MICHAEL G. BALMAGES, Senior executive vice president and general counsel, Ocean Pacific Sunwear Ltd.
Publicity surrounds a company when it files for bankruptcy. Less often, a company offers a glimpse at how it lives with Chapter 11, the device that protects it from creditors while it works out a repayment plan. Michael G. Balmages of Ocean Pacific Sunwear Ltd. in Tustin calls his company’s bankruptcy a “wonderful tool.” OP, which filed for Chapter 11 in June with $11 million in debt, licenses others to make and sell Newport Blue, Op Pro, Jimmy’Z and Hydrolight clothing. Balmages spoke with Times staff writer Anne Michaud.
Is the stigma wearing off Chapter 11 filings?
I think it’s wearing off quite a bit, but I’m a lawyer. It’s a tremendous financing device. You get all this new financing and you don’t have to apply for it. It’s just there.
You mean you can pay your debts over a longer time?
Yes, significantly longer.
How would you answer people who say that going into Chapter 11 and considering it a financing device is a little cavalier?
I disagree. This was certainly not done easily by OP, it was done after much consideration, after much negotiation with our secured lenders, after much projection, agonizing, thinking, discussing.
The idea of a Chapter 11 is to allow a debtor to reorganize and to be a profitable, productive (company). OP’s ability to compete in its market has been enhanced by the filing, and it’s perfectly appropriate to do that. The idea that that’s cavalier misses the whole point. The whole point is that you take an entity that is troubled and is restricted from reaching its full potential as a productive member of the economy, and you turn it into one that can productively compete.
If that’s cavalier, so be it. But that’s certainly an appropriate use of Chapter 11.
When competitors heard that you filed in bankruptcy court, did they jump at the chance to persuade retailers to carry their lines instead?
If our competitors are doing that, we’re not aware of it. The reaction we have gotten both in print and privately from our major competitors has been very, very good, very positive.
I think all of our competitors--and our particular segment of the market--have been affected by the recession. They’re all having financial problems, so they’re very sympathetic.
Are you having trouble persuading retailers to carry your lines?
The only negative reaction has been some confusion as to which entity was in Chapter 11. OP is a licensing entity. We don’t manufacture goods, we license independent companies that manufacture and ship, and that’s who the retailers get their deliveries from. The licensees are not affected directly by our Chapter 11.
Our sales at retail have gotten better in the last several weeks than they’ve been in a long time.
Do you feel that your image has been tarnished by the Chapter 11?
No, I don’t. OP has had financial difficulties over the last several years. Even though we’re a privately held business, these difficulties have not been very private. As a result, there has been every conceivable rumor about OP.
The Chapter 11 filing has had the effect that the rumors don’t count any more. There’s the reality that, yes, we filed and that’s OK and we’re doing well. We’re still out there selling product.
Are you still spending on marketing?
Yes, a lot. We recently had the OP Pro (surfing contest at Huntington Beach).
What’s the thinking behind that?
The licensees pay advertising dollars to us, and the OP licensing part of our company has always been profitable.
Is Ocean Pacific bringing in cash now in its regular operations?
Yes, the Chapter 11 filing has made it possible for us to use the cash to pay attention to our business and take a breather from our secured lenders. We’re in the best cash position now than we have been in several years.
How did the filing affect your relationship with vendors?
Most vendors are sophisticated enough to know what a Chapter 11 is. They know that we’re cash rich now because we don’t have to (immediately) pay any of our pre-petition debt. So, most of the vendors are saying: “Great, you now have to pay me COD or within 30 days for new stuff. I’ll gladly sell you new stuff.”
There are a couple of vendors who get upset by all this, but they’ve been very few.
What do you do with the ones who are upset?
We talk to them, deal with them as best we can.
Are you still buying from them? Did you lose anybody?
We haven’t lost any significant vendors. (OP buys advertising, showroom space and services related to merchandise shows.)
When do you plan to file your reorganization plan?
By the end of July. But it may be as late as a week or two later than that.
So, when would that bring you out of Chapter 11?
There are reasons to stay in a Chapter 11, such as taking care of general lawsuits or other problems. It’s a tremendous tool, so we’re not going to necessarily rush out of it.
But I would anticipate that we would be out of Chapter 11 by the end of the year. That doesn’t mean we’ll have everybody paid off, but we will have taken care of all the administrative matters. The (repayment) plan will be a two- or three-year plan.
On the so-called spillover effect. . .
“Before we filed the bankruptcy, we considered very carefully whether this would hurt the entire industry. There appears to be no spillover. “
On a lawsuit by an investor alleging mismanagement. . .
“If the money that OP . . . has spent on attorneys’ fees were put into the company, we might not have had to go into Chapter 11.”
On the company’s hip image. . .
“Whether the 17-year-old surfers at Huntington Beach know we’re in Chapter 11--I have a feeling they don’t. Except for my kids.”
On OP’s debt. . .
“Seven years ago, we got into manufacturing; we didn’t do a good job, and that cost us a lot of money. We built up a tremendous debt.”
On morale. . .
“The Chapter 11 has given us a chance to pay attention to our current business and forget about past mistakes for a while. “
