Dragonfly Corp Dragonfly, a Three-Year-Old

Dragonfly Corp

Dragonfly, a three-year-old corporation marketing high end clothing aimed at the teenage market, is facing dire financial circumstances. They owe over $20,000 to their landlords at Crossroads, a struggling mall. The business is not profitable, but the owners believe it will be in the near future.

Dragonfly should not declare bankruptcy, but should use the threat of it as a lever against Crossroads. At the time of the case, over a year remains on their lease at Crossroads. There is a year and a half remaining on their lease at the Bellevue location. The Crossroads lease is the biggest concern, since the mall is struggling and there appears to be no long-term future for Dragonfly at that location. The addition of the second store has improved the company's financial position, but is not enough to support Dragonfly overall. As a result, the balance sheet reveals a continued deterioration in net equity. This appears, however, to be ready to turn around, and it is not uncommon for a new retail venture to struggle for a few years before the lessons they've learned and goodwill in the marketplace begin to pay off.

Dragonfly's rent liability at Crossroads can be addressed in one of two ways. The best option is to negotiate an early exit from the lease. This would get Dragonfly out of the struggling mall and allow them to put more focus on the Bellevue location and possibly open another store elsewhere. The deal would allow them to pay Crossroads from their more profitable operations without incurring further liability. Despite the fact that the Thompson's feel 1997 was a successful year, they were not able to make any headway on their liability to Crossroads. However, given that Crossroads is about to lose 1/6 of their tenant base, they may be unwilling to make such a deal with 1 1/4 years still remaining on the lease.

Therefore, bankruptcy becomes the other option to deal with the liability to Crossroads. The issue of subordination should be dealt with before bankruptcy proceedings are undertaken, to best protect the Thompsons. At that point, the courts can sort out the extent to which Dragonfly will honor its liability to Crossroads. The downside of bankruptcy is that the Thompsons are major creditors to Dragonfly as well, and the bankruptcy could jeopardize their net worth if they are unable to convince Janet's parents to write off the Thompson's obligations to them. Bankruptcy, however, is lever that can be used against Crossroads, since the mall cannot unilaterally impose bankruptcy on Dragonfly and would ideally like to receive the monies owed.