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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-22289
Wherehouse Entertainment, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-4608339
(I.R.S. Employer Identification Number)
19701 Hamilton Avenue
Torrance, California 90502-1334
(Address of principal executive
offices including ZIP code)
(310) 538-2314
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
registrants was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ x ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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The aggregate market value of the voting stock held by non-affiliates of
the registrant is $5,446,000(1)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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As of January 31, 1997, 10,257,808 shares of the registrant's common stock
were issued and outstanding and 917,515 additional shares are expected to be
issued pursuant to the bankruptcy plan of reorganization discussed in Item 1
below.
(1) There is no established trading market for the voting stock of the
registrant. As of January 31, 1997, 10,257,808 shares of the registrant's
voting stock was issued and outstanding. All but 1,100,000 of those shares
were issued pursuant to a bankruptcy plan of reorganization. See
"Reorganization Under Chapter 11" in Item 1 below. The registrant
estimates that 917,515 additional shares of its voting stock may be issued
pursuant to the plan of reorganization, after which a total of 11,175,323
shares of the registrant's voting stock will be issued and outstanding.
The registrant estimates that of that number of total outstanding shares,
approximately 680,162 shares will be held by non-affiliates of the
registrant. The registrant estimates that the net equity value of the
registrant on a pro forma basis as of January 31, 1997 after giving effect
to the plan of reorganization is $89,483,000. This estimate is based on a
valuation prepared by American Appraisal Associates, Inc. ("AAA") in
connection with the confirmation of the Reorganization Plan. Certain
Senior Subordinated Noteholders and the Official Committee of Unsecured
Creditors in the Bankruptcy Case initially contested the Reorganization
Plan. Their arguments in opposition to the Reorganization Plan included
their contention that the value of the Company is higher than estimated by
AAA. Since this matter was resolved consensually, the Bankruptcy Court
never ruled on this issue. The market value of voting stock held by
non-affiliates of the registrant specified above assumes the issuance of
all 11,175,323 shares and was calculated by dividing the pro forma net
equity value of the registrant of $89,483,000 by 11,175,323 outstanding
shares, and multiplying the resulting quotient by 680,162 the approximate
number of shares expected to be held by non-affiliates of the registrant.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The sections of this Annual Report on
Form 10-K containing such forward-looking statements include "Business,"
"Reorganization Under Chapter 11," "Merchandise Sale Products and Supply,"
"Video and Other Product Rentals," and "Competition" under Item I below,
"Holders" under Item 5 below, and "Management's Discussion and Analysis of
Financial Condition and Results of Operation," Item 7 below. Statements in this
Annual Report on Form 10-K which address activities, events or developments that
the registrant expects or anticipates will or may occur in the future, including
such things as future issuances of shares, future capital expenditures
(including the amount and nature thereof), expansion and other development and
technological trends of industry segments in which the registrant is active,
business strategy, expansion and growth of the registrant's and its competitors'
business and operations and other such matters are forward-looking statements.
Although the registrant believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions within the bounds
of its knowledge of its business, a number of factors could cause actual results
to differ materially from those expressed in any forward-looking statements,
whether oral or written, made by or on behalf of the registrant.
The registrant's operations are subject to factors outside its control.
Any one, or a combination, of these factors could materially affect the results
of the registrant's operations. These factors include: (a) changes in levels
of competition from current competitors and potential new competition from both
retail stores and alternative methods or channels of distribution such as
electronic and telephone shopping services and mail order; (b) loss of a
significant vendor or prolonged disruption of product supply; (c) the presence
or absence of popular new releases and products in the product categories the
registrant represents; (d) changes in levels of consumer spending, especially
during seasonally significant periods; (e) changes in the Federal and state
income tax rules and regulations or interpretations of existing legislation; (f)
changes in the general economic conditions in the United States, and in
particular the eight major markets served by the registrant, including, but not
limited to consumer sentiment about the economy in general; (g) changes in
availability or terms of working capital financing from vendors and lending
institutions; (h) adverse results in significant litigation matters; and (i) the
ability to attract and retain key personnel. The foregoing should not be
construed as an exhaustive list of all factors which could cause actual results
to differ materially from those expressed in forward-looking statements made by
the registrant. Forward-looking statements made by or on behalf of the
registrant are based on a knowledge of its business and the environment in which
it operates, but because of the factors listed above, actual results may differ
from those anticipated results described in these forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the registrant will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the registrant or its business or operations.
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PART I
ITEM 1. BUSINESS
The registrant, Wherehouse Entertainment, Inc. ("New Wherehouse") was
incorporated under the laws of the State of Delaware on November 15, 1996 as WEI
Acquisition Co. On January 31, 1997, New Wherehouse acquired (the
"Acquisition") substantially all the assets of Wherehouse Dissolution Co. ("Old
Wherehouse"), a Delaware corporation, and its parent company, WEI Holdings,
Inc., a Delaware corporation ("WEI"; and together with Old Wherehouse, the
"Debtors"), pursuant to a Chapter 11 plan of reorganization (as described in
"Reorganization Under Chapter 11" below). Prior to the Acquisition, Old
Wherehouse was known as "Wherehouse Entertainment, Inc.," and, after the
Acquisition, Old Wherehouse changed its name to Wherehouse Dissolution Co.
After the Acquisition, New Wherehouse changed its name to "Wherehouse
Entertainment, Inc." New Wherehouse is the successor to Old Wherehouse, and New
Wherehouse has undertaken to continue the obligations of Old Wherehouse to file
all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended. New Wherehouse and Old Wherehouse will be collectively referred to in
this Annual Report as the "Company" or "Wherehouse" where the discussion relates
to the continuing business operations of Old Wherehouse and New Wherehouse.
Based upon published and other information available to its management,
Wherehouse is, in terms of both revenues and store count, one of the largest
retailers of prerecorded music and videocassette rentals in the western United
States. Old Wherehouse was founded in 1970 as a music retailer. Since then,
Wherehouse has evolved into a diversified entertainment retailer with a broad
range of prerecorded music, videocassettes and other products. As Wherehouse
has grown, its product lines and product mix have been adapted to respond to
changes in electronic technology and consumer tastes.
REORGANIZATION UNDER CHAPTER 11
On August 2, 1995 (the "Petition Date"), WEI and Old Wherehouse filed
voluntary petitions for relief under Chapter 11 of Title 11 of the United
States Code in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"), seeking to reorganize under Chapter 11
(the "Bankruptcy Case"). Old Wherehouse and WEI continued to manage their
respective affairs and operate their businesses as debtors-in-possession
while they worked to develop a reorganization plan that would restructure and
allow their emergence from Chapter 11.
The Debtors' plan of reorganization, entitled the "Debtors' First Amended
Chapter 11 Plan, as Revised for Technical Corrections on October 4, 1996 and
Supplemental Amendments on December 2, 1996 and December 13, 1996" (the
"Reorganization Plan"), was confirmed by an order of the Bankruptcy Court
entered on January 7, 1997 entitled "Findings of Fact, Conclusions of Law and
Order Confirming Debtors' First Amended Chapter 11 Plan Under Chapter 11 of the
Bankruptcy Code" (the "Confirmation Order"). The effective date of the
Reorganization Plan occurred on January 31, 1997 (the "Plan Effective Date").
New
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Wherehouse (as opposed to Old Wherehouse and WEI) was never the subject of a
bankruptcy case. Since the Plan Effective Date, the Bankruptcy Court has
retained jurisdiction over certain claims and other matters relating to the
Debtors' bankruptcy estates, but New Wherehouse has been and is free to carry
out its business without oversight by the Bankruptcy Court.
As of the Petition Date, payment of pre-petition liabilities to the
creditors of the Debtors, and pending litigation against the Debtors were stayed
while they continued their business operations as debtors-in-possession.
IMPLEMENTATION OF THE REORGANIZATION PLAN
Pursuant to the Reorganization Plan, substantially all of the assets of the
Debtors and certain liabilities were transferred to New Wherehouse. The Debtors
have assigned to New Wherehouse all of their executory contracts and unexpired
leases assumed during the Bankruptcy Case (not otherwise assigned to third
parties). The Reorganization Plan provides that the Debtors' bankruptcy estates
will be liquidated by New Wherehouse.
DISTRIBUTIONS UNDER THE REORGANIZATION PLAN
Under the Reorganization Plan, substantially all of the Debtors'
indebtedness held by their creditors was cancelled in exchange for cash, shares
of the Common Stock of New Wherehouse, par value $0.01 per share (the "New
Common Stock"), and/or warrants to purchase New Common Stock or for no
consideration. The Debtors' major groups of creditors were (1) senior lenders
under Old Wherehouse's bank credit agreement (the "Senior Lenders") led by
Cerberus Partners, L.P. ("Cerberus") as the agent for the Senior Lenders, (2)
trade creditors (the "Trade Creditors"), (3) holders of Old Wherehouse's Senior
Subordinated Notes (the "Senior Subordinated Noteholders"), (4) holders of Old
Wherehouse's 6 3/4% Convertible Subordinated Debentures (the "Convertible
Debentureholders"), (5) other general unsecured creditors (the "General
Unsecured Creditors") and (6) Federal and state taxing authorities.
As of the Plan Effective Date and following the exercise of the Exchange
Option (as described below) by certain Trade Creditors whose claims had been
resolved as of the Plan Effective Date, the Senior Lenders received 9,157,808
shares of New Common Stock under the Reorganization Plan on account of their
claims, representing approximately 89% of the issued and outstanding shares
of New Common Stock as of such date prior to dilution for the Warrants
described below but after dilution for the A&M Shares (as defined in Item 13
below under "Certain Relationships and Related Transactions"). The Senior
Lenders were paid approximately $2.8 million of adequate protection payments
during the Bankruptcy Case and also received approximately $256,000 in cash
subsequent to the Plan Effective Date. The Senior Lenders are likely to
receive additional shares of New Common Stock and cash as the claims of
unsecured creditors (including Trade Creditors) are resolved. Based upon New
Wherehouse's estimate of the resolution of Trade Claims, New Wherehouse
estimates that the Senior Lenders (or their assigns) will receive
approximately 9.4 million shares of New Common Stock in total. This total
may increase based on an anti-dilution feature in the Reorganization Plan.
Approximately $94.6 million of indebtedness held by the Senior Lenders was
cancelled in exchange for the issuance of such shares of New Common Stock and
cash.
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Under the Reorganization Plan, those Trade Creditors identified by Old
Wherehouse as continuing suppliers of certain inventory products and who
agreed to provide normal trade credit terms to the Company after the Plan
Effective Date were give the option (the "Exchange Option") to receive 27% of
their allowed claims in cash in lieu of shares of New Common Stock. The
source of the cash payments to the Trade Creditors exercising the Exchange
Option was $11,610,000 in cash otherwise distributable to the Senior Lenders
under the Reorganization Plan. If a Trade Creditor elected to receive cash
instead of shares of New Common Stock, the shares of New Common Stock such
Trade Creditor would have received had it not exercised the Exchange Option
were distributed to the Senior Lenders. Substantially all of the Trade
Creditors elected to exercise the Exchange Option and, as a result, the
Company estimates that once all claims are resolved, $11,302,000 in cash will
have been distributed to the Trade Creditors. Approximately $41,900,000 of
the claims of Trade Creditors who exercised the Exchange Option were
cancelled in consideration for the cash distributable in respect of such
claims. Most of the Company's vendors including its six major distributors
of pre-recorded music, Warner/Elektra/Atlantic Corporation ("WEA"), Uni
Distribution Corp. ("UNI"), Sony Music ("SONY"), Polygram Group Distribution,
Inc. ("PGD"), BMG Distribution ("BMG") and EMI Music Distribution ("EMD"),
elected to exercise the Exchange Option and have agreed to provide normal
trade credit terms to the Company.
Under the Reorganization Plan, the Senior Subordinated Noteholders receive
$2,350,000 of cash from New Wherehouse (plus $1,550,000 of cash from a third
party) and three tranches of warrants to purchase shares of New Common Stock
(the "Warrants"). The Tranche A Warrants represent the right to purchase
576,000 shares of New Common Stock at an exercise price of $2.38 per share and
have a five year maturity. The Tranche B Warrants represent the right to
purchase 100,000 shares of New Common Stock at an exercise price of $9.00 per
share and have a seven year maturity. The Tranche C Warrants represent the
right to purchase 100,000 shares of New Common Stock at an exercise price of
$11.00 per share and have a seven year maturity. The Warrants have been issued
and are being distributed by the indenture trustee for the Senior Subordinated
Notes upon the return of letters of transmittal from such Senior Subordinated
Noteholders. Under the Reorganization Plan, $117,189,722.22 of allowed senior
subordinated note claims were cancelled in consideration of the cash and
Warrants being distributed to the Senior Subordinated Noteholders as described
in this paragraph.
The Convertible Debentureholders will receive no distribution under the
Reorganization Plan. Approximately $5,344,000 of outstanding 6 3/4% Convertible
Subordinated Debentures were cancelled.
Many of the claims of the General Unsecured Creditors have not yet been
adjudicated and allowed by the Bankruptcy Court. Under the Reorganization Plan,
any claims of the General Unsecured Creditors (including claims of Trade
Creditors who did not elect the Exchange Option) that become allowed by the
Bankruptcy Court will receive approximately 31.92 shares of New Common Stock per
$1,000 in such allowed claims. Wherehouse presently estimates that
approximately 663,000 shares of New Common Stock will be issued to General
Unsecured Creditors (including Trade Creditors who did not elect the Exchange
Option.)
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Several state and local taxing authorities received on account of their
claims, Company obligations to pay these claims, with interest, generally six
years after the tax assessment date in an aggregate principal amount of
approximately $4.0 million.
The Reorganization Plan also provides that post-petition claims are to be
paid in full. The Confirmation Order established procedures for the resolution
of disputed post-petition claims and presently there are a number of disputes
before the Bankruptcy Court concerning such post-petition claims.
Pursuant to the Reorganization Plan, the Company entered into a loan and
security agreement with Congress Financial Corporation (Western) (the "Congress
Facility"), which provides a borrowing capacity of up to $30,000,000 with a
letter of credit subfacility of $10,000,000, subject to borrowing base
limitations based upon, among other things, the value of certain eligible
merchandise inventory. As of January 31, 1997, there were no borrowings
outstanding under the Congress Facility, although $0.4 million of letters of
credit were outstanding.
GENERAL
Wherehouse operated 243 stores at January 31, 1997 in seven states under
the names "The Wherehouse," "Wherehouse Entertainment," "Record Shop," "Rocky
Mountain Records" and "Odyssey." All but three of Wherehouse's stores
operate under "The Wherehouse" or "Wherehouse Entertainment" names.
Subsequent to January 31, 1997, the Company closed 3 additional stores. The
Company also intends to close each of its 9 stores located within Lucky
Supermarkets by June 30, 1997.
Wherehouse sells prerecorded music and videocassettes, video games,
personal electronics (including personal stereos, portable stereos, headphones
and related merchandise), blank audiocassettes and videocassettes, and
accessories. Approximately 84% of Wherehouse's stores also rent both
videocassettes and video games. Wherehouse believes that this combination
entertainment store format offers competitive advantages relative to those
competitors that operate stores offering only merchandise products for sale or
products for rent. The merchandise sale and video rental lines complement one
another and offer cross-selling opportunities. A video rental customer visits a
store at least once, and possibly twice, for each transaction and is presented
each time with Wherehouse's merchandise offerings.
In the fiscal year ended January 31, 1997 ("fiscal 1997"), sales of
prerecorded music, videocassettes, video games, and accessories accounted for
80.9% of revenues, and rentals of videocassettes, video games, and other
products accounted for 19.1% of revenues.
Of the 243 stores operating as of January 31, 1997, 210 stores were located
in strip centers or freestanding buildings and 33 were located in malls.
Approximately 89% of Wherehouse's stores are concentrated in eight major
marketing areas (Los Angeles, San Francisco, San Diego, Sacramento, Seattle,
Phoenix, Fresno and Las Vegas) and approximately 83% of the stores are located
in California. Wherehouse has focused its operations on its eight major
marketing areas in order to create competitive advantages in operations,
advertising and marketing, and distribution.
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SALES AND RENTAL REVENUE BY
MERCHANDISE CATEGORY
(DOLLARS IN MILLIONS)
Fiscal Years Ended January 31
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1997 1996 1995 1994 1993
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Merchandise Sales
Total music $252.7 $292.2 $333.9 $305.6 $287.0
New videocassettes 17.9 24.1 25.8 24.3 26.9
Video game software and
hardware, general
merchandise,
accessories, ticket
commissions,
and other 25.2 34.4 49.8 50.3 40.6
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Total merchandise sales $295.8 $350.7 $409.5 $380.2 $354.5
------ ------ ------ ------ ------
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Video and other product 69.7 82.5 90.1 91.6 94.0
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rentals
TOTAL MERCHANDISE $365.5 $433.2 $499.6 $471.8 $448.5
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REVENUE
MERCHANDISE SALE PRODUCTS
Wherehouse stores generally sell a broad array of entertainment products,
including prerecorded music and videocassettes, video game software, accessories
and personal electronics. The table above summarizes Wherehouse's dollar volume
of sale revenue by merchandise category from fiscal 1993 through fiscal 1997.
The percentage of total revenues contributed by merchandise sales has risen from
79.0% in 1993 to 80.9% in 1997. The number of different new music titles per
store ranges from approximately 6,000 to 60,000, representing a range of 12,000
to 120,000 individual stock-keeping units in inventory per store.
Wherehouse's most important product strategy is to ensure constant
availability of the most popular music and video titles while maximizing the
selection of catalog titles of lasting popularity. With input from store
management and a product allocation team, Wherehouse's inventory management
systems tailor each store's product selections and merchandise mix to local
market demand and maximize the availability of the most popular items at each
store, subject to store size constraints. Wherehouse's stores have been
designed to facilitate quick service and to accommodate changes in industry
trends and product offerings.
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Wherehouse also buys and sells used products, principally used CD's, in the
majority of its stores. The sale of used CDs was first tested in certain of
Wherehouse's stores in fiscal 1993. Based upon strong consumer acceptance,
Wherehouse began buying used CDs from customers and expanded upon its used
product business significantly in fiscal 1995, 1996 and 1997. Wherehouse
continues to seek to expand this line of business.
Prerecorded videocassettes (feature films, music videos, and
self-improvement programming) represented, after music, Wherehouse's second
largest sale product category in fiscal 1996 and fiscal 1997. As box-office
"hit" motion pictures continue to be released to the videocassette sell-through
market at reduced prices, industry-wide sales of this category have increased.
Wherehouse's revenues from the sales of videocassettes, however, decreased from
fiscal 1993 through 1997 with the proliferation of competitors' outlets selling
videocassettes and the highly competitive pricing of the product, particularly
from discounters and mass merchandisers and the closing of stores during the
Bankruptcy Case.
Wherehouse sells video game hardware and software, blank audio and
videocassette tapes, music and tape care products, carrying cases, storage
units, and personal electronics. Wherehouse also collects commissions on event
tickets sold under affiliations with Bay Area Seating Service (BASS) and
Ticketmaster.
VIDEO AND OTHER PRODUCT RENTALS
Wherehouse's other principal revenue source is the rental of prerecorded
videocassettes and other products, chiefly feature films. Although most
videocassette rentals are feature films, approximately 12% of Wherehouse's
rentals in fiscal 1997 were nontheatrical titles, such as children's videos,
adult videos, workout videos, music videos, educational videos, and
do-it-yourself videos. Audiocassette books, video game players and laser discs
are also offered for rent in a few select stores. As of January 31, 1997, 204
of Wherehouse's 243 stores offered videocassettes and other products for rent.
On average, stores that rent videocassettes carry approximately 5,200 units,
although units can range from as few as 2,400 units to as many as 14,100 units,
representing from approximately 1,700 to 7,100 individual titles.
Wherehouse purchases prerecorded videocassettes from a variety of
distributors and other suppliers. As with recording companies, the film
studios, or their videocassette distribution operations, each controls a certain
portion of available titles and seeks to promote those titles. As of
January 31, 1997, Wherehouse's leading suppliers of prerecorded videocassettes
are Ingram Entertainment, Warner Home Video and UNI. Wherehouse has not
experienced, and does not anticipate having in the future, any material problems
obtaining its products.
The Company believes that an important element of efficient video
operations is the disposition of used rental videocassettes to maximize the
productivity of its inventory. Wherehouse's systems monitor the rental
efficiency of its inventory on an individual title and unit basis. As a title's
efficiency declines, used rental videocassettes are sold on a clearance basis in
Wherehouse's stores, and, where appropriate, the Company may sell excess used
video inventory to third-party distributors.
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ADVERTISING AND PROMOTION
Wherehouse employs advertising, promotion, pricing, and presentation in a
coordinated manner to generate customer awareness of its breadth of product and
value pricing on selected items and to induce trial and repeat purchase of its
products and video rental services. Wherehouse advertises on a regular and
frequent basis in a variety of broadcast and print media, including radio,
newspaper, direct mail and freestanding inserts. Advertising generally
emphasizes immediate availability of hit product at competitive prices, as well
as access to a broad array of catalog product. Wherehouse believes its strategy
of clustering its stores in major markets allows it to optimize the use of its
advertising expenditures.
Wherehouse also seeks to take advantage of cooperative advertising payments
from suppliers, which are generally available to the industry. Music and video
companies generally provide funds on a title-by-title basis to promote new
releases and, occasionally, on a label-wide basis. When Wherehouse runs
pre-authorized advertising that contains reference to a specific title or label,
the related supplier will generally reimburse 100% of the pro rata cost of that
advertising.
TRADE CUSTOMS AND PRACTICES
Most of the Company's music purchases are protected by return policies
offered by major manufacturers. The return privilege generally exists for each
music title as long as that title remains in the current music catalog of a
manufacturer. Catalog changes are generally made only after advance notice,
allowing the Company to return excess inventory before a title is discontinued.
Most of the Company's major pre-recorded music suppliers provide unlimited
returns of unopened items, but generally charge return penalties of varying
amounts. The major suppliers do not accept returns of opened merchandise on the
same basis as unopened items, but do generally provide the Company with certain
additional allowances. Returns to vendors were suspended following the
bankruptcy filing but were reinstated several months later for most of the
Company's vendors. Pricing and return policies of the Company's major
distributors are subject to change.
STORE AND SITE SELECTION
The table below sets forth store openings, closings, total number of
stores, and aggregate square footage under lease for the last five fiscal years:
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Stores Approximate
------------------
Total Stores Total Stores Aggregate
Fiscal at Beginning at End Square Footage
Year of Period Opened Closed of Period at End of Period
- ----- ------------ ------ ------ ----------- -----------------
1997 297 9 63 243 1,630,000
1996 347 3 53 297 1,994,000
1995 347 4 4 347 2,159,000
1994 313 49 15 347 2,117,000
1993 301 15 3 313 2,011,000
The Company's strategy of clustering stores in marketing areas has achieved
economies of scale and scope in several business functions, including
advertising, personnel, management and distribution. During the years prior to
the bankruptcy filing, the Company pursued growth opportunities in existing
marketing areas and selectively grew through acquisition if such growth was
consistent with the Company's strategies. The Company will continue to take
advantage of opportunities to consolidate or close stores in areas where the
market becomes less favorable.
STORE OPERATIONS AND DISTRIBUTION
STORE LOCATION. As of January 31, 1997, the Company had 210 stores located
in strip centers or freestanding buildings and 33 stores located in malls. The
standard size of strip center or freestanding locations is approximately 6,000
square feet, with an approximate range of 1,500 to 29,500 square feet. Mall
stores range in size from 1,750 to 10,160 square feet of space, and most do not
offer video rental service due to the importance of convenience in the video
rental business.
RETAIL PRESENTATION. The Company has developed a contemporary store design
approach that employs light interior colors, attractive lighting, modified
exterior signage and a minimum of fixed interior walls. The design maximizes
flexibility in lighting and use of floor space (e.g., to accommodate changes in
product format) and focuses customer attention primarily on the products. The
Company maintains an active store remodeling program to keep older stores up to
date.
DISTRIBUTION. Central to Wherehouse's strategy of providing broad
merchandise selection to its customers (i.e. multiple copies of hits, select
copies of catalog product, and high quality in-stock condition) is its ability
to distribute product quickly and cost-effectively to its stores. Generally,
the Company's central distribution system fills orders to all stores twice a
week. Inventory at the Company's distribution center (located in Carson,
California) is automatically
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sorted based on individual store demand data generated by the Company's
store-level inventory systems.
Approximately 30% of the Company's inventory is shipped to store locations
directly from manufacturers and distributors (chiefly in the case of new
releases), and the remainder is shipped from the Company's distribution center.
The Company uses common carriers for deliveries from its distribution center.
COMPETITION
Both the prerecorded music and the video rental markets are highly
competitive. In the prerecorded music market, the Company competes with other
chain retailers who specialize in prerecorded music, discounters and other mass
merchandisers, direct mail programs such as record clubs, and local operators.
The video rental market is a more fragmented industry, with many small operators
and two significant competitors, Blockbuster Entertainment and Hollywood Video.
Grocery and convenience stores also account for a portion of the video rental
market. In the Company's judgment, small operators may be well located, but
usually have significant disadvantages in inventory selection and cost relative
to chain retailers. Additionally, the Company's combination entertainment store
format gives the Company cross-selling opportunities in music and rental video.
In both the music and video rental markets, there has been a trend
towards consolidation, and several large regional retail chains -- many
similar to or direct competitors of the Company -- have been acquired by
large national retail chains. In addition, several major retail chains,
including Best Buy, Blockbuster Entertainment and Hollywood Video continue to
open stores or expand their retail store presence in the Company's markets.
Accordingly, it can be expected that the Company will in future periods
experience increased competition from companies with greater financial
resources than the Company, and that such competition may result in continued
pressure on revenues and gross profit margins.
The Company also competes with cable television and DSS (Digital Satellite
Systems), which includes pay-per-view television. Currently, pay-per-view
provides less viewing flexibility to the consumer than videocassette rentals,
and at a higher cost. Also, under current entertainment industry distribution
practices, movies are generally available on videocassette prior to appearing on
pay-per-view. However, viewing flexibility may increase with improved
technology which could negatively impact the retail store delivery of home video
and Wherehouse's business. Notwithstanding potential technological advances,
Wherehouse believes that video rental should, in the near future, continue to be
the first source of filmed in-the-home entertainment, before pay-per-view, and a
primary source of filmed entertainment for the consumer.
Several major companies have announced that they are developing other
technologies which, if successful, could constitute significant competition.
These include technologies which would provide movies or interactive games "on
demand" over fiber optic telephone or cable lines, other in-the-home
entertainment which may some day be provided over the "information
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superhighway", and in-store kiosks that would provide on-site transcription of
compact discs. While none of these technologies is yet commercially available,
and it appears that significant technical, economic, and other obstacles to
their introduction remain to be resolved, if and when these or other new
technologies are introduced, it can be anticipated that Wherehouse's business
could be significantly impacted; and Wherehouse may need to develop and
implement new marketing strategies in order for its business to remain viable.
Wherehouse is one of the largest retailers of prerecorded music and
videocassette rentals in the western U.S. The Company believes that its major
competitive advantages lie in its convenient store locations and in its ability
to offer a wide and up-to-date selection of inventory, as well as to provide
better customer service.
ORGANIZATION AND EMPLOYEES
Wherehouse's corporate offices are located in Torrance, California.
Wherehouse maintains offices for its two regional divisions within the
corporate offices and in Redwood City, California. The Company's
distribution center is in Carson, California.
As of January 31, 1997, Wherehouse employed approximately 4,450 persons.
Approximately 40% were full-time employees and approximately 60% were part-time
employees. The Company's labor complement depends on seasonal requirements,
with up to 1,000 additional store and distribution center employees added during
the peak holiday season. Wherehouse's headquarters staff, which numbers
approximately 173, is responsible for executive and general operating
management, buying, merchandising, advertising, finance, accounting, information
systems and real estate.
TRADEMARKS
All but three of Wherehouse's stores operate under the name "The
Wherehouse" or "Wherehouse Entertainment." The Company owns and maintains
registrations for "The Wherehouse" trademark and variations thereof in the
United States, Mexico, Taiwan, Thailand, Hong Kong and Korea and has filed
trademark registrations in China. The Company monitors the status of its
trademark registrations to maintain them in force and to renew them as required.
SEASONALITY
The Company's business is seasonal, and, as is typical for most retailers,
its revenues peak during the Christmas holiday season. Revenues in the fourth
quarter of fiscal 1997 were slightly more than 30.7% of total annual revenues.
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ITEM 2. PROPERTIES
The Company's executive offices, which are located in Torrance, California,
are governed by a lease covering 39,855 square feet of space at a current annual
base rent of approximately $167,000. The lease expires on May 31, 1999,
however, either party may terminate this lease at any time after January 31,
1998.
The Company operates a 200,000 square foot distribution center in Carson,
California. The lease for this property expires on April 30, 2002, subject to
two five-year renewal options. The base rent for fiscal 1997 was $732,000,
although rent is subject to periodic adjustment.
As of January 31, 1997, the Company owned 1 of its retail locations and
leased space for the remaining 242 stores. Lease terms generally range from
month to month to 25 years, including renewal options. If no leased stores'
renewal options were exercised, 39 leases would expire on or before January
31, 1998, 102 would expire between February 1, 1998 and January 31, 2002, and
the remainder would expire between February 1, 2001 and January 31, 2013.
The Company has the right to terminate a number of its store leases prior to
the lease termination date, depending upon certain conditions, as defined in
each lease. The Company does not depend on the continued existence of any
one or several of its lease agreements or store locations for the operation
of its business.
As of January 31, 1997, the Company had no outstanding lease commitments to
open new stores. During fiscal 1997, the Company entered into nine short-term
leases with the Lucky's Division of American Stores, Inc. to operate sale and
rental businesses within Lucky's supermarkets, under the "Wherehouse" name. The
Company intends to close these stores by June 30, 1997.
ITEM 3. LEGAL PROCEEDINGS
(i) Bankruptcy filing
See Item 1 -- "Reorganization Under Chapter 11" above for a description of
the bankruptcy filing of Old Wherehouse and WEI.
(ii) Bankers Trust Litigation
IN RE WHEREHOUSE ENTERTAINMENT, INC., AND WEI HOLDINGS, INC.; WHEREHOUSE
ENTERTAINMENT, INC., AND WEI HOLDINGS, INC. V. BANKERS TRUST COMPANY, United
States Bankruptcy Court for the District of Delaware, Case No. 95-911 (HSB);
Adv. Pro. No. A-95-105. On November 9, 1995, Old Wherehouse filed an adversary
proceeding in the Bankruptcy Court against Bankers Trust Company, one of Old
Wherehouse's secured creditors. Old Wherehouse asserted claims against Bankers
Trust, including for reformation of the security agreement between Old
Wherehouse and Bankers Trust to provide that Bankers Trust's security interest
does not extend to Old Wherehouse's merchandise (sale) inventory and/or
equitable subordination of Bankers Trust's entire security interest to that of
other creditors. Pursuant to
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the Reorganization Plan and the Confirmation Order, this adversary proceeding
was dismissed with prejudice on the Plan Effective Date.
(iii) McMahan and Related Actions.
In January 1988, holders of approximately $17 million in principal amount
of the Company's 6-1/4% Convertible Subordinated Debentures commenced an
action entitled McMahan & Company, et al. v. Wherehouse Entertainment, Inc.,
et al., 88 Civ. 0321 (S.D.N.Y.). This lawsuit, and a related lawsuit filed in
January 1989 and consolidated with the McMahan lawsuit, alleges that the
Company, six of its former directors, the former controlling shareholder of
the Company and others, issued a prospectus in connection with the offering
of the Convertible Debentures that violated Section 10(b) of the Securities
Exchange Act of 1934. According to the plaintiffs, the prospectus failed to
disclose that the Company's independent directors retained the right to
approve any merger proposal, and thereby prevent any right of holders to
redeem the Convertible Debentures from arising, whether or not such proposal
was in the best interests of the Debentureholders. On December 23, 1996, the
parties entered into a Settlement Agreement pursuant to which the lawsuits
have been settled. This settlement, which is subject to court approval,
provides for the release of all claims against the Company and the other
defendants in exchange for a payment of $7 million to plaintiffs. Under the
terms of the Settlement Agreement, none of the settlement consideration will
be paid by the Company. On December 31, 1996, the Court preliminarily
approved the settlement and scheduled a hearing for June 3, 1997 to consider
whether the proposed settlement is fair, reasonable and adequate to the
plaintiff class.
(iv) Other.
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of its business. In the opinion of
management, all such matters are without merit or involve such amounts that
unfavorable disposition will not have a material impact on the financial
position and results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company has one class of common equity, the New Common Stock,
outstanding. See Item 12 - "Security Ownership of Certain Beneficial Owners and
Management". There is no established public trading market for the New Common
Stock.
Prior to the Plan Effective Date, Old Wherehouse had only one class of
common equity outstanding, all of which was owned by WEI. WEI had only one
class of common equity outstanding, which was owned exclusively by affiliates of
Merrill Lynch Capital Partners and certain members of management of Old
Wherehouse. Pursuant to the Reorganization Plan, the common equity of Old
Wherehouse and WEI were cancelled without any distributions being made to the
holders thereof.
HOLDERS
As of January 31, 1997, after the effectiveness of the Reorganization
Plan, there were eight holders of New Wherehouse's New Common Stock, seven of
whom were Senior Lenders. The Company estimates that approximately 918,000
additional shares of New Common Stock in total will be distributed to the
Senior Lenders, A&M Investment Associates and to approximately 1,500 holders
of unsecured claims as their claims are allowed by the Bankruptcy Court. See
"Forward-Looking Statements" immediately prior to Part I above.
DIVIDENDS
No dividends have been paid to the holders of the New Common Stock since
their issuance. The Congress Facility restricts the ability of New Wherehouse
to pay dividends. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operation." There are no plans by New
Wherehouse to pay cash dividends on its common stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data as of and for the
periods indicated below. The financial data was derived from financial
statements of the Predecessor (see Note (1) below), Old Wherehouse and New
Wherehouse. The selected financial data should be read in conjunction with the
discussion under Item 7 - "Management's Discussion and Analysis of
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Financial Condition and Results of Operation" and with the financial statements,
including the notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
(Dollar amounts in millions)
----------------------------------------------------------------------------------------------------
Old Wherehouse Predecessor(1)
------------------------------------------------------------------------ --------------------------
8 Months 4 Months
Year Ended Year Ended Year Ended Year Ended Ended Ended Year Ended
January 31, January 31, January 31, January 31, January 31, May 31 January 3,
Income statement data(1) 1997 1996 1995 1994 1993 1992 1992
----------- ----------- ----------- ----------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Sales $295.8 $350.7 $409.5 $380.2 $249.1 $105.3 $358.6
Rental 69.7 82.5 90.1 91.6 64.3 29.8 98.8
------ ------ ------ ------ ------ ------ ------
365.5 433.2 499.6 471.8 313.4 135.1 457.4
Cost and expenses:
Cost of sales 195.5 230.4 262.6 248.0 155.2 66.9 225.5
Cost of rentals including
amortization 33.5 40.0 35.0 50.8 24.8 7.3 30.9
Selling, general and
administrative expenses 146.0 167.2 188.7 196.6 122.9 59.9 179.1
Restructuring charges -- -- -- 14.3 -- -- --
Write-down of long-lived
assets - 1.5 139.5 -- -- -- --
Interest expense, net of
other income 0.6 14.7 23.0 23.2 15.6 4.8 17.9
------ ------ ------ ----- ------ ------ ------
375.6 453.8 648.8 532.9 318.5 138.9 453.4
------ ------ ------ ----- ------ ------ ------
(Loss) income before
reorganization items and
income taxes (10.1) (20.6) (149.2) (61.1) (5.1) (3.8) 3.9
Reorganization items(2) 19.9 23.2 -- -- -- -- --
------ ------ ------- ------ ----- ----- ----
(Loss) income before income
taxes (30.0) (43.8) (149.2) (61.1) (5.1) (3.8) 3.9
(Benefit) provision for
income taxes 0.0 0.0 13.0 (19.1) (1.3) (1.9) 1.0
------ ------ ------ ------ ----- ----- ----
(Loss) income before
extraordinary item(3) (30.0) (43.8) (162.2) (42.1) (3.8) (2.0) 2.9
Extraordinary item(4)(5) 173.7 -- -- -- -- (4.5) --
------ ------- ------- ------- ----- ------ -----
Net (loss) income(3) $143.7 ($43.8) ($162.2) ($42.1) ($3.8) ($6.5) $2.9
------ ------- ------- ------- ----- ------ -----
------ ------- ------- ------- ----- ------ -----
Balance Sheet Data(1) New
Wherehouse Old Wherehouse Predecessor (1)
---------- ------------------------------------------------- -------------------------
Working capital (deficiency)/
excess (excl. liabilities
subject to compromise
in 1996)(6) 59.4 $83.7 ($13.2) $ 4.9 ($ 0.5) ($30.7)
Total assets(6) 131.7 168.5 197.7 351.4 374.4 225.7
Liabilities subject to
compromise - 278.9 -- -- -- --
Long-term debt (including
current portion, excluding
long-term debt deemed
subject to compromise (6)(7) 5.4 4.2 167.4 175.1 185.1 110.0
Total shareholder's (deficit)
/equity(8) 84.1 (156.3) (112.4) 50.0 62.5 3.7
- -------------------------
</TABLE>
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(1) The Company was acquired in June 1992 by the purchase of all of WEI's
ownership interest in the Company through a merger transaction in which
Grammy Corp. was merged with and into WEI. The transaction was
accounted for using the purchase method and the term "Predecessor"
refers to the predecessor to the Company for the period from fiscal year
1989 through May 31, 1992. The transaction caused changes in the basis
of accounting thereby making periods of the Predecessor not comparable
to those of the Company.
(2) See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations."
(3) Earnings per share are omitted for the Company since it was a
wholly-owned subsidiary of WEI during the fiscal years 1993, 1994, 1995,
1996 and 1997.
(4) The extraordinary item in the four-month period ended May 31, 1992
represents the write-off of unamortized financing costs and prepayment
penalties paid related to the debt of the Predecessor that was
refinanced at the time of the Acquisition. The loss was $4.5 million,
net of an income tax benefit of $3.0 million.
(5) The extraordinary item in fiscal year ended January 31, 1997 represents
gain due to the extinguishment of debt pursuant to the Company's plan of
reorganization.
(6) Certain prior year balances have been reclassified to conform to
current classifications.
(7) Includes convertible subordinated debentures for all fiscal years
through 1995. For fiscal year 1996, convertible subordinated debentures
are included in liabilities subject to compromise.
(8) There were no cash dividends declared during any of the periods
presented above, except for cash dividends in the amount of $.2 million,
$.5 million and $.3 million paid to WEI, the Company's sole stockholder,
in fiscal years 1995, 1994 and 1992, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operation, particularly in the paragraph
entitled "Liquidity and Capital Resources," and elsewhere in this Annual
Report on Form 10-K are forward-looking statements. These statements
discuss, among other things, expected growth, future revenues and future
performance. The forward-looking statements are subject to risks and
uncertainties, including the following: (a) changes in levels of competition
from current competitors and potential new competition from both retail
stores and alternative methods or channels of distribution such as electronic
and telephone shopping services and mail order; (b) loss of a significant
vendor or prolonged disruption of product supply; (c) the presence or absence
of popular new releases and products in the product categories the registrant
represents; (d) changes in levels of consumer spending, especially during
seasonally significant periods; (e) changes in the Federal and state income
tax rules and regulations or interpretations of existing legislation; (f)
changes in the general economic conditions in the United States, and in
particular the eight major markets served by the registrant, including,
but not limited to, consumer sentiment about the economy in general; (g)
changes in availability or terms of working capital financing from vendors
and lending institutions; (h) adverse results in significant litigation
matters; and (i) the ability to attract and retain key personnel. The
foregoing should not be construed as an exhaustive list of all factors which
could cause actual results to differ materially from those expressed in
forward-looking statements made by the registrant. Actual results may
materially differ from anticipated results described in these statements.
The following Management's Discussion and Analysis of Results of Operation
include the operations of Old Wherehouse through January 31, 1997. The
discussion of financial conditions includes cash flow resulting from the
operations of Old Wherehouse and a liquidity analysis based on the balance sheet
of New Wherehouse after the reorganization, which reflects "Fresh Start"
Accounting adjustments. See note 2 to the financial statements.
YEAR ENDED JANUARY 31, 1997 COMPARED TO YEAR ENDED JANUARY 31, 1996
Revenues were $365.5 million and $433.2 million for the fiscal years ended
January 31, 1997 and January 31, 1996, respectively. This decrease of $67.7
million was principally due to a 5.0% decrease in same-store revenues (stores
open for at least 13 months) and the closing of 63 stores during the year.
Merchandise sales were $295.8 million and $350.7 million during the
fiscal years ended January 31, 1997 and 1996, respectively, representing an
aggregate decrease of 15.7% and a decrease of 4.1% on a same-store basis.
(See table in Item 1 -- "Business - Merchandise Sale Products.") The
decrease in same-store merchandise sales was principally due to decreased
customer traffic caused by
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<PAGE>
continued competitive and economic pressures in certain of the Company's markets
and, to a lesser extent, by a lack of new, "hit" release music product.
Rental revenue includes the rental of videocassettes, video games and game
players, audiocassette books and laser discs. At January 31, 1997 approximately
84% of the Company's stores offered videocassettes and other products for rent
versus approximately 81% at January 31, 1996. Rental revenue for the fiscal
year ended January 31, 1997 was $69.7 million, a decrease of 15.5% from the
previous fiscal year and a decrease of 8.7% on a same-store basis. The Company
believes that decreases in both total and same-store rental income are
attributable to a number of factors, including a lack of "hit" releases in all
rental categories, continued competition and a general softening in rental
consumer spending nationwide.
The Company believes that in the future its business and same-store
revenues may be impacted by various competitive and economic factors, including,
but not limited to, consumer tastes, new releases of music, videocassette and
video game titles available for sale or rental, and general economic trends
impacting retailers and consumers. In addition, in recent years the Company's
merchandise sales and rental revenues have been impacted by increased
competition from other music and video specialty retail chains, as well as
discounters and mass merchandisers. Further, future revenues may be reduced as
a result of the closure of 63 stores in fiscal 1997 and 53 stores in fiscal
1996, and as a result of the closure of any additional stores that may occur in
the future.
The Company's business is seasonal, and as is typical for most retailers,
its revenues tend to peak during the Christmas holiday season. See
"Seasonality," below.
