<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 1994
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- ---------
Commission file number 1-10491
-------
MERRY-GO-ROUND ENTERPRISES, INC.
- - ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0913402
- - ------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3300 Fashion Way, Joppa, Maryland 21085
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
410-538-1000
- - ----------------------------------------------------
(Registrant's telephone number, including area code)
Neither name, address nor fiscal year has been changed since last report
- - --------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock outstanding as of
December 12, 1994: 53,947,007
------------------
<PAGE>
<PAGE>
Page 2
MERRY-GO-ROUND ENTERPRISES, INC.
INDEX
-------
Part I - Financial Information
Consolidated Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended October 29, 1994
and October 30, 1993 3
Consolidated Balance Sheets as of October 29, 1994
(Unaudited) and January 29, 1994 4
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended October 29, 1994 and October 30, 1993 5
Notes to Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Part II - Other Information
Item 6 Exhibits and Reports on Form 8-K 14
(a) Exhibits
(b) Reports on Form 8-K 14
Signatures 15
<PAGE>
<PAGE>
Page 3
PART I: FINANCIAL INFORMATION
- - ------------------------------
<TABLE>
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
Oct. 29, 1994 Oct. 30, 1993 Oct. 29, 1994 Oct. 30, 1993
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $199,090,000 $255,473,000 $544,075,000 $655,812,000
------------ ------------ ------------ ------------
Costs and expenses:
Costs of sales, buying
and occupancy (note 4) 154,135,000 254,174,000 439,017,000 558,107,000
Selling and administrative 52,416,000 59,479,000 154,310,000 154,922,000
Interest expense, net 486,000 2,485,000 911,000 4,305,000
------------ ------------ ------------ ------------
Total 207,037,000 316,138,000 594,238,000 717,334,000
------------ ------------ ------------ ------------
Loss before reorganization
costs and income tax benefit
expense (7,947,000) (60,665,000) (50,163,000) (61,522,000)
Reorganization costs, net (note 3) 6,470,000 - 33,871,000 -
------------ ------------ ------------ ------------
Loss before income tax benefit (14,417,000) (60,665,000) (84,034,000) (61,522,000)
Income tax benefit (note 5) (4,107,000) (22,143,000) (11,765,000) (22,456,000)
------------ ------------ ------------ ------------
Net loss $(10,310,000) $(38,522,000) $(72,269,000) $(39,066,000)
============ ============ ============ ============
Loss per share of common stock $ (.19) $ (.71) $ (1.34) $ (.72)
============ ============ ============= ============
Weighted average number of
shares outstanding 53,947,824 53,921,425 53,939,711 53,904,701
============ ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE> Page 4
MERRY-GO-ROUND ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
October 29, 1994 January 29, 1994
---------------- ----------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,344,000 $113,119,000
Receivables 5,211,000 3,916,000
Merchandise inventories 168,053,000 71,528,000
Prepaid expenses and other, including deferred income taxes of
$2,883,000 and $2,323,000 9,295,000 4,279,000
Refundable income taxes 10,682,000 18,026,000
------------ ------------
Total current assets 205,585,000 210,868,000
------------ ------------
Property and equipment, at cost:
Land and land improvements 5,431,000 5,421,000
Buildings 32,625,000 37,428,000
Leasehold improvements 132,378,000 140,301,000
Furniture, fixtures and equipment 178,116,000 183,681,000
------------ ------------
348,550,000 366,831,000
Less accumulated depreciation and amortization 133,213,000 119,691,000
------------ ------------
Net property and equipment 215,337,000 247,140,000
------------ ------------
Other 3,925,000 3,871,000
------------ ------------
$424,847,000 $461,879,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 30,452,000 $ 5,406,000
Other payables and accrued expenses 28,999,000 30,997,000
Borrowings under line of credit 4,230,000 -
------------ ------------
Total current liabilities 63,681,000 36,403,000
------------ ------------
Noncurrent liabilities:
Long-term debt 10,000,000 10,000,000
Other, including deferred income taxes of $1,873,000 and
$648,000 12,122,000 11,113,000
