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 July 30, 1994
-------------
OR
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 the 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 September 9, 1994:
53,948,283
<PAGE>
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Page 2
MERRY-GO-ROUND ENTERPRISES, INC.
INDEX
Part I - Financial Information
Consolidated Statements of Operations (Unaudited) for the
Six Months Ended July 30, 1994 and July 31, 1993. 3
Consolidated Balance Sheets as of July 30, 1994
(Unaudited) and January 29, 1994 4
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended July 30, 1994 and July 31, 1993. 5
Notes to Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
Part II- Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<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 Six Months Ended
------------------------------- -----------------------------
July 30, 1994 July 31, 1993 July 30, 1994 July 31, 1993
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $175,969,000 $214,412,000 $344,985,000 $400,339,000
------------ ------------ ------------ ------------
Costs and expenses:
Costs of sales, buying
and occupancy 145,857,000 163,567,000 284,883,000 303,933,000
Selling and administrative 51,941,000 53,513,000 101,893,000 95,443,000
Interest expense, net 357,000 1,300,000 425,000 1,820,000
------------ ------------ ------------- -------------
Total 198,155,000 218,380,000 387,201,000 401,196,000
------------ ------------ ------------- -------------
Earnings (loss) before reorganization
costs and income tax (benefit)
expense (22,186,000) (3,968,000) (42,216,000) (857,000)
Reorganization costs, net (note 3) 20,392,000 - 27,401,000 -
------------ ------------ ------------- -------------
Earnings (loss) before income tax
(benefit) expense (42,578,000) (3,968,000) (69,617,000) (857,000)
Income tax (benefit) expense (note 4) (4,684,000) (1,449,000) (7,658,000) (313,000)
------------ ------------ ------------- -------------
Net earnings (loss) $(37,894,000) $ (2,519,000) $(61,959,000) $ (544,000)
============ ============ ============= =============
Earnings (loss) per share of $ (.70) $ (.05) $ (1.15) $ (.01)
common stock ============ ============ ============= =============
Weighted average number of
shares outstanding 53,938,973 53,911,748 53,935,654 53,896,339
============ ============ ============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 30, 1994 January 29, 1994
--------------- ----------------
(Unaudited) (Note)
ASSETS
------
<S>
Current assets: <C> <C>
Cash and cash equivalents $ 57,580,000 $113,119,000
Receivables 4,502,000 3,916,000
Merchandise inventories 128,705,000 71,528,000
Prepaid expenses and other, including deferred
income taxes of $3,557,000 and $2,323,000 13,905,000 4,279,000
Refundable income taxes 7,283,000 18,026,000
------------ ------------
Total current assets 211,975,000 210,868,000
------------ ------------
Property and equipment, at cost:
Land and land improvements 5,421,000 5,421,000
Buildings 32,612,000 37,428,000
Leasehold improvements 130,995,000 140,301,000
Furniture, fixtures and equipment 174,245,000 183,681,000
------------ ------------
343,273,000 366,831,000
Less accumulated depreciation and amortization 125,065,000 119,691,000
------------ ------------
Net property and equipment 218,208,000 247,140,000
------------ ------------
Other 3,815,000 3,871,000
------------ ------------
$433,998,000 $461,879,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable, trade $ 30,787,000 $ 5,406,000
Other payables and accrued expenses 29,687,000 30,997,000
Total current liabilities ------------ ------------
60,474,000 36,403,000
------------ ------------
Noncurrent liabilities:
Long-term debt 10,000,000 10,000,000
Other, including deferred income taxes of $3,382,000 and $648,000 14,313,000 11,113,000
----------- ------------
Total noncurrent liabilities 24,313,000 21,113,000
----------- ------------
Liabilities subject to compromise under reorganization proceedings 219,623,000 213,142,000
(note 2) ----------- ------------
Stockholders' equity:
Common stock of $.01 par value per share:
Authorized 100,000,000 shares; issued and outstanding 53,948,283
shares at July 30, 1994 and 53,932,335 shares at January 29, 1994 540,000 539,000
Additional paid-in capital 70,970,000 70,644,000
Retained earnings 58,078,000 120,038,000
------------ ------------
Total stockholders' equity 129,588,000 191,221,000
------------ ------------
$433,998,000 $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
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Page 5
