-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C/ImCvA6bmALEDRPx1V4dgC5GOiYfDGg2QkPi0GBA9Eq7Er1zuzn4M3CRcGRYc4h m6eGKIFN492c2sLaCddvJw== 0000950144-97-002706.txt : 19970324 0000950144-97-002706.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950144-97-002706 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970321 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE MERCHANDISE CO INC CENTRAL INDEX KEY: 0000089107 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISC GENERAL MERCHANDISE STORES [5399] IRS NUMBER: 620816060 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09223 FILM NUMBER: 97560408 BUSINESS ADDRESS: STREET 1: 7100 SERVICE MERCHANDISE DR CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6156606000 MAIL ADDRESS: STREET 1: PO BOX 24600 CITY: NASHVILLE STATE: TN ZIP: 37202 10-K405 1 SERVICE MERCHANDISE FORM 10-K405 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:
Name of Exchange on Title of Class Which Registered - -------------- ---------------- Common Stock ($.50 Par Value) New York Stock Exchange Series A Junior Preferred Stock Purchase Rights New York Stock Exchange 9% Senior Subordinated Debentures New York Stock Exchange 8 3/8% Senior Notes New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 $335,121,582. This calculation assumes that all shares of Common Stock beneficially held by officers and members of the Board of Directors of the Registrant are owned by "affiliates," a status which each of the officers and directors individually disclaims.
Class Outstanding at February 28, 1997 ----- -------------------------------- Common Stock ($.50 Par Value) 99,757,757 Parts in Form 10-K Where Documents Documents Incorporated by Reference Are Incorporated by Reference - ----------------------------------- ----------------------------- 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
Exhibit Index located on Pages 13-18 2 TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
Page No. ---- 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
-2- 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- 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- 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- 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:
Center Location Sq. Feet Owned/Leased Lease Term --------------- -------- ------------ ---------- 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
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:
Number of Stores ---------------- 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 ===
-6- 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- 8 Item 2. Properties (continued) SERVICE MERCHANDISE COMPANY, INC. STORE LOCATIONS 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
-8- 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:
Name, Age and Position - ---------------------- 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.
-9- 10 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.
- ------------------------------ (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:
1996 High Low - ---- ---- --- 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
-10- 11
1995 High Low - ---- ---- --- First Quarter 5 1/4 4 1/8 Second Quarter 5 1/4 4 1/4 Third Quarter 7 7/8 5 3/8 Fourth Quarter 7 1/8 4 1/2
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:
Description Page - ----------- ---- 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
Item 9. Changes in and Disagreements With Independent Auditors on Accounting and Financial Disclosure No reportable items. -11- 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- 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:
Exhibit No. Under Item 601 of Regulation S-K Brief Description -------------- ----------------- 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.
-13- 14 3. Exhibits and Index to Exhibits (continued): Exhibits filed with this Form 10-K (continued):
Exhibit No. Under Item 601 of Regulation S-K Brief Description -------------- ----------------- 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).
Exhibits incorporated herein by reference:
Exhibit No. Under Exhibit No. in Item 601 of Document Where Regulation S-K Brief Description Originally Filed -------------- ----------------- ---------------- 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.
-14- 15 3. Exhibits and Index to Exhibits (continued): Exhibits incorporated herein by reference (continued):
Exhibit No. Under Exhibit No. in Item 601 of Document Where Regulation S-K Brief Description Originally Filed -------------- ----------------- ---------------- 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.
-15- 16 3. Exhibits and Index to Exhibits (continued): Exhibits incorporated herein by reference (continued):
Exhibit No. Under Exhibit No. in Item 601 of Document Where Regulation S-K Brief Description Originally Filed -------------- ----------------- ---------------- 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.
-16- 17 3. Exhibits and Index to Exhibits (continued): Exhibits incorporated herein by reference (continued):
Exhibit No. Under Exhibit No. in Item 601 of Document Where Regulation S-K Brief Description Originally Filed -------------- ----------------- ---------------- 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.
-17- 18 3. Exhibits and Index to Exhibits (continued): Exhibits incorporated herein by reference (continued):
Exhibit No. Under Exhibit No. in Item 601 of Document Where Regulation S-K Brief Description Originally Filed -------------- ----------------- ---------------- 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.
