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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999.
Commission File No.1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Debtor-in-Possession as of March 27, 1999)
(Exact Name of Registrant as Specified In Its Charter)
TENNESSEE 62-0816060
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. BOX 24600, NASHVILLE, TN (MAILING ADDRESS)
7100 SERVICE MERCHANDISE DRIVE, BRENTWOOD, TN 37202-4600
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 660-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of April 4, 1999, there were 100,167,293 shares of the Registrant's
common stock, $.50 par value, outstanding.
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TABLE OF CONTENTS
Page
No.
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PART I FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited) First Quarter Ended April 4,
1999 and March 29, 1998.....................................................................3
Consolidated Balance Sheets - April 4, 1999 (Unaudited), March 29, 1998
(Unaudited) and January 3, 1999.............................................................4
Consolidated Statements of Cash Flows (Unaudited) First Quarter Ended April 4,
1999 and March 29, 1998.....................................................................5
Notes to Consolidated Financial Statements (Unaudited)........................................6
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations.................................................................................12
Quantitative and Qualitative Disclosure about Market Risk....................................19
PART II OTHER INFORMATION
Legal Proceedings............................................................................20
Defaults Upon Senior Securities..............................................................20
Exhibits and Reports on Form 8-K.............................................................20
SIGNATURES.......................................................................................................21
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PART I - FINANCIAL INFORMATION
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES, INC.
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DEBTOR-IN-POSSESSION)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST QUARTER ENDED
----------------------------
APRIL 4, MARCH 29,
1999 1998
--------- ---------
Net sales:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities $ 354,756 $ 431,808
Closed facilities as a result of restructuring and remerchandising activities 155,753 162,374
--------- ---------
510,509 594,182
--------- ---------
Costs and Expenses:
Cost of merchandise sold and buying and occupancy expenses:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 280,873 322,904
Closed facilities as a result of restructuring and remerchandising activities 132,835 128,177
--------- ---------
413,708 451,081
--------- ---------
Gross margin after cost of merchandise sold and buying and occupancy expenses:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 73,883 108,904
Closed facilities as a result of restructuring and remerchandising activities 22,918 34,197
--------- ---------
96,801 143,101
--------- ---------
Selling, general and administrative expenses:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 114,376 120,106
Closed facilities as a result of restructuring and remerchandising activities 52,914 29,294
--------- ---------
167,290 149,400
--------- ---------
Other income, net (3,049) (1,764)
Restructuring charge 99,454 --
Depreciation and amortization:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 10,320 10,971
Closed facilities as a result of restructuring and remerchandising activities 1,914 3,464
--------- ---------
12,234 14,435
--------- ---------
Earnings (loss) before interest, reorganization items, income tax and
extraordinary item: (179,128) (18,970)
Interest expense - debt (contractual interest $25,311) 23,845 17,827
Interest expense - capitalized leases 1,257 1,764
--------- ---------
Earnings (loss) before reorganization items, income tax and extraordinary item (204,230) (38,561)
Reorganization items 43,743 --
--------- ---------
Loss before income tax and extraordinary item (160,487) (38,561)
Income tax benefit -- 14,460
--------- ---------
Net loss before extraordinary item (160,487) (24,101)
Extraordinary loss from early extinguishment of debt (7,851) --
--------- ---------
Net loss $(168,338) $ (24,101)
========= =========
Weighted average common shares - basic and diluted 99,717 99,702
========= =========
Per Common Share:
Earnings (loss) before extraordinary item $ (1.61) $ (0.24)
Extraordinary loss from early extinguishment of debt $ (0.08) $ --
--------- ---------
Net earnings (loss)-basic and diluted $ (1.69) $ (0.24)
========= =========
See Notes to Consolidated Financial Statements.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DEBTOR-IN-POSSESSION)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 4, MARCH 29, JANUARY 3,
1999 1998 1999
----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 80,956 $ 71,530 $ 133,749
Accounts receivable, net of allowance of
$2,072, $2,712 and $2,999, respectively 30,483 47,133 38,098
Refundable income taxes -- 17,783 10,769
Inventories 732,166 935,626 896,303
Prepaid expenses and other assets 78,625 18,002 24,379
Deferred income taxes -- 22,478 --
----------- ----------- -----------
TOTAL CURRENT ASSETS 922,230 1,112,552 1,103,298
Property and equipment:
Owned assets, net of accumulated depreciation 406,471 480,965 439,710
Capitalized leases, net of accumulated amortization 20,010 31,575 21,297
Other assets and deferred charges 47,453 53,598 62,590
----------- ----------- -----------
TOTAL ASSETS $ 1,396,164 $ 1,678,690 $ 1,626,895
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities Not Subject to Compromise
Current Liabilities:
Notes payable to banks $ 155,490 $ -- $ 156,000
Accounts payable 9,083 308,820 228,373
Accrued expenses 121,262 173,067 224,813
State and local sales taxes 7,520 22,282 1,726
Income taxes 7,701 -- --
Accrued restructuring costs - current -- 18,474 7,864
Current maturities of long-term debt 1,500 23,807 220,041
Current maturities of capitalized lease obligations -- 8,572 8,501
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 302,556 555,022 847,318
Long-term Liabilities:
Accrued restructuring costs -- 54,455 45,297
Long-term debt 148,125 708,836 467,192
Capitalized lease obligations -- 47,847 41,193
----------- ----------- -----------
TOTAL LONG-TERM LIABILITIES 148,125 811,138 553,682
Liabilities Subject to Compromise 888,073 -- --
----------- ----------- -----------
TOTAL LIABILITIES 1,338,754 1,366,160 1,401,000
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
1,100 shares, none issued
Common stock, $.50 par value, authorized 500,000 shares, issued and
outstanding 100,167, 100,366 and 100,340 shares, respectively 50,084 50,183 50,170
Additional paid-in capital 7,027 7,873 7,680
Deferred compensation (1,383) (2,621) (1,975)
Accumulated other comprehensive income (loss) (869) -- (869)
Retained earnings 2,551 257,095 170,889
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 57,410 312,530 225,895
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,396,164 $ 1,678,690 $ 1,626,895
=========== =========== ===========
See Notes to Consolidated Financial Statements
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DEBTOR-IN-POSSESSION)
(IN THOUSANDS)
FIRST QUARTER ENDED
--------------------------
APRIL 4, MARCH 29,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(168,338) $ (24,101)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 22,551 15,848
Gain on sale of property and equipment (3,049) (1,764)
Change in estimate of restructuring charges (45,981) --
Write-down of property and equipment due to restructuring 24,452 --
Changes in assets and liabilities:
Accounts receivable - net 7,615 (4,003)
Inventories 164,137 (5,808)
Prepaid expenses (54,246) 5,181
Accounts payable (21,285) (173,415)
Accrued expenses and state and local taxes (25,216) (67,433)
Accrued restructuring costs 73,505 (3,313)
Income tax 18,470 (17,783)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES: (7,385) (276,591)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (3,066) (4,912)
Proceeds from sale of property and equipment 3,955 4,765
Restricted cash and other assets, net 23,525 (10,884)
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES: 24,414 (11,031)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings (510) --
Repayment of long-term debt (48,634) (2,592)
Repayment of capitalized lease obligations (1,826) (2,021)
Debt issuance costs (18,574) (362)
Exercise of stock options (forfeiture of restricted stock), net (278) (42)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (69,822) (5,017)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (52,793) (292,639)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 133,749 364,169
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 80,956 $ 71,530
========= =========
SUPPLEMENTAL DATA:
Cash paid (received) during the quarter for:
Interest $ 22,251 $ 12,700
Income tax $ (18,368) $ 100
Reorganization items - Professional fees and administrative items $ 2,238 $ --
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FIRST QUARTER ENDED APRIL 4, 1999
A. BASIS OF PRESENTATION
The consolidated financial statements, except for the consolidated
balance sheet as of January 3, 1999, have been prepared by the Company without
audit.
