========================================================================== SERVICE MERCHANDISE BANKRUPTCY NEWS Issue Number 1* -------------------------------------------------------------------------- Copyright 1999 (ISSN XXXX-XXXX) March 27, 1999 -------------------------------------------------------------------------- Bankruptcy Creditors' Service, Inc., Phone 609-392-0900 FAX 609-392-0040 -------------------------------------------------------------------------- SERVICE MERCHANDISE BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 301 North Harrison Street, Suite 206, Princeton, New Jersey 08540, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. Each issue is prepared by Peter A. Chapman, Editor. Subscription rate is US$45 per issue, plus nominal telecopy charges. Reproduction of SERVICE MERCHANDISE BANKRUPTCY NEWS by any means is prohibited without the permission of the publisher. ========================================================================== IN THIS ISSUE ------------- [00000] HOW TO ORDER A SUBSCRIPTION TO SERVICE MERCHANDISE BANKRUPTCY NEWS [00001] BACKGROUND & DESCRIPTION OF SERVICE MERCHANDISE COMPANY, INC. [00002] COMPANY'S CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 27, 1998 [00003] COMPANY'S PRESS RELEASE ABOUT CHAPTER 11 FILING & DIP FINANCING [00004] SERVICE MERCHANDISE COMPANY CHAPTER 11 DATABASE [00005] LIST OF THE DEBTORS' 20 LARGEST UNSECURED CREDITORS [00006] DEBTORS' MOTION FOR JOINT ADMINISTRATION OF CASES [00007] WHAT HAPPENS TO SERVICE MERCHANDISE COMMON STOCK & PUBLIC BONDS? KEY DATE CALENDAR ----------------- 03/15/99 Involuntary Petition Date 03/27/99 Voluntary Petition Date 04/11/99 Deadline for filing Schedules of Assets and Liabilities 04/11/99 Deadline for filing Statement of Financial Affairs 04/11/99 Deadline for filing List of Leases and Executory Contracts 04/16/99 Deadline to provide Utility Companies with adequate assurance 05/26/99 Deadline to assume or reject leases and executory contracts 06/25/99 Deadline for removal of actions pursuant to F.R.B.P. 9027 07/25/99 Expiration of Debtors' Exclusive Period to propose a Plan 09/23/99 Expiration of Debtors' Exclusive Solicitation Period 03/27/01 Deadline for Debtors' Commencement of Avoidance Actions Organizational Meeting with UST to form Official Committees Bar Date for filing Proofs of Claim First Meeting of Creditors pursuant to 11 U.S.C. Sec. 341(a) Expiration of DIP Financing Facility -------------------------------------------------------------------------- [00000] HOW TO ORDER A SUBSCRIPTION TO SERVICE MERCHANDISE BANKRUPTCY NEWS -------------------------------------------------------------------------- SERVICE MERCHANDISE BANKRUPTCY NEWS is distributed on a subscription basis by electronic mail or facsimile transmission. New issues are published on an ad hoc basis as significant activity occurs (generally every 10 to 20 days) in the Debtors' cases. The subscription rate is $45 per issue. Delivery via e-mail is at no additional charge; for fax delivery, nominal telecopy charges apply. An invoice accompanies each newsletter edition transmitted. Prompt payment is always appreciated. Subscriptions may be canceled at any time without further obligation. 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Name: ---------------------------------------------- Firm: ---------------------------------------------- Address: ---------------------------------------------- ---------------------------------------------- Phone: ---------------------------------------------- Fax: ---------------------------------------------- E-Mail: ---------------------------------------------- -------------------------------------------------------------------------- [00001] BACKGROUND & DESCRIPTION OF SERVICE MERCHANDISE COMPANY, INC. -------------------------------------------------------------------------- SERVICE MERCHANDISE COMPANY, INC. 7100 Service Merchandise Dr. Brentwood, Tennessee 37027 Phone: 615-660-6000 Fax: 615-660-3319 http://www.servicemerchandise.com "A diamond seller in the rough," is the way Hoovers Online describes troubled Service Merchandise Company, Inc. (NYSE:SME) -- the nation's largest catalog showroom, which is a dubious distinction considering the format hasn't been much of a success in the United States. The Company's franchise is built around selling nationally advertised, brand-name home products and fine jewelry. Customers are made aware of the product offerings through catalogs, direct mail flyers, newspaper inserts and television advertising. While customers may purchase products through mail order, telephone order or via the Company's Internet Web site, the majority of purchases occur directly in a Company store where the customer has physical access to the merchandise. The typical Service Merchandise store consists of approximately 50,000 square feet of total space and is situated on a stand-alone lot or as an anchor in a suburban mall or strip center. The Company's stores are divided into thematic "worlds" with displays of the products arrayed to support the world concept. In the Fine Jewelry world, merchandise is displayed in showcases and sales associates deliver items to the customers and accept payment. In