-19-
BAODOCS1/0019033.01
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 29, 1995
-----------------
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, 1995: 53,931,008
<PAGE>
MERRY-GO-ROUND ENTERPRISES, INC.
INDEX
Part I - Financial Information
Consolidated Statements of Operations (Unaudited) for
the
Three and Six Months Ended July 29, 1995 and July 30,
1994 3
Consolidated Balance Sheets as of July 29, 1995
(Unaudited) and January 28, 1995
4
Consolidated Statements of Cash Flows (Unaudited) for
the
Six Months Ended July 29, 1995 and July 30, 1994
5
Notes to Consolidated Financial Statements (Unaudited)
6
Management's Discussion and Analysis of Results of
Operations and Financial Condition
12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
18
Signatures 19
<PAGE>
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 29, 1995 July 30, 1994 July 29, 1995 July 30, 1994
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
Net sales $125,361,000 $175,969,000 $246,762,000
$344,985,000
Costs and expenses:
Costs of sales, buying and
occupancy 107,798,000 145,857,000 211,224,000
284,883,000
Selling and administrative 36,699,000 51,941,000 69,550,000
101,893,000
Interest expense, net 479,000 357,000
908,000 425,000
___________ ___________ ___________ ___________
Total 144,976,000 198,155,000 281,682,000
387,201,000
___________ ___________ ___________ ___________
Loss before reorganization
costs and income tax benefit (19,615,000) (22,186,000)
(34,920,000) (42,216,000)
Reorganization costs, net (Note 4) 8,399,000 20,392,000 12,288,000
27,401,000
___________ ___________ ___________ ___________
Loss before income tax
benefit (28,014,000) (42,578,000)
(47,208,000) (69,617,000)
Income tax benefit - (4,684,000)
- (7,658,000)
___________ ___________ ___________ ___________
Net loss $(28,014,000) $(37,894,000) $(47,208,000)
$(61,959,000)
___________ ___________ ___________ ____________
Loss per share of common stock $ (.52) $
(.70) $ (.88) $ (1.15)
Weighted average number of
shares outstanding 53,931,008 53,938,973
53,931,008 53,935,654
<FN>
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 29, 1995 January 28, 1995
----------------- ---------------------
<S> <C> <C>
(Unaudited) (Note)
ASSETS
-----------
Current assets:
Cash and cash equivalents $10,779,000 $
58,372,000
Receivables 2,071,000 7,594,000
Merchandise inventories 86,227,000 48,088,000
Prepaid expenses and other 4,769,000
2,348,000
Refundable income taxes -
16,811,000
__________ ___________
Total current assets 103,846,000
133,213,000
Property and equipment, at cost:
Land and land improvements 4,307,000
4,495,000
Buildings 32,719,000 36,811,000
Leasehold improvements 109,364,000 111,902,000
Furniture, fixtures and equipment 154,897,000
158,375,000
__________ ___________
301,287,000 311,583,000
Less accumulated depreciation and amortization 126,063,000
117,518,000
___________ ___________
Net property and equipment 175,224,000
194,065,000
___________ ___________
Other 1,100,000 1,145,000
___________ ___________
$280,170,000 $328,423,000
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------
Current liabilities:
Accounts payable, trade $ 24,894,000 $ 14,309,000
Other payables and accrued expenses 43,483,000
49,543,000
___________ ___________
Total current liabilities 68,377,000
63,852,000
Noncurrent liabilities:
Long-term debt 10,000,000 10,000,000
Other 10,350,000 10,398,000
___________ ___________
Total noncurrent liabilities 20,350,000
20,398,000
Liabilities subject to compromise under
reorganization proceedings (Note 3) 232,787,000
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 July 29, 1995 and
January 28, 1995 539,000
539,000
Additional paid-in capital 71,626,000
71,462,000
Retained earnings (deficit) (113,509,000)
(66,302,000)
____________ ___________
Total stockholders' equity (deficit) (41,344,000)
5,699,000
____________ ___________
$ 280,170,000 $328,423,000
<FN>
</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>
<TABLE>
MERRY-GO-ROUND ENTERPRISES, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
______________________________
July 29, 1995 July 30,
1994
____________
____________
<S> <C> <C>
Operating activities:
Net loss $(47,208,000)
$(61,959,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Change in non-cash reorganization items
(1,252,000) 25,395,000
Depreciation and amortization
12,615,000 18,083,000
Provision for deferred income taxes
- 1,500,000
Amortization of restricted common stock
165,000 284,000
Change in operating assets and liabilities:
(Increase) decrease in:
Receivables 5,523,000
(829,000)
Merchandise inventories
(38,139,000) (57,177,000)
Prepaid expenses and other
(3,236,000) (8,392,000)
Refundable income taxes
16,811,000 10,743,000
Other assets 45,000
(9,000)
Increase (decrease) in:
Accounts payable, trade
10,585,000 25,381,000
Other payables and
accrued expenses
(854,000) (3,400,000)
Other noncurrent liabilities
(48,000) 466,000
Operating payables
subject to compromise
under reorganization
proceedings (1,334,000) (856,000)
__________ ___________
Net cash used in operating activities (46,327,000)
(50,770,000)
Investing activities:
Property and equipment expenditures (1,477,000)
(6,627,000)
Proceeds from sales of property and equipment 4,864,000
314,000
___________ ___________
Net cash (used in) provided by
investing activities 3,387,000 (6,313,000)
___________ ___________
Financing activities:
Repayment of secured notes payable (4,653,000)
-
Net borrowings under revolving credit agreement
- 1,502,000
Proceeds from issuance of common stock -
42,000
___________ __________
Net cash (used in) provided financing activities (4,653,000)
1,544,000
Net decrease in cash and cash equivalents (47,593,000)
(55,539,000)
Cash and cash equivalents at beginning of period 58,372,000
113,119,000
__________ __________
Cash and cash equivalents at end of period $
10,779,000 $ 57,580,000
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<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 974 stores in 43 states and
Washington, D.C. at July 29, 1995.
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, 223
stores; East South Central, 53 stores; Mid-Atlantic, 160
stores; Mountain, 35 stores; New England, 69 stores; Pacific,
86 stores; South Atlantic, 200 stores; West North Central, 35
stores; and West South Central, 113 stores.
During the first six 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 July 29,
1995 Opened Closed
Converted 1995
<S> <C> <C> <C> <C> <C>
Concept
Merry-Go-Round 467 - 9
2 464
Dejaiz 232 - 9
(6) 217
Chess King 214 - 13
- 201
Cignal 73 - 1
- 72
Fashion Outlets 17 1 1
- 17
Boogies Diner 3 -
- - 3
_____ ____ ____ ____
_____
1,006 1 33
- 974
</TABLE>
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.
<PAGE>
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
prepetition creditors and stockholders. The uncertainty
regarding the eventual outcome of the Chapter 11 proceedings
and the effects of other unknown adverse factors could
threaten the Company's existence as a going concern.
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 confirmed by the Court 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 a plan
of reorganization. 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, maintenance of financing sources to meet current
and future obligations, including compliance with debtor-in-
possession financing agreements, maintenance of vendor and
factor confidence, the ability to generate sufficient cash
from operations, renewal of desirable store leases, the
availability of a financing commitment for post-effective
date financing on acceptable terms and conditions, and
development and confirmation of an acceptable plan of
reorganization.
In view of the Chapter 11 reorganization, 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 net cash provided by operating activities, factor
and vendor trade credit and debtor-in-possession financing
should enable the Company to meet its short-term liquidity
requirements. However, any change in the current status of
these or other items affecting the Company, including adverse
operating results, a 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 and on its operations.
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 normal recurring accruals, considered necessary
for a fair presentation for the interim periods have been
included in the consolidated financial statements.
<PAGE>
The results of operations for the periods ended
July 29, 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") have entered into a Debtor-in-
Possession Credit Agreement dated as of July 18, 1995 (the
"Credit Agreement") with General Electric Capital Corporation
and Citicorp USA, as co-agents (the "Co-Agents") and the
lenders named therein (the "Lenders"). The proceeds of the
initial loans and letters of credit made under the Credit
Agreement were to repay substantially all obligations and
terminate substantially all commitments in respect of the
credit facilities provided by a Revolving Credit Agreement
dated as of January 14, 1994, as amended (the "Previous
Credit Agreement"), among the company, certain of its
subsidiaries, the financial institutions from time to time
party thereto and The CIT Group/Business Credit, Inc., as
agent, and any excess proceeds are to be used for working
capital and for other general corporate purposes. The Credit
Agreement was approved by the United States Bankruptcy Court
for the District of Maryland on July 13, 1995. Concurrent
with the execution of the Credit Agreement, the Company, MGR
Distribution Corporation and MGRR, Inc., entered into a
Termination and Release Agreement with the CIT Group/Business
Credit, Inc. terminating the Previous Credit Agreement.
Under the Credit Agreement, the Borrowers may
borrow in the form of cash borrowings, documentary letters of
credit and standby letters of credit an aggregate of the
lesser of $90,000,000 or the Borrowing Base described below.
Letters of credit are further limited to the lesser of
$75,000,000 for commercial letters of credit and $15,000,000
for standby letters of credit or the Borrowing Base.
The Lenders' commitment to make loans and issue
letters of credit expires on the earlier of (i) October 15,
1996, (ii) the effective date of a plan of reorganization in
the cases filed by the Company and certain of its
subsidiaries pursuant to Chapter 11 of the U.S. Bankruptcy
Code (the "Chapter 11 Cases"), and (iii) the date of
termination of the Lenders' commitments pursuant to an "Event
of Default" as defined in the Credit Agreement (the
"Commitment Termination Date").
The Borrowing Base is defined as of any date of
determination, as an amount equal to the applicable
percentage of the "Eligible Inventory" (as defined in the
Credit Agreement) determined at the lower of cost using the
retail method or market. For the fiscal months of September,
October and November 1995, the applicable percentage used in
the determination of the Borrowing Base is 55%. The
remainder of the year the advance rate is 50%. 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 (or eliminate the same) to the standards of
eligibility set forth in the definition of "Eligible
Inventory".
<PAGE>
Each loan shall bear interest on the unpaid
principal amount thereof from the date made through maturity
at a rate per annum equal to the sum of the "Base Rate" (as
defined in the Credit Agreement) plus one and one-half
percent (1.5%) per annum. The Base Rate is defined as a
fluctuating interest rate per annum in effect from time to
time, which rate is equal to the highest of certain specified
rates. The rate fluctuates daily and as of September 6, 1995
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.
The Credit Agreement provides that all obligations
under the loan documents shall constitute allowed
administrative expense claims in the Chapter 11 Cases against
each borrower and the subsidiaries of the Company which have
executed and delivered a guaranty (collectively, the "Credit
Parties") and which are debtors in the Chapter 11 Cases, with
priority under Section 364(c)(1) of the United States
Bankruptcy Code over any and all other administrative
expenses of the kind specified or ordered pursuant to any
provision of the Code, subject to certain limited exceptions.
In addition, the Borrowers and certain subsidiaries of the
Company that have executed a guaranty have granted to General
Electric Capital Corporation, as secured party on behalf of
the Lenders a first priority security interest in
substantially all of their assets and a second priority
security interest on the Company's headquarters and
distribution center.
The Credit Agreement requires that certain
financial tests be met or exceeded, including with respect to
(i) EBITDA, (ii) the ratio of EBITDA to "Consolidated Fixed
Charges," and (iii) "Consolidated Net Worth," each as defined
in the Credit Agreement. In addition, the Credit Agreement
establishes certain restrictions on the Borrowers including
the maintenance of a cash management system, indebtedness,
guarantees, liens, capital expenditures, investments,
dividends, asset dispositions, and maximum restructuring fees
and disbursements.
<PAGE>
3. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise as of July 29,
1995 and January 28, 1995 consisted of:
<TABLE>
<CAPTION>
July 29, 1995 January 28,
1995
<S> <C> <C>
Secured note payable $ -
$ 4,997,000
Unsecured liabilities:
Accounts payable, trade 38,745,000
39,176,000
Other payables and accrued expenses 55,109,000
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
$232,787,000
$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 July 29,
1995.
A plan of reorganization ultimately confirmed by
the Court may materially change the amounts and terms of
these prepetition liabilities.
<PAGE>
4. REORGANIZATION COSTS, NET
Reorganization costs recorded in the second quarter
and first six months of fiscal 1996 and 1995 consisted of:
<TABLE>
<CAPTION>
Three Months Ended Six
Months Ended
______________________________
_____________________________
July 29, 1995 July 30, 1994 July 29, 1995 July 30, 1994
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
Write-off of leasehold improvements
and fixtures associated with
closed stores $923,000 $11,903,000 $1,523,000
$14,625,000
Estimated lease rejection claims 300,000 5,127,000
300,000 7,351,000
Professional fees 3,487,000 1,821,000
5,445,000 4,021,000
Employee retention and severance
programs and related payroll taxes
and employee benefits 1,417,000 -
2,200,000 -
Other 2,499,000 1,922,000 3,467,000
2,166,000
Interest Income (227,000) (381,000)
(647,000) (762,000)
$8,399,000 $20,392,000 $12,288,000 $27,401,000
</TABLE>
5. INCOME TAX BENEFIT - No income tax benefit has been
recorded for the second quarter and first six 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>
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 primarily for young men and women. As
of July 29, 1995, the Company operated 974 stores in 43
states and Washington, D.C. The following discussion
explains material changes in the results of operations
comparing the second quarter and first six months of fiscal
years 1996 and 1995 and significant developments affecting
the Company's financial condition since the end of fiscal
1995.
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 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.
