SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 (No Fee Required) for the fiscal year ended December 28,
1997 or
- --- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required) for the transition period from to
----- -----.
Commission File No. 1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0816060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 24600, Nashville, TN (mailing address) 37202-4600
7100 Service Merchandise Drive, Brentwood, TN 37027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (615) 660-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Class Which Registered
- -------------- -------------------
Common Stock ($.50 Par Value) New York Stock Exchange
Series A Junior Preferred Stock Purchase Rights New York Stock Exchange
9% Senior Subordinated Debentures New York Stock Exchange
8 3/8% Senior Notes New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on March 2, 1998 (based upon the average of the high and low
sales prices of such stock as of such date) was $212,012,411. This calculation
assumes that all shares of Common Stock beneficially held by officers and
members of the Board of Directors of the Registrant are owned by "affiliates," a
status which each of the officers and directors individually disclaims.
Class Outstanding at March 2, 1998
----- ----------------------------
Common Stock ($.50 Par Value) 100,373,649
Parts in Form 10-K Where Documents
Documents Incorporated by Reference Are Incorporated by Reference
- ----------------------------------- ----------------------------------
Portions of Registrant's Proxy Statement dated March 13, 1998 Part III
Portions of Registrant's Annual Report to Shareholders for the
fiscal year ended December 28, 1997 Parts II and IV
Exhibit Index located on Pages 13-17
TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
------------------------------------------- Page
No.
----
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . . . . . . . . . . . 9
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-10
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-11
Item 6. Selected Financial Data Page 6 of the Registrant's 1997 Annual Report to
Shareholders for the year ended December 28, 1997 which
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Pages 7 through 11 of the Registrant's 1997 Annual
Financial Condition and Results of Report to Shareholders for the year ended
Operations December 28, 1997 which are incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Pages 12 through 31 of the Registrant's 1997 Annual
Data Report to Shareholders for the year ended
December 28, 1997 which are incorporated herein by
reference.
Item 9. Changes in and Disagreements With
Independent Auditors on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 10. Directors and Executive Officers of the Pages 2 through 5 of the Registrant's Proxy Statement
Registrant dated March 13, 1998 which are incorporated herein by
reference.
Item 11. Executive Compensation Pages 8 through 18 of the Registrant's Proxy Statement
dated March 13, 1998 which are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Pages 6 and 7 of the Registrant's Proxy Statement dated
Owners and Management March 13, 1998 which are incorporated
herein by reference.
Item 13. Certain Relationships and Related Page 20 of the Registrant's Proxy Statement dated March
Transactions 13, 1998 which is incorporated herein by reference.
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-2-
INTRODUCTORY
- ------------
Except where the context indicates otherwise, the "Company" is a term used to
refer to the overall operations of Service Merchandise Company, Inc. and its
past and present subsidiaries and the "Registrant" means Service Merchandise,
Inc. as a separate corporate entity and does not refer to the subsidiaries. The
information included in this 10-K, unless indicated to be given as of a
specified date or for a specified period, is given as of the date of this
report, which is December 28, 1997. The Company does not intend to update such
information.
PART I
Item 1. Business ------
- ------- --------
Service Merchandise, with 361 stores in 34 states, is a leading retailer of fine
jewelry and home products. The Company streamlines its presentation to reflect
customer tastes and purchasing habits, grouping merchandise into thematic
categories called "worlds" - offering dominant selections of brand name
products. In 1997, these "worlds" consisted of: Fine Jewelry, Kitchen and
Dining, Furniture and Home Accents, Season to Season, Electronics, Looking
Healthy/Staying Healthy (promoting the concept of "wellness" with exercise
equipment, personal care items and a bath and body program), Kid Essentials and
Travel and Adventure.
General
The Company's franchise is built around selling nationally advertised,
brand-name home products and fine jewelry. Customers are made aware of the
product offerings through catalogs, direct mail flyers, newspaper inserts and
television advertising. While customers may purchase products through mail
order, telephone order or via the Company's internet website, the majority of
purchases occur directly in a Company store where the customer has physical
access to the merchandise.
