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 28, 1995
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
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(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 8,
1995: 53,931,008
<PAGE>
MERRY-GO-ROUND ENTERPRISES, INC.
INDEX
-------------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended October 28, 1995
and October 29, 1994 3
Consolidated Balance Sheets as of October 28, 1995
(Unaudited) and January 28, 1995 4
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended October 28, 1995 and October 29, 1994 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
25
Signatures
26
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------
- ----------------------------------------
Oct. 28, 1995 Oct. 29, 1994 Oct. 28, 1995
Oct. 29, 1994
----------------- ----------------- -----
- ------------ -----------------
<S> <C> <C> <C> <C>
Net sales $154,888,000$199,090,000$401,650,000$544,075,000
---------------------------------------------------
- -----------------
Costs and expenses:
Costs of sales, buying
and occupancy 122,020,000154,135,000333,244,000439,017,000
Selling and administrative35,162,00052,416,000104,712,000
154,310,000
Interest expense, net738,000 486,000 1,646,000 911,000
---------------------------------------------------
- -----------------
Total 157,920,000207,037,000439,602,000594,238,000
---------------------------------------------------
- -----------------
Loss before reorganization
costs and income tax benefit(3,032,000)(7,947,000)(37,952,000)
(50,163,000)
Reorganization costs, net (note 4)16,158,0006,470,00028,446,000
33,871,000
---------------------------------------------------
- -----------------
Loss before income tax benefit(19,190,000)(14,417,000)(66
,398,000) (84,034,000)
Income tax benefit (note 5) - (4,107,000) -
(11,765,000)
---------------------------------------------------
- -----------------
Net loss $(19,190,000)$(10,310,000)$(66,398,000)$(72
,269,000)
============ ============ ============ ============
Loss per share of common stock$ (.36)$
(.19) $ (1.23)$ (1.34)
============ ============ ============ ============
Weighted average number of
shares outstanding53,931,008 53,947,824 53,931,008 53,939,711
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 28, 1995 January
28, 1995
---------------------- -----
- ----------------
<S> <C> <C>
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 3,365,000$ 58,372,000
Receivables 2,361,000 7,594,000
Merchandise inventories 103,920,000 48,088,000
Prepaid expenses and other 5,235,000 2,348,000
Refundable income taxes - 16,811,000
-----------------------------------
Total current assets 114,881,000 133,213,000
-----------------------------------
Property and equipment, at cost:
Land and land improvements 4,307,000 4,495,000
Buildings 32,722,000 36,811,000
Leasehold improvements 108,301,000 111,902,000
Furniture, fixtures and equipment 152,385,000 158,375,000
-----------------------------------
Less accumulated depreciation and amortization297,715,000
311,583,000
129,099,000 117,518,000
-----------------------------------
Net property and equipment 168,616,000 194,065,000
-----------------------------------
Other 2,105,000 1,145,000
-----------------------------------
$285,602,000$328,423,000
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 20,320,000$ 14,309,000
Other payables and accrued expenses44,633,000 49,543,000
Borrowings under line of credit 26,535,000 -
-----------------------------------
Total current liabilities 91,488,000 63,852,000
-----------------------------------
Noncurrent liabilities:
Long-term debt 10,000,000 10,000,000
Other 10,266,000 10,398,000
-----------------------------------
Total noncurrent liabilities 20,266,000 20,398,000
-----------------------------------
Liabilities subject to compromise under reorganization
proceedings (note 3) 234,299,000 238,474,000
-----------------------------------
Stockholders' equity deficit:
Common stock of $.01 par value per share:
Authorized 100,000,000 shares; issued and outstanding
53,931,008 shares at October 28, 1995 and
January 28, 1995 539,000 539,000
Additional paid-in capital 71,710,000 71,462,000
Retained deficit (132,700,000)(66,302,000)
-----------------------------------
Total stockholders' equity (deficit)(60,451,000)5,699,000
-----------------------------------
$285,602,000$328,423,000
========================
</TABLE>
Note: The consolidated balance sheet at January 28, 1995 has been
derived from the audited consolidated financial statements at that
date.
See accompanying notes to consolidated financial statements.
