12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 1 of 52

Main Document

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------x : In re : : DAFFYS, INC., : : Debtor. : : ---------------------------------------------------------------x

Chapter 11 Case No. 12-_____ (__)

DECLARATION OF RICHARD F. KRAMER IN SUPPORT OF THE DEBTORS CHAPTER 11 PETITION AND REQUESTS FOR FIRST DAY RELIEF I, Richard F. Kramer, being fully sworn, hereby declare that the following is true to the best of my knowledge, information, and belief: 1. I am the Vice President of Finance and Secretary of Daffys, Inc. (the

Debtor). In my current capacity, I am familiar with the day-to-day operations, business, and financial affairs of the Debtor. 2. I submit this declaration (the Declaration) to assist the Court and other

parties in interest in understanding the circumstances that compelled the commencement of this chapter 11 case and in support of (a) the Debtors voluntary petition for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code) filed on the date hereof (the Commencement Date) and (b) the relief, in the form of certain motions and applications, that the Debtor has requested of the Court (collectively, the First Day Pleadings). Any capitalized term not expressly defined herein shall have the meaning ascribed to that term in the relevant First Day Pleading. Any and all factual predicates for the relief sought in any of the First Day Pleadings that are set forth in such pleadings and not set forth separately in this Declaration are incorporated by reference herein.

US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 2 of 52

Main Document

3.

Except as otherwise indicated, all facts set forth in this Declaration (or

incorporated by reference herein) are based upon my personal knowledge, my discussion with other members of the Debtors senior management, my review of relevant documents and the Debtors books and records, or my opinion based upon my experience and knowledge of the Debtors operations and financial condition. I am authorized to submit this Declaration on behalf of the Debtor, and, if I were called to testify, I would testify competently to the facts set forth (and incorporated by reference) herein. I am authorized to submit this Declaration on behalf of the Debtor. 4. This Declaration is intended to provide a summary overview of the

Debtors business and its chapter 11 case. Sections I through IV of this Declaration provide a description of the Debtors business, corporate history and organizational structure, capital structure, and the circumstances giving rise to the commencement of the Debtors chapter 11 case. Section V summarizes the First Day Pleadings and the relief they seek, which the Debtor believes is crucial to realizing the maximum value of its assets for the benefit of its estate. I. DEBTORS HISTORY AND BUSINESS A. Debtors Business 5. The Debtor is a family-owned discount retailer of apparel, accessories, and

home goods. In 1961, Irving J. Schulman opened the Debtors first store, under the name of Daffy Dans Bargaintown, in Elizabeth, New Jersey. Since that time, the Debtor has grown significantly and now operates 19 stores in New York, New Jersey, and Pennsylvania, as well as a distribution and storage facility located in Secaucus, New Jersey. Nine of the Debtors stores are located in New York City, eight of the stores are located in high-traffic suburban retail centers in New York and New Jersey, one store is located in Philadelphia, Pennsylvania, and one 2
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 3 of 52

Main Document

store is located at the Debtors facility in Secaucus, New Jersey. The Debtor leases all its stores and its distribution center/warehouse and does not own any real property. A number of the Debtors leases (particularly certain leases in New York City) are under-market and, accordingly, constitute valuable assets of the Debtors estate. Taking into account both the high concentration of stores and revenue generated by such stores, as well as the value of the Debtors leasehold interests (discussed below), the principal location of the Debtors assets is New York, New York. 6. The Debtors business model centers on providing fashionable clothing at

deep discounts. The Debtors buyers source merchandise globally, both from well-known brands, including Coach, Calvin Klein, Kenneth Cole, and Timberland, and from specialty designers. The Debtors stores also sell the Debtors private label merchandise. B. Daffys Italia 7. In addition to its stores and distribution center, the Debtor, until recently,

operated a permanent merchandising office in Florence, Italy (Daffys Italia). An Italian merchandising presence provided the Debtor with a significant advantage in sourcing emerging European styles and brands in Italy and other countries throughout Europe. Prior to the Commencement Date, the Debtor began to wind down Daffys Italia. The wind down process remains ongoing. C. The Debtors Employees 8. As of the Commencement Date, the Debtor employed approximately

1,162 employees (collectively, the Employees) in the United States, including store, office, and warehouse employees. Of these employees, approximately 685 are employed on a full-time basis and 477 are employed on a part-time basis. Approximately 135 of the Employees are salaried and 1,027 are paid hourly. None of the Debtors Employees are unionized. The Debtor also employs a limited number of independent contractors and consultants. 3
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 4 of 52

Main Document

9.

On or about July 12, 2012, the Debtor served certain of its Employees

with advance termination notices in accordance with the requirements of the Worker Adjustment and Retraining Notification Act of 1988 and applicable state laws, and the Debtor is, therefore, responsible for the payment of certain compensation obligations through October 29, 2012 for Employees employed in New York and through September 30, 2012 for Employees employed in New Jersey and Pennsylvania. 1 The Debtor requires the ongoing services of its Employees to enable the Debtor to liquidate its inventory and maximize the value of estate assets. 10. In addition, the Debtor has four employees at its Daffy's Italia location.

On or before July 16, 2012, the Debtor delivered a termination notice to each its four remaining employees employed at Daffys Italia (collectively, the Italian Employees). The Debtor is, however, required to pay certain ongoing employee obligations, including wages, withholding obligations, and payment of a form of severance referred to as Trattamento di Fine Rapporto (TFR) required under Italian law (collectively, the Italian Employee Obligations). As of the Commencement Date, the Debtor estimates that it owes the Italian Employees approximately $250,000 in outstanding prepetition Italian Employee Obligations. The Debtor estimates that it will incur approximately $80,000 in postpetition obligations associated with the wind-down of the Daffys Italia. 11. As of the Commencement Date, the Debtor estimates that the aggregate

amount of accrued, but unpaid wage obligations for domestic Employees is approximately $350,000. The Debtors Employees and the benefits payable to them are discussed in further detail in Section V.D.1 hereof.

As set forth more fully below, under the Agency Agreement, the Agent (each, as defined herein) is required to pay certain Employee wages and benefits incurred postpetition and, accordingly, I anticipate that the Debtors postpetition obligations will be reduced significantly.

4
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 5 of 52

Main Document

D.

The Debtors Balance Sheet and Corporate Structure 12. The Debtor estimates that, as of January 1, 2012, the Debtors audited

assets totaled approximately $64,694,000 2 and audited liabilities totaled approximately $67,026,000. As of July 1, 2012, the Debtors unaudited financial statements reflected total assets of $60.2 million and total liabilities of $70.5 million. The Debtors financial statements do not necessarily reflect the market value of the Debtors assets. 3 13. The Debtor filed its Schedules of Assets and Liabilities (the Schedules)

and its Statement of Financial Affairs (the SOFA) on the Commencement Date. The Schedules reflect total secured and unsecured claims against the Debtor of approximately $36.2 million. 14. For the fiscal year ending January 1, 2012, the Debtor had net sales of

$151,264,000 and net operating losses of $11,368,000. 15. The Debtor is a closely held New Jersey corporation controlled by Marcia

Wilson (the Principal Shareholder), the President and Chief Executive Officer of the Debtor. The Debtor has no parent company or subsidiaries. The Debtors stock ownership is held by the Principal Shareholder and five family trusts established by the Principal Shareholder. As of June 19, 2012, there were approximately 100,000 shares of Class A voting stock and 6,395,343 shares of Class B non-voting stock issued and outstanding. The Principal Shareholder owns 49,000 of the Class A voting shares, and the remaining 51,000 shares of Class A voting stock are owned by the Wilson 2003 Family Trust. The Principal Shareholder owns approximately

The audited assets do not necessarily reflect the market value of the Debtors under-market leases.

For instance, merchandise inventories are stated at the lower of cost or market as determined by the retail inventory method for merchandise in stores and the specific cost method for merchandise in the Debtors warehouse.

5
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 6 of 52

Main Document

5,225,143 of the Class B non-voting shares, and the remaining 1,170,200 shares of such stock are held in equal amounts by each of four individual trusts set up under the respective names of each of the Principal Shareholders children. II. INDEBTEDNESS 4 16. The Debtor is the primary obligor under a $17.5 million revolving facility,

of which approximately $6.6 million remains outstanding as of the Commencement Date (the Prepetition Revolver), and a $13.0 million term loan, of which approximately $10.2 million remains outstanding as of the Commencement Date (the Prepetition Term Loan). In connection with both facilities, the Debtor also entered into an interest rate Swap Agreement (as defined below), which was terminated prior to the Debtors chapter 11 filing. The Debtor estimates that the termination value under the Swap Agreement is approximately $610,000. 17. The Debtor guaranteed certain real estate loans totaling approximately

$9.4 million made to certain non-debtor affiliates. The Debtor also issued an unsecured promissory note in a principal amount of $1,189,617.27 in favor of Chris H. Friedlander (the Friedlander Promissory Note), a former shareholder, director, and officer of the Debtor, of which approximately $613,000 remains outstanding as of the Commencement Date. Details of each of these facilities, loans, and the promissory note follow. A. The Prepetition Revolver 18. The Debtor entered into, and became obligated as a borrower under, the

Prepetition Revolver pursuant to that certain Loan and Security Agreement, dated January 30, 2009 (together with all amendments, guarantees, related agreements and documents, the
4

The description herein of the Debtors debt documents is for informational purposes only and is qualified in its entirety by the actual terms of the referenced documents.

6
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 7 of 52

Main Document

Revolving Loan Agreements), with Vim-3, L.L.C., Vimwilco, L.P. and Vim Associates (collectively, the VIM Entities), as guarantors, and Wells Fargo Bank, National Association (as successor in interest to Wachovia Bank, National Association, Wells Fargo), as lender. The VIM Entities are owned by the Principal Shareholder. 19. The Revolving Loan Agreements provide for a senior secured asset-based

revolving credit facility of up to $17.5 million, subject to borrowing base limitations, up to $3 million of which may be available for letters of credit. There is no scheduled amortization under the Revolving Loan Agreements, and, in the absence of a default, the principal amount would be due and payable in full at maturity on July 31, 2013. As of the Commencement Date, approximately $6.6 million was drawn and outstanding under the Prepetition Revolver. 20. Pursuant to the Revolving Loan Agreements, the Debtor granted Wells

Fargo a first priority security interest in, and continuing liens on, substantial portions of the Debtors assets, including, among other things, inventory and accounts receivables, to secure the Debtors obligations thereunder. Prior to the Commencement Date, Wells Fargo swept all of the Debtors cash and applied it to reduce the amounts outstanding under the Prepetition Revolver. All amounts payable by the Debtor were subsequently funded by Wells Fargo through a series of draws on the Prepetition Revolver. 21. All borrowings under the Prepetition Revolver are also guaranteed on a

senior secured basis by the Vim Entities. 5

Vim-3, L.L.C. secured its guarantee obligations under the Revolving Loan Agreements pursuant to (i) a Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo and (ii) an Absolute Assignment of Lessors Interest in Leases and Rents, dated January 30, 2009, in favor of Wells Fargo, in each case, in respect of certain real property located in North Bergen and Secaucus, New Jersey. Vimwilco, L.P. secured its guarantee obligations under the Revolving Loan Agreements pursuant to (i) an Open-End Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo and (ii) an Absolute Assignment of Lessors Interest in Leases and Rents, dated January 30, 2009, in favor of Wells

7
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 8 of 52

Main Document

22.

