Wed 07/15/2020 17:15 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
Cash Collateral Motion
Bid Procedures Motion
 
Summary
The Paper Store is a specialty gift retailer with 86 stores in seven Northeast states
Attributes filing to adverse weather and other events causing lower sales from late 2019 to early 2020, followed by the impact of the Covid-19 pandemic
Seeks to sell assets as a going concern, stressing the importance of timing with respect to the sale and the upcoming 2020 holiday season
Notes discussions with an “investor group” interested in a stalking horse bid for all of the debtors’ assets in a 363 sale, saying they expect to provide an asset purchase agreement “shortly”

The Paper Store, LLC, an Acton, Mass.-based specialty gift retailer with 86 stores in seven Northeast states, filed for chapter 11 protection on Tuesday in the Bankruptcy Court for the District of Massachusetts, along with affiliate TPS Holdings, LLC. “In the absence of an acceptable source of capital,” G2 managing director Don Van der Wiel, the debtors’ CRO, says in the first day declaration, the debtors “must attempt to conduct a going concern sale of their assets to a buyer which will have the capital to immediately invest for the purpose of purchasing the required holiday-season inventory that the Debtors are otherwise unable to finance.” The debtors say that they have been in discussions with an “investor group” interested in making a stalking horse bid for all of the debtors’ assets in a 363 sale, whose counsel has informed the debtors that they expect to provide an asset purchase agreement “shortly” (emphasis added). The group is comprised of “at least two investment entities, one of which is a current creditor of the Debtors but otherwise has no other connection with the Debtors, and one of which is beneficially owned by members of the Debtors’ founders, the Anderson family, who are current officers, directors and the majority equity holders of the Debtors.”

Due to the potential Anderson bid, the debtors appointed an independent director, and also appointed the CRO.

Because the debtors are “running out of cash” and do not have sufficient liquidity to stock their stores with inventory for the upcoming holiday season, they are seeking to run a sale process that would conclude by the end of August. In light of this time pressure, the debtors have filed a bid procedures motion while still negotiating with the potential stalking horse.

The debtors would use cash collateral to fund the cases, sale process and payroll and are not seeking use of DIP financing at this time.

After overcoming three major obstacles - rising labor costs, changing vendors, and an expansion effort to increase the brand’s brick-and-mortar store footprint and improve its e-commerce platform - and “on the precipice of reaping the fruits of those efforts,” the debtors’ optimism for the future was undercut by the Covid-19 pandemic, Van der Wiel writes. “Even though stores have been allowed to recently reopen in most jurisdictions, the disruption and additional cost of trying to preserve the health and safety of nearly 2000 full and part time employees has only made matters worse,” the debtors say, adding that the temporary closure of all of the debtors’ 86 retail stores and the disruptions to its customer base and supply chain have also exacerbated The Paper Store’s challenges related to “substantial funded debt obligations and significant lease obligations.”

The first day hearing has been scheduled for Thursday, July 16, at 3:30 p.m. ET.

The company reports $10 million to $50 in assets and $50 million in to $100 million in liabilities. The company’s prepetition capital structure includes approximately $45 million in funded debt, of which $40 million is held by third party institutional lenders and $5 million is held by insiders of the debtors, as follows:
 

Holders of the term loan follow:
 

The Paper Store also issued a note up to $10 million payable to Robert Anderson on Aug. 9, 2019, that is junior to the prepetition revolving and term loan credit agreement, that matures on March 22, 2022, under which no amounts are due.

In addition, the debtors owe $42.2 million under a note payable to Founder Investerco (which the Anderson family owns), that is junior to the prepetition revolver and term loan, the Robert Anderson note and the junior capital loan. The note was issued in connection with a restructuring of the debtors’ ownership interests in 2014, after which the Anderson family retained substantially all of the common equity in TPS Holdings and WestView became the owner of all of the preferred equity in TPS Holdings, which is the sole owner of The Paper Store. With respect to the note payable, the Anderson family would typically allow payment of interest on a bi-annual or annual basis after the end of the Christmas season when cash flow is not constrained. In mid-March however, the Anderson family agreed to an interest hiatus for the entire 2020 year.

In addition to the debt described above, the debtors also estimate that unaudited general unsecured claims for unpaid accounts payable total approximately $13.5 million, including approximately $3.7 million owed to landlords for past due rent.

The debtors’ equity is held as follows:
 

Despite optimistic prospects for the future of the business, the first day declaration says, the sudden impact of the Covid-19 pandemic derailed the company’s expansion plans. “Like just about every retail business in the United States, the Debtors have been operating under the considerable financial strain caused by the pandemic, which has had a severe impact on revenue,” says the debtors’ CRO, adding that, “even though stores have been allowed to recently reopen in most jurisdictions, the disruption and additional cost of trying to preserve the health and safety of nearly 2000 full and part time employees has only made matters worse.” The debtors also note that two critical months for profitability, historically, are May and June.

