Brookstone and 10 affiliates filed for protection under Chapter 11 of the United States Bankruptcy Code on April 3, 2014 In the United States Bankruptcy Court for the District of Delaware under Case No. 14-10752-BLS-11.
James M. Speltz is the President and Chief Executive Officer of Brookstone Company, Inc., and the main operating company of the debtors and discusses the filing:
“As set forth in greater detail below, Brookstone Company, Inc. is a wholly owned subsidiary of Brookstone, Inc., which in turn is wholly owned by Brookstone Holdings Corp. (collectively with the other affiliated debtors, “Brookstone” or the “Debtors”). …
Overview of the Debtors’ Business
“Brookstone is a highly differentiated, product development company and multi-channel retailer offering an assortment of products that are functional in purpose, distinctive in quality and design, and not widely available from other retailers. Brookstone strives to provide its customers with innovative “must have” products of superior quality that is unmatched in its industry. Since its founding in 1965, Brookstone has developed a fun, interactive in-store shopping experience, combined with the added convenience of shopping by web, catalog, or through strategic partners.
“The Brookstone brand was introduced in 1965 by taking out a classified ad in Popular Mechanics Magazine featuring “hard-to-find tools.” In its early days, Brookstone was exclusively a catalog company. In 1973, Brookstone expanded its business by opening its first retail store in Peterborough, New Hampshire. The Debtors remain headquartered in nearby Merrimack, New Hampshire. Brookstone was an early adopter of the internet as a sales and marketing vehicle and in 1996 introduced its website, www.brookstone.com, where it offers thousands of products to consumers, many of which are not available in stores. Through a combination of Brookstone’s (i) selection of unique, trend-right products, (ii) employment of a proprietary, in-house design and engineering team that consistently delivers new product assortments, and (iii) a broad attraction to customer demographic, Brookstone has evolved into one of today’s most recognized retail brands, and that brand is one of the Debtors’ most valuable assets.
“As of February 1, 2014, Brookstone operated 242 retail stores across 40 states and Puerto Rico. Of those stores, 195 are generally located near “center court” in America’s top retail centers and 47 are located in airports. Certain airport stores are operated as a joint venture between Brookstone Stores, Inc. and one or more third parties. Joint ventures are organized as limited liability companies. Depending on the particular market, mall stores vary in size from approximately 2,500 to 3,500 square feet and they carry approximately 700 active stock keeping units (or “SKUs”). In addition to full-year stores, Brookstone operates seasonal stores, which are typically open during the winter holiday selling season and are designed to carry a limited line of the most popular, gift-oriented merchandise. Typically, seasonal stores carry between 100 and 175 SKUs. During the 2013 holiday season, Brookstone operated 63 seasonal stores.
“For Fiscal 2013, net sales decreased 7.4% to $481.3 million and comp sales decreased 2.8%, while Adjusted EBITDA decreased 42.2% to $10.7 million (compared to Fiscal 2012). For the fourth quarter ended December 28, 2013, net sales decreased 8.5% to $213.0 million, comp sales decreased 3.6% and Adjusted EBITDA decreased 14.1% to $30.4 million (compared to the fourth quarter of 2012).
“Overall, liquidity decreased in Fiscal 2013 as cash on hand at the end of the year decreased $28.7 million, leaving Brookstone with a balance of $3.3 million outstanding under its revolving credit loan facility. By contrast, Brookstone had fully paid down its revolving loan balance at the end of Fiscal 2012. Inventories decreased $2.3 million at the end of Fiscal 2013 as compared to Fiscal 2012, and accounts payable decreased $9.0 million as compared to the end of Fiscal 2012.
Product Channels and Categories
“Brookstone offers its products through a distribution platform consisting of three main channels: (i) retail stores; (ii) website, catalog and e-Commerce affiliates; and (iii) wholesale and licensing partners. Brookstone’s traditional retail stores comprise the Retail segment; its website and catalog comprise the e-Commerce segment; and wholesale and licensing comprise the Alternative Distribution segment.
