It has been, to say the least, a tumultuous year for Scott Kay Inc.
“Scott was a wonderful guy,” says company attorney Kenneth Rosen of Lowenstein Sandler. “He was the eternal optimist. He really believed in the company.”
Even so, the design house had been long been looking for a life raft, preferably in the form of a purchaser. Talking with a variety of informed sources, the following picture emerges:
By 2013, Kay had established himself as an extraordinarily successful designer with a sizable operation based in Teaneck, N.J. His work commanded considerable real estate in top retailers. But like many jewelry companies, his business was undercapitalized.
In April 2013, it received a $13 million senior secured term loan from Salus Capital Partners, a Needham, Mass.–based middle-market lender owned by holding company HRG Group. With banks increasingly skittish about the industry, the lender has targeted the jewelry business. Among the companies it’s lent to: China Pearl, Hyde Park Jewelers, Bidz.com, and Brodkey Brothers. (Salus recently trimmed 40 percent of its staff and may reportedly be sold, after top executives departed last month following its ill-fated loan to RadioShack.)
“Alternative lenders,” often backed by private equity, have been welcomed by an industry coping with funding challenges. They lend against collateral and take on risky loans banks won’t. Yet because of this, as The Wall Street Journal writes, they sometimes charge high interest rates and levy big fees for broken covenants. As former Brodkey CEO Oliver Keene told the Journal: “Once you stumble, it becomes perpetual. You can’t get out.” (Salus says it supported Brodkey more than a traditional bank would.)
Months after the deal was signed, both Salus and Kay eyed an exit. A series of post-holiday returns hurt the company’s balance sheet, and Kay execs felt the loan package was straining it further.
As the company hunted for a new owner, it hired a phalanx of C-level executives with impressive pedigrees—many of whom, like CEO David Minster, used to work for David Yurman. Kay’s former chief marketing officer, Dan Scott, was also in talks to come back.
All of which made some scratch their heads: How could a company rumored to be shaky add so many highly paid people?
But the leading candidate to buy the company—Indian manufacturer KGK—agreed to this, so it could execute its 2015 plans as best it could, sources say.
Just as the deal with KGK came close to being signed, tragedy struck: The designer died suddenly at age 57. Without the founder, KGK lowered its offer, and the deal fell apart. “His creative genius was a big part of the equation,” Rosen says. Sales fell further as the business reeled from the loss.
With the Salus loan maxed out, and no buyer or founder, the company considered a Chapter 11 filing. But Salus did not want to cough up cash to finance what can be a costly process. In the end, the company just surrendered its assets to Salus under the Uniform Commercial Code. Those assets were then sold to Frederick Goldman—an ironic purchaser, considering the two companies often butted heads.
Trade creditors have little recourse, says Rosen. “The [lender] had a lien on all the assets,” he says. “There are no receivables, no inventory. You can’t get blood from a stone.”
Goldman’s purchase brought on the departure of several recently hired executives, including CEO Minster. Terry Pasch, a Goldman veteran brought in in October as president of sales, is now at Simon G. and Zeghani. John Croston, hired last summer as chief supply chain officer, is now at Armenta.
There have also been at least two rounds of layoffs. A company that once employed 150 people now comprises a fraction of that. Goldman declined comment on how many employees currently work there, but says it is looking for a president from the luxury sector and other key positions, and notes it hired new members for its sales team.
Two recent recruits remain: Susan Chandler, another Goldman alum, and Tom Kennedy, who now serves as senior vice president of sales. Tiffany Kay, the designer’s daughter who served as brand spokesperson on QVC, is still there as well.
As National Jeweler reported, the Kay headquarters in Teaneck, co-owned by the designer, looks to be for sale. Goldman says it has no plans to move the company.
It also owns something quite valuable.
“There are a lot of designs that Scott did that would continue to be timely and timeless that have not yet gone into production,” Rosen says. “It’s a nice library of work that would it take years for Frederick Goldman to exhaust.”