SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] JOINT 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, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 33-51266-01 Commission File Number 1-8281
WEI Holdings, Inc. Wherehouse Entertainment, Inc.
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Delaware Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
13-3439558 95-2647555
(I.R.S. Employer Identification (I.R.S. Employer Identification
Number) Number)
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue 19701 Hamilton Avenue
Torrance, California 90502-1334 Torrance, California 90502-1334
(Address of principal executive (Address of principal executive
offices including ZIP code) offices including ZIP code)
(310) 538-2314 (310) 538-2314
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
6 1/4% Convertible Subordinated
None Debentures Due July 1, 2006
(Title of class) (Title of class)
None American Stock Exchange
(Name of Exchange) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants (1) have
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) have been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
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 registrants' 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 ]
All of the voting stock of Wherehouse Entertainment, Inc. is
held by WEI Holdings, Inc. All of the voting stock of WEI
Holdings, Inc. is held by affiliates. All officers, directors
and more than 5% stockholders of WEI Holdings, Inc. are deemed
"affiliates" of WEI Holdings, Inc. for the purpose of determining
the foregoing. The registrants, however, do not represent that
such persons, or any of them, would be deemed "affiliates" of the
registrants for any other purpose under the Securities Exchange
Act of 1934 or the Securities Act of 1933.
As of April 30, 1994, 2,366,113 shares of WEI Holdings,
Inc.'s common stock and 10 shares of Wherehouse Entertainment,
Inc.'s common stock were issued and outstanding.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended January 31, 1994 Compared to Year Ended January 31,
1993
Aggregate net revenues were $471.8 million and $448.5
million for the fiscal years ended January 31, 1994 and January
31, 1993, respectively. This increase of $23.3 million was
principally due to an increase in number of stores from 313 at
January 31, 1993 to 347 (including 4 stores managed by the
Company, for its benefit, under contracts with the owners
thereof) at January 31, 1994, and a 0.14% increase in same-store
revenues (stores open for at least 13 months). During fiscal
1994, in order to achieve additional geographic diversification,
the Company expanded its presence in several western states and
entered new markets in additional western and various mid-western
states through its acquisitions of an aggregate of 39 specialty
music stores from The Record Shop, Inc. and from Pegasus Music
and Video, Inc. Furthermore, during the fiscal year ended
January 31, 1994, the Company opened 6 new stores, managed 4
stores for its own benefit under contract with The Record Shop,
Inc., expanded or remodeled 69 stores and closed 15 stores.
Because the Company expects in the current fiscal year to
focus its efforts towards the improvement of its existing stores
and operations, rather than acquisitions or new store openings,
it can be expected that growth in aggregate net revenues in the
fiscal year ending January 31, 1995 will be dependent primarily
upon increases, if any, in same-store revenues; and thus the
fiscal 1994 increase in aggregate net revenues is not necessarily
indicative of increases to be expected in the current fiscal
year.
The Company will continue to opportunistically evaluate
potential acquisitions which could meet its strategic objectives,
and, if it determines the same to be appropriate, the Company
may, subject to its ability to source additional capital (the
availability of which is currently uncertain), make additional
acquisitions. On a longer-term basis, the Company intends to
continue its growth, both by opening new stores in selected
locations, and by additional acquisitions.
Merchandise sales were $380.2 million and $354.4 million
during the fiscal year ended January 31, 1994 and 1993, respec-
tively, representing an aggregate increase of 7.3% and an
increase of 1.1% on a same-store basis. (See table in Item 1 --
"Business - Merchandise Products and Supply.") The increase in
same-store merchandise sales resulted principally from increased
sales of video games and used compact disc products, which were
newer product lines for the Company, as well as from promotional
markdowns used to generate incremental sales. The Company's
sales of music cassettes continued to decline from the previous
fiscal year due to a continuing shift in consumer demand to
compact discs.
The Company's revenues from the sales of videocassettes have
decreased with the proliferation of competitors' outlets selling
videocassettes and the highly competitive pricing of the product,
particularly from discounters and mass merchandisers. The
Company has implemented new pricing and merchandising strategies
designed to counter this trend. No assurances can be given that
the Company's new strategies will be successful.
Rental revenue includes the rental of videocassettes, video
games and game players, audiocassette books and laser discs.
Approximately 75% of the Company's stores currently offer video-
cassettes and other products for rent. Rental revenue for the
fiscal year ended January 31, 1994 was $91.6 million, a decrease
of 2.6% from the previous fiscal year and a decrease of 3.3% on
a same-store basis.
In spite of the overall increase in the Company's aggregate
net revenues from fiscal 1993 to fiscal 1994, and a slight
increase in the number of stores carrying rental products from
fiscal 1993 to fiscal 1994, the Company continued to experience
declining rental revenues, primarily due to competitive factors
and, to a lesser extent, to the continued maturing of videocas-
settes in the Company's predominant markets, offset to some
extent by the growth in game rental products. It is the
Company's belief that, as a result of the large installed base of
videocassette recorders ("VCRs") in California and its other
major markets, future growth in rental revenue will be primarily
as a result of marketing and other competitive factors, as well
as additional store openings, rather than as a result of
increases in the size of the videocassette rental user market.
In connection with its 1994 Re-Engineering Plan, described below,
the Company has recently implemented new pricing and merchan-
dising strategies designed to increase rental revenue. Nonethe-
less, the Company anticipates that it will continue to experience
strong competition in this area, and no assurance can be given
that the Company's new strategies will be successful.
The Company's business and same-store revenues may be
impacted in the future by various competitive and economic
factors, including, but not limited to, consumer tastes,
acquisitions made by the Company, marketing programs, weather,
special events, the quality of new releases of music, video and
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 revenue have
been impacted by increased competition from other music and video
specialty retail chains, as well as discounters and mass merchan-
disers.
During the fiscal year ended January 31, 1994, in response
to various competitive factors and less than favorable economic
conditions, the Company developed, adopted and continued to
refine a multi-faceted re-engineering plan (the "1994 Re-Engin-
eering Plan"), which is designed to improve operating profit by
lowering costs associated with its inventory supply chain and
retail store operations, and to tailor its stores to better
accommodate local consumer tastes and entertainment needs. As
part of this strategic plan, the Company has delegated more power
to its on-site store managers to customize their inventory of
merchandise and rental products, and has further refined its
pricing strategy for videocassette rentals to lower rental cost
to enable the store manager to select from a matrix of rental
prices those which best fit the demographics and competitive
conditions of his or her market. The objectives of this strategy
are both to improve profitability and to enable each of the
Company's stores to become "the best store in the neighborhood."
The Company has also, as part of the 1994 Re-Engineering
Plan, developed a video rental remerchandising program, which was
largely implemented during the first half of the current fiscal
year. Under the video rental remerchandising program, the
Company will provide a greater number of "hit" movie titles at
its stores, as well as install new store signage and fixtures
designed specifically to support the program.
The Company believes that its planned marketing and merchan-
dising strategies and its expansion in markets outside of Cali-
fornia should improve its ability to respond to competition from
other retailers. However, the Company can give no assurances
that its marketing and merchandising strategies will be
effective.
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 increased $25.9 million to $248.0 million for
the fiscal year ended January 31, 1994, as compared with $222.1
million for the fiscal year ended January 31, 1993. As a percen-
tage of merchandise sales revenues, cost of sales increased 2.5%
to 65.2% for the fiscal year ended January 31, 1994 versus 62.7%
for the fiscal year ended January 31, 1993. The gross profit
percentage for merchandise sale product was 34.8% and 37.3% for
the fiscal years ended January 31, 1994 and 1993, respectively.
The 2.5% increase in cost of sales as a percentage of merchandise
sales revenues principally resulted from changes in product mix
and the utilization of promotional markdowns to generate incre-
mental sales (1.1%); increased costs associated with inventory
shrinkage and other book-to-physical adjustments (1.0%), lower
prompt payment discounts from suppliers (0.3%) and various other
factors (0.1%). The changes in product sales mix include an
increase in the Company's video game sales business, which
carries lower margins than the Company's other product lines,
along with the continuing shift in consumer demand from music
cassettes to lower-margin compact discs. Additionally, margins
from sales of compact discs and from video games each declined
somewhat from the prior year. Video game sales margins declined
as excess supply necessitated higher promotional markdowns. The
decreased gross margins were offset, in part, by improved gross
margins for used compact discs, accessories and personal
electronics.
Cost of rentals, including amortization, increased $18.7
million to $50.8 million for the fiscal year ended January 31,
1994, as compared with $32.1 million for the fiscal year ended
January 31, 1993. As a percentage of rental revenue, cost of
rentals increased to 55.5% for the fiscal year ended January 31,
1994 from 34.1% for the fiscal year ended January 31, 1993, an
increase of 21.4%. The gross profit percentage for rental
revenue was 44.5% and 65.9% for the fiscal years ended January
31, 1994 and 1993, respectively. The 21.4% increase in cost of
rentals, including amortization, as a percentage of rental
revenues was principally due to a change in accounting estimate
for amortizing the cost of video rental inventory that resulted
in a $20.3 million charge (22.2% of rental revenue) to reduce the
net carrying value of existing rental inventory which was
slightly offset by other factors including, among others, a
decrease in the book value of rental dispositions resulting from
the sale of older rental inventory (0.8%). In prior years, the
Company amortized the cost of video rental inventory under an
accelerated method to its estimated salvage value. During the
fiscal year ended January 31, 1994, the Company changed its
amortization estimation method by eliminating its utilization of
the half year convention and salvage value, and by further
accelerating the amortization calculation. The Company believes
that the revised amortization estimate will result in better
matching of rental revenue with the cost of such rental
inventory.