<TABLE>
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
-------------------------------
July 30, 1994 July 31, 1993
<S> <C> <C>
- - -------------- -------------
Operating activities:
Net earnings (loss) ($61,959,000) $ (544,000)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Noncash reorganization items, including $14,625,000 provision for
loss on disposal of property and equipment 25,395,000
Depreciation and amortization 18,083,000 16,847,000
Provision for deferred income taxes 1,500,000 1,325,000
Loss on disposal of property and equipment - 1,083,000
Amortization of restricted common stock 284,000 654,000
Change in operating assets and liabilities, net of effects
of store acquisition:
(Increase) decrease in:
Receivables (829,000) (699,000)
Merchandise inventories (57,177,000) (80,461,000)
Prepaid expenses and other (8,392,000) (3,776,000)
Refundable income taxes 10,743,000
Other assets (9,000) (151,000)
Increase (decrease) in:
Accounts payable, trade 25,381,000 50,164,000
Other payables and accrued expenses (3,400,000) (7,786,000)
Federal and state income taxes payable - (8,551,000)
Other noncurrent liabilities 466,000 1,646,000
Operating payables subject to compromise under reorganization plan (856) --
------------ -------------
Net cash used in operating activities (50,770,000) (30,249,000)
------------ -------------
Investing activities:
Property and equipment expenditures (6,627,000) (30,675,000)
Proceeds from sales of property and equipment 314,000 -
Acquisitions of store locations - (10,769,000)
------------ ------------
Net cash used in investing activities (6,313,000) (41,444,000)
------------ ------------
Financing activities:
Net borrowings under revolving credit agreement 1,502,000 48,034,000
Principal payments on long-term debt - (322,000)
Proceeds from issuance of common stock 42,000 382,000
Dividends paid - (1,434,000)
------------ ------------
Net cash provided by financing activities 1,544,000 46,660,000
------------ ------------
Net decrease in cash and cash equivalents (55,539,000) (25,033,000)
Cash and cash equivalents at beginning of period 113,119,000 40,115,000
------------ ------------
Cash and cash equivalents at end of period $ 57,580,000 $ 15,082,000
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
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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 1,314
stores in 44 states and Washington, D.C. at July 30, 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 ("Chapter 11") of Title 11 of
the United States Code 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,
293 stores; East South Central, 63 stores; Mid-Atlantic, 226 stores; Mountain,
44 stores; New England, 88 stores; Pacific, 125 stores; South Atlantic, 269
stores; West North Central, 53 stores; and West South Central, 153 stores.
During the first six 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 July 30,
1994 Opened Closed Converted, Net 1994
------- ------ ------ -------------- --------
Concept
- - -------
<S> <C> <C> <C> <C> <C>
Merry-Go-Round 517 - (21) 10 506
Dejaiz/Attivo 395 - (29) (20) 346
Chess King 417 5 (42) (92) 288
Cignal 80 - (3) 2 79
Club International 20 - (4) - 16
Boogies Diner 5 - (1) - 4
Fashion Outlets - - (25) 100 75
----- --- --- ---- -----
1,434 5 (125) - 1,314
----- --- --- ---- -----
</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, 25 of these stores
have been closed.
In August and the first two weeks of September 1994, the Company closed
33 store locations. In return for an extension through January 31, 1995, of
its time to assume or reject leases under the Chapter 11 proceedings, which
otherwise would have expired on August 31, 1994, the Company agreed to notify
certain landlords by September 8, 1994, of stores to be closed by September
18, 1994, and reject the related leases. Any stores leased by these landlords
not rejected in accordance with this agreement must remain open through
December 31, 1994, except in the event of a natural lease expiration. The
Company plans, pursuant to this agreement, to close 28 additional stores on or
before September 17, 1994. A portion of the stores leased by the Company are
unaffected by this agreement. After December 31, 1994, the Company's right to
reject real estate leases as permitted under Chapter 11 will be fully restored
as to all stores and will remain in effect through January 31, 1995. The
Company anticipates that it may reject additional leases and close the related
stores, although the number of stores which would be affected is undetermined
at this time.
