AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JUNE 3, 1994
Registration No. 33-51266
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
WHEREHOUSE ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 5735 95-2647555
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
incorporation or Code Number) Number)
organization)
19701 HAMILTON AVE.
TORRANCE, CALIFORNIA 90502-1334
(310) 538-2314
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------------
CATHY L. WOOD
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND SECRETARY
19701 HAMILTON AVE.
TORRANCE, CALIFORNIA 90502-1334
(310) 538-2314
(Address, including zip code, and telephone number, including
area code, of agent for service of process)
------------------------------
WEI HOLDINGS, INC.
(Exact name of Co-Registrant as specified in its charter)
DELAWARE NOT APPLICABLE 13-3439558
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
incorporation or Code Number) Number)
organization)
C/O WHEREHOUSE ENTERTAINMENT, INC.
CATHY L. WOOD
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND SECRETARY
19701 HAMILTON AVE.
TORRANCE, CALIFORNIA 90502-1334
(310) 538-2314
(Address, including zip code, and telephone number, including
area code, of Co-Registrant's principal executive offices)
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Post-Effective Amendment to the
Registration Statement is declared effective.
If any of the securities being registered on this form are
to be offered on a delayed or continuous basis pursuant to Rule
415 under the Securities Act of 1933, check the following box. X
Registration fee of $34,375 previously paid.
<PAGE>
<PAGE>
WHEREHOUSE ENTERTAINMENT, INC.
WEI HOLDINGS, INC.
----------------------
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Form S-1 Item Number Caption or Location in Prospectus
- -------------------- ---------------------------------
1. Forepart of the
Registration Statement
and Outside Front
Cover Page of
Prospectus Outside Front Cover Page
2. Inside Front and
Outside Back Cover
Pages of Prospectus Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information,
Risk Factors and Ratio
of Earnings to Fixed
Charges Prospectus Summary; Investment
Considerations
4. Use of Proceeds Prospectus Summary; Use of
Proceeds; The Company -- History
and Business Strategy
5. Determination of
Offering Price *
6. Dilution *
7. Selling Security
Holders Management; Plan of Distribution
8. Plan of Distribution Prospectus Summary; Outside Front
Cover Page of Prospectus; Plan of
Distribution
9. Description of
Securities Outside Front Cover Page;
Prospectus Summary; Description of
the Notes; Capitalization
10. Interest of Named
Experts and Counsel Federal Income Tax Considerations;
Experts
11. Information with
Respect to the
Registrant:
11(a) Description of
Business Prospectus Summary; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; The Company --
History and Business Strategy
11(b) Description of
Property The Company -- Properties
11(c) Legal Proceed-
ings The Company -- Litigation
11(d) Market Price of
and Dividends on
the Registrant's
Common Equity
and Related
Stockholder
Matters *
11(e) Financial
Statements Financial Statements
11(f) Selected
Financial Data Prospectus Summary -- Selected
Financial Data
11(g) Supplementary
Financial
Information *
11(h) Management's
Discussion and
Analysis of
Financial
Condition and
Results of
Operations Management's Discussion and
Analysis of Financial Condition
and Results of Operations
11(i) Changes in and
Disagreements
with Accountants
on Accounting and
Financial
Disclosure *
11(j) Directors and
Executive
Officers Management
11(k) Executive
Compensation Management
11(l) Security Owner-
ship of Certain
Beneficial Owners
and Management Security Ownership of Certain
Beneficial Owners and Management
11(m) Certain Relation-
ships and Related
Transactions Management; Certain Relationships
and Related Transactions
12. Disclosure of Commission
Position on Indemnifica-
tion for Securities Act
Liabilities *
______________
* Not applicable
<PAGE>
<page-1>
PROSPECTUS
WHEREHOUSE ENTERTAINMENT, INC.
13% SENIOR SUBORDINATED N OTES
DUE 2002, SERIES B
Interest on the 13% Senior Subordinated Notes Due 2002,
Series B (the "Notes") is payable semi-annually on February 1 and
August 1 of each year, accruing from August 1, 1992 at a rate of
13% per annum. The Notes were issued pursuant to an exchange
offer (the "Exchange Offer") in exchange for an equal principal
amount of 13% Senior Subordinated Notes Due 2002, Series A (the
"Series A Notes"). The initial principal amount of the Notes is
$110,000,000. On each of August 1, 2000 and August 1, 2001,
Wherehouse Entertainment, Inc., a Delaware corporation ("Where-
house" or the "Company"), will deposit with the Trustee (as de-
fined herein) $27,500,000 for the redemption of a maximum of 50%
in principal amount of the Notes, at a redemption price equal to
100% of the principal amount thereof plus accrued interest to the
date of such redemption. See "Description of the Notes."
The Notes are subordinated to all existing and future Senior
Indebtedness (as defined herein) of the Company. At April 30,
1994, the Company had outstanding an aggregate of approximately
$82.9 million of Senior Indebtedness. Subject to certain re-
strictions, exceptions and financial tests set forth in the
Indenture (as defined herein) and the Bank Credit Agreement (as
defined herein), the Company may also incur additional Senior
Indebtedness in the future.
The Notes are guaranteed on a senior subordinated basis by
WEI Holdings, Inc., a Delaware corporation ("WEI"), which owns
all of the capital stock of the Company. See "Description of the
Notes." Currently, WEI conducts no independent operations and
has no significant assets other than the capital stock of the
Company. Therefore, presently there are no resources supporting
the WEI Guarantee (as defined herein) that are incremental to
those to which holders of the Notes will already have access as
direct creditors of the Company.
The Company does not intend to list the Notes on any securi-
ties exchange nor does the Company intend to apply for quotation
of the Notes through the National Association of Securities Deal-
ers Automated Quotation system ("NASDAQ"). There can be no assur-
ance that an active public market for the Notes will develop.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVEST-
MENT IN THE NOTES, SEE "INVESTMENT CONSIDERATIONS."
- ------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<page-2>
This Prospectus is to be used by Merrill, Lynch, Pierce
Fenner & Smith ("MLPF&S") in connection with the offers and sales
of the Notes in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. MLPF&S
may act as principal or as agent in such transactions. The
Company will receive no portion of the proceeds of the sales of
such Notes and will bear the expenses incident to the registra-
tion thereof. If MLPF&S conducts any market-making activities,
it may be required to deliver a "market-making prospectus" when
effecting offers and sales of the Notes because of the equity
ownership of Merrill Lynch Capital Partners, Inc. ("MLCP") and
its affiliates of WEI. MLCP and its affiliates hold approximately
96% in the aggregate of the common stock, par value $.10, of WEI
(the "WEI Common Stock"), as of April 30, 1994. For as long as a
market-making prospectus is required to be delivered, the ability
of MLPF&S to make a market in the Notes may in part be dependent
upon the ability of the Company to maintain a current prospectus.
See "Security Ownership" for a description of the ownership of
capital stock of WEI by affiliates of MLPF&S.
- ------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 3, 1994.
