Service Merchandise Announces 1999 Results and 2000 Business Plan
NASHVILLE, Tenn.--(BUSINESS WIRE)--Feb. 22, 2000--
After Exceeding 1999 Stabilization Plan Goals, Company Will
Expand Focus on Jewelry and Complementary Hardlines Supported by
Increased Internet Presence
Two-Year Store Remodeling Program Planned; Strategic Real Estate
Initiative to Unlock Value in Real Estate Holdings
Existing DIP Co-Agent, Fleet Retail Finance Inc.,
Commits $600 Million, Four-Year DIP and Exit Financing Facilities
Human Capital Initiatives Include Reduced Corporate and Store Level
Staffing and Enhanced Severance Program for Transitional Employees
Company Continues to Target Emergence from Chapter 11 in 2001 and
Confirms Likely Cancellation of Existing Common Stock in Connection
with Anticipated 2001 Plan of Reorganization
Reflecting the success of its stabilization efforts during 1999,
Service Merchandise Company, Inc. (OTCBB:SVCDQ) today reported EBITDAR
(earnings before interest, taxes, depreciation, amortization and
restructuring charges) from continuing operations of $25.2 million for
the year ended January 2, 2000. EBITDAR from continuing operations for
the three months ended January 2, 2000 was $68.3 million compared to
$49.1 million for the prior year fourth quarter. EBITDAR from
continuing operations for the nine months ended January 2, 2000 --
encompassing reporting periods following the commencement of the
Company's voluntary Chapter 11 case on March 27, 1999 -- was
$47.6 million, exceeding the Company's 1999 Stabilization Plan by
$12.6 million, or 36.1 percent. As key components of its 2000 Business
Plan, Service Merchandise today also announced strategic initiatives
involving the refinement of its product mix with a heightened focus on
jewelry and a more targeted assortment of hardlines, and a convergence
of its store selling environments and established Internet structure.
The Company's 2000 Business Plan also includes initiatives designed to
maximize the value in the Company's real estate holdings.
To fund its 2000 Business Plan as well as future operations, and
in anticipation of emergence from Chapter 11 in 2001, the Company has
obtained a fully underwritten commitment from Fleet Retail Finance
Inc., the co-agent under the Company's current $750 million
debtor-in-possession (DIP) financing facility, for a new four-year
$600 million credit facility. This new facility will replace the
existing DIP financing and includes a commitment for exit financing
post-reorganization.
1999 Fiscal Year Results
In connection with the completion of its independent audit for
the year ended January 2, 2000, the Company announced a net loss of
$243.7 million, or $2.45 per common share, for the fiscal year, on net
sales of $2.23 billion. For the prior year, the Company reported a net
loss of $110.3 million, or $1.11 per common share, on net sales of
$3.17 billion. For the 13 weeks ended January 2, 2000, the Company
reported net income of $28.0 million, or $.28 per share, on net sales
of $835.7 million, as compared with a net loss of $41.8 million, or a
loss of $.42 per share, on net sales of $1.29 billion for the 14 weeks
ended January 3, 1999.
Commenting on the year's financial results, Chief Executive
Officer Sam Cusano said that "the Company continues to make good
progress in its restructuring efforts, with 1999 as a year of
stabilization for Service Merchandise. The year's results included
costs associated with closed facilities, restructuring and
reorganization items of $135.0 million incurred in connection with the
closing of 122 stores, the disposition of surplus inventory and real
estate interests, and in connection with the Company's reorganization
cases. The Company's EBITDAR results substantially exceeded the
benchmark targets established in our 1999 Stabilization Plan and
reflect the Company's strong performance during the 1999 holiday
season. The Company's liquidity position remains strong at year-end,
with minimum availability of $150 million and maximum excess
availability of more than $400 million at year-end."
2000 Business Plan
Mr. Cusano said that building on the successful stabilization of
the Company's business through its 1999 Business Plan initiatives, its
strong liquidity and audited 1999 financial results, which exceeded
plan projections, and based on significant analyses of its business,
Service Merchandise has formulated a strategic plan designed to
establish long-term profitability and to maximize the value of the
Company. "Our 2000 Business Plan, which will be formally presented to
the Company's lenders, vendors, landlords, employees and other
creditors in March 2000, capitalizes on Service Merchandise's key
assets, including our industry-leading jewelry franchise, the best of
our hardlines business, our well-located real estate assets and our
established Internet infrastructure."
