 were $40.7 million as
compared to $45.8 million in fiscal 1995 and $82.1 million in fiscal 1994.
Capital expenditures in fiscal 1996 related primarily to additional
stores, capital maintenance, and remodeling of select stores. Substantially all
of the Company's capital expenditures in fiscal 1995 and 1994 related to new
store openings. In fiscal 1996, the Company opened 6 stores and closed 15 stores
as compared to the opening of 9 stores and closing of 6 stores in fiscal 1995.
In fiscal 1994, the Company opened 23 stores and closed 8 stores.
Planned capital expenditures for 1997 are expected to be directed
primarily to new stores, remodeling stores, and information systems
improvements. The Company expects to fund future capital expenditures with cash
flow from operations and potential future financings.
Capital Structure
During fiscal 1996, two of the Company's objectives were to bolster
liquidity and raise long-term capital for potential future investments by the
Company. This was accomplished through the mortgage financing of twenty-six
properties for $73.6 million during the year and a reduction in working
<PAGE> 5
capital investment throughout most of the year. Average short-term borrowings
decreased to $211.3 million for fiscal 1996 as compared to $286.0 million for
fiscal 1995 due to prior year positive operating cash flow, lower working
capital investment and lower capital expenditures. Short-term borrowings under
the Credit Facility reached a maximum of $421.7 million during fiscal 1996 as
compared to $518.6 million in fiscal 1995 and $527.2 million in fiscal 1994.
During fiscal 1996, the Company amended the existing Credit Facility to
allow for increased operating flexibility with respect to certain financial
covenants and investment limitations. At December 29, 1996, the Company had no
borrowings outstanding under the Credit Facility and maintained a zero borrowing
balance for a period greater than the required thirty days under the clean-down
provision of the Credit Facility. The maximum commitment level under the Credit
Facility is $525 million for 1997.
Total debt as a percentage of total capital for fiscal 1996 was 62.0%
as compared to 62.1% in fiscal 1995 and 65.5% in fiscal 1994.
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.
<PAGE> 6
Consolidated Statements Of Operations
<TABLE>
<CAPTION>
For the Fiscal Year Ended
December 29, December 31, January 1,
(In thousands, except per share data) 1996 1995 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $3,955,016 $4,018,525 $ 4,050,381
Cost of merchandise sold and buying and occupancy expenses 2,997,961 3,042,103 3,079,350
---------- ---------- -----------
Gross margin after cost of merchandise sold and
buying and occupancy expenses 957,055 976,422 971,031
Selling, general and administrative expenses 760,838 754,349 732,799
Depreciation and amortization 59,659 61,774 62,535
---------- ---------- -----------
Earnings before interest and income taxes 136,558 160,299 175,697
Interest expense - debt 64,987 69,722 64,531
Interest expense - capitalized leases 8,643 9,407 10,231
---------- ---------- -----------
Earnings before income taxes 62,928 81,170 100,935
Income taxes 23,598 30,845 39,365
---------- ---------- -----------
Earnings before extraordinary loss 39,330 50,325 61,570
Extraordinary loss from early extinguishment of debt, net of
tax benefit of $3,462 in fiscal 1994 -- -- (5,415)
---------- ---------- -----------
Net earnings $ 39,330 $ 50,325 $ 56,155
========== ========== ===========
Per common share:
Earnings before extraordinary loss $ 0.39 $ 0.50 $ 0.61
Extraordinary loss from early extinguishment of debt,
net of tax benefit -- -- (0.06)
---------- ---------- -----------
Net earnings per common share $ 0.39 $ 0.50 $ 0.55
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 29, December 31,
(In thousands, except per share data) 1996 1995
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 285,368 $ 177,314
Accounts receivable, net of allowance of
$4,593 and $2,763, respectively 61,454 53,621
Inventories 1,052,969 1,034,467
Prepaid expenses 15,461 25,277
----------- -----------
TOTAL CURRENT ASSETS 1,415,252 1,290,679
Net property and equipment - owned 567,056 583,290
Net property and equipment - capitalized leases 37,701 44,823
Other assets and deferred charges 22,818 21,778
----------- -----------
TOTAL ASSETS $ 2,042,827 $ 1,940,570
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 595,262 $ 620,669
Accrued expenses 212,223 193,016
State and local sales taxes 62,690 61,224
Income taxes 33,898 29,209
Current maturities of long-term debt 6,842 1,936
Current maturities of capitalized lease obligations 7,303 7,885
Deferred income taxes 7,437 11,715
----------- -----------
TOTAL CURRENT LIABILITIES 925,655 925,654
Long-term debt 623,615 557,392
Capitalized lease obligations 58,541 65,894
Deferred income taxes 7,922 4,888
----------- -----------
TOTAL LIABILITIES 1,615,733 1,553,828
----------- -----------