“Brookstone sells its products within four main categories: (i) Technology, which includes audio, mobile solutions, headphones, and digital media; (ii) Wellness, which includes massagers, eComfort, massage chairs, and sleep solutions; (iii) Travel, which includes in-flight comfort, travel lifestyle, and mobile accessories; and (iv) Home, which includes home lifestyle, outdoor, entertainment, and holiday/seasonal. Brookstone’s e-Commerce segment offers all of these product categories, whereas the mall portion of the Retail segment focuses on Technology and Wellness. The airport portion of Brookstone’s Retail segment focuses on Travel and Technology.
“Brookstone has a multi-channel marketing strategy that maximizes synergies among its distribution channels and cost-effectively presents a unified brand to customers. For product launches, Brookstone creates a multi-channel marketing strategy that combines best practices in interactive store demonstrations, a content-rich www.brookstone.com website, search marketing, social media events, limited traditional advertising, viral marketing, catalogs, and wholesale distribution.
“In the Retail channel, for Fiscal 2013, net sales decreased $36.9 million, or 9.9%, to $335.6 million and same-store sales decreased 4.7% as compared to Fiscal 2012. For the fourth quarter ended December 28, 2013, net sales in the Retail channel decreased $17.6 million, or 10.9%, to $144.4 million and same-store sales decreased 3.2% as compared to the fourth quarter of 2012.
“In Fiscal 2013, Brookstone’s Retail segment accounted for approximately 69.7% of net sales, as compared to 71.7% and 75.1% in Fiscal 2012 and 2011 respectively. The decrease in Retail segment net sales as a percentage of total net sales was driven by the same store sales decrease and by increasing sales in the e-Commerce segment.
“Excluding certain overhead allocations, 52% of Fiscal 2013 store profitability was generated from the mall based retail stores and 48% from airport locations. Wellness and Technology were the principal drivers at mall based retail locations, accounting for 43% and 40% of sales respectively. Brookstone management believes that retail store EBITDA can be improved an incremental $15 million by the end of Fiscal 2016.
“Technology and Travel dominate sales in Brookstone’s airport locations, 65% and 27% of sales respectively. These high-traffic locations, with consistent store traffic patterns and limited seasonality, provide consistent profitability. Expansion in airports from the current 47 stores to 85 by the end of Fiscal 2016 and the potential of ultimately operating over 200 airport locations represents a substantial opportunity for sales and profitability growth. In order to capitalize on the strong airport market and expand its ability to successfully bid on additional airport locations, Brookstone intends to launch a new airport format focused on lifestyle essentials for the business and leisure traveler. This new branding concept will be implemented over time; projected initially for 2 stores in Fiscal 2014, 8 in Fiscal 2015 and 15 in Fiscal 2016.
“Since 1996, Brookstone has operated an interactive website at www.brookstone.com. In addition to offering products available in retail stores and the Brookstone catalog, the website contains thousands of additional items designed to broaden and deepen Brookstone’s presence in key product categories. The “web-only” assortment accounted for approximately 30% of Brookstone’s e-Commerce sales for Fiscal 2013. Brookstone is continuously adding new SKUs to its website, and had over 58,000 SKUs available for customers to purchase as of December 29, 2012, and 72,000 SKUs as of December 28, 2013. Brookstone has also increased its web presence and interactivity through marketing initiatives and promotions on Facebook, Twitter, Pinterest, FourSquare, and through other viral marketing strategies. In Fiscal 2012, Brookstone launched its first “tablet” website t.brookstone.com, and re-launched its mobile website m.brookstone.com. In the future, Brookstone anticipates that its e-Commerce strategies will serve an increasingly important role in its integrated multi-channel strategy.
“The Brookstone catalog offers a highly focused selection of merchandise available in Brookstone’s retail stores and website. The largest mailings of the Brookstone catalog occur immediately before Father’s Day and during the November and December holiday season, which coincide with Brookstone’s two busiest selling periods. The catalog is mailed to people with demographic profiles matching those of Brookstone’s traditional customers.
