Indianapolis-based Ovation Audio Video Specialists has emerged from bankruptcy, and some creditors are saying they got the short end of the amplifier.
The high-end consumer electronics retailer filed Chapter 11 on Oct. 14 after 19 years in business.
Creditors are upset because the bankruptcy case quickly became an asset sale rather than a typical Chapter 11 reorganization. They're also suspicious that the company's president walked away with some of the best assets.
"Although when they filed they talked about their great prospects for reorganization and coming out alive, in fairly short order it turned into a liquidation," said Jeff Hokanson, a partner at the Indianapolis law firm Ice Miller who represented unsecured creditors.
Ovation filed bankruptcy under its legal name, Super Sound Inc., listing assets of $9.5 million and liabilities of $14.5 million.
The company raised about $4 million by selling its seven stores and custominstallation business-not even halfway to the $9.1 million it owed its largest secured creditor, Evansville-based Old National Bank.
That means other secured creditors and unsecured creditors didn't get one penny of the cash Ovation owed them. The company's unsecured creditors had claims for more than $2 million.
Ovation President Gary McCormick, 57, said he wishes "somebody would have come in with enough money to pay everybody off." But they didn't. That meant Ovation either needed to liquidate everything or sell its assets in big chunks. It decided an asset sale would fetch more money for creditors.
All seven Ovation stores will remain open-albeit under different ownership.
McCormick, who owned 83 percent of Super Sound, led a group of three investors who formed Phoenix Audio-Video LLC to purchase five Ovation stores for $2.4 million. Phoenix has no plans to change the names of three Indianapolis stores or the outlets in Fort Wayne and Cincinnati.
"We kept the core of the best stores," McCormick said. "We're in very good to great shape."
Crestwood, Ky.-based Phase One Orace LLC bought the Louisville store for $500,000, and Mt. Washington, Ky.-based Innovative Custom Solutions LLC purchased the Lexington store for more than $270,000. They also are expected to retain the Ovation name.
Carmel-based Audio Automation Inc. bought back Tri-Phase Technologies from Ovation for more than $750,000.
The Phoenix sale is the one that had creditors throwing their hands in the air.
"The [unsecured creditors were] suspicious that initially the only bidders were insiders," said Ice Miller's Hokanson.
Essentially, they worried that Ovation was not trying to get top dollar in the asset sale because executives were hoping to buy the stores themselves for pennies on the dollar.
McCormick said the criticism is baseless. He recused himself from the bidding process and put Christi Minars, his controller, in charge of finding buyers. He even gave her names of people to contact.
"I feel like we did a diligent job of trying to find [buyers]," McCormick said. While he didn't know what companies Minars contacted, he said electronics retailers such as Indianapolis-based H.H. Gregg and New Jersey's 6th Avenue Electronics City were probably notified.
The creditors' fears turned out to be unfounded, Hokanson added, because no other companies submitted bids.
McCormick and his investors aren't exactly walking away with a money tree. Ovation lost $1.4 million in November and almost $300,000 in January because the company's empty pockets prohibited it from putting enough products on the shelves to remain competitive. Lawyer fees also took a good bite out of the bottom line, McCormick said.
In December, the busiest month of the year, Ovation made slightly more than $500,000.
McCormick thinks Phoenix's five stores can turn a profit. Thanks to investor cash, they're already putting new merchandise on the shelves. They're also focusing on installations, a part of the market that big-box retailers largely ignore.
And some of the unsecured creditors who got stiffed in the bankruptcy settlement will continue doing business with McCormick. There are too few places that sell $300 DVD players for them not to.
"As far as the fact that Ovation has found a way to pull itself out of bankruptcy and continue on as a company, we think that's a positive outcome," said David Tognotti, a spokesman for Monster Cable Products, the biggest unsecured creditor with a claim for more than $240,000. The company will continue to do business with McCormick.
Analysts say Ovation overextended itself in 2004 and 2005 by taking on too much debt to fund expansion into Fort Wayne and Cincinnati before closing underperforming stores in Louisville and Lafayette.
Ovation had $25 million in sales in 2004. McCormick predicts the five stores Phoenix Audio-Video purchased will have between $10 million and $15 million in sales this year.
Ovation employed 161 when it filed bankruptcy. McCormick said Phoenix's five stores will employ around 55.