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 thematic
"worlds" with displays of the products arrayed to support the world concept. In
the Fine Jewelry world, merchandise is displayed in showcases and sales
associates deliver items to the customers and accept payment. In other worlds, a
sample of the merchandise is displayed, and customers select their purchases via
a "pull tag" system. The pull tag is taken to a cashier, the product is paid for
and the merchandise is delivered to a pick-up station. Additionally, in
self-service departments, customers select merchandise from a shelf or display
and take it to a check-out counter to finalize the purchase.
The Company is currently testing a "Best of Service" concept which is a
scaled-down 10,000 square foot format that carries the full line of jewelry and
a limited number of top-selling products from the home product categories. Other
new store formats will also be evaluated in 1998. Additionally, in the first
quarter of 1998, the Company implemented a new private label credit card
program.
Virtually every transaction in the store that involves payment, customer
information or inventory is recorded and transmitted, on a daily basis, via
satellite to a central information system at the Company's home office. In
addition, by use of the computer, the customers may be provided with alternate
suggestion items, back-order information, on-line mail orders, gift registry,
special orders and layaway information. Most of the Company's stores are
equipped with "Service Express", a user-friendly computer which allows customers
to verify item availability, place their order, tender payment via credit card,
update their address and designate an item as a gift registry purchase.
The Company's computerized daily inventory system tracks the status (on hand, on
order, in transit), location and history of inventory in the retail network. The
raw data feeds the Company's inventory replenishment system which tracks
inventory positions, sales data and sales forecasts and generates either
suggested transfers from distribution centers or suggested purchase order
quantities. The inventory system also records all sales information to produce
daily margin reports, complete with historical comparisons.
-3-
Item 1. Business (continued)
- ------- --------------------
The Company's information systems enhance the effectiveness of the advertising
by tracking customers' purchases and tailoring the Company's mailing lists to
meet specific objectives. The Company maintains a 24-million household database
of information which is updated with each purchase. This database allows the
Company to target customers based on specific criteria, including the categories
purchased, the frequency of purchases and the value of those purchases.
Seasonality and Competition
The Company's business is highly seasonal, with the Christmas season being the
largest volume selling period of the year. In preparation for the Christmas
season, the Company significantly increases its merchandise inventories, which
are financed by internally generated funds and short-term borrowings. Fourth
quarter net sales accounted for 39.4% of total net sales in fiscal 1997.
The Company is engaged in a highly competitive business and competes with most
nationally known jewelry and home retail merchandisers, including department,
general merchandise, specialty and discount stores. Many of these competitors
are larger and have greater financial resources than the Company. The Company
considers quality, value, merchandise mix, service and location to be the most
significant competitive factors in its retailing business. The Company's
profitability is primarily dependent upon the large sales volume generated
during the fourth quarter of its fiscal year.
Suppliers
The Company purchases merchandise from approximately 1,500 suppliers, most of
which are manufacturers. In fiscal 1997, the largest vendor accounted for
approximately 6.2% of total cash disbursements for inventory items. The Company
believes it would experience no difficulty in obtaining quality merchandise from
alternate sources. Most merchandise is shipped to the Company's regional
distribution centers and transported to the stores by commercial contract
carriers.
The Company's direct import program is responsible for sourcing and repackaging
many promotional and seasonal items. Direct import purchases, which totaled
approximately $265 million in fiscal 1997 (compared to $287 million in fiscal
1996), allow the Company to reduce many traditional cost factors, thereby
lowering the cost of merchandise sold in several product lines. In addition to
its direct import program, the Company imports diamonds, gemstones and gold
which are used by contract fabricators in the manufacture of jewelry items.
Employees
The number of persons employed by the Company fluctuates seasonally. During the
fiscal year ended December 28, 1997, the number of active employees varied from
approximately 26,800 to approximately 42,700 including both permanent and
temporary employees. As of December 28, 1997, the Company had 24,168 permanent
employees, of whom 84% were hourly-paid personnel engaged in non-supervisory
activities; the balance consisted of administrative, executive, distribution
center and store management personnel. None of the Company's employees are
covered by a collective bargaining agreement. The Company has never experienced
a work stoppage due to a labor disagreement and regards its employee relations
as satisfactory.
