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November 6, 2019 – The Court hearing the SportCo Holdings cases has confirmed the Debtors' Fourth Amended Combined Chapter 11 Plan of Liquidation [Docket No. 525]. The Debtors also filed the lightlty revised Fourth Amended Combined Chapter 11 Plan of Liquidation and Disclosure Statement at Docket No. 521.
The Debtors' confirmed Plan of Liquidation marks the end of a rapid decline for the Debtors from a company that had $885.3 million in average net sales from 2012 through 2016 to one that had to shut down a short 3-week search for a buyer due to lack of interest…and leaves its pre-petition secured lenders with a paltry 14.3% recovery on $249.8mn in aggregated claims. As detailed below in "Events Leading to the Chapter 11 Filing," the Chapter 11 filings resulted from a confluence of political, operational and natural factors which depressed demand and prices for the Debtors' overstocked products; ultimately leading to liquidity issues and the refusal of pre-petition lenders to extend further credit (lender issues particularly troublesome in respect of the Debtors' prepetition ABL facility, which matured on June 7, 2019). Perhaps particularly ironic is that the financial woes were exacerbated by the Debtors' decision to buy too many guns in the run-up to the 2016 Presidential election, anticipating a Hillary Clinton win and subsequent gun control measures. Further to Donald Trump's win, the Debtors found themselves overstocked with expensive inventory and a client base no longer in a rush to purchase.
The combined Plan/Disclosure Statement states, “The Combined Plan and Disclosure Statement is a liquidating chapter 11 plan. The Combined Plan and Disclosure Statement provides for the proceeds from the Debtors’ assets already liquidated or to be liquidated over time to be distributed to holders of Allowed Claims in accordance with the terms of the Combined Plan and Disclosure Statement and the priority of claims provisions in the Bankruptcy Code. Distributions will occur on the Effective Date or as soon thereafter as is practicable and at various intervals thereafter, except as otherwise provided by Order of the Bankruptcy Court. At the Liquidation Trustee’s option, the Liquidation Trustee will cause the Debtors’ existence to be terminated by dissolution, or as otherwise permitted by applicable law, as soon as practicable on or after the Effective Date on such terms as the Liquidation Trustee determines to be necessary or appropriate to implement the Combined Plan and Disclosure Statement and without further order of the Bankruptcy Court. The Liquidation Trustee may cause the Debtors to adopt any plan and execute, deliver, and file any agreement or document the Liquidation Trustee determines to be necessary and appropriate.”
The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the combined document):
- Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $27,300 and expected recovery is 100%.
- Class 2 (“Prepetition Term Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $249.8mn and expected recovery is $35.8mn or 14.3%.
- Class 3 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $815 and expected recovery is 100%.
- Class 4 (“General Unsecured Claims and Prepetition Term Loan Deficiency Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of General Unsecured Claims is $43,000,000 amounting to approximately 16% of total Class 4 Claims; and the aggregate amount of Prepetition Term Loan Deficiency Claims is $223,828,000 amounting to approximately 84% of total Class 4 Claims. Holders of Allowed General Unsecured Claims and Prepetition Term Loan Deficiency Claims will share in recoveries from both Type A and Type B Causes of Action.
- Class 5 – ("Wellspring Subordinated Claims") is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $3.5mn and expected recovery is $0%. Wellspring has asserted claims against the Debtors totaling not less than $3,486,259 for unpaid management fees and expenses. The Prepetition Term Loan Agent and the Committee allege that pursuant to the terms of the Prepetition Term Loan Agreement, Wellspring’s Claims arising from the Management Agreement are contractually prohibited and subordinated to the Prepetition Term Loan Lenders until the Obligations (as defined in the Prepetition Term Loan Agreement) owing to the Prepetition Term Loan Lenders are indefeasibly paid in full, and as such have no value. As described herein, to the extent that the Bankruptcy Court finds that Wellspring’s Claims are subordinate, by agreement or otherwise, such Claims shall be treated as Class 5 Wellspring Subordinated Claims. To the extent that any of Wellspring’s Claims are not found to be subordinate, such Claims shall be General Unsecured Claims.
- Class 6 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $0 and expected recovery is 0%.