(b) Reports on Form 8-K There were no reports on Form 8-K during the fiscal year ended December 29, 1996. -18- 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 /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
/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- 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- 21 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------------- 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
(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- EX-4.19 2 FIRST AMENDMENT TO LOAN AGREEMENT 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 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 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 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: 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 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 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 EX-4.20 3 SECOND AMENDMENT TO LOAN AGREEMENT 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. 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 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 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 EX-4.21 4 FOURTH AMENDMENT TO THE LOAN AGREEMENT 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 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. 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. 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 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 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 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 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: 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 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 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 EX-4.22 5 THIRD AMENDMENT TO THE LOAN AGREEMENT 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 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. 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 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 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 EX-11 6 COMPUTATION OF EARNINGS 1 EXHIBIT 11 SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 29 DECEMBER 31 JANUARY 1 1996 1995 1995 ----------- ----------- --------- 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 ======== ======== =========
EX-13 7 PORTIONS OF 1996 ANNUAL REPORT 1 EXHIBIT 13 Selected Financial Information
Fiscal Year (In thousands, except per share, store, ratio and rate data) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------- 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 %
(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. 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 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. 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 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. 6 Consolidated Statements Of Operations
For the Fiscal Year Ended December 29, December 31, January 1, (In thousands, except per share data) 1996 1995 1995 - ----------------------------------------------------------------------------------------------------- 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 ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 7 Consolidated Balance Sheets
December 29, December 31, (In thousands, except per share data) 1996 1995 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 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 8 Consolidated Statements of Changes in Shareholders' Equity
Common Stock -------------------- Additional Common Par Paid-in Deferred Retained (In thousands) Shares Value Capital Compensation Earnings Total ------------------------------------------------------------------------ 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 ======= ======== ======= ======= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 9 Consolidated Statements Of Cash Flows
For the Fiscal Year Ended December 29, December 31, January 1, (In thousands) 1996 1995 1995 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 ========= ========= =========
(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. 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. 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:
December 29, December 31, (In thousands) 1996 1995 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
12 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 ========== ==========
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:
(In thousands) December 29, December 31, 1996 1995 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
13 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 ========= =========
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) Fiscal Year 1997 $ 6,842 1998 36,380 1999 38,916 2000 35,035 2001 105,380 Thereafter 407,904 -------- Total $630,457 ========
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 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:
Capitalized Lease Obligations ----------------------------- (In thousands) Furniture, Fixtures Operating Fiscal Year Real Estate and Equipment Leases 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 ======== =======
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:
Fiscal Year 1996 1995 1994 (In thousands) 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 ======= ======= =======
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. 15
December 29, 1996 December 31, 1995 ----------------- ----------------- Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value Assets: 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
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 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:
(Shares in thousands) 1996 1995 1994 ---- ---- ---- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- 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
The following table summarizes information about fixed stock options outstanding at December 29, 1996:
(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 - ------------------------ -------- ---------------- -------------- -------- -------------- $ 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 ===== =====
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:
(In thousands, except per share data) 1996 1995 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
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:
(Shares in thousands) 1996 1995 1994 Shares Shares Shares ------ ------ ------ 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 === ===== =====
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, 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:
December 29, December 31, (In thousands) 1996 1995 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 ======== ========
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. 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:
DECEMBER 29, December 31, (In thousands) 1996 1995 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 ======= =======
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:
Fiscal Year 1996 1995 1994 (In thousands) Current income taxes: Federal $21,695 $19,185 $28,159 State and local 1,271 1,050 4,813 ------- ------- -------
20 22,966 20,235 32,972 Deferred income taxes 632 10,610 2,931 ------- ------- ------- Total income taxes $23,598 $30,845 $35,903 ======= ======= =======
A reconciliation of the provision for income taxes to the federal statutory rate is as follows:
Fiscal Year 1996 1995 1994 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% ==== ==== ====
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)
March 31, June 30, September 29, December 29, THREE PERIODS ENDED 1996 1996 1996 1996 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 ========= ========= ========= ==========
21
April 2, July 2, October 1, December 31, THREE PERIODS ENDED 1995 1995 1995 1995 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 ========= ========= ========= ==========
(a) Gross margin after cost of merchandise sold and buying and occupancy expenses. 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 EX-21 8 SUBSIDIARIES LIST 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:
STATE OF PARENT INCORPORATION - ------ ------------- Service Merchandise Company, Inc. Tennessee SUBSIDIARIES Service Merchandise Co. Broad, Inc. Tennessee Service Merchandise Co. No. 34, Inc. Tennessee Service Merchandise Co. No. 35, Inc. Tennessee Service Merchandise Co. No. 51, Inc. Illinois Service Merchandise Co. No. 93, Inc. Tennessee Service Merchandise Co. No. 30, Inc. Tennessee Service Merchandise Co. No. 99, Inc. Nevada Service Merchandise Company of Iowa, Inc. Tennessee Service Merchandise Company of Kansas, Inc. Tennessee The Toy Store, Inc. Tennessee B. A. Pargh Co., Inc. Tennessee Service Merchandise Showrooms, Inc. Tennessee Wholesale Supply Company, Inc. Tennessee Homeowners Warehouse, Inc. Florida The Lingerie Store, Inc. Tennessee The McNally Supply Company Tennessee SMC Aviation, Inc. New Hamphshire H. J. Wilson Co., Inc. Louisiana Service Merchandise Co. of New York, Inc. Tennessee Travel Management Consultants, Inc. Tennessee A. F. S. Marketing Services, Inc. Tennessee Service Merchandise Financial Co., Inc. Tennessee Service Merchandise Indiana Partners Indiana Service Merchandise of Tennessee, Limited Partnership Delaware Service Merchandise of Texas, Limited Partnership Delaware SMC-SPE-1, Inc. Delaware SMC-SPE-2, Inc. Delaware SMC-HC, Inc. Delaware
EX-23 9 INDEPENDENT AUDITORS CONSENT 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 EX-27 10 FINANCAL DATA SCHEDULE
5 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. 1,000 YEAR DEC-29-1996 JAN-01-1996 DEC-29-1996 285,368 0 66,047 4,593 1,052,969 1,415,252 1,221,637 616,880 2,042,827 925,655 682,156 0 0 99,758 377,215 2,042,827 3,955,016 3,955,016 2,997,961 2,997,961 820,497 0 73,630 62,928 23,598 39,330 0 0 0 39,330 0.39 0.39 AMOUNT REPRESENTS THE NUMBER OF SHARES OF $0.50 PAR VALUE COMMON STOCK ISSUED AND OUTSTANDING. AMOUNT INCLUDES i) DEPRECIATION AND AMORTIZATION AND ii) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
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