Cost of sales decreased $34.8 million to $195.5 million for the fiscal
year ended January 31, 1997, as compared with $230.4 million for the fiscal
year ended January 31, 1996. As a percentage of merchandise sales, cost of
sales increased 0.4% to 66.1% for the fiscal year ended January 31, 1997
versus 65.7% for the fiscal year ended January 31, 1996. The gross profit
percentage for merchandise sale product was 33.9% and 34.3% for the fiscal
years ended January 31, 1997 and 1996, respectively. The 0.4% increase in
cost of sales as a percentage of merchandise sales was principally due to (i)
higher obsolescence resulting from the Company's inability, during the
bankruptcy, to rapidly dispose of returnable goods and (ii) decreased prompt
payment discounts on merchandise inventory purchases, also as a result of the
bankruptcy filing, offset by decreases in the cost of merchandise inventory.
Cost of rentals, including amortization, decreased $6.5 million to $33.5
million for the fiscal year ended January 31, 1997, as compared with $40.0
million for the fiscal year ended January 31, 1996. As a percentage of rental
revenue, cost of rentals decreased to 48.0% for the fiscal year ended January
31, 1997 from 48.5% for the fiscal year ended January 31, 1996, a decrease of
0.5%. The gross profit percentage for rental revenue was 52.0% and 51.5% for
the fiscal years ended January 31, 1997 and 1996, respectively. The 0.5%
decrease in the cost of rentals is primarily attributable to decreased rental
inventory shrinkage offset by an increase in rental amortization. Old
Wherehouse amortized rental inventory over three years for video cassettes and
two years for video games. New Wherehouse will amortize rental inventory using
the straight-line method over a three-month period with a salvage value of $3.
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<PAGE>
Merchandise sales, including ticket commissions, as a percentage of
aggregate net revenues, decreased slightly from 81.0% in the fiscal year
ended January 31, 1996 to 80.9% in the fiscal year ended January 31, 1997.
Historically, the margin on rentals has been higher than the margin on
merchandise sales. Should the product mix shift to lower margin merchandise
sales from higher margin rental revenue, it can be expected that the change
in the mix of revenue contribution could have an impact on profitability.
Several major retail chains, including Best Buy, Blockbuster Entertainment,
Hollywood Video and Virgin Megastores increased their retail store presence
in the Company's markets. This trend is expected to continue and it is
anticipated that the Company will in future periods experience increased
competition in both rentals and merchandise sales from companies with greater
financial resources than its own, and that such competition may result in
continued pressure on revenues and gross profit margins. Part of the
Company's reduction in the volume of rentals has resulted from such
competition.
Selling, general and administrative expenses were $146.0 million and $167.2
million for the fiscal years ended January 31, 1997 and 1996, respectively, a
decrease of $21.2 million, or 12.7%. As a percentage of aggregate net revenues,
selling, general and administrative expenses were 40.0% and 38.6% for the fiscal
years ended January 31, 1997 and 1996, respectively, an increase of 1.4%. The
change was primarily due to increases, as a percentage of revenue, in payroll
and rent and other occupancy costs, and to a lesser extent, other variable
expenses. Reductions in absolute dollars may occur in rent and occupancy costs
in fiscal year 1998 as a result of the rejection of certain real property leases
during the Bankruptcy Case.
The loss from operations was $9.4 million for the fiscal year ended January
31, 1997, as compared with a loss of $5.8 million for the fiscal year ended
January 31, 1996. The increase in the operating loss resulted primarily from a
decrease in the amount of gross profit dollars for the year partially offset by
decreases in selling, general and administrative expenses and a decrease in the
amount of write-down of long-lived assets. Excluding the effect of the
write-down of long-lived assets, loss from operations in fiscal year 1996, would
have been $4.3 million.
Interest expense (net of other income) decreased $14.1 million to $0.6
million for the year ended January 31, 1997 versus $14.7 million for the
year-ended January 31, 1996. The decrease was primarily due to the
suspension of the accrual of interest on the Company's revolving line of
credit, variable rate term note, Senior Subordinated Notes and Convertible
Debentures following the bankruptcy filing. The amount of interest that
ceased to accrue during the Bankruptcy Case was $26.0 million and $13.3
million for fiscal 1997 and fiscal 1996, respectively.
Reorganization items for the year ended January 31, 1997 include costs
related to the Bankruptcy Case including professional fees for legal and
financial advisors, costs related to the closing of stores (including the
write-down of inventory resulting from the closing of stores), and the
estimated cost associated with the rejection of certain executory contracts
and other reorganization costs. For the year, the Company reported total
reorganization items of $19.9 million which is comprised of $7.2 million of
professional fees, $7.0 million related to the closing of stores, $3.3
million associated with the rejection of certain executory contracts and $2.4
million of other reorganization costs.
The Company did not record an income tax provision for the year ended
January 31, 1997 but did record a tax provision of $17,000 for the year ended
January 31, 1996. While the Company
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<PAGE>
experienced a pre-tax loss in fiscal 1996, it was unable to record a tax benefit
because of an offsetting increase in the valuation allowance for deferred tax
assets.
The net operating losses of Old Wherehouse will not be available to New
Wherehouse to offset future operating income of New Wherehouse.
The Company is currently under audit by the California Franchise Tax Board
for tax years January 31, 1992, 1993 and 1994. The Company believes that it has
made adequate provision in the financial statements for this audit.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED JANUARY 31, 1995
Revenues were $433.2 million and $499.6 million for the fiscal years ended
January 31, 1996 and January 31, 1995, respectively. This decrease of $66.4
million was principally due to a 12.2% decrease in same-store revenues (stores
open for at least 13 months) and the closing of 53 stores during the year.
Merchandise sales were $350.7 million and $409.5 million during the fiscal
years ended January 31, 1996 and 1995, respectively, representing an aggregate
decrease of 14.4% and a decrease of 13.0% on a same-store basis. (See table in
Item 1 -- "Business - Merchandise Products and Supply.") The decrease in
same-store merchandise sales was principally due to decreased customer traffic
caused by a lack of new, "hit" release music product, continued competitive and
economic pressures in certain of the Company's markets and, in the opinion of
the Company, a shift in consumer spending from traditional entertainment
products to home computer hardware and software products.
Rental revenue includes the rental of videocassettes, video games and game
players, audiocassette books and laser discs. At January 31, 1996 approximately
81% of the Company's stores offered videocassettes and other products for rent
versus approximately 76% at January 31, 1995. Rental revenue for the fiscal
year ended January 31, 1996 was $82.5 million, a decrease of 8.4% from the
previous fiscal year and a decrease of 8.7% on a same-store basis. Decreases in
both total and same-store rental income were attributable to a number of
factors, including the difficulties resulting from the Company's liquidity
problems in attempting to purchase large quantities of certain "hit" titles, a
lack of "hit" releases in all rental categories, continued competition and a
general softening in rental consumer spending nationwide.
Cost of sales decreased $32.2 million to $230.4 million for the fiscal year
ended January 31, 1996, as compared with $262.6 million for the fiscal year
ended January 31, 1995. As a percentage of merchandise sales revenues, cost of
sales increased 1.6% to 65.7% for the fiscal year ended January 31, 1996 versus
64.1% for the fiscal year ended January 31, 1995. The gross profit percentage
for merchandise sale product was 34.3% and 35.9% for the fiscal years ended
January 31, 1996 and 1995, respectively. The 1.6% increase in cost of sales as
a percentage of merchandise sales revenues was principally due to increased
costs attributable to merchandise returns and inventory shrink, and decreased
prompt payment discounts on merchandise inventory purchases as a result of the
bankruptcy filing.
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<PAGE>
Cost of rentals, including amortization, increased $5.0 million to $40.0
million for the fiscal year ended January 31, 1996, as compared with $35.0
million for the fiscal year ended January 31, 1995. As a percentage of rental
revenue, cost of rentals increased to 48.5% for the fiscal year ended January
31, 1996 from 38.8% for the fiscal year ended January 31, 1995, an increase of
9.7%. The gross profit percentage for rental revenue was 51.5% and 61.2% for
the fiscal years ended January 31, 1996 and 1995, respectively. The 9.7%
increase in cost of rentals, including amortization, was primarily attributable
to costs related to increased sales of used rental inventory and to a lesser
extent, higher rental inventory shrinkage. Sales of used rental inventory
increased over last year as a byproduct of the Company's strategy of carrying
more rental "hit" titles. The sale of used rental product yields lower margins
than the rental of such product.
Merchandise sales, as a percentage of aggregate net revenues, decreased
from 82.0% in the fiscal year ended January 31, 1995 to 81.0% in the fiscal year
ended January 31, 1996.
Selling, general and administrative expenses, excluding amortization of
purchase price adjustments resulting from acquisitions, were $167.9 million
and $185.3 million for the fiscal years ended January 31, 1996 and 1995,
respectively, a decrease of $17.4 million, or 9.4%. As a percentage of
aggregate net revenues, selling, general and administrative expenses,
excluding amortization of purchase price adjustments, were 38.8% and 37.1%
for the fiscal years ended January 31, 1996 and 1995, respectively, an
increase of 1.7%. The change was primarily due to increases as a percentage
of revenue, in rent and other occupancy costs, and to a lesser extent,
payroll and advertising expense.
During the fourth quarter of fiscal 1995 the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting of the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement No.
121"). In connection with the adoption of Statement No. 121 in the fiscal year
ended January 31, 1995, the Company wrote-off its remaining excess cost over the
fair value of the net assets acquired (or "goodwill") due to an impairment in
the carrying value. Accordingly, no goodwill amortization was included in
selling, general and administrative expenses during the year ended January 31,
1996 while $3.7 million was included during the year ended January 31, 1995.
The Company evaluated the ongoing value of its equipment and improvements
on a store-by-store basis during fiscal year 1996 as required by Statement
No. 121 above. Based on this evaluation, the Company determined that store
equipment and improvements with a carrying amount of $1.8 million were
impaired and wrote them down by $1.5 million to their fair value. Fair value
was based on estimated future cash flows to be generated by the individual
stores, discounted at a market rate of interest.
The loss from operations was $5.9 million for the fiscal year ended January
31, 1996, as compared with a loss of $126.2 million for the fiscal year ended
January 31, 1995. The decrease in the operating loss resulted primarily from a
decrease in the amount of write-down of long-lived assets of $138.0 million.
Excluding the effect of the write-down of long-lived assets in both fiscal
years, loss from operations would have been $4.4 million for fiscal year ended
January 31, 1996 as compared to income from operations of $13.3 million for
fiscal year ended January 31, 1995, a decrease of $17.7 million.
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<PAGE>
Interest expense (net of interest income) decreased $8.3 million to $14.7
million for the year ended January 31, 1996 versus $23.0 million for the
year-ended January 31, 1995. The decrease was primarily due to the suspension
of the accrual of interest on the Company's revolving line of credit, variable
rate term note, Senior Subordinated Notes and Convertible Debentures following
the bankruptcy filing.
Reorganization items for the year ended January 31, 1996, include costs
related to the Bankruptcy Case including professional fees for legal and
financial advisors, costs related to the closing of stores, and the estimated
cost associated with the rejection of certain executory contracts. For the
year, the Company reported total reorganization items of $23.2 million which
was comprised of $2.5 million of professional fees, $6.2 million related to
the closing of stores, $6.0 million associated with the rejection of certain
executory contracts and $8.5 million connected with the write off of
financing costs and debt discounts.
The Company recorded an income tax provision of $17,000 for year ended
January 31, 1996 versus a tax provision of $13.0 million for year ended January
31, 1995. While the Company experienced a pre-tax loss in fiscal 1996, it was
unable to record a tax benefit because of an offsetting increase in the
valuation allowance for deferred tax assets. Although such tax assets are
available to reduce taxes payable, historical losses in fiscal years 1995 and
1996 and a projected tax loss for fiscal year 1997 necessitated the increase in
the reserve allowance.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $15.9 million for
fiscal year 1997 as compared to $(10.6) million for fiscal year 1996, an
increase of $26.5 million over the previous year. The increase was due to
(i) an increase in payables and a decrease in prepaid inventory as a result
of greater vendor support following tentative approval of the Reorganization
Plan in December, and (ii) a decrease in rental video purchases as compared to
the previous year, offset by, a reduction in merchandise inventory and other
factors.
Net cash used in investing activities totaled $1.3 million for the year
ended January 31, 1997 consisting of capital expenditures of $3.8 million
offset by proceeds from the sale of a building no longer used by the Company
of $2.5 million. Capital expenditures were predominantly used for the
remodeling of selected stores.
Net cash (used in) provided by financing activities was $(15.8) million for
the year ended January 31, 1997. These financing activities consisted of the
settlement of certain pre-petition claims of $(14.1) million, principal payments
made on capital lease obligations and other long-term debt of $(2.7) million,
offset by proceeds from the sale of new common stock to A&M Investment
Associates of $1.0 million. See Item 13 - "Certain Relationships and Related
Transactions" for a more detailed description of the transaction.
New Wherehouse has established the Congress Facility, which is a revolving
line of credit in the amount of $30.0 million, which includes a letter of credit
subfacility of $10.0 million. Borrowings under the facility bear interest, at
New Wherehouse's option, at either: (a) the prime rate; or (b) the applicable
eurodollar rate plus 2.50%. New Wherehouse had no outstanding borrowings
against the
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facility at January 31, 1997. At January 31, 1997, New Wherehouse had $0.4
million of letters of credit outstanding. New Wherehouse is subject to various
financial and other covenants under the terms of the facility including,
covenants relating to net worth, mergers or consolidations, liens, indebtedness
and other matters. As of January 31, 1997, the Company was in compliance with
all financial covenants required by this facility. The facility is available
through January 31, 2000 and is renewable annually thereafter.
As of January 31, 1997, the Company had no new significant outstanding
commitments for future capital expenditures. New Wherehouse is required to
make future payments of up to $14.0 million during the next fiscal year,
pursuant to the Reorganization Plan. Management believes that the current
borrowing facility is adequate to support current operations for the fiscal
year. However, there can be no assurance as to the effect which any future
changes in the Company's operations or results could have on its liquidity.
SEASONALITY
The Company's business is seasonal, and revenues and operating income are
highest during the fourth quarter. Working capital deficiencies and related
bank borrowings are lowest during the period commencing with the end of the
Christmas holidays and ending with the close of the Company's fiscal year.
Beginning in February, working capital deficiencies and related bank borrowings
have historically trended upward during the year until the fourth quarter. Bank
borrowings have historically been highest in October and November due to
cumulative capital expenditures for new stores and the building of inventory for
the holiday season.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations and its internal and external sources of liquidity and
working capital.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements and Financial Statement Schedules
appearing on page F-0 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the persons who
were directors and executive officers of New Wherehouse as of the Plan Effective
Date upon the effectiveness of the Reorganization Plan:
NEW WHEREHOUSE
Age at
Name Position April 30, 1997
---- -------- --------------
Antonio C. Alvarez, II Chief Executive Officer, 48
Chairman of the Board and
Director
Barbara C. Brown Senior Vice President, Sales 45
and Operations
Stephen P. Brown Senior Vice President, General 39
Merchandising Manager
Henry Del Castillo(1) Senior Vice President, Chief 58
Financial Officer and Secretary
Michael T. Buskey Vice President, Regional Manager 48
Robert C. Davenport Director 30
Jonathan Gallen Director 37
Joseph B. Smith Director 69
Bruce Ogilvie(1) Director 39
Joseph Radecki(2) Director 39
(1) Bruce Ogilvie is no longer a director of New Wherehouse, and Henry Del
Castillo is no longer employed by New Wherehouse. Effective April 7, 1997,
Mr. Robert Kelleher became Senior Vice President and Chief Financial
Officer of New Wherehouse.
(2) Mr. Radecki was elected a director of New Wherehouse on February 20, 1997.
ANTONIO C. ALVAREZ, II, Chief Executive Officer, Chairman of the Board and
Director of New Wherehouse. Mr. Alvarez commenced serving as Chief Executive
Officer, Chairman of the Board and Director of New Wherehouse on January 31,
1997. Mr. Alvarez is a principal of Alvarez & Marsal, Inc., a New York based
management consulting company. Mr. Alvarez's recent experience includes acting
as adviser to the bank lenders to Camelot Music, Inc. ("Camelot Music") and
serving as the senior executive of Phar-Mor, Inc. ("Phar-Mor"). Camelot Music
is a mall-based music retailer with
26
<PAGE>
over 300 stores. Phar-Mor is a retail chain that sells pharmaceuticals and a
wide range of other merchandise. Mr. Alvarez served as Phar-Mor's President and
Chief Operating Officer from September 1992 through February 1993, as acting
Chief Financial Officer from August 1992 to December 1992, and as Chief
Executive Officer from February 1993 through Phar-Mor's emergence from Chapter
11 bankruptcy in October 1995. Mr. Alvarez serves as the Chief Executive
Officer, Chairman of the Board and Director of New Wherehouse pursuant to a
Management Services Agreement between New Wherehouse and Alvarez & Marsal, Inc.
See Item 11- "Employment Agreements" below.
BARBARA C. BROWN, Senior Vice President, Sales and Operations of New
Wherehouse. Ms. Brown joined Old Wherehouse in 1973. She became Vice
President, Sales and Operations in 1986 and was promoted to Senior Vice
President in 1991. Prior to 1986, Ms. Brown served in a variety of store
operations positions including Store Manager, District Manager, Assistant Vice
President, Store Operations, and Associate Vice President, Store Operations.
Ms. Brown is the spouse of Mr. Stephen P. Brown, Senior Vice President, General
Merchandise Manager.
STEPHEN P. BROWN, Senior Vice President, General Merchandise Manager of New
Wherehouse. Mr. Brown joined Old Wherehouse in 1980. He became Vice President,
Merchandise Allocation and Distribution in 1993 and was promoted to Senior Vice
President, General Merchandise Manager in 1994. Prior to 1993, Mr. Brown served
in a variety of store operations positions including Store Manager, District
Manager, Regional Manager, and Assistant Vice President, Store Operations. Mr.
Brown is the spouse of Ms. Barbara C. Brown, Senior Vice President, Sales and
Operations.
HENRY DEL CASTILLO, Senior Vice President, Chief Financial Officer and
Secretary of the Company. Mr. Del Castillo joined Old Wherehouse in August
1995, following a twenty year career as a financial executive and Chief
Financial Officer of Powerine Oil Company. Previously, he served as Chief
Financial Officer of Carte Blanche Corporation, an international credit card and
travel services provider. Mr. Del Castillo tendered his resignation as an
officer of New Wherehouse effective March 3, 1997.
MICHAEL T. BUSKEY, Vice President, Regional Manager of New Wherehouse. Mr.
Buskey joined Old Wherehouse in 1993. Prior to joining Old Wherehouse he was
General Manager for Circuit City Stores, Inc.
ROBERT C. DAVENPORT, Director of New Wherehouse. Mr. Davenport commenced
serving as a director of New Wherehouse on January 31, 1997. Mr. Davenport is a
Managing Director of Cerberus Partners, L.P., a New York based investment fund,
a position he has held since February 1996. From March 1994 until February
1996, he was a private investor. From 1990 through 1994, he was with Vestar
Capital Partners, Inc., an investment fund, where he served as a vice president.
Prior to joining Vestar in 1990, Mr. Davenport was an analyst in the Mergers and
Acquisitions Group at Drexel Burnham Lambert in New York.
JONATHAN GALLEN, Director of New Wherehouse. Mr. Gallen commenced serving
as a director of New Wherehouse on January 31, 1997. Mr. Gallen is the sole
managing member of Pequod LLC, the general partner of Pequod Investments, L.P.
("Pequod"). Pequod is a distressed securities fund which invests in publicly
traded debt, private debt, trade claims, large and middle-market bank loans,
distressed real estate and public and private equity. Prior to opening Pequod,
from February 1993
27
<PAGE>
through February 1994, Mr. Gallen worked for Cerberus Partners, L.P. Mr. Gallen
has served on the Board of Directors of Harvest Foods since April 1995 and the
Board of Directors of Fruehauf Trailer Corporation since October 1996. From
1990 through early 1993 Mr. Gallen owned and operated Gallen Sports Productions,
a business engaged in the acquisition, distribution and sale of autographed
sports memorabilia. Mr. Gallen continues to be the sole owner of Gallen Sports
Productions.
JOSEPH B. SMITH, Director of New Wherehouse. Mr. Smith commenced serving
as a director of New Wherehouse on January 31, 1997. Mr. Smith is currently the
Chairman of Unison Productions, a consulting and production company, a position
he has held since April, 1994. During his career, Mr. Smith has held a variety
of positions in the music industry, including holding senior positions with
three major record companies. He most recently served as President and Chief
Executive Officer of Capitol Industries-EMI Music, Inc., a position he held from
1987 until 1993, when he retired and began his consulting work with Unison
Productions. In 1961, Mr. Smith joined Warner Bros. Records as its National
Promotion Manager. In 1970, he became Executive Vice President and General
Manager of Warner Bros./Reprise Records and in 1972 was appointed President of
Warner Bros./Reprise Records. In 1975, he became Chairman of Electra/Asylum/
Nonesuch Records. Mr. Smith left Electra/Asylum in 1983 and served for two
years as President and CEO of Home Sports Entertainment, a division of Warner/
Amex Cable. Following this he became the first full-time President of the
National Academy of Recording Arts and Sciences. Mr. Smith serves as a director
of Westwood One, Inc., a radio syndications company, and serves on its
Compensation Committee.
BRUCE OGILVIE, Director of New Wherehouse. Mr. Ogilvie served as Old
Wherehouse's and WEI's President and Chief Executive Officer from June 1996
through January 31, 1997. Mr. Ogilvie was elected a director of New Wherehouse
on January 31, 1997 and resigned as a director on February 20, 1997. In 1978,
Mr. Ogilvie founded a music distributor known as Boulevard Sales, dba Abbey Road
Distribution. In 1994, Mr. Ogilvie sold Abbey Road to Alliance Entertainment
Corp. and from February 1994 to February 1995, Mr. Ogilvie served as Senior Vice
President, Operations for Alliance Entertainment Corp. Mr. Ogilvie left
Alliance Entertainment Corp. in early 1995 to help found Contour Design, Inc., a
business engaged in the design and manufacture of computer peripheral equipment.
JOSEPH RADECKI, Director of New Wherehouse. Mr. Radecki commenced serving
as a director of New Wherehouse on February 20, 1997. Mr. Radecki is currently
Executive Vice President and Director of Financial Restructurings of Jefferies &
Company, Inc., an investment bank. Prior to joining Jefferies & Company, Inc.,
Mr. Radecki was First Vice President in the International Capital Markets Group
at Drexel Burnham Lambert, Inc., where he specialized in financial
restructurings and recapitalizations. Over the past nine years, Mr. Radecki has
been involved in 50 transactions totaling over $15 billion in recapitalized
securities. Mr. Radecki has served as a member of the Board of Directors of
Service America Corporation and is currently on the Board of Directors of
Bucyrus International, Inc, a mining equipment manufacturer and ECO-Net, a
non-profit engineering related network firm.
OLD WHEREHOUSE
The following table sets forth certain information concerning the persons
who were directors and executive officers of Old Wherehouse as of January 31,
1997 immediately prior to the effectiveness of
28
<PAGE>
the Reorganization Plan. Of the officers listed below, only Barbara C.
Brown, Stephen P. Brown and Michael T. Buskey remain employed by New
Wherehouse. Their biographies are set forth above in this Item 10. None of
the directors of Old Wherehouse listed below became directors of New
Wherehouse upon the effectiveness of the Reorganization Plan.
Age at
Name Position April 30, 1997
---- -------- --------------
Jerry E. Goldress Chief Executive Officer, 66
Chairman of the Board and
Director
Barbara C. Brown Senior Vice President, Sales 45
and Operations
Stephen P. Brown Senior Vice President, 39
General Merchandising
Manager
Henry Del Castillo Senior Vice President, Chief 58
Financial Officer and
Secretary
Michael T. Buskey Vice President, Regional 48
Manager
James J. Burke, Jr. Director 45
Gerald S. Armstrong Director 53
Rupinder S. Sidhu Director 40
Bradley J. Hoecker Director 34
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
NEW WHEREHOUSE. The following table sets forth, for the fiscal year ended
January 31, 1997, certain compensation paid by New Wherehouse or accrued for
such fiscal year, to Antonio C. Alvarez, II in all capacities in which he
served, upon the effectiveness of the Reorganization Plan. New Wherehouse paid
no cash or other compensation to any of the other officers or directors of New
Wherehouse in fiscal 1997. The cash and certain other compensation paid to the
officers and directors of New Wherehouse and Old Wherehouse by Old Wherehouse
for the fiscal years ended January 31, 1997, January 31, 1996 and January 31,
1995 are set forth in the second succeeding table below. All cash compensation
with respect to Mr. Alvarez was paid to Alvarez & Marsal, Inc., a consulting
firm in which Mr. Alvarez is a principal. All other compensation paid to Mr.
Alvarez was paid to A&M Investments #3 LLC, an affiliate of Alvarez & Marsal,
Inc.
29
<PAGE>
NEW WHEREHOUSE SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
--------------------------------- ---------------------------
No. of
Other Annual Securities All Other
Name and Fiscal Salary Bonus Compensation Underlying Compensation
Principal Position Year ($) ($) ($)(b) Options ($)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Antonio C. Alvarez II 1997 -- -- 389,452(b) 993,380(c) --
Chairman, Chief
Executive Officer(a)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Mr. Alvarez commenced serving as Chairman of the Board and Chief Executive
Officer of New Wherehouse pursuant to a Management Services Agreement dated
as of January 31, 1997. See "Employee Agreements" under this Item 11
below.
(b) This amount represents consulting fees paid by the Senior Lenders to
Alvarez & Marsal, Inc. prior to the Plan Effective Date, which amount was
reimbursed by New Wherehouse to the Senior Lenders. See "Employment
Agreements" under this Item 11 below.
(c) In connection with the Management Services Agreement, New Wherehouse issued
options to purchase 993,380 shares of New Common Stock to an affiliate of
Alvarez & Marsal, Inc., of which Mr. Alvarez is a principal, pursuant to a
Non-Transferrable Stock Option Agreement. See "Stock Options and Stock
Appreciation Rights" under this Item 11 below.
OLD WHEREHOUSE. The following table sets forth, for the fiscal years ended
January 31, 1997, January 31, 1996, and January 31, 1995, the cash compensation
paid by Old Wherehouse, as well as certain other compensation paid or accrued
for each such fiscal year, to each of the six most highly compensated executive
officers of Old Wherehouse (considering Ms. Brown, Mr. Brown, and Mr. Del
Castillo, Senior Vice Presidents of Old Wherehouse and Mr. Buskey, Vice
President of Old Wherehouse to be executive officers of WEI) who were officers
as of January 31, 1997 (collectively, the "named executive officers") in all
capacities in which they served. All compensation with respect to Mr. Goldress
was paid to Grisanti, Galef & Goldress, Inc., a management consulting firm in
which Mr. Goldress is a principal.
30
<PAGE>
OLD WHEREHOUSE SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
------------------------------------------ --------------
No. of
Other Annual Securities All Other
Name and Fiscal Salary Bonus Compensation Underlying Compensation
Principal Position Year ($) ($) ($) Options ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jerry E. Goldress(a) 1997 265,278 -- -- -- 734,722(f)
Chairman, Chief 1996 445,883 50,000 -- -- --
Executive Officer 1995 375,000 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Bruce Ogilvie(b)1997 1997 172,116 -- 4,596(e) -- 250,292(g)
President and Chief 1996 -- -- -- -- --
Executive Officer 1995 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Barbara C. Brown 1997 175,000 -- 7,200(e) -- 3,598(h)
Senior Vice President 1996 171,538 16,000 7,200(e) -- 6,847(i)
Sales and Operations 1995 165,000 11,257(c) 7,200(e) -- 7,212(j)
- -------------------------------------------------------------------------------------------------------------
Stephen P. Brown 1997 165,000 -- 7,200(e) -- 1,998(k)
Senior Vice President, 1996 159,808 16,000 7,200(e) -- 4,613(l)
General Merchandise 1995 114,615 1,499(d) 7,200(e) -- 4,242(m)
Manager
- -------------------------------------------------------------------------------------------------------------
Henry Del Castillo 1997 175,000 -- 7,200(e) -- 5,086(n)
Senior Vice President, 1996 80,769 -- 3,221(e) -- 18,375(o)
Chief Financial Officer 1995 -- -- -- -- --
and Secretary
- -------------------------------------------------------------------------------------------------------------
Michael T. Buskey 1997 136,382 -- 7,200(e) -- 3,695(p)
Vice President, 1996 132,685 1,154 7,200(e) -- 2,470(q)
General Manager - 1995 106,962 21,962 7,200(e) -- 1,930(r)
Los Angeles Region
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Mr. Goldress was elected Chairman and Chief Executive Officer on March 1,
1995. Mr. Goldress resigned as Chief Executive Officer on June 14, 1996
and resigned as Chairman on January 31, 1997. During all of fiscal 1995
and until March 1, 1995, he served as President and Chief Operating
Officer. From June 1994 until March 1, 1995, he served as Acting Chief
Financial Officer.
(b) Mr. Ogilvie was elected President and Chief Executive Officer on June 14,
1996. Mr. Ogilvie resigned as President and Chief Executive Officer on
January 31, 1997. Mr. Ogilvie was elected director of New Wherehouse on
January 31, 1997 and resigned as director on February 20, 1997.
31
<PAGE>
(c) Includes an $11,257 bonus to cover interest expense on a promissory note
which has been cancelled, and a "gross-up" to reimburse Ms. Brown for
income taxes payable as a result of the bonus.
(d) Includes a $1,499 bonus to cover interest expense on a promissory note
which has been cancelled, and a "gross-up" to reimburse Mr. Brown for
income taxes payable as a result of the bonus.
(e) Includes payment of an auto allowance to the named executive officer at a
rate of $600 per month.
(f) Mr. Goldress received a payment of $562,500 on July 2, 1996 following his
resignation as Chief Executive Officer, pursuant to the terms of his
employment contract. Mr. Goldress also received a payment of $172,222 on
January 31, 1997 following his resignation as Chairman of the Board,
pursuant to his subsequent employment contract dated June 14, 1996.
(g) Mr. Ogilvie received a payment of $250,292 on January 31, 1997 following
his resignation as Chief Executive Officer, pursuant to the terms of his
employment contract dated June 14, 1996, as amended.
(h) Includes $1,538 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $310 of premiums paid for term life insurance and $1,750 for
matching contributions to the Company's 401(k) plan made on behalf of
Ms. Brown.
(i) Includes $3,236 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $1,828 of premiums paid for term life insurance and $1,783 for
matching contributions to the Company's 401(k) plan made on behalf of Ms.
Brown.
(j) Includes $3,622 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $1,828 of premiums paid for term life insurance and $1,764 for
matching contributions to the Company's 401(k) plan made on behalf of Ms.
Brown.
(k) Includes $56 paid on behalf of Mr. Brown and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $292 of premiums paid for term life insurance and $1,650 for
matching contributions to the Company's 401(k) plan made on behalf of Mr.
Brown.
(l) Includes $179 paid on behalf of Mr. Brown and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $2,772 of premiums paid for term life insurance and $1,660 for
matching contributions to the Company's 401(k) plan made on behalf of Mr.
Brown.
32
<PAGE>
(m) Includes $1,032 paid on behalf of Mr. Brown and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $2,079 of premiums paid for term life insurance and $1,131 for
matching contributions to the Company's 401(k) plan made on behalf of Mr.
Brown.
(n) Included $4,776 paid on behalf of Mr. Del Castillo and his family for
medical expenses not covered by the Company's group medical insurance plan.
Also included are $310 of premiums paid for term life insurance made on
behalf of Mr. Del Castillo.
(o) Included is $18,375 of premiums paid for term life insurance made on
behalf of Mr. Del Castillo.
(p) Includes $2,090 paid on behalf of Mr. Buskey and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $242 of premiums paid for term life insurance and $1,363 for
matching contributions to the Company's 401(k) plan made on behalf of
Mr. Buskey.
(q) Includes $1,091 paid on behalf of Mr. Buskey and his family for medical
expenses and $1,379 for matching contributions to the Company's 401(k) plan
made on behalf of Mr. Buskey.
(r) Includes $826 paid on behalf of Mr. Buskey and his family for medical
expenses not covered by the Company's group and $1,104 for matching
contributions to the Company's 401(k) plan made on behalf of Mr. Buskey.
33
<PAGE>
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
In connection with the consummation of the Reorganization Plan, New
Wherehouse entered into a Non-Transferrable Stock Option Agreement with A&M
Investment Associates #3 LLP ("Investment Associates"), an affiliate of Alvarez
& Marsal, Inc., of which Mr. Alvarez is a principal. Pursuant to the terms of
the agreement, New Wherehouse granted to Investment Associates three tranches of
options (the "A&M Options") to acquire 331,127, 331,127 and 331,126 shares of
the New Common Stock, respectively, at exercise prices of $9.56, $11.58 and
$14.10, respectively. The A&M Options are subject to upward adjustment on a
quarterly basis as additional shares of New Common Stock are issued and are
entitled to certain other anti-dilution provisions as set forth in the Stock
Option Agreement. See "Certain Relationships and Related Transactions" under
Item 13 below. New Wherehouse has not granted any options to acquire New Common
Stock to any other officer or director of New Wherehouse.
FISCAL YEAR-END OPTION VALUES
NEW WHEREHOUSE. No options were exercised by any of the named executive
officers during fiscal 1997. The following table sets forth certain
information with respect to the named executive officers of the Company
concerning the number of shares covered by both exercisable and unexercisable
stock options held as of January 31, 1997. No established trading market
exists for the New Common Stock. New Wherehouse estimates that as of January
31, 1997, assuming the issuance of all the shares of New Common Stock
estimated to be issued pursuant to the Reorganization Plan, the fair market
value of each share of New Common Stock was $8.01. This estimate is based on
a valuation prepared by American Appraisal Associates, Inc. ("AAA") in
connection with the confirmation of the Reorganization Plan. Certain Senior
Subordinated Noteholders and the Official Committee of Unsecured Creditors in
the Bankruptcy Case initially contested the Reorganization Plan. Their
arguments in opposition to the Reorganization Plan included their contention
that the value of the Company is higher than estimated by AAA. Since this
matter was resolved consensually, the Bankruptcy Court never ruled on this
issue. See footnote (1) to the cover of this Annual Report on Form 10-K.
FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying
Unexercised Options
at Fiscal Year End
Name Exercisable Unexercisable
--------------------- --------------- ---------------
Antonio C. Alvarez, II 94,608(1) 888,814
(1) Exercisable within 60 days of January 31, 1997.
34
<PAGE>
OLD WHEREHOUSE. All of the options held by the directors and officers of
Old Wherehouse and WEI were cancelled as of the Plan Effective Date pursuant to
the Reorganization Plan.
COMPENSATION OF DIRECTORS
NEW WHEREHOUSE. Two non-employee members of the Board of Directors
of New Wherehouse receive as compensation for their services $5,000 per
attended meeting of the Board of Directors. The directors are also
reimbursed for reasonable expenses incurred in attending Board meetings.
OLD WHEREHOUSE. The directors of Old Wherehouse and WEI did not receive
compensation for their services as directors or as members of the committees of
the boards of directors of Old Wherehouse and WEI.
EMPLOYMENT AGREEMENTS
NEW WHEREHOUSE. Mr. Alvarez serves as Chairman of the Board and Chief
Executive Officer of New Wherehouse pursuant to a Management Services
Agreement dated as of January 31, 1997 among New Wherehouse, Alvarez &
Marsal, Inc. ("A&M"), Antonio C. Alvarez II, the Support Employees described
therein, Investment Associates and Cerberus Partners, L.P. (the "Management
Agreement"). Under the Management Agreement, A&M currently receives $600,000
annually as compensation for Mr. Alvarez' services and the services of other
personnel supplied by A&M. The Management Agreement expires on October 14,
1998.
Prior to the Plan Effective Date, Mr. Alvarez served as a consultant to the
Senior Lenders pursuant to a letter agreement dated as of October 14, 1996
between A&M, Mr. Alvarez and the Senior Lenders (the "Interim Agreement").
Pursuant to the Interim Agreement, the Senior Lenders agreed to pay A&M a
consulting fee of $50,000 per month plus the hourly fees of those employees of
A&M providing assistance to Mr. Alvarez in the performance of his consulting
responsibilities. The Senior Lenders paid $389,452 to A&M pursuant to the
Interim Agreement prior to January 31, 1997. Under the Management Agreement,
New Wherehouse agreed to reimburse, and has reimbursed, the Senior Lenders for
the amounts paid by the Senior Lenders to A&M pursuant to the Interim Agreement.
In the event that Mr. Alvarez is terminated other than for cause (as
defined in the Management Agreement) or there is a change-in-control (as
defined in the Management Agreement) to which A&M has not, through Mr.
Alvarez, consented the Management Agreement provides that (i) a payment of
$1,500,000 will be made to A&M, (ii) the options to purchase New Common Stock
held by Investment Associates will immediately vest, and (iii) Investment
Associates will have the right to require New Wherehouse to purchase the
shares of New Common Stock and options to acquire New Common Stock owned by
Investment Associates. Additionally, only in the event Mr. Alvarez is
terminated other than for cause, the Company will also pay Investment
Associates cash in lump sum amount equal to $50,000 multiplied by the number
of months remaining from the time of Mr. Alvarez' termination to October 14,
1998. The $1,500,000 payment referred to above will be payable by Cerberus if
a change-in-control results solely from the sale by Cerberus of more than 50%
of the shares of New Common Stock owned by Cerberus immediately prior to the
sale. For any other change-in-control, the $1,500,000 payment is to be made
by New Wherehouse. The price to be paid by New Wherehouse in purchasing the
shares of New Common Stock and options to acquire New Common Stock owned by
Investment Associates will depend on the fair market value (as defined in the
Management Agreement) of the New Common Stock at the time of purchase. Any
payments made to Investment Associates in purchasing the shares of New Common
Stock and options to acquire New
35
<PAGE>
Common Stock from Investment Associates are required to be applied to reduce the
outstanding amounts under the Promissory Notes (as defined in Item 13 below).
OLD WHEREHOUSE. Jerry E. Goldress served as Chairman of the Board,
President and Chief Executive Officer of Old Wherehouse and WEI until June 14,
1996 pursuant to an agreement dated May 11, 1994, as amended on April 5, 1995
and on December 13, 1995, between Old Wherehouse and GGG, Inc. This Management
Agreement was terminated on July 2, 1996 and Old Wherehouse paid GGG $562,500
in connection with its termination and Mr. Goldress' resignation from his
positions as President and Chief Executive Officer. Upon termination of the
Management Agreement, Old Wherehouse entered into a new employment agreement
with Mr. Goldress. Such new employment was terminated on January 31, 1997 and
Mr. Goldress was paid $172,000 on that date in connection with such
termination.
In order to retain its key management employees during the period of
deteriorating financial condition and instability prior to the bankruptcy
filing date, in July of 1995, Old Wherehouse entered into agreements with 13
of its officers that provide certain security in the event of a "Change of
Control" and the subsequent termination of such employee's employment or a
significant reduction in such employee's responsibilities (the "Change of
Control Agreements"). Since the bankruptcy filing date, Old Wherehouse
entered into Change of Control Agreements with five additional officers. The
Change of Control Agreements were approved by the Bankruptcy Court on
December 1, 1995. As of January 31, 1997, 15 agreements were in effect and
those agreements called for payments of up to $1.9 million if certain events
(as described therein) occurred. On March 3, 1997, Mr. Henry Del Castillo
resigned and was paid $350,000 pursuant to the terms of his Change of Control
agreement. In addition, Bruce Ogilvie received $250,000 on January 31, 1997
in connection the termination of his employment pursuant to the terms of his
employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
NEW WHEREHOUSE. As of January 31, 1997, New Wherehouse did not have a
compensation committee. A compensation committee and an audit committee were
created on April 8, 1997. The current members of the compensation committee of
New Wherehouse's Board of Directors are Messrs. Davenport, Radecki and Smith and
the current members of the audit committee of New Wherehouse's Board of
Directors are Messrs. Radecki, Davenport and Gallen.
OLD WHEREHOUSE. The members of Old Wherehouse's and WEI's compensation
committees were Messrs. Burke, Armstrong and Sidhu.
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
THE COMPANY
The common stock of New Wherehouse is the only outstanding class of its
voting securities. The following table sets forth, as of January 31, 1997, the
number and percentage of shares of New Common Stock beneficially owned by (i)
each person known to New Wherehouse to be the beneficial owner of more than 5%
of the outstanding shares of New Common Stock, (ii) each director of New
Wherehouse, (iii) each named executive officer, and (iv) all directors and
executive officers of New Wherehouse as a group. Unless otherwise indicated in
a footnote, each person listed below possesses sole voting and investment power
with respect to the shares indicated as beneficially owned by them, subject to
community property laws where applicable. The percentage of ownership in the
following table does not include the additional 917,515 shares expected to be
issued pursuant to the Reorganization Plan after January 31, 1997.
37
<PAGE>
Name and Address of Share of WEI Percentage of
Beneficial Owner Common Stock Ownership
- ------------------- ------------ -------------
Cerberus Partners, L.P. 5,712,558 55.7%(1)
450 Park Avenue, 28th Floor
New York, New York 10022
A&M Investment Associates #3 1,204,566(3) 11.7%(3)
LLC (2)
c/o Alvarez & Marsal, Inc.
885 Third Avenue, Suite 1700
New York, New York 10022-4834
Credit Suisse First Boston Corp. 2,041,246 19.9%
5 World Trade Center
New York, New York 10048-0205
Seneca Capital, L.P. (4) 602,879 5.9%
c/o 450 Park Avenue, 28th Floor
New York, New York 10022
Antonio C. Alvarez II (2) 0 0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Barbara C. Brown 0 0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Stephen P. Brown 0 0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Henry Del Castillo* N/A N/A
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Michael T. Buskey 0 0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
38
<PAGE>
Robert C. Davenport (5) 0 0
c/o Cerberus Partners, L.P.
450 Park Avenue, 28th Floor
New York, New York 10022
Jonathan Gallen 82,421(6) 0
c/o Pequod Investments, L.P.
450 Park Avenue, 28th Floor
New York, New York 10022
Joseph B. Smith 0 0
c/o Unison Productions
1015 Gayley Avenue
Los Angeles, California 90024
Joseph Radecki 0 0
c/o Jeffries & Co.
11100 Santa Monica Boulevard
10th Floor
Los Angeles, California 90025
* Mr. Del Castillo is no longer employed by Wherehouse.
(1) The percentages expressed in this table are a percentage of 10,257,808
shares, which is the actual number of shares issued and outstanding as of
January 31, 1997.
