"The next thing that happens is I end up purchasing Sky Courier," Brodsky spins his soon-to-turn-tragic tale. What he fails to mention is that Sky Courier Network and its subsidiaries, then doing about $52 million a year, mostly as a same-day package expediter, were clearly on their way out the mail chute. Pinned under $9.3 million of long-term debt and with negative working capital of $15.3 million, Sky's condition was so pathetic that when its operations are theoretically restated as part of CitiPostal's (an exercise public companies perform when they acquire private ones), net income for FY '87 goes from plus $1.1 million, or 25 a share, to minus $10 million, or a loss of $2.19 on each of those same shares. "This looks terrific," Brodsky enthused, rising to the challenge like a bricklayer after an earthquake. "I'm going to buy it outright."
The balance sheet was tough, he grants, "but not impossible. The negative working capital included all the write-offs. In a private company, over an extended period of time, things collect on the balance sheet that don't belong there -- bad debts, for example. We took a careful look at everything and wrote it all off at once. I knew we were going to have to absorb losses for a short period, but I had taken other companies with just as bad balance sheets and done it." By which he means combining overlapping operating segments to reduce overhead and, ipso facto, create an automatic profit.
Besides, the price was little enough. To merge 100% of Sky Courier plus a 55%-owned subsidiary into CitiPostal, he claims to have spent only a few hundred thousand dollars in cash (and we'll take his word: anyone who can find the exact amount in subsequent financial statements would be capable of running the Fed). The rest was financed via common stock and promissory notes. Brodsky seized the moment to exercise CitiPostal's buyout of the remainder of Perfect Courier by taking the entire amount in the form of a $6-million note due in 1990, on which he was to be paid $480,000 a year interest. On top of that, he rewarded his executive acumen with a salary of some $300,000 a year, and that of his new operating officer -- an investor in Sky who had brought the deal to Brodsky's attention -- with a salary of $225,000.
Then he reorganized. It makes sense to fold these companies all together, he reflected -- a surmise noble in theory, but swiftly to prove fatal in practice. In bold strokes, he made the accounting staffs one, the ground offices one, the air offices one, and pronounced, "we have one company."
And he saw that it was bad.
Some salesmen must have "gotten to the pricers" to lower quotes and fatten their commissions, he feared on closer examination, insofar as the company was servicing an extraordinary number of sales at a loss. Furthermore, the huge 60-person sales force operated under what Brodsky calls "a Death Club," whereby accounts forfeited by departed salespeople went to whoever had been there the longest, rather than reverting to a commissionless house account. "There were antiquated guys earning $300,000 a year in commissions," Brodsky was horrified to find, "and they couldn't even sell."
Worse, he discovered that the not-even-one-year-old subsidiary, which was now responsible for SEC-regulated disclosure like everyone else under the corporate shell, "was not doing things of a public-company nature." To wit, not only were some of the principals personally taking home in excess of $25,000 a month in addition to their salaries while letting the company's rent and telephone bills slide, they were also neglecting to pay withholding taxes. When Brodsky tried to summon the three other owners -- who, despite their minority, had retained 50% voting rights -- to review the situation, they disdained to show up. So he plunked down another $1.8 million in cash and future considerations and bought the rascals out. Then he plunged into the corporate archives, unearthing a trail of urgent correspondence from the IRS that the former regime had responded to by ignoring. Not only did with-holding and other payroll tax obligations and potential penalties add up to $750,000, but his former partners hadn't even filed them!
How had malfeasance so flagrant escaped notice? "I have to question my own ability to do due diligence," Brodsky was to confess. So, apparently, should the Big Eight accountants who, according to Brodsky, shrugged off their failure to flag the problem by insisting it was simply a payable like any other. Even so, says a Wall Streeter who followed CitiPostal closely: "If he had consulted with any competent investment banker on the Street and said, 'I'm contemplating buying this company in Virginia for a big number, could you take a look at it?' they would have told him 'What, are you a lunatic?' It was there to see."
Words alone cannot do justice to the mayhem that lay before Brodsky. However, some figures comparing CitiPostal's first six months after the acquisition (to December 31, 1987) with the same period the previous year -- before the acquisition -- may provide perspective:
* Cash: decreased by nearly $4 million
* Receivables: increased by $9.1 million
* Bank loans: increased by $6.7 million
* Current notes payable: increased by nearly $2 million
* Accounts payable: increased by $11.9 million
