AKRON—Faced with a negative cash flow, lines of anxious creditors and an inability to purchase product to satisfy its legions of customers, off-road tire and accessories marketer Dick Cepek Inc. has gone out of business and is in the process of being liquidated. The 42-year-old company cut its teeth providing specialty tires for enthusiasts who reveled in "rock crawling" and driving in harsh off-road environs. But in the end, it couldn't climb over a mountain of debt growing increasingly larger by the month.
Cepek filed for Chapter 11 bankruptcy protection on March 11, 1999, in U.S. District Court, Central District of California, Los Angeles Division, with the hope of working out a reorganization plan that would get it back on firm financial footing and keep its multitude of creditors at bay.
That hopefulness was even expressed in a phone message that's still being played at one of the California-based company's 14 retail stores, this one in Burbank, Calif. "As of Feb. 12, 2000, this location and all Dick Cepeks have been closed temporarily," it says. "Dick Cepek Inc. is in the process of being sold. In order for us to facilitate this transaction, our facilities will be closed for approximately two weeks...."
But after months of trying to find a buyer, on Feb. 14 the court finally ordered the case be converted to a Chapter 7 liquidation, overseen by Timothy Yoo, a court-appointed trustee. He began a May 31 auction of Cepek's holdings, including a mail order operation, tire molds, stores and inventory.
At one time the company had as many as 260 employees.
Prior to that auction, at least one potential buyer, a large West Coast automotive chain, was interested and had made an initial offer of approximately $1.4 million for the majority of Cepek's assets, said attorney Samuel R. Maizel.
Mr. Maizel, with the Los Angeles law firm Pachulski, Stang, Ziehl, Young & Jones P.C., handled the original bankruptcy case for Cepek prior to it being assigned to the trustee. He told Tire Business that discussions were held "with numerous potential buyers, some more serious than others. Even to do a sale in bankruptcy requires the deal to be worth enough to make the case stay in Chapter 11.
"There weren't any such offers received, so the case converted to a liquidation."
One of the potential suitors, he said, is Transamerican Auto Parts Co. Inc. (TAPC), a Compton, Calif., aftermarket supplier to the four-wheel-drive off-road market. Last year TAPC launched Pro Competition Tire Co., which markets its own Pro Comp private label off-road tires. TAPC also operates Transamerican Wholesale and Four Wheel Auto Parts.
A spokeswoman in Mr. Yoo's office said on May 31 that hearings to sell Cepek assets were under way. If there is a sale, the court typically waits 10 days before entering the order to make sure there are no objections.
The company's list of creditors is "huge," she added, comprising a file "at least 10 inches thick."
While still operating and its debt continuing to mount, Cepek had turned to its lender, First Bank & Trust Co., for an influx of capital.
According to a court bankruptcy document, the firm said the money was "critical for payments in connection with contracted vendors and payroll." It also asked the bank for an immediate infusion of $650,000 "for inventory purchases, which will allow it to fill substantial back orders."
Without the cash, it continued, "inventory purchases and payment of day-to-day operational expenses are all but impossible."
The bank agreed to lend Cepek, on a revolving line of credit basis, up to $7 million, but put a blanket lien on all company property, including all proceeds of sales.
Audited financial statements outlined in the firm's Chapter 11 application cited a number of factors that led to its negative cash flow situation. Those included:
A "decrease in inventory due to then undetected inventory accounting problems" which resulted from Cepek's "reliance on inventory accounting software which failed to properly allocate certain store transfers";
The decrease in inventory resulted from the improper allocation of certain research-and-development-related invoices as additional inventory;
Cepek's inventory and accounts receivable were written down to reflect slow moving inventory and aged accounts receivable; and
The company was "unexpectedly required to account for the entire amount of certain research and development expenses" which it had believed would be amortized over a period of five years.
Despite claiming it had corrected those and other problems, Cepek said in the document that the bank terminated the line of credit agreement Jan. 8, 1999.
The firm's liquidation leaves in the lurch several tire makers, including Cooper Tire & Rubber Co., Specialty Tires of America Inc. and one of Cepek's biggest suppliers, Denman Tire Corp.
As Cepek's financial woes increased, its business with Denman plummeted, in part due to Cepek's inability to pay its bills.
Jim Pearl, Denman's executive vice president of sales and marketing, told Tire Business that Cepek's business with the Leavittsburg, Ohio, tire maker reached nearly $3 million annually from 1992 to 1994, but within the last couple years fell to less than $1 million a year.
While a number of the factors noted in Cepek's Chapter 11 document led to its financial problems, a source familiar with the company's operation agreed that research and development expenses related to a new suspension system were probably "the last straw" that helped drive it over the brink.
About three years ago, Cepek introduced the system during the annual Automotive Aftermarket Industry Week shows in Las Vegas, accompanying it with a big, expensive marketing splash. The system's supplier wanted, up front, R|&|D expenditures that, the source said, amounted to between $3 million and $4 million.
But then the manufacturer finally delivered the system—months behind schedule.
At a time when the company was in a negative cash flow situation, the source added that Cepek continued to expand, but then found itself in a "Catch 22" situation: Employees were increasingly being told to sell more and more to make up for the financial shortfalls, but the company couldn't get enough product from its suppliers because it was behind in its bill paying.
Of its 14 retail stores—in California, Arizona, Nevada and Colorado—Cepek owned some and leased others. All did automotive service work, including installation of accessories for off-road and sport-utility vehicles.
It also operated a Northern California warehouse in Union City, and another in Carson in Southern California. A year ago, the company moved from its longtime Carson headquarters to a site it owned in Beaumont, Calif.
Reached by Tire Business at his home in Southern California, R. Thomas Cepek, 54, company CEO and son of its founder, Dick Cepek, said there are "always a million stories" about what leads to a company's breakup.
However, on the advice of his attorneys, and because of "potential future litigation and some other things," Mr. Cepek said he is "precluded from saying anything at this point" in regard to the liquidation.
"I'm just trying to take care of loose ends" and other problems, he said, before "it will get to the point where I can then do something productive."
>From the day in 1958 when his dad started the firm, Mr. Cepek said he worked in the dealership.
"I swept floors, cleaned the toilets, washed windows, mounted and balanced tires and anything else that needed to be done."
His father, who died in 1983, was described by one former employee as a pioneer, a leader, an entrepreneur and a man with a vision "who knew where his company needed to go."
Asked if he would like to see the Dick Cepek name live on, Tom Cepek replied: "I suspect it may."
At some point, he believes, the "real story" about why the company closed will come to light.
"It would make for a great made-for-TV movie. I'm thinking of writing a book," he said.