<PAGE>
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR IN POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
- -----------------------
October 28, 1995 October 29,
1994
---------------------- -------
- --------------
<S> <C> <C>
Operating activities:
Net loss $(66,398,000)$(72,269,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Change in non-cash reorganization items, (note 4)3,263,000
27,504,000
Depreciation and amortization 18,641,000 26,068,000
Deferred income taxes - 665,000
Amortization of restricted common stock248,000 449,000
Change in operating assets and liabilities:
(Increase) decrease in:
Receivables 5,233,000 (1,624,000)
Merchandise inventories (55,832,000)(96,525,000)
Prepaid expenses (3,702,000) (4,875,000)
Refundable income taxes 16,811,000 7,344,000
Other assets (960,000) (54,000)
Increase (decrease) in:
Accounts payable, trade 6,011,000 25,046,000
Other payables and accrued expenses(1,183,000)(4,173,000)
Other noncurrent liabilities (132,000) (216,000)
Operating payables subject to compromise under
reorganization proceedings (1,572,000) (893,000)
-----------------------------------
Net cash used in operating activities(79,572,000)(93,553,000)
-----------------------------------
Investing activities:
Property and equipment expenditures(2,326,000)(11,809,000)
Proceeds from sales of property and equipment 5,009,000 314,000
-----------------------------------
Net cash provided by (used in) investing activities2,683,000
(11,495,000)
-----------------------------------
Financing activities:
Net borrowings under revolving credit arrangement26,535,000
4,230,000
Repayment of secured note payable (4,653,000) -
Proceeds from issuance of common stock - 43,000
-----------------------------------
Net cash provided by financing activities 21,882,000
4,273,000
-----------------------------------
Net decrease in cash and cash equivalents(55,007,000)
(100,775,000)
Cash and cash equivalents at beginning of period58,372,000
113,119,000
-----------------------------------
Cash and cash equivalents at end of period$ 3,365,000$ 12,344,000
========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 951 stores in 43 states and Washington,
D.C. at October 28, 1995 (see note 6).
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, 218 stores; East South
Central, 54 stores; Mid-Atlantic, 159 stores; Mountain, 33
stores; New England, 66 stores; Pacific, 82 stores; South
Atlantic, 194 stores; West North Central, 34 stores; and West
South Central, 111 stores.
During the first nine months of fiscal 1996, the
numbers of stores opened, closed and converted to other concepts,
were as follows:
<TABLE>
<CAPTION>
Open at Open at
January 28, Stores Stores Stores October 28,
1995 Opened Closed Converted
1995
<S> <C> <C> <C> <C> <C>
Concept
Merry-Go-Round 467 - (15) 3 455
Dejaiz 232 1 (15) (2) 216
Chess King 214 - (27) (1) 186
Cignal 73 - (1) - 72
Fashion Outlets 17 4 (2) - 19
Boogies Diner 3 - - - 3
________ ______ _______ _______ ______
1,006 5 (60) - 951
</TABLE>
<PAGE>
On January 11, 1994, the Company and two of its
subsidiaries filed voluntary petitions for relief under
Chapter 11 ("Chapter 11") of Title 11 of the United States Code
(the "Bankruptcy Code") in the United States Bankruptcy Court for
the District of Maryland, Baltimore Division (the "Court").
During fiscal 1995 and 1996, various other subsidiaries of the
Company filed voluntary petitions for relief under Chapter 11.
The Company and such subsidiaries are presently operating their
businesses as debtors-in-possession under the jurisdiction of the
Court.
At this time it is not possible to predict the outcome
of the Company's Chapter 11 proceedings or the effect of the
proceedings on the Company or on the interests of creditors and
stockholders. The uncertainty regarding the eventual outcome of
the Chapter 11 proceedings and the effects of factors identified
below threaten the Company's ability to continue as a going
concern and could have a material adverse effect on the interests
of creditors and stockholders.
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 the factors identified below,
realization of assets and satisfaction of liabilities is subject
to uncertainty. A resolution of the Chapter 11 case could
materially change the amounts reported in the accompanying
consolidated financial statements, which do not give effect to
adjustments to the carrying values of assets and liabilities
which may be necessary as a consequence of such a resolution.
The ability of the Company to continue as a going concern is
dependent on, among other things, future profitable operations,
continued timely flow of merchandise inventory, the ability to
generate adequate levels of sales and sufficient cash from
operations to maintain financing sources to meet current and
future obligations, including debtor-in-possession financing
agreements and vendor and factor trade credit, renewal of
desirable store leases, and development and confirmation of an
acceptable plan of reorganization, including post-effective date
financing, none of which can be assured.
<PAGE>
In view of the Chapter 11 reorganization and the
Company's operating results, there is uncertainty with respect to
the Company's liquidity. The Company believes that at the
present time its working capital, including cash on hand, cash
management measures, anticipated cash provided by operating
activities, factor and vendor trade credit and debtor-in-
possession financing should enable the Company to meet its
immediate liquidity requirements. However, any change in the
current status of these or other items affecting the Company,
including continuing adverse operating results, a further
reduction in vendor or factor trade credit or loss or inadequacy
of debtor-in-possession financing could have a materially adverse
effect on the Company's liquidity, its operations and its ability
to continue as a going concern.
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 fiscal 1995 Annual Report.
In the opinion of management, all adjustments,
consisting of 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 periods ended October
28, 1995, are not necessarily indicative of the operating results
to be expected for the full year.
2. DEBTOR-IN-POSSESSION FINANCING
The Company and two of its subsidiaries, MGR
Distribution Corporation, and Worths Stores Corp., as Borrowers,
(the "Borrowers") are parties to a Debtor-in-Possession Credit
Agreement (the "Credit Agreement") with General Electric Capital
Corporation and
<PAGE>
Citicorp USA, as co-agents (the "Co-Agents") and the lenders
named therein (the "Lenders"). Proceeds are for working capital
and other general corporate purposes.
