-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, bau3wanJRt7uPbGOuoJyhhfGnsjsS8JvaEhcfSQM4D6m3FTMy8hWAteqJR6AXIrt NVMo8IaigDA4L/8m4DMf9g== 0000950144-95-000773.txt : 199507120000950144-95-000773.hdr.sgml : 19950711 ACCESSION NUMBER: 0000950144-95-000773 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19950101 FILED AS OF DATE: 19950328 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: 95523649 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 COMPANY, INC. 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 (Fee Required) for the fiscal year ended January 1, 1995 or - --- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) for the transition period from to . ------------- ------------ Commission File No. 1-9223 SERVICE MERCHANDISE COMPANY, INC. (Exact name of registrant as specified in its charter) 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 --- State the aggregate market value (based on the closing price as reported on the New York Stock Exchange) of the voting stock held by non-affiliates of the registrant as of March 1, 1995: $448,321,400. This calculation assumes that all shares of Common Stock beneficially held by officers and members of the Board of Directors of the Registrant are owned by "affiliates," a status which each of the officers and directors individually disclaims. Class Outstanding at March 1, 1995 ----- ---------------------------- Common Stock ($.50 Par Value) 99,646,443 Parts in Form 10-K Where Documents Documents Incorporated by Reference Are Incorporated by Reference - ----------------------------------- ----------------------------- Portions of Registrant's Proxy Statement dated March 16, 1995 Part III Portions of Registrant's Annual Report to Shareholders for the fiscal year ended January 1, 1995 Parts II and IV
2 TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
Page No. ---- PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - ------ Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 4. Submission of Matters to a Vote of Security-Holders. . . . . . . . . . . . . . . 8 Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . 8-9 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 - ------- Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 9-10 Item 6. Selected Financial Data Page 10 of the Registrant's 1994 Annual Report to Shareholders for the year ended January 1, 1995 which is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Pages 11 through 14 of the Registrant's Financial Condition and Results of 1994 Annual Report to Shareholders for Operations the year ended January 1, 1995 which are incorporated herein by reference. Item 8. Financial Statements and Supplementary Pages 15 through 31 of the Registrant's Data 1994 Annual Report to Shareholders for the year ended January 1, 1995 which are incorporated herein by reference. Item 9. Changes in and Disagreements With Independent Auditors on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 - -------- Item 10. Directors and Executive Officers of the Pages 2 through 5 of the Registrant's Proxy Registrant Statement dated March 16, 1995 which are incorporated herein by reference. Item 11. Executive Compensation Pages 8 through 18 of the Registrant's Proxy Statement dated March 16, 1995 which are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Pages 6 and 7 of the Registrant's Proxy Owners and Management Statement dated March 16, 1995 which are incorporated herein by reference. Item 13. Certain Relationships and Related Page 19 of the Registrant's Proxy Statement Transactions dated March 16, 1995 which is incorporated herein by reference. PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 - ------- Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-15 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-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 Company, Inc. as a separate corporate entity and does not refer to subsidiaries. The information included in this Form 10-K is, unless indicated to be given as of a specified date or for a specified period, given as of the date of this report, which is January 1, 1995. PART I Item 1. Business Service Merchandise, with 406 catalog stores in 37 states, is one of the nation's largest retailers of jewelry, and offers a wide selection of brand-name hardgoods in its other product lines. The major categories of goods offered by the Company are fine jewelry (including diamonds), housewares, small appliances, giftware, silverware, cameras, luggage, radios, televisions and other home electronics, patio, lawn and garden accessories, sporting goods and toys. Catalog and Store Operations The Company's franchise is built around selling nationally advertised brand-name hardgoods and quality jewelry at low prices. The Company's customer typically pre-selects merchandise from the Company's annual catalog which is distributed in early fall each year. The catalog, which had 560 pages in 1994, is supplemented by a spring catalog of 176 pages, a Christmas catalog of 160 pages and a combination of direct mail flyers and newspaper inserts distributed approximately every other week of the year. The catalogs, flyers and newspaper inserts describe the majority of merchandise offered for sale by the Company and list the Company's selling price and a reference price. The reference price is either the selling price suggested by the manufacturer, or is determined by comparison shopping and/or the application of a standard markup to the cost of an item. The Company's fall, spring and Christmas catalogs are printed only once a year, with selling prices adjusted periodically through flyers and newspaper inserts to reflect changes in merchandise costs or to provide clearance pricing. Although the typical customer pre-selects merchandise from a catalog, flyer or newspaper insert, the actual purchase usually takes place in a Company store, where the customer has physical access to the merchandise. Customers may also purchase goods through mail or telephone order, although this represents a small portion of the Company's total sales. According to a 1994 customer opinion survey, the Company's typical customer is well-educated, married and lives in a two-earner household and looks for well-made, durable products they can purchase quickly. The typical Service Merchandise store consists of approximately 50,000 square feet of total space and is situated on a stand-alone lot or as an anchor in a suburban mall or strip center. The Company's stores are divided into several departments, including jewelry, sight and sound, self-service and general showroom. In the jewelry and sight and sound departments, merchandise is displayed in showcases, and sales associates deliver it to the customer and accept payment. In the self-service department, customers select merchandise from a shelf and take it to a check-out counter to finalize the purchase. In the remainder of the store, only a sample of the merchandise is displayed and order forms are available at various locations. After the customer orders the merchandise by filling out a form, a store cashier is paid and the merchandise is delivered to a pick-up station. Management believes that this format reduces selling space requirements, handling and payroll costs, and provides greater control over customer-related inventory shrinkage. The general showroom format also permits presentation of a broad assortment of merchandise with limited inventory investment, since only one item is actually on display. Most of the Company's stores display and maintain an inventory (in warehouse space contiguous to the sales area) of substantially all of the catalog items and a limited amount of merchandise not described in the published catalogs. Each store is equipped with a computer which coordinates the inventory tracking and point of sale functions. -3- 4 Item 1. Business (continued) Virtually every action in the store that involves payment, customer information or inventory is recorded and transmitted, on a daily basis, via satellite to the central database at the Company's home office. In addition, by use of the computer, customers are provided with alternate suggestion items, back-order information, on-line mail orders, a gift registry, special orders and layaway information. Most of the Company's stores are equipped with "Service Express," a user-friendly computer which allows customers to verify item availability, place their order and tender payment via credit card. The Company's computerized daily inventory system tracks the status (on hand, on order, in transit), location and history of inventory in the retail network. This raw data feeds the Company's merchandise replenishment system which tracks inventory positions, sales data and sales forecasts and generates either suggested transfers from the distribution centers or suggested purchase order quantities. The inventory system also records all sales information to produce daily margin reports, complete with a historical comparison for each item. In fiscal 1994, store inventory levels were increased to achieve a consistently high in-stock position, particularly on promotional merchandise. The Company's information systems enhance the effectiveness of its catalog mailings and advertising campaigns by tracking customers' purchases and tailoring the Company's mailing lists to meet specific objectives. The Company maintains a database of customer household information with each purchase. This database allows management to target customers based on specific criteria, including seasonal purchasing behavior and promotional preferences. Seasonality and Competition The Company's business is highly seasonal, with the Christmas season being the largest volume selling period of the year. In preparation for the Christmas season, the Company significantly increases its merchandise inventories, which are financed by internally generated funds and short-term borrowings. The Company is engaged in a highly competitive business and competes with most nationally known jewelry and hardline retail merchandisers, including department stores, general merchandise, specialty and discount stores. Many of these competitors are larger and have greater financial resources than the Company. The Company believes its pricing policies on the brand-name hardgoods merchandise it offers are a significant factor in the operation of its business. The Company operates on high volume, low profit margin principles. Its profitability is dependent upon the large sales volume generated during the fourth quarter of its fiscal year. Suppliers The Company purchases merchandise from approximately 2,150 suppliers, most of which are manufacturers. In fiscal 1994, purchases from the largest vendor approximated 4.0% of total purchases; however, the Company believes it would experience no difficulty in obtaining comparable quality merchandise from alternate sources. Most merchandise is initially shipped to the Company's central distribution facilities which are used to store merchandise in advance of selling seasons to take advantage of favorable terms offered to the Company. Merchandise is transported to the stores from these central facilities by commercial contract carriers. The Company's direct import program is responsible for sourcing and repackaging many promotional and seasonal items from abroad. Direct imports, which totaled approximately $326 million in fiscal 1994, allow the Company to reduce many traditional cost factors, thereby lowering the cost of merchandise sold in several product lines. In addition to its direct import program, the Company imports diamonds, gemstones and gold which are used by suppliers in the manufacture of jewelry items. -4- 5 Item 1. Business (continued) Employees The number of persons employed by the Company fluctuates seasonally. During the fiscal year ended January 1, 1995, the number of employees varied from approximately 26,100 to approximately 51,700, including both permanent and temporary employees. As of January 1, 1995, the Company had 28,836 permanent employees, of whom 83% were hourly-paid personnel engaged in non-supervisory activities; the balance was administrative, executive, distribution center and store management personnel. The number of permanent employees increased in fiscal 1994 due to an increased emphasis on customer service and the opening of a net 15 stores. None of the Company's employees are covered by a collective bargaining agreement. The Company has never experienced a work stoppage due to a labor disagreement and regards its employee relations as satisfactory. Item 2. Properties The Company leases and owns retail store facilities, warehouses and office space. The Company has financed a number of its owned facilities out of internally generated funds. Some owned facilities have ground leases on a long-term basis, some are financed through industrial development financing under which the Company either has ownership or a right to obtain ownership and others are financed by real estate mortgages. The Company occupies office space in two locations in greater Nashville, Tennessee, both of which are owned by the Company. The Company operated five major distribution centers as of January 1, 1995. These distribution centers are located in Florida, New York, Tennessee, Texas and Nevada and contain an aggregate of approximately 3,492,000 square feet as set forth below:
Center Location Sq. Feet Owned/Leased Lease Term --------------- -------- ------------ ---------- Orlando, FL 460,000 Leased Renewal options through 6/30/98 Montgomery, NY 800,000 Owned Not applicable Nashville, TN (1) Owned 588,000 Owned Not applicable (2) Owned satellite 268,000 Owned Not applicable (3) Leased satellite 391,000 Leased Renewal options through 1/31/05 Dallas, TX 594,000 Leased Renewal options through 1/31/96 Henderson, NV 391,000 Leased Renewal options through 12/31/95
Subsequent to year-end, the Company had completed an extension of the renewal option for the Henderson, NV distribution center and is currently negotiating the extension of the renewal option of the Dallas, TX location. The Company anticipates that it would be able to obtain suitable replacement facilities should it not be able to renew the above leases. -5- 6 Item 2. Properties (continued) As of January 1, 1995, the Company operated 406 retail catalog stores (typically consisting of approximately 50,000 square feet) as follows:
Number of Stores ---------------- Owned land and building 102 Long-term ground lease with an owned building 43 Owned land with industrial development financing under which the Company had ownership or a right to obtain ownership of the building 3 Leased 276 Stores which have been subleased (18) --- Total 406 ===
Most of the leases contain renewal or purchase options. See the Notes to Consolidated Financial Statements, which are incorporated herein by reference to the Registrant's 1994 Annual Report to Shareholders, for information concerning the Company's lease commitments. For a listing of store locations, see page 7. The numbers in parentheses show the number of stores per state and where there is more than one store in any city, the number of stores in such city. -6- 7 Item 2. Properties (continued) SERVICE MERCHANDISE CO., INC. STORE LOCATIONS ALABAMA (8) GEORGIA (16) MARYLAND (5) NEW YORK (23) SOUTH CAROLINA (7) BIRMINGHAM (2) ATLANTA (12) COLUMBIA ALBANY CHARLESTON (2) HUNTSVILLE (2) AUGUSTA FORESTVILLE BINGHAMTON COLUMBIA (2) MOBILE COLUMBUS FREDERICK BUFFALO (2) GREENVILLE MONTGOMERY (2) MACON SALISBURY EAST MEADOW GREENWOOD TUSCALOOSA SAVANNAH WALDORF FISHKILL SUMTER ARIZONA (4) ILLINOIS (24) MASSACHUSETTS (11) HARTSDALE TENNESSEE (18) GLENDALE CHAMPAIGN AUBURN HUNTINGTON CHATTANOOGA (2) MESA (2) CHICAGO (23) BOSTON (7) LAKE GROVE JACKSON SCOTTSDALE INDIANA (16) HOLYOKE LAWRENCE KINGSPORT ARKANSAS (3) BLOOMINGTON LANESBORO/PITTSFIELD MASSAPEQUA KNOXVILLE (2) FORT SMITH CLARKSVILLE SWANSEA MIDDLETOWN MEMPHIS (5) LITTLE ROCK (2) EVANSVILLE MICHIGAN (14) NANUET NASHVILLE (7) CALIFORNIA (22) FORT WAYNE (2) ANN ARBOR PATCHOQUE TEXAS (48) LOS ANGELES (11) GRIFFITH DETROIT (9) PLATTSBURGH ABILENE MONTEBELLO INDIANAPOLIS (5) FLINT POUGHKEEPSIE AMARILLO MURRIETA KOKOMO LANSING (2) QUEENS ARLINGTON (2) SALINAS LAFAYETTE WATERFORD ROCHESTER (2) AUSTIN (2) SAN FRANCISCO/OAKLAND (6) MERRILLVILLE MINNESOTA (1) SARATOGA SPRINGS BEAUMONT SAN JOSE (2) SOUTH BEND MINNEAPOLIS SYRACUSE (2) COLLEGE STATION COLORADO (7) TERRE HAUTE MISSISSIPPI (6) YORKTOWN HEIGHTS CORPUS CHRISTI COLORADO SPRINGS IOWA (1) GAUTIER NORTH CAROLINA (9) DALLAS (8) DENVER (5) DES MOINES GULFPORT CHARLOTTE (3) DENTON PUEBLO KANSAS (4) HATTIESBURG DURHAM EL PASO (2) CONNECTICUT (8) HUTCHINSON JACKSON (2) FAYETTEVILLE FT. WORTH (3) DANBURY OVERLAND PARK MERIDIAN GASTONIA HARLINGEN DERBY WICHITA (2) MISSOURI (7) GREENSBORO HOUSTON (10) ENFIELD KENTUCKY (7) INDEPENDENCE RALEIGH (2) LAKE JACKSON HARTFORD (3) FLORENCE SPRINGFIELD OHIO (16) LAREDO ORANGE LEXINGTON ST. LOUIS (5) AKRON LONGVIEW WATERBURY LOUISVILLE (3) NEBRASKA (3) CINCINNATI (4) LUBBOCK DELAWARE (3) OWENSBORO LINCOLN COLUMBUS (4) MCALLEN (2) DOVER PADUCAH OMAHA (2) LIMA MIDLAND WILMINGTON (2) LOUISIANA (14) NEVADA (3) MANSFIELD SAN ANGELO FLORIDA (48) ALEXANDRIA LAS VEGAS (2) SANDUSKY SAN ANTONIO (3) BOCA RATON BATON ROUGE (2) RENO SPRINGFIELD TEMPLE BOYNTON BEACH HOUMA NEW HAMPSHIRE (5) TOLEDO (2) TYLER CORAL SPRINGS LAFAYETTE (2) DOVER YOUNGSTOWN WACO DAVIE LAKE CHARLES MANCHESTER OKLAHOMA (8) VERMONT (1) DAYTONA BEACH MONROE NASHUA ENID BURLINGTON FT. MYERS NEW ORLEANS (3) PLAISTOW NORMAN VIRGINIA (11) FT. PIERCE SHREVEPORT (2) SALEM OKLAHOMA CITY (3) ALEXANDRIA (2) GAINESVILLE SLIDELL NEW JERSEY (6) TULSA (3) CHANTILLY JACKSONVILLE (3) MAINE (5) HAZLET PENNSYLVANIA (12) CHESAPEAKE LAKELAND AUBURN PARAMUS ALLENTOWN DALE CITY LEESBURG AUGUSTA TURNERSVILLE HARRISBURG FREDERICKSBURG MELBOURNE BANGOR VOORHEES LANCASTER HAMPTON MIAMI/FT. LAUDERDALE (12) BRUNSWICK WAYNE PHILADELPHIA MANASSAS NAPLES PORTLAND WOODBRIDGE PITTSBURGH (6) NORFOLK OCALA NEW MEXICO (2) READING RICHMOND (2) ORLANDO (5) ALBUQUERQUE SCRANTON PENSACOLA LAS CRUCES PORT CHARLOTTE SARASOTA STUART TALLAHASSEE (2) TAMPA/CLEARWATER/ ST. PETERSBURG (8) W. PALM BEACH -7-
8 Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security-Holders There were no reportable items during the Company's fourth quarter. Executive Officers of the Registrant (1) The following is a list of executive officers, their ages, positions and business experience during the past five years as of the date hereof: Name, Age and Position - ---------------------- Raymond Zimmerman, 62 Chairman of the Board and Chief Executive Officer since October 1981; Chairman of the Board and Chief Executive President from July 1984 to November 1994 and from 1981 to October Officer 1983. Board member of The Limited Stores, Columbus, Ohio. Gary M. Witkin, 46 President and Chief Operating Officer since November 1994; Vice President, Chief Operating Officer and Chairman and Board member, Saks Fifth Avenue from October 1992 to Director November 1994; Executive Vice-President of Dayton Hudson Corp. from June 1991 to October 1992; President of the Marshall Fields & Co., division of Dayton Hudson Corp. from June 1990 to June 1991; Executive Vice President of Stores for Marshall Fields & Co., from October 1983 to June 1990. Glen A. Bodzy, 42 Secretary since July 1987; Vice President and General Counsel since Vice President, General Counsel and Secretary May 1985. S. Cusano, 41 Vice President and Chief Financial Officer since July 1993; Group Vice President and Chief Financial Officer Vice President - Finance from December 1991. Vice President and Corporate Controller of Revco D.S. Inc., a drugstore chain based in Cleveland, Ohio, from January 1990 to November 1991 and Controller, Finance from January 1989 to January 1990. Michael E. Hogrefe, 34 Treasurer since July 1993; Assistant Treasurer from March 1990. Treasurer Assistant Treasurer/Director of Financial Management for Equitable HCA Corporation of New York, New York, a financial services corporation, from March 1988 to March 1990. Robert C. Eimers, 47 Senior Vice President, Human Resources since February 1995. Vice Senior Vice President, Human Resources President, Human Resources of Sonoco Products Company from June 1988 to January 1995. -8-
9 Charles Septer, 43 Divisional Senior Vice President, Jewelry Merchandising since April Divisional Senior Vice President, Jewelry 1988; Group Vice President, Jewelry Merchandising from January 1985. Merchandising Steven F. McCann, 42 Operational Vice President of Finance and Corporate Controller since Operational Vice President of Finance, June 1994. Vice President, Controller of Robinsons-May division of Corporate Controller the May Department Store Company from February 1993 to June 1994. Vice President, Controller of the May Company division of the May Department Store Company from April 1992 to February 1993. Divisional Vice President, Divisional Controller of the May Company division of the May Department Store Company from May 1989 to April 1992. ______________________ (1) All Executive Officers serve at the pleasure of the Board of Directors.
PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The Company's Common Stock trades on the New York Stock Exchange (NYSE) under the symbol SME. The number of record holders of common shares at March 1, 1995 was 6,442 and at February 28, 1994 was 5,800. High and low closing sales prices as reported by the NYSE for fiscal 1994 and 1993 were as follows:
1994 High Low - ---- ---- --- First Quarter 10 7 5/8 Second Quarter 8 6 Third Quarter 6 7/8 5 Fourth Quarter 6 1/2 4 1/4 1993 High Low - ---- ---- ---- First Quarter 15 1/4 10 1/2 Second Quarter 11 3/4 10 Third Quarter 12 5/8 10 1/4 Fourth Quarter 11 3/8 9 3/4
The Company's new Reducing Revolving Credit Facility contains various financial and other covenants, including a restricted payments basket (as defined in the Agreement) to allow for dividends. The Company has not declared any cash dividends to shareholders for fiscal 1994 and 1993, respectively. Effective February 15, 1995, the Board of Directors approved an amendment to its Shareholders Rights Plan. The amendment effects a reduction of the Rights Plan's "flip-in" trigger from 30% to 15%. As amended, the Rights Plan provides that if any person becomes the beneficial owner of 15% or more of the Company's Common Stock, each Right not owned by such 15% holder -9- 10 will enable its holder to purchase, at the Right's then current exercise price, units of the Company's Series A Junior Preferred Stock or the Company's Common Stock having a value of twice the Right's exercise price. The Board of Directors may, upon the triggering of the Rights Plan, redeem the rights and prevent their exercise by shareholders. In addition, the Rights Plan was amended to provide that the "Distribution Date" for the Rights shall occur upon the earlier of (i) the tenth day after any person becomes the beneficial owner of 15% or more of the Company's Common Stock or (ii) the tenth day after a tender or exchange offer is commenced for 15% or more of the outstanding shares of Company Common Stock. Item 6. Selected Financial Data Page 10 under the caption "Selected Financial Information" of the Registrant's 1994 Annual Report to Shareholders for the year ended January 1, 1995 is herein incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 11 through 14 of the Registrant's 1994 Annual Report to Shareholders for the year ended January 1, 1995 under the caption "Management's Discussion and Analysis" are herein incorporated by reference. Item 8. Financial Statements and Supplementary Data As set forth in the Registrant's 1994 Annual Report to Shareholders for the year ended January 1, 1995, the following are incorporated herein by reference:
Description Page - ----------- ---- Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . 15 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . 16 Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . 17 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 18 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 19-30 Quarterly Financial Information (Unaudited). . . . . . . . . . . . . . . . 29-30 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 31
Item 9. Changes in and Disagreements With Independent Auditors on Accounting and Financial Disclosure No reportable items. -10- 11 PART III Item 10. Directors and Executive Officers of the Registrant Pages 2 through 5 under the caption "Election of Directors" of the Registrant's definitive proxy statement dated March 16, 1995 filed with the Commission pursuant to Rule 14a-6(b) are incorporated herein by reference. Pursuant to General Instruction G(3), information concerning Executive Officers of the Registrant is included in Part I, Item 4, under the caption "Executive Officers of the Registrant" of this Form 10-K. Item 11. Executive Compensation Reference is made to the information on pages 8 through 18 of the Registrant's definitive proxy statement dated March 16, 1995 filed with the Commission pursuant to Rule 14a-6(b), concerning executive compensation, which is herein incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Reference is made to the information on pages 6 and 7 of the Registrant's definitive proxy statement dated March 16, 1995 filed with the Commission pursuant to Rule 14a-6(b), concerning the beneficial ownership of Registrant's common stock, which is herein incorporated by reference. Item 13. Certain Relationships and Related Transactions Reference is made to the information on page 19 of the Registrant's definitive proxy statement dated March 16, 1995 filed with the Commission pursuant to Rule 14a-6(b), concerning certain relationships and related transactions, which is herein incorporated by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements: Reference is made to Part II, Item 8, captioned "Financial Statements and Supplementary Data" (and accompanying index) which have been incorporated by reference from the Registrant's 1994 Annual Report to Shareholders for the year ended January 1, 1995. (a) 2. Financial Statement Schedule: Independent Auditors' Report . . . . . . . . . . . . . . . . . . . 17 Schedule II. Valuation and Qualifying Accounts and Reserves. . . . . . . . 18 All other schedules are not applicable and have been omitted. -11-
12 (a) 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 Amendment No. 2 to Rights Agreement effective as of February 15, 1995. * 10.1 Employment agreement dated November 2, 1994 regarding Gary M. Witkin, President and Chief Operating Officer. * 10.2 Amended and Restated 1989 Employee Stock Incentive Plan. 11 Statement re Computation of Earnings Per Common Share for fiscal years ended January 1, 1995, January 1, 1994 and January 2, 1993. 13 Portions of Service Merchandise Company, Inc. 1994 Annual Report to Shareholders for the fiscal year ended January 1, 1995. 21 Subsidiaries of the Registrant. 23 Independent Auditors' consent relative to report on consolidated financial statements of Service Merchandise Company, Inc. for the fiscal year ended January 1, 1995. 27 Financial Data Schedule for the fiscal year ended January 1, 1995 (for SEC use only). * Executive Compensation Plans and Arrangements
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, as restated 3.1 May 1, 1989, as further amended on November 7, 1990 and April 15, 1992 which is incorporated herein by reference from the Registrant's Form S-8 filed on September 8, 1993 (Registration No. 33-50185).
-12- 13 (a) 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 -------------- ----------------- ---------------- 3.2 Registrant's By-Laws, as amended and restated as of April 3.2 19, 1989, which are incorporated herein by reference from Registrant's Form 10-Q filed for the first quarter ended March 31, 1989. 4.1 Shareholders' Rights Agreement which is incorporated 4(c) herein by reference from Registrant's Form 8-K dated February 8, 1988. 4.2 Amendment No. 1 to Shareholders' Rights Agreement which is 4(c) incorporated herein by reference from Registrant's Current Report on Form 8-K dated May 5, 1989. 4.3 Note Purchase Agreement dated as of June 28, 1990 4.2a concerning the refinancing of $90 million of the Real Estate Bridge Loan under the Credit Agreement dated as of July 24, 1989 among the Registrant, Various Banks and Chemical Bank as Agent, which is incorporated herein by reference from the Registrant's Form 10-Q filed for the second quarter ended June 30, 1990. 4.4 Trust Indenture dated as of June 28, 1990 concerning the 4.2b refinancing of $90 million of the Real Estate Bridge Loan under the Credit Agreement dated as of July 24, 1989 among the Registrant, Various Banks and Chemical Bank as Agent, which is incorporated herein by reference from the Registrant's Form 10-Q filed for the second quarter ended June 30, 1990. 4.5 Indenture, dated as of February 15, 1993, between the 4.1 Registrant and First American National Bank, as Trustee, regarding the Registrant's $300,000,000 of 9% Senior Subordinated Debentures due 2004, which is incorporated herein by reference from Form 8-K dated February 17, 1993. 4.6 First Supplemental Indenture, dated as of February 15, 4.2 1993, between the Registrant and First American National Bank, as trustee, regarding the Registrant's $300,000,000 of 9% Senior Subordinated Debentures due 2004, which is incorporated herein by reference from Form 8-K dated February 17, 1993.
-13- 14 (a) 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 -------------- ----------------- ---------------- 4.7 Form of Debenture, regarding the Registrant's $300,000,000 of 9% 4.3 Senior Subordinated Debentures due 2004, which is incorporated herein by reference from Form 8-K dated February 17, 1993. 4.8 Indenture, dated as of October 15, 1993, between the Registrant 4.1 and The First National Bank of Boston, as trustee, regarding the Registrant's $100,000,000 in principal amount of 8 3/8% Senior Notes due 2001, which is incorporated herein by reference from the Registrant's Form 8-K dated October 26, 1993. 4.9 First Supplemental Indenture, dated as of October 15, 1993, 4.2 between the Registrant and The First National Bank of Boston, as trustee, regarding the Registrant's $100,000,000 in principal amount of 8 3/8% Senior Notes due 2001, which is incorporated herein by reference from the Registrant's Form 8-K dated October 26, 1993. 4.10 Form of Notes, regarding the Registrant's $100,000,000 of 8 3/8% 4.3 Senior Notes due 2001, which is incorporated herein by references from the Registrant's Form 8-K dated October 26, 1993. 4.11 Credit Agreement dated as of June 8, 1994 among the Service 4.1 Merchandise Company, Inc. various Banks and Chemical Bank as Administrative Agent which is incorporated herein by reference from the Registrant's Form 10-Q filed for the second quarter ended July 3, 1994. 10.1 Stock Option Pledge Agreement between Service Merchandise 10.2 Company, Inc. and the Service Merchandise Foundation dated October 15, 1990, which is incorporated herein by reference from the Registrant's Form 10-K for the fiscal year ended December 29, 1990.
Executive Compensation Plans and Arrangements: 10.2 Form of Indemnification Agreement between the Registrant and Exhibit A each of Messrs. Zimmerman, Witkin, Crane, Poole, Holt, Moore, Roitenberg, Bodzy, Cusano and Hogrefe which is incorporated herein by reference from the Registrant's Proxy Statement dated April 19, 1989.
-14- 15 (a) 3. Exhibits and Index to Exhibits (continued): Executive Compensation Plans and Arrangements (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 is incorporated 10.1 herein by reference from the Registrant's Form 10-K for the fiscal year ended December 29, 1990. 10.4 Directors' Equity Plan which is incorporated herein by reference Exhibit B from the Registrant's Proxy Statement dated March 16, 1992. 10.5 Key Executive Severance Plan Agreement for execution by certain 10 key executives in replacement of employment contracts which is incorporated herein by reference from the Registrant's Form 10-Q filed for the third quarter ended October 2, 1994. (b) Reports on Form 8-K There were no reports on Form 8-K during the fiscal year ended January 1, 1995. -15-
16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SERVICE MERCHANDISE COMPANY, INC. By: /s/ S. Cusano -------------------- S. Cusano Vice President and Chief Financial Officer March 16, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Raymond Zimmerman /s/ Gary M. Witkin - ----------------------- -------------------- Raymond Zimmerman Gary M. Witkin Chairman of the Board, President, Chief Operating Chief Executive Officer, Officer and Director and Director (Principal Operating Officer) (Principal Executive Officer) March 16, 1995 March 16, 1995 /s/ Richard P. Crane, Jr. /s/ Charles V. Moore /s/ James E. Poole /s/ R. Maynard Holt - ------------------------ -------------------- ------------------ ------------------- Richard P. Crane, Jr. Charles V. Moore James E. Poole R. Maynard Holt Director Director Director Director March 16, 1995 March 16, 1995 March 16, 1995 March 16, 1995 /s/ Harold Roitenberg /s/ S. Cusano - --------------------- ----------------------------------------------------- Harold Roitenberg S. Cusano, Vice President and Chief Financial Officer Director (Principal Financial Officer) March 16, 1995 (Principal Accounting Officer) March 16, 1995
-16- 17 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Service Merchandise Company, Inc. Nashville, Tennessee We have audited the consolidated financial statements of Service Merchandise Company, Inc. and subsidiaries as of January 1, 1995 and 1994, and for each of the three years in the period ended January 1, 1995, and have issued our report thereon dated January 26, 1995; such financial statements and report are included in your 1994 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Service Merchandise Company, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP - ------------------------- DELOITTE & TOUCHE LLP Nashville, Tennessee January 26, 1995 -17- 18 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 January 1, 1995 (A) $2,894 $1,017 - ($694) $3,217 Year ended January 1, 1994 (A) $3,079 $ 577 - ($762) $2,894 Year ended January 2, 1993 (A) $2,673 $ 424 - ($18) $3,079 (A) The amounts represent transactions for Accounts Receivable Allowance for Doubtful Accounts. (B) The Allowance for Doubtful Accounts was reduced for accounts written-off against the reserve. -18-
EX-4 2 AMENDMENT NO. 2 TO RIGHTS AGREEMENT 1 Exhibit 4 AMENDMENT N0. 2 TO RIGHTS AGREEMENT Pursuant to Section 26 of the Rights Agreement (the "Rights Agreement"), dated February 8, 1988 as amended by Amendment No.1 thereto between Service Merchandise Company, Inc. (the "Company") and Harris Trust and Savings Bank as successor rights agent (the "Rights Agent"), the Rights Agent is hereby notified and directed that the Rights Agreement is hereby amended (this "Amendment No. 2") to provide that the definition of Acquiring Person in Section 1 shall be amended and restated as follows: (a) "Acquiring Person" shall mean any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity) which shall be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding. and further the definition of Distribution Date in Section 3 is amended and restated to read as follows: (a) Until the earlier of (i) the Close of Business on the tenth day after the stock Acquisition Date, and (ii) the Close of Business on the tenth day after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act Regulations, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding (the earlier of (i) and (ii) above being the "Distribution Date"), and further Section 11(a)(ii)(B) is amended and restated to read as follows: (B) any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity) shall become the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding, other than pursuant to any transaction set forth in Section 13(a) hereof; or This Amendment No. 2 is effective as of February 15, 1995 and all references to the Rights Agreement shall, as of such date, be deemed to be references to the rights Agreement as amended by Amendment No. 1 and this Amendment No. 2. EX-10.1 3 EMPLOYMENT AGREEMENT 1 Exhibit 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into between Service Merchandise Company, Inc., a Tennessee corporation (the "Company"), and Gary M. Witkin, a resident of New Canaan, Connecticut (the "Executive"), effective as of November 1, 1994. The Company and the Executive are sometimes referred to herein as the "parties." ARTICLE I EMPLOYMENT The Company hereby employs the Executive and the Executive hereby accepts employment with the Company upon the terms and conditions set forth herein. ARTICLE II DUTIES AND RESPONSIBILITIES 2.1 Scope of Service. The Executive shall, during the term of this Agreement, devote all of his business time and attention and exert his best efforts in the performance of his duties hereunder and, in performing such duties, shall promote the profit, benefit and advantage of the Company and its business. The Executive shall not, during the term of this Agreement, engage in any other business activity (whether or not such business activity is pursued for gain, profit or other pecuniary advantage) if such business activity would impair the Executive's ability to carry out his duties hereunder; provided, however, that this paragraph shall not be construed to prevent the Executive from investing his personal assets as a passive investor. 2.2 Position and Duties. Subject to the power of the Board of Directors of the Company (the "Board") to elect and remove officers, the Executive shall, during the term of this Agreement, serve as President and Chief Operating Officer or in any other comparable position as the Board of Directors may from time to time determine, shall report directly to the Chairman and Chief Executive Officer of the Company, and shall have such powers and duties as may be prescribed by the Board. Subject to the power of the Board to designate and define the powers and duties of officers of the Company, the Executive's initial areas of responsibility at the Company shall include responsibility for the following areas: Merchandising, Marketing, Advertising, Store Operations and Human Resources. The Executive agrees to serve without additional compensation in one or more offices or as a director of any of the Company's subsidiaries or affiliates. The Executive shall faithfully and diligently perform the services and functions relating to his office (or reasonably incident thereto) as may be designated from time to time by the Board. It is acknowledged that a condition to the effectiveness of this Agreement is that, as of the Executive's Employment Date, the Board shall have acted to create a vacancy on the Board of Directors and shall have appointed the Executive to fill that vacancy. 2.3 Term of Employment. The Executive's employment with the Company hereunder shall commence on the date of first employment indicated on the records of the Company, but no later than November 21, 1994 (the "Employment Date") and shall continue until terminated by either of the parties upon ninety (90) days' written notice to the other in accordance with Section 5.5 of this Agreement. 2 2.4 Resignation as Director. If the Executive's employment with the Company is terminated for any reason, whether such termination is voluntary or involuntary, the Executive shall resign his position as a director of the Company, such resignation to be effective no later than the date of termination of the Executive's employment with the Company. ARTICLE III COMPENSATION AND BENEFITS 3.1 Base Annual Salary. As compensation for services performed by the Executive during the term of his employment hereunder, the Company agrees to pay and the Executive agrees to accept an annual base salary ("Base Salary"), payable in accordance with the then current payroll policies of the Company (currently, on a weekly basis), of not less than seven hundred thousand dollars ($700,000), subject to applicable withholding taxes. Such Base Salary shall be subject to annual review by the Board of Directors (or by the Compensation Committee or such other appropriate committee of the Board as the Board may from time to time determine) at the meeting of the Board held in April of each year, with the first such review to occur at the 1996 April Board meeting. The Board (or the appropriate committee thereof) may determine, as a result of any annual review, to provide an increase in the Executive's Base Salary. 3.2 Incentive Compensation. During the term of his employment hereunder, the Executive shall be entitled to receive the following incentive compensation in addition to his Base Salary: (a) Bonus Plan. The Executive shall be entitled to participate in the Company's Key Management Incentive Plan (the "Incentive Plan") (a copy of which is attached hereto as Exhibit A), subject to shareholder approval of such Plan, under which the Executive may receive an annual bonus amount, based upon a percentage of the Executive's Base Salary and contingent upon the Company's attainment of certain goals as described in the Incentive Plan. The Executive's eligibility for such bonus shall be subject to, and determined in accordance with, the terms and conditions of the Incentive Plan, with the following exceptions: (i) Substitution of Performance Grid. In determining the Executive's bonus in any given year, the following performance grid shall be substituted in lieu of the performance grid provided in the Incentive Plan: Company Achievement 100% 110% 125% 140% 150% Bonus Percentage Base Pay 20% 25% 35% 50% 60% (ii) Minimum Bonus. With respect to fiscal years 1994 through 1996, the Executive shall be entitled to a minimum bonus of not less than fifteen percent (15%) of his Base Salary for such year ("Minimum Bonus"), which Minimum Bonus shall be payable to the Executive at such time as bonuses are generally paid to executives of the Company. Any bonus earned in accordance with the performance grid with respect to any year for which a Minimum Bonus is payable shall be offset by such Minimum Bonus. (iii) No Proration for 1994 Bonus. The bonus payable to the Executive with respect to the 1994 fiscal year shall not be prorated to reflect only a partial year of service by the Executive during such year. 3 (b) Employee Stock Incentive Plan. The Executive shall be entitled to participate in the Company's 1989 Employee Stock Incentive Plan (the "Stock Incentive Plan") (a copy of which is attached hereto as Exhibit B) and, pursuant to and in accordance with the terms and conditions of the Stock Incentive Plan, the Company shall grant to the Executive the awards described below: (i) Restricted Stock. (A) Grant of Stock. Pursuant to and in accordance with the terms of the Stock Incentive Plan, the Company shall grant to the Executive, on the Executive's Employment Date, the following shares of Restricted Stock (defined in the Stock Incentive Plan as Common Stock, $.50 par value per share, of the Company, that is subject to restrictions under Section 7 of such Plan): (I) Shares of Restricted Stock with a market value of $2.1 million as of the date of execution of this Agreement by the last party to execute the Agreement. The Executive shall make a current and timely election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to the Restricted Stock granted to the Executive under this subparagraph (I); and (II) One hundred twenty-five thousand (125,000) shares of Restricted Stock. (B) Terms and Conditions of Grant. In addition to applicable terms and conditions of the Stock Incentive Plan with respect to the Company's grant of Restricted Stock to the Executive hereunder, such grant shall be subject to the following terms and conditions: (I) The applicable "Restriction Period" referenced in the Stock Incentive Plan with respect to a grant of Restricted Stock shall (1) with respect to the grant of Restricted Stock to the Executive under subparagraph (b)(i)(A)(I) above, commence on the Executive's Employment Date and end on the third anniversary thereof (the "Three-Year Restriction Period"), at which time the Restricted Stock shall immediately vest in the Executive and the restrictions thereon shall immediately lapse; and (2) with respect to the grant of Restricted Stock to the Executive under subparagraph (b)(i)(A)(II) above, commence on the Executive's Employment Date and end in installments ("Installment Restriction Periods"), as follows:
