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A Clean Slate for Kleen: Commercial Laundry Operation Emerges From Painful Bankruptcy

  • Samantha Poland, of Lebanon, N.H., folds her clothes at Kleen Laundromat on Thursday, February 16, 2017 in Lebanon, N.H. Poland, who recently moved into a new apartment in Lebanon, visited Kleen Laundromat for the first time on Thursday. (Valley News - Jovelle Tamayo) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com.

  • Cyrl Dixon, of Lebanon, N.H., folds hospital linens at the Kleen Laundry processing plant on Tuesday, February 14, 2017 in Lebanon, N.H. (Valley News - Jovelle Tamayo) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com.

  • Dennis Kim, at left, president of Kleen Laundry, and Ned Hazard, chief financial officer of Kleen Laundry, pose for a portrait at the company's processing plant on Tuesday, February 14, 2017 in Lebanon, N.H. (Valley News - Jovelle Tamayo) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com.

  • A worker, who declined to be identified, moves hospital linens through the drying process at the Kleen Laundry processing plant on Tuesday, February 14, 2017 in Lebanon, N.H. (Valley News - Jovelle Tamayo) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com.



Valley News Business Writer
Sunday, February 19, 2017

Lebanon — Delivery trucks roll up to the dock at a former sock factory in Lebanon around the clock.

They arrive from Brunswick, Maine; St. Albans, Vt.; Clinton, Mass.; and elsewhere to unload bundles of dirty bedsheets, towels, gowns and scrubs for washing at the Kleen Laundry plant along the Mascoma River. Here they will be washed, dried, packed and returned to hospitals within 24 hours.

On a frigid day last week, with icicles dangling like glistening swords from the edge of the plant’s roof, Kleen’s owners Dennis Kim and Ned Hazard dash in shirtsleeves across the alley from their offices into the warm, cavernous interior of the former Lebanon Woolen Mills building. Outside, parked near the former steam house, a tanker delivers the liquefied natural gas that fuels the plant’s boilers as condensation vapors swirl into the air.

Inside, workers tear open boxes and snap-whip bedsheets to be loaded into bins to begin an eight-hour trip through the labyrinth of conveyor belts, slings, drums, tubes, rollers and carts that make up the 13-step sorting-to-checkout laundering process.

Working an eight-hour shift requires both stamina — workers are on their feet nearly the entire time — and constant alertness. With the plant processing 62,000 pounds of laundry each day in 95-pound bundles, finishing one load of laundry simply means another is on its way.

Kleen employees earn, on average, $10.50 an hour. It is grueling, repetitive labor. Training new workers to navigate the thicket of machinery takes three weeks. “After that, you can tell whether someone is suited,” Hazard said.

Kleen, which most people think of as a dry cleaner even though commercial laundering is the mainstay of its business, is one of the oldest companies in the Upper Valley, with roots dating back to the 19th century. And, in a region once dominated by manufacturing operations, it’s one of a dwindling number of employers still offering jobs to those without specialized skills.

In recent months, however, Kleen almost became another fallen legacy as a burdensome debt load and pressure by hospitals to hold down vendor costs pushed the company into bankruptcy.

In July, with unpaid taxes, rent and utilities bills mounting, Kleen filed for Chapter 11 reorganization in U.S. Bankruptcy Court in Manchester. Workers in Lebanon first realized something was amiss when they came to work on a Tuesday morning to collect their paychecks but were told to come back after 2 p.m. Paychecks arrived by the end of the day, but not before word had circulated that bankruptcy was delaying their regular distribution.

At the time of its bankruptcy filing, Kleen owed TD Bank $3.3 million; the Internal Revenue Service $372,000; the Thomas L. Gosselin Family Trust $1.7 million; the city of Lebanon $161,000 for water and sewer and $112,000 in property taxes; and dozens of unsecured creditors a total of nearly $100,000, with each owed $5,000 or less.

Only eight months later, Kleen has settled with creditors and recapitalized, although the bankruptcy case remains while a trustee oversees payments to unsecured creditors. Nonetheless, the voluminous court filing reveals just how dire the situation had become last summer at Kleen, which had lost $600,000 over the preceding three years on revenue of $25 million.

Now, along with the reorganization, Kleen — which employs 100 people at its Foundry Street facility and 23 more in its retail dry cleaning and laundromat business — will invest $1.4 million over the next two years on new equipment and to address deferred maintenance, Hazard said.

“One of the great parts of the Chapter 11 process is that you come out of it with a clean slate. The debt is right-sized for the operation with plenty of room for needed capital,” Hazard said.

The reorganization plan on file in bankruptcy court details how one of the Upper Valley’s oldest companies managed to stave off the worst outcome of bankruptcy: going out of business and putting 123 people out of work.

At the same time, the filing reveals the costs borne by creditors which, depending on how their debt is classified and ranked in priority of claims, received between a minor and minuscule portion of what they were owed.

Still, something is better than nothing — and it could have been nothing. Selling off Kleen’s equipment at fire-sale prices would have yielded only enough to pay a portion of the company’s bank debt and back taxes.

