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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: February 25, 2000
SERVICE MERCHANDISE COMPANY, INC.
(Debtor-in-Possession as of March 27, 1999)
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(Exact name of registrant as specified in its charter)
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Tennessee 1-9223 62-0816060
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(State or other jurisdiction of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
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7100 Service Merchandise Boulevard, Brentwood, TN 37027
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 660-6000
Not Applicable
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(Former name or former address, if changed since last report)
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Item 5. Other Events
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See attached press release.
On February 21, 2000 Service Merchandise Company, Inc. (the "Company")
and Fleet Retail Finance Inc. ("Fleet") entered into a commitment letter
pursuant to which Fleet committed to provide a Debtor-in-Possession Revolving
Credit Facility and a post-confirmation Revolving Credit Facility (collectively
the "Facility") to the Company in the maximum principal amounts of $600,000,000,
a copy of which is filed herewith as Exhibit 99.2.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
SERVICE MERCHANDISE COMPANY, INC.
Date: February 25, 2000 By: /s/ Thomas L. Garrett, Jr.
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Thomas L. Garrett, Jr.
Senior Vice President, Chief Financial
Officer
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EXHIBIT INDEX
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No. Exhibit
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99.1 Press release dated February 22, 2000
99.2 Commitment Letter and Term Sheet of Fleet Retail Finance Inc. for Debtor-in-
Possession Credit Facility and post-confirmation Revolving Credit Facility dated
February 21, 2000.
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EXHIBIT 99.1
Contact: Sitrick And Company
Ann Julsen
Brenda Adrian
(615) 660-4480
(310) 788-2850
FOR IMMEDIATE RELEASE
SERVICE MERCHANDISE ANNOUNCES 1999 RESULTS AND 2000 BUSINESS PLAN;
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
NASHVILLE, TENNESSEE - FEBRUARY 22, 2000 - 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.
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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
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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
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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
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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
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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
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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.
Service Merchandise and its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Middle
District of Tennessee in Nashville on March 27, 1999.
Service Merchandise Company, Inc. operates 221 stores in 32 states.
Customers may also shop by phone at 800-JEWELRY and on the web at
www.servicemerchandise.com.
* * * * * * * * * * * *
This press release includes certain forward-looking statements (statements
other than with respect to historical fact, including statements relating to its
2000 Business Plan, its expected plan of reorganization and its expected DIP and
exit credit facility) 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. These forward-looking
statements are based on a variety of assumptions that may not be realized and
are subject to significant business, economic, judicial and competitive
uncertainties and potential contingencies, including those set forth below, many
of which are beyond the Company's control. 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 forward-looking statements and 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: approval of plans
and activities by the Bankruptcy Court, including the proposed Fleet Retail $600
million DIP and Exit Credit Facilities, proposed enhancements to the Company's
existing employee retention program including the proposed enhanced severance
program, and the Company's proposed strategic real estate initiatives; the
ability of the
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Company to continue as a going concern; the ability of the Company to operate
pursuant to the terms of the present DIP Facility and to close and operate
pursuant to the new DIP and exit credit facility; the ability of the Company to
conduct successful clearance sales in connection with the 2000 Business Plan;
the ability of the Company to sublease successfully portions of its real estate
in connection with the 2000 Business Plan; the ability of the Company to
complete its store refurbishment program within cost and time expectations; the
successful implementation of the consolidation of its distribution centers;
risks associated with third parties seeking and obtaining Court action to
terminate or shorten the exclusivity period, the time for the Company to accept
or reject executory contracts including its store leases, and for appointment of
a Chapter 11 operating trustee or to convert the Company's reorganization cases
to liquidation cases; the ability of the Company to operate successfully under a
Chapter 11 proceeding, achieve planned sales and margin, and create and have
approved a reorganization plan in the Chapter 11 Cases; potential adverse
developments with respect to the Company's liquidity or results of operations;
the ability of the Company to obtain shipments, negotiate and maintain terms
with vendors and service providers for current orders; the ability to fund and
execute a Year 2000 Business Plan; the ability of the Company to achieve
cost-savings; the ability of the Company to enter into satisfactory arrangements
with third parties with respect to real estate and internet related strategies;
the ability of the Company to attract, retain and compensate 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 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; potential
adverse publicity; real estate occupancy and development costs, including the
substantial fixed investment costs associated with opening, maintaining or
closing a Company store; uncertainties with respect to continued public trading
in the Company's securities; the ability to effect conversions to new
technological systems; and the ability to develop, prosecute, confirm and
consummate one or more plans of reorganization with respect to its Chapter 11
cases.
# # #
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EXHIBIT 99.2
February 21, 2000
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
Attn: Mr. Sam Cusano
Re: Debtor-in-Possession Credit Facility
Dear Mr. Cusano:
1. COMMITMENT
We are pleased to advise you of the commitment of Fleet Retail Finance
Inc., subject to the terms and conditions hereof, to provide a
Debtor-in-Possession Revolving Credit Facility and a post-confirmation
Revolving Credit Facility (collectively, the "FACILITY") to Service Merchandise
Company, Inc., a debtor and debtor-in-possession under Case No.399-02649 pending
in the United States Bankruptcy Court (the "BANKRUPTCY COURT") for the Middle
District of Tennessee (referred to herein as the "COMPANY" or the "BORROWER")
which is contemplated on the Debtor-In-Possession and Exit Facility Term Sheet
(the "TERM SHEET") annexed to this letter as EXHIBIT A.
2. AGENT
Fleet Retail Finance Inc. (in such capacity, the "AGENT") will act as
Agent for itself and other lenders and participants in the Facility.
3. SYNDICATION.
The Agent's affiliate, FleetBoston Robertson Stephens Inc. (the
"SYNDICATION MANAGER") will act as the exclusive syndication manager for the
Facility and, in such capacity, will perform the duties and exercise the
authority customarily associated with such role. No additional agents, arrangers
or syndication managers will be appointed with respect to the arrangement and
syndication of the Facility without the consent of the Borrower and the
Syndication Manager. Syndication Manager may syndicate all or any portion of its
commitment hereunder to one or more financial institutions reasonably acceptable
to the Borrower (which, together with the Agent in its capacity as a lender, are
referred to herein as the "LENDERS") both before and after execution of
definitive documentation for the Facility. Subject to the consent rights of the
Borrower set forth above, Syndication Manager, in consultation with the Company,
will manage all aspects of the syndication, including the selection of lenders,
the determination of when to approach potential lenders, the titles and roles
given various lenders in the syndicate, and the final allocation of the
commitments among the lenders. Syndication Manager shall, in all events, have
the final say concerning all aspects of the syndication. The Agent shall be
released from a portion of its commitment hereunder in an aggregate amount equal
to the commitment of those Lenders which commit and subscribe to the syndicate
assembled by Syndication Manager and execute the definitive credit agreement.
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Service Merchandise Company, Inc.
Attn: Mr. Sam Cusano
February 21, 2000
Page 2
The Borrower will assist Syndication Manager in achieving a timely
syndication, such assistance to include, among other things, (a) direct contact
during the syndication between the Borrower's senior officers, representatives,
and advisors, on the one hand, and prospective lenders, on the other hand, at
such times and places as the Agent may reasonably request; (b) providing the
Agent with all such financial and other information in the Borrower's possession
with respect to the Borrower and the transactions contemplated by this Letter,
including but not limited to financial projections and forecasts relating to the
foregoing which Syndication Manager reasonably may request from time to time;
and (c) assistance in the preparation of a confidential information memorandum
and other marketing materials to be used in connection with the syndication.