For the fiscal year ended January 31, 1994, the change in
the estimate for amortization of video rental inventory resulted
in an increase of $20.3 million (40% of cost of rentals) over
what the cost of rentals would have been if the change had not
been effected. It can be expected that, in future periods, cost
of rentals as a percentage of rental revenue will be somewhat
lower than that experienced in the fiscal year ended January 31,
1994.
Merchandise sales, as a percentage of aggregate net
revenues, increased from 79.0% in the fiscal year ended January
31, 1993 to 80.6% in the fiscal year ended January 31, 1994.
Should the shift in product mix from higher margin rental revenue
to lower margin merchandise sales continue, it can be expected
that the change in the mix of revenue contribution could have an
impact on profitability.
In both the music and rental markets, there has been a
recent 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 Virgin Megastores, have announced
plans to increase their retail music store presence in
California. It can thus be expected that the Company will in
future periods experience increased competition from companies
with greater financial resources than the Company, and that
competitive pressures may result in a tightening of gross profit
margins.
Selling, general and administrative expenses, excluding $8.9
million and $7.7 million for the amortization of purchase price
adjustments resulting from acquisitions, were $187.7 million and
$175.0 million for the fiscal years ended January 31, 1994 and
1993, respectively, an increase of $12.7 million, or 7.3%. As a
percentage of aggregate net revenues, selling, general and admini-
strative expenses, excluding amortization of purchase price
adjustments, were 39.8% and 39.0% for the fiscal years ended
January 31, 1994 and 1993, respectively, an increase of 0.8%.
The 0.8% increase is principally due to increased rent and
occupancy expenses resulting from contractual escalations in base
rent for existing stores, leases for new stores and stores
acquired during the year, expenses resulting from lease renewals
and increases for the straight-line effect of scheduled future
rent increases (0.9%) and increased semi-variable and payroll
expenses attributable to new stores and acquisitions, a revised
corporate salary program, and a higher administrative headcount
than during the previous fiscal year (0.5%). The increases in
selling, general and administrative expenses were offset, in
part, by a $4.2 million decrease in advertising expenditures
during the fiscal year ended January 31, 1994 (1.0% as a
percentage of net revenues) as the Company changed its media
strategy from more expensive, image-building television to
greater product emphasis utilizing less expensive media such as
radio, billboards and newspaper. Additionally, the Company
changed the gift structure of its rental customer loyalty
program, which resulted in lower expenses. All other selling,
general and administrative expenses increased 0.4% as a
percentage of net revenues. Selling, general and administrative
expenses include non-cash provisions for the straight-line effect
of scheduled future rent increases of $4.9 million and $3.5
million for the fiscal years ended January 31, 1994 and 1993,
respectively. Absolute dollar increases in rent and occupancy
expenses are expected to continue.
As part of the 1994 Re-Engineering Plan, the Company
indentified required changes in systems and operations and,
therefore, assessed the realizable value of certain assets and
the costs of the restructuring measures. As a result, during the
fiscal year ended January 31, 1994, the Company incurred a total
of $14.3 million for restructuring charges (all of which have
resulted from, or were related to, the 1994 Re-Engineering Plan)
as follows (in millions of dollars):
Write-off of property, plant and equipment $ 8.2
Write-off of beneficial leasehold interests
and other assets 4.2
Severance costs 1.4
Consulting fees and other .5
------
$14.3
======
The loss from operations was $37.9 million for the fiscal
year ended January 31, 1994, as compared with income from
operations of $11.6 million for the fiscal year ended January 31,
1993. The decreased operating results principally resulted from
(i) the decreased gross profit for video rental due to the change
in accounting estimate referred to above, and (ii) the restruc-
turing charges discussed above. Excluding the effects of
purchase accounting in both fiscal periods, and excluding both
the change in estimate for amortizing video rental inventory and
the restructuring charges, in the fiscal year ended January 31,
1994, income from operations would have been $8.4 million for the
fiscal year ended January 31, 1994 compared to $22.7 million for
the fiscal year ended January 31, 1993.
Interest expense (net) increased $2.6 million to $23.2
million, as compared with $20.6 million, for the fiscal years
ended January 31, 1994 and January 31, 1993, respectively. The
increase principally resulted from higher overall debt levels
required for the previously-described store acquisitions and the
Acquisition, somewhat offset by lower interest rates on floating
rate debt. Included in interest expense are $1.7 million and
$2.3 million attributable to the amortization of acquisition
financing costs during the fiscal years ended January 31, 1994
and 1993, respectively.
At January 31, 1994, $56.0 million of the Company's long-
term debt (33% of total long-term debt then outstanding) and the
Company's revolving line of credit provided for interest which
varies with changes in the prime rate or other similar interest
rate indexes. A material increase in the prime rate, or other
applicable index rates, could significantly increase the
Company's interest expense. The impact of any such increase is
partially mitigated by an interest rate protection agreement with
a major financial institution covering approximately 40% of the
outstanding balance of the Company's senior term loan. The fee
for this interest rate cap arrangement was $275,000, which has
been paid in full, and covers the three years ended February,
1996. The Company has no future exposure with respect to this
arrangement; however, if the financial institution were to
default on its obligations under the arrangement, the Company's
interest rate exposure under the Term Facility could increase.
The Company has no reason to believe that the financial
institution would not be able to perform its obligations under
the arrangement. See "Inflation", below.
The effective tax benefit recorded by the Company on its
loss before income taxes was 31.2% versus 35.2% during the fiscal
years ended January 31, 1994 and January 31, 1993, respectively.
The decrease was principally due to increased goodwill amortiza-
tion resulting from the Acquisition and non-deductible reserve
allowances. The Company's tax benefit for the fiscal year ended
January 31, 1994 and 1993 differed from the statutory rate of 34%
principally due to non-deductible purchase accounting adjust-
ments, reserve allowances, state taxes and job tax credits. As a
result of net operating loss carrybacks, the Company expects to
receive an approximate $5.0 million federal income tax refund
during the second quarter of its current fiscal year. Based upon
the current operations of the Company, and other factors, it is
currently anticipated that net pre-tax losses, if any, realized
during the fiscal year ending January 31, 1995 will not result in
the recording of any additional effective tax benefit by the
Company although such tax benefits would be available to reduce
any future taxes payable if the Company generated future taxable
income.
Year Ended January 31, 1993 Compared to Year Ended January 31,
1992
The following discussion of results of operations for the
fiscal year ended January 31, 1993 includes results of the
Predecessor (see Note (1) to Notes to Consolidated Financial
Statements) for the four months ended May 31, 1992, and the
results of the Company for the eight months ended January 31,
1993.
Aggregate net revenues for the year ended January 31, 1993
were $448.5 million compared to $457.4 million for the year ended
January 31, 1992. This decrease was due to a 4.9% decrease in
same store revenues (stores open for at least 13 months),
partially offset by an increase in the number of stores from 301
at the end of fiscal 1992 to 313 at the end of fiscal 1993. The
decline in same store revenues was largely attributable to
difficult economic conditions, particularly in the state of
California, resulting in reduced revenue volume while unit prices
were generally maintained. Also, civil disturbances in the Los
Angeles market had a temporary negative effect on performance
during the year. Additionally, the introduction in February 1992
of a "value pricing" strategy for videocassette rentals in Los
Angeles, the Company's largest marketing area, and in other
markets, adversely impacted revenues during most of the fiscal
year. The demand for compact discs continued to positively
affect revenues, with CD sales representing $174.3 million or 49%
of merchandise sales for fiscal 1993, compared to $161.0 million
or 45% of merchandise sales for fiscal 1992. The Company does
not believe that the "value pricing" strategy for videocassette
rentals should have a further materially negative impact on
revenues.
Gross profit as a percentage of merchandise sales was 37.3%
in fiscal 1993 compared to 37.1% in fiscal 1992. The 0.2%
increase in gross profit as a percentage of merchandise sales
revenues is primarily attributable to an increase in supplier's
purchase discounts earned (0.1%) and a reduction in sale
inventory shrinkage partially offset by an increase in
promotional markdowns (0.1%). While the shift in product mix
from higher margin music cassettes to lower margin compact discs
had a negative impact on gross margins, this was offset by
improvement in gross profit margins on new videocassettes, blank
video tape, blank audio tape, accessories, personal electronics,
and concessions.
