Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
Service Merchandise, with 391 catalog stores in 37 states, is one of the nation's largest retailers of jewelry, and offers a wide selection of brand-name hardgoods in its other product lines. The major categories of goods offered by the Company are fine jewelry (including diamonds), housewares, small appliances, giftware, silverware, cameras, luggage, radios, televisions and other home electronics, patio, lawn and garden accessories, sporting goods and toys.
Catalog and Store Operations
The Company's franchise is built around selling nationally advertised brand-name hardgoods and quality jewelry at low prices. The Company's customer typically pre-selects merchandise from the Company's annual catalog which is distributed in early fall each year. The catalog, which had 604 pages in 1993, is supplemented by a spring catalog of 164 pages, a Christmas catalog of 108 pages and a combination of direct mail flyers and newspaper inserts distributed approximately every other week of the year. The catalogs, flyers and newspaper inserts describe the majority of merchandise offered for sale by the Company and list the Company's selling price and a reference price. The reference price is either the selling price suggested by the manufacturer, or is determined by comparison shopping and/or the application of a standard markup to the cost of an item. The Company's fall, spring and Christmas catalogs are printed only once a year, with selling prices adjusted periodically through flyers and newspaper inserts to reflect changes in merchandise costs or to provide clearance pricing. The typical customer pre-selects merchandise from a catalog, flyer or newspaper insert, but the actual purchase usually takes place in a Company store, where the customer has physical access to the merchandise. Customers may also purchase goods through mail or telephone order, although this represents a small part of the Company's total sales. In the fourth quarter of 1993, the Company initiated a broadcast campaign featuring Bill Cosby. According to a 1993 customer opinion survey, the Company's typical customers are married with children, living in a two-earner household and looking for well-made, durable products they can purchase quickly.
The typical Service Merchandise store consists of approximately 50,000 square feet of total space and is situated on a stand-alone lot or as an anchor in a suburban mall or strip center. The Company's stores are divided into several departments, including jewelry, sight and sound, self-service and general showroom. Only the jewelry and sight and sound departments require personnel for customer assistance. In those departments, merchandise is displayed in showcases, and sales associates deliver it to the customer and accept payment. In the self-service department, customers select merchandise from a shelf and take it to a check-out counter to finalize the purchase. In the remainder of the store, only a sample of the merchandise is displayed and order forms are available at various locations. After the customer orders the merchandise by filling out a form, a store cashier is paid and the merchandise is delivered to a pick-up station. Management believes that this format reduces selling space requirements, handling and payroll costs, and provides greater control over customer-related inventory shrinkage. The general showroom format also permits presentation of a broad assortment of merchandise with limited inventory investment, since only one item is actually on display.
Most of the Company's stores display and maintain an inventory (in warehouse space contiguous to the sales area) of substantially all of the catalog items and a limited amount of merchandise not described in the published catalogs. Each store is equipped with a computer which coordinates the inventory tracking and point of sale functions. Item 1. Business (continued)
Virtually every action in the store that involves payment, customer information or inventory is recorded and transmitted, on a daily basis, via satellite to the central database at the Company's home office. In addition, by use of the computer, customers are provided with alternate suggestion items, back-order information, on-line mail orders, a gift registry, special orders and layaway information. Most of the Company's stores are equipped with "Silent Sam," a user-friendly computer which allows customers to verify item availability, place their order and tender payment via credit card.
The Company's computerized daily inventory system tracks the status (on hand, on order, in transit), location and history of inventory in the retail network. This raw data feeds the Company's merchandise replenishment system which tracks inventory positions, sales data and sales forecasts and generates either suggested transfers from the distribution centers or suggested purchase order quantities. The inventory system also records all sales information to produce daily margin reports, complete with a historical comparison for each item.
The Company's information systems enhance the effectiveness of its catalog mailings and advertising campaigns by tracking customers' purchases and tailoring the Company's mailing lists to meet specific objectives. The Company maintains a database of customer household information with each purchase. This database allows management to target customers based on specific criteria, including seasonal purchasing behavior and promotional references.
Seasonality and Competition
The Company's business is highly seasonal, with the Christmas season being the largest volume selling period of the year. In preparation for the Christmas season, the Company significantly increases its merchandise inventories, which are financed by internally generated funds and short-term borrowings.
The Company is engaged in a highly competitive business and competes with all nationally known retail merchandisers, including department stores, general merchandise, specialty and discount stores. Many of these competitors are larger and have greater financial resources than the Company. The Company believes its pricing policies on the brand-name hardgoods merchandise it offers are a significant factor in the operation of its business. The Company operates on high volume, low profit margin principles. Its profitability is dependent upon the large sales volume generated during the fourth quarter of its fiscal year.
Suppliers
The Company purchases merchandise from approximately 2,500 suppliers, most of which are manufacturers. In 1993, purchases from the largest vendor approximated 3.8% of total purchases; however, the Company believes it would experience no difficulty in obtaining comparable quality merchandise from alternate sources. Most merchandise is initially shipped to the Company's central distribution facilities which are used to store merchandise in advance of selling seasons to take advantage of favorable terms offered to the Company. Merchandise is transported to the stores from these central facilities by commercial contract carriers.
The Company's direct import program is responsible for sourcing and repackaging many promotional and seasonal items from abroad. Direct imports, which totaled approximately $236 million in fiscal 1993, allow the Company to reduce many traditional cost factors, thereby lowering the cost of merchandise sold in several product lines. In addition to its direct import program, the Company imports diamonds, gemstones and gold which are used by suppliers in the manufacture of jewelry items.
Item 1. Business (continued)
Employees
The number of persons employed by the Company fluctuates seasonally. During the fiscal year ended January 1, 1994, the number of employees varied from approximately 24,500 to approximately 43,200, including both permanent and temporary employees. As of January 1, 1994, the Company had 22,879 permanent employees, of whom 81% were hourly-paid personnel engaged in non-supervisory activities; the balance was 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.
Item 2.