4. CONDITIONS.
The commitment of the Agent and Syndication Manager, as expressed in
this letter, is subject to those conditions set forth on the term sheet. In
addition, this Letter and the Term Sheet are subject to the following:
(a) The preparation, execution, and delivery of a mutually acceptable
Loan and Security Agreement and other loan documentation incorporating
the terms and conditions set forth in the Term Sheet and otherwise
consistent with the existing DIP Credit Facility.;
(b) There not having occurred or becoming known to the Agent any
material adverse change in the financial condition, operation or assets
of the Borrower;
(c) All fees and reimbursable expenses of the Agent (including, without
limitation, attorneys' fees) then due and payable shall have been paid
in full;
(d) No default or event of default shall exist under the definitive
loan documents evidencing the Facility at the time of closing; and
(e) The entry by the Bankruptcy Court on or before May 31, 2000 of a
Final Order, in form and substance satisfactory to the Agent, in its
discretion, approving the Facility and the loan documentation
evidencing same. The Final Order shall provide the Lenders with, among
other things, a super-priority first security interest in and to all of
the Borrower's assets (subject to the exceptions set forth in the Term
Sheet), and shall otherwise contain substantially the same terms and
conditions as are contained in the Final Order approving the existing
DIP Credit Facility.
5. INDEMNIFICATION
Whether or not the transactions contemplated hereby are consummated,
the Borrower agrees to indemnify and hold harmless Syndication Manager, the
Lenders, the Agent, any participants, and
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Service Merchandise Company, Inc.
Attn: Mr. Sam Cusano
February 21, 2000
Page 3
their respective directors, officers, employees, affiliates, agents, attorneys,
accountants, consultants and each other entity, if any, who controls Syndication
Manager, any Lender, the Agent, or any such participant, and to hold such
persons and entities (each, an "INDEMNIFIED PERSON") harmless from and against
all losses, claims, damages, liabilities and expenses, joint or several, to
which any such person or entity may become subject arising out of or in
connection with this Letter, the Term Sheet, the Facility, the use of proceeds
of the extensions of credit thereunder or any related transaction or any claim,
litigation, investigation or proceeding relating to any of the foregoing,
regardless of whether any of such Indemnified Persons is a party thereto, and to
reimburse each Indemnified Person upon demand for any reasonable legal or other
expenses incurred in connection with investigating or defending any of the
foregoing; provided, however, the foregoing indemnification shall not be
available, as to any Indemnified Person, on account or in respect to any claim
as to which there is a final determination made in a judicial proceeding (in
which the Agent and such party have had an opportunity to be heard), which
determination includes a specific finding that the person seeking
indemnification pursuant hereto had acted in a grossly negligent manner or in
actual bad faith.
If for any reason the foregoing indemnification is unavailable to any
Indemnified Person or insufficient to hold it harmless, then the Borrower shall
contribute to the amount paid or payable by such Indemnified Person as a result
of such loss, claim, damage or liability to the maximum amount legally
permissible. The Borrower also agrees that neither any Indemnified Person, nor
any of their respective affiliates, partners, directors, agents, employees or
controlling persons, shall have any liability to the Borrower, any person
asserting claims on behalf or in right of the Borrower or any other person in
connection with or as a result of either this arrangement or any matter referred
to herein or in the loan documentation except to the extent that there is a
final determination made in a judicial proceeding, which determination includes
a specific finding that the losses, claims, damages, liabilities or expenses
incurred by the Borrower resulted from the gross negligence or bad faith of such
Indemnified Person.
No Indemnified Person shall be liable for any indirect, special,
punitive, or consequential damages in connection with its activities related to
the Facility. The within indemnification shall survive any closing on the
Facility.
6. REIMBURSEMENT
The Borrower shall reimburse Syndication Manager and the Agent from
time to time on demand for reasonable out-of-pocket expenses (including, but not
limited to, reasonable expenses of due diligence investigation, reasonable
syndication expenses, reasonable travel expenses and reasonable fees,
disbursements and charges of its counsel), in each instance incurred in
connection with the Facility and the preparation of this Letter, the Term Sheet
and the definitive documentation for the Facility.
<PAGE> 4
Service Merchandise Company, Inc.
Attn: Mr. Sam Cusano
February 21, 2000
Page 4
7. CLOSING
This letter may be accepted by the Borrower by signing below and
returning this letter, so signed on or before February 22, 2000, which
acceptance shall be subject to Bankruptcy Court approval. The Borrower shall (i)
within five (5) business days after the execution hereof by the Borrower pay the
Agent the EXPENSE DEPOSIT (so referred to herein) of $250,000.00 towards the
appraisal, commercial finance examination, legal and other costs and expenses
incurred by the Agent in connection with the transaction contemplated by this
letter, and (ii) upon entry of the Order described below or such earlier time as
the Borrower and the Agent may agree, pay the Agent that portion of the Closing
Fee (0.25% of the Commitment Amount) required to be paid pursuant to the Term
Sheet (the "Upfront Fee"). In all events, the Borrower shall be obligated to pay
or reimburse the Agent for any expenses reasonably incurred by each, whether or
not the Facility is closed. In the event that either this letter is not accepted
by February 22, 2000, or a hearing seeking the entry of a Bankruptcy Court order
(the "Order") approving this commitment letter and the financing contemplated
hereby is not held on or before April 4, 2000, or the Order is not entered and
the Upfront Fee paid by April 15, 2000, this letter shall be void and of no
effect.
If this letter is so accepted, then, subject to the terms and
conditions of this letter, the Agent and the Lenders would be obligated to
establish the Facility if all conditions precedent thereto are satisfied (as
reasonably determined by the Agent and both Lenders) on or before May 31, 2000.
The closing, in such event, would take place at the offices of counsel to the
Agent. If the closing does not take place by May 31, 2000, the obligations of
the Agent and the Syndication Manager hereunder shall be terminated.
If the Facility is so established, then the Expense Deposit will be
credited towards the appraisal, commercial finance examination, legal and other
fees and expenses incurred by the Agent. If the Facility is not so established,
the Expense Deposit, net of appraisal, commercial finance examination, legal and
other fees and expenses incurred by the Agent in connection with the transaction
contemplated by this letter and the Term Sheet, will be refunded to the
Borrower, provided, however, the Borrower shall remain obligated to reimburse
the Agent for any such expenses incurred in connection with the transaction
contemplated by this letter and not covered by the Expense Deposit.
The Upfront Fee shall be fully earned upon payment and shall not be
refunded in whole or in part under any circumstances (whether or not the
Facility is established).
This letter does not constitute a final and binding commitment to lend.
Such a commitment will exist only following: execution and delivery of
definitive loan documents (each in form satisfactory to the Agent and each
Lender); the recordation of such instruments and documents as the Agent
reasonably determines to be appropriate under the circumstances; and the
satisfaction of all conditions precedent referenced herein, in the Term Sheet,
or in any of the loan documents.
<PAGE> 5
Service Merchandise Company, Inc.
Attn: Mr. Sam Cusano
February 21, 2000
Page 5
8. NONTRANSFERABILITY OF COMMITMENT
The identity of the Borrower is of material importance to the Agent and
each Lender. Consequently, this commitment may not be assigned or transferred by
the Borrower. The Agent and each Lender may assign its obligations (a) under
this commitment to any present or future affiliate of the Agent or any such
Lender, or (b) under the Facility in accordance with the loan documentation.
9. WAIVER OF JURY TRIAL.
The Borrower, Syndication Manager, the Agent and each Lender makes each
of the following waivers knowingly, voluntarily, and intentionally, and
understands that the Agent, in providing this letter, and the Borrower in
accepting this letter, are each relying on such waivers.