<PAGE>
<PAGE>
Page 7
Liabilities subject to compromise (see note 2) in the accompanying
consolidated balance sheets represent the Company's estimate of liabilities as
of July 30, 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 is
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 July 30, 1994, are not
necessarily indicative of the operating results to be expected for the full
year.
2. LIABILITIES SUBJECT TO COMPROMISE
---------------------------------
Liabilities subject to compromise as of July 30, 1994 and January 29,
1994 consisted of:
<TABLE> July 30, 1994 January 29, 1994
-------------- ----------------
<CAPTION>
<S> <C> <C>
Secured note payable $ 4,997,000 $ 4,997,000
Unsecured liabilities:
Accounts payable, trade 40,181,000 40,881,000
Other payables and accrued expenses 35,512,000 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
------------- ------------
$219,623,000 $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.
<PAGE>
<PAGE>
Page 8
The Company anticipates that it will negotiate with creditors to
reconcile claims filed with the Bankruptcy Court 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 sheets as liabilities subject to compromise may be
subject to further adjustment.
Included in other payables and accrued expenses above are claims by
landlords of approximately $8.9 million arising from the rejection of
approximately 88 store leases as permitted under the Bankruptcy Code. Of
these stores, 26 were leases acquired in the 1993 acquisition of Chess King
and were guaranteed by a subsidiary of Melville. Therefore, the lessors of
these leases 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
compromise in the amount of the maximum claim permitted by the landlord 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 $4.6 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 is 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>
Three Months Ended Six Months Ended
July 30, 1994 July 30, 1994
------------------ ----------------
<CAPTION>
<S> <C> <C>
Reorganization costs consisted of:
Write-off of leasehold improvements
and fixtures associated with
closed stores $ 11,903,000 $ 14,625,000
Estimated lease rejection claims 5,127,000 7,351,000
Professional fees 1,821,000 4,021,000
Other 1,922,000 2,166,000
Interest income (381,000) (762,000)
---------- ----------
$ 20,392,000 $ 27,401,000
========== ==========
</TABLE>
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Page 9
4. INCOME TAX BENEFIT
------------------
The income tax benefit for the second quarter and first six months of
fiscal 1995 reflects limitations applicable to net operating loss carrybacks
resulting from alternative minimum tax rules and the reduced realizability of
deferred tax assets.
<PAGE>
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Page 10
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 July 30, 1994, the Company operated 1,314 stores in
44 states and Washington, D.C. The following discussion explains material
changes in the results of operations for the first six 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 two of its subsidiaries, MGR
Distribution Corp. and MGRR, Inc., 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 second quarter of fiscal 1995 and 1994 were
approximately $176.0 million and $214.4 million, respectively, a decrease of
17.9%. Average sales per store (average sales per store for all stores open
during the period), decreased 14.6% while comparable store sales (sales of
stores which were open in both comparable periods), decreased 19.7% in the
second quarter of fiscal 1995. Net sales for the first six month of fiscal
1995 and 1994 were $345.0 million and $400.3 million, respectively, a decrease
of 13.8%. Average sales per store decreased 25.0% while comparable store
sales decreased 22.8% in the first six months of fiscal 1995. The decrease in
sales in the second quarter is the result of lower than desired inventory
levels which were due to the continued impact of delays by vendors early in
the quarter in accepting and/or beginning production of spring merchandise
orders and of decreased customer traffic in the DJ's/Attivo concept. The
decline in customer traffic in the DJ's/Attivo concept is primarily the result
of the major change in the merchandise package carried in these stores.