(2) A&M Investment Associates #3, LLC is a Delaware limited liability company
created for purpose of acquiring shares of New Common Stock. Mr. Alvarez
is the managing member, and as such, may be deemed to be the beneficial
owner of all the shares of New Common Stock held by Investment Associates.
Mr. Alvarez disclaims beneficial ownership of shares of New Common Stock
held by Investment Associates.
(3) Includes 1,100,000 shares of New Common Stock held by A&M Investment
Associates #3 LLC and 94,608 shares of New Common Stock subject to options
exercisable within 60 days of January 31, 1997 (the "Exercisable Options").
The 1,100,000 shares of New Common Stock held by Investment Associates may
be adjusted upward or downward to represent 10% of the sum of (i) the
shares of New Common Stock ultimately issued under the Reorganization Plan
plus (ii) the number of shares of New Common Stock issued to Investment
Associates. The 1,100,000 shares of New Common Stock represents 10.7% of
the aggregate issued and outstanding shares of New Common Stock as of
January 31, 1997 prior to dilution for the 94,608 shares of New Common
Stock subject to the Exercisable Options.
(4) Seneca Capital, L.P. was a participant of the senior debt of Old Wherehouse
held by Cerberus Partners, L.P. Seneca Capital, L.P. disclaims any
beneficial interest in the shares of New
39
<PAGE>
Common Stock held by Cerberus Partners, L.P. and Cerberus Partners, L.P.
disclaims any beneficial interest in the shares of New Common Stock held by
Seneca Capital, L.P.
(5) Mr. Davenport is a managing director of Cerberus Partners, L.P. and may be
deemed to be the beneficial owner of all of the shares of New Common Stock
held by Cerberus Partners, L.P. Mr. Davenport disclaims any beneficial
interest in the shares of New Common Stock held by Cerberus Partners, L.P.
(6) Mr. Gallen is the managing member of Pequod LLC, which is the general
partner of Pequod Investments, L.P., which is the record and beneficial
holder of 82,421 shares of New Common Stock. As such, Mr. Gallen may be
deemed to be the beneficial owner of the shares of New Common Stock held by
Pequod Investments, L.P.
OLD WHEREHOUSE. All of the common stock of Old Wherehouse and WEI were
cancelled on the Plan Effective Date pursuant to the Reorganization Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to the Management Agreement and a Stock Subscription Agreement
dated as of January 31, 1997 (the "Stock Subscription Agreement"), New
Wherehouse agreed to sell, and Investment Associates agreed to buy at a purchase
price of $6,340,000 ($1,000,000 in cash from Investment Associates' funds, plus
a secured recourse promissory note in the principal amount of $335,000 and a
secured non-recourse promissory note in the amount of $5,005,000 (collectively,
the "Promissory Notes")), 1,100,000 shares of the New Common Stock (the "A&M
Shares") (subject to adjustment upward or downward to represent 10% of the sum
of (i) the shares of New Common Stock ultimately issued under the Reorganization
Plan plus (ii) the number of shares of New Common Stock issued to Investment
Associates). The Promissory Notes bear interest at 7% per annum during the
first four years and 11% per annum during the fifth through seventh years,
mature on January 31, 2004 and have no scheduled amortization until their
maturity date. The Promissory Notes are secured by a first priority pledge of
the A&M Shares pursuant to a Pledge Agreement dated as of January 31, 1997.
In addition, New Wherehouse and Investment Associates entered into a
Non-Transferrable Stock Option Agreement dated as of January 31, 1997 (the
"Stock Option Agreement"), pursuant to which New Wherehouse issued to Investment
Associates three tranches of options to purchase shares of New Common Stock (the
"A&M Options"; and, together with the A&M Shares, the "A&M Securities")
representing in the aggregate the right to purchase an additional 10% of the
shares of New Common Stock and the shares subject to warrants issued under the
Reorganization Plan. The first tranche of options represents the right to
purchase 331,127 shares of New Common Stock at an exercise price of $9.56. The
second tranche of options represents the right to purchase 331,127 shares of New
Common Stock at an exercise price of $11.58. The third tranche of options
represents the right to purchase 331,126 shares of New Common Stock at an
exercise price of $14.10. The A&M Options vest monthly in equal installments
through October 31, 1998 and all unexercised A&M Options expire on January 31,
2003, subject to prior vesting or termination as set forth in the Management
Services Agreement. The A&M Options are subject to upward adjustment on a
quarterly basis as additional shares of New
40
<PAGE>
Common Stock are issued and are entitled to certain other anti-dilution
provisions as set forth in the Stock Option Agreement.
New Wherehouse also granted certain registration rights to Investment
Associates with respect to the A&M Securities pursuant to a Registration Rights
Agreement dated as of January 31, 1997 (the "A&M Registration Rights
Agreement"). Under the A&M Registration Rights Agreement, Investment Associates
has the right to make one demand registration and two piggy-back registrations
in respect of the A&M Securities.
New Wherehouse also granted certain registration rights to the Senior
Lenders as of the Plan Effective Date with respect to the New Common Stock
acquired by such Senior Lenders, pursuant to a Registration Rights Agreement
dated as of January 31, 1997 (the "Senior Lenders Registration Rights
Agreement"). Under the Senior Lenders Registration Rights Agreement, the
holders of a requisite number of shares acquired by the Senior Lenders have the
right to make two demand registrations and to participate in two piggy-back
registrations in respect of the such shares of New Common Stock.
Jeffries & Company, Inc., of which Mr. Radecki is an Executive Vice
President and Director of Financial Restructurings, served as the financial
consultant to Old Wherehouse in the Bankruptcy Case, and currently serve as
financial advisors to New Wherehouse.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report.
1. Financial statements.
See Index to Financial Statements and Financial Statement Schedules.
2. Financial statement schedules.
See Index to Financial Statements and Financial Statement Schedules.
All other schedules are omitted as the required information
is inapplicable or the information is presented in the consolidated financial
statements or related notes.
3. Exhibits
2.1 Merger Agreement, dated as of May 5, 1992, by and among Grammy
Corp., WEI, Old Wherehouse and A&S. (Incorporated by reference
to Exhibit 1 of Old Wherehouse's Current Report on Form 8-K dated
May 6, 1992.)
2.2 Debtors' First Amended Chapter 11 Plan, as Revised for Technical
Corrections dated October 4, 1996 and Supplemental Amendments on
December 2, 1996 and December 13, 1996. (Incorporated by
reference to Exhibits A, B and C of Exhibit 3.1 of Old
Wherehouse's Current Report on Form 8-K dated January 22, 1997.)
2.3 Asset Purchase Agreement dated as of January 31, 1997 among Old
Wherehouse, WEI and New Wherehouse. (Incorporated by reference
to Exhibit 1.4 of Old Wherehouse's Current Report on Form 8-K
dated February 12, 1997.)
3.1 Certificate of Incorporation of New Wherehouse filed with the
Delaware Secretary of State on November 15, 1997. (Incorporated
by reference to Exhibit C of Exhibit A of Exhibit 3.1 of Old
Wherehouse's Current Report on Form 8-K dated January 22, 1997.)
3.2 Certificate of Amendment of Certificate of Incorporation of New
Wherehouse filed with the Delaware Secretary of State on January
31, 1997. (Incorporated by reference to Exhibit 1.3 of Old
Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
3.3 Certificate of Amendment of Certificate of Incorporation of Old
Wherehouse filed with the Delaware Secretary of State on January
31, 1997. (Incorported by reference to Exhibit 1.2 of Old
Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
3.4 By-laws of New Wherehouse. (Incorporated by reference to
Exhibit B of Exhibit A of Exhibit 3.1 of Old Wherehouse's
Current Report on Form 8-K dated January 22, 1997.)
3.5* Amendment to By-laws of New Wherehouse adopted January 30, 1997,
adopted by Unanimous Written Consent of the Sole Director of
New Wherehouse.
- -------------
* Filed herewith
42
<PAGE>
4.1* Tranche A Warrant Agreement dated as of January 31, 1997 between
New Wherehouse and United States Trust Company of New York, as
the Warrant Agent.
4.2* Tranche B Warrant Agreement dated as of January 31, 1997 between
New Wherehouse and United States Trust Company of New York, as
the Warrant Agent.
4.3* Tranche C Warrant Agreement dated as of January 31, 1997 between
New Wherehouse and United States Trust Company of New York, as
the Warrant Agent.
4.4 Registration Rights Agreement dated as of January 31, 1997 among
New Wherehouse, Cerberus Partners, L.P., CS First Boston
Securities Corporation and Bank of America, Illinois.
(Incorporated by reference to Exhibit 1.14 of Old Wherehouse's
Current Report on Form 8-K dated February 12, 1997.)
10.1 Single Tenant Industrial Lease, dated November 5, 1991, by and
between Watson Land Company, as lessor, and Old Wherehouse, as
lessee. (Incorporated by reference to Exhibit 10.6 of the Old
Wherehouse's Annual Report on Form 10-K for the fiscal year ended
January 31, 1992.)
10.2 Management Services Agreement dated as of January 31, 1997 among
New Wherehouse Alvarez & Marsal, Inc., Antonio C. Alvarez II,
Investment Associates, Cerberus Partners, L.P. and the Support
Employees. (Incorporated by reference to Exhibit 1.5 of Old
Wherehouse's Current Report on Form 8-K dated February 12, 1997.)
10.3 Secured Recourse Promissory Note dated January 31, 1997 by
Investment Associates in favor of New Wherehouse in the principal
amount of $335,000. (Incorporated by reference to Exhibit 1.6 of
Old Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.4 Secured Non-Recourse Promissory Note dated January 31, 1997 by
Investment Associates in favor of New Wherehouse in the principal
amount of $5,005,000. (Incorporated by reference to Exhibit 1.7
of Old Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.5 Stock Pledge Agreement dated as of January 31, 1997 between
Investment Associates and New Wherehouse. (Incorporated by
reference to Exhibit 1.8 of Old Wherehouse's Current Report on
Form 8-K dated February 12, 1997.)
10.6 Stock Subscription Agreement dated as of January 31, 1997 between
New Wherehouse and Investment Associates. (Incorporated by
reference to Exhibit 1.9 of Old Wherehouse's Current Report on
Form 8-K dated February 12, 1997.)
- -------------
* Filed herewith
43
<PAGE>
10.7 Non-Transferrable Stock Option Agreement dated as of January 31,
1997 between New Wherehouse and Investment Associates.
(Incorporated by reference to Exhibit 1.10 of Old Wherehouse's
Current Report on Form 8-K dated February 12, 1997.)
10.8 Registration Rights Agreement dated as of January 31, 1997
between New Wherehouse and Investment Associates. (Incorporated
by reference to Exhibit 1.12 of Old Wherehouse's Current Report
on Form 8-K dated February 12, 1997.)
10.9 Letter agreement dated as of October 14, 1996 among Cerberus
Partners, L.P., CS First Boston Securities Corporation and Bank
of America, Illinois regarding fees to be paid to Alvarez &
Marsal, Inc. (Incorporated by reference to Exhibit 1.13 of Old
Wherehouse's Current Report on Form 8-K dated February 12, 1997.)
10.10 Letter agreement dated as of January 31, 1997 between New
Wherehouse and Cerberus Partners, L.P. regarding the
reimbursement of fees paid by Cerberus on behalf of the senior
lenders to Alvarez & Marsal, Inc. (Incorporated by reference to
Exhibit 1.11 of Old Wherehouse's Current Report on Form 8-K dated
February 12, 1997.)
10.11 Loan and Security Agreement dated as of January 31, 1997 between
New Wherehouse and Congress Financial Corporation (Western).
(Incorporated by reference to Exhibit 1.15 of Old Wherehouse's
Current Report on Form 8-K dated February 12, 1997.)
10.12 Security Agreement dated as of January 31, 1997 between New
Wherehouse and United States Trust Company of New York, as
Collateral Agent for certain trade creditors. (Incorporated by
reference to Exhibit 1.16 of Old Wherehouse's Current Report on
Form 8-K dated February 12, 1997.)
10.13 Intercreditor and Collateral Agency Agreement dated as of
January 31, 1997 among New Wherehouse, the Trade Creditors named
therein and United States Trust Company of New York, as
Collateral Agent. (Incorporated by reference to Exhibit 1.17 of
Old Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.14 Intercreditor and Subordination Agreement dated as of January 31,
1997 among the Trade Creditors named therein, United States Trust
Company of New York, as Collateral Agent for the Trade Creditors
and Congress Financial Corporation (Western). (Incorporated by
reference to Exhibit 1.18 of Old Wherehouse's Current Report on
Form 8-K dated February 12, 1997.)
44
<PAGE>
10.15* Security Agreement dated as of January 20, 1997, by and between
Mellon US Leasing, a division of Mellon Leasing Corporation,
successor to United States Leasing Corporation, as Secured Party,
and Reorganized Wherehouse.
10.16 Equipment Lease Agreement dated December 21, 1992, between
General Electric Capital Corporation, as Lessor, and Old
Wherehouse, as Lessee. (Incorporated by reference to Exhibit
10.43 of Old Wherehouse's Annual Report on Form 10-K for the
fiscal year ended January 31, 1993.)
10.17 Change of Control Agreements, dated as of July 10, 1995, between
Registrant and each of its executive officers, with schedule
required by instruction (2) to item 601(a) of Regulation S-K
identifying the parties thereto and certain other details.
(Incorporated by reference to Exhibit 10.1 of Old Wherehouse's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1995.)
27.0* Financial Data Schedule.
(b) Current Reports on Form 8-K.
(1) A Current Report on Form 8-K was filed on January 22, 1997 discussing
the reorganization of the Predecessors.
(2) A Current Report on Form 8-K was filed on February 12, 1997 discussing
the various transactions consummated on the Plan Effective Date
pursuant to the Reorganization Plan.
(3) A Current Report on Form 8-K was filed on March 10, 1997 pursuant to
which New Wherehouse became the successor issuer to Old Wherehouse and
undertook to continue the filing obligations of Old Wherehouse under
the Securities Exchange Act of 1934, as amended.
(4) A Current Report on Form 8-K/A was filed on April 16, 1997 pursuant to
which New Wherehouse filed pro forma financial statements not filed
with the Current Report on Form 8-K filed on February 12, 1997.
- ---------------
* Filed herewith
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, there-unto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: May 16, 1997 By: /s/ ANTONIO C. ALVAREZ, II
-----------------------------
Antonio C. Alvarez, II
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrants and in the capacities and on the dates indicated:
WHEREHOUSE ENTERTAINMENT, INC.
Signature Title Date
- ------------------------ ---------------------------- -----------
/s/ ANTONIO C. ALVAREZ, II Chairman of the Board, Chief 5/16 1997
- -------------------------
Antonio C. Alvarez, II Executive Officer
/s/ ROBERT C. DAVENPORT Director May 16, 1997
- -------------------------
Robert C. Davenport
/s/ JONATHAN GALLEN Director May 16, 1997
- -------------------------
Jonathan Gallen
/s/ JOSEPH RADECKI Director May 16, 1997
- -------------------------
Joseph Radecki
/s/ JOSEPH B. SMITH Director May 16, 1997
- -------------------------
Joseph B. Smith
46
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FIELD PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANT WHICH HAS NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to the security holders of
the registrant.
47
<PAGE>
Wherehouse Entertainment, Inc.
Index to Financial Statements
and Financial Statement Schedule
January 31, 1997
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . F-1
Financial Statements
Balance Sheets at January 31, 1997 (New Wherehouse) and 1996
(Old Wherehouse) . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations for the year ended
January 31, 1997 (Old Wherehouse). . . . . . . . . . . . . . . . . . F-4
Statements of Changes in Shareholders' Equity (Deficit)
for each of the three years in the period ended
January 31, 1997 (Old Wherehouse). . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for each of the three years in
the period ended January 31, 1997 (Old Wherehouse) . . . . . . . . . F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-8
Financial Statement Schedule for each of the three years ended January 31, 1997
II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . F-29
All other schedules have been omitted because they are not required under the
related instructions or are inapplicable, or because the required information is
included elsewhere in the financial statements.
F-0
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wherehouse Entertainment, Inc.
We have audited the accompanying balance sheets of Wherehouse
Entertainment, Inc. as of January 31, 1997 (New Wherehouse), and January 31,
1996 (Old Wherehouse), and the related statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
January 31, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wherehouse Entertainment, Inc.
at January 31, 1997 (New Wherehouse), and January 31, 1996 (Old Wherehouse), and
the results of its operations and its cash flows for each of the three years in
the period ended January 31, 1997 (Old Wherehouse), in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1, the Bankruptcy Court approved and confirmed Old
Wherehouse's Plan of Reorganization on January 7, 1997. As described in Note 2,
New Wherehouse accounted for the reorganization using "Fresh Start Reporting" as
recommended by the American Institute of Certified Public Accountants Statement
of Position 90-7 on "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code." As a result, the January 31, 1997, balance sheet is not
comparable with the Old Wherehouse's pre-reorganization balance sheet since it
presents the financial position of the reorganized entity.
ERNST & YOUNG LLP
Los Angeles, California
May 8, 1997
F-1
<PAGE>
Wherehouse Entertainment, Inc.
Balance Sheets
NEW OLD
WHEREHOUSE WHEREHOUSE
JANUARY 31 JANUARY 31
1997 1996
------------ ------------
ASSETS (NOTES 1 AND 4)
Current assets:
Cash $ 6,178,000 $ 7,353,000
Receivables 1,932,000 1,583,000
Prepaid inventory deposits 4,486,000 10,880,000
Merchandise inventory 75,800,000 90,951,000
Other current assets 2,259,000 4,628,000
Rental inventory (NOTE 3) 9,686,000 -
------------ ------------
Total current assets 100,341,000 115,395,000
Rental inventory, net of accumulated amortization
of $38,906,000 (1996) (NOTE 3) - 14,004,000
Equipment and improvements, at cost (NOTES 1 AND 9):
Leasehold improvements 5,952,000 24,908,000
Data processing equipment and software 6,153,000 26,289,000
Store and office fixtures and equipment 8,960,000 13,969,000
Buildings and improvements 131,000 1,590,000
Land 141,000 683,000
------------ ------------
21,337,000 67,439,000
Accumulated depreciation and amortization - 29,752,000
------------ ------------
21,337,000 37,687,000
Reorganization value in excess of amounts
allocable to identifiable assets 9,724,000 -
Financing costs and leasehold interests, net of
accumulated amortization of $11,263,000 (1996) - 641,000
Other assets 340,000 800,000
------------ ------------
Total assets $ 131,742,000 $168,527,000
------------- ------------
------------- ------------
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
NEW OLD
WHEREHOUSE WHEREHOUSE
JANUARY 31 JANUARY 31
1997 1996
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and bank overdraft $ 13,034,000 $ 8,099,000
Sales taxes payable 2,192,000 2,332,000
Other accrued expenses (NOTE 7) 10,461,000 18,609,000
Current portion of capital lease obligations and
long-term debt, secured (NOTE 9) 729,000 2,655,000
Reorganization liabilities 14,481,000 -
-------------- -------------
Total current liabilities 40,897,000 31,695,000
Notes payable (NOTE 1) 3,980,000 -
Capital lease obligations and long-term
debt, secured (NOTE 9) 722,000 1,498,000
Other long-term liabilities 2,000,000 9,494,000
Liabilities subject to compromise
(NOTES 1 AND 6) - 278,857,000
Deferred income taxes (NOTE 8) - 3,270,000
Commitments and contingencies (NOTES 9, 10 AND 11)
Shareholders' equity (deficit):
New preferred stock $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none
New common stock, $.01 par value:
Authorized shares - 24,000,000
Issued and outstanding shares - 10,257,808 103,000 -
Old common stock, $.01 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 - -
Additional paid-in capital 89,380,000 95,671,000
Accumulated deficit - (251,958,000)
Notes receivable (5,340,000) -
-------------- -------------
Total shareholders' equity (deficit) 84,143,000 (156,287,000)
-------------- -------------
Total liabilities and shareholders'
equity (deficit) $ 131,742,000 $ 168,527,000
-------------- -------------
-------------- -------------
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Wherehouse Entertainment, Inc.
Statements of Operations
<TABLE>
<CAPTION>
OLD WHEREHOUSE
------------------------------------------------------
YEAR ENDED JANUARY 31
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Sales $ 295,765,000 $ 350,646,000 $ 409,484,000
Rental revenue 69,739,000 82,547,000 90,141,000
------------------------------------------------------
365,504,000 433,193,000 499,625,000
Cost of sales 195,489,000 230,347,000 262,616,000
Cost of rentals, including amortization 33,475,000 40,049,000 34,973,000
------------------------------------------------------
228,964,000 270,396,000 297,589,000
Selling, general and administrative expenses 145,968,000 167,161,000 188,740,000
Write-down of long-lived assets (NOTE 2) - 1,476,000 139,493,000
Interest expense (contractual interest of
$25,980,000 (1997) and $28,135,000 (1996)) (NOTES 1 AND 6) 1,019,000 15,045,000 23,194,000
Other income (338,000) (283,000) (153,000)
------------------------------------------------------
Loss before reorganization items and income taxes (10,109,000) (20,602,000) (149,238,000)
Reorganization items (NOTES 1, 2 AND 3):
Professional fees 7,207,000 2,470,000 -
Write-off of financing costs and debt discount - 8,512,000 -
Provision for store closing costs 6,969,000 6,237,000 -
Provision for rejected executory contracts 3,331,000 6,000,000 -
Provision for other reorganization costs 2,429,000 - -
------------------------------------------------------
19,936,000 23,219,000 -
------------------------------------------------------
Loss before income taxes and extraordinary item (30,045,000) (43,821,000) (149,238,000)
Provision for income taxes (NOTE 8) - 17,000 13,007,000
------------------------------------------------------
Loss before extraordinary item (30,045,000) (43,838,000) (162,245,000)
Extraordinary item:
Gain on extinguishment of debt 173,765,000 - -
------------------------------------------------------
Net income (loss) $ 143,720,000 $ (43,838,000) $ (162,245,000)
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Wherehouse Entertainment, Inc.
Statements of Changes in Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
$.01 PAR VALUE PAID-IN ACCUMULATED NOTE
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1994 10 $ - $ 95,855,000 $ (45,875,000) $ - $ 49,980,000
Dividend - - (184,000) - - (184,000)
Net loss - - - (162,245,000) - (162,245,000)
-----------------------------------------------------------------------------------------------------
Balance, January 31, 1995 10 - 95,671,000 (208,120,000) - (112,449,000)
Net loss - - - (43,838,000) - (43,838,000)
-----------------------------------------------------------------------------------------------------
Balance, January 31, 1996 10 - 95,671,000 (251,958,000) - (156,287,000)
Net income - - - 143,720,000 - 143,720,000
Recapitalization and fresh
start adjustments
(NOTES 1 AND 2):
Recapitalization adjustment (10) - (95,671,000) 108,238,000 - 12,567,000
Issuance of New Common Stock 9,157,808 92,000 83,051,000 - - 83,143,000
Sale of New Common Stock 1,100,000 11,000 6,329,000 - (5,340,000) 1,000,000
-----------------------------------------------------------------------------------------------------
New Wherehouse balance,
January 31, 1997 10,257,808 $ 103,000 $ 89,380,000 $ - $ (5,340,000) $ 84,143,000
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
Wherehouse Entertainment, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
OLD WHEREHOUSE
------------------------------------------------------
YEAR ENDED JANUARY 31
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 143,720,000 $(43,838,000) $(162,245,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 35,304,000 41,403,000 47,139,000
Book value of rental inventory dispositions 9,528,000 14,448,000 8,866,000
Write-down of long-lived assets - 1,476,000 139,493,000
Deferred taxes - (207,000) 14,653,000
Gain on extinguishment of debt (173,765,000) - -
Changes in operating assets and liabilities:
Receivables (349,000) 1,572,000 (353,000)
Taxes receivable - 1,500,000 3,500,000
Prepaid inventory deposits 6,394,000 (10,880,000) -
Merchandise inventory 10,730,000 24,688,000 (2,047,000)
Other current assets 2,352,000 (1,885,000) (170,000)
Accounts payable, accrued expenses and other
liabilities not separately identified 2,401,000 (20,528,000) 1,497,000
Rental inventory purchases (32,709,000) (37,962,000) (39,201,000)
Changes due to reorganization activities:
Accrued professional fees 3,227,000 (668,000) -
Write-off of financing costs and debt discount - 8,512,000 -
Provision for store closing costs 3,767,000 5,743,000 -
Provision for rejected executory contracts 3,331,000 6,000,000 -
Other reorganization items 2,015,000 - -
-----------------------------------------------------
Net cash provided by (used in) operating activities 15,946,000 (10,626,000) 11,132,000
INVESTING ACTIVITIES
Proceeds from sale of assets 2,464,000 - 4,000
Acquisition of property, equipment and improvements (3,785,000) (10,252,000) (15,667,000)
Purchase of certain assets of The Record Shop, Inc. - - (735,000)
(Increase) decrease in other assets and intangibles - (415,000) 262,000
-----------------------------------------------------
Net cash used in investing activities (1,321,000) (10,667,000) (16,136,000)
FINANCING ACTIVITIES
Short-term borrowings (payments), net - 29,020,000 11,800,000
Principal payments on capital lease obligations and
long-term debt (2,702,000) (2,336,000) (7,769,000)
Sale of New Common Stock 1,000,000 - -
Dividend paid to WEI Holdings, Inc. - - (185,000)
Settlement of pre-petition claims (14,098,000) - -
-----------------------------------------------------
Net cash (used in) provided by financing activities (15,800,000) 26,684,000 3,846,000
</TABLE>
F-6
<PAGE>
Wherehouse Entertainment, Inc.
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
OLD WHEREHOUSE
---------------------------------------------------
YEAR ENDED JANUARY 31
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
REORGANIZATION ACTIVITIES
Reclassification of liabilities subject to compromise $ - $ 278,857,000 $ -
Decrease in accounts payable, accrued expenses and
other liabilities
(71,343,000)
Reduction of debt - (207,514,000) -
---------------------------------------------------
Net cash effect of reorganization activities - - -
---------------------------------------------------
Net (decrease) increase in cash (1,175,000) 5,391,000 (1,158,000)
Cash at beginning of year 7,353,000 1,962,000 3,120,000
---------------------------------------------------
Cash at end of year $ 6,178,000 $ 7,353,000 $ 1,962,000
---------------------------------------------------
---------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 765,000 $ 11,993,000 $20,554,000
Income taxes - (1,276,000) (5,146,000)
Reorganization items 5,687,000 2,297,000 -
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements
January 31, 1997
1. REORGANIZATION UNDER CHAPTER 11
Wherehouse Entertainment, Inc. (New Wherehouse) was incorporated under the laws
of the State of Delaware on November 15, 1996, as WEI Acquisition Co. On January
31, 1997, New Wherehouse acquired (the Acquisition) substantially all the assets
of Wherehouse Dissolution Co. (Old Wherehouse), a Delaware corporation, and its
parent company, WEI Holdings, Inc., a Delaware corporation (WEI, and together
with Old Wherehouse, the Debtors), pursuant to a Chapter 11 plan of
reorganization (the Reorganization). Prior to the Acquisition, Old Wherehouse
was known as "Wherehouse Entertainment, Inc.," and after the Acquisition, Old
Wherehouse changed its name to Wherehouse Dissolution Co. After the Acquisition,
New Wherehouse changed its name to "Wherehouse Entertainment, Inc." New
Wherehouse and Old Wherehouse are collectively referred to as the Company or
Wherehouse where the discussion relates to the continuing business operations of
Old Wherehouse and New Wherehouse.
On August 2, 1995 (the petition date), Old Wherehouse filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code
(Chapter 11 or the Bankruptcy Code) in the United States Bankruptcy Court for
the District of Delaware (the Bankruptcy Court). The Chapter 11 proceedings were
jointly administered, with the Company managing the business in the ordinary
course as debtor-in-possession subject to the control and supervision of the
Bankruptcy Court.
The Debtors' plan of reorganization, entitled the "Debtors' First Amended
Chapter 11 Plan, as Revised for Technical Corrections on October 4, 1996, and
Supplemental Amendments on December 2, 1996, and December 13, 1996" (the
Reorganization Plan), was confirmed by an order of the Bankruptcy Court entered
on January 7, 1997, entitled "Findings of Fact, Conclusions of Law and Order
Confirming Debtors' First Amended Chapter 11 Plan Under Chapter 11 of the
Bankruptcy Code" (the Confirmation Order). The effective date of the
Reorganization Plan occurred on January 31, 1997 (the Plan Effective Date). New
Wherehouse (as opposed to Old Wherehouse and WEI) was never the subject of a
bankruptcy case. Since the Plan Effective Date, the Bankruptcy Court has
retained jurisdiction over certain claims and other matters relating to the
Debtors' bankruptcy estates, but New Wherehouse has been and is free to carry
out its business without oversight by the Bankruptcy Court.
Pursuant to the Reorganization Plan, substantially all of the assets of the
Debtors and certain liabilities were transferred to New Wherehouse. The Debtors
have assigned to New Wherehouse all of their executory contracts and unexpired
leases assumed during the Bankruptcy Case (not otherwise assigned to third
parties). The Reorganization Plan provides that the Debtors' bankruptcy estates
will be liquidated by New Wherehouse.
F-8
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)
Under the Reorganization Plan, substantially all of the Debtors' indebtedness
held by their creditors was cancelled in exchange for cash, shares of the Common
Stock of New Wherehouse, par value $0.01 per share (the New Common Stock),
and/or warrants to purchase New Common Stock or for no consideration. The
Debtors' major groups of creditors were (1) senior lenders under Old
Wherehouse's bank credit agreement (the Senior Lenders) led by Cerberus
Partners, L.P. (Cerberus) as the agent for the Senior Lenders, (2) trade
creditors (the Trade Creditors), (3) holders of Old Wherehouse's Senior
Subordinated Notes (the Senior Subordinated Noteholders), (4) holders of Old
Wherehouse's 6 3/4% Convertible Subordinated Debentures (the Convertible
Debentureholders), (5) other general unsecured creditors (the General Unsecured
Creditors) and (6) federal and state taxing authorities.
As of the Plan Effective Date and following the exercise of the Exchange Option
(as described below) by certain Trade Creditors whose claims had been resolved
as of the Plan Effective Date, the Senior Lenders received 9,157,808 shares of
New Common Stock under the Reorganization Plan on account of their claims,
representing approximately 89% of the issued and outstanding shares of New
Common Stock as of such date prior to dilution for the Warrants described below
but after dilution for the A&M Shares (see Note 5). The Senior Lenders were also
paid approximately $2.8 million of adequate protection payments during the
bankruptcy case and also received approximately $256,000 in cash subsequent to
the Plan Effective Date. The Senior Lenders are likely to receive additional
shares of New Common Stock and cash as the claims of unsecured creditors
(including Trade Creditors) are resolved. Based upon New Wherehouse's estimate
of the resolution of Trade Claims, New Wherehouse estimates that the Senior
Lenders (or their assigns) will receive approximately 9.4 million shares of New
Common Stock in total. This total may increase based on an anti-dilution feature
in the Reorganization Plan. Approximately $94.6 million of indebtedness held by
the Senior Lenders was cancelled in exchange for the issuance of such shares of
New Common Stock and cash.
Under the Reorganization Plan, those Trade Creditors identified by Old
Wherehouse as continuing suppliers of certain inventory products and who agreed
to provide normal trade credit terms to the Company after the Plan Effective
Date were given the option (the Exchange Option) to receive 27% of their allowed
claims in cash in lieu of shares of New Common Stock. The source of the cash
payments to the Trade Creditors exercising the Exchange Option is $11,610,000 in
cash otherwise distributable to the Senior Lenders under the Reorganization
Plan. If a Trade Creditor elected to receive cash instead of shares of New
Common Stock, the shares of New Common Stock such Trade Creditor
F-9
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)
would have received had it not exercised the Exchange Option were distributed to
the Senior Lenders. Substantially all of the Trade Creditors elected to exercise
the Exchange Option and, as a result, the Company estimates that once all claims
are resolved, $11,302,000 in cash will have been distributed to the Trade
Creditors. Approximately $41,900,000 of the claims of Trade Creditors who
exercised the Exchange Option were cancelled in consideration for the cash
distributable in respect of such claims. Most of the Company's vendors,
including its six major distributors of pre-recorded music, elected to exercise
the Exchange Option and have agreed to provide normal trade credit terms to the
Company.
Under the Reorganization Plan, the Senior Subordinated Noteholders receive
$2,350,000 of cash from New Wherehouse (plus $1,550,000 of cash from a third
party) and three tranches of warrants to purchase shares of New Common Stock
(the Warrants). The Tranche A Warrants represent the right to purchase 576,000
shares of New Common Stock at an exercise price of $2.38 per share and have a
five-year maturity. The Tranche B Warrants represent the right to purchase
100,000 shares of New Common Stock at an exercise price of $9.00 per share and
have a seven-year maturity. The Tranche C Warrants represent the right to
purchase 100,000 shares of New Common Stock at an exercise price of $11.00 per
share and have a seven-year maturity. The Warrants have been issued and are
being distributed by the indenture trustee for the Senior Subordinated Notes
upon the return of letters of transmittal from such Senior Subordinated
Noteholders. Under the Reorganization Plan, $117,190,000 of allowed senior
subordinated note claims were cancelled in consideration of the cash and
Warrants being distributed to the Senior Subordinated Noteholders as described
in this paragraph.
The Convertible Debentureholders will receive no distribution under the
Reorganization Plan. Approximately $5,344,000 of outstanding 6 3/4% Convertible
Subordinated Debentures were cancelled.
Many of the claims of the General Unsecured Creditors have not yet been
adjudicated and allowed by the Bankruptcy Court. Under the Reorganization Plan,
any claims of the General Unsecured Creditors (including claims of Trade
Creditors who did not elect the Exchange Option) that become allowed by the
Bankruptcy Court will receive approximately 31.92 shares of New Common Stock per
$1,000 in such allowed claims. Wherehouse estimates that approximately 663,000
shares of New Common Stock will be issued to General Unsecured Creditors
(including Trade Creditors who did not elect the Exchange Option).
F-10
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)
Several state and local taxing authorities received on account of their claims,
promissory notes due generally six years after the tax assessment date, in the
approximate aggregate principal amount of $4.0 million.
The Reorganization Plan also provides that post-petition claims are to be paid
in full. The Confirmation Order established procedures for the resolution of
disputed post-petition claims and presently there are a number of disputes
before the Bankruptcy Court concerning such post-petition claims.
2. BASIS OF PRESENTATION
COMPANY OPERATIONS
Wherehouse is a retailer of prerecorded music, videocassette rentals and other
entertainment-oriented products. At January 31, 1997, the Company operated 243
stores in seven states. Approximately 89% of the Company's stores are
concentrated in eight major marketing areas (Los Angeles, San Francisco, San
Diego, Sacramento, Fresno, Seattle, Phoenix and Las Vegas) and approximately 83%
of the stores are located in California.
Prior to the Reorganization, WEI held all of the capital stock of Old
Wherehouse. WEI was owned by affiliates of Merrill Lynch Capital Partners, Inc.
(MLCP) and certain members of management.
Pursuant to the Reorganization, the Company operates as a single Delaware
corporation.
For financial reporting purposes, the effective date of the Reorganization was
assumed to be January 31, 1997, the last day of the Company's fiscal year.
The Company has implemented the recommended accounting principles for entities
emerging from Chapter 11 set forth in the American Institute of Certified Public
Accountants Statement of Position 90-7 on Financial Reporting by Entities in
Reorganization under the Bankruptcy Code (SOP 90-7). This results in the use of
fresh start reporting, since the reorganization value, as defined, was less than
the total of all post-petition liabilities and pre-petition claims, and holders
of voting shares immediately before confirmation of the Plan received less than
fifty percent of the voting shares of the emerging entity. Under this concept,
all assets and liabilities are restated to reflect the reorganization value of
the reorganized entity, which approximates its fair value at the date of
reorganization. In addition, the accumulated deficit of the Company was
eliminated
F-11
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
2. BASIS OF PRESENTATION (CONTINUED)
and its capital structure was recast in conformity with the Plan. As such, the
accompanying Company balance sheet as of January 31, 1997, represents that of a
successor company which, in effect, is a new entity with assets, liabilities and
a capital structure having carrying values not comparable with prior periods and
with no beginning retained earnings or deficit.
The reorganization value of $83,643,000 was determined by the Company with the
assistance of its financial advisors. The net present value approach was used in
the determination of the reorganization value. The significant factors used
were: (a) the projected discounted cash flows of the company through fiscal year
2001 and (b) the terminal equity value at the end of fiscal 2001 discounted to
the present.
The effect of the consummation of the Plan, including the gain on extinguishment
of pre-petition debt of $173,765,000 and adjustments to record assets at their
estimated fair values, has been reflected in the accompanying balance sheet as
of January 31, 1997, as follows:
<TABLE>
<CAPTION>
OLD (1) (2) (3) NEW
WHEREHOUSE WHEREHOUSE
------------- -------------
PRE-FRESH FRESH
START BALANCE START BALANCE
SHEET CANCELLATION FRESH START SHEET
JANUARY 31 OF DEBT FAIR VALUE JANUARY 31
1997 STOCK DISCHARGE ADJUSTMENT 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 6,178,000 $ - $ - $ - $ 6,178,000
Receivables 1,932,000 - - - 1,932,000
Prepaid inventory deposits 4,486,000 - - - 4,486,000
Merchandise inventory 77,321,000 - - (1,521,000) 75,800,000
Other current assets 2,259,000 - - - 2,259,000
Rental inventory 13,650,000 - - (3,964,000) 9,686,000
-------------------------------------------------------------------------
Total current assets 105,826,000 - - (5,485,000) 100,341,000
Equipment and improvements, at cost 54,634,000 - - (33,297,000) 21,337,000
Accumulated depreciation and
amortization (31,195,000) - - 31,195,000 -
-------------------------------------------------------------------------
23,439,000 - - (2,102,000) 21,337,000
Reorganization value in excess of
amounts allocable to identifiable
assets - (95,671,000) - 105,395,000 9,724,000
Other assets 340,000 - - - 340,000
-------------------------------------------------------------------------
Total assets $ 129,605,000 $ (95,671,000) $ - $ 97,808,000 $ 131,742,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
2. BASIS OF PRESENTATION (CONTINUED)
<TABLE>
<CAPTION>
OLD (A) (B) (C) NEW
WHEREHOUSE WHEREHOUSE
------------- -------------
PRE-FRESH FRESH
START BALANCE START BALANCE
SHEET CANCELLATION FRESH START SHEET
JANUARY 31 OF DEBT FAIR VALUE JANUARY 31
1997 STOCK DISCHARGE ADJUSTMENT 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and bank overdraft $ 13,034,000 $ - $ - $ - $ 13,034,000
Sales taxes payable 2,192,000 - - - 2,192,000
Other accrued expenses 10,461,000 - - - 10,461,000
Current portion of capital lease
obligations and long-term debt,
secured 729,000 - - - 729,000
Reorganization liabilities (3,769,000) - 18,250,000 - 14,481,000
-------------------------------------------------------------------------
Total current liabilities 22,647,000 - 18,250,000 - 40,897,000
Notes payable - - 3,980,000 - 3,980,000
Capital lease obligations and long-term
debt, secured 722,000 - - - 722,000
Other long-term liabilities 11,160,000 - - (9,160,000) 2,000,000
Liabilities subject to compromise 279,138,000 - (279,138,000) - -
Deferred income taxes 1,270,000 - - (1,270,000) -
Commitments and contingencies
Shareholders' equity (deficit):
New common stock, $.01 par value 11,000 - 92,000 - 103,000
Old common stock, $.01 par value - - - - -
Additional paid-in capital 102,000,000 (95,671,000) 83,051,000 - 89,380,000
Accumulated deficit (282,003,000) - 173,765,000 108,238,000 -
Notes receivable (5,340,000) - - - (5,340,000)
-------------------------------------------------------------------------
Total shareholders' equity (deficit) (185,332,000) (95,671,000) 256,908,000 108,238,000 84,143,000
-------------------------------------------------------------------------
Total liabilities and shareholders' equity
(deficit) $ 129,605,000 $ (95,671,000) $ - $ 97,808,000 $ 131,742,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
2. BASIS OF PRESENTATION (CONTINUED)
(1) Issuance of New Common Stock and warrants and cancellation of Old Common
Stock.
(2) Exchange of pre-petition debt for New Common Stock and related gain on debt
extinguishment.
(3) Record assets and liabilities at their fair value pursuant to the
reorganization value of the Company and eliminate retained deficit.
The fresh start balance sheet at January 31, 1997, includes estimated
liabilities for the settlement of certain prepetition claims including payments
to landlords for leases rejected during the reorganization proceedings for which
the amount payable by the Company had not yet been determined and allowed by the
bankruptcy court. Differences between the amounts recorded by the Company at
January 31, 1997, and amounts ultimately paid will be included in income or loss
from continuing operations of the Company when resolved.
In addition to the 10,257,808 shares of New Common Stock issued and outstanding,
917,515 shares are issuable under the Reorganization Plan but had not been
issued as of January 31, 1997. Such shares may be issued to certain General
Unsecured Creditors provided the full amount of their claims become allowed by
the Bankruptcy Court. Should an amount less than the full claim become allowed,
a portion of the New Common Shares will be issued to the Senior Leaders (see
Note 1).
3. SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method. Inventory consists primarily of resaleable prerecorded
music, videocassettes, video games and other products.
RENTAL INVENTORY
New Wherehouse amortizes video rental inventory using the straight-line method
over a three-month period with a $3 salvage value. At January 31, 1997, the fair
value of rental inventory has been classified as a current asset as
substantially all revenue and cash flow from rental on hand is expected to be
derived within a one-year period.
F-14
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to the Reorganization, rental inventory was amortized over a period of two
years for video games and three years for videocassettes.
The Company sells rental cassettes and games in excess of ongoing needs after
the initial rental period at prices which are often less than net book value.
The sell-through of such rental inventory in the year purchased results in
additional amortization, which is included in the cost of rentals. Although
rental inventory generated a portion of Old Wherehouse's current revenue and
cash flow, the rental inventory was classified as a noncurrent asset because not
all inventory was expected to be realized as cash or sold in the normal business
cycle.
DEPRECIATION AND AMORTIZATION
In accordance with fresh start reporting, the pre-effective date accumulated
depreciation and amortization of $31,195,000 has been eliminated, and a new
depreciation and amortization base has been established equal to the appraised
value of the existing fixed assets, which reflects their fair market value.
Depreciation and amortization of equipment and leasehold improvements is
computed on the straight-line method over the following periods:
Years
----------
Leasehold improvements 2 - 10*
Data processing equipment and software 5
Store and office fixtures and equipment 5 - 10
Buildings and improvements 5 - 30
*Amortization over related lease periods
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets
resulting from the Reorganization will be amortized using the straight-line
method over 10 years.