THE BORROWER, SYNDICATION MANAGER, THE AGENT AND EACH LENDER
WAIVES THE FOLLOWING:
THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN
WHICH THE BORROWER, SYNDICATION MANAGER, THE AGENT, OR ANY LENDER TO
WHICH A PART OF THE REVOLVING CREDIT IS SYNDICATED OR PARTICIPATED, IS
OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR
AGAINST THE BORROWER, SYNDICATION MANAGER, THE AGENT, AND/OR SUCH
LENDER OR PARTICIPANT OR IN WHICH THE BORROWER, SYNDICATION MANAGER,
THE AGENT, OR SUCH LENDER OR PARTICIPANT, IS JOINED AS A PARTY
LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF,
ANY RELATIONSHIP AMONGST OR BETWEEN THE BORROWER, SYNDICATION MANAGER,
OR ANY OTHER PERSON AND, SYNDICATION MANAGER, THE AGENT OR SUCH LENDER.
10. GOVERNING LAW.
This letter, the Term Sheet, the Facility, and the loan documentation
evidencing the Facility shall be governed by, and construed in accordance with
the law of the Commonwealth of Massachusetts, without regard to conflicts of
laws principles.
<PAGE> 6
Service Merchandise Company, Inc.
Attn: Mr. Sam Cusano
February 21, 2000
Page 6
If the foregoing is in accordance with your understanding of our
Agreement, please sign this letter in the space indicated below and return it to
the Agent.
Very truly yours,
FLEET RETAIL FINANCE INC.
/s/ Betsy Ratto
-------------------------------------
By: Betsy Ratto
Title: Managing Director
The foregoing is agreed to:
SERVICE MERCHANDISE COMPANY, INC.
By /s/ Thomas L. Garrett, Jr.
------------------------------
Title: SVP & CFO
Dated: 2/21/00
<PAGE> 7
SERVICE MERCHANDISE, INC.
DEBTOR-IN-POSSESSION AND EXIT FACILITY TERM SHEET
FEBRUARY 21, 2000
Borrower: Service Merchandise, Inc. (the "Borrower") as debtor and
debtor-in-possession under Chapter 11 of the Bankruptcy
Code. For the Exit Facility, the "Borrower" may be, at
Service Merchandise's future election (and subject to
completion of satisfactory legal due diligence by the
Facility Agent with respect thereto), either a newly formed
holding company or one or more newly formed operating
companies, so long as all subsidiaries of Service
Merchandise (or its parent, if applicable) provide secured
guaranties of the Exit Facility.
Agent: Fleet Retail Finance, Inc. ("FRF"), as administrative agent
(the "Facility Agent") for itself and other lenders (as
defined below).
Collateral Agent: Fleet Retail Finance, Inc. (the "Collateral Agent").
Underwriter: FleetBoston Robertson Stephens, Inc. ("FBRS")
Lenders: The Facility Agent will provide the Borrower with a fully
underwritten and committed $600,000,000 facility as
described below. Facility Agent expressly reserves the right
to syndicate part of such facility to other financial
institutions reasonably satisfactory to the Borrower
(collectively including FBNA, the "Lenders").
Closing Date: The closing for the DIP Facility shall occur on or before
May 31, 2000 and concurrent with or following the entry of
an order by the United States Bankruptcy Court of Tennessee
(the "Court") approving the DIP Facility (the "Financing
Order") provided that there is no stay of the order pending
at such time (the "DIP Closing Date"). The Closing for the
Exit Facility (the "Exit Closing Date") will occur on or
after the effective date of the substantial consummation of
Borrower's Plan of Reorganization (the "Plan").
Facility: The Facility shall consist of a debtor-in-possession
revolving credit facility in the maximum principal amount of
$600,000,000 (the "DIP Facility") converting into a
post-confirmation revolving credit facility ("Revolver") in
the maximum principal amount of $600,000,000 the "Exit
Facility"), (together, the "Facilities). The maturity of the
Revolver shall be no later than four years from the closing
of the DIP Facility. The Facility Agent reserves the right
to allocate up to $85,000,000 of the Revolver to a term
loan. A Swingline Facility shall be established to
facilitate borrowings consistent with the Existing DIP
Facility.
With respect to either Facility, the sum of direct
borrowings plus letter of credit outstandings and unpaid
reimbursement obligations in respect of letters of credit
shall not exceed $600,000,000. Furthermore, the sum of
direct borrowings under either Facility plus letter of
credit outstandings and unpaid reimbursement obligations
minus fully cash collateralized secured letters of credit
(as provided below) shall not exceed the Borrowing Base as
provided below. Both Facilities will have a sublimit of
$150,000,000 for documentary and standby letters of credit
to be issued by the Facility Agent and such other Lenders
selected by the Borrower and willing to act as an Issuing
Bank.
Availability: During the term of both Facilities, revolving credit loans
will be available daily upon notice (if received prior to
3:00 p.m. Boston time on that day) for Base Rate Loans and
upon two business days notice, and in minimum amounts of
$1,000,000 or larger integral multiples thereof, for
Eurodollar loans. The Borrower may not have more than
fifteen eurodollar loans outstanding at any one time.
Letters of credit will be available upon notice customary
for facilities of this type in agreed upon amounts. Except
as set forth above, the mechanics of borrowing and Letter of
Credit provisions will be consistent with the Existing DIP
Facility.
<PAGE> 8
Termination Date: All obligations under the DIP Facility, if not converted
into the Exit Facility, will be due and payable and all
commitments under the DIP Facility shall be permanently
terminated, upon the substantial consummation of the
Borrower's Plan of Reorganization which is confirmed
pursuant to a final order entered by the Court, or, if
earlier, four years from the DIP Closing Date (the "DIP
Termination Date"). All obligations under the Exit Facility
must be repaid in four years from the DIP Closing Date and
no letter of credit shall be issued after or expire (unless
cash collateralized in an amount equal to 103% of the
maximum drawing amount thereof) later than such termination
date (the "Exit Termination Date"). Letters of credit
outstanding on the thirtieth (30th) day prior to the later
of the DIP Termination Date or the Exit Termination Date
shall be cash collateralized or secured as provided below.
Prepayments;
Repayments: Loans shall be repaid under the DIP Facility on a daily
basis from the proceeds of collections in the Borrower's
cash concentration account at FleetBoston, NA (FBNA), as
provided below. Daily payment of proceeds under the Exit
Facility will be subject to the Cash Management provisions
below. Immediate prepayment shall be required if and to the
extent that outstandings under either Facility exceed any
availability limitations thereunder. The Borrower shall also
immediately (and in any event on the same business
day, provided notice is given to the Borrower before 2 p.m.)
reimburse FBNA for any drawing under any letter of credit.
Subject to applicable conditions, amounts prepaid under
either Facility may be reborrowed prior to maturity. All DIP
and Exit Facility loans repaid or prepaid shall not be
charged a premium or penalty except for breakage costs
associated with Eurodollar Loans as provided below.
Interest: All loans outstanding under the Facilities shall bear
interest at FBNA's Alternate Base Rate in effect from time
to time plus the Base Rate Margin per annum or, at the
Borrower's option, so long as no event of default has
occurred and is then continuing, at the fully reserve
adjusted Eurodollar rate plus the Eurodollar Margin for
interest periods of one (1), two (2), three (3), and (6) six
months.
The interest rate will be subject to adjustment one year
from the DIP Closing Date through the Exit Facility
Termination Date, based on the following performance
parameters:
Initial pricing will be at Level II on the grid below.
