In the fall of 1989, Donald G. McClure was running out o everything from doorknobs to time.
His storm window and door-making business, Baltimore-based Acadia Manufacturing Co., had filed for bankruptcy five months earlier and was so cash-starved it couldn't buy all the supplies it needed. The company faced an unpaid tax bill of $350,000 -- more than a liquidation auction would raise. And business loans Mr. McClure had personally guaranteed were overdue, forcing him to file for personal bankruptcy.
Mr. McClure told Stephen Seymour, a business acquaintance, that a reorganized and recapitalized Acadia would be a success -- but he hadn't been able to find a backer.
That's when Mr. Seymour, a Ruxton investor who had built a multimillion-dollar turnaround fund by buying and selling radio stations in the 1980s, had a vision.
He saw a pony.
Mr. Seymour explains his vision this way: A father gives his two sons keys to two identical rooms. The boys eagerly unlock the rooms, only to find each one packed with manure. One son pokes around for a minute, then returns to his father asking him why he gave him a roomful of manure. The other son digs like mad, convinced there is a pony in the back, making all the manure.
Mr. Seymour says he thought Acadia was a mess, but there was a pony in there somewhere. Despite its problems, 43-year-old Acadia, which at its height had more than 100 employees producing 40,000 windows a year, still had loyal customers, a strong product and a good name, he believed.
So Mr. Seymour, best known for his management of Baltimore's WMAR and WJZ television stations in the early 1980s, formed a partnership with Mark Wright, a former International Playtex, Inc. executive.
The two bought Acadia's debts for pennies on the dollar. They poured $75,000 in cash into Acadia to keep the glass, vinyl and hardware coming. They moved the company into a new plant. And they started developing new products to catch up with competitors and began marketing Acadia's vinyl replacement windows like crazy.
The result: Although there are still plenty of hard feelings among some of Acadia's creditors and suppliers -- unsecured creditors were stuck with $1.4 million of Acadia's unpaid bills -- the company has emerged from bankruptcy.
The story of Acadia's dramatic fall is, in many ways, a typical story for these days of record business failures.
A combination of the debt binge of the 1980s and the recent recession contributed to a record 1,356 business bankruptcies in Maryland last year, nearly triple 1989's level.
And as the defaulters spread out their losses, more and more businesses are pulled under. According to Dun & Bradstreet, 384 Maryland businesses failed in the first four months of this year -- more than double the rate for the same period in 1990.
For a variety of reasons -- ranging from the recession to an owner's reluctance to admit mistakes -- only about one in 10 Maryland companies that file for bankruptcy will successfully reorganize, says Murray Siegel, senior bankruptcy analyst at the Justice Department's Baltimore office.
That's why Acadia's recovery story is unusual, bankruptcy experts say. Those familiar with Acadia say it will need several more months of strong sales to return to firm financial ground, but Acadia now has a fighting chance to return to profitability.
Bankruptcy experts say the way Acadia got into trouble -- and is now digging its way out -- reveals how dramatic a reorganization must be for it to succeed.
Acadia has been refashioned several times in its bumpy history.
After two of the founder's sons, Charles and Robert Barry, died in the 1970s, remaining family members decided to sell what was then a profitable aluminum storm window and door-making business.
Mr. McClure, who was working for Maryland National Bank and looking for an investment, joined a Florida investor to buy the company for $780,000 in 1979. Mr. McClure said he and his partner, Harold Gore, borrowed about 60 percent of the purchase price, and then quickly changed the company's product line to vinyl windows, which were taking over the storm window market from aluminum.
After a couple of years, Mr. McClure, who was running Acadia, decided to expand by buying a Philadelphia-based maker of aluminum windows and doors.
"It was the single most stupid thing I've done in my life," Mr. McClure says now of the $350,000 purchase of a company called Stephen Laurie.
Acadia executives didn't investigate the company very well. They discovered after the purchase that Stephen Laurie was hemorrhaging money, was millions of dollars in debt and was losing market share rapidly, Mr. McClure said.
Mr. McClure says he sued Stephen Laurie's former owner for misrepresentation but lost. He soon realized the best thing to do would be to liquidate Stephen Laurie.
By 1987, all Acadia had to remember from its attempt to grow was $4.6 million in debt, production problems and plenty of disaffected customers.
Mr. McClure, who says he specializes in managing turnarounds, then tried to informally reorganize Acadia. He began negotiating with banks for deferments on loans, lending the company money himself and raising cash from potential investors.
