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WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Matthew S. Barr
Jill Frizzley
Kevin Bostel
Proposed Counsel for Debtors
and Debtors in Possession
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------------------------------x
In re:
:
:
ANGELICA CORPORATION, et al.,
:
:
1
Debtors.
:
:
----------------------------------------------------------------x
Chapter 11
Case No. 17-10870 (JLG)
(Joint Administration Pending)
MOTION OF DEBTORS PURSUANT TO 11 U.S.C. § 365,
FED. R. BANKR. P. 6006, AND LOCAL RULE 6006-1 FOR AUTHORITY TO
ASSUME TEXTILE SUPPLY AGREEMENT WITH MEDLINE INDUSTRIES, INC.
TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE:
Angelica Corporation (“Angelica Corp.”) and its affiliates, as debtors and debtors
in possession in the above-captioned chapter 11 cases (collectively, the “Debtors” or
“Angelica”), respectfully represent:
Background
1.
On the date hereof (the “Commencement Date”), the Debtors each
commenced with the Court a voluntary case under chapter 11 of title 11 of the United States
Code (the “Bankruptcy Code”).
1
The Debtors are authorized to continue to operate their
The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification
number, are as follows: Angelica Corporation (5260); Clothesline Holdings, Inc. (1081); Angelica Textile Services,
Inc.–NY (6508); Royal Institutional Services, Inc. (8906); and Angelica Textile Services, Inc.–CA (5010). The
location of the Debtors’ corporate headquarters is 1105 Lakewood Parkway, Suite 210, Alpharetta, Georgia 30009.
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business and manage their properties as debtors in possession pursuant to sections 1107(a) and
1108 of the Bankruptcy Code. No trustee, examiner, or statutory committee of creditors has
been appointed in these chapter 11 cases.
2.
Contemporaneously herewith, the Debtors have filed a motion requesting
joint administration of the chapter 11 cases pursuant to Rule 1015(b) of the Federal Rules of
Bankruptcy Procedure (the “Bankruptcy Rules”).
3.
Information regarding the Debtors’ business, capital structure, and the
circumstances leading to the commencement of these chapter 11 cases is set forth in the
Declaration of John Makuch Pursuant to Rule 1007-2 of the Local Bankruptcy Rules for the
Southern District of New York, sworn to on the date hereof (the “Makuch Declaration”), which
has been filed with the Court contemporaneously herewith and is incorporated by reference
herein.
Jurisdiction
4.
The Court has jurisdiction to consider this matter pursuant to 28 U.S.C.
§§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper
before the Court pursuant to 28 U.S.C. §§ 1408 and 1409.
Relief Requested
5.
By this Motion, pursuant to section 365(a) of the Bankruptcy Code,
Bankruptcy Rule 6006, and Local Rule 6006-1, the Debtors request authorization to assume
(i) that certain Textile Supply Agreement (the “Agreement”), dated February 1, 2016, by and
between Angelica Corporation and Medline Industries, Inc. (“Medline”), as modified by that
certain modification and extension agreement, dated March 6, 2017 (the “MEA,” and together
with the Agreement, the “Medline Agreements”) and (ii) the MEA. A proposed form of order
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granting the relief requested herein is attached hereto as Exhibit A (the “Proposed Order”).
Copies of the Agreement and the MEA are attached as Exhibit 1 and Exhibit 2, respectively, to
the Proposed Order. In support of this Motion, the Debtors submit the declaration of John
Makuch, Angelica’s Interim Chief Financial Officer, which is attached hereto as Exhibit B and
incorporated by reference herein.
Angelica/Medline Relationship and MEA
6.
Medline is in the business of providing textiles and related services to
healthcare facilities and service providers, such as Angelica.
Medline has been supplying
Angelica with linen products for numerous years. The Debtors purchase more of their annual
linen needs from Medline than any other supplier; this includes both custom and stock textiles,
many of which cannot be easily sourced from other suppliers in the short term.
7.