F-15
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," in the year ended January 31, 1995. Accordingly, the Company
records impairment losses on long-lived assets used in operations, and the
related goodwill, when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.
Management identified significant adverse changes in the Company's business
climate late in the fourth quarter of the year ended January 31, 1995, that
persisted subsequent to year end. These changes were largely due to increasing
competition in the Company's marketplace, which led to operating results and
forecasted future results that were less than previously planned. These factors
led to the conclusion that there was a potential impairment in the recorded
value of goodwill and fixed assets. Accordingly, management reviewed the
recoverability of the carrying value of long-lived assets, primarily goodwill
and fixed assets, based upon a 20-year cash flow analysis. While goodwill was
being amortized on a straight-line basis over 40 years, management's estimate of
undiscounted cash flows over the reduced life amounted to less than the recorded
value of goodwill, indicating impairment of the goodwill under the provisions of
Statement No. 121. Management's estimate, however, indicated that the carrying
value of fixed assets at January 31, 1995, was recoverable over their remaining
useful lives.
An impairment loss of $139,493,000 is included in the accompanying 1995
statement of operations, representing the difference between the estimated
discounted cash flows (at 11.5% per year) and the recorded value of goodwill.
The discount rate of 11.5% represents the Company's weighted average interest
rate in effect on the revolving line of credit, variable rate term note, and the
13% senior subordinated notes at January 31, 1995.
F-16
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF LONG-LIVED ASSETS (CONTINUED)
As a result of the Company's financial performance and the Chapter 11
proceedings, the Company closed 63 locations during 1997, and 53 locations
during 1996. In addition, during fiscal 1996, the Company evaluated the ongoing
value of its equipment and improvements on a store-by-store basis. Based on this
evaluation, the Company determined that store equipment and improvements with a
carrying amount of $1,843,000 were impaired and wrote them down by $1,476,000 to
their fair value. Fair value was based on estimated future cash flows to be
generated by the individual stores, discounted at a market rate of interest.
ADVERTISING COSTS
The Company expenses nonreimbursable advertising costs as costs are incurred.
The amount charged to advertising expense during the years ended January 31,
1997, 1996, and 1995, was $5,282,000, $5,596,000, and $5,704,000, respectively.
PRE-OPENING COSTS
Expenditures associated with opening new stores are charged to expense as
incurred.
EARNINGS PER SHARE
Earnings per share for Old Wherehouse have been omitted since it was a wholly
owned subsidiary of WEI.
REORGANIZATION ITEMS
Reorganization items include: (a) professional fees relating to legal,
accounting and consulting services provided in connection with the Chapter 11
proceedings, (b) costs and expenses associated with the closing of locations,
including an estimated accrual for the expected allowed claims related to
rejected executory contracts, and estimated losses from the liquidation of
inventory from closed stores, (c) the write off of unamortized financing costs
and debt discount in order to record debt subject to the Chapter 11 proceedings
at par value, (d) employee severance costs and an estimated accrual for
contractual obligations under employee change of control agreements and (e)
United States trustee fees and other costs of the Chapter 11 proceedings.
F-17
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures made. The effect on the Company of the adoption of the
provisions for pro forma disclosure requirements of SFAS 123 was not material at
January 31, 1997.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred taxes are determined based on the difference
between the financial statement and tax basis of assets and liabilities and are
measured at the enacted tax rates that will be in effect when these differences
reverse.
4. REVOLVING CREDIT FACILITY
Pursuant to the Reorganization Plan, the Company entered into a loan and
security agreement with Congress Financial Corporation (Western) (the Congress
Facility), which provides a borrowing capacity of up to $30,000,000 with a
letter of credit subfacility of $10,000,000, subject to borrowing base
limitations based upon, among other things, the value of certain eligible
merchandise inventory. As of January 31, 1997, there were no borrowings
outstanding under the Congress Facility, although $400,000 of letters of credit
were outstanding.
F-18
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
4. REVOLVING CREDIT FACILITY (CONTINUED)
The Congress Facility is available through January 31, 2000. Borrowings bear
interest at the prime rate or the Eurodollar rate plus 2.50 percentage points at
the option of the Company.
In connection with the closing of the Congress Facility, the Company incurred a
closing fee in the amount of $150,000 payable $75,000 upon closing and $75,000
on January 31, 1998.
The Congress Facility is secured by cash, credit card receivables, general
intangible assets, and inventory and requires that the Company maintain net
worth (as defined) of not less than $60 million dollars and subjects the Company
to other operating and compliance covenants.
5. STOCKHOLDERS' EQUITY
Pursuant to the Management Agreement (see Note 11) and a Stock Subscription
Agreement dated as of January 31, 1997 (the Stock Subscription Agreement), New
Wherehouse agreed to sell, and Investment Associates an affiliate of Alvarez and
Marsal, Inc. (A&M) agreed to buy at a purchase price of $6,340,000 ($1,000,000
in cash from Investment Associates' funds, plus a secured recourse promissory
note in the principal amount of $335,000 and a secured non-recourse promissory
note in the amount of $5,005,000 (collectively, the Promissory Notes), 1,100,000
shares of the New Common Stock (the A&M Shares) (subject to adjustment upward or
downward to represent 10% of the sum of (i) the shares of New Common Stock
ultimately issued under the Reorganization Plan plus (ii) the number of shares
of New Common Stock issued to Investment Associates). The Promissory Notes bear
interest at 7% per annum during the first four years and 11% per annum during
the fifth through seventh years, mature on January 31, 2004, and have no
scheduled amortization until their maturity date. The Promissory Notes are
secured by a first priority pledge of the A&M Shares pursuant to a Pledge
Agreement dated as of January 31, 1997.
In addition, New Wherehouse and Investment Associates entered into a
Non-Transferrable Stock Option Agreement dated as of January 31, 1997 (the Stock
Option Agreement), pursuant to which New Wherehouse issued to Investment
Associates three tranches of options to purchase shares of New Common Stock (the
A&M Options; and, together with the A&M Shares, the A&M Securities) representing
in the aggregate the right to purchase an additional 10% of the shares of New
Common Stock and the shares subject to
F-19
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
warrants issued under the Reorganization Plan. The first tranche of options
represents the right to purchase 331,127 shares of New Common Stock at an
exercise price of $9.56. The second tranche of options represents the right to
purchase 331,127 shares of New Common Stock at an exercise price of $11.58. The
third tranche of options represents the right to purchase 331,126 shares of New
Common Stock at an exercise price of $14.10. The A&M Options vest monthly in
equal installments through October 31, 1998, and all unexercised A&M Options
expire on January 31, 2003, subject to prior vesting or termination as set forth
in the Management Services Agreement. The A&M Options are subject to upward
adjustment on a quarterly basis as additional shares of New Common Stock are
issued and are entitled to certain other anti-dilution provisions as set forth
in the Stock Option Agreement.
New Wherehouse also granted certain registration rights to Investment Associates
with respect to the A&M Securities pursuant to a Registration Rights Agreement
dated as of January 31, 1997 (the A&M Registration Rights Agreement). Under the
A&M Registration Rights Agreement, Investment Associates has the right to make
one demand registration and two piggy-back registrations in respect of the A&M
Securities.
New Wherehouse also granted certain registration rights to the Senior Lenders as
of the Plan Effective Date with respect to the New Common Stock acquired by such
Senior Lenders, pursuant to a Registration rights Agreement dated as of January
31, 1997 (the Senior Lenders Registration Rights Agreement). Under the Senior
Lenders Registration Rights Agreement, the holders of a requisite number of
shares acquired by the Senior Lenders have the right to make two demand
registrations and to participate in two piggy-back registrations in respect of
the such shares of New Common Stock.
F-20
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
6. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise at January 31, 1996, include the following:
13% senior subordinated notes $ 110,000,000
Variable rate term note and revolving line of credit 92,170,000
Accrued interest 8,507,000
Lease rejection claims 6,000,000
Convertible subordinated debentures 5,344,000
Trade and other miscellaneous claims 56,836,000
--------------
$ 278,857,000
--------------
--------------
Liabilities subject to compromise under the Chapter 11 proceedings include
substantially all current and long-term debt and trade and other payables as of
the petition date.
As a result of the Chapter 11 proceedings, the unpaid principal of, and interest
on, all of the indebtedness of the Company as of the petition date became
immediately due and payable in accordance with the terms of the instruments
governing such indebtedness.
While the Chapter 11 proceedings were pending, however, the Company was
prohibited from making any payments of obligations owing as of the petition
date, except as permitted by the Bankruptcy Court and contractual terms of debt
obligations have been suspended subject to settlement.
During the Chapter 11 proceeding the Company obtained a debtor-in-possession
financing arrangement with a financial institution whereby a $30,000,000
revolving credit facility (DIP facility), which includes a letter of credit
subfacility of $10,000,000, was available to fund working capital, issue letters
of credit and make certain other payments during the Chapter 11 proceedings.
Borrowings under the DIP facility bore interest, at the Company's option, at
either: (a) the Base Rate (defined as the higher of the Prime Rate or the
Federal Funds Effective Rate plus 1/2%) plus 1% (9.5% at January 31, 1996); or
(b) the Eurodollar Rate (defined as the rate to first-class banks for dollar
deposits in the Eurodollar Market) plus 2.75% (8.125% at January 31, 1996). The
Company had no outstanding borrowings against the DIP facility at January 31,
1996. At January 31, 1996, the Company had $400,000 of letters of credit
outstanding.
For the disposition of liabilities subject to compromise see Note 1.
F-21
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
7. OTHER ACCRUED EXPENSES
Other accrued expenses consists of the following:
NEW OLD
WHEREHOUSE WHEREHOUSE
---------------------------
1997 1996
---------------------------
Gift certificate liability $ 4,249,000 $ 5,138,000
Payroll and related costs 3,414,000 4,799,000
Store closing costs 621,000 1,780,000
Other 2,177,000 6,892,000
---------------------------
$ 10,461,000 $ 18,609,000
---------------------------
---------------------------
8. INCOME TAXES
As a result of the Acquisition by New Wherehouse of substantially all of the
assets of Old Wherehouse, a new tax basis equivalent to the fair value of net
assets acquired was established. The net operating loss carryovers and other
deferred tax assets were used by Old Wherehouse to offset a portion of the gain
on the extinguishment of debt. Under the provisions of the Internal Revenue
Code, no provision for income taxes was recorded on the remaining gain on the
extinguishment of debt.
No deferred tax assets or liabilities were recorded by New Wherehouse at
January 31, 1997.
The provision for income taxes includes:
PREDECESSOR
---------------------------------------------
YEAR ENDED JANUARY 31
1997 1996 1995
---------------------------------------------
Current:
Federal $ - $ - $ (1,500,000)
State - 17,000 -
---------------------------------------------
- 17,000 (1,500,000)
Deferred:
Federal - (14,187,000) (5,057,000)
State - (2,695,000) (2,249,000)
Valuation allowance - 16,882,000 21,813,000
---------------------------------------------
- - 14,507,000
---------------------------------------------
$ - $ 17,000 $ 13,007,000
---------------------------------------------
---------------------------------------------
F-22
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation of the difference between the federal statutory rate and the
effective tax rate is summarized as follows:
OLD WHEREHOUSE
------------------------------
YEAR ENDED JANUARY 31
1997 1996 1995
------------------------------
Statutory tax rate 34.0% (34.0)% (34.0)%
Permanent tax differences for
deductions (primarily amortization
of excess of cost over fair value of
net assets acquired) - - 30.5
Job tax credits - - (2.1)
State taxes, net of federal benefit - - (1.0)
Valuation allowance and other (34.0) 34.0 15.3
------------------------------
- % - % 8.7%
------------------------------
------------------------------
The components of net deferred income taxes at 1996 are as follows:
Net current deferred income tax assets (liabilities):
Merchandise inventory $ 3,596,000
Vacation liability 894,000
Other accrued liabilities 115,000
Prepaid expenses (143,000)
------------
4,462,000
Net long-term deferred income tax assets (liabilities):
Video rental inventory 1,312,000
Equipment and improvements 3,251,000
Store closure liability 717,000
Average rent liability 3,810,000
Federal/state operating loss carryovers 11,651,000
Federal/state credit carryovers 8,588,000
F-23
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred compensation $ 564,000
Other accrued liabilities (4,147,000)
Capital leases 469,000
Goodwill 3,243,000
Loan fees 2,708,000
Rejected executory contracts 2,408,000
------------
34,574,000
------------
39,036,000
Valuation allowance for deferred tax assets (42,306,000)
------------
Net deferred income tax liability $ (3,270,000)
------------
------------
During the year ended January 31, 1996, the valuation allowance for deferred tax
assets increased by $16,882,000 from $25,424,000 at January 31, 1995 to
$42,306,000 at January 31, 1996.
The Company is currently undergoing an audit by the State of California for the
years ended January 31, 1992, 1993 and 1994. Management believes that it has
made adequate provision in the accompanying financial statements for these
audits. In connection with the Chapter 11 case, the Company agreed to pay
certain priority tax claims, including amounts payable to the state of
California, and other state taxing authorities, six years from the assessment
date of the tax claim. At January 31, 1997, these amounts are reflected in the
balance sheet of New Wherehouse as non-current notes payable.
9. COMMITMENTS
LEASES
The Company leases substantially all of its data processing equipment, retail
stores and other facilities. The capital and operating lease agreements expire
on various dates through 2013 with renewal options for certain leases. Certain
leases provide for payment of real estate taxes and additional rents based on a
percentage of sales. During the Chapter 11 case, the Company renegotiated the
terms of numerous leases and in certain cases has the right to terminate leases
prior to the original lease expiration date.
F-24
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
9. COMMITMENTS (CONTINUED)
LEASES (CONTINUED)
Future minimum annual lease payments under capital and operating leases at
January 31, 1997, including the modifications resulting from the Chapter 11
proceedings, are payable as follows:
CAPITAL OPERATING
LEASES LEASES
--------------------------
1998 $ 556,000 $ 23,701,000
1999 58,000 21,296,000
2000 - 18,088,000
2001 - 16,149,000
2002 - 13,990,000
Thereafter - 38,094,000
--------------------------
Total future minimum lease payments 614,000 $ 131,318,000
-------------
-------------
Less amounts representing interest 23,000
---------
Present value of future minimum lease payments 591,000
Less current portion 536,000
---------
Long-term obligations under capital leases $ 55,000
---------
---------
Rental expense charged to operations was approximately $33,159,000 in fiscal
1997, $38,892,000 in fiscal 1996, and $43,331,000 in fiscal 1995. In addition,
real estate taxes and additional rents based on percentage of sales were
approximately $2,434,000 in fiscal 1997, $2,871,000 in fiscal 1996, and
$3,158,000 in fiscal 1995.
Included in equipment and improvements are assets held under capital leases with
an original cost to the Company of $2,993,000 and $4,067,000 at January 31, 1997
and 1996. Capital lease obligations are assumed to be fully secured by the value
of the related equipment and improvements.
In connection with the Reorganization, the Company converted an equipment lease,
previously accounted for as a capital lease, to a note payable, with monthly
installments of $12,750 through September 1999.
F-25
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
9. COMMITMENTS (CONTINUED)
MANAGEMENT CONSULTING AGREEMENTS
As part of the re-engineering project begun in June 1993, the Company entered
into a management consulting agreement with a company whose chairman provided
services first by leading the re-engineering project and then as chairman of
the board and chief executive officer of the Company. The agreement was
terminated on July 2, 1996. In connection with the termination, the Company
paid $562,000. The Company then entered into a new employment agreement which
was terminated January 31, 1997. Additional payments in connection with the
employment agreements during the fiscal year ended January 31, 1997,
aggregated $437,000. Amounts paid under the initial agreement were $496,000
and $375,000 during fiscal 1996 and 1995, respectively.
10. CONTINGENCIES
The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of its business. In the opinion of management,
all such matters are without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial position or results
of operations of the Company.
11. EMPLOYEE BENEFITS
EXECUTIVE OFFICERS' RETIREMENT PLAN: The Company provides life insurance for the
executive officers of the Company, with face values of such policies ranging
from $250,000 to $500,000. Upon retirement at the normal retirement age of 65,
covered executives are entitled to receive annual payments equal to 10% of the
face amount of their life insurance policies for each of the 15 years following
retirement. The Company recognized expense of $25,000 in 1997, $60,000 in 1996,
and $27,000 in fiscal 1995, under this plan.
EMPLOYEES' SAVINGS RETIREMENT PLAN: In March 1992, the Company established a tax
qualified 401(k) Savings Retirement Plan (401(k) Plan). All employees who have
completed one year of service and at least 1,000 hours of service in that year
with the Company are eligible to join the 401(k) Plan on the first day of each
calendar quarter. All eligible employees may contribute from 1% to 10% of their
annual compensation on a pre-tax basis. The Company makes a matching
contribution in an amount equal to 50% of the employees' contributions of 1% to
3% of their annual compensation and 25% of the employees' contributions of 4% to
5% of their annual compensation. Matching
F-26
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
11. EMPLOYEE BENEFITS (CONTINUED)
contributions made by the Company vest 25% per year beginning with the
employee's second year of employment. The Company recognized expense of $257,000
in 1997, $305,000 in 1996, and $381,000 in 1995 for matching costs and
administrative costs under the 401(k) Plan.
SEVERANCE AGREEMENTS: In order to retain certain key management employees prior
to and during the Chapter 11 proceedings, the Company has established severance
agreements with such employees. These agreements would take effect in the event
of a change in control of the Company (as defined), which would result in such
employees' termination of employment or in a significant reduction in such
employees' responsibilities. If such an event occurred, the Company would be
liable for payments of up to $1,900,000 (at January 31, 1997) under the various
severance agreements. In addition, the salary of the chairman of the board and
chief executive officer of Old Wherehouse had been guaranteed through October 1,
1997. In accordance with the terms of the above agreements, the Company paid
$350,000 to one of its officers subsequent to January 31, 1997.
EMPLOYMENT AGREEMENTS
In connection with the Reorganization plan, the Company entered into a
Management Services Agreement dated as of January 31, 1997, with A&M, Antonio C.
Alvarez II, the Support Employees described therein, Investment Associates and
Cerberus Partners, L.P. (the Management Agreement). Under the Management
Agreement Mr. Alvarez serves as chairman of the board and chief executive
officer of New Wherehouse with A&M receiving $600,000 annually as compensation
for Mr. Alvarez' services. The Management Agreement expires on October 14, 1998.
Prior to the Plan Effective Date, Mr. Alvarez served as a consultant to the
Senior Lenders pursuant to a letter agreement dated as of October 14, 1996,
between A&M, Mr. Alvarez and the Senior Lenders (the Interim Agreement).
Pursuant to the Interim Agreement, the Senior Lenders agreed to pay A&M a
consulting fee of $50,000 per month plus the hourly fees of those employees of
A&M providing assistance to Mr. Alvarez in the performance of his consulting
responsibilities. The Senior Lenders paid $389,000 to A&M pursuant to the
Interim Agreement prior to January 31, 1997. Under the Management Agreement, New
Wherehouse agreed to reimburse, and has reimbursed, the Senior Lenders for the
amounts paid by the Senior Lenders to A&M pursuant to the Interim Agreement.
F-27
<PAGE>
Wherehouse Entertainment, Inc.
Notes to Financial Statements (continued)
11. EMPLOYEE BENEFITS (CONTINUED)
The Management Agreement provides that a payment of $1,500,000 will be made to
A&M, the options to purchase New Common Stock held by Investment Associates will
immediately vest and Investment Associates will have the right to require New
Wherehouse to purchase the shares of New Common Stock and options to acquire New
Common Stock owned by Investment Associates in the event that Mr. Alvarez is
terminated other than for cause (as defined in the Management Agreement) or
there is a change-in-control (as defined in the Management Agreement) to which
A&M has not, through Mr. Alvarez, consented. The $1,500,000 payment referred to
above will be payable by Cerberus if a change-in-control results solely from the
sale by Cerberus of more than 50% of the shares of New Common Stock owned by
Cerberus immediately prior to the sale. For any other change-in-control, the
$1,500,000 payment is to be made by New Wherehouse. The price to be paid by New
Wherehouse in purchasing the shares of New Common Stock and options to acquire
New Common Stock owned by Investment Associates will depend on the fair market
value (as defined in the Management Agreement) of the New Common Stock at the
time of purchase. Any payments made to Investment Associates in purchasing the
shares of New Common Stock and options to acquire New Common Stock from
Investment Associates are required to be applied to reduce the outstanding
amounts under the Promissory Notes.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information (unaudited) is as follows (in thousands):
NET REVENUE GROSS PROFIT NET INCOME (LOSS)
--------------------------------------------------
1997 - QUARTER ENDED
April 30 $ 87,490 $ 35,472 $ (2,266)
July 31 87,670 31,833 (8,010)
October 31 78,144 28,723 (7,456)
January 31* 112,200 40,512 161,452
1996 - QUARTER ENDED
April 30 $ 103,976 $ 43,106 $ (7,438)
July 31 105,036 41,076 (10,151)
October 31 93,100 34,823 (12,048)
January 31 131,081 43,792 (14,201)
1995 - QUARTER ENDED
April 30 $ 113,863 $ 46,505 $ (5,648)
July 31 114,324 47,904 (3,729)
October 31 112,651 45,919 (6,052)
January 31 158,787 61,708 (146,816)
*Net loss includes an extraordinary gain of $173,765, resulting from the
extinguishment of debt in connection with the Reorganization.
F-28
<PAGE>
Wherehouse Entertainment, Inc.
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions(1)(2) End of Year
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated amortization deducted
from video rental inventory:
Company:
Year ended January 31, 1997 $38,906,000 $23,535,000 $62,441,000 $ -
Year ended January 31, 1996 40,984,000 24,213,000 26,291,000 38,906,000
Year ended January 31 1995 38,966,000 26,831,000 24,813,000 40,984,000
</TABLE>
- ----------------
(1) Accumulated amortization on dispositon of video rental tapes.
(2) The deduction in 1997 resulted from the elimination of the accumulated
amortization in conjunction with Fresh Start accounting adjustments.
F-29
<PAGE>
UNANIMOUS WRITTEN CONSENT OF THE SOLE
DIRECTOR OF
WEI ACQUISITION CO.,
A DELAWARE CORPORATION
The undersigned, being the sole director of WEI Acquisition Co., a
Delaware corporation (the "Company"), acting pursuant to the authority of
Section 141(f) of the General Corporation Law of the State of Delaware, hereby
consents to the adoption of the following recitals and resolutions:
ASSET PURCHASE AGREEMENT.
WHEREAS, this Board has been presented with a form of Asset Purchase
Agreement (the "Asset Purchase Agreement") between the Company, as the Buyer,
and Wherehouse Entertainment, Inc., a Delaware corporation, and its parent WEI
Holdings, Inc., together as the Sellers, pursuant to which the Company will
purchase from Sellers and Sellers will sell to Buyer substantially all of the
assets and the Company will assume substantially all of the liabilities of the
Sellers; and
WHEREAS, this Board has also been presented with certain agreements
and documents to be executed and delivered by the Company in connection with the
Asset Purchase Agreement, including, without limitation a Bill of Sale, a
Trademark Assignment, a Patent Assignment, an Assumption Agreement, a
Liquidation Agent Agreement, a Tranche A Warrant Agreement, a Tranche B Warrant
Agreement, a Tranche C Warrant Agreement, an Employee Benefit Plans Assignment
and Assumption Agreement and an Affidavit of Property Value (each such document,
together with the Asset Purchase Agreement, collectively, the "Purchase
Documents").
NOW, THEREFORE, BE IT RESOLVED, that the form, terms and provisions of
the Purchase Documents are in all respects authorized, approved and adopted, and
that the execution and delivery of each Purchase Document and all other actions
taken by and documents delivered on behalf of the Company in connection
therewith be, and hereby are, in all respects approved, ratified and confirmed
as the acts and deeds of the Company;
RESOLVED FURTHER, that the officers of the Company be, and each of
them hereby is, authorized and empowered, in the name and on behalf of the
Company, to negotiate, execute, deliver and perform the Asset Purchase
Agreement, the other Purchase Documents and each other agreement, certificate or
other document to be executed and delivered by the Company in connection
therewith, with such additions, deletions, modifications or other changes
thereto as the officer executing the same shall have
1
<PAGE>
determined to be desirable or appropriate, such determination to be
conclusively evidenced by the execution thereof;
RESOLVED FURTHER, that the issuance by the Company of the shares of
the Company's common stock, par value $0.01 per share (the "Common Stock") in
accordance with the Debtors' First Amended Chapter 11 Plan, as Revised for
Technical Corrections dated October 4, 1996 and Supplemental Amendments on
December 2, 1996 and December 13, 1996 (the "Plan") filed by the Sellers, and
with the Asset Purchase Agreement, be and hereby is, approved; that upon receipt
by the Company of the full consideration for such shares in accordance with the
Plan and the Asset Purchase Agreement, the proper officers of the Company be,
and they hereby are, authorized and directed, in the name and on behalf of the
Company, to issue certificates representing such shares of Common Stock; that
the par value thereof be designated as capital in the accounts of the Company;
and that, upon the issuance of such certificates, the shares of Common Stock
represented thereby shall be validly issued, fully paid, and non-assessable; and
RESOLVED, that the issuance by the Company of the three tranches of
warrants in accordance with the Plan (the "Warrants") and with the Asset
Purchase Agreement be, and hereby is, approved; that upon receipt by the
Company of the full consideration for such Warrants in accordance with the
Plan and the Asset Purchase Agreement, the proper officers of the Company be,
and they hereby are, authorized and directed, in the name and on behalf of
the Company and under its corporate seal, to issue certificates representing
such Warrants; that upon the proper exercise of the Warrants into shares of
Common Stock and the receipt by the Company of the full exercise price for
such shares in accordance with the Warrant Agreements under which the
Warrants were issued, the proper officers of the Company be, and they hereby
are, authorized and directed, in the name and on behalf of the Company, to
issue certificates representing such shares of Common Stock; that the par
value thereof be designated as capital in the accounts of the Company; and
that, upon the issuance of such certificates, the shares of Common Stock
represented thereby shall be validly issued, fully paid, and non-assessable.
2
<PAGE>
RESOLVED FURTHER, that any and all actions previously taken by any
officer of the Company prior to the date hereof in furtherance of the
foregoing resolutions be, and hereby is, ratified, confirmed and approved as
the act and deed of the Company.
REGISTRATION RIGHTS AGREEMENT WITH SENIOR LENDERS
WHEREAS, this Board has been presented with a form of Registration
Rights Agreement (the "Registration Rights Agreement") between the Company,
Cerberus Partners, L.P., CS First Boston Securities Corporation and Bank of
America, Illinois, who are the senior lenders to the Sellers (the "Senior
Lenders") under the Plan, pursuant to which the Company will grant to the Senior
Lenders certain registration rights in respect of the shares of Common Stock to
be issued to the Senior Lenders under the Plan.
NOW, THEREFORE, BE IT RESOLVED, that the form, terms and provisions of
the Registration Rights Agreement is in all respects authorized, approved and
adopted, and that the execution and delivery of the Registration Rights
Agreement and all other actions taken by and documents delivered on behalf of
the Company in connection therewith be, and hereby are, in all respects
approved, ratified and confirmed as the acts and deeds of the Company;
3
<PAGE>
RESOLVED FURTHER, that the officers of the Company be, and each of
them hereby is, authorized and empowered, in the name and on behalf of the
Company, to negotiate, execute, deliver and perform the Registration Rights
Agreement and each other agreement, certificate or other document to be executed
and delivered by the Company in connection therewith, with such additions,
deletions, modifications or other changes thereto as the officer executing the
same shall have determined to be desirable or appropriate, such determination to
be conclusively evidenced by the execution thereof;
RESOLVED FURTHER, that any and all actions previously taken by any
officer of the Company prior to the date hereof in furtherance of the foregoing
resolutions be, and hereby is, ratified, confirmed and approved as the act and
deed of the Company.
ELECTION OF DIRECTORS
WHEREAS, the Plan provides that Antonio C. Alvarez II, Bruce Ogilvie,
Joe Smith and Jonathan Gallen, together with Robert C. Davenport, shall be
elected to the Board of Directors of the Company and that Antonio C. Alvarez II
shall serve as the Chairman of the Board of Directors;
NOW, THEREFORE, BE IT RESOLVED, that Antonio C. Alvarez II, Bruce
Ogilvie, Joe Smith and Jonathan Gallen be, and hereby are, elected to the Board
of Directors of the Company and that Antonio C. Alvarez II shall serve as the
Chairman of the Board of Directors, such election, in each case, to be effective
upon the effectiveness of the Plan, to hold office until his successor is
elected in accordance with the Bylaws of the Company;
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RESOLVED FURTHER, that Robert C. Davenport shall continue to serve on
the Board of Directors of the Company until his successor is elected in
accordance with the Bylaws of the Company;
RESOLVED FURTHER, that any and all actions previously taken by any
officer of the Company prior to the date hereof in furtherance of the foregoing
resolutions be, and hereby is, ratified, confirmed and approved as the act and
deed of the Company.
AMENDMENT OF BYLAWS
WHEREAS, Section 3 of Article III of the Bylaws of the Company
provides as follows:
Special meetings of the stockholders, for any purpose whatsoever, may
be called by the board of directors or by the holders of a majority of
shares then entitled to vote at an election of directors.
WHEREAS, the Board desires to amend Section 3 of Article III of the
Bylaws of the Company as provided below;
NOW, THEREFORE, BE IT RESOLVED, that Section 3 of Article III of the
Bylaws of the Company be amended to read as follows, such amendment to be
effective upon the effectiveness of the Plan:
Special meetings of the stockholders, for any purpose whatsoever, may
be called by the board of directors or by the holders of at least 35%
of shares then entitled to vote at an election of directors.
RESOLVED FURTHER, that any and all actions previously taken by any
officer of the Company prior to the date hereof in furtherance of the foregoing
resolutions be, and hereby is, ratified, confirmed and approved as the act and
deed of the Company.
ALVAREZ & MARSAL AGREEMENTS.
WHEREAS, this Board has been presented with a form of Management
Services Agreement (draft dated January 25, 1997) (the "Management Agreement")
between the Company, Alvarez & Marsal, Inc. ("A&M"), Antonio C. Alvarez II
("Alvarez"), A&M Investments Associates #3, LLC (the "Affiliate") and Cerberus
Partners, L.P., pursuant to which the Company will, among other things, engage
the management services of A&M and Alvarez, sell to the Affiliate shares of the
Company's common stock and make a loan to Antonio C. Alvarez II in connection
therewith, and grant to the Affiliate options to purchase the Company's common
stock, all as set forth therein; and
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WHEREAS, this Board has also been presented with certain agreements
and documents to be executed and delivered or accepted by the Company in
connection with the Management Agreement, including, without limitation a Stock
Subscription Agreement, an Alvarez Promissory Note to be made by Alvarez in
favor of the Company, a Secured Recourse Promissory Note to be made by the
Affiliate in favor of the Company, a Secured Non-Recourse Promissory Note to be
made by the Affiliate in favor of the Company, a Stock Pledge Agreement, a
Registration Rights Agreement, a Non-Transferrable Stock Option Agreement and a
Tax-Audit Notification Agreement (each such document, together with the
Management Agreement, collectively, the "A&M Documents").
NOW, THEREFORE, BE IT RESOLVED, that the form, terms and provisions of
the A&M Documents are in all respects authorized, approved and adopted, and that
the execution and delivery of each A&M Document and all other actions taken by
and documents delivered on behalf of the Company in connection therewith be, and
hereby are, in all respects approved, ratified and confirmed as the acts and
deeds of the Company;
RESOLVED FURTHER, that the Board deems that the A&M Documents and the
transactions contemplated therein, including the transactions approved in the
second RESOLVED FURTHER paragraph below, may reasonably be expected to benefit
the Company;
RESOLVED FURTHER, that the officers of the Company be, and each of
them hereby is, authorized and empowered, in the name and on behalf of the
Company, to negotiate, execute, deliver and perform the Management Agreement,
the other A&M Documents and each other agreement, certificate or other document
to be executed and delivered by the Company in connection therewith and all the
transactions contemplated therein, with such additions, deletions, modifications
or other changes thereto as the officer executing the same shall have determined
to be desirable or appropriate, such determination to be conclusively evidenced
by the execution thereof;
RESOLVED FURTHER, that (i) the making of the loan to Anthony C.
Alvarez II in the amount of $5,340,000 and the acceptance of the Alvarez
Promissory Note in consideration therefor, (ii) the issuance and sale by the
Company of 1,100,000 shares of Common Stock to A&M Investment Associates #3,
LLC, a Delaware limited liability company ("A&M"), for a purchase price of
$6,340,000 to be paid in cash, pursuant to the Stock Subscription Agreement
dated as of January 31, 1997 between the Company and A&M, and (iii) the
exchange of the Alvarez Promissory Note for the Secured Non-Recourse
Promissory Note in the principal amount of $5,005,000 and the Secured
Recourse Promissory Note in the principal amount of $335,000 made by A&M
Investment Associates #3 LLC, be and hereby are, approved; that upon receipt
by the Company of the full cash consideration for such shares of Common
Stock, the proper officers of the Company be, and they hereby are, authorized
and directed, in the name and on behalf of the Company, to issue certificates
representing such shares of Common Stock; that the par value thereof be
designated as capital in the accounts of the Company; and that, upon the
issuance of such certificates, the shares of Common Stock represented thereby
shall be validly issued, fully paid, and non-assessable;
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RESOLVED FURTHER, that the issuance by the Company to A&M of options
to purchase [993,380] shares of Common Stock (the "Options") pursuant to a
Non-Transferrable Stock Option Agreement dated as of January 31, 1997 between
the Company and A&M (the "Option Agreement") be, and hereby is, approved;
that upon the proper exercise of the Options into shares of Common Stock and
the receipt by the Company of the full exercise price for such shares in
accordance with the Option Agreement, the proper officers of the Company be,
and they hereby are, authorized and directed, in the name and on behalf of
the Company, to issue certificates representing such shares of Common Stock;
that the par value thereof be designated as capital in the accounts of the
Company; and that, upon the issuance of such certificates, the shares of
Common Stock represented thereby shall be validly issued, fully paid, and
non-assessable;
RESOLVED FURTHER, that each officer of the Company, including Robert
C. Davenport whose signature appears on this Written Consent of the Sole
Director, be, and each hereby is, authorized and empowered, in the name and on
behalf of the Company, to take all such other actions and execute all such other
documents as the officer taking such action or executing such documents shall
deem necessary or desirable in order to carry out and perform the purposes of
the foregoing resolutions, the taking of such actions or execution of such
documents to be conclusive evidence of the necessity or desirability thereof;
and
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RESOLVED FURTHER, that any and all actions previously taken by any
officer of the Company prior to the date hereof in furtherance of the foregoing
resolutions be, and hereby is, ratified, confirmed and approved as the act and
deed of the Company.
LOAN FROM CONGRESS FINANCIAL CORPORATION
WHEREAS, the Company desires to enter into certain financing
arrangements with CONGRESS FINANCIAL CORPORATION (WESTERN) ("Congress"); and
WHEREAS, in order to induce Congress to enter into the financing
arrangements, the Company has agreed to grant Congress a security interest in
and lien upon certain assets and property of the Company as set forth in the
Loan and Security Agreement to be entered into between the Company and Congress;
and
WHEREAS, the Company deems the financing arrangements with Congress to
be in its best interests;
NOW THEREFORE, BE IT RESOLVED, that any of the officers or agents of
the Company, and each of them, are hereby authorized, directed and empowered to
make, execute and deliver, either jointly or severally, for and on behalf of and
in the name of the Company, financing, security and other agreements with
Congress (including, without limitation, the Loan and Security Agreement)
relating to the terms and conditions upon which the financing arrangements may
be obtained from Congress and to the security to be furnished by the Company
therefor, related Uniform Commercial Code financing statements, and any and all
amendments, supplements, modifications, extensions, renewals, replacements and
agreements, documents and instruments relating to the foregoing or requested by
Congress;
RESOLVED FURTHER, that said documents shall be substantially in the
form presented to the Board;
RESOLVED FURTHER, that any of the officers or agents of the Company,
and each of them, are hereby authorized, directed and empowered, for and on
behalf of and in the name of the Company: (a) to borrow from Congress such
amount or amounts of money or obtain such other financial accommodations as may
be made available to the Company by Congress at this time or any other time;
(b) to extend or renew any loan or loans or any installment of principal or
interest thereof, or any indebtedness owing to Congress; and (c) to enter into
such financing arrangements at this time or at any other time as they, or any of
them may see fit;
RESOLVED FURTHER, that the officers and agents of the Company, and
each of them, for and on behalf of and in the name of the Company, are hereby
authorized, directed and empowered to make, execute and deliver, from time to
time, the note or notes of the Company, evidencing said loan or loans,
extensions or renewals, and to sell, transfer, lease, assign, hypothecate, set
over, otherwise transfer, grant security interests in, mortgage
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or pledge any or all of the property of the Company, real, personal, or
mixed, tangible or intangible, now owned or hereafter acquired as security or
otherwise, as required under the Loan and Security Agreement;
RESOLVED FURTHER, that said officers and agents, and each of them,
are hereby authorized, directed and empowered to execute and deliver any and
all instruments, papers and documents and to do all other acts that they may
deem convenient or proper to effectuate the purpose and intent hereof or to
further secure Congress from time to time or otherwise;
RESOLVED FURTHER, that the form of resolutions, if any, not
inconsistent with these resolutions, required by Congress to be adopted by
the Directors of the Company is hereby deemed to be adopted and approved and
the Secretary or the Treasurer of the Company is hereby directed to attach to
this written consent a copy thereof as so deemed adopted;
RESOLVED FURTHER, that all actions heretofore taken and all
documentation heretofore delivered by any of said officers, or by any
individual who currently holds or has held any of said offices, in
furtherance of the foregoing is hereby ratified, adopted, approved and
confirmed and declared to be binding and enforceable obligations of the
Company in accordance with the respective terms and provisions thereof;
RESOLVED FURTHER, that the authorization herein set forth shall remain
in full force and effect until written notice of their modification or
discontinuance shall be given to and actually received by Congress at its
address designated in the documents mentioned above, but no such modification or
discontinuance shall affect the validity of the acts of any person, authorized
to so act by these resolutions, performed prior to the receipt of such notice by
Congress.
[remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the undersigned, constituting the sole director of
the Company, has executed this Unanimous Written Consent as of the 30th day of
January, 1997.
/s/ Robert C. Davenport
------------------------
Robert C. Davenport
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TRANCHE A WARRANT AGREEMENT
WARRANT AGREEMENT
RELATING TO THE ISSUANCE OF THE
TRANCHE A WARRANTS
WEI ACQUISITION CO.
(which will change its name to Wherehouse Entertainment, Inc.)
and
UNITED STATES TRUST COMPANY OF NEW YORK
Dated as of January 31, 1997
<PAGE>
TABLE OF CONTENTS
SECTIONS PAGE(S)
SECTION 1. Appointment of Warrant Agent. . . . . . . . . . . . . . . . . 1
SECTION 2. Form of Warrants. . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Form of Warrant Certificates. . . . . . . . . . . . . . 1
2.2. Countersignature of Warrant Certificates. . . . . . . . 2
2.3. Registration. . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3. Transfer or Exchange of Warrants. . . . . . . . . . . . . . . 3
3.1. Transfer. . . . . . . . . . . . . . . . . . . . . . . . 3
3.2. Exchange of Warrant Certificates. . . . . . . . . . . . 3
SECTION 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 5. Mutilated or Missing Warrants . . . . . . . . . . . . . . . . 3
SECTION 6. Term of Warrants; Exercise of Warrants. . . . . . . . . . . . 4
6.1. Term of Warrants. . . . . . . . . . . . . . . . . . . . 4
6.2. Exercise of Warrants. . . . . . . . . . . . . . . . . . 4
SECTION 7. Disposition of Proceeds on Exercise of Warrants . . . . . . . 5
SECTION 8. Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 9. Reservation of Warrant Shares; Purchase and Cancellation of
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9.1. Reservation of Warrant Shares . . . . . . . . . . . . . 5
9.2. Governmental Approvals and Listings . . . . . . . . . . 6
9.3. Purchase of Warrants by the Company . . . . . . . . . . 6
9.4. Cancellation of Warrants. . . . . . . . . . . . . . . . 6
SECTION 10. Exercise Price. . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 11. Adjustment of Exercise Price and Number of Warrant Shares . . 6
11.1. Adjustments. . . . . . . . . . . . . . . . . . . . . . 6
(a) Stock Dividends, Splits, etc. . . . . . . . . . . . 7
(b) Distributions of Assets . . . . . . . . . . . . . . 7
(c) Computation of Market Price . . . . . . . . . . . . 8
(d) Minimum Adjustment. . . . . . . . . . . . . . . . . 8
(e) Warrant Share Adjustment. . . . . . . . . . . . . . 9
(f) Notice of Adjustment. . . . . . . . . . . . . . . . 9
(g) Definition of Common Stock. . . . . . . . . . . . . 9
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(h) Company May Reduce Exercise Price or
Increase Number of Warrant Shares Purchasable . . . 10
(i) Subsequently Issued Warrants. . . . . . . . . . . . 10
(j) Number of Warrant Shares on Warrant Certificates. . 10
11.2. No Adjustment for Dividends. . . . . . . . . . . . . . 10
11.3. Preservation of Purchase Rights and Adjustment of
Exercise Price upon Merger, Consolidation, etc. . . 10
SECTION 12. No Rights as Stockholders; Notices to Warrant Holders . . . . 12
SECTION 13. Purchase Rights . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 14. FRACTIONAL SHARES OF COMMON STOCK . . . . . . . . . . . . . . 13
SECTION 15. Right of Action . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 16. Inspection of Warrant Agreement . . . . . . . . . . . . . . . 14
SECTION 17. Merger or Consolidation or Change of Name of Warrant Agent. . 14
SECTION 18. Concerning the Warrant Agent. . . . . . . . . . . . . . . . . 14
18.1. Disclaimer of Representations . . . . . . . . . . . 15
18.2. No Responsibility for Failure of Company's
Covenants . . . . . . . . . . . . . . . . . . . . . 15
18.3. Delegation. . . . . . . . . . . . . . . . . . . . . 15
18.4. Opinion of Counsel. . . . . . . . . . . . . . . . . 15
18.5. Officer's Certificate . . . . . . . . . . . . . . . 15
18.6. Compensation and Reimbursement. . . . . . . . . . . 15
18.7. No Action Without Assurance of Reimbursement. . . . 16
18.8. Conflicts of Interest . . . . . . . . . . . . . . . 16
18.9. Solely as Agent . . . . . . . . . . . . . . . . . . 16
18.10. Reliance on Documents . . . . . . . . . . . . . . . 16
18.11. No Representation Regarding Validity, Etc.. . . . . 17
18.12. Instructions from Company . . . . . . . . . . . . . 17
SECTION 19. Change of Warrant Agent . . . . . . . . . . . . . . . . . . . 17
SECTION 20. Identity of Transfer Agent. . . . . . . . . . . . . . . . . . 18
SECTION 21. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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SECTION 22. Supplements and Amendments. . . . . . . . . . . . . . . . . . 18
SECTION 23. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 24. Merger or Consolidation of the Company. . . . . . . . . . . . 19
SECTION 25. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 26. Benefits of this Agreement. . . . . . . . . . . . . . . . . . 19
SECTION 27. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 28. Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 29. Plan of Reorganization. . . . . . . . . . . . . . . . . . . . 20
EXHIBIT A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
PURCHASE FORM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
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WARRANT AGREEMENT relating to the issuance of the Tranche A Warrants,
dated as of January 31, 1997, between WEI ACQUISITION CO. (which will change its
name to Wherehouse Entertainment, Inc.), a Delaware corporation (the "Company"),
and UNITED STATES TRUST COMPANY OF NEW YORK, as Warrant Agent (the "Warrant
Agent").