With its traditional business essentially at a standstill, the debtors attempted to renegotiate existing lease terms with their landlords, most of whom were “not interested,” with the debtors noting that they have not paid most rent obligations for the months of April, May and June. Unpaid rent obligations total approximately $3.7 million.

In addition to the hindrances associated with the pandemic, the company’s performance was hindered by a shortened holiday season (due to the timing of Thanksgiving) and an “abundance of snowfall that adversely impacted the Debtors’ operations,” forcing the company to close stores early, open them late and undergo multi-day complete store shutdowns. “The abbreviated operating hours caused by snow storms significantly reduced customer traffic and put further downward pressure on sales and revenues in an already challenging holiday season,” the debtors say, adding that this “extreme” holiday season undercut the debtors’ bottom line, with a “significant decrease in anticipated sales by approximately $2 million and a reduction in annual EBITDA by approximately $1 million.” The debtors also blame the “failure of the New England Patriots to advance to the NFL playoffs” for an underperforming start to 2020.

Before implementing a furlough program that began on March 28, 2020, the debtors staffed approximately 474 full time and 1,597 part time and seasonal employees. Due to store closures in response to the pandemic, the debtors furloughed “almost all” of their employees and retained an emergency crew in the headquarters and distribution center. All six members of the debtors’ management team, who are also members of the Anderson family, have voluntarily waived all wages for the entirety of 2020, resulting in savings of approximately $1.5 million.

The debtors are represented by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Boston as counsel, G2 Capital Advisors as restructuring advisor and SSG Capital Advisors as investment banker. G2 managing director Don Van der Wiel is serving as the debtors’ CRO. The case has been assigned to Judge Christopher J. Panos (case number 20-40743).

Background

Founded in 1964 in Maynard, Mass., by family patriarch Robert Anderson, The Paper Store began as a family owned and operated traditional local paper stand and stationary store. “Today, The Paper Store is the largest family owned and operated specialty gift business in the Northeast, with 86 stores in seven states – and a thriving e-commerce business – with nearly 2,000 full and part time employees,” the first day declaration says. The Paper Store’s merchandise consists of fashion, accessories, spa, home décor, stationery, jewelry, sports “and more,” from “well-regarded” brands such as Vera Bradley, Lilly Pulitzer, Godiva, 47 Brands, Alex and Ani, Life is Good, Vineyard Vines and Sugarfina. The debtors are a Hallmark greeting cards partner, which they say “ties into the backbone of the company’s mission to commit and provide stellar service to all Hallmark Gold Crown customers and provide the offerings they have come to know and expect from Hallmark.”

For fiscal years ended 2019 and 2018, net revenue totaled approximately $167 million and $161.9 million, respectively, with EBITDA of approximately $9.5 million and $10.7, respectively. To account for the impact of Covid-19, the debtors are projecting their year-over-year sales to be 75% of the prior year levels through the end of the third quarter and 80% of prior year sales through the end of the year.

Although the debtors began and evolved over the years entirely owned and controlled by the Anderson family, the company took on a non-family investor in 2014. At the same time, the debtors consolidated and expanded their funded debt platform as the business continued to grow. In August 2019, the existing equityholders infused $5 million of additional capital into the business on a subordinated basis in order to fund The Paper Store’s “aggressive growth plan.” The debtors lease their corporate office and distribution center from entities owned by the Anderson family. The leases are long term leases with terms “at or about market rates.” The company is now headquartered in Acton, Mass.

The typical Paper Store is approximately 8,000 square feet and stocks a wide variety of “on-trend and highly popular ‘giftable’ products in over 15 major categories.” “The Debtors’ philosophy of maintaining a broad selection of products attracts customers into the stores, while the expansive selection of Hallmark products keeps customers coming back,” the company says. Although it varies, each retail location typically staffs approximately 18 employees. Since 2011, the debtors have run logistics from their warehouse and distribution center located in Leominster, Mass, which has grown in size over the years from approximately 85,000 square feet to more than 250,000 square feet.

For over 100 days now, the debtors have been selling personal protective equipment to customers, which has led to a “sizable growth” in digital sales, increasing more than 1,000% between April and June, and are up over 500% for the year, with sales of personal protective equipment accounting for more than 50% of the increase. E-commerce sales totaled $5.9 million for 2019 and are projected to reach $18.8 million in 2020 and $15.6 million in 2021.