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 99,758 and 99,686 shares, respectively 49,879 49,843
Additional paid-in capital 5,670 5,483
Deferred compensation (1,251) (2,050)
Retained earnings 372,796 333,466
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 427,094 386,742
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,042,827 $ 1,940,570
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 8
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<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 1, 1994 99,368 $ 49,684 $ 4,055 $(1,187) $226,986 $ 279,538
Net earnings -- -- -- -- 56,155 56,155
Exercise of stock options 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 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
Net earnings -- -- -- -- 39,330 39,330
Exercise of stock options 52 26 93 -- -- 119
Shares issued under restricted
stock awards 26 13 115 (128) -- --
Amortization of deferred
compensation -- -- -- 927 -- 927
Cancellation / forfeiture of restricted stock (6) (3) (21) -- -- (24)
------- -------- ------- ------- -------- ---------
BALANCE DECEMBER 29, 1996 99,758 $ 49,879 $ 5,670 $(1,251) $372,796 $ 427,094
======= ======== ======= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 9
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
For the Fiscal Year Ended
December 29, December 31, January 1,
(In thousands) 1996 1995 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 39,330 $ 50,325 $ 56,155
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization (a) 62,683 64,569 66,850
Deferred income taxes (1,244) 11,976 3,659
(Gain) loss on sale of property and equipment (4,656) 166 (1,107)
Write-off of bond discount and debt issue costs -- -- 6,830
Changes in assets and liabilities (net of disposition) (b):
Accounts receivable (7,833) 1,513 (2,120)
Inventories (18,502) (30,185) (65,023)
Prepaid expenses 9,816 2,501 2,120
Accounts payable (25,407) (19,097) 9,043
Accrued expenses 20,673 (11,690) 22,615
Income taxes 4,689 (10,155) (15,550)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 79,549 59,923 83,472
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (40,746) (45,763) (82,108)
Proceeds from sale of property and equipment 9,855 1,554 7,269
Other, net 965 (3,569) (327)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (29,926) (47,778) (75,166)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 421,700 518,600 527,200
Repayment of short-term borrowings (421,700) (518,600) (527,200)
Proceeds from long-term debt 73,563 6,800 3,200
Repayment of long-term debt (2,486) (5,430) (153,849)
Repayment of capitalized lease obligations (8,693) (8,294) (8,133)
Debt issuance costs (4,048) (287) (1,771)
Exercise of stock options (forfeiture of restricted stock), net 95 (884) 419
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 58,431 (8,095) (160,134)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 108,054 4,050 (151,828)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 177,314 173,264 325,092
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 285,368 $ 177,314 $ 173,264
========= ========= =========
</TABLE>
(a) Includes other amortization classified as selling, general and
administrative expenses of $2,972 for fiscal 1996, $2,743 for fiscal
1995, $4,263 for fiscal 1994, and $52 of discount amortization
classified as interest expense in fiscal 1996, 1995 and 1994,
respectively.
(b) Includes disposition costs previously accrued which were associated
with the closing of various store locations.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER
29, 1996
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: Service Merchandise Company, Inc.
("Company"), with 400 stores in 37 states, is one of the nation's
largest retailers of jewelry and offers a wide selection of brand-name
hard goods 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. Customer purchases typically take
place in a Service Merchandise store. 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: The Company maintains its books using a 52/53
week year ending on the Sunday closest to the end of the calendar year.
There were 52 weeks in each of the three fiscal years in the period
ended December 29, 1996.
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 amounts
reported in the consolidated financial statements and related notes to
the consolidated financial statements. Changes in such estimates may
affect amounts reported in future periods.
Cash and cash equivalents: Cash and cash equivalents include
cash on hand and short-term, highly liquid investments which generally
include commercial paper, time deposits, securities under repurchase
agreements and institutional money market funds. Such investments are
generally made for periods covering one to thirty days. These
investments are valued at cost, which approximates market, and have a
weighted-average interest rate of 5.6% and 5.8% as of December 29, 1996
and December 31, 1995, respectively.
