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
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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.
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See Notes to Consolidated Financial Statements.
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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.
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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-
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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.
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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.
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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
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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
========== =========== ==========
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See Notes to Consolidated Financial Statements.
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7
Service Merchandise Company, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 1, January 1,
(In thousands, except per share data) 1995 1994
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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
========== ==========
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See Notes to Consolidated Financial Statements.
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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
======= ======= ======= ======= ======== ========
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See Notes to Consolidated Financial Statements.
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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.
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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
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