Gross profit as a percentage of rental revenue was 65.9% for
fiscal 1993 compared to 68.7% for fiscal 1992, a decrease of 2.8%
as a percentage of rental revenues. The 2.8% decrease is
primarily attributable to amortization of purchase accounting
adjustments resulting from the Acquisition ($3.4 million), a
decline in rental revenue from the Los Angeles "value pricing"
strategy -- a price reduction strategy with respect to video-
cassette rentals that varied from region-to-region, depending
upon competition and other market factors -- which lowered the
per night rental price and various other factors (5.5%). The
decrease in rental gross profit was partially offset by a
decrease in the book value of rental dispositions resulting
primarily from the sale of older rental inventory during fiscal
1993 compared to the prior year (1.7%) and a reduction in rental
inventory shrinkage (1.0%). Without the effects of the amortiza-
tion of purchase accounting adjustments, gross profit as a
percentage of rental income would have been 69.5% for fiscal 1993
compared to 68.7% for fiscal 1992, an increase of 0.8%.
Selling, general, and administrative expenses were 40.7% of
total revenues in fiscal 1993 compared to 39.2% in fiscal 1992.
The increase of 1.5% is primarily due to an increase in rent and
occupancy expense per store resulting from lease renewals,
consumer price index escalations for existing stores, and new
leases for larger stores (0.9%), an increase in advertising
expenditures (0.5%), and the amortization of goodwill and
depreciation of property and equipment resulting from the
Acquisition (1.3%). These increases were partially offset by a
reduction in historical depreciation expense (0.7%) and an
increase in other operating income (0.5%), including financial
remuneration from suppliers to help defray the cost of
introducing smaller CD packaging.
Income from operations decreased to $11.6 million in fiscal
1993, compared to $21.9 million in fiscal 1992, primarily due to
the declines in revenue as explained above, the decrease in
rental gross profit rate related to purchase accounting amortiza-
tion, and the increase in rent and occupancy costs. Excluding
the effects of purchase accounting adjustments in both years,
operating income was $22.7 million in fiscal 1993 compared to
$26.8 million in fiscal 1992.
Net interest expense and other income was $20.6 million or
4.6% of total revenues in fiscal 1993 compared to $17.9 million
or 3.9% of total revenues in fiscal 1992. This increase was
attributable to increased levels of subordinated debt, which was
partially offset by lower interest rates on lower term loan
borrowings and by lower interest rates on comparable revolving
line of credit borrowings.
The Company recorded an effective income tax benefit of
35.2% on its loss before taxes in fiscal 1993, compared to an
effective income tax provision of 26.0% on its income before
taxes in fiscal 1992. The Company's tax benefit in fiscal 1993
and its tax provision in fiscal 1992 differed from the statutory
rate of 34%, primarily as a result of non-deductible purchase
accounting adjustments, state taxes and job tax credits.
As part of the Acquisition, the Company reported a $4.5
million loss as an extraordinary item, net of tax, which
represented the non-cash write-off of unamortized acquisition
financing costs associated with the Adler & Shaykin acquisition
in fiscal 1988 and prepayment penalties associated with the
repayment of debt of the Predecessor that was refinanced at the
time of the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended January 31, 1994, the Company's
operations generated net cash of $7.1 million compared to $1.3
million during the fiscal year ended January 31, 1993. Operating
cash flows in both fiscal years were primarily used for the
purchase of merchandise and rental video inventory and the
payment of service and supply providers. The increase in cash
flow generated by operations was primarily a result of lower
increases in inventory levels offset by higher operating losses
and the resulting increase in tax refunds receivable for the
carryback of such operating losses.
Cash used in investing activities totaled $24.8 million as
compared to $136.1 million for the fiscal years ended January 31,
1994 and January 31, 1993, respectively. Cash used in investing
activities during the fiscal year ended January 31, 1994 included
approximately $12.2 million for the acquisitions of 39 specialty
music stores from The Record Shop, Inc. and Pegasus Music and
Video, Inc. and $11.8 million for acquisitions of property, plant
and equipment. Acquisitions of property, plant and equipment
increased $2.5 million during the fiscal year ended January 31,
1994 as compared to the prior fiscal year. Property, plant and
equipment acquisitions in both periods were used primarily for
the opening of new stores and the remodeling of existing stores,
and in fiscal 1993, funds were also used for the acquisition of
new equipment for the Company's new distribution center. During
the fiscal year ended January 31, 1993, $125.8 million of the
$136.1 million used for investing activities was due to the
Acquisition of the Company.
Cash provided by financing activities was $16.4 million as
compared to $143.5 million during fiscal years ended January 31,
1994 and 1993, respectively. On January 31, 1994, WEI raised
$30.0 million through the sale of common stock to certain of its
existing stockholders. All of these funds were contributed by
WEI to the capital of the Company and provided permanent
financing for the acquisition of stores from The Record Shop,
Inc. and Pegasus Music and Video, Inc. and for expenses
associated with those acquisitions. In addition, during fiscal
1994, borrowings were reduced by approximately $13.2 million.
During the fiscal year ended January 31, 1993, the $143.5 million
of cash provided by financing activities consisted principally of
a $70.3 million capital contribution and a net increase in
borrowings, principally for new senior subordinated debt, both of
which are attributable to the Acquisition.
The Company's operations used net cash of $1.3 million for
the year ended January 31, 1993 compared to the generation of
$29.5 million for the year ended January 31, 1992. The decrease
was primarily a result of an increase in merchandise inventory
due to the introduction of new product lines and the expansion of
certain existing product lines, the introduction of a value
pricing strategy for videocassette rentals, and the extended
economic recession in California. In addition to the changes in
inventory, other factors affecting working capital were: (i) an
increase in receivables partially related to insurance receiv-
ables, the timing of credit card receipts at year-end, and
reimbursement from landlords, and (ii) an increase in accounts
payable and accrued expenses related primarily to increases in
interest and sales taxes payable, offset by slight decreases in
accounts payable and other accrued expenses. The increase in
interest payable was attributable to higher debt levels and a
change in the timing of the due date for interest on subordinated
debt. The sales taxes payable increase was also attributable to
timing differences on the due date. Video rental purchases were
less during fiscal 1993 than in the prior year due to more
efficient utilization by the Company of the videocassette rental
inventory.
Cash used in investing activities totalled $136.1 million
compared to $14.2 million in the 1993 and 1992 fiscal years,
respectively. The $136.1 million included $125.8 million to
complete the Acquisition of the Company. The remainder was used
primarily for opening new stores, remodeling existing stores, and
acquiring fixtures and equipment for the new distribution center.
Capital expenditures, including equipment under capital leases,
totalled $12.9 million in fiscal 1993, up $1.2 million from
fiscal 1992.
Cash provided by financing activities was $143.5 million
compared to $16.9 million of cash used in financing activities in
the 1993 and 1992 fiscal years, respectively. The $143.5 million
consisted primarily of a $70.3 million capital contribution and a
net increase in borrowings, principally for new senior subordi-
nated debt, both of which were related to the Acquisition.
The Company's institutional indebtedness currently includes
the following:
i) a senior term loan in the original principal amount of
$65.0 Million. As of January 31, 1994, the outstanding indebted-
ness was $56.0 million. This facility matures in January 1998,
with principal payments made in installments of varying amounts,
and with interest payments due quarterly on prime-based
borrowings and upon maturity for Eurodollar-based borrowings.
Borrowings under the term loan bear interest at Prime plus 1.5%
or Eurodollar plus 3.0%.
ii) $110 Million in Senior Notes (the "Notes"). The Notes
mature in August, 2002 and bear interest at 13% per annum,
payable semi-annually. The Company is required to make sinking
fund payments in August 2000 and August 2001 of $27.5 million
each to allow for the redemption of a maximum of 50% in principal
amount of the Notes at a price equal to 100% of the principal
amount redeemed plus accrued interest thereon.
iii) revolving line of credit in the amount of $45.0
million. Borrowings under the facility bear interest at the same
rates as the term loan. As of January 31, 1994, the outstanding
indebtedness on this facility was $4.0 million. Within the
capacity of the revolving line of credit, the Company has a $10.0
million swingline facility to accommodate daily fluctuations in
its working capital. Borrowings under the swingline bear
interest at the rate of prime plus 1.0%. Both of these facili-
ties mature in January 1998.
These debt agreements require the Company to meet certain
restrictive covenant tests at periodic intervals, and, as is
customary for such borrowings, include such factors as mainte-
nance of financial ratios and limitations on dividends, capital
expenditures, transactions with affiliates, and other indebted-
ness, and, under the revolving line of credit and swingline
facility, a thirty day "clean-down", during which borrowings
thereunder are not permitted. As of January 31, 1994, the
Company was in compliance with all such covenants. The Company
did not satisfy the entire "clean-down" period during the year
ended January 31, 1994 and obtained a waiver with respect thereto
from its lenders.
As of January 31, 1994, the Company had outstanding, net of
unamortized discount, $3.6 million of its 6 1/4% convertible
subordinated debentures, issued July 1986, representing $5.7
million in principal amount. These debentures mature in July
2006; all sinking fund payment obligations of the Company, for
the balance of the term of the debentures, have been satisfied.
The Company is highly leveraged, and results of operations
have been, and will continue to be, affected by the increased
interest expense and amortization of goodwill recorded in
connection with the Acquisition.
As of April 1, 1994, the Company has signed lease commit-
ments to open two new stores and may open additional stores over
the next twelve months. While the Company can reasonably esti-
mate the cost to open a new store, the actual number and types of
stores opened will depend upon the Company's ability to locate
and obtain appropriate sites and upon its financial position.