Accounts receivable: Accounts receivable primarily include
trade accounts, vendor allowances and customer layaway receivables.
Inventories: Inventories are valued at the lower of cost or
market. Cost is determined utilizing the first-in, first-out method.
Advertising: The Company generally expenses the costs of
producing and communicating advertising the first time the advertising
takes place. Net advertising expense was $144.0 million, $146.9 million
and $133.1 million for the fiscal years 1996, 1995 and 1994,
respectively. Advertising costs of $8.3 million and $18.2 million were
included in prepaid expenses at December 29, 1996 and December 31,
1995, respectively.
<PAGE> 11
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 five to ten
years for furniture, fixtures and equipment and thirty 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.
Stock-based compensation: Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require, companies to adopt the fair value
method of accounting for stock-based employee compensation. The
Company has chosen to continue to account for stock-based employee
compensation in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related
Interpretations.
Store opening costs: Costs of opening new stores are charged
to operations as incurred.
Income taxes: The Company reports income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
the asset and liability method is used for computing future income tax
consequences of events which have been recognized in the Company's
financial statements or income tax returns. Deferred income tax expense
or benefit is the change during the year in the Company's deferred
income 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 includes the effect of
outstanding stock options and restricted shares under the treasury
stock method.
Accounting change: In fiscal 1996, the Company implemented
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." This standard prescribes the
method for asset impairment evaluation for long-lived assets and
certain identifiable intangibles that are either held and used or to be
disposed of. The implementation of this standard did not have a
material effect on the Company's financial position or results of
operations.
B. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 29, December 31,
(In thousands) 1996 1995
<S> <C> <C>
Owned assets:
Land $ 121,815 $ 121,932
Buildings 455,823 445,782
Furniture, fixtures and equipment 385,609 369,689
Leasehold improvements 125,177 122,838
Construction in progress 2,522 7,406
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C>
Other 6,280 21,072
---------- ----------
1,097,226 1,088,719
Less: Accumulated depreciation and amortization (530,170) (505,429)
---------- ----------
Owned assets, net $ 567,056 $ 583,290
========== ==========
Capitalized leases:
Real estate $ 113,899 $ 113,899
Furniture, fixtures and equipment 10,512 12,503
---------- ----------
124,411 126,402
Less: Accumulated amortization (86,710) (81,579)
---------- ----------
Capitalized leases, net $ 37,701 $ 44,823
========== ==========
</TABLE>
C. REDUCING REVOLVING CREDIT FACILITY
The Company has available a Reducing Revolving Credit Facility
("Credit Facility") with a maximum commitment level which reduces $25
million annually until reaching $475 million at December 31, 1998. As
of December 31, 1996, the maximum commitment level was $525 million.
The Credit Facility matures on June 8, 1999 and as of December 29, 1996
carried an interest rate of LIBOR + 5/8% on borrowings and a 3/8%
facility fee on the entire committed amount. The interest rate is
subject to change based on the Company's public debt rating. The 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 weighted-average interest rate on
Credit Facility borrowings in 1996 and 1995 was 6.2% and 6.7%,
respectively.
The Credit Facility contains various financial and other
covenants, including: (a) certain restrictions on mergers,
consolidations and sales 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 $65 million as of December 29, 1996; (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, an interest coverage
ratio and a fixed charge coverage ratio, as defined. The Credit
Facility requires borrowings outstanding to be less than a defined
amount for a period of thirty consecutive days each year. During 1996,
the Company amended the Credit Facility to allow for increased
operating flexibility within certain covenants. At December 29, 1996
and December 31, 1995, the Company was in compliance with all covenants
and there were no borrowings outstanding under the Credit Facility.
D. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(In thousands) December 29, December 31,
1996 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 $212 and $265, respectively 99,788 99,735
First Mortgage Secured Notes, variable interest rate
at December 29, 1996 of 6.5%, payable in three
equal installments from 1998 to 2000 90,000 90,000
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C>
Real Estate Mortgage Financing Notes, weighted-average
fixed interest rate at December 29, 1996 of 9.2%,
payable in mortgage installments to 2011 67,895 --
Industrial Revenue Bonds, fixed and variable interest
rates, weighted-average interest rate at December 29, 1996
of 4.3%, payable in varying amounts to 2024 39,085 39,785
Mortgage notes payable, weighted-average fixed
interest rate at December 29, 1996 of 8.7%, payable
in varying amounts to 2022 33,689 29,808
--------- ---------
630,457 559,328
Less: Current maturities (6,842) (1,936)
--------- ---------
Long-term debt $ 623,615 $ 557,392
========= =========
</TABLE>
In fiscal 1996, the Company issued $68.2 million of Real
Estate Mortgage Financing Notes payable to a bank and Mortgage notes
payable of $5.4 million.
Long-term debt maturities are as follows:
(In thousands)
<TABLE>
<S> <C>
Fiscal Year
1997 $ 6,842
1998 36,380
1999 38,916
2000 35,035
2001 105,380
Thereafter 407,904
--------
Total $630,457
========
</TABLE>
During fiscal 1994, the Company prepaid high coupon mortgages
of $27.1 million with interest rates ranging from 10.0% to 12.5%.
Additionally, the Company prepaid the remaining $122.0 million
outstanding under a secured term loan as a result of the completion of
the Credit Facility. 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.
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. Interest on the Debentures is
payable semi-annually in June and December.
Mortgages and Industrial Revenue Bonds are collateralized by
property and equipment having a net book value of approximately $167.7
million and $23.3 million, respectively, at December 29, 1996. The
Industrial Revenue Bonds are primarily floating rate demand
obligations.
Cash payments for interest related to debt and capitalized
leases were $71.3 million, $79.6 million, and $73.6 million for fiscal
1996, 1995 and 1994, respectively.
E. LEASE COMMITMENTS
The Company has both capital and operating lease agreements
for stores 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
<PAGE> 14
costs. Initial 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 29, 1996 are as follows:
<TABLE>
<CAPTION>
Capitalized Lease Obligations
-----------------------------
(In thousands) Furniture, Fixtures Operating
Fiscal Year Real Estate and Equipment Leases
<S> <C> <C> <C>
1997 $ 13,954 $ 1,177 $ 71,688
1998 13,758 271 65,616
1999 12,759 96 61,420
2000 12,109 49 57,990
2001 11,123 12 54,774
Thereafter 45,953 -- 402,669
-------- ------- --------
Total minimum payments 109,656 1,605 $714,157
Less: Imputed interest and executory costs (45,339) (78) ========
-------- -------
Present value of net minimum lease payments 64,317 1,527
Less: Current maturities (6,210) (1,093)
-------- -------
Capitalized lease obligations $ 58,107 $ 434
======== =======
</TABLE>
Minimum sublease rentals, not deducted from above, to be
received in the future under noncancellable operating subleases
aggregated $26.2 million at December 29, 1996. Minimum lease rentals to
be received in the future on noncancellable leases of owned properties
aggregated $33.6 million at December 29, 1996.
Capitalized real estate and equipment leases are at effective
interest rates of approximately 12.5% and 5.5%, respectively, as of
December 29, 1996. Additions to capitalized leases in fiscal 1996 were
$0.8 million as compared to $0.6 million in fiscal 1995.
Rental expense, net of lease income on owned properties and
sublease income on leased properties, consists of the following:
<TABLE>
<CAPTION>
Fiscal Year
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Minimum rentals $85,038 $81,926 $75,193
Contingent rentals 1,376 1,379 1,898
Sublease rental income (4,296) (4,029) (4,297)
Owned properties rental income (4,819) (4,759) (5,260)
------- ------- -------
Net rental expense $77,299 $74,517 $67,534
======= ======= =======
</TABLE>
F. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments has been estimated by
the Company using available market information as of December 29, 1996
and December 31, 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.
<PAGE> 15
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
----------------- -----------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $285,368 $285,368 $177,314 $177,314
Liabilities:
9% Senior Subordinated Debentures 300,000 252,750 300,000 246,000
8 3/8% Senior Notes, net of discount 99,788 94,801 99,735 96,245
Mortgages 191,584 176,923 119,808 111,601
Industrial Revenue Bonds 39,085 39,085 39,785 39,785
</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 27, 1996 and December 29, 1995.
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.