------------ ------------
Total noncurrent liabilities 22,122,000 21,113,000
------------ ------------
Liabilities subject to compromise under reorganization
proceedings (note 2) 219,600,000 213,142,000
------------ ------------
Stockholders' equity:
Common stock of $.01 par value per share:
Authorized 100,000,000 shares; issued and outstanding
53,953,007 shares at October 29, 1994 and 53,932,335
shares at January 29, 1994 540,000 539,000
Additional paid-in capital 71,135,000 70,644,000
Retained earnings 47,769,000 120,038,000
------------ ------------
Total stockholders' equity 119,444,000 191,221,000
------------ ------------
$424,847,000 $461,879,000
============ ============
<FN>
Note: The consolidated balance sheet at January 29, 1994 has been derived from the audited consolidated
financial statements at that date.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Page 5
MERRY-GO-ROUND ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
------------------------------------
October 29, 1994 October 30, 1993
---------------- ----------------
<S> <C> <C>
Operating activities:
Net loss $(72,269,000) $(39,066,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non cash reorganization items, including $14,625,000
for loss on disposal of property and equipment 27,504,000 -
Special charge (note 4) - 55,293,000
Depreciation and amortization 26,068,000 26,870,000
Deferred income taxes 665,000 (3,256,000)
Loss on disposal of property and equipment - 978,000
Amortization of restricted common stock 449,000 981,000
Change in operating assets and liabilities, net of effects
of acquisitions of store locations:
(Increase) decrease in:
Receivables (1,624,000) (732,000)
Merchandise inventories (96,525,000) (86,388,000)
Prepaid expenses (4,875,000) (1,846,000)
Refundable income taxes 7,344,000 (21,656,000)
Other assets (54,000) (51,000)
Increase (decrease) in:
Accounts payable, trade 25,046,000 18,757,000
Other payables and accrued expenses (4,173,000) (11,167,000)
Federal and state income taxes payable - (8,039,000)
Other noncurrent liabilities (216,000) 2,560,000
Operating payables subject to compromise under
reorganization proceedings (893,000) -
------------ ------------
Net cash used in operating activities (93,553,000) (66,762,000)
------------ ------------
Investing activities:
Property and equipment expenditures (11,809,000) (41,901,000)
Proceeds from sales of property and equipment 314,000 314,000
Acquisitions of store locations - (10,769,000)
------------ ------------
Net cash used in investing activities (11,495,000) (52,356,000)
------------ ------------
Financing activities:
Net borrowing under revolving credit arrangement 4,230,000 42,273,000
Borrowing under notes payable - 65,000,000
Repayment of notes payable - (15,000,000)
Principal payments on long-term debt - (428,000)
Proceeds from issuance of common stock 43,000 461,000
Dividends paid - (2,150,000)
------------ ------------
Net cash provided by financing activities 4,273,000 90,156,000
------------ ------------
Net decrease in cash and cash equivalents (100,775,000) (28,962,000)
Cash and cash equivalents at beginning of period 113,119,000 40,115,000
------------ ------------
Cash and cash equivalents at end of period $ 12,344,000 $ 11,153,000
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
Page 6
MERRY-GO-ROUND ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. REORGANIZATION AND BASIS OF REPORTING
-------------------------------------
Merry-Go-Round Enterprises, Inc. (the "Company"), a national specialty
retailer of contemporary fashions for young men and women, operated 1,230
stores in 43 states and Washington, D.C. at October 29, 1994.
As a result of certain events in the third and fourth quarters of fiscal
1994, on January 11, 1994, the Company and certain of its subsidiaries, filed
voluntary petitions for relief under Chapter 11 of Title 11 of the United
States Code ("Chapter 11")in the United States Bankruptcy Court for the
District of Maryland, Baltimore Division (the "Bankruptcy Court"). The
Company and its subsidiaries are presently operating their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and
intend to propose a plan of reorganization pursuant to Chapter 11. As
debtors-in-possession, the Company and its subsidiaries may not engage in
transactions outside of the ordinary course of business without approval of
the Bankruptcy Court.