In management's opinion, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of the consolidated financial
position and consolidated results of operations for the interim period
presented. Certain prior period amounts have been reclassified to conform to the
current year's presentation. These consolidated financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1999.
The Company has historically incurred a net loss for the first three
quarters of the year due to the seasonality of its business. The results of
operations for the quarters ended April 4, 1999 and March 29, 1998 are not
necessarily indicative of the operating results for an entire fiscal year.
The Company's consolidated statements of operations presentation
changed in fiscal 1997 to disclose the financial statement impact of the
inventory liquidations associated with the results of restructuring and
remerchandising activities. The line item "Closed facilities as a result of
restructuring and remerchandising activities" represents activity specifically
identifiable to closed or closing facilities and to inventory liquidations
conducted in conjunction with the Company's restructuring plans. All activity
for these items is classified in "Closed facilities and remerchandising
activities." Prior year amounts reflect operating results for these same
facilities and merchandise classifications. Selling, general and administrative
expenses for results of restructuring and remerchandising activities does not
include any allocation of corporate overhead.
B. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On March 15, 1999, five of the Company's vendors filed an involuntary
petition for reorganization under Chapter 11 ("Chapter 11") of title 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Middle District of Tennessee (the "Bankruptcy Court")
seeking court supervision of the Company's restructuring efforts. On March 27,
1999, the Company and 31 of its subsidiaries (collectively, the "Debtors") filed
voluntary petitions with the Bankruptcy Court for reorganization under Chapter
11 under case numbers 399-02649 through 399-02680 (the "Chapter 11 Cases") and
orders for relief were entered by the Bankruptcy Court. The Chapter 11 Cases
have been consolidated for the purpose of joint administration under Case No.
399-02649. The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis of accounting and in accordance with AICPA
Statement of Position 90-7. The accompanying consolidated financial statements
have been prepared on a going concern basis of accounting and do not reflect any
adjustments that might result if the Company is unable to continue as a going
concern. The Company's recent losses and negative cash flows from operations,
and the Chapter 11 Cases raise substantial doubt about the Company's ability to
continue as a going concern. The Company intends to submit a plan for
reorganization to the Bankruptcy Court. The ability of the Company to continue
as a going concern and appropriateness of using the going concern basis is
dependent upon, among other things, (i) the Company's ability to comply with
debtor-in-possession financing agreements, (ii) confirmation of a plan of
reorganization under the Bankruptcy Code, (iii) the Company's ability to achieve
profitable operations after such confirmation, and (iv) the Company's ability to
generate sufficient cash from operations to meet its obligations.
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Actions to collect pre-petition indebtedness are stayed and other
contractual obligations against the Debtors may not be enforced. In addition,
under the Bankruptcy Code the Debtors may assume or reject executory contracts,
including lease obligations. Parties affected by these rejections may file
claims with the Bankruptcy Court in accordance with the reorganization process.
Substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Bankruptcy Court. Although the Debtors expect to file a
reorganization plan or plans that provide for emergence from bankruptcy in 2000
or 2001, there can be no assurance that a reorganization plan or plans will be
proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such
plan(s) will be consummated. As provided by the Bankruptcy Code, the Debtors
initially have the exclusive right to submit a plan of reorganization for 120
days. Further extensions may be sought and may be granted or rejected by the
Bankruptcy Court. If the Debtors fail to file a plan of reorganization during
such period or if such plan is not accepted by the required number of creditors
and equity holders, any party in interest may subsequently file its own plan of
reorganization for the Debtors. A plan of reorganization must be confirmed by
the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court
which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a
plan notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity security holders if certain requirements of the Bankruptcy
Code are met. A plan of reorganization could also result in holders of the
Common Stock receiving no value for their interests. Because of such
possibilities, the value of the Common Stock is highly speculative.
A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. The consolidated financial
statements do not give effect to any adjustment to the carrying value of assets
or amounts and classifications of liabilities that might be necessary as a
result of the Chapter 11 Cases.
C. RESTRUCTURING PLANS
1997 RESTRUCTURING PLAN
On March 25, 1997, the Company adopted a business restructuring plan to
close up to 60 under performing stores and one distribution center (the "1997
Restructuring Plan"). As a result, a pre-tax charge of $129.5 million for
restructuring costs was taken in the first quarter of fiscal 1997. The
components of the restructuring charge and an analysis of the amounts charged
against the accrual during the first quarter of 1999 are outlined in the
following table:
FIRST QUARTER 1999 ACTIVITY
---------------------------------------------------------------------------
ACCRUED
RESTRUCTURING ACCRUED
COSTS AS OF RESTRUCTURING
JANUARY 3, RESTRUCTURING ASSET CHANGE IN COSTS AS OF
1999 COSTS PAID WRITE-DOWNS ESTIMATE APRIL 4, 1999
-------------- -------------- ------------- ----------- -------------
(in thousands)
Lease termination and other real estate costs $ 53,161 $ (1,497) $ -- $ (45,981) $ 5,683
Property and equipment write-downs -- -- -- -- --
Employee severance -- -- -- -- --
Other exit costs -- -- -- -- --
-------------- -------------- ------------- ----------- -------------
Total $ 53,161 $ (1,497) $ -- $ (45,981) $ 5,683
============== ============== ============= =========== =============
The closing of nine stores during the first half of fiscal 1998 brought
the total number of closures, in accordance with the 1997 Restructuring Plan, to
53 stores and one distribution center. Store closures were completed as of May
1998. The Company closed less than 60 stores primarily due to the inability to
negotiate acceptable exit terms from the related lessors.