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 a notice for a confirmation hearing be given no later
than September 5, 1995. As notice was not given by this
deadline and the Plan will not be 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 (or modification of the initial
Plan) and confirmation of a plan of reorganization which
depends on, among other things, the successful implementation
and validation of the Company's 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 stockholders constituencies stakeholders in the
Chapter 11 proceeding have entered into a Stipulation,
approved by the Court on August 31, 1995, in which they and
the Company and the stockholders 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 Company expects there
will be further discussions concerning the timing and terms
of a plan of reorganization prior to January 31, 1996. If no
plan of reorganization is successfully implemented, the
Company would be liquidated. A failure to successfully
implement a plan of reorganization could have a material
adverse effect on the value of the claims of prepetition
creditors and stockholders' interest in the Company.
<PAGE>
The Company recently agreed with certain landlords that
any store leased from such landlords not closed by September
17, 1995 would remain open through December 31, 1995 and the
Company would pay rent through January 31, 1996.
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 circumstances
relating to this event, realization of assets and
satisfaction of liabilities is subject to uncertainty. The
final plan of reorganization could materially change the
amounts reported in the consolidated financial statements,
which do not give effect to 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, future profitable operations, continued timely
flow of merchandise inventory, maintenance of financing
sources to meet current and future obligations, including
compliance with debtor-in-possession financing agreements,
maintenance of vendor and factor confidence, the ability to
generate sufficient cash from operations, renewal of
desirable store leases, the availability of a financing
commitment for post-effective date financing on acceptable
terms and conditions, and development and confirmation of an
acceptable plan of reorganization, none of which can be
assured.
Net Sales - Net sales decreased $50.6 million or 28.8% and
$98.2 million or 28.5% in the second quarter and first six
months of fiscal 1996 compared to the second quarter and
first six months of fiscal 1995. The decreases were due to
several factors including the closing of 436 underperforming
stores during fiscal 1995, resulting in a decrease of 26.4%
and 28.4% in the weighted average number of stores open
during the second quarter and first six months of fiscal
1996, respectively. In addition, sales per selling square
foot decreased from approximately $50 and $95 in the second
quarter and first six months of fiscal 1995 to approximately
$47 and $93 in the second quarter and first six months of
fiscal 1996. The decrease in sales is attributable to
difficult and highly competitive and promotional market
conditions in the specialty retail apparel industry, lower
than desirable inventory levels in the first six months of
fiscal 1996, the continuing effects of the merchandising
transition in the Dejaiz and Cignal stores, and a
comparatively higher level of clearance sales of fall
merchandise in the first six months of last year. In
addition, approximately $9.2 million in sales at closed
stores realized during the store closing periods were
classified along with cost of sales and store operating
expenses as reorganization costs in the first quarter of
fiscal 1996.
Comparable store sales decreased 14% and 12% in the
second quarter and first six months of fiscal 1996 as a
result of certain factors described above.
Cost of Sales, Buying and Occupancy - Cost of sales, buying
and occupancy decreased $38.1 million or 26.1% and $73.7
million or 25.9% in the second quarter and first six
<PAGE>
months of fiscal 1996 compared to the second quarter and
first six months of fiscal 1995. As a percentage of net
sales, these costs were 86.0% and 85.6% for the second
quarter and first six months of fiscal 1996, compared to
82.9% and 82.6% 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 $15.2 million or 29.3% and
$32.3 million or 31.7% in the second quarter and first six
months of fiscal 1996 compared to the second quarter and
first six months of fiscal 1995. Selling and administrative
expenses as a percentage of net sales were 29.3% and 28.2% in
fiscal 1996 compared to 29.5% and 29.5% in fiscal 1995. The
decrease in these expenses in fiscal 1996 is the result of
the closing of stores and management's program to bring
selling and administrative costs in line with current sales
volumes. This program has resulted in expense reductions in
store operations, the corporate office and the distribution
center.
Interest Expense, Net - Interest expense was $497,000 and
$958,000 and interest income was $18,000 and $50,000 for the
second quarter and first six months of fiscal year 1996,
respectively compared to $423,000 and $745,000 and $66,000
and $320,000 for fiscal 1995. Under the Code, prepetition
liabilities generally do not continue to accrue interest
unless the debt is clearly collateralized by assets having
current fair market values in excess of the amount of the
debt. Therefore, interest has not been accrued on any of the
Company's prepetition obligations except for a $10 million
note payable secured by the headquarters and distribution
center facility. Interest income in the amount of
approximately $227,000 and $647,000 in the second quarter and
first six months of fiscal 1996, and $381,000 and $762,000 in
the second quarter and 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".
<PAGE>
Reorganization Costs - Costs associated with reorganization
under Chapter 11 protection in the second quarter and first
six months of fiscal 1996 and 1995, included:
<TABLE>
<CAPTION>
Three Months Ended Six
Months Ended
______________________________
_____________________________
July 29, 1995 July 30, 1994 July 29, 1995 July 30, 1994
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
Write-off of leasehold improvements
and fixtures associated with
closed stores $923,000 $11,903,000 $1,523,000
$14,625,000
Estimated lease rejection claims 300,000 5,127,000
300,000 7,351,000
Professional fees 3,487,000 1,821,000
5,445,000 4,021,000
Employee retention and severance
programs and related payroll taxes
and employee benefits 1,417,000 -
2,200,000 -
Other 2,499,000 1,922,000 3,467,000
2,166,000
Interest Income (227,000) (381,000)
(647,000) (762,000)
$8,399,000 $20,392,000 $12,288,000 $27,401,000
</TABLE>
<PAGE>
The Company anticipates that it will incur additional
reorganization costs for the remainder of its Chapter 11
reorganization.
Income tax benefit - No income tax benefit has been recorded
for the second quarter and first six 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 $28.0 million and $47.2 million
in the second quarter and first six months of fiscal 1996 as
compared to $37.9 million and $62.0 million in the second
quarter and first six months of fiscal 1995. The reduction
in the net loss is the result of reduced selling and
administrative expenses and lower reorganization costs,
offset in part by the impact of lower sales productivity and
reduced income tax benefits.
Earnings before interest, income taxes, depreciation,
amortization and reorganization costs (EBITDA), supplemental
financial information generally reported by debtors-in-
possession, were negative $12.9 million and negative $21.4
million in the second quarter and first six months of fiscal
1996 compared to negative $12.8 million and negative $23.7
million in the second quarter and first six months of fiscal
1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the first
six months of fiscal 1996 was approximately $46.3 million
compared to $50.8 million for the first six months of fiscal
1995. Property and equipment expenditures were $1.5 million
in the first six months of
<PAGE>
fiscal 1996 compared to $6.6 million for the first six months
of fiscal 1995. The capital expenditures for fiscal 1996 and
fiscal 1995 were principally for store openings and
remodelings.
The Company currently contemplates that it will open 1
new store and remodel 23 stores during the remainder of
fiscal 1996 at a cost of approximately $4.9 million, and make
other capital expenditures of approximately $1.4 million.
As of August 26, 1995, the Company's cash in banks plus
unused availability on its Debtor-in-Possession facility was
approximately $30.9 million.
The Company and two of its subsidiaries, MGR
Distribution Corporation, and Worths Stores Corp., as
Borrowers, (the "Borrowers") have entered into a Debtor-in-
Possession Credit Agreement dated as of July 18, 1995 (the
"Credit Agreement") with General Electric Capital Corporation
and Citicorp USA, as co-agents (the "Co-Agents") and the
lenders named therein (the "Lenders"). The proceeds of the
initial loans and letters of credit made under the Credit
Agreement were to repay substantially all obligations and
terminate substantially all commitments in respect of the
credit facilities provided by a Revolving Credit Agreement
dated as of January 14, 1994, as amended (the "Previous
Credit Agreement"), among the company, certain of its
subsidiaries, the financial institutions from time to time
party thereto and The CIT Group/Business Credit, Inc., as
agent, and any excess proceeds are to be used for working
capital and for other general corporate purposes. The Credit
Agreement was approved by the United States Bankruptcy Court
for the District of Maryland on July 13, 1995. Concurrent
with the execution of the Credit Agreement, the Company, MGR
Distribution Corporation and MGRR, Inc., entered into a
Termination and Release Agreement with the CIT Group/Business
Credit, Inc. terminating the Previous Credit Agreement.
Under the Credit Agreement, the Borrowers may borrow in
the form of cash borrowings, documentary letters of credit
and standby letters of credit an aggregate of the lesser of
$90,000,000 or the Borrowing Base described below. Letters
of credit are further limited to the lesser of $75,000,000
for commercial letters of credit and $15,000,000 for standby
letters of credit or the Borrowing Base.
The Lenders' commitment to make loans and issue letters
of credit expires on the earlier of (i) October 15, 1996,
(ii) the effective date of a plan of reorganization in the
cases filed by the Company and certain of its subsidiaries
pursuant to Chapter 11 of the U.S. Bankruptcy Code (the
"Chapter 11 Cases"), and (iii) the date of termination of the
Lenders' commitments pursuant to an "Event of Default" as
defined in the Credit Agreement (the "Commitment Termination
Date").
The Borrowing Base is defined as of any date of
determination, as an amount equal to the applicable
percentage of the "Eligible Inventory" (as defined in the
Credit Agreement) determined at the lower of cost using the
retail method or market. For the fiscal months of September,
October and November 1995, the applicable percentage used
<PAGE>
in the determination of the Borrowing Base is 55%. The
remainder of the year the advance rate is 50%. 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 (or eliminate the same) to the standards of
eligibility set forth in the definition of "Eligible
Inventory".
Each loan shall bear interest on the unpaid principal
amount thereof from the date made through maturity at a rate
per annum equal to the sum of the "Base Rate" (as defined in
the Credit Agreement) plus one and one-half percent (1.5%)
per annum. The Base Rate is defined as a fluctuating
interest rate per annum in effect from time to time, which
rate is equal to the highest of certain specified rates. The
rate fluctuates daily and as of September 6, 1995 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.
The Credit Agreement provides that all obligations
under the loan documents shall constitute allowed
administrative expense claims in the Chapter 11 Cases against
each borrower and the subsidiaries of the Company which have
executed and delivered a guaranty (collectively, the "Credit
Parties") and which are debtors in the Chapter 11 Cases, with
priority under Section 364(c)(1) of the United States
Bankruptcy Code over any and all other administrative
expenses of the kind specified or ordered pursuant to any
provision of the Code, subject to certain limited exceptions.
In addition, the Borrowers and certain subsidiaries of the
Company that have executed a guaranty have granted to General
Electric Capital Corporation, as secured party on behalf of
the Lenders a first priority security interest in
substantially all of their assets and a second priority
security interest on the Company's headquarters and
distribution center.
The Credit Agreement requires that certain
financial tests be met or exceeded, including with respect to
(i) EBITDA, (ii) the ratio of EBITDA to "Consolidated Fixed
Charges," and (iii) "Consolidated Net Worth," each as defined
in the Credit Agreement. In addition, the Credit Agreement
establishes certain restrictions on the Borrowers including
the maintenance of a cash management system, indebtedness,
guarantees, liens, capital expenditures, investments,
dividends, asset dispositions, and maximum restructuring fees
and disbursements.
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,
<PAGE>
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, 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 net cash provided by operating activities, factor
and vendor trade credit and debtor-in-possession financing
should enable the Company to meet its short-term liquidity
requirements. However, any change in the current status of
these or other items affecting the Company, including adverse
operating results, a 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 and on its operations.
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
27 Financial Data Schedule
10(ai) Executive Employment Agreement
entered into on
June 28, 1995 between the Registrant
and Richard
Crystal
10(aj) Management Agreement dated June
30, 1995
between the Registrant and Meridian
Ventures, Inc.
(b) Reports on Form 8-K
The Company filed a report on Form 8-
K dated
July 18, 1995 reporting the
replacement of its
pre-existing Debtor-in-Possession
Financing
arrangement with a new facility.
<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 September 12, 1995 /s/ Isaac Kaufman
Isaac Kaufman
Executive Vice President, Chief
Financial
Officer, Secretary and
Treasurer (Principal
Financial Officer)
DATE September 12, 1995 /s/ Robert J.
Reiners
Robert J. Reiners
Vice President of Finance and
Corporate Controller
(Principal Accounting Officer)
-5-
BADOCS1/0023388.01
Executive Employment Agreement
This Executive Employment Agreement (this Agreement) is
made and entered into on June 28, 1995, but shall be
effective for all purposes as of the Effective Date (as
hereafter defined) by Merry-Go-Round Enterprises, Inc. (the
Company) and Richard P. Crystal (the Employee).
Recitals
A. The Company desires to employ and retain the
Employee, and the Employee desires to enter into such
employment, on the terms and conditions set forth in this
Agreement.
B. The Company is a debtor in a Chapter 11 bankruptcy
proceeding pending in the United States Bankruptcy Court for
the District of Maryland, Baltimore Division (the Court) as
Case No. 94-5-0161-SD, et al. (the Bankruptcy Case).
Agreement
Now, therefore, in consideration of the promises and
the covenants contained in this Agreement, and other good
and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Employee
hereby agree as follows:
1. Employment. During the term of this Agreement
(the Term), the Company shall employ the Employee, and the
Employee hereby agrees to be employed by the Company, as the
President and Chief Executive Officer of the Company, upon
the terms and conditions set forth in this Agreement. The
parties acknowledge and agree that this Agreement is entered
into subject to the approval of the Court (and if such
approval is not obtained by September 1, 1995, this
Agreement shall be null and void and neither the Company nor
the Employee shall have any rights or obligations
hereunder). Except as contemplated by Section 2 hereof, the
Employee shall commence the performance of his services for
the Company hereunder on the Effective Date.