Certain Factors that may affect Operating Results
On March 25, 1997, the Company announced a corporate restructuring and
repositioning plan ("1997 Restructuring Plan"). See the Notes to Consolidated
Financial Statements, which are incorporated herein by reference to the
Registrant's 1997 Annual Report to Shareholders, for a description of this plan.
-4-
Item 1. Business (continued)
- ------- --------------------
The Company's liquidity, capital resources and results of operations may be
affected from time to time by a number of factors and risks, including, but not
limited to, trends in the economy as a whole, which may affect consumer
confidence and consumer demand for the types of goods sold by the Company;
competitive pressures from other retailers, including specialized retailers and
discount stores which may affect the nature and viability of the Company's
business strategy; availability and cost of labor employed; real estate
occupancy and development costs, including the substantial fixed investment
costs associated with opening, maintaining or closing a Company store; the
ability to advertise effectively and control advertising costs; availability,
costs and terms of financing, including the risk of rising interest rates;
availability of trade credit and terms with vendors; the Company's use of
substantial financial leverage and the potential impact of such leverage on the
Company's ability to execute its operating strategies, to withstand significant
economic downturns and to repay its indebtedness; the ability to maintain gross
profit margins and to achieve future cost savings; the seasonal nature of the
Company's business and the ability of the Company to predict consumer demand as
a whole, as well as demand for specific goods; the ability of the Company to
attract and retain customers by executing the Company's remerchandising strategy
and improving customer service; costs associated with the shipping, handling and
control of inventory and the Company's ability to optimize its supply chain;
potential adverse publicity; the ability and success in completing the
disposition of store locations closed and designated to be closed pursuant to
the 1997 Restructuring Plan; the ability and success in completing and
implementing plans regarding the Company's credit card program and alternative
store formats; the ability to execute a strategic repositioning of the Company;
and the ability to effect conversions to new technological systems including,
becoming year 2000 compliant.
This report includes, and other reports and statements issued on behalf of the
Company may include, certain forward-looking information that is based upon
management's beliefs as well as on assumptions made by and data currently
available to management. This information, which has been or in the future may
be, included in reliance on the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, is subject to a number of risks and
uncertainties, including but not limited to the factors identified above. Actual
results may differ materially from those anticipated in any such forward-looking
statements. The Company undertakes no obligation to update or revise any such
forward-looking statements to reflect subsequent events or circumstances.
-5-
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 four major distribution centers and one return center
(Bowling Green, Kentucky) as of December 28, 1997. These distribution centers
are located in Florida, New York, Tennessee, and Texas and contain an aggregate
of approximately 3,102,000 square feet as set forth below:
Center Location Sq. Feet Owned/Leased Lease Term
--------------- -------- -------------- ------------------------------------------
Orlando, FL 460,000 Leased Primary term extends through 6/30/98 with
renewal options through 6/30/22
Montgomery, NY 800,000 Sale/Leaseback Primary term extends through 12/31/24
Nashville, TN
(1) Owned 588,000 Owned Not applicable
(2) Owned satellite 268,000 Owned Not applicable
(3) Leased satellite 392,000 Leased Primary term extends through 1/31/01 with
renewal options through 1/31/05
Dallas, TX 594,000 Leased Primary term extends through 1/31/01 with a
renewal option through 1/31/06
Bowling Green, KY (Return center) 180,000 Leased Primary term extends through 12/31/00 with
renewal options through 12/31/25
The Company anticipates that it would be able to obtain suitable replacement
facilities should it not be able to renew the above leases.
-6-
Item 2. Properties (continued)
- ------- ----------------------
As of December 28, 1997, the Company operated 361 retail stores (typically
consisting of approximately 50,000 square feet) as follows:
Number of Stores
----------------
Owned land and building 92
Long-term ground lease with an owned building 38
Owned land with industrial development financing under which the Company has
ownership or a right to obtain ownership of the building 3
Leased 243
Stores which have been subleased (15)
-----
Total 361
=====
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 1997 Annual Report to Shareholders, for information concerning
the Company's lease commitments.
For a listing of store locations, see page 8. The numbers in parentheses show
the number of stores per state and where there is more than one store in any
city, the number of stores in such city.