<PAGE>
<page-3>
TABLE OF CONTENTS
PAGE
----
Index of Certain Defined Terms............................ 5
Available Information..................................... 9
Prospectus Summary........................................ 10
The Company............................................. 10
Summary of Terms of the Notes........................... 11
Selected Financial Information.......................... 14
Recent Operating Results................................ 16
Investment Considerations................................. 17
Leverage................................................ 17
Subordination; Effect of Asset Encumbrances............. 17
Restrictions Under Financing Agreements;
Variable Interest Rate................................ 18
Certain Fraudulent Transfer Considerations.............. 19
Competition............................................. 21
Litigation.............................................. 21
Absence of a Market for the Notes....................... 21
Use of Proceeds........................................... 22
Capitalization............................................ 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 24
Results of Operations................................... 24
Liquidity and Capital Resources......................... 30
Seasonality............................................. 33
Inflation............................................... 33
Recent Operating Results................................ 34
The Company............................................... 35
History and Business Strategy........................... 35
Merchandise Products and Supply......................... 36
Video and Other Product Rentals......................... 38
Advertising and Promotion............................... 38
Trade Customs and Practices............................. 39
Store Additions and Site Selection...................... 39
Store Operations and Distribution....................... 40
Competition............................................. 41
Organization and Employees.............................. 42
Trademarks.............................................. 42
Seasonality............................................. 43
Properties.............................................. 43
Litigation.............................................. 43
Management................................................ 48
Executive Compensation.................................. 52
<PAGE>
<page-4> PAGE
----
Security Ownership........................................ 58
The Company............................................. 58
WEI..................................................... 58
Pledge of Common Stock of the Company................... 61
Certain Relationships and Related Transactions............ 62
Description of the Notes.................................. 65
General................................................. 65
Maturity, Interest and Principal........................ 66
Redemption.............................................. 66
Change of Control....................................... 67
Subordination........................................... 69
Guarantees.............................................. 71
Certain Covenants....................................... 72
Merger, Sale of Assets, etc............................. 80
Events of Default....................................... 81
Defeasance or Covenant Defeasance of Indenture.......... 84
Satisfaction and Discharge.............................. 85
Amendments and Waivers.................................. 86
Governing Law........................................... 86
Certain Definitions..................................... 87
Description of the Senior Bank Financing.................. 97
The Senior Bank Facilities.............................. 97
Interest Payments....................................... 98
Prepayments............................................. 98
Security Interests...................................... 99
Guarantees.............................................. 99
Covenants............................................... 99
Events of Default....................................... 100
Fees.................................................... 101
Federal Income Tax Considerations......................... 102
Interest Payments on the Notes.......................... 102
Tax Basis............................................... 102
Sale, Exchange or Retirement............................ 102
Market Discount and Bond Premium........................ 103
Plan of Distribution...................................... 104
Legal Matters............................................. 104
Experts................................................... 104
<PAGE>
<page-5>
INDEX OF CERTAIN DEFINED TERMS
TERM PAGE
---- ----
1988 Acquisition........................................ 15
1988 Acquisition Agreement.............................. 44
1988 Acquisition Purchase Adjustments................... 15
1988 Predecessor........................................ 15
1994 Re-Engineering Plan................................ 25
A&S..................................................... 10
Acquired Indebtedness................................... 87
Acquisition............................................. 10
Acquisition Indebtedness................................ 19
Adjusted Cash Flow Coverage Ratio....................... 87
Adjusted Consolidated Net Income........................ 88
Affiliate............................................... 88
Agent................................................... 18
Amended Complaint....................................... 46
Asset Acquisition....................................... 88
Asset Sale.............................................. 88
Asset Sale Event........................................ 77
Asset Sale Offer........................................ 77
Asset Sale Offer Price.................................. 77
Average Life to Stated Maturity......................... 89
Bank Credit Agreement................................... 12, 89
Banks................................................... 97
Base Salary............................................. 56
Borrowing Base.......................................... 98
Capital Stock........................................... 89
Cause................................................... 56
Change of Control....................................... 68
Change of Control Date.................................. 67
Change of Control Offer................................. 67
Change of Control Purchase Date......................... 67
Change of Control Purchase Price........................ 67
Commission.............................................. 9
Company................................................. 1
Consolidated Adjusted EBITDAV........................... 100
Consolidated Cash Flow Available for Fixed Charges...... 89
Consolidated Excess Cash Flow........................... 98
Consolidated Fixed Charges.............................. 89
Consolidated Free Cash Flow............................. 98
Consolidated Income Tax Expense......................... 90
Consolidated Interest Expense........................... 90
Consolidated Net Income................................. 90
<PAGE>
<page-6> PAGE
----
Consolidated Net Worth.................................. 90
Consolidated Non-cash Charges........................... 90
covenant defeasance..................................... 84
Debenture Indenture..................................... 44
Debentureholders........................................ 43
Debentures.............................................. 43
Default................................................. 91
defeasance.............................................. 84
Deferred Purchase Price................................. 15
Designated Senior Indebtedness.......................... 71
District Court.......................................... 45
Effective Time.......................................... 15
EITF 88-16.............................................. 17
Eligible Inventory...................................... 98
Eligible Receivables.................................... 98
Employee Stock Loan Interest Bonus...................... 91
Eurodollar Loans........................................ 98
ERISA Event............................................. 101
Events of Default....................................... 81
Excess Proceeds......................................... 77
Exchange Act............................................ 9
Exchange Offer.......................................... 1
Fair Market Value....................................... 91
FAS 13 Rent Expense..................................... 91
Four Quarter Period..................................... 87
Froley Revy............................................. 44
GAAP.................................................... 91
Good Reason............................................. 56
Guarantee............................................... 91
Guarantor............................................... 91
Guarantor Senior Indebtedness........................... 71
Indebtedness............................................ 91
Indenture............................................... 65
Independent Directors................................... 44
Independent Financial Advisor........................... 92
Interest Rate Protection Obligations.................... 92
Investment.............................................. 93
Issue Date.............................................. 66
Letter of Credit........................................ 72
Letter of Credit Facility............................... 72
Lien.................................................... 93
Loans................................................... 97
<PAGE>
<page-7> PAGE
----
Management Notes........................................ 62
Management Investors.................................... 62
Merger.................................................. 10
ML Investors............................................ 51
MLCP.................................................... 2
MLCP Affiliates......................................... 68
MLPF&S.................................................. 2
named executive officers................................ 52
NASDAQ.................................................. 1
Net Cash Proceeds....................................... 93
Non-payment Default..................................... 69
Notes................................................... 1
Old Notes............................................... 56
Payment Blockage Period................................. 69
Permitted Indebtedness.................................. 72
Permitted Investment.................................... 93
Permitted Liens......................................... 94
Predecessor............................................. 15
Preferred Stock......................................... 95
Prime Lending Rate...................................... 19
Prime Rate Loans........................................ 98
Redeemable Capital Stock................................ 95
Refinanced Indebtedness................................. 19
Registration Statement.................................. 9
Requisite Lenders....................................... 18
Reserve Adjusted Eurodollar Rate........................ 19
Restricted Payments..................................... 74
Revolving Credit Facility............................... 98
Sale and Leaseback Transaction.......................... 77
Second Circuit.......................................... 45
Securities Act.......................................... 9
Senior Bank Facilities.................................. 97
Senior Indebtedness..................................... 70
Series A Notes.......................................... 1
Shamrock................................................ 46
Special Charges......................................... 95
Stated Maturity......................................... 95
Stockholders' Agreement................................. 62
Subordinated Debt Documents............................. 100
<page-8> PAGE
----
Subordinated Indebtedness............................... 74
Subordinated Obligations................................ 95
Subsidiary.............................................. 95
Surviving Entity........................................ 80
Term Facility........................................... 97
Transaction Date........................................ 87
triggering events....................................... 44
Trustee................................................. 65
Unvested WEI Common Stock............................... 62
U.S. Government Obligations............................. 84
U.S. Subsidiary......................................... 96
VCRs.................................................... 25
Voting Stock............................................ 96
WAC..................................................... 44
WAC Offer............................................... 46
WEI..................................................... 1
WEI Common Stock........................................ 2
WEI Guarantee........................................... 13
Wherehouse.............................................. 1
<PAGE>
<page-9>
AVAILABLE INFORMATION
The Company and WEI have jointly filed with the Securities
and Exchange Commission (the "Commission") a Registration
Statement on Form S-1 (together with all amendments, exhibits,
schedules and supplements thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Notes offered hereby and the related
WEI Guarantee thereof. This Prospectus, which forms a part of
the Registration Statement, does not contain all the information
set forth in the Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the
Company, WEI, the Notes and the related WEI Guarantee offered
hereby, reference is made to the Registration Statement. State-
ments contained in this Prospectus as to the contents of certain
documents filed as exhibits to the Registration Statement are not
necessarily complete, and, in each instance, reference is made to
the copy of the document so filed. Each such statement is
qualified in its entirety by such reference. The Registration
Statement can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the Commission's
regional offices at Seven World Trade Center, Thirteenth Floor,
New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can also
be obtained from the Commission at prescribed rates through its
Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549.
The Company and WEI are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith file reports
and other information with the Commission. The Company and WEI
will fulfill their obligations with respect to such requirements
by filing periodic reports with the Commission. In addition, the
Company will send to each holder of the Notes copies of annual
reports and quarterly reports containing the information required
to be contained under the Exchange Act. See "Description of the
Notes." Reports and other information filed by the Company and
WEI can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the Commission's
regional offices at Seven World Trade Center, Thirteenth Floor,
New York, New York 10048 and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can
also be obtained from the Commission at prescribed rates through
its Public Reference Section at 450 Fifth Street, N.W., Washing-
ton, D.C. 20549.
Separate financial statements of WEI have not been included
in the Registration Statement. Currently, WEI conducts no
independent operations and has no significant assets other than
the capital stock of the Company.
<PAGE>
<page-10>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
more detailed information and financial statements appearing
elsewhere in this Prospectus.
THE COMPANY
Wherehouse, which is headquartered in Torrance, California,
believes that, in terms of both revenues and store count, it is
currently the largest specialty retailer of prerecorded music in
the western U.S. and the second largest renter of videocassettes
in the western U.S.