Previously, the DJ's/Attivo merchandise package was targeted at trendy fashion
forward young men. As part of the Company's reorganization, the focus has
been moved toward a slightly older, slightly more conservative consumer. The
new package has not yet gained wide acceptance in the market due to the
significance of the change and the short time the package has been in the
stores. Sales decreased for the six month period due to these factors as well
as decreased customer traffic in the Company's stores in the first quarter of
fiscal 1995, the closing of 125 stores and the continued impact of a highly
promotional retail environment and shift by customers away from higher-priced
branded merchandise to lower-priced private label merchandise. Toward the end
of the second quarter, the Company experienced delays in receiving certain
international shipments. The resulting inventory levels, which were lower
than expected, have continued to have an adverse impact on the beginning of
the third quarter. The Company believes that the decreased customer traffic
in the DJ's/Attivo concept also will continue to have an adverse impact on
sales through the third and fourth quarters. In the second quarter of fiscal
1994 comparable store sales decreased 6.7% due to a number of factors,
including the effects of continuing weakness in consumer confidence and
spending patterns, the absence of a clear fashion trend and a shift by the
Company's traditional customer base toward lower priced basic fashion
merchandise.
Net sales for August 1994 and 1993 were $76.3 million and $93.5 million,
respectively. Average sales per store for August, 1994 decreased 8% while
comparable store sales for August, 1994 decreased 13%.
<PAGE>
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Page 11
Costs of sales, buying and occupancy expenses decreased approximately
$17.7 million or 10.8% in the second quarter of fiscal 1995 compared to the
second quarter of fiscal 1994. These costs decreased approximately $19.1
million or 6.3% in the first six months of fiscal 1995. As a percentage of
net sales, these costs increased to 82.9% in the second quarter of fiscal
1995 from 76.3% in the second quarter of fiscal 1994 and to 82.6% in the first
six months of fiscal 1995 from 75.9% in the first six months of fiscal 1994.
These increases are due primarily to decreased leverage on fixed occupancy
costs resulting from the decrease in sales per square foot to approximately
$50.00 in the second quarter of fiscal 1995 from approximately $58.00 in the
second quarter of fiscal 1994.
Selling and administrative expenses decreased approximately $1.6 million
or 2.9% in the second quarter of fiscal 1995 compared to the second quarter of
fiscal 1994. These costs increased approximately $6.5 million or 6.8% in the
first six months of fiscal 1995. As a percentage of net sales, these costs
increased to 29.5% in the second quarter of fiscal 1995 from 25.0% in the
second quarter of fiscal 1994 and to 29.5% in the first six months of fiscal
1995 from 23.8% in the same period last year. The decrease in selling and
administrative expenses in the second quarter of fiscal 1995 compared to the
second quarter of fiscal 1994 is the result of reduced sales volumes. As a
percentage of sales, these costs have increased due to decreased leverage on
fixed operating expenses resulting from lower average sales. In addition,
selling and administrative expenses for the first six months of the year have
increased due to the increase in the number of stores operating during the
period, primarily arising from the Chess King acquisition in May, 1993.
Interest expense was $423,000 and $1,309,000 and interest income was
$66,000 and $9,000 for the second quarters of fiscal 1995 and 1994,
respectively. Interest expense was $745,000 and $2,005,000 and interest
income was $320,000 and $185,000 for the first six 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 Company's
headquarters and distribution center facility. As a result, interest expense
in fiscal 1995 has decreased. In addition, interest income in the amount of
approximately $381,000 in the second quarter and $762,000 in the first six
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".
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, 25 of these stores
have been closed.
In August and the first two weeks of September 1994, the Company closed
33 store locations. In return for an extension through January 31, 1995, of
its time to assume or reject leases under the Chapter 11 proceedings, which
otherwise would have expired on August 31, 1994, the Company agreed to notify
certain landlords by September 8, 1994, of stores to be closed by September
18, 1994, and reject the related leases. Any stores leased by these landlords
not rejected in accordance with this agreement must remain open through
December 31, 1994, except in the event of a natural lease expiration. The
Company plans, pursuant to this agreement, to close 28 additional stores on or
before September 17, 1994. A portion of the stores leased by the Company are
unaffected by this agreement. After December 31, 1994, the Company's right to
reject real estate leases as permitted under Chapter 11 will be fully restored
as to all stores and will remain in effect through January 31, 1995. The
Company anticipates that it may reject additional leases and close the related
stores, although the number of stores which would be affected is undetermined
at this time.
