Back from the brink.

Cash flow is weak, foreign currency fluctuations are against you, your key customers are fleeing, and you fall into the abyss of Chapter 11. Seven stakeholder groups, from a Dutch lender to your Japanese supplier, are elbowing one another for a different outcome. Here's the plan...

What distinguishes businesses that survive crises from those that fail? Simply put: a recognition that the business environment has changed, and that the culture that worked for the growing company is likely to be a liability for the downsizing, troubled company. An organization in financial hot water must concentrate on profit and cash flow, not on growth or market share.

Savin Corp. learned this lesson the hard way. Deeply in debt and mired in a bankruptcy proceeding two years ago, the 30-year-old office copier and facsimile equipment company crafted and implemented a rigorous plan to get back in the black. The strategy focused on creating a survival culture; making money; retaining key people who could successfully engineer the Chapter 11 reorganization, and re-establishing credibility among customers and suppliers and international investors who did not understand the U.S. Bankruptcy Code.

The plan transformed Savin from a company with $400 million in accumulated deficit and a negative $200 million equity into a healthy organization that closed 1993 with a $25 million positive shareholder's equity. Examining what worked and why may prove instructive to the tens of thousands of U.S. companies that run the bankruptcy gauntlet each year.

SURVIVAL CULTURE

Savin management first turned its attention to the company's culture, a root cause of many of its difficulties. Savin's problems began in the early 1980s. Over the next decade, the company was redirected every few years by three successive owners. The majority owners consistently focused on market-leadership strategies, often with substantial up-front launch costs. As a result, profitability suffered. By the end of 1991, Savin's board could no longer believe that its current majority owner, the Dutch firm HCS Technologies, would arrest the company's financial slide. After an interviewing process with 10 crisis-management firms, Savin's board of directors appointed Regent Pacific Management as the company's general manager on February 21, 1992. Simultaneously, the board accepted the resignations of both the chief executive and chief operating officer, appointing me as the new CEO. The situation was acknowledged by industry observers and the board to be a crisis of both cash and confidence, since the stakeholders alleged that the succession of management at Savin had destroyed the company's credibility.

A crisis situation such as Savin's demands a survival culture. Savin didn't need people who were good at building a business and who knew how to launch new products into new markets, to "tool up" new production facilities, to attract bright people with a "ground-floor" opportunity and lavish stock options, to divisionalize for each growing product line, and to raise money through debt or equity offerings. It needed people who could pragmatically assess the success or failure of product lines, distribution channels, and plant efficiencies. Marginal products must be phased out, marginal plants must be closed, and marginal distribution must be dropped. Cash is king in this culture.

Savin had to retain key, overworked people without rising options on a stock that already was viewed as marginal. These executives had to generate cash through good management decisions to pay their own bonuses. Savin's management had to operate with a dry well, as its former debt-and-equity capital sources dried up. The culture restructuring was not an easy task, especially since Savin's former culture trader three majority owners during the 1980s focused on growth. Some people who refused to accept the downsizing culture as essential for the enterprise's survival had to be replaced.

TACTICAL MISTAKES

Once the only company that threatened Xerox in the U.S. plain-paper copier industry, Savin committed a series of mistakes in 1981 that contributed to the crisis that boiled over in 1992. Savin rashly told Ricoh, its supplier of copier equipment, that it intended to manufacture its own copiers and soon would directly compete with Ricoh throughout the world. After pouring over $250 million into a four-year manufacturing program, Savin gave up in 1985 and returned, hat-in-hand, to Ricoh, which had lost faith in Savin's judgment.

As Savin struggled to overcome the cash drain, its majority stakeholder, HCS Technologies, in 1991 took on several large institutional and governmental copier contracts, many of which turned out to be money losers.

The final mistake was made by Savin incrementally, over all the preceding managements' tenures. To raise cash, Savin sold portions of its lease and rental portfolios to third-party lessors. In 1990, a privately owned, third-party lessor in Minneapolis sued Savin for failing to live up to their contract agreement. Two years later, a unit of the ING Bank of Holland filed suit against Savin with similar allegations of non-performance.

My appointment as CEO marked the fifth Savin top-management change in seven years. At the time, Savin ranked 10th in the U.S. plain-paper copier market. Ricoh was effectively Savin's only supplier. Ricoh sold its product denominated in yen, while the dollar continued to weaken. Unwilling to accept virtually any credit risk, Ricoh feared that Savin, which purchased $100 million per year in Ricoh-manufactured products, would soon be out of business.

