Tom and Reed Pumpelly's father always used to tell his sons that life was a learning experience.
Over the past few months, the two brothers have learned a lifetime's worth.
Since June, the Pumpellys' company, NTW Inc. -- the Washington area's largest tire retailer -- has been operating under Chapter 11 of the federal bankruptcy code, the aftermath of a series of managerial errors and business misfortunes that beset it at the peak of its success and just as it was preparing to sell stock to the public for a massive expansion.
Since November, the brothers have been locked in a battle for the company that sounds like something straight out of "Dallas" or "Dynasty." Longtime sibling rivals, they joined forces against a takeover attempt by a group including the company's financial consultant, Richard Strother, and G. Bradford Cook, a former Securities and Exchange Commission chairman who was a peripheral figure in the Watergate scandal.
Cook, now a Washington investor, got involved when he helped Reed Pumpelly in a surreptitious attempt to wrest control of NTW from Tom Pumpelly last fall. But the brothers reconciled on Christmas Day, leaving the ownership of NTW in disarray, with both the Cook group and the Pumpelly brothers claiming control of the company.
Now, Cook is suing Reed Pumpelly for breach of contract, the Pumpellys are suing Cook for fraud, and the question of who actually owns NTW hangs in the balance -- to be settled, perhaps, in a Delaware Chancery Court trial that begins today. Related suits also are pending in federal courts in the District and Alexandria, and in federal bankruptcy court in Alexandria.
The Delaware court will be asked to sort out a bewildering series of questions about the management of NTW; the validity of contracts signed by Reed Pumpelly giving control of his NTW stake to Cook; the validity of board meetings held by each side in the tussle over ownership, and the propriety of unusual actions by all sides.
Despite the confusion over the company's ownership, a revamped NTW continues to sell tires, profitably and efficiently, according to Tom Pumpelly, who is running the company pending resolution of the court battle.
In the beginning, it was simple enough. Tom Pumpelly and his older brother Reed founded NTW in 1971, hocking their cars to raise $6,000 and borrowing a few thousand dollars more. They bought a truckload of tires on credit and set up shop in Springfield as National Tire Wholesalers to sell tires to the public at bargain prices.
They sold the first batch and used the proceeds to buy more, increasing the size of the business on the same principle -- financing operations through cash flow and staying a step ahead of the creditors. "We'd buy tires and have some time to pay for them," Tom Pumpelly says. As long as the company could keep selling tires faster than the bills from wholesalers came due, it could stay profitable and expand.
By 1983, NTW was doing about $145 million worth of business annually at 81 company-owned and franchised stores around the country. The brothers began to think about selling stock to the public and becoming the first true national independent tire retailer. They hired Strother to help them shape up the company for public sale.
But even as the Pumpellys contemplated the stock offering, NTW was running into trouble. According to Tom Pumpelly, problems in the company's dealer-franchise program had left NTW with a number of weak franchises that owed it millions of dollars. A transition in the company's accounting system masked the problem at first, he said, but it soon became apparent that NTW had $12 million worth of receivables from its franchisees -- about twice what the company thought it could handle.
"Really [it was] my error, in that I allowed credit to franchises too freely," Tom Pumpelly says. "Virtually all our suppliers and the bank felt that we were in huge jeopardy as a result of the receivables getting to that level. . . . We realized that no matter what we did at that point, we were going to have a cash-flow problem."
To alleviate the cash crunch, in late 1983 NTW began trying to reduce its receivables level. It pushed franchisees to pay their bills, closed 19 franchises and either sold their equipment to raise the money or wrote their receivables off as a loss. A huge sale of tires reclaimed from defunct franchises also helped.
The efforts whittled down the receivables, but created a new problem: NTW's principal lender, Sovran Bank, considered the receivables collateral for its loan to the company. Worried about the declining level of receivables, early last year Sovran began reducing the $4 million line of credit it had extended to the company.
For a company like NTW that does most of its business on its credit float, a reduction in available credit can be critical. To cope with the new cash-flow squeeze, NTW's management had to make the company leaner and tighter. But during the first few months of 1984, every time NTW thought it had solved its problems, Sovran seemed to tighten credit another notch, according to Tom Pumpelly. Sovran declined to comment.
