Paper Zone stores file Chapter 11

Paper Zone LLC, which operates 12 retail stores and 2 online stores under the name of “Paper Zone” and “Memories”, filed for Chapter 11 bankruptcy protection in the Western District of Washington U.S. Bankruptcy Court on April 2nd, 2007.

Paper Zone LLC is headquartered in Seattle, and in 2005 it bought the 16-store Memories chain from Memories & More, Inc. in an attempt at nationwide expansion. That did not go as well as planned and the company has since closed most of the stores that it acquired from Memories, with the exception of two in Utah. The remaining Paper Zone stores are 7 stores in Washington and 3 in Oregon. In bankruptcy filings, Paper Zone management blames the declining scrapbook market segment, difficulty converting the Memories stores to the Paper Zone information technology system, and the unsuccessful attempted conversion of some Memories stores to the Paper Zone format for the failure of the acquisition.

The company’s public statements to customers and vendors, issued by Vice President/General Merchandise Manager Jim Nystrom on April 2nd and April 3rd, explain Paper Zone is only seeking reorganization and court help in voiding leases at vacated locations.

According to the original petition for Chapter 11 protection filed April 2nd, Paper Zone LLC owes about $5.4 million to various creditors but only has total assets of about $3.2 million. That puts their books about $2.2 million out of balance. The company reports that it currently has $441,000 of liquid cash, but is forecasting a balance of only $15,000 cash on June 3rd as its forecast cash balance fluctuates greatly over the coming weeks due to the timing of anticipated expenses versus expected income.

A crucial element in the plan for Paper Zone’s future is the rejecting of the unexpired leases on properties where the company closed stores. The U.S. Bankruptcy Court Judge for the case issued an order on April 4th granting the company’s request to close out 19 unexpired leases. But The Official Unsecured Creditors Committee appointed for the company has already filed notice with the court that at an April 23rd hearing it may possibly appeal that ruling on the three longest of those leases.

Another important part of Paper Zone’s cash flow forecast is their plan to substantially reduce in the next 13 weeks the amount that they spend each week for new inventory purchases, while trying to only marginally decrease their anticipated sales numbers for the same periods.

According to bankruptcy laws, the secured creditors of the company get paid first. In the filing paperwork, Paper Zone lists two types of secured creditors. The first is tax liens: Paper Zone LLC owes small amounts to various tax entities that are secured by personal property liens against the company. The largest amounts, however, are listed as owed to Intracorp Capital, LLC and Intracorp Funding Invest., LLC, both of Seattle. Those two companies are owed a total of $2.2 million in secured loans by Paper Zone LLC.

Intracorp Capital is the company that bought Paper Zone in 2002 amid much fanfare of plans to expand the chain to 50 stores in four to five years. The same man, Gordon McFadden, is the president of Intracorp Capital, and also the chairman of Paper Zone LLC. By buying Paper Zone through a holding company, Paper Zone Holdings, LLC, of which Intracorp owns 70.3%, Intracorp has ensured that they will get their money back out first as a secured creditor.

In bankruptcy, the unsecured creditors divide up the remainder after the secured creditors are paid. This means quite possibly accepting only a percentage of what their debt is worth, as is common in bankruptcy cases.

According to the bankruptcy filing, Paper Zone has a lot of unsecured creditors, over 400, who are owed a total of $3.1 million. Some of the listed debts appear to be expenses such as rent and utilities in association with the closed locations. But many of the debts, some in the tens of thousands of dollars to individual creditors, are to inventory vendors. In the scrapbook industry alone, some of the major creditors are:

My Minds Eye   $48,050.72

Making Memories   $44,451.57

Enthusiast Media LLC $39,147.22

QuicKutz   $36,916.70

ProvoCraft   $30,493.99

EK Success  $27,943.87

Doodlebug Design   $24,930.99

SEI  $24,477.43

Basic Grey   $14,093.46

DG Inventive/Mari-Mi $13,631.62

American Crafts   $12.582.77

Bazzill Basics   $11,939.59

Scrapbook Trends    $11,387.28

Several dozen other scrapbook companies are owed amounts less than $10,000, including Prima, Sandylion, Autumn Leaves/Westrim, Advantus, Mrs. Grossman’s, Karen Foster Design, Fiskars, and We R Memory Keepers.

Given the number of companies owed large amounts of money, many people will be watching with great interest in the progress of the bankruptcy proceedings. On April 3rd, the United States Trustee in the Paper Zone bankruptcy appointed a five-member committee to represent the interests of the unsecured creditors in the case. The 5 members were selected from among the 7 largest unsecured creditors of Paper Zone, and are owed between $59,000 and $129,000 each. One (R&J Puyallup) was the landlord for a former store and the rest are representatives of product vendors (Leader Paper Products, Notes & Queries, West Coast Paper, Astro Converters).

What most of the observers will want to know of course is when they might get their bills paid by Paper Zone or be able to collect on their receivables insurance. An emergency court order was signed on April 4th allowing Paper Zone to use their existing cash to continue to run the company’s day-to-day operations. A final hearing on making that order permanent is scheduled for April 23rd. These orders for use of the company’s “cash collateral” do not include any payments to creditors listed in the bankruptcy application, but only payments to allow for the ongoing operation of the business such as utilities and payroll. The “First Meeting of Creditors Business” to address the longer-term debt is scheduled for May 9th at 1:30pm at the U.S. Courthouse in Seattle.

Paper Zone’s Vice President, Jim Nystrom, referred all questions about the company’s pre-bankruptcy debts to the company’s bankruptcy attorney for legal reasons. EK Success, one of Paper Zone’s major creditors, also declined comment for this story when contacted through their representative.

Another one of Paper Zone’s major creditors, QuicKutz, issued the following statement through their representative, Melanie Kirry: “That obviously is a matter of significant concern for us, but we simply need to give them the time that the law allows to develop that plan. We sincerely hope they will be able to quickly resolve their current financial difficulties.”

Scrapbook Update will continue to follow this story and post follow-ups as court filings warrant them.

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