See "Results of Operations", above. The Company may, subject to
its ability to source additional capital, make additional acqui-
sitions if it determines such acquisitions to be appropriate.
While certain expenditures during the next twelve months
will be higher than in prior periods, management believes that
current cash flows from operations and borrowings under the
revolving credit facility will be adequate to meet the Company's
liquidity requirements. Debt service requirements are expected
to be funded through internal cash flow or through refinancing in
outlying years.
<PAGE>
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 expen-
ditures for new stores and the building of inventory for the
holiday season.
INFLATION
Inflation has not had a material effect on the Company, its
operations and its internal and external sources of liquidity and
working capital. However, interest rate increases, beyond
current levels, could have an impact on the Company's operations.
The impact on the Company of interest rate fluctuations is
partially mitigated by an interest rate protection agreement with
a major financial institution covering approximately 40.0% of the
outstanding balance of the senior term loan at January 31, 1994.
Such agreement limits the net interest cost to the Company out-
side a specified range on the amounts covered by the agreement.
<PAGE>
<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 which appears on page F-0 hereof.
2. Financial statement schedules.
See Index to Financial Statements and Financial Statement
Schedules which appears on page F-0 hereof.
All other schedules are omitted as the required information
is inapplicable or the information is presented in the consoli-
dated financial statements or related notes.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrants have duly caused
this report to be signed on its behalf by the undersigned, there-
unto duly authorized.
WEI HOLDINGS, INC.
Date: August 26, 1994 By: /s/ Scott Young
-----------------------------
Scott Young
Chairman of the Board,
Chief Executive Officer
and Director
(Principal Executive
Officer)
WHEREHOUSE ENTERTAINMENT, INC.
Date: August 26, 1994 By: /s/ Scott Young
------------------------------
Scott Young
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:
WEI HOLDINGS, INC.
Signature Title Date
- --------- ----- ----
/s/ Scott Young Chairman of the August 26, 1994
- ------------------------ Board, Chief Executive
Scott Young Officer and Director
(Principal Executive
(Officer)
/s/ Jerry E. Goldress President, Chief August 26, 1994
- ------------------------ Operating Officer and
Jerry E. Goldress Acting Chief Financial
Officer
(Principal Financial
Officer)
/s/ Kathy J. Ford Vice President, August 26, 1994
- ------------------------ Controller
Kathy J. Ford (Principal Accounting
Officer)
/s/ James J. Burke, Jr. Director August 26, 1994
- ------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong Director August 26, 1994
- ------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu Director August 26, 1994
- ------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker Director August 26, 1994
- ------------------------
Bradley J. Hoecker
WHEREHOUSE ENTERTAINMENT, INC.
Signature Title Date
- --------- ----- ----
/s/ Scott Young Chairman of the August 26, 1994
- ------------------------ Board, Chief Executive
Scott Young Officer and Director
(Principal Executive
(Officer)
/s/ Jerry E. Goldress President, Chief August 26, 1994
- ------------------------ Operating Officer and
Jerry E. Goldress Acting Chief Financial
Officer
(Principal Financial
Officer)
/s/ Kathy J. Ford Vice President, August 26, 1994
- ------------------------ Controller,
Kathy J. Ford (Principal Accounting
Officer)
<PAGE>
/s/ James J. Burke, Jr. Director August 26, 1994
- ------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong Director August 26, 1994
- ------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu Director August 26, 1994
- ------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker Director August 26, 1994
- ------------------------
Bradley J. Hoecker
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to the
security holders of either of the registrants.
<PAGE>
<page-F-0>
WHEREHOUSE ENTERTAINMENT, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
January 31, 1994
CONTENTS
Report of Independent Auditors...............................F-1
Financial Statements
Balance Sheets at January 31, 1994 and 1993 (Company)........F-2
Statements of Operations for the year ended
January 31, 1994 (Company) and the Eight (Company)
and Four Month (Predecessor) Periods ended
January 31, 1993 and May 31, 1992, respectively,
and for the year ended January 31, 1992 (Predecessor)......F-4
Statements of Changes in Shareholder's Equity for the
year ended January 31, 1994 (Company) and the Eight
(Company) and Four Month (Predecessor) Periods ended
January 31, 1993 and May 31, 1992, respectively, and
for the year ended January 31, 1992 (Predecessor)..........F-5
Statements of Cash Flows for the year ended January 31,
1994 (Company) and the Eight (Company) and Four Month
(Predecessor) Periods ended January 31, 1993 and
May 31, 1992, respectively, and for the year ended
January 31, 1992 (Predecessor).............................F-6
Notes to Financial Statements ...............................F-8
Financial Statements Schedules for the year ended January 31,
1994 (Company) the Eight (Company) and Four Month (Predecessor)
Periods ended January 31, 1993 and May 31, 1992, respectively,
and for the year ended January 31, 1992 (Predecessor)
V Property, Plant and Equipment........................F-24
VI Accumulated Depreciation and Amortization
of Property, Plant and Equipment...................F-26
VIII Valuation and Qualifying Accounts....................F-28
IX Short-term Borrowings................................F-29
X Supplementary Income Statement Information...........F-30
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>
<page-F-1>
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, 1994 and 1993 (Company) and
the related statements of operations, shareholder's equity, and
cash flows for the year ended January 31, 1994 and the eight
months ended January 31, 1993 (Company), the four months ended
May 31, 1992 and the year ended January 31, 1992 (Predecessor).
Our audits also included the financial statement schedules listed
in the index at item 14(a). These financial statements and
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements 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, 1994 and 1993
(Company), and the results of its operations and its cash flows
for the year ended January 31, 1994, the eight months ended
January 31, 1993 (Company), the four months ended May 31, 1992
and for the year ended January 31, 1992 (Predecessor) in
conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.
April 22, 1994
F-1
<PAGE>
<page-F-2>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
BALANCE SHEETS
<CAPTION>
January 31
1994 1993
----------------------------
<S> <C> <C>
Assets (Note 5)
Current assets:
Cash $ 3,120,000 $ 4,462,000
Receivables 2,802,000 3,889,000
Taxes receivable 5,000,000 445,000
Merchandise inventory 113,592,000 110,457,000
Deferred income taxes (Note 7) 4,402,000 4,517,000
Other current assets 2,573,000 2,453,000
----------------------------
Total current assets 131,489,000 126,223,000
Rental inventory, net of
accumulated amortization of
$38,966,000 (1994) and
$14,703,000 (1993) 11,689,000 32,305,000
Equipment and improvements,
at cost (Note 5):
Leasehold improvements 25,136,000 21,469,000
Data processing equipment and
software 19,813,000 25,788,000
Store and office fixtures and
equipment 20,273,000 23,402,000
Buildings and improvements 1,495,000 2,641,000
Land 683,000 2,801,000
----------------------------
67,400,000 76,101,000
Accumulated depreciation and
amortization 20,239,000 13,257,000
----------------------------
47,161,000 62,844,000
Intangible assets:
Excess of cost over fair value
of net assets acquired, net
of accumulated amortization
of $5,873,000 (1994) and
$2,315,000 (1993) 142,932,000 137,212,000
<PAGE>
Financing costs and leasehold
interests, net of accumulated
amortization of $1,226,000 (1994)
and $1,813,000 (1993) 9,905,000 14,613,000
----------------------------
152,837,000 151,825,000
Deferred income taxes (Note 7) 6,774,000 -
Other assets 1,425,000 1,183,000
----------------------------
Total assets $351,375,000 $374,380,000
============================
See accompanying notes.