Almost all of the Company's stores are located in enclosed regional
shopping malls and are leased. The geographic distribution of the retail
stores by regions of the United States was as follows: East North Central,
276 stores; East South Central, 59 stores; Mid-Atlantic, 212 stores; Mountain,
42 stores; New England, 86 stores; Pacific, 116 stores; South Atlantic, 247
stores; West North Central, 49 stores; and West South Central, 143 stores.
During the first nine months of fiscal 1995, the numbers of stores
opened, closed and converted to other concepts, were as follows:
<TABLE>
<CAPTION>
Open at Open at
January 29, Stores Stores Stores October 29,
1994 Opened Closed Converted 1994
------- ------ ------ --------- --------
Concept
- - -------
<S> <C> <C> <C> <C> <C>
Merry-Go-Round 517 1 (37) 10 491
DJ's 395 - (43) (30) 322
Chess King 417 1 (61) (61) 296
Cignal 80 - (4) 2 78
Club International 20 - (13) (1) 6
Boogies Diner 5 - (2) - 3
Fashion Outlets - - (46) 80 34
----- --- --- ---- -----
1,434 2 (206) - 1,230
----- --- --- ---- -----
</TABLE>
During the first quarter of fiscal 1995, the Company converted the
merchandising strategy for 101 store locations to offer prior season clearance
and "off-price" branded merchandise. Since conversion, 46 of these stores
have been closed and 21 have converted to other concepts.
<PAGE>
<PAGE>
Page 7
The Company's right to assume and reject leases under the U.S. Bankruptcy
Code currently expires January 31, 1995. The Company anticipates that it will
reject additional leases and close the related stores, although the number of
stores which would be affected is undetermined at this time.
Liabilities subject to compromise (see note 2) in the accompanying
consolidated balance sheets represent the Company's estimate of liabilities as
of October 29, 1994, subject to adjustment in the reorganization process.
Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on events that occurred, on or before
the petition date of January 11, 1994. The ultimate terms of settlement of
these claims will be determined in accordance with a plan of reorganization
confirmed by the Bankruptcy Court. Other liabilities may arise or be subject
to compromise as a result of rejection of executory contracts, including
leases, or the Bankruptcy Court's resolution of contingent and disputed
claims. The ultimate resolution of such liabilities will be addressed as part
of a plan of reorganization.
The accompanying consolidated financial statements have been presented on
the basis that the Company is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the Chapter 11 filing and circumstances relating
to this event, realization of assets and satisfaction of liabilities are
subject to uncertainty. A plan of reorganization could materially change the
amounts reported in the accompanying consolidated financial statements, which
do not reflect adjustments to the carrying values of assets and liabilities
which may be necessary as a consequence of a plan of reorganization. The
ability of the Company to continue as a going concern is dependent on, among
other things, confirmation of an acceptable plan of reorganization, future
profitable operations, compliance with the debtor-in-possession financing
agreement, and the ability to generate sufficient cash from operations and
financing sources to meet future obligations.
The consolidated financial statements included herein do not include all
the information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles. For further information, such as the significant accounting
policies followed by the Company, refer to the notes to consolidated financial
statements contained in the 1994 Annual Report.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation for the
interim periods have been included in the consolidated financial statements.
The results of operations for the period ended October 29, 1994, are not
necessarily indicative of the operating results to be expected for the full
year.
<PAGE>
<PAGE>
Page 8
2. LIABILITIES SUBJECT TO COMPROMISE
---------------------------------
Liabilities subject to compromise as of October 29, 1994 and January 29,
1994 consisted of:
<TABLE>
<CAPTION>
October 29, 1994 January 29, 1994
---------------- ----------------
<S> <C> <C>
Secured note payable $ 4,997,000 $ 4,997,000
Unsecured liabilities:
Accounts payable, trade 40,271,000 40,881,000
Other payables and accrued expenses 35,399,000 28,331,000
Revolving credit debt 44,520,000 44,520,000
Chess King acquisition debt 29,413,000 29,413,000
Institutional investor notes 65,000,000 65,000,000
------------ ------------
$219,600,000 $213,142,000
============ ============
</TABLE>
A plan of reorganization ultimately confirmed by the Bankruptcy Court may
materially change the amounts and terms of these prepetition liabilities.