2. Term. The Term shall commence on the later of
(a) the day following the end of Employee's current
employment, which employment shall end no later than
August 1, 1995, or (b) the date of the entry of an order by
the Court approving the terms of this Agreement (the
Effective Date) and, subject to the provisions of Section 9,
the Term shall end on the date that is three (3) full
calendar years after the Effective Date. To the extent that
the Employee commences the performance of his services under
this Agreement prior to the Effective Date, then within five
(5) business days following the entry of an order by the
Court approving the terms of this Agreement, the Company
shall pay the Employee for any Base Compensation (as
hereafter defined) which would have
<PAGE>
been payable with respect to such period and, in such event,
the Effective Date shall be deemed to be the date upon which
the Employee commences such services.
3. Duties of the Employee.
(a) During the Term, the Employee shall serve as
the President and Chief Executive Officer of the Company.
In such position, the Employee shall have the customary
powers, responsibilities and authority of chief executive
officers of corporations of the size, type and nature of the
Company, including the primary executive and general
management responsibilities for the Company's business. The
Employee shall perform such duties and exercise such powers,
commensurate with his position, as may be determined from
time to time by the Company's Board of Directors to whom the
Employee shall report. During the Term, the Employee shall
be provided with an adequate office, staff and other working
facilities consistent with his position and adequate for the
performance of his duties. The Employee shall devote all of
his business time, attention, and energy to the Company and
shall not, during the Term, be engaged in any managerial or
employment capacity in any other business activity for gain,
profit, or other pecuniary advantage, without the express
prior consent of the Board of Directors; provided that the
foregoing shall not prohibit the Employee from making
investments that do not interfere with the performance of
his duties with the Company so long as such investments do
not violate the provisions of subparagraph 11(f) hereof.
(b) As soon as practicable on or after the
Effective Date and prior to the effective date of a Plan (as
hereinafter defined), the Company shall appoint the Employee
as a Director to serve on the Board of Directors.
(c) From and after the effective date of a Plan,
the Company shall nominate the Employee to serve as a
director on the Board of Directors and shall use the same
reasonable efforts as are expended for other management
nominees to cause the Employee to be elected to the Board
and thereafter to be re-elected as a director during the
Term.
(d) Commencing no later than the first
anniversary of the effective date of a Plan, and at each
election of officers of the Company by the Board held
thereafter during the Term, the Company shall nominate the
Employee to serve as Chairman of the Board of Directors and
shall use (in addition to the reasonable efforts required by
subparagraph 3(c) regarding the election of the Employee as
a director) such efforts as may be reasonable or appropriate
to cause the Employee to be elected, and thereafter re-
elected, as Chairman of the Board.
(e) So long as the Employee is not serving as the
Chairman of the Board of Directors (and whether or not the
Employee is entitled to be nominated therefor pursuant to
subparagraph 3(d)), the Chairman of the Board of Directors
shall not, without the Employee's express prior consent,
share any of the Employee's primary executive and
<PAGE>
management responsibilities for the Company's business. In
addition, the Employee's title as President and Chief
Executive Officer shall not be changed, and the Employee's
responsibilities, duties and powers (as set forth in
subparagraph 3(a)) shall not be materially reduced, without
the Employee's express prior consent.
4. Compensation.
(a) Base Compensation. The Employee shall
receive, as compensation for his services hereunder, an
annual base salary (the Base Compensation) equal to:
(a) $650,000 during the period commencing on the Effective
Date and ending 366 days thereafter (the First Year);
(b) $650,000 during the period commencing on the first
anniversary of the Effective Date and ending 365 days
thereafter (the Second Year); and (c) $700,000 during the
period commencing on the second anniversary of the Effective
Date and ending 365 days thereafter (the Third Year), which
amounts shall be payable in equal installments in accordance
with the standard payroll practices of the Company.
Payments of Base Compensation for any partial pay period
during the Term of this Agreement shall be proportionately
adjusted.
(b) Signing Bonus. The Employee shall receive an
initial signing bonus in the amount of $350,000 in cash upon
the later of (i) the actual commencement of Employee's
services under this Agreement, or (ii) the Effective Date.
In addition, provided the Effective Date has occurred, the
Employee shall receive an additional signing bonus in the
amount of $200,000 in cash upon the Employee's permanent
relocation of his residence and family to the Baltimore,
Maryland metropolitan area.
(c) Incentive Cash Compensation. In lieu of any
other cash incentive compensation or bonus program provided
by the Company to any of its other employees, the Employee
shall be entitled to incentive cash compensation as follows:
(i) Upon the expiration of the First Year
(if the Employee is still then employed by the Company), the
Employee shall receive incentive cash compensation in the
amount of $250,000;
(ii) Upon the expiration of each of the
Company's fiscal years 1997, 1998 and 1999 (i.e., the twelve
month periods ending January 31, 1997, 1998 and 1999,
respectively), the Employee shall be eligible to receive
cash incentive compensation in an amount ranging from 25% to
100% of the Employee's then current Base Compensation, upon
the Company's achievement of certain financial performance
thresholds during the fiscal year of the Company then ended,
which thresholds shall be determined in the discretion of
the Compensation Committee of the Board of Directors of the
Company (based on performance thresholds which are utilized
by comparable companies in the Company's industry);
provided, however, that except as otherwise provided in
subparagraph 10(a), the Employee shall not be entitled to
any incentive cash compensation for the Company's fiscal
year 1997, 1998 and/or 1999 unless (in the case
<PAGE>
of fiscal years 1997 and 1998) the Employee is still
employed by the Company on the last day of such fiscal
year(s) or unless (in the case of fiscal year 1999) the
Employee is still employed by the Company on the last day of
the Third Year. Notwithstanding the foregoing, if the
Employee is entitled to receive incentive compensation
pursuant to this subparagraph 4(c)(ii) upon the expiration
of either the Company's fiscal year 1997 or the Company's
fiscal year 1999, the amount of such incentive compensation
shall be proportionately adjusted by multiplying such
incentive compensation by a fraction. For the Company's
fiscal year 1997, the numerator of the fraction shall be the
number of days in fiscal year 1997 remaining after the
expiration of the First Year, and the denominator thereof
shall be 365. For the Company's fiscal year 1999, the
numerator of the fraction shall be the number of days during
fiscal year 1999 during which the Employee is employed by
the Company and the denominator thereof shall be 365; and
(iii) All incentive cash compensation
payments to the Employee pursuant to this subparagraph 4(c)
shall be paid at the same time the Company pays incentive
cash compensation to other executives but in no event later
than ninety (90) days after the end of the First Year or the
Company's applicable fiscal year, as the case may be.
5. Letter of Credit. In order to secure the payment
of the amounts set forth in subparagraphs 4(a), 4(c)(i),
10(b)(i) or 10(b)(ii) of this Agreement, the Company shall
arrange for a letter of credit to be issued for the benefit
of the Employee in the following amounts for the following
periods:
(a) During the First Year, the Company shall
maintain a letter of credit for the benefit of the Employee
in an amount equal to $2,250,000, which amount shall decline
on a monthly basis by an amount equal to $54,167. For
example, if the Effective Date of this Agreement is August
1, 1995, the amount of the letter of credit to be posted on
such date shall be equal to $2,250,000, with the amount of
such letter of credit declining on September 1, 1995 to
$2,195,833, and on October 1, 1995 to $2,141,666, and so
forth.
(b) During the Second Year, the Company shall
maintain a letter of credit for the benefit of the Employee
in an amount equal to $975,000.
(c) During the Third Year, the Company shall
maintain a letter of credit for the benefit of the Employee
in the amount of $1,050,000.
(d) Notwithstanding the provisions of
subparagraphs 5(a), 5(b) and 5(c), the Company shall not be
required to provide any letter of credit under this
Section 5 from and after the later of (i) the effective date
of a plan of reorganization (a Plan) confirmed in the
Bankruptcy Case, (ii) a termination of this Agreement and
the full payment of all sums, if any, owed the Employee
pursuant to subparagraphs 4(a), 4(c)(i), 10(b)(i) and
10(b)(ii) hereof, or (iii) January 31, 1997. If the Company
is no
<PAGE>
longer required to provide a letter of credit pursuant to
this subparagraph 5(d), the Employee shall have no right to
make any draw, or any further draw, under any letter of
credit then outstanding pursuant to this Section 5 and shall
instead immediately surrender any such letter of credit for
cancellation as directed by the Company.
(e) The initial letter of credit (provided for in
subparagraph 5(a)) shall be issued no later than the
Effective Date and each subsequent letter of credit (or
renewal of an existing letter of credit) shall be issued at
least (30) days prior to the expiration date of the initial,
subsequent or renewal letter of credit in question (and if
an existing letter of credit is replaced, rather than
renewed, the Employee shall surrender the existing letter of
credit at the time the Employee receives the replacement
letter of credit). Each initial, subsequent or renewal
letter of credit shall remain in effect until at least the
45th day after the end of the First Year, Second Year or
Third Year, as the case may be, for which it is being
maintained.
(f) Each letter of credit to be issued to the
Employee pursuant to this Section 5 shall be irrevocable and
provide that if the Company fails to make any payment
required by subparagraphs 4(a) or 4(c)(i), which failure
continues uncured for a period of thirty (30) days after the
Employee has given the Company written notice thereof (which
notice may run concurrently with notice of default pursuant
to subparagraph 9(d)), the Employee may elect between the
following: (i) if the undrawn balance of the then-current
letter of credit equals or exceeds the amount of the payment
which is in default and which the Company has failed to
cure, the Employee may either (1) make a draw under the
letter of credit in an amount sufficient to make the payment
in default (in which event the default shall be deemed fully
cured and the Employee shall not be entitled to terminate
his employment for Good Reason (as hereinafter defined)
pursuant to subparagraph 9(d)), or (2) exercise the
Employee's rights to terminate his employment for Good
Reason pursuant to subparagraph 9(d); or (ii) if the undrawn
balance of the then-current letter of credit is less than
the amount of the payment in default and which the Company
has failed to cure, the Employee may draw the remaining
balance under the letter of credit (which shall be applied
in reduction of the sums owed the Employee by the Company)
and, at his option, exercise the Employee's rights to
terminate his employment for Good Reason pursuant to
subparagraph 9(d). If the Company fails to make any payment
required by subparagraph 10(b)(i) or 10(b)(ii) then, (A) if
such failure occurs on or after a termination of the
Employee's employment by the Company without Cause (as
hereinafter defined), or (B) if such failure occurs on or
after a termination of the Employee's employment by the
Employee for Good Reason (following a failure by the Company
to cure as provided in subpart (y) of the Provided clause
following subparagraph 9(d)(v)), the Employee may elect to
make a draw under the letter of credit in the amount of such
default. If the balance of the letter of credit is less
than the amount of the payment in default, the draw upon the
letter of credit pursuant to the preceding sentence or
clause (ii) of the next preceding sentence shall be applied
in reduction of sums owed the Employee by the Company but
shall not relieve the Company of its obligation with respect
to any remaining amounts owed to the Employee.
<PAGE>
(g) Any draw upon any letter of credit by the
Employee shall be accompanied by his sight draft, an
affidavit executed by the Employee to the effect that
(i) the Company has failed to make a specified payment and
(ii) the Employee is entitled under this Agreement to submit
his sight draft for payment of a sum under the letter of
credit which is not less than the amount of such sight draft
and such other documentation (including the original of the
letter of credit) as may be required by the issuer of the
letter of credit pursuant to the terms thereof. The Company
hereby expressly waives any right to obtain injunctive
relief against the cashing of any letter of credit by the
Employee unless, as a condition to such relief, the issuer
of the letter of credit agrees, or is ordered, to extend the
term of the letter of credit in question for a period
expiring no less than fifteen (15) days after the respective
rights of the Company and the Employee in the underlying
dispute are agreed or finally determined.
(h) Each letter of credit shall be issued by an
issuer, and shall otherwise be in form and substance
reasonably satisfactory to the Company and the Employee
(provided, however, that the Company and the Employee each
agree that any letter of credit issued under, or pursuant
to, any debtor-in-possession financing arranged by the
Company shall be deemed to be issued by an acceptable
issuer).
6. Insurance.
(a) Life Insurance. During the Term, the Company
shall provide at its expense a term life insurance policy
for the Employee at a face amount equal to 200% of the
Employee's then-current Base Compensation (the Base Policy).
At the election of the Employee, the face amount of the Base
Policy may be increased to an amount equal to 300% of the
Employee's then-current Base Compensation, provided that the
Employee shall pay for any premiums for such life insurance
policy in excess of the amount of the premiums payable in
connection with the Base Policy.
(b) Disability Insurance. During the Term, the
Company shall provide at its expense disability insurance
for the benefit of the Employee in an amount equal to 65% of
the Employee's then current Base Compensation, provided that
such benefits shall in no event exceed $20,000 per month.
(c) Standard Rates. It is acknowledged and
agreed that the provisions of subparagraphs (a) and (b) of
this Section 6 are based on the assumption that the Employee
is insurable at standard rates (an assumption which, to the
best of the Employee's knowledge, information and belief, is
true and correct). Prior to the Effective Date, the
Employee shall cooperate with the issuer(s) of the proposed
life and disability insurance policies in providing such
information as either of them may reasonably request or
require (including taking a physical examination) in
connection with arranging for the life and disability
insurance coverage for the Employee provided for in
subparagraphs 6(a) and 6(b). If the Employee is insurable
at rates other than standard rates, then the Company shall
procure for the benefit of the Employee such insurance as
may be
<PAGE>
procured by payment of such standard rates in full
satisfaction of its obligations under this Section 6.
7. Other Benefits.
(a) Automobile Allowance. During the Term, the
Employee shall be entitled to a $20,000 annual allowance for
the lease or purchase of a suitable automobile to be used by
the Employee in connection with the business of the Company.
(b) Legal Fee Reimbursement. The Employee shall
be entitled to reimbursement of his legal fees in connection
with the negotiation and documentation of this Agreement in
an amount not to exceed $10,000.
