CHAMPAIGN — One of the largest hobby product distributors in the country filed for Chapter 11 bankruptcy protection Wednesday, which could spell trouble for the 332 employees at its Champaign facility.
Hobbico, formed in 1985 when Clint Atkins combined Don Anderson's Great Planes Model Distributors and Bruce Holecek's Tower Hobbies, said it plans to sell the company and will continue operating throughout the bankruptcy process.
As it has grown, Hobbico said it has added too much debt and hasn't been able to successfully restructure, especially facing "an increasingly competitive industry, market headwinds and a series of one-off events with key suppliers."
In its filing with the U.S. Bankruptcy Court in Delaware, Hobbico said it has an estimated 200 to 999 creditors, $10 million to $50 million in assets, and $100 million to $500 million in liabilities.
"Despite Hobbico's core strengths, our business has faced a number of challenges in the last few years, and we have taken steps to ensure all available options to restore the stability of the company have been exhausted," said Louis Brownstone, Hobbico's president. "However, while these efforts were taken to rebuild revenue and profitability, they did not sufficiently address our challenges, and we decided to pursue a Chapter 11 reorganization and attempt to attract new capital investment."
Also on Wednesday, Hobbico sent a notice that mass layoffs could begin in April, though the company hopes to avoid them.
"Upon the sale of the company, it is possible that there will be a permanent shutdown of all Hobbico operations and locations and the permanent termination of all Hobbico employees, including the permanent layoff of all 332 employees assigned to the company's facility at 2904 Research Road, Champaign," Human Resources Director Howard Salazar wrote in a letter obtained by The News-Gazette.
In a letter to employees dated Wednesday with answers to frequently asked questions, Salazar said this notice was only a placeholder and that "preserving as many jobs as possible is a priority and overriding goal."
"Please note, this is not a guarantee of position eliminations, but rather a placeholder should such an event occur," Salazar wrote. "If circumstances warrant, the company may provide employees with a second notice. If/when there is an impact on jobs, you have our commitment that we will be fully forthcoming with you and do everything we can to help affected employees."
The letters to employees were sent as a formal notice under the Illinois Worker Adjustment and Retraining Notification Act, which requires employers to notify employees and the Illinois Department of Commerce and Economic Opportunity 60 days before they plan to make mass layoffs.
According to the bankruptcy documents, Hobbico employs 417 people, with most of them in Illinois, Nevada, Colorado and California.
Craig Rost, executive director of the Champaign County Economic Development Corporation, said the EDC has contacted the company and offered its assistance.
"Our first obligation is to the company to try and help them with whatever problem they are solving because they are a significant employer," Rost said. "We want to try to help the company do what they need to do to retain jobs."
But if there are layoffs, Rost said, the EDC would do whatever it can to help the affected employees get rehired and stay in the area.
"The bottom line is, we don't want to lose employees in the county," he said. "And we have employers looking for highly skilled workers."
Rost also said he has been in touch with the city of Champaign and the Champaign County Chamber of Commerce so they can help in more of a coordinated effort.
Hobbico has been an important company for the community, Rost said.
"Back in the day, we had people that would claim we were the RC (radio control) and model capital of the U.S.," Rost said. "This became a U.S. node for radio control and model distribution."
Besides being a steady employer, Rost said Hobbico has had a multiplier effect.
"They have relationships with other warehouses, trucking firms," he said.
In its statement, Hobbico said filing for bankruptcy protection "is difficult, but it will help preserve the value of our business."
"And it's the right thing to do for our company and our employees," Brownstone said. "Under the process afforded to us under Chapter 11, we hope to reach an agreement with our creditors that will allow us to implement a restructuring plan that fully addresses our financial challenges while simultaneously identifying a prospective buyer that shares our vision of providing the best possible outcome for our employees and the future of Hobbico."
In the FAQ to employees, Salazar said it's too soon to say how long the bankruptcy process will take.
"It is too early to definitively say at this time," he wrote. "However, we are already in the process of actively exploring prospective buyers that will help lead us down a path that provides the best possible outcome for the future of Hobbico."
Salazar also said the last 18 months have been rough for the company.
"After a strong prior year, the softening of the overall drone market in 2016 led to substantial declines in sales for Hobbico," he wrote.
Two of its leading product lines also filed for bankruptcy in 2016, which led to "a double-digit sales decrease."
It also faces a legal dispute with a major supplier "that considerably impacted our product supply and sales volume."
"These factors — combined with increasing competition and changing consumer behaviors/buying patterns — contributed to a considerable reduction in sales," Salazar wrote.
To combat this, Salazar said Hobbico attempted to refinance and restructure its debt, improve product profitability and create new products.
"Although product development remains a strong area of our business, the decline in certain product lines overshadowed our sales generated from new products," Salazar wrote. "While we have begun to show positive results, unfortunately we continue to struggle to meet our financial obligations and liabilities."
The U.S. Department of Labor is also investigating Hobbico's employee stock-ownership plan after the company deferred payments at the end of 2016.
And the share value of employee stocks recently declined by more than 80 percent, with one former employee telling The News-Gazette the value of her ESOP account dropped from just over $27,000 to less than $5,000.
In its FAQ for employees, Salazar said the ESOP is currently frozen, though the value of participants' shares in it is not protected.
"This means that no new participants will enter the plan, no further contributions will be made and all accounts are fully vested," Salazar wrote. "Everyone vested in the ESOP will maintain their current number of shares in their account, but it is important for you to know that the accumulated value of the ESOP and participants' shares in it are not protected."
However, the employees' 401(k) plans will remain intact and protected, although they are also frozen.
"Hobbico will not be able to make further matching contributions as part of our bankruptcy filing," Salazar wrote.
Hobbico also recently announced it will close its distribution facility in Reno, Nev., on Feb. 28.