After weeks of intense negotiation, Merry-Go-Round Enterprises Inc. has agreed to pay a bonus that could reach $8.8 million to its two new bosses if they succeed in restoring the Joppa-based retailer to a certain level of profitability.
But the deal is still controversial among Merry-Go-Round's creditors, who want to speed the chain's bankruptcy process so they can receive what they're owed more quickly. Creditors may try to block the package because it contains no incentives for management to file a reorganization plan in 1995, said people close to Merry-Go-Round.
VTC Creditors "still have some issues with our agreement, but we feel can work out an acceptable resolution to the disagreements that we have," said Thomas Shull, Merry-Go-Round's new president.
The contract must be approved by Judge E. Stephen Derby of the U.S. Bankruptcy Court in Baltimore.
Merry-Go-Round, which entered bankruptcy proceedings in January, hired Mr. Shull as chief executive and James Kenney as chief operating officer last month after previous management couldn't stem heavy losses. Mr. Shull and Mr. Kenney are working through their consulting firm, Meridian Ventures.
The negotiations over Meridian's pay have sharply highlighted the various conflicting interests in Merry-Go-Round's bankruptcy.
Shareholders want a long reorganization process to rebuild the company's worth and have some value left over after creditors are paid back. Stock owners receive nothing until debts are met.
As a result, the contract filed in Bankruptcy Court yesterday would boost Meridian's payout as Merry-Go-Round's value rises. And it gives Meridian until Feb. 28, 1996, to file a reorganization plan before its bonus is reduced.
The shareholders' committee in Merry-Go-Round's bankruptcy approves of the deal, said its attorney, Stephen Selbst. But creditors oppose it. Two of Merry-Go-Round's biggest creditors, investment firms Fidelity Investments and Bear Stearns & Co., are pushing for a reorganization plan to be filed next spring or summer, sources said.
Under the contract filed yesterday, Meridian would receive a monthly fee of $95,000 for operating Merry-Go-Round for the next year. Plus, it would receive a "success fee" pegged to Merry-Go-Round's value, as determined by Judge Derby, when it emerges from bankruptcy.
If Merry-Go-Round is worth $340 million or more, Meridian would get 2 percent of the company's value in Merry-Go-Round stock and $2 million in cash. With a value of $340 million, Meridian would receive $8.8 million.
The bonus would decline as value dropped and would disappear at the $200 million level.
It's unclear what Merry-Go-Round's worth is today. Typically, companies in bankruptcy proceedings are valued by multiplying their annual cash flow by seven or so. But Merry-Go-Round's cash flow -- profit before interest, taxes, reorganization fees and depreciation -- has been negative through the first nine months of its fiscal year.
The top value target on Meridian's menu -- $340 million -- "doesn't seem like a very high hurdle to me, if you look back on what the company was worth just a year and a half ago," said Peter Schaeffer, a retail analyst with Dillon Read & Co. In 1992, Merry-Go-Round's stock market worth was more than $800 million.
Mr. Shull said Merry-Go-Round will have to achieve annual cash flow of $40 million to $50 million before Meridian makes a bonus.