<TABLE>
<CAPTION>
=================================================================================
Level EBITDA Availability Eurodollar Base Rate
Margin Margin
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
I N/A Less than 2.75% 1.00%
$50,000,000
II N/A Greater than 2.50% 0.75%
$50,000,000 but
less than or
equal to
$75,000,000
III Greater than Greater than 2.25% 0.50%
$50,000,000, $75,000,000
but less than
or equal to
$75,000,000
IV Greater than Greater than 2.00% 0.25%
$75,000,000 $75,000,000
================================================================================
</TABLE>
The Company will become eligible for a pricing adjustment
twelve months from closing. Thereafter, the pricing will be
reviewed each fiscal quarter. The applicable pricing Level
will be that in which both tests are met; if only one of the
tests in any Level is met, then
2
<PAGE> 9
pricing will be in the next higher Level (with Level I being
the highest Level and Level IV the lowest). For purposes of
this pricing grid, EBITDA shall be calculated on a trailing
twelve month basis.
FBNA's Alternate Base Rate shall be defined as the higher of
(i) the annual rate of interest announced from time to time
by FBNA at its head office in Boston, Massachusetts, as its
"Base Rate" or (ii) one-half of one percent (.50%) above the
Federal Funds Effective Rate. Federal Funds Effective Rate
shall mean for one day, the rate per annum equal to the
weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System
arranged by federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New
York, or, if such rate is not published for any day that is
a Business Day, the average of the quotations for such day
on such transactions received by FBNA from three funds
brokers of recognized standing selected by FBNA.
Loans bearing interest based on the Alternate Base Rate
shall herein be referred to as "Base Rate Loans" and loans
bearing interest based on the fully reserve adjusted
Eurodollar rate shall herein be referred to as "Eurodollar
Loans". For both Facilities, interest on Base Rate Loans
shall be payable quarterly in arrears on the first business
day of each calendar quarter following the quarter in which
such interest accrued, commencing on the first such date
after the DIP Closing Date, and at maturity. Interest on all
Eurodollar Loans shall be payable at the end of the
applicable interest period. The Borrower will be responsible
on the terms set forth in the Existing DIP Facility for all
costs related to the termination for any reason of any
Eurodollar Loan prior to its maturity.
Letter of Credit
Fees: For standby letters of credit, a fee equal to the Eurodollar
Margin less 25 basis points per annum shall be applicable
and for documentary letters of credit a fee equal to 1.25%
per annum shall be applicable (the "L/C Fees") on the
maximum amount available to be drawn under each letter of
credit. All L/C Fees will be payable to the Facility Agent
(for the pro-rata account of the Lenders), quarterly in
arrears based on the average daily outstanding balance of
all such letters of credit. In addition, the Borrower will
pay to the applicable Issuing Bank an issuance fee of 0.125%
per annum on the maximum amount available to be drawn under
each such standby or documentary letter of credit and
customary and usual fees to cover the costs of negotiation,
settlement, amendments and processing.
Letters of Credit Letters of credit will support such obligations as may be so
supported under the Existing DIP Facility. At the request of
the Borrower, letters of credit will be issued under the DIP
Facility on the DIP Closing Date to support documentary
and/or standby letters of credit outstanding on the DIP
Closing Date which have been issued by other financial
institutions. Letters of credit issued under either Facility
will have expiry on terms consistent with the Existing DIP
Facility.
On the thirtieth (30th) day prior to the later of the DIP
Termination Date or the Exit Termination Date, each letter
of credit then outstanding shall be (a) cash collateralized
in an amount equal to 103% of the maximum amount available
to be drawn under such letter of credit or (b) secured by a
"back-to-back" letter of credit in form and substance and
issued by a bank reasonably satisfactory to the Facility
Agent, in an amount equal to 103% of the maximum amount
available to be drawn under such letter of credit (it being
understood that from time to time such cash collateral will
be released, and such back-to-back letters of credit may be
reduced, to the extent that amounts available for drawing
under the applicable letters of credit are reduced). If
letters of credit are issued, amounts available for drawing
under letters of credit and amounts drawn and remaining
3
<PAGE> 10
unreimbursed thereunder will reduce the amount available for
borrowing under both Facilities.
Agency Fee: See "Fee Letter Addendum".
Borrowing Base: The Borrowing Base for the Facilities shall be an amount
equal to the lesser of $600,000,000 or the Borrowing Base,
which shall be defined as follows:
(i) 70% of the cost value of Eligible Adjusted Inventory
(including eligible clearance inventory under the 2000
Business Plan) and Eligible LC Inventory from
January 1 - August 31 and 75% of Eligible Inventory
and Eligible LC Inventory from September 15 - December
15, plus;
(ii) 80% Eligible Accounts Receivable, plus;
(iii) 54.5% Eligible Owned Real Estate (Based upon an
Alternative Use Appraisal), plus;
(iv) 25% Eligible Leasehold Real Estate (for DIP Facility
only), plus
(v) 100% of Intransit Cash and cash collateral (i.e.
pledged cash equivalents) and, minus;
(vi) Reserves, as set forth in the Existing DIP Facility.
Amounts available under clauses (iii) and (iv), above, shall
at no time exceed $115,000,000 in the aggregate. In
connection with the Borrower's emergence from Chapter 11,
the Facility Agent may, in its discretion, continue to
advance 25% of eligible leasehold real estate subsequent to
the Exit Closing Date, subject to the terms of this term
sheet and the applicable loan documents.
Upon exit, subject to the Facility Agent's consent and the
completion of due diligence reasonably satisfactory to the
Facility Agent, the Facility Agent will consider providing
an advance of up to 80% of Eligible Consumer Credit Card
Receivables. Additionally, on a best efforts basis and
subject to the completion of due diligence reasonably
satisfactory to FBRS, FBRS would look to actively structure
a securitization of the Company's Consumer Credit Card
Receivables to the extent owned or purchasable.
The Facility Agent will have the discretion to raise the
Inventory Advance Rate by up to 250 basis points, subject to
a maximum loan to appraised value of 85% on such inventory
collateral based on appraisals completed during the tenure
of the Facilities.
Except as otherwise provided herein, Eligible Adjusted
Inventory and other components of the Borrowing Base will be
defined in the same manner as set forth in the Existing DIP
Facility.
The Facility Agent shall be entitled to obtain periodic
inventory liquidation analysis performed by an appraisal
firm chosen by the Facility Agent and a follow-up reviews of
the Borrower's books and records to be conducted by a
commercial finance audit firm chosen by the Facility Agent,
in each case on the terms set forth in the Existing DIP
Facility. The Facility Agent shall be entitled to obtain (a)
prior to the occurrence of an Event of Default, updated real
estate appraisals on all eligible owned real estate and
eligible leasehold real estate bi-annually, at the
Borrower's expense, (b) without duplication of appraisals
pursuant to clause (a) hereof, updated real estate
evaluations (not constituting a full appraisal) on all
eligible owned real estate and eligible leasehold real
estate annually, at the Borrower's expense, and (c) during
the occurrence of an Event of Default, updated real estate
appraisals and evaluations on all eligible owned real estate
and eligible leasehold real estate, at the Borrower's
expense, at reasonable intervals. Without limiting the
foregoing, the Facility Agent will commence undertaking such
real estate appraisals upon the Borrower's owned real estate
upon the date that the attached commitment letter is
executed, to the end that such appraisals shall be completed
at or
4
<PAGE> 11
about the DIP Closing Date (provided that the completion of
such appraisals shall not be a condition to such closing).