The Credit Agreement permits borrowings, in the forms
of cash, documentary letters of credit and standby letters of
credit, of up to the lesser of $90,000,000 or the "Borrowing
Base" defined below. Letters of credit are further limited to
the lesser of $75,000,000 for commercial letters of credit
("Commercial Letters of Credit") and $15,000,000 for standby
letters of credit ("Standby Letters of Credit") or the Borrowing
Base. The Credit Agreement expires on the earlier of (i) October
15, 1996, (ii) the effective date of a plan of reorganization, or
(iii) the date of termination of the Lenders' commitments
pursuant to an "Event of Default" as defined in the Credit
Agreement.
The "Borrowing Base" is an amount equal to the product
of the applicable "Advance Percentage" multiplied by the
"Eligible Inventory" (defined in the Credit Agreement)
determined, from time to time, at the lower of cost using the
retail method or market. For September, October and November
1995, the Advance Percentage is 55%; the remainder of the year it
is 50%. The Advance Percentage for the fiscal 1996 holiday
season was increased pursuant to a recent amendment (see below).
The Co-Agents shall be entitled, at any time, to (i) establish,
increase or decrease reserves (including a seasonal reserve from
December 1, 1995 through February 28, 1996) against Eligible
Inventory or the Borrowing Base, and (ii) impose additional
requirements on eligibility of inventory.
Each borrowing bears interest at a rate per annum equal
to a specified variable rate (the "Base Rate"), plus one and one-
half percent (1.5%). As of November 25, 1995 the rate was 10.25%
per annum.
The Credit Agreement provides for a letter of credit
fee equal to 2.25% per annum of the average daily maximum amount
available to be drawn under such Standby Letter of Credit, and a
letter of credit fee equal to 2.00% per annum of the aggregate
maximum amount
<PAGE>
outstanding for all Commercial Letters of Credit. The Credit
Agreement also provides for the payment of commitment fees equal
to (i) the average of the daily excess of the commitments over
the sum of (a) the aggregate principal amount of loans
outstanding plus (b) the letter of credit usage multiplied by
(ii) 1/2 of 1% per annum.
All obligations under the Credit Agreement constitute
allowed administrative expense claims in the Chapter 11 cases
against the Company and the subsidiaries of the Company which
have guaranteed the debt, with priority under Section 364(c)(1)
of the Bankruptcy Code over all other administrative expenses of
the kind specified or ordered pursuant to any provision of the
Bankruptcy Code, subject to certain limited exceptions.
Repayment of amounts outstanding pursuant to, or otherwise
payable under, the Credit Agreement are secured by a first
priority lien in substantially all of the assets of the Company
and certain of its subsidiaries, and by a second priority lien on
the Company's headquarters and distribution center (collectively,
the "Collateral").
The Credit Agreement requires compliance with certain
financial covenants, including with respect to (i) "Consolidated
Adjusted EBITDA", (ii) the ratio of "Consolidated Adjusted
EBITDA" to "Consolidated Fixed Charges," and (iii) "Consolidated
Net Worth," each as defined in the Credit Agreement, and with
certain other covenants, including with respect to maintenance of
a cash management system, indebtedness, guarantees, liens,
capital expenditures, investments, dividends, asset dispositions,
and maximum restructuring fees and disbursements. In the
Amendment (as defined below), the Lenders agreed to a limited
waiver of compliance with the Consolidated Adjusted EBITDA
covenant for the third fiscal quarter and the Consolidated Net
Worth covenant up to the end of the fourth fiscal quarter and to
an amendment of certain covenants to accommodate the recently
announced store closings (see note 6). The amendment also
requires that the Borrowing Base minus Total Utilization of
Commitments (as defined under the Credit Agreement) (other than
amounts available under the Term Loan, as defined below) plus
cash in the Collection Account (as defined under the Credit
Agreement), be not less than $10,000,000 at any time during the
period from January 18 through January 31, 1996. In view of
<PAGE>
the Company's recent operating results and decision to close
stores, the Company expects not to be in compliance with certain
covenants when measured in or as of the end of the fourth fiscal
quarter. The Company expects to engage in further discussions
with the Lenders to amend, or obtain a waiver of compliance with,
the covenants. There is no assurance, however, that such an
amendment or waiver will be obtained.
In response to adverse retail conditions, which have
had an impact on sales for many retailers, including the Company,
and in view of the Company's recent operating results, certain
factors and vendors have reduced the availability of trade
credit. Consequently, early in November 1995, in order to help
ensure timely merchandise receipts for the holiday season, the
Company sought additional credit and availability under the
Credit Agreement. Pursuant to a previously announced amendment
(the "Amendment"), the Advance Percentage for the period from
November 10 through December 22, 1995 was increased to 60%,
subject to a maximum increase in the Borrowing Base of
$7,500,000. The amendment also provides for term loans from
Belmont Capital Partners (II), LP, which, along with certain of
its affiliates, is a significant unsecured creditor of the
Company (the "Term Loan Lender"), in the principal amount of up
to $15,000,000 (the "Term Loan"). Of the Term Loan, $7,500,000
has been advanced to the Company. The Company may request an
additional borrowing of up to $7,500,000 under the Term Loan, to
be made in the Term Loan Lender's sole discretion. The Term Loan
bears interest at a rate per annum equal to the Base Rate plus
4%. The Company paid fees of approximately $450,000 in
connection with the Amendment and additional interest equal to 2%
of the amount of any advance under the Term Loan.