Expiration Date of Installment Restriction Period Number of Shares ------------------------------------------------- ---------------- First Anniversary of Executive's Employment Date 12,500 shares Second Anniversary of Executive's Employment Date 12,500 shares Third Anniversary of Executive's Employment Date 12,500 shares Fourth Anniversary of Executive's Employment Date 17,500 shares
4 Fifth Anniversary of Executive's Employment Date 25,000 shares Sixth Anniversary of Executive's Employment Date 45,000 shares
At the end of each Installment Restriction Period, the Restricted Stock subject to such Period shall immediately vest in the Executive and the restrictions thereon shall immediately lapse. (II) Upon the occurrence of a Trigger Date (as defined in subparagraph (b) of Section 4.2 of this Agreement) prior to expiration of the Three-Year Restriction Period, the Executive's Restricted Stock described in subparagraph (b)(i)(A)(I) shall immediately vest in the Executive and the restrictions thereon shall immediately lapse. If the Executive's employment with the Company is terminated for any reason prior to expiration of the Three-Year Restriction Period, and such termination does not cause a Trigger Date to occur, all rights to the Executive's Restricted Stock described in subparagraph (b)(i)(A)(I) shall be forfeited by the Executive as of the date of termination of his employment. (III) If the Executive's employment with the Company is terminated for any reason prior to expiration of any Installment Restriction Period, whether or not such termination causes a Trigger Date (as defined in subparagraph (b) of Section 4.2 of this Agreement) to occur, all rights to the Executive's Restricted Stock described in subparagraph (b)(i)(A)(II) shall be forfeited by the Executive as of the date of termination of his employment. (C) Payment of Taxes. In accordance with and subject to the conditions provided in subparagraph (a) of Section 3.7 of this Agreement, the Company shall pay certain taxes actually payable by the Executive with respect to the Restricted Stock granted to the Executive pursuant to subparagraph (b)(i)(A)(I) of this Section 3.2 but shall not pay any taxes payable with respect to the Restricted Stock granted to the Executive pursuant to subparagraph (b)(i)(A)(II) of this Section 3.2. (ii) Non-Qualified Stock Options. (A) Grant of Option. Pursuant to and in accordance with the terms of the Stock Incentive Plan, the Company shall grant to the Executive, as of the Executive's Employment Date, a Non-Qualified Stock Option (as that term is defined in the Stock Incentive Plan) to purchase one hundred twenty-five thousand (125,000) shares of Common Stock, $.50 par value per share, of the Company. (B) Terms and Conditions of Grant. In addition to applicable terms and conditions of the Stock Incentive Plan with respect to the Company's grant of a Non-Qualified Stock Option to the Executive, such grant shall be subject to the following terms and conditions: 5 (I) The Option Price (as defined in the Stock Incentive Plan) per share of the Common Stock purchasable under the Executive's Non-Qualified Stock Option shall be the Fair Market Value (defined in the Stock Incentive Plan) of such stock as of the date of execution of this Agreement by the last party to execute the Agreement. (II) Except as provided in subparagraph (III) below, the Executive's Non-Qualified Stock Option shall be exercisable in installments, as follows:
Earliest Date Exercisable Number of Shares ------------------------- ---------------- First Anniversary of Executive's Employment Date 12,500 shares Second Anniversary of Executive's Employment Date 12,500 shares Third Anniversary of Executive's Employment Date 12,500 shares Fourth Anniversary of Executive's Employment Date 17,500 shares Fifth Anniversary of Executive's Employment Date 25,000 shares Sixth Anniversary of Executive's Employment Date 45,000 shares
(III) No portion of the Executive's Non-Qualified Stock Option shall be exercisable more than ten (10) years after the date such option was granted to the Executive. 3.3 Other Compensation. The Company shall pay the Executive additional compensation in the amount of thirty thousand dollars ($30,000) during each year of his employment hereunder, which amount shall be treated as paid under a "nonaccountable plan" pursuant to Section 1.62-2(c)(3) of the Treasury Regulations. 3.4 Other Benefits. (a) Standard Benefit Plans. During the term of his employment hereunder, the Executive shall be entitled to participate in all standard benefit plans of the Company (including without limitation any life, accident, medical, hospitalization, disability, pension or profit sharing plan afforded by the Company to its employees generally), if and to the extent that the Executive is eligible to so participate in accordance with the terms of any such plan, provided, however, that both parties understand and agree that the termination benefits provided under the terms of this Agreement are in lieu of any severance benefits to which the Executive may otherwise be entitled under the Company's Severance Pay Plan. Notwithstanding any of the above, nothing herein is intended, or shall be construed, to affect the Company's right to amend or terminate any of its standard benefit plans or to require the Company to institute any particular plan or benefit except as otherwise specifically required in this Agreement. The benefit plans that the Company currently provides for its employees generally and in which the Executive shall be entitled to participate include, without limitation, the following: 6 SMC Health Care Plan Business Travel Accident Plan Group Life Insurance Plan (currently provides life insurance equal to two (2) times Base Salary) Long-Term Disability Plan Restated Retirement Plan Savings and Investment Plan (which is a 401(k) plan) (b) Additional Benefits. In addition to participation in the benefit plans described in subparagraph (a) above, the Company shall provide the Executive with the following benefits during the term of the Executive's employment hereunder: (i) Participation in the Company's Executive Medical Plan, subject to and in accordance with the terms of such Plan (which, generally, provides an annual ten thousand dollar ($10,000) family benefit to cover deductibles and co-payments under the SMC Health Care Plan referenced in subparagraph (a) above and any other medical, dental or vision expenses that are not covered by the SMC Health Care Plan or any other health plan sponsored by the Company, but only to the extent any such expenses are deductible under Section 213 of the Code); (ii) Payment of all premiums for individual and dependent coverage under the SMC Health Care Plan; (iii) Reimbursement of any premiums payable by the Executive for coverage of the Executive and/or his eligible dependents pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), to the extent such coverage is required in order to continue the Executive's prior health care coverage from the date of the Executive's termination of employment with his current employer through the first ninety (90) days of his employment with the Company hereunder; (iv) In accordance with and subject to the conditions provided in subparagraph (a) of Section 3.7 of this Agreement, payment by the Company of certain taxes actually payable by the Executive with respect to any premium payment or reimbursement provided to the Executive under subparagraphs (ii) and (iii) above; (v) Four weeks' paid vacation granted on the Employment Date, and accrued thereafter at the rate of four (4) weeks per year, subject to the terms of the Company's currently existing vacation policy, as from time to time amended; and (vi) The use of a vehicle to be provided by the Company, which vehicle shall be an American brand of the Executive's choice with a fair market value no greater than forty-five thousand dollars ($45,000), subject to and in accordance with the terms of the Company's currently existing policy, as from time to time amended, with respect to executive use of Company vehicles, including without limitation the terms of such policy relating to the Company's periodic replacement of such vehicles with new vehicles. 3.5 Reimbursement of Relocation Expenses. The Company shall reimburse the Executive for expenses in connection with the Executive's move from Connecticut to Tennessee as described below, with the exception that certain real estate expenses may be provided through the services of a third party relocation service, the cost of which shall be borne by the Company. The choice between the foregoing alternatives as to certain real estate expenses shall be at the sole option of the Company. 7 (a) Temporary Housing. The Company shall provide the Executive with a two-bedroom condominium of the Executive's choice, with maid service, for a period beginning on the Employment Date and ending no later than nine (9) months thereafter, provided, however, that the amount paid by the Company for any temporary housing provided hereunder (including any amount paid for maid service) shall not exceed three thousand dollars ($3,000) per month. (b) Duplicate Mortgage Payments. In the event that and so long as the Executive owns both a new residence and his old residence during the transition period following his Employment Date, the Company shall reimburse the Executive for the lesser of (i) his monthly mortgage payment for his new residence in Tennessee or (ii) his monthly mortgage payment for his former residence in Connecticut, provided, however, that the Company shall reimburse the Executive only for one such mortgage payment each month during the transition period, which period shall commence with the first month during which the Executive is required to make duplicate mortgage payments (one for his new residence in Tennessee and one for his old residence in Connecticut) and shall end with the earlier of (i) the month during which the Executive sells his old residence in Connecticut or (ii) the fourth month during which the Executive is required to make the duplicate mortgage payments described above. (c) Real Estate Expenses. The Company shall reimburse the Executive for the following real estate expenses associated with the sale of his current residence and the acquisition of a new residence: (i) Normal and customary closing costs, up to one percent (1%) of the sale price, on the sale of the Executive's current residence and also on his acquisition of a new residence; (ii) Any sales commission paid by the Executive, up to five percent (5%) of the sale price, upon the sale of the Executive's current residence; and (iii) The excess, if any, of (A) the original purchase price plus capital improvements for the Executive's current residence (subject to a maximum amount of $1.85 million), over (B) the amount received by the Executive upon the sale of such residence as the gross sale price therefor, such excess amount to be paid to the Executive as soon as reasonably practicable after the closing of the sale of such residence; provided, however, that receipt of such amount by the Executive from the Company is contingent upon receipt by the Company from the Executive of documentation, satisfactory to the Company, substantiating the amount of the original purchase price and capital improvements for such residence, and is subject to the right of the Company to approve any sales contract for the sale of such residence and to elect to purchase such residence itself or to provide a third party buyer (approved by the Company) to purchase such residence. Notwithstanding any of the above, nothing in this subparagraph (c) shall be construed to require the Company to purchase, or to provide a third party purchaser for, the Executive's current residence. 8 (d) Moving Expenses. The Company shall reimburse the Executive for all reasonable expenses related to moving the Executive's household and personal items, including any expenses incurred to move antique cars, boats or other collectibles. (e) Commuting Expenses. The Company shall reimburse the Executive for reasonable travel expenses consistent with current Company policy necessary for the Executive to return to his home in Connecticut each weekend until his relocation is complete, for a period beginning on the Employment Date and ending as soon as his relocation is complete (but, in any event, no later than nine (9) months after his Employment Date). (f) Payment of Taxes. In accordance with and subject to the conditions provided in subparagraph (a) of Section 3.7 of this Agreement, the Company shall pay certain taxes actually payable by the Executive with respect to any reimbursed relocation expenses provided to the Executive under this Section 3.5, if and to the extent such relocation expenses are considered to be taxable income. 3.6 Legal Fees. The Company shall reimburse the Executive for any reasonable legal fees incurred by the Executive for review and negotiation of this Agreement, provided, however, that such reimbursement is contingent upon receipt by the Company from the Executive (or his attorney) of documentation, satisfactory to the Company, substantiating such fees and itemizing the services rendered therefor, and provided further, that such reimbursement shall not exceed five thousand dollars ($5,000). 3.7 Payment of Taxes. (a) In accordance with and subject to the following terms and conditions, the Company shall pay certain taxes actually payable by the Executive with respect to certain amounts paid to the Executive under this Agreement: (i) Provided that the Executive makes a current and timely election under Section 83(b) of the Code, the Company shall pay any federal income and payroll withholding taxes and, provided that the Executive complies with subparagraph (v) below, any Connecticut state and local income taxes, to the extent such federal and state and local taxes are actually payable by the Executive with respect to the Restricted Stock granted to the Executive pursuant to subparagraph (b)(i)(A)(I) of Section 3.2 of this Agreement and also with respect to the amount of taxes paid hereunder, computed in the manner described in subparagraph (iv) below. (ii) The Company shall pay any federal income and payroll withholding taxes and, provided that the Executive complies with subparagraph (v) below, any Connecticut state and local income taxes, to the extent such federal and state and local taxes are actually payable by the Executive with respect to any premium payment or reimbursement provided to the Executive under subparagraphs (b)(ii) and (b)(iii) of Section 3.4 of this Agreement and also with respect to the amount of taxes paid hereunder, computed in the manner described in subparagraph (iv) below. (iii) The Company shall pay any federal income and payroll withholding taxes and, provided that the Executive complies with subparagraph (v) below, any Connecticut state and local income taxes, to the extent such federal and state and local taxes are actually payable by the Executive with respect to any reimbursed relocation expenses provided to the Executive under Section 3.5 of 9 this Agreement and also with respect to the amount of taxes paid hereunder, if and to the extent such relocation expenses are considered to be taxable income, computed in the manner described in subparagraph (iv) below. (iv) Any calculation of taxes payable by the Company under this Agreement shall be computed at the marginal rate of tax applicable to the Executive (currently 39.6% for federal income tax on taxable income in excess of $250,000, 1.45% for payroll tax on wages in excess of $135,000, and 4.5% for Connecticut state and local income tax on all taxable income); provided, however, that any calculation of taxes payable by the Company under this Agreement shall assume the full deductibility of state and local income taxes for purposes of computing federal income tax liability. (v) The Executive shall take such reasonable steps as may be necessary to minimize the applicability of Connecticut state and local income taxes to any amounts payable to the Executive under this Agreement, including without limitation such reasonable steps as may be necessary to enable the Executive to claim Tennessee residency for the Executive and his family as promptly as practicable following his termination of employment with his current employer. The Executive shall also permit the Company to review any Connecticut state or local tax return, prior to the time it is filed by the Executive, to the extent such return relates to any amounts paid to the Executive under this Agreement. (b) To the extent required by law, federal, state and local income and payroll withholding taxes shall be withheld on all cash and in-kind payments made by the Company to the Executive. ARTICLE IV TERMINATION OF EMPLOYMENT 4.1 Termination of Agreement. All of the terms of this Agreement shall cease upon termination of the Executive's employment, except to the extent otherwise provided by the terms of this Agreement or any benefit plan documents and policies described herein. 