Case DOT Doc 15 Filed 12/12/11 Entered 12/12/11 17:13:04 Desc Main Document Page 1 of 55

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1 Document Page 1 of 55 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: Chapter 11 ROOMSTORE, INC., Debtor. Case No. 11- DECLARATION OF LEWIS M. BRUBAKER, JR., SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF ROOMSTORE, INC., IN SUPPORT OF CHAPTER 11 PETITION AND FIRST-DAY PLEADINGS Lewis M. Brubaker, Jr., being of full age, hereby declares (this Declaration ) as follows, pursuant to 28 U.S.C. 1746: 1. I am the Senior Vice President and Chief Financial Officer of RoomStore, Inc., ( RoomStore or the Debtor ), the debtor and debtor-in-possession in the above-captioned chapter 11 case. 2. I am familiar with the Debtor s day-to-day operations, business affairs, and books and records. I have reviewed the Debtor s first day motions and proposed orders attached thereto (the First Day Motions ). 3. I have personal knowledge of the facts, circumstances and other matters set forth in the First Day Motions and in this Declaration or have gained knowledge of such matters from LOWENSTEIN SANDLER PC Kenneth A. Rosen (NJ Bar No ) (Admission Pro Hac Vice Pending) Bruce D. Buechler (NJ Bar No ) (Admission Pro Hac Vice Pending) Mary E. Seymour (NJ Bar No ) (Admission Pro Hac Vice Pending) Cassandra M. Porter (NJ Bar No ) (Admission Pro Hac Vice Pending) Andrew David Behlman (NJ Bar No ) (Admission Pro Hac Vice Pending) 65 Livingston Avenue Roseland, New Jersey (973) and - KAPLAN & FRANK, PLC Troy Savenko (Va. Bar No ) Leslie A. Skiba (Va. Bar No ) 7 East 2nd Street ( ) Post Office Box 2470 Richmond, Virginia (804) Proposed Co-Counsel to the Debtor and Debtor-in-Possession

2 Document Page 2 of 55 RoomStore s officers, employees or retained advisers that report to me in the ordinary course of my responsibilities as Senior Vice President and Chief Financial Officer. 4. I believe the First Day Motions are necessary to enable RoomStore to continue to operate its business within the confines of the Bankruptcy Code and are in the best interests of its estate, employees, and creditors. 5. This Declaration is intended to provide background information about the Debtor, a brief description of its business, an overview of its prepetition capital structure, an explanation of the circumstances leading to its chapter 11 bankruptcy filing, a description of its objectives within the chapter 11 process, and a summary of the relief sought in the First Day Motions. Unless otherwise indicated, all financial data set forth herein is presented on an unaudited basis. 6. If called as a witness, I would testify as follows: THE BANKRUPTCY CASE 7. On December 12, 2011 (the Petition Date ), RoomStore commenced a bankruptcy case (the Bankruptcy Case ) under chapter 11 of title 11 of the United States Code, 11 U.S.C. 101 et seq. as amended (the Bankruptcy Code ) in the United States Bankruptcy Court for the Eastern District of Virginia (the Bankruptcy Court ). CORPORATE STRUCTURE 8. RoomStore is a publically-held Virginia corporation whose stock is traded on the OTC Bulletin Board under the ticker symbol ROOM. The Debtor is headquartered in Richmond, Virginia ( Headquarters ). 9. RoomStore currently operates sixty-three (63) retail furniture stores, both large format and clearance stores (the Retail Stores ), in eight (8) states: Alabama, Florida, Maryland, North Carolina, Pennsylvania, South Carolina, Texas, and Virginia. In addition, the Debtor operates seven (7) warehouses and distribution centers (the Warehouses and Distribution Centers ) located in Alabama, Maryland, North Carolina, and Texas that service the Retail Stores. -2-

3 Document Page 3 of As more fully described herein, the Debtor owns a 65% equity interest Mattress Discounters Group, LLC ( MDG ). MDG is a Virginia Limited Company and operates eightyone (81) retail bedding stores in Delaware, District of Columbia, Maryland and Virginia. MDG is a separate operating entity from RoomStore. MDG has not filed for relief under the Bankruptcy Code. Earlier in 2011, RoomStore attempted to sell its interest in MDG to investor third party. No sale was consummated. 11. RoomStore owns a 31% equity interest in Creative Distribution Services, LLC ( CDS ). CDS is a Virginia Limited Liability Company that was formed for the purpose of buying and holding real estate. Prior to April 2010, RoomStore owed a retail store located in Lanham, Maryland. In April 2010, RoomStore sold the store to CDS for $2.6 million. CDS also owns a distribution center located in Orangeburg, South Carolina subject to a first mortgage in the approximate amount of $850,000. CDS is a separate operating entity from RoomStore and has not filed for relief under the Bankruptcy Code. CORPORATE HISTORY 12. RoomStore was founded in Its first stores were located in Dallas, Texas. By late 1996, RoomStore had grown to ten stores and two warehouses. 13. Around this time, Heilig-Meyers Company ( Heilig-Meyers ), one of the largest furniture retail companies in the United States at that time, made an offer to purchase RoomStore. The purchase was completed in February RoomStore was then incorporated in Virginia as HMY RoomStore, Inc. 14. Heilig-Meyers sought to expand the business and, in January 1998, purchased the assets of a Delaware company named Reliable Stores, Inc. (d/b/a The Hub) that had twenty-four furniture stores and three warehouses located in Pennsylvania, Maryland and Virginia. When this acquisition was completed, Heilig-Meyers closed some of the acquired furniture stores and converted the remainder to RoomStore s format. 15. By August 2000, RoomStore had grown to thirty (30) stores located in Texas, Oregon and Washington and twenty-four (24) stores located in Maryland and Virginia. -3-