The Company operated approximately 347 stores in eleven
states as of April 30, 1994. The Company's major marketing areas
are the metropolitan areas of Los Angeles, San Francisco,
Seattle, Phoenix, Sacramento, San Diego, Fresno, Las Vegas,
Denver and Salt Lake City. All but two of the Company's stores
sell prerecorded music, videocassettes, video games and acces-
sories, sales of which constitute approximately 81% of the
Company's fiscal 1994 (year ended January 31, 1994) revenues. In
addition, approximately 75% of the Company's stores also rent
videocassettes and video games. Rentals of videocassettes and
video games, in the aggregate, constituted approximately 19% of
the Company's fiscal 1994 revenues.
The Company was founded as a record retailer in 1970 and
until early 1988 was an independent publicly traded company
listed on the American Stock Exchange. Since 1988, the Company
has been privately held.
On June 11, 1992, the Company was acquired from affiliates
of Adler & Shaykin ("A&S") through the acquisition (the "Acquisi-
tion") by Grammy Corp., a Delaware corporation, of all of the
outstanding shares of capital stock and all other related equity
securities of WEI, which Acquisition was effected through the
merger (the "Merger") of Grammy Corp. with and into WEI, with WEI
surviving the Merger as the surviving corporation operating under
the name "WEI Holdings, Inc." Grammy Corp. was formed by MLCP on
February 26, 1992 solely to effect the Acquisition.
WEI holds all of the capital stock of the Company and, in
turn, is owned by affiliates of MLCP and certain members of
management of the Company. As of April 30, 1994, MLCP and its
affiliates owned approximately 92.4% of the common stock par
value $.10, of WEI, and management of the Company owned
approximately 7.6% of the WEI Common Stock, on a fully diluted
basis, excluding unvested performance based options and
unallocated options reserved for future grant under the WEI
Management Stock Option Plan. See "Security Ownership." WEI is
not an operating company.
The Company's principal executive office is located at 19701
Hamilton Ave., Torrance, California 90502-1334, telephone number
(310) 538-2314.
<page-11>
WEI's principal executive office is located at 19701
Hamilton Ave., Torrance, California 90502-1334, telephone number
(310) 538-2314.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCAITED WITH AN
INVESTMENT IN THE NOTES, SEE "INVESTMENT CONSIDERATIONS."
SUMMARY OF TERMS OF THE NOTES
Aggregate Principal Amount........ $110,000,000
Interest Payment Dates............ February 1 and August 1
Interest Rate..................... 13% Maturity
Date.............................. August 1, 2002
Sinking Fund...................... The Company will deposit
$27,500,000 with the Trustee
under the Indenture on each of
August 1, 2000 and August 1,
2001 for the redemption of a
maximum of 50% in aggregate
principal amount of the Notes
at a redemption price equal to
100% of the principal amount
thereof plus accrued interest
thereon to the date of
redemption.
Optional Redemption.............. The Notes may be redeemed at
any time on or after August 1,
1997, at the option of the
Company, in whole or in part,
at the following redemption
prices (expressed as percent-
ages of the principal amount),
if redeemed during the
12-month period beginning
August 1 of the years
indicated below:
Redemption
Year Price
---- ----------
1997 104.875%
1998 103.250%
1999 101.625%
and thereafter at 100% of the
principal amount, in each case
together with accrued interest
to the redemption date
(subject to the right of
holders of record on relevant
record dates to receive
interest due on an interest
payment date).
<page-12>
Change of Control................ Upon the occurrence of a
Change of Control (as defined
in "Description of the Notes")
of the Company, the Company is
obligated to make an offer to
purchase all outstanding Notes
at a price in cash equal to
101% of the principal amount
of the Notes, plus accrued
interest thereon; provided,
however, that the Company
shall have no obligation to
accept any Notes tendered
pursuant to such an offer
unless it shall have (a)
obtained the consent of the
lenders under the Company's
Bank Credit Agreement, dated
as of June 11, 1992, as
amended from time to time, by
and among Wherehouse, as
borrower, WEI, as guarantor,
Bankers Trust Company, as
Agent, and Heller Financial,
Inc., as Co-agent (the "Bank
Credit Agreement"), to such
transaction or (b) repaid the
entire indebtedness under the
Bank Credit Agreement or
offered to repay and have
repaid any lender under the
Bank Credit Agreement that
accepts such offer. A Change
of Control would also consti-
tute an event of default under
the Bank Credit Agreement,
which represents obligations
that are senior in right of
payment to the Notes, and
could result in circumstances
under which payments in
respect of the Notes could not
be made under the subordina-
tion provisions of the
Indenture. See "Description
of the Notes--Subordination."
See "--Subordination" below
for the amount of Senior
Indebtedness, including
indebtedness under the Bank
Credit Agreement, outstanding
at April 30, 1994. Notwith-
standing any of the foregoing,
the failure to make such an
offer or to have satisfied the
foregoing conditions precedent
prior to the date on which
such an offer is required to
be made will constitute a
covenant default and therefore
an Event of Default (as
defined herein) under the
Indenture. No assurances can
be given that the Company will
be able to comply with all its
obligations under its various
agreements in the event of a
Change of Control or to
refinance any of these or
other obligations that might
become due by reason of these
provisions. The existence of a
holder's right to require the
Company to repurchase its
Notes upon a Change of Control
may deter a third party from
acquiring the Company in a
transaction which constitutes
a Change of Control. See
"Description of the Notes--
Change of Control."
<PAGE>
<page-13>
Guarantees....................... The Notes are guaranteed on a
senior subordinated basis by
WEI (the "WEI Guarantee").
Currently, WEI conducts no
business other than holding
the capital stock of the
Company and has no significant
assets other than the capital
stock of the Company. See
"Investment Considerations--
Subordination; Effect of Asset
Encumbrances." In addition,
if any Subsidiary (as defined
herein) of the Company becomes
a guarantor or obligor in
respect of Indebtedness (as
defined herein) of the Company
or any of its Subsidiaries,
the Company's obligations
under the Notes will be
guaranteed by such Subsidiary.
Subordination.................... Payments on the Notes are
subordinated to all existing
and future Senior Indebtedness
of the Company. As of April
30, 1994, the Company had out-
standing an aggregate of
approximately $82.9 million of
Senior Indebtedness. See
"Investment Considerations--
Subordination; Effect of Asset
Encumbrances" and "Description
of the Notes--Subordination."
Certain Covenants................ The Indenture contains certain
covenants, including, but not
limited to, covenants with
respect to the following
matters: (i) limitation on
indebtedness; (ii) limitation
on restricted payments; (iii)
limitation on transactions
with affiliates; (iv) disposi-
tion of proceeds of asset
sales; (v) limitation on sale
and leaseback transactions;
(vi) limitation on liens;
(vii) limitation on other
senior subordinated indebted-
ness; (viii) limitation on
guarantees by subsidiaries;
(ix) restrictions on preferred
stock of subsidiaries; (x)
limitation on dividends and
other payment restrictions
affecting subsidiaries; and
(xi) transfers of assets to
certain subsidiaries. See
"Description of the Notes--
Certain Covenants."
For more complete information regarding the Notes, see
"Description of the Notes."
<page-14>
WHEREHOUSE ENTERTAINMENT, INC.
SELECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT REVENUE PER SQUARE FOOT AMOUNTS)
The following table sets forth selected financial data and
other operating information of Wherehouse. The financial data in
the table for the three years ended January 31, 1992, for the
four months ended May 31, 1992, for the eight months ended
January 31, 1993, and for the year ended January 31, 1994 are
derived from the financial statements of the Company and the
Predecessor (as defined herein). The data should be read in
conjunction with the financial statements and related Notes
thereto, and other financial information included herein, as well
as the discussion under "Management's Discussion of Financial
Condition and Results of Operation."
