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April 26, 2011 | last updated December 1, 2011 12:17 pm
Portlandbiz

Would-be investors open up about Maine Cottage's demise

When Maine Cottage Furniture abruptly closed in February, a single notice on the door of its Yarmouth store said it would reopen in the spring of 2011, following a remodeling. The note, decorated with a cartoon of two fashionable women in hard hats, also urged people to visit the website.

Today that website leads you to a Maryland furniture company, Russell & Mackenna, which recently bought Maine Cottage's website and intellectual property after Maine Cottage collapsed this winter, leaving behind debt, confused customers and some inventory that the store's bank later sold.

Maine Cottage's demise has captured the attention of many people familiar with the Yarmouth-based company's popular, high-end furniture, and what had seemed like a great entrepreneurial success story. The company, which did not declare bankruptcy, left many customers with unfilled orders. The Maine attorney general's office says it has been directing all consumer complaints to the company's senior lender, KeyBank.

KeyBank took possession of Maine Cottage's assets in late February, according to a KeyBank lawyer, Jacob Manheimer of Pierce Atwood in Portland. Manheimer says the last order he knows of occurred Feb. 10. "I can confirm that there are customer orders for which there is no merchandise," he says.

With the help of a former Maine Cottage employee, KeyBank has been able to link some furniture with customer orders. "Over the last seven weeks, we have responded to over 100 inquiries from customers and contacted 50 more to try to answer their questions about their merchandise," Manheimer says. "To the extent that we were able to identify merchandise in the bank's possession, we have released that merchandise to customers."

He adds, however, that he doesn't know how many more customers may have paid or partially paid for items that do not exist. Maine Cottage's lawyer, Timothy Norton of Kelly, Remmel and Zimmerman of Portland, did not return phone calls. Attempts to contact the company's manager, David Petersen, and President Peter Bass, have been unsuccessful.

Manheimer says he does not believe any payments were taken dishonestly. "I have no reason to believe that the people at Maine Cottage who were accepting the orders had any reason to believe the company could not fulfill the orders," he says. "I have had irate people on the phone say, 'They lied to me.' I have no reason to believe that any employee lied."

Yet, three people who tried to buy Maine Cottage in its final weeks -- including Sam Eakin of Cape Elizabeth and Portland furniture maker Brian Haddock -- say they could have helped fill customer orders, avoiding losses of up to $900,000, according to Eakin, who is managing partner of investment firm Relentless Capital. KeyBank would not verify this amount, and a spokeswoman said she couldn't comment on details of the negotiations.

One of the potential investors preferred to remain anonymous, but all three say they made offers to KeyBank to acquire Maine Cottage. They argue when their offers were rejected, the bank lost an opportunity to assist hundreds of customers and keep a Maine company alive.

Manheimer says it's easy for those who weren't facing potential financial losses to point fingers. "That is an easy criticism to make, because they didn't risk anything," he says. "They're just sitting on the sidelines, looking at the situation. It is sideline sniping."

The rise and fall of Maine Cottage

Peter and Carol Bass launched Maine Cottage in Yarmouth in 1988, creating a colorful line of wood furniture with clean, simple lines for second homes, a design niche that became known as the "cottage style." Peter grew up in Wilton and is part of the G.H. Bass shoe family, according to a 2002 Mainebiz story about Maine Cottage. Carol is an artist living in Yarmouth. The couple divorced in the mid-1990s, and Carol eventually left the company while Peter stayed on.

According to furniture maker Haddock, Carol was the creative inspiration behind Maine Cottage and the reason for its success. For 18 years, Haddock's business, Furniturea, made Maine Cottage's wood furniture. And for most of those years, Haddock says Maine Cottage was his primary client, growing 30% or more a year through the 1990s. The store, after branching into wholesale markets, reached sales of approximately $7 million in 2000, according to the Mainebiz story. But Haddock says in the early 2000s, he became concerned about the company's stagnation.

"Carol was the creative spark in that company," Haddock says, taking a break from work recently at his manufacturing shop in an industrial development off outer Forest Avenue in Portland. After she left the company, he continues, "that creativity went with her, and the designs stayed the same for years and became stale and became less attractive in the marketplace because they lost their edge," Haddock says. And Maine Cottage became vulnerable to copycats. "They were a stationary target for others to imitate [and to charge lower prices]," he says. Carol Bass did not return a call seeking a comment for this story.

About a decade ago, Haddock began encouraging Petersen and Peter Bass to develop a more contemporary line that was compatible with Maine Cottage's brand. When they did not, he did. Haddock says that Furniturea, which has about seven employees, "decided at that point that it was important we stick our neck out to develop the new products we had been advising Maine Cottage to develop." In 2006, Furniturea opened a retail store in the Old Port, selling its original furniture that Haddock describes as "rural modern," inspired by Maine's countryside architectural heritage. Haddock says in the ensuing years he watched his sales volume grow as Maine Cottage's dwindled.

Meanwhile, in the years leading up to the 2008 economic crash, Maine Cottage expanded. It first opened a store in Charleston, S.C., about seven years ago, and in 2008, opened another in West Palm Beach, Fla., according to Haddock.