At the same time, friction between the Pumpelly brothers increased. Reed and Tom Pumpelly had not gotten along well for years -- "Tom and I have a history of years of disagreeing on the position of the sun in the sky," Reed says -- but NTW's problems escalated the tension. Tom had always run the company, with Reed taking a more passive role; and while Reed disagreed often with Tom's management style, he didn't want to cross his brother, even in the throes of the financial plight last spring. "I always made sure I didn't get involved in anything Tom was involved in, because we clashed," Reed says. "We clashed all the time." Still, Reed began taking a more active role in the troubled company.
Reed was not the only one with whom Tom was having disputes. Tom Pumpelly concedes that his laid-back personal demeanor masked an increasingly authoritarian management style. Around NTW's Woodbridge headquarters, he was known as "Captain Queeg."
With NTW's finances and the brothers' relationship increasingly frayed, NTW financial consultant Richard Strother became a more important figure in the company. With NTW clearly not ready for a public stock sale -- his original task -- Strother became a company trouble-shooter and, according to the Pumpellys, a go-between for the warring brothers. Strother downplays his role as an intermediary, but his actions in the months leading up to the bankruptcy, and his part in the takeover drama that followed, are among the issues raised in the NTW-related lawsuits.
Reed Pumpelly says Strother painted a bleak picture of NTW's operations last spring. "He told me that instead of the company doing better and things looking brighter and so forth, as we all presumed, . . . it was a management disaster," Reed says. "He said we were spiraling downward. He likened it to an airplane that is in a tailspin."
Tom Pumpelly, however, says Strother was telling him something else in the spring of 1984: "Dick was telling me, 'Look, what you're doing is really terrific, the company is going to be so much stronger as a result of this, you're really making the right decisions. I'm backing you all the way.' "
Strother's version is closer to Reed's. He says that when he joined NTW in January 1984, he quickly found that the company was far less healthy than he had first thought. "The profit turned out to be a $3 million pretax loss," he says. "Turns out that there's a cash crisis." He says the company's accounting practices were chaotic and Tom Pumpelly's relations with employes, suppliers, franchisees and bankers were rocky.
Despite NTW's problems, Strother and the Pumpellys believed that the company could be rescued without resorting to a bankruptcy filing. They lobbied suppliers and the bank to extend credit, they tightened operations further -- and it seemed to be working, at least in Tom Pumpelly's eyes. "By the end of March, the beginning of April, the management of the company was good and it was starting to become apparent," he says. "The company was becoming quite strong."
Sovran Bank apparently didn't agree. It was still choking off its credit to the company, bringing the credit line down to $3 million in April. The Pumpellys began to seek other financing, talking to several banks and, at one point, almost securing a loan from one. That loan fell apart amid complications about Sovran's role in the financing and the new bank's demand to see a complete, audited set of books -- something NTW's ailing accounting system couldn't supply, according to Tom Pumpelly and others.
In late May, Strother introduced the Pumpellys to another possible source of financing: G. Bradford Cook. Briefly chairman of the SEC in the Nixon administration, Cook had resigned in 1973 after charges that he had sidetracked an SEC investigation on Nixon campaign contributions from financier Robert L. Vesco. Cook was later disbarred when he admitted he had lied to the Watergate grand jury about his role in the Vesco affair.
Since reinstated to the practice of law, Cook is now a Washington-based investor with fairly extensive real estate interests and some holdings in small private companies. Last May a mutual friend introduced him to Strother as someone who might be willing to invest in NTW.
Cook said he was too leery of NTW's finances to invest in the company himself. But he offered to take control and rebuild NTW's credibility with its bankers, suppliers and franchisees, with a promise of an investment later. "I thought that by changing the management, the board and so forth . . . that would change the perception of the company," Cook says. "What I didn't want to do is become chairman of the board and then kind of have everything blow up."
"We were told that Brad didn't want to get involved with any business, and put his good name in it, that might fail," Tom Pumpelly says. The Pumpellys wanted financing, but they weren't interested in surrendering control of their company to get it. So they turned down Cook's offer.
Besides, Tom Pumpelly thought things were getting better for NTW. "At that point, I saw the light at the end of the tunnel and I saw our way clear to get by without a Chapter 11."