Mr. Cusano also said that the Company intends to file motions
this month with the Bankruptcy Court in Nashville seeking approval at
the April 2000 omnibus hearing of certain elements of the Company's
2000 Business Plan, including the new Fleet financing facility,
modifications to the Company's existing employee retention program,
and the retention of advisors in connection with the Company's
strategic real estate and other 2000 Business Plan initiatives.
He said that in determining the Company's refined product mix and
other 2000 Business Plan initiatives, management conducted in-depth
customer research, reviewed the financial performance of each of the
Company's lines of business, analyzed the Company's overhead cost
structure, investigated potential cost reductions and reviewed the
Company's store space needs and real estate value opportunities.
"Service Merchandise's jewelry operations, which sell more
jewelry per store each year than competitive national jewelry chains
and department stores, and contribute the majority of Service
Merchandise's EBITDAR, are the cornerstone of the Company's business.
Conversely, Service Merchandise compares less favorably to its
competitors in certain hardlines sectors, which continue to be
unprofitable for the Company, as a result of the limited amount of
space devoted to each category and the highly competitive nature of
those sectors," Mr. Cusano stated.
Based on the Company's analyses and market review, Service
Merchandise will expand its focus during 2000 on its core competency
-- the design, manufacture and sale of jewelry -- while also offering
a more targeted selection of hardlines items that customers have
historically shown an affinity for purchasing at Service Merchandise.
The Company will exit certain unprofitable hardlines categories,
including toys, juvenile, sporting goods, most consumer electronics
and indoor furniture. The Company plans to conduct clearance sales at
its 221 stores in the ordinary course of business over the next
several months in order to rebalance its inventory requirements
consistent with the 2000 Business Plan.
"Going forward, Service Merchandise will feature an expanded
offering of jewelry and jewelry-related products as the centerpiece of
the business," Mr. Cusano stated. "This enhanced jewelry strategy will
feature wider assortments within all categories of jewelry, with the
bulk of the expansion in diamonds. Service Merchandise plans to expand
in the area of higher-end or `guild' products, composed of an
assortment of classic, elegant jewelry in heavier weight and higher
qualities at great values."
"In addition to our enhanced jewelry selection, we are focusing
on hardlines categories that have historically performed well for us
and which the customer has come to expect from Service Merchandise,"
said Mr. Cusano. "These ongoing categories of housewares and giftware
include tabletop, cookware, small appliances, dining and patio
furniture, pantryware, silver, crystal, personal care, floor care,
luggage and clocks."
An important element of the Company's strategy is the convergence
of the Internet and store selling environments. Each Service
Merchandise store will feature Internet kiosks that will provide
immediate access to the Company's web site,
www.servicemerchandise.com, its bridal and gift registry, and its
store directory. Using the in-store Internet kiosks, customers will be
able to purchase and pick up merchandise from the store or have it
delivered to their homes. The Company also expects to enter into
additional vendor partnerships similar to its recently announced
alliances with brands such as Corning, Black and Decker and Panasonic
Home. Under these alliances, Service Merchandise plans to offer a
portion of each company's product line in its stores and the entire
product line via the Internet. The Company is working to establish a
system to offer the hardlines categories which will no longer be
carried in stores for purchase via the Internet based on vendor
ability to ship directly to consumers.
Strategic Reorganization Timeline and Reorganization Plan
The Company said that the 2000 Business Plan was the next step in
the strategic reorganization timeline established by the Company and
announced to creditors, shareholders, landlords, employees and other
interested parties at the outset of its Chapter 11 reorganization
cases last year. The Company said that, after successfully completing
the Company's stabilization plan during 1999, the 2000 Business Plan,
if also successfully implemented, should provide the framework for a
plan of reorganization to be proposed, filed, prosecuted, confirmed
and consummated by the Company during 2001. The Company said that the
plan or plans of reorganization presently being considered by the
Company involve a debt conversion of the Company's prepetition
unsecured claims into new common equity of the reorganized company.