4 Document Page 4 of On August 16, 2000, Heilig-Meyers and all of its subsidiaries (including RoomStore) filed for bankruptcy under chapter 11 of the Bankruptcy Code. After the bankruptcy filing, stores in Washington and Oregon were closed. However, RoomStore gained sixteen (16) new stores by converting some of the Heilig-Meyers furniture stores into RoomStore-style furniture stores. 17. During the nearly five year period that RoomStore operated while in bankruptcy, it closed several additional, underperforming stores (in addition to the stores previously closed in Washington and Oregon). RoomStore emerged from bankruptcy on June 1, 2005 with sixtythree stores. 18. In 2006, Rhodes, Inc., a significant furniture retailer at the time, filed for bankruptcy. RoomStore acquired the leases for six former Rhodes stores located in North Carolina (Raleigh and Durham), Alabama (Birmingham and Dothan) and Florida (Tallahassee). 19. In September 2008, Mattress Discounters Corporation (collectively with Mattress Discounters Corporation East) filed for chapter 11, and attempted to reorganize its business. When it filed for bankruptcy, Mattress Discounters Corporation operated eighty-nine bedding and mattress stores in Maryland, Virginia, and the District of Columbia, under the trade name of Mattress Discounters. When Mattress Discounters Corporation s reorganization efforts failed, RoomStore learned that the company s remaining assets might be available for sale. 20. In November 2008, RoomStore formed, along with an individual investor, MDG, for the purpose of purchasing certain assets from the bankrupt Mattress Discounters Corporation. After conducting due diligence, MDG submitted a bid for the assets of Mattress Discounters Corporation, and the Bankruptcy Court approved the asset sale on December 4, At the closing on December 5, 2008, MDG acquired the designated assets of Mattress Discounters Corporation, which consisted primarily of inventory. MDG also assumed seventy-three property leases and nine executory contracts. The minority interest holder serves as the Chief Executive Officer of MDG. -4-

5 Document Page 5 of 55 THE DEBTOR S BUSINESS 22. RoomStore provides its customers with moderately priced, high quality, fashionable furniture and accessories. RoomStore s best customers include younger families with children at home who have recently relocated to a new or larger home and are in need of new furniture. RoomStore s highest performing stores are either located in areas with significant new housing growth or in markets where there is high housing turnover (such as cities with large military bases). A. RoomStore s Properties and Leases. 23. RoomStore owns two properties in fee simple: a retail store in Myrtle Beach, South Carolina and a distribution center in Rocky Mount, North Carolina. The Debtor does not own the land under the Myrtle Beach store, however, which is subject to a long-term ground lease. The Rocky Mount property is unencumbered while the Myrtle Beach store is subject to an outstanding mortgage loan in the approximate amount of $2.4 million. 24. RoomStore is currently a party to seventy-two leases for retail, office and warehouse properties used in its business. These leases have remaining terms ranging from less than one year to over fifteen years. These leases impose substantial financial obligations on RoomStore. 25. For the fiscal year ended February 28, 2011, the Debtor s payments for rents were just over $23.1 million. B. Internet Sales. 26. RoomStore also sells products through its website, Internet sales have grown steadily since the website was created in In fiscal year 2012, RoomStore anticipates selling close to $6.4 million of its products via the internet, with higher profit margins as compared to its physical stores. RoomStore s total internet sales for fiscal year 2011 were approximately $5.8 million. C. Employees. 27. As of December 1, 2011, the Debtor has 1,194 employees (the Employees ). -5-

6 Document Page 6 of Employees are paid bi-weekly on Fridays. There are two paydays left in 2011: December 16, 2011 and December 30, The Debtor uses the payroll services of PayChex, Inc. ( PayChex ) to handle the production of Employee paychecks. PayChex withdraws funds for wages, withholding taxes, payroll taxes, and other payroll-related disbursements from the Payroll Account (as defined below) via ACH debit. The Payroll Account is a zero-balance account that draws from the Operating Account (as defined below) as items clear. 29. Employees are entitled to a variety of benefits including product discounts; monthly and annual bonuses; paid vacation, personal, holiday and sick time-off; medical, dental, vision and life insurance policies; savings and retirement plans; workers compensation programs and other cash and non-cash compensation. D. Distribution and Delivery of Goods to Customers. 30. RoomStore uses a variety of distribution and delivery methods to deliver the products it sells to its customers. For stores in Texas, customers may pick up purchased furniture directly from designated stores and warehouses or have the furniture delivered by an independent delivery company. 31. For stores located on the east coast, RoomStore uses several delivery methods and uses its facility located in Rocky Mount, North Carolina as the hub. 32. For deliveries to the Baltimore-Washington region, furniture is trucked daily from Rocky Mount to a cross-dock facility in Jessup, Maryland. In Jessup, the furniture is transferred to delivery trucks that operate five days a week for delivery to RoomStore s customers. The delivery drivers unbox and assemble the product at the customer s home, except for chairs, which are assembled in Rocky Mount. A few of these trucks are operated by RoomStore employees and the remainder are operated by independent contractors. 33. For stores located in Tallahassee, Florida, Dothan, Alabama, Winchester, Virginia and Wilmington, North Carolina, furniture is trucked from Rocky Mount to a smaller, local warehouse, where it is prepped and delivered by local RoomStore delivery crews. -6-