On or about June 5, 2012, Wells Fargo provided the Debtor with a notice

of default under the Revolving Loan Agreements (the Revolver Default Notice), reserving its right to implement the Default Rate (as defined in the Revolving Loan Agreements) of interest under the Revolving Loan Agreements retroactively to June 4, 2012. 6 As set forth in more detail below, the Debtor anticipates that shortly after the Commencement Date it will enter into the DIP Credit Agreement (as defined below) and, pursuant to such agreement, roll up its obligations under the Prepetition Revolver into the DIP Facility (as defined herein). The interest rate provided for under the DIP Credit Agreement is lower than the Default Rate under the Revolving Loan Agreements. B. The Prepetition Term Loan 23. The Debtor entered into, and became obligated as a borrower under, the

Prepetition Term Loan pursuant to that certain Loan and Security Agreement, dated January 30, 2009 (together with all amendments, guarantees related agreements and documents, the Term Loan Agreements), with the Vim Entities, as guarantors, and Wells Fargo, as lender. 24. Pursuant to the Term Loan Agreements, Wells Fargo made the senior

secured Prepetition Term Loan of $13 million to the Debtor on January 30, 2009. The Prepetition Term Loan amortizes at a rate of approximately 1.5% per year, payable in monthly installments. In the absence of a default, the remaining principal amount outstanding would be

Fargo, in each case, in respect of certain real property located in Philadelphia, Pennsylvania. Vim Associates secured its guarantee obligations under the Revolving Loan Agreements pursuant to (i) an Open-End Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo and (ii) an Absolute Assignment of Lessors Interest in Leases and Rents, dated January 30, 2009, in favor of Wells Fargo, in each case, in respect of certain real property located in East Hanover, New Jersey.
6

The Default Rate under the Revolving Loan Agreements is the applicable non-default interest rate plus 2 percent per annum.

8
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 9 of 52

Main Document

due and payable in full at maturity on February 3, 2014. As of the Commencement Date, $10.2 million remains outstanding on the Prepetition Term Loan. 25. To secure the Prepetition Term Loan, pursuant to the Term Loan

Agreements, the Debtor granted Wells Fargo a first priority security interest in, and continuing liens on, the same collateral that secures the Prepetition Revolver. The Term Loan also is guaranteed on a senior secured basis by each of the Vim Entities. 7 26. On or about June 7, 2012, Wells Fargo provided the Debtor with a notice

of default under the Term Loan Agreements (the Term Loan Default Notice), reserving its right to implement the Default Rate (as defined in the Term Loan Agreements) of interest under the Term Loan Agreements retroactively to June 4, 2012. 8 C. The Swap Agreement 27. In connection with the Term Loan Agreements, the Debtor entered into

that certain Amended and Restated Swap Transaction Confirmation, dated February 5, 2009, between the Debtor and Wells Fargo (the Swap Agreement). The Swap Agreement is based upon a standard form of ISDA, which permits termination of the Swap Agreement upon the
7

Vim-3, L.L.C. secured its guarantee obligations under the Term Loan Agreements pursuant to (a) a Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo and (b) an Absolute Assignment of Lessors Interest in Leases and Rents, dated January 30, 2009 in favor of Wells Fargo, in each case, in respect of certain real property located in North Bergen and Secaucus, New Jersey. Vimwilco, L.P. secured its guarantee obligations under the Term Loan Agreements pursuant to (a) an Open-End Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo and (b) an Absolute Assignment of Lessors Interest in Leases and Rents, dated January 30, 2009 in favor of the Wells Fargo, in each case, in respect of certain real property located in Philadelphia, Pennsylvania. Vim Associates secured its guarantee obligations under the Term Loan Agreements pursuant to (a) an Open-End Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo and (b) an Absolute Assignment of Lessors Interest in Leases and Rents, dated January 30, 2009 in favor of Wells Fargo, in each case, in respect of certain real property located in East Hanover, New Jersey.

The Default Rate under the Term Loan Agreements is the applicable non-default interest rate plus 2 percent per annum.

9
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 10 of 52

Main Document

commencement of a chapter 11 case. The Debtor estimates that Wells Fargos claim arising from the termination of the Swap Agreement is approximately $610,000. As set forth more fully below, the Debtor anticipates that its obligations under the Swap Agreement will be rolled up into the Debtors DIP Facility pursuant to the DIP Credit Agreement. D. The Vim Real Estate Loans 28. Vim-3, L.L.C. and Vimwilco, L.P. (collectively, the Vim Borrowers)

entered into, and became obligated as borrowers under, that certain Amended and Restated Loan and Security Agreement, dated January 30, 2009 (together with all amendments, related agreements and documents, the Vim Real Estate Loan Agreements), with Wells Fargo, as lender. 29. the Vim Borrowers: (a) (b) (c) 30. a $8.5 million term loan facility with Vim-3, L.L.C. and Vimwilco, L.P., collectively, as borrower (Vim Term Loan), a $599,999.32 mortgage loan to Vimwilco, L.P. (the Philadelphia Mortgage Loan), and a $2.76 million mortgage loan to Vim-3, L.L.C. (the North Bergen Mortgage Loan and collectively, the Vim Real Estate Loans). The Vim Borrowers obligations under the Vim Real Estate Loan The Vim Real Estate Loan Agreements provide for the following loans to

Agreements are guaranteed by the Debtor and Vim Associates on a senior secured basis. Additionally, the Principal Shareholder personally guaranteed all of the obligations of Vim-3, L.L.C. and Vimwilco, L.P. to Wells Fargo, including their obligations under the Vim Real Estate Loan Agreements, up to a maximum amount of $7.5 million. The Vim Term Loan amortizes at a rate of approximately 1.5% per year, payable in monthly installments, with the remaining principal amount due at maturity on February 3, 2014. The Philadelphia Mortgage Loan

10
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 11 of 52

Main Document

amortized in 36 consecutive monthly installments and was paid in full in January 2012. The North Bergen Mortgage Loan amortizes in 92 consecutive monthly installments, the first 91 of which are in the amount of $30,000, with a 92nd and final payment due on the first business day of September 2016. 31. Pursuant to the Vim Real Estate Loan Agreements, Vim-3, L.L.C. and

Vimwilco, L.P. granted Wells Fargo a first-priority security interest in, and continuing liens on, substantially all of their assets to secure their obligations thereunder. 9 32. On or about June 7, 2012, Wells Fargo provided the Debtor with a notice

of default under the Vim Real Estate Loan Agreement (the Vim Real Estate Loan Default Notice and together with the Revolver Default Notice and the Term Loan Default Notice, the Default Notices), reserving its right to implement the Default Rate (as defined in the Vim Real Estate Loan Agreements) of interest under the Vim Real Estate Loan Agreements retroactively to June 4, 2012. 10 In connection with the execution of the DIP Credit Agreement, the Debtor anticipates that, shortly after the Commencement Date, the Debtor, Wells Fargo, the Principal Shareholder, and the VIM Entities will enter into the Forbearance Agreement, pursuant to which Wells Fargo will agree to forbear from accelerating the Vim Borrowers outstanding liabilities under the Vim Real Estate Loan Agreements and enforcing its rights and remedies under such

Vim-3, L.L.C. also secured its obligations under the Real Estate Loan Agreements pursuant to (a) an Amended, Restated and Consolidated Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo and (b) an Absolute Assignment of Lessors Interest in Leases and Rents, dated January 30, 2009 in favor of Wells Fargo, in each case, in respect of certain real property located in North Bergen and Secaucus, New Jersey. Vimwilco, L.P. secured its obligations under the Real Estate Loan Agreements pursuant to an Open-End Mortgage and Security Agreement, dated January 30, 2009, in favor of Wells Fargo in respect of certain real property located in Philadelphia, Pennsylvania.
10

The Default Rate under the Vim Real Estate Loan Agreements is the applicable non-default interest rate plus 2 percent per annum.

11
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 12 of 52

Main Document

agreements. Further, notwithstanding any reservation by Wells Fargo of its right to implement the Default Rate retroactively to June 4, 2012, Wells Fargo will agree to continue to accrue interest from and after execution of the Forbearance Agreement at the non-default interest rate 33. As of the Commencement Date, approximately $9.4 million was owed to

Wells Fargo under the Vim Real Estate Loan Agreements. E. Friedlander Promissory Note 34. On March 15, 2012, the Debtor issued the Friedlander Promissory Note to

Chris H. Friedlander, a former officer, director, and stockholder of the Debtor, in connection with the redemption of his equity interests in the Debtor. On March 15, 2012, the Debtor made a principal payment of $500,000 on the Promissory Note. Absent a default, the remaining principal of the Promissory Note was to be payable in 36 successive monthly installments of $19,156.04 commencing on May 1, 2012. As of the Commencement Date, approximately $613,000 remains outstanding on the Friedlander Promissory Note. III. CIRCUMSTANCES GIVING RISE TO THE DEBTORS CHAPTER 11 FILING 35. The Debtors operations during the last fifty years have generally been

profitable. In 2011, however, as a result of the continued economic downturn and increased competition in the discount fashion market including an increase in online discount retailers the Debtor suffered a net operating loss of approximately $11,368,000. In an attempt to restructure its business and return to profitability, in February 2011, the Debtor hired a new senior management team, including a new Chief Executive Officer, a new Chief Operating Officer/Chief Financial Officer, and a new Chief Merchandising Officer. 36. One of the Debtors most valuable leases is its lease of a 97,124 square

foot store in New York Citys Herald Square (the Herald Square Lease), with a current rent 12
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 13 of 52