The Term Loan matures on January 17, 1996, but may be
repaid only if (i) no Event of Default under the Credit Agreement
exists as of that date as a result of the Company's failure to
pay any installment of principal or interest on any loan when due
and (ii) the Borrowing Base minus Total Utilization of
Commitments (other than amounts available under the Term Loan)
plus cash on hand irrespective of outstanding checks, exceeds
$10,000,000, after giving effect to the repayment of the Term
Loan. Amounts not repaid on the maturity date will
<PAGE>
bear interest at a default rate of 14% per annum. The Term Loan
was otherwise made on substantially the same terms and conditions
set forth in the Credit Agreement for non Term Loan advances, and
repayment of amounts due under the Term Loan is secured by the
Collateral on a basis subordinated to the rights of the Lenders.
3. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION
PROCEEDINGS
Liabilities subject to compromise under reorganization
proceedings as of October 28, 1995 and January 28, 1995 consisted
of:
<TABLE>
<CAPTION>
October 28, 1995 January
28, 1995
<S> <C> <C>
Secured note payable $ -$ 4,997,000
Unsecured liabilities:
Accounts payable, trade 38,746,000 39,176,000
Other payables and accrued expenses56,620,000 55,368,000
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
----------------------------------------
$ 234,299,000 $ 238,474,000
============ ============
</TABLE>
The secured note payable was satisfied in part on
February 28, 1995, as a result of the sale of the retail location
securing the note. The creditor received net proceeds of
$4,653,000 and may be allowed an unsecured claim in Court for the
remaining balance of $344,000 which is classified in other
payables and accrued expenses at October 28, 1995.
A resolution of the Chapter 11 proceedings may
materially change the amounts and terms of these prepetition
liabilities.
<PAGE>
4. REORGANIZATION COSTS, NET
Reorganization costs recorded in the third quarter and
first nine months of fiscal 1996 and 1995 consisted of:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------
- --- ----------------------------------------
- -
Oct. 28, 1995 Oct. 29, 1994 Oct.
28, 1995 Oct. 29, 1994
----------------- -----------------
- ----------------- -----------------
<S> <C> <C> <C> <C>
Write-off of leasehold improvements
and fixtures associated with
closed stores $ 1,287,000$ -$ 2,810,000
$ 14,625,000
Estimated lease rejection claims1,750,000 - 2,050,000
7,351,000
Professional fees 2,042,000 3,230,000 7,487,000 7,251,000
Employee retention and severance
programs and related payroll
taxes and employee benefits 1,294,000 - 3,494,000
- -
Loss from store operations related
to store closing sales and inventory
write-downs 7,646,000 2,300,000 7,794,000 2,300,000
Other 2,160,000 1,047,000 5,479,000 3,213,000
Interest Income (21,000) (107,000) (668,000) (869,000)
----------------------------------------------------
- --- ------------------
$16,158,000$ 6,470,000$28,446,000$33,871,000
=============================================
</TABLE>
Inventory write-downs of $7,143,000 included in
reorganization costs for fiscal 1996 represent markdowns related
to merchandise categories and styles discontinued as a result of
inventory repositioning in the third quarter.
5. INCOME TAX BENEFIT
No income tax benefit has been recorded for the third
quarter and first nine months of fiscal 1996, as the Company has
exhausted its available net operating loss carrybacks permitted
under the federal and state tax codes. The benefit of net
operating loss carryforwards will be reflected in future periods
when it becomes more likely than not that the benefit will be
realized.
<PAGE>
6. SUBSEQUENT EVENTS
Subsequent to October 28, 1995, the Company determined
to close approximately 375 underperforming stores and convert
approximately 40 other stores from their existing concepts to
other concepts operated by the Company. Included in the store
closings and conversions is the elimination of the Chess King
concept. The store closings will result in rejection of leases,
where appropriate, producing additional liabilities subject to
compromise of approximately $24,000,000. Write-off of leasehold
improvements, fixtures and equipment associated with these
closings is estimated at $25,000,000. Store closings will occur
primarily in the months of December and January and will result
in reductions of personnel in the home office and store
operations commensurate with the reduction in operational
demands. Total severance amounts payable to personnel due to
these reductions are estimated to be not more than $5,000,000.
Amounts related to these transactions will be recorded as fourth
quarter events.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company is a national specialty retailer of
contemporary fashion for young men and women. As of October 28,
1995, the Company operated 951 stores in 43 states and
Washington, D.C. The following discussion explains material
changes in the results of operations comparing the third quarter
and first nine months of fiscal years 1996 and 1995 and
significant developments affecting the Company's financial
condition since the end of fiscal 1995.
