Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, November 2, 1994 TAG: 9411020077
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
SOURCE: MICHAEL STOWE AND JAN VERTEFEUILLE STAFF WRITERS
DATELINE: FOREST LENGTH: Long
The mail includes fund-raising letters for candidates such as Oliver North in Virginia and George W. Bush, the former president's son, in Texas, and for causes and organizations such as the National Rifle Association and the Republican National Committee.
It's election season, and for Direct Mail Communications it's a busy season.
In just five years, DMC has grown into Bedford County's second-largest employer. It's one of only four facilities in the country that offer "one-stop shopping" for fund-raisers and companies that use mass mailings.
But the bustling atmosphere doesn't present a complete picture of the company.
In the past two years, it has gone from profits of $2.6 million to finishing $300,000 in the red last year. It has been forced to reduce its work force and is struggling to pay its bills.
The company is at the center of a legal battle between its current owners - two men who left executive jobs in Washington to live in Forest - and its founders - two men who, a month after the business opened, agreed to sell it for $2.5 million and who now control a large part of Liberty University.
Three lawsuits in state and federal court involving DMC offer a rare glimpse behind the scenes of one of the country's biggest direct-mail businesses.
Caught in the middle of the squabble is the company and the 200 full-time workers who earn about $6 an hour printing letters and fliers and stuffing envelopes.
The power of direct mail
Daniel Reber and Jimmy Thomas are known in Lynchburg as the saviors of Liberty University. In recent years, the two have bought up more than $30 million of the school's debt and been made members of its board of trustees.
The pair started as nonprofit fund-raisers for the Rev. Jerry Falwell's ministries, but they left in the late 1980s to start a direct-mail company in the Lynchburg suburb of Forest.
DMC started big and was successful from the beginning, but their ownership was short-lived.
A month after DMC opened in 1989, Charles Keith and Roger Ott, former marketing executives at The Washington Times, agreed to buy the company.
Keith and Ott already owned a company called Mail America; its main client was Oliver North, who had emerged as a conservative hero after the Iran-Contra hearings. With the help of Ott and Keith, among others, North became a master of direct mail, a skill he has continued to use to finance his campaign for the U.S. Senate, raising more money than any other candidate in Virginia history.
Unlike DMC, however, Mail America did not print and produce mass mailings. Instead, it worked with clients on their fund-raising appeals and referred them to full-service companies such as DMC for production.
Computer-generated pieces produced by the millions at DMC can look like personal letters to the sender, complete with a stamp instead of a meter postmark and with the recipient's name mentioned throughout the letter.
In 1989, Keith recalls, he and Ott decided they wanted to buy a direct mail production facility. Ron Godwin, senior vice president of The Washington Times and a former executive with Falwell's ministry, introduced the two to Reber and Thomas.
DMC was what Keith and Ott were looking for: a facility that could do everything for religious and conservative fund-raisers except write their letters. The company could make envelopes, print and personalize fund-raising or subscription letters with sophisticated computers, and stuff all the pieces into the envelope.
There was an additional convenience: Direct Mail Leasing, a related company that owns the Forest shopping center where DMC is housed, rents space to the U.S. Post Office next door. The Postal Service backs up its trucks to DMC's loading dock every night and hauls away hundreds of thousands of letters.
On Oct. 6, 1989, Keith, Ott and Godwin agreed to pay $2.5 million for DMC, court records say, although Godwin later bowed out of the deal.
The $2.5 million price tag may sound like a lot for such a young company, but Keith said DMC had tremendous potential.
"We thought it was a very fair price for what we were getting," he said in an interview last month.
The deal allowed the partners to buy a company that was up and running, and they had five years to pay for it. The contract called for Reber and Thomas to continue running the company by proxy, even though Ott and Keith legally owned all of the stock.
In late 1992, as Ott and Keith finished paying for DMC - the deal was renegotiated several times and ended up costing them $3 million - the partners began making plans to help run the company.
Ott moved from Washington to Forest; at the same time, a deal was struck that started the legal battle that now consumes much of DMC's and Reber's time. DMC kept Reber on as CEO, with a contract paying him $365,000 a year. He was supposed to devote most of his time to running DMC.
Throughout the ownership changes, DMC continued to grow and hire new workers. From 1990 to 1992, Direct Mail's average annual profit was about $2.4 million, court records say, although Ott and Keith now allege that Reber inflated the 1992 value of DMC to increase the payment he received through a stock purchase agreement.
In May 1993, the company employed about 340 workers.