WITNESSETH:
-----------
WHEREAS, pursuant to the Debtors' First Amended Chapter 11 Plan, as
Revised for Technical Corrections dated October 4, 1996 and Supplemental
Amendments on December 2, 1996 and December 13, 1996 (the "POR") and an Asset
Purchase Agreement dated as of January 31, 1997 (the "ASSET PURCHASE
AGREEMENT"), the Company will acquire substantially all of the assets of
Wherehouse Entertainment, Inc., and its parent, WEI Holdings, Inc., which
companies are debtors and debtors-in-possession (collectively, the
"DEBTORS"), in Case No. 95-911 (HSB) (Jointly Administered) (the "BANKRUPTCY
CASE") in the Bankruptcy Court for the District of Delaware (the "BANKRUPTCY
COURT");
WHEREAS, as part of the purchase price for the assets of the
Debtors to be acquired by the Company, the Company proposes to issue up to
576,000 Common Stock Purchase Warrants hereinafter described (the "Warrants")
to purchase its Common Stock, par value $0.01 per share (the "Common Stock"),
each Warrant entitling the registered owner thereof to purchase one share of
Common Stock (each share of Common Stock purchasable upon the exercise of a
Warrant being referred to herein as a "WARRANT SHARE"); and
WHEREAS, the Company wishes the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing to act, in connection with the
issuance, transfer, exchange and exercise of the Warrants.
NOW, THEREFORE, in consideration of the foregoing and for the
purpose of defining the terms and provisions of the Warrants and the
respective rights and obligations thereunder of the Company and the
registered owners of the Warrants (the "Holders"), the Company and the
Warrant Agent hereby agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT.
The Company hereby appoints the Warrant Agent to act as agent for
the Company in accordance with the terms and conditions hereinafter set
forth, and the Warrant Agent hereby accepts such appointment.
SECTION 2. FORM OF WARRANTS.
2.1. FORM OF WARRANT CERTIFICATES. The text of the Warrant
certificate and of the form of election to purchase Warrant Shares shall be
substantially as set forth in Exhibit A attached hereto. The Warrant
certificates shall be appropriately printed, lithographed or engraved and may
have such letters, numbers or other marks of
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identification as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The price per Warrant Share
and the number of Warrant Shares issuable upon exercise of each Warrant are
subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Warrant certificates shall be executed on behalf
of the Company by its Chairman of the Board, its President or one of its Vice
Presidents under its corporate seal reproduced thereon and attested by its
Secretary or an Assistant Secretary. The signature of any of such officers
on the Warrant certificates may be manual or facsimile.
Warrant certificates bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall
bind the Company, notwithstanding that such individuals or any one of them
shall have ceased to hold such offices prior to the delivery of such Warrant
certificates or did not hold such office on the date of this Agreement.
Warrant certificates shall be dated as of the date of
countersignature thereof by the Warrant Agent either upon initial issuance or
upon exchange, substitution or transfer.
2.2. COUNTERSIGNATURE OF WARRANT CERTIFICATES. The Warrant
certificates shall be manually countersigned by the Warrant Agent (or any
successor to the Warrant Agent then acting as warrant agent under this
Agreement) and shall not be valid for any purpose unless so countersigned.
Warrant certificates may be countersigned by the Warrant Agent (or by its
successor as warrant agent hereunder) and may be delivered by the Warrant
Agent notwithstanding that the persons whose manual or facsimile signatures
appear thereon as proper officers of the Company shall have ceased to be such
officers at the time of such countersignature, issuance or delivery. The
Warrant Agent shall, upon written instructions of the Chairman of the Board,
the President, any Vice President or the Secretary of the Company,
countersign, issue and deliver Warrant certificates entitling the Holders
thereof to purchase in the aggregate Warrant Shares (subject to adjustment
pursuant to Section 11 hereof) and shall countersign and deliver Warrant
certificates as otherwise provided in this Agreement.
2.3. REGISTRATION. The Warrant certificates shall be numbered and
shall be registered in a register (the "Warrant Register") as they are
issued. The Company and the Warrant Agent shall be entitled to treat the
registered holder of any Warrant as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to
or interest in such Warrant on the part of any other person, notwithstanding
any notice to the Company or the Warrant Agent to the contrary.
SECTION 3. TRANSFER OR EXCHANGE OF WARRANTS.
3.1. TRANSFER. The Warrants shall be transferable only in the
books of the Company maintained at the office or agency of the Warrant Agent
in the City of New York upon delivery thereof duly endorsed by the Holder or
by his or her duly authorized attorney or legal representative, or
accompanied by proper evidence of succession, assignment or
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<PAGE>
authority to transfer, which endorsement shall be guaranteed by a bank or
trust company located in the United States or a broker or dealer that is a
member of a national securities exchange. In all cases of transfer by an
attorney, the original power of attorney, duly approved, or an official copy
thereof, duly certified, shall be deposited and remain with the Warrant
Agent. In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority shall
be produced, and may be required to be deposited and remain with the Warrant
Agent in its discretion. Upon any registration of transfer, the Warrant
Agent shall countersign and deliver a new Warrant certificate to the person
entitled thereto.
3.2. EXCHANGE OF WARRANT CERTIFICATES. Warrant certificates may be
exchanged for another certificate or certificates entitling the Holder
thereof to purchase a like aggregate number of Warrant Shares as the
certificate or certificates surrendered then entitle such Holder to purchase.
Any Holder desiring to exchange a Warrant certificate shall make such
request in writing delivered to the Warrant Agent, and shall surrender,
properly endorsed in the manner described in subsection 3.1 hereof, the
Warrant certificate or certificates to be so exchanged. Thereupon, the
Warrant Agent shall countersign and deliver to the person entitled thereto a
new Warrant certificate or certificates, as the case may be, as so requested.
SECTION 4. [SECTION 4 INTENTIONALLY LEFT BLANK].
SECTION 5. MUTILATED OR MISSING WARRANTS.
In case any of the certificates evidencing the Warrants shall be
mutilated, lost, stolen or destroyed, the Company may, in its discretion,
issue and the Warrant Agent shall countersign and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant certificate,
or in lieu of and substitution for the Warrant certificate lost, stolen or
destroyed, a new Warrant certificate of like tenor and representing an
equivalent right or interest, but only, in case of any such loss, theft or
destruction, upon receipt of evidence satisfactory to the Company and the
Warrant Agent thereof and an indemnity also satisfactory to them. An
applicant for such substitute Warrant certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
SECTION 6. TERM OF WARRANTS; EXERCISE OF WARRANTS.
6.1. TERM OF WARRANTS. Subject to the terms of this Agreement,
each Holder shall have the right until 5:00 P.M., New York time, on January
31, 2002 (the fifth anniversary of the Effective Date (as defined in the
POR)) (the "Expiration Date"), to purchase from the Company the number of
fully paid and nonassessable Warrant Shares which the Holder may at the time
be entitled to purchase on exercise of such Warrants.
6.2. EXERCISE OF WARRANTS. Warrant Shares may be purchased upon
surrender to the Company at the office or agency of the Warrant Agent in the
City of New York, of
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the certificate or certificates evidencing the Warrants to be exercised,
together with the form of election to purchase on the reverse thereof duly
filled in and signed, which signature shall, if the Warrant Shares are to be
issued in the name of a person other than the Holder of the Warrant, be
guaranteed by a bank or trust company located in the United States or a
broker or dealer that is a member of a national securities exchange, and upon
payment to the Warrant Agent for the account of the Company of the Exercise
Price (as defined in and determined in accordance with the provisions of
Sections 10 and 11 hereof) for the number of Warrant Shares in respect of
which such Warrants are then being exercised. Payment of the aggregate
Exercise Price shall be made by certified or cashier's check, or by any
combination thereof.
Subject to Section 8 hereof, upon such surrender of Warrants and
payment of the Exercise Price as aforesaid, the Company shall issue and cause
to be delivered, with all reasonable dispatch, to or upon the written order
of the Holder and in such name or names as the Holder may designate, a
certificate or certificates for the number of full Warrant Shares so
purchased upon the exercise of such Warrants. Such certificate or
certificates shall be deemed to have been issued and any person so designated
to be named therein shall be deemed to have become a holder of record of such
Warrant Shares as of the date of the surrender of such Warrants and payment
of the Exercise Price, as aforesaid; PROVIDED, HOWEVER, that if such Warrants
are surrendered, and the Exercise Price is paid, on a Saturday, Sunday or
other day on which banking institutions in the City of New York are
authorized or obligated by law or executive order to close, or on a day when
the Common Stock transfer books of the Company are closed, the certificates
for the Warrant Shares in respect of which such Warrants are then exercised
shall be issuable as of the next succeeding Monday, Tuesday, Wednesday,
Thursday or Friday on which such banking institutions are not so authorized
or obligated to close (whether before or after the Expiration Date) and which
is a day on which the Common Stock transfer books of the Company are open.
The rights of purchase represented by the Warrants shall be exercisable, at
the election of the Holders thereof, either in full or from time to time in
part and, in the event that a certificate evidencing Warrants is exercised in
respect of less than all of the Warrant Shares specified therein at any time
prior to the expiration of such Warrants, a new certificate evidencing the
remaining Warrant or Warrants will be issued, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrant
certificates pursuant to the provisions of this subsection and of subsection
2.2 hereof and the Company, whenever required by the Warrant Agent, will
supply the Warrant Agent with Warrant certificates duly executed on behalf of
the Company for such purpose.
SECTION 7. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
The Warrant Agent shall account promptly to the Company with
respect to the Warrants exercised and concurrently pay to the Company all
moneys received by the Warrant Agent for the purchase of the Warrant Shares
through the exercise of such Warrants.
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SECTION 8. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes, if any,
attributable to the issuance of any Warrant certificates or certificates for
Warrant Shares issuable upon the exercise of Warrants; PROVIDED, HOWEVER,
that the Company shall not be required to pay, and the Holder shall pay, any
tax or taxes that may be payable in respect of any transfer involved in the
issue or delivery of any Warrant certificates or certificates for Warrant
Shares in a name other than that of the registered Holder of the Warrants
that were surrendered and the Company shall not be required to issue or
deliver such Warrant certificates or certificates for Warrant Shares unless
or until the persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
SECTION 9. RESERVATION OF WARRANT SHARES; PURCHASE AND
CANCELLATION OF WARRANTS.
9.1. RESERVATION OF WARRANT SHARES. There have been reserved, and
the Company shall at all times keep reserved out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the right of purchase represented by the outstanding Warrants.
The Company covenants that all Warrant Shares will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable. Before taking any
action that would cause an adjustment reducing the Exercise Price below the
then par value, if any, of the shares of Common Stock issuable upon exercise
of the Warrants, the Company shall take any corporate action which may, in
the opinion of it counsel, be necessary in order that the Company may validly
and legally issue fully paid and nonassessable shares of such Common Stock,
at such adjusted Exercise Price. The Transfer Agent for the Common Stock and
every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of any of the rights of purchase aforesaid will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be requisite for such purpose. The Company will
keep a copy of this Agreement on file with the Transfer Agent for the Common
Stock and with every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Warrant Agent is hereby irrevocably
authorized to requisition from time to time from such Transfer Agent stock
certificates required to honor outstanding Warrants upon exercise thereof in
accordance with the terms of this Agreement. The Company will supply such
Transfer Agent with duly executed stock certificates for such purpose.
Promptly after the Expiration Date, the Warrant Agent shall certify to the
Company the aggregate number of Warrants then outstanding and thereafter no
shares shall be subject to reservation in respect of such Warrants.
9.2. GOVERNMENTAL APPROVALS AND LISTINGS. The Company will as
promptly as practicable take all action which may be necessary to obtain and
keep effective (a) any and all permits, consents and approvals of
governmental agencies and authorities, and will make any and all filings
under federal and state securities laws, necessary in connection with the
issuance, distribution and transfer of Warrant certificates, the exercise of
the Warrants,
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and the issuance, sale, transfer and delivery of Warrant Shares and (b) if
any of the Warrant Shares have been listed on any securities exchange, the
listing of the Warrant Shares on any securities exchange on which the Common
Stock may be listed (it being understood that the Company has no obligation
to list any Warrant Shares with any securities exchange).
9.3. PURCHASE OF WARRANTS BY THE COMPANY. The Company shall have
the right, except as limited by law, other agreement or herein, to purchase
or otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
9.4. CANCELLATION OF WARRANTS. In the event the Company shall
purchase or otherwise acquire Warrants, the related Warrant certificates
shall thereupon be delivered to the Warrant Agent and be cancelled by it and
retired. The Warrant Agent shall cancel any Warrant certificate surrendered
for exchange, substitution, transfer or exercise in whole or in part.
Warrant certificates cancelled by the Warrant Agent pursuant to any provision
of this Agreement shall be delivered to the Company or, upon the request of
the Warrant Agent and with the consent of the Company, destroyed by the
Warrant Agent. The Warrant Agent shall furnish to the Company written
confirmation of the destruction of the Warrant certificates so cancelled.
SECTION 10. EXERCISE PRICE.
The price per share at which Warrant Shares shall be purchasable
upon exercise of each Warrant (the "Exercise Price") shall be $2.38, subject
to adjustment pursuant to Section 11 hereof.
SECTION 11. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT
SHARES.
11.1. ADJUSTMENTS. The number and kind of securities purchasable
upon the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) STOCK DIVIDENDS, SPLITS, ETC. In case the Company shall at any
time after the date of this Agreement (w) pay a dividend or make a
distribution on its Common Stock which is paid or made (A) in Common Stock
or other shares of the Company's capital stock or (B) in rights to purchase
Common Stock or other capital stock of the Company if such rights are not
exercisable or separable from the Common Stock except upon the occurrence
of a contingency, (x) subdivide its outstanding Common Stock into a greater
number of shares of Common Stock, (y) combine its outstanding shares into a
smaller number of shares of Common Stock or (z) issue by reclassification
of its Common Stock other securities of the Company, then, in any such
event the number of Warrant Shares purchasable upon exercise of each
Warrant immediately prior thereto shall be adjusted so that the Holder of
each Warrant shall be entitled to receive upon exercise of such Warrant the
kind and number of shares of the Company and rights to purchase Common
Stock or other securities of the Company (or, in the event of the
redemption of any such rights, any
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cash paid in respect of such redemption) that he, she or it would have
owned or have been entitled to receive after the happening of any of the
events described above had such Warrant been exercised immediately prior
to the happening of such event or any record date with respect thereto.
An adjustment made pursuant to this paragraph (a) shall become effective
immediately after the opening of business on the next business day
following the record date in the case of dividends or other
distributions and shall become effective immediately after the opening
of business on the next business day following the effective date in the
case of a subdivision or combination.
(b) DISTRIBUTIONS OF ASSETS. In case the Company shall at any time
after the date of this Agreement distribute to all holders of its Common
Stock evidences of indebtedness of the Company or assets of the Company
(including cash dividends or distributions out of retained earnings other
than cash dividends or distributions made on a quarterly or other periodic
basis) or warrants to subscribe for securities of the Company (excluding
those referred to in paragraph (a) above), then in each case the Exercise
Price shall be adjusted to a price determined by multiplying the Exercise
Price in effect immediately prior to such distribution by a fraction, of
which the numerator shall be the then current market price per share of
Common Stock (as defined in paragraph (c) below) on the record date for
determination of shareholders entitled to receive such distribution, less
the then fair value (as determined in good faith by the Board of Directors
of the Company, whose determination shall be conclusive) of the portion of
the assets or evidences of indebtedness so distributed or of such
subscription rights or warrants which are applicable to one share of Common
Stock, and of which the denominator shall be such market price per share of
Common Stock; PROVIDED, HOWEVER, that if the then current market price per
share of Common Stock on the record date for determination of shareholders
entitled to receive such distribution is less than the then fair value of
the portion of the assets or evidences of indebtedness so distributed or of
such subscription rights or warrants which are applicable to one share of
Common Stock, the foregoing adjustment of the Exercise Price shall not be
made and in lieu thereof the Holder of each Warrant shall be entitled to
receive upon exercise of such Warrant in addition to the Common Stock the
kind and number of assets, evidences of indebtedness, subscription rights
and warrants (or, in the event of the redemption of any such evidences of
indebtedness, subscription rights and warrants, any cash paid in respect of
such redemption) that he or she would have owned or have been entitled to
receive after the happening of such distribution had such Warrant been
exercised immediately prior to the record date for such distribution. Such
adjustment shall be made successively whenever such a record date is fixed,
and in the event that such distribution is not so made, the Exercise Price
shall again be adjusted to be the Exercise Price which would then be in
effect if such record date had not been fixed.
(c) COMPUTATION OF MARKET PRICE. For the purpose of any computation
under this Agreement, the current market price per share of Common Stock at
any date shall be deemed to be the average of the daily Market Price (as
defined below)
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per share for the 30 consecutive Trading Days (as defined below)
commencing 45 Trading Days before the date in question. "Market Price"
is defined as the closing sale price (or, if no closing sale price is
reported, the closing bid price) for the Common Stock in the
over-the-counter market, as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or, if the
Common Stock is not quoted on NASDAQ, as reported by the National
Quotation Bureau Incorporated, or, if the Common Stock is not so
reported, as furnished by any two members of the National Association of
Securities Dealers, Inc., selected from time to time by the Company for
that purpose. In the event that the Common Stock is hereafter listed
for trading on one or more United States national or regional securities
exchanges, Market Price shall be the closing price on the exchange or
system designated by the Board of Directors of the Company as the
principal United States market in which the Common Stock is traded. If
Market Price cannot be established as described above, Market Price
shall be the fair market value of the Common Stock as determined in good
faith by the Board of Directors. "Trading Day" shall mean a Monday,
Tuesday, Wednesday, Thursday or Friday on which banking institutions in
the City of Los Angeles and the State of California or New York, New
York, are not authorized or obligated by law or executive order to close
or, if the Common Stock is listed or admitted to trading on a national
securities exchange, a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is
open for the transaction of business.
(d) MINIMUM ADJUSTMENT. No adjustment in the number of Warrant
Shares purchasable hereunder or the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least one per
cent (1%) in the number of Warrant Shares purchasable upon the exercise of
each Warrant, or the Exercise Price, as the case may be; PROVIDED, HOWEVER,
that any adjustments which by reason of this paragraph (d) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be
made to the nearest cent or the nearest ten-thousandth of a share, as the
case may be
(e) WARRANT SHARE ADJUSTMENT. Upon each adjustment of the Exercise
Price as a result of the calculations made in paragraph (a) or (b) above,
each Warrant outstanding immediately prior to the making of such adjustment
shall thereafter evidence the right to purchase, at the adjusted Exercise
Price, that number of shares (calculated to the nearest ten-thousandth)
obtained by (A) multiplying (x) the number of shares covered by a Warrant
immediately prior to such adjustment of the Exercise Price by (y) the
Exercise Price in effect immediately prior to such adjustment of the
Exercise Price and (ii) dividing the product so obtained by the Exercise
Price in effect immediately after such adjustment of the Exercise Price.
(f) NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of Warrants or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Company shall cause the
Warrant Agent promptly to mail by first class mail, postage prepaid, to
each Holder of a Warrant
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or Warrants notice of such adjustment or adjustments and shall deliver
to the Warrant Agent a certificate of a firm of independent public
accountants selected by the Board of Directors of the Company (who may
be the regular accountants employed by the Company) setting forth (A)
the number of Warrant Shares purchasable upon the exercise of each
Warrant and the Exercise Price of such Warrant Shares after such
adjustment, (B) a brief statement of the facts requiring such adjustment
and (C) the computation by which such adjustment was made. Such
certificate shall be conclusive evidence of the correctness of such
adjustment. The Warrant Agent shall be entitled to rely on such
certificate and shall be under no duty or responsibility with respect to
any such certificate, except to exhibit the same, from time to time, to
any Holder desiring an inspection thereof during reasonable business
hours. The Warrant Agent shall not at any time be under any duty or
responsibility to any Holders to determine whether any facts exist that
may require any adjustment of the Exercise Price or the number of
Warrant Shares or other stock or property purchasable upon exercise
thereof or with respect to the nature or extent of any such adjustment
when made, or with respect to the method employed in making such
adjustment.
(g) DEFINITION OF COMMON STOCK. For the purpose of this subsection
11.1, the term "Common Stock" shall mean (A) the class of stock designated
as the Common Stock of the Company at the date of this Agreement or (B) any
other class of stock resulting from successive changes or reclassifications
of such shares consisting solely of changes in par value, or from par value
to no par value or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holders of a Warrant or Warrants shall become entitled to
purchase any securities of the Company other than Common Stock, thereafter
the number of such other securities so purchasable upon exercise of each
Warrant and the Exercise Price of such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Warrant Shares
contained in this subsection 11.1 and the provisions of Section 6 and
subsections 11.2 and 11.3, inclusive, with respect to the Warrant Shares,
shall apply on like terms to any such other securities.
(h) COMPANY MAY REDUCE EXERCISE PRICE OR INCREASE NUMBER OF WARRANT
SHARES PURCHASABLE. The Company may, at its option, at any time during the
term of the Warrants, reduce the then current Exercise Price, or increase
the number of Common Shares purchasable upon exercise of each Warrant, to
any amount deemed appropriate by the Board of Directors of the Company.
(i) SUBSEQUENTLY ISSUED WARRANTS. All Warrants originally issued by
the Company subsequent to any adjustment made to the Exercise Price
hereunder shall evidence the right to purchase, at the adjusted Exercise
Price, the number of shares of Common Stock purchasable from time to time
hereunder upon exercise of the Warrants, all subject to further adjustment
as provided herein.
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(j) NUMBER OF WARRANT SHARES ON WARRANT CERTIFICATES. Irrespective
of any adjustment or change in the Exercise Price or the number of shares
of Common Stock issuable upon the exercise of the Warrants, the Warrant
certificates theretofore and thereafter issued may continue to express the
Exercise Price per share and the number of shares which were expressed upon
the initial Warrant certificates issued hereunder.
11.2. NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection
11.1, no adjustment in respect of any dividends made on a quarterly or other
periodic basis out of retained earnings shall be made during the term of a
Warrant or upon the exercise of a Warrant.
11.3. PRESERVATION OF PURCHASE RIGHTS AND ADJUSTMENT OF EXERCISE PRICE
UPON MERGER, CONSOLIDATION, ETC. In case the Company shall consolidate or merge
with or into any other corporation (other than a consolidation or merger in
which the Company is the surviving corporation and each share of Common Stock
outstanding immediately prior to such consolidation or merger is to remain
outstanding immediately after such consolidation or merger and no cash,
securities or other property is distributed with respect to such shares) or
shall sell or transfer all or substantially all of its assets to any
corporation, the Company or such successor or purchasing corporation, as the
case may be (collectively, the "acquiring corporation"), shall execute with the
Warrant Agent an agreement that each Holder of a Warrant shall have the right
thereafter upon payment of the Exercise Price in effect immediately prior to
such action to purchase upon exercise of each Warrant the kind and amount of
shares and other securities, cash and other property that he or she would have
owned or have been entitled to receive after the happening of such
consolidation, merger or sale had such Warrant been exercised immediately prior
to such action (assuming that such Holder, as a holder of Common Stock prior to
such action, would not have exercised any rights of election as a holder of
Common Stock as to the kind or amount of securities, cash or other property
receivable upon such consolidation, merger or sale; provided, that if the kind
or amount of securities, cash or other property receivable upon such
consolidation, merger or sale is not the same for each non-electing share of
Common Stock, then the kind and amount of securities, cash or other property
receivable shall be deemed to be the kind and amount so receivable by a
plurality of the non-electing shares). The Company shall mail by first-class
mail, postage prepaid, to each Holder, notice of the execution of any agreement
with an acquiring corporation as provided in the first sentence of this
subsection 11.3. In addition to any adjustments required by this subsection
11.3, such agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
11. The Company shall not effect any such consolidation, merger or sale unless
prior to or simultaneously with the consummation thereof the acquiring
corporation (if other than the Company) resulting from such consolidation or
merger or the acquiring corporation purchasing such assets or other appropriate
corporation or entity shall assume, by written instrument executed and delivered
to the Warrant Agent, the obligation to deliver to each Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to receive and the other obligations of the Company
under this Agreement. The provisions of this subsection 11.3 shall similarly
apply to successive consolidations, mergers,
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sales or conveyances. The Warrant Agent shall be under no duty or
responsibility to determine the correctness of any provisions contained in
any such agreement relating either to the kind or amount of shares of stock
or other securities, cash or property receivable upon exercise of Warrants or
with respect to the method employed and provided therein for any adjustments.
11.4 NO ADJUSTMENT FOR EMPLOYEE COMPENSATION AND ISSUANCES TO ALVAREZ
& MARSAL, INC. Notwithstanding anything to the contrary contained herein, no
adjustment to the Exercise Price or the number of shares of Common Stock
purchasable upon exercise of any Warrant shall be made in connection with the
issuance by the Company of any shares of Common Stock or options to purchase
Common Stock or other securities which may be convertible or exercisable into
shares of Common Stock to (i) any employee of the Company as compensation for
services rendered to the Company or (ii) Alvarez & Marsal, Inc. ("A&M") or any
of its affiliates, in connection with the management services to be provided by
A&M to the Company under that certain Management Services Agreement dated as of
January 31, 1997 between the Company, A&M, A&M Investment Associates #3, LLC,
Antonio C. Alvarez II, Cerberus Partners, L.P. and certain of A&M's employees.
SECTION 12. NO RIGHTS AS STOCKHOLDERS; NOTICES TO WARRANT HOLDERS.
(a) Nothing contained in this Agreement or in any of the Warrants
shall be construed as conferring upon the Holders or their transferees the
right to vote or to receive dividends or to consent or to receive notice as
shareholders in respect of any meeting of shareholders for the election of
directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company. If prior to the expiration of the Warrants:
(A) the Company shall declare a dividend or other distribution
on its Common Shares, other than (i) in cash as described in Section 11.2,
(ii) in other shares of Common Stock, or (iii) in rights to purchase shares
of Common Stock or other securities of the Company of the character
described in paragraph (a) of subsection 11.1; or
(B) the Company shall authorize the issuance to all holders of
its Common Stock of rights or warrants entitling them to subscribe for or
purchase any Common Stock or any other subscription rights or warrants
(other than rights of the character described in paragraph (a) of
subsection 11.1); or
(C) there shall occur a reclassification of the capital stock of
the Company (other than a subdivision or combination of its outstanding
Common Stock); or
(D) the Company shall propose to effect any consolidation or
merger into or with, or to effect any sale or other transfer requiring an
adjustment pursuant to Section 11.3; or
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(E) the Company shall take an action ("Adjustment Action") which
would cause an adjustment pursuant to Section 11 hereof of the number or
kind of Common Stock (or other securities) purchasable upon the exercise of
each Warrant or of the Exercise Price that would have the effect of
reducing the price payable for a share of the Company's capital stock by a
Holder upon exercise of a Warrant to an amount which is less than the
current value of such share; or
(F) a voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be proposed;
then, in any such event, the Company shall cause to be mailed to the Warrant
Agent and the Holders in the manner provided in Section 21 hereof, at least 20
days prior to the applicable record or effective date hereinafter specified, a
notice stating (i) the date as of which the holders of record of Common Stock to
be entitled to such dividend, distribution, rights or warrants are to be
determined, or (ii) the date on which such reclassification, Adjustment Action,
consolidation, merger, sale, transfer, dissolution, liquidation, or winding up
is expected to become effective, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their shares of
securities or other property, if any, deliverable upon such reclassification,
Adjustment Action, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Such notice shall also state whether such
transaction will result in any adjustment of the number or kind of Common Stock
(or other securities) purchasable upon the exercise of a Warrant or of the
Exercise Price and, if so, shall set forth the nature thereof and the date upon
which it will become effective. In the event the Company gives notice to the
holders of its Common Stock of the declaration or distribution of rights to
purchase Common Stock or other securities of the Company of the character
described in paragraph (a) of subsection 11.1, the Company will give
concurrently a similar notice to the Holders in the manner provided in Section
21 hereof. The failure to give the notices required by this Section 12, or any
defect therein, shall not affect the legality or validity of any such dividend,
distribution, right, warrant, reclassification, Adjustment Action, dissolution,
liquidation or winding up or other action, or the vote on any action authorizing
the same.
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SECTION 13. PURCHASE RIGHTS.
If at any time or from time to time on or after the date of the
Agreement, the Corporation shall give notice (a "Purchase Rights Notice")
pursuant to paragraph (B) of Section 12(a) of an issuance of rights or warrants,
(the "Purchase Rights") to all record holders of Common Stock, such issuance
shall not result in an adjustment of the Exercise Price or the number of
Warrants under Section 11 hereof, but each Holder shall be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such Holder could have acquired if it had held the number of shares of
Common Stock acquirable upon exercise of the Warrants immediately before the
record date for the grant, issuance, or sale of such Purchase Rights. The
Purchase Rights Notice shall describe the Purchase Rights and their availability
to the Holders.
SECTION 14. FRACTIONAL SHARES OF COMMON STOCK.
The Company will not issue fractions of Warrants or distribute Warrant
certificates which evidence fractional Warrants. In lieu of such fractional
Warrants, there shall be paid to the Holders to whom Warrant certificates
representing such fractional Warrants would otherwise be issuable an amount in
cash equal to the product of such fraction of a Warrant multiplied by the
current market price per share of Common Stock issuable with respect to such
fraction of a Warrant.
SECTION 15. RIGHT OF ACTION.
All rights of action in respect of this Agreement are vested in the
respective Holders of the Warrant certificates, and any Holder of any Warrant
certificate, without the consent of the Warrant Agent or of the Holder of any
other Warrant certificate, may, on such Holder's own behalf and for such
Holder's own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
such Holder's right to exercise the Warrants evidenced by such Warrant
certificate in the manner provided in such Warrant certificate and in this
Agreement.
SECTION 16. INSPECTION OF WARRANT AGREEMENT.
The Warrant Agent shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by the Holders during
normal business hours at its office in the City of New York for that purpose.
The Company shall supply the Warrant Agent from time to time with such numbers
of copies of this Agreement as the Warrant Agent may request.
SECTION 17. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT
AGENT.
Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the stock
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transfer or corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of
any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as successor
Warrant Agent under the provisions of Section 19 hereof. In case at the time
such successor to the Warrant Agent shall succeed to the agency created by
this Agreement any of the Warrants shall have been countersigned but not
delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrants so
countersigned; and in case at that time any of the Warrants shall not have
been countersigned, any successor to the Warrant Agent may countersign such
Warrants either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent, and in all such cases such Warrants shall
have the full force provided in the Warrants and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignatures under its prior
name and deliver Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, the Warrant Agent may countersign
such Warrants either in its prior name or in its changed name; and in all such
cases such Warrants shall have the full force provided in the Warrants and in
this Agreement.
SECTION 18. CONCERNING THE WARRANT AGENT.
The Warrant Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Company and the Holders of Warrants, by their acceptance thereof, shall be
bound:
18.1. DISCLAIMER OF REPRESENTATIONS. The statements contained
herein and in the Warrants shall be taken as statements of the Company, and
the Warrant Agent assumes no responsibility for the correctness of any of
the same except such as describe the Warrant Agent or action taken by it.
The Warrant Agent assumes no responsibility with respect to the
distribution of the Warrants except as herein otherwise provided.
18.2. NO RESPONSIBILITY FOR FAILURE OF COMPANY'S COVENANTS. The
Warrant Agent shall not be responsible for any failure of the Company to
comply with any of the covenants contained in this Agreement or in the
Warrants.
18.3. DELEGATION. The Warrant Agent may execute and exercise any
of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents (which shall not
include its employees), and the Warrant Agent shall not be answerable or
accountable for any act, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from such neglect or
misconduct provided reasonable care shall have been exercised in the
selection and continued employment thereof.
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18.4. OPINION OF COUNSEL. The Warrant Agent may consult at any
time with legal counsel satisfactory to it, and the Warrant Agent shall
incur no liability or responsibility to the Company or to any Holder in
respect of any action taken, suffered or omitted by it hereunder in good
faith and in accordance with the opinion or the advice of such counsel.
18.5. OFFICER'S CERTIFICATE. Whenever in the performance of its
duties under this Agreement the Warrant Agent shall deem it necessary or
desirable that any fact or matter be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company and delivered to
the Warrant Agent; and such certificate shall be full authorization to the
Warrant Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
18.6. COMPENSATION AND REIMBURSEMENT. The Company agrees to pay
the Warrant Agent reasonable compensation for all services rendered by the
Warrant Agent in the performance of its duties under this Agreement, to
reimburse the Warrant Agent for all expenses, taxes and governmental
charges and other charges of any kind and nature reasonably incurred by the
Warrant Agent in the performance of its duties under this Agreement, and
agrees to indemnify the Warrant Agent and save it harmless against any and
all liabilities, including judgments, costs and reasonable counsel fees,
for anything done or omitted by the Warrant Agent in the performance of its
duties under this Agreement except as a result of the Warrant Agent's gross
negligence or willful misconduct.
18.7. NO ACTION WITHOUT ASSURANCE OF REIMBURSEMENT. The Warrant
Agent shall be under no obligation to institute any action, suit or legal
proceeding or to take any other action likely to involve expense unless the
Company or one or more Holders shall furnish the Warrant Agent with
reasonable security and indemnity for any costs and expenses which may be
incurred; but this provision shall not affect the power of the Warrant
Agent to take such action as the Warrant Agent may consider proper, whether
with or without any such security or indemnity. All rights or action under
this Agreement or under any of the Warrants may be enforced by the Warrant
Agent without the possession of any of the Warrants or the production
thereof at any trial or other proceeding relative thereto, and any such
action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the Holders, as their respective rights or interests may
appear.
18.8. CONFLICTS OF INTEREST. The Warrant Agent and any
stockholder, director, officer or employee of the Warrant Agent may buy,
sell or deal in any of the Warrants or other securities of the Company or
become pecuniarily interested in any transaction in which the Company may
be interested, or contract with or lend money
15
<PAGE>
to the Company or otherwise act as fully and freely as though it were
not Warrant Agent under this Agreement. Nothing herein shall preclude
the Warrant Agent from acting in any other capacity for the Company or
for any other legal entity.
18.9. SOLELY AS AGENT. The Warrant Agent shall act hereunder
solely as agent, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything that
it may do or refrain from doing in connection with this Agreement except
for its own gross negligence or bad faith.
18.10. RELIANCE ON DOCUMENTS. The Warrant Agent will not incur any
liability or responsibility to the Company or to any Holder of any Warrant
for any action taken in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument
reasonably believed by it to be genuine and to have been signed, sent or
presented by the proper party or parties.
18.11. NO REPRESENTATION REGARDING VALIDITY, ETC. The Warrant
Agent shall not be under any responsibility in respect of the validity of
this Agreement or the execution and delivery hereof (except the due
execution and delivery hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof);
nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Warrant Shares (or other stock) to be issued pursuant to this Agreement or
any Warrant, or as to whether any Warrant Shares (or other stock) will when
issued be validly issued, fully paid and nonassessable, or as to the
Exercise Price or the number or amount of Warrant Shares or other
securities or other property issuable upon exercise of any Warrant.
18.12. INSTRUCTIONS FROM COMPANY. The Warrant Agent is hereby
authorized and directed to accept instructions with respect to the
performance of its duties hereunder from the Chairman of the Board, the
President, any Vice President, the Treasurer or the Secretary of the
Company, and to apply to such officers for advice or instructions in
connection with its duties, and shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with instructions of
any such Officers.
SECTION 19. CHANGE OF WARRANT AGENT.
The Warrant Agent may resign and be discharged from its duties
under this Agreement by giving to the Company 60 days' notice in writing.
The Warrant Agent may be removed by like notice to the Warrant Agent from the
Company. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the
Warrant Agent. If the Company shall fail to make such appointment within a
period of 50 days after such notice of removal or after it has been notified
in writing of such resignation or incapacity by the resigning or
incapacitated Warrant Agent or by any Holder (who shall with such notice
submit his Warrant for inspection by the Company), then the resigning,
discharged or removed Warrant Agent or
16
<PAGE>
any Holder may apply to any court of competent jurisdiction for the
appointment of a successor to the Warrant Agent. Any successor warrant
agent, whether appointed by the Company or such court, shall be (a) a bank or
trust company, in good standing, incorporated under the laws of the United
States of America or any state thereof and having at the time of its
appointment as warrant agent a combined capital and surplus of at least
$100,000,000, as set forth in its most recent published annual report of
condition or (b) an affiliate of a corporation described in clause (a) above.
After appointment, the successor warrant agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally
named as Warrant Agent hereunder without further act or deed; but the former
Warrant Agent shall deliver and transfer to the successor warrant agent any
property at the time held by it hereunder, and shall execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose.
Failure to file any notice provided for in this Section 19, however, or any
defect therein, shall not affect the legality or validity of the resignation
or removal of the Warrant Agent or the appointment of the successor warrant
agent, as the case may be. In the event of such resignation or removal, the
successor warrant agent shall mail, by first-class mail, postage prepaid, to
each Holder, written notice of such removal or resignation and the name and
address of such successor warrant agent.
SECTION 20. IDENTITY OF TRANSFER AGENT.
Forthwith upon the appointment of any subsequent Transfer Agent for
the Company's shares of Common Stock, or any other shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrants, the Company will file with the Warrant Agent a statement
setting forth the name and address of such Transfer Agent.
SECTION 21. NOTICES.
Any notice pursuant to this Agreement by the Company or by the Holder
of any Warrant to the Warrant Agent, or by the Warrant Agent or by the Holder of
any Warrant to the Company, shall be in writing and shall be deemed to have been
duly given if delivered or mailed by certified mail, return receipt requested,
(a) if to the Company, to WEI Acquisition Co., 19701 Hamilton Avenue, Torrance,
California 90502-1334, Attention: Henry Del Castillo and, if to the Warrant
Agent, to United States Trust Company of New York; Corporate Trust Division, 114
West 47th Street, 15th Floor, New York, NY 10036-1532; Attention: Louis Young.
Each party hereto may from time to time change the address to which notices to
it are to be delivered or mailed hereunder by notice in writing to the other
party.
Any notice mailed pursuant to this Agreement by the Company or the
Warrant Agent to the Holders of Warrants shall be in writing and shall be deemed
to have been duly given if mailed by first-class mail, postage prepaid, to such
Holders at their respective addresses on the Warrant Register of the Warrant
Agent.
17
<PAGE>
SECTION 22. SUPPLEMENTS AND AMENDMENTS.
(a) The Company and the Warrant Agent may from time to time
supplement or amend this Agreement, without the approval of any Holder in order
to cure any ambiguity or to correct or supplement any provision contained herein
that may be defective or inconsistent with any other provisions herein, or to
make any other provisions with regard to matters or questions arising hereunder
that the Company and the Warrant Agent may deem necessary or desirable and that
shall not adversely affect the interests of the Holders of Warrants.
(b) In addition to the foregoing, with the consent of Holders of
Warrants entitled, upon exercise thereof, to receive not less than two-thirds of
the shares of Common Stock issuable thereunder, the Company and the Warrant
Agent may modify this Agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement or
modifying in any manner the rights of the Holders of the Warrants; provided,
however, that no modification of the terms (including, but not limited to the
adjustments described in Section 11) upon which the Warrants are exercisable or
reducing the percentage required for consent to modification of this Agreement,
no acceleration of the Expiration Date and no increase in the Exercise Price
may, in each case, be made without the consent of the Holder of each outstanding
Warrant affected thereby.
SECTION 23. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder.
SECTION 24. MERGER OR CONSOLIDATION OF THE COMPANY.
The Company will not merge or consolidate with or into any other
corporation unless the corporation resulting from such merger or consolidation
(if not the Company) shall expressly assume, by supplemental agreement
satisfactory in form to the Warrant Agent in the exercise of its reasonable
judgment and executed and delivered to the Warrant Agent, the due and punctual
performance and observance of each and every covenant and condition of this
Agreement to be performed and observed by the Company.
SECTION 25. APPLICABLE LAW.
This Agreement and each Warrant issued hereunder shall be deemed to be
a contract made under the internal laws of the State of New York (without
preference to conflicts of law principles) and for all purposes shall be
construed in accordance with the laws of said State.
18
<PAGE>
SECTION 26. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company, the Warrant Agent and the Holders of the
Warrants any legal or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, and their respective successors and assigns hereunder, and the
holders from time to time of the Warrants.
SECTION 27. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
SECTION 28. CAPTIONS.
The captions of the Sections and subsections of this Agreement have
been inserted for convenience only and shall have no substantive effect.
SECTION 29. PLAN OF REORGANIZATION.
The Company will comply for the benefit of the Holders with
Section 8.04 of the POR.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
WEI ACQUISITION CO.
By /s/ Robert C. Davenport
----------------------------
Name: Robert C. Davenport
Title: Chief Financial Officer and Secretary
UNITED STATES TRUST COMPANY OF NEW YORK
as Warrant Agent
By /s/ Louis P. Young
----------------------------
Name: Louis P. Young
Title: Vice President
S-1
<PAGE>
TRANCHE A WARRANT TO PURCHASE COMMON STOCK VOID AFTER
5:00 P.M., NEW YORK TIME, ON JANUARY 31, 2002
WHEREHOUSE ENTERTAINMENT, INC.