In recent years, the relationship between Medline and Angelica (together,
the “Parties”) has been governed by one-year supply agreements. Pursuant to the supply
agreements then in effect, Medline provides product in accordance with the price and quantity
designated by Angelica through purchase orders. Prior to the expiration of each one year term,
Angelica typically issues a request for proposal to Medline for its upcoming linen needs,
pursuant to which Medline offers pricing and other customary terms. In the months leading up
to the commencement of these chapter 11 cases, Medline and Angelica were operating under the
Agreement. The initial term of the Agreement was for one year from February 1, 2016, expiring
January 31, 2017, which was extendable upon mutual written consent of the Parties.
8.
Starting in October 2016, Medline contacted Angelica’s management to
discuss changes to the payment and credit terms under the Agreement. At that time, given the
150-day payment terms under the Agreement, Angelica had an accounts payable balance to
3
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Medline of approximately $13 million (the “Outstanding Receivables”). Following a series of
discussions, Angelica (a) confirmed it would continue—as it had been—to make payments on
account of the Outstanding Receivables in accordance with the terms of the Agreement, and (b)
agreed to make payments to Medline in advance of shipment of new product. On February 13,
2017, Medline informed Angelica that Medline would no longer be shipping product as of
February 17, 2017 given the status of the unresolved Outstanding Receivables.
9.
Faced with an imminent supply disruption and potential costly litigation,
Angelica quickly evaluated its options and ultimately decided the best path forward to maximize
the value of its business was to enter into the MEA, which would ensure uninterrupted linen
supply and avoid a premature chapter 11 filing. After extensive discussions and negotiations
involving the Parties and KKR (as defined in the Makuch Declaration) in its capacity as Stalking
Horse Bidder (as defined in the Makuch Declaration), on March 6, 2017, Angelica and Medline
entered into the MEA to, among other things, modify and extend the Agreement, resolve the cure
amount for the Outstanding Receivables, and provide for Angelica’s assumption of the Medline
Agreements at the onset of these chapter 11 cases.
10.
The MEA provided—and will continue to provide—substantial benefit to
Angelica in the short and long term. As a result of the MEA, Angelica was able to secure a
steady supply of product as it continued to conduct its sale process and negotiate with the
Stalking Horse Bidder, thereby avoiding a premature chapter 11 filing and costly and uncertain
litigation over the validity of the extension of the Agreement. In addition, the MEA preserves an
4
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important business relationship and ensures that Angelica will have a long-term, committed
supply partner as it repositions itself in the market. The key terms of the MEA are as follows:2
a)
the term of Agreement is amended to continue in effect until
April 30, 2020, extendable for additional one year terms upon
mutual written consent of the Parties at least 60 days prior to the
term’s expiration;
b)
Angelica agrees to purchase from Medline 50% of the Debtors’
annual supply purchases and to provide Medline with forecasts and
notifications that help to effectuate this minimum commitment;
c)
Angelica agreed to file a motion to assume the Medline
Agreements upon the commencement of chapter 11 cases;
d)
the Parties agree to a cure amount totaling $8.5 million, payable as
follows:
(i)
$1.5 million in cash upon the Court’s approval of this
Motion;
(ii)
$2.0 million in cash upon the closing of a sale transaction;
and
(iii)
$5.0 million silent second lien secured note; non-interest
bearing with a five year term (the “Note”);3
e)
Medline is permitted to submit a non-priority, general unsecured
claim for the balance of the Outstanding Receivables in the amount
of $4,984,474.75; and
f)
Medline agreed to immediately begin shipping product and release
and deliver any retained products to Angelica in fulfillment of
outstanding and future purchase orders.
2
The following summary is provided for purposes of convenience only. In the event of any inconsistency between
this summary and the terms and provisions of the MEA, the terms of the MEA shall control. Capitalized terms
used but not otherwise defined in the summaries of the MEA contained herein shall have the meanings ascribed to
such terms in the MEA.
3
Pursuant to the MEA, any asset purchase agreement must provide for the assumption and assignment of the
Medline Agreements and the issuance of the Note by the purchaser thereunder.
5
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Assumption Is Sound Exercise of Debtors’ Business Judgment
11.
Section 365(a) of the Bankruptcy Code provides, in relevant part, that a
debtor in possession, “subject to the court’s approval, may assume or reject any executory
contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a); COR Route 5 Co., LLC v. Penn.
Traffic Co. (In re Penn Traffic Co.), 524 F.3d 373, 378 (2d Cir. 2008). The Bankruptcy Code
does not define the term “executory contract,” but the Second Circuit has characterized an
executory contract as one “on which performance remains due to some extent on both sides.” E.
