Merry-Go-Round closer to giving in


Admitting that its supplies have been disrupted by its financial problems, Merry-Go-Round Enterprises Inc. yesterday increased speculation that it soon will file for Chapter 11 bankruptcy protection.

"I don't think they have any alternative," said Peter N. Schaeffer, a partner in Johnson Redbook Service, a New York company that follows retail stocks. "The sooner they file, the sooner they get spring shipments."

There also was speculation that the Joppa-based retailer may have to close as many as 500 of its 1,450 clothing stores to put its finances in order.

In a filing with the Securities and Exchange Commission yesterday, Merry-Go-Round said it may be forced to file for Chapter 11 bankruptcy protection because of financial problems stemming from its miscalculation of fashion trends.

Up until yesterday, the company, which operates stores under the names Merry-Go-Round, Attivo, DJs, Dejaiz, Cignal and Chess King, had maintained that it did not plan to file for Chapter 11 bankruptcy, though it did not rule it out.

In its 10Q filing -- a quarterly financial statement required by the SEC -- the company said some of its shipments have been disrupted by its credit problems, though it has enough merchandise for the holiday season.

But some suppliers and factors -- which finance purchases -- have refused to ship spring merchandise to the company, Merry-Go-Round said.

The company also said it was in violation of loan agreements with its lenders because of its loss in the fiscal third quarter that ended Oct. 30. But the banks have not yet declared Merry-Go-Round in default or accelerated payments.

The chain store said it is still negotiating with lenders, which are -- led by Signet Bank/Maryland, but added there is no assurance that these talks will be successful.

If the banks accelerate payments on the debts, "the company would be unable to meet its borrowing repayment and other obligations as they become due," Merry-Go-Round said.

Speculation about the company filing for Chapter 11 bankruptcy started late last week when it was reported that Merry-Go-Round missed its Dec. 10 payments to some suppliers and factors. That started a steep decline in the company's stock price, which fell to $2.875 a share from $6.125 a share. The stock continued to fall Friday, dropping 26 percent to $2.125 a share.

On both days, the stock was the most actively traded on the New York Stock Exchange.

However, after yesterday's filing, the stock fluctuated little and closed unchanged at $2.125 a share. It was the 10th most actively traded stock with about two million shares changing hands.

Mr. Schaeffer said he does not expect the stock to fall further because it is now at about its liquidation value. The company's book value -- stockholder equity divided by the number of shares -- was $3.66 a share as of Oct. 30.

Filing for Chapter 11 could actually be a boost for Merry-Go-Round, since suppliers and factors providing merchandise would be assured of their payments, Mr. Schaeffer said.

Mr. Schaeffer said the company should close about a third of its stores, renegotiate leases and redirect its merchandising operation, which selects the inventory.

But another analyst opposed a bankruptcy filing, saying it would be particularly harmful to stockholders.

Shareholders would lose much of the value of the stock and in bankruptcy, "common shareholders are at the bottom of the list," said Harry G. Katica, a retail analyst for Raymond James & Associates Inc., a stock brokerage in St. Petersburg, Fla.

"I'm very surprised it reached this point," Mr. Katica said. "A company with a healthy balance sheet should be able to come up with a solution," he said.

Even though the company had stockholder equity of $197.4 million at the end of October, its cash flow in operating activities was a negative $66.8 million during the third quarter, compared to a positive cash flow of $7.2 million in last year's third quarter.

The company also was being squeezed by its lenders, which have cut its line of credit from $101 million in July to $85 million in August and more recently to $42 million.

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