-7-
Item 2. Properties (continued)
- ------- ----------------------
SERVICE MERCHANDISE COMPANY, INC.
STORE LOCATIONS
ALABAMA (7) GEORGIA (15) MARYLAND (6) NEW YORK (22) SOUTH CAROLINA (5)
BIRMINGHAM (2) ATLANTA (9) BALTIMORE ALBANY CHARLESTON
HUNTSVILLE (2) AUGUSTA COLUMBIA BINGHAMTON COLUMBIA
MOBILE BUCKHEAD FORESTVILLE BUFFALO GREENVILLE
MONTGOMERY COLUMBUS FREDERICK EAST MEADOW GREENWOOD
TUSCALOOSA DOUGLASVILLE SALISBURY HARTSDALE SUMTER
ARIZONA (3) MACON WALDORF HUNTINGTON TENNESSEE (18)
GLENDALE SAVANNAH MASSACHUSETTS (11) LAKE GROVE COOKEVILLE
MESA (2) ILLINOIS (22) AUBURN LAWRENCE CHATTANOOGA (2)
ARKANSAS (4) CHICAGO (22) BOSTON (7) MASSAPEQUA JACKSON
FAYETTEVILLE INDIANA (14) HOLYOKE MIDDLETOWN JOHNSON CITY
FORT SMITH BLOOMINGTON LANESBORO/PITTSFIELD NANUET KINGSPORT
LITTLE ROCK (2) CLARKSVILLE SWANSEA PATCHOQUE KNOXVILLE (2)
CALIFORNIA (2) EVANSVILLE MICHIGAN (13) PLATTSBURGH MEMPHIS (5)
SAN FRANCISCO FORT WAYNE ANN ARBOR POUGHKEEPSIE NASHVILLE (5)
SAN JOSE GRIFFITH DETROIT (8) QUEENS TEXAS (40)
COLORADO (6) INDIANAPOLIS (4) FLINT ROCHESTER (2) ABILENE
COLORADO SPRINGS KOKOMO LANSING (2) SARATOGA SPRINGS AMARILLO
DENVER (4) LAFAYETTE WATERFORD SYRACUSE (2) ARLINGTON
PUEBLO MERRILLVILLE MISSISSIPPI (6) UTICA AUSTIN
CONNECTICUT (6) SOUTH BEND GAUTIER YORKTOWN HEIGHTS BEAUMONT
DANBURY TERRE HAUTE GULFPORT NORTH CAROLINA (8) COLLEGE STATION
DERBY KANSAS (3) HATTIESBURG CHARLOTTE (2) CORPUS CHRISTI
HARTFORD (2) OVERLAND PARK JACKSON (2) DURHAM DALLAS (6)
ORANGE WICHITA (2) MERIDIAN FAYETTEVILLE EL PASO
WATERBURY KENTUCKY (7) MISSOURI (7) GASTONIA FT. WORTH (2)
DELAWARE (3) FLORENCE INDEPENDENCE GREENSBORO HARLINGEN
DOVER LEXINGTON SPRINGFIELD RALEIGH (2) HOUSTON (9)
WILMINGTON (2) LOUISVILLE (3) ST. LOUIS (5) OHIO (15) LAKE JACKSON
FLORIDA (50) OWENSBORO NEVADA (3) AKRON LAREDO
BOCA RATON PADUCAH LAS VEGAS (2) CANTON LONGVIEW
BOYNTON BEACH LOUISIANA (14) RENO CINCINNATI (4) LUBBOCK
CORAL SPRINGS ALEXANDRIA NEW HAMPSHIRE (5) COLUMBUS (4) MCALLEN (2)
DAVIE BATON ROUGE (2) DOVER LIMA MIDLAND
DAYTONA BEACH HOUMA MANCHESTER MANSFIELD SAN ANGELO
FT. MYERS LAFAYETTE (2) NASHUA SPRINGFIELD SAN ANTONIO (3)
GAINESVILLE LAKE CHARLES PLAISTOW TOLEDO (2) TEMPLE
JACKSONVILLE (3) MONROE SALEM OKLAHOMA (7) TYLER
LAKELAND NEW ORLEANS (3) NEW JERSEY (6) NORMAN WACO
LEESBURG SHREVEPORT (2) HAZLET OKLAHOMA CITY (3) VERMONT (1)
MELBOURNE SLIDELL PARAMUS TULSA (3) BURLINGTON
MIAMI/FT. LAUDERDALE (13) MAINE (5) TURNERSVILLE PENNSYLVANIA (14) VIRGINIA (11)
NAPLES AUBURN VOORHEES ALLENTOWN ALEXANDRIA
OCALA AUGUSTA WAYNE HARRISBURG BAILEY'S CROSSROADS
ORLANDO (6) BANGOR WOODBRIDGE LANCASTER CHANTILLY
PENSACOLA BRUNSWICK NEW MEXICO (2) PHILADELPHIA (2) CHESAPEAKE
PORT CHARLOTTE PORTLAND ALBUQUERQUE PITTSBURGH (6) DALE CITY
SARASOTA LAS CRUCES READING FREDERICKSBURG
STUART SCRANTON HAMPTON
TALLAHASSEE (2) WILKES-BARRE MANASSAS
TAMPA/CLEARWATER/ NORFOLK
ST. PETERSBURG (8) RICHMOND (2)
W. PALM BEACH
VERO BEACH
-8-
Item 3. Legal Proceedings
- ------- -----------------