“Indeed, the Brookstone catalog and website, www.Brookstone.com, are the primary drivers for e-Commerce sales. Each of the catalog and website not only serves as a marketing vehicle for online sales, but also in-store sales. A review of the financial impact of the catalog reveals that it is a profitable multi-channel advertising and sale generation vehicle. Circulation cuts since Fiscal 2008 have significantly impacted sales, by approximately $20 million in Fiscal 2013. Return on investment in catalog spending is realized in a matter of weeks and positively impacts purchase frequency. Additional demand and margin driven by catalog mailings offsets the expense of production, mailing and fulfillment. Significant growth opportunities to scale the catalog’s impact and drive increased sales exist within Brookstone’s household database and externally from customer prospects who Brookstone has identified through demographic research.
“In Fiscal 2013, on-line demand, from Brookstone’s tablet and mobile device optimized website increased 22%. Thirty percent (30%) of Brookstone’s e-Commerce sales delivered in drop shipments eliminating the need to handle and store that merchandise. Fiscal 2014 January catalog statistics indicate that with increased circulation over the same period in Fiscal 2013, demand is up 46% and variable profit is up 125%. These improvements can be attributed to the greater volume of catalogs mailed, enhanced customer modeling, refined customer segmentation and selection, improved merchandising mix and increased page density. The catalog is critical to driving visits to the Brookstone website homepage where approximately 5.2% of visitors made a purchase in Fiscal 2013, compared to only 0.6% of mobile visitors. The Debtors believe that Fiscal 2013 catalog reductions led to a 12% decrease in visits to the Brookstone.com homepage.
“In addition to catalog driven sales, online marketing fuels e-Commerce growth. Brookstone’s continued strategic investment in online marketing is necessary to continue the growth in web traffic and demand with increased speed and efficiency. This process is complex and data-driven. Core competencies in the four major sources of e-Commerce: Search, Affiliates, Third Party Marketplaces and e-Mail are critical to success.
“Overall, net sales in the e-Commerce channel increased $3.5 million or 3.3% to $108.9 million for Fiscal 2013, as compared to Fiscal 2012. For the fourth quarter ended December 28, 2013, net sales in the e-Commerce channel decreased $1.0 million, or 1.6%, to $59.1 million as compared to the fourth quarter of fiscal 2012.
“In Fiscal 2013, Brookstone’s e-Commerce segment accounted for approximately 22.6 % of net sales, as compared to 20.3% and 19.7% in Fiscal 2012 and 2011 respectively. The increase in e-Commerce segment net sales as a percentage of total net sales was primarily the result of continuing growth of online marketing, search engine optimization, and partnership programs.
Alternative Distribution Segment
“Since 2007, Brookstone has sought to capitalize on wholesale partnerships in its Alternative Distribution segment. Brookstone’s Alternative Distribution segment primarily includes sales of products to select resellers and corporate partners.
“The Debtors believe that their unique product offerings, price stability and limited distribution entice retailers to partner with Brookstone and carry Brookstone products. As a result, these partnerships have led to growing marketshare, positive EBITDA contribution and increased brand awareness without detracting from Brookstone’s other segments. During the period between Fiscal 2009 and Fiscal 2013, the Debtors have realized a 51.4% compound annual growth rate in this segment. Of the $36.5 million in sales in Fiscal 2013, pillows and bedding (31%), comfort and massage (17%) and audio and technology (17%) were the principal drivers in this segment. Wine and food (11%) and mobile technology (10%) were significant contributors as well.
“This external presence increases awareness of the Brookstone brand and its products. As awareness grows and strengthens, demand for Brookstone’s products from wholesale partners increases. This expanding awareness also drives consumers to the Brookstone website and stores.