Reorganization costs, which were approximately $20.4 million in the
second quarter and $27.4 million in the first six 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 $4.7 million and $7.7 million for
the second quarter and first six months of fiscal 1995 representing an
effective tax rate of 11% compared to approximately $1.4 million and $313,000
in the second quarter and first six months of fiscal 1994 representing an
effective tax rate of 36.5%. The income tax benefit reflects limitations on
net operating loss carrybacks resulting from alternative minimum tax rules and
reduced realizability of deferred tax assets.
<PAGE>
<PAGE>
Page 12
The net loss was approximately $37.9 million and $62.0 million compared
to $2.5 million and $544,000 in the second quarter and first six months of
fiscal 1995 and 1994, respectively. Earnings before interest, income taxes,
depreciation, amortization and reorganization costs (EBITDA), an alternative
measure of operating performance generally reported by debtors-in-possession,
were approximately negative $12.8 million for the second quarter of fiscal
1995 compared to a positive $6.4 million for the second quarter of fiscal
1994. EBITDA for the first six months of fiscal 1995 was approximately
negative $23.7 million compared to positive $17.8 million in the same period
last year. The decrease in net earnings and EBITDA were the result of the
decreases in both total and same store sales. The net loss was also adversely
impacted by the costs associated with the Chapter 11 process and the
limitations on the tax benefit.
The results of operations for the three and six month periods ended July
30, 1994 are not necessarily indicative of the operating results to be
expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
At July 30, 1994, the Company's working capital was approximately $151.5
million and its current ratio was 3.5. Net cash used in operating activities
was approximately $50.8 million for the first six months of fiscal 1995,
compared to approximately $30.2 million for the first six months of fiscal
1994.
The increase in net cash used in operating activities is due primarily to
an increase in the net loss for the first six months of fiscal 1995, partially
offset by a smaller increase in inventory levels than during the first six
months of fiscal 1994.
Property and equipment expenditures for the first six months of fiscal
1995 were approximately $6.6 million compared to $30.7 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 expand and remodel
20 stores during the remainder of fiscal 1995 at a cost of approximately $7.2
million. In addition, the Company plans to spend an additional $3.3 million
on other capital projects.
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, and 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 July 30, 1994, anticipated
net cash provided by operating activities and its debtor-in-possession
financing should enable the Company to meet its liquidity requirements during
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.
<PAGE>
<PAGE>
Page 13
Item 6. Exhibits and Reports on Form 8-K
- - --------------------------------------------
(a) Exhibits
10(z) Third Amendment to Revolving Credit Agreement
27 Financial Data Schedule (filed by EDGAR)
(b) Reports on Form 8-K - none
<PAGE>
<PAGE>
Page 14
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 September 13, 1994 /s/ Isaac Kaufman
------------------ --------------------------------------
Isaac Kaufman
Executive Vice President, Secretary and
Treasurer (Principal Financial Officer)
DATE September 13, 1994 /s/ Frank C. Peters
------------------ --------------------------------------
Frank C. Peters
Vice President and Controller
(Principal Accounting Officer)
<PAGE> 1
THIRD AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
Third Amendment, dated as of August 1, 1994, to the
Revolving Credit Agreement, dated as of January 14, 1994, as
amended (as so amended, the "Credit Agreement"), among
MERRY-GO-ROUND ENTERPRISES, INC., a Maryland corporation
("MGRE"), MGR DISTRIBUTION CORPORATION, a Maryland corporation
("MGRD", and together with MGRE, collectively, the "Borrowers"
and individually, a "Borrower"), MGRR, INC., a Delaware
corporation (the "Guarantor"), the financial institutions from
time to time party thereto (collectively, the "Lenders" and
individually, a "Lender"), and THE CIT GROUP/BUSINESS CREDIT,
INC. ("CIT"), as agent for the Lenders (in such capacity, the
"Agent").
