May Shed Bankruptcy Shield This Year : Cambridge Diet Firm Slims Down in Bid to Improve Financial Health

Cambridge Plan International--the company behind the controversial Cambridge diet--will make its first payment to major creditors this month, part of a debt settlement process that will take the company out of Chapter 11 bankruptcy proceedings, perhaps by the end of 1985.

“We are leaner . . . (and) a lot healthier,” said Cambridge President Vaughn Feather, adding that the company has introduced new products that have made its weight-loss system more acceptable to many in the medical community.

But as the “new” Cambridge emerges reorganized and pared of corporate fat, questions remain among doctors, nutritionists and the Food and Drug Administration about the safety and long-term effectiveness of the Cambridge diet.

The Cambridge saga began in February, 1980, when Vaughn Feather and his family--parents Jack and Eileen and brother Vincent--introduced the liquid Cambridge diet through their small mail-order operation. Cambridge joined such other Feather family products as the Mark Eden bust developer, Slim-Skins sauna pants and the Astro-Trimmer waist reducer.

The original Cambridge product, which elicits criticism from some and extreme loyalty from others, is basically a vitamin- and mineral-enhanced drink that looks and tastes like a milkshake. The Cambridge powder, invented by a nutritionist with Cambridge University in England, also comes in soup and pudding forms.

More Calories Now

If a dieter uses only the Cambridge powder mixed with water three times each day and doesn’t eat any regular food, the diet provides a total of 330 calories. Cambridge’s new products provide more calories per day.

Today, at Cambridge’s headquarters in Pacific Grove, near Monterey, telephone operators greet callers with a cheery: “It’s a great day at Cambridge Plan International. Can I help you?”

But great days were scarce for Cambridge by September, 1983, when the company filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 11, a company is allowed to continue operating while it works out a plan to pay its debts.

The troubles became apparent in 1982, as Cambridge was enjoying its greatest success.

In May of that year, the wildly popular Cambridge diet ate up a record $47 million in sales. Cambridge tallied nearly $400 million in sales in 1982, compared to about $23 million in 1984.

Cambridge employed 1,200 people, up from 30 in February, 1981, when the company switched to a multilevel marketing system from the original mail-order operation. Under that distribution system, about 150,000 salespeople, dubbed “counselors,” had sold the diet to more than 5 million people by the end of 1982.

But after that May sales peak, things were never the same.

Out of Control

The company’s sales success masked problems with the firm’s multilevel distribution system of counselors, patterned after the system used by Mary Kay Cosmetics, which was swelling out of control. The company, too, had grown corpulent, spending millions on a massive computer system to handle new sales heights that never came, buying instead of leasing buildings and doing nearly everything in a “first-class,” expensive way.

What’s more, Cambridge was plagued by controversy.

The medical community and the FDA gave the diet low marks. Claims that Cambridge caused illness, and even death, surfaced.

In December, 1982, a wrongful death suit was filed against Cambridge over the death of a Northern California woman. (Cambridge settled the suit late last year for an undisclosed sum “to avoid the time and expense of a lawsuit” even though “had the case gone to trial we had several people ready to testify that Cambridge had nothing to do with it,” Feather said.)

And Cambridge was tailed by a pack of imitators, such as the “Oxford” and “University” diets.

In late 1982, sales began to drop dramatically and several months later cash-strapped Cambridge filed for bankruptcy law protection.

Opportunity to Change

“It was like a land rush,” Feather said. “It was like a gyroscope off balance. . . . Chapter 11 gave us the opportunity to change.”

Change came quickly. Cambridge fired all but 90 employees--now up to about 130 employees--and began cutting expenses.

Before the bankruptcy, “we treated the counselors out there very lavishly and we treated our employees very lavishly,” Feather said. “You tend to look very bad when it all falls apart, but nobody was complaining at the time.”

Now, “we have crunched this company down to very low overhead,” Feather said.

Cambridge also started liquidating non-operating assets to pay its thousands of creditors.

When Cambridge entered Chapter 11, $64 million worth of claims was filed against the company. The company thus far has negotiated the debt down to $29.6 million, and it maintains that legitimate claims total only about $20 million.

In the next few weeks, Cambridge will make its first payment to major creditors. The approximately $3.6-million payment will settle half of each of the undisputed claims, said Robert Phelan, Cambridge’s outside bankruptcy attorney.

Settled 11,000 Claims

Cambridge has already made a $1.65-million payment to creditors, settling nearly 11,000 small claims, Phelan said.

Because negotiation and litigation over disputed debts are still being conducted, it’s unclear exactly when Cambridge will make future payments to creditors. But Feather said he hopes to have the company’s Chapter 11 debts substantially settled by the end of the year.