Under such circumstances, the existing common stock of the Company
would be cancelled and existing shareholders would not receive any
distribution in connection with the reorganization. The Company said
that the value of its common stock was highly speculative since it was
highly probable that it would be cancelled and therefore worthless if
the expected plan of reorganization is consummated.
Strategic Real Estate Initiatives
Mr. Cusano said that the Company's enhanced jewelry focus with a
more targeted assortment of hardlines categories will also permit
Service Merchandise to take initiatives to unlock value from its real
estate assets, as the Company's stores will be reformatted to feature
increased square footage for jewelry and related items, but less
square footage overall. The Company plans to continue operating in
substantially all of its 221 locations. All stores will receive
Internet kiosks and other capital improvements. Seventy to 80 stores
are scheduled for total refurbishment (including an expansion of the
jewelry selling area) during the next six months while the balance
will undergo a more limited capital improvement remodel during 2000.
Another 70 to 80 stores are scheduled for total refurbishment and
upgrade to an expanded jewelry selling area in 2001 and the Company
will evaluate the long-term use, and possible replacement, of the
remaining 50 to 60 stores as part of the Company's five-year strategic
business plan under development in connection with the expected plan
of reorganization designed to permit the Company's exit from Chapter
11 in 2001. In connection with the store refurbishment program,
approximately one-half of each store location will become available
for subleasing or other real estate transactions.
"Decreasing the size of each of our retail stores will create
substantial surplus real estate for alternative use, allowing the
Company to benefit from the increased market value of its real estate.
The Company will work with its real estate advisors to identify and
negotiate package real estate deals with retailers having similar
demographic profiles to Service Merchandise and the ability to drive
additional traffic to the Company's stores," Mr. Cusano said. "The
Company should benefit short-term from reduced occupancy costs, while
long-term benefits include the potential income generation from our
real estate holdings."
As part of the elimination of certain unprofitable hardlines
categories from its retail stores, the Company said that it will
benefit from substantially reduced logistics demands across its retail
network. The reductions will allow the Company to close its Orlando,
Florida and Montgomery, New York distribution centers during 2000 and
to consolidate its logistics operations in its Nashville regional
distribution center.
In a related action, Eric Kovats has been promoted to Senior Vice
President, Stores, assuming overall responsibility for the Company's
221 stores. Mr. Kovats, 45, joined Service Merchandise in 1973, and
has served in various store management and district management
positions, including three years as Regional Vice President. He has
been Vice President, Hardlines Stores Organization, since March 1999.
"Eric Kovats brings 26 years of experience -- at every level of
our organization -- to his new expanded position and we are extremely
pleased that he will lead our stores as we move forward with our 2000
Business Strategy," Mr. Cusano said.
Human Capital Initiatives
As part of the 2000 Business Plan, the Company will begin
immediately to reduce the workforce at its corporate offices in
Nashville and throughout its stores organization which will result in
the elimination of approximately 4,800 positions in stages during the
2000 fiscal year. Approximately 350 distribution center positions will
be also be impacted. "The reductions in force will bring our store and
corporate support functions in line with the service requirements of
our smaller store layout and corresponding reduced merchandise volume.
We recognize and regret the impact this action will have on the
associates whose hard work and contributions have played key roles in
our progress during the past year," Mr. Cusano said. He also stated
that the Company plans to seek approval of modifications to its
existing employee retention program which will benefit go-forward
employees and provide enhanced severance to most transitional
employees who are asked to stay with the Company for a limited period
of time to complete specific projects and objectives established by
the Company.
DIP and Exit Credit Facilities
Following the expected approval of the Bankruptcy Court and
closing, the Company's new four-year, $600 million DIP and exit credit
facility will replace the Company's existing $750 million DIP
financing agreement and is expected to provide adequate DIP financing
as well as exit financing for ongoing capital improvements, operating
expenses and general working capital once the Company emerges from
Chapter 11. The new facility will be agented by Fleet Retail Finance
Inc., a co-agent of the current DIP facility, and fully underwritten
by FleetBoston Robertson Stephens Inc. "We are very supportive of the
Company and its 2000 Business Plan. We look forward to working with
Service Merchandise as it implements its Plan and successfully emerges
from Chapter 11," said Ward Mooney, President of Fleet Retail Finance.