(c) Vacation. The Employee shall be entitled to
paid vacation of four (4) weeks during each full year of the
Term, each of which weeks may be taken separately or
together; provided, however, any allotted vacation time
which has not been used in any particular year of the Term
may not be carried over to the next ensuing year.
(d) Relocation Benefits. The Company shall
provide the Employee with the following relocation benefits,
at the Company's expense:
(i) For a period not to exceed one (1) year
after the Effective Date, or for a period terminating upon
the Employee's permanent relocation of his residence and
family to the Baltimore, Maryland, metropolitan area,
whichever is shorter, the Company shall arrange for an
apartment for the Employee in the Baltimore, Maryland
metropolitan area at a monthly cost not to exceed $4,000.00,
which apartment shall be mutually acceptable to the Company
and the Employee;
(ii) The Company shall pay for all reasonable
out-of-pocket expenses incurred by the Employee in
connection with his relocation and the relocation of his
family to the Baltimore, Maryland, metropolitan area,
including moving expenses, reasonable brokerage fees (not in
excess of 6%), and customary closing costs (not to exceed
$5,000), incurred in connection with the sale of the
Employee's current residence;
(iii) In the event that the Employee is
unable to sell his current residence within a nine-month
period following the Effective Date, the Company shall
retain a nationally recognized relocation service reasonably
acceptable to the Company and the Employee, and the Employee
and the Company shall proceed in accordance with such
relocation service's normal practices and procedures
regarding the valuation of the subject residence and the
Employee shall be paid in consideration for such residence
an amount equal to such valuation. The Company shall pay
the reasonable fees and expenses charged by such relocation
service;
<PAGE>
(iv) The Company shall reimburse the Employee
for reasonable travel expense necessary for the Employee to
return to his current residence each weekend until his
relocation is complete; and
(v) The Company shall reimburse the Employee
for any income taxes actually paid by the Employee with
respect to any relocation expenses paid for or reimbursed to
the Employee pursuant to this subparagraph 7(d) (excluding
any taxes on the gain from a sale of the Employee's current
residence).
(e) Miscellaneous Benefits. The Company will
provide the Employee with medical, health and accident
benefits and other regular benefits in accordance with the
policies of the Company, including, without limitation,
access to Company credit cards, expense reimbursements or
any 401(k) plan or deferred compensation plan, on the same
terms and conditions as provided to other senior executives
of the Company, provided that such benefits shall not
include incentive cash compensation plans, stock options,
signing bonuses, relocation benefits, life or disability
insurance benefits, vacations or other benefits provided for
in this Section 7 or elsewhere in this Agreement except to
the extent expressly provided in this Agreement or as to
which the Compensation Committee of the Board may hereafter
elect to include the Employee.
8. Stock Options. As additional compensation for the
Employee's services under this Agreement, the Company shall
grant to the Employee options to purchase shares of common
stock of the reorganized Company issued pursuant to a Plan
(the New Common Stock), as follows:
(a) As of the Effective Date, the Company shall
grant to the Employee options to purchase shares of New
Common Stock in an amount equal to 2% of the number of
shares of New Common Stock issued and outstanding on the
date of issuance thereof, at a price per share equal to 50%
of the average of the trading price per share of such New
Common Stock over the ten day period commencing on the
twentieth (20th) day on which such New Common Stock is first
traded, which options shall vest in full on the later of
(i) the first anniversary of the Effective Date, or (ii) on
the effective date of the Plan.
(b) On each of the first anniversary and the
second anniversary of the Effective Date, the Company shall
grant to the Employee options to purchase shares of New
Common Stock in an amount equal to 1% of the number of
shares of New Common Stock then issued and outstanding
(assuming the exercise, conversion or exchange of all
options, warrants and other convertible or exchangeable
securities of the reorganized Company issued after the
effective date of the Plan other than the Plan Options (as
defined in subparagraph 8(g)), at a price per share equal to
the average of the trading price of such New Common Stock
over the first 20 days immediately preceding the date of the
grant of such options or if the effective date of a Plan has
not then occurred, the ten-day period commencing on the
twentieth (20th) day on which such New Common
<PAGE>
Stock is first traded. The options subject to each such
grant shall vest in three equal annual increments on the
first, second and third anniversary of the date of grant.
(c) In the event of a termination of the
Employee's employment with the Company as a result of the
Employee's death or by the Company without Cause or by the
Employee for Good Reason, all of the options previously
granted to the Employee shall fully vest. In the event of
the termination of the Employee's employment with the
Company as a result of the Employee's disability (as
hereafter defined) the options previously granted to the
Employee will continue to vest in accordance with Sections
8(a) and 8(b). In the event of the termination of the
Employee's employment with the Company for any other reason
(such as for Cause or other than for Good Reason), the
options previously outstanding and vested shall be
exercisable, but all options not granted or vested shall be
cancelled.
(d) Except as otherwise provided in subparagraph
8(c), the options granted to the Employee pursuant to this
Section 8 shall expire and become unexercisable upon the
tenth anniversary of the date of grant to the Employee.
(e) If permitted by law at the time of exercise,
the options granted to the Employee pursuant to this Section
8 shall provide that, at the sole discretion of the
Employee, the exercise price of any option may be paid by
surrender to the Company of that number of currently
exercisable options, each valued at the difference between
the exercise price thereof and the market price of the New
Common Stock on the date of exercise, having an aggregate
value equal to the aggregate exercise price of the options
to be so exercised.
(f) Subject to the provisions of subparagraph
8(g):
(i) If the reorganized Company shall, after
the consummation of a Plan, issue any additional shares of
stock by way of a stock dividend on, or split-up,
subdivision, or reclassification of outstanding shares of
New Common Stock, the options granted pursuant to this
Section 8 shall provide that the number of shares of New
Common Stock subject to such options and the exercise prices
therefor shall be proportionately adjusted;
(ii) If, after the consummation of a Plan,
there shall be any capital reorganization, or consolidation,
recapitalization or merger of the reorganized Company with
any other corporation or corporations, or any sale of all or
substantially all of the reorganized Company's property and
assets to any other corporation or corporations, the options
granted pursuant to this Section 8 shall provide that (and
the reorganized Company shall take appropriate action to
enable) the Employee to receive upon any subsequent exercise
of such option, in lieu of any shares of New Common Stock,
the shares or other securities or other assets as were
issuable or payable upon such
<PAGE>
reorganization, consolidation, recapitalization, merger or
sale in respect of or in exchange for such shares of New
Common Stock; and
(iii) Notwithstanding any adjustments to
be made pursuant to this subparagraph 8(f), no fractional
share shall be issued upon any exercise of any option, and
the aggregate price paid shall be appropriately reduced on
account of any fractional share not issued.
(g) It is expressly understood and agreed that a
Plan will, or may, provide for the issuance of warrants,
options or conversion, exchange or other similar rights with
respect to the New Common Stock (Plan Options). The options
granted pursuant to this Section 8 (and the shares of New
Common Stock subject thereto) shall not be protected against
dilution by (but shall instead be subject to dilution to the
extent of) the issuance (or exercise) of any or all such
Plan Options. Except for dilution resulting from the
issuance or exercise of Plan Options, the options granted
pursuant to this Section 8 shall be protected against
dilution. The number of shares of New Common Stock subject
to the options granted in this Section 8 shall be calculated
in accordance with the provisions of this subparagraph 8(g).
(h) It is further expressly understood and agreed
that a Plan will, or may, provide for a stock option plan
respecting options for shares of New Common Stock, which
options are to be available to employees of the reorganized
Company. The Employee agrees that (i) any provision in an
employee stock option plan contained in, or adopted pursuant
to, a Plan which supplements, or is not inconsistent with,
subparts (a) through (g) of this Section 8 shall apply to
the options to be granted pursuant to this Section 8 and
(ii) that if it is necessary to modify the provisions of
subparts (d), (e) and (f) of this Section 8 in order to make
such subparts consistent with an employee stock option plan
contained in, or adopted pursuant to, a Plan (which plan
shall not materially and adversely affect the value of the
Employee's options and in which the Employee shall
participate), the Employee shall not unreasonably withhold
his consent to such modifications.
9. Termination.
(a) Death. The Employee's employment hereunder
shall terminate upon the Employee's death.
(b) Disability. If the Employee becomes disabled
(as hereinafter defined), the Company may terminate the
Employee's employment hereunder upon not less than five (5)
days' notice. For all purposes of this Agreement, the
Employee shall be deemed to be "disabled" (or to be under a
"disability") if the Employee qualifies for total disability
benefits under the disability policy for the Employee
provided for in subparagraph 6(b) (or if, there is then no
such policy in force as to the Employee, the
<PAGE>
Employee's condition would constitute total disability under
the disability policy then in force for the Company's
employees).
(c) Cause. The Company may terminate the
Employee's employment hereunder for Cause. "Cause" shall
mean any one or more of the following, to be determined in
the reasonable business judgment of the Board of Directors
of the Company:
(i) The Employee's conviction of, or plea of
nolo contendere to, any crime constituting a felony, or a
misdemeanor involving moral turpitude;
(ii) The Employee's willful misconduct
(including fraud, embezzlement or misappropriation) or
willful malfeasance by the Employee in connection with his
employment;
(iii) The Employee's breach of the
provisions of subparagraphs 11(a), 11(b), 11(d) or 11(e)
while still employed by the Company, or the Employee's
breach of his representations and warranties pursuant to
Section 13; or
(iv) Except for material breaches of this
Agreement already provided for in subparts (i) through (iv)
of this subparagraph 9(c), the Employee's material breach of
any provision of this Agreement which is not fully cured
within thirty (30) days after notice thereof from the Board
of Directors.
Termination of the Employee's employment pursuant to
this subparagraph 9(c) shall be made (and shall be effective
upon) delivery to the Employee of a copy of a resolution
duly adopted by the affirmative vote of not less than a
majority of the Board of Directors at a meeting called and
held (whether in person, by telephone or by any other means
permitted by applicable law or the Company's By-laws) for
that purpose finding that, in the reasonable business
judgment of the Board, one or more of the events specified
in subparts (i) through (iv) of this subparagraph 9(c) have
occurred and specifying the material particulars thereof (to
the extent then known to the members of the Board other than
the Employee).
(d) Good Reason. The Employee may terminate his
employment for Good Reason. For the purposes of this
Agreement, "Good Reason" shall mean the occurrence of any
one or more of the following:
(i) The conversion of the Bankruptcy Case to
a Chapter 7 bankruptcy proceeding or the appointment of a
trustee for the Company in the Bankruptcy Case (other than
for or on account of any malfeasance, misfeasance or other
misconduct by the Employee);
<PAGE>
(ii) The relocation, without the Employee's
prior consent, of the Company's principal executive offices
from its present location to a location which is more than
twenty-five (25) miles away from its present location or
otherwise outside the Baltimore, Maryland/ Washington, D.C.,
metropolitan area;
(iii) Any failure to elect the Employee
as Chairman of the Board of Directors at any meeting of
directors at which the Employee is entitled to be nominated
for such chairmanship pursuant to subparagraph 3(d);
(iv) Any assumption of Control by a
Competitor without the Employee's prior consent. For the
purposes of this Agreement:
(1) a "Competitor" shall mean and
include any retailer with annual sales in excess of
$50,000,000 and any parent, subsidiary, affiliate, division,
director, officer, employee or agent of any such retailer;
and
(2) a Competitor's "assumption of
Control" shall mean and include any one or more of the
following: the acquisition of all or substantially all of
the Company's assets by any Competitor; or representatives
of any Competitor constituting a majority of the Company's
Board; or the Company's merger with, or consolidation into,
any other corporation or entity, other than a merger or
consolidation which results in a majority of the board of
directors (or other similar committee) of the surviving
entity being comprised of persons other than representatives
of a Competitor; or
(v) A material breach of this Agreement
(including, without limitation, any change in the Employee's
title, or any material reduction in the Employee's
responsibilities, duties and powers, without the Employee's
prior consent in violation of subparagraph 3(e) or any
reduction, or attempted reduction, without the Employee's
prior consent, of the Employee's Base Compensation, the
number of options or the exercise price or the other option
rights provided in Section 8 or the range of the Employee's
incentive cash compensation opportunity provided in
subparagraph 4(c) hereof) by the Company;
Provided, however, that (except as otherwise provided
in the immediately following subpart (z)) the foregoing
events shall not be deemed to constitute Good Reason unless
(y) in the case of each of the events specified in
subparagraphs 9(d)(i) through 9(d)(v) the Employee shall
have given notice to the Company of the occurrence of such
event and the Company shall have failed to cure such event
within thirty (30) days after the giving of such notice, or
(z) in the case of the Company's failure to make a payment
to the Employee required by subparagraphs 4(a) or 4(c)(i)
(which constitutes a material breach of this Agreement
within the meaning of subparagraph 9(d)(v)), the respective
rights and options of the Employee to treat such a failure
as Good Reason shall be as set forth in, and shall be
governed by, subparagraph 5(f).
<PAGE>
(e) Resignation. Resignation shall govern
situations where the Employee chooses to voluntarily
terminate his employment relationship with the Company other
than for Good Reason.
10. Compensation Upon Termination.
(a) For Death or Disability. If the Employee's
employment terminates because of the Employee's death or
disability, the Company shall not thereafter be obligated to
make any further payments of any type or amount pursuant to
this Agreement other than (i) any benefits required by
Federal or State law; (ii) any accrued and unpaid Base
Compensation; (iii) any incentive compensation earned
pursuant to subparagraph 4(c)(i) with respect to the First
Year (if previously completed) or subparagraph 4(c)(ii) with
respect to any previously completed fiscal year which
remains unpaid as of such date of termination; and (iv) any
amounts to which the Employee may be entitled pursuant to
the plans, policies and practices of the Company then in
effect. In addition, if the Employee's employment
terminates due to his death or disability prior to the end
of the First Year or during a fiscal year, the Company shall
pay to the Employee (or his legal representative) at the
time incentive cash compensation is paid with respect to the
First Year or fiscal year in which such termination occurs a
pro rata amount of any cash incentive compensation due in
respect of the First Year or fiscal year in which such event
occurs calculated as if the Employee had been employed for
the duration of such First Year or fiscal year, provided,
however, that the amount of such incentive compensation
shall be proportionately adjusted by multiplying such
incentive compensation by a fraction, the numerator of which
is the number of days in such First Year or fiscal year
prior to the termination of the Employee's employment
hereunder and the denominator of which is 365 or 366, as
applicable.