“Significant opportunity for growth, including through licensing the Brookstone trademarks, exists in the Alternative Distribution segment. In order to capitalize on these opportunities, however, substantial capital investment in the Brookstone platform and operations will be required. The Debtors anticipate that licensing arrangements, leveraging external resources to finance inventory, sales and logistics and refocusing internal resources will be key avenues to achieving success in the Alternative Distribution segment. Attention to Brookstone’s operating assets and procedures will be required to support all improvement initiatives.
“For Fiscal 2013, net sales in the Alternative Distribution channel, which includes the wholesale business, decreased $4.8 million or 11.6% to $36.8 million as compared to Fiscal 2012. For the fourth quarter ended December 28, 2013, net sales in the Alternative Distribution channel decreased $1.2 million or 11.5% to $9.5 million as compared to the fourth quarter of Fiscal 2012.
“In Fiscal 2013, Brookstone’s Alternative Distribution segment accounted for approximately 7.7% of net sales, as compared to 8.0% and 5.5% in Fiscal 2012 and 2011 respectively. The decrease in the Alternative Distribution segment net sales as a percentage of total net sales for Fiscal 2013 as compared to Fiscal 2012 was primarily the result of the Company’s focus on profitable go forward wholesale customers.
“A significant portion of the Debtors’ sales are generated from Brookstone- branded products that are developed in New Hampshire and sourced internationally through a network of third-party manufacturers and vendors. Approximately two-thirds of the products sold are proprietary Brookstone products. The other one-third is sourced from third parties.
“Brookstone’s sourcing capabilities are diverse and flexible with a vendor network of over 1,000 partners, of which approximately 170 are in Asia. Brookstone’s largest partner is comprised of a network of over 150 factories. This partner also manages product development, sourcing and quality assurance functions. No one factory in this partner’s consortium represents more than 4% of total purchases. The top 25 factories in this vendor group represent approximately 30% of Brookstone purchases. These sourcing resources respond to Brookstone’s centralized merchandising and planning function that allocates purchases between third party and proprietary goods.
“Brookstone employs merchandise professionals who pursue new products that differentiate it in the marketplace and that meet Brookstone’s quality and profitability standards. These professionals also travel worldwide visiting trade shows, manufacturers, and inventors in search of new and innovative products. Brookstone’s merchandise directors develop relationships with third party manufacturers and coordinate with sourcing and quality control teams in Asia.
“Brookstone’s sourcing network allows it to monitor and maintain quality standards throughout the development and manufacturing process and provides it with the flexibility to match manufacturing capacity with demand. Brookstone Labs, Brookstone’s in- house engineering and design group, based at its corporate headquarters in Merrimack, New Hampshire, helps translate the strategies of Brookstone’s merchandising professionals into a consistent and unique design esthetic. Through these efforts, Brookstone has obtained numerous utility and design patents and owns the manufacturing molds for most Brookstone-branded products. The Debtors believe that selling Brookstone-branded products reinforces its franchise value and generates and strengthens customer loyalty. The patents and trademarks for these proprietary products are an important asset of Brookstone.
“Although Brookstone will need to invest in additional distribution assets to carry out its improvement plan, Brookstone’s current distribution and customer care center contains sophisticated material handling equipment facilitating the shipment of up to 60,000 packages daily. This capacity supplements the e-Commerce drop ships mentioned previously. The customer care center includes a 130 seat call center that handles customer service needs for all of Brookstone’s channels.
Corporate Headquarters and Distribution Center
“Brookstone owns its corporate headquarters located in Merrimack, New Hampshire. Brookstone also operates a single distribution center in Mexico, Missouri (the “Distribution Center”) that is approximately 400,000 square feet and, as needed, leases additional warehouse offsite space at locations throughout the country. Brookstone receives and distributes nearly all its inventory through its Distribution Center, which supports the Retail, e- Commerce, and Alternative Distribution segments. Brookstone seeks to maintain an inventory of products in its Distribution Center that ensures a sufficient supply for sale to customers. Distributions to retail stores are made, at a minimum, on a weekly basis predominantly through United Parcel Service (“UPS”) shipments. Distributions to e-Commerce customers are made daily, predominantly through UPS. Additionally, a number of products are “drop-shipped” or shipped directly to customers by vendors.