This certifies that, for value received, ___________________________
or registered assigns (the "Holder"), is entitled to purchase from Wherehouse
Entertainment, Inc., a Delaware corporation (the "Company"), until 5:00 P.M.,
New York time, on January 31, 2002, or such other date as may be provided for
pursuant to the Warrant Agreement referred to below (the "Expiration Date"),
at the purchase price of $2.38 per share (the "Exercise Price"), a number of
shares of Common Stock, par value $0.01 per share, of the Company (the
"Common Stock") that is equal to the number of Warrants represented hereby.
The number of shares purchasable upon exercise of this Warrant and the
Exercise Price per share are subject to adjustment from time to time as set
forth in the Warrant Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form on the reverse
side hereof duly executed (with a signature guarantee if required by the Warrant
Agreement) and simultaneous payment of the Exercise Price (subject to
adjustment) at the office or agency of the Company maintained for that purpose
in the City of New York. Initially, United States Trust Company of New York
will act as Warrant Agent (the "Warrant Agent"). Payment of such price shall be
made at the option of the holder hereof by certified or cashier's check. No
fractional shares will be issued upon the exercise of rights to purchase
hereunder, but the Company shall pay the cash value of any such fraction upon
the exercise of one or more Warrants, all as provided in the Warrant Agreement.
Upon any partial exercise of this Warrant Certificate, there shall be
countersigned and issued to the Holder hereof a new Warrant Certificate in
respect of the shares as to which this Warrant shall not have been exercised.
This Warrant Certificate may be exchanged at the office of the Warrant Agent
maintained for that purpose in the City of New York by surrender of this Warrant
Certificate properly endorsed (with a signature guarantee if required by the
Warrant Agreement), either separately or in combination with one or more other
Warrant Certificates, for one or more new Warrant Certificates for the same
aggregate number of shares as were evidenced by the Warrant Certificate or
Warrant Certificates exchanged.
This Warrant Certificate is transferable at the office of the Warrant
Agent maintained for that purpose in the City of New York in the manner and
subject to the limitations set forth in the Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Common Stock Purchase Warrants with rights to purchase an aggregate of up to
576,000
1
<PAGE>
shares of Common Stock (subject to adjustment) and are issued under and in
accordance with a Warrant Agreement dated as of January 31, 1997, between the
Company and the Warrant Agent and are subject to the terms and provisions
contained in the Warrant Agreement, to all of which the Holder of this
Warrant Certificate by acceptance hereof consents. Copies of the Warrant
Agreement are on file at the above mentioned office of the Warrant Agent and
may be obtained for inspection by the Holder hereof upon written request to
the Warrant Agent.
The Holder hereof may be treated by the Company, the Warrant Agent,
and all other persons dealing with this Warrant Certificate as the absolute
owner hereof for any purpose and as the person entitled to exercise the rights
represented hereby, or to the transfer hereof on the books of the Company, any
notice to the contrary notwithstanding, and until such transfer on such books,
the Company, the Warrant Agent and all such other persons may treat the
registered holder hereof as the owner for all purposes.
The Warrants evidenced hereby do not entitle any Holder hereof to any
of the rights of a stockholder of the Company.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed by its duly authorized officers and the corporate seal hereunto
affixed.
Dated: WHEREHOUSE ENTERTAINMENT, INC.
By:
-----------------------------
Title:
ATTEST:
-------------------------
Name:
Title:
COUNTERSIGNED:
UNITED STATES TRUST COMPANY OF NEW YORK
WARRANT AGENT
By:
----------------------
Name:
Title:
3
<PAGE>
WHEREHOUSE ENTERTAINMENT, INC.
PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ______ shares of Common Stock, provided for therein, and requests
that certificates for such shares of Common Stock be issued in the name of:
Name:
-------------------------------------------------------
Address:
-------------------------------------------------------
- -----------------------------------------------------------------
Social Security or Taxpayer's
Identification Number:
----------------------------------------
and, if said number of shares of Common Stock shall not be all the Common Stock
purchasable thereunder, that a new Warrant Certificate for the balance remaining
of the Common Stock purchasable under the within Warrant Certificate be
registered in the name of the undersigned Warrantholder or his or her Assignee
as below indicated and delivered to the address stated below.
Name of Warrantholder
or Assignee:
-----------------------------------
Address:
-----------------------------------
Social Security or Taxpayer's
Identification Number:
-----------------------------------
Signature:
-------------------
Dated:
-------------------
Signature Guaranteed:
NOTICE: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever,
unless this Warrant has been assigned.
4
<PAGE>
ASSIGNMENT
(To be signed only upon
assignment of Warrant Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________
(Name of Assignee)
__________________________________________________________
__________________________________________________________
__________________________________________________________
(Social Security or other Taxpayer Identification Number of Assignee)
the within Warrants, hereby irrevocably constituting and appointing
_____________________________________________________ Attorney to transfer
said Warrants on the books of the Company, with full power of substitution in
the premises.
5
<PAGE>
DATED: _____________________
______________________________
Signature of Registered Holder
Signature Guaranteed:
NOTICE: The signature of this assignment must
correspond with the name as it appears
upon the face of the within Warrant
Certificate in every particular, without
alteration or enlargement or any change
whatever.
6
<PAGE>
TRANCHE B WARRANT AGREEMENT
- -------------------------------------------------------------------------------
WARRANT AGREEMENT
RELATING TO THE ISSUANCE OF THE
TRANCHE B WARRANTS
WEI ACQUISITION CO.
(which will change its name to Wherehouse Entertainment, Inc.)
and
UNITED STATES TRUST COMPANY OF NEW YORK
Dated as of January 31, 1997
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Sections Page(s)
- -------- -------
<S> <C> <C>
SECTION 1. Appointment of Warrant Agent. . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Form of Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Form of Warrant Certificates. . . . . . . . . . . . . . . . . 1
2.2. Countersignature of Warrant Certificates. . . . . . . . . . . 2
2.3. Registration. . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3. Transfer or Exchange of Warrants. . . . . . . . . . . . . . . . . . 3
3.1. Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2. Exchange of Warrant Certificates. . . . . . . . . . . . . . . 3
SECTION 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 5. Mutilated or Missing Warrants . . . . . . . . . . . . . . . . . . . 3
SECTION 6. Term of Warrants; Exercise of Warrants. . . . . . . . . . . . . . . 4
6.1. Term of Warrants. . . . . . . . . . . . . . . . . . . . . . . 4
6.2. Exercise of Warrants. . . . . . . . . . . . . . . . . . . . . 4
SECTION 7. Disposition of Proceeds on Exercise of Warrants . . . . . . . . . . 5
SECTION 8. Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 9. Reservation of Warrant Shares; Purchase and Cancellation of
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9.1. Reservation of Warrant Shares . . . . . . . . . . . . . . . . 5
9.2. Governmental Approvals and Listings . . . . . . . . . . . . . 6
9.3. Purchase of Warrants by the Company . . . . . . . . . . . . . 6
9.4. Cancellation of Warrants. . . . . . . . . . . . . . . . . . . 6
SECTION 10. Exercise Price. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 11. Adjustment of Exercise Price and Number of Warrant Shares . . . . . 6
11.1. Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . 6
(a) Stock Dividends, Splits, etc. . . . . . . . . . . . . 7
(b) Distributions of Assets . . . . . . . . . . . . . . . 7
(c) Computation of Market Price . . . . . . . . . . . . . 8
(d) Minimum Adjustment. . . . . . . . . . . . . . . . . . 8
(e) Warrant Share Adjustment. . . . . . . . . . . . . . . 9
(f) Notice of Adjustment. . . . . . . . . . . . . . . . . 9
(g) Definition of Common Stock. . . . . . . . . . . . . . 9
i
<PAGE>
(h) Company May Reduce Exercise Price or Increase Number
of Warrant Shares Purchasable . . . . . . . . . . . . 10
(i) Subsequently Issued Warrants. . . . . . . . . . . . . 10
(j) Number of Warrant Shares on Warrant Certificates. . . 10
11.2. No Adjustment for Dividends . . . . . . . . . . . . . . . . 10
11.3. Preservation of Purchase Rights and Adjustment of Exercise
Price upon Merger, Consolidation, etc. . . . . . . . . . . 10
SECTION 12. No Rights as Stockholders; Notices to Warrant Holders . . . . . . . 12
SECTION 13. Purchase Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 14. FRACTIONAL SHARES OF COMMON STOCK . . . . . . . . . . . . . . . . . 13
SECTION 15. Right of Action . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 16. Inspection of Warrant Agreement . . . . . . . . . . . . . . . . . . 14
SECTION 17. Merger or Consolidation or Change of Name of Warrant Agent. . . . . 14
SECTION 18. Concerning the Warrant Agent. . . . . . . . . . . . . . . . . . . . 14
18.1. Disclaimer of Representations . . . . . . . . . . . . . . 15
18.2. No Responsibility for Failure of Company's Covenants. . . 15
18.3. Delegation. . . . . . . . . . . . . . . . . . . . . . . . 15
18.4. Opinion of Counsel. . . . . . . . . . . . . . . . . . . . 15
18.5. Officer's Certificate . . . . . . . . . . . . . . . . . . 15
18.6. Compensation and Reimbursement. . . . . . . . . . . . . . 15
18.7. No Action Without Assurance of Reimbursement. . . . . . . 16
18.8. Conflicts of Interest . . . . . . . . . . . . . . . . . . 16
18.9. Solely as Agent . . . . . . . . . . . . . . . . . . . . . 16
18.10. Reliance on Documents . . . . . . . . . . . . . . . . . . 16
18.11. No Representation Regarding Validity, Etc.. . . . . . . . 17
18.12. Instructions from Company . . . . . . . . . . . . . . . . 17
SECTION 19. Change of Warrant Agent . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 20. Identity of Transfer Agent. . . . . . . . . . . . . . . . . . . . . 18
SECTION 21. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ii
<PAGE>
SECTION 22. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . 18
SECTION 23. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 24. Merger or Consolidation of the Company. . . . . . . . . . . . . . . 19
SECTION 25. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 26. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . 19
SECTION 27. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 28. Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 29. Plan of Reorganization. . . . . . . . . . . . . . . . . . . . . . . 20
EXHIBIT A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
PURCHASE FORM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
</TABLE>
iii
<PAGE>
WARRANT AGREEMENT relating to the issuance of the Tranche B Warrants,
dated as of January 31, 1997, between WEI ACQUISITION CO. (which will change
its name to Wherehouse Entertainment, Inc.), a Delaware corporation (the
"Company"), and UNITED STATES TRUST COMPANY OF NEW YORK, as Warrant Agent
(the "Warrant Agent").
WITNESSETH:
WHEREAS, pursuant to the Debtors' First Amended Chapter 11 Plan, as
Revised for Technical Corrections dated October 4, 1996 and Supplemental
Amendments on December 2, 1996 and December 13, 1996 (the "POR") and an Asset
Purchase Agreement dated as of January 31, 1997 (the "ASSET PURCHASE
AGREEMENT"), the Company will acquire substantially all of the assets of
Wherehouse Entertainment, Inc., and its parent, WEI Holdings, Inc., which
companies are debtors and debtors-in-possession (collectively, the
"DEBTORS"), in Case No. 95-911 (HSB) (Jointly Administered) (the "BANKRUPTCY
CASE") in the Bankruptcy Court for the District of Delaware (the "BANKRUPTCY
COURT");
WHEREAS, as part of the purchase price for the assets of the Debtors
to be acquired by the Company, the Company proposes to issue up to 100,000
Common Stock Purchase Warrants hereinafter described (the "Warrants") to
purchase its Common Stock, par value $0.01 per share (the "Common Stock"), each
Warrant entitling the registered owner thereof to purchase one share of Common
Stock (each share of Common Stock purchasable upon the exercise of a Warrant
being referred to herein as a "WARRANT SHARE"); and
WHEREAS, the Company wishes the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to act, in connection with the
issuance, transfer, exchange and exercise of the Warrants.
NOW, THEREFORE, in consideration of the foregoing and for the purpose
of defining the terms and provisions of the Warrants and the respective rights
and obligations thereunder of the Company and the registered owners of the
Warrants (the "Holders"), the Company and the Warrant Agent hereby agree as
follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT.
The Company hereby appoints the Warrant Agent to act as agent for the
Company in accordance with the terms and conditions hereinafter set forth, and
the Warrant Agent hereby accepts such appointment.
SECTION 2. FORM OF WARRANTS.
2.1. FORM OF WARRANT CERTIFICATES. The text of the Warrant
certificate and of the form of election to purchase Warrant Shares shall be
substantially as set forth in Exhibit A attached hereto. The Warrant
certificates shall be appropriately
<PAGE>
printed, lithographed or engraved and may have such letters, numbers or other
marks of identification as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The price per Warrant Share
and the number of Warrant Shares issuable upon exercise of each Warrant are
subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Warrant certificates shall be executed on behalf
of the Company by its Chairman of the Board, its President or one of its Vice
Presidents under its corporate seal reproduced thereon and attested by its
Secretary or an Assistant Secretary. The signature of any of such officers
on the Warrant certificates may be manual or facsimile.
Warrant certificates bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall
bind the Company, notwithstanding that such individuals or any one of them
shall have ceased to hold such offices prior to the delivery of such Warrant
certificates or did not hold such office on the date of this Agreement.
Warrant certificates shall be dated as of the date of countersignature
thereof by the Warrant Agent either upon initial issuance or upon exchange,
substitution or transfer.
2.2. COUNTERSIGNATURE OF WARRANT CERTIFICATES. The Warrant
certificates shall be manually countersigned by the Warrant Agent (or any
successor to the Warrant Agent then acting as warrant agent under this
Agreement) and shall not be valid for any purpose unless so countersigned.
Warrant certificates may be countersigned by the Warrant Agent (or by its
successor as warrant agent hereunder) and may be delivered by the Warrant Agent
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature, issuance or delivery. The Warrant Agent
shall, upon written instructions of the Chairman of the Board, the President,
any Vice President or the Secretary of the Company, countersign, issue and
deliver Warrant certificates entitling the Holders thereof to purchase in the
aggregate Warrant Shares (subject to adjustment pursuant to Section 11 hereof)
and shall countersign and deliver Warrant certificates as otherwise provided in
this Agreement.
2.3. REGISTRATION. The Warrant certificates shall be numbered and
shall be registered in a register (the "Warrant Register") as they are issued.
The Company and the Warrant Agent shall be entitled to treat the registered
holder of any Warrant as the owner in fact thereof for all purposes and shall
not be bound to recognize any equitable or other claim to or interest in such
Warrant on the part of any other person, notwithstanding any notice to the
Company or the Warrant Agent to the contrary.
2
<PAGE>
SECTION 3. TRANSFER OR EXCHANGE OF WARRANTS.
3.1. TRANSFER. The Warrants shall be transferable only in the books
of the Company maintained at the office or agency of the Warrant Agent in the
City of New York upon delivery thereof duly endorsed by the Holder or by his or
her duly authorized attorney or legal representative, or accompanied by proper
evidence of succession, assignment or authority to transfer, which endorsement
shall be guaranteed by a bank or trust company located in the United States or a
broker or dealer that is a member of a national securities exchange. In all
cases of transfer by an attorney, the original power of attorney, duly approved,
or an official copy thereof, duly certified, shall be deposited and remain with
the Warrant Agent. In case of transfer by executors, administrators, guardians
or other legal representatives, duly authenticated evidence of their authority
shall be produced, and may be required to be deposited and remain with the
Warrant Agent in its discretion. Upon any registration of transfer, the Warrant
Agent shall countersign and deliver a new Warrant certificate to the person
entitled thereto.
3.2. EXCHANGE OF WARRANT CERTIFICATES. Warrant certificates may be
exchanged for another certificate or certificates entitling the Holder thereof
to purchase a like aggregate number of Warrant Shares as the certificate or
certificates surrendered then entitle such Holder to purchase. Any Holder
desiring to exchange a Warrant certificate shall make such request in writing
delivered to the Warrant Agent, and shall surrender, properly endorsed in the
manner described in subsection 3.1 hereof, the Warrant certificate or
certificates to be so exchanged. Thereupon, the Warrant Agent shall countersign
and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
SECTION 4. [SECTION 4 INTENTIONALLY LEFT BLANK].
SECTION 5. MUTILATED OR MISSING WARRANTS.
In case any of the certificates evidencing the Warrants shall be
mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue
and the Warrant Agent shall countersign and deliver in exchange and substitution
for and upon cancellation of the mutilated Warrant certificate, or in lieu of
and substitution for the Warrant certificate lost, stolen or destroyed, a new
Warrant certificate of like tenor and representing an equivalent right or
interest, but only, in case of any such loss, theft or destruction, upon receipt
of evidence satisfactory to the Company and the Warrant Agent thereof and an
indemnity also satisfactory to them. An applicant for such substitute Warrant
certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company or the Warrant Agent may prescribe.
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SECTION 6. TERM OF WARRANTS; EXERCISE OF WARRANTS.
6.1. TERM OF WARRANTS. Subject to the terms of this Agreement, each
Holder shall have the right until 5:00 P.M., New York time, on January 31, 2004
(the seventh anniversary of the Effective Date (as defined in the POR)) (the
"Expiration Date"), to purchase from the Company the number of fully paid and
nonassessable Warrant Shares which the Holder may at the time be entitled to
purchase on exercise of such Warrants.
6.2. EXERCISE OF WARRANTS. Warrant Shares may be purchased upon
surrender to the Company at the office or agency of the Warrant Agent in the
City of New York, of the certificate or certificates evidencing the Warrants to
be exercised, together with the form of election to purchase on the reverse
thereof duly filled in and signed, which signature shall, if the Warrant Shares
are to be issued in the name of a person other than the Holder of the Warrant,
be guaranteed by a bank or trust company located in the United States or a
broker or dealer that is a member of a national securities exchange, and upon
payment to the Warrant Agent for the account of the Company of the Exercise
Price (as defined in and determined in accordance with the provisions of
Sections 10 and 11 hereof) for the number of Warrant Shares in respect of which
such Warrants are then being exercised. Payment of the aggregate Exercise Price
shall be made by certified or cashier's check, or by any combination thereof.
Subject to Section 8 hereof, upon such surrender of Warrants and
payment of the Exercise Price as aforesaid, the Company shall issue and cause to
be delivered, with all reasonable dispatch, to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate or
certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants. Such certificate or certificates shall be deemed to
have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the Exercise Price, as
aforesaid; PROVIDED, HOWEVER, that if such Warrants are surrendered, and the
Exercise Price is paid, on a Saturday, Sunday or other day on which banking
institutions in the City of New York are authorized or obligated by law or
executive order to close, or on a day when the Common Stock transfer books of
the Company are closed, the certificates for the Warrant Shares in respect of
which such Warrants are then exercised shall be issuable as of the next
succeeding Monday, Tuesday, Wednesday, Thursday or Friday on which such banking
institutions are not so authorized or obligated to close (whether before or
after the Expiration Date) and which is a day on which the Common Stock transfer
books of the Company are open. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the Holders thereof, either in
full or from time to time in part and, in the event that a certificate
evidencing Warrants is exercised in respect of less than all of the Warrant
Shares specified therein at any time prior to the expiration of such Warrants, a
new certificate evidencing the remaining Warrant or Warrants will be issued, and
the Warrant Agent is hereby irrevocably authorized to countersign and to deliver
the required new Warrant certificates pursuant to the provisions of this
subsection and of subsection 2.2
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hereof and the Company, whenever required by the Warrant Agent, will supply
the Warrant Agent with Warrant certificates duly executed on behalf of the
Company for such purpose.
SECTION 7. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
The Warrant Agent shall account promptly to the Company with respect
to the Warrants exercised and concurrently pay to the Company all moneys
received by the Warrant Agent for the purchase of the Warrant Shares through the
exercise of such Warrants.
SECTION 8. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes, if any, attributable
to the issuance of any Warrant certificates or certificates for Warrant Shares
issuable upon the exercise of Warrants; PROVIDED, HOWEVER, that the Company
shall not be required to pay, and the Holder shall pay, any tax or taxes that
may be payable in respect of any transfer involved in the issue or delivery of
any Warrant certificates or certificates for Warrant Shares in a name other than
that of the registered Holder of the Warrants that were surrendered and the
Company shall not be required to issue or deliver such Warrant certificates or
certificates for Warrant Shares unless or until the persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
SECTION 9. RESERVATION OF WARRANT SHARES; PURCHASE AND
CANCELLATION OF WARRANTS.
9.1. RESERVATION OF WARRANT SHARES. There have been reserved, and the
Company shall at all times keep reserved out of its authorized Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of the
right of purchase represented by the outstanding Warrants. The Company
covenants that all Warrant Shares will, upon issuance, be duly authorized,
validly issued, fully paid and nonassessable. Before taking any action that
would cause an adjustment reducing the Exercise Price below the then par value,
if any, of the shares of Common Stock issuable upon exercise of the Warrants,
the Company shall take any corporate action which may, in the opinion of it
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable shares of such Common Stock, at such adjusted
Exercise Price. The Transfer Agent for the Common Stock and every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of any of the rights of purchase aforesaid will be irrevocably
authorized and directed at all times to reserve such number of authorized shares
as shall be requisite for such purpose. The Company will keep a copy of this
Agreement on file with the Transfer Agent for the Common Stock and with every
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of the rights of
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purchase represented by the Warrants. The Warrant Agent is hereby
irrevocably authorized to requisition from time to time from such Transfer
Agent stock certificates required to honor outstanding Warrants upon exercise
thereof in accordance with the terms of this Agreement. The Company will
supply such Transfer Agent with duly executed stock certificates for such
purpose. Promptly after the Expiration Date, the Warrant Agent shall certify
to the Company the aggregate number of Warrants then outstanding and
thereafter no shares shall be subject to reservation in respect of such
Warrants.
9.2. GOVERNMENTAL APPROVALS AND LISTINGS. The Company will as
promptly as practicable take all action which may be necessary to obtain and
keep effective (a) any and all permits, consents and approvals of governmental
agencies and authorities, and will make any and all filings under federal and
state securities laws, necessary in connection with the issuance, distribution
and transfer of Warrant certificates, the exercise of the Warrants, and the
issuance, sale, transfer and delivery of Warrant Shares and (b) if any of the
Warrant Shares have been listed on any securities exchange, the listing of the
Warrant Shares on any securities exchange on which the Common Stock may be
listed (it being understood that the Company has no obligation to list any
Warrant Shares with any securities exchange).
9.3. PURCHASE OF WARRANTS BY THE COMPANY. The Company shall have the
right, except as limited by law, other agreement or herein, to purchase or
otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
9.4. CANCELLATION OF WARRANTS. In the event the Company shall
purchase or otherwise acquire Warrants, the related Warrant certificates shall
thereupon be delivered to the Warrant Agent and be cancelled by it and retired.
The Warrant Agent shall cancel any Warrant certificate surrendered for exchange,
substitution, transfer or exercise in whole or in part. Warrant certificates
cancelled by the Warrant Agent pursuant to any provision of this Agreement shall
be delivered to the Company or, upon the request of the Warrant Agent and with
the consent of the Company, destroyed by the Warrant Agent. The Warrant Agent
shall furnish to the Company written confirmation of the destruction of the
Warrant certificates so cancelled.
SECTION 10. EXERCISE PRICE.
The price per share at which Warrant Shares shall be purchasable upon
exercise of each Warrant (the "Exercise Price") shall be $9.00, subject to
adjustment pursuant to Section 11 hereof.
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SECTION 11. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT
SHARES.
11.1. ADJUSTMENTS. The number and kind of securities purchasable
upon the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) STOCK DIVIDENDS, SPLITS, ETC. In case the Company shall at any
time after the date of this Agreement (w) pay a dividend or make a
distribution on its Common Stock which is paid or made (A) in Common Stock
or other shares of the Company's capital stock or (B) in rights to purchase
Common Stock or other capital stock of the Company if such rights are not
exercisable or separable from the Common Stock except upon the occurrence
of a contingency, (x) subdivide its outstanding Common Stock into a greater
number of shares of Common Stock, (y) combine its outstanding shares into a
smaller number of shares of Common Stock or (z) issue by reclassification
of its Common Stock other securities of the Company, then, in any such
event the number of Warrant Shares purchasable upon exercise of each
Warrant immediately prior thereto shall be adjusted so that the Holder of
each Warrant shall be entitled to receive upon exercise of such Warrant the
kind and number of shares of the Company and rights to purchase Common
Stock or other securities of the Company (or, in the event of the
redemption of any such rights, any cash paid in respect of such redemption)
that he, she or it would have owned or have been entitled to receive after
the happening of any of the events described above had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the opening of business on the
next business day following the record date in the case of dividends or
other distributions and shall become effective immediately after the
opening of business on the next business day following the effective date
in the case of a subdivision or combination.
(b) DISTRIBUTIONS OF ASSETS. In case the Company shall at any time
after the date of this Agreement distribute to all holders of its Common
Stock evidences of indebtedness of the Company or assets of the Company
(including cash dividends or distributions out of retained earnings other
than cash dividends or distributions made on a quarterly or other periodic
basis) or warrants to subscribe for securities of the Company (excluding
those referred to in paragraph (a) above), then in each case the Exercise
Price shall be adjusted to a price determined by multiplying the Exercise
Price in effect immediately prior to such distribution by a fraction, of
which the numerator shall be the then current market price per share of
Common Stock (as defined in
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paragraph (c) below) on the record date for determination of
shareholders entitled to receive such distribution, less the then fair
value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be conclusive) of the portion of the
assets or evidences of indebtedness so distributed or of such
subscription rights or warrants which are applicable to one share of
Common Stock, and of which the denominator shall be such market price
per share of Common Stock; PROVIDED, HOWEVER, that if the then current
market price per share of Common Stock on the record date for
determination of shareholders entitled to receive such distribution is
less than the then fair value of the portion of the assets or evidences
of indebtedness so distributed or of such subscription rights or
warrants which are applicable to one share of Common Stock, the
foregoing adjustment of the Exercise Price shall not be made and in lieu
thereof the Holder of each Warrant shall be entitled to receive upon
exercise of such Warrant in addition to the Common Stock the kind and
number of assets, evidences of indebtedness, subscription rights and
warrants (or, in the event of the redemption of any such evidences of
indebtedness, subscription rights and warrants, any cash paid in respect
of such redemption) that he or she would have owned or have been
entitled to receive after the happening of such distribution had such
Warrant been exercised immediately prior to the record date for such
distribution. Such adjustment shall be made successively whenever such
a record date is fixed, and in the event that such distribution is not
so made, the Exercise Price shall again be adjusted to be the Exercise
Price which would then be in effect if such record date had not been
fixed.
(c) COMPUTATION OF MARKET PRICE. For the purpose of any computation
under this Agreement, the current market price per share of Common Stock at
any date shall be deemed to be the average of the daily Market Price (as
defined below) per share for the 30 consecutive Trading Days (as defined
below) commencing 45 Trading Days before the date in question. "Market
Price" is defined as the closing sale price (or, if no closing sale price
is reported, the closing bid price) for the Common Stock in the over-the-
counter market, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or, if the Common Stock is
not quoted on NASDAQ, as reported by the National Quotation Bureau
Incorporated, or, if the Common Stock is not so reported, as furnished by
any two members of the National Association of Securities Dealers, Inc.,
selected from time to time by the Company for that purpose. In the event
that the Common Stock is hereafter listed for trading on one or more United
States national or regional securities exchanges, Market Price shall be the
closing price on the exchange or system designated by the Board of
Directors of the Company as the principal
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United States market in which the Common Stock is traded. If Market
Price cannot be established as described above, Market Price shall be
the fair market value of the Common Stock as determined in good faith by
the Board of Directors. "Trading Day" shall mean a Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the City
of Los Angeles and the State of California or New York, New York, are
not authorized or obligated by law or executive order to close or, if
the Common Stock is listed or admitted to trading on a national
securities exchange, a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is
open for the transaction of business.
(d) MINIMUM ADJUSTMENT. No adjustment in the number of Warrant
Shares purchasable hereunder or the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least one per
cent (1%) in the number of Warrant Shares purchasable upon the exercise of
each Warrant, or the Exercise Price, as the case may be; PROVIDED, HOWEVER,
that any adjustments which by reason of this paragraph (d) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be
made to the nearest cent or the nearest ten-thousandth of a share, as the
case may be
(e) WARRANT SHARE ADJUSTMENT. Upon each adjustment of the Exercise
Price as a result of the calculations made in paragraph (a) or (b) above,
each Warrant outstanding immediately prior to the making of such adjustment
shall thereafter evidence the right to purchase, at the adjusted Exercise
Price, that number of shares (calculated to the nearest ten-thousandth)
obtained by (A) multiplying (x) the number of shares covered by a Warrant
immediately prior to such adjustment of the Exercise Price by (y) the
Exercise Price in effect immediately prior to such adjustment of the
Exercise Price and (ii) dividing the product so obtained by the Exercise
Price in effect immediately after such adjustment of the Exercise Price.
(f) NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of Warrants or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Company shall cause the
Warrant Agent promptly to mail by first class mail, postage prepaid, to
each Holder of a Warrant or Warrants notice of such adjustment or
adjustments and shall deliver to the Warrant Agent a certificate of a firm
of independent public accountants selected by the Board of Directors of the
Company (who may be the regular accountants employed by the Company)
setting forth (A) the number of Warrant Shares purchasable upon the
exercise
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of each Warrant and the Exercise Price of such Warrant Shares after such
adjustment, (B) a brief statement of the facts requiring such adjustment
and (C) the computation by which such adjustment was made. Such
certificate shall be conclusive evidence of the correctness of such
adjustment. The Warrant Agent shall be entitled to rely on such
certificate and shall be under no duty or responsibility with respect to
any such certificate, except to exhibit the same, from time to time, to
any Holder desiring an inspection thereof during reasonable business
hours. The Warrant Agent shall not at any time be under any duty or
responsibility to any Holders to determine whether any facts exist that
may require any adjustment of the Exercise Price or the number of
Warrant Shares or other stock or property purchasable upon exercise
thereof or with respect to the nature or extent of any such adjustment
when made, or with respect to the method employed in making such
adjustment.
(g) DEFINITION OF COMMON STOCK. For the purpose of this subsection
11.1, the term "Common Stock" shall mean (A) the class of stock designated
as the Common Stock of the Company at the date of this Agreement or (B) any
other class of stock resulting from successive changes or reclassifications
of such shares consisting solely of changes in par value, or from par value
to no par value or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holders of a Warrant or Warrants shall become entitled to
purchase any securities of the Company other than Common Stock, thereafter
the number of such other securities so purchasable upon exercise of each
Warrant and the Exercise Price of such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Warrant Shares
contained in this subsection 11.1 and the provisions of Section 6 and
subsections 11.2 and 11.3, inclusive, with respect to the Warrant Shares,
shall apply on like terms to any such other securities.
(h) COMPANY MAY REDUCE EXERCISE PRICE OR INCREASE NUMBER OF WARRANT
SHARES PURCHASABLE. The Company may, at its option, at any time during the
term of the Warrants, reduce the then current Exercise Price, or increase
the number of Common Shares purchasable upon exercise of each Warrant, to
any amount deemed appropriate by the Board of Directors of the Company.
(i) SUBSEQUENTLY ISSUED WARRANTS. All Warrants originally issued by
the Company subsequent to any adjustment made to the Exercise Price
hereunder shall evidence the right to purchase, at the adjusted Exercise
Price, the number of shares of Common Stock
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purchasable from time to time hereunder upon exercise of the Warrants,
all subject to further adjustment as provided herein.
(j) NUMBER OF WARRANT SHARES ON WARRANT CERTIFICATES. Irrespective
of any adjustment or change in the Exercise Price or the number of shares
of Common Stock issuable upon the exercise of the Warrants, the Warrant
certificates theretofore and thereafter issued may continue to express the
Exercise Price per share and the number of shares which were expressed upon
the initial Warrant certificates issued hereunder.
11.2. NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection
11.1, no adjustment in respect of any dividends made on a quarterly or other
periodic basis out of retained earnings shall be made during the term of a
Warrant or upon the exercise of a Warrant.
11.3. PRESERVATION OF PURCHASE RIGHTS AND ADJUSTMENT OF EXERCISE PRICE
UPON MERGER, CONSOLIDATION, ETC. In case the Company shall consolidate or merge
with or into any other corporation (other than a consolidation or merger in
which the Company is the surviving corporation and each share of Common Stock
outstanding immediately prior to such consolidation or merger is to remain
outstanding immediately after such consolidation or merger and no cash,
securities or other property is distributed with respect to such shares) or
shall sell or transfer all or substantially all of its assets to any
corporation, the Company or such successor or purchasing corporation, as the
case may be (collectively, the "acquiring corporation"), shall execute with the
Warrant Agent an agreement that each Holder of a Warrant shall have the right
thereafter upon payment of the Exercise Price in effect immediately prior to
such action to purchase upon exercise of each Warrant the kind and amount of
shares and other securities, cash and other property that he or she would have
owned or have been entitled to receive after the happening of such
consolidation, merger or sale had such Warrant been exercised immediately prior
to such action (assuming that such Holder, as a holder of Common Stock prior to
such action, would not have exercised any rights of election as a holder of
Common Stock as to the kind or amount of securities, cash or other property
receivable upon such consolidation, merger or sale; provided, that if the kind
or amount of securities, cash or other property receivable upon such
consolidation, merger or sale is not the same for each non-electing share of
Common Stock, then the kind and amount of securities, cash or other property
receivable shall be deemed to be the kind and amount so receivable by a
plurality of the non-electing shares). The Company shall mail by first-class
mail, postage prepaid, to each Holder, notice of the execution of any agreement
with an acquiring corporation as provided in the first sentence of this
subsection 11.3. In addition to any adjustments required by this subsection
11.3, such agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
11. The Company shall not effect any such consolidation, merger or sale unless
prior to or simultaneously with the consummation thereof the acquiring
corporation (if other than the Company) resulting from such consolidation or
merger or the acquiring corporation
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purchasing such assets or other appropriate corporation or entity shall
assume, by written instrument executed and delivered to the Warrant Agent,
the obligation to deliver to each Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such Holder may be
entitled to receive and the other obligations of the Company under this
Agreement. The provisions of this subsection 11.3 shall similarly apply to
successive consolidations, mergers, sales or conveyances. The Warrant Agent
shall be under no duty or responsibility to determine the correctness of any
provisions contained in any such agreement relating either to the kind or
amount of shares of stock or other securities, cash or property receivable
upon exercise of Warrants or with respect to the method employed and provided
therein for any adjustments.
11.4 NO ADJUSTMENT FOR EMPLOYEE COMPENSATION AND ISSUANCES TO ALVAREZ
& MARSAL, INC. Notwithstanding anything to the contrary contained herein, no
adjustment to the Exercise Price or the number of shares of Common Stock
purchasable upon exercise of any Warrant shall be made in connection with the
issuance by the Company of any shares of Common Stock or options to purchase
Common Stock or other securities which may be convertible or exercisable into
shares of Common Stock to (i) any employee of the Company as compensation for
services rendered to the Company or (ii) Alvarez & Marsal, Inc. ("A&M") or any
of its affiliates, in connection with the management services to be provided by
A&M to the Company under that certain Management Services Agreement dated as of
January 31, 1997 between the Company, A&M, A&M Investment Associates #3, LLC,
Antonio C. Alvarez II, Cerberus Partners, L.P. and certain of A&M's employees.
SECTION 12. NO RIGHTS AS STOCKHOLDERS; NOTICES TO WARRANT HOLDERS.
(a) Nothing contained in this Agreement or in any of the Warrants
shall be construed as conferring upon the Holders or their transferees the
right to vote or to receive dividends or to consent or to receive notice as
shareholders in respect of any meeting of shareholders for the election of
directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company. If prior to the expiration of the Warrants:
(A) the Company shall declare a dividend or other distribution
on its Common Shares, other than (i) in cash as described in Section 11.2,
(ii) in other shares of Common Stock, or (iii) in rights to purchase shares
of Common Stock or other securities of the Company of the character
described in paragraph (a) of subsection 11.1; or
(B) the Company shall authorize the issuance to all holders of
its Common Stock of rights or warrants entitling them to subscribe for or
purchase any Common Stock or any other subscription
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rights or warrants (other than rights of the character described in
paragraph (a) of subsection 11.1); or
(C) there shall occur a reclassification of the capital stock of
the Company (other than a subdivision or combination of its outstanding
Common Stock); or
(D) the Company shall propose to effect any consolidation or
merger into or with, or to effect any sale or other transfer requiring an
adjustment pursuant to Section 11.3; or
(E) the Company shall take an action ("Adjustment Action") which
would cause an adjustment pursuant to Section 11 hereof of the number or
kind of Common Stock (or other securities) purchasable upon the exercise of
each Warrant or of the Exercise Price that would have the effect of
reducing the price payable for a share of the Company's capital stock by a
Holder upon exercise of a Warrant to an amount which is less than the
current value of such share; or
(F) a voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be proposed;
then, in any such event, the Company shall cause to be mailed to the Warrant
Agent and the Holders in the manner provided in Section 21 hereof, at least 20
days prior to the applicable record or effective date hereinafter specified, a
notice stating (i) the date as of which the holders of record of Common Stock to
be entitled to such dividend, distribution, rights or warrants are to be
determined, or (ii) the date on which such reclassification, Adjustment Action,
consolidation, merger, sale, transfer, dissolution, liquidation, or winding up
is expected to become effective, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their shares of
securities or other property, if any, deliverable upon such reclassification,
Adjustment Action, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Such notice shall also state whether such
transaction will result in any adjustment of the number or kind of Common Stock
(or other securities) purchasable upon the exercise of a Warrant or of the
Exercise Price and, if so, shall set forth the nature thereof and the date upon
which it will become effective. In the event the Company gives notice to the
holders of its Common Stock of the declaration or distribution of rights to
purchase Common Stock or other securities of the Company of the character
described in paragraph (a) of subsection 11.1, the Company will give
concurrently a similar notice to the Holders in the manner provided in Section
21 hereof. The failure to give the notices required by this Section 12, or any
defect therein, shall not affect the legality or validity of any such dividend,
distribution, right, warrant, reclassification, Adjustment Action, dissolution,
liquidation or winding up or other action, or the vote on any action authorizing
the same.
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SECTION 13. PURCHASE RIGHTS.
If at any time or from time to time on or after the date of the
Agreement, the Corporation shall give notice (a "Purchase Rights Notice")
pursuant to paragraph (B) of Section 12(a) of an issuance of rights or warrants,
(the "Purchase Rights") to all record holders of Common Stock, such issuance
shall not result in an adjustment of the Exercise Price or the number of
Warrants under Section 11 hereof, but each Holder shall be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such Holder could have acquired if it had held the number of shares of
Common Stock acquirable upon exercise of the Warrants immediately before the
record date for the grant, issuance, or sale of such Purchase Rights. The
Purchase Rights Notice shall describe the Purchase Rights and their availability
to the Holders.
SECTION 14. FRACTIONAL SHARES OF COMMON STOCK.
The Company will not issue fractions of Warrants or distribute Warrant
certificates which evidence fractional Warrants. In lieu of such fractional
Warrants, there shall be paid to the Holders to whom Warrant certificates
representing such fractional Warrants would otherwise be issuable an amount in
cash equal to the product of such fraction of a Warrant multiplied by the
current market price per share of Common Stock issuable with respect to such
fraction of a Warrant.
SECTION 15. RIGHT OF ACTION.
All rights of action in respect of this Agreement are vested in the
respective Holders of the Warrant certificates, and any Holder of any Warrant
certificate, without the consent of the Warrant Agent or of the Holder of any
other Warrant certificate, may, on such Holder's own behalf and for such
Holder's own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
such Holder's right to exercise the Warrants evidenced by such Warrant
certificate in the manner provided in such Warrant certificate and in this
Agreement.
SECTION 16. INSPECTION OF WARRANT AGREEMENT.
The Warrant Agent shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by the Holders during
normal business hours at its office in the City of New York for that purpose.
The Company shall supply the Warrant Agent from time to time with such numbers
of copies of this Agreement as the Warrant Agent may request.
14
<PAGE>
SECTION 17. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT
AGENT.
Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the stock transfer or corporate trust business of the Warrant
Agent, shall be the successor to the Warrant Agent hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as successor Warrant Agent under the provisions of Section 19 hereof. In case
at the time such successor to the Warrant Agent shall succeed to the agency
created by this Agreement any of the Warrants shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrants so
countersigned; and in case at that time any of the Warrants shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrants
either in the name of the predecessor Warrant Agent or in the name of the
successor Warrant Agent, and in all such cases such Warrants shall have the full
force provided in the Warrants and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignatures under its prior
name and deliver Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, the Warrant Agent may countersign
such Warrants either in its prior name or in its changed name; and in all such
cases such Warrants shall have the full force provided in the Warrants and in
this Agreement.
SECTION 18. CONCERNING THE WARRANT AGENT.
The Warrant Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Company and the Holders of Warrants, by their acceptance thereof, shall be
bound:
18.1. DISCLAIMER OF REPRESENTATIONS. The statements contained
herein and in the Warrants shall be taken as statements of the Company, and
the Warrant Agent assumes no responsibility for the correctness of any of
the same except such as describe the Warrant Agent or action taken by it.
The Warrant Agent assumes no responsibility with respect to the
distribution of the Warrants except as herein otherwise provided.
18.2. NO RESPONSIBILITY FOR FAILURE OF COMPANY'S COVENANTS. The
Warrant Agent shall not be responsible for any failure of the Company to
comply with any of the covenants contained in this Agreement or in the
Warrants.
15
<PAGE>
18.3. DELEGATION. The Warrant Agent may execute and exercise any
of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents (which shall not
include its employees), and the Warrant Agent shall not be answerable or
accountable for any act, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from such neglect or
misconduct provided reasonable care shall have been exercised in the
selection and continued employment thereof.
18.4. OPINION OF COUNSEL. The Warrant Agent may consult at any
time with legal counsel satisfactory to it, and the Warrant Agent shall
incur no liability or responsibility to the Company or to any Holder in
respect of any action taken, suffered or omitted by it hereunder in good
faith and in accordance with the opinion or the advice of such counsel.
18.5. OFFICER'S CERTIFICATE. Whenever in the performance of its
duties under this Agreement the Warrant Agent shall deem it necessary or
desirable that any fact or matter be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company and delivered to
the Warrant Agent; and such certificate shall be full authorization to the
Warrant Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
18.6. COMPENSATION AND REIMBURSEMENT. The Company agrees to pay
the Warrant Agent reasonable compensation for all services rendered by the
Warrant Agent in the performance of its duties under this Agreement, to
reimburse the Warrant Agent for all expenses, taxes and governmental
charges and other charges of any kind and nature reasonably incurred by the
Warrant Agent in the performance of its duties under this Agreement, and
agrees to indemnify the Warrant Agent and save it harmless against any and
all liabilities, including judgments, costs and reasonable counsel fees,
for anything done or omitted by the Warrant Agent in the performance of its
duties under this Agreement except as a result of the Warrant Agent's gross
negligence or willful misconduct.