As we previously reported on the new Class 5 [Docket No. 394], "The combined document has been amended at the last minute to allow for the creation of a new class, Class 5 ('Wellspring Subordinated Claims'). Class 5 is comprised of management fees that are claimed by Wellspring Capital Management LLC ('Wellspring') one of the Debtors' principal pre-petition equity holders. The response from the Debtors' pre-petition term loan lenders, who have a large deficiency claim sitting in Class 4 ('General Unsecured Claims and Prepetition Term Loan Deficiency Claims') is the standard one from someone waiting in line when someone tries to cut into that line at the last minute: 'The line is back there…behind me.' Behind that large ($223.8mn) deficiency claim, the claim is worth nothing. The Debtors have added the class so that the Plan can move on towards confirmation, where the issue of subordination can be decided by the Court.
Plan Voting Results
On October 17, 2019, the Debtors' claims agent submitted its Tabulation of Ballots:
- Class 2 (“Prepetition Term Loan Claims”) 6 claims holders, representing $249,800,405 in amount and 100% in number, accepted the Plan.
- Class 4 (“General Unsecured Claims and Prepetition Term Loan Deficiency Claims”) – 150 claims holders, representing $245,978,922.13 (or 99.98%) in amount and 96.77% in number, accepted the Plan. 5 claims holders, representing $40,216.45 (or 0.02%) in amount and 3.23% in number, rejected the Plan.
The combined document attached the following document:
- Exhibit A: Liquidation Analysis
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Johnson Declaration”), Bradley P. Johnson, the Debtors' Chief Executive Officer, detailed the events leading to SportCo's Chapter 11 filing which chronicles a confluence of political, operational and natural factors which have depressed demand and prices for its overstocked products; ultimately leading to liquidity issues and the refusal of prepetition lenders to extend further credit (lender issues particularly troublesome in respect of the Debtors' prepetition ABL facility, which matured on June 7, 2019). In a further insight which may bode ill for the Debtors' hopes of selling its business as a going concern, Johnson cites SportCo's inability to successfully integrate the AcuSport assets which the Debtors bought out of bankruptcy in June of 2018.
The Johnson Declaration provides the following detail as to bottom line impact: "In 2018, USC’s net sales across all distribution channels were approximately $557.0 million, with $531.1 million in net sales for 2017. Despite USC’s strong sales volume, these figures are well below USC’s $885.3 million in average net sales from 2012 through 2016. In line with USC’s decreased sales, its adjusted EBITDA has dropped from an average of $55.8 million from 2012 through 2016 to $4.0 million in 2018."
The Johnson Declaration continues:
"Since 2015, the Debtors have faced economic headwinds and operational challenges that significantly and adversely impacted the operating performance of the Debtors’ businesses, including:
- Industry-Wide Decline Due to an Uncertain Political Climate. In the lead up to the 2016 presidential election, the Debtors anticipated an uptick in firearms sales historically attributable to the election of a Democratic presidential nominee. The Debtors increased their inventory to account for anticipated sales increases. In the aftermath of the unexpected Republican victory, the Debtors realized lower than expected sales figures for the 2017 and 2018 fiscal years, with higher than expected carrying costs due to the Debtors’ increased inventory. These factors contributed to the Debtors tightening liquidity and an industry-wide glut of inventory.
- Excess Inventory Led to Discounting, Which Eroded the Debtors’ Margins. An over-supply of firearms following the 2016 presidential election and the financial distress of certain market participants led to industry-wide sales discounts. The Debtors were forced to lower prices to remain competitive and maintain sales figures, which further eroded the Debtors’ slim margins and contributed to the Debtors’ tightening liquidity.
- The Debtors’ Over-Leveraged Capital Structure Further Eroded the Debtors’ Margins. The Debtors’ high fixed costs under the prepetition credit facilities adversely affected the Debtors’ financial liquidity and required the Debtors’ to stretch accounts payable beyond the Debtors’ customary payment terms. The resulting management of accounts payable resulted in the Debtors foregoing customary discount terms and volume rebates offered by the Debtors’ top vendors.
- Significant Disruptions in the Industry Eroded the Debtors’ Channel Sales. Many of the Debtors’ vendors and manufacturers suffered heavy losses as a result of the Cabela’s-Bass Pro Shop merger, Dick’s Sporting Good’s pull back from the market, and the recent Gander Mountain and AcuSport bankruptcies. Those losses adversely impacted the terms and conditions on which such vendors and manufacturers were willing to extend credit to the Debtors. With respect to the Gander Mountain and AcuSport bankruptcies, the dumping of excess product into the marketplace pushed prices—and margins—even lower. The resulting tightening of credit terms eroded the Debtors’ sales and further contributed to the Debtors’ tightening liquidity.