“Under the operating agreements governing airport store joint ventures, the Debtors retain title to the inventory located in each store. Members enjoy a percentage interest in the profits generated by operation of each joint venture location.
“Brookstone Holdings Corp. and Brookstone, Inc. are both incorporated in Delaware and are holding companies, the principal asset of which is the capital stock of Brookstone Company, Inc., a New Hampshire corporation that, along with its direct and indirect subsidiaries, operates the Debtors’ businesses. Brookstone is a privately held, indirect wholly- owned subsidiary of OSIM Brookstone Holdings, L.P. (“OBH LP”), the general partner of which is OSIM Brookstone Holdings, Inc., (“OBH GP”). OBH LP’s limited partners include OSIM International, Ltd. (“OSIM”), affiliates of J.W. Childs Equity Partners III, L.P. (“JWC”), and Century Private Equity Holdings (S) Pte Ltd. (“Temasek”).
“The chart below sets forth the Debtors’ funded debt obligations as of the Petition Date:
Senior Secured Prepetition Credit Facility
“Brookstone Company, Inc., as lead borrower, and Wells Fargo Bank, National Association, as administrative agent, collateral agent, and term loan agent (the “Credit Facility Agent”), and certain lenders are parties to an Amended and Restated Credit Agreement, dated as of August 13, 2013 (as amended, modified, supplemented, or restated from time to time, the “Senior Secured Credit Facility” or “Prepetition Credit Facility”). Each of the other Debtors guaranteed the obligations under the Senior Secured Credit Facility. The Senior Secured Credit Facility is comprised of a $110.0 million revolving credit facility (the “Revolver”) and a term loan with the original value of $20.0 million (the “Term Loan”).
“The Senior Secured Credit Facility obligations are secured by first priority liens on substantially all of the Debtors’ assets, including receivables, inventory, general intangibles, intellectual property, documents, deposit accounts, equipment, fixtures, inventory, and intellectual property, all as set forth in the Security Agreement, dated as of December 30, 2011, by and among the Debtors and the Credit Facility Agent. The Senior Secured Credit Facility is further secured by a first mortgage on the Debtors’ corporate headquarters property in Merrimack, New Hampshire.
Second Lien Notes
“Brookstone Company, Inc. issued 13.00% Second Lien Senior Secured Notes due 2014 (the “Second Lien Notes” or “Prepetition Notes”) pursuant to the Indenture, dated as of October 26, 2010, by and among the Debtors and Wilmington Trust, National Association, as successor to Wells Fargo Bank, National Association, indenture trustee (the “Indenture Trustee”). The other Debtors guaranteed the Second Lien Notes. As of the Petition Date, $137.3 million of Second Lien Notes is outstanding. The Second Lien Notes are secured by second priority liens on substantially the same assets as the Senior Secured Credit Facility, however, the collateral securing the Second Lien Notes does not include the Debtors’ interests in owned or leased real estate.
“Brookstone Company, Inc., the Indenture Trustee, and Bank of America, N.A., as priority lien collateral agent, entered into an Intercreditor Agreement on October 26, 2010 that, among other things, governs the relative priorities of liens granted under the Senior Secured Credit Facility and Second Lien Notes, respectively.
“As of the Petition Date, the Debtors estimate that their unsecured debt is between $75 to $85 million, consisting of accounts payable (approximately $5.6 million) to vendors, accrued but unpaid expenses (approximately $5.5 million), and the Second Lien Notes’ deficiency claim which is in the range of 70-80% of the total unsecured debt.
“Brookstone Holdings Corp. is owned by OBH LP, a Cayman Islands limited partnership, the general partner of which is OBH GP. The limited partners of OBH LP consist of OSIM, JWC, Temasek and numerous current and former Brookstone employees.
