Last week we discussed the details of the Family Christian Stores (FCS) Chapter 11 bankruptcy filing. Since then I have spoken to numerous publishers and both industry and outside experts. Much new information has surfaced. What I’m writing here is based on those conversations and on a number of public news reports.
Who is Going to Get Paid?
FCS owes more than $40 million in unpaid receivables (due to publishers and vendors) which is an unsecured debt. It is being assumed that none of these bills will be paid. This is a devastating blow to many publishers and vendors.
Don’t forget that although a purchase price of $73 million has been proposed for the stores, only $28 million of that purchase price is in cash. That $28 million is then what would be available to pay creditors, and the debts are closer to $100 million.
There is a $34 million bank loan from Credit Suisse AG. This is a secured debt, which means they are among the first in line to be paid. Their representative lawyer was quoted as saying “It’s hard to believe it all vaporized” referring to the money loaned to FCS in 2012.
There is an additional $23 million bank loan that is also a secured debt. The surprise was that this debt is no longer held by JP Morgan Chase Bank. Instead one of the owners of FCS, Richard L. Jackson, acquired that debt through an entity called Family Christian Special Funding. And since Mr. Jackson is also part of the bid to purchase the bankrupt assets of FCS he is, at the same time, a suitor, a creditor, and an owner. Michael Maggio, an attorney for the Office of the United States Trustee, said “This man is wearing three hats.” The lawyer representing Jackson’s affilitate responded by saying “Let’s not put a black hat on my client.” (quoted from the excellent article by Jim Harger at Mlive.com, the website of the Grand Rapids Press.)
Regardless of how many hats or what color they are, it is obvious that there is a very complicated relationship between Jackson and his partners, the bankrupt stores, and the non-profit that owns them. The court will have to sort that all out.
Further Pain for Publishers and Vendors
To further complicate matters there is a special situation regarding Consignment Inventory. Consignment Inventory is where the supplier sends product to the stores, but keeps the title and ownership of that product until it is sold.
This arrangement began many years ago when a number of publishers and vendors came up with a creative marketing and sales strategy with FCS. The publishers and vendors would ship inventory to FCS on consignment and FCS would not have to pay until the product was sold. I remember back in the 90s when this arrangement began to take shape. Publishers’ sales increased because the product was on the shelf and they were not at the continued mercy of budgetary constraints normally associated with retail. In essence the stores warehoused “unsold” inventory. The practice benefited FCS (for cash flow reasons) and benefited the publishers and vendors (for sales reasons).
As mentioned above there is $40 million in unpaid and unsecured receivables. This is product actually purchased by FCS and invoiced by their vendors. But buried in the 150 page bankruptcy filing in paragraph 48 and in schedule 4.5 is the request by FCS to keep all $20 million in consignment inventory…without having to pay anything for it.
One executive with whom I discussed this said that adding the consignment loss to the receivables owed means that their company’s potential loss nearly quadruples into the millions. Not only would they lose the cash for product sold but also everything remaining on the shelves of the 266 FCS stores and in the FCS distribution warehouse in unsold inventory.
In looking at the list of consignment vendors in the court documents, well over a hundred vendors have products on consignment, which they still technically own, but for which they may never get paid. How many of them can absorb losses like these?
If both the receivables and the consignment inventory is cleared from the books, FCS will, in essence, have received a $60 million infusion but at the price of their publishing partners.
As mentioned in the previous post, the unpaid receivables will have to be written off by the publisher. The sales made under those invoices will be reversed and royalties reduced accordingly.
If FCS is granted ownership of the consignment inventory at no cost, that will likely be accounted for as product given away since the products were never actually sold and billed. There should not be any effect on an author’s royalty earnings.
If FCS is not granted ownership and consignment inventory is sold, the question is whether these would fall under new receivables due to the publishers and vendors. If those are paid, then the author gets paid. If those are unpaid, the author is unpaid.
