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Reorganization Case Study #2
In December 2002, the Company (or "Debtor"), a $130 million manufacturer of consumer products, was under criminal investigation by the U.S. Department of Justice. The Company was alleged to have overstated assets and net income in excess of $30 million over a three-year period. In January, 2003, in response to these allegations, the Company's lender froze the Company's main operating account and access to additional credit.
At the same time, the lender demanded, under a proposed forbearance agreement (granting, among other things, the ability to continue to operate), that the Company's sole shareholder (an elderly passive investor) guarantee past and future indebtedness. This was resisted by the shareholder. Consequently, Chapter 11 Bankruptcy filing was necessary in early February, 2003.
Restructuring
In conjunction with Finley, Colmer and Company, Jim Jennings was hired coincident with the Bankruptcy filing. Finley Colmer was immediately charged with assessing all financial and operational aspects of the Company; obtaining DIP financing; overseeing production in the Company's sixteen manufacturing plants; and recommending a reorganization, or restructuring, plan. Jim Jennings was hired to assist full time in the reorganization efforts.
Liquidation
The Company's lender (also the largest general unsecured creditor), was owed approximately $49 million. In the spring of 2003, the Committee of General Unsecured Creditors, in conjunction with the Debtor, determined that it was in their best interests to market and sell certain divisions of the Company on a going concern basis, and to orderly liquidate others. A summary of the Company (circa February, 2003), by major asset category and its ultimate disposition is as follows ($ = millions):
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Asset
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Annual Revenues
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Number of Employees
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Disposition
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Sale or Liquidation Date(s)
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Approx. Proceeds
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Cordage Division
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$80
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450
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Sold as going concern
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10/2003
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$16
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Home Products Division
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$27
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100
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Liquidated in the normal course
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2/2003 - 9/2004
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$3
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Water Sports Division
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$15
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30
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Liquidated in the normal course
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3/2003 - 11/2003
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$1
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Hunting Division
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$8
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20
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Sold as going concern
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2/2004
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$8
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Other assets: AR, Inventory, Equipment, Real Estate
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NA
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NA
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Realized or sold in the normal course of business
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10/2003 - 6/2005
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$40
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TOTAL
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$130
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600
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$68
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Milestones
Here are the highlights of milestones achieved during the proceeding.
Operating phase
February 3, 2003 to February 29, 2004:
- Assisted in negotiating Debtor in Posession financing with another lender.
- Assisting in cutting overhead in excess of $15 million during 2003 (prior to selling any divisions), through payroll reductions, plant closings, and outsourcing. Closed eight plants through October, 2003.
- Assisted in representing the Debtor in all matters concerning the marketing and sale of its divisions and other assets. Spearheaded coordination with over thirty prospective buyers in their due diligence efforts. Prepared forecasts and business plans for those assets marketed as going concerns.
- Assisted in organizing and participated in formal auction proceedings for Debtor assets.
- Assisted in negotiating consignment inventory agreements with major asset purchasers. This gave the Debtor access to normal distribution channels for its excess inventory. Otherwise, the inventory would have been liquidated for amounts significantly less than cost.
- Assisted in negotiating Transition Services Agreements with various purchasers of major assets.
Wind-down phase
March, 2004-present:
- Realized net liquidation proceeds to date (after administrative expenses) in excess of $55 million.
- Reconciled and settled Filed and Scheduled Claims in excess of $90 million. Through these efforts, total Allowed Claims were reduced to $65 million. The payout percentage is approaching 85%.
- Assisted in the marketing and sale of remaining real estate and other assets.
Click here to read another reorganization case study from Jim Jennings, CPA.
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