Liberty's white knights'
In 1993, Keith and Ott allege in court filings, Reber began spending excessive amounts of time at Liberty University, to the detriment of DMC.
Much of his time at the school, court filings say, was spent negotiating with Liberty's creditors. Reber and Thomas eventually paid $5 million for nearly $30 million of Liberty's debt from two major creditors - Household Finance, a Chicago consumer credit enterprise, and Church and Institutional Facilities Development Corp., a Texas group that was in bankruptcy.
Falwell portrayed Reber and Thomas as white knights of the school - and they were. They came through with more than $500,000 to finish construction of the school's cafeteria after the contractor shut down work for lack of payment. When they bought out Household, they saved Liberty's campus from foreclosure.
They offered the school's creditors - who saw little chance of extracting their money from an insolvent university - pennies on the dollar. In return, Reber and Thomas took control of that indebtedness and the real estate collateral that backs it.
Reber's motive for helping Liberty, court filings allege, was the "immense profit" he hoped to reap from the deals. If LU becomes solvent, with Reber's help, it may be able to generate enough money to pay back those debts at face value, which would be considerably more than Reber and Thomas paid for them.
In effect, Reber and Thomas essentially have financial control of Liberty, which is more than $70 million in debt and facing an uncertain future. While they're considered "friendly creditors" and Falwell has announced publicly that the two plan to donate the debt they control, others doubt that.
"Financially, they call the shots," said a source familiar with the arrangement. "I'd be very surprised if they gave up the club that gives them that control."
There's only one creditor in a better position than Reber and Thomas - a group of 2,200 bondholders from around the country who collectively are owed about $20 million and have the first lien on the campus. With Reber in charge of Liberty's finances, those bondholders are concerned about whose debts will take priority.
"There's certainly the opportunity for him to pay himself and not pay us," said Claude Ferebee, a member of the bondholders committee.
Reber and Thomas, through two charitable organizations they set up, already have taken possession of several small parcels of Falwell ministry property and Old Time Gospel Hour's former administration building in Lynchburg, which they rent out.
"Basically," another creditor said, Reber and Thomas "got the meaningful assets of Old Time Gospel Hour and Liberty, second only to the bondholders."
A Falwell ministry attorney, Robert Glenn, said Reber and Thomas have been "working closely with Liberty to help resolve the financial problems, and have been successful."
Reber and Thomas "have been trying to get some of [Liberty's] activities on a more business-like basis, pruning some unnecessary things, to get their expenses in line with their income," Glenn said.
Ott and Keith allege that, in his last months as CEO, Reber took long absences from DMC while working at Liberty. The last straw, they say, came in January when he took a secret, weeklong trip to South Korea.
DMC's owners allege that Reber flew to South Korea with Falwell and Godwin, where they met with a representative of the Rev. Sun Myung Moon's Unification Church.
John Martin, an attorney for the Unification-controlled Washington Times, said he doesn't know why Reber and Falwell met with church officials in Korea or why Washington Times President Dung Joo flew to Liberty University last year to meet with Reber and Falwell there, as court filings also allege.
Godwin, who is a personal friend of Falwell, said his trip to Korea at the same time Reber and Falwell went was a coincidence and that he was there on other business. He said he didn't know about the meeting with Joo at Liberty last year.
Less than a month after Reber returned from Korea, DMC, citing declining profits, dismissed him as its CEO, and began negotiating to make him an independent sales representative for the company.
That's when the legal battle began.
Charge, countercharge
Reber fired first.
He filed a suit against Ott and Keith in Bedford County Circuit Court in March, alleging that DMC had fired him unjustly and in breach of his employment contract. He's asking for more than $1 million and other damages stemming from the breach of contract.
The lawsuit caught Keith and Ott by surprise.
"We really thought we had settled and Dan was going to become an independent sales rep," Keith said.
Reber alleged in his suit that Keith and Ott began to take away his management duties in the spring of 1993.
"Despite Reber's personal responsibility for approximately 70 percent of gross sales for 1993, Ott, as national sales manager, never invited Reber to any DMC sales meeting and scheduled important customer meetings when Ott knew Reber was unavailable," Reber's suit says.
Reber alleged that, by the fall of 1993, the company was so poorly managed that he could not assure customers that production would be completed on schedule.
In a second lawsuit filed in the spring, Reber asked the court to dissolve the leasing company that owns Forest Hills Shopping Center where DMC, the post office and the Bedford County Library all rent space. Reber, who still owns one-third of the leasing company, claims Keith and Ott used the shopping center's rent money to pay DMC and personal expenses.