Eligible Inventory will include letter of credit inventory
which will be limited to the cost value of any letter of
credit, which has an expiry within 120 days of its inclusion
as eligible letter of credit inventory. Such letters of
credit included as eligible will be issued for the receipt
of inventory, which inventory has not been received and has
not otherwise been included in Eligible Inventory described
above.
Reserves: Inventory availability reserves may be established by the
Collateral Agent from time to time on the terms of the
Existing DIP Facility. Initial reserves will be the same as
those set forth in the Existing DIP Facility, it being
understood that additional reserves may be taken in respect
of inventory discontinued under the 2000 plan and not sold
prior to the end of July, 2000. Further, in the event that
amounts available to be borrowed under clause (i) of the
definition of Borrowing Base exceed 85% of appraised value
of such Inventory, the Facility Agent shall institute a
reserve up to the amount of such excess on account thereof.
Changes to reserves will be initiated on ten business days
notice to the Borrower.
Purpose: To repay in full the Existing DIP Facility and to fund
working capital needs and for general corporate purposes and
to provide Chapter 11 Exit Financing subject to the
conditions outlined herein.
Unused Commitment
Fees: A commitment fee (the Commitment Fee") in the amount of
0.375% per annum on the average daily unused amount of the
Facilities will accrue for the pro-rata benefit of all the
Lenders. The aggregate amount of outstanding Letters of
Credit will be treated as a use of the Facilities in such
amount for purposes of calculating the Commitment Fee. The
Commitment Fee will be payable for the period from the DIP
Closing Date to the later of the DIP Termination Date or the
Exit Termination Date, quarterly in arrears on the first
business day of each quarter commencing on the first such
date after the DIP Closing Date with final payment due upon
the later of the DIP Termination Date or the Exit
Termination Date.
Structuring Fee: See "Fee Letter Addendum"
Closing Fee: See "Fee Letter Addendum".
Transaction
Expenses: The Borrower will seek Bankruptcy Court Approval on the
terms set forth in the commitment letter for an expense
deposit of $250,000.00 to cover Lender's costs in due
diligence, including legal costs and the cost of the owned
real estate appraisal. Any unused due diligence deposit will
be returned to the Borrower.
Nature of Fees: Non-refundable under all circumstances except for any unused
amount of the Transaction Expenses.
Calculations,
Payments: All computations of interest and fees shall be based on a
365-day year for Base Rate Loans and a 360-day year for
Eurodollar Loans and paid for the actual number of days
elapsed. All payments shall be made to the Facility Agent in
United States dollars in immediately available funds.
Default Interest: Upon the occurrence and during the continuance of an Event
of Default at the Facility Agent's discretion, or at the
request of the Required Lenders, by notice to the Borrowers,
and notwithstanding any otherwise applicable interest rate,
the interest rate shall be the greater of the interest rate
then in effect plus two percent per annum, or FBNA's
Alternate Base Rate plus 2.00% per annum.
5
<PAGE> 12
Cash Concentration
Account: No later than the DIP Closing Date, and subject to the other
provisions of this section, FBNA will become (and shall
remain throughout the term of both Facilities) the
concentration bank for the Borrower's cash management
system. All collections and proceeds from assets sales will
be deposited either directly into an account with FBNA or
into an account at institutions for which the Facility Agent
has in place an agency agreement substantially similar as
those in effect under the Existing DIP Facility or otherwise
reasonably satisfactory to it in its sole discretion (it
being understood that, in the case of the DIP facility,
only, delivery of the court order to such effect to the
applicable primary depository banks shall be required). The
primary concentration bank (Citibank) will be required to
sign an agency agreement. The Borrower shall be allowed to
retain proceeds in its stores, and in transit and petty cash
in amounts consistent with the Existing DIP Facility as well
as up to an additional $15,000,000 at any time. Subject to
the following sentences, after establishment of the Exit
Facility, the Borrower may at its election retain control of
cash, provided that the Facility Agent at all times has in
place the Agency Agreements referred to above. Should the
Borrower fall below $40MM in excess availability during the
tenure of the Exit Facility for ten (10) consecutive
business days (a "Cash Dominion Event"), the Facility Agent
will have the right to re-institute the control of cash
provisions set forth above. Once a Cash Dominion Event has
occurred, the Facility Agent shall have the right to
continue the effectiveness of the cash control provisions
set forth above until such time as excess availability is
equal to or in excess of $50,000,000.00 for thirty (30)
consecutive days.
During the term of the DIP Facility and thereafter during
the continuation of a Cash Dominion Event, all amounts in
accounts at institutions referred to above (other than FBNA)
shall be swept daily into the FBNA cash concentration
account and applied as follows: first to pay amounts due and
payable under the DIP Facility or Exit Facility whichever is
applicable (other than Base Rate Loans and Eurodollar
Loans), second to reduce outstanding Base Rate Loans under
the DIP Facility or Exit Facility whichever is applicable,
third to reduce, or at the Borrower's option, cash
collateralize outstanding Eurodollar Loans under the DIP
Facility or Exit Facility whichever is applicable until the
expiration of the Interest Period therefor (with the
Borrower being obligated to pay any breakage fees associated
with a reduction of Eurodollar Loans), and fourth if a
Default or Event of Default has occurred and is then
continuing, to cash collateralize letters of credit
outstanding under the DIP Facility or Exit Facility
whichever is applicable in an amount equal to 103% of the
maximum amount available to be drawn under such letter of
credit.
As needed, the Facility Agent will charge the concentration
account for the unpaid amount of any and all fees, interest
and other amounts payable under the Facility. So long as no
default or Event of Default has occurred and is then
continuing, excess funds not applied in the manner described
in the preceding paragraph and the preceding sentence shall
be released to the Borrower. Funds swept into the FBNA cash
concentration shall be applied or released as described
above as of the day after funds are received with the
Borrower agreeing to indemnify FBNA against the nonpayment
of any provisional items.
The Borrower may maintain its existing concentration account
arrangements with Citibank, and agency accounts under which
funds are transferred daily to that concentration account so
long as Citibank enters into Agency Agreements substantially
the same as those in effect under the Existing DIP Facility
or otherwise reasonably acceptable to FBNA and pursuant to
arrangements reasonably satisfactory to the Facility Agent,
funds are swept daily from that concentration account to
FBNA's concentration account for application as set forth
above.
Priority and
Security: For the DIP Facility, all direct borrowings and
reimbursement obligations under Letters of Credit shall at
all times be entitled to superpriority claim status under
Section 364(c)(1)
6
<PAGE> 13
of the Bankruptcy Code and have priority over any and all
administrative expenses specified in Bankruptcy Code
Sections 503(b), 507(b), 364(c) or otherwise, subject only
to Permitted Expenses, as defined in the Existing DIP
Facility and other exceptions under the Existing DIP
Facility.
All loans and extensions of credit and other obligations of
the Borrower shall be secured at all times by a first
priority perfected lien on and security interest in all
existing and after acquired assets, properties, and rights
of the Borrower (including, without limitation, inventory,
accounts receivables, general intangibles, equipment,
intellectual property and real estate), whether now owned or
hereafter acquired or arising, and all proceeds thereof
subject only to permitted liens under the Existing DIP
Facility, except that the Exit Facility need not be secured
by a perfected first lien on leasehold interests (except to
the extent that such leasehold interests are included in the
Borrowing Base), liens junior to third party mortgage debt
on owned real estate to the extent not required by the
Facility Agent in its discretion or to the extent that the
pre-petition senior lenders of the Borrower did not have a
junior lien on such property, and other exceptions
reasonably satisfactory to the Facility Agent. In addition,
the Facility Agent shall be named loss payee and additional
insured on all insurance policies relating to property
subject to the Lenders' first priority security interest.