<PAGE>
<TABLE>
<CAPTION>
Company Predecessor (1)
----------------- --------------------------------------
Fiscal For the For the
Year 8 Months 4 Months
Ended Ended Ended Fiscal Years Ended
Jan. 31, Jan. 31, May 31, January 31,
------- ------- ------- ----------------------------
1994 1993 1992 1992 1991 1990
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Data
Sales $380.2 $249.1 $105.3 $358.6 $352.2 $296.8
Rental revenue (2) 91.6 64.3 29.8 98.8 99.9 91.5
------- ------- ------- ------- ------- -------
471.8 313.4 135.1 457.4 452.1 388.3
Cost of sales (3) 248.0 155.2 66.9 225.5 223.0 189.7
Cost of rentals
including
amortization (4) 50.8 24.8 7.3 30.9 43.2 41.2
------- ------- ------- ------- ------- -------
298.8 180.0 74.2 256.4 266.2 230.9
Selling, general
and administrative
expenses (5) (6) 196.6 122.9 59.9 179.1 170.1 148.5
Restructuring
charges (7) 14.3 --- --- --- --- ---
------- ------- ------- ------- ------- -------
(Loss) income
from operations (37.9) 10.5 1.1 21.9 15.8 9.0
Interest expense 23.2 15.6 4.9 17.9 19.7 19.6
------- ------- ------- ------- ------- -------
(Loss) income
before income taxes (61.1) (5.1) (3.8) 3.9 (4.0) (10.6)
(Benefit) provision
for income taxes (19.1) (1.3) (1.9) 1.0 (2.8) (5.1)
(Loss) income before
extraordinary item (42.1) (3.8) (2.0) 2.9 (1.2) (5.5)
------- ------- ------- ------- ------- -------
Extraordinary item
less income taxes (8) --- --- 4.5 --- --- ---
------- ------- ------- ------- ------- -------
Net (loss) income $(42.1) $ (3.8) $ (6.5) $ 2.9 $ (1.2) $ (5.5)
======= ======= ======= ======= ======= =======
Balance Sheet Data
(As of End of
Period)
Working capital
(deficiency) $ 4.9 $ (0.5) $(30.7) $(20.5) $(30.5)
Adjusted operating
assets and
operating
liabilities (9) $ 16.6 $ 16.6 $(10.3) $ 1.9 $ 9.4
Total assets 351.4 374.4 225.4 226.9 235.5
Long-term debt
(including
current portion) 175.1 185.1 110.0 120.5 140.2
Shareholder's
equity 50.0 62.5 3.7 1.2 2.4
Other Information
Capital expen-
ditures (10) $ 14.6 $ 6.4 $ 2.9 $ 11.7 $ 10.7 $ 21.4
Stores open at
period end 347 313 301 283 263
Retail square feet
(period-end, in
thousands) 2,117 2,011 1,946 1,932 1,811 1,640
Revenue/average
retail square
foot $ 229 $ 227(11) $ 244 $ 262 $ 256
Ratio of earnings
to fixed
charges(12) (13) (13) (13) 1.11x (13) (13)
</TABLE>
<PAGE>
<page-15>
NOTES TO SELECTED FINANCIAL INFORMATION
(1) The Company was acquired in June 1992 by the purchase of all
of WEI's ownership interest in the Company through a merger
transaction in which Grammy Corp. was merged with and into
WEI. The transaction was accounted for using the purchase
method and the term "Predecessor" refers to the predecessor
to the Company for the periods from fiscal year 1990 through
May 31, 1992. The term "1988 Predecessor" refers to the
predecessor to the Predecessor which was acquired by
affiliates of A&S and certain other investors in 1988 (such
transaction being hereinafter referred to as the "1988
Acquisition"). The Acquisition and the 1988 Acquisition
caused changes in the bases of accounting thereby making
period-to-period comparisons difficult. The significant
effects on comparability are explained in Notes (4), (5) and
(8) below.
(2) Includes an estimated $1.0 in fiscal 1991 relating to the
disposition of beta format videocassette rental inventory.
(3) Includes net charges relating to the disposition of obsolete
computer software inventory of an estimated $0.5 and $1.4 in
fiscal 1991 and fiscal 1990, respectively.
(4) Includes amortization of $2.8 for the fiscal year ended
January 31, 1994 and $3.4 for the eight months ended January
31, 1993 related to the Acquisition purchase adjustments and
amortization of $6.7 and $6.7 in fiscal 1991 and fiscal
1990, respectively, related to the purchase accounting
adjustments related to the 1988 Acquisition (the "1988
Acquisition Purchase Adjustments"), and charges relating to
the disposition of beta format videocassette rental
inventory of an estimated $3.9 in fiscal 1991.
(5) Includes amortization of $8.9 for the fiscal year ended
January 31, 1994 and $6.0 related to the Acquisition
purchase adjustment for the eight months ended January 31,
1993. Includes the following for the four months ended May
31, 1992, fiscal 1992, fiscal 1991 and fiscal 1990, respec-
tively: amortization of $1.7, $5.0, $5.0 and $5.0 related to
the 1988 Acquisition Purchase Adjustments; certain expenses
associated with A&S's investment, which did not continue
following the Acquisition, of $0.2, $1.1, $0.9, and $1.2;
certain severance and executive recruiting expenses of $0.0,
$0.4, $0.1, and $0.1; certain legal expenses associated with
litigation, the payment of future expenses of which, to the
extent such expense exceeds $700,000, will be funded by
borrowings incurred as of the effective time of the Merger
(the "Effective Time") for the Deferred Purchase Price (as
is defined in the Indenture) of $0.0, $0.2, $0.3, and $0.1.
(6) Includes non-cash expense accruals in accordance with
Financial Accounting Standards Board Statement 13: Account-
ing for Leases, of $4.9, $2.5, $0.9, $2.4 and $0.5 for the
fiscal year ended January 31, 1994, the eight months ended
January 31, 1993, the four months ended May 31, 1992, fiscal
1992 and fiscal 1991, respectively.
(7) See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of
Operations."
<page-16>
(8) Represents the write-off of unamortized financing costs and
pre-payment penalties paid relating to debt of the Predeces-
sor refinanced at the time of the Acquisition.
(9) Adjusted operating assets and operating liabilities is (i)
total current assets less (ii) total current liabilities
exclusive of notes payable and current maturities of capital
lease obligations and long-term debt.
(10) Capital expenditures exclude capital expenditures obtained
through capital lease financing.
(11) Calculated using revenues for the combined periods of eight
months ended January 31, 1993 and the four months ended May
31, 1992.
(12) For the purpose of computing the ratios of earnings to fixed
charges, "earnings" consists of income (loss) before income
taxes and fixed charges. "Fixed charges" consists of
interest expense, amortization of debt expenses and the
portion of rental expenses deemed representative of the
interest factor.
(13) Fixed charges exceeded earnings by $4.0 and $10.6 in fiscal
1991 and 1990, respectively, and by $3.8 for the four months
ended May 31, 1992, and $5.1 for the eight months ended
January 31, 1993 and by $61.1 for fiscal 1994.
RECENT OPERATING RESULTS
For the quarter ended April 30, 1994, the Company recorded
net revenues of approximately $113,900,000 and a net loss of
approximately $5,600,000. For the corresponding period of fiscal
1994, the Company recorded net revenues of approximately
$102,500,000 and a net loss of approximately $5,400,000.
<page-17>
INVESTMENT CONSIDERATIONS
Prospective investors in the Notes should carefully consider
the investment considerations set forth below, as well as the
other information set forth in this Prospectus.
LEVERAGE
The indebtedness incurred in connection with the Acquisi-
tion, including without limitation indebtedness incurred under
the Bank Credit Agreement and the Notes, resulted in a highly
leveraged capital structure, with a debt-to-equity ratio for the
Company of 4.95 to 1 (as of April 30, 1994), including current
portion of long-term debt and adjustments made in accordance with
EITF 88-16, BASIS IN LEVERAGED BUYOUT TRANSACTIONS ("EITF 88-
16"), and assuming full utilization of the Revolving Credit
Facility (as defined herein). In order to repay the indebtedness
incurred in connection with the Acquisition, the Company will be
required to generate substantial operating cash flow. The
ability of the Company to meet its debt service obligations will
depend on the future performance of the Company, which will be
subject to prevailing economic conditions and to financial,
business and other factors, many of which are beyond the control
of the Company. While WEI and the Company believe that, based
upon current levels of operations and anticipated growth, the
repayment of such indebtedness can be effected within the
required time frame, there can be no assurances with respect
thereto.
The Company had, as of April 30, 1994, $198.9 million of
long-term debt (including current portion and $24.7 million drawn
on its Revolving Credit Facility) and $51.6 million of share-
holder's equity (prior to the adjustment in the amount of $7.4
million to predecessor basis of management's continuing equity
investment, in accordance with EITF 88-16). In addition, the
Company would have had the ability to borrow an additional $19.9
million under its Revolving Credit Facility.
SUBORDINATION; EFFECT OF ASSET ENCUMBRANCES
Principal of, premium, if any, and interest on the Notes
will be subordinated to all existing and future Senior Indebted-
ness of the Company, including indebtedness incurred under the
Bank Credit Agreement. Therefore, in the event of the bankrupt-
cy, liquidation, dissolution, reorganization or other winding up
of the Company or upon the acceleration of the Notes or any
Senior Indebtedness, the assets of the Company will be available
to pay obligations on the Notes only after all Senior Indebted-
ness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes.