The Borrowers, the Guarantor and the Lenders desire to
establish new financial covenants in the Credit Agreement with
respect to Cumulative FIFO EBITDA and minimum and maximum
amounts of Inventory on the terms and conditions hereinafter
set forth. Accordingly, the Borrowers, the Guarantor, the
Agent and the Lenders hereby agree as follows:
1. Definitions. All capitalized terms used herein
and not otherwise defined herein are used as defined in the
Credit Agreement.
2. FIFO EBITDA. The definition of the term "FIFO
EBITDA" in Section 1.01 of the Credit Agreement is hereby
amended by adding the following before the period at the end of
such definition:
"provided, that for purposes of this Agreement, FIFO
EBITDA shall be reduced at the end of each fiscal year
of MGRE by the amount agreed upon in writing among the
Borrowers and the Lenders."
3. Cumulative FIFO EBITDA. Section 9.02 of the
Credit Agreement is hereby amended in its entirety to read as
follows:
"9.02 Cumulative FIFO EBITDA. The Borrowers
shall not permit Cumulative FIFO EBITDA for the fiscal
months listed below to be less than the amount
specified opposite each such fiscal month:
<TABLE>
<CAPTION>
Month Ending FIFO EBITDA
<S> <C>
February 1994 ($ 6,619,000)
March 1994 ($ 8,421,000)<PAGE>
<PAGE> 2
<S> <C>
April 1994 ($11,771,000)
May 1994 ($19,104,000)
June 1994 ($22,790,000)
July 1994 ($28,359,000)
August 1994 ($23,549,000)
September 1994 ($21,220,000)
October 1994 ($23,662,000)
November 1994 ($21,143,000)
December 1994 $10,221,000
January 1995 $ 384,000
February 1995 ($ 3,123,000)
March 1995 ($ 4,845,000)
April 1995 ($ 1,552,000)
May 1995 $ 50,000
June 1995 $ 2,012,000
July 1995 $ 3,972,000
August 1995 $ 6,393,000
September 1995 $ 8,074,000
October 1995 $ 9,015,000
November 1995 $10,831,000
December 1995 $16,557,000
January 1996 $16,727,000"
(and thereafter)
</TABLE>
4. Maintenance of Inventory. Section 9.16 of the
Credit Agreement is hereby amended in its entirety to read as
follows:
"9.16 Maintenance of Inventory. The Borrowers
shall not permit the aggregate amount of their
Inventory (valued at Book Value) at the end of each
fiscal month set forth below to be less than or more
than the amounts specified opposite each such month
set forth below:
<TABLE>
<CAPTION>
Fiscal Month Minimum Amount Maximum Amount
<S> <C> <C>
February 1994 $ 56,116,000 $ 84,174,000
March 1994 $ 72,810,000 $109,214,000
April 1994 $ 95,787,000 $143,681,000
May 1994 $ 92,988,000 $125,808,000
June 1994 $ 94,194,000 $127,440,000
July 1994 $118,985,000 $160,979,000
August 1994 $117,058,000 $158,372,000
September 1994 $109,838,000 $148,604,000
October 1994 $122,740,000 $166,060,000
November 1994 $132,537,000 $179,315,000
December 1994 $ 81,940,000 $110,860,000
January 1995 $ 76,013,000 $102,841,000
February 1995 $ 72,513,000 $ 98,105,000
March 1995 $ 79,774,000 $107,930,000
April 1995 $ 89,718,000 $121,384,000
<PAGE>
<PAGE> 3
<S> <C> <C>
May 1995 $ 99,517,000 $134,641,000
June 1995 $100,374,000 $135,800,000
July 1995 $123,021,000 $166,440,000
August 1995 $121,820,000 $164,816,000
September 1995 $114,446,000 $154,838,000
October 1995 $127,520,000 $172,528,000
November 1995 $137,126,000 $185,524,000
December 1995 $ 84,967,000 $114,955,000
January 1996 $ 78,011,000 $105,545,000
February 1996 $ 83,449,000 $125,173,000
March 1996 $ 99,472,000 $149,208,000
April 1996 $100,813,000 $151,219,000
</TABLE>
, provided that the Borrowers and the Agent shall
negotiate in good faith to determine an adjustment to
the minimum amount and maximum amount of Inventory set
forth above in connection with the store closings
permitted by Section 9.09(b)(i) and (iii) hereof."