other worlds, a sample of the merchandise is displayed, and customers select their purchases via a "pull tag" system. The pull tag is taken to a cashier, the product is paid for and the merchandise is delivered to a pick-up station. Additionally, in self- service departments, customers select merchandise from a shelf or display and take it to a check-out counter to finalize the purchase. At the end of 1998, the Company had nearly 350 stores open in 34 states. On February 9, 1999, the Company announced a plan to shutter up to 134 underperforming stores and reposition itself as a home and jewelry specialty retailer. The Company relies heavily on its data processing systems, capturing, processing and rehashing all transactions related to customer purchases and inventory management. The Company maintains a 24-million household database of information which is updated with each merchandise purchase. The Company purchases merchandise from some 1,500 suppliers, mostly manufacturers. The Company indicated in its latest annual report that it would experience no difficulty in obtaining quality merchandise from alternate sources. The Company's direct import program is responsible for sourcing and repackaging many promotional and seasonal items. In 1997, employee headcount varied from 26,800 to 42,700 including both permanent and temporary employees. The Company is not a party to any collective bargaining agreement. -------------------------------------------------------------------------- [00002] COMPANY'S CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 27, 1998 -------------------------------------------------------------------------- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 54,452 Accounts receivable, net of allowance of $2,144 48,767 Income taxes 27,311 Inventories 1,044,170 Prepaid expenses 18,282 Deferred income taxes 22,478 ------------ TOTAL CURRENT ASSETS 1,215,460 Property and equipment: Owned assets, net of accumulated depreciation of $537,053 476,964 Capitalized leases, net of accumulated amortization of $74,977 27,819 Other assets and deferred finance charges 59,205 ------------ TOTAL ASSETS $1,779,448 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 65,000 Accounts payable 398,454 Accrued expenses 202,099 State and local sales taxes 21,362 Accrued restructuring costs - current 12,581 Current maturities of long-term debt 21,281 Current maturities of capitalized lease obligations 8,545 ---------- TOTAL CURRENT LIABILITIES 729,322 Accrued restructuring costs 52,834 Long-term debt 685,486 Capitalized lease obligations 43,417 ---------- TOTAL LIABILITIES 1,511,059 ---------- SHAREHOLDERS' EQUITY: Preferred stock, none issued Series A Junior Preferred Stock, none issued Common stock 50,178 Additional paid-in capital 7,721 Deferred compensation (2,170) Retained earnings 212,660 ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,779,448 ============ -------------------------------------------------------------------------- [00003] COMPANY'S PRESS RELEASE ABOUT CHAPTER 11 FILING & DIP FINANCING -------------------------------------------------------------------------- Service Merchandise Files to Restructure Under Chapter 11; Company has Commitment for $750 Million in Post-Petition Financing NASHVILLE, Tennessee -- March 27, 1999 -- Service Merchandise Company, Inc. (NYSE:SME) announced today that in order to implement the next phase of its restructuring process, it has filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Debtor-in-Possession Financing Friday, the Company announced it obtained a commitment for up to $750 million in debtor-in-possession financing to fund the Company's operations during its voluntary restructuring under Chapter 11. The financing, which is subject to Court approval, is being provided by the Company's current senior lenders led by 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. "With [DIP Financing in place], the Company is now in a position to implement the next phase of its restructuring process," Chief Executive Officer Sam Cusano said, adding that the company "appreciate[s] the level of ongoing support demonstrated by our lenders, which will enable Service Merchandise to operate on a business-as-usual basis" while in chapter 11. "With the commitment for DIP financing, we expect to have sufficient funding for all trade, employee and other obligations during the restructuring process," Mr. Cusano stressed. Reason for the Bankruptcy Filing As widely reported last week, Service Merchandise's Board of Directors authorized the Company to commence the voluntary proceedings after an involuntary Chapter 11 petition was filed on March 15 by five merchandise vendors. "After exploring all available alternatives, we believe that a voluntary Chapter 11 proceeding presents the most effective means to restructure our debt and our operations," said Chief Executive Officer Sam Cusano. "Chapter 11 allows us to continue to move forward with our planned improvements in operations and merchandising and allows us to achieve our restructuring objectives in an orderly, timely manner." The Future "With the support of our vendors and the hard work of our employees, we will be able to emerge from this