<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended April 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
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 [ ]
As of April 30, 1997, 10,257,808 shares of the registrant's common stock
were issued and outstanding and 907,839 additional shares are expected to be
issued pursuant to the bankruptcy plan of reorganization discussed in Item 1
below.
<PAGE>
The Registrant's Form 10-Q for the quarter ended April 30, 1997, is being
amended to read as follows:
INDEX
WHEREHOUSE ENTERTAINMENT, INC.
Page
----
FORWARD LOOKING STATEMENTS 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
April 30, 1997 (Unaudited) and January 31, 1997 4
Condensed Statements of Operations -
Three Months Ended April 30, 1997 (New Wherehouse)
and 1996 (Old Wherehouse) (Unaudited) 5
Condensed Statements of Cash Flows -
Three Months Ended April 30, 1997 (New Wherehouse) and
1996 (Old Wherehouse) (Unaudited) 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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
Report containing such forward-looking statements include "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
under Item 2 of Part I below. Statements in this Report which address
activities, events or developments that the registrant expects or anticipates
will or may occur in the future, including such things as the future issuance
of shares, future capital expenditures (including the amount and nature
thereof), expansion and other developments and technological trends of
industry segments in which the registrant is active, business strategies,
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 those 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.
3
<PAGE>
ITEM 1
PART 1
FINANCIAL INFORMATION
WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1997 1997
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 18,492,000 $ 6,178,000
Receivables 1,222,000 1,932,000
Prepaid inventory deposits 294,000 4,486,000
Merchandise inventory 72,527,000 75,800,000
Other current assets 1,659,000 2,259,000
Rental inventory, net (Note 5) 8,015,000 9,686,000
------------ ------------
Total current assets 102,209,000 100,341,000
Equipment and improvements, net 20,377,000 21,337,000
Reorganization value in excess of amounts
allocable to identifiable assets, net 9,481,000 9,724,000
Other assets 330,000 340,000
------------ ------------
Total assets $ 132,397,000 $ 131,742,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 40,311,000 $ 40,168,000
Current maturities of capital lease obligations
and long-term debt 530,000 729,000
------------ ------------
Total current liabilities 40,841,000 40,897,000
------------ ------------
Capital leases obligations and long-term debt 707,000 722,000
Notes payable 3,980,000 3,980,000
Other long-term liabilities 3,105,000 2,000,000
------------ ------------
Shareholders' equity
Common stock, $.01 par value, 24,000,000
authorized, 10,257,808 issued and outstanding
at April 30, 1997 and January 31, 1997, respectively 103,000 103,000
Additional paid-in capital 89,380,000 89,380,000
Retained earnings (286,000) -----
Notes receivable (5,433,000) (5,340,000)
------------ ------------
Total shareholders' equity 83,764,000 84,143,000
------------ ------------
Total liabilities and shareholders' equity $ 132,397,000 $ 131,742,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to Condensed Financial Statements
4
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WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
New Old
Wherehouse Wherehouse
------------- --------------
Three Three
Months Ended Months Ended
April 30, 1997 April 30, 1996
-------------- --------------
<S> <C> <C>
Sales $ 59,929,000 $ 69,372,000
Rental revenue 13,254,000 18,118,000
------------- --------------
73,183,000 87,490,000
Cost of sales 38,281,000 44,971,000
Costs of rentals, including amortization (Note 5) 7,831,000 7,047,000
------------- --------------
46,112,000 52,018,000
Selling, general and administrative expenses 25,979,000 33,248,000
Depreciation and amortization 1,616,000 3,469,000
------------- --------------
Income (loss) from operations (524,000) (1,245,000)
Interest expense 111,000 189,000
Interest income (189,000) (52,000)
------------- --------------
Income (loss) before reorganization items & income taxes (446,000) (1,382,000)
Reorganization items
Professional fees ----- 853,000
Provision for store closing costs ----- 31,000
------------- --------------
----- 884,000
------------- --------------
Income (loss) before income taxes (446,000) (2,266,000)
------------- --------------
Provision (benefit) for income taxes (160,000) -----
------------- --------------
Net income (loss) $ (286,000) $ (2,266,000)
------------- --------------
------------- --------------
Net income (loss) per share $ (0.03)
-------------
-------------
Weighted average shares outstanding 10,297,808
-------------
-------------
</TABLE>
See accompanying notes to Condensed Financial Statements
5
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WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
New Old
Wherehouse Wherehouse
------------- --------------
Three Three
Months Ended Months Ended
April 30, 1997 April 30, 1996
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (286,000) $ (2,266,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,617,000 9,388,000
Rental amortization, included in cost of rental 6,544,000
Book value of rental inventory dispositions,
included in cost of rental 1,397,000 1,127,000
Changes in operating assets and liabilities:
Receivables 618,000 (191,000)
Prepaid inventory deposits 4,192,000 6,413,000
Merchandise inventory 3,273,000 (1,564,000)
Other current assets 599,000 241,000
Accounts payable, accrued expenses and