Air Lines, Inc. v. Ins. Co. of Pa. (In re Ionosphere Clubs, Inc.), 85 F.3d 992, 998-99 (2d Cir.
1996) (quoting NLRB v. Bildisco & Bildisco, 104 S.Ct. 1188, 1194 n.6 (1984)). The Medline
Agreements are executory contracts because both Angelica and Medline have performance
obligations remaining thereunder.
12.
The “business judgment” test is the standard courts use to decide whether
to authorize a debtor’s assumption of an executory contract. Orion Pictures Corp. v. Showtime
Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir. 1993), cert. dismissed,
114 S. Ct. 1418 (1994). The “business judgment” test is not a strict standard, as it only requires
a showing that assumption of an executory contract will benefit the debtor’s estate. See Old
Carco LLC, 406 B.R. 180, 196 (Bankr. S.D.N.Y. 2009) (A debtor’s decision to assume an
executory contract is a proper exercise of its business judgment if it is “rational” and does not
“demonstrate bad faith or whim or caprice”); Official Comm. of Subordinated Bondholders v.
Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y 1992) (quoting
Smith v. Van Gorkum, 488 A.2d 858, 872 (Del. 1985)) appeal dismissed, 3 F.3d 49 (2d Cir.
1993); Comm. of Asbestos-Related Litigants v. Johns-Manville Corp. (In re Johns-Manville
Corp.), 60 B.R. 612 (Bankr. S.D.N.Y. 1986). Accordingly, courts generally defer to a debtor’s
6
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business judgment in assuming an executory contract. See Nostas Assocs. v. Costich (In re Klein
Sleep Prods., Inc.), 78 F.3d 18, 25 (2d Cir. 1996); Orion Pictures, 4 F.3d at 1099; In re Child
World, Inc., 142 B.R. 87, 89–90 (Bankr. S.D.N.Y. 1992).
13.
As discussed above, the MEA preserved Angelica’s continuity of supply
of critical product utilized in its business. Accordingly, this allowed Angelica to focus its limited
and valuable resources on running its business operations, servicing its customers, and
maximizing values pursuant to the sale process.
14.
Medline, as Angelica’s largest and primary linen supplier, is critical to
Angelica’s operations. Angelica relies on Medline’s supply of both custom and stock product in
order to meet its obligations to its customers. The assumption of the Agreement provides the
necessary access to essential inventory that Angelica will need to run its business and provide
services to its customers. The prices set forth in the Agreement were bargained for in good faith,
at arms-length, and are consistent with industry norms.
15.
Moreover, assumption of the Medline Agreements provides for a
substantial cash savings to the Debtors’ estates. Absent the MEA, upon assumption of the
Agreement, the Debtors would have been required to pay the full Outstanding Receivables in
cash to assume the Agreement – an amount in excess of $13 million. The MEA, however,
provides that in full satisfaction of all prepetition amounts due and owing under the Agreement,
the Parties agree to a cure amount totaling $8.5 million and Medline’s right to file a proof of
claim for a non-priority general unsecured claim against the Debtors for any unpaid amount
under the Agreement has been preserved. Further, only a small portion of the cure amount (i.e.,
$1.5 million) is payable in cash prior to the consummation of a sale during these chapter 11 cases
The remaining $7 million is payable in two installments: (a) a $2 million cash payment upon
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consummation of a sale; and (b) a $5 million non-interest bearing, secured note with a five-year
term. Not only is this $8.5 million total cost lower than the approximately $13 million in cure
amount the Debtors would otherwise owe in full in cash, but the $5 million note also relieves the
Debtors of a substantial current cash obligation. Thus, the MEA represents substantial shortterm savings to the Debtors’ estates and preserves cash at a time when maintaining liquidity is
paramount.
16.
In sum, assumption of the Medline Agreements benefits the estates
because (a) it guarantees access to necessary supply from Medline, (b) the negotiated cure
amount provides a substantial cash saving to the Debtors’ estates, (c) it provides certainty for the
business regarding a reliable, long-term supply partner going forward, and (d) it allows
management to focus resources on operating the business and maximizing value in the sale
process rather than on disputes with Medline. Accordingly, assumption of the Agreement is
clearly a sound exercise of the Debtors’ business judgment.