Letters of credit: The Company has commercial and standby
letters of credit used to secure corporate obligations. The commercial
letters of credit have contractual amounts totaling $40.5 million and
$31.7 million at December 29, 1996 and December 31, 1995, respectively,
and a fair value of $0.1 million at December 29, 1996 and December 31,
1995, respectively. The standby letters of credit have contractual
amounts totaling $59.1 million and $49.1 million at December 29, 1996
and December 31, 1995, respectively, and a fair value of $0.4 million
at December 29, 1996 and December 31, 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.
G. STOCK OPTIONS AND AWARDS
Under the Company's employee stock incentive plans, the
Compensation Committee of the Board of Directors ("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. 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 ("Directors' Plan") for nonemployee 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
<PAGE> 16
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 and restated the 1989
Employee Stock Incentive Plan ("Stock Incentive Plan") to increase the
number of shares issuable to 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. Options are generally granted with a three to
five year vesting requirement. At December 29, 1996, there were
approximately 4.5 million shares of unissued common stock reserved for
issuance under the Company's stock incentive plans.
Stock options: A summary of the status of the Company's two
fixed stock option plans for fiscal 1996, 1995 and 1994, and changes
during those years is presented below:
<TABLE>
<CAPTION>
(Shares in thousands) 1996 1995 1994
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 5,521 $6.00 4,149 $6.75 3,090 $6.69
Granted 1,924 4.95 2,091 4.78 1,742 6.98
Exercised (52) 2.43 (48) 2.47 (112) 3.95
Forfeited or cancelled (1,634) 7.20 (671) 7.09 (571) 7.72
------- ------ -----
Outstanding, end of year 5,759 5.35 5,521 6.00 4,149 6.75
======= ====== =====
Options exercisable at year-end 2,361 5.39 2,085 5.73 1,759 5.28
Weighted-average fair value of
options granted during the year $ 2.69 $ 2.71
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 29, 1996:
<TABLE>
<CAPTION>
(Shares in thousands) Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Number Weighted-Average Number Weighted-
Outstanding at Remaining Weighted-Average Exercisable at Average
Range of Exercise Prices 12/29/96 Contractual Life Exercise Price 12/29/96 Exercise Price
- ------------------------ -------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.85 - 3.00 656 2.11 $2.64 656 $2.64
3.01 - 4.75 1,863 8.28 4.62 633 4.49
4.76 - 6.50 1,839 8.85 5.10 142 5.74
6.51 - 10.38 1,401 5.72 7.90 930 7.89
----- -----
$1.85 - 10.38 5,759 7.14 5.35 2,361 5.39
===== =====
</TABLE>
Had the fair value of options granted under these plans beginning in
1995 been recognized as compensation expense on a straight-line basis over the
vesting period of the grant, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1996 1995
<S> <C> <C>
Net Income As reported $39,330 $50,325
Pro forma $37,896 $49,874
Earnings Per Share As reported $ 0.39 $ 0.50
Pro forma $ 0.38 $ 0.49
</TABLE>
<PAGE> 17
The pro forma effect on net income for 1996 and 1995 is not
representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996 and
1995: no dividend yield for all years; expected volatility of 50 and 52
percent, respectively; risk-free interest rate ranges of 5.8% to 6.9%
and 5.4% to 6.8%, respectively; and expected lives of six years.
Restricted stock awards: Periodically, the Company issues
shares of restricted stock under provisions of the Stock Incentive
Plan. A total of 511,625 restricted shares remained outstanding at
December 29, 1996. These remaining shares will vest at various rates
through the year 2000. During the vesting periods, none of such shares
may be sold, transferred, pledged or assigned. 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>
(Shares in thousands) 1996 1995 1994
Shares Shares Shares
------ ------ ------
<S> <C> <C> <C>
Restricted Stock
Outstanding, beginning of year 515 1,202 903
Granted 26 48 480
Vested (23) (507) (39)
Forfeited or cancelled (6) (228) (142)
--- ----- -----
Outstanding, end of year 512 515 1,202
=== ===== =====
</TABLE>
The estimated weighted-average fair value at date of grant for
restricted stock granted during 1996, 1995 and 1994 was $4.95, $4.38
and $5.88 per share, respectively. Deferred compensation of $0.1
million was recorded during fiscal 1996 in connection with restricted
stock awards. Deferred compensation amortization relating to restricted
stock awards of $0.9 million, $0.9 million and $0.3 million was charged
to operations in fiscal 1996, 1995 and 1994, respectively.
Service Merchandise Foundation option: The Service Merchandise
Foundation ("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.