"When the economy really started to slide, they had a lot of operating expenses tied in with these stores, and instead of cutting expenses, they hoped the stores would improve and cover their costs," Haddock says. "By the time they realized things were hopeless, they were, too, hopeless." By last summer, the company began to slide more rapidly, he says, forcing him to refuse to build anything for Maine Cottage unless he was paid up front, in full.

The failed take over

Sam Eakin refers to himself as "a seasoned corporate turnaround specialist." Originally from Louisiana, he's still got a pronounced Southern drawl, despite having lived in Maine for 10 years. Dining recently at the Portland Regency Hotel's restaurant, Eakin describes how he first contacted Petersen last fall after hearing that he was looking for investors to expand the company. Eakin got together with Maine Cottage's longtime manager to hear Petersen's pitch to invest $2 million to open two more retail stores.

Eakin has written up an informal account of his negotiations with Maine Cottage. In this report, he writes of his first meeting with Petersen, "I left him with unsolicited advice I bequeathed to him free of charge; no one was going to fund two new stores while the existing three were still bleeding."

Petersen also handed over Maine Cottage's financial data to Eakin, who says he found the store's aggregate sales had dropped from about $8.7 million to $5.3 million between 2008 and 2010. The store averaged a loss of roughly $600,000 during each of these years. But piquing Eakin's interest was his discovery that Maine Cottage had retained high profit margins despite dropping sales, "presumably due to a high level of brand name allegiance," he writes.

After his meeting with Petersen, Eakin and his wife made a trip to see Haddock at his Portland furniture shop. Impressed with Haddock and his business, Eakin proposed that the two work together to acquire Maine Cottage and consolidate its operations with Furniturea. But they had to move fast. Eakin says Maine Cottage's consumer liability was $300,000 by December, and "growing steadily." Haddock puts it more bluntly: "They were taking people's deposits to cover bills, not actually to make furniture."

Although initially negotiating with Petersen, Eakin says by January, it was clear he would be dealing with Maine Cottage's lender, KeyBank. In the third week of January, Eakin says he submitted a formal proposal on his and Furniturea's behalf.

He asked that the bank shave its Maine Cottage note of $900,000 to $700,000 for his new company, and requested between four to six months to refinance with another lender. He also promised to inject $300,000 of cash into the new business, and to get rid of the Charleston and West Palm Beach stores, "jettisoning almost $1 million in excessive overhead, and still saving 20 jobs in Maine," Eakin writes.

Haddock says merging his operations with Maine Cottage's would have "had a significant positive effect on my business," which currently earns about $1 million a year, because he could have integrated the manufacturing, design, marketing and retail operations into one company. Both men say they planned to fill the orders of customers over time to reestablish the company's good name.

Between January and February, negotiations continued to play out among KeyBank, Eakin and other interested investors, while Maine Cottage continued to accumulate debt to customers, Eakin says. Furniture orders reached as much as $900,000 by mid-February, he says.

Facing the company's dwindling value, Eakin says he insisted the bank make a decision quickly, and made it clear that his offer was only good if Maine Cottage stayed open. When the bank failed to respond as he wished, he had his attorney meet with Manheimer on Feb. 17. Confident they had reached a deal, Eakin waited over the weekend for a bank officer to formalize the agreement. But nothing happened. The following Monday the store closed for good and all employees were dismissed. At that point, Eakin says he cut his offer in half. KeyBank didn't accept it.

"I hate to see a company needlessly wiped out for no reason," Eakin says.

Haddock says he was surprised that the bank failed to act on his and Eakin's offer. "The bank didn't take into account the customers of the deposits -- that was not on their radar at all. ... They forced a loss on the customers and probably took a loss themselves."

Manheimer says it's not the bank's responsibility to appease Maine Cottage's customers. "The bank didn't own the company and wasn't an officer of the company," he says. "The bank was just its lender."

The final days

Following the closing of the store, KeyBank auctioned the company's remaining inventory and intellectual property. Eventually Marden's Surplus and Salvage, which has 14 locations in Maine, won the bid.

John Marden, a co-owner, says Marden's bought the company's physical inventory, which included warehouse equipment and office desks as well as furniture. He did not disclose the final price, but says he paid much more than $150,000. Marden's sold the finished furniture for 65% off the original retail price, he says, and "people bought it up."

Russell & Mackenna, the Maryland furniture maker, won the bid on April 10 for Maine Cottage's brand, which includes all registered trademarks and copyrights, as well as its domain names, according to a company press release. Russell & Mackenna's site says it is "in the process of refreshing the Maine Cottage Furniture Brand" and plans to reintroduce the line soon.

Meanwhile, Maine Cottage customers left hanging with unfilled orders don't have much recourse, according to John McVeigh, a business law and litigation lawyer with the Portland law firm Preti Flaherty. McVeigh is not connected to the Maine Cottage case.

Customers who did not receive the items they paid for could possibly claim a breach of contract against the furniture company, he says, but "that doesn't get you much because Maine Cottage is toast, it has no money, it can't respond to a damage claim.

"Unfortunately the people who put down deposits and paid for goods not delivered, that is a just a dead loss for them. But that is how our financial system works. The bank is the secured creditor; they come ahead of everyone," McVeigh says. "You can't blame the bank [for] going in and liquidating, and it is too bad there are casualties and consumer casualties that occurred."

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