Restructuring costs paid during the first quarter of 1999 relate
primarily to lease termination and other real estate costs. The Company incurred
$1.1 million in contractual rent payments and lease termination fees and $0.4
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million in other real estate costs primarily related to utilities, common area
maintenance fees, real estate taxes and brokerage costs.
In connection with the Chapter 11 Cases, the $46.0 million change in
estimate was made to reflect the reduction allowed under Section 502(b)(6) of
the Bankruptcy Code. Amounts had been accrued according to the remaining
leasehold obligations. Section 502(b)(6) limits a lessor's claim to the rent
reserved by such lease, without acceleration for the greater of one year, or 15
percent, not to exceed three years, of such lease, plus any unpaid rent.
The leases remaining on closed locations as of April 4, 1999 vary in
length with expiration dates ranging from April 1999 to December 2030.
As of April 4, 1999, property and equipment associated with the 1997
Restructuring Plan have been written-down to reflect their estimated fair value.
The Company anticipates selling or abandoning substantially all remaining owned
property and equipment associated with the 1997 Restructuring Plan.
Approximately 3,000 employees were terminated pursuant to the 1997 Restructuring
Plan. All such terminations were completed as of May 1998.
RATIONALIZATION PLAN
In February 1999, the Company announced a rationalization plan to close
up to 132 stores, up to four distribution centers and to reduce corporate
overhead (the "Rationalization Plan"). On March 8, 1999, as part of the
Rationalization Plan and prior to the filing of the involuntary bankruptcy
petition, the Board of Directors approved the adoption of a business
restructuring plan to close 106 stores, the Dallas distribution center and to
reduce the Company's workforce at its Nashville corporate offices by 150
employees. As a result, a pre-tax charge of $99.5 million for restructuring
costs was recorded in the first quarter of 1999. On March 29, 1999 and in
connection with the Chapter 11 Cases, store leases under this plan were approved
for rejection by the Bankruptcy Court. The components of the restructuring
charge and the amounts charged against the accrual in the first quarter of 1999
are outlined in the following table.
FIRST QUARTER 1999 ACTIVITY
--------------------------------------------------------------
INITIAL
CHARGE ACCRUED
RECORDED IN COSTS ASSET COSTS AS OF
MARCH PAID WRITE-DOWNS APRIL 4, 1999
----------- ---------- ----------- -------------
(in thousands)
Lease termination and other real estate costs $ 62,469 $ -- $ -- $62,469
Property and equipment write-downs 24,452 -- (24,452) --
Employee severance 12,533 -- -- 12,533
-------- ---------- -------- -------
Total $ 99,454 $ -- $(24,452) $75,002
======== ========== ======== =======
The stores planned for closure include both owned and leased
properties. Lease termination and other real estate costs consist principally of
the remaining rental payments required under the closing stores' and
distribution center lease agreements under Section 502(b)(6) of the Bankruptcy
Code, net of any actual or reasonably probable sublease income. Section
502(b)(6) limits the lessor's claim to the rent reserved by such lease, without
acceleration, for the greater of one year, or 15 percent, not to exceed three
years, of such lease, plus any unpaid rent.
After taking into effect the above asset write-downs, the Company's
carrying value of the property and equipment associated with the closures is
$23.2 million as of April 4, 1999. The Company anticipates selling substantially
all owned property and equipment associated with the closures.
The employee severance provision was recorded for the planned
termination of approximately 4,389 employees associated with the closures, as
well as the reduction of corporate overhead.
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D. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise refer to liabilities incurred prior
to the commencement of the Chapter 11 Cases. These liabilities consist primarily
of amounts outstanding under long-term debt and also include accounts payable,
accrued interest, accrued restructuring costs, and other accrued expenses. These
amounts represent the Company's best estimate of known or potential claims to be
resolved in connection with the Chapter 11 Cases. Such claims remain subject to
future adjustments based on negotiations, actions of the Bankruptcy Court,
further development with respect to disputed claims, future rejection of
additional executory contracts or unexpired leases, and determination as to the
value of any collateral securing claims or other events. Payment terms for these
amounts, which are considered long-term liabilities at this time, will be
established in connection with the Chapter 11 Cases.
The Company has received approval from the Bankruptcy Court to pay
pre-petition and post-petition employee wages, salaries, benefits and other
employee obligations, to pay vendors and other providers in the ordinary course
for goods and services received from March 15, 1999, and to honor customer
service programs, including warranties, returns, layaways and gift certificates.
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below.
APRIL 4, 1999
-------------
(in thousands)
Accounts payable $198,005
Accrued expenses 72,541
Accrued restructuring costs 80,685
Long-term debt 488,974
Capitalized lease obligations 47,868
--------
Total $888,073
========
Contractual interest expense not recorded on certain pre-petition debt
totaled $1.5 million for the quarter ended April 4, 1999.
E. REORGANIZATION ITEMS
Expenses and income directly incurred or realized as a result of the
Chapter 11 cases have been segregated from the normal operations and are
disclosed separately. The major components are as follows:
QUARTER ENDED
APRIL 4, 1999
-------------
(in thousands)
Restructuring charges (income) $(45,981)
Professional fees and administrative items 2,238
--------
$(43,743)
RESTRUCTURING CHARGES (INCOME):
In connection with the Chapter 11 Cases, the 1997 Restructuring Plan
was adjusted to reflect the reduction allowed under Section 502(b)(6) of the
Bankruptcy Code. An amount had been accrued according to the remaining leasehold
obligation. Section 502(b)(6) limits the lessor's claim to the rent reserved by
such leases, without acceleration for the greater of one year, or 15 percent,
not to exceed three years, of such leases, plus any unpaid rent.
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PROFESSIONAL FEES AND ADMINISTRATIVE ITEMS:
Professional fees and administrative items relate to legal, accounting
and other professional costs directly attributable to the Chapter 11 Cases.
F. BORROWINGS
From September 1997 through January 20, 1999, the Company had a
five-year, $900 million, fully committed asset-based credit facility (the
"Amended and Restated Credit Facility"). The Amended and Restated Credit
Facility included $200 million in term loans and up to a maximum of $700 million
in revolving loans including a $175 million sub-facility for letters of credit.
