John Wolz

Fastener companies and other suppliers could lose $8.4 million in the proposed acquisition between bankrupt Distribution Dynamics Inc. and Anixter International, under a deal that would assure DDI CEO Dominic Polimeni a bonus of at least $1.4 million.\
Court documents reveal that DDI owes Textron Fastening Systems, Porteous Fastener Co. and several other major fastener suppliers more than a total of $2 million, an amount the vendors are unlikely to recover under the current $25 million offer.
DDI signed the acquisition agreement with Anixter on April 23, three days before filing for Chapter 11 bankruptcy, which financial experts describe as a “stalking horse agreement.””
TFS, Porteous and seven other creditors were appointed to an unsecured creditors committee by U.S. District Judge Dennis O’Brien.
On May 20 the committee was dealt a blow when O’Brien denied its request to reduce a multimillion dollar provision of the Anixter deal that would provide significant bonuses for Polimeni and 11 other top employees to lead DDI during the transition.
The vendors committee objected to certain aspects of the purchase agreement, including a key employee incentive-based retention program (KERP) filed with the court.
In an April 26 press release announcing the Chapter 11 filing Polimeni stated that “it is now in the best interest of our customers, employees and suppliers to seek a fresh start.””
According to a motion filed by the Official Committee of Unsecured Creditors, DDI would provide bonuses of at least $2.27 million to Polimeni and other DDI executives. If the final sale price is higher than Anixter’s $25 million offer, court records state those key employees would be paid an additional 4.2% of any proceeds that exceed the original offer.
Considering that Polimeni and CFO Michael Wise, who stands to make at least $292,500 from the deal, have worked for DDI since last fall and continue to receive their annual compensation packages, the vendors group claimed the KERP is “excessive.””
“The committee does not believe it is fair or reasonable, or a result of sound business judgment, to award disproportionately large bonuses to such employees for only several months of work,”” court documents state.
The committee contended that all active DDI workers, including 10 of the 12 “key”” employees, have been assured job offers by Anixter once the deal is completed. This should be sufficient enticement for them to continue working for DDI without additional bonus payments, the group argued.
“In fact, [DDI] employees, if they remain in their & employ for the next two months, will have ongoing career opportunities with the buyer.””
Court records show the KERP is structured so that Polimeni and his associates would be compensated in full before any vendor debts are paid, even if the sale price is less than the company’s total indebtedness. The committee lamented that the KERP “may cause [DDI’s] estates and their unsecured creditors to recover nothing in the sale of & assets.””
Polimeni has not returned calls from FIN about the compensation.
The committee is made up of representatives from nine companies, including seven fastener firms, collectively owed more than $1.86 million by DDI. The suppliers are Textron Inc., Porteous Fastener Co., Kanebridge Corp., Safety Socket Screw Corp., Brynolf Manufacturing, Lindstrom Metric and Matenaer Corp.
Court records state Textron is owed $587,014; Porteous is owed $577,303; Matenaer is owed $120,244; Safety Socket is owed $109,195; Brynolf is owed $103,446; Kanebridge is owed $84,265; and Lindstrom Metric is owed $62,465.
Other fastener companies owed more than $50,000 include Brighton Best Socket Mfg. Co. ($173,374), SPS Technologies ($146,134), Heads and Threads International ($102,687), Hill Fastener Corp. (83,337), Emhart Teknologies ($66,721) and Rockford Fastener Inc. ($74,760).
The bankruptcy filing includes 1,739 unsecured creditors – including many fastener companies – owed more than a total of $8.4 million. Also owed money are landlords in 11 states and Canada – including for a “corporate apartment” in Eden Prairie; taxes in 13 states and Canada; and vehicle and equipment leases.
The vendors claim that since Polimeni and Wise will be paid once the court approves the purchase agreement, there is “little incentive for such individuals to look for higher and better offers.”
“The committee does not object to a bonus payment being made to & Polimeni and Wise, albeit a smaller one, to the extent [DDI] can demonstrate that & Polimeni and Wise have made a substantial contribution to the Debtors’ estates, or will otherwise benefit the Debtors’ unsecured creditors,”” the committee wrote.
DDI Could Be Sold in Pieces
In a potential victory for unpaid vendors, O’Brien granted a committee motion requiring DDI to entertain bids for portions of the company. The auction will be conducted June 18.
According to court documents, DDI had requested that the bankruptcy court only permit bids for the entire company. The vendors committee challenged these terms, claiming that the company may be worth more if sold in pieces.
“[DDI’s] businesses can be easily divided into separate and distinct divisions,”” the vendors noted. “Accordingly, sale of & businesses on a division-by-division basis may result in a combined, higher and better offer for [DDI’s] assets.””
Vendors also stated that the Anixter deal, if approved, would be millions less than the company’s admitted debt of “not less than $29,220,000 to their lenders.””
The committee objected to the “fast track” nature of the deal,” claiming it gives them little time to explore more potentially lucrative options.
“As a result, the sale proceeds will not even satisfy the prepetition indebtedness, nor result in the recovery to the debtors’ unsecured creditors.””
If outbid, Anixter would receive a $350,000 fee for its part in the deal. Bidding would start at $25.85 million and advance in $500,000 increments.
GE as Alternative Bidder?
One potential suitor is General Electric. Observers note that as a secured creditor with $29.849,836 in claims, GE Capital/Heller Financial Inc. may have a stake in bidding higher than Anixter.
GE already owns a competing fastener distributorship, GE Supply Logistics. Ironically, it is the former Questron Technologies that GE acquired for $88.7 million in 2002 when Polimeni was Questron CEO.
DDI suppliers have been roiled by the company”s conduct in recent months. One former Questron member told FIN that Polimeni was reportedly soliciting higher lines of credit from fastener vendors at the National Industrial Fastener Show in Las Vegas last November.
Eden Prairie, MN-based DDI is a privately held distributor of fasteners, hardware and related products specializing in inventory logistics management programs for OEMs. The company has 227 employees and 20 North American locations. DDI reported $76 million in sales for the fiscal year ended September 30, 2003.
The Minneapolis law firm of Faegre & Benson LLP is counsel for the committee of unsecured creditors, and Dorsey & Whitney LLP represents DDI. �2004 FastenerNews.com