Main Document

that is substantially below market. To increase liquidity, the Debtor entered into that certain Option Agreement, dated December 20, 2011 (as amended, the Option Agreement), with Herald Center Department Store Tenant LLC (the Option Holder), a subsidiary of J.E.M.B. Realty Corporation, pursuant to which the Option Holder purchased from the Debtor an irrevocable option (the Option) to acquire the Debtors interest in the Herald Square Lease. The landlord under the Herald Square Lease is an affiliate of the Purchaser (as defined herein) and the Option Holder. The Option Agreement provided for a total purchase price of $30 million dollars in the form of a nonrefundable $10 million dollar option payment that was paid to the Debtor at the time the Debtor granted the Option and, in the event of the Option Holders exercise of the Option, another $20 million to be paid in accordance with the terms of the Option Agreement. The Option Agreement expires by its own terms on December 20, 2012. 37. Despite the Debtors efforts to improve liquidity and restructure its

business, the Debtor continued to operate at a loss, and, by early 2012, it became apparent that the strategies implemented by the Debtors new management team had not taken hold. In light of the Debtors continuing losses and declining sales performance, the Debtors board of directors fired the new management team in early 2012 and attempted to save the company by, among other things, cutting the companys cost structure. 38. Between April 2012 and June 2012, however, the Debtors sales

performance continued to decline by approximately $1 million - $1.5 million a month, and the Debtors board of directors recognized that without a significant new equity infusion, which was unavailable, the Debtor would soon violate certain loan covenants contained in the Vim Real Estate Loan Agreements and would likely trigger a material adverse change default under the Prepetition Term Loan. On June 5, 2012 and June 7, 2012, Wells Fargo served the Debtor with

13
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 14 of 52

Main Document

the Default Notices. In light of the Debtors circumstances, the board decided that the Debtor would best be able to maximize its assets through a sale of the Debtors leasehold interests and a liquidation of the Debtors inventory. 39. Beginning in March 2012, the Debtor worked with its existing corporate

counsel, Weil, Gotshal & Manges LLP, to assist the Debtors management and the board with analyzing its options for effectuating a sale of its leasehold interests and a liquidation of its inventory, as well as preparing for a potential filing under chapter 11 of the Bankruptcy Code. IV. PREPETITION PREPARATION FOR BANKRUPTCY 40. Given the existing Option on the Herald Square Lease, the Debtor

principally negotiated with the Option Holder and its affiliates with respect to a sale of the Debtors portfolio of leases to an affiliate of the Option Holder, Jericho Acquisitions I LLC (together with its designees and assigns, the Purchaser). Based upon the Debtors calculations, the $43 million purchase price offered by the Purchaser would provide the Debtor with sufficient funds to pay all of its creditors in full. Further, another affiliate of the Purchaser offered, through a separate sale transaction (the Vim Properties Sale), to purchase certain properties (the Vim Properties) indirectly owned by the Principal Shareholder through the Vim Entities, and leased by the Vim Entities to the Debtor. 11 Because the Debtor guarantees over $9 million in obligations of the Vim Entities to Wells Fargo, the potential Vim Properties Sale (which will result in the repayment or refinancing of such debt and the release of the Debtors guarantees) provides a significant benefit to the Debtor and its estate. In light of the foregoing

The Vim Properties consist of three properties, the Debtors headquarters and distribution center in Secaucus, New Jersey, and two of the Debtors retail store locations in Philadelphia, Pennsylvania and Hanover, New Jersey.

11

14
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 15 of 52

Main Document

considerations, the Debtor pursued negotiations with the Purchaser for a sale (the Sale) of certain of the Debtors real property leasehold interests, including the Herald Square Lease, fixtures, and intellectual property (the Purchased Assets). 41. Over a period of approximately five months, the Debtor engaged in good

faith, arms length negotiations with the Purchaser on the terms of a potential deal. These negotiations led to the subsequent execution, on July 18, 2012, of an Asset Purchase, Assignment, and Support Agreement (the Purchase Agreement), by and among the Debtor, the Principal Shareholder, and the Wilson 2003 Family Trust, as sellers, and the Purchaser. The Purchase Agreement provides for, among other things, the Purchasers payment of aggregate cash consideration of $43 million in exchange for the Sale of the Purchased Assets. 42. Further, on July 18, 2012, the Principal Shareholder, as successor in

interest to Vim Associates, and each of the Vim Borrowers, as sellers, entered into that certain Agreement for Sale of Real Estate (the Vim Real Estate Purchase Agreement) with Jericho Acquisitions II LLC and Morris Bailey (together with Jericho Acquisitions II LLC, the Vim Real Estate Purchasers), as buyer, for the sale of the Vim Properties. The Vim Real Estate Purchase Agreement provides for, among other things, the Purchasers payment of aggregate cash consideration of $40,000,000 in exchange for the sale and transfer of the Vim Properties. The proceeds of the sale will be used to satisfy all obligations arising under the Vim Real Estate Loan Agreements, which, in turn, will eliminate the Debtors guarantee of the Vim Borrowers obligations under those agreements. 43. After an auction process to identify which liquidator would provide the

greatest return on the Debtors existing inventory, the Debtor also entered into an Agency Agreement with a joint venture comprised of Gordon Brothers Retail Partners, LLC and Hilco

15
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 16 of 52

Main Document

Merchant Resources, LLC (together, the Agent) by which the Debtor plans to sell substantially all of its remaining inventory. As discussed below, the Debtor seeks to assume the Purchase Agreement and the Agency Agreement during the initial days of its chapter 11 case and believes that the funds generated pursuant to these two agreements will be more than sufficient to satisfy all creditors in full. The Debtor has also proposed a chapter 11 plan (the Plan), 12 which, among other things, provides that all claims of creditors will be unimpaired and effectuates the transactions set forth in the Purchase Agreement. A. The Purchase Agreement 44. Concurrently herewith, the Debtor has filed a motion (the Purchase

Agreement Assumption Motion) 13 to, among other things, assume the Purchase Agreement. Generally, the Purchase Agreement provides for the Sale of the Purchased Assets to the Purchaser in exchange for aggregate cash consideration of $43 million. If the Purchaser elects not to take assignment of a particular lease, the Debtor may reject the lease, and the Purchaser will reimburse the Debtor for any rejection damages associated with such lease. In the event the Purchase Agreement is terminated, the Purchaser retains its Option under the Purchase Agreement to purchase the Herald Square Lease for $20 million. In support of its obligations under the Purchase Agreement, the Purchaser has provided the Debtor with a good faith deposit in the form of a $20 million letter of credit. The Purchase Agreement and related transactions will be effectuated in connection with the Debtors Plan. A detailed summary of the salient

12

Debtors Plan under Chapter 11 of the Bankruptcy Code, dated August 1, 2012.

13

Motion of the Debtor for an Order (I) Approving Debtors (A) Assumption of Asset Purchase, Assignment, and Support Agreement, (B) Assumption, Assignment, and Sale of Unexpired Lease to Purchaser, (C) Entry into Assignment Agreement, and (D) Payment of Purchaser Transaction Expenses and (II) Extending the Time to Assume or Reject Unexpired Leases Pursuant to Sections 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004, 6006, and 9014, dated August 1, 2012.

16
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 17 of 52

Main Document

terms of the Purchase Agreement is included in the Purchase Agreement Assumption Motion. In addition, see the discussion of the Purchase Agreement Assumption Motion in Section V.E.1 of this Declaration. B. The Agency Agreement 45. On July 30, 2012, the Debtor conducted an auction, with a stalking horse

bidder, to retain a liquidator for its remaining inventory. The Agent won the auction, and, accordingly, on July 31, 2012, the Debtor and the Agent entered into that certain Agency Agreement (the Agency Agreement), pursuant to which the Agent will liquidate the Debtors remaining inventory. Concurrently herewith, the Debtor has filed a motion 14 seeking authority to, among other things, assume the Agency Agreement (the Agency Agreement Assumption Motion). 46. Generally, the Agency Agreement provides that the Agent shall guarantee

the Debtor a Guaranty Percentage minimum recovery of 99.5% of the cost of the Debtors inventory, which equates to a minimum recovery for the Debtor under the Agency Agreement of approximately $16.915 million based on a threshold inventory level of $17 million. The Debtors inventory level is determined as of the sale commencement date, which the Debtor anticipates will be the first day after an order of the Court is signed approving assumption of the Agency Agreement. If the Debtors inventory level drops below $17 million however, the Guaranty Percentage will ratchet down from 99.5%. The Agency Agreement is conditioned upon the entry of an order approving assumption of the Agency Agreement no later than August

14

Motion of Debtor For an Order (I) Authorizing Debtor to Sell Assets Through Store closing Sales, (II) Approving (A) Assumption of Agency Agreement and (B) Store Closing Sale Procedures, (III) Exempting Debtor From Compliance With Contractual and Statutory Store Closing Sale Restrictions, and (IV) Granting Related Relief Pursuant to Sections 105(a), 363, and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6003 and 6004.

17
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 18 of 52

Main Document

10, 2012. Accordingly, although the Agency Agreement Assumption Motion is not one of the First Day Pleadings, the Debtor is requesting the Court to set an expedited hearing on the Agency Agreement Assumption Motion so that such motion can be heard in the early part of next week. 47. The Agency Agreement also provides that the Debtor shall receive 5% of

the gross proceeds from the sale by the Agent of any augmented inventory the Agent includes as part of the store closing sale process. Under the Agency Agreement, the Agent has also agreed to reimburse the Debtor for certain costs related to the continued operation of its stores during the wind down, including certain Employee obligations. 48. A detailed summary of the salient terms of the Agency Agreement is

included in the Agency Agreement Assumption Motion. In addition, see the discussion of the Agency Agreement Assumption Motion in Section V.E.2 of this Declaration. C. The Plan 49. Taking into account the proceeds from the Purchase Agreement and the

minimum guaranteed amount expected to be obtained through the Agency Agreement, and after considering the costs of administration not funded under the Agency Agreement, the Debtor expects that it will generate cash proceeds of at least $59 million to satisfy approximately $37 million in claims. In light of the foregoing, on the Commencement Date, the Debtor filed the Plan, which provides for the payment in full, in cash, of all claims against the Debtor, leaves equity interests in the Debtor in place, and treats all classes of claims and interests as unimpaired. The Debtor has commenced this chapter 11 case to facilitate the orderly sale of its remaining inventory under the Agency Agreement and the disposition of the Purchased Assets, including the Debtors leasehold interests, in accordance with the Purchase Agreement. The Debtor seeks

18
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 19 of 52

Main Document

to proceed to confirmation and consummation of the Plan as soon as practicable to enable the expeditious payment of all creditors claims. V. FIRST DAY PLEADINGS 15 50. In connection with the commencement of this chapter 11 case, the Debtor

has filed certain First Day Pleadings pursuant to which the Debtor respectfully requests immediate relief necessary to stabilize the Debtors business, permit the Debtors continued operation, and facilitate the Debtors orderly winddown of its retail operations. A summary of the First Day Pleadings, a description of the relief requested therein, and certain of the facts supporting each of the First Day Pleadings is set forth below. A. Summary of the First Day Pleadings 51. The Debtors First Day Pleadings can be categorized into five groups:

(a) motions related to streamlining the administration of this chapter 11 case (collectively, the Procedural First Day Motions), (b) motions related to maintaining the Debtors financial operations and to obtain postpetition financing (collectively, the Financing First Day Motions), (c) motions seeking substantive first day relief, typically in the form of payment of prepetition claims (collectively, the Substantive First Day Motions), (d) motions related to the effectuation of the transactions described above to wind down the Debtors retail operations (collectively, the Transactional Motions), and (e) an application to retain Donlin, Recano & Company, Inc. (DRC) as the Debtors claims and noticing agent in this chapter 11 case. 16

15

The summary of each First Day Pleading contained herein is for reference only. Please refer to the applicable First Day Pleading for the details regarding the relief requested therein.