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. Most of these properties secure borrowings under the Credit Agreement. Some owned facilities have ground leases on a long-term basis, some are financed through industrial development financing under which the Company either has ownership or a right to obtain ownership and others are financed by real estate mortgages. The Company occupies office space in two locations in greater Nashville, Tennessee, both of which are owned by the Company.
The Company operated five major distribution centers as of January 1, 1994. These distribution centers are located in Florida, New York, Tennessee, Texas and Nevada and contain an aggregate of approximately 3,401,000 square feet, as set forth below:
The Company anticipates that it would be able to obtain suitable replacement facilities should it not be able to renew the above leases.
Item 2. Properties (continued)
As of January 1, 1994, the Company operated 391 retail catalog stores (typically consisting of approximately 50,000 square feet), and 3 specialty retail stores, as follows:
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 1993 Annual Report to Shareholders, for information concerning the Company's lease commitments.
For a listing of store locations, see page 7. The numbers in parentheses show the number of stores per state and where there is more than one store in any city, the number of stores in such city.
Item 2. Properties (continued)
SERVICE MERCHANDISE CO., INC. STORE LOCATIONS
Item 3.

Item 3. Legal Proceedings
Not applicable.
Item 4.

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:
___________________
(1) All Executive Officers serve at the pleasure of the Board of Directors.
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock trades on the New York Stock Exchange (NYSE) under the symbol SME. The number of record holders of common shares at February 28, 1994 and 1993 was 5,800 and 5,637, respectively.
High and low closing sales prices as reported by the NYSE for fiscal 1993 and 1992 were as follows.
All per share data has been restated for the three for two stock split in 1992.
The Company's bank Credit Agreement includes certain restrictive covenants which, among other things, prohibit (with certain limited exceptions) further distributions and dividends by the Company. Certain of the Company's other debt agreements also limit the payment of dividends.
Item 6.

Item 6. Selected Financial Data
Page 12 under the caption "Selected Financial Information" of the Registrant's 1993 Annual Report to Shareholders for the year ended January 1, 1994 is herein incorporated by reference.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Pages 13 through 15 of the Registrant's 1993 Annual Report to Shareholders for the year ended January 1, 1994 under the caption "Management's Discussion and Analysis" are herein incorporated by reference.
Item 8.


Item 8. Financial Statements and Supplementary Data
As set forth in the Registrant's 1993 Annual Report to Shareholders for the year ended January 1, 1994, the following are incorporated herein by reference:
Item 9.

Item 9. Changes in and Disagreements With Independent Auditors on Accounting and Financial Disclosure
No reportable items.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant
Pages 2 through 4 under the caption "Election of Directors" of the Registrant's definitive proxy statement dated March 18, 1994 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.

Item 11. Executive Compensation
Reference is made to the information on pages 7 through 14 of the Registrant's definitive proxy statement dated March 18, 1994 filed with the Commission pursuant to Rule 14a-6(b) concerning executive compensation which is herein incorporated by reference.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information on pages 5 and 6 of the Registrant's definitive proxy statement dated March 18, 1994 filed with the Commission pursuant to Rule 14a-6(c) concerning the beneficial ownership of Registrant's common stock which is herein incorporated by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions
Reference is made to the information on pages 14 and 15 of the Registrant's definitive proxy statement dated March 18, 1994 filed with the Commission pursuant to Rule 14a-6(c) concerning certain relationships and related transactions which is herein incorporated by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
All other schedules are not applicable and have been omitted.
(a) 3. Exhibits and Index to Exhibits
Exhibits filed with this Form 10-K:
Exhibits incorporated herein by reference:
(a) 3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
(a) 3. Exhibits and Index to Exhibits (Continued):
Exhibits incorporated herein by reference (Continued):
(a) 3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
(a) 3.Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
Executive Compensation Plans and Arrangements (continued):
(b) Reports on Form 8-K
As reported on Form 8-K dated October 26, 1993, the Registrant indicated it issued $100,000,000 in principal amount of 8 3/8% Senior Notes due 2001. Initially, the net proceeds were used for general corporate purposes, including the Registrant's opening of new stores and other capital expenditures, and will be used to prepay approximately $27.2 million of certain high coupon mortgage indebtedness during the first half of 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SERVICE MERCHANDISE COMPANY, INC.
By: /s/ S. Cusano ----------------------- S. Cusano Vice President and Chief Financial Officer
March 18, 1994
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.
(DELOITTE & TOUCHE LETTERHEAD)
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Service Merchandise Company, Inc. Nashville, Tennessee
We have audited the consolidated financial statements of Service Merchandise Company, Inc. and subsidiaries as of January 1, 1994 and January 2, 1993, and for each of the three years in the period ended January 1, 1994, and our report thereon appears on Page 48. Our audits also included the consolidated financial statement schedules of Service Merchandise Company, Inc., listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE
/s/ Deloitte & Touche
Nashville, Tennessee January 26, 1994
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS)
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for more information concerning methods of amortization and depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS)
NOTES:
(A) See Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for more information concerning methods of amortization and depreciation.
(B) Represents primarily dispositions and trade-ins.
(C) Represents primarily transfers between classifications.