No reportable items.
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
- ----------------------
Gary M. Witkin, 49 President and Chief Executive Officer since April 1997; President and
President, Chief Executive Officer Chief Operating Officer from November 1994 to April 1997; Vice Chairman
And Director and Board member, Saks Fifth Avenue from October 1992 to November 1994;
Board member of Genesco, Inc.
Raymond Zimmerman, 65 Chairman of the Board since October 1981; Chief Executive Officer from
Chairman of the Board (2) October 1981 to April 1997; President from July 1984 to November 1994
and from 1981 to October 1983. Board member of The Limited Stores,
Columbus, Ohio.
S. Cusano, 44 Executive Vice President and Chief Financial Officer since April, 1997;
Executive Vice President and Chief Financial Vice President and Chief Financial Officer from July 1993 to April
Officer 1997; Group Vice President - Finance from December 1991 to July 1993.
Thomas L. Garrett, Jr., 44 Vice President and Treasurer since July 1996; Treasurer, Magma Copper
Vice President and Treasurer Company from July 1992 to May 1996.
C. Steven Moore, 35 Corporate Secretary since August 1996; Vice President and Managing
Vice President, Managing Attorney and Corporate Attorney since August 1996; Senior Corporate Attorney from November
Secretary 1994 to August 1996; Corporate Attorney from May 1992 to November
1994.
Kenneth Brame, 50 Senior Vice President, Information Services and Chief Information
Senior Vice President, Information Services and Officer since February 1996; Vice President, Systems Development,
Chief Information Officer American Stores Company from May 1994 to February 1996; Director of
Systems Development, Belk Stores Services from April 1989 to April 1994.
Chuck Kremers, 48 Senior Vice President, Marketing since June 1997; Senior Vice
Senior Vice President, Marketing President, Marketing, Cotter & Company, Inc. from 1993 to June 1997;
and Advertising Vice President, Marketing, CompUSA, Inc. from 1989 to 1993.
-9-
Item 4. Submission of Matters to a Vote of Security-Holders (continued)
Harold Mulet, 46 Senior Vice President, Stores since August 1995; Regional
Senior Vice President, Stores Vice President of Target division of the Dayton Hudson Corp. from
December 1988 to August 1995.
Gary Sease, 54 Senior Vice President, Logistics since September 1996; Senior Vice
Senior Vice President, Logistics President, Operations Services of American National Can Company from
September 1992 to September 1996.
Charles Septer, 46 Senior Vice President, Jewelry Merchandising since April 1988.
Senior Vice President, Jewelry Merchandising
Steven F. McCann, 45 Vice President, Corporate Controller since June 1994. Vice President,
Vice President, Corporate Controller Controller of Robinsons-May division of the May Department Store
Company from February 1993 to June 1994. Vice President, Controller of
the May Company division of the May Department Store Company from April
1992 to February 1993.
