The nation's biggest name in surf wear, Ocean Pacific Sunwear Ltd., filed for Chapter 11 protection from creditors Wednesday, saying it was having trouble paying its long-term debt and needed to fend off a lawsuit from its largest shareholder.
The Tustin-based company, a leading force in the so-called "California lifestyle apparel" market since the early 1980s, listed about $11 million in debts to two secured and scores of unsecured creditors in its petition filed in U.S. Bankruptcy Court in Santa Ana.
During the reorganization, Ocean Pacific said, it will maintain its work force of 60 and network of 12 domestic and 19 international licensees, the companies that place Ocean Pacific's brand names on products ranging from corduroy shorts to T-shirts. The company intends to continue its sponsorship of the popular OP Pro surfing contest, to be held next month in Huntington Beach.
"This is a smart move for us," OP chairman and co-founder Jim Jenks said in a statement. "It clears up some old problems while allowing the company to move ahead."
The filing drew mixed reactions from industry competitors and observers. Most said that OP fell victim to its own problems, but others worried that a bankruptcy petition of an industry's largest player was bound to have a spillover effect.
Ocean Pacific licenses clothing under the Newport Blue and OP Pro labels and is in the process of trying to sell two other brand names, Jimmy'Z apparel and Hydrolight wet suits.
The company blamed its cumbersome debt on an ill-fated attempt at reviving its own manufacturing operations in 1985. The company discontinued making its own apparel for a second time in 1989, and now limits itself to assisting in the design of its clothing line, marketing and collecting royalties on the use of its logos.
Last year, Ocean Pacific was sued by its largest shareholder, Elaine Ornitz, widow of former OP Chairman Larry Ornitz. She alleged that the company was basically insolvent. OP officials have denied the charges.
OP Senior Vice President Mike Balmages, who is also the company's lawyer, said Wednesday that he has long favored filing under Chapter 11, but that others in the company were hesitant. He said that with so many major retailers having either filed similar petitions recently or contemplating it, retailers would surely understand OP's troubles.
He said that OP expects to repay all of its debt. Under a preliminary reorganization plan, the company's two largest creditors, Republic Factors and Wells Fargo Bank, which are owed $7 million collectively, could be repaid in less than three years.
Filing the bankruptcy petition would also forestall the costs arising from defending against the Ornitz lawsuit, Balmages said.
Ornitz, in a statement issued through her lawyer, Bruce Vann, said that litigation will continue against each of the individual Ocean Pacific partners and that she expects to prevail.
Ocean Pacific products are sold in 73 countries. Balmages would not disclose how much Ocean Pacific receives in fees and royalties. He added, however, that licensees' worldwide sales last year were about $250 million, and are expected to be about the same this year.
OP's licensee for girl's and junior's swimwear, Lunada Bay Corp. in the City of Commerce, did not expect any problems from the bankruptcy filing. "As far as we're concerned, it doesn't affect us," said Vice President Mark Klein. The OP brand "has been good for us, and I don't see why it shouldn't continue."
Like most surf wear companies, Ocean Pacific had modest beginnings. Surfboard dealer Jim Jenks noticed that most swim trunks were too tight in the thighs to allow surfers to easily paddle their boards. In 1972, he founded the company.
Selling a line of T-shirts and trunks, Ocean Pacific reported first-year sales of about $50,000. A decade later, sales had topped $100 million and doubled from that level by the mid-1980s. OP signed top surfers as celebrity endorsers and started hosting the now-famous surfing tourney.
Its apparel sales expanded from being offered exclusively at surf shops to the mainstream: department stores such Mervyn's and Nordstrom.
But after the latest foray into manufacturing, OP seemed to lose some of its luster. Ornitz, who gained a 30% stake in the company after the 1988 death of her husband, warned in the lawsuit that the company's working capital deficiency had doubled to $5.7 million by the end of fiscal 1990 and that "nothing short of a sale" or massive cash infusion could save the company.
OP offered itself for sale as recently as January, when a Menlo Park venture capital firm was interested. The deal broke off abruptly a month later.
Ocean Pacific hired a financial consultant, Lee Katz, as its chief executive officer, in April. He departed abruptly a month later. The company's marketing chief, Bonnie Crail, left earlier this month to take a job at an Irvine firm, and the president of the company's Newport Blue division, John Bernards, departed last week.
Several competitors and observers of the surf wear industry, which is primarily based in Orange County, said that OP's problems are unique and its bankruptcy petition does not spell trouble for others.
"In general . . . this market is tough. There is no room for fat. There is no room for error. And these guys had a little fat left over from a couple years ago," said Roy Wallack, editor of Action Sports Retailer, a leading surf wear industry trade magazine based in Laguna Beach.
"Once (OP officials) reduce their debt, they should be all right," Wallack said. "They are doing well in snow-boarding and Op Pro, their hard-core surf wear line. Their Hydrolight wet suits are also well thought of."
Bob McKnight, chairman of Quiksilver Inc. in Costa Mesa, a competing surf wear maker, said OP--like the rest of the industry--was caught up in the euphoria of enormous sales in the late 1980s. With the neon look, the "whole country went surf crazy" and the appeal broadened far past the serious surfers who had been the industry's mainstay.
Sun Won't Set on OP Ocean Pacific Sunwear Ltd. said its decision to file for Chapter 11 will not affect its 12 domestic or 19 international fashion licensees who will continue to manufacture and distribute its Op and Newport Blue lines. Also unaffected are company-sponsored sporting events and teams, including the 1992 OP Pro Surfing Championship in Huntington Beach next month. Trademark Op Ocean Pacific has 1,200 registrations of its trademarks in more than 70 countries. They include: Ocean Pacific OP OP Pro Board man logo Newport Blue Newport Blue flag logo Hot Sauce Hydrolight Jimmy'Z Jimmy'Z woody logo Surf's Up Ocean Pacific sponsors the following: Op Pro Surfing Championship Snow boarding team Beach vollyball team Miss Op contest Researched by DALLAS M. JACKSON / Los Angeles Times