The deadline for creditors to file proofs of claim against the Company in
Bankruptcy Court was October 14, 1994. The Company anticipates that it will
negotiate with creditors to reconcile these claims to the Company's financial
records. The additional liability arising from this reconciliation process,
if any, is not subject to reasonable estimation. As a result, no provision
has been recorded for these possible claims. The Company will recognize the
additional liability, if any, as the amounts become subject to reasonable
estimation.
Additional bankruptcy claims and prepetition liabilities may arise from
the termination of other contractual obligations and the settlement of
contingent and disputed claims. Consequently, the amounts included in the
consolidated balance sheet as liabilities subject to compromise may be subject
to further adjustment.
Included in other payables and accrued expenses above are claims by
landlords, which are permitted by the Bankruptcy Code, of approximately $9.0
million arising from the rejection of approximately 90 store leases. Of these
stores, 29 were leases acquired in the 1993 acquisition of Chess King and were
guaranteed by a subsidiary of Melville. Therefore, the related lessors may
have a claim against Melville for unpaid lease obligations and breach of
contract claims beyond the amounts permitted by the Bankruptcy Code. As part
of the purchase agreement, the Company has agreed to indemnify Melville
against any loss under its lease guarantees. As a result, Melville may assert
claims against the Company for amounts, if any, it is required to pay under
the lease guarantees.
If Melville is required to perform under its lease guarantees relating to
these rejected leases, the amount of any allowed claim against the Company in
Bankruptcy Court under the indemnification clause of the purchase agreement is
uncertain. As a result, the Company has recorded a liability subject to
<PAGE>
<PAGE>
Page 9
compromise in the amount of the maximum claim permitted under the Bankruptcy
Code and has not recorded any amount relating to the potential claims by
Melville which may arise under the indemnification clause of the purchase
agreement. In addition, since landlords are generally required to mitigate
losses under the rejected leases, the amount of their losses including the
portion of their losses which may represent a claim against Melville, cannot
be estimated at this time. The total lease commitments on the rejected Chess
King stores in excess of the recorded claims are approximately $6.1 million.
Additional amounts relating to these stores will be recorded, if
necessary, in the period in which, based on the legal status of Melville's
claim, it becomes probable that the Company will be required to reimburse
Melville for any amounts paid under the lease guarantees and those amounts can
be reasonably estimated. In the event claims arising from the Melville lease
guarantees are permitted in Bankruptcy Court, these claims will be prepetition
claims and will be subject to the payment terms dictated by a confirmed plan
of reorganization.
3. REORGANIZATION COSTS, NET
-------------------------
<TABLE>
Reorganization costs consisted of:
<CAPTION> Three Months Ended Nine Months Ended
October 29,1994 October 29, 1994
------------------ -----------------
<S> <C> <C>
Write-off of leasehold improvements
and fixtures associated with
closed stores $ - $ 14,625,000
Estimated lease rejection claims - 7,351,000
Professional fees 3,230,000 7,251,000
Loss from store operations related to
store closing sales 1,915,000 1,915,000
Other 1,432,000 3,598,000
Interest income (107,000) (869,000)
------------ ------------
$ 6,470,000 $ 33,871,000
============ ============
</TABLE>
4. SPECIAL CHARGE
--------------
In the quarter ended October 30, 1993, the Company recorded a special
charge of $55.3 million before the applicable income tax benefit. Of such
amount, approximately $54.8 million is included in cost of sales, buying and
occupancy expenses and the remaining $500,000 is included in selling and
administrative expenses. Net of the related income tax benefit of
approximately $20.2 million, the special charge was $35.1 million.
The special charge included the following items:
<TABLE>
<S> <C>
Inventory write-down $ 43,300,000
Write-off of leasehold improvements and fixtures 9,200,000
Provision for lease obligations 2,300,000
Other 500,000
-------------
$ 55,300,000
=============
</TABLE>
<PAGE>
<PAGE>
Page 10
5. INCOME TAX BENEFIT
------------------
The income tax benefit for the third quarter and first nine months of
fiscal 1995 reflect limitations applicable to net operating loss carrybacks
resulting from alternative minimum tax rules and the reduced realizability of
deferred tax assets.