The Amended and Restated Credit Facility was set to mature on September 10,
2002. Interest rates on the Amended and Restated Credit Facility were subject to
change based on a financial performance-based grid and could not exceed a rate
of LIBOR + 2.25% on revolving loans and LIBOR + 2.50% on the term loan. There
was a commitment fee of 3/8% on the undrawn portion of the revolving loans.
There were no outstanding loans under the Amended and Restated Credit Facility
as of April 4, 1999.
On January 20, 1999, the Company completed a $750 million, 30-month
asset-based credit facility (the "Second Amended and Restated Credit Facility")
which replaced the Amended and Restated Credit Facility. The Second Amended and
Restated Credit Facility included $150 million in term loans and a maximum of
$600 million in revolving loans. The Second Amended and Restated Credit Facility
included a $200 million sub-facility for standby and trade letters of credit.
Interest rates on the Second Amended and Restated Facility were based on either
Prime Rate + 1.5% or LIBOR + 2.75%.
On March 29,1999, the Company entered into a 27-month, $750 million,
fully committed asset-based debtor-in-possession credit facility (the "DIP
Facility") which replaced the Second Amended and Restated Credit Facility. The
Bankruptcy Court approved the DIP Facility on an interim basis on March 29, 1999
and granted final approval on April 27, 1999.
The DIP Facility, which matures on June 30, 2001, includes $100 million
in term loans and up to a maximum of $650 million in revolving loans including a
$200 million sub-facility for letters of credit. Interest rate spreads on the
DIP Facility are LIBOR + 2.25% on Eurodollar loans and Prime Rate + 1.25% on
Alternate Base Rate loans. There were outstanding borrowings under both the DIP
Facility and the Second Amended and Restated Credit Facility as of April 4,
1999. Short-term borrowings related to the DIP Facility and the Second Amended
and Restated Credit Facility were $26.7 million and $128.8 million as of April
4, 1999, respectively. There were no short-term borrowings under the Amended and
Restated Credit Facility at March 28, 1998. Outstanding borrowings under the
term loan of the Second Amended and Restated Credit Facility were $149.6 million
as of April 4, 1999. There were no term loan borrowings under the DIP facility
as of April 4, 1999. Term loan borrowings under the Amended and Restated Credit
Facility were $199 million as of March 28, 1998. There is a commitment fee of
0.375% on the undrawn portion of the revolving loans, under the DIP Facility.
The DIP Facility is secured by all material unencumbered assets of the
Company and its subsidiaries including inventory but excluding previously
mortgaged property. Borrowings under the DIP Facility are limited based on a
borrowing base formula which considers eligible inventories, eligible accounts
receivable, mortgage values on eligible real properties, eligible leasehold
interests, available cash equivalents and in-transit cash. The DIP Facility had
a borrowing base reserve of $75 million from March 29, 1999 to April 27, 1999,
the date of final approval by the DIP Facility lenders. A borrowing base reserve
of $50 million will apply until a business plan is accepted by and financial
covenants are negotiated with the Company's lenders.
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G. EARNINGS PER SHARE
Basic earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted-average number of common shares outstanding
during the reported period. Diluted net earnings (loss) per common share is
computed by dividing net earnings (loss) by the weighted-average number of
common shares outstanding during the period plus incremental shares that would
have been outstanding upon the assumed vesting of dilutive restricted stock and
the assumed exercise of dilutive stock options. As of April 4, 1999, all
outstanding restricted stock and stock options are considered anti-dilutive.
H. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets for the Company were $78.6 million as
of April 4, 1999 compared to $18.0 million as of March 29, 1998. The increase
was primarily due to cash in advance payments for inventory of approximately $50
million and prepaid advertising of approximately $10 million.
I. OTHER COMMITMENTS AND CONTINGENCIES
On January 28, 1997, the Company and Service Credit Corp. (the
"Subsidiary"), a wholly-owned subsidiary, entered into an agreement with World
Financial Network National Bank ("WFNNB") for the purpose of providing a
proprietary credit card to its customers. The contract requires the Subsidiary
to maintain a 3% credit risk reserve for the outstanding balances, which are
owned by WFNNB. The purpose of this reserve is to offset future potential
negative spreads and portfolio losses. The negative spreads or losses may result
from potential increased reimbursable contractual program costs. The 3% credit
risk reserve is held by the bankruptcy remote Subsidiary in the form of cash and
cash-equivalents. On April 28, 1999, WFNNB advised the Company that WFNNB has
projected that such portfolio losses and negative spreads will be at least
approximately $9 million. The Company does not have in its possession sufficient
information to determine the accuracy or validity of WFNNB's projection.
Moreover, the Company is investigating (a) whether WFNNB has breached, or
violated applicable bankruptcy laws in connection with, the agreement and (b)
its rights and remedies with respect thereto. Pending confirmation of the
accuracy of WFNNB's projection and a resolution (consensual or otherwise) of the
Company's rights and remedies, the Company has made provision for such potential
liability for the period ending April 4, 1999 by establishing a 3% credit risk
reserve of $9 million.
The Company was involved in litigation, investigations and various
legal matters during the first quarter of 1999 which are being defended and
handled in the ordinary course of business. While the ultimate results of these
matters cannot be determined or predicted, management believes that they will
not have a material adverse effect on the Company's results of operations or
financial position. Any potential liability may be affected by the Chapter 11
Cases.
J. SEGMENT REPORTING
The Company manages its business on the basis of one reportable
segment. As of April 4, 1999, all of the Company's operations are located within
the United States. The following data is presented in accordance with SFAS No.
131 for all periods presented.
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FOR THE YEAR
FOR THE QUARTERS ENDED ENDED
---------------------- ------------
CLASSES OF SIMILAR PRODUCTS
4/4/99 3/29/98 1/3/99
-------- -------- ----------
Net Sales (in thousands):
Hardlines $349,805 $449,359 $2,249,628
Jewelry 160,704 144,823 919,897
-------- -------- ----------
Total Net Sales $510,509 $594,182 $3,169,525
======== ======== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For comparative purposes, interim balance sheets are more meaningful
when compared to the balance sheets at the same point in time of the prior year.
Comparisons to balance sheets of the most recent fiscal year end may not be
meaningful due to the seasonal nature of the Company's business.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q includes certain forward-looking
statements based upon management's beliefs, as well as assumptions made by and
data currently available to management. This information has been, or in the
future may be, included in reliance on the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The projections with respect
to the Company's three-month borrowing base and borrowing availability
projections under the DIP facility, while presented with numerical specificity,
are forward-looking statements which are based on a variety of assumptions
regarding the Company's operating performance that may not be realized and are
subject to significant business, economic, political and competitive
uncertainties and potential contingencies, including those set forth below, many
of which are beyond the Company's control. Consequently, such forward-looking
information should not be regarded as a representation or warranty by the
Company that such projections will be realized. Actual results may differ
materially from those anticipated in any such forward-looking statements. The
Company undertakes no obligation to update or revise any such forward-looking
statements.