DMC's owners were stung by the lawsuits, Keith said, in part because they had once considered Reber a solid partner and at times even thought of him as a friend.
Ott, a member of Falwell's Thomas Road's Baptist Church for 20 years, was so shaken by the suits that he wrote a letter to the chairman of the church's board of deacons, asking the church to help resolve it, "because it's not right for two Christians to go to court," Keith said.
The chairman of the board of deacons is Sam K. Pate, Falwell's brother-in-law and the owner of a rival direct mail business. Pate did not respond to Ott's letter. Ott no longer worships at Thomas Road.
In September, Ott and Keith filed a federal lawsuit against Reber and Thomas, claiming that the two men had engaged in racketeering and securities fraud that damaged DMC's profitability. The 70-page federal suit asks for $50 million in damages.
The lawsuit claims that Reber and Thomas sabotaged the company to make it unprofitable so they could buy it back at a cheap price. The suit also claims that the two former owners used company money for personal travel and provided free printing services for various organizations, including Liberty University and Falwell's Old Time Gospel Hour.
Calls to Reber's office at Liberty and to Thomas weren't returned. Reber's attorney, Bill Boland, said that he doesn't think the suit will hold up in federal court, and that he expects "a rapid disposal of all those claims."
An attorney for Thomas, who is involved only in the federal lawsuit, argues that DMC's federal suit misuses the RICO statutes, which were enacted to cripple organized crime.
"This looks like a business dispute, not any kind of RICO or fraud," William Rakes said. "Clearly a case like this one was not what was intended by Congress."
But no `real far left'
DMC has been in a downward slide for most of the past year. In 1993, it suffered more than a $300,000 loss on $18 million worth of sales and has been forced to lay off more than 100 workers, according to court records.
One way to change that, Keith said, is to tap into a customer base they feel has yet to realize direct mail's capabilities for them: commercial businesses. Groups like credit card companies and magazines can target specific demographic groups with direct mail and chart the response they get more accurately than through advertising, DMC says.
DMC "used to be very, very oriented to nonprofit fund-raising clients," Keith said. "We've tried to go commercial. You can only grow so big with nonprofits."
Keith said the company - which once did 80 percent of its work for nonprofit clients such as Falwell, Coral Ridge Ministries and The Rutherford Institute, a conservative legal defense organization - now does 80 percent of its work for commercial clients. DMC no longer does any work for Falwell's ministries and claims the ministries still owe money for work done.
But DMC hasn't strayed far from its conservative origins. On a recent tour of the plant, DMC was producing mailings for two Republican congressional candidates, the Korean War Veteran's Memorial Dedication Fund and former Los Angeles police officer Stacey Koon, who was sentenced to 21/2 years for his role in the Rodney King beating.
Keith insists the company will produce mailing for mainstream groups - even Democrats - but that it wouldn't accept business from a group like the National Organization for Women.
"We probably would not do a job for something that was a real far left organization," he said.
Keith said the company needs to mail out 2 million letters a week to break even. In recent weeks, that hasn't been a problem.
"We have the work," he said, adding that the company had a $500,000 operating profit at the end of July.
So how does he explain the fact that creditors seeking $183,000 in unpaid bills have filed judgments against DMC in Bedford County Circuit Court in the past two months?
"Ours is not an operating profit problem, but a cash flow problem," Keith said.
Much of the company's money, he explained, is tied up paying off a $2 million loan used to buy new equipment and help complete a 26,000-square-foot expansion of the company's production facility last year.
But the company's biggest problem, Keith said, is that "we don't have a plant manager at this time," he said.
He admits that he and Ott came from marketing backgrounds at The Washington Times and know very little about direct mail production. That was Reber's field.
Keith would say little about the company's legal battles, only that the decision to file the federal lawsuit against Reber "is a matter of vindication."
"I think at this point it is the only way we are going to find out what the truth is," Keith said. "Roger and I are outsiders. We both moved from Washington. We don't have a lot of friends to tell our story to."
A trial on Reber's breach-of-contract suit had been set for Nov. 15 in Bedford Circuit Court, but Boland said it has been postponed until February. Keith said he and Ott simply hope they have enough money for legal fees. In September alone, he said, they paid their attorneys more than $100,000.
"If we can stay in court, we will not settle this lawsuit," Keith said. "We would never settle. We want to take it all the way down to the end."
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by CNB