Finance: The Lazarus Play
Five years ago, Gordon Weinberger, then president and CEO of Top of the Tree Baking Co., wrote his suppliers with some bad news: As you probably know, Top of the Tree Baking Co. is at a critical juncture. Despite our pies' amazing visibility in the market ... not only have we yet to experience a positive cash flow, but we have outstanding invoices with vendors like you.
It was a stunning admission from Weinberger, who had started Top of the Tree in the summer of 1993. The Londonderry, N.H., company quickly attracted notice. Weinberger's most creative marketing vehicle was the "Piebus," a converted school bus he decorated for weekend promotional events and, later, for cruising around to some of the 225-plus supermarkets where Gordon's Pies sold for $5.99 apiece. Weinberger, who stands six feet nine inches tall, was an unforgettable figure at the helm of the bus and as the face of the product, its packaging, and its marketing campaign.
However, by 1997 the Piebus was barreling toward bankruptcy court. Although Top of the Tree had sales of $400,000, it was losing money on every pie it turned out. At that point, the company owed $225,000 to 71 vendors, ranging from its flour supplier to its insurance agency. Weinberger's efforts to raise capital had crashed. Just like that, Top of the Tree was out of business. The company still had orders coming in, but "vendors had shut us off," says Weinberger. "We couldn't ship any more pies."
Desperate, Weinberger consulted bankruptcy lawyer Pam Coleman, who was a friend of his sister's. Coleman had one question: "Do you talk to your vendors?" Weinberger's answer: "Just about every day." With that, Coleman had a way to bring Top of the Tree back from the dead without ever entering bankruptcy court.
She knew that many companies try to dodge their creditors either because they're still desperately seeking to raise money even as their bills are overdue or because they simply can't pay what they already owe. But the faster a CEO runs, "the faster they chase you -- and then they don't trust you," Coleman says. "The debtor feels there's no option but to file for Chapter 11, because you get what's called an automatic stay." Being granted such a stay means that creditors can't bother you while you try to reorganize. Coleman's plan was risky but straightforward: "Have Gordon create his own automatic stay."
Weinberger promptly fired his old lawyer and accountant. And in the spring of 1997 he and Coleman devised a private plan to satisfy his creditors and keep the company out of Chapter 11. Their first step was to send all Top of the Tree's creditors a letter announcing the company's bad news. After introducing the problem, the letter went straight to the point: We have consulted with bankruptcy attorneys who have advised us that we could immediately file for Chapter 11 bankruptcy protection.... However, ... even if we do file, there's no guarantee that vendors like you would get anything of note in a plan of reorganization, since there is a secured lender ... ahead of you.... We believe that it makes sense to wait it out with us for just a little while longer.... You will be receiving a letter from us outlining our plan in the next several weeks.... Yours with...survival in mind, Gordon Weinberger.
Then Weinberger spent hours phoning and visiting his vendors and endlessly reassuring them of his honorable intentions. He knew that under federal law, any three creditors could force his company into involuntary liquidation. The ultimate testament to Weinberger's credibility? Not one of his vendors ever threatened to close down the company.
The bank, however, was another matter. Top of the Tree also owed the Bank of New Hampshire $175,000. Weinberger recalls the tense negotiations: "Their attitude was, 'If you don't pay us, we're going to shut you down." And the bank might have done exactly that if it hadn't been for one "work-out officer, a young woman who said, 'The guy wants to pay you back. Leave him alone," says Weinberger.
Next was the question of how to make money. Even at its peak of 1,000 pies a day, Top of the Tree's factory was hopelessly inefficient, according to an outside expert whom Weinberger consulted.
Based on his consultant's advice, Weinberger closed down Top of the Tree's operations and laid off its 50 employees. He sold all the assets except the Piebus.
With the bank's approval, the proceeds from the equipment sale -- less than $100,000 -- went to operating capital. Top of the Tree was back in business. But it was a very different business from the one that Weinberger had originally started. "We went to 100% brand management," Weinberger says.
In a second letter to vendors, sent a month after the first letter, Weinberger announced that the factory was closing and reiterated his desire to avoid bankruptcy court. He laid out two payment options: Top of the Tree is prepared to make an immediate payment of 15 cents as a settlement in full for each $1 due to each unsecured creditor.... If you choose not to accept the aforementioned offer, we ask that you accept our more aggressive offer of a full payback.... It will take us about 24 weeks to get back on our feet. Therefore, you will be receiving a letter from me outlining an exact payment plan no later than February 1, 1998.
No one accepted 15¢ on the dollar. A few vendors who said they'd settle for half of what they were owed were paid immediately. Most, however, chose to wait for a full payback. "I just trusted Gordon," says Phil Allen, an agent for Chalmers Insurance Agency, in Bridgton, Maine, which was owed $10,000. "I had the choice of not continuing his insurance or waiting it out. I continued to pay his premiums out of my paycheck. Basically, I invested in his company for a year until he could pay me back." Not every vendor felt as benevolent. At a wedding reception, Allen met one of Weinberger's angry creditors. "He wasn't very complimentary about Gordon. And that scared my wife. She asked me, 'Are we going to lose that money?"
It was a fair question. After all, 24 weeks was not a lot of time. But Weinberger figured his best chance of success was during the fourth quarter of the year, when pie sales typically peak. In August 1997 he persuaded Shaw's Supermarkets, a large New England chain, to buy a tractor-trailer load of pies. "That was a $25,000 order," says Weinberger. "I had never before sold that much at one time."
Weinberger and Coleman (who by now had joined the company full-time in exchange for a 13% stake) spent the next four months on the road in the Piebus, stopping at 500 grocery stores and racking up $1 million in sales by Thanksgiving. "That gave us a war chest," says Weinberger. The profits were enough to start paying off vendors -- ahead of schedule.
At company headquarters, in Londonderry, a whiteboard listed the bank loan and all 71 debts to vendors, ranging from $5 to a local egg farmer to $20,000 to a large box manufacturer. Many of the figures were in the range of $10,000 to $20,000. Coleman formulated the final "settlement and forbearance" agreements. The company paid many of the vendors in full in December 1997 and January 1998.
The daring, do-it-yourself bankruptcy protection and reorganization plan had worked. Still, the idea engenders debate. "It's the unusual situation where it works," says Alan Rubenstein, a partner at Rackemann, Sawyer & Brewster, in Boston, who specializes in business litigation. A private plan can succeed only "if all substantial creditors go along. And that's a big if," Rubenstein says. In Coleman's experience, only about 5% of insolvent companies attempt their own "work-out" plan with creditors.
Within a few years of its recovery, Top of the Tree hit $5 million in annual sales. In January 2002, Weinberger sold the company to Mrs. Smith's Bakeries, the preeminent player in frozen pies, which is owned by $1.6-billion Flowers Foods Inc. The same month, Top of the Tree made one final loan payment, for $50,000, to the bank. Gordon Weinberger was finally a debt-free man.
Susan Greco is a senior writer at Inc.
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