The new credit facility is presently structured as a $600 million
revolver, although Fleet has reserved the right to allocate up to $85
million to a term loan prior to closing. The facility also includes a
letter of credit subfacility of $150 million and permits subordinated
secured financing in amounts up to an additional $50 million on terms
reasonably satisfactory to Fleet. The facility requires superpriority
claim status and a first priority security interest in all assets
subject to existing liens, and contains certain other customary
priority provisions.
The financing is subject to various customary terms and
conditions, and must be closed by the Company no later than May 31,
2000. The facility will mature four years from closing but can be
converted to exit financing by the Company at any time during the
four-year term as long as applicable conditions to conversion are
satisfied. The interest rate during the first year of the term is
LIBOR plus 250 basis points or prime plus 75 basis points; thereafter,
the interest rate on the facility is subject to quarterly adjustment
pursuant to a pricing grid based on availability and/or EBITDA with
ranges of 200 to 275 basis points over LIBOR and 25 to 100 basis
points over prime.
The borrowing base under the facility is substantially similar to
the Company's existing $750 million DIP facility except for increases
in certain seasonal advance rates and total availability based on real
estate holdings. The facility has no mandatory commitment reductions
or mandatory prepayments except, prior to exit from Chapter 11, the
facility includes a daily sweep of cash towards the revolver balance
(subject to certain exceptions). Following exit from Chapter 11, the
daily sweep would occur only during specified cash dominion events.
The facility includes various covenants designed to facilitate
implementation of the 2000 Business Plan and the Company's anticipated
emergence from Chapter 11 in 2001. To fund capital expenditures,
including the Company's planned two-year store renovation program, the
proposed facility will permit the Company to invest up to $70 million
of capital expenditures during 2000 (plus certain incremental amounts
based on the amount of subleased space completed during the fiscal
year). In 2001, the facility will permit capital expenditures up to
$150 million less actual capital expenditures invested during 2000.
During 2002 and 2003, the Company may invest up to $50 million each
year with 100 percent carry over of unexpended amounts from prior
years. The facility will include a financial covenant test similar to
the test in the current $750 million DIP facility. The Company would
not breach this financial covenant unless unused borrowing
availability falls below $50 million and the Company fails to meet
specified minimum EBITDAR performance. Excluded from the EBITDAR
calculation are revenues and expenses associated with discontinued
inventory lines, the Orlando and Montgomery warehouses and the
reduction in force plan (including payroll and severance) except with
respect to non-continuing EBITDAR amounts in excess of $100 million.
There are no restrictions in the facility on the Company's
ability to sublease and lease store space pursuant to the 2000
Business Plan; lease all or part of the corporate headquarters; sell,
pursuant to sale-leasebacks or outright, the corporate headquarters,
the Orlando and/or the Montgomery distribution centers; and/or
implement a credit card receivables securitization program. The
Company also retains the ability to complete intercompany
restructurings, intercompany asset transfers and
intercompany/third-party real estate transactions.
Events of default under the facility include customary default
provisions as well as key management provisions that would trigger a
default in the event that both the current CEO and President ceased to
be employed, unless at least one of them is replaced by a person
reasonably satisfactory to Fleet within 90 days and/or the acquisition
by any one person or entity of 50 percent of the voting stock of the
company. Closing of the proposed facility is subject to customary
closing conditions, including at least $155 million of availability at
close and no material adverse change at the time of closing.
Conversion of the DIP Facility to an exit facility is also based on
customary closing conditions, including the Agent's reasonable
satisfaction with capital structure, plan of reorganization and any
materially revised projections, as well as the achievement by the
Company of a specified trailing 12-month EBITDA (which varies
depending on time of exit) and certain minimum availability (which
varies from $50 to $100 million) depending on the time of exit.
"With our new financing commitment and with the Court's approval
earlier this month of our exclusive right to propose a reorganization
plan through April 2001, the Company's 2000 Business Plan should serve
as the basis for the creation of Service Merchandise's reorganization
plan and emergence from Chapter 11 in 2001," Mr. Cusano said. The
Company said that it will file the commitment letter agreed to between
Fleet and the Company as an exhibit to a filing on Form 8-K with the
Securities and Exchange Commission. |