</TABLE>
F-2
<PAGE>
<page-F-3>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
BALANCE SHEETS
<CAPTION>
January 31
1994 1993
----------------------------
<S> <C> <C>
Liabilities and shareholder's
equity
Current liabilities:
Short-term borrowings (Note 4) $ 4,000,000 $ 6,550,000
Accounts payable and bank
overdraft 80,935,000 70,180,000
Interest payable 8,122,000 8,530,000
Sales taxes payable 3,025,000 8,103,000
Other accrued expenses 22,781,000 22,825,000
Current portion of capital
lease obligations and
long-term debt (Note 5) 7,772,000 10,562,000
----------------------------
Total current liabilities 126,635,000 126,750,000
Long-term debt (Note 5) 163,699,000 171,006,000
Other long-term liabilities 7,426,000 2,523,000
Convertible subordinated
debentures (Note 6) 3,635,000 3,563,000
Deferred income taxes (Note 7) - 8,008,000
Commitments and contingencies
(Notes 8, 9 and 10)
Shareholder's equity:
Common stock, $.01 par value,
1,000 shares authorized,
10 issued and outstanding - -
Additional paid-in capital 95,855,000 66,346,000
Accumulated deficit (45,875,000) (3,816,000)
----------------------------
Total shareholder's equity 49,980,000 62,530,000
----------------------------
Total liabilities and
shareholder's equity $351,375,000 $374,380,000
============================
</TABLE>
F-3
<PAGE>
<page-F-4>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Company Predecessor
---------------------------- --------------------------
Eight Months Four Months
Year Ended Ended Ended Year Ended
January 31, January 31, May 31, January 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Sales $380,202,000 $249,113,000 $105,349,000 $358,598,000
Rental Revenue 91,584,000 64,293,000 29,762,000 98,765,000
---------------------------- --------------------------
471,786,000 313,406,000 135,111,000 457,363,000
Cost of sales 247,997,000 155,172,000 66,904,000 225,527,000
Cost of rentals, including
amortization 50,837,000 24,805,000 7,272,000 30,913,000
---------------------------- --------------------------
298,834,000 179,977,000 74,176,000 256,440,000
Selling, general and
administrative expenses 196,622,000 122,877,000 59,851,000 179,061,000
Restructuring charges
(Note 2) 14,259,000 - - -
---------------------------- --------------------------
(Loss) income from
operations (37,929,000) 10,552,000 1,084,000 21,862,000
Interest expense 23,525,000 15,703,000 4,928,000 18,052,000
Other income (318,000) (44,000) (9,000) (138,000)
---------------------------- --------------------------
23,207,000 15,659,000 4,919,000 17,914,000
---------------------------- ------------ -----------
(Loss) income before
income taxes (61,136,000) (5,107,000) (3,835,000) 3,948,000
---------------------------- --------------------------
(Benefit) provision for
income taxes (Note 7) (19,077,000) (1,291,000) (1,859,000) 1,025,000
---------------------------- --------------------------
(Loss) income before
extraordinary item (42,059,000) (3,816,000) (1,976,000) 2,923,000
Extraordinary item less
income taxes (Note 1) - - 4,526,000 -
---------------------------- --------------------------
Net (loss) income $(42,059,000) $ (3,816,000) $ (6,502,000) $ 2,923,000
============================ ==========================
See accompanying notes.
</TABLE>
F-4
<PAGE>
<page-F-5>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<CAPTION>
Common Stock Additional
.01 Par Value Paid-In Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Predecessor:
Balance, January 31, 1991 10 $ - $ 22,500,000 $(21,266,000) $ 1,234,000
Capital contribution - - 1,147,000 - 1,147,000
Accretion of
redeemable stock
purchase warrants - - - (1,296,000) (1,296,000)
Dividend - - - (272,000) (272,000)
Net income - - - 2,923,000 2,923,000
-----------------------------------------------------------------
Balance, January 31, 1992 10 - 23,647,000 (19,911,000) 3,736,000
Accretion of
redeemable stock
purchase warrants - - - (324,000) (324,000)
Net loss - - - (6,502,000) (6,502,000)
-----------------------------------------------------------------
Balance, May 31, 1992 10 $ - $ 23,647,000 $(26,737,000) $(3,090,000)
=================================================================
Company:
Balance, June 1, 1992 - $ - $ - $ - $ -
Issuance of common
stock 10 - 65,966,000 - 65,966,000
Capital contribution - - 380,000 - 380,000
Net loss - - - (3,816,000) (3,816,000)
-----------------------------------------------------------------
<PAGE>
Balance, January 31, 1993 10 - 66,346,000 (3,816,000) 62,530,000
Capital contribution - - 30,000,000 - 30,000,000
Dividend - - (491,000) - (491,000)
Net loss - - - (42,059,000) (42,059,000)
-----------------------------------------------------------------
Balance, January 31, 1994 10 $ - $95,855,000 $(45,875,000) $49,980,000
=================================================================
See accompanying notes.
</TABLE>
F-5
<PAGE>
<page-F-6>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Year Ended Ended Ended Year Ended
January 31, January 31, May 31, January 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Operating activities
Net (loss) income $ (42,059,000) $ (3,816,000) $ (6,502,000) $ 2,923,000
Adjustments to reconcile net
(loss) income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 70,530,000 33,197,000 11,911,000 41,082,000
Extraordinary item -
write-off of unamortized
acquisition financing costs - - 5,430,000 -
Book value of rental
inventory dispositions 6,983,000 8,251,000 2,669,000 13,104,000
Noncash portion of
restructuring charges 13,590,000 - - -
Other 32,000 62,000 9,000 99,000
Deferred taxes (14,667,000) (3,395,000) (1,738,000) (6,091,000)
Changes in operating assets
and liabilities:
Receivables 1,087,000 206,000 (2,400,000) (491,000)
Taxes receivable (4,555,000) - - (190,000)
Merchandise inventory (3,135,000) (23,423,000) (224,000) (2,966,000)
Other current assets (750,000) 394,000 (458,000) (524,000)
Accounts payable, accrued
expenses and other
liabilities 10,279,000 37,259,000 (27,896,000) 13,610,000
Rental inventory
purchases (30,222,000) (20,294,000) (7,917,000) (31,044,000)
---------------------------- --------------------------
Net cash provided by (used in)
operating activities 7,113,000 28,441,000 (27,116,000) 29,512,000
Investing activities
Payment for purchase of Company,
net of cash acquired - (125,796,000) - -
Proceeds from sale of assets 1,042,000 - - -
Acquisition of property,
equipment and improvements (11,784,000) (6,374,000) (2,935,000) (11,717,000)
Purchase of certain assets of
The Record Shop, Inc. (6,745,000) - - -
Purchase of certain assets of
Pegasus Music and Video, Inc. (5,502,000) - - -
(Increase) decrease in other
assets and intangibles (1,844,000) (1,028,000) 39,000 (2,507,000)
---------------------------- --------------------------
Net cash used in investing
activities (24,833,000) (133,198,000) (2,896,000) (14,224,000)
</TABLE>
F-6
<PAGE>
<page-F-7>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Year Ended Ended Ended Year Ended
January 31, January 31, May 31, January 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Financing activities
Short-term borrowings
(payments), net $ (2,550,000) $ (19,527,000) $ 37,700,000 $ (3,900,000)
Long-term debt - 175,000,000 - -
Principal payments on
capital lease obligations
and long-term debt (10,582,000) (116,907,000) (3,462,000) (13,315,000)
Subordinated debenture
redemptions - - - (550,000)
Equity contribution 30,000,000 70,273,000
Capital contribution - 380,000 - 1,147,000
Dividend paid to WEI
Holdings, Inc. (490,000) - - (272,000)
---------------------------- --------------------------
Net cash provided by (used
in) financing activities 16,378,000 109,219,000 34,238,000 (16,890,000)
---------------------------- --------------------------
Net increase (decrease) in
cash (1,342,000) 4,462,000 4,226,000 (1,602,000)
Cash at beginning of period 4,462,000 - 171,000 1,773,000
---------------------------- --------------------------
Cash at end of period $ 3,120,000 $ 4,462,000 $ 4,397,000 $ 171,000
============================ ==========================
Supplemental disclosure of
cash flow information:
Cash paid during the
period for:
Interest $ 22,448,000 $ 5,643,000 $ 4,271,000 $ 16,648,000
Income taxes 164,000 (63,000) 4,762,000 4,209,000
Supplemental disclosure of noncash investing and financing activities:
Capital lease obligations of $483,000 in the twelve months ended January 31, 1994,
$3,545,000 in the eight months ended January 31, 1993 and $3,323,000 in fiscal 1992
were incurred when the Company entered into leases for equipment.
The Company recorded accretion of redeemable stock purchase warrants in the amounts
of $324,000 during the four months ended May 31, 1992 and $1,296,000 in fiscal 1992.
See accompanying notes.
</TABLE>
F-7
<PAGE>
<page-F-8>
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(January 31, 1994)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On June 11, 1992, the Company was acquired by the purchase of all
of WEI Holdings, Inc.'s (WEI) ownership interest in the Predeces-
sor by certain affiliates of Merrill Lynch Capital Partners, Inc.
(MLCP) (the Acquisition). The consideration paid to acquire the
Company, net of cash acquired, consisted of $70.3 million in
equity cash contributions and $55.5 million in incremental
borrowings. WEI accounted for the transaction under the purchase
method of accounting, following the accounting treatment in
accordance with push-down accounting, whereby the Company
recorded the purchase price allocation in its financial state-
ments. For financial reporting purposes, the Company accounted
for the transaction effective June 1, 1992. Certain members of
management had ownership in WEI. Therefore, according to EITF
Issue No. 88-16, "Basis in Leveraged Buyout Transactions", the
net assets acquired were recorded at the reinvesting share-
holders' carryover basis. The purchase price, net of the
carryover basis equity adjustment of $7,367,000, was allocated to
assets and liabilities based on their respective fair values at
June 1, 1992, as adjusted, resulting in an opening shareholder's
equity of $65,966,000. WEI holds all of the capital stock of the
Company and, in turn, is owned by affiliates of MLCP (92.4%) and
certain members of management (7.6%) on a fully diluted basis.
Currently, WEI conducts no independent operations and has no
significant assets other than the capital stock of the Company.
Financial statements of the Company prior to the Acquisition are
designated as "Predecessor".
Unaudited pro-forma consolidated revenues for the year ended
January 31, 1993, assuming the Acquisition occurred on February
1, 1992, would have been $448,517,000. Pro forma net loss before
extraordinary item for the year ended January 31, 1993, including
adjustments for amortization of asset value changes based on fair
value adjustments, amortization of the excess cost over fair
value of assets acquired, and interest expense related to acqui-
sition indebtedness and the elimination of nonrecurring expenses
related to the Acquisition, would have been $5,978,000.