(b) Without Cause or for Good Reason. If the
Company terminates the Employee's employment without Cause
(for purposes of this Agreement, termination "without Cause"
shall mean that the Company terminates the Employee's
employment for any reason other than for the Employee's
death, disability, or "Cause"), or if the Employee
terminates his employment hereunder for Good Reason, the
Employee shall receive the following:
(i) If such termination occurs prior to the
effective date of a Plan, (x) during the First Year, an
amount equal to $2,250,000, which amount shall be reduced on
a monthly basis by an amount equal to $54,167 per month; or
(y) during the Second Year, an amount equal to $975,000; or
(z) during the Third Year, an amount equal to $1,050,000.
(ii) If such termination occurs on or after
the effective date of a Plan, (x) during the First Year or
the Second Year, an amount equal to $975,000; or (y) during
the Third Year, an amount equal to $1,050,000.
<PAGE>
(iii) In either case covered by subpart
(i) or (ii) of this subparagraph 10(b), together with (w)
any benefits required by Federal or State law; (x) any
accrued and unpaid Base Compensation; (y) any incentive
compensation earned pursuant to subparagraph 4(c)(i) with
respect to any previously completed First Year or
subparagraph 4(c)(ii) with respect to any previously
completed fiscal year which remains unpaid as of such date
of termination; and (z) any amounts to which the Employee
may be entitled pursuant to the plans, policies and
practices of the Company then in effect.
(iv) If such termination occurs (1) prior to
the effective date of a Plan, and (2) following an
assumption of Control by a Competitor (on the basis of which
the Employee timely elects to terminate this Agreement for
Good Reason pursuant to subparagraph 9(d) or is terminated
by the Company pursuant to subparagraph 14(a)(ii)), and (3),
as a result of such Competitor's assumption of Control,
either no New Common Stock is to be issued by the
reorganized Company or all or substantially all of such New
Common Stock is to be issued to the Competitor, then the
Company shall pay the Employee an Option Cancellation Fee,
which shall mean the sum obtained by multiplying the value
of the stockholders' equity in the Company (as determined by
the Court in the Bankruptcy Case in connection with the
Competitor's assumption of Control) by the Employee's
"Option Percentage" and by then reducing the product of each
multiplication by the Employee's "Imputed Exercise Price."
For the purposes of this Agreement:
(A) the Employee's "Option Percentage"
shall mean 2% (if a termination described in this
subparagraph 10(b)(iv) occurs during the First Year), or 3%
(if such a termination occurs during the Second Year), or 4%
(if such a termination occurs during the Third Year); and
(B) the Employee's "Imputed Exercise
Price" shall mean the aggregate price the Employee would
have had to pay to exercise options to purchase the
applicable Option Percentage of the Company's issued and
outstanding common stock as of the date on which a
termination described in this subparagraph 10(b)(iv) occurs,
using as an exercise price (for options granted on the
Effective Date) a price per share equal to 50% of the
average of the trading price per share of such stock over
the twenty (20) day period immediately preceding the public
announcement of such occurrence, or using as an exercise
price (for options granted on the first or second
anniversary of the Effective Date) a price per share equal
to the average of the trading price of such stock over the
twenty (20) day period immediately preceding the public
announcement of such occurrence.
(v) Any sums owed the Employee pursuant to
(1) subparts (i), (ii) and (iii) of this subparagraph 10(b)
shall be paid within thirty (30) days after termination and
(2) subpart (iv) of this subparagraph 10(b) shall be paid
within thirty (30) days after a termination described in
such subpart (iv) or within thirty (30) days after the
determination of the Option Cancellation Fee, whichever is
later.
<PAGE>
(vi) If the Employee's employment is
terminated by the Company without Cause or by the Employee
for Good Reason, the Employee shall have no obligation to
seek other employment or otherwise to mitigate any payments
to be made to the Employee pursuant to this subparagraph
10(b) and any such payments to the Employee by the Company
shall not be reduced by any payments the Employee may
receive from any third party after the termination of his
employment by the Company; provided, however, that the
provisions of this subparagraph 10(b)(vi) shall not be
deemed or construed to limit, restrict, prejudice or
adversely affect in any manner any rights or remedies the
Company may have against the Employee under Section 11
hereof or any other provision of Agreement.
(c) For Cause or Resignation. If the Employee is
terminated for Cause, or if the Employee resigns his
employment other than for Good Reason, he shall not be
entitled to any further compensation whatsoever under this
Agreement other than (i) any benefits required by Federal or
State law; (ii) any accrued and unpaid Base Compensation;
(iii) any incentive compensation earned pursuant to
subparagraph 4(c)(i) with respect to the First Year (if
previously completed) or subparagraph 4(c)(ii) with respect
to any previously completed fiscal year which remains unpaid
as of such date of termination; and (iv) any amounts to
which the Employee may be entitled pursuant to the plans,
policies and practices of the Company then in effect. Any
payments made, or due, to the Employee pursuant to this
subparagraph 10(c) shall be without prejudice to the
Company's rights, claims and remedies for or on account of
the Employee's termination for Cause or resignation other
than for Good Reason and the Company shall be entitled to
pursue all such rights, claims and remedies against the
Employee as may be available at law, in equity or otherwise.
(d) Expiration Without Renewal. In the event the
Employee's employment is not terminated during the Term of
this Agreement, but is not renewed by the Company upon the
expiration of the Term, the Company shall pay the Employee
an amount equal to $700,000, together with (i) any benefits
required by Federal or State law; (ii) any accrued and
unpaid Base Compensation; (iii) any incentive compensation
earned for fiscal years 1997, 1998 and 1999 pursuant to
subparagraph 4(c)(ii) which remains unpaid as of such date
of termination; and (iv) any amounts to which the Employee
may be entitled pursuant to the plans, policies and
practices of the Company then in effect.
11. Non-Competition and Covenant Not to Compete. The
Employee acknowledges that his employment with the Company
will, of necessity, provide him with specialized, unique
knowledge and confidential information which, if used in
competition with the Company, could cause harm to the
Company which is engaged in a highly competitive business on
a national basis. In consideration of the Employee's
continued employment, and in further consideration of the
substantial obligations the Company must undertake pursuant
to this Agreement, the Employee agrees:
<PAGE>
(a) While engaged as an Employee of the Company,
the Employee may only use confidential information of the
Company for purposes which are in furtherance of the
Company's interests and directly related to the carrying out
of the Employee's duties as an employee of the Company. The
Employee shall not make use of any confidential information
of the Company after he is no longer an employee of the
Company (and regardless of the reason for the termination of
the Employee's employment with the Company, i.e., whether or
not such termination is with or without Cause or Good
Reason). For the purpose of this Agreement, all
information, whether written or otherwise, regarding the
Company's customers, customer lists, prospective customers,
costs and pricing, supplier information, earnings,
contracts, employees, subcontractors, business plans,
marketing strategies, and other business arrangements shall
be considered to be confidential information of the Company;
provided, however, that "confidential information" shall not
include (i) information which is generally known to the
public or the industry other than as a result of the
Employee's breach of this Section 11 or any of the
Employee's other obligations hereunder; (ii) information
regarding the Company's business or industry properly
acquired by the Employee in the course of his career as an
executive in the Company's industry and prior to, and
independent of, the Employee's employment by the Company and
any discussions or negotiations concerning this Agreement
and the Employee's prospective employment by the Company; or
(iii) information which the Employee is obligated to
disclose pursuant to an order, or other compulsory process,
of any judicial or governmental authority (except that the
Employee shall immediately give notice to the Company of the
receipt or service of any such order or process and shall
fully cooperate with all efforts of the Company to seek a
protective order or any other restraint against disclosure
that may lawfully be available).
The Employee further agrees that he will, immediately
upon termination of his employment with the Company return
to the Company all books, records, customer and pricing
lists, correspondence, contracts (other than this Agreement
or other agreements to which he is a party) or orders,
advertising or promotional material, and other written,
typed or printed materials, whether furnished by the Company
or prepared by the Employee, which contain any information
relating to the Company's business (whether or not deemed
confidential hereunder), and the Employee agrees that he
will neither make nor retain any copies of such materials;
provided, however, that the foregoing provisions shall not
be deemed to apply to the Employee's purely personal records
and papers which contain no confidential information
respecting the Company.
(b) While employed by the Company, the Employee
agrees that he will not, directly or indirectly, be employed
by or work for any other person, firm or entity without the
express prior consent of the Board of Directors pursuant to
subparagraph 3(a).
(c) If the Employee's employment with the Company
is terminated with Cause or for other than Good Reason,
then, for a period of one (1) year after such
<PAGE>
termination, the Employee shall not, directly or indirectly,
either as a proprietor, stockholder, partner, officer,
employee, consultant, advisor or otherwise work or render
services of any kind to or for any retailer with annual
sales in excess of $50,000,000 that specializes in and
derives 50% or more of its revenues from men's and/or
women's sportswear or fashion forward attire or any parent,
subsidiary, affiliate, division, director, officer, employee
or agent of any such retailer.
(d) While employed by the Company as well as for
a period of one (1) year thereafter (and regardless of the
reason for the termination of the Employee's employment with
the Company), the Employee shall not, directly or
indirectly, induce, entice or hire, or attempt to induce,
entice or hire any employee of the Company, or former
employee of the Company who had been an employee of the
Company at any time during the one (1) year period prior to
the Employee's actual or attempted inducement, enticing or
hiring of such individual, to leave the Company's employ or
otherwise to work or render services of any kind, as an
employee, consultant, representative or independent
contractor or otherwise, to or for any person or entity
other than the Company.
(e) The Employee represents and warrants that the
knowledge, skills and abilities he currently possesses
and/or possessed prior to employment hereunder are
sufficient to permit him, in the event of the termination of
his employment hereunder for any reason, to earn a
livelihood satisfactory to himself without violating any
provision of this Agreement, for example, by using such
knowledge, skills and abilities, or some of them, in the
service of a noncompetitor of the Company.
(f) Nothing in this Agreement shall be deemed to
prevent the Employee from owning securities of any publicly-
owned corporation engaged in a similar business, provided,
however, that the total amount of securities of each class
owned by the Employee in such publicly-owned corporation
does not exceed one percent (1%) of the outstanding
securities of such class.
(g) In the event of a breach or threatened breach
by the Employee of the provisions of subparagraphs 11(a),
11(b), 11(c), 11(d) or 11(e) of this Agreement, the Company
shall be authorized and entitled to obtain an injunction
restraining the Employee from such breach or threatened
breach; provided, however, the foregoing shall not be deemed
to prevent the Employee from contesting the issuance of any
such injunction on the ground that no such violation or
threatened violation has occurred. The Company and the
Employee agree that all actions or proceedings arising in
connection with any injunctive relief sought pursuant to
this subparagraph 11(g) or otherwise under this Agreement
shall be tried and litigated only in the Maryland State or
Federal courts located in the City or County of Baltimore,
State of Maryland. The Employee hereby irrevocably submits
to the exclusive jurisdiction and venue of the foregoing
State and Federal courts for the purpose of any such action
or proceeding and hereby further irrevocably agrees that
process in any such action or proceeding may be served upon
the
<PAGE>
Employee, in addition to any other method provided by law,
in the same manner as a notice given to the Employee
pursuant to Section 17. Nothing in this Agreement shall be
construed as prohibiting the Company from pursuing any other
remedies available to it for a breach or threatened breach
of subparagraphs 11(a), 11(b), 11(c), 11(d) or 11(e).
(h) In the event any provision of subparagraphs
11(a), 11(b), 11(c), 11(d) or 11(e) above is held to be an
unreasonable restriction upon the Employee, the court so
holding may reduce the territory to which it pertains and/or
the period of time in which it operates, or order any other
change to the extent necessary to render such provision
enforceable.
(i) Without in any way limiting the rights of the
Company hereunder, it is expressly acknowledged and agreed
that the Employee's compliance with subparagraphs 11(a),
11(c), 11(d) and 11(e) is a condition precedent to the
Company's obligation to make any payments to the Employee
pursuant to subparagraphs 10(b)(i), 10(b)(ii) and 10(b)(iv)
hereof.
(j) In recognition of the respective rights of
the Company and the Employee to terminate the Employee's
employment with the Company at any time for any reason,
subject to the consequences of such termination as set forth
in this Agreement, the Employee agrees that nothing
contained herein shall be deemed to give the Employee a
continuing right to employment and that he is employed by
the Company on an at-will basis. Nothing contained in this
Agreement or elsewhere shall be construed as limiting the
effect of this subparagraph 11(j).
12. Arbitration. Except for actions or proceedings
for injunctive relief, any dispute or controversy arising
under or in connection with this Agreement or in any manner
associated with Employee's employment shall be settled
exclusively by arbitration in Maryland, in accordance with
the rules of the American Arbitration Association then in
effect. The parties agree to execute and be bound by the
mutual agreement to arbitrate claims attached hereto as
Attachment A.