But that light turned out to be the glare of an oncoming train: In the third week of June, Sovran Bank pulled the plug. It notified NTW that it would terminate the company's credit line, by then down to $2 million. Suppliers refused to help NTW out, and another try at a deal with Cook fell through. "I'm telling you, that was the worst week of my life," Tom Pumpelly says. At the end of it, on June 28, NTW filed in Alexandria for protection from its creditors and reorganization under Chapter 11 of the federal bankruptcy code.
Under bankruptcy protection and freed from the demands of its creditors, NTW's finances seemed to stabilize. It even began turning a profit, according to Tom Pumpelly. But his brother and Strother didn't see it that way.
"As events progressed through the summer, from the filing of Chapter 11, through July, August and September, my opinion of the financial ability of the company grew worse and worse, and I'm sitting looking at certain disaster, certain failure," Reed Pumpelly says. "Dick Strother told me that in his opinion the company was -- at any time, even in the best months -- either breaking even or losing money, and still spiraling downhill."
So Reed began a move to take over NTW. "I guess Dick and I decided pretty much together, oh, in July and August, that a change in management was necessary," he says. "And if Tom wasn't going to do it voluntarily, then it would have to be done by force, so to speak."
Reed Pumpelly began looking for a partner for his planned coup. But at the same time, in early August, Strother went to Tom Pumpelly to warn him of the threat from Reed. He asked Tom to release a small block of stock that had been put in escrow for Strother when he was hired. Although the block contained only 30 shares of stock, it was pivotal, given NTW's total of 961 outstanding shares. In a showdown, Strother's holding combined with Tom's stock could be used to block a takeover. Tom and Reed each owned 384 shares, plus another 120 shares they held jointly.
Strother says he wanted the shares as compensation for his increased role in the company, as well as a barrier to takeover. Tom Pumpelly released the shares, although he now says he believed the transfer of shares violated bankruptcy laws and did it just to give Strother the ability to bluff down Reed. Strother was fired by NTW in September, and the Pumpellys have challenged Strother's ownership of the shares in a case filed with the bankruptcy court.
The Pumpellys contend that Strother actually sought the shares to join forces with Cook. As long as Strother had his shares and could defeat any plan Reed put together, the brothers allege, he could force Reed to join a takeover attempt by Cook. Cook and Strother deny this. "One of the . . . innuendos or charges is that Dick and I . . . at some time were in cahoots," Cook says. "That's absolute rubbish."
By September, Reed Pumpelly, Cook and Strother were allies in an effort to take over the company. It was critical, Reed believed, that Tom not find out. As it turns out, Tom Pumpelly was about the only person who didn't know what was afoot. Many NTW suppliers, creditors, franchisees and employes apparently knew that Reed was involved in a takeover attempt. "We were slightly amazed that no one did go to Tom," Strother says.
Even the Pumpellys' stepmother was in on the plan. As part of the deal with Reed, Cook in early November purchased Helen Pumpelly's 15 shares of NTW for $50,000. According to Reed Pumpelly, she was told it was for the good of the company and she promised not to tell Tom.
Cook says his purchase of those shares indicated his good faith in the company while he negotiated with Reed over the terms of the takeover. He says he told Reed to go through with the scheme only if he really believed in it.
"I told Reed a couple of times . . . 'This is Cain and Abel,' " Cook says. " 'You're going up against a very strong individual in your brother, and you'd better make damn sure you're 100 percent comfortable.' "
Indeed, Reed says he was having some second thoughts about the plan, but Strother persuaded him to go along with Cook. "My gut reaction, within the business, is that things are getting better. Things were feeling better," Reed says. "And yet Dick is telling me that there is no improvement, to the contrary, things are getting worse, and my relationship with Tom is remaining bad, so I've got a conflict here. So I decide that what Strother is telling me is correct, that things are bad. . . .
"I felt I didn't have a choice," Reed says. "The company is going downhill. My personal situation is precarious. If I don't do this, I won't be able to do anything. So I have two alternatives -- do this deal, or do nothing. To do nothing was a suicidal alternative."
But Reed Pumpelly couldn't simply sell his 384 NTW shares to Cook and Strother. Cook says that the precariousness of NTW's finances and future made the value of its stock questionable. So he proposed to Reed a plan similar to the one he had suggested back in May -- a jointly controlled voting trust of stock held by Reed, Cook and Strother, with an option for Cook eventually to buy Reed's shares. They also agreed on a stock-pooling arrangement to control the 120-share block held jointly by Reed and Tom Pumpelly. Under either arrangement, Cook and Strother could outvote Reed Pumpelly on the use of the shares.