16

The Debtor is not seeking first day relief with respect to the Agency Agreement Assumption Motion, but the relief sought therein is necessary to the successful consummation of the Plan and administration of the Debtors chapter 11 case, and, accordingly, the Debtor is seeking expedited relief with respect to the

19
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 20 of 52

Main Document

B.

Procedural First Day Motions 52. The Procedural First Day Motions seek certain relief designed to assist the

Debtor with the administration of its chapter 11 case. The relief requested in such motions is not intended to affect the substantive rights of any party in interest, and such relief is typically granted in most chapter 11 cases. The Procedural First Day Motions seek the following relief: (a) A waiver of the requirement to file a list of creditors and approval of certain related notice procedures, including the form of notice of commencement of this chapter 11 case; 17 Approval of certain case management procedures; 18 Entry of an order establishing a deadline to file proofs of claim and administrative expense requests and approval of related notice procedures; 19 Approval of certain notice and objection procedures related to confirmation of the Debtors Plan; 20 and Approval of certain adequate assurance procedures for utilities and approval of the Debtors proposed form of adequate assurance. 21

(b) (c)

(d) (e)

relief sought in such motion. In light of the significance of the relief sought in the Agency Agreement Assumption Motion, the Debtor is including a summary of such motion herein.
17

See Motion of Debtor Requesting (I) a Waiver of the Requirement That the Debtor File a List of Creditors and Approval of Certain Notice Procedures and (II) a Waiver of the Requirement That a Meeting of Creditors Be Held Pursuant to Sections 105(a), 341, and 521(a)(1) of the Bankruptcy Code, Bankruptcy Rules 1007(a), 2002(f), and (m), and 9007, and Local Rule 1007-1 (the Waiver of List of Creditors Motion).

See Motion of Debtor for Authorization to Implement Certain Notice and Case Management Procedures Pursuant to Section 105(a) of the Bankruptcy Code and Bankruptcy Rules 2002(m) and 9007 (the Case Management Procedures Motion). See Motion of Debtor for an Order Fixing a Final Date for Filing Requests for Payment of Certain Administrative Expenses, Establishing Deadlines for Filing Proofs of Claim for Prepetition Claims, and Approving the Form and Manner of Notice Thereof Pursuant to Sections 502(b)(9) and 503(a) of the Bankruptcy Code, Bankruptcy Rules 2002(a)(7), (f), (l), and 3003(c)(3), and Local Rule 3003-1 (the Bar Date Motion).
20 19

18

See Motion of Debtor for an Order (I) Scheduling a Confirmation Hearing and (II) Establishing Notice and Objection Procedures for Confirmation of the Debtors Chapter 11 Plan (the Confirmation Hearing Procedures Motion).

20
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 21 of 52

Main Document

1.

Waiver of List of Creditors Motion 53. By the Waiver of List of Creditors Motion, the Debtor seeks to waive the

requirement that the Debtor file a list of creditors with the Clerk of the Court and the requirement that the Debtor hold a meeting of creditors. 54. Contemporaneously herewith, the Debtor has filed a motion to retain and

employ DRC as notice and claims processing agent. 22 The Debtor has furnished its list of creditors to DRC, and, as soon as possible following the commencement of this case, DRC will undertake the mailing of the Debtors notice of commencement of this chapter 11 case (the Notice of Commencement) to the parties on the Debtors list of creditors. 55. In light of the fact that DRC will receive a list of creditors and will use the

list to furnish the Notice of Commencement to creditors, filing a list of creditors concurrently with the Debtors chapter 11 petition will serve no independent purpose and is an unnecessary expenditure of the Debtors resources. The Clerk of the Court has granted the Debtor permission to forego the requirement that the Debtor file a list of creditors and has instructed the Debtor to provide the list of creditors to DRC, as proposed. The Debtor also requests approval of the proposed Notice of Commencement. 2. Case Management Procedures Motion 56. By the Case Management Procedures Motion, the Debtor seeks to

implement certain case management procedures. The proposed procedures are designed to
21

See Motion of Debtor for Interim and Final Orders (I) Prohibiting Utilities From Altering, Refusing, or Discontinuing Service, (II) Approving the Debtors Proposed Adequate Assurance, and (III) Approving Procedures for Resolving Requests for Additional Adequate Assurance Pursuant to Sections 105(a) and 366 of the Bankruptcy Code (the Utilities Motion). Debtors Application to Retain Donlin, Recano & Company, Inc. as Notice and Claims Agent Pursuant to Section 156(c) of the Judicial Code, Local Rule 5075-1 and General Order M-409 (the DRC Retention Application).

22

21
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 22 of 52

Main Document

streamline the administration of the Debtors chapter 11 case. The streamlined and efficient administration of the Debtors chapter 11 case will preserve value and ultimately inure to the benefit of the Debtor and its estate. 3. Bar Date Motion 57. By the Bar Date Motion, the Debtor seeks to set a deadline to file proofs

of claim and administrative expense requests as well as approve related notice procedures. Because the Plan proposes to pay all claims in full, the Debtor seeks to set a bar date sufficiently in advance of the confirmation hearing to evaluate asserted claims against the Debtor prior to confirmation. The setting of the proposed bar date will afford the Debtor adequate time to review any filed claims and prepare a showing for the Court at confirmation that the Plan is feasible. In addition, because the Plan will allow distribution of all remaining value to holders of equity interests after the passage of the Governmental Bar Date and payment of all allowed claims and allowed administrative expenses against the Debtor, it is essential that the Debtor be able to ascertain the amount of administrative expenses prior to consummation of the Plan. 58. Accordingly, the relief requested in the Bar Date Motion is necessary in

furtherance of the Debtors reorganization. 4. Confirmation Hearing Procedures Motion 59. By the Confirmation Hearing Procedures Motion, the Debtor seeks to

establish notice and objection procedures for confirmation of the Plan. The Debtor seeks to establish such procedures at the outset of its case because it wishes to proceed to confirmation of the Plan as expeditiously as possible and to mail notice of the Plan (together with the Plan and related documents on CD-ROM) to all known creditors within a week after the Court approves such procedures. Such relief is necessary for the Debtor to seek confirmation of the Plan and

22
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 23 of 52

Main Document

will afford the Debtor time to attempt to resolve any objections to confirmation thereof. Accordingly, such relief is necessary for the Debtor to consummate the Plan. 5. Utilities Motion 60. By the Utilities Motion, the Debtor seeks to establish certain adequate

assurance procedures to ensure the continuation of utility service during the initial days of the Debtors chapter 11 case. The Debtor currently receives utility services from approximately 25 utility companies. In the past twelve months, the Debtor paid an average of approximately $141,000 per month on account of all utility services and, during that period, has had no defaults or arrearages. The Debtor requires continued utility services to operate its business while it effectuates the transactions contemplated by the Agency Agreement, the Purchase Agreement, and the Plan, and the abrupt discontinuation of such services would impair the Debtors business operations and severely and irreparably harm the Debtor and its estate. Entry of an interim order with respect to the Utilities Motion will establish procedures by which utility companies may assert any objections to the Debtors proposed adequate assurance and afford the Debtor time to attempt to resolve any such objections prior to the consideration of the Utilities Motion on a final basis. C. Financing First Day Motions 61. The Debtor seeks first day relief upon two Financing First Day Motions.

First, the Debtor seeks to continue to use its existing cash management system. 23 Additionally, the Debtor seeks to fund its operations by seeking (a) authorization to enter into a postpetition

23

See Motion of Debtor for (I) Authority to Continue to Use Existing Cash Management Systems, (II) Authority to Maintain Existing Bank Accounts and Business Forms, and (III) a Waiver of the Requirements of Section 345(b) of the Bankruptcy Code Pursuant to Sections 105(a), 345(b), and 363(c) of the Bankruptcy code (the Cash Management Motion).

23
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 24 of 52

Main Document

financing facility, secured by a consensual priming first lien (the DIP Facility), and (b) continued use of cash collateral on a consensual basis. 24 1. Cash Management Motion 62. By the Cash Management Motion, the Debtor seeks to continue to use its

existing cash management system, as such system is described in the Cash Management Motion. The relief requested will help ensure the Debtors orderly entry into chapter 11 and avoid many of the possible disruptions and distractions that could divert the Debtors attention from more pressing matters during the initial days of its chapter 11 case. 63. Any disruption of the Debtors cash management system, including

closure of bank accounts, would cause delays in the collection and disbursement of funds. Such delays could cause the Debtor to default on its postpetition accounts payable obligations to third parties, which, in turn, could jeopardize the planned windown of the Debtors business. Such a result would have a severe and adverse impact upon the Debtors efforts to wind down its operations and dispose of its principal assets in an orderly fashion. Moreover, if the Debtor were required to close its existing bank accounts immediately and terminate its cash management system, it would be extremely difficult (if not impossible) and expensive to promptly establish new bank accounts and a new cash management system with sufficient sophistication to fulfill the Debtors business needs. 64. The Debtor issues a large number of checks in the ordinary course of

business. Although most of the Debtors checks are generated electronically, it will require

24

See Debtors Motion For an Order (I) Authorizing Postpetition Financing, (II) Granting Liens and Providing Super Priority Administrative Expense Priority, (III) Authorizing Use of Cash Collateral and Providing for Adequate Protection, (IV) Modifying the Automatic Stay, and (V) Scheduling a Final Hearing Pursuant to Sections 105, 361, 362, 363 and 364 of the Bankruptcy Code and Bankruptcy Rules 2002, 4001, and 9014 (the DIP Motion).