<PAGE>
CHAPTER 11 REORGANIZATION
On January 11, 1994, the Company and two of its
subsidiaries filed voluntary petitions for relief under Chapter
11 in the U.S. Bankruptcy Court for the District of Maryland,
Baltimore Division (the "Court"). During fiscal 1996 and 1995,
various other subsidiaries of the Company filed voluntary
petitions for relief under Chapter 11. The Company and such
subsidiaries are presently operating their businesses as debtors-
in-possession under the jurisdiction of the Court.
On February 23, 1995, the Company and its official
creditors' and equity committees (collectively the "Plan
Proponents") filed a Joint Plan of Reorganization under Chapter
11 of the Bankruptcy Code (the "Plan"). Among the conditions to
the confirmation of the Plan was a requirement that notice for a
confirmation hearing be given no later than September 5, 1995.
As notice was not given by this deadline and the Plan was not
confirmed by the October 2, 1995 deadline, the Plan will not be
confirmed as filed. The Company's ability to emerge from Chapter
11 protection depends on the development and confirmation of a
plan of reorganization (or modification of the initial Plan)
which depends on, among other things, the successful
implementation and validation of a business plan, the
availability of adequate financing on acceptable terms and the
acceptance of the plan by the numbers and amounts of impaired
prepetition creditors and stockholders required by the Bankruptcy
Code. The Company and the principal creditor and stockholder
constituencies (the "Stakeholders") in the Chapter 11 proceeding
have entered into a Stipulation, approved by the Court on August
31, 1995, in which the Company and the Stakeholders agreed not to
file, support or prosecute any disclosure statement, any plan of
reorganization, any motion concerning substantive consolidation
or any motion to convert to Chapter 7 or to dismiss any of the
Company's or its subsidiaries' Chapter 11 cases, until January
31, 1996. The Court has also extended the time for filing a
disclosure statement until January 31, 1996 and, except as to
Stakeholders, has extended the period during which the Company
has the exclusive right to solicit acceptances of a plan of
reorganization until March 31, 1996. The Company expects to have
further discussions with its Stakeholders
<PAGE>
concerning the Chapter 11 cases prior to January 31, 1996. If no
plan of reorganization is ever successfully implemented, the
Company would be liquidated. A failure to successfully implement
a plan of reorganization would have a material adverse effect on
the value of the claims of creditors and stockholders' in the
Company.
The Company has an agreement with certain landlords
that any store which the Company leases from such landlords
which was not closed by September 17, 1995 will remain open
through December 31, 1995 and the Company will pay rent through
January 31, 1996.
Subsequent to October 28, 1995, the Company determined
to close approximately 375 underperforming stores and convert
approximately 40 other stores from their existing concepts to
other concepts operated by the Company. Included in the store
closings and conversions is the elimination of the Chess King
concept. The store closings will result in rejection of leases,
where appropriate, producing additional liabilities subject to
compromise of approximately $24,000,000. Write-off of leasehold
improvements, fixtures and equipment associated with these
closings is estimated at $25,000,000. Store closings will occur
primarily in the months of December and January and will result
in reductions of personnel, in the home office and in store
operations, commensurate with the reduction in operational
demands. Total severance amounts payable to personnel due to
these reductions are estimated to be not more than $5,000,000.
Amounts related to these transactions will be recorded as fourth
quarter events.
RESULTS OF OPERATIONS
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 the factors identified below, realization
of assets and satisfaction of liabilities is subject to
uncertainty. A resolution to the Chapter 11 case could materially
change the amounts reported in the consolidated financial
statements, which do not give effect to all adjustments to the
carrying
<PAGE>
values of assets and liabilities which may be necessary as a
consequence of such a resolution. The ability of the Company to
continue as a going concern is dependent on, among other things,
future profitable operations, continued timely flow of
merchandise inventory, the ability to generate adequate levels of
sales and sufficient cash from operations to maintain financing
sources to meet current and future obligations, including debtor-
in-possession financing agreements and vendor and factor trade
credit, renewal of desirable store leases, and development and
confirmation of an acceptable plan of reorganization, including
post-effective date financing, none of which can be assured.
The Company recently announced certain store closings,
including the elimination of the Chess King concept (see above).
The Company may take other measures aimed at increasing liquidity
or enabling the Company to continue as a going concern,
including, but not limited to, additional store closings or
conversions, disposition of certain assets, amending its
financing arrangements, further downsizing, expense reduction and
other appropriate actions.