<PAGE>
<PAGE>
Page 11
MERRY-GO-ROUND ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company is a national specialty retailer of contemporary fashions for
young men and women. At October 29, 1994, the Company operated 1,230 stores
in 43 states and Washington, D.C. The following discussion explains material
changes in the results of operations for the first nine months of fiscal years
1995 and 1994 and significant developments affecting financial condition since
the end of fiscal 1994.
CHAPTER 11 REORGANIZATION
- - -------------------------
On January 11, 1994, the Company and certain of its subsidiaries, filed
voluntary petitions for relief under Chapter 11 of Title 11 of the United
States Code in the United States Bankruptcy Court for the District of
Maryland, Baltimore Division.
The consolidated financial statements have been presented on the basis
that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
As a result of the Chapter 11 filing and circumstances relating to this event,
realization of assets and satisfaction of liabilities is subject to
uncertainty. A plan of reorganization could materially change the amounts
reported in the accompanying consolidated financial statements, which do not
reflect all adjustments to the carrying values of assets and liabilities which
may be necessary as a consequence of a plan of reorganization. The ability of
the Company to continue as a going concern is dependent on, among other
things, confirmation of an acceptable plan of reorganization, future
profitable operations, compliance with the debtor-in-possession financing
agreement and the ability to generate sufficient cash from operations and
financing sources to meet future obligations.
RESULTS OF OPERATIONS
- - ---------------------
Net sales for the third quarter of fiscal 1995 and 1994 were
approximately $199.1 million and $255.5 million, respectively, a decrease of
22.1%. Average sales per store, which are average sales per store for all
stores open during the period, decreased 8.1% while comparable store sales,
which are sales of stores which were open in both comparable periods,
decreased 14.5% in the third quarter of fiscal 1995.
The decrease in sales in the third quarter is the result of operating 190
fewer stores than in the comparable period for the prior year and decreased
customer traffic in the stores. The decrease in customer traffic in DJ's is
the result of slower acceptance of its revamped merchandise targeted to an
older, slightly more conservative customer. Sales have also been somewhat
hampered at the Company's Merry-Go-Round and Chess King concepts primarily as
a result of merchandise packages which included more styles and less depth
within certain styles than desireable. In addition, approximately $5.0
million in sales at closed stores, realized during store closing periods, were
classified, along with the related costs of sales and operating expenses as
reorganization costs.
<PAGE>
<PAGE>
Page 12
In November, 1994, the Company retained a new Chief Executive Officer and
Chief Operating Officer to lead its reorganization efforts. The new
management team has begun refining the focus of the Company's main concepts,
in particular DJ's. The DJ's concept will again target a younger, more
fashion oriented consumer, similar to its traditional customer. Management is
also refocusing the merchandise packages of Merry-Go-Round and Chess King to
include fewer styles with more selection within each style. While management
believes that increasing the depth of the selection in the Company's
merchandise packages and the effort to refocus DJ's should result in long-term
improvement in both sales and gross margins, the current efforts to refocus
the merchandise packages, which will include aggressive markdowns of current
merchandise, will put pressure on margins during the fourth quarter of fiscal
1995.
Net sales for the first nine months of fiscal 1995 and 1994 were $544.1
million and $655.8 million, respectively, a decrease of 17.0%. Average sales
per store decreased 18.6% while comparable store sales decreased 19.7% in the
first nine months of fiscal 1995. Sales decreased for the nine month period
due to the closing of 206 stores, the decreased customer traffic, the
continued impact of a highly promotional retail environment and the shift by
customers away from higher-priced, branded merchandise to lower-priced,
private label merchandise.
Net sales for November 1994 and 1993 were $65.2 million and $78.5
million, respectively. Average sales per store for November 1994 were even
with November 1993 while comparable store sales for November 1994 decreased 7%.