other liabilities 1,388,000 (1,555,000)
Liabilities subject to compromise ----- (2,228,000)
Rental inventory purchases (6,271,000) (9,028,000)
-------------- ------------
Net cash provided by operating activities 13,071,000 337,000
INVESTING ACTIVITIES:
Acquisition of property, equipment and improvements (553,000) (392,000)
Decrease (increase) in other assets and intangibles 10,000 (397,000)
-------------- ------------
Net cash used in investing activities (543,000) (789,000)
FINANCING ACTIVITIES:
Principal payments on capital lease obligations
and long-term debt (214,000) (209,000)
-------------- ------------
Net cash used in financing activities (214,000) (209,000)
Net increase (decrease) in cash 12,314,000 (661,000)
Cash at beginning of the period 6,178,000 7,353,000
-------------- ------------
Cash at end of the period $ 18,492,000 $ 6,692,000
-------------- ------------
-------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 26,000 $ 152,000
Income taxes ----- 2,000
Reorganization items 7,260,000 66,000
</TABLE>
See accompanying notes to Condensed Financial Statements
6
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended April 30, 1997 are not necessarily indicative of
the results that may be expected for the year ended January 31, 1998.
Certain reclassifications of balances have been made to the 1996 amounts to
conform to the 1997 presentation. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended January 31, 1997.
2. REORGANIZATION UNDER CHAPTER 11
The Company's Plan of Reorganization, (the "Plan") was confirmed by an
order of the Bankruptcy Court entered on January 7, 1997. The effective date
of the Plan occurred on January 31, 1997.
Pursuant to the Plan, Wherehouse Entertainment, Inc. (New Wherehouse)
was incorporated 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), and its parent company, WEI
Holdings, Inc.,. 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.
Since the Plan Effective Date, the Bankruptcy Court has retained
jurisdiction over certain claims and other matters relating to the Debtors'
Bankruptcy estates, but the Company has been and is free to carry out its
business without oversight by the Bankruptcy Court.
For a summary of the Plan of Reorganization, reference is made to the
Company's Annual Report on Form 10-K for the year ended January 31, 1997.
7
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3. FRESH START REPORTING
On January 31, 1997, the Company 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 resulted 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 were restated to reflect the reorganization value of
the reorganized entity, which approximated its fair value at the date of
reorganization. In addition, the accumulated deficit of the Company was
eliminated 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. In addition, the Company selected certain accounting policies
adopted at New Wherehouse's inception which are not consistent with those
used by Old Wherehouse. Accordingly, the results of operations of New
Wherehouse may not be comparable to those of Old Wherehouse.
4. REVOLVING CREDIT FACILITY
Pursuant to the 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. The Congress facility prohibits the Company from
declaring or paying dividends on its classes of capital stock, including the
common stock, in excess of an aggregate of $6 million, unless certain
financial performance targets set forth in the Congress Facility are met. As
of April 30, 1997, there were no borrowings outstanding under the Congress
Facility, although $700,000 of letters of credit were outstanding.
5. RENTAL INVENTORY AMORTIZATION
On January 31, 1997, the Company adopted an accelerated method of
amortization which amortizes rental inventory using the straight-line method
over a three-month period with a salvage value of $3.00. The previous method
amortized rental inventory over three years for video cassettes and two years
for video games. The new method generated higher rental amortization (and,
therefore, lower gross profit) in the first quarter of the fiscal year ending
January 31, 1998 as compared to the method used in the first quarter of the
fiscal year ended January 31, 1997.
8
<PAGE>
6. RESTATEMENT OF QUARTERS
The Company is amending this Form 10-Q for the period ended April 30,
1997 to reflect adjustments to depreciation and amortization expense
resulting principally from changes in the initial allocation of assets
related to the Company's fresh start reporting. These changes were based on
analysis and appraisals received, by the Company, during the third quarter.
The earnings impact on the first quarter of the fiscal year ending
January 31, 1998 was as follows:
THREE MONTHS ENDED
APRIL 30, 1997
Previously
Reported Restated
--------- --------
Income (loss) from operations $(1,430,000) $(524,000)
Net income (loss) (830,000) (286,000)
Net income (loss) per share $ (.08) $ (.03)
9
<PAGE>
WHEREHOUSE ENTERTAINMENT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATION
INTRODUCTION
This discussion should be read in conjunction with the financial
statements, related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operation contained in the Company's
Annual Report on Form 10-K for the year ended January 31, 1997.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED APRIL 30, 1997 AND APRIL 30, 1996
Net revenues were $73.2 million and $87.5 million for the quarters ended
April 30, 1997 and 1996, respectively. The Company believes that the
decrease of $14.3 million, or 16.4%, was principally due to the closing of 63
stores during fiscal year 1997 and 7 stores during the first quarter of
fiscal year 1998, as well as continued competitive and economic pressures in
certain of the Company's markets.