Conditions of Initial
Extension of
Credit: The obligation to provide the initial extension of credit
under the DIP Facility or, as the case may be, the Exit
Facility (such closing conditions to be applicable to both
facilities unless otherwise indicated) shall be subject to
the satisfaction of usual and customary conditions,
including, without limitation, the following conditions:
1. For the DIP Facility, the Bankruptcy Court shall
have entered an order (the "Financing Order") in the Chapter
11 cases reasonably satisfactory to the Facility Agent
approving the transactions contemplated herein and
including, specifically but without limiting the foregoing,
the grant to the Lenders and the Facility Agent of
superpriority status pursuant to Section 364(c)(1) of the
Bankruptcy Code. The Financing Order shall have authorized
extensions of credit in the full amount of the DIP Facility
or otherwise in an amount satisfactory to the Lenders and
shall not have been reversed, modified, amended, or stayed;
2. For the Exit Facility, the final terms of any Plan
to be consummated and the order of the Bankruptcy Court
approving such Plan (the "Confirmation Order") shall be
reasonably satisfactory to the Facility Agent, and the
Borrower shall have met the conditions set forth on Schedule
A. All conditions precedent to confirmation and to the
"Effective Date" under and as defined in the Plan shall have
been met (or the waiver thereof shall have been consented to
by the Facility Agent, such consent not to be unreasonably
withheld) and the "Effective Date" and substantive
consummation of the Plan shall have occurred or shall be
scheduled to occur but for such initial extension of credit
under the Exit Facility. The Confirmation Order shall not
have been reversed, modified, amended, or stayed and, unless
otherwise agreed by the Facility Agent, all appeal periods
relating to the Confirmation Order shall have expired, and
no appeals from the Confirmation Order shall be outstanding.
Except as consented to by the Facility Agent, the Bankruptcy
Court's retention of jurisdiction under the Confirmation
Order shall not govern the enforcement of the loan and
security documents for the Exit Facility or any rights or
remedies relating thereto. The financial condition and
financial projections, including cash flow, of the Borrower
shall be substantially the same as those set forth in the
projections and delivered to the Facility Agent in
connection herewith or otherwise reasonably satisfactory to
the Facility Agent, and the capital structure shall be
reasonably satisfactory to the Facility Agent in all
respects, and the terms of indebtedness (if any) and capital
stock and shall be reasonably satisfactory to the Facility
Agent in all respects.
7
<PAGE> 14
3. Execution of definitive loan documents reasonably
acceptable, (including if requested by the Borrower, by way
of assignment of the Existing DIP Facility), to the Facility
Agent in all respects and delivery of such loan documents
(including a certified Borrowing Base certificate, security
documentation) executed by the Borrower;
4. Receipt of customary and usual closing documents
reasonably satisfactory in form and substance to the
Facility Agent;
5. Legal opinions of counsel to the Borrower reasonably
satisfactory in form and substance to the Facility Agent
including in the case of the Exit Facility only, with
respect to the enforceability, and perfection of the
Facility Agent's security interests;
6. The Borrower shall have paid to the Facility Agent
all fees then payable as referenced herein;
7. For the DIP, the Facility Agent shall have received
and be satisfied with a detailed one year financial
projections and business assumptions. For the Exit Facility,
the Facility Agent shall have received 30 days prior to the
effective date of a Plan of Reorganization a three year
business plan substantially the same as those set forth in
the projections delivered to the Facility Agent in
connection herewith or otherwise reasonably acceptable to
the Facility Agent;
8. Any other information (financial or otherwise)
reasonably requested by the Facility Agent shall have been
received by the Facility Agent and shall be in form and
substance reasonably satisfactory to the Facility Agent;
9. In case of the DIP Facility, the Facility Agent
shall have received results of UCC and real estate title
searches or other evidence reasonably satisfactory to the
Facility Agent (in each case dated as of a date reasonably
satisfactory to the Facility Agent) indicating the absence
of liens on the assets of the Borrower, except for liens
permitted by the loan documentation (see description of
permitted liens in the negative covenant section below) and
liens for which termination statements and releases
reasonably satisfactory to the Facility Agent are being
tendered concurrently with such extension of credit;
10. In the case of the Exit Facility, the Facility
Agent shall have filed all such financing statements and
mortgages or deeds of trust, and notices as may be necessary
for the Facility Agent to perfect its security interest in
the collateral and to assure its first priority status
(subject to permitted liens), including, if requested by the
Borrower, by way of assignment the rights under the Existing
DIP Facility;
11. For the DIP Facility, the Facility Agent shall have
completed and be satisfied with the following due diligence
with respect to the Borrower a follow-up review of the
Borrower's books and records to be conducted by a commercial
finance audit firm chosen by the Facility Agent. In
addition, the Borrower shall have minimum excess
availability of not less than $155 million at closing of the
DIP Facility.
12. There shall not have occurred or become known to
the Facility Agent any material adverse change in the
financial condition, operations or assets of the Borrower;
13. The cash management system described above shall
have been substantially implemented;
14. All corporate proceedings and all instruments and
agreements in connection with the transactions between the
Borrower and the Facility Agent contemplated by the Facility
documents shall be reasonably satisfactory in form and
substance to the Facility Agent
8
<PAGE> 15
and the Facility Agent shall have received all information
and copies of all documents or papers reasonably requested
by the Facility Agent;
15. The Facility Agent shall be reasonably satisfied
with the Borrower's insurance arrangements and shall have
received all documentation requested in connection with such
insurance including, documentation naming the Facility Agent
as "loss payee" under each policy, all proceeds from
insurance shall be subject to the cash management
requirements outlined herein;
16. Any material debt instruments and preferred stock
issued (if any), by the Borrower related to a Plan of
Reorganization shall contain terms reasonably satisfactory
in form and substance to the Facility Agent;
17. For the DIP Facility, a payoff letter reasonably
satisfactory to the Facility Agent from the existing
debtor-in-possession Administrative Agent and tender of
assignment, or release and discharge of all collateral
security.
Conditions of Each
Extension of
Credit: The obligation to provide each extension of credit
(including the initial extension of credit) shall be subject
to the satisfaction of the following conditions:
(a) No continuing default or continuing Event of
Default shall exist or shall result from the requested
extension of credit;
(b) Representations and warranties shall be true and
correct in all material respects at the date of each
extension of credit except to the extent that such
representations and warranties expressly relate to a prior
date, in which case they shall be true and correct in all
material respects as of such earlier date;
(c) Receipt of a notice of borrowing from the Borrower;
(e) The Borrower shall have paid the balance of all
fees then due and payable as referenced herein.
The request by the Borrower of, and the acceptance by the
Borrower of, each extension of credit shall be deemed to be
a representation and warranty by the Borrower that the
conditions specified above have been satisfied and that
after giving effect to such extension of credit the Borrower
shall continue to be in compliance with the Borrowing Base.