4.2 Rights of Executive Upon a Trigger Date. (a) Upon the occurrence of a Trigger Date (as defined in subparagraph (b) below), in addition to any Standard Termination Amounts (as defined in subparagraph (c) below), the Executive shall be entitled to the following termination benefits, provided, however, that the Executive's right to any such benefits is expressly conditioned upon his compliance in all respects with Section 4.5 (Non-Competition) and Section 4.6 (Unauthorized Disclosure; Adverse Statements) of this Agreement at all times prior to each payment of a benefit (or, in the case of the vesting of Restricted Stock, at all times prior to the Trigger Date): (i) as salary continuation, payment of (A) an amount equal to two (2) times the Executive's Base Salary in effect immediately prior to the Trigger Date, plus (B) an amount equal to any unpaid Minimum Bonus that would otherwise be payable to the Executive pursuant to and in accordance with subparagraph (a)(ii) of Section 3.2 of this Agreement (in the aggregate, the "salary continuation payment"), which salary continuation payment shall be payable, at the Company's option, either in a lump sum or over a thirteen (13) month period commencing on the Trigger Date and ending on the thirteenth monthly anniversary thereof (the "severance period"), 10 with one half of such salary continuation payment payable in equal monthly installments over the first twelve (12) months of the severance period, and the remaining one half payable on the thirteenth monthly anniversary of the Trigger Date; (ii) reimbursement for the premium paid by the Executive for continued coverage for the Executive (and any dependents of the Executive covered by the Company's health care plans as of the Trigger Date) under the Company's health care plan pursuant to COBRA (or any other mandatory health care continuation law then in effect), such coverage then being substantially similar to that provided by the Company to its senior executives and their eligible dependents, subject to the following terms and conditions: (A) The Executive will be entitled to the reimbursement provided hereunder for the period commencing with the Trigger Date and ending on the earlier of (I) the second anniversary of the Trigger Date, or (II) the date the Executive becomes eligible to receive any health care coverage from another employer of the Executive or his spouse that does not contain any exclusion or limitation with respect to any pre-existing condition of the Executive or his covered dependents; (B) If the Executive (or his dependents covered by the Company's health care plans as of the Trigger Date) elects not to continue coverage under COBRA (or any other mandatory health care continuation law then in effect) or is not eligible to continue coverage under such law and is otherwise eligible for the benefits provided under this subparagraph (a)(ii), the Company will reimburse the Executive for the cost of purchasing substantially similar coverage or a supplement required to achieve substantially similar coverage under another arrangement approved by the Company for the period described in subparagraph (A) above; provided, however, that such reimbursement shall be limited to the then current premium charged by the Company to others for substantially similar coverage under COBRA (or any other mandatory health care continuation law then in effect); and (C) Any amount payable to the Executive hereunder shall be subject to withholding of applicable taxes as provided in Section 3.7 of this Agreement; and (iii) the immediate vesting of, and the lapse of any restrictions on, any Restricted Stock granted to the Executive in accordance with subparagraph (b)(i)(A)(I) of Section 3.2 of this Agreement. (b) For purposes of this Agreement, "Trigger Date" shall be the date upon which any of the following events occurs: (i) termination of the Executive's employment hereunder by the Company for any reason other than for Cause or Disability (each of which is defined in Section 4.3 below) or as a result of the Executive's death; or (ii) termination of the Executive's employment hereunder by the Executive for Good Reason (as hereinafter defined) pursuant to a Notice of Termination (as hereinafter defined). For purposes of this subparagraph (ii), "Good Reason" shall mean the occurrence, without the Executive's express written consent, of any of the following circumstances unless, in the case of subparagraph (A) or (B), such circumstances are fully corrected prior to the Date of 11 Termination (as defined below) specified in the Notice of Termination (defined below) given in respect thereof: (A) other than for Cause or Disability (each of which is defined in Section 4.3 below), or by reason of his election as Chief Executive Officer of the Company, (I) assignment by the Company to the Executive of any duties that are materially inconsistent with the customary powers and duties of a president and chief operating officer of a company of the size, type and nature of the Company; (II) the Company's removal of the Executive from his position as President and Chief Operating Officer of the Company; or (III) any material diminution by the Company in the nature of the Executive's responsibilities as President and Chief Operating Officer of the Company; (B) failure of the Company, prior to the effectiveness of any acquisition of the Company or substantially all of the Company's assets, to obtain an agreement from the successor to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such acquisition had taken place; (C) any material breach of this Agreement by the Company which is not cured within thirty (30) days after delivery to the Company of the Notice of Termination (as defined below); or (D) failure of the Board of Directors to elect the Executive as its Chief Executive Officer within ninety (90) days following the earlier of the following dates: (I) the date of resignation, retirement or termination of Raymond Zimmerman from his position as Chief Executive Officer of the Company, or (II) April 30, 1998. Any purported termination of the Executive's employment hereunder by the Executive for Good Reason (as defined above) shall be pursuant to a written Notice of Termination delivered to the Company in accordance with Section 5.5 of this Agreement. For purposes of this subparagraph (ii), a "Notice of Termination" shall mean a notice which shall expressly indicate the specific termination provisions in this Agreement upon which the Executive is relying; shall set forth in reasonable detail the facts and circumstances claimed by the Executive to provide a basis for termination of the Executive's employment under the provisions so indicated; and shall specify a Date of Termination (which shall not be less than ninety (90) days from the date such Notice of Termination is given). (c) For purposes of this Agreement, "Standard Termination Amounts" shall mean, as of the date of termination of the Executive's employment hereunder, prorated as appropriate, the following: (i) any earned but unpaid installments of the Executive's Base Salary (as then in effect) that would otherwise be due through the date of his termination; (ii) any earned but unpaid installments of the additional compensation provided under Section 3.3 of this Agreement to the extent such installments would otherwise be due through the Executive's date of termination; and (iii) any payments or benefits otherwise due to the Executive under and in accordance with the terms of any benefit plan documents and policies described in this Agreement. 12 4.3 Rights of Executive Upon Other Voluntary Termination or Termination for Cause, Disability or Death. (a) Except as otherwise provided in Section 4.2, above, if (i) the Company terminates the Executive's employment hereunder for Cause or Disability (each of which is defined below), (ii) the Executive voluntarily resigns for any reason (other than termination under subparagraph (b)(ii) of Section 4.2 above), or (iii) the Executive dies, then, in each case, the Executive (or his estate or beneficiaries, as the case may be) shall be entitled to receive only any Standard Termination Amounts (as defined in subparagraph (c) of Section 4.2 above) payable to the Executive. The Company shall then have no further obligations to the Executive under this Agreement. (b) For purposes of this Agreement, the following definitions of "Cause" and "Disability" shall apply: (i) "Cause" shall include the following: (A) a felony conviction of the Executive, the failure of the Executive to contest prosecution for a felony, or the Executive's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or its Subsidiaries or Affiliates (as defined in the Stock Incentive Plan); for this purpose, no act, or failure to act, on the part of the Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that such action or omission was in the best interest of the Company; (B) any violation by the Executive of Section 4.5 (Non-Competition) of this Agreement; or (C) any material breach of this Agreement by the Executive which is not cured within thirty (30) days after delivery to the Executive of written notice of such breach provided in accordance with Section 5.5 of this Agreement, which notice shall set forth in reasonable detail the facts and circumstances claimed by the Company to constitute a material breach of this Agreement by the Executive. (ii) "Disability" shall have the same meaning as is provided under the Company's long-term disability plan. 4.4 Employment Rights. Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or the Executive to employ the Executive or to have the Executive remain in the employment of the Company. If this Agreement or the employment of the Executive is terminated under circumstances in which the Executive is not entitled to the termination benefits provided in Section 4.2 of this Agreement, and except for any right or employee benefit that the Executive may have pursuant to the terms of any other agreement, policy, plan, program or arrangement of the Company, including any right to indemnification provided by contract, state law or the charter or by-laws of the Company, neither the Company nor the Executive shall have any further obligation or liability to the other hereunder or otherwise with respect to the Executive's prior or future employment by the Company. 4.5 Non-Competition. During the period in which the Executive is employed by the Company hereunder and during the severance period (as defined in subparagraph (a)(i) of Section 4.2 above), the Executive will not: 13 (a) directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director or otherwise with, or have any financial interest in, or aid or assist anyone else in the conduct of, any of the following types of businesses: catalog showroom retail business, national jewelry-only specialty business, national electronics-only specialty business, or national houseware/giftware-only retail business, in any area where such business is being conducted at the time of such termination (provided that ownership of five percent (5%) or less of the voting stock of any publicly held corporation shall not constitute a violation hereof); or (b) directly or indirectly employ, solicit for employment, or advise or recommend to any other persons that they employ or solicit for employment, any person who, at the time of such employment, solicitation, advice or recommendation, is an employee of the Company or any of its subsidiaries or affiliates, provided, however, that this subparagraph (b) shall not be construed to prevent the Executive from engaging in generic nontargeted advertising for employees generally. 4.6 Unauthorized Disclosure; Adverse Statements. (a) During the period in which the Executive is employed by the Company hereunder, the Executive shall not, without the prior written consent of the Board of Directors, or a person authorized thereby, disclose to any person, other than a person to whom disclosure is necessary or appropriate in connection with the performance by the Executive of his duties as an officer of the Company, or its subsidiaries or its affiliates, any confidential information obtained by him while in the employ of the Company with respect to any of the Company's products, improvements, formulae, designs or styles, processes, customers, methods of marketing or distribution, systems, procedures, plans, proposals, policies or methods of manufacture, the disclosure of which he knows, or should have reason to know, will be damaging to the Company or its subsidiaries or its affiliates; provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosures by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. Following the termination of the Executive's employment with the Company for any reason, the Executive shall not disclose any confidential information of the type described above except as may be required in the opinion of the Executive's counsel in connection with any judicial or administrative proceeding or inquiry. (b) During the period in which the Executive is employed by the Company hereunder and thereafter, the Executive shall not make any false statements regarding the Company or its subsidiaries or its affiliates, or make any statement or take any other action which he knows, or should have reason to know, will be damaging to the Company or its subsidiaries or its affiliates. (c) The provisions of this Section 4.6 shall be binding upon the Executive's heirs, successors and legal representatives. 4.7 Specific Performance. The Executive acknowledges and agrees that, in the event of a breach of Section 4.5 or Section 4.6 hereof by the Executive, the Company would be irreparably harmed and that monetary damages would be an inadequate remedy in favor of the Company. Accordingly, the Executive and the Company agree that, in the event of such a breach, the Company shall be entitled to injunctive relief against the Executive. 14 ARTICLE V MISCELLANEOUS 5.1 Construction and Amendment. This Agreement contains all the material terms and conditions governing the Company's continued employment of the Executive, and shall supersede any and all prior oral and written understandings and agreements and all contemporaneous oral understandings and agreements between the Company and the Executive. In this respect, the Executive acknowledges and agrees that the Company's sole obligations to the Executive with respect to the future termination of the Executive's employment by the Company (for whatever reason and under whatever circumstances) are set forth in this Agreement. No amendment of the terms and conditions of this Agreement shall be effective unless agreed to in writing by the Company and the Executive. 5.2 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 5.3 Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Tennessee. 5.4 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and the Executive and his heirs, executors, administrators and legal representatives. The Executive's rights and benefits under this Agreement are personal and, except as otherwise provided herein, no such right or benefit shall be subject to voluntary or involuntary alienation, assignment or transfer without the prior written consent of the Company. 5.5 Notice. Any notice or other communication required or permitted under, or given by reason of, this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or when mailed, by certified mail (return receipt requested), postage prepaid, addressed as follows (or to such other address as the party may specify by notice pursuant to this provision, except that notices of change of address shall be effective only upon receipt): (a) To the Company: Service Merchandise Company 7100 Service Merchandise Drive Brentwood, Tennessee 37027 (b) To the Executive: Gary M. Witkin 416 Greenley Road New Canaan, CT 06840 5.6 Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration in Nashville, Tennessee. In the proceeding, the Executive shall select one arbitrator, the Company shall select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of a majority of the arbitrators shall be binding on the Executive and on the Company. Should one party fail to select an arbitrator within five days after notice of the appointment of an arbitrator by the other party or should the two arbitrators selected by the Executive and the Company fail to select a third arbitrator within ten days after the date of the appointment of the last of such two arbitrators, any person sitting as a judge of the United States District Court for the Middle District of Tennessee, Nashville Division, upon application of the Executive or the Company, shall appoint an arbitrator to fill such space with the same 15 force and effect as though such arbitrator had been appointed in accordance with the first sentence of this paragraph. Any arbitration proceeding pursuant to this paragraph shall be conducted in accordance with the rules of the American Arbitration Association. Judgment may be entered on the arbitrators' award in any court having jurisdiction. Each of the parties hereto shall pay its own expenses of arbitration and one half of the expenses of the arbitrators. If any position by either party hereunder, or any defense or objection thereto, is deemed by the arbitrators to have been unreasonable, the arbitrators shall assess, as part of their award against the unreasonable party or reduce the award to the unreasonable party, all or part of the arbitration expenses (including reasonable attorneys' fees) of the other party and of the arbitrators. 5.7 Additional Instruments. The parties shall execute and deliver any and all additional instruments and agreements that may be necessary or proper to carry out the purposes of this Agreement. 5.8 Execution. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. 5.9 Waiver of Breach. No waiver at any time by either party hereto of any breach by the other of, or compliance by the other with, any condition or provision of this Agreement to be performed by such other party shall operate or be construed as a waiver of similar or dissimilar provisions at the same or at any prior or subsequent time. 5.10 Condition Subsequent. Within ten (10) days following execution of this Agreement by both the Executive and the Company, (a) the Company shall have the opportunity to obtain certain background information about the Executive, including without limitation information from the Executive's former and current employers; and (b) if the Company discovers any material adverse information about the Executive of which the Company was not aware prior to its execution of this Agreement and which adverse information relates to activities of the Executive while an employee or director of Saks & Company ("Saks") constituting one or more of the following: (i) conduct in violation of law reasonably related to the Executive's ability to perform his duties to Saks; or (ii) gross negligence or gross misconduct in the performance of the Executive's duties, or a documented record of incompetent performance, as an employee or director of Saks; the Company shall have the right, at its sole option, to rescind this Agreement and, if so rescinded by the Company, this Agreement shall have no force or effect. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates indicated below. SERVICE MERCHANDISE COMPANY Date: 11/2/94 By: /s/ Raymond Zimmerman --------------------- ----------------------- Raymond Zimmerman Name: Title: EXECUTIVE Date: 11/2/94 /s/ Gary M. Witkin --------------------- --------------------- Gary M. Witkin EX-10.2 4 AMENDED AND RESTATED 1989 EMP. STK. INCENTIVE PLAN 1 Exhibit 10.2 SERVICE MERCHANDISE COMPANY, INC. AMENDED AND RESTATED 1989 EMPLOYEE STOCK INCENTIVE PLAN SECTION 1. Purpose; Definitions. The purpose of the Service Merchandise Company, Inc. Amended and Restated 1989 Employee Stock Incentive Plan (the "Plan") is to enable Service Merchandise Company, Inc. (the "Company") to attract, retain and reward key employees of the Company and its Subsidiaries and Affiliates, and strengthen the mutuality of interests between such key employees and the Company's shareholders, by offering such key employees performance-based stock incentives and/or other equity interests or equity-based incentives in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity. b. "Board" means the Board of Directors of the Company. c. "Book Value" means, as of any given date, on a per share basis (i) the Stockholders' Equity in the Company as of the end of the immediately preceding fiscal year as reflected in the Company's consolidated balance sheet, subject to such adjustments as the Committee shall specify at or after grant, divided by (ii) the number of then outstanding shares of Stock as of such year-end date (as adjusted by the Committee for subsequent events). d. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. e. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. f. "Company" means Service Merchandise Company, Inc., a corporation organized under the laws of the State of Tennessee or any successor corporation. g. "Disability" means disability as determined under procedures established by the Committee for purposes of this Plan. h. "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission under the 2 Securities Exchange Act of 1934, or any successor definition adopted by the Commission. i. "Early Retirement" means retirement, with the express consent for purposes of this Plan of the Company at or before the time of such retirement, from active employment with the Company and any Subsidiary or Affiliate pursuant to the early retirement provisions of the applicable pension plan of such entity. j. "Fair Market Value" means, as of any given date, unless otherwise determined by the Committee in good faith, the mean between the highest and lowest quoted selling price, regular way, of the Stock on the New York Stock Exchange or, if no such sale of Stock occurs on the New York Stock Exchange on such date, the fair market value of the Stock as determined by the Committee in good faith. k. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. l. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. m. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Affiliate on or after age 65. n. "Other Stock-Based Award" means an award under Section 9 below that is valued in whole or in part by reference to, or is otherwise based on, Stock. o. "Plan" means this Service Merchandise Company, Inc. 1989 Employee Stock Incentive Plan, as amended from time to time. p. "Restricted Stock" means an award of shares of Stock that is subject to restrictions under Section 7 below. q. "Retirement" means Normal or Early Retirement. r. "Stock" means the Common Stock, $.50 par value per share, of the Company. s. "Stock Appreciation Right" means the right pursuant to an award granted under Section 6 below to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option (or such portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), subject, where applicable, to the pricing provisions in Section 6(b)(ii); and (ii) the aggregate exercise price of such Stock Option (or such portion thereof). 3 t. "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 below. u. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. In addition, the terms "Change in Control", "Potential Change in Control" and "Change in Control Price" shall have meanings set forth, respectively, in Sections 9(b), (c) and (d) below and the term "Cause" shall have the meaning set forth in Section 5(i) below. SECTION 2. Administration. The Plan shall be administered by a Committee of not less than three Disinterested Persons, who shall be appointed by the Board of Directors of the Company (the "Board") and who shall serve at the pleasure of the Board. The functions of the Committee specified in the Plan shall be exercised by the Board, if and to the extent that no Committee exists which has the authority to so administer the Plan. The Committee shall have full authority to grant, pursuant to the terms of the Plan, to officers and other key employees eligible under Section 4: (i) Stock Options, (ii) Stock and Appreciation Rights, (iii) Restricted Stock and (iv) Other Stock-Based Awards. In particular, the Committee shall have the authority: (i) to select the officers and other key employees of the Company and its Subsidiaries and Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards, or any combination thereof, are to be granted hereunder to one or more eligible employees; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Stock Option or other award and/or the shares of Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion); 4 (v) to determine whether and under what circumstances a Stock Option may be settled in cash, Restricted Stock and/or under Section 5(k) or (1), as applicable, instead of Stock; (vi) to determine whether, to what extent and under what circumstances Option grants and/or other awards under the Plan made by the Company are to be made, and operate, on a tandem basis vis-a-vis other awards under the Plan or on an additive basis; (vii) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); (viii) to determine whether to require payment of any withholding taxes in shares of Common Stock. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 8,437,500 shares. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. Subject to Section 6(b)(iv) below, if any shares of Stock that have been optioned cease to be subject to a Stock Option, or if any such shares of Stock that are subject to any Restricted Stock award, or Other Stock-Based Award granted hereunder are forfeited or any such award otherwise terminates without a payment being made to the participant in the form of Stock, such shares shall again be available for distribution in connection with future awards under the Plan, unless dividends have already been paid with respect to such shares. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, Stock split or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a 5 whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. Eligibility. Officers and other key employees of the Company and its Subsidiaries and Affiliates (but excluding members of the Committee and any person who serves only as a director) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its Subsidiaries and Affiliates are eligible to be granted awards under the Plan. SECTION 5. Stock Options. Stock Options may be granted alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% (or, in the case of an employee who owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any of its subsidiary or parent corporations, not less than 110%) of the Fair Market Value of the Stock at grant, in the case of Incentive Stock Options, and not less than 50% of the Fair Market Value of the Stock at grant, in the case of Non-Qualified Stock Options. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten years (or, in the case of Incentive Stock Options granted to an employee who owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any of its subsidiary or parent corporations, more than five years) after the date the Option is granted. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at 6 or after grant; provided, however, that, except as provided in Section 5(f) and (g) and Section 9, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise provisions apply under Section 5(c), Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Non-Qualified Stock Option or Restricted Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the Option is exercised, as determined by the Committee). If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, such Restricted Stock (and any replacement shares relating thereto) shall remain (or be) restricted in accordance with the original terms of the Restricted Stock award in question, and any additional Stock received upon the exercise shall be subject to the same forfeiture provisions and other restrictions, unless otherwise determined by the Committee, in its sole discretion, at or after grant. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 14(a). (e) Non-Transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent such option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. 7 (g) Termination by Reason of Disability. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of three years (or such other period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such three-year period (or such other period as the Committee shall specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of Normal or Early Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of three years (or such other period as Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such three-year period (or such other period as the Committee may specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or after grant, if an optionee's employment by the Company and any Subsidiary or Affiliate terminates for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised, to the extent otherwise then exercisable, for the lesser of three months or the balance of such Stock Option's term if the optionee is involuntarily terminated by the Company and any Subsidiary or Affiliate without Cause. For purposes of this Plan, "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. 8 (j) Incentive Stock Options. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee (s) affected, to disqualify any Incentive Stock Option under such Section 422. To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement: (i) if (x) a participant's employment is terminated by reason of death, Disability or Retirement and (y) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under Section 5(f), (g) or (h), applied without regard to the $ 100,000 limitation contained in Section 422(d) of the Code, is greater than the portion of such option that is immediately exercisable as an "incentive stock option" during such post- termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option; and (ii) if the exercise of an Incentive Stock Option is accelerated by reason of a Change in Control, any portion of such option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option. (k) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash, Stock, Deferred Stock or Restricted Stock an option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. (1) Settlement Provisions. If the option agreement so provides at grant or is amended after grant and prior to exercise to so provide (with the optionee's consent), the Committee may require that all or part of the shares to be issued with respect to the spread value of an exercised Option take the form of Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Restricted Stock determined without regard to the deferral limitations and/or forfeiture restrictions involved. SECTION 6. Stock Appreciation Rights. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant 9 where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option. A Stock Appreciation Right may be exercised by an optionee, subject to Section 6(b), in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan; provided, however, that any Stock Appreciation Right granted to an optionee subject to Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act") subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of its term. The exercise of Stock Appreciation Rights held by optionees who are subject to Section 16(b) of the Exchange Act shall comply with Rule 16(b)-3 thereunder, to the extent applicable. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. When payment is to be made in shares, the number of shares to be paid shall be calculated on the basis of the Fair Market Value of the shares on the date of exercise. When payment is to be made in cash, such amount shall be calculated on the basis of the average of the highest and lowest quoted selling price, regular way, of the Stock on the New York Stock Exchange during the applicable period referred to in Rule 16b-3(e) under the Exchange Act. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(e) of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. 10 (v) In its sole discretion, the Committee may grant "Limited" Stock Appreciation Rights under this Section 6, i.e., Stock Appreciation Rights that become exercisable only in the event of a Change in Control and/or a Potential Change in Control, subject to such terms and conditions as the Committee may specify at grant. Such Limited Stock Appreciation Rights shall be settled solely in cash. Limited Stock Appreciation Rights granted to persons subject to Section 16(b) of the Exchange Act shall not be exercisable if the exercise thereof would create a liability on the part of the grantee to the Company under Section 16(a) of the Exchange Act. (vi) The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right or Limited Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant. SECTION 7. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or times within which such awards may be subject to forfeiture, and all other terms and conditions of the awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such award. (i) The purchase price for shares of Restricted Stock shall be equal to or less than their par value and may be zero. (ii) Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the award date, by executing a Restricted Stock Award Agreement and paying whatever price (if any) is required under Section 7(b)(i). 11 (iii) Each participant receiving a Restricted Stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award. (iv) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(e), in additional Restricted Stock to the extent shares are available under Section 3, or otherwise reinvested. Pursuant to Section 3 above, Stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. (iii) Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. (iv) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares shall be delivered to the participant promptly. (d) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee 12 may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Restricted Stock award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 8. Other Stock-Based Awards. (a) Administration. Other awards of Stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Stock ("Other Stock-Based Awards"), including, without limitation, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Stock awards or options valued by reference to Book Value or subsidiary performance, may be granted either alone or in addition to or in tandem with Stock Options, Stock Appreciation Rights or Restricted Stock granted under the Plan. Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such awards shall be made, the number of shares of Stock to be awarded pursuant to such awards, and all other conditions of the awards. The Committee may also provide for the grant of Stock upon the completion of a specified performance period. The provisions of other Stock-Based Awards need not be the same with respect to each recipient. (b) Terms and Conditions. Other Stock-Based Awards made pursuant to this Section 8 shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement referred to in Section 10(b)(v) below, shares subject to awards made under this Section 8 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. (ii) Subject to the provisions of this Plan and the award agreement and unless otherwise determined by the Committee at grant, the recipient of an award under this Section 8 shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by the award, as determined at the time of the award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock or otherwise reinvested. (iii) Any award under Section 8 and any Stock covered by any such award shall vest or be forfeited to the extent so provided in the award agreement, as determined by the Committee, in its sole discretion. (iv) In the event of the participant's Retirement, Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any 13 or all of the remaining limitations imposed hereunder (if any) with respect to any or all of an award under this Section 8. (v) Each award under this Section 8 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Company and by the participant. (vi) Stock (including securities convertible into Stock) issued on a bonus basis under this Section 8 may be issued for no cash consideration. Stock (including securities convertible into Stock) purchased pursuant to a purchase right awarded under this Section 8 shall be priced at least 50% of the Fair Market Value of the Stock on the date of grant. SECTION 9. Change in Control Provisions. (a) Impact of Event. In the event of: (1) a "Change in Control" as defined in Section 9(b) or (2) a "Potential Change in Control" as defined in Section 9(c), but only if and to the extent so determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination), the following acceleration and valuation provisions shall apply: (i) Any Stock Appreciation Rights (including, without limitation, any Limited Stock Appreciation Rights) outstanding for at least six months and any Stock Option awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested. (ii) The restrictions and deferral limitations applicable to any Restricted Stock, and Other Stock-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such shares and awards shall be deemed fully vested. (iii) Except as otherwise provided in Section 9(a)(iv) below, the value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock, and Other Stock-Based Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or (except in the case of an Incentive Stock Option) after grant but prior to any Change in Control, be cashed out on the basis of the "Change in Control Price" as defined in Section 9(d) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (iv) In the case of any Options, Stock Appreciation Rights, Restricted Stock and Other Stock-Based Awards held by any person subject to Section 16(b) of the Exchange Act, the value of all such Options, Stock Appreciation Rights, Restricted Stock or Other Stock-Based Awards, in each case to the extent that they have been held for at least six months, shall, unless otherwise determined by the Committee in its sole discretion, be cashed out on the basis of the Change in Control Price as of the date of 14 such Change in Control or such Potential Change in Control is determined to have occurred. The Committee shall have the right (a) to cause any right to receive the Change in Control Price to be cancelled with respect to all or any grantee(s) who are subject to Section 16(b) of the Exchange Act if payment of the Change in Control Price to such grantee(s) would cause liability under Section 16 of the Exchange Act, and (B) to determine whether the Change in Control Price shall be paid in cash or in shares of capital stock to grantees who are subject to Section 16(b) of the Exchange Act. (b) Definition of "Change in Control". For purposes of Section 9(a), a. "Change in Control" means the happening of any of the following: (i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, other than the Company or a wholly-owned subsidiary thereof or any employee benefit plan of the Company or any of its Subsidiaries, becomes the beneficial owner of the Company's securities having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. (c) Definition of Potential Change in Control. For purposes of Section 9(a), a "Potential Change in Control" means the happening of any one of the following: (i) The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 9(b); or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of such plan acting as such trustee)) of 15 securities of the Company representing 5% or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. (d) Change in Control Price. For purposes of this Section 9, "Change in Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index, or paid or offered in any bona fide transaction related to a potential or actual Change in Control of the Company at any time during the 60 day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights (or Limited Stock Appreciation Rights) or, where applicable, the date on which a cashout occurs under Section 9 (a) (iii) or Section 9(a)(iv), as applicable. SECTION 10. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right (or Limited Stock Appreciation Right), Restricted Stock award or Other Stock-Based Award theretofore granted, without the optionee's or participant's consent, or which, without the approval of the Company's stockholders, would: (a) except as expressly provided in this Plan, increase the total number of shares reserved for the purpose of the Plan; (b) change the pricing terms of Sections 5(a) or 9(a); (c) change the employees or class of employees eligible to participate in the Plan; or (d) extend the maximum option period under Section 5(b) of the Plan. The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or other basis), including previously granted Stock Options having higher option exercise prices. Subject to the above provisions, the Board shall have broad authority to amend the Plan to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments. 16 SECTION 11. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 12. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option or other award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary or Affiliate any right to continued employment with the Company or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time. (d) No later than the date as of which an amount first becomes includable in the gross income of the participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and 17 its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options, Stock Purchase Rights and other Plan awards). (f) In addition to any other restrictions on transfer that may be applicable under this Plan or the applicable award agreement, no Option, Stock Appreciation Right, Restricted Stock award (while the shares remain restricted), Other Stock-Based Award or other right issued under the Plan is transferrable by the participant other than by will or by the laws of descent and distribution. (g) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Tennessee. SECTION 13. Effective Date of Amended and Restated Plan. The Plan as amended and restated shall be effective upon adoption by the Board. SECTION 14. Term of Plan. No Stock Option, Stock Appreciation Right, Restricted Stock award or Other Stock-Based Award shall be granted pursuant to the Plan on or after the tenth anniversary of the earlier of the date of Board approval or the date of shareholder approval of the Plan, as amended and restated, but awards granted prior to such tenth anniversary may extend beyond that date. EX-11 5 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11 Service Merchandise Company, Inc. and Subsidiaries COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
January 1 January 1 January 2 1995 1994 1993 --------- --------- --------- PRIMARY - ------- Earnings before extraordinary loss and cumulative effect of change in accounting principle $ 61,570 $ 82,315 $ 84,495 Extraordinary loss from early extinguishment of debt, net of tax benefit of $3,462 and $4,982, respectively (5,415) (7,474) - Cumulative effect of change in accounting principle - 7,742 - -------- -------- -------- Net earnings $ 56,155 $ 82,583 $ 84,495 ======== ======== ======== Shares: - ------ Weighted average common shares outstanding 98,549 98,294 97,483 Weighted average shares of restricted stock outstanding 883 948 1,128 Additional shares assuming exercise of stock options 1,941 2,836 2,991 -------- -------- -------- Weighted average common shares and common share equivalents outstanding - primary 101,373 102,078 101,602 ======== ======== ======== Earnings per commmon share before extraordinary loss and cumulative effect of change in accounting principle $ 0.61 $ 0.80 $ 0.83 Extraordinary loss per common share from early extinguishment of debt, net of tax benefit (0.06) (0.07) - Cumulative effect per common share of change in accounting principle - 0.08 - -------- -------- -------- Primary net earnings per common share $ 0.55 $ 0.81 $ 0.83 ======== ======== ======== ASSUMING FULL DILUTION - ---------------------- Earnings before extraordinary loss and cumulative effect of change in accounting principle $ 61,570 $ 82,315 $ 84,495 Extraordinary loss before from early extinguishment of debt, net of tax benefit of $3,462 and $4,982, respectively (5,415) (7,474) - Cumulative effect before of change in accounting principle - 7,742 - -------- -------- -------- Net earnings $ 56,155 $ 82,583 $ 84,495 ======== ======== ======== Shares: - ------ Weighted average common shares outstanding 98,549 98,294 97,483 Weighted average shares of restricted stock outstanding 883 948 1,128 Additional shares assuming exercise of stock options 1,954 2,858 3,066 -------- -------- -------- Weighted average common shares and common share equivalents outstanding - fully diluted 101,386 102,100 101,677 ======== ======== ======== Earnings per common share before extraordinary loss and cumulative effect of change in accounting principle $ 0.61 $ 0.80 $ 0.83 Extraordinary loss per common share from early extinguishment of debt, net of tax benefit (0.06) (0.07) - Cumulative effect per common share of change in accounting principle - 0.08 - -------- -------- -------- Fully diluted net earnings per common share $ 0.55 $ 0.81 $ 0.83 ======== ======== ========