17.
Pursuant to section 365(b) of the Bankruptcy Code, in order for a debtor to
assume an executory contract, the debtor must cure any defaults under the contract or provide
adequate assurance that it promptly will cure such defaults. 11 U.S.C. § 365(b)(1)(A). If there
has been a default, the debtor also must provide adequate assurance of future performance under
the contract. 11 U.S.C. § 365(b)(1)(C). There are currently no defaults under the Medline
Agreements. Medline has consented to the assumption of the Medline Agreements and the cure
amount as set forth in the MEA.
8
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Reservation of Rights
18.
Nothing contained herein is intended to be or shall be construed as (a) an
admission as to the validity of any claim against the Debtors or (b) a waiver of the Debtors’
rights to dispute any claim.
Notice
19.
Notice of this Motion has been provided to (i) the Office of the United
States Trustee for Region 2; (ii) the holders of the four largest secured claims against the Debtors
(on a consolidated basis); (iii) the holders of the 20 largest unsecured claims against the Debtors
(on a consolidated basis); (iv) counsel for Wells Fargo Capital Finance, LLC, as agent and lender
under that certain Loan and Security Agreement, dated as of July 15, 2011 (as modified,
supplemented, or amended from time to time); (v) counsel for Cortland Capital Market Services
LLC, as agent under that certain Amended and Restated Loan and Security Agreement, dated
July 12, 2016 (as thereafter amended or modified from time to time, the “Term Loan Credit
Agreement”); (vi) counsel for KKR Credit Advisors (US) LLC, as lenders under the Term Loan
Credit Agreement; (vii) counsel for the DIP Lenders (as defined in the Makuch Declaration);
(viii) the Unions (as defined in the Debtors’ Motion of Debtors Pursuant to 11 U.S.C. §§ 105(a),
363 and 507(a) for Interim and Final Authority to (I) Pay Certain Prepetition Wages and
Reimbursable Employee Expenses, (II) Pay and Honor Employee Medical and Other Benefits,
and (III) Continue Employee Benefits Programs, and for Related Relief, filed contemporaneously
herewith) and their counsel, if any; (ix) the Securities and Exchange Commission; (x) the
Internal Revenue Service; (xi) the United States Attorney’s Office for the Southern District of
New York; and (xii) counsel for Medline. The Debtors submit that, in view of the facts and
circumstances, such notice is sufficient and no other or further notice need be provided.
9
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No previous request for the relief sought herein has been made by the
Debtors to this or any other court.
WHEREFORE the Debtors respectfully request entry of an order granting the
relief requested herein and such other and further relief as is just.
Dated: April 3, 2017
New York, New York
/s/ Matthew S. Barr
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Matthew S. Barr
Jill Frizzley
Kevin Bostel
Proposed Counsel for Debtors
and Debtors in Possession
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Exhibit A
Proposed Order
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
:
:
ANGELICA CORPORATION, et al.,
:
:
Debtors.1
:
:
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Chapter 11
Case No. 17-10870 (JLG)
(Jointly Administered)
ORDER PURSUANT TO 11 U.S.C. § 365(a), FED. R. BANKR. P. 6006,
AND LOCAL RULE 6006-1 AUTHORIZING DEBTORS TO
ASSUME TEXTILE SUPPLY AGREEMENT WITH MEDLINE INDUSTRIES, INC.
Upon the motion of Angelica Corporation and its affiliates, as debtors and debtors
in possession in the above-captioned chapter 11 cases (collectively, the “Debtors” or
“Angelica”), pursuant to section 365(a) of title 11 of the United States Code (the “Bankruptcy
Code”), Rule 6006 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”),
and Rule 6006-1 of the Local Bankruptcy Rules for the Southern District of New York (the
“Local Rules”) for entry of an order authorizing the Debtors to assume (i) that certain Textile
Supply Agreement (the “Agreement”), dated February 1, 2016, by and between Angelica
Corporation and Medline Industries, Inc. (“Medline”), as modified by that certain modification
and extension agreement, dated March 6, 2017 (the “MEA,” and together with the Agreement,
the “Medline Agreements”) and (ii) the MEA (the “Motion”),2 all as more fully set forth in the
Motion; and this Court having jurisdiction to consider the Motion and the relief requested therein
in accordance with 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference
M-431, dated January 31, 2012 (Preska, C.J.); and consideration of the Motion and the relief
1
The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification
number, are as follows: Angelica Corporation (5260); Clothesline Holdings, Inc. (1081); Angelica Textile Services,
Inc.–NY (6508); Royal Institutional Services, Inc. (8906); and Angelica Textile Services, Inc.–CA (5010). The
location of the Debtors’ corporate headquarters is 1105 Lakewood Parkway, Suite 210, Alpharetta, Georgia 30009.