Representations
and Warranties: The same as those set forth in the Existing DIP Facility
with the following changes:
(a) Section 5.25 of the Existing DIP Facility shall be
deleted;
(b) With respect to the DIP Facility, no material adverse
change in the operations, business, properties, assets
or financial condition of the Borrower since the date
of the financial statements delivered prior to the date
of the letter to which this Term Sheet is attached
(other than those contemplated by the 2000 Business
Plan) and with respect to the Exit Facility, no
material adverse change in the operations, business,
properties, assets or financial condition of the
Borrower have occurred from that set forth in the
Borrower's financial statements reflecting the Plan
(after the approval of the Plan by the Facility Agent),
other than those contemplated by the Plan;
(c) With respect to the Exit Facility, no litigation which
has not been resolved or fully reserved for under the
Plan which would have a materially adverse effect
9
<PAGE> 16
on the operations, business, properties, assets or
financial condition of the Borrower;
(d) With respect to the Exit Facility, absence of
pre-petition administrative claims or liens other than
those discharged on the Effective Date or those
contemplated by the Plan to survive the Effective Date;
(e) Upon or following the closing of the DIP Facility, the
financing order has been entered has not been stayed
and otherwise remains in effect; and
(f) Upon or following the closing of the Exit Facility, the
Plan has become effective and the confirmation order
has been entered and remains in effect.
Affirmative
Covenants: The same as those forth in the Existing DIP Facility with
the following changes:
(a) Sections 7.12 and 7.15 of the Existing DIP Facility
shall be deleted;
(b) Establish and maintain cash concentration system
with FBNA, it being permitted for the Borrower to use
Citibank as concentration bank, subject to Blocked Account
Agreement, as set forth above;
(c) As soon as practicable, and in any event no less
frequently than on an annual basis and no later than ninety
(90) days following the commencement of the each fiscal
year, deliver to and discussed with the Lenders its future
financial projections; and
(d) With respect to the DIP Facility, upon the
occurrence of any Event of Default, the Borrower shall
execute such mortgages, deeds of trust and UCC financing
statements as the Facility Agent may reasonably request.
Negative
Covenants: The same as those set forth in the Existing DIP Facility
with the following changes:
(a) the "no lien" and indebtedness covenants will be
revised to permit the Borrower to obtain in the future up to
$50,000,000 in junior secured term financing from Back Bay
Capital or such other lender acceptable to the Facility
Agent on terms and conditions reasonably acceptable to the
Facility Agent, which terms shall provide for such Term Loan
to be on a last out basis with a specified additional
advance amount on inventory (by way of example up to 93% of
appraised value);
(b) Financial Covenants:
1) Maximum capital expenditures of $150,000,000 in
the aggregate for FY2000 and FY2001 and $50,000,000
for each fiscal year thereafter. In FY2000, maximum
capital expenditures will be in an amount equal to
$70,000,000 (the "Base CapEx"), plus after August
31, 2000, an amount equal to $650,000 for each
store in excess of sixty-five for which subleases
are executed (the "Additional CapEx"). Capital
expenditures for FY2001 shall not exceed
$150,000,000 less the actual amount of capital
expenditures expended in FY2000. Capital
expenditures for each fiscal year after FY2001 may
be increased by the difference between the amount
permitted for the immediately preceding fiscal year
and the amounts actually expended in such year.
2) Minimum EBITDA which will be tested when
excess availability falls below $50,000,000. The
EBITDA covenant will tested on a cumulative basis
from January 1, 2000 through December 31, 2000 and
thereafter on a trailing twelve month basis.
Subject to the foregoing, minimum EBITDA shall be
in the following amounts:
10
<PAGE> 17
<TABLE>
<CAPTION>
Period Ending Minimum EBITDA
<S> <C>
April 2000 ($60,000,000)
May, 2000 ($58,000,000)
June, 2000 ($60,000,000)
July, 2000 ($63,000,000)
August, 2000 ($69,000,000)
September, 2000 ($72,000,000)
October, 2000 ($74,000,000)
November, 2000 ($70,000,000)
December, 2000 ($12,000,000)
January, 2001 ($13,000,000)
February, 2001 ($14,000,000)
March, 2001 ($11,000,000)
April, 2001 ($8,000,000)
May, 2001 ($5,000,000)
June, 2001 ($2,000,000)
July, 2001 $ 2,000,000
August, 2001 $ 6,000,000
September, 2001 $ 8,000,000
October, 2001 $13,000,000
November, 2001 $15,000,000
December, 2001 $32,000,000
January, 2002 $36,000,000
February, 2002 $42,000,000
March, 2002 $46,000,000
April, 2002 $51,000,000
May, 2002 $56,000,000
June, 2002 $60,000,000
July, 2002 $64,000,000
August, 2002 $67,000,000
September, 2002 $70,000,000
October, 2002 $73,000,000
</TABLE>
11
<PAGE> 18
<TABLE>
<S> <C>
November, 2002 $76,000,000
December, 2002 $84,000,000
January, 2003 and each $85,000,000
month end thereafter
</TABLE>
For purposes hereof, EBITDA shall have the
meaning set forth on Schedule B hereto.
(c) The applicable covenants will be revised to permit,
without the use of existing baskets: (i) lease, sublease or
other transfer of space in the Borrower's stores in
furtherance of the Borrower's strategic plan or leases of
space at the Borrower's headquarters, (ii) the sale
leaseback (or, at the Borrowers election, the outright sale)
of the Borrower's headquarters, Montgomery distribution
center and/or Orlando distribution center, (iii) a credit
card receivable securitization program, and (iv) purchase
money financings and securitizations of existing and future
real property, for prices and upon terms reasonably
satisfactory to the Facility Agent, if the net proceeds
therefrom are not at least equal to 54.5% of the alternate
use appraised value thereof if such property is included in
the Borrowing Base. It is noted that the clearance sales of
inventory contemplated by the Borrowers strategic plan are
already permitted by the provisions of the Existing DIP
Facility.
Events of Default: The same as those set forth in the Existing DIP Facility,
with, in the case of the Exit Facility, such changes as are
reasonably satisfactory to each of the Facility Agent and
the Borrower, it being understood that, for purposes of the
Exit Facility, paragraphs (l) through (t) of section 9 of
the Existing DIP Facility will be replaced with customary
bankruptcy, receivership, etc. based events of default. In
addition, the termination or resignation of both the chief
executive officer and the president of the Borrower shall
constitute an Event of Default unless at least one
replacement reasonably satisfactory to the Facility Agent is
obtained within ninety (90) days thereafter.
Voting: The same as those set forth in the Existing DIP Facility
with such changes as are reasonably satisfactory to each of
the Facility Agent and the Borrower.
Yield Protection
and Increased
Costs: Standard yield protection and indemnification, the same as
those set forth in the Existing DIP Facility with such
changes as are reasonably satisfactory to each of the
Facility Agent and the Borrower.
Costs and
Expenses: All reasonable out-of-pocket costs and expenses of the
Facility Agent and its business and legal advisors
(including, without limitation, reasonable legal fees and
fees of other agents to the Facility Agent; reasonable
expenses in connection with periodic field examinations, the
monitoring of assets, syndication, enforcement of rights and
publicity, and other miscellaneous disbursements) and legal
review costs of the Facility Agent shall be payable by the
Borrower on demand whether or not the transactions
contemplated hereby are consummated.
12
<PAGE> 19
Syndication: The Borrower will provide all information (including pro
forma financial projections for the DIP period), in a form
reasonably acceptable to the Underwriter, necessary for the
preparation of an information memorandum describing the
Borrower and the Facilities. Such package will be
distributed on a confidential basis to selected financial
institutions. In addition, management of the Borrower will,
at the request of the Underwriter, hold themselves and their
advisors available at reasonable times to meet with
potential Lenders and to answer questions during the
syndication process.