24
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 25 of 52

Main Document

changes to the Debtors check generating programs to reflect the Debtors Debtor in Possession status on its checks, and such changes cannot be made during the initial days of this chapter 11 case. The Debtor requests authority to use its existing check stock and electronically generated forms, rather than obtain new check stock reflecting its status as a debtor in possession and listing the case number under which this case is being administered. To the extent the Debtor uses check stock, any new check stock ordered will reflect its status as debtor in possession and list the case number. Moreover, the Debtor will work with its systems personnel and outside systems consultants to determine what system changes are required to reflect its debtor in possession status on electronically generated checks. It will keep the Office of the United States Trustee apprised of its progress on this project and will implement changes to its electronically generated checks as soon as reasonably practicable. 65. The Debtor holds its funds in certain bank accounts with Wells Fargo and

in one offshore account related to Daffys Italia, which the Debtor is currently winding down. Wells Fargo is a highly rated and federally chartered bank, subject to supervision by federal banking authorities. The amounts held in the Daffys Italia account total approximately $53,000 and are necessary to complete the wind down of Daffys Italia. In addition, in connection with relief sought in the Employee Wages Motion (as defined herein), the Debtor seeks authority to fund, and deposit into the Daffys Italia account, up to $400,000 to cover the expenses associated with winding down the Daffys Italia office. 66. The costs of satisfying the bonding requirements under section 345(b) of

the Bankruptcy Code are burdensome, and the process of satisfying those requirements would lead to needless inefficiencies in the management of the Debtors business. Accordingly, I believe that the Debtors funds are reasonably secure and that obtaining bonds to secure those

25
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 26 of 52

Main Document

funds, as required by section 345(b) of the Bankruptcy Code, would be unnecessary and detrimental to the Debtor and its estate. 67. For all of the foregoing reasons, the Debtor seeks entry of an order

approving the relief sought in the Cash Management Motion and submits that such relief is reasonable and in the best interest of the Debtor and its estate. 2. The DIP Motion 68. By the DIP Motion, the Debtor seeks to obtain authority to enter into that

certain Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the DIP Credit Agreement) with Wells Fargo, as lender, and each of the Vim Entities and the Principal Shareholder, as guarantors, pursuant to which the Debtor will obtain $10 million in postpetition financing, including $2.5 million in new financing on a revolving basis (subject to a borrowing base) and the roll up of all obligations under the Prepetition Revolver and Swap Agreement. Under the DIP Credit Agreement, the DIP Facility is secured by a consensual priming first lien, and the Debtor is permitted to continue to use cash collateral on a consensual basis. All letters of credit issued under the Prepetition Revolver will become postpetition obligations under the DIP Facility. 69. Upon receiving the guaranteed amounts under the Agency Agreement, the

Debtor will repay all outstanding draws under the $2.5 million revolver as well as any amounts related to the rolled-up obligations under the Prepetition Revolver. The Debtor would not be required to repay any rolled-up obligations under the Swap Agreement. The Debtor could use any remaining cash as cash collateral to fund its operations until the effective date of the Plan. Should the cash collateral be insufficient, the Debtor may also draw on the $2.5 million revolving line of credit.

26
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 27 of 52

Main Document

70.

The DIP Facility will be secured by substantial portions of the Debtors

assets, as more fully described in the DIP Motion and DIP Credit Agreement, on a first priority consensual priming basis. Wells Fargo, as the Debtors prepetition secured lender, has agreed to permit the priming of its liens to the liens of Wells Fargo, as the Debtors postpetition lender. Wells Fargo will also receive a superpriority administrative expense for all obligations arising under the DIP Facility. 71. In exchange for its permitted use of cash collateral, Wells Fargo, as

prepetition lender, will receive replacement liens as well as a superpriority administrative expense for any diminution in the value of its collateral. 72. Prior to the commencement of its chapter 11 case, the Debtor sought to

obtain financing on more favorable terms, but was unable to find such financing that provided the same flexibility and certainty as that provided under the DIP Credit Agreement. Under the circumstances, the Debtor has negotiated the best terms available for the funding necessary for the Debtor to continue operations while it effectuates the transactions contemplated by the Purchase Agreement, the Agency Agreement, and the Plan. 73. Approval of the DIP Facility and the consensual use of cash collateral will

provide the Debtor with immediate and ongoing access to liquidity to pay its current and ongoing operating expenses, including, among other things, postpetition employee-related benefits and compensation, payments to landlords under the Debtors real property leases, and utilities. Absent such expenditures, the Debtor will be forced to cease operations immediately, resulting in immediate and irreparable harm to the Debtor and its businesses and impairing the Debtors ability to maximize value for all constituencies.

27
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 28 of 52

Main Document

74.

Approval of the Debtors entry into the DIP Facility and the roll-up of the

prepetition indebtedness under the Swap Agreement and Prepetition Revolver is warranted in light of the Debtors current circumstances. Wells Fargo required the roll-up of the prepetition indebtedness as a condition to entering into the DIP Credit Agreement and providing the DIP Facility to the Debtor. Absent the roll-up the prepetition Wells Fargo loans would continue to accrue interest at the default rate, which is greater than the interest rate under the DIP Facility. Furthermore, no creditors will be harmed by the roll-up because Wells Fargo has a first lien on substantially all of the assets of the Debtor, and the Plan proposes to pay all claims in full. D. Substantive First Day Motions 75. The Substantive First Day Motions seek substantive relief, typically in the

form of authority to pay prepetition claims, to avoid immediate and irreparable harm to the Debtor and its estate. Specifically, the Substantive First Day Motions seek the following relief: (a) (b) (c) Authority to pay employee compensation, continue to honor and maintain employee benefits programs, and pay any obligations related thereto, 25 Authority to honor certain prepetition customer programs, 26 and Authority to pay certain prepetition taxes. 27

25

See Motion of Debtor for Interim and Final Orders (I) Authorizing the Debtor to (A) Pay Certain Employee Compensation and Benefits and (B) Maintain and Continue Such Benefits and Other Employee-Related Programs and (II) Directing the Debtors Financial Institutions to Honor and Process Checks and Transfers Related to Such Obligations Pursuant to Sections 105(a), 363(b), and 507 of the Bankruptcy Code (the Employee Wage Motion). See Motion of Debtor for Authorization to Honor Certain Prepetition Customer Programs Pursuant to Sections 105(a) and 503(b)(1) of the Bankruptcy Code (the Customer Programs Motion).

26

See Motion of Debtor for an Order Authorizing the Debtor to Pay Prepetition Taxes and Assessments Pursuant to Sections 105(a), 363(b), 507(a)(8), and 541 of the Bankruptcy Code (the Tax Motion).

27

28
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 29 of 52

Main Document

1.

Employee Wage Motion 28 76. By the Employee Wage Motion, the Debtor seeks to pay certain

prepetition wages and benefits as well as to continue its employee benefit programs postpetition. The continued operation of the Debtors businesses while it effectuates the Agency Agreement, Purchase Agreement, and Plan depends upon the cooperation and continued efforts of the Debtors Employees and other personnel. 77. The Debtor employs over 1,000 Employees in New York, New Jersey, and

Pennsylvania on both a salaried and hourly basis. In the ordinary course of business, the Debtor incurs obligations related to the payment of Employee wages, including Weekly Wages and Salaries, Reimbursement Obligations, ADP Withholding Fees, Supplemental Workforce Obligations, and Payroll Maintenance Fees. Additionally, the Debtor incurs other obligations in the ordinary course of business related to the maintenance of certain employee programs, including Incentive Programs, Health and Welfare Benefits, Insurance Programs, and Other Employee Benefits. As of the Commencement Date, the Debtor has certain unpaid prepetition obligations related to the foregoing Employee programs. 78. The Debtors Employees and other personnel maintain the Debtors daily

operations, and the Debtor cannot successfully operate without its Employees continued support. Any failure to pay the Debtors outstanding obligations may lead to the deterioration of Employee morale, which, at this juncture, could negatively affect the value of the Debtors assets and business and cause the Debtor to suffer immediate and irreparable harm. Accordingly, the Debtor has requested authority to satisfy its Employee-related obligations and continue its

28

Due to the voluminous nature of the facts set forth in the Employee Wage Motion, the facts set forth therein are incorporated herein by reference.

29
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 30 of 52

Main Document

ordinary course employee-related benefits and programs as in effect prior to the Commencement Date. 79. Moreover, if the checks issued and fund transfers requested for payment of

prepetition Employee obligations are not honored, or if such earned obligations are not timely paid postpetition, the Debtors Employees may suffer extreme personal hardship and may even be unable, in some instances, to pay their daily living expenses. It is inequitable to place Employees in such an untenable position while relying upon such individuals for the continuation of the Debtors operations. 80. Based upon the foregoing and the extensive facts set forth in the Employee

Wage Motion and incorporated by reference herein, I believe that honoring all prepetition Employee obligations and benefits, as well as obligations incurred postpetition, is in the best interest of the Debtor and its estate. 2. Customer Programs Motion 81. By the Customer Programs Motion, the Debtor seeks authority to continue

certain customer programs. Specifically, the Debtor seeks authority to continue to honor its gift cards, certain advance deposits placed by customers for future purchases, and customer deposits that are part of the Debtors layaway program. 82. Prior to the Commencement Date, in the ordinary course of business, the

Debtor sold pre-paid, reloadable gift cards to customers through its stores and website and provided gift cards to customers in connection with the resolution of various customer service issues and returns. The gift cards may only be redeemed in the Debtors stores for goods. As a result, use of gift cards encouraged the Debtors customers to return to its stores, and typically those returning customers spent more than the face amount of their gift cards. As of the

30
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 31 of 52

Main Document

Commencement Date, the face value of the Debtors outstanding gift cards is approximately $700,000. 83. Prior to the Commencement Date, in the ordinary course of business, the

Debtor also allowed customers to place deposits on certain products for future purchase. As of the Commencement Date, the Debtor estimates that the amount of outstanding advance purchase deposits is approximately $10,000. 84. Additionally, the Debtors layaway program allows customers to place a

fifteen percent deposit on certain items, including furniture, to be picked up and paid in full (less the deposit) within 30 days. As of the Commencement Date, the Debtor estimates that the aggregate amount of outstanding layaway program payments is approximately $180,000. 85. Continuation of these customer programs is necessary to preserve ongoing

goodwill with the Debtors customers and avoid immediate and irreparable harm to the Debtor and its estate. Although the Debtor intends to cease operating as a retailer in the near future, the Debtor has developed a loyal customer base over the more than 50 years of its operation and requires the support of these customers to maximize value during its winddown. Further, as the Debtor intends to pay all customers in full, refusing to honor customer programs in the ordinary course will needlessly alienate customers. The Debtors ability to continue its customer programs will not adversely affect other creditors, but likely increase the funds received by the estate. Accordingly, continuation of the Debtors customer programs is in best interest of the Debtor and its estate. 3. Tax Motion 86. The Debtor seeks entry of an order authorizing the Debtor to pay sales

taxes, use taxes, franchise and income taxes, use and occupancy taxes, and other similar governmental assessments to various state and local taxing authorities, including all taxes and 31
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 32 of 52

Main Document

assessments subsequently determined upon audit, or otherwise, to be owed for periods prior to the Commencement Date, and including any penalties and interest thereon. 87. In the ordinary course of business, the Debtor collects and remits sales

taxes to applicable taxing authorities on a monthly basis. As of the Commencement Date, the Debtor estimates that it owes approximately $75,500 to various taxing authorities on account of sales taxes. 88. The Debtor may also be responsible for the payment of use taxes when it

purchases certain tangible personal property from vendors that do not collect a sales tax. The Debtor is obligated to self-assess and pay such use taxes, when applicable, to the states in which it operates. The Debtor pays such use taxes in arrears based upon invoices from vendors and remits use taxes on a monthly basis. As of the Commencement Date, the Debtor estimates that it will have incurred, but not yet paid, less than one $1,000 in use taxes. 89. Certain jurisdictions also require payment of franchise and income taxes.