“In liquidation, no funds would be left to pay any other creditors,” Hazard said in an affidavit in support of the reorganization plan.

Catering to Hospitals

As one of the few commercial laundry companies to operate in Northern New England — and the sole dry cleaner in Lebanon, Hartford and Hanover — Kleen’s financial struggles might strike some as puzzling. Much of the company’s problem, however, can be traced back to the heavily leveraged deal to buy Kleen from its longtime Gosselin family owners.

More than three-quarters of Kleen’s revenue comes from commercial laundering, a low-margin business that suffered a setback eight years ago when Dartmouth-Hitchcock Medical Center swung its laundry contract to United Linen in Lawrence, Mass.

Kleen has 23 commercial accounts and processes laundry for such hospitals as Alice Peck Day Memorial Hospital in Lebanon, Springfield (Vt.) Hospital, Valley Regional Hospital in Claremont, Mt. Ascutney Hospital and Health Center in Windsor, Elliot Hospital in Manchester, and Central Vermont Medical Center in Berlin.

But Kim disputes any suggestion that commercial laundering is a hopelessly throwback industry.

During a tour of the Lebanon plant, where dryers the size of garden sheds handle 400-pound loads, Kim shows off the latest in the industry’s high-tech equipment: Xeros washing machines that use polymer beads half the size of Tic Tac mints with only a splash of water to remove soil from fabric.

He calls the laundry business “part science, part engineering, part logistics.”

The Gosselin Era

Founded in 1897 as Lebanon Steam Laundry, a home laundry service, the business was bought by Joe Gosselin in 1928, who then expanded into dry cleaning as the industry became widespread with the introduction of the solvent perchloroethylene, known as PCE, in the 1930s. (Kleen stopped using PCE in 2014 and now uses a non-toxic liquid silicone.)

In 1959, Joe Gosselin’s son, Leon, acquired Williams Laundry, which provided laundry services for restaurants, motels and Dartmouth College. In 1963, Williams Laundry was merged with Lebanon Steam, which was run by Leon’s sons Tom and Jim. They renamed the merged operation Kleen Laundry and Dry Cleaning.

Over the following decades the business grew and the Gosselin family bought the former Lebanon Woolen Mills on Foundry Street in Lebanon, where it based its commercial laundry operation and acquired other area dry cleaning businesses. Other moves included opening coin-operated laundromats, consolidating its dry cleaning operation into a single site on Mechanic Street, and launching Kleenpak, which rents non-sterile reusable gowns and towels to hospitals in place of paper gowns.

Jim Gosselin retired in 1999. Tom Gosselin continued to own and run Kleen until 2006 when, at 67, he also retired and sold the business to Massachusetts tech executive Kevin Melia and other investors for $7.2 million. Gosselin, however, retained ownership of company’s three properties — 1 Foundry St., 45 Mechanic St. and 25 Mechanic St. — and leased them to the new owners for $164,000 over a 10-year term payable in monthly installments and with options extending occupancy 35 years, according to the lease agreements, which 10 years later became critical in the timing of the bankruptcy filing.

The new owners changed the name of the company to Kleen LLC.

But as part of the $7.2 million sale, Tom Gosselin agreed to take back a subordinated note — which means it ranks after other debts in the event of bankruptcy — of $1.2 million. The purchase of Kleen was also partially funded with a loan from TD Bank.

Tom Gosselin died in 2012; Jim Gosselin lives in Vero Beach, Fla.

A pivotal change occurred in 2012 when Melia merged Kleen LLC with Manchester, N.H.-based industrial laundry service provider Envoy Services and formed Kleen/Envoy Services. The combined company was owned 60 percent by the former Kleen shareholders and 40 percent by Envoy principals Dennis Kim, Ned Hazard and Jonathan Benjamin.

The Envoy principals — Hazard is a Dartmouth graduate — were relative newcomers to the commercial laundry and dry cleaning industry. The young trio ran a Boston consulting firm when they bought Manchester’s Bird Bath Commercial Laundry in 2004 “because we wanted manufacturing with a service element that couldn’t be outsourced to Mexico,” Kim said.

“We like bricks and mortar. We like mature businesses,” he explained.

Envoy went on to buy Freitas Equipment in Maine, which sells and services industrial laundry equipment, and launched Turning Bridge, which advises hospitals on managing linen inventory.

Death Disrupts Negotiations

Kleen/Envoy suffered a setback in 2014 when Melia, who was chairman, died unexpectedly after a brief illness. Melia, 67, was a highly regarded tech executive who had held senior posts at Digital Equipment Corp. and Sun Microsystems before setting out on his own as a consultant and investor.

Melia died at a critical juncture: Four months earlier, Kleen/Envoy had entered into an option to buy the Gosselin note for a discounted $1.1 million. But the deal was contingent upon the company obtaining financing. Melia’s untimely death upended those negotiations — as well as simultaneous renegotiations with TD Bank on the original loan to buy Kleen.