2
Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the
Motion.
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requested therein being a core proceeding pursuant to 28 U.S.C. § 157(b); and venue being
proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409; and notice of the Motion
having been given as provided in the Motion, and such notice having been adequate and
appropriate under the circumstances; and it appearing that no other or further notice need be
provided; and this Court having held a hearing to consider the relief requested in the Motion (the
“Hearing”); and upon the Declaration of John Makuch Pursuant to Rule 1007-2 of the Local
Bankruptcy Rules for the Southern District of New York, filed contemporaneously with the
Motion, the record of the Hearing and all of the proceedings had before this Court; and this Court
having found and determined that the relief sought in the Motion is in the best interests of the
Debtors, their estates, creditors, and all parties in interest, and that the legal and factual bases set
forth in the Motion establish just cause for the relief granted herein; and after due deliberation
and sufficient cause appearing therefor, it is
ORDERED that the Motion is granted to the extent set forth herein; and it is
further
ORDERED that the assumption of the Medline Agreements hereby is authorized
pursuant to section 365(a) of the Bankruptcy Code, Bankruptcy Rule 6006, and Local Rule 60061, effective as of the date hereof; and it is further
ORDERED that notwithstanding entry of this Order, nothing herein shall create,
nor is intended to create, any rights in favor of or enhance the status of any claim held by, any
party; and it is further
ORDERED that the Debtors and Medline are authorized to take all actions
necessary to carry out this Order; and it is further
2
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ORDERED that this Court shall retain jurisdiction to hear and determine all
matters arising from or related to the implementation, interpretation and/or enforcement of this
Order.
Dated: ______________, 2017
New York, New York
____________________________________
UNITED STATES BANKRUPTCY JUDGE
3
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Exhibit 1
Agreement
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Exhibit 2
MEA
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Exhibit B
Declaration in Support of Motion
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
:
:
ANGELICA CORPORATION, et al.,
:
:
Debtors.1
:
:
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Chapter 11
Case No. 17-10870 (JLG)
(Joint Administration Pending)
DECLARATION OF JOHN MAKUCH IN SUPPORT
OF MOTION OF DEBTORS PURSUANT TO 11 U.S.C. § 365,
FED. R. BANKR. P. 6006, AND LOCAL RULE 6006-1 FOR AUTHORITY
TO ASSUME TEXTILE SUPPLY AGREEMENT WITH MEDLINE INDUSTRIES, INC.
I, John Makuch, make this declaration under 28 U.S.C. § 1746:
1.
I am a Managing Director with Alvarez & Marsal North America, LLC
(“A&M”). I have more than 20 years of operational and financial restructuring and management
consulting experience.
I have been involved in all aspects of the reorganization process,
including the development and evaluation of strategic business plans, the implementation of
liquidity management strategies, and advising on numerous out-of-court and chapter 11
proceedings.
2.
On April 20, 2016, A&M was engaged by Angelica Corporation
(“Angelica Corp.”) and its affiliates, the debtors and debtors in possession in the abovecaptioned chapter 11 cases (collectively, the “Debtors” or “Angelica”), to, among other things,
provide Angelica with financial advisory services in connection with Angelica’s evaluation and
development of a revised operating plan and cash flow forecast, and to assist Angelica in its
negotiations with creditors. I was appointed the Interim Chief Financial Officer (“Interim
1
The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification
number, are as follows: Clothesline Holdings, Inc. (1081); Angelica Corporation (5260); Angelica Textile Services,
Inc.–NY (6508); Royal Institutional Services, Inc. (8906); and Angelica Textile Services, Inc.–CA (5010). The
location of the Debtors’ corporate headquarters is 1105 Lakewood Parkway, Suite 210, Alpharetta, Georgia 30009.