(1) All Executive Officers serve at the pleasure of the Board of Directors.
(2) Effective January 29, 1998, James E. Poole was elected Chairman of the Board.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock trades on the New York Stock Exchange (NYSE) under
the symbol SME. The number of record holders of Common Stock at March 2, 1998
and February 28, 1997 were 5,844 and 6,076, respectively.
High and low closing sales prices as reported by the NYSE for fiscal 1997 and
1996 were as follows:
1997 High Low
- ---- ----- -----
First Quarter 4 3/4 3 3/8
Second Quarter 3 5/8 2 5/8
Third Quarter 4 1/2 2 7/8
Fourth Quarter 4 7/8 1 7/8
1996 High Low
- ---- ----- -----
First Quarter 6 4 1/2
Second Quarter 6 1/4 4 5/8
Third Quarter 5 3/4 4 1/2
Fourth Quarter 6 3/8 4 1/4
The Company's Amended and Restated Credit Facility contains certain restrictive
covenants, including limitations on the ability to pay dividends. The Company
has not declared any cash dividends to shareholders for fiscal 1997 or 1996. The
Company's amended and restated Credit Facility permits the payment of dividends
with respect to the Company's common stock, $0.50 par value (a) payable solely
in securities of the Company, and (b) after June 30, 1999, payable in cash (if
no Default or Event of Default exists) in an aggregate amount by which the
following, when added to the amount
-10-
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
(continued)
of any cash dividends paid or declared would exceed 25% of Consolidated Net
Income of the Company for the period of September 30, 1997 through the last day
of the fiscal quarter prior to the dividend payment date: (i) Acquisitions and
Investments under Section 8.8(m) of the Credit Facility in excess of $80
million, or (ii) Investments (other than Acquisitions under Section 8.8(m) of
the Credit Facility in excess of $30 million).
Item 6. Selected Financial Data
Page 6 under the caption "Selected Financial Information" of the Registrant's
1997 Annual Report to Shareholders for the year ended December 28, 1997 is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 7 through 11 of the Registrant's 1997 Annual Report to Shareholders for
the year ended December 28, 1997 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 1997 Annual Report to Shareholders for the year
ended December 28, 1997, the following are incorporated herein by reference:
Description Page
- ----------- ----
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-30
Quarterly Financial Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 9. Changes in and Disagreements With Independent Auditors on Accounting and Financial Disclosure
- ------- ---------------------------------------------------------------------------------------------
No reportable items.
-11-
PART III
Item 10. Directors and Executive Officers of the Registrant
Pages 2 through 5 under the caption "Election of Directors" and page 20 under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the
Registrant's Proxy Statement dated March 13, 1998 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
Proxy Statement dated March 13, 1998 filed with the Commission pursuant to Rule
14a-6(b), concerning executive compensation, which is herein incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information on pages 6 and 7 of the Registrant's Proxy
Statement dated March 13, 1998 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 20 of the Registrant's Proxy
Statement dated March 13, 1998 filed with the Commission pursuant to Rule
14a-6(b), concerning certain relationships and related transactions, which is
herein incorporated by reference.
-12-
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) Documents filed as a part of this report.
1. Financial Statements
Reference is made to Part II, Item 8, captioned "Financial Statements and Supplementary Data" (and accompanying
index) which have been incorporated by reference from the Registrant's 1997 Annual Report to Shareholders for
the year ended December 28, 1997.
2. Financial Statement Schedule
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 19
Schedule
--------
II. Valuation and Qualifying Accounts and Reserves . . . . . . . . . 20
All other schedules are not applicable and have been omitted.
3. Exhibits and Index to Exhibits
Exhibits filed with this Form 10-K:
-----------------------------------
Exhibit No. Under
Item 601 of
Regulation S-K Brief Description
----------------- -----------------
3.1 Registrant's Charter, as amended February 5, 1998
(restated in electronic format only for purpose of filing
with the Commission).
4.15 Note Issuance Agreement dated September 30, 1997 among
Service Merchandise Company, Inc., H.J. Wilson Co., Inc.
and The Long-Term Credit Bank of Japan, Ltd.