Melia “was important to the operation and management of Kleen and to the refinancing which would have permitted the purchase of the Gosselin note and would have extended the term of certain TD Bank liabilities,” the bankruptcy filing said. “Shortly after his death, the contemplated refinancing fell through and withholding tax obligations were not met,” the filing said.

Tom Gosselin’s son, Greg, who was president of Kleen at the time of its merger with Envoy, called Melia “the adult supervision that (Envoy) needs and didn’t have,” as his death left a hole in the company’s relationship with its lender.

Greg Gosselin, who left Kleen in August 2013, said “the record speaks for itself” when asked his view of the management of Kleen under Envoy.

In July 2016, as Kleen fell behind on its bills, including its monthly lease payments, Greg Gosselin served an eviction notice on Kleen to vacate the properties his family still owned when the 10-year lease agreement expired that month. He had previously sued the company for not following through on purchase of the Gosselin Family Trust note, which turned into a $1.7 million liability after a default judgment was entered against the company for non-payment.

Moving to evict the company was not taken lightly, said Gosselin, but only “after we discovered that they had liens against them for not paying their taxes, water and sewer for years on the properties.”

To forestall eviction, Kleen filed for bankruptcy on July 25, thereby freezing the order while the company was in bankruptcy court.

Owners Buy Assets

Kleen elected under the bankruptcy code to auction the company’s assets. The company’s executives, lawyers and advisers determined that a simple liquidation would raise insufficient funds to settle claims. By liquidating, Hazard said in an affidavit, “no funds would be left to pay any creditors.”

Kleen set a “stalking horse” bid — essentially a backup bid — at $1,845,400, which it based on a multiple of the company’s annual cash flow. The proceeds from the auction would then be applied to paying creditors, both secured and — with whatever was left over — unsecured.

Despite the auction house contacting 28 potential bidders, no bids surfaced, so the owners of Kleen formed Kleen LD LLC to acquire the assets at the backup bid price plus $150,000 for a total of $1.9 million. Financing for the deal was drawn from a $2 million credit line provided by Austin Financial Services of Los Angeles, and funds contributed by the Envoy side of the company.

Under the reorganization plan, TD Bank agreed to accept $1.5 million on the $3.3 million it was owed. The IRS received $70,000, with the balance of the $302,000 in back taxes to be paid in installments. That left, after legal and other administrative fees, $477,000 to be divided among a total of $2.3 million in unsecured claims, including the Gosselin Family Trust note.

Greg Gosselin said he is not sure how much the family trust will eventually recover on the $1.7 million note. But he estimates that the note accounts for about 70 percent of the unsecure $477,000 claim pool, or about $334,000.

Gosselin, who today works for the biofuels company Ensyn, is not happy with how things turned out. “First and foremost, it’s very sad,” he said. “It’s a 120-year-old company now, and it had been in my family for almost 100 years, and I had been the fourth generation. ...

“Am I satisfied? When you have to take a haircut like I had to take, no, I’m not satisfied.”

All other unsecured creditors owed more than $5,000 would receive about 21 cents for each dollar they were owed. Claims under $5,000 would receive 2.5 cents on the dollar.

Pushing North

Gosselin said the company faces an uphill battle even without the debt load. “It’s a tough business because of the pressure hospitals are putting on vendors to hold down costs. That was the reason I pushed my dad into selling it 2006. I saw this price pressure coming. And we were never a low-cost provider. We were a quality provider. For many years our loyal customers were willing to pay for that superior service.”

Kleen/Envoy hopes the worst is now behind it, and the company is now structured to operate profitably within expectations for the business, the owners said.

“The fundamentals are there,” Kim said of Kleen. “We’re now much more stabilized.”

To secure new laundry contracts, which generally run three to five years, Kleen is looking north.

“We’re going to be focusing on Northern New England because of the competitive advantage,” Kim said. Massachusetts and southern New Hampshire are already heavily served with commercial laundry services.

And the company now plans long overdue equipment and plant upgrades. This year, Kleen will begin a $250,000 project to build a water recycling facility that will cut water consumption — Kleen uses 70,000 to 80,000 gallons of water a day — by 50 percent. Kleen also plans to spend a similar amount on a tunnel system washer.

With the balance sheet restructured, that should help the company turn a profit, too.

Kleen/Envoy Services, the parent company of Kleen LD, forecasts revenues of $16.2 million and net income of $64,000 in 2017 and revenues of $18.7 million and net income $193,000 in 2018, according to financial projections filed as part of the bankruptcy proceeding.

Importantly, however, the parent company forecasts positive cash flow for each of the years as $1 million and $1.2 million. (Cash flow is defined as income before deductions for depreciation and amortization, interest expense and taxes.) The forecasts show the company has plenty of financial room to cover more than $225,000 each year in interest expense on its loans.

“We’re glad to have this behind us,” Hazard said.

John Lippman can be reached at 603-727-3219 or jlippman@vnews.com.

Correction

Greg Gosselin left Kleen in August 2013. An earlier version of this story incorrectly reported the year.