And yet more than a year later the issue remained unresolved. In a June 1992 board meeting Broad noted that CPI was still "at risk of being audited and can be liable for back taxes of about $300,000 to $500,000." Two months later the board chose a different tack. Why not pay out a percentage of revenues, not profits? That, noted Broad, would be "cleaner in the eyes of the IRS and avoids the tax-liability issue."
Cohen liked the idea. He replied in a handwritten note, "It gets $150,000 less to the govt. Also I think we could call this a marketing initiative and not be liable to IRS for taxes."
The IRS never objected to CPI's accounting, but John Riley, who has provided accounting services to CPI since the fall of 1989, related that one option the company considered was to get an opinion from the IRS. That was never done, says Riley, "because one doesn't ask for an opinion from the IRS in a case like that because the chances would be that it would be negative."
Furman says that CPI's board sought legal advice on the matter. Though acknowledging that CPI did little advertising or marketing in the traditional sense, he notes that its donations policy raised the company's image. "Giving our profits back to environmental groups was an attempt to tell customers that by buying the product they would enjoy these good things the company stood for and they could get behind it," he explains.
Broad downplays the tax issue, noting that CPI sought legal advice. "We got ourselves the justification we needed," she says. But she does concede, "This was not the cleanest solution."
Ben's Departure
By mid-1992, a downward turn in the company's fortunes was rendering the tax issue academic and, ironically, distancing Cohen from CPI at a time when it needed him all the more. By then CPI had given away half a million dollars, and the company was losing money. As Broad had cautioned in a memo earlier that year, there was "an increasing need to spend money on selling and marketing (as we get older the torrent of press coverage/free publicity has subsided)." CPI, after all, was in the specialty-foods industry, which demanded novelty. Promoting new products and getting them accepted in the marketplace was expensive.
The company now had to survive on more than just PR. The rain forest was fading as a cause célèbre. CPI's attempts at introducing new products independent of Ben & Jerry's were not panning out: Rainforest Crunch cookies kept breaking in transit. A product called the Rainforest Crunch Chew had a prohibitively high cost-of-goods-sold ratio of 90%. CPI's main customer, Ben & Jerry's, had negotiated a 12% price decrease because, Irv Deutsch says, "they felt they were paying too much."
Inside the company, the pace was hardly letting up. "Irv and I were down in the trenches. I was saying, 'We need some help," recalls Broad. She was asking Cohen for help--and getting the opposite response. "Ben said to our faces, 'I don't want to run the company. I've been there and done that."
In fact, to replace himself as president at CPI, Cohen hired Warren Bingham. Bingham had gone to the Wharton School and had earned executive experience during a 25-year career in business, including heading up a printing division at Sara Lee. But Bingham also had experience in the nonprofit world and shared Cohen's desire to push business in new, more socially responsible ways. He recalls his first meeting with Cohen: "Ben laid out the vision. He wanted to push the envelope on what they were doing at Ben & Jerry's. It was a very ambitious vision he was articulating." That energized Bingham. After all, his mandate was to grow the company--which, by the time he took over, was fast wilting.
Bingham began at CPI in July 1993 by taking a hard look at the business. He concluded that CPI had probably been unprofitable since at least the beginning of the year and had been making donations out of cash flow. "The capital structure and donations policy were not sustainable," he says, which saddled CPI with "the most enormously high cost of capital I'd ever seen."
Bingham's analysis looked prophetic when in 1993 CPI reported a loss of $153,000--a big swing from the net profit of $257,000 the previous year. He argued that the company should be recapitalized; investors should exchange their debentures for nonyielding equity, and the donations policy should be cut back dramatically. He also asked the board for the authority to sell equity in the closely held company to outsiders. Those proposals went nowhere, and the red ink kept flowing. In 1994, CPI lost $147,000.
Asked why he didn't recapitalize the business, Cohen replies, "It wasn't necessary." As for Bingham's proposal to convert CPI's debt to equity, Cohen says, "I don't remember the discussion."
As the company lay mired in the red, its bank, growing nervous, sought a personal guarantee from Cohen for the company's $250,000 line of credit. Cohen, unwilling to invest further in CPI, resisted. In one standoff, Bingham recalls, Cohen agreed to sign but then delayed. Bingham asked him, "Are you prepared to let the company go bankrupt?" Cohen replied that "he'd rather step up and pay off the loan out of the goodness of his heart than feel obligated to do it," according to Bingham. Cohen denies making the remark.
Cohen didn't pay off the loan, but he countered with another proposal, says Bingham: to guarantee the line of credit if CPI signed over the Rainforest Crunch trademark to him. As Bingham recounts the story, he turned Cohen down, since the trademark was the only thing of value that CPI owned. Cohen says that he has no recollection of making such an offer.
Whatever actually went on behind the scenes, Cohen finally relented and agreed to personally guarantee the line of credit. That, in effect, made him the banker to CPI, which gave him the advantage of being a secured creditor of the company in the event of bankruptcy. Nonetheless, Cohen invested no new funds in CPI. "I didn't want to put more money into the business," he says. "It wasn't necessary." He adds that he had already paid by his own sweat. "It should be noted that I wasn't compensated for the hundreds of hours of work I put into CPI."
