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Turnaround Gets Device Firm Back on Growth

Neal St. Anthony’s column in the Business section
From Star Tribune, Saturday, October 21, 2006

Headlines about AGA Medical Corp. the past several years have been mostly negative -- a former executive facing criminal prosecution; a bitter boardroom battle that ended up in court.

That sort of news generally isn't good for business.

But AGA is expanding. In December, the medical device maker will move into a newly remodeled headquarters in Plymouth on 27 acres that will house a fast-growing workforce of 230 employees, nearly double its size in 2004.

The company expects to generate positive cash flow from more than $100 million in sales of tiny, implantable heart-occlusion devices that have substantially eliminated the need for more-expensive open-heart surgery for infants and other patients.

"We are a very solid company," said Chief Executive Frank Gougeon, the company's majority owner.

There is even a buzz in financial circles that AGA may soon go public with an initial public offering. However, Gougeon said the board has yet to make a decision about raising additional capital.

Things were a lot shakier a few years ago.

The company was founded in 1995 by Dr. Kurt Amplatz, a longtime University of Minnesota research physician and engineer. He hired his son-in-law, Gougeon, a business executive, and Michael Afremov, a manufacturing executive. The three had worked together earlier at another medical-products company.

But by 2002, the management of the fast-growing company had splintered over an ownership dispute and claims of fraud that pitted Gougeon and Amplatz against Afremov.

By 2003, the dispute landed in Hennepin County District Court, where Judge Patricia Kerr Karasov removed the warring parties from the company and inserted John Borg, a former Hennepin County judge and Medtronic lawyer, to oversee the business.

A turnaround specialist
Borg recognized the financial and operations problems at a company where some of the top talent had been distracted by the ownership fracas. Manufacturing lead times and customer back orders were mounting.

He hired Manchester Companies Inc., a Minneapolis turnaround-management company.

"The good news was that sales were growing," said Mark Sheffert, CEO of Manchester, who has overseen several dozen corporate revivals. "The bad news was that they couldn't get the product out the door fast enough."

Manchester, in a two-year effort led by Buckley Brinkman, drove down manufacturing lead time, inventory and back orders, reorganized and streamlined the manufacturing process and increased gross profitability.

Meanwhile, the three-year legal battle ended in 2005 with a settlement. The pact redeemed Afremov's half ownership of the company for about $275 million. The capital was raised through corporate debt and an investment by a New York venture capital firm oriented toward health care, Welsh, Carson, Anderson & Stowe. Gougeon and Welsh Carson are now the two shareholders. Amplatz had sold his stock earlier to Gougeon and Afremov.

"It was a unique investment banking experience," recalled Dave Hallett, whose firm, Goldsmith Agio Helms of Minneapolis, arranged the company's recapitalization. "The shareholders were deadlocked and the company was under supervision of the court. Welsh Carson saw AGA as a recognized leader for closure devices for the pediatric market. And they appreciated the portfolio of new products that are expected to fuel future growth."

Also under the settlement, Gougeon was returned to his post as CEO. Amplatz, 82, a native of Austria, was returned to the board and is still involved in research at the company. Tommy Thompson, the former Wisconsin governor and former secretary of the U.S. Department of Health and Human Services, now serves as chairman.

(In a separate action, a federal grand jury in June indicted Afremov for allegedly masterminding a kickback scheme with an equipment vendor doing business with AGA between 1998 and 2002, under which Afremov is accused of collecting more than $1 million. His trial is pending.)

"This was a very complex turnaround -- the perfect storm of ownership and management disputes, alleged fraud and manufacturing problems," said Joe Kenyon, a CPA and fraud examiner at the Schechter Dokken Kanter firm and president of the Upper Midwest Turnaround Management Association. "These situations often take a fresh set of eyes. AGA is now a larger company with great potential."

The association next week will name Manchester's work at AGA the winner of its "turnaround of the year" award.

"In the end, I think the company avoided a difficult situation," Sheffert said. "The company stayed intact. Employees kept their jobs and employment grew."

In the turnaround business, that's called a happy ending.

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