Pennsylvania, for instance, assesses both franchise taxes and income taxes, while New York City, on the other hand, assesses either franchise taxes or income taxes depending on which results in a higher tax. New Jersey and the State of New York assess only income taxes, and the City of Elizabeth assesses only franchise taxes. Estimated franchise and income taxes are remitted on a quarterly basis to the relevant taxing authorities, and the Debtor believes that it is current in its payments of such taxes. Out of an abundance of caution, however, the Debtor requests authority to pay any amounts that subsequently may be determined to be owed with respect to taxation periods beginning prior to the Commencement Date. 90. Certain of the Debtors locations are also subject to use and occupancy

taxes, which generally are assessed by localities based on the Debtors usage or occupancy of

32
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 33 of 52

Main Document

qualifying real property for the purpose of commercial activity. The Debtor generally pays such taxes ratably throughout the year. The Debtor estimates that, as of the Commencement Date, the Debtor has accrued but not paid approximately $43,000 in use and occupancy taxes. The Debtor seeks authority from the Court to pay all use and occupancy taxes as they come due in the ordinary course of business 91. Payment of the prepetition sales taxes, use taxes, franchise and income

taxes, use and occupancy taxes, and other similar governmental assessments may be critical to the Debtors continued, uninterrupted operations. Nonpayment of these obligations may cause taxing authorities to take precipitous action, including, but not limited to, preventing the Debtor from conducting business in applicable jurisdictions, subjecting the Debtors directors and officers to personal liability for nonpayment of taxes, and seeking to modify the automatic stay, any of which would disrupt the Debtors day-to-day operations and could impose significant costs on the Debtors estate. Authority to pay the taxing authorities in accordance with the Debtors prepetition business practices is in the best interests of the Debtor and its estate and will enable the Debtor to continue to operate its business in chapter 11 without disruption. E. Transactional Motions 92. As described previous, the Debtor seeks to consummate the Plan and pay

all creditors of the Debtor in full by monetizing its under-market leasehold interests, selling certain fixtures and intellectual property, and liquidating its store inventory. To facilitate the foregoing, prior to the Commencement Date, the Debtor entered into the Agency Agreement and the Purchase Agreement, and the Debtor, via the Purchase Agreement Assumption Motion and the Agency Agreement Assumption Motion, seeks, among other things, to assume these prepetition agreements. The Debtor only seeks first day relief with respect to the Purchase Agreement Assumption Motion. The Debtor, however, seeks an expedited hearing on the 33
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 34 of 52

Main Document

Agency Agreement Assumption Motion and, accordingly, pertinent facts relating to the Agency Agreement Assumption Motion are also set forth herein. 1. Purchase Agreement Assumption Motion 93. The Purchase Agreement Assumption Motion seeks Court approval of the

Debtors assumption of the Purchase Agreement, the Debtors assumption, assignment, and sale of the Debtors interest in the Herald Square Lease to the Purchaser, the Debtors entry into the Herald Square Assignment Agreement, and the Debtors payment of the Purchasers Transaction Expenses. The Debtor, by the Purchase Agreement Assumption Motion, also requests an extension of the time within which to assume or reject unexpired leases of nonresidential real property through February 27, 2013, the date that is 210 days from the Commencement Date. 94. Prior to the Commencement Date, the Debtor and the Purchaser negotiated

the Option Agreement and, subsequently, the Purchase Agreement, in good faith and at arms length. Absent the Debtors assumption of the Purchase Agreement, the Debtor would lack the funds necessary to consummate the Plan and pay all of its creditors in full pursuant thereto. The Debtor believes that the Purchase Agreement provides a significant benefit to the Debtor and that assumption of the Purchase Agreement is in the best interest of the Debtor and its estate. Accordingly, the Debtor submits that assumption of the Purchase Agreement constitutes a reasonable exercise of the Debtors business judgment and should be approved. 95. As more fully set forth in the Purchase Agreement Assumption Motion,

the Purchase Agreement provides that, upon the Purchasers election on or before November 25, 2012 or, alternatively, upon termination of the Purchase Agreement pursuant to Sections 10.2, 10.3(b), or 10.3(d) thereof, the Debtor may be required to deliver an executed copy of the Herald Square Assignment Agreement to the Purchaser, thereby assigning the Herald Square Lease to the Purchaser. Accordingly, the Purchase Agreement Assumption Motion also seeks approval of 34
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 35 of 52

Main Document

the Debtors assumption and assignment of the Herald Square Lease to the Purchaser and the Debtor submits that the decision to do so constitutes a sound exercise of the Debtors business judgment. 96. The ability of the Purchaser to demand assignment of the Herald Square

Lease, upon written notice and payment of cash in an amount of $20,000,000, was an essential deal term upon which the successful negotiation of the Purchase Agreement hinged and was a necessary inducement for the Purchaser to enter into the Purchase Agreement. Moreover, I am not aware of any liens, claims, or other encumbrances on the Herald Square Lease that would prohibit the transfer of such lease free and clear, and, to my knowledge, there are no defaults under the Herald Square Lease or the Purchase Agreement. In light of the foregoing, I believe that the assumption and assignment of the Herald Square Lease to the Purchaser constitutes a reasonable exercise of the Debtors business judgment and is in the best interests of the Debtor and its estate. 97. The Purchase Agreement also provides for the payment of certain

Purchaser Transaction Expenses in the event that the Purchase Agreement is terminated by the Debtor pursuant to Section 10.3(b) of the Purchase Agreement. The Transaction Expenses, as with the Purchase Agreement, were negotiated in good faith and at arms length and were a necessary inducement for the Purchaser to enter into the Purchase Agreement. In the event that the Debtor terminates the Purchase Agreement pursuant to Section 10.3(b) thereof a fiduciary out provision it will only be because the Debtor has obtained higher and better value for the Purchased Assets. Accordingly, I believe that the Transaction Expenses are in the best interest of the Debtor and its estate.

35
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 36 of 52

Main Document

98.

The terms of the Purchase Agreement were negotiated in good faith and at

arms length, and the terms of the Purchase Agreement constitute the highest and best known offer for the Purchased Assets. Further, the Herald Square Purchase Price provides substantial value for the Debtor and its estate and constitutes fair and reasonable value for the Herald Square Lease. In light of the foregoing, I believe that the relief requested in the Purchase Agreement Assumption Motion is in the best interest of the Debtor and its estate and should be approved. 2. Agency Agreement Assumption Motion 99. The Debtor seeks, pursuant to the Agency Assumption Motion, entry of an

order approving the Debtors assumption of the Agency Agreement, authorizing the Debtor to liquidate its inventory through certain approved store closing procedures, and exempting the Debtor from, and overriding, any contractual provisions or state or local laws that may restrict the Debtors ability to conduct such sales. 100. The Agency Agreement constitutes the highest and best offer for the assets

conveyed thereby, and the Debtors assumption of the Agency Agreement constitutes a sound exercise of the Debtors business judgment. Prior to selecting the Agent and entering into the Agency Agreement, the Debtor solicited bid packages from five different liquidating agents and, following execution of a non-disclosure agreement, granted each such agent access to an internal data room. Four of the five liquidating agents submitted competitive bids to the Debtor, and, after good faith, arms length negotiation, the Debtor, in its reasonable business judgment entered into a preliminary agreement with the Great American Group WF, LLC to serve as the stalking horse bidder in an auction to obtain the highest and best offer. Such stalking horse bid provided, among other things, for a Guaranty Percentage of 92.7%. 101. On July 30, 2012, the Debtor conducted an auction at the offices of Weil,

Gotshal & Manges, LLP. Following an auction that lasted over eight hours, the Debtor selected 36
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 37 of 52

Main Document

the Agents proposal, with a Guaranty Percentage of 99.5%, as the highest and best offer for the Debtors remaining inventory. I believe that the Agency Agreement constitutes the highest and best offer for the Debtors remaining inventory and that the terms of the Agency Agreement provide fair and reasonable consideration for such assets. 102. The Debtor, exercising its sound business judgment and in consultation

with its advisors and key constituents, has determined that assumption of the Agency Agreement is in the best interest of its estate because it will allow the Debtor to begin liquidating the Stores promptly and thus maximize the value of its assets. In order to maximize profits, the Debtors store closing sales must begin immediately because much of the merchandise is seasonal and will decrease in value over time. Further, the Debtor is incurring costs operating its stores, and, upon assumption of the Agency Agreement, certain of those costs can be passed on to the Agent. Moreover, the auction, through its competitive bidding procedures, ensured that the Agent was chosen in good faith and that the terms and conditions of the Agency Agreement are fair and reasonable. In light of the foregoing, I believe that the assumption of the Agency Agreement represents a reasonable exercise of the Debtors business judgment, is in the best interest of its estate, and should be approved. 103. Moreover, the Debtor is requesting an expedited hearing on the Agency

Agreement Assumption Motion because time is of the essence to preserve and maximize the value of the Debtors assets and to minimize the Debtors expenses. The Stores and distribution center contain significant levels of Merchandise that will be subject to the Store Closing Sales. The realization of fair value for these assets as promptly as possible will inure to the benefit of all parties in interest. Prompt entry of an order granting the Agency Agreement Assumption Motion also will help ensure that the Debtors inventory is at a level sufficient to avoid having

37
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 38 of 52

Main Document

the Guaranty Percentage of 99.5% ratchet down, which is what would occur if the inventory level declines below $17 million. Finally, a condition of the Agency Agreement is that such an order be entered on or before August 10, 2012. 104. The Debtor has fully performed all of its obligations under the Agency