process a stronger, more competitive company," Mr. Cusano stated. "Looking ahead, the $750 million financing package we have arranged will fund our ongoing operations and enable the Company to purchase and pay for goods and services." Service Merchandise said that while it completes its restructuring, the Company's stores, distribution centers and offices will continue to operate as usual. The Company's employees will continue to be paid without interruption, and it will continue to pay for all new product shipments from vendors in the ordinary course of business. The Company said that it expects policies regarding returns, exchanges, layaways, product protection plans and gift certificates to remain unchanged. Personnel Changes On March 24, 1999, the Company announced the appointment of: * Sam Cusano, age 45, as its Chief Executive Officer. Prior to his appointment as CEO, Mr. Cusano served as Executive Vice President and Chief Financial Officer. Mr. Cusano has been with the Company since 1991. He was elected to the Board of Directors in July 1998. * Charles Septer, age 47, to serve as President and Chief Operating Officer of the Company, and was elected to the Board of Directors. Mr. Septer, a long-term Service Merchandise executive, has headed the Company's jewelry organization since 1982, and will lead all of the Company's merchandising and marketing operations going forward. He joined Service Merchandise in 1982 and became Senior Vice President, Jewelry Merchandising in 1988. * C. Steven Moore, Senior Vice President and General Counsel, age 36, to assume the additional role of Chief Administrative Officer. Mr. Moore joined the Company in 1992 and assumed the role of General Counsel and Corporate Secretary in 1996. "Throughout their combined tenures with the Company, Messrs. Cusano and Septer have developed a key understanding of our business, our customers, our vendors and our employees," said Raymond Zimmerman, Chairman of the Board. "Our Board of Directors has the highest degree of confidence in their abilities to lead Service Merchandise as the Company builds the fundamentals for a solid future. Sam Cusano has extensive knowledge of every aspect of Service Merchandise's operations and with his historical perspective as Executive Vice President and a Board member, he is in a unique position to lead the transformation of the Company's business," he noted. "Under Charles Septer's leadership, Service Merchandise's jewelry organization has continued to expand and flourish, despite the significant challenges our Company has faced in recent years. Going forward, we are confident that he will be able to translate the success of our core jewelry business to our Company's overall operations." Jay Alix & Associates, retained by Service Merchandise in January 1999, is expected to continue as financial adviser to the Company. "Our Board of Directors is extremely grateful for the contributions of Jay Alix in this process, and in particular JA&A principal Bettina M. Whyte, who has served as interim CEO of Service Merchandise during these critical past few months. As interim CEO, Ms. Whyte was instrumental in leading the Company in its restructuring process, in particular the reorganization of the Company's cost structure, a process that is now well underway. As the Company proceeds with its restructuring utilizing the Chapter 11 process rather than continuing with its out-of-court restructuring activities, we believe it is the right time to put in place a permanent management team, " Mr. Zimmerman said. "Sam Cusano and Charles Septer bring the experience and talent necessary to successfully reorganize Service Merchandise," Ms. Whyte said, adding that, "The Jay Alix organization looks forward to working with them and the whole Service Merchandise team in continuing to complete this process." -------------------------------------------------------------------------- [00004] SERVICE MERCHANDISE COMPANY CHAPTER 11 DATABASE -------------------------------------------------------------------------- State of PARENT COMPANY: Incorporation ------------- Service Merchandise Company, Inc. Tennessee DEBTOR AFFILIATES FILING SEPARATE CHAPTER 11 PETITIONS: SMC-HC, Inc. Delaware SMC-SPE-1, Inc. Delaware SMC-SPE-2, Inc. Delaware Service Merchandise of Tennessee, L.P. Delaware Service Merchandise of Texas, L.P. Delaware A. F. S. Marketing Services, Inc. Tennessee B. A. Pargh Co., Inc. Tennessee Service Merchandise RM, Inc. [Unknown] The McNally Supply Company Tennessee Promotables, Inc. [Unknown] Service Merchandise Financial Co., Inc. Tennessee Service Merchandise Co. Broad, Inc. Tennessee Service Merchandise Co. No. 30, Inc. Tennessee Service Merchandise Co. No. 34, Inc. Tennessee Service Merchandise Co. No. 35, Inc. Tennessee Service Merchandise Co. No. 93, Inc. Tennessee Service Merchandise Company of Iowa, Inc. Tennessee Service Merchandise Company of Kansas, Inc. Tennessee Service Merchandise Co. of New York, Inc. Tennessee Service Merchandise Office Supply, Inc. [Unknown] Service Merchandise Showrooms, Inc. Tennessee The Toy Store, Inc. Tennessee Travel Management Consultants, Inc. Tennessee Wholesale Supply Company, Inc. Tennessee SMC Aviation, Inc. N.H. Homeowners