7 Document Page 7 of For all other stores and markets on the east coast, RoomStore has outsourced its distribution and delivery function to a third party. E. RoomStore s Inventory Sources. 35. RoomStore purchases approximately 60% of its goods from U.S.-based companies, which generally obtain the products from foreign countries such as China, Vietnam and Malaysia. For the remaining 40%, since 2006, RoomStore has been pursuing a direct sourcing initiative whereby it purchases goods directly from Asian manufacturers. 36. Over the past several years, RoomStore has experienced some success in locating reliable manufacturers and working directly with them to design and manufacture furniture. For direct sourced goods, RoomStore has been able to sell the products at a higher margin, thereby increasing profitability. 37. While RoomStore plans to continue with direct sourcing, it is unlikely that RoomStore will direct source all of its furniture in the foreseeable future. F. Trademarks. 38. The RoomStore name and logo are protected by three separate trademark registrations. The Debtor also has trademark protection for several other marks, including RoomStore World, Kidstore, Room of Dreams, and We don t cut corners, we cut prices. The Debtor has licensed the name RoomStore to two furniture retail companies, one of which operates ten stores in Arizona, and another that operates several stores in Mississippi. PREPETITION CAPITAL STRUCTURE A. Prepetition Credit Facility with Wells Fargo Capital Finance, LLC. 39. On May 27, 2010, RoomStore entered into a four-year $30 million revolving credit facility with Wells Fargo Bank, National Association, successor by merger to Wells Fargo Retail Finance, LLC ( Wells Fargo or WFB ), which replaced a credit facility with Bank of America that matured in the same month (the Credit Facility or Revolver ). 40. RoomStore s borrowing availability under the Credit Facility fluctuates based on outstanding borrowings, inventory levels and other specified adjustments. If the Debtor s actual -7-

8 Document Page 8 of 55 borrowings exceed a certain amount, then Wells Fargo could impose a number of conditions which would limit RoomStore s independence by requiring Wells Fargo s consent for certain operating decisions. For example, Wells Fargo may limit the Debtor s ability to (i) incur additional indebtedness, (ii) pay dividends or make other payments, (iii) consummate future asset sales or acquisitions, (iv) enter into future transactions with affiliates, or (v) merge, consolidate or sell, assign, transfer, lease, convey, or otherwise dispose of all or substantially all of RoomStore s assets. 41. Interest rates under the Credit Facility are variable and based on the higher of the Federal Funds rate plus 0.5%, LIBOR rate plus 1% or the Wells Fargo prime rate. An additional 2% is then added to the highest rate to get the total interest rate on the borrowing. Within the Credit Facility, RoomStore has the option to enter into up to five fixed maturity loans at a time with interest calculated at LIBOR plus 3.0%. The fixed maturity LIBOR loans generally have a 30-day maturity and a lower interest rate than the variable portion of the facility and may be rolled over indefinitely until the credit facility expires. RoomStore was in compliance with all Credit Facility covenants as of February 28, As of December 1, 2011, RoomStore owed Wells Fargo approximately $4.3 million in outstanding borrowings under the Credit Facility. B. Real Estate Mortgage Note. 43. RoomStore is the borrower under a real estate mortgage note payable to GE Commercial Finance Business Property Corp. bearing interest at 7.25% per year with a final balloon payment due on July 1, This note was used to finance the construction of RoomStore s Myrtle Beach, South Carolina store. The principal unpaid balance as of November 30, 2011, was approximately $2.4 million. The loan is secured by the building only. C. Letters of Credit Relating to Insurance Policies. 44. As of November 30, 2011, RoomStore had $1.4 million of outstanding letters of credit related to insurance policies. These include $800,000 letter of credit for RoomStore s -8-

9 Document Page 9 of 55 current workers compensation insurance carrier, and four other letters of credit totaling $645,000 for prior worker s compensation insurance carriers. D. Cash Management System. 45. The Debtor s cash management system (the Cash Management System ) consists of twelve primary accounts (the Bank Accounts ): three store depository accounts (the Store Depository Accounts ), two credit card merchant processing depository accounts (the Merchant Depository Accounts ), three in-store financing and secondary financing depository accounts (the Financing Depository Accounts ), a concentration account (the Concentration Account ), an operating account (the Operating Account ), a payroll disbursement account (the Payroll Account ), and a positive-pay 1 controlled disbursement account (the Controlled Disbursement Account ). 46. The Cash Management System is designed to enable the efficient flow of cash receipts from the Debtor s geographically dispersed retail store locations into a central concentration account for repayment of the Revolver, and the centralized disbursement of funds for payroll, vendor payments, taxes, and other payments made by the Debtor. A flowchart detailing the flow of funds through the various accounts comprising the Cash Management System is annexed as Exhibit A to the Cash Management Motion. 47. The Debtor maintains the Store Depository Accounts at Wells Fargo, Hagerstown Trust, and JPMorganChase Bank. 2 Cash and checks received from customers are deposited into the Store Depository Accounts on a daily basis. The Store Depository Account at Wells Fargo, which includes numerous subaccounts for substantially all of the Debtor s retail store locations, is a zero-balance account, with all balances swept nightly into the Concentration 1 A positive-pay account, such as the Controlled Disbursement Account, is a type of checking account with an additional layer of control whereby a bank will only honor checks and other debits identified on a disbursements listing provided electronically by the accountholder. 2 The Store Depository Accounts at Hagerstown Trust and JPMorganChase Bank serve two store locations for which there is no nearby Wells Fargo branch. -9-

