Merry-Go-Round Enterprises Inc. creditors and stockholders yesterday presented the company with a reorganization plan that could allow the Joppa-based clothier to leave bankruptcy protection by the summer.
Merry-Go-Round analysts had predicted the retailer's bankruptcy case would drag on for at least another year. Yesterday's proposal, while still tentative and requiring approval the court, also appeared to be blessed by the company.
"We were reaching a point in the road where things could have become very contentious," said Wilbur L. Ross Jr., senior managing director of Rothschild Inc., a financial adviser to the company's equity holders, of the negotiations between the two sides. "So we tried to reach an agreement amicably. The alternative would have been to go to war for a year or so."
Mr. Ross said the company could emerge from bankruptcy protection within the next six months.
In many bankruptcy reorganization cases, including that of the recently resolved R. H. Macy & Co., unsecured creditors and equity holders often battle for years over how to divide assets and provide for returns based on future earnings.
Under terms of the Merry-Go-Round plan, the company would provide unsecured creditors with up to $130 million through a combination of cash and new unsecured debt, and 75 percent of the stock of the reorganized chain.
The balance of the stock would be distributed to existing equity holders. Under a complex formula, that 25 percent figure could go as low as 10 percent with warrants issued for future stock, if unsecured creditors' claims exceed expectations.
That they would receive even 10 percent is considered unusual, however, since in many bankruptcy reorganizations stockholders often are forced to accept little or nothing in return for their stock ownership.
The company's unsecured creditors estimate they are owed roughly $225 million. In return for the stock, they would relinquish about $105 million in debt owed by the company.
Merry-Go-Round officials cautiously endorsed the proposal late
"Although the company has not completed its study of the proposal, on a preliminary basis, management and the board are supportive of this plan," Thomas C. Shull, Merry-Go-Round's president and chief executive, said in a prepared statement. "It appears to be consensual and provide for a fair recovery to all stakeholders, and should lead to a swift emergence from Chapter 11."
Merry-Go-Round filed for Chapter 11 bankruptcy protection in January 1994, after several of its merchandising selections failed to catch fire. At the same time, the company was burdened with debt resulting from the acquisition of the Chess King chain.
"This means we can continue focusing our energy on turning the business around, and less time in dealing with the reorganization and external constituents," said James Kenney, who in mid-November was appointed chief operating officer and executive vice president of Merry-Go-Round.
He added the proposal should accelerate the reorganization by between six to nine months, and that if approved, the company (( should leave bankruptcy by January or February 1996 at the latest.
The plan also would eliminate the need for another wave of store closings and layoffs. Earlier this month, Merry-Go-Round announced it would close 200 more stores by February, bringing its total number of outlets to 1,000. At the start of its bankruptcy proceedings, the company operated 1,445 outlets under the Merry-Go-Round, Dejaiz, Attivo, Cignal and Chess King trade names.
With the store closings, the company is expected to lay off roughly 700 employees, most of whom work in the field.
Mr. Kenney said stores that fail to contribute cash to the company will be closed, and more layoffs of personnel in the Joppa headquarters may be inevitable. Earlier this month, the company said 70 people in its headquarters operation would lose their jobs, trimming the number of employees there to 620.
The unsecured creditors and the stockholders hope to file a detailed plan for reorganization by Feb. 15, provided some outstanding issues can be resolved, Mr. Ross said.
Both Mr. Ross and Mr. Kenney say they believe the company will be profitable by this time next year. In the first nine months of 1994, Merry-Go-Round posted negative cash flow -- profit before interest, depreciation, amortization, taxes and bankruptcy-related expenses -- of $22 million, on revenues of $544.1 million.
Implementation of the plan is contingent upon both court approval, the company's ability to obtain exit financing and other matters. Mr. Ross said obtaining future financing shouldn't be difficult, since Merry-Go-Round has access to an untapped $100 million credit line with the CIT Group. The clothier also is expected to temporarily increase its cash holdings substantially by the end of February, based on Christmas sales and anticipated store closings.
"This is a wonderful New Year's present for everybody," Mr. Ross said. "For the creditors, the vendors, the company and the employees."