Events Leading to These Chapter 11 Cases
“In 2005, Brookstone was acquired by a consortium of investors including JWC, OSIM and Temasek. At its peak in 2007, Brookstone generated net sales of $563 million and adjusted EBITDA of $59 million, representing an adjusted EBITDA margin of 11%. The tepid pace of economic recovery following the Great Recession, however, has hampered the Debtors’ efforts to restore its performance to pre-recession levels. In Fiscal 2013, the Debtors’ adjusted EBITDA was $ 10.7 million. The chart below shows the Debtors’ historical financial performance:
Historical Net Sales and EBITDA
“Brookstone entered the economic downturn with a highly levered capital structure, and in an attempt to navigate the challenging environment, undertook a number of strategic initiatives to improve its cost structure, aimed primarily at boosting short-term performance and liquidity. This effort included, eliminating unprofitable stores, reducing overhead, streamlining product development, and cutting investment into marketing/customer acquisition. These cuts in investment included a 50% cut in catalog circulation, which negatively impacted revenues in a significant way. When combined with a 60% decrease in capital spending, Brookstone’s stores became dated, a void was created in new merchandising, and its customer base was weakened. In addition, Brookstone has employed seven different Chief Executive Officers and four different Chairmen over the past seven years, resulting in inconsistent leadership and lack of a long-term strategic plan.
“In 2010, the Debtor sought to de-lever its balance sheet through an exchange of its Second Lien Notes. Under the 2010 exchange, holders of second lien notes issued in 2005 were offered a combination of cash (invested by Brookstone shareholders) and new Second Lien Notes. As a result of the 2010 exchange, and Brookstone’s subsequent repurchase of outstanding 2012 second lien notes in 2011, the outstanding principal amount of Brookstone’s noteholder debt decreased from approximately $170,000,000 to $126,500,000; however, the interest rate payable on Brookstone’s Second Lien Notes increased from 12% to 13% annually.
“More recently, in Fiscal 2013, the Debtors implemented several cost cutting programs in an effort to save approximately $25.8 million in annual expenses. For example, the Debtors eliminated 121 staff positions saving approximately $11.5 million, and reduced additional overhead through store closings. The Debtors also began re-establishing long-term growth initiatives by investing in store productivity training and modestly increasing catalog circulation. Despite these and other efforts, Brookstone was unable to increase revenues and generate net income in amounts necessary to satisfy looming debt maturities.
“By the end of December 2013, it became clear to the Debtors that holiday sales would be substantially less than expected and that EBITDA would also be disappointing. Faced with a looming interest payment on the Second Lien Notes (i.e. January 15, 2014), and the maturity of the Second Lien Notes in October 2014, the Debtors engaged legal and financial advisors and began restructuring discussions with their creditors. More specifically, the Debtors retained Jefferies LLC (“Jefferies”) as their investment banker and Deloitte Transactions and Business Analytics LLP (“Deloitte”) as their financial advisor, and (b) formed a three member sub-committee of the Debtors’ board of directors (the “Sub-Committee”) to evaluate, monitor and oversee the Debtors’ efforts to restructure or reorganize.
“Following approval by the full board of directors on January 9, 2014, Brookstone embarked on a “dual track” strategy whereby they would pursue a traditional effort to market Brookstone’s businesses for sale, while simultaneously engaging in discussions with holders of Second Lien Notes concerning the possibility of a balance sheet restructuring (either in or outside of bankruptcy). Led by a team of investment bankers from Jefferies, Brookstone embarked on a comprehensive marketing process for the sale of the Debtors’ business or financial restructuring of the Debtors. The Debtors and their Senior Secured Lender, Wells Fargo subsequently entered into a written Forbearance Agreement, whereby the Bank agreed to forebear from taking collection action or exercising its rights in the Debtors’ assets through March 15, 2014, affording the Debtors a short but meaningful amount of time to evaluate their restructuring alternatives. That agreement was thereafter extended through April 2, 2014.