HCS was Savin's only viable source of working capital. In mid-1991, HCS publicly announced it would supply no more capital to Savin. The company's well-publicized financial problems made it difficult to attract good salespeople and even more difficult to retain key dealers. The company had no research, development, or manufacturing capabilities, and it relied on selling and servicing more effectively than its competitors.

Cash was not only tight, but non-existent. The lending line periodically suffered from inadequate eligible collateral. Ricoh held millions of dollars worth of Savin-branded product, awaiting payments. The shareholders suffered a 100-to-1 reverse split, and the public bondholders received no interest payments for over a year. The principal was due on one of the bond issues within a week.

Brian Merriman, president of Savin, had spent the 1980s in the copier industry, recently with Konica, and the prior three years at Savin. In our first meeting, Merriman pointed out that the dealers were still obtaining orders of $3 million more each month than Savin's tapped-out cash could supply. Products were put on allocation and parceled out among dealers who wanted more. Yet, against all odds, the dealers and the branches continued to sell and service better than the competitor down the street.

Savin's customers returned to the Savin brand more than 80 percent of the time. Savin's employees and dealers knew that customers didn't just buy copiers, customers wanted a reliable source of high-quality copiers that work every time and are repaired quickly if they don't. That's what Savin's reputation was built on and what the employees and dealers were willing to supply. They just needed a stable working environment in which to do it.

CONFLICTING AGENDAS

Seven stakeholders--Foothill Capital, HCS, ING Bank, Credit Lyonnais of the Netherlands, Ricoh, the Minneapolis litigant, and the Savin bondholders--held Savin's fate in their hands. Each of these groups desired a different outcome. Some of the stakeholders didn't care if Savin survived; others felt their claim's value depended upon Savin's survival. Even though the plan presented initially was substantially the same as the plan agreed to over a year later, no stakeholder was prepared to accept it at first look. The Foothill line was secured by receivables and inventory, and it simply wanted the company to survive. Already in bankruptcy, HCS was in the hands of Dutch court-appointed trustees who merely wanted a return for the HCS estate. The Dutch banks wanted cash but appeared to be unsecured. The Minneapolis litigant wanted cash and an ongoing role as the company's leasing agent. The claim submitted to the court by this stakeholder alone was $176 million, and Savin could not have paid even $10 million to all stakeholders and retained adequate working capital to survive. Ricoh wanted a solvent customer. The major bondholders were willing to make a deal, but they wanted to be sure the others didn't get too much.

During the six months preceding the filing of the bankruptcy petition, it became clear that Savin, freed of its excess facilities and debt, would be a profitable enterprise. A reorganization plan that would convert the debt to equity was offered. When the plan was initially proposed, no stakeholder was convinced the equity would have real value.

So Savin's management and members of the Regent Pacific team flew to Tokyo, London, Amsterdam, Minneapolis, Los Angeles,and Chicago to convince the skeptics that Savin's proposed survival plan would work. Videotapes were sent to all dealers who couldn't be contacted face-to-face. The final layoff that reduced the work force from 1,400 to 900 was concluded in April, and employees were assured it was the last.

In May 1992, Savin's survival strategy (the same debt-to-equity conversion plan) was presented to the stakeholders, including an unofficial committee of major bondholders, which was formed to bring them up-to-date on the company's status. Most of the major bondholders had bought the bonds at 85 percent discounts from par, looking for an equity upside. All stakeholders (except ING, which filed its suit in May) agreed to await the plan's results before seeking further remedies.

In August 1992, the Savin petition was filed in the Federal Bankruptcy court for the Southern District of New York. The bankruptcy code provides many protections from outside parties while trying to reorganize within Chapter 11. A court-imposed stay is granted on all unsecured amounts owed by the company prior to the petition. This stay applied to the back-rent payment, the Dutch debts, the litigations, the trade credits, and the subordinated bondholder debt. The code also allows for rejection of executory contracts where they are onerous for the debtor to perform. Several facilities were closed, dropping over $3 million annually from Savin's rental expenses.

The net cash flow became the key criterion for measuring the reorganization plan's success. It became the basis for the management's quarterly bonuses, and it was displayed at every meeting with every stakeholder group as the measure of Savin's success or failure.