13. Representation and Warranties.
(a) Employee represents and warrants to the
Company that:
(i) The Employee is under no contractual or
other restriction or obligation, compliance with which is
inconsistent with the execution of this Agreement, the
performance of the Employee's obligations hereunder, or the
other rights of the Company hereunder;
(ii) The Employee is under no physical or
mental disability that would hinder the performance of the
Employee's obligations under this Agreement; and
<PAGE>
(iii) The Company has advised the
Employee to consult an attorney regarding the terms of this
Agreement and the Employee has done so.
(b) The Company represents and warrants to the
Employee that, subject to approval by the Court in the
Bankruptcy Case, the Company has all requisite corporate
power and authority to enter into this Agreement and this
Agreement has been duly authorized by all necessary
corporate actions.
14. Consolidation, Merger or Sale of Assets.
(a) In the event of a future disposition of all
or substantially all of the properties and businesses of the
Company by merger, acquisition, consolidation, or sale of
assets, then the Company may elect either:
(i) To assign this Agreement and all of its
rights and obligations hereunder to the acquiring or
surviving person or entity; provided that such corporation,
person or entity shall assume in writing all of the
obligations of the Company hereunder; or
(ii) In addition to the Company's other
rights of termination, to terminate this Agreement without
Cause, by giving the Employee at least five days' written
notice and by paying the Employee in accordance with
subparagraph 10(b) hereof.
(b) A change or changes in Company ownership due
to acquisition of Company stock or confirmation of a Plan
shall not be considered a consolidation, merger or sale of
assets for purposes of Section 14(a).
(c) The provisions of subparagraphs 14(a) and
14(b) shall not be deemed or construed as prejudicing or
adversely affecting the rights of the Employee pursuant to
subparagraphs 9(d)(iv), 10(b)(iv) and 10(b)(v) hereof.
15. Waiver of Breach. The waiver by either the
Company or the Employee of any breach of any provision of
this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach of any
provision of this Agreement. No waiver of any provision of
this Agreement shall be valid unless in writing and signed
by the party sought to be charged thereby.
16. Assignment. The Employee acknowledges that the
services to be rendered by him are unique and personal.
Accordingly, the Employee may not assign any of his rights
or delegate any of his duties or obligations under this
Agreement (except that the Employee may make an outright
assignment of any of his rights to receive payments or other
property hereunder by will or by operation of the laws of
intestate succession). The rights and obligations of the
Company under this Agreement shall inure to the benefit of
<PAGE>
and shall be binding upon the successors and assigns of the
Company (either by merger, purchase or otherwise and
specifically including, without limitation, the reorganized
Company pursuant to the Plan), provided that any such
assignment may be made only in accordance with subparagraph
14(a)(i) above.
17. Notice. For purposes of this Agreement, notices
and all other communications provided for in the Agreement
shall be in writing and shall be deemed to have been duly
given when hand-delivered, sent by Federal Express or
similar commercial overnight delivery service, or mailed by
United States certified mail, return receipt requested,
postage prepaid, as follows:
If to the Company:
Mr. Stephen Wertheimer
Merry-Go-Round Enterprises, Inc.
3300 Fashion Way
Joppa, Maryland 21085
With a copy (which shall not constitute notice) to:
Roger Frankel, Esquire
Swidler & Berlin, Chartered
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
If to the Employee:
Mr. Richard P. Crystal
c/o Merry-Go-Round Enterprises, Inc.
3300 Fashion Way
Joppa, Maryland 21085
With a copy (which shall not constitute notice
except in the case of the Employee's disability) to:
John M. Callagy, Esquire
Kelley, Drye & Warren
101 Park Avenue
New York, New York 10178
or such other addresses, or addressees, either party may
have furnished to the other in writing in accordance
herewith, except that notices of change of address, or
addressees, shall be effective only upon receipt.
<PAGE>
18. Validity. The invalidity or unenforceability of
any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
19. Binding Effect. This Agreement shall be binding
upon and shall inure to the benefit of the respective
permitted successors, assigns, legal representatives and
heirs to the parties hereto.
20. Applicable Law. This Agreement is made pursuant
to and shall be governed, construed and enforced in all
respects and for all purposes in accordance with the laws of
the State of Maryland, without regard to principles of
conflicts of law.
21. Entire Agreement Amendment. This Agreement
contains the entire understandings of the parties, and
supersedes all prior and contemporaneous agreements between
the parties with respect to the subject matter hereof. It
may not be changed orally but only by an agreement in
writing signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is
sought.
22. COBRA Rights. The Company shall reimburse the
Employee for all payments made, or payable, by the Employee
to maintain the health coverage benefits for himself and his
family pursuant to COBRA during the period following the
expiration of the Employee's employment with his last
employer and ending with the date on which the Employee
became eligible for coverage by the Company's health
benefits plan.
In witness whereof the parties have executed this
Agreement as of the date first written above.
Merry-Go-Round Enterprises, Inc.
("Company")
/s/Richard P. Crystal By:/s/Thomas C. Shull
Richard P. Crystal ("Employee") Thomas C. Shull
Chairman and CEO
<PAGE> ATTACHMENT A
MUTUAL AGREEMENT
TO ARBITRATE CLAIMS
1. I, Richard P. Crystal, recognize that differences
could arise between Merry-Go-Round (the "Company") and me
during or following my employment with the Company. I
understand and agree that by entering into this Agreement to
Arbitrate Claims ("Agreement"), I gain the benefits of a
speedy, impartial dispute-resolution procedure.
2. I understand that any reference in this Agreement
to the Company will be a reference also to all stockholders,
directors, officers, employees, parents, subsidiaries and
affiliated entities, all benefit plans, the benefit plans'
sponsors, fiduciaries, administrators, and all successors
and assigns of any of them.
Claims Covered by the Agreement
3. The Company and I mutually agree to the resolution
by arbitration of all claims or controversies ("claims"),
arising out of my employment (or its termination), that the
Company may have against me or that I may have against the
Company. The claims covered by this Agreement include, but
are not limited to, claims under my Employment Agreement
with the Company of even date, claims for wages or other
compensation due; claims for breach of any contract or
covenant (express or implied); tort claims; claims for
discrimination (including, but not limited to, race, sex,
color, religion, national origin, age, (state or federal Age
Discrimination in Employment Act), marital status, veterans
status, sexual preference, medical condition, handicap or
disability); claims for benefits, after exhaustion of any
review procedures (except where an employee benefit or
pension plan specifies that its claims review procedure
shall culminate in an arbitration procedure different from
this one); and claims for violation of any federal, state,
or other law, statute, regulation, or ordinance, except
claims excluded in the following paragraphs.
Claims Not Covered by the Agreement
4. Claims I may have for workers' compensation or
unemployment compensation benefits are not covered by this
Agreement.
5. Also not covered are claims for injunctive and/or
other equitable relief to the extent permitted by the
Employment Agreement.
<PAGE>
Required Notice of All Claims
6. The Company and I agree that the aggrieved party
must give written notice of any claim to the other party
within the applicable state or federal statute of
limitations. The other party shall have 15 working days to
serve a written notice of its defenses.
Notice
7. For purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be
in writing and shall be deemed to have been duly given when
hand-delivered, sent by Federal Express or similar
commercial overnight delivery service, or mailed by United
States certified mail, return receipt requested, postage
prepaid, as follows:
If to the Company:
Mr. Stephen Wertheimer
Merry-Go-Round Enterprises, Inc.
3300 Fashion Way
Joppa, Maryland 21085
With a copy (which shall not constitute notice) to:
Roger Frankel, Esquire
Swidler & Berlin, Chartered
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
If to the Employee:
Mr. Richard P. Crystal
c/o Merry-Go-Round Enterprises, Inc.
3300 Fashion Way
Joppa, Maryland 21085
With a copy (which shall not constitute notice
except in the case of the Employee's disability) to:
John M. Callagy, Esquire
Kelley, Drye & Warren
101 Park Avenue
New York, New York 10178
<PAGE>
or such other addresses, or addressees, either party may
have furnished to the other in writing in accordance
herewith, except that notices of change of address, or
addressees, shall be effective only upon receipt.
8. The written notice shall identify and describe the
nature of all claims or defenses asserted and the material
facts upon which such claims or defenses are based.
9. In order to avoid delay, the Company will not
defend a claim of employment discrimination on the grounds
that I have not received a notice of right to sue, if I am
not yet eligible to receive such a notice.
Representation
10. Any party may be represented by an attorney or
other representative selected by the party.
Discovery
11. Each party shall have the right to take the
deposition of at least one individual and any expert witness
designated by another party. Each party also shall have the
right to make requests for production of documents to any
party. Additional discovery may be had only where the
Arbitrators selected pursuant to this Agreement so order.
Arbitration Procedures
12. The Company and I agree that, except as provided
in this Agreement, any arbitration shall be in accordance
with the then-current Employment Arbitration Procedures of
the American Arbitration Association ("AAA").
13. The Dispute shall be heard and determined by three
arbitrators selected in accordance with the Employment
Arbitration Procedures of the AAA. All decisions of the
Arbitrators will be by a majority.
14. The Arbitrators shall apply the substantive law
(and the law of remedies, if applicable) of the state in
which the claim arose, or federal law, or both, as
applicable to the claim(s) asserted. The Arbitrators, and
not any federal, state, or local court or agency, shall have
exclusive authority to resolve any dispute relating to the
interpretation, applicability, enforceability or formation
of this Agreement, including but not limited to any claim
that all or any part of the Agreement is void or voidable.
15. The Arbitrators shall have jurisdiction to hear
and rule on pre-hearing disputes and are authorized to hold
pre-hearing conferences by telephone or in person as
<PAGE>
the Arbitrators deem necessary. The Arbitrators shall have
the authority to entertain a motion to dismiss and/or a
motion for summary judgment by any party.
16. Either party, at its expense, may arrange for and
pay the cost of a court reporter to provide a stenographic
record of proceedings.
17. Either party, upon request at the close of hearing
shall be given leave to file one or more post-hearing
briefs. The time for filing such briefs shall be set by the
Arbitrators.
18. Either party may bring an action in any court of
the competent jurisdiction to compel arbitration under this
Agreement and to enforce an arbitration award.
Arbitration Fees and Costs
19. The Company and I shall equally share the fees and
costs of the Arbitrators.
20. Each party to the arbitration shall pay for its
own costs and attorneys' fees, if any. However, if a party
prevails on a claim, the Arbitrators may award reasonable
costs or attorneys' fees to such prevailing party.
Proceedings
21. The arbitration proceedings shall be held in
Maryland.
Requirements for Modification or Revocation
22. This Agreement to arbitrate shall survive the
termination of my employment. It can only be revoked or
modified by a writing signed by the parties which
specifically states a mutual intent to revoke or modify this
Agreement.
Sole and Entire Agreement
23. This is the complete agreement of the parties on
the subject of arbitration of disputes. This Agreement
supersedes any prior or contemporaneous oral or written
understanding on the subject.
24. No party is relying on any representations, oral
or written, on the subject of the effect, enforceability or
meaning of this Agreement, except as specifically set forth
in this Agreement.
<PAGE>
Construction
25. If any provision of this Agreement is found to be
void or otherwise unenforceable, in whole or in part, such
adjudication shall not affect the validity of the remainder
of the Agreement.
Consideration
26. The promises by the Company and by me to arbitrate
differences, rather than litigate them before courts or
other bodies, provide consideration for each other. In
addition, I have entered into an Employment Agreement as
further consideration for entering into this Agreement.
Not an Employment Agreement
27. This Agreement is purely procedural. It does not
provide any substantive rights in addition to those provided
by applicable law or my Employment Agreement.
Voluntary Agreement
28. 1 acknowledge that I have carefully read this
Agreement, that I understand its terms, that all
understandings and agreements between the Company and me
relating to the subjects covered in the Agreement are
contained in it, and that I have entered into the Agreement
voluntarily and not in reliance on any promises or
representations by the Company other than those contained in
this Agreement itself.
29. The Age Discrimination in Employment Art protects
individuals over 40 years of age from age discrimination.
The ADEA contains some special requirements before an
employee can give up the right to file a lawsuit in court.
The following provisions are designed to comply with those
requirements.
a. I agree that this Agreement to arbitrate is
valuable to me, because it permits a faster resolution of
claims than I would receive in court.
b. I have been advised to consult an attorney
before signing this Agreement.
c. I have 21 days to consider this Agreement.
However, I may sign it sooner if I wish.
d. I have 7 days following my signing this
Agreement to revoke my signature, and the Agreement will not
be legally binding until the 7 day period has gone by.
<PAGE>
30. I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE
OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL
COUNSEL AND HAVE AVAILED MYSELF TO THAT OPPORTUNITY TO THE
EXTENT I WISH TO DO SO.
Merry-Go-Round Enterprises, Inc. Richard P.
Crystal
__________________________________
______________________________
Signature of Authorized Company Signature of
Mr. Crystal
Representative
__________________________________
Title of Representative
__________________________________
______________________________
Date Date
-15-
BAODOCS1/0023381.01
Management Agreement
This Management Agreement (the Agreement) is
entered into on the 30th day of June, 1995, between Merry-Go-
Round Enterprises, Inc., a Maryland corporation (the
Company), and Meridian Ventures, Inc., a South Carolina
corporation (Meridian).
Recitals
A. The Company filed a petition under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court for the
District of Maryland, Baltimore Division (the Bankruptcy
Court) on January 11, 1994 (the Chapter 11 case of the
Company, Case No. 94-5-0161-SD, is referred to as the
Bankruptcy Case).
B. The Company and Meridian entered into a
certain Management Agreement dated January 6, 1995 (the
Prior Agreement) pursuant to which Meridian has
satisfactorily performed certain management and other
services to and on behalf of the Company.
C. The Prior Agreement expires pursuant to its
terms on June 30, 1995.
D. Meridian and the Company have agreed to
certain terms and conditions upon which Meridian shall
perform management services to and on behalf of the Company
after June 30, 1995, which terms and conditions are as set
forth in this Agreement.