EX-13 6 PORTIONS OF 1994 ANNUAL REPORT 1 EXHIBIT 13 Service Merchandise Company, Inc. and Subsidiaries SELECTED FINANCIAL INFORMATION
Fiscal Year (In thousands, except per share, store and ratio data) 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net sales $4,050,381 $3,814,618 $3,712,790 $3,399,752 $3,435,037 Earnings before interest and income taxes 175,697 210,434 231,202 233,595 224,382 Interest expense - debt and capitalized leases 74,762 73,243 92,685 108,874 126,459 Earnings before extraordinary loss and cumulative effect of change in accounting principle 61,570 82,315 84,495 76,080 60,712 Net earnings 56,155 82,583 84,495 76,080 60,712 Ratios & Rates Gross margin to net sales 24.0% 24.8% 24.4% 25.8% 25.1% Selling, general and administrative expenses to net sales (a) 18.1% 17.7% 16.6% 17.3% 16.9% Effective tax rate 39.0% 40.0% 39.0% 39.0% 38.0% Earnings before extraordinary loss and cumulative effect of change in accounting principle to net sales 1.5% 2.2% 2.3% 2.2% 1.8% Net earnings to net sales 1.4% 2.2% 2.3% 2.2% 1.8% PER COMMON SHARE (b) Earnings per share before extraordinary loss and cumulative effect of change in accounting principle $ 0.61 $ 0.80 $ 0.83 $ 0.76 $ 0.62 Net earnings per share $ 0.55 $ 0.81 $ 0.83 $ 0.76 $ 0.62 Weighted average common shares and common share equivalents outstanding 101,373 102,078 101,602 100,476 98,528 FINANCIAL POSITION Inventories $1,004,282 $ 939,259 $ 857,640 $ 793,311 $ 747,697 Accounts payable 639,766 630,723 496,946 370,434 407,791 Working capital 292,982 314,715 289,599 221,613 252,922 Total assets (a) 1,926,902 2,011,575 1,707,460 1,570,783 1,651,132 Long-term obligations (c) 618,423 698,521 696,911 714,696 826,602 Shareholders' equity 336,376 279,538 194,207 104,315 25,374 Ratios Inventory turnover 3.2x 3.2x 3.4x 3.3x 3.4x Current ratio 1.3x 1.3x 1.4x 1.3x 1.3x Long-term obligations to total capitalization 64.8% 71.4% 78.2% 87.3% 97.0% OTHER INFORMATION Total net sales increase (decrease) 6.2% 2.7% 9.2% (1.0%) 3.9% Comparable stores net sales increase (decrease) (d) 1.3% 0.3% 5.2% (4.8%) 0.9% Number of catalog stores 406 391 371 359 346 EBITDA DATA EBITDA (e) $ 242,495 $ 280,075 $ 300,033 $ 299,183 $ 294,778 EBITDA to net sales 6.0% 7.3% 8.1% 8.8% 8.6% (a) Certain prior period amounts have been reclassified for comparative purposes. (b) Restated for stock splits in 1992 and 1991. (c) Includes both long-term debt and capitalized lease obligations. (d) Adjusted to reflect a comparable number of selling days. (e) EBITDA consists of net earnings before interest, income taxes, depreciation and amortization and other non-cash charges and credits. Also included in EBITDA is other amortization classified as selling, general and administrative expenses in the following amounts: 1994 - $4,263; 1993 - $7,884; 1992 - $10,131; 1991 - $9,434; 1990 - $15,709. EBITDA is not intended to represent net earnings, cash flow or any other measures of performance in accordance with generally accepted accounting principles, but is included because management believes certain investors find it to be a useful tool for measuring creditworthiness. - ---------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. -10-
2 Service Merchandise Company, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FISCAL YEAR ENDED JANUARY 1, 1995 COMPARED TO FISCAL YEAR ENDED JANUARY 1, 1994 Net earnings for the fiscal year ended January 1, 1995 (fiscal 1994) were $56.2 million, or $0.55 per share, compared to net earnings of $82.6 million, or $0.81 per share, for the fiscal year ended January 1, 1994 (fiscal 1993). These amounts include extraordinary charges attributable to the early extinguishment of debt incurred in both years (See "Liquidity") and a benefit in fiscal 1993 related to the cumulative effect of adopting the new accounting standard for income taxes. The decrease in earnings is primarily attributable to additional store payroll costs resulting from an increased emphasis on customer service and to lower gross margin rates. Fiscal 1994 marked the beginning of a transition for Service Merchandise. The initial steps to this process included recognition of the importance of sales and service by improving the shopping experience for customers and increasing store inventory levels to achieve a consistently high in-stock position, particularly on promotional merchandise. This transition required higher payroll and inventory carrying costs which have adversely affected earnings. The transition begun in fiscal 1994 will continue into fiscal 1995. The Company will focus on all aspects of merchandising, looking for opportunities to improve the profitability of its core merchandise lines and addressing those areas of underperformance. In addition, the Company remains committed to the customer service initiatives undertaken in fiscal 1994, but will focus on ways to increase the productivity of the Company's expense structure. The Company intends to reduce the number of store openings in order to concentrate its efforts on increasing the profitability of existing stores. The Company's business is highly seasonal, with a significant portion of its sales occurring in the fourth quarter. Fourth quarter net sales accounted for 42.5% and 42.8% of total net sales, in fiscal 1994 and 1993, respectively. Fourth quarter net sales for fiscal 1994 increased 5.4% as compared to the fourth quarter of fiscal 1993. For fiscal 1994, net sales were $4.1 billion compared to $3.8 billion for fiscal 1993, an increase of $235.8 million or 6.2%. Comparable store sales, adjusted for the one additional selling day in fiscal 1994, increased 1.3%. The increase in comparable store sales reflects the initiatives undertaken in fiscal 1994 to provide higher levels of customer service, more competitive pricing and a better inventory in-stock position. Comparable store sales for the second half of fiscal 1994 increased 2.7% over the year-earlier period which was a significant improvement over the comparable store sales decrease of 0.8% for the first half of fiscal 1994. Gross margin, after cost of merchandise sold and buying and occupancy expenses, decreased, as a percentage of net sales, to 24.0% from 24.8% in fiscal 1993. The decreased margin rate is a result of more competitive pricing in most product categories. This decrease is partially offset by a shift in the sales mix towards jewelry products. The decrease in the gross margin rate was less significant in the fourth quarter than the decline in either the second or third quarters. Selling, general and administrative expenses for fiscal 1994 increased as a percentage of net sales to 18.1% from 17.7% in fiscal 1993. The increase is a result of additional payroll costs, as discussed earlier, associated with the renewed emphasis on customer service, offset in part by a decrease in advertising expense. Depreciation and amortization on owned and leased property and equipment was $62.5 million for fiscal 1994 compared to $61.8 million for fiscal 1993, an increase of 1.3%. The increase is a result of additional capital expenditures associated with the opening of a net 15 stores. Capital expenditures (excluding capitalized leases) decreased to $82.1 million in fiscal 1994 from $115.6 million in fiscal 1993. Interest expense on debt and capitalized leases increased slightly to $74.8 million in fiscal 1994 from $73.2 million in fiscal 1993. The increase is primarily a result of the rising interest rate environment in general, offset in part by the lower effective interest rate on the $600 million Reducing Revolving Credit Facility, better interest rate management and the prepayment of high coupon mortgages totaling $27.1 million (See "Liquidity"). The effective income tax rate decreased to 39% in fiscal 1994 from 40% in fiscal 1993 as a result of a reduction in the effective rates of state income taxes. -11- 3 Service Merchandise Company, Inc. and Subsidiaries FISCAL YEAR ENDED JANUARY 1, 1994 COMPARED TO FISCAL YEAR ENDED JANUARY 2, 1993 Net earnings for the fiscal year ended January 1, 1994 (fiscal 1993) were $82.6 million, or $0.81 per share, compared to net earnings of $84.5 million, or $0.83 per share, for the fiscal year ended January 2, 1993 (fiscal 1992). The decrease in net earnings reflected a $4.5 million pre-tax charge ($2.7 million after-tax or $0.03 per share) associated with closing the Company's three store Kids' Central USA operations, a test specialty store concept initiated in 1992. The decision to discontinue the concept reflected the Company's efforts to focus on its core business. The Company's business is highly seasonal, with a significant portion of its sales occurring in the fourth quarter. Fourth quarter net sales accounted for 42.8% and 42.2% of total net sales, in fiscal 1993 and 1992, respectively. Fourth quarter net sales for fiscal 1993 increased 4.2% as compared to the fourth quarter of fiscal 1992. For fiscal 1993, net sales were $3.8 billion compared to $3.7 billion for fiscal 1992, an increase of $101.8 million or 2.7%. The Company opened a net of 20 catalog stores during fiscal 1993. Comparable store sales, adjusted for the five fewer selling days in fiscal 1993, increased 0.3% over fiscal 1992. Jewelry sales increased at a pace exceeding that experienced by the Company as a whole. The relatively flat comparable store sales performance was attributable to several factors. The Company was not as price promotional as it was in fiscal 1992 while many other retailers continued heavy price promotional programs to attract sales volume in a highly competitive retail environment. While retail sales, in general, reported moderate increases, consumer demand was strongly focused on durable goods in the home improvement area, principally furnishings and major appliances, which are not significant product offerings for the Company. Competition was also particularly intense in consumer electronics, specifically in certain geographic markets where competitors opened a significant number of new stores. Additionally, in the southern Florida market, sales comparisons to last year were adversely impacted by the additional sales volume generated in fiscal 1992 by Hurricane Andrew. Gross margin, after cost of merchandise sold and buying and occupancy expenses, increased, as a percentage of net sales, to 24.8% in fiscal 1993 from 24.4% in fiscal 1992. The increase in gross margin rate reflected less reliance on promotional pricing, improvements in the jewelry and hardlines margin rates and a shift in sales mix toward jewelry sales, partially offset by an increase in transportation costs and an increase in rent and occupancy costs associated with the new store openings during fiscal 1993. Selling, general and administrative expenses for fiscal 1993 increased as a percentage of net sales to 17.7% from 16.6% in fiscal 1992. Of the increase, approximately $28.8 million related to planned increases in advertising expenditures. A significant portion of the advertising expense increase related to the Company's fourth quarter broadcast campaign featuring Bill Cosby. While this campaign generated strong customer awareness, it did not translate into the sales increases originally anticipated. The remainder of the increase in advertising expense related to increases in household circulation and page quantities of the Company's traditional advertising vehicles of catalogs, newspaper inserts and flyers to support expansion of the Company's customer base. Additional increases in selling, general and administrative expenses related to the growth in employment and other overhead expenses associated with the net 20 catalog store openings during 1993 which were not totally offset by growth in sales volume. Selling, general and administrative expenses in fiscal 1993 also reflected $3.3 million of the total charge relating to the closing of the three Kids' Central USA stores. Depreciation and amortization on owned and leased property and equipment was $61.8 million for fiscal 1993, a 5.2% increase over the $58.7 million recorded in fiscal 1992. Increased depreciation was attributable to capital expenditures, including increased new store ownership. The Company experienced significant growth in fiscal 1993 with the opening of a net 20 catalog stores, the most the Company had opened in any one year since 1985. Capital expenditures for property and equipment were $115.6 million and $64.4 million for fiscal 1993 and 1992, respectively. Interest expense on debt and capitalized leases decreased $19.4 million, or 21.0% as compared to fiscal 1992. The lower interest expense was attributable to the first quarter refinancing of $300 million senior subordinated debt at a substantially lower rate and the second quarter successful renegotiation of lower rates on the Company's Credit Agreement (See "Liquidity"). Partially offsetting these inter- -12- 4 Service Merchandise Company, Inc. and Subsidiaries est savings was the incremental interest expense associated with the $100 million Senior Notes issued in October 1993. These notes were issued to provide additional long-term financing for general corporate purposes, including funding of planned store openings and prepayment of certain high coupon mortgages. In connection with the refinancing of the $300 million senior subordinated debt in fiscal 1993, the Company recorded an extraordinary loss due to early extinguishment of debt of $7.5 million, net of tax benefit of $5.0 million, or $0.07 per share. The effective income tax rate increased to 40% for fiscal 1993 as compared to 39% in fiscal 1992. The increase related to an increase in the statutory federal income tax rate from 34% to 35% as enacted by the Omnibus Budget Reconciliation Act of 1993. In addition, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 3, 1993. The cumulative effect of this change in accounting principle was a benefit of $7.7 million or $0.08 per share. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL The Company's business is highly seasonal, with the Company's investment in inventories reaching a peak prior to the Christmas season. These requirements are financed by internally generated funds and short-term borrowings. Cash flow from operations is principally generated in the fourth quarter of each fiscal year, reflecting the seasonal nature of the Company's retail business. Cash flow during the fourth quarter has been more than sufficient to allow the Company to repay all short-term borrowings under its Reducing Revolving Credit Facility prior to the end of each fiscal year (See "Liquidity"). Working capital decreased $21.7 million to $293.0 million at January 1, 1995 as compared to $314.7 million at January 1, 1994. Working capital at January 2, 1993 was $289.6 million. The current ratio at both January 1, 1995 and 1994 was 1.3 to 1 as compared to 1.4 to 1 at January 2, 1993. Working capital decreased in fiscal 1994 primarily as a result of the prepayment of approximately $150 million of long-term debt which enhanced the Company's capital structure (See "Liquidity"). Current maturities of long-term debt decreased to $13.1 million at January 1, 1995 from $91.8 million at January 1, 1994 as a result of these prepayments. Short-term borrowings under the new $600 million Reducing Revolving Credit Facility reached a maximum of $527.2 million during fiscal 1994 as compared to $354.3 million and $377.6 million in fiscal 1993 and 1992, respectively. The increase was primarily attributable to the refinancing of the Secured Term Loan (See "Liquidity"). LIQUIDITY FISCAL 1994 On June 8, 1994, the Company completed a new $600 million Reducing Revolving Credit Facility which replaced its Amended and Restated Credit Agreement originally dated May 20, 1992. The new Reducing Revolving Credit Facility replaced the $475 million Revolving Credit Facility and allowed for the prepayment of the remaining $122 million outstanding under the Secured Term Loan. The Company believes the new Reducing Revolving Credit Facility will be sufficient to meet its needs over the life of the agreement. The new Credit Facility extends the maturity of the Company's working capital facility from December 31, 1995 to June 8, 1999, reduces the effective interest rate on those borrowings to LIBOR +1.0% from LIBOR + 1.5% (both rates include a 3/8% facility fee on the committed amount), releases the security interests held in connection with the prior facility and provides for generally less restrictive covenants. The Reducing Revolving Credit Facility includes a $400 million competitive bid facility which allows the Company to solicit bids from its lenders to borrow at interest rates below the contractual rate. The maximum commitment level for the new facility reduces $25 million annually until reaching $475 million at December 31, 1998. At January 1, 1995, the maximum commitment level for the new facility was $575 million, and there were no outstanding borrowings at that time. As discussed earlier, current maturities of long-term debt decreased in fiscal 1994 as compared to fiscal 1993 as a result of the prepayment of the Secured Term Loan and high coupon mortgages. In connection with these prepayments, an extraordinary loss of $5.4 million, net of tax benefit of $3.5 million, or $0.06 per share was recorded during fiscal 1994. -13- 5 Service Merchandise, Company, Inc. and Subsididaries Cash provided from operations was $83.5 million for fiscal 1994 as compared to $236.4 million for fiscal 1993. In addition to the decrease in earnings for fiscal 1994, the decrease in cash flow from operations in fiscal 1994 is also a result of a less significant increase in trade payables as compared to the increases in fiscal 1993 and 1992. The cash generated from operations in fiscal 1994, supplemented with our existing Credit Facility, was used to finance capital expenditures of $82.1 million (excluding capitalized leases) for land, buildings, fixtures and equipment, the prepayment of the $122 million outstanding under the Secured Term Loan and to provide for general working capital needs associated with the opening of a net 15 stores. The Company believes that its existing debt structure and additional cash from operations will continue to fund future operations and capital expansion. FISCAL 1993 In February 1993, the Company issued $300 million of 9% Senior Subordinated Debentures due in equal installments in 2003 and 2004. Net proceeds of $294 million, together with cash on hand, were used to redeem the existing $300 million of 11 3/4% Senior Subordinated Notes due in 1996 at a premium of 101.68% plus accrued interest. The Company recorded an extraordinary loss of $7.5 million, net of tax benefit of $5.0 million, or $0.07 per share, in connection with the early extinguishment of this debt. In April 1993, the Company amended the existing Credit Agreement to reduce the contractual rate for the Secured Term Loan to LIBOR plus 1 1/2%, or Prime Rate plus 1/2%, and for the Revolving Credit Facility to LIBOR plus 1 1/8%, or Prime Rate plus 1/8%, plus a facility fee of 3/8% on the total commitment. This Credit Agreement was replaced with the $600 million Reducing Revolving Credit Facility in fiscal 1994. In October 1993, the Company issued $100 million of 8 3/8% Senior Notes due 2001, priced at 99.621% to yield 8.45%. The proceeds were used for general corporate purposes, including the Company's planned opening of new stores, other capital expenditures and prepayment of high coupon mortgages totaling $27.1 million during the first half of fiscal 1994. Cash provided from operations was $236.4 million for fiscal 1993 as compared to $192.9 million for fiscal 1992. These funds combined with short-term and long-term borrowings were used to finance capital expenditures of $115.6 million (excluding capitalized leases) for land, buildings, fixtures and equipment and to provide for general working capital needs associated with the opening of a net 20 catalog stores. CAPITAL EXPENDITURES Capital expenditures (excluding capitalized leases) in fiscal 1994 were $82.1 million, as compared to $115.6 million in fiscal 1993 and $64.4 million in fiscal 1992. The majority of the Company's capital expenditures related to the opening of new stores although a significant portion of the fiscal 1994 openings were operating lease properties. In fiscal 1994, the Company opened 23 stores (8 existing stores were closed) as compared to the opening of 27 catalog stores (7 existing catalog stores were closed) and 1 new Kids' Central USA store during fiscal 1993 and 17 catalog stores (5 existing stores were closed) along with 2 Kids' Central USA stores during fiscal 1992. The Company expects the new store growth rate in fiscal 1995 to slow to an annual rate of approximately 3%, down from the 4% to 5% rate of the past two fiscal years. This decrease will allow the Company to focus its efforts on increasing the profitability of its existing stores. The Company expects to fund future capital expenditures through cash on hand together with cash flow from operations and temporary borrowings under the Reducing Revolving Credit Facility. INFLATION The Company does not believe inflation has had a material impact on the Company's net sales or net earnings during the last three fiscal years. -14- 6 Service Merchandise Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Year Ended January 1, January 1, January 2, (In thousands, except per share data) 1995 1994 1993 --------------------------------------------------------------------------------------------------------------------- Net sales $4,050,381 $3,814,618 $3,712,790 Cost of merchandise sold and buying and occupancy expenses 3,079,350 2,868,482 2,805,979 ---------- ---------- ---------- Gross margin after cost of merchandise sold and buying and occupancy expenses 971,031 946,136 906,811 Selling, general and administrative expenses 732,799 673,945 616,909 Depreciation and amortization 62,535 61,757 58,700 ---------- ---------- ---------- Earnings before interest and income taxes 175,697 210,434 231,202 Interest expense - debt 64,531 62,102 80,856 Interest expense - capitalized leases 10,231 11,141 11,829 ---------- ---------- ---------- Earnings before income taxes 100,935 137,191 138,517 Income taxes 39,365 54,876 54,022 ---------- ---------- ---------- Earnings before extraordinary loss and cumulative effect of change in accounting principle 61,570 82,315 84,495 Extraordinary loss from early extinguishment of debt, net of tax benefit of $3,462 and $4,982, respectively (5,415) (7,474) - Cumulative effect of change in accounting principle - 7,742 - ---------- ---------- ---------- Net earnings $ 56,155 $ 82,583 $ 84,495 ========== ========== ========== Per common share: Earnings before extraordinary loss and cumulative effect of change in accounting principle $ 0.61 $ 0.80 $ 0.83 Extraordinary loss from early extinguishment of debt, net of tax benefit (0.06) (0.07) - Cumulative effect of change in accounting principle - 0.08 - ---------- ----------- ---------- Net earnings per common share $ 0.55 $ 0.81 $ 0.83 ========== =========== ========== - ------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. -15-