In addition, under certain circumstances, no payments may be made
for a specified period with respect to the principal of, premium,
if any, or interest on the Notes if a default exists with respect
to certain Senior Indebtedness. See "Description of the Notes--
Subordination." As of April 30, 1994, the Company had approxi-
mately $82.9 million of Senior Indebtedness outstanding,
including $24.7 million drawn on its Revolving Credit Facility,
and an additional $19.9 million aggregate principal amount of
availability of Senior Indebtedness under its Revolving Credit
Facility. See "Description of the Senior Bank Financing."
Subject to certain restrictions, exceptions and financial tests
set forth in the Indenture and the Bank Credit Agreement, the
Company may also incur additional Senior Indebtedness in the
future.
<page-18>
WEI has guaranteed the Notes on a senior subordinated basis.
Currently, WEI conducts no business other than holding the
capital stock of the Company and has no significant assets other
than the capital stock of the Company. Therefore, currently
there are no resources supporting the WEI Guarantee that are
incremental to those to which holders of the Notes will already
have access as direct creditors of the Company. Moreover, the
WEI Guarantee is subordinated in right of payment to the
guarantee provided by WEI under the Bank Credit Agreement.
Generally, the Indenture contains no restrictions on the
activities of WEI. See "Description of the Notes--Guarantees."
The Company's indebtedness under the Bank Credit Agreement
is secured by (i) a first priority pledge by WEI of the capital
stock of the Company and (ii) a first priority lien on all or
substantially all of WEI's and the Company's assets other than
sale or rental inventory, except that mortgages on the real
property and leaseholds owned, directly or indirectly, by the
Company have not been granted and will be granted by the Company
only as requested by the Agent and Requisite Lenders (as such
terms are defined in the Bank Credit Agreement). In addition,
the Company is prohibited from placing a security interest on any
of its unencumbered assets. See "Description of the Senior Bank
Financing."
RESTRICTIONS UNDER FINANCING AGREEMENTS; VARIABLE INTEREST RATE
The Bank Credit Agreement contains certain financial and
other covenants, including covenants requiring the Company to
maintain certain financial ratios and restricting the ability of
the Company to incur indebtedness or to create or suffer to exist
certain liens. The Company is in compliance with all of such
covenants as a result of amendments to the Bank Credit Agreement,
dated August 17, 1993 and January 27, 1994, which provide the
Company with more operating flexibility given current economic
conditions and the seasonality of the Company's business. If the
California economy worsens, or if the Company continues to
recognize significant operating losses, the Company may need
additional covenant relief. The Bank Credit Agreement also
requires that certain amounts of indebtedness thereunder be
repaid by specified dates. The ability of the Company to comply
with all of such provisions may be affected by events beyond its
control. A failure to make any required payment under the Bank
Credit Agreement or to comply with any of the financial and
operating covenants included in the Bank Credit Agreement would
result in an event of default thereunder, permitting the lenders
to accelerate the maturity of the indebtedness under the Bank
Credit Agreement and foreclose upon their collateral and,
depending upon the action taken by such lenders, delaying or
precluding payment of principal of, premium, if any, or interest
on the Notes. Such an acceleration could also result in the
acceleration of the Company's and its subsidiaries' other
indebtedness. See "Description of the Senior Bank Financing."
The Indenture also contains certain covenants which, if violated,
would result in an event of default thereunder permitting holders
of the Notes to accelerate the Notes. Any such event of default
or acceleration could also result in the acceleration of other
indebtedness of the Company. See "Description of the Notes--
Events of Default." If the lenders under the Bank Credit Agree-
ment accelerate the maturity of the indebtedness thereunder,
there can be no assurance that the Company will have sufficient
assets to satisfy its obligations under the Notes.
<page-19>
The Company may borrow a maximum of $65 million under its
Term Facility (as defined herein) and $45 million under its
Revolving Credit Facility. As of April 30, 1994, there was $55.3
million outstanding under the Term Facility and $24.7 million
outstanding under the Revolving Credit Facility. The Company's
indebtedness under the Bank Credit Agreement bears interest at
rates that will fluctuate with changes in certain prevailing
interest rates (although such rates may be fixed for limited
periods of time). Interest on loans under the Senior Bank
Facilities (as defined herein) is payable at one of the following
rates, at the Company's option: (i) the Prime Lending Rate (as
defined in the Bank Credit Agreement) plus 1.50% per annum or
(ii) the Reserve Adjusted Eurodollar Rate (as defined in the Bank
Credit Agreement) plus 3.00% per annum. The loans under the Term
Facility as of June 1, 1994 bear interest at the rate of approxi-
mately 7.47% per annum. See "Description of the Senior Bank
Financing."
The Bank Credit Agreement requires the Company to enter into
interest rate protection arrangements with respect to approxi-
mately 25% of the lenders' commitments under the Term Facility.
As of April 30, 1994, the Company had entered into interest rate
protection arrangements with a major financial institution, with
respect to approximately 40.5% of the lenders' commitment under
the Term Facility. To the extent the Company's indebtedness is
not subject to such arrangements to protect or hedge against
increases in interest rates, a substantial increase in interest
rates could adversely affect the Company's ability to satisfy its
debt service obligations.
CERTAIN FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence by the Company of indebtedness, including
indebtedness incurred under the Bank Credit Agreement and the
Series A Notes (collectively, the "Acquisition Indebtedness"),
the proceeds of which were used to finance the Acquisition, the
issuance of the Notes and the WEI Guarantee, are subject to
review under relevant federal and state fraudulent conveyance
statutes in a bankruptcy, reorganization or rehabilitation case
or a lawsuit by or on behalf of unpaid creditors of the Company
or WEI, as the case may be. Under these fraudulent conveyance
statutes, if a court were to find that, at the time the Series A
Notes or the Notes were issued, in the case of the Company, or
the WEI Guarantee was given, in the case of WEI, or at the time
any of the indebtedness which was repaid from the proceeds of the
Acquisition Indebtedness (the "Refinanced Indebtedness") was
incurred, (a) the Company issued the Series A Notes or Notes or
WEI issued the WEI Guarantee, or the Company incurred the
Refinanced Indebtedness with the intent of hindering, delaying or
defrauding current or future creditors or (b) (i) the Company or
WEI received less than reasonably equivalent value or fair
consideration for issuing the Notes or WEI Guarantee, as the case
may be, or for incurring the Refinanced Indebtedness and (ii) the
Company or WEI, as the case may be, (A) was insolvent or was
rendered insolvent by reason of the Acquisition and/or such
transactions, including the incurrence of the Acquisition
<page-20>
Indebtedness, the issuance of the Notes, the issuance of the WEI
Guarantee and the incurrence of the Refinanced Indebtedness, (B)
was engaged in a business or transaction for which its assets
constituted unreasonably small capital, (C) intended to incur, or
believed that it would incur, debts beyond its ability to pay as
they matured (as all of the foregoing terms are defined in or
interpreted under applicable fraudulent conveyance statutes), or
(D) was a defendant in an action for money damages, or had a
judgment for money damages docketed against it (if, in either
case, after final judgment the judgment is unsatisfied), such
court could subordinate the Notes and/or the WEI Guarantee to
presently existing and future indebtedness of the Company and/or
WEI, as the case may be (in addition to the Senior Indebtedness
to which the Notes are expressly subordinated and the guarantee
under the Bank Credit Agreement to which the WEI Guarantee is
expressly subordinated), or take other action detrimental to the
holders of the Notes and the WEI Guarantee, including, under
certain circumstances, invalidating the Notes and/or the WEI
Guarantee.
The measures of insolvency for purposes of the foregoing
considerations will vary depending upon the law applied in any
such proceeding. Generally, however, the Company or WEI would be
considered insolvent if the sum of its debts, including contin-
gent liabilities, were greater than the fair saleable value of
all of its assets at a fair valuation or if the present fair
saleable value of its assets were less than the amount that would
be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and
mature.
Each of the Company and WEI believes that at the time of the
issuance of the Series A Notes and Notes by the Company, the
Company was and, at the time of the issuance of the WEI Guarantee
by WEI, WEI was, (a) neither insolvent nor rendered insolvent
thereby, (b) in possession of sufficient capital to run their
respective businesses effectively, and (c) incurring debts within
their respective abilities to pay as the same mature or become
due. In reaching these conclusions, the Company and WEI have
relied upon various valuations and cash flow estimates of manage-
ment of the Company which necessarily involve a number of
assumptions and choices of methodology. In addition, it was a
condition of the Bank Credit Agreement that Grammy Corp. obtain
an independent appraiser's opinion in respect of certain solvency
matters regarding the Company, Grammy Corp. and WEI. No
assurance can be given, however, that the assumptions and
methodologies chosen by the Company, Grammy Corp. and WEI would
be adopted by a court or that a court would concur with such
conclusions, or the conclusion of Valuation Research Corporation,
which was retained by Grammy Corp. to deliver such opinion.
