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).
Until now.
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.
Author’s Concerns
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.
What’s Next?
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.
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Steve, Thank you for clarifying details. I have been a vendor since 2013. I would like to give my perspective. I started my business 9 years because our oldest son, who was going through cancer treatment needed much care. I was a music teacher at the time, and started my handcrafted soap business in the hopes I could take care of our son and bring in some income to help my family. It has been a tough road, but I have worked hard to try to make a profit and build my business. I make all of my natural soaps and skin care in my home studio. FCS came to me early 2013 wanting me to make product for their stores. This was very exciting. Even though they have extremely demanding terms, and wanted deep discounts, I took the risk to help my business and my family. I have made and packaged over 14,000 bars of soap since. I provided soaps for the fall and Christmas holidays 2013, 2014, and Spring/Summer order recently. My husband and I hand delivered the most recent orders at the end of January, and another on February 6. I got an email with the bankruptcy notification less than a week later. I had no idea exactly the magnitude of what it meant. I was never contacted by my buyer. Surely FCS knew they were going bankrupt when placing the order in October, and then receiving it in January and February! When I emailed my buyer, he said, “Sorry about this, but you will not be paid for the delivered products”. I was floored. I contacted a friend who is an attorney and was shocked to learn there is basically nothing I can do. And then I learn they will not let me have my products back….and then I see them being sold in stores! That is theft, is it not?? I made and packaged this product with my own hands, hand delivered, and purchased displays required of me. They have $20,000 worth of my soaps and displays. I am devastated. My tiny micro-business is not only in trouble, now, my family is affected, as well. I have a small cushion to pay my business bills for a few more months. Without the money owed to me that I was counting on, I will not be able to keep this business going. Because I am a LLC, my personal finances/assets are not protected in this kind of situation. I stand to not only lose my business, but much more. I am angry, in shock, sad, and devastated. I am working hard to scramble around to try to bring in other streams of income.
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.
http://cbanews.org/court-oks-fcss-sales-motion/?utm_source=wysija&utm_medium=email&utm_campaign=RRWeekly-20150409
Steve. Here is a new link with interesting information on this case that we have not seen published any where else.
Thoughts?
http://www.freep.com/story/money/business/michigan/2015/04/18/family-christian-bankruptcy-bookstore-chain/25531487/
Steve, I appreciate your knowledge on this subject. June 8, 2015, is fast coming up. How can a bankruptcy judge with any legal sense give a green light to Family Christian Book Stores?! I work part-time for FCBS and am very distraught about the whole situation. Management is telling us so many non-truths about the entire situation, even lying to us to try to boost sales! I am not comfortable doing this. I am a Christian, and I believe there is right and wrong. There is mostly wrong being done, in my view, from Jackson on down to store managers. They are painting a rosy picture for after June 8. It is my belief that the judge should order the assets be sold and the creditors paid off as much as possible. Consignment merchandise should also go back to where they were gotten. What is your latest assessment of what is going to happen. There is nothing Christian about FCBS at this time!!
Thanks,
Ron Rust
Ron,
I also work for FCS and I’m curious as to what “lies” you believe you’re being told. The entire company is working so hard to keep jobs going and to be able to continue blessing the ministries we serve. In all honesty I couldn’t see them being any more Christian in their actions.
Tori,
Speaking from the point of view of a vendor, it is not Christian like what they are doing. They are putting tiny home-based businesses out of business and hurting their families by not paying them AND keeping their merchandise. They are not giving the merchandise back that they didn’t pay for… They are still selling it! How in the world do you think this is ok??
Somebody drinking the Kool-aid?
Tori,
I have no doubt that as the stores continue to remain open that many positive ministry interactions are taking place on the sales floor. You are probably close to that, and from your perspective see that particular aspect of what can be accomplished through Christian retail.
But the situation with respect to the consignment vendors is, in the view of many, clearly an ethical transgression, and a number of the small family-owned vendors impacted by this will simply be forced to dissolve one way or another. That does not, to use your words, constitute “blessing the ministries we serve.”
It’s under my impression, that when the chapter was officially filed and information was handed out to all the companies there was a time period in which a response was needed on whether or not items would still be available in store.
Also, when it is all finalized, the companies will get paid a lump sum, and yes I’m aware it won’t be all that is owed. Yet, by keeping our stores open and continuing to sell items from vendors afterwards, it should, in theory, be better as the company won’t be struggling to pay off so much debt.
Not once had the company said they weren’t going to give anybody any money. In fact, in everything I’ve heard the stewards wish they could pay it all back in full. This was never any easy decisions to be made.