Warehouse, Inc. Florida Service Merchandise Co. No. 51, Inc. Illinois Service Merchandise Indiana Partners Indiana H. J. Wilson Co., Inc. Louisiana H. J. Wilson Company Realty, Inc. [Unknown] Service Merchandise Co. No. 99, Inc. Nevada NON-DEBTOR AFFILIATES: Service Merchandise Co. No. 80, Inc. Tennessee The Lingerie Store, Inc. Tennessee SerPlus Assurance Co., Ltd. [a Bank Debt Guarantor] [Unknown] Service Credit Corp. [a Bank Debt Guarantor] [Unknown] Consolidated Bankruptcy Case No.: 399-02649 Petition Date: Saturday, March 27, 1999, 9:14 a.m. Court: United States Bankruptcy Court Middle District of Tennessee 701 Broadway, Room 200 Nashville, TN 37203 (615) 736-5590 Judge: The Honorable George C. Paine II, Chief Judge Circuit: Sixth Debtors' Lead Counsel: John Wm. "Jack" Butler, Jr., Esq. Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive Chicago, Illinois 60606 Telephone 312-407-0700 Fax 312-407-0411 Debtors' Local Counsel: Paul G. Jennings, Esq. Bass, Berry & Sims PLC 2700 First American Center Nashville, Tennessee 37238-2700 Telephone 615-742-6200 Fax 615-742-6293 U.S. Trustee: Beth R. Derrick, Esq. Assistant U.S. Trustee Office of the U.S. Trustee for Region VIII 701 Broadway, Room 318 Nashville, TN 37203 Telephone 615-736-2254 Fax 615-736-2260 Financial Condition as of February 28, 1999: Total Consolidated Assets: $1,457,931,000 Total Consolidated Liabilities $1,287,735,000 -------------------------------------------------------------------------- [00005] LIST OF THE DEBTORS' 20 LARGEST UNSECURED CREDITORS -------------------------------------------------------------------------- Creditor Nature of Claim Amount -------- --------------- ------ The Bank of New York, 9% Senior Subordinated as Indenture Trustee Debentures due 2004 $300,000,000 State Street Bank & Trust Company, 8 3/4% Senior Notes as Indenture Trustee due 2001 13,799,000 Icon Health & Fitness Trade 12,625,274 Lucent Technologies Trade 8,269,483 Dorel Industries Trade 6,786,790 Uniden Corporation Trade 5,433,028 O'Sullivan Industries Trade 5,166,431 Meade Instruments Corp. Trade 4,025,529 Remington Products Co. Trade 3,420,748 Samsonite Luggage Co. Trade 2,650,185 Hoover Company Trade 2,650,185 Olympus Camera Corp. Trade 2,553,059 Sharp Electronics Trade 2,460,022 Mattel Toys Trade 2,365,796 Franklin Computer Trade 2,176,055 Eureka Company Trade 2,124,076 Fisher Price, Inc. Trade 2,099,465 Ashley Furniture Trade 1,974,250 Sunbeam Trade 1,772,465 National Presto Industries, Inc. Trade 1,690,151 -------------------------------------------------------------------------- [00006] DEBTORS' MOTION FOR JOINT ADMINISTRATION OF CASES -------------------------------------------------------------------------- The Debtors have requested, pursuant to Rule 1015(b)(4) of the Federal Rules of Bankruptcy Procedure, that the Court order their chapter 11 cases be jointly administered in order to reduce costs and facilitate a more efficient administrative process, unencumbered by the procedural problems otherwise attendant to the administration of multiple chapter 11 cases. Judge Paine granted the Debtors' Motion, ordering that these cases be administered jointly under Case No. 399-02649. Judge Paine makes it clear that this is for procedural purposes only and neither contemplates nor impairs the right of any party-in-interest to seek a substantive consolidation of the Debtors' estates. -------------------------------------------------------------------------- [00007] WHAT HAPPENS TO SERVICE MERCHANDISE COMMON STOCK & PUBLIC BONDS? -------------------------------------------------------------------------- After a company files for bankruptcy, its debt and equity securities will continue to trade so long as there's a market (i.e., willing buyers and sellers) for those securities. The New York Stock Exchange will -- as in all bankruptcy situations -- append a Q to the Company's stock symbol. Accordingly, in a few days, the official symbol under which Service Merchandise's common stock trades will change from SME to SMEQ. Until the Company fails to meet the NYSE's listing criteria -- see http://www.nyse.com for further details -- Service Merchandise stock will continue to trade on the NYSE, just under the new SMEQ symbol. Before the conclusion of the chapter 11 case, it would not be surprising for the NYSE to question whether the shares should be delisted. If the shares were delisted from the NYSE, the stock would then trade in the so-called pink sheets. Again, so long as there's a market, securities continue to trade. Friday, SME shares closed at 15/16. Now that the Company has entered the chapter 11 process, it is prohibited from paying pre-petition debts except pursuant to the terms of a plan of reorganization or with the express permission of the Bankruptcy Judge. Bondholders, vendors, service providers, etc., are similarly-situated general unsecured creditors whose claims must be treated equally. With this in mind, the Company will not make further interest payments on the 9% Senior Subordinated Debentures or the 8 3/4% Senior Notes. Friday, DLS Capital Partners, Inc., indicated that the 9% Senior Subordinated Debentures due 2004 were trading at 25-26. *** End of Issue No. 1 ***