10 Document Page 10 of 55 Account. The Debtor initiates a wire, typically weekly or biweekly, of the balance in the Store Depository Account at Hagerstown Trust into the Concentration Account. The balance in the JPMorganChase Bank Store Depository Account is transferred into the Concentration Account each Monday pursuant to a standing wire order. 48. The Debtor s card payment processor, Chase Paymentech, deposits the net proceeds of customers credit and debit card transactions into the Merchant Depository Accounts at Wells Fargo. Similarly, the proceeds of third-party in-store customer financing arrangements are deposited by its respective lenders into one of three Financing Depository Accounts at Wells Fargo. The Merchant Depository Accounts and the Financing Depository Accounts are zero-balance accounts with its balances swept nightly into the Concentration Account. 49. Funds in the Concentration Account are in turn paid to Wells Fargo Capital Finance, LLC daily, pursuant to a standing wire order, to pay down borrowings under the Revolver. In turn, advances under the Revolver are deposited into the Operating Account as they are drawn. 50. The Debtor pays accounts payable, sales taxes, customs duties, rent, and other operating disbursements from the Controlled Disbursement Account, a positive-pay zerobalance account that draws from the Operating Account daily as items clear. CIRCUMSTANCES LEADING TO BANKRUPTCY FILING A. RoomStore s Recent Performance. 51. Due to the substantial efforts of the Debtor and its employees, for the fiscal years ending February 28, 2011, 2010, and 2009, RoomStore generated net sales of approximately $261.8 million, $258.6 million and $318.5 million, respectively. However, net losses for each year were $13.2 million, $7.1 million, and $13.6 million, respectively. 52. Moreover, RoomStore anticipates sales for the fiscal year ending February 29, 2012 to be approximately $190.0 million. The largest driver of declining sales performance was a decline in store traffic between fiscal years ending 2011 and

11 Document Page 11 of 55 B. Poor Performance of Retail Furniture Industry Overall. 53. The furniture retail industry is very cyclical. The U.S. furniture retail industry grew substantially between 1998 and In 1998, total annual furniture and bedding sales were $59.6 billion. In 2007, total annual furniture and bedding sales had grown to $86.5 billion a 45% increase RoomStore believes that much of this retail growth was driven by corresponding growth in the residential housing market. During 2005, 8.3 million new and existing homes were sold in the U.S. In the second half of 2006, housing markets around the country started to cool down. Just over 7.5 million new and existing homes were sold in In 2007 and 2008, the slowdown continued, with only 6.4 million and 5.4 million units sold, respectively. 4 Housing starts are an important barometer for furniture sales. When housing starts are rising, so are furniture sales. Conversely, when housing starts decline, furniture sales decline In line with the housing market, furniture sales began to decline in the second half of In 2007, these declines accelerated and leading furniture chains experienced a significant drop in sales. For many retailers, 2008 and 2009 were even worse, and double-digit sales declines were common. 6 Many furniture manufacturers and retailers have not survived this multi-year decline in sales. At the end of 2009 and the beginning of 2010, there were positive signs of increased furniture sales. As 2010 passed, however, furnishings sales weakened again in tandem with another decline in housing sales. 7 As noted above, there is a strong correlation between housing sales and furniture sales. For early 2011, housing sales are 3 Source: April 2008 Furnishings Digest at page 10, published by Mann, Epperson & Epperson. 4 Source: National Association of Home Builders ( 5 Source: U.S. Department of Commerce Industry Report, Furniture and Related Products NAICS Code 337 ( 6 Source: 2009 Survey of Top 100 U.S. Furniture Stores, published by Furniture Today on May 25, 2009, and 2010 Survey of Top 100 U.S. Furniture Stores, published by Furniture Today on May 24, Source: Furnishings Digest Newsletter, published by Mann, Armistead & Epperson (March 2011). -11-

12 Document Page 12 of 55 still decreasing. Compared to March 2009 to March 2010, housing sales during the period of March 2010 to March 2011 were down 6.3% As reflected in its net sales prediction above, RoomStore expects that the remainder of fiscal year 2012 will continue to be a difficult year with very fierce competition among the retailers who are still in business. 57. For these reasons, RoomStore has sought relief under the Bankruptcy Code to enable it to reorganize its businesses and better structure its operations for the benefit of its estate and creditors. PREPETITION TURNAROUND EFFORTS. 58. Throughout the summer of 2011, RoomStore repaid a substantial portion of the monies owed to Wells Fargo pursuant to its Revolver. Those payments depleted RoomStore s available cash which, in congruence with declining sales and other factors, has made it difficult for the Debtor to continue paying its expenses going forward. 59. In addition, RoomStore attempted to sell its interest in MDG to an outside investor. As noted above, this sale did not take place and RoomStore is reconsidering how to best utilize this asset. 60. Just prior to filing its Petition, RoomStore replaced Curtis Kimbrell, its Chief Executive Officer since 2001, with Stephen Giordano. Mr. Giordano has an extensive background in the industry and the Debtor believes Mr. Giordano s management will be integral to a successful reorganization. 61. RoomStore also began the process of evaluating its stores and operations with the goal of closing weak-performing stores. RoomStore has already commenced closing five of its Retail Store locations. RoomStore believes these efforts will substantially reduce its overhead 8 Source: National Association of Realtors ( pdf?mod=ajperes&cacheid=3c deea388c3cf60f51ebbfd). -12-

