Best seeks to recover LBO funds; requests Chap. 11 plan extension - Best Products Company Inc., leveraged buyout

Discount Store News, Feb 1, 1993 by Arthur Markowitz

NEW YORK -- Citing a pending multi-million dollar action in the bankruptcy court here seeking to recover funds from its $1.14 billion leveraged buyout. Best Products requested another extension of its deadline for filing a Chapter 11 reorganization plan.

The United States Bankruptcy Court for the Southern District of New York is due to decide at presstime on Best's motion to extend the deadline from Feb. 1 to June 1.

In its petition to the cataloger, Best stated that "the potential recoveries in this action [from the various parties involved in its 1988 LBO] ... might range in the hundreds of millions of dollars." The claims "constitute a major intercreditor issue that must be resolved" to develop a reorganization plan, Best added.

Best's creditors committee has retained a financial advisor to help the Trade Subcommittee resolve the intercreditor recovery issues. This step is seen as preliminary to creditors negotiating any plan of reorganization proposed by Best.

Best's petition, in passing, also noted two other factors for the request for the extension: creditor's late filing of counter proposals to Best's Plan Term Sheet, which contained "substantial elements of a proposed reorganization plan," and the need to review the past holiday season to update its Revised Business Plan which "is critical to the development and finalization of a proposed" reorganization plan.

Best commenced its recovery action at the end of December 1992 against a combination of over 400 individuals and companies to preserve claims that might have expired under the statute of limitations taking effect on Jan. 4.

In its recovery action, Best contended that the LBO weakened the company financially and led to the Chapter 11 filing in January 1991. The cataloger explained that the high fees paid during the course of the LBO and for subsequent financial services reduced Best's capital and net worth and saddled it with more debt than it could pay off--"in essence, Best paid for its own purchase."

The petition alleged that all the parties directly involved with the LBO--everyone listed other than outside shareholders--knew or should have known that Best didn't receive a fair return on the fees related to the LBO and that the deal would increase Best's debt and "improperly increase the risk to other creditors."

It also noted that Adler & Shaykin (A&S), which acquired control of Best, didn't have a new management team in place at the time of the LBO and many experienced senior Best executives left with |golden parachute' packages due to the LBO. This "increased the risks that Best would not be able to achieve the aggressive sales results on which A&S had relied in projecting Best's post-LBO value, including Best's ability to pay its debts as they came due."

The parties listed include * Adler & Shaykin; * Three groups of lenders totaling over 20 major financial institutions like Chemical Bank of New York, Rockefeller Group Capital Corp., Equitable Life Assurance Society, Metropolitan Life Insurance Co., Wells Fargo Bank, Industrial Bank of Japan, Nippon Credit Bank, Mitsubishi Bank, and Credit Lyonnais; * Insider shareholders that, include the catalogers founders, Sydney and Frances Lewis; directors like former chairman and chief executive officer Robert E. R. Huntley; president and chief operating officer William F. Costello and other directors, and other top executives who had substantial stock holdings when they left the company.

Also included in the action were all outside stockholders who owned at least 1,000 shares, a number of whom held substantial stakes. Best explained that all stockholders benefited from the $27.50 per share price they received, which was more thant wice what its stock had traded a few months before the LBO.

Best said it would try to negotiate a settlement, but that it would pursue legal action if negotiations failed. Best's attorney, Weil, Gotshal & Manges of New York, declined to say whether any negotiations were underway.

Any recoveries would become part of the assets that could be used in Best's reorganization plan and to pay creditors. The recovery suit could also affect the standing of the lending institutions, which are secured creditors, and they could end up behind lenders and other unsecured creditors.

Substantial funds are involved, with A&S paid about $31.6 million in fees and the banks and other lending institutions about $1 billion in fees, principal and interest, while directors sold stock worth about $30 million. The negotiations are expected to include discussion on what part of the $27.50 per share buyout is to be repaid.

Best, with bankruptcy court approval, first hired Joel B. Piassick of the Atlanta law firm of Kilpatrick & Cody to determine if there were any grounds for recovery of any monies from the parties to the LBO. After he said there were, Best hired the New York law firm of Orans, Elsen & Lupert, to advise the company on possible courses of action. It advised filing the complaint to ward ff any statute of limitations while pursuing negotiations, with a lawsuit a the last resort.