10.8 Agreement between Service Merchandise Company, Inc. and
James E. Poole dated February 11, 1998.
13 Portions of Service Merchandise Company, Inc. 1997 Annual
Report to Shareholders for the fiscal year ended December
28, 1997.
21 Subsidiaries of the Registrant.
23 Independent Auditors' consent.
27 Financial Data Schedule for the fiscal year ended December
28, 1997.
-13-
Exhibits incorporated herein by reference:
------------------------------------------
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 3.2
April 19, 1989, which are incorporated herein by
reference from Registrant's Form 10-Q filed for the first
quarter ended March 31, 1989.
4.1 Rights Agreement, dated February 2, 1998 which is 99.2
incorporated herein by reference from Registrant's Form
8-K dated February 3, 1998.
4.2 Note Purchase Agreement dated as of June 28, 1990 4.2a
concerning the refinancing of $90 million of the Real
Estate Bridge Loan under Credit Agreement dated as
of July 24, 1989 among the Registrant, Various Banks
and Chemical Bank as Agent, which is incorporated
herein by reference from the Registrant's Form 10-Q
filed for the second quarter ended June 30, 1990.
4.3 Trust Indenture dated as of June 28, 1990 concerning 4.2b
the refinancing of $90 million of the Real Estate Bridge
Loan under the Credit Agreement dated as of July 24,
1989 among the Registrant, Various Banks and
Chemical Bank as Agent, which is incorporated herein
by reference from the Registrant's Form 10-Q filed for the
second quarter ended June 30, 1990.
4.4 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.
4.5 First Supplemental Indenture, dated as of February 4.2
15, 1993, between the Registrant and First
American National Bank, as Trustee, regarding the
Registrant's $300,000,000 of 9% Senior Subordinated
Debentures due 2004, which is incorporated herein by
reference from Form 8-K dated February 17, 1993.
-14-
Exhibit No. in
Document Where
Brief Description Originally Filed
----------------- ----------------
4.6 Form of Debenture, regarding the Registrant's $300,000,000 4.3
of 9% Senior Subordinated Debentures due 2004, which is
incorporated herein by reference from Form 8-K dated
February 17, 1993.
4.7 Form of Notes, regarding the Registrant's $100,000,000 of 8 4.3
3/8% Senior Notes due 2001, which is incorporated herein by
reference from the Registrant's Form 8-K dated October 26,
1993.
4.8 Conditional Loan Commitment dated as of September 9, 1996, 4.2
concerning the $75 million Real Estate Mortgage Financing
among Service Merchandise Company, Inc., and First Union
National Bank of North Carolina which is incorporated
herein by reference from the Registrant's Form 10-Q filed
for the third quarter ended September 29, 1996.
4.9 Loan Agreement dated as of October 4, 1996 concerning the 4.2a
$75 million Real Estate Mortgage Financing among SMC-SPE-1,
Inc., and First Union National Bank of North Carolina which
is incorporated herein by reference from the Registrant's
Form 10-Q filed for the third quarter ended September 29,
1996.
4.10 Loan Agreement dated as of October 4, 1996 concerning the 4.2b
$75 million Real Estate Mortgage Financing among SMC-SPE-2,
Inc., and First Union National Bank of North Carolina which
is incorporated herein by reference from the Registrant's
Form 10-Q filed for the third quarter ended September 29,
1996.
4.11 First Amendment to Loan Agreement dated as of November 7, 4.19
1996 concerning the $75 million Real Estate Mortgage
Financing among SMC-SPE-2, Inc., and First Union National
Bank of North Carolina which is incorporated herein by
reference to the Registrant's Form 10-K for the fiscal year
ended December 29, 1996.
-15-
Exhibit No. in
Document Where
Brief Description Originally Filed
----------------- ----------------
4.12 Second Amendment to Loan Agreement dated as of December 20, 4.20
1996 concerning the $75 million Real Estate Mortgage
Financing among SMC-SPE-2, Inc., and First Union National
Bank of North Carolina which is incorporated herein by
reference to the Registrant's Form 10-K for the fiscal year
ended December 29, 1996.