5. Conditions to Effectiveness. This Amendment
shall become effective only upon satisfaction in full of the
following conditions precedent (the first date upon which all
such conditions have been satisfied being herein called the
"Effective Date");
(i) The Agent shall have received counterparts
of this Amendment which bear the signatures of the Borrowers,
the Guarantor and the Lenders.
(ii) The Borrowers shall have paid to the Agent,
for the account of each Lender in accordance with such Lender's
Pro Rata Share, a non-refundable amendment fee of $100,000.
The Borrowers and the Lenders hereby authorize the Agent to
charge the Borrower's Account on the Effective Date in the
amount of such amendment fee.
(iii) The Bankruptcy Court shall have approved an
order, substantially in the form of Exhibit A attached hereto.
(iv) All legal matters incident to this Amendment
shall be satisfactory to the Agent and its counsel.
6. Representations and Warranties. Each of the
Borrowers and the Guarantor represents and warrants to the
Lenders as follows:
(a) The execution, delivery and performance by
the Borrowers and the Guarantor of this Amendment and the
performance by the Borrowers and the Guarantor of the Credit
Agreement as amended hereby (i) have been duly authorized by
all necessary corporate action and (ii) do not and will not
contravene their organizational documents or any applicable law.<PAGE>
<PAGE> 4
(b) This Amendment and the Credit Agreement, as
amended hereby, constitute the legal, valid and binding
obligations of the Borrowers and the Guarantor, enforceable
against the Borrowers and the Guarantor in accordance with
their terms.
(c) The representations and warranties contained
in Article VI of the Credit Agreement are correct on and as of
the Effective Date as though made on and as of the Effective
Date (except to the extent such representations and warranties
expressly relate to an earlier date), and no Event of Default
or Potential Default, has occurred and is continuing on and as
of the Effective Date.
7. Waivers and Consents. (a) Pursuant to the
request of the Borrowers and the Guarantor and in accordance
with Section ll.03 of the Credit Agreement, and subject to the
satisfaction of the conditions to effectiveness set forth in
Section 5 of this Amendment, the Lenders and the Agent hereby
consent to, and waive any Event of a Default that would
otherwise arise under Section 10.01 of the Credit Agreement
from, any noncompliance by the Borrowers with the provisions of
(i) Section 8.08 of the Credit Agreement by reason of the
failure of the Borrowers and the Guarantor to enter into
Collection Account Agreements, the Restricted Account Agreement
and similar agreements required under Section 8.08, provided
that each of the requirements of Section 8.08 are fully
satisfied by the Borrowers and the Guarantor on or before
August 15, 1994 subject to any approval of the Bankruptcy Court
that may be required and (ii) Section 9.02 of the Credit
Agreement by reason of the failure of the Borrowers to maintain
Cumulative FIFO EBITDA of not less than ($11,618,000) for the
May 1994 fiscal month of the Borrowers.
(b) The waivers and consents in this Section 7
shall be effective only in this specific instance and for the
specific purposes set forth herein and do not allow for any
other or further departure from the terms and conditions of the
Credit Agreement or any other Related Document, which terms and
conditions shall continue in full force and effect.