If FRF and FRBS determine that changes are advisable in
order to insure a successful syndication, FRF and FRBS shall
be entitled (a) to change the pricing by up to 25 basis
points without the consent of the Borrower, and/or (b) to
change the structure or any other terms of the Facilities
with the consent of the Borrower, which consent shall not be
unreasonably withheld or delayed. The provisions of this
Paragraph shall terminate on the date of entry of a final
order of the Bankruptcy Court approving the DIP Facility.
Assignments and
Participations: Rights and obligations under loan documents and notes to be
assignable by the Facility Agent to Eligible Assignees (to
be defined in a manner satisfactory to the Borrower and the
Facility Agent provided that the Borrower shall have no
consent rights during an event of default) subject to
$10,000,000 minimum amounts. All assignments shall require
the consent of the Facility Agent. The Facility Agent will
receive a processing and recordation fee of $3,000 from each
assignee with each assignment. The Borrower shall not be
required to pay the expenses of the assignor, but shall pay
its own expenses and that of the Facility Agent. Each Lender
shall have the right to sell participations in its loans as
set forth in the Existing DIP Facility, subject to voting
and indemnification limitations.
Indemnity: The Borrower shall indemnify and hold harmless the Facility
Agent and the Lenders and their respective officers,
directors, employees, affiliates, agents and controlling
persons from and against any and all losses, claims, damages
and liabilities to which any such person may become subject
arising out of, or in connection with, this term sheet, the
transactions contemplated hereby or any claim, litigation,
investigation or proceeding relating to any of the
foregoing, whether or not any of such indemnified persons is
a party thereto, and to reimburse each of such indemnified
persons, from time to time upon their demand, for any
reasonable out-of-pocket legal or other expenses incurred in
connection with investigating or defending any of the
foregoing, whether or not the transactions contemplated
hereby are consummated, provided that the foregoing
indemnity will not, as to any indemnified person, apply to
losses, claims, damages, liabilities or related expenses to
the extent that they arise from the bad faith, willful
misconduct or gross negligence of such indemnified person as
finally determined by a final non-appealable order of a
court of competent jurisdiction.
Documentation: Except as modified hereby, the same documentation for the
Existing DIP Facility, with such changes thereto as are
reasonably satisfactory in form and substance to the
Facility Agent and the Borrower.
Governing Law: All loans and related documents shall be governed by, and
construed in accordance with, the laws of the Commonwealth
of Massachusetts and, to the extent applicable, the
provisions of the Bankruptcy Code.
13
<PAGE> 20
SCHEDULE A
Proposed Requirements For Exit Facility:
- - Repayment in Full of DIP Facility
- - Settlement on Pre-Petition Debt, in a manner that ensures the Excess
Availability on a pro forma basis exceeds $50,000,000 at all times based on
projections of the Borrower that are substantially the same as those delivered
by the Borrower in connection herewith or otherwise reasonably acceptable to the
Facility Agent.
- - Trailing 12 month EBITDA at time of Exit shall be no less than (a) if
prior to the fiscal month ending on or about December 31, 2001, the following:
January, 2001 $ 7,000,000
February, 2001 $ 6,000,000
March, 2001 $ 9,000,000
April, 2001 $12,000,000
May, 2001 $15,000,000
June, 2001 $18,000,000
July, 2001 $22,000,000
August, 2001 $26,000,000
September, 2001 $28,000,000
October, 2001 $33,000,000
November, 2001 $35,000,000
December, 2001 $50,000,000
or (b) if after the fiscal month ending on or about December 31, 2001,
$50,000,000.
- - No Defaults on the Existing DIP Facility or prospective defaults based
on projections provided by the Borrower with respect to the Exit Facility
covenants, it being understood that covenants may be reset based on consent of
the Borrower, the Facility Agent and Required Lenders.
- - All undisputed outstanding trade credit at the time of the Exit Closing
Date must be reasonably paid to date within the respective terms of each vendor,
as agreed to by the Borrower.
- - Excess Borrowing Availability on the Exit Facility shall be a minimum of
the following:
<TABLE>
<CAPTION>
Fiscal Month Required Availability
------------ ---------------------
<S> <C>
January $ 80,000,000
February $ 65,000,000
March $ 65,000,000
April $ 65,000,000
May $ 50,000,000
June $ 50,000,000
July $ 50,000,000
August $ 50,000,000
</TABLE>
14
<PAGE> 21
<TABLE>
<S> <C>
September $ 50,000,000
October $ 50,000,000
November $ 65,000,000
December $ 100,000,000
</TABLE>
15
<PAGE> 22
SCHEDULE B
"EBITDA": With respect to any period, consolidated net income of the
Borrower and its consolidated subsidiaries for such period plus (a) in each case
to the extent deducted in determining such consolidated net income for such
period, the sum of the following (without duplication): (i) consolidated
interest expense of the Borrower and its consolidated subsidiaries; (ii)
consolidated income tax expense of the Borrower and its consolidated
subsidiaries; (iii) consolidated depreciation and amortization expense of the
Borrower and its consolidated subsidiaries, including, without limitation,
depreciation and amortization included in selling, general and administrative
expenses of the Borrower and its consolidated subsidiaries; (iv) any non-cash
expenses, non-cash losses or other non-cash charges resulting from the
impairment or write down in the valuation of any assets; (v) any non-recurring
charge, reorganization cost or restructuring charge which was deducted in
determining consolidated net income for such period, (vi) Permitted Expenses (as
defined in the Existing DIP Facility), (vii) expenses, losses and other charges
in respect of employee retention bonuses and other payments approved by the
Bankruptcy Court; (viii) non-cash losses or gains arising from the freezing or
termination of any employee benefit or welfare plan; and (ix) losses or gains
arising from asset dispositions, minus (b) to the extent added in determining
such consolidated net income for such period, any non-cash gains resulting from
the write up in the valuation of any assets; in each case exclusive of any
Non-Continuing EBITDA Items for such period, provided that to the extent that
Non-Continuing EBITDA Items aggregate more than ($100,000,000), such additional
negative amounts will reduce EBITDA.
"NON-CONTINUING EBITDA ITEMS": With respect to any period, the
following (without duplication): (i) the revenues and cost of goods sold for
discontinued product lines pursuant to the 2000 Business Plan, (ii) all other
expenses associated with the clearance of such discontinued product lines, (iii)
advertising expenses and cooperative income associated with discontinued product
lines (iv) store payroll, benefits and other expenses that are either directly
associated with the conversion of stores pursuant to the 2000 Business Plan, or
which would not have been incurred had the conversions been completed; (v) all
expenses associated with the Orlando and Montgomery distribution centers; (vi)
all corporate payroll, benefits and other expenses arising in connection with
positions to be eliminated pursuant to the 2000 Business Plan; and (vii)
severance for employees terminated or to be terminated as a result of the
discontinued product lines, distribution center closures and corporate
downsizing; in each of the above cases to the extent arising after February,
2000.
16
<PAGE> 23
SERVICE MERCHANDISE, INC.
DEBTOR-IN-POSSESSION AND EXIT FACILITY TERM SHEET
FEBRUARY 21, 2000
FEE ADDENDUM
Outlined below are the fees that shall be charged by FRF and FBRS in connection
with the proposed Debtor-In-Possession and Exit Financing outlined in detail in
the Term Sheet of even date.
Agency Fee: $250,000 payable on the DIP Closing Date and annually in
advance, thereafter.
Closing Fee: 0.75% of the Commitment Amount, of which 0.25% is due upon
the Bankruptcy Court approving the Borrower entering into a
Commitment Letter on the proposed Transaction, with the
remainder due upon the funding under the Financing Order.
Structuring Fee: 0.625% of the Commitment Amount, due upon the funding under
the Financing Order.
17