A summary of total net merchandise sales and rental revenues, by product
category, is provided below:
NET MERCHANDISE SALES AND RENTAL REVENUES
BY MERCHANDISE CATEGORY
(DOLLAR AMOUNTS IN MILLIONS)
Quarter Ended
April 30,
1997 1996
----- -----
Net Merchandise Sales:
Music $ 51.8 $ 58.8
Other, principally sales of new video
cassettes, video game software and hardware,
General merchandise and ticket commissions. 8.1 10.6
----- -----
Total merchandise sales $ 59.9 $ 69.4
Videocassette and other rental revenue 13.3 18.1
----- -----
Total revenues $ 73.2 $ 87.5
----- -----
----- -----
10
<PAGE>
The sale of pre-recorded music, new video cassettes, video game software
and hardware and general merchandise continue to represent the greatest
portion of the Company's revenues. For the quarter ended April 30, 1997, net
merchandise sales represented 81.9% of aggregate revenues. On a same-store
basis net merchandise sales increased by 0.7% during the quarter ended April
30, 1997 as compared to the quarter ended April 30, 1996. (It should be
noted that February, 1996 had 29 days as compared to 28 days for February,
1997. After excluding the impact of the difference in days, net merchandise
sales increased by 1.8% on a same-store basis.) Net merchandise sales were
$59.9 million versus $69.4 million for the quarters ended April 30, 1997 and
April 30, 1996, respectively, representing an overall decrease of 13.6%. The
decrease of $13.6% was largely the result of the closure of 63 stores during
fiscal year 1997.
Rental revenue includes the rental of videocassettes, video games and
game players, audiocassette books, and laserdiscs; and sales of previously
viewed videocassettes and previously played video games. Approximately 189
of the Company's stores currently offer rental products. Rental revenue was
$13.3 million versus $18.1 million during the quarters ended April 30, 1997
and April 30, 1996, respectively, representing a decrease of $4.9 million or
26.8%. On a same-store basis rental revenue decreased approximately 17.0% as
compared to the prior year. After excluding the impact of the difference in
days as mentioned in the above paragraph, rental revenue decreased by 16.1%
on a same-store basis. The Company believes that the decrease in same-store
rental revenue was attributable to continued competition and general
softening in rental consumer spending nationwide. During the quarter ended
April 30, 1997, the Company decreased its purchases of video rental product
by $2.8 million or 30.5% versus the same quarter of the prior year.
Cost of sales decreased $6.7 million to $38.3 million for the quarter
ended April 30, 1997 versus $45.0 million for the quarter ended April 30,
1996, representing a decrease of 14.9%. As a percentage of net merchandise
sales, costs of sales decreased 0.9% to 63.9% during the quarter ended April
30, 1997 versus 64.8% during the quarter ended April 30, 1996. The 0.9%
decrease in cost of sales as a percentage of net merchandise sales was
principally due to decreases in the cost of merchandise inventory and higher
prompt payment discounts.
Cost of rentals, including amortization, increased to $7.8 million
during the quarter ended April 30, 1997, an increase of $0.8 million or
11.0%, versus $7.0 million during the quarter ended April 30, 1996. As a
percentage of rental revenue, cost of rentals increased to 59.1% during the
quarter ended April 30, 1997 versus 38.9% during the quarter ended April 30,
1996, representing an increase of 20.1%. The 20.1% increase in cost of
rentals is primarily due to the adoption by New Wherehouse of a more
accelerated amortization method versus the method used by Old Wherehouse
during the quarter ended April 30, 1996. If Old Wherehouse had adopted this
accelerated method of amortization as of January 31, 1996, cost of rentals
during the quarter ended April 30, 1996 would have been higher (and gross
profit lower) by approximately $2.7 million.
Merchandise sales as a percentage of aggregate net revenues increased
2.6% to 81.9% during the quarter ended April 30, 1997 versus 79.3% during the
quarter ended April 30, 1996.
11
<PAGE>
Several major retail chains, including Best Buy, Blockbuster
Entertainment and Hollywood Video have increased their retail store presence
in the Company's markets. This trend may continue and it is anticipated the
Company may, in future periods, experience increased competition and that
such competition may result in continued pressure on revenues and gross
profit margins.
