Putting A Business Together Again

Shattered by a business downturn, Marine Optical found that declaring bankruptcy gave it a second chance. Changing attitudes and new laws make that option more viable than ever for troubled companies.

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People used to think of bankruptcy as being hauled away to the gallows and left to hang there for days," says bankruptcy attorney Gary Cruickshank. "That image has changed."

There are several reasons for the new attitude toward bankruptcy: High interest rates and double-digit inflation have driven even solid, well-managed companies into bankruptcy proceedings. Large, highly publicized corporation have openly chosen the bankruptcy route and in the process have made bankruptcy almost an acceptable business practice. And companies both large and small that are willing to do the necessary surgery are showing they can be successfully reorganized with the help of the bankruptcy courts.

Perhaps the major reason for bankruptcy's rise to respectability, however, is the recently enacted federal Bankruptcy Code, which went into effect on October 1, 1979. Since then, the number of cases in the nation's 95 federal bankruptcy courts has risen dramatically. In the year that ended June 30, 1981, according to the Administrative Office of the U.S. Courts, business bankruptcies totaled 47,414 -- 31% higher than the previous year. Although the figures have not been broken down by company size, economists estimate at least half of the failures occurred in small firms.

Approximately 35,300 of the business bankruptcies recorded in 1981 were filed under the new code's Chapter 7, the provisions that cover liquidation. Another 7,231 fell under Chapter 11, a revision and consolidation of the repealed Bankruptcy Act's Chapters X, XI, and XII. Though analysts continue to debate whether debtors benefit more than creditors from the changes in the code, many of them would agree that companies with some chance of rehabilitation have a good possibility of surviving under the new Chapter 11.

One company that would agree with these analysts is Marine Optical Inc., a manufacturer of plastic and metal eye-glass frames based in Brockton, Mass. Ted Izzi and Bob Kemp bought the firm in 1975, when it was still based in Boston. At that point, the company was 50 years old, and had a deteriorating sales level of $1.5 million and heavy losses. Within nine months, Izzi, the company's president, and Kemp, the treasurer, had brought Marine Optical to a breakeven point. By 1979, sales had grown to $4.25 million and the company was consolidating an already strong reputation within the industry.

The slide into Chapter 11 began one summer day in 1979 when the company's landlord told Marine Optical it had three months to clear out of its Boston facility. The problem for Izzi and Kemp was to find a 40,000-square-foot building immediately available to house a 110-employee manufacturing plant.

The new facility was found -- 20 miles south in Brockton -- but the move nearly killed the company. About two-thirds of its employees, the majority of whom were neighborhood workers already close to retirement, left Marine Optical rather than commute to Brockton. During the relocation, the company also had to forgo introducing new products even though 50% of its sales routinely came from this end of the business.

The move made the effects of an industrywide downturn even worse. Increased imports had severely challenged domestic manufacturers, and many new eyeglass companies had gone into direct sales rather than the wholesale distribution approach Marine Optical had always taken.

The company was not profitable in the fall of 1979 and the first quarter of 1980. Though sales were strong in April and May, they slumped in June and July. By early summer, says Kemp, "we knew the bank was getting nervous. The loan officers began sending us messages that we couldn't make even one stumble."

The company's relationship with its major creditor -- First National Bank of Boston -- was soon to degenerate into a totally adversarial one. But during the summer of 1980 the two parties were still amicably discussing ways to strengthen the company's financial position. The bank's major concern was its loan to Marine Optical, which was based on a formula involving a percentage of the company's receivables and inventory. First National had also granted the company a loan of $300,000, which was guaranteed by a stockholder.

"We were very highly leveraged when we started out in 1975," admits Izzi. The forced move made the situation worse, since most of the relocation costs had to be financed out of working capital. During the summer of 1980, the company began to exceed its loan formula on a fairly regular basis.

In August, with the approval of the bank, Marine Optical hired a consultant to shrink the company and pull down the loan. "We reduced our overhead, sold off inventory, pushed collection of receivables, and turned assets into cash -- all the classic things that have to be done when you have a working-capital crunch," says Izzi. On September 26, the company and the bank agreed that in 30 days the loan would be brought down by $100,000.

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