The Company's liquidity, capital resources and results of operations
are subject to a number of risks and uncertainties including, but not limited
to, the following: the ability of the Company to continue as a going concern;
the ability of the Company to operate pursuant to the terms of the DIP Facility;
the ability of the Company to operate successfully under a Chapter 11
proceeding; approval of plans and activities by the Bankruptcy Court; risks
associated with operating a business in Chapter 11; the ability of the Company
to create and have approved a reorganization plan in the Chapter 11 Cases;
adverse developments with respect to the Company's liquidity or results of
operations; the ability of the Company to obtain shipments and negotiate terms
with vendors and service providers for current orders; the ability to conduct
inventory liquidation sales to improve liquidity; the ability to develop, fund
and execute an operating plan for the Company; the ability of the Company to
attract and retain key executives and associates; competitive pressures from
other retailers, including specialty retailers and discount stores, which may
affect the nature and viability of the Company's business strategy; trends in
the economy as a whole which may affect consumer confidence and consumer demand
for the types of goods sold by the Company; the ability to maintain gross profit
margins; the seasonal nature of the Company's business and the ability of the
Company to predict consumer demand as a whole, as well as demand for specific
goods; the ability of the Company to attract and retain customers; costs
associated with the shipping, handling and control of inventory and the
Company's ability to optimize its supply chain; potential adverse publicity;
availability and cost of management and labor employed; real estate occupancy
and development costs, including the substantial fixed investment costs
associated with opening, maintaining or closing a Company store; the potential
delisting of the Company's securities and the absence of an active public
trading market; the ability of the Company to provide a private label credit
card; and the ability to effect conversions to new technological systems,
including becoming Year 2000 compliant.
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Actual results may differ materially from those anticipated in any such
forward-looking statements. The Company undertakes no obligation to update or
revise any forward-looking statements to reflect subsequent events or
circumstances.
OVERVIEW
The Company, with 341 stores in 34 states at April 4, 1999, is one of
the nation's largest retailers of jewelry and offers a selection of brand-name
hardlines and other product lines.
As a result of the Company's decreased net sales in the fourth quarter
of fiscal 1998 and the resulting negative cash flows from operations, in January
1999 the Company began an effort to effect an out-of-court restructuring plan.
Before the Company was able to effect an out-of-court restructuring, on March
15, 1999, five of the Company's vendors filed an involuntary petition for
reorganization under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Tennessee seeking court supervision
of the Company's restructuring efforts. On March 27, 1999, the Company and 31 of
its subsidiaries filed voluntary petitions with the Bankruptcy Court for
reorganization under Chapter 11 and orders for relief were entered by the
Bankruptcy Court. The Chapter 11 Cases have been consolidated for the purpose of
joint administration under Case No. 399-02649. The Debtors are currently
operating their businesses as debtors-in-possession pursuant to the Bankruptcy
Code.
Actions to collect pre-petition indebtedness are stayed and other
contractual obligations against the Debtors may not be enforced. In addition,
under the Bankruptcy Code the Debtors may assume or reject executory contracts,
including lease obligations. Parties affected by these rejections may file
claims with the Bankruptcy Court in accordance with the reorganization process.
Substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Bankruptcy Court. Although the Debtors expect to file a
reorganization plan or plans that provide for emergence from bankruptcy in 2000
or 2001, there can be no assurance that a reorganization plan or plans will be
proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such
plan(s) will be consummated. As provided by the Bankruptcy Code, the Debtors
initially have the exclusive right to submit a plan of reorganization for 120
days. Further extensions may be sought and may be granted or rejected by the
Bankruptcy Court. If the Debtors fail to file a plan of reorganization during
such period or if such plan is not accepted by the required number of creditors
and equity holders, any party in interest may subsequently file its own plan of
reorganization for the Debtors. A plan of reorganization must be confirmed by
the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court
which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a
plan notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity security holders if certain requirements of the Bankruptcy
Code are met. A plan of reorganization could also result in holders of the
Common Stock receiving no value for their interests. Because of such
possibilities, the value of the Common Stock is highly speculative.
At the first day hearing held on March 29, 1999 before Judge George C.
Paine, the Bankruptcy Court entered first day orders granting authority to the
Debtors, among other things, to pay pre-petition and post-petition employee
wages, salaries, benefits and other employee obligations, and to pay vendors and
other providers in the ordinary course for goods and services received from
March 15, 1999, and to honor customer service programs, including warranties,
returns, layaways and gift certificates.
The Company entered into the DIP Facility dated March 29, 1999 with
Citicorp USA, Inc., as administrative agent, BankBoston, N.A. as documentation
agent and collateral monitoring agent, and Salomon Smith Barney Inc. as sole
arranger and book manager, for a debtor-in-possession credit facility under
which the Company may borrow up to $750 million, subject to certain limitations,
to fund ongoing working capital needs while it prepares a reorganization plan.
The DIP Facility includes $100 million in term loans and a maximum of $650
million in revolving loans. Financial covenants are subject to amendment pending
the finalization of the Company's business plan. The DIP Facility includes a
$200 million sub-facility for standby and trade letters of credit. Interest
rates on the DIP Facility are either the Prime Rate plus 1.25% or LIBOR plus
2.25% for revolving loans and the term loan.
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The DIP Facility is secured by substantially all of the assets of the Company
and its subsidiaries, subject only to valid, enforceable, subsisting and
non-voidable liens of record as of the date of commencement of the Chapter 11
Cases and other liens permitted under the DIP Facility.
Borrowings under the DIP Facility are limited based on a borrowing base
formula which considers eligible inventories, eligible accounts receivable,
trade letters of credit, mortgage values on eligible real properties, eligible
leasehold interests, available cash equivalents and in-transit cash. The DIP
Facility contains various restrictive covenants that are subject to amendment
pending finalization of the Company's business plan. The Company's ability to
obtain new borrowings after the first anniversary of the DIP Facility is subject
to the Company and the lenders having agreed upon a business plan and revised
financial and other covenants.
On April 27, 1999, the Bankruptcy Court gave final approval to the DIP
Facility. The Company believes the DIP Facility should provide it with adequate
liquidity to conduct its operations while it prepares a reorganization plan.