Agreement
Now, therefore, in consideration of the foregoing
and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties
hereby agree as follows:
1. Retention. The Company hereby retains
Meridian, and Meridian hereby agrees to perform services for
the Company, upon the terms and subject to the conditions
set forth in this Agreement.
2. Term. The term of this Agreement shall
commence on July 1, 1995 and shall terminate on July 31,
1995, unless earlier terminated pursuant to paragraph 7 or
8(n); provided that the Company may extend the term of this
Agreement through and until August 31, 1995 by providing
written notice of such extension to Meridian on or before
July 20, 1995. In the event the Company exercises its right
to extend the term of this Agreement, the term shall be
extended through and until August 31, 1995, upon the same
terms and conditions as set forth herein, which extension
shall be effective as of the then current expiration date of
this Agreement.
<PAGE>
3. Services.
(a) Scope of Services. Subject to the
provisions of paragraph 3(h), Meridian shall perform, or
shall cause to be performed, the management of all aspects
of the Company's operations, including, but not limited to
the administration of the Company with respect to matters
relating to the Bankruptcy Case, real estate operations and
leasing, legal and personnel administration and Company
operations. Meridian shall use its best efforts to
finalize and obtain a replacement debtor-in-possession
financing facility for the Company on the terms provided in
that certain Commitment Letter form GE Capital Corporation
and Citibank USA (the Lenders) dated June 9, 1995 (the
Replacement DIP Facility). In addition, Meridian shall
cooperate with the Company, the Board and the Lenders, and
take such actions as are necessary, to ensure a smooth and
orderly transition with the permanent CEO and President of
the Company. Meridian shall perform all of its obligations
and services hereunder in a manner consistent with the
policies adopted by the Board and consistent with Chapter 11
of the United States Bankruptcy Code, based upon the advice
of qualified bankruptcy counsel of the Company.
(b) Shull and Kenney. Subject to the
provisions of paragraph 3(h), Meridian shall furnish, and
the Company shall accept, the services of (i) Thomas C.
Shull (Shull), who shall serve as the Company's Chairman and
Chief Executive Officer, and (ii) James P. Kenney (Kenney),
who shall serve as the Company's President and Chief
Operating Officer. Shull and Kenney shall perform the
services required of Meridian under this Agreement and may
utilize the services of such other Meridian personnel from
time to time, as Meridian deems appropriate. Subject to the
provisions of paragraph 3(h), Shull and Kenney shall serve
as full-time officers of the Company, devote substantially
all of their business time, energy and abilities to the
business, affairs and interest of the Company and its
affiliates and perform their services and the services of
Meridian contemplated by this Agreement and such other
duties and services customarily performed by officers
serving in the positions held by Shull and Kenney in
accordance with policies established by the Board and in a
manner consistent with Chapter 11 of the Bankruptcy Code.
Notwithstanding the foregoing, the parties acknowledge and
agree that each of Shull and Kenney shall be permitted to
continue as principals of Meridian; provided that neither
Shull nor Kenney shall lead or act as the principal or
material consultant in any other assignment or pursuant to
any other agreement to which they or Meridian are a party
during the term hereof.
(c) Board Representation. Shull shall be a
member of the Board and shall be nominated for reelection to
the Board, when appropriate, during the term of this
Agreement. Kenney may attend meetings of the Board, but
will not be a member of the Board nor be entitled to vote on
matters presented to the Board.
<PAGE>
(d) Duties of Shull and Kenney. Shull,
Kenney and any other employees, representatives, agents or
consultants of Meridian performing services for or on behalf
of the Company, agree to observe and comply with the
policies of the Company as adopted by the Board with respect
to the performance of Meridian's duties and the duties
delegated to Shull and Kenney, and agree to carry out and
perform such orders, directions and policies of the Company
and the Board as may be stated either orally or in writing
from time to time.
(e) Employment Decisions. Shull and Kenney
shall have the ability to hire new employees on behalf of
the Company, provided that neither Shull nor Kenney may hire
any new employee on behalf of the Company for a position
providing an annual aggregate of salary and benefits in
excess of $150,000 without obtaining the prior written
approval of the Board. No employment contracts shall be
entered into and no benefits exceeding tier 2 benefits (as
defined in Retention Incentive and Severance Plan approved
by the Bankruptcy Court by Order entered October 25, 1994)
shall be granted, except upon approval of the Board, the
Official Committees in the Bankruptcy Case (the Committees),
Fidelity Research and Management Company (Fidelity) and Bear
Stearns & Co., Inc. (Bear Stearns). Shull and Kenney shall
have the ability to fire employees of the Company without
obtaining the prior approval of the Board with respect to
all positions within the Company, except for the Executive
Vice President and Chief Financial Officer of the Company
and the Presidents of each division of the Company. In
addition, neither Shull nor Kenney may cause the Company to
hire employees or affiliates of Meridian, or hire, retain or
terminate professionals of or on behalf of the Company,
without obtaining the prior written approval of the Board.
(f) Other Meridian Personnel. Meridian, at
its option, may furnish the services of other Meridian
personnel or affiliates as Meridian may from time to time
deem necessary or appropriate to perform Meridian's
obligations hereunder and such personnel or affiliates shall
have the duties assigned to them by Meridian, consistent
with the policies of the Company as adopted by the Board and
with Chapter 11 of the Bankruptcy Code; provided that no
additional fees shall be paid to such personnel or
affiliates for such services without the prior written
approval of the Board.
(g) Employees of Meridian; No Benefits. The
parties acknowledge and agree that: (i) by furnishing the
services of Shull and Kenney and other Meridian personnel to
the Company, Meridian is functioning as an independent
contractor to the Company; (ii) Shull, Kenney and other
personnel provided by Meridian shall remain employees of
Meridian, and Meridian retains the right (subject to the
terms hereof) to direct and control the performance of all
Meridian employees, including Shull and Kenney, consistent
with the policies of the Company; (iii) Meridian is solely
responsible for the payment of salary, employee benefits and
all other compensation due to Meridian personnel rendering
services to the Company, including Shull and Kenney, and for
all applicable federal, state and local tax withholding with
respect to compensation and benefits payable to them under
this Agreement or otherwise; (iv) the
<PAGE>
compensation to Meridian set forth in paragraph 4 shall be
exclusive and Meridian personnel, including Shull and
Kenney, shall not participate in or be eligible to
participate in any compensation or benefit plan or
perquisite of the Company; and (v) all amounts of cash which
may be paid to Shull, Kenney or any other Meridian personnel
pursuant to this Agreement shall be paid to and received by
such persons solely as nominees for and on behalf of
Meridian and not on their own account.
(h) New CEO. Notwithstanding any other
provision of this Agreement to the contrary, Meridian
acknowledges and agrees that the Company and the Board are
actively seeking to retain a new CEO and President of the
Company (the New CEO) to replace Meridian, Shull and
Kenney. Upon the retention of the New CEO, Shull shall no
longer be CEO of the Company and Kenney shall no longer be
President and Chief Operating Officer of the Company.
Meridian agrees that neither the retention by the Company of
the New CEO nor the diminution or change in the level and
nature of services to be provided by Meridian, Shull and
Kenney hereunder shall constitute an event permitting
Meridian to terminate this Agreement. Meridian agrees to
use its best efforts to ensure a smooth transition of
management to the New CEO.
4. Fees. In consideration of the services to be
performed hereunder and for providing the services of Shull,
Kenney, and other Meridian personnel, Meridian shall receive
the fees set forth in this paragraph 4; provided, that if
this Agreement is terminated pursuant to paragraph 7 or
paragraph 8(n) of this Agreement, such compensation shall be
adjusted or forfeited as provided in paragraph 7 or
paragraph 8(n), as applicable. The amounts payable pursuant
to this paragraph 4 shall constitute the exclusive
compensation payable to Meridian for its services provided
under this Agreement and for the services provided by Shull,
Kenney and all other Meridian personnel hereunder, and no
other compensation or consideration shall be payable to
Meridian or any other individual provided by Meridian in
connection with the services provided hereunder, except as
otherwise expressly provided in this Agreement.
(a) Monthly Management Fee.
(i) During the term of this Agreement,
the Company shall pay Meridian a
monthly management fee of $95,000
per month.
(ii) The Management Fees shall be
payable monthly in arrears on the
first day of each month commencing
on the first day of the first month
following the commencement of the
term of this Agreement.
(b) Bonus Fee. In addition to Management
Fees but in lieu of any Bonus Fee payable under the Prior
Agreement, the Company shall pay to Meridian bonus
compensation (the Bonus Fee) in an amount in cash equal to:
(i) $75,000 upon the
<PAGE>
closing of the Replacement DIP Facility, such that the
Lenders are prepared to make advances to or for the benefit
of the Company thereunder, so long as such closing occurs
during the Term of this Agreement as such term may be
extended pursuant to paragraph 2, and (ii) an additional
amount equal to $50,000 on the effective date of a Chapter
11 plan of reorganization for the Company confirmed pursuant
to Section 1129 of the Bankruptcy Code (a Plan).
5. Expense Reimbursement. Shull and Kenney
shall be entitled to be reimbursed by the Company from time
to time (but not more frequently than monthly) for
reasonable out-of-pocket business expenses incurred by Shull
and Kenney, including expenses in connection with bona fide
business travel on behalf of the Company, upon presentation
from time to time of an itemized written account of such
expenses. Notwithstanding the foregoing, neither Meridian,
Shull, Kenney nor any other Meridian personnel shall be
entitled to be compensated or reimbursed for any out-of-
pocket or other expenses not related to the business and
services performed hereunder, including but not limited to
commuter travel and lodging expenses.
6. D&O Liability Coverage; Indemnification;
Release.
(a) D&O Insurance. Shull and Kenney, in
their respective official capacities on behalf of the
Company, shall be covered by the Company's Director and
Officer Liability Insurance Policy, to the same extent as
other officers and directors of the Company. Such coverage
shall continue for Shull and Kenney following the expiration
or earlier termination of this Agreement (other than as a
result of a termination pursuant to paragraph 7(a)) for the
same duration as such coverage is available to other
officers and directors of the Company.
(b) Indemnification.
(i) Indemnified Parties. Except
as otherwise expressly provided in
this Agreement, the Company agrees
to indemnify and hold Meridian,
Shull and Kenney (collectively, the
Indemnified Parties) harmless from
and against any and all actions,
claims, damages and liabilities,
including the costs of
investigating, preparing or
defending any such action or claim,
whether or not in connection with
litigation in which an Indemnified
Party is a party, caused by,
relating to, based upon or arising
out of such Indemnified Party's
acceptance of or the performance or
non-performance of its obligations
under this Agreement; provided,
however, that such indemnity and
hold harmless obligation shall not
apply to any such action, claim,
damage, liability or
<PAGE>
cost to the extent arising out of
or attributable to the gross
negligence, willful misconduct or
fraud of, or breach of this
Agreement by, an Indemnified Party.
(ii) Indemnification Demand. If
any action, proceeding or
investigation is commenced for
which an Indemnified Party proposes
to demand such indemnification, it
will notify the Company with
reasonable promptness; provided,
however, that any failure by an
Indemnified Party to notify the
Company will not relieve the
Company from its obligations
hereunder, except to the extent
that such failure shall have
prejudiced the defense of any such
action, proceeding or
investigation. The Company shall
promptly pay expenses reasonably
and actually incurred by an
Indemnified Party in defending or
settling any action, proceeding or
investigation in which an
Indemnified Party is a party or is
threatened to be made a party by
reason of its relationship with the
Company hereunder, upon submission
of invoices therefor. The
Indemnified Parties shall repay any
and all such amounts so advanced if
it shall be determined that such
Indemnified Party is not entitled
to be indemnified therefor. If any
such action, proceeding, or
investigation in which an
Indemnified Party is a party is
also against the Company or any of
its affiliates, the Company may, in
lieu of advancing the expenses of
separate counsel for such
Indemnified Party, provide such
Indemnified Party with legal
representation by the same counsel
who represents the Company or its
affiliates, as applicable, at no
cost to such Indemnified Party;
provided, however, that if such
counsel or counsel to such
Indemnified Party shall determine
that due to the existence of actual
or potential conflicts of interest
between such Indemnified Party and
any one or more of the Company or
its affiliates, such counsel is
unable to represent both the
Indemnified Party and one or more
of the Company or its affiliates,
then the Indemnified Party shall be
entitled to use separate counsel of
its own choice, and the Company
shall promptly pay the Indemnified
Party's reasonable
<PAGE>
expenses of such separate counsel
upon submission of invoices
therefor. Nothing herein shall
prevent any Indemnified Party from
using separate counsel of its own
choice at its own expense. The
Company shall only be liable for
settlements of claims against any
Indemnified Party made with the
Company's written consent, which
consent shall not be unreasonably
withheld.
(iii) Contribution If
Indemnification Provisions Not
Enforced. In order to provide for
just and equitable contribution if
a claim for indemnification
pursuant to these indemnification
provisions is made but it is found
by a court of competent
jurisdiction that such
indemnification may not be enforced
in such case, even though the
express provisions hereof would
require indemnification, then the
Company, on the one hand, and the
applicable Indemnified Party, on
the other hand, shall contribute to
the amount paid or payable as a
result of the losses, claims,
damages, liabilities and costs in
such proportion as is appropriate
to reflect the relative fault of
the Company and Indemnified Party
in connection with the acts or
omissions which resulted in such
losses, claims, damages,
liabilities and costs, as well as
any other relevant equitable
considerations. The amount paid or
payable by a party as a result of
the losses, claims, damages and
liabilities and expenses referred
to above shall be deemed to
include, subject to the limitations
set forth in paragraph 6(b)(ii)
above, any legal or other fees or
expenses reasonably incurred by
such party in connection with any
investigation or proceeding.