“During the sale marketing process, Jefferies contacted a total of 158 parties, of which 65 were strategic and 93 were financial prospects. Of those contacted, 53 signed confidentiality agreements and were granted access to an electronic dataroom containing approximately 1,871 documents (representing 42,090 pages) regarding the business and financial condition of the Debtors, including certain material non-public information. The initial marketing process ended on February 10, by which time Brookstone had received eight (8) non- binding initial indications of interest ranging in value from $75 to $110 million. Interested parties included a mix of strategic and financial buyers that proposed varying deal concepts and structures. The Debtors invited four (4) of the eight (8) bidders to continue into a second round of the sale process during which they were asked to complete their diligence and to make a formal purchase offer by March 5, 2014. Ultimately, the Debtors received formal offers from three (3) of the four (4) potential bidders. These second round bids were received from strategic and financial bidders alike and proposed varying deal structures, with estimated values ranging from a low of $83 million to a high of $123 million, subject to various adjustments.
“Simultaneously with the sale process, Brookstone began negotiating with an ad hoc group (the “Ad Hoc Committee”) of Second Lien Note holders. Discussions between the Debtors and the Ad Hoc Committee began in January, continued through February, and intensified in March. The Ad Hoc Committee also began exploring the possibility of acquiring Brookstone through either a debt to equity exchange in a plan of reorganization or through a credit bid for all assets in a sale under Section 363 of the Bankruptcy Code.
“The Ad Hoc Committee proposed a comprehensive restructuring whereby Wells Fargo Credit Facility would be refinanced through (i) a debtor-in-possession loan to be made by a group of the holders of the Second Lien Notes (“Second Lien Noteholders” or “Prepetition Noteholders”) and (ii) the conversion of all Second Lien Notes into 100% of Brookstone’s equity under a Chapter 11 plan of reorganization. After thoroughly evaluating each of the four alternative proposals, the Debtors’ board of directors concluded that the proposal made by the Ad Hoc Committee represented the highest and best offer to acquire the companies. Following a meeting of the Debtors’ board of directors, management and the Debtors’ professionals were authorized to commence negotiations with representatives of the Ad Hoc Committee with the objective of finalizing definitive agreements, pleadings and other documents by March 15, or as soon thereafter as was practicable.
“During the course of the Debtors’ negotiations with the Ad Hoc Committee, one of the second round bidders, SPB Acquisition LLC (“SPB”) an affiliate of Spencer Spirit Holdings, Inc. (“Spencer”) substantially improved its March 5 offer, but conditioned its new proposal on its ability to complete further due diligence. After consulting with the Ad Hoc Committee, Brookstone agreed to allow SPB to conclude its additional diligence, even while the Ad Hoc Committee and the Debtors continued their efforts to finalize agreements concerning a Chapter 11 plan and financing therefor.
“After further extensive and good faith negotiations among the Debtors, SPB and the Ad Hoc Committee, the parties reached agreement on the terms of a Chapter 11 plan of reorganization. In summary, SPB has agreed, subject to the terms and conditions of the Restructuring Transaction Agreements (as defined below), to sponsor a Chapter 11 plan supported by the Prepetition Noteholders whereby SPB will acquire 100% of the newly issued shares of stock of reorganized Brookstone Holdings Corp. (the “Shares”) for $120 million in cash plus the additional consideration as set forth in the SPA (as defined below) that in the aggregate the Debtors estimate could be worth up to approximately $146,265,000 million (the “Purchase Price”). To ensure that maximum value for the Shares is achieved, notwithstanding the extensive pre-petition marketing efforts, the right to serve as plan sponsor will be market tested through a competitive auction process to be approved by this Court. To induce SPB to serve as a stalking horse for a plan sponsorship auction, the Debtors’ have agreed, subject to this Court’s approval to certain “bidder protections” including a break-up fee of $3.7 million and an expense reimbursement of $500,000.
“The proposal made by SPB is the highest and best offer received by the Debtors. SPB is a highly reputable, experienced and financially sound specialty retailer focused on providing a fun and engaging retail experience through two principal formats Spencer’s and Spirit. Spencer’s is a mall-based specialty retailer targeting the 18 to 24 year old demographic, with a distinctive and fun mix of products offered in over 640 stores in the U.S. and Canada. Spirit is a seasonal, “category killer,” Halloween retailer with over 1,000 stores in the U.S. and Canada. Spencer has an over 65-year history of bringing distinctive and exciting products to its customers, and continues to be a pioneer in the retail industry.