Grammy Corp. conducted no independent investigation in connection
with the Acquisition to determine whether the incurrence by the
Company of the Refinanced Indebtedness at the time of the 1988
Acquisition represented a fraudulent conveyance. At the time of
the 1988 Acquisition, the Company received a letter from Valua-
tion Research Corporation respecting certain solvency matters.
However, there can be no assurance that a court would concur with
the conclusions of Valuation Research Corporation as to the
solvency of the Company at such time.
<PAGE>
<page-21>
COMPETITION
Both the prerecorded music and the video rental markets are
highly competitive. In the prerecorded music market, the Company
competes with other chain retailers who specialize in prerecorded
music, discounters and other mass merchandisers, direct mail
programs and local operators. The video rental market is a more
fragmented industry, with many small operators and one signifi-
cant competitor, Blockbuster Entertainment Corporation, whose
estimated nationwide marketshare is currently approximately 20%.
In addition, the Company competes with cable television
which includes pay-per-view television. However, notwithstanding
potential technological advances of pay-per-view, the Company
believes that video rental should, in the near future, continue
to be the first source of filmed in-the-home entertainment.
Also, several major companies have announced that they are
developing other technologies which, if successful, could
constitute significant competition. While none of these techno-
logies is yet commercially available, and it appears that
significant technical, economic, and other obstacles to their
introduction remain to be resolved, if and when these or other
new technologies are introduced, it can be anticipated that the
Company's business could be significantly impacted; and the
Company may need to develop and implement new marketing
strategies in order for its business to remain viable.
Finally, in both the music and rental markets, there has
been a recent trend towards consolidation. 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. Thus, it can be expected that the Company will, in
future periods, experience increased competition from companies
with greater financial resources than the Company. See "The
Company -- Competition."
LITIGATION
For a discussion of certain pending litigation, as well as
the financing of certain costs related to such litigation, see
"The Company -- Litigation."
<PAGE>
ABSENCE OF A MARKET FOR THE NOTES
The Company does not intend to list the Notes on any
securities exchange or to apply for quotation through NASDAQ.
MLPF&S has indicated to the Company that it intends to make a
market in the Notes, but it is under no obligation to do so and
such market-making could be discontinued at any time. No
assurance can be given that an active trading market for the
Notes will develop.
<page-22>
USE OF PROCEEDS
Neither the Company nor WEI will receive any proceeds from
any sales of Notes effected in market-making transactions. The
$110 million in proceeds received by the Company from the sale of
the Series A Notes was used, along with approximately $65 million
of indebtedness incurred under the Term Facility, approximately
$22.5 million of indebtedness incurred under the Revolving Credit
Facility, the approximately $73.3 million equity contribution to
WEI and approximately $4.2 million cash on hand, to effect the
Acquisition.
<PAGE>
<page-23>
CAPITALIZATION
The following table sets forth the capitalization of the
Company as of April 30, 1994 (amounts in millions):
Short-term debt:
Revolving Credit Facility.......................... $ 24.7
Current portion of long-term debt.................. 8.0
---------
Total short-term debt........................... $ 32.7
=========
Long-term debt:
Term Facility...................................... 48.1
Other debt and capital lease obligations
outstanding...................................... 4.5
Senior Subordinated Notes.......................... 110.0
Debentures(1)...................................... 3.7
---------
Total long-term debt............................. 166.3
Shareholder's equity(2).............................. 44.3
---------
Total capitalization including short-term
debt........................................... $ 243.3
=========
- ---------------
(1) As issued in 1986, the Debentures had certain conversion
rights, which were amended in connection with the 1988
Acquisition, to provide that the holders of the Debentures
will receive $507 cash for each $1,000 principal amount of
Debentures upon conversion thereof. In connection with the
1988 Acquisition, the Debentures were discounted to 56.1% of
face value. As of April 30, 1994, $5.666 million in
principal amount of Debentures was outstanding. For a
discussion of certain litigation related to the Debentures,
see "The Company -- Litigation."
(2) Includes the adjustment, in the amount of $7.4 million, to
predecessor basis of management's continuing equity
investment, in accordance with EITF 88-16.
<PAGE>
<page-24>
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 years 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 "The
Company -- 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.
<page-25>
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 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 merchandisers.
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
"value pricing" strategy for videocassette rentals 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."
<page-26>
The Company has also, as part of the 1994 Re-Engineering
Plan, developed a video rental remerchandising program, which is
currently scheduled to be 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 increase in cost of sales as a percentage of merchandise
sales revenues resulted from increased costs associated with
inventory shrinkage, changes in the product sales mix, higher
return penalties, the utilization by the Company of promotional
markdowns to generate incremental sales, and lower prompt payment
discounts from suppliers. 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 mark-
downs. 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. The
gross profit percentage for rental revenue was 44.5% and 65.9%
for the fiscal years ended January 31, 1994 and 1993, respective-
ly. The increased cost of rental revenue, including amortiza-
tion, 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 to reduce the carrying value of existing
rental inventory. 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.
<page-27>
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. The increase is
principally due to (i) 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, and
(ii) 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. The increases in selling, general and administra-
tive expenses were offset, in part, by decreased advertising
expenditures during the fiscal year ended January 31, 1994 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. Addi-
tionally, the Company changed the gift structure of its rental
customer loyalty program, which resulted in lower expenses.
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.
<page-28>
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. 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%
<page-29>
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 increase is
primarily attributable to an increase in supplier's purchase
discounts earned and a reduction in sale inventory shrinkage
partially offset by an increase in promotional markdowns. 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. The decrease is
primarily attributable to: (i) amortization of purchase account-
ing adjustments resulting from the Acquisition, which represented
3.6% of rental revenue and (ii) a decline in rental revenue from
the Los Angeles "value pricing" strategy, which lowered the per
night rental price. This decrease was partially offset by (i) 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 and (ii) a reduction in rental
inventory shrinkage.
<page-30>
Selling, general, and administrative expenses were 40.7% of
total revenues in fiscal 1993 compared to 39.2% in fiscal 1992.
The increase is primarily due to (i) 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, (ii) an increase in advertising expendi-
tures, and (iii) the amortization of goodwill and depreciation of
property and equipment resulting from the Acquisition, totalling
1.3% of total revenue. These increases were partially offset by
a reduction in historical depreciation expense and an increase in
other operating income, 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.
<page-31>
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 associ-
ated 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 borrow-
ings, 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.
<page-32>
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 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. See "Description of the Notes."
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.
<page-33>
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.
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-34>
RECENT OPERATING RESULTS
For the quarter ended April 30, 1994, the Company recognized
total revenues of approximately $113.9 million, up 11.1% from the
approximately $102.5 million recognized in the quarter ended
April 30, 1993. Merchandise sales recognized for the quarter
ended April 30, 1994 were approximately $92.0 million, up 14.44%
from the approximately $80.4 million recognized in the quarter
ended April 30, 1993 and up 7% on a "same-store" basis. Rental
revenue recognized for the quarter ended April 30, 1994 was
approximately $21.9 million, down 0.01% from the approximately
$22.1 million recognized in the quarter ended April 30, 1993 and
down 0.33% on a "same-store" basis.
The Company reported a loss from operations before interest
expense, other income, and taxes of $0.1 million and a net loss
of $5.6 million for the quarter ended April 30, 1994, as compared
with a loss from operations before interest expense, other
income, and taxes of $0.5 million and a net loss of $5.4 million
for the quarter ended April 30, 1993.
<PAGE>
<page-35>
THE COMPANY
HISTORY AND BUSINESS STRATEGY
The Company believes that, in terms of both revenues and
store count, it is currently the largest specialty retailer of
prerecorded music in the western U.S. and the second largest
renter of videocassettes in the western U.S. The Company
believes that it sells more prerecorded music in the state of
California than any other specialty retailer. Founded in 1970 as
a music retailer, Wherehouse has evolved into a diversified
entertainment retailer with a broad range of prerecorded music,
videocassettes and other products. As the Company has grown, its
product lines and product mix have been adapted to changes in
electronics technology and consumer tastes.
Wherehouse operated 347 stores at April 1, 1994 in eleven
states under the names "The Wherehouse," "Wherehouse Entertain-
ment," "Record Shop," "Paradise Music," "Pegasus," "Rocky Moun-
tain Records," "Leopolds" and "Odyssey." All but forty-six of
the Company's stores operate under "The Wherehouse" name. The
"Record Shop," "Paradise Music," "Pegasus," and "Rocky Mountain
Records" names were acquired with the recent acquisitions of
those stores, and the stores continue to operate under those
names at this time.