The Company's Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The filing of the involuntary and voluntary petitions referred to
above, the related circumstances and the losses from operations raise
substantial doubt with respect to the Company's ability to continue as a going
concern. The appropriateness of using the going concern basis is dependent upon,
among other things, confirmation of a plan or plans of reorganization, future
profitable operations and the ability to generate cash from operations and
financing sources sufficient to meet obligations. As a result of the filing of
the Chapter 11 Cases and related circumstances, realization of assets and
liquidation of liabilities is subject to significant uncertainty. While under
the protection of Chapter 11, the Debtors may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the Consolidated Financial Statements. Further, a plan or plans of
reorganization could materially change the amounts reported in the accompanying
Consolidated Financial Statements. The Consolidated Financial Statements do not
include any adjustments relating to recoverability of the value of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary as a consequence of a plan of reorganization.
At this time, it is not possible to predict the outcome of the Chapter
11 Cases or their effect on the Company's business. Unsecured claims may be
satisfied at less than 100% of their face value and the equity interests of the
Company's shareholders may have no value. The Company believes the DIP Facility
should provide the Company with adequate liquidity to conduct its business while
it prepares a reorganization plan. However, the Company's liquidity, capital
resources, results of operations and ability to continue as a going concern are
subject to known and unknown risks and uncertainties, including those set forth
above under "Safe Harbor Statement Under The Private Securities Litigation
Reform Act of 1995."
RESULTS OF OPERATIONS
FIRST QUARTER ENDED APRIL 4, 1999 COMPARED TO FIRST QUARTER ENDED MARCH 29, 1998
Net Sales
Net sales for the Company were $510.5 million for the first quarter of
1999 compared to $594.2 million for the first quarter of 1998. The $83.7 million
decrease reflects the $77.1 million loss in sales from the operations excluding
closing facilities as a result of restructuring and remerchandising activities
and a reduction of $6.6 million in sales from liquidating stores. The Company
believes that a portion of the comparable store sales decrease is attributable
to out of stock levels associated with product procurement difficulties
encountered early in the rationalization process and prior to the Chapter 11
filing.
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Net sales from operations excluding results of restructuring and
remerchandising activities for the first quarter of 1999 were $354.8 million
versus $431.8 million for the same period in 1998. This represents a comparable
store sales decrease of $47.2 million or 12.7% and a decline in the remaining
stores included in operations excluding closed facilities as a result of
restructuring and remerchandising activities of $29.9 million. Jewelry
comparable store sales increased 10.9%, while hardline comparable store sales
decreased 21.7%.
Gross Margin
In the first quarter of 1999, gross margin was $96.8 million as
compared to $143.1 million in the first quarter of 1998. The decrease was
primarily due to a $83.7 decline in sales, a $5.2 million or 1% increase in cost
of goods sold, a $13.8 million increase in inventory shrink accrual and a $1.6
million increase in freight expense which were partially offset by decreases in
occupancy and other costs. The changes were primarily a result of the
rationalization process, store closure activity and significant levels of
inter-store transfers during the quarter.
Gross margin after cost of merchandise sold and buying and occupancy
expenses and excluding closed facilities as a result of restructuring and
remerchandising was $73.9 million or 20.8% of net sales for the first quarter of
1999, compared to $109.9 million or 25.2% of net sales for the first quarter of
1998. The margin decrease was primarily the result of changes in product mix.
Gross margin after cost of merchandise sold and buying and occupancy
expenses for closed facilities as a result of restructuring and remerchandising
activities was $22.9 million, or 14.7% of net sales for the first quarter of
1999 compared to $34.2 million, or 21.1% of net sales for the first quarter of
1998. The margin decrease was primarily a result of changes in product mix and
additional markdowns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $17.9 million in
the first quarter of 1999 to $167.3 million from $149.4 million in the first
quarter of 1998. The increase was primarily attributable to a $9.0 million
charge to offset future potential negative spreads or portfolio losses and a
$8.5 million charge to allow for potential receivable losses related to the
private label credit card program. The negative spreads or losses may result in
potential increased reimbursable contractual program costs.
Interest Expense
Interest expense for the first quarter of 1999 was $25.1 million as
compared to $19.6 million for the first quarter of 1998. The increase in
interest expense reflects the higher average borrowings against the Company's
DIP Facility, the Second Amended and Restated Credit Facility and the Amended
and Restated Credit Facility. The increase was partially offset by contractual
interest expense not recorded on certain prepetition debt totaling $1.5 million.
Income Taxes
The Company did not recognize an income tax benefit due to the
recording of a deferred tax asset valuation allowance. Deferred taxes are
recognized to reflect the estimated future utilization of temporary book/tax
differences. The Company has recorded a full valuation allowance on net deferred
tax assets as realization of such assets in future years is uncertain.
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1997 Restructuring Plan
On March 25, 1997, the Company adopted a business restructuring plan to
close up to 60 under performing stores and one distribution center. As a result,
a pre-tax charge of $129.5 million for restructuring costs was taken in the
first quarter of fiscal 1997. The components of the restructuring charge and an
analysis of the amounts charged against the accrual during first quarter of 1999
are outlined in the following table:
FIRST QUARTER 1999 ACTIVITY
---------------------------------------------------------------------
ACCRUED
RESTRUCTURING ACCRUED
COSTS AS OF RESTRUCTURING
JANUARY 3, RESTRUCTURING ASSET CHANGE IN COSTS AS OF
1999 COSTS PAID WRITE-DOWNS ESTIMATE APRIL 4, 1999
----------- ----------- ----------- ------------ -------------
(in thousands)
Lease termination and other real estate costs $ 53,161 $ (1,497) $ -- $ (45,981) $ 5,683
Property and equipment write-downs -- -- -- -- --
Employee severance -- -- -- -- --
Other exit costs -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Total $ 53,161 $ (1,497) $ -- $ (45,981) $ 5,683
=========== =========== =========== ============ ===========
Restructuring costs paid during the first quarter of 1999 relate
primarily to lease termination and other real estate costs. The Company incurred
$1.1 million in contractual rent payments and lease termination fees and $0.4
million in other real estate costs primarily related to utilities, common area
maintenance fees, real estate taxes and brokerage costs.
In connection with the Chapter 11 Cases, the $46.0 million change in
estimate was made to reflect the reduction allowed under Section 502(b)(6) of
the Bankruptcy Code. Amounts had been accrued according to the remaining
leasehold obligations. Section 502(b)(6) limits a lessor's claim to the rent
reserved by such lease, without acceleration for the greater of one year, or 15
percent, not to exceed three years, of such lease, plus any unpaid rent.
The leases remaining on closed locations as of April 4, 1999 vary in
length with expiration dates ranging from April 1999 to December 2030.
