This time it's over: Strouds to liquidate

Brent Felgner, May 27, 2003

City of Industry, CA — This time there will be no reorganization. Slightly more than a month after Bill Stroud died, the remnants of his retail dream have also passed.

Strouds, the distressed 50-store specialty linen retailer, last week filed Chapter 11 bankruptcy and immediately received a federal judge's OK to begin liquidating the approximately $150 million chain.

More than a few vendors were outraged — some even threatening legal action — if not by the fact that the retailer failed, then because it happened so quickly after a voluntary restructuring effort earlier this year that saw suppliers forgive debt. Agreements for new investment capital were also put in place.

"I think there's something smelly there," said Dale Talbert, vp, sales and merchandising for Veratex, the company's second largest unsecured creditor. "And you've got to ask: 'What happened to all the money?' Where did it all go?"

Word of Strouds' liquidation came initially from some vendors who were told through back channels, then confirmed by a principal in Fog Cutter Capital Group, Strouds' controlling shareholder.

"The company has or will enter into a liquidation agreement with one of the national consortiums and, in an orderly process, liquidate its inventory," Andrew Wiederhorn, a partner in Fog Cutter, told HTT in a telephone interview.

More than two dozen calls placed to executives — including interim ceo Susan Storey — at Strouds' headquarters have gone unreturned. Company president Rob Valone, reached at his office earlier last week before the filing, declined to discuss the matter.

As of Friday afternoon, no schedule had yet been announced concerning the liquidation. Random calls to a handful of Strouds stores seemed to indicate they were open for business.

While Hollander Home Fashions is listed as Strouds' largest unsecured creditor, most of that debt apparently dates back to last year. According to president and coo Jeff Hollander, the company has shipped Strouds on a CBD (cash before delivery) basis this year.

""We have no facts yet about whether their actions were kosher," Hollander said. "We're not aware of any fraud, and there's a big difference between fraud and being misled. We feel betrayed, but you can only be betrayed by someone you love. There still is an emotional relationship to dealing with the Strouds of the past. When Bill said something it was gospel."

But this wasn't Bill Strouds' business anymore, and it hadn't been for years. Strouds Acquisition Corp., led by Cruttenden, Valone, former cfo Gary VanWagner and members of management, led Strouds out of its first bankruptcy in 2001 in an 11th hour save that blocked an impending liquidations.

Since that time the retailer has struggled to reclaim its market position while managing tight cash flow, a tighter economy and increasing competition. Earlier this year, Strouds sidestepped a financial crisis by voluntarily restructuring its trade debt with suppliers.

Fog Cutter entered the picture last March, piecing together a $2.9 million financing package — with additional funds from investor Walter Cruttenden, Strouds' chairman, and Fleet Retail Financing — as the company battled a liquidity crisis. Simultaneously, Strouds and its investors extracted agreements from trade suppliers for reduced and delayed payments as a precondition for that equity financing. Vendors grumbled but most went along with one of the plans.

Wiederhorn stated that the two-stage capital plan involved an additional loan would have been made based on Strouds' ability to attract additional equity investments. Those investments were not forthcoming.

"We extended a lifeline to Strouds to try to help them stabilize their business and figure out where they wanted to go. And management came to the conclusion that without substantially more equity they wouldn't be able to get there," Wiederhorn said.

However, Fog Cutter was effectively part of Strouds' management. It garnered a 49.5 percent stake in the business — became Strouds' largest shareholder — and took control of its board when it extended the loan. In doing so, it also secured its interests by inventory and other assets, Wiederhorn said.

"I want to emphasize that we were just a lender in this situation," Wiederhorn said. "And, as a merchant bank, we certainly wanted this company to succeed because we purchased some preferred stock and warrants, and there would have been a substantial upside if it had worked. But it didn't work; and our first objective is to protect the interests of our shareholders."

Even Cruttenden's and Fleet's secured loans to Strouds are subordinate to Fog Cutter's, Wiederhorn stated.

As a result, Fog Cutter last week told its shareholders that its expects full payment of Strouds' outstanding debt. Fog Cutter said it believes its loans are adequately collateralized.

"I think the industry looked at Strouds like a little brother," offered Veratex's Talbert. "But it doesn't seem they were honest and fair with the industry. There doesn't seem to be any loyalty to the industry that will enable it to recoup its money.

"It's sad to see another player and account" disappear from retailing, Talbert added.

— Reported by Cecile Corral, Brent Felgner, Don Hogsett, Andrea Lillo and Carole Sloan.

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