Accounting malpractices by a trusted CFO has led Lamar Health, Fitness & Sports to a point of no return: The company closed its doors Sept. 4 at the end of the day, suspending all business operations and saying goodbye to all remaining employees. Despite that, CEO Kevin Lamar remained hopeful that one of several interested parties would be able to negotiate a purchase of assets from the bank.
"I'm working with people to buy our assets back and restart as soon as possible," Lamar told SNEWS®. His hope is that one of a number of investors or companies would buy his inventory and assets from the lender, Wells Fargo, then he would be able to re-sign the license agreements he had in place and "we're back in business."
How the three-year-old company got to this point is a story that includes long chapters of strong growth and, then, this summer, a short chapter of pain. The pain brought operations to a screeching halt when a Wells Fargo audit team walked into Lamar's office in Boulder, Colo., on May 31 at 2 p.m. to tell him there were major problems. Not only did he not have enough collateral to keep the business' loan, they said, but he was actually in the red.
It turned out his CFO, someone Lamar had known for years and who owned a small percent of the company, had been creating fictitious assets and shuffling money around to make sure there was enough cash flow for the business to keep growing. The CFO was immediately let go, Lamar said, although he had to stay around for nearly three weeks to unravel his story and statements for the bank.
"I'm not a finance guy. I'm not looking over his shoulders," he said. "If I had any fault, I should have paid more attention to how the guy got us funded to this position."
Spending much of the summer scrambling to get the company back on good financial footing (and in fact working the loan balance down by nearly 50 percent), Lamar and the company presented several restructuring plans to the bank, showing orders and accounts receivable, that would turnaround the problems by the end of the year. He hoped that would convince Wells Fargo to allow the company to keep going. But time after time, the bank representatives only came back with more questions, he said. In addition, Lamar said, several companies or investors approached Wells Fargo during the summer to buy out the loan to allow Lamar to keep operating and let Wells Fargo get out of it. But since the offers were for partial pay-off, because of damaged collateral, rather than full pay-off to Wells Fargo, bank representatives said no.
A bank representative was not available for comment by deadline.
To keep the business going while paying his employees but not himself, Lamar asked his children to pitch in, answering phones (quite professionally, we might add), packing products to ship and filing papers.
"It's not as if our business is bad," he said. "This company should not be in this situation if you look at our balance sheet."
Despite more than $5 million in orders already placed for the fourth quarter and more being faxed in daily, Lamar was forced to send a short, personally signed email, but without detail, to industry partners Sept. 4, at 9:22 p.m., Mountain time, noting the business was shutting down:
All Customers and Business Partners,
It is with an enormous amount of regret that I inform you that as of this moment Lamar Health Fitness and Sports is suspending business operations. Due to an unfortunate issue, we have been placed in this situation and have no choice but to shut down currently. I know I speak for my entire team in sincerely thanking all of you for your support over the last 2 plus years and we hope in some manner in the future we can in another way serve you.
After taking care of loose ends on Sept. 4, he then handed the keys to the headquarters in Boulder and the warehouse in Longmont the morning of Sept. 5 to Wells Fargo representatives who had called for the note to be paid. Lamar said he signed over the assets to avoid going to court for a hearing before a judge required by law when a lender wants to collect on a note. By that time in August, it was too late for Lamar to try to file Ch. 11 bankruptcy reorganization and he didn't have the assets, business or personal, to pay off the loan.
"I thought of doing that in July," he said, referring to a Ch. 11 filing, but at that time things seemed to be going in a positive direction and he believed, based on conversations with the bank, that everything would work out.
"I'm on hold until we can figure something out," he added. "I had no choice."
Lamar can be reached at firstname.lastname@example.org.
SNEWS® View: The situation is one that any business owner would dread: You put your trust in an employee, perhaps one you have known from past endeavors, and you go about running the business, growing it by leaps and bounds. Then all the walls come crashing down when you discover said trusted employee mucked up big-time by fiddling with assets in such a way that a suited troop of bank people come marching in with briefcases. No, in this case the employee did not literally steal or embezzle, and it’s possible he thought he was doing a good thing by making more cash available for even more growth. But since his actions in the end not only forced a company shut-down, a couple of dozen people to lose jobs, and the Lamar family and others to lose their personal investments, the end result was nearly as bad as stealing. It stole jobs, income, lives and savings.
And that’s only the first blow. The second blow is when a bank that you had trusted to be your partner in building a business, in the end is the one that basically sits back, watching you slither toward the drain, then pulls the plug to make sure you get sucked down.
Since bank representatives were not available for comment and didn’t return a call by deadline, we at SNEWS® can’t say for sure why the bank turned down repeated plans by the Lamar business offering different restructuring plans, why it turned down offers from other investors to buy-out the loan, even if it weren’t at full value, and why it just took the keys and closed the door. The business had many millions in orders, back-ordered product in China ready to ship, and a busy fax machine as more orders rolled in. Of course, a finance expert said that banks aren’t really restructuring experts, but know more about how to dole out loans. They are credit people. They give you money and if you don’t follow the rules, they take it back, come what may. We were told that it is most likely that Wells Fargo didn’t really understand the business or even most of what was in the plans Lamar’s company presented, let alone what a failure of a new and growing business like this would mean to the industry, especially when it didn’t have to fail. “We weren’t given an opportunity to right a wrong,” said Christine Lamar about the ordeal. “I can’t really express how disappointed I am with Wells Fargo.”
The lesson learned isn’t one you want to learn: that a business should not necessarily put full trust in one person to do finances, that even if it’s not required by law (as in this case) the CEO or another should keep tabs on the books just to make sure something odd doesn’t start up and end up taking down a business. Another accounting expert told SNEWS® that it is not unusual for small businesses to find out a trusted employee has run amok since it’s not that hard to siphon off money or to inflate receivables – especially if no one is watching regularly. No matter how small, a business should have an independent accounting firm around to peek into the books at regular intervals to review what’s going on and to make sure the numbers all match up appropriately. Most small businesses, we were told, just don’t understand what could happen and just don’t understand the need for internal controls and oversight. In this case, Wells Fargo had meetings with the CFO because of the loan but it apparently missed the shenanigans for a number of months at least … until it was too late.
It’s really too bad businesses – even small ones -- can’t stick to simple trust and hand-shakes, but business is business. Although we want to believe it’s inherently good, human nature can take detours along the road. We as a company, and we’re sure also the fitness and sporting goods industry as a whole, wish Lamar, his family, his former employees and his business partners all the best. We know we haven’t seen the last of any of them and we know he'll do the best he can to take care of retailers and other partners.