<PAGE>
<page-F-9>
Extraordinary Item
The extraordinary item in the four month period ended May 31,
1992 represents the write-off of unamortized financing costs and
prepayment penalties associated with the repayment of debt of the
Predecessor that was refinanced at the time of the Acquisition.
The loss was $4,526,000, net of an income tax benefit of
$3,035,000.
Principles of Consolidation
The consolidated financial statements of the Predecessor include
the accounts of the Company and its subsidiaries, all of which
are wholly owned. All significant intercompany accounts and
transactions have been eliminated.
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
In the fourth quarter of fiscal 1994, the Company accelerated the
amortization of rental inventory by switching to a more
accelerated method which eliminated the use of the half-year
convention and salvage values. Rental inventory continues to be
amortized over a period of two years for video games and three
years for video cassettes. In adopting the more accelerated
amortization, the Company recorded a charge of $20,268,000 to
reduce the carrying value of existing rental inventory. The
charge was accounted for as a change in estimate and was recorded
as additional amortization expense included in "cost of rentals"
on the accompanying statement of operations. In addition, 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 amortiza-
tion, which is included in the cost of rentals. Although rental
inventory generates a portion of the Company's current revenue
and cash flow, the rental inventory is classified as a noncurrent
asset because not all inventory is expected to be realized as
cash or sold in the normal business cycle.
F-9
<PAGE>
<page-F-10>
Depreciation and Amortization
Depreciation and amortization of equipment and leasehold improve-
ments is computed on the straight-line method over the following
periods:
Years
---------
Leasehold improvements 2 - 12 *
Data processing equipment and software 5
Store and office fixtures and equipment 5 - 10
Buildings and improvements 5 - 10
* Amortization over related lease periods
Leasehold Interests
Leasehold interests and over-market leasehold liabilities are
amortized on the straight-line method over the estimated remain-
ing lease terms of the related store operating leases which vary
from 2 to 12 years.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess cost over the fair value of net assets acquired (or good-
will) generally is amortized on a straight-line basis over 40
years. The carrying value of goodwill is reviewed if the facts
and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the Company
over the remaining amortization period, the carrying value of the
goodwill is reduced by the estimated shortfall of cash flows.
Financing Costs
Financing costs are amortized using the effective interest rate
method over the terms of the related financing which varies with
the terms of the related agreement.
F-10
<PAGE>
<page-F-11>
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.
Earnings per Share
Earnings per share are omitted for the Company since it is a
wholly-owned subsidiary of WEI.
Reclassifications
Certain reclassifications of balances have been made to the 1993
amounts to conform to the 1994 presentation.
2. RESTRUCTURING CHARGES
In response to an increasingly competitive retail environment,
the Company began a "re-engineering" project during fiscal 1994
in order to lower costs and provide greater value at lower prices
to customers. As part of this project, the Company identified
required changes in systems and operations and, therefore,
assessed the realizable value of certain assets and the cost of
restructuring measures. As a result, in the fourth quarter of
fiscal 1994, $14,259,000 in restructuring charges were recorded
that included the write off of $8,167,000 in equipment, property
and improvements, $3,472,000 in beneficial leasehold interests
and $721,000 in other assets as well as the recognition of
$1,899,000 for severance payments for employees terminated before
January 31, 1994, consultants fees and other costs related to re-
engineering. Other accrued expenses at January 31, 1994 includes
$1,230,000 related to the restructuring charges which is expected
to be disbursed in the next year.
F-11
<PAGE>
<page-F-12>
3. ACQUISITIONS
During June 1993 and January 1994, the Company agreed to acquire
up to 31 store locations (17 at the initial closing) and related
assets of The Record Shop, Inc. (Record Shop) and 15 from Pegasus
Music & Video, Inc. (Pegasus), respectively. The aggregate
consideration for transferred assets, without inventory, was
approximately $6,745,000 for Record Shop and $5,502,000 for
Pegasus. The Company accounted for the transactions using the
purchase method of accounting. Included in the statement of
operations for the Company are the results of all Record Shop
stores and Pegasus stores acquired, effective June 24, 1993 and
January 14, 1994, respectively, as well as additional stores
operated under management contract for the benefit of the
Company. The purchase price of each acquisition was allocated to
property and equipment, beneficial leaseholds, and store trade
name, with the remainder ($4,722,000 - Record Shop and $4,532,000
- - Pegasus) recorded as excess cost of over fair value of net
assets acquired. Aggregate revenues of the acquired companies
from the date of acquisition was $11,768,000. The net effect of
the consolidated operations was not significant.
4. NOTES PAYABLE AND CREDIT ARRANGEMENTS WITH FINANCIAL
INSTITUTIONS
As of January 31, 1994, the Company had a $45,000,000 revolving
line of credit, under a credit agreement, with the same lenders
that provided the variable rate term note (Note 5).
The revolving line of credit expires January 31, 1998, is subject
to the same covenants as the term note and is collateralized by
all of the Company's assets except merchandise inventory and by a
pledge by WEI of all the Company's capital stock. Borrowings
bear interest at the rates and terms described for the term note.
In addition, the credit agreement provides for a "clean down"
period during each fiscal year, whereby all borrowings must be
repaid. The Company did not satisfy the "clean down" period
during the year ended January 31, 1994 and obtained a waiver with
respect thereto from its lenders.
The Company also has a letter of credit facility which provides
up to $5,000,000 of letters of credit to be outstanding.
Issuance of the letters of credit serves to reduce the total
available borrowings under the revolving line of credit. At
January 31, 1994, the Company had $400,000 of letters of credit
outstanding.
F-12
<PAGE>
<page-F-13>
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
Descriptions 1994 1993
- ----------------------------------------------------------------
10-5/8% promissory note $ 1,927,000 $ 1,962,000
Variable rate term note 56,000,000 65,000,000
13% senior subordinated notes 110,000,000 110,000,000
Other 224,000 250,000
Capital lease obligations (Note 8) 3,320,000 4,356,000
---------------------------
171,471,000 181,568,000
Less current portion (7,772,000) (10,562,000)
---------------------------
$163,699,000 $171,006,000
---------------------------
Long-term debt matures as follows:
1995 $ 7,772,000
1996 9,811,000
1997 19,645,000
1998 23,748,000
1999 253,000
Thereafter 110,242,000
-------------
Total $171,471,000
=============
Required payments on capital lease obligations are disclosed in
Note 8.
10-5/8% Promissory Note: The original amount of $2,800,000 is
payable in monthly installments of $20,000 (including principal
and interest) through December 1, 1996, at which time the remain-
ing principal balance is due. The note is collateralized by a
deed of trust on land and building with a net book value of
approximately $3,527,000 at January 31, 1994.
F-13
<PAGE>
<page-F-14>
Variable Rate Term Note: The Company's credit agreement, result-
ing from the Acquisition, provides for a variable rate term note
which bears interest at prime rate plus 1-1/2% or Eurodollar Rate
plus 3%. These interest rates are subject to a discount based on
the Company's ability to maintain certain leverage ratios. At
January 31, 1994, the Company's borrowing rates ranged from 6.13%
to 7.5%. Interest on the term note is payable quarterly. The
Company has an interest rate protection agreement with a major
financial institution covering 40% of the outstanding balance of
the term note at January 31, 1994. The agreement limits net
interest costs to the Company to a ceiling of 9-1/8% with respect
to the balances covered by the agreement. The Company is exposed
to credit loss in the event of nonperformance by other parties to
the interest rate protection agreement. However, the Company
does not anticipate nonperformance by the counterparties.
The credit agreement was amended on January 27, 1994 to revise
certain financial covenants and provide the Company with
additional flexibility. In connection with this amendment, MLCP
received a fee of $300,000.
This note is collateralized by all of the Company's assets except
merchandise inventory and by a pledge by WEI of all the Company's
capital stock. Principal payments are due in quarterly install-
ments and in the following aggregate annual amounts: $7,000,000
in fiscal 1995, $9,000,000 in fiscal 1996, $17,000,000 in fiscal
1997 and $23,000,000 in fiscal 1998.
13% Senior Subordinated Notes: The notes are due August 2002
with interest payable semi-annually. The notes are noncallable
prior to August 1, 1997 and require sinking fund payments of
$27,500,000 in August 2000 and 2001.
WEI and MLCP are affiliates of Merrill Lynch, Pierce, Fenner &
Smith Incorporated (MLPF&S). In connection with the original
sale of the senior subordinated notes as part of the Acquisition,
MLPF&S received a fee of $3,850,000 with respect to its
activities as placement agent. In addition, in connection with
the Acquisition, MLCP received a fee of $2,500,000 plus
reimbursement of expenses of $135,000 from the Company.
F-14
<PAGE>
<page-F-15>
Financial Covenants
The variable rate term note, as amended, and the 13% senior
subordinated notes agreements include various restrictive
covenants, including covenants requiring the maintenance of
certain financial ratios such as minimum consolidated adjusted
EBITDAV, maximum leverage, and minimum fixed charge coverage.