13 Document Page 13 of 55 expenses and costs and help it to emerge a stronger, profitable entity. To date, two of these stores have closed and RoomStore intends to continue these efforts during its chapter 11 case. OBJECTIVES OF CHAPTER 11 FILING 62. RoomStore commenced this chapter 11 case to promptly and efficiently restructure its operational footprint and capital structure. In that regard, RoomStore has commenced this case with the immediate goal of obtaining three significant types of relief designed to meet its long-term turnaround and financial performance objectives: (i) approval of adequate post-petition financing to ensure a smooth transition into chapter 11; (ii) authorization to close various stores and hold store closing sales ( Store Closing Sales ); and (iii) authorization to reject of unnecessary unexpired leases of non-residential real property and, upon conclusion of the Store Closing Sales, reject or assume additional leases. 63. Once these initial goals are satisfied, RoomStore will work closely with its vendors and enhance customer relations, and hopes that it will be in a position to emerge from chapter 11 in first half of FIRST-DAY MOTIONS 64. In furtherance of its restructuring objectives, RoomStore expects to file a number of First Day Motions, as listed below, and respectfully requests that the Court consider entering the proposed orders accompanying the First Day Motions. 65. I have reviewed each of the First Day Motions (including the exhibits thereto). The facts set forth therein are true and correct to the best of my knowledge, information and belief, with appropriate reliance on other employees of the Debtor and its advisors. 66. Moreover, I believe that the relief sought in each of the First Day Motions (i) is vital to enable the Debtor to make the transition to, and operate in, chapter 11 with a minimum interruption or disruption to its business or loss of productivity or value; (ii) constitutes a critical element in achieving the Debtor s successful reorganization; and (iii) ensures that RoomStore complies with applicable non-bankruptcy law, to the extent such law remains applicable in a chapter 11 bankruptcy proceeding. -13-

14 Document Page 14 of 55 Motion Of Debtor For Order Under 11 U.S.C. 105(a) And 366, And Bankruptcy Rule 6003 (I) Approving Debtor s Adequate Assurance Of Payment To Utility Companies, (II) Establishing Procedures For Resolving Requests By Utility Companies For Additional Assurance Of Payment, (III) Scheduling A Hearing With Respect To Contested Adequate Assurance Of Payment Requests, And (IV) Such Other Relief As Deemed Necessary By The Court (the Utility Motion ). 67. By the Utility Motion, the Debtor seeks the entry of an Order (i) approving the Debtor s segregation of blocked funds to be held by Wells Fargo Bank, N.A. (the Bank ) in the amount of $270,000 in a segregated account (the Utility Blocked Account ) to provide Utility Companies with adequate assurance of payment under Bankruptcy Code sections 366(b) and 366(c)(1)(A) and deeming all Utility Companies to be adequately assured of payment pursuant to section 366(b), (ii) approving the Additional Adequate Assurance Procedures, as set forth below, as the sole method for resolving disputes with Utility Companies regarding adequate assurance of payment, (iii) scheduling a hearing, to be held on or before a day that is thirty days after the Petition Date, on any Additional Adequate Assurance Requests that are disputed by the Debtor, and (iv) such other relief as deemed necessary by the Court. 68. The Debtor fully intends to pay all post-petition obligations owed to the Utility Companies in a timely manner. Moreover, the Debtor expects that its operating cash flow and borrowings under its proposed post-petition credit facility will be sufficient to pay such postpetition utility obligations. 69. The Debtor proposes to establish the Utility Blocked Account, in accordance with the terms and conditions of the Debtor s proposed post-petition credit facility in the amount of $270,000, which amount is equal to the charges incurred by the Debtor for approximately two weeks of Utility Services from all of the Utility Companies during the one year period prior to the Petition Date. The Utility Blocked Account will be established either by permitting the Bank to block available borrowing in amount equal to $270,000 or by segregating the funds into a separate account to be administered in accordance with the Utility Order. The Utility Blocked Account would serve as a cash security deposit to provide adequate assurance of payment for Utility Services provided to the Debtor post-petition. -14-