The Company sells prerecorded music and videocassettes,
video games, personal electronics (including personal stereos,
portable stereos, headphones and related merchandise), blank
audiocassettes and videocassettes, and accessories. Approxi-
mately 75% of the Company's stores also rent both videocassettes
and video games. The Company believes that this combination
entertainment store format offers competitive advantages relative
to those competitors that operate stores offering only merchan-
dise products for sale or products for rent. The merchandise
sale and video rental lines complement one another and offer
cross-selling opportunities. A video rental customer visits a
store at least once, and possibly twice, for each transaction and
is presented each time with the Company's merchandise offerings.
In fiscal 1994, sales of prerecorded music, videocassettes,
video games, and accessories accounted for 81% of revenues, and
rentals of videocassettes, video games, and other products
accounted for 19% of revenues.
The Company expanded its retail operations significantly
from fiscal 1990 to the present. At February 1, 1989, Wherehouse
operated 221 stores. Since then, 157 stores have been opened, 48
as a result of the Company's store acquisition program and 109 as
internally developed locations, while 31 have been closed, expand-
ing the Company's operations to a net total of 347 stores in
eleven states as of January 31, 1994 (see "Store Additions and
Site Selection" below), including one store temporarily closed
due to the Southern California earthquake. No new stores were
opened from February 1, 1994 to April 1, 1994. Of the 347 stores
operating as of April 1, 1994, 273 stores were located in strip
centers or freestanding buildings and 74 were located in malls.
Approximately 91% of the Company's stores are concentrated in ten
major marketing areas (Los Angeles, San Francisco, San Diego,
Sacramento, Seattle, Phoenix, Fresno, Las Vegas, Denver and Salt
Lake City) and approximately 78% of the stores are located in
California. The Company has focused its operations on its ten
major marketing areas in order to create competitive advantages
in operations, advertising and marketing, and distribution.
<page-36>
During the 1994 fiscal year, the Company expanded its
presence in several western states and entered new markets in the
west and mid-west through the acquisition of 39 specialty music
stores from The Record Shop, Inc. and Pegasus Music and Video,
Inc. Four other Record Shop stores, which were operated under
management agreements during the latter half of the 1994 fiscal
year, have subsequently been purchased or may be purchased in
fiscal 1995. These acquisitions expanded the Company's opera-
tions into five additional states (Utah, Montana, Iowa, Minnesota
and North Dakota) and established Salt Lake City as a major
marketing area.
The Company expects in the current fiscal year to focus its
efforts towards improvement of its existing stores, rather than
acquisitions and new store openings (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations").
Nevertheless, the Company will opportunistically evaluate
potential acquisitions which could provide additional geographic
diversification while still accomplishing the strategy of
clustering stores in order to concentrate on selected marketing
areas and achieve the economies which clustering provides. If it
determines the same to be appropriate, the Company may, subject
to its ability to source additional capital, 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.
Currently, WEI conducts no independent operations and has no
significant assets other than the capital stock of the Company.
MERCHANDISE PRODUCTS AND SUPPLY
Wherehouse stores generally sell a broad array of entertain-
ment products, including prerecorded music and videocassettes,
video game software, accessories and personal electronics. The
table at the end of this section summarizes the Company's dollar
volume of sale revenue by merchandise category from fiscal 1990
through fiscal 1994. The percentage of total revenues contri-
buted by merchandise sales has risen from 76% in 1990 to 81% in
1994. The number of different music titles per store ranges from
6,000 to 70,000, representing approximately 12,000 to 140,000
individual units in inventory per store.
The Company's most important product strategy is to ensure
constant availability of the most popular music and video titles
while maximizing the selection of catalog titles of lasting
popularity. With input from store management and a product
allocation team, Wherehouse's inventory management systems tailor
each store's product selections and merchandise mix to local
market demand and maximize the availability of the most popular
items at each store, subject to store size constraints. The
Company's stores have been designed to facilitate quick service
and to accommodate changes in industry trends and product
offerings.
<page-37>
The Company purchases its prerecorded music from all major
suppliers, including WEA (Warner/Elektra/Atlantic Corporation),
Sony Music Entertainment, Inc., CEMA Distribution, Polygram
Distribution, UNI Distribution, and BMG Distribution. The
Company has not experienced, and does not anticipate having in
the future, any material problems obtaining its products.
The Company also buys and sells used CDs in the majority of
its stores. The sale of used CDs was first tested in certain of
the Company's stores in fiscal 1993. Based upon strong consumer
acceptance, the Company began buying used CDs from customers and
expanded upon this business significantly in fiscal 1994.
Prerecorded videocassettes (feature films, music videos, and
self-improvement programming) represented, after music, the
Company's second largest sale product category in fiscal 1994.
As box-office hit motion pictures continue to be released to the
videocassette sell-through market at decreased prices, industry-
wide sales of this category have increased. The Company's
revenues from the sales of videocassettes have, however,
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.
During fiscal 1994, the Company significantly expanded its
presence in the video game business, carrying both software and
hardware. The Company's other sale merchandise items include
blank audio and videocassette tapes, music and tape care
products, carrying cases, storage units, and personal electron-
ics. The Company also collects commissions on event tickets sold
under affiliations with Bay Area Seating Service (BASS) and
Ticketmaster.
It is the Company's objective to keep as much of its inven-
tory as possible in its stores rather than at its distribution
center. Substantially all of each store's inventory is on
display and available for sale, with little or no merchandise in
back room storage.
<TABLE>
Sales and Rental Revenue By
Merchandise Category
(dollars in millions)
<CAPTION>
Fiscal Years Ended January 31,
---------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Merchandise Sales
Compact discs
(including
used CDs) $203.7 $174.3 $161.0 $135.8 $ 93.6
Cassettes and
other music 101.9 112.7 124.5 133.8 131.7
------ ------ ------ ------ ------
Total music 305.6 287.0 285.5 269.6 225.3
New videocassettes 24.3 26.9 33.4 37.0 26.9
Video game software
and hardware,
general merchandise
accessories,
ticket commissions,
and other 50.3 40.6 39.7 45.7 44.6
------ ------ ------ ------ ------
Total merchandise
sales $380.2 $354.5 $358.6 $352.2 $296.8
====== ====== ====== ====== ======
Video and other
product rentals 91.6 94.0 98.8 99.9 91.5
------ ------ ------ ------ ------
TOTAL REVENUE $471.8 $448.5 $457.4 $452.1 $388.3
====== ====== ====== ====== ======
</TABLE>
<page-38>
VIDEO AND OTHER PRODUCT RENTALS
The Company's other principal revenue source is the rental
of prerecorded videocassettes and other products, chiefly feature
films. Although most videocassette rentals are feature films,
approximately 15% of Wherehouse's rentals in fiscal 1993 were
nontheatrical titles, such as children's videos, adult videos,
workout videos, music videos, educational videos, and do-it-
yourself videos. Wherehouse also rents audiocassette books.
Video game players and laser discs are also offered for rent in a
few select stores. As of April 1, 1994, 260 of Wherehouse's 347
stores offered videocassettes and other products for rent. On
average, stores that rent videocassettes carry approximately
7,000 units, and can range from as few as 3,000 to as many as
14,000 units, representing from 2,000 to 9,000 individual
titles.
Wherehouse purchases prerecorded videocassettes from a
variety of distributors and other suppliers. As with recording
companies, the film studios, or their videocassette distribution
operations, each controls a certain portion of available titles
and seeks to promote those titles. The Company's leading
suppliers of prerecorded videocassettes are Ingram Entertainment,
Warner Home Video, Columbia TriStar Home Video, MCA/Universal
Home Video, Paramount Home Video, Baker & Taylor Video and Fox
Video. The Company has not experienced, and does not anticipate
having in the future, any material problems obtaining its
products.
The Company believes that an important element of efficient
video operations is the disposition of used rental videocassettes
to maximize the productivity of its inventory. Wherehouse's
systems enable the Company to effectively monitor the rental
efficiency of its inventory on an individual title and unit
basis. As a hit title's efficiency declines, used rental video-
cassettes are sold on a clearance basis in the Company's stores,
and, where appropriate, the Company may sell excess used video
inventory to third-party distributors.
During fiscal 1994, the Company expanded its video game
rental business, including the sale and rental of related video
game hardware, and intends to continue this expansion in fiscal
1995. With the retail price of most video games exceeding $50,
the opportunity for customers to try the games for a minimal
nightly rental fee is compelling. Further, younger consumers,
generally ages 8 to 16, find the daily rental of a video game to
be an attractive entertainment alternative.
ADVERTISING AND PROMOTION
The Company employs advertising, promotion, pricing, and
presentation in a coordinated manner to generate customer
awareness of its breadth of product and value pricing on selected
items and to induce trial and repeat purchase of its products and
video rental services. Wherehouse advertises on a regular and
frequent basis in a variety of broadcast and print media,
including radio, newspaper, direct mail, freestanding inserts,
magazines, and cable television. Advertising generally
emphasizes immediate availability of hit product at reduced
prices, as well as access to a broad array of catalog product.
