Innovative Solutions… Consumed in Litigation: EMAK Worldwide Emerges from Bankruptcy With Brincko’s Help
In today’s environment, restructuring assignments are challenging enough, but having to rescue a company embroiled in more than a dozen major lawsuits compounded the job for John Brincko, President of the Sitrick Brincko Group in Los Angeles. The rescuee was EMAK Worldwide, Inc., a major advertising/marketing company, with a roster of clients that includes Disney, Kraft, Hilton, Corona Beer, Constellation Brands, and Subway.
At its pinnacle, in 2002 and 2003, EMAK generated revenues of more than $220 million and a profit of $10 million, much of it coming from point-of-sale marketing of children’s meals for Burger King, a major client at the time. However, by 2005, after a series of poor acquisitions and tighter margins in the Burger King line of business, EMAK tumbled into the red, posting a $32 million loss for the year.
A CEO was brought in from the outside, replacing one of the company’s founders serving in that capacity. However, the company continued to struggle and lose money, and soon the suits and countersuits began to fly, beginning with the former CEO, who filed in the Delaware Chancery Court and Los Angeles Superior Court to oust the new CEO and the board.
The former CEO was briefly successful in 2010, prevailing in a petition filed in the Delaware Chancery Court. EMAK appealed the decision and it was overturned, but not before the former CEO ran the company for 10 weeks. Meanwhile, EMAK continued to hemorrhage revenue—now down to $90 million. It could ill afford the cash drain of fighting litigation in both Delaware and California. Further exacerbating matters, the Delaware judge, even in reversing and ruling against the former CEO, said that the company needed to immediately pay a $2.5 million legal fee to the former CEO’s law firm. The company only had $4 million in cash at the time, so a decision was made in August of 2010 to file for bankruptcy to avoid having to pay that judgment, among other reasons.
With the company’s future very much in doubt, EMAK was finding it hard to retain its major clients, who were big enough that they did not want to be subject to the problems of a small provider of services.
It was a messy situation and time was running out for EMAK when Brincko entered the picture. He was hired after one of the firms representing the debtor, as well as bankruptcy counsel, litigation counsel, a law firm representing a major investor, and a law firm representing the unsecured creditors’ committee concluded that someone needed to be brought in who would be viewed as independent and who could quickly grasp all of the litigation issues.
After several candidates were interviewed, Brincko was selected to become an independent director for EMAK, one of three serving on the board, and was appointed as the only member of a special litigation committee charged with resolving not only the Delaware and California lawsuits, but the other litigation as well.
“I came into a very litigious situation,” Brincko recounts. “The charges were personal that went beyond business. There were probably eight major litigations going on — suits and countersuits against management, former employees, former sellers of businesses as well as four additional potential actions. I was brought in principally to deal with that.”
Brincko said that although the litigation was his primary focus when he first arrived, within a couple of weeks it became clear to him that nobody understood what was going on with the business and the company was languishing. Moving on that front, he encouraged EMAK to look for a buyer for its products business. Although this line of business was not going to fetch a high sales price, it was losing money and the quicker it was sold, the quicker the company could stem its losses.
After getting out of the products business via a sale, which at one time accounted for two-thirds of EMAK’s revenues but by 2010 was down to 40 percent, EMAK had streamlined to two major lines of business: marketing and advertising. EMAK then went after its major customers, meeting with all of them. “We laid out our restructuring plan to them,” recounts Brincko. “Costs were cut significantly, including corporate expenses, which were reduced from $15 million to $900 thousand. Many layers of management were eliminated. We then found a plan sponsor, someone who had been involved with the company in the past.”
Returning to the litigation front, Brincko concluded, after extensive meetings with several key people, that EMAK needed to give up on two major actions in California and settle. Even though the insurance company proceeds could have been significant, it would be offset by the cost of litigation. Says Brincko: “The best thing for this company was to get out of bankruptcy quickly, which we did.”
In less than a year, EMAK had managed to stabilize its client structure and, in the process of meeting with customers, found a potential new client in Subway, which would be a major boost to EMAK’s revenue stream. Subway would not, however, sign on so long as EMAK was in bankruptcy, giving Brincko another reason to move the company out of bankruptcy quickly and settle all major litigation.
“One of the Things I Am Happiest I Have Done”
The story ends well. With the company’s fortunes beginning to improve, the plan sponsor agreed to contribute an initial $5 million of new money, and a plan was developed that would pay unsecured creditors 100 cents on the dollar. EMAK landed the Subway account and currently is helping the company develop pointof-sale materials, as well as some point-of-sale marketing and micro advertising. EMAK continues to do the same work it was doing before for companies like Corona Beer.
On June 30, 2011, EMAK emerged from bankruptcy and is looking to achieve revenues of around $60 million for the year with an EBIDTA of $5 to $6 million. It is a much smaller company, but a healthy one with a promising future once again.
“Although a small matter from a personal standpoint, it was one of the things I’m happiest I have done in recent years,” says Brincko. “It had to be resolved quickly, and it was, yet it was a very contentious case. I don’t think I’ve ever been involved in a case where there was more acrimony and litigation. Even though it was only a $200 million company, the legal fees were $15 million to $20 million during one short period.”
In a case notable for its opposing points of view, Brincko said that, ironically, the bankruptcy judge presiding over the case was someone that Brincko had differed with many times in the past when the judge was serving as a lawyer for the other side. “The judge even noted during the case that he and I were rarely on the same side,” says Brincko, “but that he had always respected the work I had done. He said this case needed someone like me because it was going nowhere.”
SOURCE Turnarounds & Workouts Trends, a publication of The Beard Group