4.13 Third Amendment to Loan Agreement dated as of January 16, 4.22
1997 concerning the $75 million Real Estate Mortgage
Financing among SMC-SPE-2, Inc., and First Union National
Bank of North Carolina which is incorporated herein by
reference to the Registrant's Form 10-K for the fiscal year
ended December 29, 1996.
4.14 Amended and Restated Credit Agreement dated as of 4
September 10, 1997 among Service Merchandise
Company, Inc., Various Banks and The Chase Manhattan
Bank as Administrative and Collateral Agent and
Citibank as Documentation Agent which is incorporated
herein by reference from the Registrant's Form 10-Q for
the quarter ended September 28, 1997.
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 Exhibit A
and each of Messrs. Zimmerman, Witkin, Crane, Poole, Holt,
Moore, Roitenberg, Cusano, Mulet and Septer which is
incorporated herein by reference from the Registrant's
Proxy Statement dated April 19, 1989.
10.3 Directors' Deferred Compensation Plan, which is 10.1
incorporated herein by reference from the Registrant's Form
10-K for the fiscal year ended December 29, 1990.
-16-
Exhibit No. in
Document Where
Brief Description Originally Filed
----------------- ----------------
10.4 Directors' Equity Plan which is incorporated herein by Exhibit B
reference from the Registrant's Proxy Statement dated March
16, 1992.
10.5 Key Executive Severance Plan Agreement for execution by 10
certain key executives in replacement of employment
contracts which is incorporated herein by reference from
the Registrant's Form 10-Q filed for the third quarter
ended October 2, 1994.
10.6 Employment agreement dated November 2, 1994 regarding Gary 10.1
M. Witkin which is incorporated herein by reference from
the Registrant's Form 10-K for the fiscal year ended
January 1, 1995.
10.7 Amended and Restated 1989 Employee Stock Incentive Plan 10.2
which is incorporated herein by reference from the
Registrant's Form 10-K for the fiscal year ended January 1,
1995.
(b) Reports on Form 8-K
During the fiscal year ended December 28, 1997, the Company filed one report on Form 8-K dated July 21, 1997 announcing that
the Company had signed a commitment letter with The Chase Manhattan Bank and Citicorp USA, Inc. to provide a five-year, $900
million bank facility to replace the Company's then existing bank lines.
-17-
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
Executive Vice President and
Chief Financial Officer
March 27, 1998
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/ James E. Poole /s/ Gary M. Witkin
- ------------------- -------------------
James E. Poole Gary M. Witkin
Chairman of the Board President, Chief Executive Officer
March 27, 1998 and Director
(Principal Executive Officer)
March 27, 1998
/s/ Richard P. Crane, Jr. /s/ Charles V. Moore /s/ Raymond Zimmerman /s/ R. Maynard Holt
- -------------------------- -------------------- ----------------------- -------------------
Richard P. Crane, Jr. Charles V. Moore Raymond Zimmerman R. Maynard Holt
Director Director Director Director
March 27, 1998 March 27, 1998 March 27, 1998 March 27, 1998
/s/ Harold Roitenberg /s/ S. Cusano
- --------------------- -------------
Harold Roitenberg S. Cusano, Executive Vice President and Chief Financial Officer
Director (Principal Financial Officer)
March 27, 1998 (Principal Accounting Officer)
March 27, 1998
-18-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Service Merchandise Company, Inc.
Brentwood, Tennessee
We have audited the consolidated financial statements of Service Merchandise
Company, Inc. and subsidiaries as of December 28, 1997 and December 29, 1996,
and for each of the three years in the period ended December 28, 1997, and have
issued our report thereon dated February 6, 1998; such consolidated financial
statements and report are included in your 1997 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of Service Merchandise Company, Inc.,
listed in Item 14. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 6, 1998
-19-
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other Accounts Deductions at End of
DESCRIPTION of Period Expenses (Describe) (Describe) (B) Period
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 28, 1997 (A) $4,593 $4,388 - ($5,525) $3,456
Year ended December 29, 1996 (A) $2,763 $2,183 - ($353) $4,593
Year ended December 31, 1995 (A) $3,217 ($207) - ($247) $2,763
(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.