DETROIT — Chivas Products Ltd., a minority-owned supplier of plastic automotive interior trim, has filed for protection under Chapter 11 of the U.S. Bankruptcy Code after being pressured to do so by two Big Three automakers.
The filing comes amid charges by former employees of mismanagement at the custom injection molder.
The Sterling Heights, Mich., company will attempt to come up with a reorganization plan that meets the approval of 20 of its largest creditors by Dec. 9, according to documents filed Oct. 14 at U.S. Bankruptcy Court in Detroit.
If that plan is not approved, the company would be forced to obtain a written offer by Jan. 31 to buy its assets.
According to the filing, Chivas had assets of $29 million and a debt load of $39.7 million as of June 29. The company initially filed for bankruptcy protection Oct. 7 after attempting unsuccessfully since July to reach a settlement with major creditors.
The filing was fueled partly by General Motors Corp. and Chrysler Corp. Chivas was a key partner under the automakers' minority supplier development programs. The carmakers provided management advice and arranged low-interest loans for the company.
Big Three carmakers each are attempting to conduct as much as 5 percent of their business with minority-owned companies.
At the time of the filing, Chivas owed $900,000 to both GM and Chrysler in past-due loans. In addition, five former Chivas middle-management employees, speaking on condition of anonymity, said the automakers were extremely unhappy with the work provided by Chivas and forced the company to make internal changes.
GM and Chrysler also negotiated favorable terms for Chivas in exchange for the bankruptcy filing and the company restructuring, said Chivas lawyer I. William Cohen. The automakers will advance Chivas loans totaling $1.5 million, which will be added to a revolving credit line created in September 1996 by Detroit-based Comerica Bank. The combined loan amount from Comerica and the automakers is $10.6 million.
Moreover, both automakers essentially agreed to continue current parts production volumes with Chivas through the 2002 model year. However, for that to happen, the company must formulate a restructuring plan that both automakers approve by early December.
Chivas already has launched its restructuring program by breaking ties with several high-ranking officials, Cohen said. In September, the company parted ways with President Frank Scheckel and Milton Roye, vice president of sales. Several other officials, including a financial vice president, also were ousted.
The departures were mutually agreed to by the executives and Joseph Anderson, Chivas chairman and chief executive officer, Cohen said. While no pressure was exerted by GM and Chrysler officials for the executives' resignation, the exits will help meet the automakers' terms, he said.
``It's a way of trimming down the operation,'' Cohen said. ``The [executives] were highly respected, but it was a joint decision by all of them to leave and help the company's future.''
The company believes it can develop a plan by the end of October to eliminate the red ink, Cohen added. According to documents, Chivas expects a $1.3 million cash shortfall for the month of October.
Chivas will refocus its attention on profitable core businesses and cut out those that drain operating expenses, Cohen said. Part of the company's difficulties stemmed from inadequate cash flow, he said.
The Chivas CEO is a former director with GM's Inland Fisher Guide division, which now is part of Delphi Automotive, and a board member of several Detroit-area companies.
Chivas is a major supplier to GM and Chrysler of interior plastic trim and lighting components. The company injection molds parts on 18 presses in its Canton, Mich., facility and assembles plastic parts at its Sterling Heights plant. Chivas recorded $41.5 million in 1995 sales, the last year that figures were available.
In 1996, Chivas also formed a joint venture with Plymouth, Mich.-based Johnson Controls Inc. to make interior parts for GM's model-year 2000 vehicles at a $5 million Detroit plant scheduled to be built next year and to open in 1999. The GM contract, worth an estimated $900 million, and the plant project are ongoing, said JCI spokesman Jeff Steiner.
However, many costly problems at Chivas caused GM and Chrysler to take action, said the former employees.
Those difficulties included a high defect rate, the result of products leaving Chivas' plants without being tested adequately, they said. Three of the ex-middle managers, all of whom left the company in the past six months, also charged that product test results frequently were more positive than those obtained by GM and Chrysler.
Missed shipments were also a problem, according to the former employees. On several occasions, Chrysler's Dodge City assembly plant in Warren, Mich., and others were forced to halt production briefly while awaiting parts shipments that had to be airlifted on an emergency basis, they said.
Anderson, who owns a majority stake in Chivas, attributed some of the problems to ``a cash-flow problem that made it difficult to achieve a significant amount of growth that we're going through.''
Since Jan. 1, at least 92 salaried employees have left the company, said the sources, who added that detailed records of employee departures were kept on Chivas' electronic mail system. Chivas has about 145 salaried employees and 420 total workers.
``It's a tight [automotive] market,'' Anderson said. ``There's a normal cycle of turnover in this industry. The instability might have exacerbated some of that with us.''
Several ex-employees also claim that both Ford Motor Co. and automotive supplier United Technologies Automotive recently have refused to do any more business with Chivas. Spokesmen for those companies would not comment.
Heightening the exodus from Chivas has been the perception of top-heavy management and no effective lines of communication or direction, former officials said. At one point this year, the small-sized company had at least eight vice presidents.
In addition, as the financial problems grew, Chivas's salaried employees no longer were paid for expenses or overtime work, which still was expected, the ex-employees said. In contrast, top management drove Chrysler Grand Cherokee sports utility vehicles at the company's expense, they said.
Chrysler spokesman David Barnas said the automaker will continue working with Chivas to resolve its problems and get it back on its feet. A GM spokesman referred all inquiries to Chivas.
The bankruptcy filing listed money owed to other major creditors. The debts include $850,000 owed to Brooklyn Products Inc. of Brooklyn, Mich., a maker of vinyl and cloth seat inserts; $481,000 owed to GE Plastics' Polymerland arm in Huntersville, N.C.; $273,000 owed Troy, Mich.-based Textron Automotive Co.; $179,000 owed Ashland Chemical Co.'s General Polymers Division in Warren, Mich.; and $148,000 owed Bay Resins in Charlotte, N.C.
The largest creditor is Detroit Investment Fund, a for-profit fund providing limited financing that is owed $2.5 million.
The group of 20 creditors had met July 16 with Chivas to discuss an out-of-court plan to make payment arrangements, said Michael Ratz, vice president of finance with Brooklyn Products. However, Chivas was unable to come to terms with all the creditors, who had formed an unofficial committee, he said.
Chivas is expected to meet with the creditors' committee Nov. 13 to discuss settlement terms, according to the documents.