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CFO”) of Angelica Corp. on July 29, 2016. As Interim CFO, I report and provide advice to
Angelica Corp.’s Board of Directors and Chief Executive Officer in connection with the
financial affairs and operations of Angelica and these chapter 11 cases.
3.
On the date hereof (the “Commencement Date”), the Debtors each
commenced with the Court a voluntary case under chapter 11 of title 11 of the United States
Code (the “Bankruptcy Code”). I am knowledgeable and familiar with Angelica’s day-to-day
operations, business and financial affairs, books and records, and the circumstances leading to
the commencement of these chapter 11 cases. Contemporaneously, the Debtors filed the Motion
of Debtors Pursuant to 11 U.S.C. § 365, Fed. R. Bankr. P. 6006, and Local Rule 6006-1 for
Authority to Assume Textile Supply Agreement with Medline Industries, Inc., (the “Motion”). I
submit this declaration (this “Declaration”) in support of the Motion.
4.
Except as otherwise indicated herein, the facts set forth in this Declaration
are based upon my personal knowledge, my review of relevant documents, information provided
to me by employees of A&M or Angelica or advisors and counsel to Angelica, or my opinion
based upon my experience, knowledge, and information concerning Angelica’s operations. If
called upon to testify, I would testify competently to the facts set forth in this Declaration.
5.
I am authorized to submit this Declaration on behalf of the Debtors.
Angelica/Medline Relationship and MEA
6.
Medline Industries, Inc. (“Medline”) is in the business of providing
textiles and related services to healthcare facilities and service providers, such as Angelica.
Medline has been supplying Angelica with linen products for numerous years. The Debtors
purchase more of their annual linen needs from Medline than any other supplier; this includes
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both custom and stock textiles, many of which cannot be easily sourced from other suppliers in
the short term.
7.
In recent years, the relationship between Medline and Angelica (together,
the “Parties”) has been governed by one-year supply agreements. Pursuant to the supply
agreements then in effect, Medline provides product in accordance with the price and quantity
designated by Angelica through purchase orders. Prior to the expiration of each one year term,
Angelica typically issues a request for proposal to Medline for its upcoming linen needs,
pursuant to which Medline offers pricing and other customary terms. In the months leading up
to the commencement of these chapter 11 cases, Medline and Angelica were operating under that
certain Textile Supply Agreement (the “Agreement”), dated February 1, 2016, by and between
Angelica Corporation and Medline. The initial term of the Agreement was for one year from
February 1, 2016, expiring January 31, 2017, which was extendable upon mutual written consent
of the Parties.
8.
Starting in October 2016, Medline contacted Angelica’s management to
discuss changes to the payment and credit terms under the Agreement. At that time, given the
150-day payment terms under the Agreement, Angelica had an accounts payable balance to
Medline of approximately $13 million (the “Outstanding Receivables”). Following a series of
discussions, Angelica (a) confirmed it would continue to make payments on account of the
Outstanding Receivables in accordance with the terms of the Agreement, and (b) agreed to make
payments to Medline in advance of shipment of new product. On February 13, 2017, Medline
informed Angelica that Medline would no longer be shipping product as of February 17, 2017
given the status of the unresolved Outstanding Receivables.
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Angelica thus faced an imminent supply disruption. Angelica quickly
evaluated its options and ultimately decided the best path forward to maximize the value of its
business was to enter into that certain modification and extension agreement, dated March 6,
2017 (the “MEA,” and together with the Agreement, the “Medline Agreements”), which would
ensure uninterrupted linen supply and avoid a premature chapter 11 filing. After extensive
discussions and negotiations involving the Parties and KKR (as defined in the Declaration of
John Makuch Pursuant to Rule 1007-2 of the Local Bankruptcy Rules for the Southern District
of New York, sworn to on the date hereof (the “Makuch Declaration”)) in its capacity as
Stalking Horse Bidder (as defined in the Makuch Declaration), on March 6, 2017, Angelica and
Medline entered into the MEA to, among other things, modify and extend the Agreement,
resolve the cure amount for the Outstanding Receivables, and provide for Angelica’s assumption
of the Medline Agreements at the onset of these chapter 11 cases.