But, recalls Keith Straley, the company's former chief financial // officer, Acadia's debts were pulling it into a vortex of failure. The company wasn't earning enough to
meet operating costs and cover the additional $38,000-a-month debt payments.
So, suppliers of glass and other important materials went unpaid. Angry suppliers started pulling in the company's credit line or cutting off the company altogether, making it impossible for Acadia to fill orders on time. Unable to fill its orders quickly, Acadia drove customers into the arms of more reliable competitors, further reducing the amount of cash available for the next round of material purchases.
"I can remember many, many times that orders for customers couldn't be produced because we had no raw materials," Mr. Straley says.
Soon, Acadia wasn't making its withholding tax payments, and its payroll checks bounced occasionally.
In early 1989, the Internal Revenue Service started dunning the company for about $245,000 in unpaid taxes. On top of that, a private lender, G. William Floyd, sued Acadia for repayment of some of the $600,000 he and a partner had lent the company.
Mr. McClure realized there wasn't anything to do but file for bankruptcy court protection. The company filed for Chapter 11 protection in U.S. Bankruptcy Court in Baltimore on May 19, 1989.
"We had always thought it was fixable," Mr. Straley says, explaining that despite the company's problems the demand for Acadia's replacement windows was still strong enough to fuel annual revenues of about $3 million in 1988.
ABut the realization that bankruptcy was the only option left "was very, very emotional."
"It was the stigma, the ego. We were feeling badly for the vendors we had convinced to go along with us and extend credit . . . We really thought we could make it," he says.
After the filing, Mr. McClure redoubled his efforts to raise cash, going to suppliers, customers and locally known investors.
And that's where Mr. Seymour came in.
After hearing Mr. McClure'spitch, Mr. Seymour and Mr. Wright did a fast but intense study of Acadia's true value. Researching similar auctions, the two businessmen found that if the creditors pushed for liquidation to raise at least some payment, an auction would likely only bring in about $200,000.
"For inventory, they'd only get 10 cents on the dollar, for machinery, they'd probably get 15 cents on the dollar, for receivables, maybe 25 cents," Mr. Seymour says, explaining that Acadia's 1,100 accounts were mostly small home improvement contractors who would likely be slow to pay if Acadia went out of business.
"It would be a hideous nightmare to try and track them alldown."
So, the pair prepared for what turned out to be a crucial moment in Acadia's history: the negotiation with NCNB Bank of Maryland for purchase of the secured debt.
Whoever owns the secured debt calls the tune in bankruptcy proceedings, Mr. Wright explains.
The two took a report documenting the validity of their bid of about $200,000 for $1.5 million worth of liens to their meeting with the NCNB bankers.
It was a tense moment for the two, Mr. Wright recalls. "I was a little nervous. . . . It's kind of like buying a house. You always wonder what if this happens . . . what if that . . . ."
On Jan. 31, 1990, NCNB, running out of patience and glad to get something out of the deal, accepted $230,000 in return for its liens on Acadia. The partners then quickly snapped up another bank's lien on Acadia's computer equipment.
They had, essentially, taken control of a company with $3 million in annual sales for $233,000 plus attorney's fees, which the partners say exceeded $100,000.
Bankruptcy experts say the debt reduction was key to Acadia's revival.
Although there are a thousand reasons that businesses fail these days, two themes are common:
Many companies, especiallyones associated with construction and real estate development, have been driven into bankruptcy by a sudden plunge in sales. Bankruptcy court reorganizations usually aren't successful for companies that don't have strong sales, explained Gary Greenblatt, head of Maryland's bankruptcy attorneys' trade group. Mr. Greenblatt served as the attorney for the partnership that staked Acadia's turnaround.
Companies like Acadia -- which were able to cover their operating expenses but were dragged under by huge debt payments -- can often benefit from reorganization, however. Essentially, said Mr. Greenblatt, debt-overloaded companies that go bankrupt recapitalize at the expense of their creditors. Freed from debt, they have a good chance of succeeding as long as the cash flow remains positive.
The partners immediately put $45,000 into Acadia to keep the company afloat during its traditional slow winter period.
And, in early 1990, Mr. Wright and Mr. Seymour took control of the day-to-day operations of Acadia.
The change in management, the bankruptcy experts say, was the second key to Acadia's success.
