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Furniture Factory Ultimate Holding, LP – Files Chapter 11 with Plans to Sell Assets, Inks Cash and Credit Bid Stalking Horse Agreement Worth $12.0mn


November 5, 2020 – Furniture Factory Ultimate Holding, LP and seven affiliated Debtors (“Furniture Factor” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-12816. The Debtors, Fort Smith, Arkansas-based home furnishing retailers, are represented by Domenic E. Pacitti of Klehr Harrison Harvey Branzburg LLP. Further board-authorized engagements include (i) RAS Management Advisors, LLC as financial and restructuring advisor, (ii) FocalPoint Securities, LLC as investment banker and (iii) Stretto as claims agent. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $10.0mn and $50.0mn]; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) The Springfield News Leader ($1.8mn), (ii) Homestretch ($1.7mn) and (iii) Malouf ($1.1mn).

Goals of the Chapter 11 Filings

In a declaration in support of the Chapter 11 filing (the “Roach Declaration”), Donald Roach, the Debtors’ chief operating officer and chief financial officer, stated, "The Company commenced these chapter 11 cases to preserve value for its stakeholders, including its employees and creditors. Additionally, the Debtors have negotiated a debtor-in-possession financing facility that will allow the Debtors to continue to operate in the normal course, pay landlords and vendors, and have sufficient liquidity to pay the administrative costs, both operational and statutory, required in these chapter 11 cases.

FocalPoint will continue to market the Debtors' assets for sale to potential purchasers other than Stalking Horse Purchaser American Freight FFO, LLC (more on Stalking Horse Agreement below), with the Stalking Horse Purchaser serving as a bidding floor."

The Stalking Horse Bid consists of a (i) credit bid a portion of the Debtors' Secured Debt in an amount of $7.0mn (ii) credit bid up to the amount of all outstanding obligations under the DIP Agreement as of the Closing Date and (iii) a cash payment to Sellers (via wire transfer of immediately available funds into a bank account designed in writing by Sellers) in an amount of $739k to fund the wind-down of the Sellers’ estates and the closure of the Chapter 11 Cases (such amount, the "Wind Down Cash").

In a motion for approval of the Stalking Horse Agreement [Docket No. 16], the Debtors stated, "The Stalking Horse Agreement allows the Debtors to continue pursuing a sale of the Purchased Assets while at the same time locking in a purchase price of approximately $[12] million for the Purchased Assets in the form of a credit bid plus certain additional cash to fund a wind-down of the Debtors' Chapter 11 Cases. Perhaps most importantly, the Stalking Horse Agreement includes a commitment from the Stalking Horse Bidder to maintain existing operations and employ substantial number of the Debtors' existing employees without disrupting operations."

The Debtors' proposed sale timeline is as follows:

  • Bid Deadline: December 14, 2020
  • Auction (if necessary): December 15, 2020
  • Sale Objection Deadline: December 10, 2020
  • Sale Hearing: December 17, 2020

The Roach Declaration said the proposed sale timeline is necessary in order to allow the transaction to close prior to the end of the year, as the Debtors’ industry is experiencing significant supply chain shortages and disruption, but experiences a surge of demand toward the middle to end of the first quarter of the year, which coincides with anticipated and paid tax refunds. In order to secure inventory to meet such demand, the Debtors will be required to expend significant funds in advance for delivery of inventory, and vendors may be less inclined to schedule production and shipment for the Debtors and instead schedule production and shipment for their competitors if the Debtors do not have certainty with respect to their new ownership.

"Although the DIP Lender and Stalking Horse is willing to fund the process to get to a transaction, they are unwilling to fund the significantly increased expenditures that would be needed to build up the inventory for the peak season. As a result, the proposed sale timeline is necessary to maximize the value of the Debtors’ estates. The Debtors believe that a marketing sale process through these chapter 11 cases is in the best interest of the Company’s creditors and will maximize the value of these estates."

The Stalking Horse Bidder has agreed to provide the Debtors with $6,540,000 in DIP Financing, $1,759,000 of which will be available upon entry of an Interim DIP order.

Events Leading to the Chapter 11 Filing

The Roach Declaration provides: “The Company brought on new leadership in 2019 and began a series of strategic initiatives to revitalize the brand, business model and sales strategy to reshape the business’ long-term strategic direction. The Debtors were experiencing initial success with their initiatives and were seeing operational improvements prior to the COVID-19 pandemic.

In March of this year, the COVID-19 pandemic resulted in mandatory closure orders, which forced the Company to temporarily close its stores and its manufacturing facility for the duration of the orders. These closures dropped the Company’s revenue to nearly zero overnight, which led to the Company laying off approximately 95% of its total workforce. During the mandated closures, the Debtors addressed their lease obligations and attempted to negotiate more favorable terms with their landlords. However, the continuing impacts of the pandemic and the need to conserve cash ultimately required the Debtors to permanently exit a significant amount of their stores.

