Can This Company Be Saved?

Cardinal Services is slipping toward bankruptcy. A turnaround team is trying to rescue it. Time is running out

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NO SOONER HAD THE INK DRIED ON the pages of its 1986 statements than Cardinal Services' director of accounting laid down his red-stained quill and joined a seminary. Any of us might have chosen to be a cleric over a clerk, given the pitiful results of the company's past two fiscal years. In 1985, Cardinal lost $2.7 million on revenues that, at $23.3 million, were off more than 30% from the previous year. Revenues for fiscal '86 slid even farther, and $2.5 million more went down the drain. Loan covenants were in tatters, long-term debt in default. At the end of '86, Cardinal's receivables totaled a scant $0.4 million, payables $3.4 million. With cash flow like that, it was evident that hundreds of vendors -- never mind an annual debt service of more than $1 million -- didn't stand a prayer of being paid.

Not knowing where to turn for capital or advice, the Sandusky, Ohio, food vendor simply forged ahead, come what may. By mid-'87, the private company had weathered more adversity than Job, owed about as much as Brazil, yet was still doing business as usual -- which consists mainly of coin-dispensing in-house meals to a captive audience of factory-worker gourmands. Miraculously, Cardinal had managed (if that's the word) to stave off receivership, even after its $3.5-million revolver was turned over to the bank's loan-workout department. But miracle or not, this author is quoting long odds against survival.

Cardinal's in extremis condition didn't scare one Gregory R. Kelly, however. "Odds are just odds, part of the game," philosophizes the president and founder of Multi Financial Services Inc. (MFS), a Birmingham, Mich., 21-person consultancy with a specialty in do-or-die turnaround missions. "I think this one has a shot." Thus when MFS was summoned by Cardinal Services Inc. owner and president Edward O. Ries last January, an ad hoc team of games players willingly trekked off to Sandusky to take a crack at halting the slide.

Though it was apparent even to the cleaning crew that the end of the poverty-stricken company couldn't have been more than three months away, don't mistake MFS for fools rushing in where other financial angels feared to tread. MFS works its wonders in ways strange to the rescue industry: for fees, not equity. No wonder Kelly, a 39-year-old onetime car repossessor, can afford to be sanguine about the outcome. "If we don't make it, it doesn't defeat our purpose. The measure will be, did we try as hard as we could?"

Nor were Kelly's unflappable turnaround troops startled to discover that the situation was considerably more desperate than Cardinal's chief executive had admitted -- or, indeed, recognized. "Typically, a client insists that the answer to his problem is more money -- another loan, or a partner who will bring in additional equity," says operations expert Larry L. Walker, MFS's mission leader. Usually, though, the enterprise is so riddled with debt and delinquency that if it gets more money, it loses it even faster than before. "Almost every time," the veteran Walker concludes, "more money is the last thing needed."

Needier than most, this particular client undertook to bring in the additional money on his own. Ries had recently sold a family house, plowing the funds he received into the corporation in an admirable but woefully inadequate attempt to revive its moribund treasury. To create yet more spendables, some taxes owed the federal government and the six states in which Cardinal operated went unpaid. While states have to fight for their due like anyone else, not paying the feds on time exposes a corporation and anything remotely connected to it -- including the personal property of its owners, officers, and directors -- to unannounced visits from lien-wielding Internal Revenue Service agents. To collect overdue withholding (for which a corporation is considered trustee), the feds can butt in ahead of everybody else in the liquidation line -- to the annoyance of no-longer-so-secured lenders, of which Cardinal had several.

Hoping to mollify some suppliers with which Cardinal was sorely behind, Ries and his wife had personally guaranteed promissory notes; to yet others the company had issued checks postdated for as many as 21 months into the future. They all added up to more than $600,000, but inside the corporation, nothing was changed. "Usually the principals aren't even convinced that corrective action is required," observes MFS teammate Jay N. Brown, an erstwhile banker lured to the other side of the cage by Kelly. "When a company has book losses like that, management's first reaction is, it's a volume problem, a temporary downturn; renewed prosperity is just around the corner. Had we gotten in a year ago, maybe there wouldn't be any problems today. But who's going to pay for a couple of people with a portable computer to tell them what to do when things don't look bad? It has to be at the point where you can't pay the bills, when there's no cash available, when there are lawsuits and collections and the bank's on your back and everybody's screaming -- then when someone tells you they have some answers, maybe you'll listen."

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