Costs of sales, buying and occupancy expenses decreased approximately
$100.0 million or 39.4% in the third quarter of fiscal 1995 compared to the
third quarter of fiscal 1994. As a percentage of sales, these costs decreased
to 77.4% from 99.5% for the third quarter of fiscal 1995 and 1994,
respectively, resulting in an increase in gross margin percentage to 22.6%
from 0.5% for the same periods. The reduction in costs of sales, buying and
occupancy expenses are a result of a $54.8 million special charge in the third
quarter of fiscal 1994 (see note 4 to the consolidated financial statements),
the operation of 190 fewer stores and lower occupancy expenses per store than
in the third quarter of fiscal 1994. The Company expects to continue to
experience lower occupancy costs in the future as a result of the rejection of
certain leases and the renegotiation of rents under certain other leases.
Excluding the effect of the special charge, costs of sales, buying and
occupancy as a percentage of sales remained even for the third quarter of
fiscal 1995 compared to the third quarter of fiscal 1994. For the first nine
months of fiscal 1995 costs of sales, buying and occupancy as a percentage of
net sales decreased to 80.7% from 85.1% in the same period last year,
primarily for the reasons described above.
Selling and administrative expenses decreased approximately $7.1 million
or 11.9% in the third quarter of fiscal 1995 compared to the third quarter of
fiscal 1994. Selling and administrative expenses for the first nine months of
fiscal 1995 decreased approximately $600,000 or 0.4% compared to the same
period in fiscal 1994. As a percentage of net sales, these costs increased to
26.3% in the third quarter of fiscal 1995 from 23.3% in the third quarter of
fiscal 1994 and to 28.4% in the first nine months of fiscal 1995 from 23.6% in
the same period last year. The decrease in selling and administrative
expenses in the third quarter of fiscal 1995 compared to the third quarter of
fiscal 1994 is the result of reduced sales volumes. As a percentage of sales,
<PAGE>
<PAGE>
Page 13
these costs have increased due to decreased leverage on fixed operating
expenses resulting from lower average sales per store. Management has
recently completed a comprehensive review of expenses and has begun to
implement an expense reduction program, including personnel reductions which
is expected to reduce selling and administrative expenses beginning in the
first quarter of fiscal 1996.
Interest expense was $503,000 and $2.7 million and interest income was
$17,000 and $24,000 for the third quarters of fiscal 1995 and 1994,
respectively. Interest expense was $1.2 million and $4.5 million and interest
income was $337,000 and $210,000 for the first nine months of fiscal 1995 and
1994, respectively. Under the Bankruptcy Code, prepetition liabilities do not
continue to accrue interest unless the debt is clearly collateralized by
assets having current fair market values in excess of the amount of the debt.
Therefore, interest has not been accrued on any of the Company's prepetition
obligations except for a $10 million note payable secured by the headquarters
and distribution center facility. As a result, interest expense in fiscal
1995 has decreased. In addition, interest income in the amount of
approximately $107,000 in the third quarter and $869,000 in the first nine
months of fiscal 1995, has been classified as a reduction in reorganization
costs in accordance with AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code".
Reorganization costs, which were approximately $6.5 million in the third
quarter and $33.9 million in the first nine months of fiscal 1995, include all
costs associated with the reorganization under Chapter 11 such as, the
write-off of leasehold improvements and fixtures associated with
closed stores, estimated lease rejection claims, professional fees and certain
other expenses. See note 3 to the consolidated financial statements for the
detail components of reorganization costs.
Income tax benefit was approximately $4.1 million and $11.8 million for
the third quarter and first nine months of fiscal 1995 representing an
effective tax rate of 28.5% and 14%, respectively, compared to approximately
$22.1 million and $22.5 million in the third quarter and first nine months of
fiscal 1994 representing an effective tax rate of 36.5% in both periods. The
income tax benefit reflects limitations on the use of net operating loss
carrybacks resulting from alternative minimum tax rules and reduced
realizability of deferred tax assets.
The net loss was approximately $10.3 million and $72.3 million compared
to $38.5 million and $39.1 million in the third quarter and first nine
months of fiscal 1995 and 1994, respectively. The decrease in net earnings
were the result of the decreases in both total sales and average sales per
store. The net loss was also adversely impacted by the costs associated with
the Chapter 11 process and the limitations on the tax benefit. Earnings
before interest, income taxes, depreciation, amortization and reorganization
costs (EBITDA), a supplemental measure of operating performance generally
reported by debtors-in-possession, were approximately $524,000 for the third
quarter of fiscal 1995 compared to $4.1 million for the third quarter of
fiscal 1994. EBITDA for the first nine months of fiscal 1995 were
approximately negative $21.9 million compared to positive $31.1 million in the
same period last year. EBITDA for fiscal 1994 exclude the effects of the
$55.3 million charge in the third quarter and the reversal of a $3.1 million
incentive compensation accrual in the first quarter.