8. Continued Effectiveness of Credit Agreement.
Each of the Borrowers and the Guarantor hereby (i) confirms and
agrees that each Related Document to which it is a party is,
and shall continue to be, in full force and effect and is
hereby ratified and confirmed in all respects except that on
and after the Effective Date of this Amendment all references
in any such Related Document to "the Credit Agreement",
"thereto", "thereof", "thereunder" or words of like import
referring to the Credit Agreement shall mean the Credit
Agreement as amended by this Amendment, and (ii) confirms and<PAGE>
<PAGE> 5
agrees that to the extent that any such Related Document
purports to assign or pledge to the Agent, or to grant to the
Agent a security interest in or Lien on, any collateral as
security for the Obligations of the Borrowers or the Guarantor
from time to time existing in respect of the Credit Agreement
and the Related Documents, such pledge, assignment and/or grant
of the security interest or Lien is hereby ratified and
confirmed in all respects.
9. Consent to LaSalle Business Credit, Inc., as a
New Lender. LaSalle National Bank desires to assign all of its
interests, rights and obligations under the Credit Agreement to
its affiliate, LaSalle Business Credit, Inc. On or prior to
the Effective Date, LaSalle National Bank and LaSalle Business
Credit, Inc. will execute and deliver to the Agent an
Assignment and Acceptance in the form of Exhibit F to the
Credit Agreement, with the blanks appropriately filled in. The
Borrowers and the Guarantor hereby consent to the assignment by
LaSalle National Bank to LaSalle Business Credit, Inc.
10. Miscellaneous.
a. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate
counterparts, each of which shall be deemed to be an original,
but all of which taken together shall constitute one and the
same agreement.
b. Section and paragraph headings herein are
included for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose.
c. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York.
d. The Borrowers will pay on demand all fees,
costs and expenses of the Agent in connection with the
execution and delivery of this Amendment, including, without
limitation, the reasonable fees, disbursements and other
charges of Schulte Roth & Zabel, counsel to the Agent.<PAGE>
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused
this Amendment to be executed by their respective officers
thereunto duly authorized as of the day and year first above
written.
BORROWERS:
MERRY-GO-ROUND ENTERPRISES, INC.,
as debtor and as debtor-in-
possession
By:/s/ Isaac Kaufman
Name:
Title:
MGR DISTRIBUTION CORPORATION, as
debtor and as debtor-in-possession
By:/s/ Isaac Kaufman
Name:
Title:
GUARANTOR:
MGRR, INC., as debtor and as
debtor-in-possession
By:/s/ Isaac Kaufman
Name:
Title:
AGENT AND LENDER:
THE CIT GROUP/BUSINESS CREDIT, INC.
By:/s/
Name:
Title:<PAGE>
<PAGE> 7
LENDERS:
THE BANK OF NEW YORK
COMMERCIAL CORPORATION
By:/s/
Name:
Title:
CONGRESS FINANCIAL CORPORATION
By:/s/
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY
By:/s/
Name:
Title:
LASALLE BUSINESS CREDIT, INC.
By:/s/
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By:/s/
Name:
Title:
STERLING NATIONAL BANK
& TRUST COMPANY OF NEW YORK
By:/s/
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MERRY-GO-ROUND ENTERPRISES, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED JULY 30, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-END> JUL-30-1994
<CASH> 57,580
<SECURITIES> 0
<RECEIVABLES> 4,502
<ALLOWANCES> 0
<INVENTORY> 128,705
<CURRENT-ASSETS> 211,975
<PP&E> 218,208
<DEPRECIATION> 18,083
<TOTAL-ASSETS> 433,998
<CURRENT-LIABILITIES> 60,474
<BONDS> 0
<COMMON> 540
0
0
<OTHER-SE> 129,048
<TOTAL-LIABILITY-AND-EQUITY> 433,998
<SALES> 344,985
<TOTAL-REVENUES> 344,985
<CGS> 284,883
<TOTAL-COSTS> 386,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 425
<INCOME-PRETAX> (69,617)
<INCOME-TAX> (7,658)
<INCOME-CONTINUING> (69,617)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,959)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