10.
As a result of the MEA, Angelica was able to secure a steady supply of
product as it continued to conduct its sale process and negotiate with the Stalking Horse Bidder,
thereby avoiding a premature chapter 11 filing. I believe that the MEA preserves an important
business relationship and ensures that Angelica will have a long-term, committed supply partner
as it repositions itself in the market. The key terms of the MEA are as follows:2
a)
The term of Agreement is amended to continue in effect until
April 30, 2020, extendable for additional one year terms upon
mutual written consent of the Parties at least 60 days prior to the
term’s expiration;
2
The following summary is provided for purposes of convenience only. In the event of any inconsistency between
this summary and the terms and provisions of the MEA, the terms of the MEA shall control. Capitalized terms
used but not otherwise defined in the summaries of the MEA contained herein shall have the meanings ascribed to
such terms in the MEA.
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b)
Angelica agrees to purchase from Medline 50% of the Debtors’
annual supply purchases and to provide Medline with forecasts and
notifications that help to effectuate this minimum commitment;
c)
Angelica agreed to file a motion to assume the Medline
Agreements upon the commencement of chapter 11 cases;
d)
the Parties agree to a cure amount totaling $8.5 million, payable as
follows:
(i)
$1.5 million in cash upon the Court’s approval of this
Motion;
(ii)
$2.0 million in cash upon the closing of a sale transaction;
and
(iii)
$5.0 million silent second lien secured note; non-interest
bearing with a five year term (the “Note”);3
e)
Medline is permitted to submit a non-priority, general unsecured
claim for the balance of the Outstanding Receivables in the amount
of $4,984,474.75; and
f)
Medline agreed to immediately begin shipping product and release
and deliver any retained products to Angelica in fulfillment of
outstanding and future purchase orders.
Medline is Angelica’s largest and primary linen supplier, and is critical to
Angelica’s operations. Angelica relies on Medline’s supply of both custom and stock product in
order to meet its obligations to its customers. The assumption of the Medline Agreements
provides the necessary access to essential inventory that Angelica will need to run its business
and provide services to its customers. I believe the prices set forth in the Agreement were
bargained for in good faith, at arms-length, and are consistent with industry norms.
12.
Absent the MEA, upon assumption of the Medline Agreements, the
Debtors would have been required to pay the full Outstanding Receivables in cash to assume the
Agreements—an amount in excess of $13 million. The MEA, however, provides that in full
3
Pursuant to the MEA, any asset purchase agreement must provide for the assumption and assignment of the
Medline Agreements and the issuance of the Note by the purchaser thereunder.
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satisfaction of all prepetition amounts due and owing under the Agreement, the Parties agree to a
cure amount totaling $8.5 million and Medline’s right to file a proof of claim for a non-priority
general unsecured claim against the Debtors for any unpaid amount under the Agreement has
been preserved. A portion of the cure amount (i.e., $1.5 million) is payable in cash prior to the
consummation of a sale during these chapter 11 cases The remaining $7 million is payable in
two installments: (a) a $2 million cash payment upon consummation of a sale and (b) a $5
million non-interest bearing, secured note with a five-year term. This $8.5 million total cost is
lower than the approximately $13 million in cure amount the Debtors would otherwise owe in
full in cash.
The $5 million note also relieves the Debtors of a substantial current cash
obligation. Thus, the MEA represents substantial short-term savings to the Debtors’ estates.
13.
I believe assumption of the Medline Agreements benefits the estates
because (a) it guarantees access to necessary supply from Medline, (b) the negotiated cure
amount provides a substantial cash saving to the Debtors’ estates, (c) it provides certainty for the
business regarding a reliable, long-term supply partner going forward, and (d) it allows
management to focus resources on operating the business and maximizing value in the sale
process.
14.
There are currently no defaults under the Medline Agreements. Medline
has consented to the assumption of the Medline Agreements and the cure amount as set forth in
the MEA.
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I declare under penalty of perjury that, to the best of my knowledge and after
reasonable inquiry, the foregoing is true and correct.
Executed this 3rd day of April, 2017
/s/ John Makuch
John Makuch
Interim Chief Financial Officer,
Angelica Corporation
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