“The sale of the Shares to SPB, who will operate the Brookstone chain as a going concern, will preserve jobs for most of Brookstone’s full and part time employees. This acquisition will also preserve relationships with landlords and vendors and will rejuvenate the Debtors both financially and operationally.
Proposed Course of Chapter 11 Cases
“Following a Board of Directors meeting on Saturday, March 29, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Agreement”) with certain holders of the Second Lien Notes (the “Consenting Noteholders”). Pursuant to the Restructuring Agreement, the Debtors agreed, among other things, to (a) commence these Chapter 11 Cases; obtain approval for the DIP Facility, and (c) prosecute, obtain confirmation of and implement a plan of reorganization which shall be consistent in all material respects with the terms and conditions of the Restructuring Support Agreement, and the Plan Term Sheet.
“In addition, the Debtors have entered into two agreements with SPB: (a) a Plan Sponsorship Agreement (the “PSA”); and (b) a Stock Purchase Agreement (the “SPA”) (together, the “Spencer Agreements”). Under the plan contemplated by and subject to the terms and conditions set forth in the Spencer Agreements, the Plan Term Sheet and the Restructuring Agreement (collectively, the “Restructuring Transaction Agreements”), SPB will acquire the Shares for the Purchase Price. The Restructuring Agreement and Spencer Agreements contemplate, among other things, the filing of a Chapter 11 plan within 20 days after the Petition Date.
“The Spencer Agreements and Restructuring Agreements further contemplate competitive bidding and an auction process for the right to serve as plan sponsor. … The Bidding Procedures describe, among other things, the requirements for prospective purchasers to participate in the bidding process, the availability and conduct of due diligence by prospective bidders, the deadline and requirements for submitting a bid, the method and criteria for bids to become “qualified,” the manner in which qualified bids will be negotiated, clarified, and improved, and the criteria for selecting a winning bidder, including if necessary, through a public auction.
“With respect to post-petition financings, the Debtors actively solicited proposals from more than twenty (20) lenders and other financial institutions. Of those parties contacted by Jefferies, twelve (12) parties requested non-disclosure agreements, five (5) parties signed such agreements and conducted due diligence. Ultimately, four (4) DIP financing proposals were received, including proposals from Wells Fargo and the Ad Hoc Committee. Although certain aspects of the DIP financing proposal made by the Ad Hoc Committee was more expensive than the proposal made by Wells Fargo (but were otherwise more favorable and less expensive than the other two proposals), the Ad Hoc Committee’s proposal is an integral component of, and foundation for, the plan sponsored by SPB which plan has formal support from more than two- thirds of the Second Lien Noteholders. Facilitating a comprehensive restructuring of the Debtors was a feature that no other DIP Lender could offer. For that reason, the Debtors submit that they were unable to obtain financing on more favorable terms from sources other than the DIP Lenders, and that without such financing, the Debtors’ ability to successfully consummate a reorganization would be jeopardized. …
“The Debtors in these Chapter 11 Cases, along with the last four digits of each Debtor’s federal tax identification number, are Brookstone Holdings Corp. (4638), Brookstone, Inc. (2895), Brookstone Company, Inc. (3478), Brookstone Retail Puerto Rico, Inc. (5552), Brookstone International Holdings, Inc. (8382), Brookstone Purchasing, Inc. (2514), Brookstone Stores, Inc. (2513), Gardeners Eden, Inc. (7793), Brookstone Military Sales, Inc. (2029), Big Blue Audio LLC (NIA), Brookstone Holdings, Inc. (2515); and, Brookstone Properties, Inc. (2517). The Debtors’ corporate headquarters and the mailing address for each Debtor is One Innovation Way, Merrimack, NH 03054.