In September 1993, the court confirmed Savin's reorganization plan, and in December 1993, 16 months after the petition was filed, Savin emerged from bankruptcy.

There is always an instance in which you recognize your credibility is being restored. Merriman perceived it when the dealers began to talk about supporting the reorganization plan, rather than complaining about the bankruptcy filing. I sensed it when Foothill Capital said it would be insulted if a bankruptcy proceeding were used and it wasn't asked to provide Savin with the capital.

INTERNATIONAL PERCEPTIONS

No equivalent for Chapter 11 can be found in Europe or Asia. In almost any other language, "bankruptcy" translates to "ruin and liquidation." The concept of a debtor-in-possession, in which management is allowed to continue to run a business that has been judged bankrupt, does not exist in foreign laws.

Four of the seven stakeholder groups were international, so the communications were intensified. In addition to flying to Tokyo, we set up monthly meetings with the chairman of Ricoh's U.S. company. At each meeting, we discussed:

* How Savin could operate without paying its bills.

* Why companies would bid to buy Savin during the bankruptcy.

* How Savin would handle the letters of credit that backed the Ricoh receivables.

This effort resulted in a carefully worded letter, issued within a month of the petition, stating that Ricoh intended to fully support the company during its reorganization. Savin was so concerned that Ricoh's critical supply line not be interrupted during the proceeding that it sought, and obtained, a court order allowing uninterrupted business with Ricoh.

To enhance their understanding of their rights under U.S. law, each of the three Dutch claimants hired independent bankruptcy law firms in the U.S. Since there were securities questions, contract questions, and questions of tax-loss preservation under the IRS code, each bankruptcy attorney also relied on corporate-, security-, and tax-law partners. During the final negotiations leading to the draft plan of reorganization, as many as 40 attorneys assisted the seven stakeholders and the debtor principals. This process culminated in a "term sheet" signed by the major claimant groups in July 1993 and finalized by the reorganization plan filed in September.

These activities consumed a great deal of time, and they also added risk. Any company in the throes of bankruptcy reorganization suffers from the administrative load of pleasing the creditors and the courts while running a business to satisfy the customers. The business prospects and revenues also tend to degenerate with time, since some major customers still have a policy of not buying from companies in bankruptcy proceedings, and Savin's competitors liked nothing better than reminding prospects of Savin's unsettled future.

The Regent Pacific team and I managed the bankruptcy, updating the company's officers in a weekly staff meeting on progress, while the officers managed the day-to-day business, only requiring Regent Pacific's efforts when conflicts arose between Savin's dealer division and branch division, and when the business plans were developed. The divisional conflicts typically revolved around dealers accusing the company's branches of undercutting prices, branches accusing dealers of selling outside their territories, as well as major market changes that required synchronizing the branches and the dealers.

ON THE HOMEFRONT

The independent dealers, wary after Savin's decade of mistakes, remained skeptical throughout most of the bankruptcy. Only after we showed that Savin had reached agreement on an exit plan, and that it had deposited over $20 million in cash into the bank during the first 11 months of the bankruptcy, did they come around.

Employees, many of whom had worked for Savin throughout the decade of its decline, lost their skepticism more quickly. After six months of face-to-face meetings with myself and other members of the Regent Pacific team in which Savin's problems were candidly discussed, the employees felt they were at last being given the chance to concentrate on what they did best: selling and servicing customers.

If Savin's employees and dealers had lost faith in the company, no amount of cash could have saved it. Major employee and/or dealer defections, or even lack of effort and dedication on Savin's behalf, could have sunk the company. Management that led the company certainly deserves some credit, but the loyalty and dedication of employees and dealers were the real keys to survival.

No two turnaround situations are the same. Each is colored by the stakeholders and the circumstances that contributed to and created the crisis. Not all the circumstances surrounding Savin apply to every troubled company, and others may find that their choices are different. But in Savin's case, management's credibility and regular, candid, and thoughtful communication were crucial factors in the company's successful turnaround.

Mission accomplished.

William R. Krehbiel is president of Regent Pacific Management, an international turnaround management, restructuring, and financial advisory firm in Cupertino, CA. He has participated in the restructurings of companies including Karen Austin Petites, Virtual Imaging, Ariel Electronics, Acurex, Koala Technologies, and Teledex. Krehbiel is also the farmer CEO of Stamford, CT-based Savin Corp., a $220 million supplier of black and white copiers and facsimile machines.