15 Document Page 15 of The Debtor submits that the Utility Blocked Account, in conjunction with the Debtor s ability to pay for future Utility Services in the ordinary course of business (collectively, the Proposed Adequate Assurance ), constitutes sufficient adequate assurance of payment. Nonetheless, the Debtor anticipates that certain Utility Companies may not find the Utility Blocked Account satisfactory and may request additional adequate assurance of payment pursuant to Bankruptcy Code section 366(c)(2) ( Additional Adequate Assurance ). Thus, the Utility Motion provided for such procedures. The Debtor requests the Court grant the Utility Motion as it is essential for its continued operations. Motion Of Debtor For Order Pursuant To 11 U.S.C. 105(a), 363(b), 506(a), 507(a), And 541 And Bankruptcy Rules 6003 And 6004(h) (I) Authorizing The Debtor To Pay Prepetition Sales, Use, Trust Fund And Other Taxes, And Related Fees And Obligations; And (II) Directing Certain Financial Institutions To Honor Prepetition Payments Made By Debtor Related To Taxes And Fees (the Tax Motion ). 71. By the Tax Motion, the Debtor requests that this Court enter an order, under Bankruptcy Code sections 105(a), 363(b), 506(a), 507(a), and 541 (i) authorizing, but not directing, the Debtor to pay prepetition sales, use, and other similar trust fund taxes, real and personal property taxes, business lien fees, annual report taxes and other similar taxes and fees (the Taxes and Fees ) and similar obligations detailed herein to the respective taxing or other appropriate authorities (the Taxing Authorities ) in an amount up to $2.3 million, in the ordinary course of the Debtor s business and the payment of Taxes and Fees relating to tax audits that have been completed, are in progress, or arise from prepetition periods; and (ii) directing financial institutions to honor prepetition payments made by the Debtor related to prepetition sales, use, trust fund and other taxes, and related fees and obligations. 72. The Debtor collects and remits sales taxes in connection with the sale of merchandise to its customers. Generally, sales taxes collected from customers are remitted to the Taxing Authorities in the month following collection. The Debtor also may be responsible for remitting use taxes on account of purchases of various supplies and fixtures. Use taxes typically arise if a supplier does not have business operations in the state in which it is -15-

16 Document Page 16 of 55 supplying goods and does not charge state taxes. The Debtor remits approximately $1.1 million per month, on average, in sales and use taxes. 73. In addition, under applicable law, state and local governments in jurisdictions where the Debtor s operations are located are granted the authority to levy property taxes against the Debtor s real and personal property. The Debtor typically pays property taxes on its real and personal property in the ordinary course of business as such taxes are invoiced for the prior year or quarter, depending on how the applicable tax is assessed. The Debtor remits approximately $1.1 million per quarter, on average, in real and personal property taxes. 74. The Debtor is required to obtain certain business licenses, health permits, and second hand dealer permits and pay corresponding fees in many jurisdictions in which they operate. The criteria to obtain these licenses and permits vary significantly by jurisdiction. 75. The method of calculating and the deadlines for making payments vary by jurisdiction. In some states, the Debtor is required to pay annual reporting fees to state governments to remain in good standing for purposes of conducting business within the state. Further, the Debtor is required to pay various business taxes in certain states. These taxes may be based on gross receipts, rental receipts or other bases determined by the taxing authority. The Debtor remits approximately $96,000 per quarter, on average, in business license fees, annual report taxes and other taxes and fees. 76. To implement the relief requested herein, the Debtor further requests that the order approving this Motion authorize and direct banks and other financial institutions, including but not limited to Wells Fargo Bank, Hagerstown Trust, and JPMorganChase Bank (collectively, the Financial Institutions ), to honor and process transfers, deposits, or checks issued by the Debtor on account of any pre-petition Taxes and Fees that have not cleared as of the Petition Date and to rely on the representations of the Debtor as to which checks are issued and authorized to be paid in accordance with this Motion without any duty of further inquiry and without liability for following the Debtor s instructions, provided that sufficient funds are available in the applicable amounts to make the payments. -16-

17 Document Page 17 of The Debtor believes that, among other things, the success of its chapter 11 efforts will require it to remain in good standing within the states in which it does business and a complete devotion of effort by its officers and directors to the bankruptcy case, rather than attending to any tax-related issues that may arise by reason of failure to pay the Taxing Authorities. For these reasons, if the relief requested in the Tax Motion is not granted, the Taxes and Fees described above would cause the Debtor s estate immediate and irreparable harm by detracting from, and potentially derailing, the Debtor s chapter 11 efforts. Motion Of Debtor For An Order Under 11 U.S.C. 105(a), 363(b), 1107(a), And 1108 And Bankruptcy Rules 6003 And 6004(h) Authorizing Payment Of Certain Prepetition Customs Duties, Brokers Fees, Shipping And Warehousing Charges (Including Demurrage And Terminal Charges), And Related Possessory Liens (the Brokers and Shippers Motion ). 78. By the Brokers and Shippers Motion, the Debtor seeks entry of an order authorizing, but not requiring, it to pay prepetition customs duties (the Customs Duties ) to the relevant governmental authorities (the Customs Authorities ), customs brokers fees (the Brokers Fees ) to the Debtor s customs brokers (the Customs Brokers ), shipping and delivery fees and warehousing expenses (including demurrage and terminal charges) (the Shipping and Warehousing Charges ) to third party shippers, haulers, common carriers, and other transporters (the Shippers ), and warehousemen (the Warehousemen ), and any related possessory liens that the Debtor determines, in the exercise of its business judgment, are necessary or appropriate to obtain the release of goods in the possession of such parties and to satisfy the liens, if any, in respect of amounts owed to such parties. The Debtor estimates that the prepetition Customs Duties, Brokers Fees, and Shipping and Warehousing Charges to be paid under this Motion are collectively no more than $430,000 and seeks authorization to pay prepetition Customs Duties, Brokers Fees, and Shipping and Warehousing Charges in an amount not to exceed $430,000 in its discretion. 79. In the ordinary course of its business, the Debtor purchases goods, merchandise and products from vendors throughout the United States, Canada, and Asia. The Debtor -17-