18.7. NO ACTION WITHOUT ASSURANCE OF REIMBURSEMENT. The Warrant
Agent shall be under no obligation to institute any action, suit or legal
proceeding or to take any other action likely to involve expense unless the
Company or one or more Holders shall furnish the
16
<PAGE>
Warrant Agent with reasonable security and indemnity for any costs and
expenses which may be incurred; but this provision shall not affect the
power of the Warrant Agent to take such action as the Warrant Agent may
consider proper, whether with or without any such security or indemnity.
All rights or action under this Agreement or under any of the Warrants
may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding
relative thereto, and any such action, suit or proceeding instituted by
the Warrant Agent shall be brought in its name as Warrant Agent, and any
recovery of judgment shall be for the ratable benefit of the Holders, as
their respective rights or interests may appear.
18.8. CONFLICTS OF INTEREST. The Warrant Agent and any
stockholder, director, officer or employee of the Warrant Agent may buy,
sell or deal in any of the Warrants or other securities of the Company or
become pecuniarily interested in any transaction in which the Company may
be interested, or contract with or lend money to the Company or otherwise
act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
18.9. SOLELY AS AGENT. The Warrant Agent shall act hereunder
solely as agent, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything that
it may do or refrain from doing in connection with this Agreement except
for its own gross negligence or bad faith.
18.10. RELIANCE ON DOCUMENTS. The Warrant Agent will not incur any
liability or responsibility to the Company or to any Holder of any Warrant
for any action taken in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument
reasonably believed by it to be genuine and to have been signed, sent or
presented by the proper party or parties.
18.11. NO REPRESENTATION REGARDING VALIDITY, ETC. The Warrant
Agent shall not be under any responsibility in respect of the validity of
this Agreement or the execution and delivery hereof (except the due
execution and delivery hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof);
nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Warrant Shares (or other stock) to be issued pursuant to this Agreement or
any Warrant, or as to whether any Warrant Shares (or other stock) will when
issued be
17
<PAGE>
validly issued, fully paid and nonassessable, or as to the Exercise
Price or the number or amount of Warrant Shares or other securities or
other property issuable upon exercise of any Warrant.
18.12. INSTRUCTIONS FROM COMPANY. The Warrant Agent is hereby
authorized and directed to accept instructions with respect to the
performance of its duties hereunder from the Chairman of the Board, the
President, any Vice President, the Treasurer or the Secretary of the
Company, and to apply to such officers for advice or instructions in
connection with its duties, and shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with instructions of
any such Officers.
SECTION 19. CHANGE OF WARRANT AGENT.
The Warrant Agent may resign and be discharged from its duties under
this Agreement by giving to the Company 60 days' notice in writing. The Warrant
Agent may be removed by like notice to the Warrant Agent from the Company. If
the Warrant Agent shall resign or be removed or shall otherwise become incapable
of acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of 50 days after
such notice of removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Warrant Agent or by
any Holder (who shall with such notice submit his Warrant for inspection by the
Company), then the resigning, discharged or removed Warrant Agent or any Holder
may apply to any court of competent jurisdiction for the appointment of a
successor to the Warrant Agent. Any successor warrant agent, whether appointed
by the Company or such court, shall be (a) a bank or trust company, in good
standing, incorporated under the laws of the United States of America or any
state thereof and having at the time of its appointment as warrant agent a
combined capital and surplus of at least $100,000,000, as set forth in its most
recent published annual report of condition or (b) an affiliate of a corporation
described in clause (a) above. After appointment, the successor warrant agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Warrant Agent hereunder without further act or
deed; but the former Warrant Agent shall deliver and transfer to the successor
warrant agent any property at the time held by it hereunder, and shall execute
and deliver any further assurance, conveyance, act or deed necessary for the
purpose. Failure to file any notice provided for in this Section 19, however,
or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be. In the event of such resignation or removal,
the successor warrant agent shall mail, by first-class mail, postage prepaid, to
each Holder, written notice of such removal or resignation and the name and
address of such successor warrant agent.
18
<PAGE>
SECTION 20. IDENTITY OF TRANSFER AGENT.
Forthwith upon the appointment of any subsequent Transfer Agent for
the Company's shares of Common Stock, or any other shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrants, the Company will file with the Warrant Agent a statement
setting forth the name and address of such Transfer Agent.
SECTION 21. NOTICES.
Any notice pursuant to this Agreement by the Company or by the
Holder of any Warrant to the Warrant Agent, or by the Warrant Agent or by the
Holder of any Warrant to the Company, shall be in writing and shall be deemed
to have been duly given if delivered or mailed by certified mail, return
receipt requested, (a) if to the Company, to WEI Acquisition Co., 19701
Hamilton Avenue, Torrance, California 90502-1334, Attention: Henry Del
Castillo and, if to the Warrant Agent, to United States Trust Company of New
York, Corporate Trust Division, 114 West 47th Street, 15th Floor, New York,
NY 10036-1532;, Attention: Louis Young. Each party hereto may from time to
time change the address to which notices to it are to be delivered or mailed
hereunder by notice in writing to the other party.
Any notice mailed pursuant to this Agreement by the Company or the
Warrant Agent to the Holders of Warrants shall be in writing and shall be deemed
to have been duly given if mailed by first-class mail, postage prepaid, to such
Holders at their respective addresses on the Warrant Register of the Warrant
Agent.
SECTION 22. SUPPLEMENTS AND AMENDMENTS.
(a) The Company and the Warrant Agent may from time to time
supplement or amend this Agreement, without the approval of any Holder in order
to cure any ambiguity or to correct or supplement any provision contained herein
that may be defective or inconsistent with any other provisions herein, or to
make any other provisions with regard to matters or questions arising hereunder
that the Company and the Warrant Agent may deem necessary or desirable and that
shall not adversely affect the interests of the Holders of Warrants.
(b) In addition to the foregoing, with the consent of Holders of
Warrants entitled, upon exercise thereof, to receive not less than two-thirds of
the shares of Common Stock issuable thereunder, the Company and the Warrant
Agent may modify this Agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement or
modifying in any manner the rights of the Holders of the Warrants; provided,
however, that no modification of the terms (including, but not limited to the
adjustments described in Section 11) upon which the Warrants are exercisable or
reducing the percentage required for consent to modification of this Agreement,
no acceleration of the Expiration Date
19
<PAGE>
and no increase in the Exercise Price may, in each case, be made without the
consent of the Holder of each outstanding Warrant affected thereby.
SECTION 23. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder.
SECTION 24. MERGER OR CONSOLIDATION OF THE COMPANY.
The Company will not merge or consolidate with or into any other
corporation unless the corporation resulting from such merger or consolidation
(if not the Company) shall expressly assume, by supplemental agreement
satisfactory in form to the Warrant Agent in the exercise of its reasonable
judgment and executed and delivered to the Warrant Agent, the due and punctual
performance and observance of each and every covenant and condition of this
Agreement to be performed and observed by the Company.
SECTION 25. APPLICABLE LAW.
This Agreement and each Warrant issued hereunder shall be deemed to be
a contract made under the internal laws of the State of New York (without
preference to conflicts of law principles) and for all purposes shall be
construed in accordance with the laws of said State.
SECTION 26. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company, the Warrant Agent and the Holders of the
Warrants any legal or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, and their respective successors and assigns hereunder, and the
holders from time to time of the Warrants.
SECTION 27. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
SECTION 28. CAPTIONS.
The captions of the Sections and subsections of this Agreement have
been inserted for convenience only and shall have no substantive effect.
20
<PAGE>
SECTION 29. PLAN OF REORGANIZATION.
The Company will comply for the benefit of the Holders with
Section 8.04 of the POR.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
WEI ACQUISITION CO.
By /s/ Robert C. Davenport
---------------------------
Name: Robert C. Davenport
Title: Chief Financial Officer
and Secretary
UNITED STATES TRUST COMPANY OF NEW YORK,
as Warrant Agent
By /s/ Louis P. Young
---------------------------
Name: Louis P. Young
Title: Vice President
S-1
<PAGE>
TRANCHE B WARRANT TO PURCHASE COMMON STOCK VOID AFTER
5:00 P.M., NEW YORK TIME, ON JANUARY 31, 2004
WHEREHOUSE ENTERTAINMENT, INC.
This certifies that, for value received, __________
___________________ or registered assigns (the "Holder"), is entitled to
purchase from Wherehouse Entertainment, Inc., a Delaware corporation (the
"Company"), until 5:00 P.M., New York time, on January 31, 2004, or such
other date as may be provided for pursuant to the Warrant Agreement referred
to below (the "Expiration Date"), at the purchase price of $9.00 per share
(the "Exercise Price"), a number of shares of Common Stock, par value $0.01
per share, of the Company (the "Common Stock") that is equal to the number of
Warrants represented hereby. The number of shares purchasable upon exercise
of this Warrant and the Exercise Price per share are subject to adjustment
from time to time as set forth in the Warrant Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part
by presentation of this Warrant Certificate with the Purchase Form on the
reverse side hereof duly executed (with a signature guarantee if required by
the Warrant Agreement) and simultaneous payment of the Exercise Price
(subject to adjustment) at the office or agency of the Company maintained for
that purpose in the City of New York. Initially, United States Trust Company
of New York will act as Warrant Agent (the "Warrant Agent"). Payment of such
price shall be made at the option of the holder hereof by certified or
cashier's check. No fractional shares will be issued upon the exercise of
rights to purchase hereunder, but the Company shall pay the cash value of any
such fraction upon the exercise of one or more Warrants, all as provided in
the Warrant Agreement.
Upon any partial exercise of this Warrant Certificate, there shall
be countersigned and issued to the Holder hereof a new Warrant Certificate in
respect of the shares as to which this Warrant shall not have been exercised.
This Warrant Certificate may be exchanged at the office of the Warrant Agent
maintained for that purpose in the City of New York by surrender of this
Warrant Certificate properly endorsed (with a signature guarantee if required
by the Warrant Agreement), either separately or in combination with one or
more other Warrant Certificates, for one or more new Warrant Certificates for
the same aggregate number of shares as were evidenced by the Warrant
Certificate or Warrant Certificates exchanged.
This Warrant Certificate is transferable at the office of the
Warrant Agent maintained for that purpose in the City of New York in the
manner and subject to the limitations set forth in the Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized issue
of Common Stock Purchase Warrants with rights to purchase an aggregate of up
to
1
<PAGE>
100,000 shares of Common Stock (subject to adjustment) and are issued under
and in accordance with a Warrant Agreement dated as of January 31, 1997,
between the Company and the Warrant Agent and are subject to the terms and
provisions contained in the Warrant Agreement, to all of which the Holder of
this Warrant Certificate by acceptance hereof consents. Copies of the
Warrant Agreement are on file at the above mentioned office of the Warrant
Agent and may be obtained for inspection by the Holder hereof upon written
request to the Warrant Agent.
The Holder hereof may be treated by the Company, the Warrant Agent,
and all other persons dealing with this Warrant Certificate as the absolute
owner hereof for any purpose and as the person entitled to exercise the
rights represented hereby, or to the transfer hereof on the books of the
Company, any notice to the contrary notwithstanding, and until such transfer
on such books, the Company, the Warrant Agent and all such other persons may
treat the registered holder hereof as the owner for all purposes.
The Warrants evidenced hereby do not entitle any Holder hereof to
any of the rights of a stockholder of the Company.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
executed by its duly authorized officers and the corporate seal hereunto
affixed.
Dated: WHEREHOUSE ENTERTAINMENT, INC.
By:
- -----------------------------
Title:
ATTEST:
- -----------------------------
Name:
Title:
COUNTERSIGNED:
UNITED STATES TRUST COMPANY OF NEW YORK
WARRANT AGENT
By: ------------------------
Name:
Title:
3
<PAGE>
WHEREHOUSE ENTERTAINMENT, INC.
PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ______ shares of Common Stock, provided for therein, and requests
that certificates for such shares of Common Stock be issued in the name of:
Name:
-------------------------------------------------------
Address:
-------------------------------------------------------
- -----------------------------------------------------------------
Social Security or Taxpayer's
Identification Number:
----------------------------------------
and, if said number of shares of Common Stock shall not be all the Common Stock
purchasable thereunder, that a new Warrant Certificate for the balance remaining
of the Common Stock purchasable under the within Warrant Certificate be
registered in the name of the undersigned Warrantholder or his or her Assignee
as below indicated and delivered to the address stated below.
Name of Warrantholder
or Assignee:
-----------------------------------
Address:
-----------------------------------
Social Security or Taxpayer's
Identification Number:
-----------------------------------
Signature:
--------------------
Dated:
--------------------
Signature Guaranteed:
NOTICE: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever,
unless this Warrant has been assigned.
4
<PAGE>
ASSIGNMENT
(To be signed only upon
assignment of Warrant Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________
(Name of Assignee)
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
(Social Security or other Taxpayer Identification Number of Assignee)
the within Warrants, hereby irrevocably constituting and appointing
_____________________________________________________ Attorney to transfer
said Warrants on the books of the Company, with full power of substitution in
the premises.
5
<PAGE>
DATED:
---------------------
------------------------------
Signature of Registered Holder
Signature Guaranteed:
NOTICE: The signature of this assignment must
correspond with the name as it appears
upon the face of the within Warrant
Certificate in every particular, without
alteration or enlargement or any change
whatever.
6
<PAGE>
TRANCHE C WARRANT AGREEMENT
- ------------------------------------------------------------------------------
WARRANT AGREEMENT
RELATING TO THE ISSUANCE OF THE
TRANCHE C WARRANTS
WEI ACQUISITION CO.
(which will change its name to Wherehouse Entertainment, Inc.)
and
UNITED STATES TRUST COMPANY OF NEW YORK
Dated as of January 31, 1997
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTIONS PAGE(S)
- -------- -------
<S> <C> <C>
SECTION 1. Appointment of Warrant Agent. . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Form of Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Form of Warrant Certificates. . . . . . . . . . . . . . . . . 1
2.2. Countersignature of Warrant Certificates. . . . . . . . . . . 2
2.3. Registration. . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3. Transfer or Exchange of Warrants. . . . . . . . . . . . . . . . . . 3
3.1. Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2. Exchange of Warrant Certificates. . . . . . . . . . . . . . . 3
SECTION 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 5. Mutilated or Missing Warrants . . . . . . . . . . . . . . . . . . . 3
SECTION 6. Term of Warrants; Exercise of Warrants. . . . . . . . . . . . . . . 4
6.1. Term of Warrants. . . . . . . . . . . . . . . . . . . . . . . 4
6.2. Exercise of Warrants. . . . . . . . . . . . . . . . . . . . . 4
SECTION 7. Disposition of Proceeds on Exercise of Warrants . . . . . . . . . . 5
SECTION 8. Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 9. Reservation of Warrant Shares; Purchase and Cancellation of
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9.1. Reservation of Warrant Shares . . . . . . . . . . . . . . . . 5
9.2. Governmental Approvals and Listings . . . . . . . . . . . . . 6
9.3. Purchase of Warrants by the Company . . . . . . . . . . . . . 6
9.4. Cancellation of Warrants. . . . . . . . . . . . . . . . . . . 6
SECTION 10. Exercise Price. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 11. Adjustment of Exercise Price and Number of Warrant Shares . . . . . 6
11.1. Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . 6
(a) Stock Dividends, Splits, etc. . . . . . . . . . . . . . . 7
(b) Distributions of Assets . . . . . . . . . . . . . . . . . 7
(c) Computation of Market Price . . . . . . . . . . . . . . . 8
(d) Minimum Adjustment. . . . . . . . . . . . . . . . . . . . 8
(e) Warrant Share Adjustment. . . . . . . . . . . . . . . . . 9
(f) Notice of Adjustment. . . . . . . . . . . . . . . . . . . 9
(g) Definition of Common Stock. . . . . . . . . . . . . . . . 9
</TABLE>
i
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<TABLE>
<S> <C> <C>
(h) Company May Reduce Exercise Price or Increase Number
of Warrant Shares Purchasable. . . . . . . . . . . . 10
(i) Subsequently Issued Warrants. . . . . . . . . . . . . . 10
(j) Number of Warrant Shares on Warrant Certificates. . . . 10
11.2. No Adjustment for Dividends. . . . . . . . . . . . . . . . 10
11.3. Preservation of Purchase Rights and Adjustment of Exercise
Price upon Merger, Consolidation, etc. . . . . . . . . . . 10
SECTION 12. No Rights as Stockholders; Notices to Warrant Holders . . . . . . . 12
SECTION 13. Purchase Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 14. FRACTIONAL SHARES OF COMMON STOCK . . . . . . . . . . . . . . . . . 13
SECTION 15. Right of Action . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 16. Inspection of Warrant Agreement . . . . . . . . . . . . . . . . . . 14
SECTION 17. Merger or Consolidation or Change of Name of Warrant Agent. . . . . 14
SECTION 18. Concerning the Warrant Agent. . . . . . . . . . . . . . . . . . . . 14
18.1. Disclaimer of Representations . . . . . . . . . . . . . . 15
18.2. No Responsibility for Failure of Company's Covenants. . . 15
18.3. Delegation. . . . . . . . . . . . . . . . . . . . . . . . 15
18.4. Opinion of Counsel. . . . . . . . . . . . . . . . . . . . 15
18.5. Officer's Certificate . . . . . . . . . . . . . . . . . . 15
18.6. Compensation and Reimbursement. . . . . . . . . . . . . . 15
18.7. No Action Without Assurance of Reimbursement. . . . . . . 16
18.8. Conflicts of Interest . . . . . . . . . . . . . . . . . . 16
18.9. Solely as Agent . . . . . . . . . . . . . . . . . . . . . 16
18.10. Reliance on Documents . . . . . . . . . . . . . . . . . . 16
18.11. No Representation Regarding Validity, Etc.. . . . . . . . 17
18.12. Instructions from Company . . . . . . . . . . . . . . . . 17
SECTION 19. Change of Warrant Agent . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 20. Identity of Transfer Agent. . . . . . . . . . . . . . . . . . . . . 18
SECTION 21. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 22. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . 18
SECTION 23. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 24. Merger or Consolidation of the Company. . . . . . . . . . . . . . . 19
SECTION 25. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 26. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . 19
SECTION 27. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 28. Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 29. Plan of Reorganization. . . . . . . . . . . . . . . . . . . . . . . 20
EXHIBIT A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
PURCHASE FORM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
</TABLE>
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WARRANT AGREEMENT relating to the issuance of the Tranche C
Warrants, dated as of January 31, 1997, between WEI ACQUISITION CO. (which
will change its name to Wherehouse Entertainment, Inc.), a Delaware
corporation (the "Company"), and UNITED STATES TRUST COMPANY OF NEW YORK, as
Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, pursuant to the Debtors' First Amended Chapter 11 Plan, as
Revised for Technical Corrections dated October 4, 1996 and Supplemental
Amendments on December 2, 1996 and December 13, 1996 (the "POR") and an Asset
Purchase Agreement dated as of January 31, 1997 (the "ASSET PURCHASE
AGREEMENT"), the Company will acquire substantially all of the assets of
Wherehouse Entertainment, Inc., and its parent, WEI Holdings, Inc., which
companies are debtors and debtors-in-possession (collectively, the
"DEBTORS"), in Case No. 95-911 (HSB) (Jointly Administered) (the "BANKRUPTCY
CASE") in the Bankruptcy Court for the District of Delaware (the "BANKRUPTCY
COURT");
WHEREAS, as part of the purchase price for the assets of the
Debtors to be acquired by the Company, the Company proposes to issue up to
100,000 Common Stock Purchase Warrants hereinafter described (the "Warrants")
to purchase its Common Stock, par value $0.01 per share (the "Common Stock"),
each Warrant entitling the registered owner thereof to purchase one share of
Common Stock (each share of Common Stock purchasable upon the exercise of a
Warrant being referred to herein as a "WARRANT SHARE"); and
WHEREAS, the Company wishes the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing to act, in connection with the
issuance, transfer, exchange and exercise of the Warrants.
NOW, THEREFORE, in consideration of the foregoing and for the
purpose of defining the terms and provisions of the Warrants and the
respective rights and obligations thereunder of the Company and the
registered owners of the Warrants (the "Holders"), the Company and the
Warrant Agent hereby agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT.
The Company hereby appoints the Warrant Agent to act as agent for
the Company in accordance with the terms and conditions hereinafter set
forth, and the Warrant Agent hereby accepts such appointment.
SECTION 2. FORM OF WARRANTS.
2.1. FORM OF WARRANT CERTIFICATES. The text of the Warrant
certificate and of the form of election to purchase Warrant Shares shall be
substantially as set forth in Exhibit A attached hereto. The Warrant
certificates shall be appropriately
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printed, lithographed or engraved and may have such letters, numbers or other
marks of identification as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The price per Warrant Share
and the number of Warrant Shares issuable upon exercise of each Warrant are
subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Warrant certificates shall be executed on behalf
of the Company by its Chairman of the Board, its President or one of its Vice
Presidents under its corporate seal reproduced thereon and attested by its
Secretary or an Assistant Secretary. The signature of any of such officers
on the Warrant certificates may be manual or facsimile.
Warrant certificates bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall
bind the Company, notwithstanding that such individuals or any one of them
shall have ceased to hold such offices prior to the delivery of such Warrant
certificates or did not hold such office on the date of this Agreement.
Warrant certificates shall be dated as of the date of
countersignature thereof by the Warrant Agent either upon initial issuance or
upon exchange, substitution or transfer.
2.2. COUNTERSIGNATURE OF WARRANT CERTIFICATES. The Warrant
certificates shall be manually countersigned by the Warrant Agent (or any
successor to the Warrant Agent then acting as warrant agent under this
Agreement) and shall not be valid for any purpose unless so countersigned.
Warrant certificates may be countersigned by the Warrant Agent (or by its
successor as warrant agent hereunder) and may be delivered by the Warrant
Agent notwithstanding that the persons whose manual or facsimile signatures
appear thereon as proper officers of the Company shall have ceased to be such
officers at the time of such countersignature, issuance or delivery. The
Warrant Agent shall, upon written instructions of the Chairman of the Board,
the President, any Vice President or the Secretary of the Company,
countersign, issue and deliver Warrant certificates entitling the Holders
thereof to purchase in the aggregate Warrant Shares (subject to adjustment
pursuant to Section 11 hereof) and shall countersign and deliver Warrant
certificates as otherwise provided in this Agreement.
2.3. REGISTRATION. The Warrant certificates shall be numbered and
shall be registered in a register (the "Warrant Register") as they are
issued. The Company and the Warrant Agent shall be entitled to treat the
registered holder of any Warrant as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to
or interest in such Warrant on the part of any other person, notwithstanding
any notice to the Company or the Warrant Agent to the contrary.
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SECTION 3. TRANSFER OR EXCHANGE OF WARRANTS.
3.1. TRANSFER. The Warrants shall be transferable only in the
books of the Company maintained at the office or agency of the Warrant Agent
in the City of New York upon delivery thereof duly endorsed by the Holder or
by his or her duly authorized attorney or legal representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer, which endorsement shall be guaranteed by a bank or trust company
located in the United States or a broker or dealer that is a member of a
national securities exchange. In all cases of transfer by an attorney, the
original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited and remain with the Warrant Agent. In case of
transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Warrant
Agent in its discretion. Upon any registration of transfer, the Warrant
Agent shall countersign and deliver a new Warrant certificate to the person
entitled thereto.
3.2. EXCHANGE OF WARRANT CERTIFICATES. Warrant certificates may be
exchanged for another certificate or certificates entitling the Holder
thereof to purchase a like aggregate number of Warrant Shares as the
certificate or certificates surrendered then entitle such Holder to purchase.
Any Holder desiring to exchange a Warrant certificate shall make such
request in writing delivered to the Warrant Agent, and shall surrender,
properly endorsed in the manner described in subsection 3.1 hereof, the
Warrant certificate or certificates to be so exchanged. Thereupon, the
Warrant Agent shall countersign and deliver to the person entitled thereto a
new Warrant certificate or certificates, as the case may be, as so requested.
SECTION 4. [SECTION 4 INTENTIONALLY LEFT BLANK].
SECTION 5. MUTILATED OR MISSING WARRANTS.
In case any of the certificates evidencing the Warrants shall be
mutilated, lost, stolen or destroyed, the Company may, in its discretion,
issue and the Warrant Agent shall countersign and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant certificate,
or in lieu of and substitution for the Warrant certificate lost, stolen or
destroyed, a new Warrant certificate of like tenor and representing an
equivalent right or interest, but only, in case of any such loss, theft or
destruction, upon receipt of evidence satisfactory to the Company and the
Warrant Agent thereof and an indemnity also satisfactory to them. An
applicant for such substitute Warrant certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
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<PAGE>
SECTION 6. TERM OF WARRANTS; EXERCISE OF WARRANTS.
6.1. TERM OF WARRANTS. Subject to the terms of this Agreement,
each Holder shall have the right until 5:00 P.M., New York time, on January
31, 2004 (the seventh anniversary of the Effective Date (as defined in the
POR)) (the "Expiration Date"), to purchase from the Company the number of
fully paid and nonassessable Warrant Shares which the Holder may at the time
be entitled to purchase on exercise of such Warrants.
6.2. EXERCISE OF WARRANTS. Warrant Shares may be purchased upon
surrender to the Company at the office or agency of the Warrant Agent in the
City of New York, of the certificate or certificates evidencing the Warrants
to be exercised, together with the form of election to purchase on the
reverse thereof duly filled in and signed, which signature shall, if the
Warrant Shares are to be issued in the name of a person other than the Holder
of the Warrant, be guaranteed by a bank or trust company located in the
United States or a broker or dealer that is a member of a national securities
exchange, and upon payment to the Warrant Agent for the account of the
Company of the Exercise Price (as defined in and determined in accordance
with the provisions of Sections 10 and 11 hereof) for the number of Warrant
Shares in respect of which such Warrants are then being exercised. Payment
of the aggregate Exercise Price shall be made by certified or cashier's
check, or by any combination thereof.
Subject to Section 8 hereof, upon such surrender of Warrants and
payment of the Exercise Price as aforesaid, the Company shall issue and cause
to be delivered, with all reasonable dispatch, to or upon the written order
of the Holder and in such name or names as the Holder may designate, a
certificate or certificates for the number of full Warrant Shares so
purchased upon the exercise of such Warrants. Such certificate or
certificates shall be deemed to have been issued and any person so designated
to be named therein shall be deemed to have become a holder of record of such
Warrant Shares as of the date of the surrender of such Warrants and payment
of the Exercise Price, as aforesaid; PROVIDED, HOWEVER, that if such Warrants
are surrendered, and the Exercise Price is paid, on a Saturday, Sunday or
other day on which banking institutions in the City of New York are
authorized or obligated by law or executive order to close, or on a day when
the Common Stock transfer books of the Company are closed, the certificates
for the Warrant Shares in respect of which such Warrants are then exercised
shall be issuable as of the next succeeding Monday, Tuesday, Wednesday,
Thursday or Friday on which such banking institutions are not so authorized
or obligated to close (whether before or after the Expiration Date) and which
is a day on which the Common Stock transfer books of the Company are open.
The rights of purchase represented by the Warrants shall be exercisable, at
the election of the Holders thereof, either in full or from time to time in
part and, in the event that a certificate evidencing Warrants is exercised in
respect of less than all of the Warrant Shares specified therein at any time
prior to the expiration of such Warrants, a new certificate evidencing the
remaining Warrant or Warrants will be issued, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrant
certificates pursuant to the provisions of this subsection and of subsection
2.2
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<PAGE>
hereof and the Company, whenever required by the Warrant Agent, will
supply the Warrant Agent with Warrant certificates duly executed on behalf of
the Company for such purpose.
SECTION 7. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
The Warrant Agent shall account promptly to the Company with
respect to the Warrants exercised and concurrently pay to the Company all
moneys received by the Warrant Agent for the purchase of the Warrant Shares
through the exercise of such Warrants.
SECTION 8. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes, if any,
attributable to the issuance of any Warrant certificates or certificates for
Warrant Shares issuable upon the exercise of Warrants; PROVIDED, HOWEVER,
that the Company shall not be required to pay, and the Holder shall pay, any
tax or taxes that may be payable in respect of any transfer involved in the
issue or delivery of any Warrant certificates or certificates for Warrant
Shares in a name other than that of the registered Holder of the Warrants
that were surrendered and the Company shall not be required to issue or
deliver such Warrant certificates or certificates for Warrant Shares unless
or until the persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
SECTION 9. RESERVATION OF WARRANT SHARES; PURCHASE AND
CANCELLATION OF WARRANTS.
9.1. RESERVATION OF WARRANT SHARES. There have been reserved, and
the Company shall at all times keep reserved out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the right of purchase represented by the outstanding Warrants.
The Company covenants that all Warrant Shares will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable. Before taking any
action that would cause an adjustment reducing the Exercise Price below the
then par value, if any, of the shares of Common Stock issuable upon exercise
of the Warrants, the Company shall take any corporate action which may, in
the opinion of it counsel, be necessary in order that the Company may validly
and legally issue fully paid and nonassessable shares of such Common Stock,
at such adjusted Exercise Price. The Transfer Agent for the Common Stock and
every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of any of the rights of purchase aforesaid will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be requisite for such purpose. The Company will
keep a copy of this Agreement on file with the Transfer Agent for the Common
Stock and with every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of
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<PAGE>
purchase represented by the Warrants. The Warrant Agent is hereby irrevocably
authorized to requisition from time to time from such Transfer Agent stock
certificates required to honor outstanding Warrants upon exercise thereof in
accordance with the terms of this Agreement. The Company will supply such
Transfer Agent with duly executed stock certificates for such purpose.
Promptly after the Expiration Date, the Warrant Agent shall certify to the
Company the aggregate number of Warrants then outstanding and thereafter no
shares shall be subject to reservation in respect of such Warrants.
9.2. GOVERNMENTAL APPROVALS AND LISTINGS. The Company will as
promptly as practicable take all action which may be necessary to obtain and
keep effective (a) any and all permits, consents and approvals of
governmental agencies and authorities, and will make any and all filings
under federal and state securities laws, necessary in connection with the
issuance, distribution and transfer of Warrant certificates, the exercise of
the Warrants, and the issuance, sale, transfer and delivery of Warrant Shares
and (b) if any of the Warrant Shares have been listed on any securities
exchange, the listing of the Warrant Shares on any securities exchange on
which the Common Stock may be listed (it being understood that the Company
has no obligation to list any Warrant Shares with any securities exchange).
9.3. PURCHASE OF WARRANTS BY THE COMPANY. The Company shall have
the right, except as limited by law, other agreement or herein, to purchase
or otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
9.4. CANCELLATION OF WARRANTS. In the event the Company shall
purchase or otherwise acquire Warrants, the related Warrant certificates
shall thereupon be delivered to the Warrant Agent and be cancelled by it and
retired. The Warrant Agent shall cancel any Warrant certificate surrendered
for exchange, substitution, transfer or exercise in whole or in part.
Warrant certificates cancelled by the Warrant Agent pursuant to any provision
of this Agreement shall be delivered to the Company or, upon the request of
the Warrant Agent and with the consent of the Company, destroyed by the
Warrant Agent. The Warrant Agent shall furnish to the Company written
confirmation of the destruction of the Warrant certificates so cancelled.
SECTION 10. EXERCISE PRICE.
The price per share at which Warrant Shares shall be purchasable
upon exercise of each Warrant (the "Exercise Price") shall be $11.00, subject
to adjustment pursuant to Section 11 hereof.
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<PAGE>
SECTION 11. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
11.1. ADJUSTMENTS. The number and kind of securities purchasable upon
the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) STOCK DIVIDENDS, SPLITS, ETC. In case the Company shall at any
time after the date of this Agreement (w) pay a dividend or make a
distribution on its Common Stock which is paid or made (A) in Common Stock
or other shares of the Company's capital stock or (B) in rights to purchase
Common Stock or other capital stock of the Company if such rights are not
exercisable or separable from the Common Stock except upon the occurrence
of a contingency, (x) subdivide its outstanding Common Stock into a greater
number of shares of Common Stock, (y) combine its outstanding shares into a
smaller number of shares of Common Stock or (z) issue by reclassification
of its Common Stock other securities of the Company, then, in any such
event the number of Warrant Shares purchasable upon exercise of each
Warrant immediately prior thereto shall be adjusted so that the Holder of
each Warrant shall be entitled to receive upon exercise of such Warrant the
kind and number of shares of the Company and rights to purchase Common
Stock or other securities of the Company (or, in the event of the
redemption of any such rights, any cash paid in respect of such redemption)
that he, she or it would have owned or have been entitled to receive after
the happening of any of the events described above had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the opening of business on the
next business day following the record date in the case of dividends or
other distributions and shall become effective immediately after the
opening of business on the next business day following the effective date
in the case of a subdivision or combination.
(b) DISTRIBUTIONS OF ASSETS. In case the Company shall at any time
after the date of this Agreement distribute to all holders of its Common
Stock evidences of indebtedness of the Company or assets of the Company
(including cash dividends or distributions out of retained earnings other
than cash dividends or distributions made on a quarterly or other periodic
basis) or warrants to subscribe for securities of the Company (excluding
those referred to in paragraph (a) above), then in each case the Exercise
Price shall be adjusted to a price determined by multiplying the Exercise
Price in effect immediately prior to such distribution by a fraction, of
which the numerator shall be the then current market price per share of
Common Stock (as defined in
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<PAGE>
paragraph (c) below) on the record date for determination of
shareholders entitled to receive such distribution, less the then fair
value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be conclusive) of the portion of the
assets or evidences of indebtedness so distributed or of such
subscription rights or warrants which are applicable to one share of Common
Stock, and of which the denominator shall be such market price per share
of Common Stock; PROVIDED, HOWEVER, that if the then current market
price per share of Common Stock on the record date for determination of
shareholders entitled to receive such distribution is less than the then
fair value of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights or warrants which are
applicable to one share of Common Stock, the foregoing adjustment of the
Exercise Price shall not be made and in lieu thereof the Holder of each
Warrant shall be entitled to receive upon exercise of such Warrant in
addition to the Common Stock the kind and number of assets, evidences of
indebtedness, subscription rights and warrants (or, in the event of the
redemption of any such evidences of indebtedness, subscription rights
and warrants, any cash paid in respect of such redemption) that he or
she would have owned or have been entitled to receive after the
happening of such distribution had such Warrant been exercised
immediately prior to the record date for such distribution. Such
adjustment shall be made successively whenever such a record date is fixed,
and in the event that such distribution is not so made, the Exercise Price
shall again be adjusted to be the Exercise Price which would then be in
effect if such record date had not been fixed.
(c) COMPUTATION OF MARKET PRICE. For the purpose of any computation
under this Agreement, the current market price per share of Common Stock at
any date shall be deemed to be the average of the daily Market Price (as
defined below) per share for the 30 consecutive Trading Days (as defined
below) commencing 45 Trading Days before the date in question. "Market
Price" is defined as the closing sale price (or, if no closing sale price
is reported, the closing bid price) for the Common Stock in the over-the-
counter market, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or, if the Common Stock is
not quoted on NASDAQ, as reported by the National Quotation Bureau
Incorporated, or, if the Common Stock is not so reported, as furnished by
any two members of the National Association of Securities Dealers, Inc.,
selected from time to time by the Company for that purpose. In the event
that the Common Stock is hereafter listed for trading on one or more United
States national or regional securities exchanges, Market Price shall be the
closing price on the exchange or system designated by the Board of
Directors of the Company as the principal
8
<PAGE>
United States market in which the Common Stock is traded. If
Market Price cannot be established as described above, Market Price
shall be the fair market value of the Common Stock as determined in good
faith by the Board of Directors. "Trading Day" shall mean a Monday,
Tuesday, Wednesday, Thursday or Friday on which banking institutions in
the City of Los Angeles and the State of California or New York, New
York, are not authorized or obligated by law or executive order to close
or, if the Common Stock is listed or admitted to trading on a national
securities exchange, a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is
open for the transaction of business.
(d) MINIMUM ADJUSTMENT. No adjustment in the number of Warrant
Shares purchasable hereunder or the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least one per
cent (1%) in the number of Warrant Shares purchasable upon the exercise of
each Warrant, or the Exercise Price, as the case may be; PROVIDED, HOWEVER,
that any adjustments which by reason of this paragraph (d) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be
made to the nearest cent or the nearest ten-thousandth of a share, as the
case may be
(e) WARRANT SHARE ADJUSTMENT. Upon each adjustment of the Exercise
Price as a result of the calculations made in paragraph (a) or (b) above,
each Warrant outstanding immediately prior to the making of such adjustment
shall thereafter evidence the right to purchase, at the adjusted Exercise
Price, that number of shares (calculated to the nearest ten-thousandth)
obtained by (A) multiplying (x) the number of shares covered by a Warrant
immediately prior to such adjustment of the Exercise Price by (y) the
Exercise Price in effect immediately prior to such adjustment of the
Exercise Price and (ii) dividing the product so obtained by the Exercise
Price in effect immediately after such adjustment of the Exercise Price.
(f) NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of Warrants or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Company shall cause the
Warrant Agent promptly to mail by first class mail, postage prepaid, to
each Holder of a Warrant or Warrants notice of such adjustment or
adjustments and shall deliver to the Warrant Agent a certificate of a firm
of independent public accountants selected by the Board of Directors of the
Company (who may be the regular accountants employed by the Company)
setting forth (A) the number of Warrant Shares purchasable upon the
exercise
9
<PAGE>
of each Warrant and the Exercise Price of such Warrant Shares after
such adjustment, (B) a brief statement of the facts requiring such
adjustment and (C) the computation by which such adjustment was made. Such
certificate shall be conclusive evidence of the correctness of such
adjustment. The Warrant Agent shall be entitled to rely on such
certificate and shall be under no duty or responsibility with respect to
any such certificate, except to exhibit the same, from time to time, to any
Holder desiring an inspection thereof during reasonable business hours.
The Warrant Agent shall not at any time be under any duty or responsibility
to any Holders to determine whether any facts exist that may require any
adjustment of the Exercise Price or the number of Warrant Shares or
other stock or property purchasable upon exercise thereof or with
respect to the nature or extent of any such adjustment when made, or
with respect to the method employed in making such adjustment.
(g) DEFINITION OF COMMON STOCK. For the purpose of this subsection
11.1, the term "Common Stock" shall mean (A) the class of stock designated
as the Common Stock of the Company at the date of this Agreement or (B) any
other class of stock resulting from successive changes or reclassifications
of such shares consisting solely of changes in par value, or from par value
to no par value or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holders of a Warrant or Warrants shall become entitled to
purchase any securities of the Company other than Common Stock, thereafter
the number of such other securities so purchasable upon exercise of each
Warrant and the Exercise Price of such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Warrant Shares
contained in this subsection 11.1 and the provisions of Section 6 and
subsections 11.2 and 11.3, inclusive, with respect to the Warrant Shares,
shall apply on like terms to any such other securities.
(h) COMPANY MAY REDUCE EXERCISE PRICE OR INCREASE NUMBER OF WARRANT
SHARES PURCHASABLE. The Company may, at its option, at any time during the
term of the Warrants, reduce the then current Exercise Price, or increase
the number of Common Shares purchasable upon exercise of each Warrant, to
any amount deemed appropriate by the Board of Directors of the Company.
(i) SUBSEQUENTLY ISSUED WARRANTS. All Warrants originally issued by
the Company subsequent to any adjustment made to the Exercise Price
hereunder shall evidence the right to purchase, at the adjusted Exercise
Price, the number of shares of Common Stock
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<PAGE>
purchasable from time to time hereunder upon exercise of the Warrants, all
subject to further adjustment as provided herein.
(j) NUMBER OF WARRANT SHARES ON WARRANT CERTIFICATES. Irrespective
of any adjustment or change in the Exercise Price or the number of shares
of Common Stock issuable upon the exercise of the Warrants, the Warrant
certificates theretofore and thereafter issued may continue to express the
Exercise Price per share and the number of shares which were expressed upon
the initial Warrant certificates issued hereunder.
11.2. NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection
11.1, no adjustment in respect of any dividends made on a quarterly or other
periodic basis out of retained earnings shall be made during the term of a
Warrant or upon the exercise of a Warrant.
11.3. PRESERVATION OF PURCHASE RIGHTS AND ADJUSTMENT OF EXERCISE PRICE
UPON MERGER, CONSOLIDATION, ETC. In case the Company shall consolidate or
merge with or into any other corporation (other than a consolidation or
merger in which the Company is the surviving corporation and each share of
Common Stock outstanding immediately prior to such consolidation or merger is
to remain outstanding immediately after such consolidation or merger and no
cash, securities or other property is distributed with respect to such
shares) or shall sell or transfer all or substantially all of its assets to
any corporation, the Company or such successor or purchasing corporation, as
the case may be (collectively, the "acquiring corporation"), shall execute
with the Warrant Agent an agreement that each Holder of a Warrant shall have
the right thereafter upon payment of the Exercise Price in effect immediately
prior to such action to purchase upon exercise of each Warrant the kind and
amount of shares and other securities, cash and other property that he or she
would have owned or have been entitled to receive after the happening of such
consolidation, merger or sale had such Warrant been exercised immediately
prior to such action (assuming that such Holder, as a holder of Common Stock
prior to such action, would not have exercised any rights of election as a
holder of Common Stock as to the kind or amount of securities, cash or other
property receivable upon such consolidation, merger or sale; provided, that
if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger or sale is not the same for each non-electing
share of Common Stock, then the kind and amount of securities, cash or other
property receivable shall be deemed to be the kind and amount so receivable
by a plurality of the non-electing shares). The Company shall mail by
first-class mail, postage prepaid, to each Holder, notice of the execution of
any agreement with an acquiring corporation as provided in the first sentence
of this subsection 11.3. In addition to any adjustments required by this
subsection 11.3, such agreement shall provide for adjustments which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 11. The Company shall not effect any such consolidation, merger
or sale unless prior to or simultaneously with the consummation thereof the
acquiring corporation (if other than the Company) resulting from such
consolidation or merger or the acquiring corporation
11
<PAGE>
purchasing such assets or other appropriate corporation or entity shall
assume, by written instrument executed and delivered to the Warrant Agent,
the obligation to deliver to each Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such Holder may be
entitled to receive and the other obligations of the Company under this
Agreement. The provisions of this subsection 11.3 shall similarly apply to
successive consolidations, mergers, sales or conveyances. The Warrant Agent
shall be under no duty or responsibility to determine the correctness of any
provisions contained in any such agreement relating either to the kind or
amount of shares of stock or other securities, cash or property receivable
upon exercise of Warrants or with respect to the method employed and provided
therein for any adjustments.