Agreement and thus does not have any defaults to cure under section 365(b) of the Bankruptcy Code. 105. The Debtor also requests approval to sell assets subject to the Agency

Agreement on a final as is basis, free and clear of any and all liens, claims, and encumbrances. Wells Fargo has consented to the store closing sales and the Debtors assumption of the Agency Agreement and, particularly, to the sale of the Debtors remaining inventory free and clear of its liens, claims and encumbrances. Other than the liens granted to Wells Fargo in connection with the DIP Facility, the Debtor is not aware of any liens relating to the Debtors merchandise that will be liquidated through the store closing sales. F. Retention of Donlin, Recano & Company, Inc. 106. The Debtor has filed only one retention application for which it seeks first

day relief. Specifically, the Debtor seeks to retain DRC as claims and noticing agent for the Debtor during this chapter 11 case. Prior to selecting DRC, the Debtor solicited bids from three other approved claims agents, all of whom have been approved by this Court to serve as claims and noticing agents. 107. Based on DRCs experience in providing similar services in other chapter

11 cases, I believe that DRC is qualified to serve as the claims and noticing agent in this chapter 11 case. A detailed description of the services that DRC has agreed to render and the compensation and other terms of the engagement are provided in the DRC Retention Application and the Affidavit of Colleen McCormick in Support of the Application of the Debtor Pursuant to 38
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 39 of 52

Main Document

Section 156(c) of the Judicial Code, Local Rule 5075-1 and General Order M-409 to Retain Donlin, Recano & Company, Inc. attached to the DRC Retention Application. 108. I have reviewed the terms of the engagement and believe that the estate,

creditors, parties in interest, and this Court will benefit as a result of DRCs experience and cost effective methods and that retention of DRC is appropriate and in the best interests of the Debtor and its estate. VI. INFORMATION REQUIRED BY LOCAL RULE 1007-2 109. Rule 1007-2 of the Local Bankruptcy Rules for the Southern District of

New York requires the disclosure of certain information related to the Debtors business. This information is contained in the exhibits annexed hereto as Exhibits 1 through 10. In light of all of the facts set forth herein and in the First Day Pleadings, I respectfully request that the Court grant all relief requested in the First Day Pleadings and such other and further relief as may be just. Dated: August 1, 2012 BY: /s/ Richard F. Kramer Richard F. Kramer Vice President of Finance and Secretary Daffys, Inc.

39
US_ACTIVE:\44028450\8\39982.0003

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 40 of 52

Main Document

Schedule 1 List of Holders of 30 Largest Unsecured Claims

Pursuant to Local Rule 1007-2(a)(4), the following is a list of the holders of the Debtor's 30 largest unsecured creditors.

CREDITOR

MAILING ADDRESS & PHONE NUMBER

AMOUNT OF CLAIM

NATURE OF CLAIM

CHRIS FRIEDLANDER

21 Pondfield Pkwy Mt Vernon, NY 10552

$612,993.11

Trade debt

100 5th Ave., 16th fl. DEVITO VERDI New York, NY 10011 Attn: Alix Colas Tel: (212) 431-4694 21 Industrial Park Ave. FALL USA INC. Westmoreland, NH 03467 Attn: Tracy Williams Tel: (603) 352-9161 200 Industrial Park Rd. PEERLESS CLOTHING INTERNATIONAL INC. St. Albans, VT 05478 Attn: Rose Miniaci Tel: (514) 593-9300 321 Palmer Road LATICO LEATHERS Denville, NJ 07834 Attn: Kevin Cahill Tel: (973) 442-9622 2100 Abbot Kinney Blvd., Unit D Venice, CA 90291 BABAKUL Attn: Sophie Wizman Tel: (310) 578-5600 P.O. Box 92550 TIMBERLAND LLC Chicago, IL 60675 Attn: Pam Holmes Tel: (603) 772-9500 DBA E-Land Kids 33 West 33rd St. EL INTERNATIONAL USA INC. New York, NY 10001 Attn: Finn Charles Worth Tel: (212) 868-5933 180 Madison Ave. Suite 700 INTERNATIONAL INTIMATES INC. New York, NY 10016 Attn: Iris Margulies Tel: (212) 213-4848 450 Shrewsbury Plaza #39 NY ACCESSORY GROUP LLC Shrewsbury, NJ 07702 Attn: Marc Siruya Tel: (212) 288-4111 231 W. 39th St. Rm. #208 SWEET ROMEO New York, NY 10018 Attn: Richard Gabor Tel: (203) 246-7429 331 Changebridge Rd. WESTPORT CORPORATION Attn: Mike Rahim P.O. Box 2002 Pine Brook, NJ 07058 $86,814.40 Trade debt $91,973.50 Trade debt $93,840.50 Trade debt $103,715.79 Trade debt $123,014.50 Trade debt $154,645.50 Trade debt $176,307.10 Trade debt $238,863.00 Trade debt $267,753.55 Trade debt $271,574.50 Trade debt $352,739.00 Trade debt

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 41 of 52

Main Document

CREDITOR

MAILING ADDRESS & PHONE NUMBER

AMOUNT OF CLAIM

NATURE OF CLAIM

55 Harbor Park Rd. HARBOR FOOTWEAR Attn: Glenda Cohen Tel: (516) 621-8400 Port Washington, NY 11050 $86,105.00 Trade debt

385 5th Ave. COLLECTION 18 New York, NY 10016 Attn: Yenta McCalla Tel: (212) 686-8990 $80,977.50 Trade debt

P.O. Box 798133 DELTA GALIL USA Attn: Scott Wolffe St. Louis, MO 63179 499 7th Ave., 2nd fl. North Tower ROMEO & JULIET New York, NY 10018 Attn: Mohamed Azwan Tel: (212) 279-5566 Line 1: 75 Oxford Drive Line 2: 806 Tyvola Road, Ste. 108 THE ECHO DESIGN GROUP, INC. Moonachie, NJ 07074 Attn: Cheryl Glaeser Tel: (201) 994-0444 1400 Broadway ANNALEE & HOPE New York, NY 10018 Attn: Ursiline Walker Tel: (212) 869-3300 390 Starke Rd. KAKTUS SPORTSWEAR INC. Carlstadt, NJ 07072 Attn: Madhavi Jalu Tel: (201) 372-0004 205 W. 39th St., 17th fl. THE ISABELLA CO. (NEW YORK), INC. New York, NY 10018 Attn: Jenny Debran Tel: (212) 302-2055 52-16 Barnett Ave. MADDEN MENS Long Island City, NY 11104 Attn: Sunita Melaram Tel: (718) 446-1800 15 W. 37th Street PORTOLANO PRODUCTS INC. New York, NY 10018 Attn: Vincent Troia Tel: (212) 719-4403 183 Madison Ave., 10th fl. DREAMWEAR INC. New York, NY 10016 Attn: Jorge Guaman Tel: (212) 684-7799 1411 Broadway, 24th fl. 2B RYCH New York, NY 10018 Attn: Cecilia Liang Tel: (212) 944-7924 40 West 57th St. NAUTICA MENS SLEEPWEAR New York, NY 10019 Attn: Tammy Hunt Tel: (212) 841-7212 13259 Ralston Ave. THREE HANDS CORPORATION Sylmar, CA 91342 Attn: Nancy Dekonski Tel: (800) 443-5443 $57,287.10 Trade debt $57,568.40 Trade debt $60,010.00 Trade debt $69,148.50 Trade debt $70,358.00 Trade debt $71,774.75 Trade debt $76.089.00 Trade debt $76,576.00 Trade debt $77,259.00 Trade debt $78,717.45 Trade debt $78,791.25 Trade debt $80,836.00 Trade debt

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 42 of 52

Main Document

CREDITOR

MAILING ADDRESS & PHONE NUMBER 148 Madison Ave., 13th fl.

AMOUNT OF CLAIM

NATURE OF CLAIM

OAKHURST PARTNERS LLC

New York, NY 10016 Attn: Debbie Lerno Tel: (212) 502-3220 Vatan Cad. No. 2 Ortadogu Merkezi Kat:6 34403

$56,801.00

Trade debt

DERKON LEATHER FASHION

Caglayan-Istanbul, Turkey Attn: David Behmuaras Tel: 90.216.680 47 01 777 West Putnam Ave.

$55,290.00

Trade debt

MARC FISHER LLC

Greenwich, CT 06830 Attn: Madara Kaimina Tel: (203) 302-2800 108 Pierson Ave. Edison, NJ 8837 Attn: Chief Legal or Other Officer Tel: (732) 603-7877

$55,441.00

Trade debt

TACHING INC.

$54,285.90

Trade debt

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 43 of 52

Main Document

Schedule 2
List of Holders of 5 Largest Secured Claims

Pursuant to Local Bankruptcy Rule 1007-2(a)(5), the following lists the creditors holding, as of August 1, 2012, the five largest secured claims against the Debtor. The information contained herein shall not constitute an admission of liability by, nor is it binding on the Debtor. Any amounts listed herein are estimated, on a preliminary basis, and are subject to verification. The Debtor reserves any and all rights to assert that any debt or claim listed herein is a disputed claim, debt or lien and to assert any remedies, defenses, counterclaims, and offsets with respect thereto. The description of the collateral securing the underlying obligation is intended only as a brief summary. In the event of any inconsistency between the summary set forth below and the respective operative documents relating to such obligations, the descriptions in the operative documents shall control.