18 Document Page 18 of 55 estimates than on an annual basis it imports $75 million of merchandise from locations outside of the United States. 80. The Debtor imports a number of furniture pieces and other merchandise from factories located in Asia. This merchandise is subject to Customs Duties, including merchandise-processing fees, imposed by the laws of the United States. The Debtor coordinates most United States-side customs-related activities in-house. However, it relies on certain third party Customs Brokers such as Central Global Express, Orient Express Container Co., Ltd. (NY), and American Global Logistics, LLC, to take all actions necessary, including making payments, to obtain the release of merchandise made overseas for delivery to the Debtor. In exchange, the Debtor pays a fee to the Customs Brokers based on the type of services provided, and size and origin of the shipment. The Debtor estimates it owes approximately $3,500 for unpaid prepetition Customs Duties and Brokers Fees and seeks authorization to pay unpaid prepetition Customs Duties and Brokers Fees in an amount not to exceed $3, Prompt payment of the Customs Duties and Brokers Fees promotes the uninterrupted flow of inventory, which is critical to the Debtor s operations. The amount of Customs Duties and Brokers Fees fluctuates depending upon the amount of goods clearing customs. 82. In the normal course of its business, the Debtor incurs certain fees and charges to several Shippers to ship and transport goods and merchandise to the Distribution Centers through established distribution networks in Asia and the United States. These Shippers include, but are not limited to, Evergreen Shipping Agency (America), Corp., COSCO Container Lines Americas, Inc., K Line America, Inc., and Hainan PO Shipping, Ltd. The Debtor may also incur fees (including demurrage and terminal charges) to Shippers and/or Warehousemen in the event merchandise being shipped from a factory is stored for a period of time prior to being delivered to the Distribution Centers. 83. The Debtor s monthly Shipping and Warehousing Charges are roughly $750,000 per month, and average $9 million to $10 million per year. The Debtor estimates it owes -18-

19 Document Page 19 of 55 approximately $425,000 for unpaid prepetition Shipping and Warehousing Charges. The Debtor seeks authorization to pay unpaid prepetition Shipping and Warehousing Charges in an amount not to exceed $425,000. Thus, the Debtor requests the Court grant the Brokers and Shippers Motion. Motion Of Debtor For Order Pursuant To 11 U.S.C. 105(a), 363, 506, 507(a), 553, 1107(a), And 1108 And Bankruptcy Rules 6003 And 6004(h) Authorizing Continuation Of Certain Customer Programs And Practices And Granting Related Relief (the Customer Programs Motion ). 84. By The Customer Programs Motion, the Debtor seek entry of an order authorizing the Debtor (a) to honor or pay certain prepetition obligations to its customers in the ordinary course of its business and (b) granting related relief. 85. Prior to filing this chapter 11 case, the Debtor engaged in certain programs and practices (the Customer Programs and Practices ), in the ordinary course of its business, to develop and sustain positive customer relationships, and maintain efficient day-to-day operations. 86. Approximately 35% to 40% of the Debtor s sales are made by repeat customers. To continue its successful sales efforts, the Debtor engaged in marketing and sales programs that were used to target and develop a positive reputation for its merchandise. The Debtor s practices included accounting for various payments, cash, and non-cash credits, honoring customer deposits, offering a layaway program, accepting returns, and providing merchandise credits and warranties. The Debtor seeks authority, but not direction, to continue to honor and pay its Customer Programs and Practices post-petition. 87. The Debtor further requests that all banks and other financial institutions on which checks to its customers are drawn be authorized and directed to receive, process, honor and pay any and all such checks, whether presented prior to or after the Petition Date, upon the receipt by each such bank of notice of such authorization. 88. The Customer Programs and Practices (as described below) are employed by the Debtor to account for consumer deposits and credits, allow for payment of merchandise over -19-

20 Document Page 20 of 55 time (layaway), permit refunds and exchanges, and provide warrantees and protection plans on its goods and services. The continuation of the Customer Programs and Practices post-petition is necessary in order to sustain operation of the Debtor s business, operations and customer good will while the Debtor is in the process of reorganizing its estate. Moreover, the Debtor s reputation would suffer if certain Customer Programs and Practices were not honored and/or maintained. 89. Customer Deposits. The Debtor obtains a deposit (the Customer Deposits ) from a customer towards the purchase of goods not in inventory at the time of sale, specialized goods, and goods paid for over time through the Layaway Program (defined below). The Customer Deposits are not maintained in a separate bank account by the Debtor. As of December 7, 2011, the Debtor estimates it has aggregate Customer Deposits paid by cash, check or credit card from customers totaling $3.2 million. The Debtor requests authorization to use pre-petition Customer Deposits for merchandise, furniture, or other goods delivered postpetition upon a customer remitting the remaining unpaid balance on the purchase, if any, as some orders are fully paid in advance. 90. At the time customers made its Customer Deposits, they had every expectation that the Debtor would apply the Customer Deposits towards the purchase price of the selected products and merchandise. Moreover, the vast majority of Customer Deposits represent only a portion of the final purchase price of the sold goods. Consequently, while the Debtor s delivery of goods may result in satisfaction of a pre-petition claim, it produces an even larger postpetition benefit that enhances the Debtor s liquidity and provides a more favorable outcome to the estate. 91. The Debtor s inability to use its reasonable business judgment to continue honoring Customer Deposits as described above would significantly harm the goodwill of the Debtor and its ongoing customer relationships, thereby decreasing the value of its business as a going concern. Accordingly, the Debtor seeks the authority to continue honoring Customer -20-