As closure restrictions started to ease, the Debtors began reopening their stores in May of this year…The results from the re-openings have been generally in line with expectations on a significantly reduced store base. Access to inventory on a consistent basis has been a limiting factor to consistent sales performance. In addition to the direct impact of the pandemic on the Debtors’ business by way of closures, the Debtors’ entire supply chain has faced challenges that have further pressured the business. Raw materials have been harder to acquire, which has impacted manufacturers’ ability to produce goods. The pandemic has also impacted manufacturing safety which has lessened the amount of finished goods available. Furthermore, transportation of raw materials and finished goods has been additionally pressured as a result of restrictions on the labor force. As a result, the Debtors’ revenue continues to be choked by the lessened inventory supply chain.

In addition to the COVID impacts, the Debtors are also suffering weather related shortages of raw materials for their mattress manufacturing business. Recent storms have affected the Gulf region which has impacted both soy-based foam and petroleum-based foam availability. As a result, the Debtors’ revenue has been further constrained by their inability to meet demand due to raw material shortages. Although the Debtors’ business is generally performing in line with expectations for its reduced size, the reduction in the total size of the enterprise, along with the cash pressures as a result of the time the Debtors’ stores were closed, caused the Debtors to explore restructuring alternatives.

During the months prior to the Petition Date, the Debtors determined that a sale of substantially all of their assets (i.e., the Business) as a going concern would maximize the value of the Debtors' estates for the benefit of their creditors and other stakeholders. To that end, in June 2020, the Debtors engaged FocalPoint Securities, LLC ('FocalPoint') as their proposed investment banker to locate investors and to assist in the evaluation of strategic alternatives, including the sale of the Debtors or their assets. The Debtors tasked FocalPoint with marketing their assets for sale as a going concern. FocalPoint prepared marketing materials intended for distribution to prospective buyers of the Debtors’ assets including a teaser, confidential investment memorandum and the aggregation of key company documents located in an online data room for further diligence.

In addition, FocalPoint worked with the Debtors to develop a list of suitable potential buyers to be contacted on a discreet and confidential basis, after approval by the Debtors. As of the Petition Date, FocalPoint contacted approximately 121 potential strategic and financial buyers, out of which 24 executed confidentiality agreements and received the confidential information memorandum and requested diligence information and 3 parties participated in management meetings and had access to the full online data room. The Debtors received initial indications interest from each of the 3 that participated in management presentations. In addition, the Debtors commenced negotiations with American Freight FFO, LLC to serve as a stalking horse purchaser for the proposed sale. As a product of these negotiations, the Debtors and American Freight FFO, LLC entered into that certain Asset Purchase Agreement dated November 4, 2020 (the 'Stalking Horse Agreement'), by and among the Debtors as sellers and American Freight FFO, LLC as buyer (the 'Stalking Horse Purchaser'). A copy of the Stalking Horse Agreement is attached to the Roach Declaration as Exhibit B.

In the interim, however, the Debtors continued to suffer a drain on cash flow and lacked a source of long-term additional liquidity. Due to the Debtors' cash position and lack of realistic, viable alternatives, it became apparent that the most effective way to maximize the value of the Debtors' estates for the benefit of their stakeholders was to continue the sale process through chapter 11.”

Prepetition Indebtedness

As of the Petition Date, the Debtors’ capital structure consists of outstanding funded-debt obligations in the aggregate principal amount of approximately $49.4 million, $22.0 million of which is outstanding under the 1L Pre-Petition Credit Agreement, $12.7 million of which is outstanding under the 2L Pre-Petition Credit Agreement and $14.7 million of which is outstanding under certain unsecured grid notes, and unsecured trade debt of approximately $14.9 million, excluding lease termination and lease rejection claims.

About the Debtors

According to the Roach Declaration: “The Debtors are an everyday low-price provider of fashionable and affordable home furniture in South Central and Midwest United States and were founded in 1984 in Muldrow, Oklahoma around an original concept of providing quality furniture at highly competitive prices with the Company's 'lowest price every day' guarantee, a differentiator from the competition. The Company offers products spanning every need for the home, including living room, dining room and bedroom furniture, mattresses, home decor and other accessories and carries prominent furniture brands, including Serta, Jackson Catnapper and United/Lane, as well as a range of products under its Natural Elements Brand.

Prior to the governmental mandated COVID-19 shutdown, the Debtors operated 68 locations and employed approximately 675 employees. As a consequence of the required shutdowns and the concomitant massive reduction in revenue and available liquidity, the Debtors permanently closed 37 locations and terminated employees at those locations. As of the Petition Date the Debtors are operating 31 retail locations across Arkansas, Missouri, Oklahoma, Kentucky and Indiana, in addition to a bedding manufacturing facility and one distribution facility (the 'Business') and the Debtors currently employ 270 employees.

Corporate Structure Chart

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The post Furniture Factory Ultimate Holding, LP – Files Chapter 11 with Plans to Sell Assets, Inks Cash and Credit Bid Stalking Horse Agreement Worth $12.0mn appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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