The Company also must comply with limitations on dividends,
capital expenditures, transactions with affiliates, capital lease
borrowings and other indebtedness. The restrictive covenants
were amended January 27, 1994 and the Third Amendment and Limited
Waiver to Credit Agreement. At January 31, 1994, the Company was
in compliance with all such amended covenants.
The fair values of the Company's capital lease obligations, long-
term debt, short-term borrowings and related interest rate
protection agreement at January 31, 1994 are estimated to be
equal to their carrying amounts as reflected in the Company's
balance sheet at that date. The fair values of the Company's
convertible subordinated debentures are $2.9 million based upon
their current cash conversion amounts (carrying value is $3.6
million). The fair values of the Company's 13% Senior Subordi-
nated Notes are estimated based upon quoted market values for
these debt instruments at January 31, 1994. The fair values of
all other debt instruments are estimated based upon interest
rates currently available to the Company for debt with similar
terms and average maturities. The Company's other debt was
primarily entered into in conjunction with the Acquisition; the
short-term borrowings and variable rate term note are subject to
repricing under variable interest rate provisions.
6. CONVERTIBLE SUBORDINATED DEBENTURES
In 1986, the Predecessor issued $50,000,000 of 6-1/4% convertible
subordinated debentures due in 2006.
In conjunction with a prior acquisition of the Predecessor in
1988, the Predecessor and its Trustee for the convertible
subordinated debentures entered into a First Supplemental
Indenture, which provides that convertible subordinated debenture
holders may convert their debentures into cash and have no other
rights under the indenture to convert their debentures into
common stock of the Company. As a result of the 1988 Acquisi-
tion, the subordinated debentures were discounted to fair value.
No adjustment was made to the carrying value as a result of the
June 1992 Acquisition. The remaining discount is amortized by
the interest method over the term of the debentures. When the
debentures are redeemed, the discount is considered a reduction
in the payment amount and is included in current earnings in the
year of redemption. There were no redemptions in fiscal years
1994 or 1993. At January 31, 1994, the principal amount of
subordinated debentures was $3,635,000, net of discount of
$2,031,000.
F-15
<PAGE>
<page-F-16>
Refer to Note 9 for a discussion of litigation associated with
these convertible subordinated debentures.
7. INCOME TAXES
The benefit (provision) for income taxes includes:
<TABLE>
<CAPTION>
Company Predecessor
------------------------- -------------------------
Eight Four
Months Months
Ended Ended
January 31, May 31,
1994 1993 1992 1992
------------------------- -------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ (4,390,000) $ 1,659,000 $ 40,000 $ 5,256,000
State (20,000) 445,000 (161,000) 1,880,000
------------------------- ------------------------
(4,410,000) 2,104,000 (121,000) 7,136,000
Deferred:
Federal (14,164,000) (2,694,000) $(1,327,000) (4,774,000)
State (4,114,000) (701,000) (411,000) (1,337,000)
Valuation
Allowance 3,611,000 - - -
------------------------- -------------------------
(14,667,000) (3,395,000) (1,738,000) (6,111,000)
------------------------- -------------------------
$(19,077,000) $(1,291,000) $(1,859,000) $ 1,025,000
========================= =========================
</TABLE>
F-16
<PAGE>
<page-F-17>
The credit for deferred income taxes consists of the following:
<TABLE>
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Ended Ended
January 31, May 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Depreciation $ (8,595,000) $(2,389,000) $ (405,000) $(4,539,000)
State taxes (117,000) 129,000 242,000 156,000
Merchandise and video inventory (4,636,000) (1,257,000) (81,000) (1,334,000)
Debt discount (29,000) (15,000) (8,000) (201,000)
Leases (2,168,000) (559,000) (830,000) (1,182,000)
Employee benefits (175,000) (6,000) (49,000) (221,000)
Tax credit carryovers (3,260,000) (309,000) (600,000) 1,295,000
Prepaid expense (54,000) 633,000 - -
Expenses associated with early
extinguishment of debt - 403,000 - -
Accrued liabilities 1,563,000 - - -
Operating loss carryover (816,000) - - -
Other 9,000 (25,000) (7,000) (85,000)
Valuation allowance 3,611,000 - - -
---------------------------- --------------------------
$(14,667,000) $(3,395,000) $(1,738,000) $(6,111,000)
============================ ==========================
</TABLE>
F-17
<PAGE>
<page-F-18>
A reconciliation of the difference between the federal statutory rate
and the effective rate is summarized as follows:
<TABLE>
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Ended Ended
January 31, May 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Statutory tax rate (34.0)% (34.0)% (34.0)% 34.0%
Permanent tax differences for
deductions (primarily amorti-
zation of excess of cost over
fair value of net assets
acquired) 2.5 16.9 7.0 5.0
Job tax credits (1.5) (5.5) (15.7) (23.0)
State taxes, net of federal
benefit (4.0) (3.2) (5.8) 9.0
Other (0.1) 0.5 - 1.0
Valuation allowance 5.9 - - -
---------------------------- --------------------------
(31.2)% (25.3)% (48.5)% 26.0%
============================ ==========================
<\table)
The components of net deferred income tax assets at January 31,
1994 are as follows:
<PAGE>
Net current deferred income tax assets:
Merchandise inventory $ 3,309,000
Vacation liability 1,135,000
Other accrued liabilities 270,000
Prepaid expenses (312,000)
------------
4,402,000
F-18
<PAGE>
<page-F-19>
Net long-term deferred income tax assets:
Convertible subordinated debenture discount $ (689,000)
Video rental inventory 3,520,000
Equipment and improvements 1,424,000
Leasehold interests 528,000
Store closure liability 243,000
Average rent liability 2,981,000
State operating loss carryover 842,000
Credit carryovers 5,158,000
Deferred compensation 108,000
Other accrued liabilities (4,147,000)
Capital leases 417,000
------------
10,385,000
Valuation allowance for deferred tax assets (3,611,000)
------------
6,774,000
------------
Net deferred income tax asset $11,176,000
============
The Company has a carryover benefit for job tax and alternative
minimum tax credits of $5,074,000 which will expire by 2008. For
financial reporting purposes, the benefit has been included as a
deferred tax asset at January 31, 1994.
8. 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 2012
with renewal options for certain leases. Certain leases provide
for payment of real estate taxes and additional rents based on a
percentage of sales.
F-19
<PAGE>
<page-F-20>
Future minimum annual lease payments under capital and operating
leases at January 31, 1994 are payable as follows:
Capital Operating
Leases Leases
-------------------------------
1995 $ 894,000 $ 40,654,000
1996 880,000 40,337,000
1997 879,000 36,287,000
1998 776,000 33,847,000
1999 250,000 32,028,000
Thereafter 123,000 179,500,000
-------------------------------
Total future minimum lease
payments 3,802,000 $362,653,000
================
Less amounts representing
interest 482,000
------------
Present value of future
minimum lease payments 3,320,000
Less current portion 706,000
------------
Long-term obligations under
capital leases $2,614,000
============
Rental expense charged to operations was approximately
$42,285,000 in fiscal 1994, $25,056,000 in the eight month period
ended January 31, 1993, $11,733,000 in the four month period
ended May 31, 1992 and $32,668,000 in fiscal 1992. In addition,
real estate taxes and additional rents based on percentage of
sales were approximately $2,881,000 in fiscal 1994, $1,548,000 in
the eight month period ended January 31, 1993, $708,000 in the
four month period ended May 31, 1992, and $2,082,000 in fiscal
1992. The Company subleases a portion of its warehouse in
Gardena, California for an annual rent of $192,000 through April,
1997.
Included in equipment and improvements are assets held under
capital leases with a cost to the Company of $4,067,000 and
$6,263,000 at January 31, 1994 and 1993, respectively.
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 an officer of the Company. The
current agreement specifies monthly payments of $25,000. During
fiscal 1994, $250,000 was paid under this agreement.
F-20
<PAGE>
<page-F-21>
Prior to the Acquisition, the Company had another agreement with
this same company which specified monthly payments of
approximately $23,000 and was terminated at the Acquisition.
Expenses pursuant to this agreement were $83,000 in the four
month period ended May 31, 1992 and $292,000 in fiscal 1992. An
additional $135,000 was paid in connection with the Acquisition.
Also, prior to the Acquisition, the Company had a management
consulting agreement with Adler & Shaykin, then an affiliate of
the Predecessor, which specified quarterly financial advisory
fees of $87,500. In 1993, payments of $146,000 were paid under
this agreement, which expired on the date of the transaction.
Payments of $350,000 were paid in fiscal 1992.
Other Agreements
The Company receives credit card services from First USA, Inc.
under a three year agreement ending April 1996. Affiliates of
MLCP held a controlling interest in First USA, Inc. until
February 1993. During fiscal 1994, $1,742,000 was paid under
this agreement.
9. CONTINGENCIES
The Company (as a successor to the Predecessor), certain of its
former directors, WEI and its investment bankers are defendants
in three class action lawsuits; two lawsuits relate to the
subordinated debentures outstanding at the time of the 1988
Acquisition of the Predecessor and one relates to a pre-1988
potential acquisition of the Predecessor. The lawsuits, among
other claims, request unspecified damages. Based upon discovery
proceedings to date and the Company's discussions with its trial
lawyers, the Company believes that these actions are without
merit and they are vigorously defending them.