Net Sales - Net sales decreased $44.2 million or 22.2% and $142.4
million or 26.2% in the third quarter and first nine months of
fiscal 1996 compared to the third quarter and first nine months
of fiscal 1995. The decreases were due to several factors
including the closing of 436 and 60 stores during fiscal 1995 and
1996, respectively, resulting in decreases of 22.8% and 26.5% in
the weighted average number of stores open during the third
quarter and first nine months of fiscal 1996, respectively. In
addition, sales per selling square foot decreased from
approximately $61 and $156 in the third quarter and first nine
months of fiscal 1995 to approximately $59 and $152 in the third
quarter and first nine months of fiscal 1996. With the
transition of the Company's top management from Meridian Ventures
to a permanent CEO, certain merchandising decisions have been
made with regard to styles and quality to be carried, which
management believes will improve the focus and performance of
each concept. The decrease in sales is attributable to highly
competitive and promotional market conditions in the retail
apparel industry, lower than desirable inventory levels in the
first nine months of fiscal 1996, and the continuing effects of
the merchandising transition in the stores.
<PAGE>
Comparable store sales decreased 11.3% and 11.9% in the
third quarter and first nine months of fiscal 1996 as a result of
certain factors described above.
Sales for the four weeks ended November 25, 1995 were
$46.9 million compared to $64.6 million in the same period last
year, a decline of 27%. The number of stores operated at the end
of November decreased 22% compared to the prior year. Same store
sales for the month decreased 16%.
Cost of Sales, Buying and Occupancy - Cost of sales, buying and
occupancy decreased $32.1 million or 20.8% and $105.8 million or
24.1% in the third quarter and first nine months of fiscal 1996
compared to the third quarter and first nine months of fiscal
1995. As a percentage of net sales, these costs were 78.8% and
83.0% for the third quarter and first nine months of fiscal 1996,
compared to 77.4% and 80.7% for the comparable periods in fiscal
1995. The costs as a percentage of net sales increased in fiscal
1996 primarily due to the lower sales productivity discussed
above.
Selling and Administrative Expenses - Selling and administrative
expenses decreased $17.3 million or 32.9% and $49.6 million or
32.1% in the third quarter and first nine months of fiscal 1996
compared to the third quarter and first nine months of fiscal
1995. Selling and administrative expenses as a percentage of net
sales were 22.7% and 26.1% in the third quarter and first nine
months of fiscal 1996 compared to 26.3% and 28.4% in fiscal 1995.
The decrease in these expenses in fiscal 1996 is the result of
store closings and management's efforts to bring selling and
administrative costs in line with current sales volumes. These
efforts have resulted in expense reductions in store operations,
the corporate office and the distribution center.
Interest Expense, Net - Interest expense was $740,000 for the
third quarter and $1.7 million for the first nine months of
fiscal 1996 versus $503,000 and $1.2 million for the comparable
periods in fiscal 1995. Interest income was $2,000 and $52,000
for the third quarter and first nine months of fiscal 1996 versus
$17,000 and $337,000 for the comparable periods in fiscal 1995.
<PAGE>
Under the Code, prepetition liabilities generally do not continue
to accrue interest unless the debt is 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. Interest income in the amount of approximately $21,000
and $668,000 in the third quarter and first nine months of fiscal
1996, and $107,000 and $869,000 in the third quarter and 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 - Costs associated with reorganization under
Chapter 11 protection in the third quarter and first nine months
of fiscal 1996 and 1995, included:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------
- ----------------------------------------
Oct. 28, 1995 Oct. 29, 1994 Oct. 28, 1995
Oct. 29, 1994
----------------- ----------------- -----
- ------------ -----------------
<S> <C> <C> <C> <C>
Write-off of leasehold improvements
and fixtures associated with
closed stores$1,287,000$ - $2,810,000 $
14,625,000
Estimated lease rejection claims1,750,000 - 2,050,000
7,351,000
Professional fees2,042,000 3,230,000 7,487,000 7,251,000
Employee retention and severance
programs and related payroll
taxes and employee benefits1,294,000 - 3,494,000 -
Loss from store operations related
to store closing sales and inventory
write-downs 7,646,000 2,300,000 7,794,000 2,300,000
Other 2,160,000 1,047,000 5,479,000 3,213,000
Interest income (21,000) (107,000)(668,000) (869,000)
------------------ -------------------- -----------------
- - ------------------
$16,158,000 6,470,000 $28,446,000 33,871,000
=========== ============ =========== ===========
</TABLE>
The Company anticipates that it will incur additional
reorganization costs for the remainder of its Chapter 11
reorganization.
<PAGE>
Income tax benefit - No income tax benefit has been recorded for
the third quarter and first nine months of fiscal 1996, as the
Company has exhausted its available net operating loss carrybacks
permitted under the federal and state tax codes. The benefit of
net operating loss carryforwards will be reflected in future
periods when it becomes more likely than not that the benefit
will be realized.
Net loss - The net loss was $19.2 million and $66.4 million in
the third quarter and first nine months of fiscal 1996 as
compared to $10.3 million and $72.3 million in the third quarter
and first nine months of fiscal 1995. The increase in net loss
for the third quarter of fiscal 1996 compared to the third
quarter of fiscal 1995 is due to decreased sales productivity and
income tax benefits and increased reorganization costs, offset in
part by reduced selling and administrative costs. The decrease
in net loss for the first nine months of fiscal 1996 compared to
fiscal 1995 is due to decreased selling and administrative costs
and reorganization costs offset in part by decreased sales
productivity and income tax benefits.