7 Service Merchandise Company, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
January 1, January 1, (In thousands, except per share data) 1995 1994 ---------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 173,264 $ 325,092 Accounts receivable, net of allowance of $3,217 and $2,894, respectively 55,134 53,014 Inventories 1,004,282 939,259 Prepaid expenses 27,778 29,898 ---------- ---------- TOTAL CURRENT ASSETS 1,260,458 1,347,263 Net property and equipment - owned 594,772 575,712 Net property and equipment - capitalized leases 51,932 60,128 Other assets and deferred charges 19,740 28,472 ---------- ---------- TOTAL ASSETS $1,926,902 $2,011,575 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 639,766 $ 630,723 Accrued expenses 205,709 188,050 State and local sales tax 61,668 59,035 Income taxes 39,364 54,914 Current maturities of long-term debt 13,098 91,751 Current maturities of capitalized lease obligations 7,871 8,075 ---------- ---------- TOTAL CURRENT LIABILITIES 967,476 1,032,548 Long-term debt 544,808 616,752 Capitalized lease obligations 73,615 81,769 Deferred income taxes 4,627 968 ---------- ---------- TOTAL LIABILITIES 1,590,526 1,732,037 ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, $1 par value, authorized 4,600 shares undesignated as to rate and other rights, none issued Series A Junior Preferred Stock, $1 par value, authorized 400 shares, none issued Common stock, $.50 par value, authorized 500,000 shares, issued and outstanding 99,818 and 99,368 shares, respectively 49,909 49,684 Additional paid-in capital 6,115 4,055 Deferred compensation (2,789) (1,187) Retained earnings 283,141 226,986 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 336,376 279,538 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,926,902 $2,011,575 ========== ========== - -------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. -16-
8 Service Merchandise Company, Inc. and Subsidiaries 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 December 28, 1991 65,532 $32,766 $ 8,572 $(4,274) $ 67,251 $104,315 Net earnings - - - - 84,495 84,495 Three-for-two stock split 32,836 16,418 (9,075) - (7,343) - Exercise of stock options, net 738 369 4,187 - - 4,556 Amortization of deferred compensation - - - 1,227 - 1,227 Cancellation of restricted stock (66) (33) (483) 516 - - Other (30) (15) (355) (16) - (386) ------- ------- ------- ------- -------- -------- Balance January 2, 1993 99,010 49,505 2,846 (2,547) 144,403 194,207 Net earnings - - - - 82,583 82,583 Exercise of stock options, net 454 227 1,794 - - 2,021 Amortization of deferred compensation - - - 727 - 727 Cancellation of restricted stock (96) (48) (594) 642 - - Other - - 9 (9) - - ------- ------- ------- ------- -------- -------- Balance January 1, 1994 99,368 49,684 4,055 (1,187) 226,986 279,538 Net earnings - - - - 56,155 56,155 Exercise of stock options, net 112 56 363 - - 419 Shares issued under restricted stock awards 480 240 2,579 (2,819) - - Amortization of deferred compensation - - - 264 - 264 Cancellation of restricted stock (142) (71) (882) 953 - - ------- ------- ------- ------- -------- -------- Balance January 1, 1995 99,818 $49,909 $ 6,115 $(2,789) $283,141 $336,376 ======= ======= ======= ======= ======== ======== - ------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. -17-
9 Service Merchandise Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Year Ended January 1, January 1, January 2, (In thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 56,155 $ 82,583 $ 84,495 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization (a) 66,850 69,711 69,278 Deferred income taxes 3,659 (8,251) 790 (Gain) loss on sale of property and equipment (1,107) 1,509 543 Write-off of bond discount and debt issue costs 6,830 5,094 - Changes in assets and liabilities (net of disposition)(b) : Accounts receivable (2,120) 297 (9,236) Inventories (65,023) (81,619) (64,329) Prepaid expenses 2,120 (9,444) (5,035) Accounts payable 9,043 133,777 126,512 Accrued expenses 22,615 40,426 (6,800) Income taxes (15,550) 2,354 (3,269) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 83,472 236,437 192,949 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment - owned (82,108) (115,645) (64,400) Proceeds from sales of property and equipment 7,269 644 3,239 Other, net (327) (2,033) 2,357 --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (75,166) (117,034) (58,804) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings 527,200 354,300 377,600 Repayment of short-term borrowings (527,200) (354,300) (377,600) Proceeds from long-term debt 3,200 399,621 1,485 Repayment of long-term debt (153,849) (341,219) (67,827) Repayment of capitalized lease obligations (8,133) (9,953) (8,313) Debt issuance costs (1,771) (10,098) (9,445) Exercise of stock options 419 2,021 4,556 --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (160,134) 40,372 (79,544) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (151,828) 159,775 54,601 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 325,092 165,317 110,716 --------- --------- --------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 173,264 $ 325,092 $ 165,317 ========= ========= ========= (a) Includes other amortization classified as selling, general and administrative expenses of $4,263 for fiscal 1994, $7,884 for fiscal 1993, $10,131 for fiscal 1992 and $52, $70 and $447 of discount amortization classified as interest expense in fiscal 1994, 1993, and 1992, respectively. (b) Includes disposition costs previously accrued which were associated with the closing of the three Kids' Central USA stores. - -------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. -18-
10 Service Merchandise Company, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JANUARY 1, 1995 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions and balances have been eliminated. Business segment: Substantially all of the Company's assets, revenue and operating income are employed in or generated from the retail store industry within the United States. Fiscal year: Effective January 2, 1994, the Company began reporting quarterly results as 13 weeks (two four-week periods and one five-week period) instead of three calendar months. Under the new reporting method, the Company's fiscal year ends on the Sunday closest to the end of the calendar year instead of the closest Saturday as in the last two fiscal years. The effect of the change to the new reporting method was immaterial to the comparability of the Company's financial results. There were 52 weeks in the fiscal years ended January 1, 1995 and 1994 and 53 weeks in the fiscal year ended January 2, 1993. Cash and cash equivalents: Cash and cash equivalents include cash on hand and short-term, highly liquid investments which generally include certificates of deposit, commercial paper, time deposits, securities under repurchase agreements and institutional money market funds. Such investments are generally made for periods covering 1 to 30 days. These investments are valued at cost, which approximates market, and have a weighted average interest rate of 6.0% and 3.3% as of January 1, 1995 and 1994, respectively. Accounts receivable: Accounts receivable include trade accounts, vendor advertising allowances and customer layaway receivables. Inventories: Inventories are valued at the lower of cost or market, utilizing the first-in, first-out method. Property and equipment - owned: Owned property and equipment are stated at cost. Depreciation and amortization are provided principally on the straight-line method over a period of 5 to 10 years for furniture, fixtures and equipment and 30 years for buildings. Leasehold improvements are depreciated over the lesser of the life of the asset or the real estate lease term. Accelerated depreciation methods are used for income tax purposes. Property and equipment - capitalized leases: Capitalized leases are recorded at the lower of fair value of the leased property or the present value of the minimum lease payments at the inception of the lease. Amortization of leased property is computed using the straight-line method over the term of the lease. Deferred charges: Deferred charges consist primarily of debt issuance costs and deferred finance charges which are amortized over the life of the related debt. Income taxes: In fiscal 1992, income taxes were accounted for in accordance with Accounting Principles Board Opinion ("APB") No. 11, "Accounting for Income Taxes." Effective the first day of fiscal 1993, the Company implemented Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which superseded APB No. 11. Under SFAS No. 109, the asset and liability method is used for computing future tax consequences of events which have been recognized in the Company's financial statements or tax returns. Deferred tax expense or benefit is the change during the year in the Company's deferred tax assets and liabilities. Net earnings per common share: Net earnings per common share is computed by dividing net earnings by the weighted average number of common shares and common share equivalents which consist of outstanding stock options and restricted shares (See Note G). All 1992 per share data has been restated for the three-for-two stock split in fiscal 1992. Reclassifications: Certain prior period amounts have been reclassified for comparative purposes. -19- 11 Service Merchandise Company, Inc. and Subsidiaries B. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
January 1, January 1, (In thousands) 1995 1994 ------------------------------------------------------------------------------------------- Owned assets: Land $ 119,555 $ 114,275 Buildings 433,587 408,037 Furniture, fixtures and equipment 351,410 325,402 Leasehold improvements 119,234 112,891 Construction in progress 6,631 2,896 Other 20,944 20,907 ---------- ---------- 1,051,361 984,408 Less: accumulated depreciation and amortization (456,589) (408,696) ---------- ---------- Owned assets, net $ 594,772 $ 575,712 ========== ========== Capitalized leases: Real estate $ 116,049 $ 116,469 Furniture, fixtures and equipment 11,916 11,904 ---------- ---------- 127,965 128,373 Less: accumulated amortization (76,033) (68,245) ---------- ---------- Capitalized leases, net $ 51,932 $ 60,128 ========== ========== -------------------------------------------------------------------------------------------
C. REDUCING REVOLVING CREDIT FACILITY On June 8, 1994, the Company completed a new $600 million Reducing Revolving Credit Facility which replaced its existing $475 million Revolving Credit Facility and $122 million outstanding under the Secured Term Loan (See Note D). The new $600 million Reducing Revolving Credit Facility extends the maturity of the Company's working capital facility from December 31, 1995 to June 8, 1999, reduces the effective interest rate on those borrowings to LIBOR + 1.0% from LIBOR + 1.5% (both rates include a 3/8% facility fee on the committed amount), releases the security interests held in connection with the prior facility and provides for generally less restrictive covenants. The Reducing Revolving Credit Facility includes a $400 million competitive bid facility which allows the Company to solicit bids from its lenders to borrow at interest rates below the contractual rate. The maximum commitment level for the new facility reduces $25 million annually until reaching $475 million as of December 31, 1998. As of January 1, 1995, the maximum commitment level was $575 million. The Reducing Revolving Credit Facility contains various financial and other covenants, including: (a) certain restrictions on mergers, consolidation and sale of assets; (b) a restricted payments basket (as defined) to allow for dividends, debt and stock buyback under certain circumstances in an aggregate amount not to exceed a defined amount; (c) certain restrictions on incurring and assuming liens on non-permitted property or assets; and (d) financial tests including requirements to maintain levels of tangible net worth, leverage ratios, interest coverage ratio and fixed charge coverage, as defined. At January 1, 1995, the Company was in compliance with these covenants. The Reducing Revolving Credit Facility requires borrowings outstanding to be less than a defined amount for a period of 30 consecutive days each year. At January 1, 1995, there were no borrowings outstanding under this Credit Facility. -20- 12 Service Merchandise Company, Inc. and Subsidiaries D. LONG-TERM DEBT Long-term debt consists of the following:
January 1, January 1, (In thousands) 1995 1994 --------------------------------------------------------------------------------------------------- 9% Senior Subordinated Debentures, payable in equal installments in 2003 and 2004 $300,000 $300,000 Secured Term Loan - 122,026 8 3/8% Senior Notes due 2001, net of unamortized discount of $317 and $369, respectively 99,683 99,631 First Mortgage Secured Notes, weighted average variable interest rate at January 1, 1995 of 6.2%, payable in three equal installments from 1998 to 2000 90,000 90,000 Mortgage notes payable, weighted average fixed interest rate at January 1, 1995 of 10.1%, payable in varying amounts to 2022 27,664 56,131 Industrial Revenue Bonds, fixed and variable interest rates, weighted average interest rate at January 1, 1995 of 4.9%, payable in varying amounts to 2024 40,485 40,485 Other 74 230 -------- -------- 557,906 708,503 Less: current maturities (13,098) (91,751) -------- -------- Long-term debt $544,808 $616,752 ======== ======== ---------------------------------------------------------------------------------------------------
During fiscal 1994, the Company prepaid high coupon mortgages of $27.1 million with interest rates ranging from 10% to 12.5%. Additionally, the Company prepaid the remaining $122 million outstanding under the Secured Term Loan as a result of the completion of the new Reducing Revolving Credit Facility (See Note C). In connection with these prepayments, the Company recorded an extraordinary loss of $5.4 million, net of tax benefit of $3.5 million, or $0.06 per share. On February 17, 1993, the Company issued $300 million of 9% Senior Subordinated Debentures (the "Debentures"), due in equal installments in 2003 and 2004. Net proceeds of $294 million, together with cash on hand, were used to redeem the existing $300 million of 11 3/4% Senior Subordinated Notes due in 1996 at a premium of 101.68% plus accrued interest. The Company recorded an extraordinary loss of $7.5 million, net of tax benefit of $5.0 million, or $0.07 per share, in connection with the early extinguishment of this debt. Interest on the Debentures is payable semi-annually in June and December. The Debentures are subordinated to all senior indebtedness of the Company, as defined, and are callable, at the Company's option, beginning December 1997 at a premium of 104.5% which decreases annually until reaching par in December 2000. -21- 13 Service Merchandise Company, Inc. and Subsidiaries D. LONG-TERM DEBT (continued) On October 26, 1993, the Company issued $100 million of 8 3/8% Senior Notes (the "Notes") due 2001, priced at 99.621% to yield 8.45%. The proceeds were used for general corporate purposes, including the Company's opening of new stores and other capital expenditures, as well as the prepayment of $27.1 million of certain high coupon mortgages during the first half of fiscal 1994. Interest on the Notes is payable semi-annually in January and July. Long-term debt maturities are as follows:
(In thousands) Fiscal year ---------------------------------- 1995 $ 13,098 1996 1,545 1997 4,159 1998 33,235 1999 35,475 Thereafter 470,394 -------- Total $557,906 ======== ----------------------------------
Mortgages and Industrial Revenue Bonds are collateralized by property and equipment having a net book value of approximately $111.5 million and $28.7 million, respectively, at January 1, 1995. The Industrial Revenue Bonds are primarily floating rate demand obligations. In the past, the Company has entered into interest rate protection agreements to reduce the risk of unfavorable interest rate fluctuations on its variable interest rate long-term debt. At January 1, 1995, the Company had an 11.5%, three month LIBOR interest rate cap agreement on $45 million of its variable interest rate First Secured Mortgage Notes. The interest rate cap agreement matures on June 30, 1998. The Company is exposed to a minimal credit loss in the event of nonperformance by a counterparty to the interest rate cap agreement; however, the Company does not anticipate nonperformance by the counterparty. Cash payments for interest were $73.6 million, $72.2 million and $109.2 million for fiscal years 1994, 1993 and 1992, respectively. -22- 14 Service Merchandise Company, Inc. and Subsidiaries E. LEASE COMMITMENTS The Company has both capital and operating lease agreements for store and other facilities as well as for certain furniture, fixtures and equipment. Under most of these lease agreements, the Company pays taxes, insurance and maintenance costs. Lease terms for stores generally range from 10 to 25 years with renewal periods for an additional 5 to 10 years. Certain store leases provide for additional contingent rental payments based on a percentage of sales in excess of specified minimum amounts. Future minimum lease payments as of January 1, 1995 are as follows:
Capitalized Lease Obligations ---------------------------- Furniture, (In thousands) Real Fixtures Operating Fiscal year Estate and Equipment Leases ------------------------------------------------------------------------------------- 1995 $ 14,492 $ 2,864 $ 72,604 1996 14,126 2,572 70,090 1997 13,954 974 63,337 1998 13,671 175 58,218 1999 12,759 -- 54,781 Thereafter 69,186 -- 450,992 -------- ------- -------- Total minimum payments 138,188 6,585 $770,022 ======== Less: imputed interest and executory costs (62,800) (487) -------- ------- Present value of net minimum lease payments 75,388 6,098 Less: current maturities (5,392) (2,479) -------- ------- Capitalized lease obligations $ 69,996 $ 3,619 ======== ======= -------------------------------------------------------------------------------------
Minimum sublease rentals, not deducted from above, to be received in the future under noncancellable operating subleases, aggregated $72.0 million at January 1, 1995. Capitalized real estate and equipment leases are at effective rates of approximately 12.3% and 5.8%, respectively, as of January 1, 1995. There were no significant additions to capitalized leases in fiscal 1994 as compared to $1.1 million and $5.0 million in fiscal 1993 and 1992, respectively. Rental expense consists of the following:
Fiscal year (In thousands) 1994 1993 1992 ------------------------------------------------------------------------------ Minimum rentals $75,193 $66,807 $62,425 Contingent rentals 1,898 1,833 2,234 Sublease rental income (9,557) (9,034) (9,335) ------- ------- ------- Net rental expense $67,534 $59,606 $55,324 ======= ======= ======= ------------------------------------------------------------------------------
-23- 15 Service Merchandise Company, Inc. and Subsidiaries F. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair value of financial instruments as of January 1, 1995 and 1994 is made in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" and SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." The Company has limited involvement with derivatives and does not use them for trading purposes. The estimated fair value amounts have been determined by the Company using available market information as of January 1, 1995 and 1994 and valuation methodologies considered appropriate to the circumstances. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange.