These options are not treated as granted and outstanding until such
time the Foundation sells them.
H. SHAREHOLDERS' RIGHTS PLAN
In February 1988, the Company adopted a shareholder rights
plan. The plan declared a distribution of one Series A Junior Preferred
Stock Purchase Right ("Rights") for each share of then outstanding
common stock. The Rights attach to and are transferred with all
certificates representing shares of common stock; no separate Rights
certificates have been distributed. Each Right entitles the holder to
purchase from the Company one one-hundredth of a share of Series A
Junior Preferred Stock,
<PAGE> 18
$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. The Board of Directors may, upon the
triggering of the Rights Plan, redeem the Rights and prevent the
purchase of Right units by shareholders. The Rights currently expire in
1998.
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 1996, 1995 and 1994, the Company made
contributions of approximately $8.9 million, $8.8 million and $8.9
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 29, December 31,
(In thousands) 1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation (includes
$47,711 and $55,285 of vested benefit
obligation, respectively) $(49,411) $(57,269)
======== ========
Projected benefit obligation $(63,732) $(62,448)
Plan assets at fair value, primarily
listed corporate stocks and bonds 69,945 61,496
-------- --------
Plan assets in excess of (less than)
projected benefit obligation 6,213 (952)
Unrecognized net loss 4,070 9,855
Unrecognized transitional liability, net of amortization (2,655) (3,035)
Unrecognized prior service cost (1,014) (3,411)
-------- --------
Prepaid pension cost $ 6,614 $ 2,457
======== ========
Service cost $ 5,946 $ 6,660
Interest on projected benefit obligation 4,463 4,197
Actual return on plan assets (8,731) (13,550)
Net amortization and deferrals 3,021 8,170
-------- --------
Net pension expense $ 4,699 $ 5,477
======== ========
</TABLE>
Net pension expense was $5.2 million for fiscal 1994.
Assumptions used in determining the actuarial present value of
the projected benefit obligation were as follows: weighted-average
discount rates for fiscal 1996 and 1995 were 7.8% and 7.3%,
respectively; expected long-term rate of return on pension plan assets
for both fiscal 1996 and 1995 was 9.5%; and rate of increase in future
compensation levels for fiscal 1996 and 1995 was 4.5% and 5.0%,
respectively.
<PAGE> 19
J. EMPLOYEE SAVINGS PLAN
The Service Merchandise Company, Inc. Savings and Investment
Plan ("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, $2.1
million and $3.6 million for fiscal 1996, 1995 and 1994, respectively.
The Company match percentage equaled 30% in fiscal 1996 and fiscal 1995
and 50% in fiscal 1994.
K. INCOME TAXES
Deferred income tax assets and liabilities at December 29,
1996 and December 31, 1995 are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 29, December 31,
(In thousands) 1996 1995
<S> <C> <C>
Deferred income tax assets:
Financial accruals $15,234 $15,356
Capitalized leases 11,687 11,974
Other 7,436 4,261
------- -------
Deferred income tax asset 34,357 31,591
------- -------
Deferred income tax liabilities:
Depreciation 38,522 39,662
Layaway sales 4,688 4,153
Pension liability 3,005 2,602
Other 3,501 1,777
------- -------
Deferred income tax liability 49,716 48,194
------- -------
Net deferred income tax liability $15,359 $16,603
======= =======
Net current deferred income tax liability $ 7,437 $11,715
Net long-term deferred income tax liability 7,922 4,888
------- -------
Net deferred income tax liability $15,359 $16,603
======= =======
</TABLE>
The provision for income taxes, net of tax benefit of $3.5
million in fiscal 1994 on the extraordinary loss from early
extinguishment of debt, consists of the following:
<TABLE>
<CAPTION>
Fiscal Year
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Current income taxes:
Federal $21,695 $19,185 $28,159
State and local 1,271 1,050 4,813
------- ------- -------
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
22,966 20,235 32,972
Deferred income taxes 632 10,610 2,931
------- ------- -------
Total income taxes $23,598 $30,845 $35,903
======= ======= =======
</TABLE>
A reconciliation of the provision for income taxes to the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year
1996 1995 1994
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal benefit 1.6% 2.0% 3.4%
Other 0.9% 1.0% 0.6%
---- ---- ----
Effective tax rate 37.5% 38.0% 39.0%
==== ==== ====
</TABLE>
Cash payments for income taxes were $19.9 million, $28.7
million and $47.4 million for fiscal 1996, 1995 and 1994, respectively.