Earnings before interest, income taxes, depreciation,
amortization and reorganization costs (EBITDA), supplemental
financial information generally reported by debtors-in-
possession, were positive $3.7 million and negative $17.7 million
in the third quarter and first nine months of fiscal 1996
compared to negative $524,000 and negative $23.2 million in the
third quarter and first nine months of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the first nine
months of fiscal 1996 was approximately $79.6 million compared
to $93.5 million for the first nine months of fiscal 1995.
Property and equipment expenditures were $2.3 million in the
first nine months of fiscal 1996 compared to $11.8 million for
the first nine months of fiscal 1995. The capital expenditures
for fiscal 1996 and fiscal 1995 were principally for store
openings and remodelings.
<PAGE>
The Company currently contemplates that it will make capital
expenditures of up to $2.0 million during the remainder of fiscal
1996, including store remodels and conversions.
As of November 25, 1995, the Company's cash in banks plus
unused availability on its Debtor-in-Possession facility was
approximately $29.7 million.
DEBTOR-IN-POSSESSION FINANCING
The Company and two of its subsidiaries, MGR Distribution
Corporation, and Worths Stores Corp., as Borrowers, (the
"Borrowers") are parties to a Debtor-in-Possession Credit
Agreement (the "Credit Agreement") with General Electric Capital
Corporation and Citicorp USA, as co-agents (the "Co-Agents") and
the lenders named therein (the "Lenders"). Proceeds are for
working capital and other general corporate purposes.
The Credit Agreement permits borrowings, in the forms of
cash, documentary letters of credit and standby letters of
credit, of up to the lesser of $90,000,000 or the "Borrowing
Base" defined below. Letters of credit are further limited to
the lesser of $75,000,000 for commercial letters of credit
("Commercial Letters of Credit") and $15,000,000 for standby
letters of credit ("Standby Letters of Credit") or the Borrowing
Base. The Credit Agreement expires on the earlier of (i) October
15, 1996, (ii) the effective date of a plan of reorganization, or
(iii) the date of termination of the Lenders' commitments
pursuant to an "Event of Default" as defined in the Credit
Agreement.
The "Borrowing Base" is an amount equal to the product of
the applicable "Advance Percentage" multiplied by the "Eligible
Inventory" (defined in the Credit Agreement) determined, from
time to time, at the lower of cost using the retail method or
market. For September, October and November 1995, the Advance
Percentage is 55%; the remainder of the year it is 50%. The
Advance Percentage for the fiscal 1996 holiday season was
increased pursuant to a recent amendment (see below). The Co-
Agents shall be entitled, at any time, to (i)
<PAGE>
establish, increase or decrease reserves (including a seasonal
reserve from December 1, 1995 through February 28, 1996) against
Eligible Inventory or the Borrowing Base, and (ii) impose
additional requirements on eligibility of inventory.
Each borrowing bears interest at a rate per annum equal to a
specified variable rate (the "Base Rate"), plus one and one-half
percent (1.5%). As of November 25, 1995 the rate was 10.25% per
annum.
The Credit Agreement provides for a letter of credit fee
equal to 2.25% per annum of the average daily maximum amount
available to be drawn under such Standby Letter of Credit, and a
letter of credit fee equal to 2.00% per annum of the aggregate
maximum amount outstanding for all Commercial Letters of Credit.
The Credit Agreement also provides for the payment of commitment
fees equal to (i) the average of the daily excess of the
commitments over the sum of (a) the aggregate principal amount of
loans outstanding plus (b) the letter of credit usage multiplied
by (ii) 1/2 of 1% per annum.
All obligations under the Credit Agreement constitute
allowed administrative expense claims in the Chapter 11 cases
against the Company and the subsidiaries of the Company which
have guaranteed the debt, with priority under Section 364(c)(1)
of the Bankruptcy Code over all other administrative expenses of
the kind specified or ordered pursuant to any provision of the
Bankruptcy Code, subject to certain limited exceptions.
Repayment of amounts outstanding pursuant to, or otherwise
payable under, the Credit Agreement are secured by a first
priority lien in substantially all of the assets of the Company
and certain of its subsidiaries, and by a second priority lien on
the Company's headquarters and distribution center (collectively,
the "Collateral").