<PAGE>
<PAGE>
Page 14
The results of operations for the three and nine month periods ended
October 29, 1994 are not necessarily indicative of the operating results to
be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
At October 29, 1994, the Company's working capital was approximately
$141.9 million and its current ratio was 3.2. Net cash used in operating
activities was approximately $93.5 million for the first nine months of fiscal
1995, compared to approximately $66.8 million for the first nine months of
fiscal 1994. The increase in net cash used in operating activities is due
primarily to the net loss for the first nine months of fiscal 1995.
Property and equipment expenditures for the first nine months of fiscal
1995 were approximately $11.8 million compared to $41.9 million in the same
period last year. Property and equipment expenditures were principally for
store remodelings.
The Company currently expects to open 4 new stores and remodel 11 stores
during the remainder of fiscal 1995 at a cost of approximately $2.2 million.
In connection with the Chapter 11 filing, the Company entered into and
the Bankruptcy Court approved an agreement with certain lenders and The CIT
Group/Business Credit, Inc., as agent, to provide unsecured
debtor-in-possession financing in the form of a $125 million line-of-credit.
The agreement provides for cash borrowings and the issuance of up to $90
million in letters of credit which, in the aggregate, cannot exceed the lower
of a "borrowing base", as defined, or $125 million. Cash borrowings bear
interest at either a banks prime rate plus 1% or LIBOR plus 2-1/2%, at the
option of the Company. The Company is required to meet minimum levels of
earnings before interest, income taxes, depreciation, amortization and
reorganization costs, maintain specified inventory levels, limit its capital
expenditures and may not pay dividends on its common stock over the term of
the agreement. The agreement will terminate on the earlier of April 21, 1996
or the date of consummation of a plan of reorganization.
The Company believes that working capital at October 29, 1994,
anticipated net cash provided by operating activities and its
debtor-in-possession financing should enable the Company to meet its liquidity
requirements for the remainder of fiscal 1995. However, in view of the
Chapter 11 reorganization, there is uncertainty with respect to the Company's
liquidity.
The foregoing discussion is designed to comply with the quarterly
reporting standards and should be read in conjunction with the more detailed
discussion in the 1994 Annual Report.
PART II: OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K
- - --------------------------------------------
(a) Exhibits - none
27 Financial Data Schedule (filed by EDGAR)
(b) Reports on Form 8-K - none
<PAGE>
<PAGE>
Page 15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRY-GO-ROUND ENTERPRISES, INC.
DATE December 13, 1994 /s/ Isaac Kaufman
------------------- -----------------------------------
Isaac Kaufman
Executive Vice President, Secretary and
Treasurer (Principal Financial Officer)
DATE December 13, 1994 /s/ Frank C. Peters
------------------- -----------------------------------
Frank C. Peters
Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MERRY-GO-ROUND ENTERPRISES, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE
NINE MONTHS ENDED OCTOBER 29, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-END> OCT-29-1994
<CASH> 12,344
<SECURITIES> 0
<RECEIVABLES> 5,211
<ALLOWANCES> 0
<INVENTORY> 168,053
<CURRENT-ASSETS> 205,585
<PP&E> 215,337
<DEPRECIATION> 26,068
<TOTAL-ASSETS> 424,847
<CURRENT-LIABILITIES> 63,681
<BONDS> 0
<COMMON> 540
0
0
<OTHER-SE> 118,904
<TOTAL-LIABILITY-AND-EQUITY> 424,847
<SALES> 544,075
<TOTAL-REVENUES> 544,075
<CGS> 439,017
<TOTAL-COSTS> 593,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 911
<INCOME-PRETAX> (84,034)
<INCOME-TAX> (11,765)
<INCOME-CONTINUING> (84,034)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,269)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