21 Document Page 21 of 55 Deposits in the ordinary course of its business and in the exercise of its reasonable business judgment. 92. Layaway Program. Prior to the Petition Date, in the ordinary course of the Debtor s business, the Debtor allowed customers to place merchandise on layaway (the Layaway Program ). Pursuant to the Layaway Program, customers are typically required to make an initial layaway deposit of 20% to 50% of the purchase price of the merchandise (the Layaway Deposit ) and to complete the purchase, through periodic payments, within 3 to 6 months (the Layaway Payment ). The Layaway Deposits and Layaway Payments are not set aside in a separate bank account. 93. Customers are allowed to exchange layaway merchandise for other merchandise; receiving full credit for Layaway Payment(s), and a full refund of the Layaway Deposit. Approximately 4.1% of the Debtor s merchandise is purchased through the Layaway Program. As of December 7, 2011, the Debtor has 2,120 customers with Layaway Programs. 94. The Debtor believes honoring prepetition Layaway Deposits and Layaway Payments, along with maintaining the Layaway Program, is an essential component to maintaining its relationship with its customers. The Debtor s inability to use its reasonable business judgment to continue honoring the Layaway Program would significantly harm the goodwill of the Debtor and its ongoing customer relationships, thereby decreasing the value of its business as a going concern. Moreover, the Debtor anticipates continuing its Layaway Program post-petition as it generates a significant number sales. Accordingly, the Debtor requests authority to honor, in its business judgment, all prepetition Layaway Deposits and Layaway Payments. The Debtor also seeks, in its business judgment, to continue the Layaway Program. 95. Refunds or Exchange Policy. If a customer is not satisfied with merchandise purchased in the Debtor s stores or website, the customer has the option to return or exchange the goods within two days after receiving them for a full refund. As a result, certain customers hold contingent claims against the Debtor for refunds, returns, exchanges and other credit -21-

22 Document Page 22 of 55 balances (collectively, the Refunds ) relating to goods sold to customers in stores and online, in the ordinary course of its business prior to the Petition Date. 96. Ascertaining with precision an estimate of the aggregate amount of requests for Refunds for merchandise purchased prior to the Petition Date is impracticable. However, the Debtor estimates that for the year to date, through December 7, 2011, the approximate percent of merchandise sold that was returned is 6.6%. For that period, approximately 1.3% of the merchandise that was returned was exchanged for other merchandise. 97. The ability to provide Refunds is vital to the Debtor s ongoing relationship with its customers. The Debtor believes that, without the ability to provide the Refunds, many customers would be unwilling to purchase merchandise from the Debtor. Accordingly, the Debtor seeks entry of an order authorizing, but not directing, it to continue to provide Refunds and pay customer claims associated therewith in the ordinary course of business, including claims arising prior to the Petition Date. 98. Warranties and Guarantees. Prior to the Petition Date, the Debtor warranted all merchandise it sold to be free of manufacturing defects in materials and workmanship for a period of one year from the date of delivery to the original purchaser at the original delivery address (the One Year Warranty ). The One Year Warranty was provided without additional cost to the Debtor s customers. 99. The Debtor also offered customers an extension of the One Year Warranty through a multi-tiered protection plan (the Protection Plans ) for an additional price. The Debtor offered three types of Protection Plans: Silver, Gold and Platinum. The terms of the Protection Plans varied by plan and type of product purchased. Briefly, the Protection Plan provided a customer with up to 4 year(s) (after the manufacturer s warranty had expired) to have a product repaired and replaced. The Debtor satisfies a customer s claim under the Protection Plans by repairing or replacing (depending on type) of products found to be defective or broken during the warranty period. To date, the Debtor estimates it has 326,475 of Protection Plans outstanding. -22-

23 Document Page 23 of Price Guarantee. The Debtor also offered a price guarantee. If a customer found merchandise offered by a competitor at a lower price within 30-days of purchasing the same merchandise from RoomStore, the Debtor guaranteed that it will refund or credit the difference in prices to the customer (the 30-Day Price Guarantee, together with the One Year Warranty and the Protection Plans, the Warranties and Guarantees ) Estimating the amount of obligations that may arise through the Debtor s various Warranties and Guarantees is impracticable. However, the ability to continue to provide the Warranties and Guarantees is vital to the Debtor s ongoing relationship with its customers. The Debtor believes that the increase in customer loyalty generated by the Warranties and Guarantees far outweighs the costs of such programs. Accordingly, the Debtor seeks authorization, but not direction, to continue to honor its obligations under the Warranties and Guarantees in the ordinary course of business, including obligations arising prior to the Petition Date Gift Cards. Prior to the Petition Date, the Debtor sold, in the ordinary course of business, pre-paid gift cards for use at any of the Debtor s stores or to purchase goods through the Debtor s website (the Gift Cards ). Customers have the option of purchasing Gift Cards in any denomination. There is currently no expiration on the Gift Cards. At the time customers purchased Gift Cards, customers had every expectation that the Debtor would honor the Gift Cards and utilize the funds in the Gift Cards towards the purchase price of selected products As of the Petition Date, many customers had not yet redeemed certain of the Gift Cards. The Debtor estimates that, as of December 7, 2011, the approximate amount of outstanding obligations with respect to Gift Cards is $20, Gift Certificate Program and Coupons. The Debtor utilizes two additional programs to maintain customer loyalty and satisfaction: Gift Certificates and Coupons Under the Gift Certificate Program the Debtor allows its customer service representatives to provide customers with small denomination gift certificates as an incentive to return to the Retail Stores or as amelioration for a poor shopping experience (the Gift -23-