- Disruptions Caused by Natural Disasters. The recent spate of disastrous hurricanes in the Southeastern United States resulted in decreased demand for firearms and other sporting goods where the Debtors’ sales are disproportionately focused. The reduction in demand caused additional losses for the Debtors and contributed to the Debtors’ tightening liquidity.
In June 2018, the Debtors acquired certain assets from competitor AcuSport Corporation, including the Debtors’ distribution facility in Bellefontaine, Ohio (the 'AcuSport Assets'), in an asset sale approved by the United States Bankruptcy Court for the District of Ohio pursuant to Bankruptcy Code section 363 (the 'AcuSport Transaction'). The Debtors consummated the AcuSport Transaction to realize certain supply chain synergies attributable to the integration of the AcuSport Assets and expand the Debtors’ sales footprint. However, as of the Petition Date, the Debtors have been unable to realize the operational savings and increased sales anticipated from the AcuSport Transaction due to higher than anticipated costs of integrating the AcuSport Assets with the Debtors’ existing distribution infrastructure and maintaining such assets post-integration, as well as lower than anticipated incremental sales.
The lower than anticipated increase in customer base following the AcuSport Transaction magnified the adverse effects of the market factors discussed above and resulted in a faster than expected tightening of the Debtors’ liquidity and overall deterioration of the Debtors’ financial condition.
Given the Debtors’ tight liquidity position in the lead up to these Chapter 11 Cases, the Debtors approached the Prepetition Agents on several occasions seeking amendments to the Prepetition Documents to, among other things, decrease the Debtors’ leverage and improve the Debtors’ financial condition.
Mounting prepetition lawsuits against the Debtors (as well as their directors and officers) detrimentally affected their ability market a sale of the company and otherwise buy and sell inventory in the ordinary course of business. The automatic stay imposed upon the filing of these Chapter 11 Cases will provide a necessary reprieve from litigation to allow the Debtors to focus on maximizing value for all creditors. Importantly, absent a bankruptcy filing, the Debtor would not have the working capital necessary to implement the contemplated wind-down plan because the Debtors’ Prepetition ABL Facility was otherwise scheduled to mature on June 7, 2019 following a short-term extension to allow the Debtors to continue their pursuit of a going-concern sale."
As of the Petition Date, 94.30% of SportCo’s fully-diluted shares were held by three investor groups: Wellspring Capital Partners IV, L.P. (60.58%), Prospect Capital Corporation and certain affiliates (21.16%), and Summit Partners Credit Fund, L.P. and certain affiliates (12.55%). The remaining 5.70% of SportCo’s fully-diluted shares are held by individuals, including current and former members of SportCo’s management team or reserved for issuance under the Debtors’ management incentive plan.
About the Debtors
At filing, United Sporting Companies described itself as "leading the shooting sports industry for 85 years, offering one of the largest product selections in the hunting, shooting, and marine industries. The most knowledgeable sales team in the country supports the broad product offerings of over 85,000 products. Coupled with our best in class distribution facilities, this allows us to provide excellent service to over 30,000 independent retail customers across all 50 states.
Our product selection includes firearms, reloading, marine electronics, trolling motors, optics, cutlery, archery equipment, ammunition, leather goods, sportsman gifts, and a variety of other outdoor sporting goods products."
SportCo operated its business primarily through Ellett Brothers, LLC, a South Carolina limited liability company and wholly-owned subsidiary of United Sporting Cos. (“Ellett”), and four of Ellett’s six wholly-owned subsidiaries: Evans Sports, Inc., a South Carolina corporation (“Evans”); Jerry’s Sports, Inc., a Delaware corporation (“Jerry’s”), Outdoor Sports Headquarters, Inc., a Delaware corporation (“Outdoor Sports”); and Simmons Gun Specialties, Inc., a Delaware corporation (“Simmons” and, together with Evans, Jerry’s, and Outdoor Sports, the “Operating Subsidiaries”). Ellett’s two remaining wholly-owned subsidiaries, Bonitz Brothers, Inc., a Delaware corporation (“Bonitz”) and Quality Boxes, Inc., a South Carolina corporation (“Quality Boxes” and, together with Bonitz, the “Non-Operating Subsidiaries”), ceased operations prior to the Petition Date.
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