The Credit Agreement requires compliance with certain
financial covenants, including with respect to (i) "Consolidated
Adjusted EBITDA", (ii) the ratio of "Consolidated Adjusted
EBITDA" to "Consolidated Fixed Charges," and (iii) "Consolidated
Net Worth," each as defined
<PAGE>
in the Credit Agreement, and with certain other covenants,
including with respect to maintenance of a cash management
system, indebtedness, guarantees, liens, capital expenditures,
investments, dividends, asset dispositions, and maximum
restructuring fees and disbursements. In the Amendment (as
defined below), the Lenders agreed to a limited waiver of
compliance with the Consolidated Adjusted EBITDA covenant for the
third fiscal quarter and the Consolidated Net Worth covenant up
to the end of the fourth fiscal quarter and to an amendment of
certain covenants to accommodate the recently announced store
closings (see note 6). The amendment also requires that
Borrowing Base minus Total Utilization of Commitments (as defined
under the Credit Agreement) (other than amounts available under
the Term Loan, as defined below) plus cash in the Collection
Account (as defined under the Credit Agreement), be not less than
$10,000,000 at any time during the period from January 18 through
January 31, 1996. In view of the Company's recent operating
results and decision to close stores, the Company expects not to
be in compliance with certain covenants when measured in or as of
the end of the fourth fiscal quarter. The Company expects to
engage in further discussions with the Lenders to amend, or
obtain a waiver of compliance with, covenants. There is no
assurance, however, that such an amendment or waiver will be
obtained.
In response to adverse retail conditions, which have had an
impact on sales for many retailers, including the Company, and in
view of the Company's recent operating results, certain factors
and vendors have reduced the availability of trade credit.
Consequently, early in November 1995, in order to help ensure
timely merchandise receipts for the holiday season, the Company
sought additional credit and availability under the Credit
Agreement. Pursuant to a previously announced amendment (the
"Amendment"), the Advance Percentage for the period from November
10 through December 22, 1995 was increased to 60%, subject to a
maximum increase in the Borrowing Base of $7,500,000. The
amendment also provides for term loans from Belmont Capital
Partners (II), LP, which, along with certain of its affiliates,
is a significant unsecured creditor of the Company (the "Term
Loan Lender"), in the principal amount of up to $15,000,000 (the
"Term Loan"). Of the Term Loan, $7,500,000 has been advanced to
the Company. The Company may request an additional borrowing of
up to $7,500,000 under the
<PAGE>
Term Loan, to be made in the Term Loan Lender's sole discretion.
The Term Loan bears interest at a rate per annum equal to the
Base Rate plus 4%. The Company paid fees of approximately
$450,000 in connection with the Amendment and additional interest
equal to 2% of the amount of any advance under the Term Loan.
The Term Loan matures on January 17, 1996, but may be repaid
only if (i) no Event of Default under the Credit Agreement exists
as of that date as a result of the Company's failure to pay any
installment of principal or interest on any loan when due and
(ii) the Borrowing Base minus Total Utilization of Commitments
(other than amounts available under the Term Loan) plus cash on
hand irrespective of outstanding checks, exceeds $10,000,000,
after giving effect to the repayment of the Term Loan. Amounts
not repaid on the maturity date will bear interest at a default
rate of 14% per annum. The Term Loan was otherwise made on
substantially the same terms and conditions set forth in the
Credit Agreement for non Term Loan advances, and repayment of
amounts due under the Term Loan is secured by the Collateral on a
basis subordinated to the rights of the Lenders.
The Company's net operating loss for fiscal 1995 was carried
back to prior fiscal years, resulting in refundable Federal and
state income taxes paid in such years. In May, 1995 the Company
received refunds of Federal income taxes in the aggregate amount
of approximately $19.5 million.
In view of the Chapter 11 reorganization and the Company's
operating results, there is uncertainty with respect to the
Company's liquidity. The Company believes that at the present
time its working capital, including cash on hand, cash management
measures, anticipated cash provided by operating activities,
factor and vendor trade credit and debtor-in-possession financing
should enable the Company to meet its immediate liquidity
requirements. However, any change in the current status of these
or other items affecting the Company, including continuing
adverse operating results, a further reduction in vendor or
factor trade credit or loss or
<PAGE>
inadequacy of debtor-in-possession financing could have a
materially adverse effect on the Company's liquidity its
operations and its ability to continue as a going concern.
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a
report on Form 8-K dated November 13,
1995 reporting the amendment of its
Debtor-in-Possession Financing
arrangement and store closing.
<PAGE>
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 12, 1995 /s/ Isaac Kaufman
Isaac Kaufman
Executive Vice President,
Chief Financial
Officer, Secretary and
Treasurer
(Principal Financial 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 28, 1995, 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> FEB-03-1995
<PERIOD-END> OCT-28-1995
<CASH> 3,365
<SECURITIES> 0
<RECEIVABLES> 2,361
<ALLOWANCES> 0
<INVENTORY> 103,920
<CURRENT-ASSETS> 114,881
<PP&E> 297,715
<DEPRECIATION> 129,099
<TOTAL-ASSETS> 285,602
<CURRENT-LIABILITIES> 91,488
<BONDS> 0
<COMMON> 539
0
0
<OTHER-SE> (60,990)
<TOTAL-LIABILITY-AND-EQUITY> 285,602
<SALES> 401,650
<TOTAL-REVENUES> 401,650
<CGS> 333,244
<TOTAL-COSTS> 437,956
<OTHER-EXPENSES> 28,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,646
<INCOME-PRETAX> (66,398)
<INCOME-TAX> 0
<INCOME-CONTINUING> (66,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,398)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