CREDITOR

MAILING ADDRESS & PHONE NUMBER

AMOUNT OF CLAIM

NATURE OF CLAIM

TYPE OF COLLATERAL

VALUE OF COLLATERAL

Term Loan Credit Facility - Loan Successor To Wachovia Bank, N.A. Stephanie Micua, Senior Vice President Fargo Bank, National Association 1 South Broad Street, 8th Floor MAC Y1375-084 Philadelphia, PA 19109 Tel: (267) 321-7075 $10,180,629.88 And Security Agreement By And Between Wachovia Bank, National Association, As Lender, Daffy's, Inc., As Borrower And Vim-3, L.L.C., Vimwilco, L.P. And Vim Associates, As Guarantors, Dated January 30, 2009, As Amended Substantial tl Portions of the on Debtor's Assets Unknown

Successor To Wachovia Bank, N.A. Stephanie Micua, Senior Vice President Wells Fargo Bank, National Association 1 South Broad Street, 8th Floor MAC Y1375-084 Philadelphia, PA 19109 Tel: (267) 321-7075 $7,902,999.64

Amended And Restated Loan And Security Agreement By And Between Wachovia Bank, National Association As Lender, Vim-3, L.L.C. And Vimwilco, L.P., As Borrowers And Daffy's, Inc. And Vim Associates, As Guarantors, Dated January 30, 2009, As Amended Substantial Portions of the Debtor's Assets Unknown

Revolving Loan Credit Facility Successor To Wachovia Bank, N.A. Attn: Brent E. Shay Wells Fargo Bank, National Association One Boston Place 18th Floor Boston, MA 02108 Tel: (617) 624-4463 $4,666,227.37 Loan And Security Agreement By And Between Wachovia Bank, National Association, As Lender, Daffy's, Inc., As Borrower And Vim-3, L.L.C., Vimwilco, L.P. And Vim Associates, As Guarantors, Dated January 30, 2009, As Amended Substantial Portions of the Debtor's Assets Unknown

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 44 of 52

Main Document

CREDITOR

MAILING ADDRESS & PHONE NUMBER

AMOUNT OF CLAIM

NATURE OF CLAIM

TYPE OF COLLATERAL

VALUE OF COLLATERAL

Successor To Wachovia Bank, N.A. Stephanie Micua, Senior Vice President Wells Fargo Bank, National Association 1 South Broad Street, 8th Floor MAC Y1375-084 Philadelphia, PA 19109 Tel: (267) 321-7075 $1,501,478.00 Loan Agreement Dated As Of August 14, 1996, As Amended Mortgage Debt With Daffy's, Inc. As Guarantor Substantial Portions of the Debtor's Assets Unknown

U.S. Trade Services 401 Linden Street, 1st Floor Wells Fargo Bank, N.A. Mac D4004-012 Winston-Salem, NC 27101 Tel: (800) 776-3862 $1,000,000.00 Standby Letter Of Credit Number Is0007758 In Favor Of The CIT Group Substantial Portions of the Debtor's Assets Unknown

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 45 of 52

Main Document

Schedule 3
Summary of Debtor's Assets and Liabilities

Balance Sheet As of July 1, 2012

Unaudited

Total Assets: $60.2 million

Total Liabilities: $70.5 million

Asssets and liabilities stated herein are in accordance with the accounting principles generally used by the Debtor. The numbers set forth herein are unaudited and do not reflect the fair market value of assets or the actual amount of known liabilities.

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 46 of 52

Main Document

Schedule 4
Debtor's Property Not in the Debtor's Possession

Pursuant to Local Rule 1007-2(a)(8), the following lists the Debtor's property that is in the possession or custody of any custodian, public officer, mortgagee, pledge, assignee of rents, secured creditor, or agent for any such entity.

To the extent the Debtor has paid retainers to professionals, these can be viewed within the individual professional retention and fee applications.

Name

Mailing Address 250 W. 57th St., Suite 420

Deposit Amount

Chase Paymentech (credit card processor)

Attn: Lori Cullen or Chief Legal Officer New York, NY 10107 C/O Daffy's, Inc. Attn: Marcia Wilson

433,092.69

Vimwilco L.P. (landlord)

Daffy s Way Secaucus, NJ 07094 C/O Daffy's, Inc. Attn: Marcia Wilson

250,000.00

Vimwilco L.L.C. (landlord)

Daffy s Way Secaucus, NJ 07094 C/O DMP Estates, Inc.

128,541.67

John Penni p Penniplede (landlord)

P.O. Box 4265 Osborneville, NJ 08723 900 Cottage Grove Road

14,406.50

CIGNA Health and Life Insurance Company

Hartford, CT 06152

73,000.00

900 Cottage Grove Road CIGNA Health and Life Insurance Company Hartford, CT 06152

30,000.00

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 47 of 52

Main Document

Schedule 5
Debtor's Leased Premises
Pursuant to Local Rule 1007-2(a)(9), the following lists the property or premises owned, leased, or held under other arrangement from which the Debtor operate its business.

Location ID STORE #213

-

Location Address
3 East 18th Street 218 West 44th Street 1311 Broadway 335 Madison Avenue 135 East 57th Street 462 Broadway 50 Broadway 1775 Broadway Atlantic Terminal 1900 Northern Blvd 88-01 Queens Blvd. 3461 Route 10 West 111-117 Spring Street Jersey Gardens Mall 165 Route 4 West

City New York New York New York New York New York New York New York New York Brooklyn Manhasset Elmhurst East Hanover Elizabeth Elizabeth Paramus

State
NY NY NY NY NY NY NY NY NY NY NY NJ NJ NJ NJ

Zip
10003 10036 10001 10017 10022 10013 10004 10019 11217 11030 11373 07936 07201 07201 07652

Country USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA

18th Street

STORE #215 Times Square STORE #204 STORE #202 STORE #205

Herald Center Madison Avenue 57th Street

STORE #207Grand St. STORE #211-50 Broadway STORE #210

1775 Broadway

STORE #209 Atlantic Terminal STORE #203 STORE #208 STORE #103 STORE #105

Manhasset Queens Place E. Hanover Elizabeth

STORE #101 Jersey Gardens STORE #104 STORE #106

Paramus Secaucus warehouse,

headquarters, and distribution center STORE #107 Totowa STORE #401

One Daffy s Way

Secaucus

NJ

07094

USA

215 Route 46 West 1700 Chestnut Street 2120 Bartow Avenue 208 and 210 Paterson Plank Road Viale Europa, 101, 50126

Totowa Philadelphia Bronx Union City Florence

NJ PA NY NJ

07512 19103 10475 07087

USA USA USA USA Italy

Philadelphia

STORE #214Bay Plaza Display Storage DAFFY'S ITALIA

Union City

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 48 of 52

Main Document

Schedule 6 Location of Debtor's Assets, Books and Records

Pursuant to Local Rule 1007-2(a)(10), the following lists the locations of the Debtor's substantial assets, the location of their consolidated books and records, and the nature, location, and value of any assets held by the Debtors outside the territorial limits of the United States.

Location of Debtor's Substantial Assets

Location of Books and Debtor Name Location of Substantial Assets Store #204 - Herald Center 1311 Broadway Daffy's, Inc. New York, NY 10001 One Daffy's Way Secaucus, NJ 07094 Records

Debtor's Assets Outside the United States

Daffy's, Inc. maintains a buying office in Florence, Italy and maintains a bank account at Monte Dei Paschi di Siena at Viale Europa 52-54, Florence, Italy, the balance of which totaled approximately $53,223.93 U.S. dollars as of July 24, 2012

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 49 of 52

Main Document

Schedule 7 Litigation

Pursuant to Local Bankruptcy Rule 1007-2(a)(11), the following is a list of the nature and present status of each action or proceeding, pending or threatened, against the Debtor or its properties where a judgment against the Debtor or a seizure of its property may be imminent.

Action or Proceeding

Nature of Proceeding

Status of the Proceeding

Fanda Gjelaj and Mirash Gjelaj v. Daffy's, Inc. and Fujitec America, Inc.; Supreme Court of the State of New York, County of New York (Index No. 103945/11)

General Liability - Personal Injury

Pending

Monica Golden v. Daffy's, Inc. and Jersey Garden Mall; Supreme Court of New Jersey Law Divivion, Hudson County (Docket: HUD-L-2447-11 Christine Haffenden v. Daffy's, Inc.; Supreme Court of the State of New York, County of Kings (Index No. 18573/11) Viola Jordan v. Daffy's Inc.; Court of Common Pleas of Philadelphia County (No. 081200002)

General Liability - Personal Injury General Liability - Personal Injury General Liability - Personal Injury

Pending Pending Pending

Jackeline Montoya v. Daffy's, Inc., et al.; Supreme Court of the State of New General Liability - Personal Injury York (Index No. 21612/2011 E

Pending

Galyna Turko v. Daffy's, Inc., and Schwartz & Benjamin, Inc.; Supreme Court of the State of New York, County of Nassau (Index No. 04621/08) Star Fabrics, Inc. v. Daffy's, Inc., et al; United States District Court, Central District of California (Case No. CV12-01042 (SJO)(JCGx) Warren G. Browne, et al. v. Daffy's, Inc., et al.; Superior Court of Pennsylvania (Docket # 1817 E 2012) Carolyn English v. Daffy's, Inc.; Supreme Court of the State of New York (Index No. 701015/2012)

General Liability - Personal Injury Copyright Infringement Appeal of Dismissal of Action Re: Noise Pollution Complaint

Pending Pending Pending

General Liability - Personal Injury

Pending

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 50 of 52

Main Document

Schedule 8 Senior Management

Pursuant to Local Rule 1007-2(a)(12), the following provides the names of the individuals who comprise the Debtor's existing senior management and a brief summary of their relevant responsibilities and experience.

Name / Position

Prior Experience J Responsibilities

Ms. Wilson is Chair of the Board, President, and Chief Executive Officer of the Debtor. She is responsible for the Debtor's overall operations, including strategic planning, leading the marketing Marcia Wilson (Chair of the Board, President, and Chief Executive Officer) function and strengthening the brand. Ms. Wilson joined her father in the family business in 1970 and has dedicated her professional career to the Debtor's business.

Mr. Kramer is the Vice President of Finance and Secretary of the Debtor. He oversees financial Richard Kramer (Vice President of Finance and Secretary) compliance and planning, accounting, real estate, human resources, and information technology functions. Mr. Kramer joined the Debtor in May 1998 and served as a director until October 2011.

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 51 of 52

Main Document

Schedule 9 Payroll

Pursuant to Local Rule 1007-2(b)(1)-(2)(A) and (C), the following provides the estimated amount of weekly payroll to the Debtor's employees (not including officers, directors, and stockholders) and the estimated amount to be paid to officers, stockholders, directors, and financial and business consultants retained by the Debtor, for the 30day period following the filing of the chapter 11 petitions.

Payments to Employees (Not Including Officers, Directors and Stockholders) $509,661

Payments to Officers, Stockholders, and Directors $92,677

Payments to Financial and Business Consultants $225,000

12-13312-mg

Doc 2

Filed 08/01/12

Entered 08/01/12 17:34:33 Pg 52 of 52

Main Document

Schedule 10 Cash Receipts and Disbursements, Net Cash Gain or Loss, Unpaid Obligations and Receivables

Pursuant to Local Rule 1007-2(b)(3), the following provides, for the thirty 30-day period following the filing of the chapter 11 petition, the estimated cash receipts and disbursements, net cash gain or loss, and obligations and receivables expected to accrue that remain unpaid, other than professional fees.

Cash Receipts Cash Disbursements Net Cash Gain or (Loss) Unpaid Obligations Unpaid Receivables

$21,900,000 $16,300,000 $5,600,000 $800,000 $2,600,000