I feel confident in saying that if any suppliers feel they’re being cheated, it is not the intention. Not of the Stewards, not of anybody in managerial positions, and not any of us at the bottom of the totem pole being sales floor reps. If there was any way possible to give what was due to all, it would have been done. And it’s business in a fallen world… There’s only so much even Christians can do.
I don’t know quite how to respond to this. I don’t think it would do any good. It seems as though there is a veil over people’s faces preventing them from seeing what is happening to the tiny vendors who are not secured, and have spent so much time and money working on making BY HAND (in some cases) products for them. Spent money and time in good faith that they would be paid. I am not talking about banks or credit card companies, or big companies who can afford a blow like this. I am talking about the few small businesses who were counting on this to pay their bills to keep their businesses going. Some of these businesses will go out of business and may even be forced to file personal bankruptcy themselves because of this. This seems to ALL get lost on you folks who are so caught up in the ‘Christian’ way of that company. So, this is business in this world we live in..ok. It doesn’t make it RIGHT. And it doesn’t make it Christian just because it is a Christian organization.
Nor is a Christian company obligated to pay the companies/suppliers anything from when court stuff was being decided. But Jackson had put down an even larger bid, buying back the company, but also during legal things being figured out said the company would pay back as much as they could. When filing bankruptcy all is frozen, we legally cannot pay anybody anything.
In the conference calls our manager had over the past few months, there was always at least one steward in it too, on way or another, so all information I’ve gotten could not have come from a better source.
Family Christian plans on paying what is owed to the best of their abilities, which is not required by legal standards.
Woo goo. We’re gonna win! God is awesome. We will survive. I’m so happy!
Sounds like good news. Did Jackson come through?
Good news for whom?
WHAT is exactly awesome about this? Explain, please.
“If anyone forces you to go one mile, go with them two miles.” Matthew 5:41
“…if I have cheated anybody out of anything, I will pay back four times the amount.” (Zaccheus – Luke 19:8)
I think what we see over and over again in scripture is that adopting a Christian ethic compels us to go beyond any restitution that the law requires.
In Tori’s case I would think that means that whatever financial recovery she might see — and it might be only twenty cents on the dollar or even less — the company, in whatever form it takes, still has a moral obligation to do something over and above what the court mandates in order to make this right.
Sorry, I guess that should read, “in k’s case.”
I know the sealed bids that came in on Monday were suppose to be opened on Friday. I know there was suppose to be a conference call on Friday afternoon with staff giving the results.
So what is the results? Did Jackson come up with any more funds or did he get it cheap?
Who are the new owners closing the transaction in June?
Jim,
To answer your question. The whole thing may be delayed even further. Read the following article.
http://cbanews.org/fcs-seeks-extension-in-hopes-of-a-sale/
The article speaks of the request by FCS to delay everything for Four months.
It also talks about the Mediator being named in a related lawsuit.
And the request of one the secured creditors to possibly come in as a bidder using the debt they are owed as leverage to buy the assets.
This is truly a complicated process. Multiple suits and countersuits.
The issue of who owns the consignment inventory is still not settled.
Steve
Thanks Steve for the update. Somehow that news link didn’t make my Google aleart.
The inventories are getting slim in some stores. Delaying the sale will also take the value of the sale down.
Maybe thier hoping for a better liquidation value at Christmas.
http://www.mlive.com/business/west-michigan/index.ssf/2015/05/family_christian_store_employe.html
Maybe by end of day
So, what’s the latest update, now that we’re at 4 months later?
https://stevelaube2.wpengine.com/family-christian-stores-survive-bankruptcy/
I know bankruptcies are a dirty business for all concerned. Since I work part-time for FCS, I hope they come out of it all right. BUT, some things I do believe strongly about. 1) I really sorry for K and others like him with their small businesses who stand to lose their existence because of paragraph 48 of the bankruptcy papers. 2) Christians, because of who they are, are held to a higher standard by God as far as moral conduct and doing the right thing are concerned. That means they should pay all the consignment companies back in full, instead of keeping their mdse. and selling it. 3) The most important point of all—–Deut. 5: 12-14, “Be careful to observe the Sabbath day just as the Lord your God has commanded you. You are to work and do all your tasks in six days, but seventh day is the Sabbath.”
It is hard to be a distinctively Christian business, and at the same time break one of the 10 commandments. Tell me, how can God honor this?
There is right and there is wrong, black and white, moral and immoral. FCS, do what IS right in this situation and I believe God will honor you!