Pen­nySaver was on brink for months

The firm had been in de­fault on op­er­at­ing loan since De­cem­ber, but few work­ers knew.

Los Angeles Times - - BUSINESS - By Dean Stark­man

Coupon mail­ing com­pany Pen­nySaver USA was in de­fault on its main op­er­at­ing loan for five months be­fore it abruptly shut down on the eve of the Me­mo­rial Day week­end, some­thing few of its roughly 680 em­ploy­ees knew be­fore they were put out of work.

The owner, pri­vate eq­uity firm OpenGate Cap­i­tal in Cen­tury City, had turned over man­age­ment of the firm in De­cem­ber to a restruc­tur­ing and liq­ui­da­tion com­pany, Re­al­iza­tion Ser­vices Inc. in Bed­ford Hills, N.Y.

And in the two months be­fore the shut­down, the len­der, a unit of Cap­i­tal One Fi­nan­cial Corp., had placed one and some­times two rep­re­sen­ta­tives at Pen­nySaver’s Brea head­quar­ters to mon­i­tor the op­er­a­tion and the com­pany’s fi­nan­cial con­di­tion, un­der terms of the line of credit it was us­ing to pay em­ploy­ees, among other ex­penses.

The de­fault, the hir­ing of the restruc­tur­ing firm and the len­der’s pres­ence on site paint a pic­ture of a com­pany in fi­nan­cial dis­tress, the kind that for­mer em­ploy­ees al­lege should have prompted OpenGate to pro­vide a fed­er­ally re­quired 60 days’ no­tice be­fore clos­ing the plant.

Through it all, few em­ploy­ees un­der­stood the depth of the com­pany’s dis­tress. Work­ers are su­ing OpenGate and its man­ag­ing part­ner, An­drew Nikou, in state and fed­eral court, al­leg­ing they failed to pro­vide ad­e­quate no­tice to work­ers about the shut­down and is­sued fi­nal pay­checks that bounced.

“It’s not like they didn’t know they had to give 60 days’ no­tice, and it’s not like they didn’t know there were some sig­nif­i­cant fi­nan­cial is­sues,” said Richard McCune, a Red­lands lawyer who filed a law­suit seek­ing class-ac­tion sta­tus on be­half of for-

mer em­ploy­ees.

Elaine Buck­ley, a for­mer se­nior vice pres­i­dent for sales and a 35-year em­ployee, said she be­lieves the com­pany was in “liq­ui­da­tion mode” for months.

Barry L. Ka­soff, pres­i­dent of Re­al­iza­tion Ser­vices who served as Pen­nySaver’s chief restruc­tur­ing of­fi­cer, de­nied the as­ser­tion and said the de­ci­sion to close with lit­tle no­tice was dic­tated by Cap­i­tal One.

“That would be a hard ar­gu­ment to make,” he said. “The com­pany was start­ing to be prof­itable. We had paid down the loan.... If we wanted to liq­ui­date the com­pany it would be done by now. Why would we put in all that ef­fort?”

Ka­soff, mak­ing the first ex­tended com­ments on be­half of Pen­nySaver since its clo­sure, said the de­fault was tech­ni­cal and that the com­pany was pay­ing down the loan.

Fi­nanc­ing terms re­quired Pen­nySaver to meet cer­tain fi­nan­cial goals and main­tain var­i­ous debt ra­tios at cer­tain lev­els. Not meet­ing those goals or main­tain­ing those lev­els would re­sult in a de­fault re­gard­less of whether loan pay­ments were made.

“It’s not a good sign, ob­vi­ously,” Ka­soff said of the de­fault. “But it’s not like the world’s com­ing to an end.... Most of my clients are in de­fault. You get out of de­fault.”

Ka­soff said that his sole fo­cus af­ter his com­pany was brought in was on fix­ing Pen­nySaver and that a shut­down was never con­tem­plated un­til Cap­i­tal One shut off credit with­out ex­pla­na­tion.

He said that cost cuts and other moves had pushed Pen­nySaver back to­ward prof­itabil­ity by May and the com­pany was near­ing the end of ne­go­ti­a­tions to re­fi­nance the line of credit or sell the com­pany when Cap­i­tal One stopped re­turn­ing the com­pany’s calls.

Ka­soff said that the bank ex­plic­itly forced the de­fault when, on the last day of oper­a­tions, a bank rep­re­sen­ta­tive phoned to say that the bank would not ad­vance the $400,000 needed to fund cor­po­rate pay­rolls un­less Pen­nySaver agreed to shut down and dis­miss all em­ploy­ees not needed to wind down the com­pany.

“If we wanted the em- ploy­ees to be paid, we had to im­me­di­ately ter­mi­nate all the em­ploy­ees other than those that were needed to liq­ui­date,” Ka­soff said. “I’ve been do­ing this over three decades. You al­ways pay your em­ploy­ees. Banks don’t do this.... Ev­ery ma­jor bank in the U.S. cov­ers the pay­rolls.”

Cap­i­tal One spokesman Michael Bul­ger said: “With­draw­ing fund­ing is a last re­sort. We work with ev­ery cus­tomer to find a work­able so­lu­tion, but un­for­tu­nately we weren’t able to reach an agree­ment in this sit­u­a­tion.” He de­clined to com­ment fur­ther.