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 has settled this matter for an amount which is not material to
the financial position of the Company.
The Company was also involved in other litigation,
investigations of a routine nature and various legal matters during
fiscal 1996 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.
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, June 30, September 29, December 29,
THREE PERIODS ENDED 1996 1996 1996 1996
<S> <C> <C> <C> <C>
Net sales $ 715,628 $ 859,984 $ 738,328 $1,641,076
========= ========= ========= ==========
Gross margin (a) $ 160,758 $ 207,851 $ 175,118 $ 413,328
========= ========= ========= ==========
Net earnings (loss) $ (24,715) $ (1,822) $ (12,324) $ 78,191
========= ========= ========= ==========
Net earnings (loss) per common
share $ (0.24) $ (0.02) $ (0.12) $ 0.78
========= ========= ========= ==========
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
April 2, July 2, October 1, December 31,
THREE PERIODS ENDED 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
========= ========= ========= ==========
Net earnings (loss) $ (23,009) $ 849 $ (8,540) $ 81,025
========= ========= ========= ==========
Net earnings (loss) per common
share $ (0.23) $ 0.01 $ (0.08) $ 0.80
========= ========= ========= ==========
</TABLE>
(a) Gross margin after cost of merchandise sold and buying and
occupancy expenses.
<PAGE> 22
Statement Of Responsibility
The Company is responsible for the information presented in
this Annual Report. The consolidated 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 consolidated
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 consolidated 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.
/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
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
29, 1996 and December 31, 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 29, 1996. 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 29, 1996 and
December 31, 1995, and the consolidated results of their operations and
cash flows for each of the three years in the period ended December 29,
1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
-------------------------
DELOITTE & TOUCHE LLP
January 28, 1997
Nashville, Tennessee
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of the Registrant as of December 29,
1996 all of which are wholly-owned:
<TABLE>
<CAPTION>
STATE OF
PARENT INCORPORATION
- ------ -------------
<S> <C>
Service Merchandise Company, Inc. Tennessee
SUBSIDIARIES
Service Merchandise Co. Broad, Inc. Tennessee
Service Merchandise Co. No. 34, Inc. Tennessee
Service Merchandise Co. No. 35, Inc. Tennessee
Service Merchandise Co. No. 51, Inc. 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
SMC-SPE-1, Inc. Delaware
SMC-SPE-2, Inc. Delaware
SMC-HC, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-60201, 33-7079, 33-11340, 33-30983 and 33-50185 on Form S-8 of our report
dated January 28, 1997 incorporated by reference in the Annual Report on Form
10-K of Service Merchandise Company, Inc. for the fiscal year ended December 29,
1996.
/s/ Deloitte & Touche LLP
- -----------------------------
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SERVICE
MERCHANDISE COMPANY, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 29, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS DETAILED IN EXHIBIT 13 OF THE
FORM 10-K WHICH IS INCORPORATED BY REFERENCE IN PART II OF THE FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 285,368
<SECURITIES> 0
<RECEIVABLES> 66,047
<ALLOWANCES> 4,593
<INVENTORY> 1,052,969
<CURRENT-ASSETS> 1,415,252
<PP&E> 1,221,637
<DEPRECIATION> 616,880
<TOTAL-ASSETS> 2,042,827
<CURRENT-LIABILITIES> 925,655
<BONDS> 682,156
0
0
<COMMON> 99,758<F1>
<OTHER-SE> 377,215
<TOTAL-LIABILITY-AND-EQUITY> 2,042,827
<SALES> 3,955,016
<TOTAL-REVENUES> 3,955,016
<CGS> 2,997,961
<TOTAL-COSTS> 2,997,961
<OTHER-EXPENSES> 820,497<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,630
<INCOME-PRETAX> 62,928
<INCOME-TAX> 23,598
<INCOME-CONTINUING> 39,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,330
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<FN>
<F1>AMOUNT REPRESENTS THE NUMBER OF SHARES OF $0.50 PAR VALUE COMMON STOCK
ISSUED AND OUTSTANDING.
<F2>AMOUNT INCLUDES i) DEPRECIATION AND AMORTIZATION AND ii) SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.
</FN>
</TABLE>
