Key Points From The Antioch Company/Creative Memories Bankruptcy

The Antioch Company (parent company of Creative Memories) filed literally hundreds of pages of documents with the court today as they started Chapter 11 bankruptcy proceedings. The documents make up about two dozen motions and other types of filings that were filed with the court.

In addition to the initial bankruptcy petition for Chapter 11 reorganization and the proposed plan that has already been approved by its major secured creditors, Antioch filed an assortment of emergency "First Day" motions. Since the company is continuing to operate while in bankruptcy, the motions are to allow for things like continued use of the company's bank accounts, payment of debts due to employees and consultants for payroll and commissions, and to ensure their utilities remain in service.

An order was issued this afternoon in response to the company's motion for an expedited hearing on all of the First Day motions. The hearing on those motions will take place tomorrow morning, November 14th, at 10:30am in Dayton, OH. The court's rulings at the hearing on the First Day motions by Antioch will determine whether the company can effectively continue to operate under its current systems. (Scrapbook Update will report on the hearing's outcome when information is available hopefully tomorrow afternoon.)

What happened to Creative Memories?

So how did the company that arguably started the scrapbooking revolution end up in this situation?

Antioch repeated blamed two factors in its court filings: the downward trend in the scrapbook market, and its move to being entirely employee owned (through a stock program) in 2003:

In 2004, one year after the Company became wholly owned by its employees, it achieved revenues of approximately $336.6 million. The Company's 2004 revenues represented an increase of more than 2400% of the Company's 1994 revenues of $13.9 million. As the scrapbooking market peaked and the Company's revenues began to fall, numerous employees left the Company. With record high stock prices and the start of declining revenue and portfolio trends, employees wanted to sell shares that were allocated to their ESOP accounts, leading to an unintended incentive for many employees to terminate employment in order to lock in their stock value. Consequently, between 2004 and 2007, approximately 800 of the Company's 1,150 employees resigned; the Company was required to make share repurchase payments of approximately $190 million under the ESOP.

(ESOP=Employee Stock Ownership Program. It means the program by which the employees owned the company through ownership of its stock.)

The company's Gross Sales this year through the first 3 quarters were just shy of $149 million, putting the company on track for sales of just under $200 million if sales trends hold steady in the 4th quarter despite the economy. Those numbers would be less than 60% of the amount of business the company did in 2004.

Antioch doesn't sound too optimistic about the future compared to the past few years, forecasting only $156 million in sales for 2009 in their filings. Their forecast calls for slow, steady growth back to just under $200 million in sales in 2012, with 10% of revenue coming from digital products over this time period. Is this realistic given the state of the economy and the decline in interest in scrapbooking? It will be a challenge for sure.

Several attempts were actually made in the past year to sell the company, most notably to equity firm JH Whitney but no satisfactory agreement was ever reached.

What is the bankruptcy plan?

The bankruptcy plan that was pre-approved by the company's major secured creditors before the filing is extremely complex. It involves ending the company's status of being owned by employee-stockholders and making the company an LLC (Limited Liability Company). The current employee-owners of the company would be compensated for the loss of their share ownership through being granted common member interest in a trust connected to the company's holding company in the complicated arrangement. The holders of the company's major debt would reduce some of that debt as part of the plan.

Why would employees give up their ownership shares in exchange for the interest in the trust that the company admits has an unknown value? The math is actually very simple if you believe the company's assertion that this reorganization plan is the only way they can continue to do business at all.

First, if the company was forced to file for Chapter 7 liquidation, all 518 (as of Oct. 31st) of them would lose their jobs. Second, according to the liquidation analysis the company filed today, there would be no money left over after paying the secured creditors to compensate the stockholders after a liquidation. Their stocks would be worthless.

Basically, getting something of unknown value in exchange for their otherwise valueless stock - and keeping their jobs in today's rocky economy - is better than getting nothing and being unemployed.

Why would the company's secured debtors agree to this plan if it reduces their own compensation? Because according to the company's analysis, liquidation only gets them about 34% of what they are owed. The bankruptcy plan as filed today with their agreement will compensate them about 75% of what they are owed.