Nikou and OpenGate ex­ec­u­tives wouldn’t dis­cuss Pen­nySaver’s clos­ing.

OpenGate, which ac­quired Pen­nySaver in 2013, spe­cial­izes in buy­ing units of larger com­pa­nies and re­selling them. Its web­site says its busi­nesses gen­er­ate an­nual rev­enue of about $3 bil­lion, mak­ing it a small player.

Nikou, its founder, is a board mem­ber at the Ham­mer Mu­seum and, un­til re­cently, at the Mu­seum of Con­tem­po­rary Art. He was born in Van­cou­ver, at­tended USC’s busi­ness school and then took a job at Los An­ge­les pri­vate eq­uity firm Plat­inum Eq­uity in its Paris of­fice, ac­cord­ing to OpenGate’s web­site.

OpenGate, which Nikou started in 2005, has en­gaged in more than two dozen trans­ac­tions. Among them were a French chil­dren’s book pub­lisher, a Fin­nish pa­per pro­ducer, the Ni­cole Farhi di­vi­sion of fash­ion firm French Con­nec­tion and Mod­els One Ltd., the mod­el­ing agency that has rep­re­sented su­per­mod­els Bar Re­faeli, Alessan­dra Am­bro­sio and oth­ers.

OpenGate has had suc­cesses. It bought Gabriel Ride Con­trol, a shock ab­sorber maker los­ing $20 mil­lion a year, re­turned it to prof­itabil­ity and pre­served 1,400 jobs be­fore selling it in 2012.

OpenGate is per­haps best known for its 2008 pur­chase of the print ver­sion of TV Guide for a nom­i­nal price plus as­sumed debt. It said the once-pop­u­lar mag­a­zine was los­ing money and is now prof­itable.

But not all OpenGate deals have worked out.

In Jan­uary 2013, for in­stance, OpenGate abruptly shut down Golden Guernsey Dairy in Wauke­sha, Wis. It had about 100 work­ers, some of whom ar­rived at the plant one Jan­uary morn­ing to find the gates locked, ac­cord­ing to state doc­u­ments.

An in­ves­ti­ga­tion by the state’s Depart­ment of Work- force De­vel­op­ment in 2013 cited the dairy for vi­o­lat­ing a fed­eral law re­quir­ing a 60day warn­ing of mass lay­offs and said it owed work­ers $1.6 mil­lion. A state claim for wages was filed in the dairy’s pend­ing Delaware bank­ruptcy case.

A bank­ruptcy trustee sub­se­quently al­leged in a court fil­ing that Nikou and OpenGate had ob­tained the com­pany at a “bar­gain pur­chase” price when the fair value of as­sets ex­ceeded li­a­bil­i­ties by $10.9 mil­lion.

The trustee, Charles Stanziale, said OpenGate “made no net in­vest­ment” in the dairy af­ter its ini­tial pur­chase and the “value was con­sis­tently eroded” over the months lead­ing to bank­ruptcy. Stanziale al­leged that the dairy was in­sol­vent in De­cem­ber 2011, more than a year be­fore the hur­ried shut­down.

OpenGate has said that it boosted sales at the plant by 20%, but that the shut­down was forced by cred­i­tors and oth­ers who re­fused to make con­ces­sions on con­tracts that were not sus­tain­able. In court pa­pers, it said the trustee’s al­le­ga­tions are with­out merit.

Last year, an OpenGate port­fo­lio com­pany called Fu­sion Paper­board in Sprague, Conn., shut down, elim­i­nat­ing 145 jobs and de­fault­ing on the $1.8-mil­lion bal­ance of a state-subsi- dized loan, ac­cord­ing to the state Depart­ment of Eco­nomic and Com­mu­nity De­vel­op­ment. Cather­ine A. Osten, Sprague’s first se­lect­man, the equiv­a­lent of mayor, said the com­pany owes more than $240,000 in back taxes.

Ka­soff, who also han­dled the Con­necti­cut plant for OpenGate, said Fu­sion acted prop­erly in all re­spects in selling some as­sets to a com­peti­tor and said it re­tains own­er­ship of its real es­tate and other as­sets, which it will sell to pay off cred­i­tors.

This spring, Hamil­ton Sci­en­tific, a De Pere, Wis., lab equip­ment maker owned by OpenGate, abruptly shut down, lay­ing off 80 peo­ple there and 190 at plants in Texas and Arkansas with­out no­tice, ac­cord­ing to a law­suit filed by for­mer em­ploy­ees.

The Hamil­ton shut­down was the re­sult of a dis­pute in which the land­lord of its main plant in Texas moved to evict the firm, im­per­il­ing the busi­ness, ac­cord­ing to an OpenGate spokesman.

The spokesman, who did not want to be iden­ti­fied be­cause of pend­ing lit­i­ga­tion, said the com­pany warned work­ers about the pos­si­bil­ity of a plant clo­sure when it learned of the evic­tion threat.

Christina House For The Times

WORK­ERS en­ter the Pen­nySaver plant in Brea for a meet­ing May 26, four days af­ter the coupon-mail­ing com­pany’s abrupt clo­sure.

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