As of April 4, 1999, property and equipment associated with the 1997
Restructuring Plan have been written-down to reflect their estimated fair value.
The Company anticipates selling or abandoning substantially all remaining owned
property and equipment associated with the 1997 Restructuring Plan.
Approximately 3,000 employees were terminated pursuant to the 1997 Restructuring
Plan. All such terminations were completed as of May 1998 for the 1997
Restructuring Plan.
Rationalization Plan
In February 1999, the Company announced a rationalization plan to close
up to 132 stores, up to four distribution centers and to reduce corporate
overhead (the "Rationalization Plan"). On March 8, 1999, as part of the
Rationalization Plan and prior to the filing of the involuntary bankruptcy
petition, the Board of Directors approved the adoption of a business
restructuring plan to close 106 stores, the Dallas distribution center and to
reduce the Company's workforce at its Nashville corporate offices by 150
employees. As a result, a pre-tax charge of $99.5 million for restructuring
costs was recorded in the first quarter of 1999. On March 29, 1999 and in
connection with the Chapter 11 Cases, store leases under this plan were approved
for rejection by the Bankruptcy Court. The components of the restructuring
charge and the amounts charged against the accrual in the first quarter of 1999
are outlined in the following table.
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FIRST QUARTER 1999 ACTIVITY
--------------------------------------------------------------
INITIAL
CHARGE ACCRUED
RECORDED IN COSTS ASSET COSTS AS OF
MARCH PAID WRITE-DOWNS APRIL 4, 1999
----------- ---------- ----------- -------------
(in thousands)
Lease termination and other real estate costs $ 62,469 $ -- $ -- $62,469
Property and equipment write-downs 24,452 -- (24,452) --
Employee severance 12,533 -- -- 12,533
-------- ---------- -------- -------
Total $ 99,454 $ -- $(24,452) $75,002
======== ========== ======== =======
The stores planned for closure include both owned and leased
properties. Lease termination and other real estate costs consist principally of
the remaining rental payments required under the closing stores' and
distribution center lease agreements under Section 502(b)(6) of the Bankruptcy
Code, net of any actual or reasonably probable sublease income. Section
502(b)(6) limits the lessor's claim to the rent reserved by such lease, without
acceleration, for the greater of one year, or 15 percent, not to exceed three
years, of such lease, plus any unpaid rent.
After taking into effect the above asset write-downs, the Company's
carrying value of the property and equipment associated with the closures is
$23.2 million as of April 4, 1999. The Company anticipates selling substantially
all owned property and equipment associated with the closures.
The employee severance provision was recorded for the planned
termination of approximately 4,389 employees associated with the closures, as
well as the reduction of corporate overhead.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1999, the Debtors filed the Chapter 11 Cases, which will
affect the Company's liquidity and capital resources in fiscal 1999. See Note B,
Notes to the Financial Statements - "Proceedings Under Chapter 11 of the
Bankruptcy Code."
From September 1997 through January 20, 1999, the Company had a
five-year, $900 million, fully committed asset-based credit facility (the
"Amended and Restated Credit Facility"). The Amended and Restated Credit
Facility included $200 million in term loans and up to a maximum of $700 million
in revolving loans including a $175 million sub-facility for letters of credit.
The Amended and Restated Credit Facility was set to mature on September 10,
2002. Interest rates on the Amended and Restated Credit Facility were subject to
change based on a financial performance-based grid and could not exceed a rate
of LIBOR + 2.25% on revolving loans and LIBOR + 2.50% on the term loan. There
was a commitment fee of 3/8% on the undrawn portion of the revolving loans.
There were no outstanding loans under the Amended and Restated Credit Facility
as of April 4, 1999.
On January 20, 1999, the Company completed a $750 million, 30-month
asset-based credit facility (the "Second Amended and Restated Credit Facility")
which replaced the Amended and Restated Credit Facility. The Second Amended and
Restated Credit Facility included $150 million in term loans and a maximum of
$600 million in revolving loans. The Second Amended and Restated Credit Facility
included a $200 million sub-facility for standby and trade letters of credit.
Interest rates on the Second Amended and Restated Facility were based on either
Prime Rate + 1.5% or LIBOR + 2.75%.
On March 29,1999, the Company entered into a 27-month, $750 million,
fully committed asset-based debtor-in-possession credit facility (the "DIP
Facility") which replaced the Second Amended and Restated Credit Facility. The
Bankruptcy Court approved the DIP Facility on an interim basis on March 29, 1999
and granted final approval on April 27, 1999. The DIP Facility includes $100
million in term loans and up to a maximum of $650 million in revolving loans,
17
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including a $200 million sub-facility for letters of credit. The DIP Facility
matures on June 30, 2001. Interest rates on the DIP Facility are either Prime
Rate + 1.25% or LIBOR + 2.25% for the revolving loans and the term loan. There
is a commitment fee of 3/8% on the undrawn portion of the revolving loans. The
Company had $26.7 million in short-term borrowings outstanding under the DIP
Facility and $128.8 million in short-term borrowings outstanding under the
Second Amended and Restated Credit Facility. Other extensions of credit under
the Second Amended and Restated Facility, as of April 24, 1999, included $149.6
million in term loans and $75.5 million in letters of credit.
The DIP Facility is secured by all material unencumbered assets of the
Company and its subsidiaries, including inventory but excluding previously
mortgaged property and leasehold interests.
Borrowings under the DIP Facility are limited based on a borrowing base
formula which considers eligible inventories, eligible accounts receivable,
mortgage values on eligible real properties, available cash equivalents,
eligible leasehold interests and in-transit cash. The Company had $100.2 million
of unused borrowing availability under the DIP Facility as of April 4, 1999.
The DIP Facility had a borrowing base reserve of $75 million from March
29, 1999 to April 27, 1999, the date of final approval by the Bankruptcy Court.
A borrowing base reserve of $50 million will apply until a business plan is
accepted and financial covenants are negotiated with the Company's lenders.
The following table sets forth the Company's three month borrowing base
and borrowing availability projections under the DIP Facility. The forecast
projects a borrowing base which ranges from $514 million to $523 million over
the period from May 17, 1999 to August 15, 1999, and unused borrowing
availability which ranges from $239 million to $284 million. The projected
availability is subject to the $50 million borrowing base reserve noted above.
These forward-looking statements are subject to assumptions, known and unknown
risks and uncertainties. See "Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995."