Selling, general and administrative expenses, were $26.0 million versus
$33.2 million for the quarters ended April 30, 1997 and April 30, 1996,
respectively, a decrease of $7.2 million or 21.9%. As a percentage of net
revenues, selling, general and administrative expenses, were 35.5% during the
quarter ended April 30, 1997 versus 38.0% during the quarter ended April 30,
1996, representing a decrease of 2.5%. The 2.5% decrease was principally due
to reductions in rent and occupancy costs, and to a lesser extent,
advertising expense. During the quarter ended April 30, 1997, rent and
occupancy costs decreased in absolute dollars by $3.8 million versus the
quarter ended April 30, 1996.
Loss from operations for April 30, 1997 was $0.5 million as compared to
$1.2 million for April 30, 1996, an improvement of $0.7 million. As
mentioned previously, the Company adopted an accelerated method of
amortization for rental inventory at January 31, 1997. If the Company would
have adopted the accelerated method at January 31, 1996, loss from operations
for the quarter ended April 30, 1996 would have been $3.9 million. Excluding
the impact of the change in the method of amortization of rental inventory,
loss from operations for the period ended April 30, 1997 was lower than that
experienced for the period ended April 30, 1996. The improvement in loss
from operations was primarily the result of the closure of 63 underperforming
stores during fiscal year 1997, reductions in rent and occupancy costs
through landlord concessions, and decreases in other selling, general and
administrative expenses that occurred as a result of the closure of stores.
Reorganization items 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 quarter ended April 30,
1996, the Company reported total reorganization items of $0.9 million which
was primarily comprised of professional fees. The Company does not expect to
record any reorganization items during fiscal year ended January 31, 1998.
The Company recorded a tax benefit of $0.2 million for quarter ended
April 30, 1997 but did not record any tax benefit for quarter ended April 30,
1996. Should Wherehouse realize pre-tax income in future quarters it will be
subject to Federal and State tax. The benefit represents an effective tax
rate of 40% which the Company estimates will be its effective tax rate for
the year ended January 31, 1998.
The Company is currently under audit by the California Franchise Tax
Board ("FTB") 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.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended April 30, 1997, the Company's net cash provided
by operating activities increased by $12.8 million to $13.1 million from $0.3
million for the corresponding quarter of the prior fiscal year, due to
decreases in merchandise inventory, lower purchases of rental inventory and
other factors, offset by the change in prepaid inventory deposits.
Cash used in investing activities decreased by $0.3 million to $0.5
million during the quarter ended April 30, 1997 from $0.8 million during the
quarter ended April 30, 1996, principally due to lower increases in other
assets and intangibles offset by increased acquisitions of property,
equipment and improvements.
Cash used in financing activities remained approximately the same for
the quarter ended April 30, 1997 as compared to the quarter ended April 30,
1996.
While the Company believes that the current borrowing facility (see Note
4 under Notes to Condensed Financial Statements) is adequate to support
operations for the remainder of the current fiscal year, there can be no
assurance as to the effect which any future changes in the Company's
operations may have on its liquidity.
As of April 30, 1997 the Company has not signed any lease commitments to
open new stores during the next twelve months.
SEASONALITY
The Company's business is seasonal, and revenues and operating income
are highest during 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, except for changes in the minimum wage
mandated by the Federal government, inflation has not had a material effect
on its operations and its internal and external sources of liquidity and
working capital.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(I) McMahan and Related Actions
In January 1988, holders of approximately $17.0 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, alleged 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. Although all claims of the McMahan plaintiffs were
discharged in the Wherehouse Plan of Reorganization for no consideration,
Wherehouse and the other parties are attempting to resolve the litigation
procedurally, which should have no adverse impact on the Company. On
December 23, 1996, the parties entered into a Settlement Agreement pursuant
to which the lawsuits have been settled. This settlement, which was approved
by the court on June 5, 1997, 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.
(ii) Other.
The Company is a party to various other claims, legal actions and
companies arising in the ordinary course of its business. In the opinion of
management, all such matters are without merit or involve such moments that
unfavorable disposition will not have a material impact on the financial
position an results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In its Annual Report on Form 10-K, filed on May 16, 1997, the
Company erroneously stated that Mr. Gallen, a Director of the Company, had
worked for Cerberus Partners, L.P., during the period of February 1993
through February 1994. Mr. Gallen spent this period on the premises of
Feinberg Management, L.P. ("FMLP"), under the tutelage of Stephen Feinberg,
the principal of FMLP, observing, training and learning investment
techniques, procedures and philosophies. Mr. Gallen received no compensation
from FMLP.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: December 30, 1997 /s/ Antonio C. Alvarez
----------------------------------
ANTONIO C. ALVAREZ
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: December 30, 1997 /s/ Robert S. Kelleher
----------------------------------
ROBERT S. KELLEHER
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
16
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