If authors have questions or concerns they should talk with their literary agent or with their publisher.
Charitable Donations Made by Family Christian Stores
When FCS was purchased in 2012, much was made of the fact that the business would remain in Christian hands and dedicated to the Lord’s work. In 2013, the business was placed in a non-profit entity. In the bankruptcy filing it is stated that FCS has donated $300,000 to charitable causes since they took over the company.
When describing this situation I’ve been asked, “How can FCS donate money when they owe so much money to their creditors?” That is an excellent question.
Technically everything was “fine” until the bankruptcy filing two weeks ago. And the donation question was not an issue.
But now questions are being raised.
As mentioned, there has been $300,000 donated by FCS in the past two years. (This is over and above any donations made in-store by customers.) While the grand total is wonderful it is a very small percentage of the approximately $450 million in gross sales generated by FCS over the past two years.
If gross sales over the last two years were $450 million and Cost of Sales was 40% (an industry average used for these type of exercises) then gross profit was $270,000,000 ($270 million). That makes the donation of $300,000 a little more than .01% of gross profit. This suggests there was very little profit from which to donate.
The intent to donate profits was noble. But when there aren’t any profits we are only left with good intentions. And noble intentions don’t pay the bills.
The acquisition of FCS by Jackson and his partners in 2012 was evidently done with the honorable intent to direct the profits of their business into charitable causes. But the debt incurred as part of the leveraged buyout, coupled with a difficult retail environment has made the venture a financial disaster.
Some have wondered if it wouldn’t have been better if they had put their millions directly into a non-profit to support those same ministries. Then there would have been millions directed into ministry instead of only $300,000. Maybe then, bankers, creditors, authors and artists, wouldn’t be now left with empty pockets.
Obviously the courts will process all the claims and counterclaims. Whether FCS will get to keep the consignment inventory is an important question to many. Whether there will be anything to pay the $40 million in receivables is unlikely.
The management of FCS would like to say they can keep all the stores open and all the employees untouched. The reality may not be as cheery. Typical reorganizations mean reduction in costs, closing unprofitable stores, and the loss of jobs. We will have to see how that plays out.
It is unlikely that publishers and vendors will be willing to continue the consignment inventory practice. Again, much will depend on the court proceedings.
No one wants to lose an important account like FCS. For some publishers or vendors FCS represented a major slice of their annual business. But at the same time, if FCS cannot pay their bills, selling to them is untenable.
There has been a long and rich retail history with the Family Christian Stores (originally a part of the Zondervan family and later the Zondervan corporation). When I started in Christian retail in 1981 they had 40 stores in their chain and by 2012 there were 280. Obviously there are decades of goodwill that is now in jeopardy because of this Chapter 11 reorganization effort.
Update – April 10, 2015
The Christian Bookseller’s web site released the following information:
The Grand Rapids, MI, court handling the Family Christian Stores (FCS) chapter 11 bankruptcy issued an order last week approving bidding procedures for the sale of substantially all of the chain’s assets and set May 12 as the a deadline for purchase bids to be submitted.
Court documents indicate FCS is trying to find another purchaser of the entire company, after withdrawing a controversial plan for an insider purchase by the chain’s owner Richard Jackson.
The court also established June 9 as the last date for all creditors to file proofs of debt claims.
Other debtors filed documents recently to claim consignment merchandise, including Oasis Audio. At least one creditor, Velcor Leasing Corp., filed a motion to compel payment and overturn a stay so it could get paid for leased vehicles and fuel expenses. Suppliers have about $20 million worth of merchandise on consignment to FCS. About 30 suppliers earlier filed objections to retain ownership and gain possession of consignment merchandise.
FCS reports about $100 million total in various types of debt on annual sales of $230 million. It projects declining sales in 2015 fiscal year to about $216 million.
The courts also approved procedures and payments for FCS leaders and for professionals involved with the bidding and valuation arrangements.