Phelan said the company’s year-end target may be optimistic, especially because some of the disputed claims involve litigation.

“Who’s to say” when Cambridge will emerge from Chapter 11 bankruptcy proceedings, Phelan said. “That’s in the laps of the gods of the various appellate courts.”

Phelan added that within a year to 18 months Cambridge should have accumulated enough of a surplus to pay even its disputed claims.

During its bankruptcy stint, Cambridge simplified its distribution system. Instead of having 150,000 counselors who dealt individually with the company, it now deals directly with 500 area distributors, each of whom maintains a stable of about 15 to 20 counselors.

The old system “was running amok and out of control,” Feather said. Each counselor got his product directly from the company, and a complex commission system paid counselors not only for their sales volume but also for the sales volume of counselors they had recruited.

Simpler System

Under the current system, distributors are responsible for passing out the product and determining commissions.

Cambridge also developed new products, partly in an attempt to mollify the FDA and the medical community, which condemned the original diet as being too low in calories.

The new “Food for Life” system features an 800-calorie four-drink-per-day diet and a 420-calorie three-drink-per-day diet. The company also has introduced freeze-dried entrees and diet bars for use in combination with its other products.

When one “balanced” meal a day is added, a Cambridge brochure says, the calorie total could climb as high as 1,200 calories. A 1982 study determined that 60% of Cambridge users combined the diet product with a meal, Feather said.

The new products have improved the company’s relationship with the medical community and at least behind the scenes with the FDA, Feather said. The FDA, however, said its official view of the Cambridge diets is unchanged.

“Our position on the Cambridge diet is the position we take on all extremely low-calorie diets (less than 400 calories per day) or regular low-calorie diets (less than 800 calories per day),” said Jim Green, an FDA spokesman. “Our position is that these diets are physiologically unsound regardless of their nutritional composition.

Need Medical Supervision

“We consider them experimental and people should have full knowledge of the risks and should undertake them only with proper medical supervision,” he said.

The FDA received reports of 138 illnesses and six deaths “associated with the diet,” Green said. However, the reports of symptoms ranging from nausea to cardiac irregularities were “anecdotal and hard to verify,” he said.

“We were not able to clearly associate those illnesses and deaths with the diet, but, on the other hand, it was not possible to exclude the diet as a contributing cause to those illnesses and deaths,” Green said.

Even though the official position hasn’t changed, in recent months Cambridge has had “a very good dialogue” with FDA staff members, Feather said.

“They’re a watchdog agency,” he said. “They’re in the business of being cautious.”

Doctors and nutritionists have other complaints, beyond the extremely low calorie content of the original diet.

“The problem with the whole concept is it’s not an education in how to eat with any kind of good sense--it’s kind of a crutch approach,” said Dr. William Jarvis, president of the National Council Against Health Fraud and chairman of the Department of Public Health Science at Loma Linda University.

Lose Too Quickly

In addition, the diet causes users to lose weight much more quickly than the recommended one to two pounds per week, Jarvis said.

Feather said that quick initial weight loss is necessary to “get people feeling successful (before) ridding them of their previous habits with food.”

“What the nutritionists are saying is right: Eventually, if you don’t learn to have a successful relationship with food, you aren’t going to do it,” Feather said. “We’re trying to show people that they can be in control.”

The California Dietetic Assn. is “very much against that whole concept of having untrained people selling a formula on which people will lose weight,” President Rita Storey said. “The bottom line is when people go below 1,000 calories or 800 calories a day, they should do it only under medical care. “ (A rough guideline for measuring the number of calories needed daily to maintain weight, she said, is 12 calories per pound for an inactive person, 15 calories for a person who is lightly active, 20 calories for someone who is moderately active and 25 calories for someone who is quite active, such as a marathon runner.)

Feather responded that the success of the Cambridge diet lies in the peer support dieters receive from counselors, most of whom have used the diet themselves.

“It’s the kind of counseling that you can’t get from a doctor or from a nutritionist because you can’t relate to them as a peer,” he said. “All these people (counselors) have done well with the program.”

Intensive Training

Cambridge distributors go through an intensive four-day training session, so that they can train their counselors, Feather said. Counselors never represent themselves as health professionals, but they are supplied with “prepackaged modules” of health information to pass on to customers, he said. Cambridge literature also urges that users consult their doctors.

Feather said one of his biggest jobs right now is to bolster morale among the distributors and counselors by traveling the country to meet with them. In addition, Feather said he must constantly remind people that Cambridge is still in business. The company ran some rare advertising recently and has held a few free weight-loss clinics to promote visibility.