11.4 NO ADJUSTMENT FOR EMPLOYEE COMPENSATION AND ISSUANCES TO
ALVAREZ & MARSAL, INC. Notwithstanding anything to the contrary
contained herein, no adjustment to the Exercise Price or the number of shares
of Common Stock purchasable upon exercise of any Warrant shall be made in
connection with the issuance by the Company of any shares of Common Stock or
options to purchase Common Stock or other securities which may be convertible
or exercisable into shares of Common Stock to (i) any employee of the Company
as compensation for services rendered to the Company or (ii) Alvarez &
Marsal, Inc. ("A&M") or any of its affiliates, in connection with the
management services to be provided by A&M to the Company under that certain
Management Services Agreement dated as of January 31, 1997 between the
Company, A&M, A&M Investment Associates #3, LLC, Antonio C. Alvarez II,
Cerberus Partners, L.P. and certain of A&M's employees.
SECTION 12. NO RIGHTS AS STOCKHOLDERS; NOTICES TO WARRANT HOLDERS.
(a) Nothing contained in this Agreement or in any of the Warrants
shall be construed as conferring upon the Holders or their transferees the
right to vote or to receive dividends or to consent or to receive notice as
shareholders in respect of any meeting of shareholders for the election of
directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company. If prior to the expiration of the Warrants:
(A) the Company shall declare a dividend or other distribution
on its Common Shares, other than (i) in cash as described in Section 11.2,
(ii) in other shares of Common Stock, or (iii) in rights to purchase shares
of Common Stock or other securities of the Company of the character
described in paragraph (a) of subsection 11.1; or
(B) the Company shall authorize the issuance to all holders of
its Common Stock of rights or warrants entitling them to subscribe for or
purchase any Common Stock or any other subscription
12
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rights or warrants (other than rights of the character described
in paragraph (a) of subsection 11.1); or
(C) there shall occur a reclassification of the capital stock of
the Company (other than a subdivision or combination of its outstanding
Common Stock); or
(D) the Company shall propose to effect any consolidation or
merger into or with, or to effect any sale or other transfer requiring an
adjustment pursuant to Section 11.3; or
(E) the Company shall take an action ("Adjustment Action") which
would cause an adjustment pursuant to Section 11 hereof of the number or
kind of Common Stock (or other securities) purchasable upon the exercise of
each Warrant or of the Exercise Price that would have the effect of
reducing the price payable for a share of the Company's capital stock by a
Holder upon exercise of a Warrant to an amount which is less than the
current value of such share; or
(F) a voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be proposed;
then, in any such event, the Company shall cause to be mailed to the Warrant
Agent and the Holders in the manner provided in Section 21 hereof, at least
20 days prior to the applicable record or effective date hereinafter
specified, a notice stating (i) the date as of which the holders of record of
Common Stock to be entitled to such dividend, distribution, rights or
warrants are to be determined, or (ii) the date on which such
reclassification, Adjustment Action, consolidation, merger, sale, transfer,
dissolution, liquidation, or winding up is expected to become effective, and
the date as of which it is expected that holders of record of Common Stock
shall be entitled to exchange their shares of securities or other property,
if any, deliverable upon such reclassification, Adjustment Action,
consolidation, merger, sale, transfer, dissolution, liquidation or winding
up. Such notice shall also state whether such transaction will result in any
adjustment of the number or kind of Common Stock (or other securities)
purchasable upon the exercise of a Warrant or of the Exercise Price and, if
so, shall set forth the nature thereof and the date upon which it will become
effective. In the event the Company gives notice to the holders of its
Common Stock of the declaration or distribution of rights to purchase Common
Stock or other securities of the Company of the character described in
paragraph (a) of subsection 11.1, the Company will give concurrently a
similar notice to the Holders in the manner provided in Section 21 hereof.
The failure to give the notices required by this Section 12, or any defect
therein, shall not affect the legality or validity of any such dividend,
distribution, right, warrant, reclassification, Adjustment Action,
dissolution, liquidation or winding up or other action, or the vote on any
action authorizing the same.
13
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SECTION 13. PURCHASE RIGHTS.
If at any time or from time to time on or after the date of the
Agreement, the Corporation shall give notice (a "Purchase Rights Notice")
pursuant to paragraph (B) of Section 12(a) of an issuance of rights or
warrants, (the "Purchase Rights") to all record holders of Common Stock, such
issuance shall not result in an adjustment of the Exercise Price or the
number of Warrants under Section 11 hereof, but each Holder shall be entitled
to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Holder could have acquired if it had held the
number of shares of Common Stock acquirable upon exercise of the Warrants
immediately before the record date for the grant, issuance, or sale of such
Purchase Rights. The Purchase Rights Notice shall describe the Purchase
Rights and their availability to the Holders.
SECTION 14. FRACTIONAL SHARES OF COMMON STOCK.
The Company will not issue fractions of Warrants or distribute Warrant
certificates which evidence fractional Warrants. In lieu of such fractional
Warrants, there shall be paid to the Holders to whom Warrant certificates
representing such fractional Warrants would otherwise be issuable an amount
in cash equal to the product of such fraction of a Warrant multiplied by the
current market price per share of Common Stock issuable with respect to such
fraction of a Warrant.
SECTION 15. RIGHT OF ACTION.
All rights of action in respect of this Agreement are vested in the
respective Holders of the Warrant certificates, and any Holder of any Warrant
certificate, without the consent of the Warrant Agent or of the Holder of any
other Warrant certificate, may, on such Holder's own behalf and for such
Holder's own benefit, enforce, and may institute and maintain any suit,
action or proceeding against the Company to enforce, or otherwise act in
respect of, such Holder's right to exercise the Warrants evidenced by such
Warrant certificate in the manner provided in such Warrant certificate and in
this Agreement.
SECTION 16. INSPECTION OF WARRANT AGREEMENT.
The Warrant Agent shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by the Holders during
normal business hours at its office in the City of New York for that purpose.
The Company shall supply the Warrant Agent from time to time with such
numbers of copies of this Agreement as the Warrant Agent may request.
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SECTION 17. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
Any corporation into which the Warrant Agent may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the stock transfer or corporate trust business of the Warrant
Agent, shall be the successor to the Warrant Agent hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for
appointment as successor Warrant Agent under the provisions of Section 19
hereof. In case at the time such successor to the Warrant Agent shall
succeed to the agency created by this Agreement any of the Warrants shall
have been countersigned but not delivered, any such successor to the Warrant
Agent may adopt the countersignature of the original Warrant Agent and
deliver such Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, any successor to the Warrant
Agent may countersign such Warrants either in the name of the predecessor
Warrant Agent or in the name of the successor Warrant Agent, and in all such
cases such Warrants shall have the full force provided in the Warrants and in
this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignatures under its prior
name and deliver Warrants so countersigned; and in case at that time any of
the Warrants shall not have been countersigned, the Warrant Agent may
countersign such Warrants either in its prior name or in its changed name;
and in all such cases such Warrants shall have the full force provided in the
Warrants and in this Agreement.
SECTION 18. CONCERNING THE WARRANT AGENT.
The Warrant Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions, by all of which the
Company and the Holders of Warrants, by their acceptance thereof, shall be
bound:
18.1. DISCLAIMER OF REPRESENTATIONS. The statements contained
herein and in the Warrants shall be taken as statements of the Company, and
the Warrant Agent assumes no responsibility for the correctness of any of the
same except such as describe the Warrant Agent or action taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants except as herein otherwise provided.
18.2. NO RESPONSIBILITY FOR FAILURE OF COMPANY'S COVENANTS. The Warrant
Agent shall not be responsible for any failure of the Company to comply with
any of the covenants contained in this Agreement or in the Warrants.
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18.3. DELEGATION. The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys or agents (which shall not include its
employees), and the Warrant Agent shall not be answerable or accountable for
any act, neglect or misconduct of any such attorneys or agents or for any
loss to the Company resulting from such neglect or misconduct provided
reasonable care shall have been exercised in the selection and continued
employment thereof.
18.4. OPINION OF COUNSEL. The Warrant Agent may consult at any time
with legal counsel satisfactory to it, and the Warrant Agent shall incur no
liability or responsibility to the Company or to any Holder in respect of any
action taken, suffered or omitted by it hereunder in good faith and in
accordance with the opinion or the advice of such counsel.
18.5. OFFICER'S CERTIFICATE. Whenever in the performance of its duties
under this Agreement the Warrant Agent shall deem it necessary or desirable
that any fact or matter be proved or established by the Company prior to
taking or suffering any action hereunder, such fact or matter (unless other
evidence in respect thereof be herein specifically prescribed) may be deemed
to be conclusively proved and established by a certificate signed by the
Chairman of the Board, the President, any Vice President, the Treasurer or
the Secretary of the Company and delivered to the Warrant Agent; and such
certificate shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement
in reliance upon such certificate.
18.6. COMPENSATION AND REIMBURSEMENT. The Company agrees to pay the
Warrant Agent reasonable compensation for all services rendered by the
Warrant Agent in the performance of its duties under this Agreement, to
reimburse the Warrant Agent for all expenses, taxes and governmental charges
and other charges of any kind and nature reasonably incurred by the Warrant
Agent in the performance of its duties under this Agreement, and agrees to
indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs and reasonable counsel fees, for
anything done or omitted by the Warrant Agent in the performance of its
duties under this Agreement except as a result of the Warrant Agent's gross
negligence or willful misconduct.
18.7. NO ACTION WITHOUT ASSURANCE OF REIMBURSEMENT. The Warrant Agent
shall be under no obligation to institute any action, suit or legal
proceeding or to take any other action likely to involve expense unless the
Company or one or more Holders shall furnish the
16
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Warrant Agent with reasonable security and indemnity for any costs and
expenses which may be incurred; but this provision shall not affect the power
of the Warrant Agent to take such action as the Warrant Agent may consider
proper, whether with or without any such security or indemnity. All rights
or action under this Agreement or under any of the Warrants may be enforced
by the Warrant Agent without the possession of any of the Warrants or the
production thereof at any trial or other proceeding relative thereto, and any
such action, suit or proceeding instituted by the Warrant Agent shall be
brought in its name as Warrant Agent, and any recovery of judgment shall be
for the ratable benefit of the Holders, as their respective rights or
interests may appear.
18.8. CONFLICTS OF INTEREST. The Warrant Agent and any stockholder,
director, officer or employee of the Warrant Agent may buy, sell or deal in
any of the Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend money to the Company or otherwise act as fully and
freely as though it were not Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
18.9. SOLELY AS AGENT. The Warrant Agent shall act hereunder solely as
agent, and its duties shall be determined solely by the provisions hereof.
The Warrant Agent shall not be liable for anything that it may do or refrain
from doing in connection with this Agreement except for its own gross
negligence or bad faith.
18.10. RELIANCE ON DOCUMENTS. The Warrant Agent will not incur any
liability or responsibility to the Company or to any Holder of any Warrant
for any action taken in reliance on any notice, resolution, waiver, consent,
order, certificate, or other paper, document or instrument reasonably
believed by it to be genuine and to have been signed, sent or presented by
the proper party or parties.
18.11. NO REPRESENTATION REGARDING VALIDITY, ETC. The Warrant Agent
shall not be under any responsibility in respect of the validity of this
Agreement or the execution and delivery hereof (except the due execution and
delivery hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant (except its countersignature thereof); nor shall the
Warrant Agent by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Warrant Shares (or
other stock) to be issued pursuant to this Agreement or any Warrant, or as to
whether any Warrant Shares (or other stock) will when issued be
17
<PAGE>
validly issued, fully paid and nonassessable, or as to the Exercise Price or
the number or amount of Warrant Shares or other securities or other property
issuable upon exercise of any Warrant.
18.12. INSTRUCTIONS FROM COMPANY. The Warrant Agent is hereby
authorized and directed to accept instructions with respect to the
performance of its duties hereunder from the Chairman of the Board, the
President, any Vice President, the Treasurer or the Secretary of the Company,
and to apply to such officers for advice or instructions in connection with
its duties, and shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such
Officers.
SECTION 19. CHANGE OF WARRANT AGENT.
The Warrant Agent may resign and be discharged from its duties under this
Agreement by giving to the Company 60 days' notice in writing. The Warrant
Agent may be removed by like notice to the Warrant Agent from the Company.
If the Warrant Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of
50 days after such notice of removal or after it has been notified in writing
of such resignation or incapacity by the resigning or incapacitated Warrant
Agent or by any Holder (who shall with such notice submit his Warrant for
inspection by the Company), then the resigning, discharged or removed Warrant
Agent or any Holder may apply to any court of competent jurisdiction for the
appointment of a successor to the Warrant Agent. Any successor warrant
agent, whether appointed by the Company or such court, shall be (a) a bank or
trust company, in good standing, incorporated under the laws of the United
States of America or any state thereof and having at the time of its
appointment as warrant agent a combined capital and surplus of at least
$100,000,000, as set forth in its most recent published annual report of
condition or (b) an affiliate of a corporation described in clause (a) above.
After appointment, the successor warrant agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally
named as Warrant Agent hereunder without further act or deed; but the former
Warrant Agent shall deliver and transfer to the successor warrant agent any
property at the time held by it hereunder, and shall execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose.
Failure to file any notice provided for in this Section 19, however, or any
defect therein, shall not affect the legality or validity of the resignation
or removal of the Warrant Agent or the appointment of the successor warrant
agent, as the case may be. In the event of such resignation or removal, the
successor warrant agent shall mail, by first-class mail, postage prepaid, to
each Holder, written notice of such removal or resignation and the name and
address of such successor warrant agent.
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SECTION 20. IDENTITY OF TRANSFER AGENT.
Forthwith upon the appointment of any subsequent Transfer Agent for
the Company's shares of Common Stock, or any other shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrants, the Company will file with the Warrant Agent a statement
setting forth the name and address of such Transfer Agent.
SECTION 21. NOTICES.
Any notice pursuant to this Agreement by the Company or by the
Holder of any Warrant to the Warrant Agent, or by the Warrant Agent or by the
Holder of any Warrant to the Company, shall be in writing and shall be deemed
to have been duly given if delivered or mailed by certified mail, return
receipt requested, (a) if to the Company, to WEI Acquisition Co., 19701
Hamilton Avenue, Torrance, California 90502-1334, Attention: Henry Del
Castillo and, if to the Warrant Agent, to United States Trust Company of New
York, Corporate Trust Division, 114 West 47th Street, 15th Floor, New York,
NY 10036-1532;, Attention: Louis Young. Each party hereto may from time to
time change the address to which notices to it are to be delivered or mailed
hereunder by notice in writing to the other party.
Any notice mailed pursuant to this Agreement by the Company or the
Warrant Agent to the Holders of Warrants shall be in writing and shall be
deemed to have been duly given if mailed by first-class mail, postage
prepaid, to such Holders at their respective addresses on the Warrant
Register of the Warrant Agent.
SECTION 22. SUPPLEMENTS AND AMENDMENTS.
(a) The Company and the Warrant Agent may from time to time
supplement or amend this Agreement, without the approval of any Holder in
order to cure any ambiguity or to correct or supplement any provision
contained herein that may be defective or inconsistent with any other
provisions herein, or to make any other provisions with regard to matters or
questions arising hereunder that the Company and the Warrant Agent may deem
necessary or desirable and that shall not adversely affect the interests of
the Holders of Warrants.
(b) In addition to the foregoing, with the consent of Holders of
Warrants entitled, upon exercise thereof, to receive not less than two-thirds
of the shares of Common Stock issuable thereunder, the Company and the
Warrant Agent may modify this Agreement for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of this Agreement or modifying in any manner the rights of the Holders of the
Warrants; provided, however, that no modification of the terms (including,
but not limited to the adjustments described in Section 11) upon which the
Warrants are exercisable or reducing the percentage required for consent to
modification of this Agreement, no acceleration of the Expiration Date
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and no increase in the Exercise Price may, in each case, be made without the
consent of the Holder of each outstanding Warrant affected thereby.
SECTION 23. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder.
SECTION 24. MERGER OR CONSOLIDATION OF THE COMPANY.
The Company will not merge or consolidate with or into any other
corporation unless the corporation resulting from such merger or consolidation
(if not the Company) shall expressly assume, by supplemental agreement
satisfactory in form to the Warrant Agent in the exercise of its reasonable
judgment and executed and delivered to the Warrant Agent, the due and punctual
performance and observance of each and every covenant and condition of this
Agreement to be performed and observed by the Company.
SECTION 25. APPLICABLE LAW.
This Agreement and each Warrant issued hereunder shall be deemed to be
a contract made under the internal laws of the State of New York (without
preference to conflicts of law principles) and for all purposes shall be
construed in accordance with the laws of said State.
SECTION 26. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company, the Warrant Agent and the Holders of the
Warrants any legal or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, and their respective successors and assigns hereunder, and the
holders from time to time of the Warrants.
SECTION 27. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
SECTION 28. CAPTIONS.
The captions of the Sections and subsections of this Agreement have
been inserted for convenience only and shall have no substantive effect.
20
<PAGE>
SECTION 29. PLAN OF REORGANIZATION.
The Company will comply for the benefit of the Holders with
Section 8.04 of the POR.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
WEI ACQUISITION CO.
By /s/ Robert C. Davenport
-------------------------
Name: Robert C. Davenport
Title: Chief Financial Officer
and Secretary
UNITED STATES TRUST COMPANY OF NEW YORK,
as Warrant Agent
By /s/ Louis P. Young
-------------------------
Name: Louis P. Young
Title: Vice President
S-1
<PAGE>
TRANCHE C WARRANT TO PURCHASE COMMON STOCK VOID AFTER
5:00 P.M., NEW YORK TIME, ON JANUARY 31, 2004
WHEREHOUSE ENTERTAINMENT, INC.
This certifies that, for value received, __________
___________________ or registered assigns (the "Holder"), is entitled to
purchase from Wherehouse Entertainment, Inc., a Delaware corporation (the
"Company"), until 5:00 P.M., New York time, on January 31, 2004, or such other
date as may be provided for pursuant to the Warrant Agreement referred to below
(the "Expiration Date"), at the purchase price of $11.00 per share (the
"Exercise Price"), a number of shares of Common Stock, par value $0.01 per
share, of the Company (the "Common Stock") that is equal to the number of
Warrants represented hereby. The number of shares purchasable upon exercise of
this Warrant and the Exercise Price per share are subject to adjustment from
time to time as set forth in the Warrant Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form on the reverse
side hereof duly executed (with a signature guarantee if required by the Warrant
Agreement) and simultaneous payment of the Exercise Price (subject to
adjustment) at the office or agency of the Company maintained for that purpose
in the City of New York. Initially, United States Trust Company of New York
will act as Warrant Agent (the "Warrant Agent"). Payment of such price shall be
made at the option of the holder hereof by certified or cashier's check. No
fractional shares will be issued upon the exercise of rights to purchase
hereunder, but the Company shall pay the cash value of any such fraction upon
the exercise of one or more Warrants, all as provided in the Warrant Agreement.
Upon any partial exercise of this Warrant Certificate, there shall be
countersigned and issued to the Holder hereof a new Warrant Certificate in
respect of the shares as to which this Warrant shall not have been exercised.
This Warrant Certificate may be exchanged at the office of the Warrant Agent
maintained for that purpose in the City of New York by surrender of this Warrant
Certificate properly endorsed (with a signature guarantee if required by the
Warrant Agreement), either separately or in combination with one or more other
Warrant Certificates, for one or more new Warrant Certificates for the same
aggregate number of shares as were evidenced by the Warrant Certificate or
Warrant Certificates exchanged.
This Warrant Certificate is transferable at the office of the Warrant
Agent maintained for that purpose in the City of New York in the manner and
subject to the limitations set forth in the Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Common Stock Purchase Warrants with rights to purchase an aggregate of up to
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100,000 shares of Common Stock (subject to adjustment) and are issued under and
in accordance with a Warrant Agreement dated as of January 31, 1997, between the
Company and the Warrant Agent and are subject to the terms and provisions
contained in the Warrant Agreement, to all of which the Holder of this Warrant
Certificate by acceptance hereof consents. Copies of the Warrant Agreement are
on file at the above mentioned office of the Warrant Agent and may be obtained
for inspection by the Holder hereof upon written request to the Warrant Agent.
The Holder hereof may be treated by the Company, the Warrant Agent,
and all other persons dealing with this Warrant Certificate as the absolute
owner hereof for any purpose and as the person entitled to exercise the rights
represented hereby, or to the transfer hereof on the books of the Company, any
notice to the contrary notwithstanding, and until such transfer on such books,
the Company, the Warrant Agent and all such other persons may treat the
registered holder hereof as the owner for all purposes.
The Warrants evidenced hereby do not entitle any Holder hereof to any
of the rights of a stockholder of the Company.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.
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IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed by its duly authorized officers and the corporate seal hereunto
affixed.
Dated: WHEREHOUSE ENTERTAINMENT, INC.
By:
-------------------------------
Title:
ATTEST:
---------------------------
Name:
Title:
COUNTERSIGNED:
UNITED STATES TRUST COMPANY OF NEW YORK
WARRANT AGENT
By:
------------------------------
Name:
Title:
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WHEREHOUSE ENTERTAINMENT, INC.
PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ______ shares of Common Stock, provided for therein, and requests
that certificates for such shares of Common Stock be issued in the name of:
Name:
------------------------------------------------------
Address:
------------------------------------------------------
- ----------------------------------------------------------------
Social Security or Taxpayer's
Identification Number:
---------------------------------------
and, if said number of shares of Common Stock shall not be all the Common Stock
purchasable thereunder, that a new Warrant Certificate for the balance remaining
of the Common Stock purchasable under the within Warrant Certificate be
registered in the name of the undersigned Warrantholder or his or her Assignee
as below indicated and delivered to the address stated below.
Name of Warrantholder
or Assignee:
----------------------------------
Address:
----------------------------------
Social Security or Taxpayer's
Identification Number:
----------------------------------
Signature:
-------------------
Dated:
-------------------
Signature Guaranteed:
NOTICE: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever,
unless this Warrant has been assigned.
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ASSIGNMENT
(To be signed only upon
assignment of Warrant Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
------------------------------
(Name of Assignee)
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
(Social Security or other Taxpayer Identification Number of Assignee)
the within Warrants, hereby irrevocably constituting and appointing
_____________________________________________________ Attorney to transfer
said Warrants on the books of the Company, with full power of substitution in
the premises.
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DATED:
---------------------
--------------------------------
Signature of Registered Holder
Signature Guaranteed:
NOTICE: The signature of this assignment must
correspond with the name as it appears
upon the face of the within Warrant
Certificate in every particular, without
alteration or enlargement or any change
whatever.
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SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made and dated as of January 20, 1997, and is
granted to MELLON US LEASING, A DIVISION OF MELLON LEASING CORPORATION, a
Pennsylvania corporation, successor to United States Leasing Corporation
("Secured Party") having offices at 733 Front Street, San Francisco,
California 94111 by REORGANIZED WHEREHOUSE, a Delaware corporation authorized
to do business under the laws of the State of California, having offices at
19701 Hamilton Avenue, Torrance, California, 90502.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and adequacy of which are
hereby acknowledged, Debtor hereby agrees as follows:
1. GRANT OF SECURITY INTEREST. Debtor hereby grants to Secured Party a
security interest under the Uniform Commercial Code, as enacted and from time to
time in effect in the State of California ("UCC"), in the property described in
Paragraph 2 below (the "Collateral") to secure payment and performance of the
obligations of Debtor to Secured Party described in Paragraph 3 below (the
"Obligations").
2. COLLATERAL; DOCUMENTATION. The Collateral shall consist of the
following:
(a) All Equipment listed on the Collateral List, attached as Exhibit A
hereto, any and all additions or accessions thereto or substitutions therefor
(individually an "Item" and collectively the "Equipment"); and
(b) Any and all proceeds of the conversion, voluntary or involuntary, of
all or any portion of the Equipment now or from time to time hereafter subject
or required or intended to be subject to the lien of this Agreement and any form
of proceeds (including proceeds of insurance and of any governmental takings)
arising therefrom or in connection therewith.
The lien of this Agreement is the only lien permitted by this Agreement to
exist on or in respect of the Collateral. Debtor will provide to Secured Party
such UCC-1 Financing Statements as Secured Party may reasonably require to
perfect its interest in the Collateral, the Collateral List attached as Exhibit
A hereto, the Waiver of Security Interest attached as Exhibit B hereto, the
Promissory Note (the "Note"), a form of which is attached as Exhibit C hereto,
and an amortization schedule which is attached as Exhibit D hereto, all executed
by the appropriate parties.
3. OBLIGATIONS. The Obligations of Debtor secured by this Agreement
shall consist of any and all debts, obligations and liabilities of Debtor to
Secured Party arising out of, connected with or related to this Agreement,
including, without limitation, Debtor's Obligations under the Note from Debtor
to Secured Party, dated January 20, 1997. The Obligations shall also include
interest, penalties, damages, costs and expenses (including reasonable
attorneys' fees and court costs) incurred or suffered by Secured Party as the
result of any default by Debtor under or in connection with any of the
Obligations.
<PAGE>
4. REPRESENTATIONS AND WARRANTIES. Debtor hereby represents and warrants
that:
(a) As to the Note and this Agreement, and the performance thereof,
(i) the execution by Debtor thereof has been duly authorized by all necessary
corporate or other action, (ii) they constitute legal, valid and binding
obligations of the Debtor enforceable in accordance with their terms, (iii) they
do not violate any agreement to which Debtor is a party, (iv) no agreement
(other than this Agreement) to which Debtor is a party or by which its property
may be bound or affected, creates or imposes any lien on the Collateral, and
(v) the execution by Debtor thereof is not inconsistent with the Debtor's First
Amended Chapter 11 Plan as Revised for Technical Corrections on October 4, 1996
in the United States Bankruptcy Court for the District of Delaware, Case No.
95-911 (HSB) (the "Plan");
(b) Debtor is the owner of the Equipment and no person, entity, agency or
government (other than Secured Party) has any right, title, claim or interest
(by way of security interest or other lien or charge or otherwise) in, against
or to the Collateral;
(c) With respect to the transaction covered by this Agreement and
associated Note, each and every material representation made in this Agreement,
in the associated Note and in every certificate, schedule or report submitted to
Secured Party by or on behalf of Debtor is true and correct;
(d) The Contracts are the only agreements between Debtor and Vendors
respecting the Equipment; and
(e) The security interest granted in the Collateral, when perfected by the
filing of a financing statement, will create a valid perfected first priority
lien in the Collateral securing the Note.
5. RIGHTS OF DEBTOR. In addition to all covenants and agreements of
Debtor set forth in Obligations or made in connection therewith, which are
incorporated herein by this reference, Debtor hereby agrees:
(a) to do all acts that may be necessary to maintain, preserve and protect
the Collateral;
(b) not to use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement, or any applicable statute,
regulation or ordinance or any policy of insurance covering the Collateral;
(c) to pay promptly when due all taxes (including sales, use and property
taxes) assessments, charges, encumbrances and liens which may now or hereafter
be imposed or levied upon or in respect of the sale, purchase, ownership,
leasing, possession or use of the Collateral;
(d) that Debtor will execute, acknowledge and deliver to Secured Party
such financing statements and other forms of notice relating to this Agreement
and any amendment thereto to
2
<PAGE>
be filed or recorded in such other places within or without the United States
as Secured Party may reasonably request and Debtor further will from time to
time do and perform any acts and obtain, execute, acknowledge, and deliver
any and all other instruments required by law or reasonably requested for the
purpose of protecting Secured Party's security interest in the Collateral or
any Item to the satisfaction of Secured Party;
(e) that Secured Party or its representative shall have the right to
inspect the Collateral and all records pertaining to the use, operation or
condition of the Equipment at such reasonable times as Secured Party may request
and Debtor shall cooperate to make the Equipment and such records available for
such inspection;
(f) to appear in and defend any action or proceeding which may affect its
title to or Secured Party's interest in the Collateral, and to take all actions
necessary to keep the Collateral free from liens or claims of any nature;
(g) to assure that the Equipment will remain personal property regardless
of how and to what degree it may be attached or affixed to any building or
structure, or for what use the Equipment or structure may be used; and
(h) as long as Debtor has outstanding obligations under the Note or this
Agreement, to maintain its corporate existence and will not merge, consolidate
or sell all or a substantial portion of its assets without the prior written
consent of Secured Party.
6. AUTHORIZED ACTION BY SECURED PARTY. Debtor hereby irrevocably
appoints Secured Party as its attorney-in-fact to do (but Secured Party shall
not be obligated to and shall incur no liability to Debtor or any third party
for failure to do so) any act which Debtor is obligated by this Agreement to do,
and to exercise such rights and powers as Debtor might exercise with respect to
the Collateral for the account of and at the sole cost and expense of Debtor.
7. RELEASES. When the Note is paid in full and all Obligations of Debtor
performed either at maturity of the Note or earlier, if allowed by the terms of
the Note, Secured Party shall release its security interest in the Collateral by
appropriate instrument.
8. EVENTS OF DEFAULT. Upon occurrence of any of the following (herein
referred to as "Event of Default"), the entire principal amount outstanding
under the Note, and all accrued interest thereon and other amounts due
thereunder shall at once become due and payable at the option of Secured Party:
(a) Debtor defaults in the payment of any sums due under the Note as and
when due and payable, and such default continues uncured for ten (10) days after
receipt of written notice of such default;
(b) Debtor fails to observe and perform each and every condition, covenant
and obligation stated in this Agreement or the Obligations which are to be
observed or performed
3
<PAGE>
by them at the time and in the manner it is so required to be observed or
performed, and such default continues uncured for ten (10) days after receipt
of written notice of such default;
(c) Debtor shall be or become insolvent or any proceeding by or against
Debtor shall be further instituted under the federal bankruptcy laws, as now or
hereafter constituted, or any other applicable federal or state bankruptcy,
insolvency or other similar law and the same is not discussed within thirty (30)
days, or Debtor shall consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custody sequestrator (or other similar
official) of itself or of any substantial part of its property, or the making by
Debtor of any assignment for the benefit of creditors or the failure of Debtor
generally to pay its debts as such debts become due or the taking of corporate
action by Debtor in furtherance of any of the foregoing;
(d) Debtor defaults in any manner under any agreement with Secured Party
or under any material loan, financing, conditional sale, security or lease
agreement as and when due and payable, subject to any applicable grace or cure
periods;
(e) Secured Party discovers the falsehood, of any material respect, of any
representation or warranty made by the Debtor to Secured Party with respect to
the subject manner of this Agreement and the Note.
9. REMEDIES OF SECURED PARTY. Upon the occurrence of any Event of
Default, Secured Party may, at its option, in addition to its other rights
hereunder, and without notice to or demand on Debtor and in addition to all
rights and remedies otherwise available to Secured Party under the UCC, do any
one or more of the following:
(a) declare the unpaid balance on the Note due and payable;
(b) foreclose or otherwise enforce Secured Party's security interest in
any manner permitted by law, or provided for in this Agreement;
(c) sell, lease or otherwise dispose of any Collateral at one or more
public or private sales, whether or not such Collateral is present at the place
of sale, for cash or credit or future delivery, on such terms and in such manner
as Secured Party may determine;
(d) recover from Debtor all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid by Secured Party in
exercising any right, power or remedy provided by this Agreement or by law;
(e) require Debtor to deliver the Collateral or assemble the Collateral
and make it available to Secured Party at a place to be designated by Secured
Party and store the Collateral, all at Debtor's risk and without charge to
Secured Party;
(f) enter onto property where any Collateral is located and take
possession thereof with or without judicial process;
4
<PAGE>
(g) prior to the disposition of the Collateral, store, process, repair or
recondition it or otherwise prepare it for disposition in any reasonable manner
and to the extent Secured Party deems appropriate; and
(h) to the extent permitted by, and subject to compliance with any
mandatory requirements of, applicable law then in effect, as a matter of right
and without regard to the adequacy of the security, to appoint or have appointed
a receiver or receivers (or other similar officials) for all or any portion of
the Collateral and for the rents, products, revenues and other income therefrom,
with such rights, powers, privileges and immunities as applicable law or the
court or other entity making such appointment shall confer.
The obligation of Debtor to assemble and deliver the Collateral pursuant to
part (d) above, is a basic provision of this Agreement and Secured Party may
apply to a court of competent jurisdiction for and obtain specific performance
of such Obligations.
10. In addition to the above, and not in substitution thereof, should
Debtor default during the first twenty-four (24) months from the date of this
Agreement, Secured Party shall have the right to additional damages per the
following schedule against Reorganized Wherehouse for claim:
DATE ADDITIONAL CLAIM AMOUNT
---- -----------------------
1-6 months $150,000
7-9 months $120,000
10-12 months $100,000
13-15 months $ 80,000
16-18 months $ 60,000
19-21 months $ 40,000
22-24 months $ 20,000
After 24 months $ -0-
11. CUMULATIVE RIGHTS. The rights, powers and remedies of Secured Party
under this Agreement shall be in addition to all rights, powers and remedies
given to Secured Party by virtue of the UCC or any other statute or rule of law,
or any other agreement, all of which rights, powers and remedies shall be
cumulative and may be exercised successively or concurrently without impairing
Secured Party's security interest in the Collateral.
12. WAIVER. Any forbearance or failure or delay by Secured Party in
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Secured Party shall continue in
full force and effect until such right, power or remedy is specifically waived
in a writing executed by Secured Party. Debtor waives any right to require
Secured Party to proceed against any person or to exhaust any Collateral or to
pursue any remedy in Secured Party's power.
13. BINDING UPON ASSIGNMENT. All rights of Secured Party under this
Agreement shall inure to the benefit of its successors and assigns, and all
Obligations of Debtor shall bind
5
<PAGE>
its heirs, executors, administrators, successors and assigns. Secured Party
may assign its rights under this Agreement, the Note, and any other related
documents without notice to Debtor, but Debtor shall not assign any of its
rights and obligations under such agreements without Secured Party's prior
written consent.
14. ENTIRE AGREEMENT. This Agreement contains the entire security
agreement between Secured Party and Debtor.
15. NOTICES. Any written notice, consent or other communication provided
for in this Agreement shall be considered received when delivered via overnight
or other express carrier or five (5) days after being sent by certified U.S.
mail, with postage prepaid, return receipt requested to the following addresses:
SECURED PARTY:
--------------
MELLON US Leasing
733 Front Street, Mail Stop 380
San Francisco, California 94111
Attn: Litigation Specialist
On or after April 1, 1997 to:
MELLON US Leasing
525 Market Street, 35th Floor
San Francisco, California 94105
Attn: Litigation Specialist
DEBTOR:
-------
Reorganized Wherehouse
19701 Hamilton Avenue
Torrance, California 90502
Attn: Eliot Cobb, Executive VP & Treasurer
Such addresses may be changed by written notice given as provided herein.
16. LAWS APPLICABLE. This Agreement is to be governed by and construed in
accordance with the laws of the State of California.
17. TIME OF THE ESSENCE. Time is of the essence with respect to each and
every provision of this Agreement and the Note.
18. SEVERABILITY. Any provision of this Agreement which shall be held
invalid or unenforceable shall be ineffective without invalidating the remaining
provisions hereof.
19. AMENDMENT. This Agreement may not be amended or supplemented, except
by a writing signed by authorized representatives of Secured Party and Debtor.
6
<PAGE>
20. DESCRIPTIVE HEADINGS. The descriptive headings which are used in this
Agreement are for the convenience of the parties only and shall not affect the
meaning of any provision of this Agreement.
IN WITNESS WHEREOF, Debtor has executed this Agreement on the day and year
first written above.
Reorganized Wherehouse, DEBTOR
By: /s/ Eliot Cobb
------------------------
Its: VP/Treasurer
-----------------------
Dated: 3/25/97
---------------------
Accepted by:
MELLON US Leasing, SECURED PARTY
By: /s/ Authorized Signatory
-------------------------
Its: Director, Operations
------------------------
Dated: 4/2/97
----------------------
7
<PAGE>
EXHIBIT "A"
COLLATERAL LIST
Equipment Description:
1. Mantissa Series 6000 Tilt-Tray Sortation System including Drive, Chutes,
Trays, Tippers, Chain, Guards, Curves, Supports, Mezzanine, Controls, and
Software Installation.
2. The location of the above Equipment is 2230 East Carson Street, Carson,
California 90746.
3. The Equipment has a cost value of $1,074,133.70.
4. The above may be referred to as "the Collateral" or "the Equipment".
Debtor's initials:______
A-1
<PAGE>
EXHIBIT "B"
WAIVER OF SECURITY INTEREST
Eliot Cobb, Executive Vice President and Treasurer, Wherehouse
Entertainment, Inc., being duly sworn according to law does depose and hereby
state as follows:
1. That he is Senior Vice President and Chief Financial Officer of
Reorganized Wherehouse, a Delaware corporation, and a corporation authorized to
do business under the laws of the State of California (the "Corporation").
2. That the Corporation is obligated to pay Mellon US Leasing, a division
of Mellon Leasing Corporation, a Pennsylvania corporation, and successor to
United States Leasing Corporation ("Secured Party") the sum of $417,163.36 under
a certain obligation and restructured agreement resulting in converting a true
lease contract to a conditional sales contract and the Secured Party having a
security interest in a Mantissa Series 6000 Tilt-Tray Sortation System,
including various equipment as more particularly set forth in Exhibit A and
identified as the Collateral List attached to the aforementioned Security
Agreement (the "Equipment").
3. That the Corporation warrants and insures that the Secured Party's
security interest in the Equipment as a perfected priority interest and will
provide all necessary releases from any and all lienholders, including blanket
lienholders, and such other lienholders that may have made demand in security
position against the Equipment and shall provide the necessary documentation to
the satisfaction of Secured Party hereunder evidence such as termination,
including UCC financing statement termination filings, as may be required by
Secured Party.
4. That all potential lienholders, including mechanic's lien claimants
and landlords, have released any potential claims against any of the Secured
Party's collateral and that the Corporation shall indemnify and hold harmless
Secured Party from any such claims.
5. That the deponent is hereby duly authorized to execute and deliver
this instrument on behalf of Corporation.
____________________________________
Eliot Cobb
Executive VP & Treasurer of Reorganized
Wherehouse, a Delaware corporation
SWORN TO AND SUBSCRIBED before me this ____ day of __________, 1997.
____________________________________
Notary Public
My Commission Expires:
B-1
<PAGE>
EXHIBIT "C"
PROMISSORY NOTE
$417,163.36 January 20, 1997
REORGANIZED Wherehouse (the "BORROWER"), for valuable consideration, hereby
promises to pay to the order of MELLON US Leasing ("HOLDER"), at its office
located at 733 Front Street, San Francisco, California 94111, or at such other
place or to such other party as the then holder hereof, including Holder, may
from time to time designate in writing, in lawful money of the United States of
America, the principal sum of Four Hundred Seventeen Thousand One Hundred
Sixty-three Dollars and Thirty-six Cents ($417,163.36) (the "Loan"), together
with interest thereon from and after the date hereof and until maturity at the
rates of interest set forth below.
All payments on this Note shall, at the option of Holder, be applied first
to the payment of accrued interest, and any remainder shall be applied to
reduction of the principal balance. All interest shall be computed on the basis
of a year consisting of three hundred sixty (360) days.
This Note shall be payable in thirty-two (32) monthly installments of
$12,750.00 and a thirty-third installment of $59,865.70 commencing on the
Twentieth Day of January, 1997 and payable on the seventieth day of each month
thereafter until the note is paid (or if the payment date is not a Business Day,
on the next succeeding Business Day). The interest due and payable on the
principal under this Note shall be eight percent (8%) per annum from the date
hereof. "Business Day" shall mean any day other than Saturday, Sunday or any
other day on which federal savings banks in San Francisco are not open for
business.
This Secured Note is the Note referred to in the Security Agreement dated
January 20, 1997 between Holder and Borrower, which agreement contains
additional rights of Holder, and provides the security for this Note. This Note
is secured by the Collateral specified in the Security Agreement. If an Event
of Default shall occur and be continuing, the unpaid balance hereon may be
declared and shall thereupon become due and payable in the manner and with the
effect provided in the Security Agreement.
To the extent it may lawfully do so, Borrower waives presentment, notice of
nonpayment or dishonor, protest, notice of protest, demand and, other than as
expressly set forth herein, all other notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note. Payments of
interest and principal due under this Note shall be absolute and unconditional
and shall not be subject to abatement, reduction, set-off, defense,
counterclaim, interruption, deferment or recoupment for any reason whatsoever.
If Borrower fails to pay any monthly installment due under this Note by the
tenth day after the date such installment is due, Borrower shall pay Holder, in
addition to such installment, a default amount equal to five percent of such
installment then due.
C-1
<PAGE>
All notices or other communications hereunder to either party shall be
(a) in writing and, if mailed, shall be deemed to be given on the third Business
Day after the date when deposited in the United States mail, by registered or
certified mail, postage prepaid, addressed as provided hereinafter, and (b)
addressed as follows:
If to Borrower: Reorganized Wherehouse
19701 Hamilton Avenue
Torrance, CA 90502
ATTN: Eliot Cobb
If to Holder: MELLON US Leasing
733 Front Street, Mail Stop 380
San Francisco, CA 94111
ATTN: Litigation Specialist
or to either party at such other addresses as such party may designate in a
written notice to the other party.
Any provision of this Note that is illegal, invalid or unenforceable, shall
be ineffective to the extent of such illegality, invalidity or unenforceability
without rendering illegal, invalid or unenforceable the remaining provisions of
this Note.
This secured Note is executed and delivered in, and shall in all respects
be governed by and construed in accordance with the laws of the State of
California, including all matters of validity and performance.
BORROWER:
Reorganized Wherehouse
By:
--------------------------
Its:
-------------------------
Attest:
By:
--------------------------
Its:
-------------------------
C-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the Form 10-K for the year ended January 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 6,178
<SECURITIES> 3
<RECEIVABLES> 1,932
<ALLOWANCES> 0
<INVENTORY> 75,800
<CURRENT-ASSETS> 100,341
<PP&E> 21,337
<DEPRECIATION> 0
<TOTAL-ASSETS> 131,742
<CURRENT-LIABILITIES> 40,897
<BONDS> 0
0
0
<COMMON> 89,483
<OTHER-SE> (5,340)
<TOTAL-LIABILITY-AND-EQUITY> 131,742
<SALES> 295,765
<TOTAL-REVENUES> 365,504
<CGS> 228,964
<TOTAL-COSTS> 374,932
<OTHER-EXPENSES> 19,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 681
<INCOME-PRETAX> (30,045)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,045)
<DISCONTINUED> 0
<EXTRAORDINARY> 173,765
<CHANGES> 0
<NET-INCOME> 143,720
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