As part of the Acquisition, approximately $18,750,000 of the
merger consideration was deferred and is subject to reduction to
the extent the Company incurs certain litigation costs related to
the aforementioned class action lawsuits.
F-21
<PAGE>
<page-F-22>
Based on management's discussions with its trial lawyers, the
Company does not currently believe that any of the foregoing
litigation matters will have a material adverse effect on the
Company. However, if any of these matters were to be determined
adversely by a court of law, such determination could have a
material adverse effect on the Company.
The Company is a party to various 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 of the Company.
10. EMPLOYEE BENEFITS
Executive Officer's 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 $1,000,000.
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
$20,000 of expense in 1994 and $70,000 in fiscal 1993 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 year. 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 contributions made by the
Company vest 25% per year beginning with the employee's second
year of employment. The Company recognized $477,000 in 1994 and
$293,000 in 1993 for matching costs and administrative costs
under the 401(k) Plan.
F-22
<PAGE>
<page-F-23>
11. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarterly financial information is as follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Net Income
Net Revenue Gross Profit (Loss)
--------------------------------------------------
<S> <C> <C> <C>
1994 - Quarter Ended
Company:
April 30 $102,510 $44,727 $ (5,395)
July 31 108,620 46,429 (7,869)
October 31 107,899 44,574 (2,544)
January 31 152,757 37,222 (26,251)
1993 - Period Ended
Predecessor:
Quarter ended April 30 100,778 45,753 (1,967)
Month ended May 31 34,333 15,182 (4,535)
Company:
As reported:
Two months ended
July 31 70,508 28,570 (3,878)
Quarter ended
October 31 98,485 42,260 (4,585)
Quarter ended
January 31 144,413 62,599 4,647
</TABLE>
F-23
<PAGE>
<page-F-24>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Balance at Balance
Beginning Additions Retirements at End
Classification of Period at Cost(c) or Sales(b) of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Company:
Year ended January 31, 1994:
Leasehold improvements $ 21,469,000 $ 7,260,000 $ 3,593,000 $ 25,136,000
Data processing equipment
and software 25,788,000 1,954,000 7,929,000 19,813,000
Store and office fixtures
and equipment 23,402,000 5,884,000 9,013,000 20,273,000
Buildings and building
improvements 2,641,000 - 1,146,000 1,495,000
Land 2,801,000 - 2,118,000 683,000
-----------------------------------------------------------
$ 76,101,000 $15,098,000 $23,799,000 $ 67,400,000
===========================================================
Eight months ended January
31, 1993:
Leasehold improvements(a) $ 18,197,000 $ 3,331,000 $ 59,000 $ 21,469,000
Data processing equipment
and software(a) 22,718,000 3,070,000 - 25,788,000
Store and office fixtures
and equipment(a) 19,895,000 3,518,000 11,000 23,402,000
Buildings and building
improvements(a) 2,641,000 - - 2,641,000
Land(a) 2,801,000 - - 2,801,000
-----------------------------------------------------------
$ 66,252,000 $ 9,919,000 $ 70,000 $ 76,101,000
===========================================================
</TABLE>
F-24
<PAGE>
<page-F-25>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Balance at Balance
Beginning Additions Retirements at End
Classification of Period at Cost(c) or Sales(b) of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Predecessor:
Four months ended May 31,
1992:
Leasehold improvements $ 39,688,000 $ 327,000 $ - $ 40,015,000
Data processing equipment
and software 45,088,000 1,461,000 - 46,549,000
Store and office fixtures
and equipment 37,482,000 1,147,000 19,000 38,610,000
Buildings and building
improvements 4,387,000 - - 4,387,000
Land 1,900,000 - - 1,900,000
-----------------------------------------------------------
$128,545,000 $ 2,935,000 $ 19,000 $131,461,000
===========================================================
Twelve months ended
January, 31, 1992:
Leasehold improvements $ 35,335,000 $ 4,838,000 $ 485,000 $ 39,688,000
Data processing equipment
and software 38,987,000 6,101,000 - 45,088,000
Store and office fixtures
and equipment 33,651,000 4,111,000 280,000 37,482,000
Buildings and building
improvements 4,383,000 4,000 - 4,387,000
Land 1,900,000 - - 1,900,000
-----------------------------------------------------------
$114,256,000 $15,054,000 $ 765,000 $128,545,000
===========================================================
(a) Beginning balances at June 1, 1992 have been adjusted to reflect valuations under
purchase accounting.
(b) Includes abandonment of property for stores closed and fully depreciated assets
written off.
(c) Includes property purchased as part of the acquisition of Record Shop and Pegasus
stores.
</TABLE>
F-25
<PAGE>
<page-F-26>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and Retirements at End
Classification of Period Expenses or Sales of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Company:
Year ended January 31, 1994:
Leasehold improvements $ 3,424,000 $ 5,652,000 $ 3,034,000 $ 6,042,000
Data processing equipment
and software 5,093,000 7,423,000 5,164,000 7,352,000
Store and office fixtures
and equipment 4,502,000 6,970,000 4,669,000 6,803,000
Buildings and building
improvements 238,000 111,000 307,000 42,000
-----------------------------------------------------------
$13,257,000 $20,156,000 $13,174,000 $20,239,000
===========================================================
Eight months ended January
31, 1993:
Leasehold improvements(a) $ - $ 3,431,000 $ 7,000 $ 3,424,000
Data processing equipment
and software(a) - 5,093,000 - 5,093,000
Store and office fixtures
and equipment - 4,503,000 1,000 4,502,000
Buildings and building
improvements(a) - 238,000 - 238,000
-----------------------------------------------------------
$ - $13,265,000 $ 8,000 $13,257,000
===========================================================
</TABLE>
F-26
<PAGE>
<page-F-27>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Additions
Balance Charged to Balance
Beginning Costs and Retirements at End
Classification of Period Expenses or Sales of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Predecessor:
Four months ended May 31,
1992:
Leasehold improvements $19,423,000 $ 1,777,000 $ - $21,200,000
Data processing equipment
and software 32,385,000 2,192,000 - 34,577,000
Store and office fixtures
and equipment 19,548,000 1,584,000 10,000 21,122,000
Buildings and building
improvements 646,000 43,000 - 689,000
-----------------------------------------------------------
$72,002,000 $ 5,596,000 $ 10,000 $77,588,000
===========================================================
Year ended January, 31, 1992:
Leasehold improvements $14,529,000 $ 5,299,000 $ 405,000 $19,423,000
Data processing equipment
and software 24,222,000 8,163,000 - 32,385,000
Store and office fixtures
and equipment 15,175,000 4,580,000 207,000 19,548,000
Buildings and building
improvements 485,000 161,000 - 646,000
-----------------------------------------------------------
$54,411,000 $18,203,000 $ 612,000 $72,002,000
===========================================================
(a) Beginning balances at June 1, 1992 have been adjusted to reflect valuations under
purchase accounting.
</TABLE>
F-27
<PAGE>
<page-F-28>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(1) of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated amortization
deducted from video rental
inventory:
Company:
Year ended January 31,
1994 $14,703,000 $41,392,000 $17,129,000 $38,966,000
Eight months ended
January 31, 1993 - 14,703,000 - 14,703,000
Predecessor:
Four months ended
May 31, 1992 44,125,000 4,583,000 4,806,000 43,902,000
Year ended January 31,
1992 38,392,000 15,009,000 9,276,000 44,125,000
(1) Accumulated amortization on disposition of video rental tapes.
</TABLE>
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<PAGE>
<page-F-29>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE IX - SHORT-TERM BORROWINGS
<CAPTION>
Weighted
Maximum Average Average
Weighted Amount Amount Interest
Category Balance at Average Outstanding Outstanding Rate
Short-Term End of Interest During the During the During the
Classification Borrowings Period Rate Period Period(1) Period(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
Year ended
January 31, 1994 Bank $ 4,000,000 6.28% $44,600,000 $33,858,000 6.37%
Eight months ended
January 31, 1993 Bank 6,550,000 6.89 41,600,000 21,715,000 6.82
Predecessor:
Four months ended
May 31, 1992 Bank 43,000,000 6.96 43,000,000 32,364,000 7.09
Year ended
January 31, 1992 Bank 5,300,000 9.26 37,200,000 23,877,000 8.93
(1) Computed by multiplying each loan balance by days outstanding.
(2) Computed by dividing the actual interest expense on bank short-term
debt by the average aggregate short-term borrowings during the year.
</TABLE>
F-29
<PAGE>
<page-F-30>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<CAPTION>
Company Predecessor
----------------------------------------------------------
Year Eight Months Four Months Year
Ended Ended Ended Ended
January 31, January 31, May 31, January 31,
Description 1994 1993 1992 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maintenance and repairs * * * *
Depreciation and amortiza-
tion of intangible assets,
pre-operating costs and
similar deferrals $4,228,000 $2,655,000 $1,315,000 $3,934,000
Taxes, other than payroll
and income taxes * * * *
Royalties * * * *
Advertising ** $6,910,000 $6,995,000 $4,123,000 $9,197,000
* Less than 1% of revenues.
** Advertising expense net of cooperative advertising allowances.
</TABLE>
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