The debtors’ corporate organizational structure is below:
 

The debtors' largest unsecured creditors are listed below:
 
10 Largest Unsecured Creditors
Creditor
Location Claim Type Claim Amount
Hallmark Cards, Inc. Chicago Trade $    1,263,724
Vera Bradley Designs, Inc. Roanoke, Ind. Trade 734,973
DEMDACO Kansas City, Mo. Trade 271,718
Lifeguard Press Bowling Green, Ky. Trade 248,489
Jolie Los Angeles Trade 226,527
Lotus and Luna San Diego, Calif. Trade 219,526
Thread and Supply Vernon, Calif. Trade 267,399
Cheveux Corp. Ridgefield, N.J. Trade 146,309
Lantern Enterprises Ontario, Calif. Trade 145,322
Malden International Designs Middleboro, Mass. Trade 143,865

The case representatives are as follows:
 
Representatives
Role Name Firm Location
Debtors' Counsel Paul J. Ricotta Mintz Levin
Cohn Ferris
Glovsky
and Popeo 
Boston
Kevin J. Walsh
Timothy J. McKeon
Kaitlin R. Walsh New York
Debtors' Restructuring
Advisor
Don Van der Wiel (CRO) G2 Capital
Advisors
Houston
Debtors' Investment
Banker
J. Scott Victor SSG Capital
Advisors
West Conshohocken, Pa.
Teresa C. Kohl
Craig D. Warznak
Matthew R. DiTosto
Co-Counsel to the
Prepetition Agent
Sean Scott Mayer
Brown
Chicago
Aaron Gavant
Co-Counsel to the
Prepetition Agent
David A. Mawhinney Bowditch
& Dewey
Framingham, Mass.
Mark W. Powers
Co-Counsel to City
National Bank
Vadim J. Rubinstein Loeb &
Loeb
New York
Lance N. Jurich
Co-Counsel to City
National Bank
Paul W. Carey Mirick,
O'Connell,
DeMallie
& Lougee
Worcester, Mass.
Christine E. Devine
United States Trustee Richard T. King Office of the
U.S. Trustee
Worcester, Mass.
Debtors' Claims Agent Nellwyn Voorhies Donlin
Recano
Brooklyn, N.Y.

Bid Procedures Motion

The debtors request approval of bid procedures for the sale of substantially all of their assets without a current stalking horse bidder, though, as described above, they are expecting a stalking horse bid shortly.

One of the “lynchpins” for a successful sale pursuit, the debtors say, is the timing of closing. “If a sale cannot be closed by the end of August so that a buyer can timely place the necessary inventory orders for the holiday season, it may dissuade going-concern buyers from making any bid or, at a minimum, it might significantly reduce the value of the Debtors and their assets, thereby risking the viability of the Debtors as a going concern,” the debtors write. The company estimates that it will require approximately $12 million to $15 million of cash starting at the end of August in order to purchase the inventory needed to support projected sales for the third quarter and the holiday shopping season. To that end, the debtors are proposing the following sale timeline:
 

To the extent that a stalking horse is selected, the debtors propose a breakup fee and expense reimbursement up to 2.5%, and to the extent the stalking horse is an insider, it would not be awarded a breakup fee, but rather an expense reimbursement up to $100,000.

Cash Collateral Motion

The debtors request the use of cash collateral on an interim basis for 14 days and through Sept. 5 on a final basis, pursuant to a budget. “The total length of time for the use of Cash Collateral as requested by this Motion is eight (8) weeks, at which point, the Debtors anticipate that a sale will have been consummated and these cases can be put on a path to be closed,” the debtors say.

The company proposes the following adequate protection to its prepetition secured lenders: payment of non-default interest pursuant to the budget, replacement liens (including proceeds of avoidance actions), allowed superpriority administrative expense claims and financial reporting. In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).

The carveout for professional fees of the debtors is $250,000 and for an official unsecured creditors’ committee, $50,000.

The use of cash collateral is subject to milestones consistent with the bid procedures, along with a sale closing by Aug. 28.

The lien challenge deadline is 60 days from entry of the interim order.

Van der Wiel submitted a declaration in support of the use of cash collateral, saying that without it, “the end result may be a forced liquidation of the debtors’ assets.”

Kayne Senior Credit II GP LLC, as prepetition agent, filed a limited objection to the debtors’ cash collateral motion, stressing uncertainty regarding the debtors’ sale prospects. “The Prepetition Secured Parties are supportive of these efforts, to the extent a committed bid acceptable to them is received in the near term. It is not clear yet, however, whether this will be possible,” the motion says. “If following the interim period no more concrete path forward has become clear, or a proposed asset purchase agreement (if any) is not satisfactory,” the prepetition agent continues, “the Prepetition Secured Parties reserve the right to object to further use of their Cash Collateral or to seek agreement on such other terms as may be warranted.” The objection states further that, “in sum, the prepetition secured parties do not, today, consent to the continued use of their Cash Collateral beyond the interim period until the path this case will take becomes more clear.”

Other Motions

The debtors also filed various standard first day motions, including the following:
 
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