PD The old managers have usually used up their credibility with sup
pliers and customers, and are often likely to lapse into their bad old habits, Mr. Greenblatt said.
Mr. Wright, a tall, self-confident 38-year-old with an MBA from Columbia University, said he realized that the years of financial difficulties had fostered plenty of bad habits throughout Acadia's staff: factory workers were putting out poor quality windows and getting into accidents; purchasers weren't bothering to insist on top-quality materials, and sales employees were out looking for other jobs.
Mr. Wright, who had served as controller of Playtex's factory in Dover, Del. and as a turnaround consultant for local businesses, said his goal was to "bring big business discipline to a small company." His aim, he said, was to focus the company on making and selling top-notch windows.
So, he started offering a $10-a-week bonus to workers with perfect attendance, no accidents and good productivity. He and other managers walked the factory floor and stressed improving quality "til we talked ourselves blue in the face."
But before he could do much to shake the staff out of its malaise, Mr. Wright was faced with an immediate crisis: he had to quickly find a new plant, since a bank was foreclosing on Acadia's factory.
Convincing someone to lease a bankrupt company 30,000 square feet of industrial space wasn't easy. But Leroy Merritt, a developer looking for his first tenant for an industrial park under construction just three miles south of Acadia's White Marsh plant on Pulaski Highway, gave the company a deal.
The move turned out to be the key to fixing many of Acadia's
Mr. Wright had the company hold a huge "garage sale" to get rid of glass and other supplies at bargain prices. What didn't sell was donated to schools and charities.
Then, during the company's slow period last February, Acadia's 35 remaining employees shut down production and started a mad 12-hour-a-day, seven-day loading and unloading rush, moving all but four pieces of equipment themselves in Acadia's own trucks.
That saved precious cash. And the self-help move rallied Acadia workers and convinced them the company could survive, Mr. Wright said.
In addition, the new cleaner, safer and cooler building has helped productivity jump 80 percent from the same period a year ago, Mr. Wright said.
Complicating the partners' task was the continuing battle over the company's huge debts.
The partnership's attorneys hammered out an agreement with the IRS, waiving the penalties and giving Acadia six years to repay the back taxes, a settlement that is not unusual, Mr. Greenblatt said.
But some of Acadia's unsecured creditors, including some unpaid suppliers, fought the company's bid to emerge from bankruptcy.
Ronald Leiphart, sales manager for a Pennsylvania-based aluminum supply company, says he objected to the partnership's reorganization plan because his Pennex Aluminum Co. got nothing forthe more than $1,000 it was owed. Meanwhile, McClure retained 50 percent of the company's equity and was granted a $115,000-a-year consulting fee for three years.
Finally, last February, despite the continued opposition of some unsecured creditors, U.S. Bankruptcy Judge James F. Schneider approved the partnership's reorganization, enabling the company to start winning back the right to use credit.
Although he wouldn't discuss Acadia's case, Judge Schneider indicated that simply getting that far was an accomplishment. JudgeSchneider said he's presided over bankruptcies in which the costs of litigating the filing -- attorneys and accountants' fees -- have eaten up all the troubled company's assets.
Now, under the day-to-day guidance of Mr. Wright, the company about to launch a more expensive line of windows to complement its existing 20-product offering. In addition, the company is attempting to win over customers and creditors alike.
Sandy Lombardo, whose father used to install Acadia windows as a part of his home improvement business, said he gave up on some Acadia products, such as the aluminum storm windows, in the mid-1980s because of declining quality.
Now, says Mr. Lombardo, who runs Baltimore-based Home Craftsmen Co., Acadia is regaining contractors by introducing a premium line. Acadia, a wholesaler that only sells windows through licensed contractors, also allows contractors to use its new showroom in sales pitches.
"The showroom is a godsend. Nobody else has such a beautiful one. I use it as much as possible," Mr. Lombardo says.
In addition, Acadia, which had become notorious for unreliability, is guaranteeing contractors 10-day delivery.
And suppliers who had cut Acadia off are beginning to loosen up.
Jeff Staub, sales manager for the Adept Corp., a York, Pa., maker of window hardware, said his company got stuck for more than $1,000 when Acadia filed for Chapter 11, and has been on cash terms since then.
But now, he said, he's agreed to give the company 30 days' credit for small orders.
"They're much more active. We've made more sales to them," he said. "It's not quite normal. . . . But they've put on a new face," he said.