January 1, 1995 January 1, 1994 -------------------------- ------------------------- Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value ----------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $173,264 $173,264 $325,092 $325,092 Liabilities: 9% Senior Subordinated Debentures 300,000 232,500 300,000 302,250 Secured Term Loan -- -- 122,026 122,235 8 3/8% Senior Notes, net of discount 99,683 85,727 99,631 100,005 Mortgages 117,664 106,932 146,131 145,417 Industrial Revenue Bonds 40,485 40,485 40,485 40,485 -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments (less than three months). 9% Senior Subordinated Debentures and 8 3/8% Senior Notes: Fair value is based on quoted market prices from the New York Stock Exchange at December 30, 1994 and December 31, 1993. Secured Term Loan and mortgages: Fair value is based on management's estimate of the present value of estimated future cash flows discounted at the current market rate for financial instruments with similar characteristics and maturity. Industrial Revenue Bonds: The carrying value approximates the fair value. Due to the variable rate nature of the instruments, the interest rate paid by the Company is equivalent to the current market rate demanded by investors; therefore, the instruments trade at par. Interest rate cap agreement: The Company has an interest rate cap agreement in order to reduce the risk of unfavorable interest rate fluctuations. The carrying value of the interest rate cap agreement was $0.3 million and $0.4 million at January 1, 1995 and 1994, respectively, as compared to the initial cost of $0.6 million which is being amortized over the term of the agreement. The fair value is estimated to be approximately $0.1 million at January 1, 1995 and 1994 as derived from quoted market prices from an institution making a market in these instruments. Letters of credit: The Company also has commercial and standby letters of credit used to secure corporate obligations. The commercial letters of credit have contractual amounts totaling $44.7 million and $37.1 million at January 1, 1995 and 1994, respectively, and a fair value of $0.1 million at January 1, 1995 and 1994. The standby letters of credit have a contractual amount totaling $51.8 million at both January 1, 1995 and 1994, respectively, and fair values of $0.7 million and $0.8 million at January 1, 1995 and 1994, respectively. The fair value is estimated to be equivalent to fees currently charged for similar arrangements, which approximate the fees paid by the Company due to the short-term nature (less than one year) of the Company's commitments. -24- 16 Service Merchandise Company, Inc. and Subsidiaries G. STOCK OPTIONS AND AWARDS Under the Company's employee stock incentive plans, the Compensation Committee of the Board of Directors (the "Compensation Committee") has authority to grant the following types of awards: (a) stock options; (b) stock appreciation rights; (c) restricted stock; (d) deferred stock; (e) stock purchase rights and/or (f) other stock-based awards. Generally, no deferred compensation is recorded due to stock option grants, as the value at the date of grant equals the fair market value. Awards are exercisable subject to terms and conditions as determined by the Compensation Committee, with no awards exercisable ten years after the date of grant. In 1991, the Board of Directors adopted the 1991 Directors' Equity Plan (the "Directors' Plan") for non-employee directors. Under the Directors' Plan, eligible directors annually receive 188 shares of restricted stock and stock options exercisable for 750 shares of the Company's common stock. Vesting of the restricted stock occurs one year from the date of grant. The stock options are granted with an exercise price equal to the fair market value of the Company's common stock as of the date of grant, are exercisable in 20% installments beginning one year from the date of grant and expire ten years from the grant date. An aggregate of 46,875 shares of the Company's common stock is authorized to be issued under this plan. At January 1, 1995, there were approximately 1.3 million shares of unissued common stock reserved for issuance under the Company's various stock incentive plans. Stock options: Stock option activity for these plans during the last three fiscal years was as follows:
Non- (In thousands, except per share data) Incentive Qualified ----------------------------------------------------------------------------------- Balance December 28, 1991 735 2,627 Granted at $10.08 per share -- 193 Exercised at $1.85 to $7.64 per share (327) (506) Cancelled (9) (110) ----- ----- Balance January 2, 1993 399 2,204 Granted at $10.13 to $10.38 per share -- 1,111 Exercised at $1.67 to $10.08 per share (119) (349) Cancelled (6) (150) ----- ----- Balance January 1, 1994 274 2,816 Granted At $5.94 To $7.06 per share -- 1,742 Exercised At $1.85 To $6.73 per share (70) (42) Cancelled (7) (564) ----- ----- Balance January 1, 1995 197 3,952 ===== ===== -----------------------------------------------------------------------------------
Outstanding stock options at January 1, 1995 have exercise prices ranging from $1.85 to $9.97 per share for incentive stock options and $2.20 to $10.38 per share for non-qualified stock options. Of the options outstanding at January 1, 1995, approximately 1.8 million were available for exercise. -25- 17 Service Merchandise Company, Inc. and Subsidiaries G. STOCK OPTIONS AND AWARDS (continued) Restricted stock awards: During fiscal 1989 and 1994, the Company issued shares of restricted stock under provisions of the 1989 Employee Stock Incentive Plan. The shares granted in 1989 are restricted until February 1995 unless otherwise determined by the Compensation Committee. A total of 478,685 restricted shares (excluding Directors' Plan shares) were issued in 1994. A portion of these shares were granted with restrictions terminating on November 21, 1997, and the remaining shares' restrictions terminating over a six year period ending November 21, 2000. During the vesting periods described above, none of such shares may be sold, transferred, pledged or assigned. If a holder of restricted stock ceases to be employed by the Company, shares of restricted stock held will generally be forfeited. During the restriction period, holders of the shares may exercise full voting rights and receive all dividends with respect to those shares. Restricted stock activity for the last three fiscal years was as follows:
(In thousands) ---------------------------------------------- Balance December 28, 1991 1,205 Cancelled (76) Vested (131) Granted 2 ----- Balance January 2, 1993 1,000 Cancelled (96) Vested (2) Granted 1 ----- Balance January 1, 1994 903 Cancelled (142) Vested (39) Granted 480 ----- Balance January 1, 1995 1,202 ===== ----------------------------------------------
Deferred compensation of $2.8 million was recorded during 1994 in connection with the restricted stock awards. Deferred compensation amortization of $0.3 million, $0.7 million and $1.2 million was charged to operations in fiscal 1994, 1993 and 1992, respectively. Service Merchandise Foundation option: The Service Merchandise Foundation (the "Foundation"), a private charitable foundation, was formed in 1990. As a charitable contribution, the Company granted the Foundation an option to purchase approximately 1.9 million shares of common stock at $2.20 per share, the then current market price. The option is exercisable in whole or in part from the date of grant until October 15, 2000. Under applicable Internal Revenue Service rulings, the stock option may not be exercised directly by the Foundation. The Foundation may sell all or a part of the option to unrelated not-for-profit entities, which may then exercise the option directly. H. SHAREHOLDERS' RIGHTS PLAN In February 1988, the Company issued Series A Junior Preferred Stock Purchase Rights to holders of its common stock. Each right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Junior Preferred Stock, $1 par value. The rights are not and will not become exercisable except upon certain events such as a change of control. There are 400,000 shares of Series A Junior Preferred Stock authorized, none of which have been issued as of January 1, 1995. Also authorized are 4.6 million shares of $1 par value preferred stock, none of which have been issued as of January 1, 1995. -26- 18 Service Merchandise Company, Inc. and Subsidiaries I. RETIREMENT PLAN The Company has a defined benefit pension plan in which all employees of the Company are eligible to participate upon reaching age 21 and completing one year of qualified service, as defined in the pension plan. Benefits are based on years of service and employee compensation. Contributions to the plan are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future. The Company's funding policy has been to contribute at least the amount required by the Employee Retirement Income Security Act of 1974, but no more than the maximum tax deductible amount. In fiscal years 1994, 1993 and 1992, the Company made contributions of approximately $8.9 million, $8.4 million and $8.5 million, respectively, to the pension plan. The following table sets forth the funded status of the pension plan and net pension expense:
January 1, January 1, (In thousands) 1995 1994 ------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Accumulated benefit obligation (includes $47,279 and $47,693 of vested benefit obligation, respectively) $ 49,501 $ 49,997 ========= ======== Projected benefit obligation 53,412 $ 55,301 Plan assets at fair value, primarily listed corporate stocks and bonds 46,678 49,522 --------- -------- Projected benefit obligation in excess of plan assets 6,734 5,779 Unrecognized net loss (13,342) (8,785) Unrecognized transitional asset, net of amortization 3,414 3,793 Unrecognized prior service cost 4,031 3,750 Additional minimum liability 1,985 -- --------- -------- Accrued pension liability 2,822 $ 4,537 ========= ======== Service cost $ 6,748 $ 7,355 Interest on projected benefit obligation 3,944 3,602 Actual return on plan assets 1,710 (4,435) Net amortization and deferrals (7,170) (719) --------- -------- Net pension expense $ 5,232 $ 5,803 ========= ======== ------------------------------------------------------------------------------------------ Net pension expense was $5.0 million for fiscal 1992.
Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: weighted average discount rates for fiscal 1994 and 1993 were 8.0% and 7.5%, respectively; expected long-term rates of return on pension plan assets for fiscal 1994 and 1993 were 9.5% and 10.5%, respectively; and rate of increase in future compensation levels for both fiscal 1994 and 1993 was 5%. J. EMPLOYEE SAVINGS PLAN The Service Merchandise Company, Inc. Savings and Investment Plan (the "Plan") is a voluntary compensation deferral plan under Section 401(k) of the Internal Revenue Code. All employees of the Company are eligible to participate upon reaching age 21 and completing one year of qualified service, as defined in the Plan. Eligible employees may elect to defer from 1% to 15% of their compensation. The Company will match, based on earnings performance, up to 50% of the first 6% of employees' salary deferral. Deferrals are invested in Company common stock and/or in other securities and investments as permitted by the Plan and directed by each employee. Company contributions to the Plan were $3.6 million, $3.6 million and $3.8 million for fiscal 1994, 1993 and 1992, respectively. -27- 19 Service Merchandise Company, Inc. and Subsidiaries K. INCOME TAXES The adjustment to the January 3, 1993 consolidated balance sheet to adopt SFAS No. 109 was a benefit of $7.7 million. This benefit was reflected in net income for the first quarter of fiscal 1993 as the cumulative effect of change in accounting principle. The adjustment primarily represents the impact of adjusting deferred taxes to reflect the 34% federal income tax rate at the time of the change as opposed to the higher income tax rates in effect when the temporary differences originated. There was no material impact to the deferred tax liability resulting from the statutory federal income tax rate increase enacted by the Omnibus Budget Reconciliation Act of 1993. The provision for income taxes, net of tax benefit of $3.5 and $5.0 million in fiscal 1994 and 1993, respectively, on the extraordinary loss from early extinguishment of debt, consists of the following:
Fiscal year (In thousands) 1994 1993 1992 ----------------------------------------------------------------------- Current income taxes: Federal $28,159 $42,802 $45,191 State and local 4,813 7,021 8,041 ------- ------- ------- 32,972 49,823 53,232 Deferred income taxes 2,931 71 790 ------- ------- ------- Total income taxes $35,903 $49,894 $54,022 ======= ======= ======= -----------------------------------------------------------------------
Deferred tax assets and liabilities at January 1, 1995 and 1994 are comprised of the following:
January 1, January 1, (In thousands) 1995 1994 --------------------------------------------------------------------------- Deferred Tax Assets: Financial accruals without economic performance $21,081 $19,571 Capitalized leases 12,077 12,131 Deferred compensation 1,181 2,132 Pension liability -- 1,582 Other 6,491 6,247 ------- ------- Deferred tax asset 40,830 41,663 ------- ------- Deferred Tax Liabilities: Depreciation 38,924 36,589 Layaway sales 3,733 3,840 Pension liability 728 -- Other 2,072 2,202 ------- ------- Deferred tax liability 45,457 42,631 ------- ------- Net deferred tax liability $ 4,627 $ 968 ======= ======= ---------------------------------------------------------------------------
Prior to the change in accounting method, the source of deferred tax items and the corresponding tax effects were as follows:
Fiscal year (In thousands) 1992 ----------------------------------------------------------------- Depreciation $(1,170) Deferred compensation 1,386 Other 574 ------- Total provision for deferred taxes $ 790 ======= -----------------------------------------------------------------
-28- 20 Service Merchandise and Company, Inc. and Subsidiaries K. INCOME TAXES (continued) A reconciliation of the provision for income taxes to the federal statutory rate is as follows:
Fiscal year 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 34.0% State and local income taxes, net of federal benefit 3.4% 3.7% 3.9% Other 0.6% 1.3% 1.1% ---- ---- ---- Effective tax rate 39.0% 40.0% 39.0% ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------
Cash payments for income taxes were $47.4 million, $48.0 million and $55.4 million for fiscal 1994, 1993 and 1992, respectively. L. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
(In thousands, except per share data) April 3, July 3, October 2, January 1, THREE PERIODS ENDED (See Note A): 1994 1994 1994 1995 ----------------------------------------------------------------------------------------------------------------------- Net sales $ 724,209 $ 845,934 $ 757,662 $1,722,576 ========= ========= ========= ========== Gross margin (a) $ 166,598 $ 200,232 $ 175,248 $ 428,953 ========= ========= ========= ========== Earnings (loss) before extraordinary loss and cumulative effect of change in accounting principle $ (12,821) $ (1,274) $ (10,329) $ 85,994 Extraordinary loss from early extinguishment of debt, net of tax benefit (1,265) (4,061) -- (89) Cumulative effect of change in accounting principle -- -- -- -- --------- --------- --------- ---------- Net earnings (loss) $ (14,086) $ (5,335) $ (10,329) $ 85,905 ========= ========= ========= ========== Per common share: Earnings (loss) before extraordinary loss and cumulative effect of change in accounting principle $ (0.13) $ (0.01) $ (0.10) $ 0.85 Extraordinary loss from early extinguishment of debt, net of tax benefit (0.01) (0.04) -- -- Cumulative effect of change in accounting principle -- -- -- -- ---------- --------- --------- ---------- Net earnings (loss) per common share $ (0.14) $ (0.05) $ (0.10) $ 0.85 ========== ========= ========= ========== ----------------------------------------------------------------------------------------------------------------------- (a) Gross margin after cost of merchandise sold and buying and occupancy expenses. -29-
21 Service Merchandise Company, Inc. and Subsidiaries L. QUARTERLY FINANCIAL INFORMATION - UNAUDITED (continued)
(In thousands, except per share data) March 31, June 30, September 30, January 1, THREE MONTHS ENDED: 1993 1993 1993 1994 - --------------------------------------------------------------------------------------------------------------------------- Net sales $ 672,863 $ 803,112 $ 704,080 $1,634,563 ========= ========= ========= ========== Gross margin (a) $ 154,471 $ 201,423 $ 169,421 $ 420,821 ========= ========= ========= ========== Earnings (loss) before extraordinary loss and cumulative effect of change in accounting principle $ (10,858) $ 8,420 $ (4,303) $ 89,056 Extraordinary loss from early extinguishment of debt, net of tax benefit (7,598) -- 124 -- Cumulative effect of change in accounting principle 7,742 -- -- -- --------- --------- --------- ---------- Net earnings (loss) $ (10,714) $ 8,420 $ (4,179) $ 89,056 ========= ========= ========= ========== Per common share: Earnings (loss) before extraordinary loss and cumulative effect of change in accounting principle $ (0.11) $ 0.08 $ (0.04) $ 0.87 Extraordinary loss from early extinguishment of debt, net of tax benefit (0.07) -- -- -- Cumulative effect of change in accounting principle 0.08 -- -- -- --------- --------- --------- ---------- Net earnings (loss) per common share $ (0.10) $ 0.08 $ (0.04) $ 0.87 ========= ========= ========= ========== - -------------------------------------------------------------------------------------------------------------------------- (a) Gross margin after cost of merchandise sold and buying and occupancy expenses. -30-
22 Service Merchandise Company, Inc. and Subsidiaries STATEMENT OF RESPONSIBILITY - -------------------------------------------------------------------------------- The Company is responsible for the information presented in this Annual Report. The financial statements have been prepared in accordance with generally accepted accounting principles and present fairly in all material respects the Company's Consolidated Balance Sheets, Statements of Operations, Changes in Shareholders' Equity and Cash Flows. Certain amounts included in the financial statements are estimated based on currently available information and judgment regarding the outcome of future conditions and circumstances. Financial information presented elsewhere in this Annual Report is consistent with that in the financial statements. Management developed and maintains a system of accounting and controls, including an extensive internal audit program, designed to provide reasonable assurance that the Company's assets are protected from improper use, and accounting records provide a reliable basis for the preparation of financial statements. This system is continually reviewed, improved and modified in response to changing business conditions and operations and to recommendations made by the independent and internal auditors. Management believes the accounting and control systems provide reasonable assurance that assets are safeguarded and financial information is reliable. /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
23 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- Board of Directors and Shareholders Service Merchandise Company, Inc. We have audited the accompanying consolidated balance sheets of Service Merchandise Company, Inc. and subsidiaries as of January 1, 1995 and 1994 and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended January 1, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Service Merchandise Company, Inc. and subsidiaries at January 1, 1995 and 1994, and the consolidated results of their operations and cash flows for each of the three years in the period ended January 1, 1995, in conformity with generally accepted accounting principles. As discussed in Note K to the consolidated financial statements, Service Merchandise Company, Inc. and subsidiaries changed their method of accounting for income taxes effective January 3, 1993 to conform with Statement of Financial Accounting Standards No. 109. /s/ DELOITTE & TOUCHE LLP - ------------------------- DELOITTE & TOUCHE LLP January 26, 1995 Nashville, Tennessee -31- EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of subsidiaries of the Registrant as of January 1, 1995 all of which are wholly-owned:
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. Tennessee Service Merchandise Co. No. 93, Inc. Tennessee Service Merchandise Co. No. 30, Inc. Tennessee Service Merchandise Company of Iowa, Inc. Tennessee Service Merchandise Company of Kansas, Inc. Tennessee The Toy Store, Inc. Tennessee B. A. Pargh Co., Inc. Tennessee Cherry-Tolleson, Inc. Tennessee Service Merchandise Showrooms, Inc. Tennessee Wholesale Supply Company, Inc. Tennessee Homeowners Warehouse, Inc. Florida The Lingerie Store, Inc. Tennessee The McNally Supply Company Tennessee SMC Aviation, Inc. New Hampshire Porta-File Tennessee H. J. Wilson Co., Inc. Louisiana Service Merchandise of New York, Inc. Tennessee Travel Management Consultants, Inc. Tennessee Service Merchandise of West Virginia, Inc. (Co.) Tennessee A. F. S. Marketing Services, Inc. Tennessee Service Merchandise Financial Co., Inc. Tennessee Service Merchandise Indiana Partners Indiana Service Merchandise of Texas, Limited Partnership Delaware
EX-23 8 INDEPENDENT AUDITORS REPORT 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Annual Report on Form 10-K and previously filed Registration Statement Nos. 33- 7079, 33-11340, 33-30983 and 33-50185 on Form S-8 of our report dated January 26, 1995 accompanying the consolidated financial statements of Service Merchandise Company, Inc. for the fiscal year ended January 1, 1995. /s/ Deloitte & Touche LLP - -------------------------- DELOITTE & TOUCHE LLP Nashville, Tennessee March 24, 1995 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains financial information extracted from the Service Merchandise Company Inc. Form 10-K for the year ended January 1, 1995 and is qualified in its entirety by reference to such financial statements and accompanying notes to the financial statements detailed in Exhibit 13 of the Form 10-K which is incorporated by reference in Part II of the Form 10-K. 1,000 YEAR JAN-01-1995 JAN-02-1994 JAN-01-1995 173,264 0 58,351 3,217 1,004,282 1,260,458 1,179,326 532,622 1,926,902 967,476 618,423 99,818 0 0 286,467 1,926,902 4,050,381 4,050,381 3,079,350 3,079,350 795,334 0 74,762 100,935 39,365 61,570 0 (5,415) 0 56,155 0.55 0.55 Amount represents the number of shares of $.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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