That 120-share block has become the centerpiece in the dispute over control of NTW, because whoever controls it controls the company. Cook argues that under the agreement with Reed, his group could vote at least 60 of the 120 shares the Pumpellys held jointly. Tom Pumpelly, however, argues that the brothers, as long as both were alive, had to agree on disposition of the shares.
And Reed now says that he didn't realize how much control he was giving Cook when he signed the voting trust and stock-pooling agreements. He says he assented because of bad advice he received from attorneys recommended by Strother. Cook says any suggestion that Strother or he influenced the lawyers "is the most outrageous claim possible."
On Nov. 21, the Cook group, claiming control of the 60 shares and the 429 others obtained from Reed Pumpelly, Helen Pumpelly and Strother, argued that it now held a majority of NTW's 961 shares (50.88 percent). The Cook group appointed a new board for the company -- including Tom Pumpelly -- and adopted a new charter with more stringent financial controls. A few days later, Cook says, he had a "very positive meeting" with Tom Pumpelly.
But Tom quickly struck back. He held a meeting of the company's old board of directors on Nov. 27 -- over Reed's objections -- and declared Cook's actions invalid. He also purchased 28 shares held by an ex-employe, and in exchange for $350,000 in debts, was issued 39 new shares of NTW stock. With his own 384 shares, it was enough to give him control -- once he asserted his right to the disputed 120-share block or voided Strother's 30 shares.
Cook contends that the Nov. 27 meeting was invalid, and that the issuance of stock to Tom Pumpelly violated bankruptcy laws -- not unlike the charges the Pumpellys make about Strothers' stock. In addition, Cook says, it is the board's exclusive right to issue shares, "and the board did not issue shares -- that was not the board."
Two groups now claimed to be NTW's board of directors. Each has its own version of how the changes in control affected the company. Cook says the company's suppliers, franchisees, bankers and officers, many of whom had been warned in advance of Cook's and Reed's plans, accepted the Cook group. But the Pumpellys contend that the company was in an uproar.
"It simply didn't work like it was supposed to," Reed Pumpelly says. "The major parties of the company didn't buy it, and it looked to me like, if I had persisted in this thing, . . . somebody was going to come along and sink the company."
The problem, according to the brothers, was Cook's Watergate background -- which Reed says he did not know about before December. Particularly peeved was Helen Pumpelly. The brothers say she felt she had been tricked into selling her stock to Cook without knowing his background. One of the Pumpellys' suits against Cook charges him with defrauding their stepmother.
Cook, however, says he never made any secret of his past, although, he says, "I don't think it was material. . . . You run a stop sign 10 years ago, it doesn't mean you're going to run a stop sign the rest of your life." And Cook says that when Reed confronted him in December, Cook gave him references whom Reed contacted. Cook says Reed then withdrew his objections and again pledged his support to Cook.
But Reed says he was very troubled by Cook's past, and he alleges in suits against Cook and Strother that the two men misled him.
In the long run, Reed decided to make peace with Tom. "It was a no-conditions thing," he says. "I decided on Christmas Day that I had made a severe mistake, and I changed my mind." Meeting at Tom's house on Christmas, Reed told his brother he would seek to dissolve his agreement with Cook.
"Reed Pumpelly saw the light," William Daniel Sullivan, the Pumpellys' attorney, told a bankruptcy court hearing in January. "He found out about the things that Mr. Cook didn't tell him about, and he found out that some things he was told weren't true. Mr. Reed Pumpelly said, 'I'm not with the Cook group any more. I'm going to vote with you, Tom.' "
Cook says he learned of Reed's defection during a phone conversation on New Year's Eve. "He said, 'Well, Pumpelly says, "I think the fact that we're in business today, with all these harpoons in our back -- the franchise problem and the Strother problem and . . .the legal fees that go along with that, and the trauma that it puts on management, and the amount of management time that it takes to deal with these things -- the fact that we're doing well, I think, is a miracle."
"I agree with that," Reed says. "It's rather amazing."
And Tom adds, "Reed and I get along pretty well these days, by the way."