(iv) Indemnification Remains in Effect.
Neither the termination of this
Agreement nor completion of the
retention of Meridian, Shull and
Kenney hereunder shall affect these
indemnification provisions, which
shall hereafter remain operative
and in full force and effect for a
period expiring two (2) years after
such termination or completion.
(v) Indemnification Under Agreement Not
Exclusive; Limitation. The rights
provided in this paragraph
<PAGE>
6(b) shall not be deemed exclusive
of any other rights to which the
Indemnified Parties may be entitled
under the articles of incorporation
and bylaws of the Company, any
other agreements, any vote of
stockholders or disinterested
directors of the Company, any
applicable law or otherwise, but
shall nevertheless in all respects
be limited to the maximum extent
permitted by applicable law.
(c) Releases Under Plan. The Company shall
use its best efforts to include a provision in a Plan
providing for a release of liability for Meridian, Shull and
Kenney upon the same terms and conditions as provided for
professionals and for former officers and directors of the
Company.
7. Termination. This Agreement may be
terminated prior to the expiration of the term of this
Agreement only as provided in this paragraph 7 or paragraph
8(n).
(a) Termination by the Company for Cause. The Company
shall have the right to terminate this Agreement for cause
at any time prior to July 31, 1995 (as such date may be
extended pursuant to paragraph 2) by giving written notice
to Meridian. The Company shall have "cause" if, prior to
such termination, the Board makes a determination in good
faith of: (i) Shull's or Kenney's personal dishonesty,
gross negligence, willful misconduct, habitual abuse of
alcoholic beverages or other substance abuse, breach of
fiduciary duty or intentional failure to perform stated or
assigned duties, or upon Shull's or Kenney's conviction of
any offense punishable by imprisonment of one year or more,
(ii) Meridian's gross negligence, willful misconduct, breach
of fiduciary duty or intentional failure to perform its
obligations hereunder, (iii) Shull, Kenney or Meridian
(collectively, the Meridian Parties) commits any act of
fraud or dishonesty in connection with the services rendered
hereunder, (iv) any of the Meridian Parties commits a
material breach of any of their respective obligations
hereunder or under any other agreement between the Meridian
Parties, or any of them, and the Company, and shall fail to
remedy such breach within ten (10) days after having
received written notice from the Company, or (v) Shull and
Kenney die or become "permanently disabled" (as hereafter
defined). If this Agreement is terminated by the Company
for cause under this paragraph 7(a), the Meridian Parties
shall not be entitled to receive any further compensation
under this Agreement, including, but not limited to,
Management Fees (other than Management Fees accrued, but
unpaid as of the date of termination, with respect to the
period prior to termination), and any Bonus Fee payable
pursuant to and in accordance with paragraph 4(b), and the
Company shall be entitled to pursue such remedies against
Meridian, Shull and Kenney as may be available at law, in
equity or otherwise. For purposes of this Agreement, a
person shall be deemed to be "permanently disabled" if any
ailment, illness or other physical or mental incapacity
<PAGE>
prevents such person from performing its duties as specified
in this Agreement for a period of 17 consecutive business
days during the term of this Agreement, or if such
disability meets the criteria of "permanent and total
disability" within the meaning of Section 22(e)(3) of the
Internal Revenue Code.
(b) Termination by Meridian for Cause;
Expiration of Term Without Renewal.
(i) Meridian shall have the right to
terminate this Agreement for cause
at any time prior to July 31, 1995
(as such date may be extended
pursuant to paragraph 2) by giving
10 days prior written notice to the
Company. Meridian shall have
"cause" if (aa) the Company commits
a material breach of any of its
obligations hereunder or under any
other agreement between Meridian
and the Company and shall fail to
remedy such breach within 10 days
after having received written
notice thereof from Meridian;
(bb) at any time prior to the
appointment of the New CEO, the
Company, without the prior written
consent of Meridian, materially
diminishes the titles and
responsibilities initially given
Shull or Kenney hereunder or
materially diminishes the duties of
Shull or Kenney to a level where
either's duties are substantially
dissimilar to the duties performed
by persons employed in similar
positions with other retail
companies of comparable size, or
(cc) the Board establishes
limitations, instructions,
directions or controls applicable
to either Shull's or Kenney's
performance of their respective
duties hereunder which are
materially inconsistent with the
bylaws of the Company, or at any
time prior to the appointment of
the New CEO, are not (except as
warranted by the Company's
circumstances) customary for the
offices held by Shull or Kenney, as
the case may be. Notwithstanding
the foregoing, the retention by the
Company of a New CEO as
contemplated under paragraph 3(h),
and any resulting diminution in the
position, duties and
responsibilities of Meridian, Shull
or Kenney, shall not constitute an
event permitting Meridian to
terminate this Agreement.
<PAGE>
(ii) In the event that this Agreement is
terminated by Meridian pursuant to
paragraph 7(b)(i), the Company
shall continue to pay Meridian the
Management Fees through and until
July 31, 1995 (as such date may be
extended pursuant to paragraph 2)
on a monthly basis, as if this
Agreement had not been terminated.
In addition, in the event that this
Agreement is terminated by Meridian
for cause, then notwithstanding
such termination, Meridian shall be
entitled to receive any Bonus Fee
payable pursuant to paragraph 4(b)
in the manner provided in such
paragraph, but no other amounts
shall be due and payable hereunder
by the Company (other than
Management Fees accrued, but unpaid
as of the date of termination, with
respect to the period prior to
termination).
8. General.
(a) Bankruptcy Court Approval. The
effectiveness of this Agreement shall be conditioned upon
the entry of an order of the Bankruptcy Court approving this
Agreement with respect to which no appeal has been taken, or
if an appeal has been taken, no stay pending such appeal has
been obtained (Bankruptcy Court Approval).
(b) Amendment. No modification or amendment
of, or waiver under, this Agreement shall be valid unless in
writing and signed by each of the parties hereto, and
approved by the Committees, Fidelity and Bear Stearns.
(c) Binding Agreement. This Agreement shall
inure to the benefit of and be binding upon the parties
hereto and their respective successors and assigns.
(d) Authorization. Subject to Bankruptcy
Court approval, the Company and Meridian each represent and
warrant that this execution, delivery and performance of
this Agreement has been duly authorized by all necessary
corporate action.
(e) Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of Maryland.
(f) Severability. If any term, provision,
covenant or restriction herein is held by a court of
competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall
<PAGE>
remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby.
(g) Notices. All notices, requests, demands
and other communications hereunder shall be in writing and
shall be deemed to have been duly given (i) when delivered
personally or sent by overnight courier express service or
(ii) three days after having been deposited in the United
States mail, registered or certified, return receipt
requested, postage prepaid, addressed as follows:
If to Meridian, to:
Thomas C. Shull
James P. Kenney
Meridian Ventures, Inc.
2 Corpus Christi Circle
Hilton Head, South Carolina 29928
FAX: 803-842-3920
PHONE: 803-842-2920
with a copy to:
John Paul Ketels, Esquire
Rogers & Wells
607 14th Street, N.W., 10th Floor
Washington, D.C. 20005
FAX: (202) 434-0800
PHONE: (202) 434-0700
- and -
Dennis Drebsky, Esquire
Rogers & Wells
200 Park Avenue
New York, New York 10166
FAX: (212) 878-3211
PHONE: (212) 878-8059
<PAGE>
If to the Company, to:
Merry-Go-Round Enterprises, Inc.
3300 Fashion Way
Joppa, Maryland 21085
Attention: Isaac Kaufman
FAX: 410-676-5577
PHONE: 410-538-1000
with a copy to:
Roger Frankel, Esquire
Richard H. Wyron, Esquire
Swidler & Berlin, Chartered
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
FAX: 202-424-7645
PHONE: 202-424-7500
and with copies to the Committees, Fidelity and Bear Stearns
at such address as each shall designate by giving notice
hereunder to Meridian and the Company or to such other
address or addresses as each of the parties hereto may
communicate in writing to the other. Written notice given
by any other method shall be deemed effective only when
actually received by the party to whom given.
(h) Attorneys' Fees. In the event that any
party to this Agreement shall default in the performance of
any of its obligations hereunder, in addition to any and all
other rights or remedies which the non-defaulting party may
have against the defaulting party, the defaulting party
shall be liable to the non-defaulting party for all court
costs and attorneys' fees incurred by the non-defaulting
party in enforcing its rights hereunder.
(i) Tax Indemnification. Meridian, Shull
and Kenney agree jointly and severally to indemnify and hold
the Company harmless against, and to reimburse the Company
on demand for any federal, state or local taxes, workers
compensation, health or disability benefits, and any
penalties and interest thereon to the extent not otherwise
paid by Meridian, and required to be paid and paid by or on
behalf of the Company in respect of the services of
Meridian, Shull, Kenney or any of the other Meridian
personnel whose services are furnished to the Company
pursuant to this Agreement.
<PAGE>
(j) Entire Agreement. This Agreement
contains the entire understanding of the parties hereto
respecting the subject matter hereof and supersedes all
prior discussions and understandings.
(k) Confidentiality; Agreement of Meridian,
Shull and Kenney Not to Compete.
(i) The Meridian Parties acknowledge
that neither they nor any of their
respective agents or employees will
at any time during the term of this
Agreement and thereafter, either
directly or indirectly, use for his
or their own account, or disclose,
Confidential Information (as
hereafter defined) to any person,
firm or corporation except that
Confidential Information may be
disclosed to (aa) authorized
officers, directors and employees
of the Company or its affiliates,
(bb) to the extent necessary in
connection with the services
provided hereunder during the term
of this Agreement, to Meridian
personnel who in Shull's and
Kenney's good faith judgment have a
need to be familiar with or aware
of the Confidential Information in
order to perform their
responsibilities to the Company
provided that such personnel are
bound by the terms of this
Agreement, (cc) to professionals
retained (x) by or on behalf of the
Company, or (y) by Meridian, to
assist it in the execution of or
the performance of services under
this Agreement, and (dd) as
appropriate, to the Committees,
Fidelity, Bear Stearns and to other
persons or entities bound by the
terms of a valid confidentiality
agreement with the Company. As
used herein, Confidential
Information means information of
any kind, nature or description
which is disclosed to or otherwise
known by or to the Meridian Parties
(which information is not generally
known in the business in which the
Company is engaged) or which
information relates to specific
investment opportunities within the
scope of the Company's business
which were considered by the
Meridian Parties or the Company
during the term of this Agreement.
<PAGE>
(ii) During a period of one year
following the termination or
expiration of this Agreement, the
Meridian Parties shall not induce
any current employee (or an
employee terminated within the then
most recent twelve (12) month
period) of the Company or any of
its subsidiaries to terminate his
or her employment by the Company or
its subsidiaries in order to obtain
employment with any other person,
firm or corporation.
(iii) For a period of one year
following the termination or
expiration of this Agreement,
neither Shull nor Kenney shall
serve as an officer, director,
employee of or consultant to any
retailer with annual sales in
excess of $50 million that
specializes in and derives fifty
percent or more of their business
from young men's and/or young
women's casual sportswear, or
fashion forward attire, including
but not limited to The Gap, Inc.,
Structure, Abercrombie & Fitch,
Edison Brothers and their
respective parents, subsidiaries,
divisions and affiliates.
(l) Specific Performance. The parties agree
that irreparable damage will result if this Agreement is not
performed in accordance with its terms, and the parties
agree that any damages available at law for a breach of this
Agreement would not be an adequate remedy. Therefore, the
provisions hereof and the obligations of the parties
hereunder shall be enforceable in a court of equity, or
other tribunal with jurisdiction, by a decree of specific
performance, and appropriate injunctive relief may be
applied for and granted in connection therewith. Such
remedies and all other remedies provided for in this
Agreement shall, however, be cumulative and not exclusive
and shall be in addition to any other remedies that a party
may have under this Agreement, at law or in equity.
(m) Effective Date Defined. For purposes of
this Agreement, the term "effective date" shall mean the
date on which the Company makes the initial distribution of
cash, other property and/or securities to parties-in-
interest pursuant to the Plan.
(n) Permanent Management. Notwithstanding
the provisions of paragraph 7(b)(i) of this Agreement,
nothing in this Agreement shall preclude the Company from
employing during the term of this Agreement the New CEO. In
addition to ease the transition to the New CEO, the Company
may terminate this Agreement upon delivery of written notice
of such termination to Meridian, provided, however,
<PAGE>
(i) Meridian shall remain entitled to Management Fees
through July 31, 1995 (as such date may be extended pursuant
to paragraph 2), and (ii) the Company shall pay to Meridian
any Bonus Fee if, when and to the extent such Bonus Fee is
payable pursuant to paragraph 4(b).
In witness whereof, the parties have executed this
Agreement as of the date and year first above written.
Company:
Merry-Go-Round Enterprises,
Inc.
____________________________ By: /s/Isaac Kaufman
Name: Isaac Kaufman
Title: Exec. VP/CFO
Meridian:
Meridian Ventures, Inc.
6/30/95 By: /s/Thomas C.
Shull
Name: Thomas C. Shull
Title: CEO
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-END> JUL-29-1995
<CASH> 10,779
<SECURITIES> 0
<RECEIVABLES> 2,071
<ALLOWANCES> 0
<INVENTORY> 86,227
<CURRENT-ASSETS> 103,846
<PP&E> 175,224
<DEPRECIATION> 12,615
<TOTAL-ASSETS> 280,170
<CURRENT-LIABILITIES> 68,377
<BONDS> 0
<COMMON> 539
0
0
<OTHER-SE> (41,883)
<TOTAL-LIABILITY-AND-EQUITY> 280,170
<SALES> 246,762
<TOTAL-REVENUES> 246,762
<CGS> 211,224
<TOTAL-COSTS> 281,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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