Forecast Forecast Forecast Forecast
5/23/99 6/20/99 7/18/99 8/15/99
-------- -------- -------- --------
(in millions)
Ending Total Revolver Balance $ 73.2 $ 70.8 $ 68.1 $ 99.5
Term Loan 100.0 100.0 99.8 99.8
Standby Letters of Credit 31.9 29.8 29.8 29.8
Trade Letters of Credit 30.0 36.0 50.0 55.0
-------- -------- -------- --------
Total Extensions of Credit $ 235.1 $ 236.6 $ 247.7 $ 284.1
-------- -------- -------- --------
Borrowing Base $ 519.5 $ 514.8 $ 515.3 $ 523.3
Availability* $ 284.4 $ 278.2 $ 267.6 $ 239.2
*Borrowing Base and Availability calculated before deduction of Interim Reserve
Amount ($50 million until a business plan is accepted)
CAPITAL STRUCTURE
During the first quarter of 1999, the Company's principal sources of
liquidity were its successive credit facilities (1) the Amended and Restated
Credit Facility, which included a $200 million term loan and a revolving credit
facility with a maximum commitment level of $700 million, (2) the Second Amended
and Restated Credit Facility, which included a $150 million term loan and a
revolving credit facility with a maximum commitment level of $600 million, and
(3) the DIP
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Facility, which includes a $100 million term loan and a revolving credit
facility with a maximum commitment level of $650 million.
At April 4, 1999, the Company had total extensions of credit of $380.6
million under the DIP Facility and the Second Amended and Restated Credit
Agreement. At March 29, 1998, the Company had total extensions of credit of
$224.3 million under the Amended and Restated Credit Facility.
On January 14, 1999, the Company made a $13.5 million interest payment
on its 9% Senior Subordinated Debentures.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This pronouncement will be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is still in the process of analyzing
the impact of the adoption of this Statement. The Company anticipates that the
adoption of this statement will not have a material impact on its operating
results or financial position.
YEAR 2000 COMPLIANCE
The Company is currently conducting an organization wide program to
ensure that all the systems critical to the operation of the Company are year
2000 compliant. In all categories the awareness and assessment phases are
complete. The renovation, validation (including testing) and implementation
phases are currently in progress. As of April 4, 1999, information technology
supported systems are approximately 93% complete and non-information technology
systems (end user systems) are approximately 100% complete. It is expected that
information technology supported systems will be completed by the end of the
third quarter of 1999. In the course of the Company's preparation for year 2000,
the Company has corresponded with all software vendors, financial institutions,
and its top 1,000 merchandise vendors and we are monitoring their progress.
Replacement, conversion and testing of hardware and systems
applications are expected to cost between $2.5 million and $3.0 million. To
date, approximately $2.3 million of costs have been incurred. These costs are
being expensed as incurred.
Given that there can be no assurance that the systems of other entities
on which the Company relies will be year 2000 compliant in a timely manner, the
major risk factor associated with year 2000 pertains to our third party
relationships. The Company is currently developing contingency plans to address
a potential worst case scenario involving difficulties experienced by the U.S.
Postal Service in the distribution of direct mailings and other publications. If
such an event occurs, the Company would have to insert a majority of its
publications into local newspapers and other publications in lieu of mailing
them. If local utility companies are unable to provide services to any of our
locations, there is no contingency plan in place and our business would be at
risk. The Company is unable to determine the impact, if any, of the Chapter 11
Cases on the Company's year 2000 program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's operations are subject to market risks primarily from
changes in interest rates. The Company has immaterial exposure to exchange rate
risk. As discussed in the Company's Annual Report on Form 10-K filed on April 5,
1999, the Company had interest rate swaps at fiscal year-end with a notional
amount of $125 million. As of April 4, 1999, the fair value of the interest rate
swap agreements was ($1.6) million.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 15, 1999, five of the Company's vendors filed an involuntary
petition for reorganization under Chapter 11 in the Bankruptcy Court seeking
court supervision of the Company's restructuring efforts. On March 27, 1999, the
Company and 31 of its subsidiaries filed voluntary petitions with the Bankruptcy
Court for reorganization under Chapter 11 of the Bankruptcy Code. The Debtors
are currently operating their businesses as debtors-in-possession. The Chapter
11 Cases have been consolidated for the purpose of joint administration under
Case No. 399-02649.
At this time, it is not possible to predict the outcome of the Chapter
11 Cases or their effect on the Company's business. Additional information
regarding the Chapter 11 Cases is set forth in Item 1. "Business -- Proceedings
Under Chapter 11 of the Bankruptcy Code," Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Note B of Notes to
Consolidated Financial Statements, and the Report of Independent Auditors
included in the Company's Annual Report on Form 10-K filed on April 5, 1999,
which includes an explanatory paragraph concerning a substantial doubt as to the
Company's ability to continue as a going concern. If it is determined that the
liabilities subject to compromise in the Chapter 11 Cases exceed the fair value
of the assets, unsecured claims may be satisfied at less than 100% of their face
value and the equity interests of the Company's shareholders may have no value.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company commenced the Chapter 11 Cases on March 27, 1999. As a
result of filing the Chapter 11 Cases, no principal or interest payments will be
made on certain indebtedness incurred by the Company prior to March 27, 1999,
including the 9% Senior Subordinated Debentures and 8 3/8% Senior Notes, until a
plan of reorganization defining the payment terms has been approved by the
Bankruptcy Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits filed with this Form 10-Q
27 Financial Data Schedule for the First Quarter ended April 4,
1999.
(b) Reports on Form 8-K.
During the first quarter ended April 4, 1999, the Company filed the
following five reports on Form 8-K: (i) dated January 12, 1999 announcing that
the Company had obtained a $750 million credit facility commitment; (ii) dated
January 28, 1999 announcing that the Company had secured a $750 million credit
facility; (iii) dated March 30, 1999 announcing that five of the Company's
vendors had filed an involuntary Chapter 11 reorganization petition and that the
Company had filed a voluntary Chapter 11 reorganization petition; (iv) dated
March 31, 1999 announcing that the Company had appointed S. Cusano as Chief
Executive Officer, Charles Septer as President and Chief Operating Officer and
various other appointments and that the Bankruptcy Court had approved on an
interim basis the $750 million DIP Facility; and (v) dated April 29, 1999
announcing that the Company had received final approval by the Bankruptcy Court
of the $750 million DIP Facility.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ S. Cusano
- -----------------------------------------
S. Cusano
Director and Chief Executive Officer
(Principal Executive Officer)
May 19, 1999
/s/ Thomas L. Garrett
- -----------------------------------------
Thomas L. Garrett
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
May 19, 1999
/s/ Steven F. McCann
- -----------------------------------------
Steven F. McCann
Senior Vice President of Finance and Chief Accounting Officer
(Principal Accounting Officer)
May 19, 1999
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