The Company believes its strategy of clustering its stores in
major markets allows it to optimize the use of its advertising
expenditures.
<page-39>
Wherehouse seeks to maximize cooperative advertising
payments from suppliers, which are generally available to the
industry. Music and video companies generally provide funds on a
title-by-title basis to promote new releases and, occasionally,
on a label-wide basis. When the Company runs pre-authorized
advertising that contains reference to a specific title or label,
the related supplier will generally reimburse 100% of the pro
rata cost of that advertising.
The Company believes that Wherehouse is among the most
effective among entertainment retailers at securing cooperative
advertising funds. Because of its strong market position in
western markets, suppliers seek the Company's support for their
product. Furthermore, the Company's concentration of stores in
major markets provides economies when purchasing broad scale
media and makes the supplier's own advertising expenditures more
effective when allocated to Wherehouse.
TRADE CUSTOMS AND PRACTICES
Substantially all of the Company's music purchases are
protected by return policies offered by major manufacturers. The
return privilege generally exists for a particular music title as
long as that title remains in the current music catalog of a
manufacturer. Catalog changes are generally made only after
advance notice, allowing the Company to return excess inventory
before a title is discontinued. None of the Company's major
pre-recorded music suppliers limit returns of unopened items, but
they generally charge return penalties of varying amounts. Most
major suppliers do not accept returns of opened merchandise on
the same basis as unopened items, but do generally provide the
Company with certain additional allowances. Over the past few
years, several of the major manufacturers have effected material
changes in their pricing and return policies. Most recently, one
of the major manufacturers changed its pricing policies to
lengthen the period of front-end promotional prices, while at the
same time substantially increasing its return penalty rates. The
Company has not yet been able to determine whether the effect of
these changes will be beneficial to its operating results. Addi-
tional changes in these policies could have an adverse effect on
the Company.
STORE ADDITIONS AND SITE SELECTION
Wherehouse added a total of 126 stores from fiscal 1990
through fiscal 1994, net of store closings. The table below sets
forth store openings, closings, total number of stores, and
aggregate square footage under lease for the last five fiscal
years:
<TABLE>
<CAPTION>
Total Stores Stores Total Stores Aggregate
Fiscal at Beginning _____________ at End Square Footage
Year of Period Opened Closed of Period of Period
______ ____________ ______ ______ ___________ ______________
<S> <C> <C> <C> <C> <C>
1994 313 49 15 347 2,117,000
1993 301 15 3 313 2,011,000
1992 283 21 3 301 1,932,000
1991 263 24 4 283 1,811,000
1990 221 48 6 263 1,640,000
</TABLE>
<page-40>
During the fiscal year ended January 31, 1994, the Company's
new store openings ranged in size from 1,350 to 14,300 square
feet. Initial cash investment in leasehold improvements,
fixtures and equipment for these new stores generally ranged from
$90,000 to $900,000. As previously mentioned, new store openings
in fiscal 1994 included 43 stores acquired from, or managed by
the Company for its own benefit under contract with, The Record
Shop, Inc. and Pegasus Music and Video, Inc.
The Company's strategy of clustering stores in marketing
areas has led to the achievement of important economies of scale
and scope in several business functions, including advertising,
personnel, management and distribution. In recent years, the
Company has pursued growth opportunities in existing marketing
areas and has selectively grown through acquisition if such
growth was consistent with the Company's strategies. The Company
will continue to take advantage of opportunities to consolidate
or close stores in areas where the market has become less
favorable.
SITE SELECTION. In its new store location decisions,
Wherehouse takes into consideration the following factors, among
others: demographics (population density and level of household
income), psychographics (propensity of the population to buy
entertainment-related products), site access and visibility,
traffic patterns, parking and the particular terms of a proposed
lease. The Company has not experienced any overall difficulties
with site selection to date.
STORE OPERATIONS AND DISTRIBUTION
STORE LOCATION. As of April 1, 1994, the Company had 273
stores located in strip centers or freestanding buildings and 74
stores located in malls. The standard size of strip center or
freestanding location is approximately 6,500 square feet, with a
range of 1,100 to 28,000 square feet. Mall stores on average
utilize from 1,350 to 6,600 square feet of space, and most do not
offer video rental service due to the importance of convenience
in the video rental business.
RETAIL PRESENTATION. The Company has developed a contempo-
rary store design approach that employs light interior colors,
attractive lighting, modified exterior signage and a minimum of
fixed interior walls. The design maximizes flexibility in
lighting and use of floor space (e.g., to accommodate changes in
product format) and focuses customer attention primarily on
products. The Company, which maintains an active store remodel-
ing program to keep older stores up to date, has remodelled
approximately 310 stores in the past five years, including recent
remodels of substantially all of the stores acquired from The
Record Shop, Inc. and Pegasus Music and Video, Inc.
DISTRIBUTION. Central to Wherehouse's strategy of providing
broad merchandise selection to its customers (i.e. multiple
copies of hits, select copies of catalog product, and high
quality in-stock condition) is its ability to distribute product
quickly and cost-effectively to its stores. The Company's
central distribution system achieves this result by filling
orders to all stores twice a week. Inventory at the Company's
distribution center (located in Carson, California) is automa-
tically sorted based on individual store demand data generated by
its store-level inventory systems.
<page-41>
Approximately 30% of the Company's inventory is shipped to
store locations directly from manufacturers and distributors
(chiefly in the case of new releases), and the remainder is
shipped from the distribution center. The Company uses common
carriers for deliveries from its distribution center.
COMPETITION
Both the prerecorded music and the video rental markets
are highly competitive. In the prerecorded music market, the
Company competes with other chain retailers who specialize in
prerecorded music, discounters and other mass merchandisers,
direct mail programs such as record clubs, and local operators.
The video rental market is a more fragmented industry, with many
small operators and one significant competitor, Blockbuster
Entertainment Corporation, whose estimated nationwide marketshare
is currently approximately 20%. Grocery and convenience stores
also account for a portion of the video rental market. In the
Company's judgment, small operators may be well located, but
usually have significant disadvantages in inventory selection and
cost relative to chain retailers. Additionally, the Company's
combination entertainment store format gives the Company cross-
selling opportunities in music and rental video which most of its
competition does not have.
Nevertheless, 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.
The Company also competes with cable television, which
includes pay-per-view television. Currently, pay-per-view
provides less viewing flexibility to the consumer than video-
cassette rentals, and at a higher cost. Also, under current
entertainment industry distribution practices, movies are
generally available on videocassette prior to appearing on pay-
per-view. However, viewing flexibility may increase with
improved technology which could negatively impact the retail
store delivery of home video and the Company's business. Notwith-
standing potential technological advances, the Company believes
that video rental should, in the near future, continue to be the
first source of filmed in-the-home entertainment, before pay-per-
view, and a primary source of filmed entertainment for the
consumer.
<page-42>
Several major companies have announced that they are
developing other technologies which, if successful, could
constitute significant competition. These include technologies
which would provide movies or interactive games "on demand" over
fiber optic telephone or cable lines, other in-the-home enter-
tainment which may some day be provided over the "information
superhighway", and in-store kiosks that would provide on-site
transcription of compact discs. While none of these technologies
is yet commercially available, and it appears that significant
technical, economic and other obstacles to their introduction
remain to be resolved, if and when these or other new technolo-
gies are introduced, it can be anticipated that the Company's
business could be significantly impacted; and the Company may
need to develop and implement new marketing strategies in order
for its business to remain viable.
The Company believes that, in terms of both revenues and
store count, it currently is the largest retailer of prerecorded
music in the western U.S. and the second largest renter of
videocassettes in the western U.S. The Company believes that its
major competitive advantages lie in its convenient store loca-
tions and in its ability to offer a wider and more up-to-date
selection of inventory and to provide better customer service.
The Company believes that factors such as significant economies
of scale in marketing, purchasing and distribution currently
favor the Company over most of its competitors. Wherehouse's
combination entertainment store format provides cross-selling
opportunities and provides one convenient source of prerecorded
music and videocassettes for the consumer.
ORGANIZATION AND EMPLOYEES
The Company's corporate offices are located in Torrance,
California. The Company maintains one regional operations
office within the corporate offices and the other two regional
operations offices in Redwood City and San Diego. The Company's
distribution center is in Carson, California.
As of April 1, 1994, the Company employed approximately
7,700 persons. Approximately 32% were full-time employees and
approximately 68% were part-time employees. The Company's labor
complement depends on seasonal requirements, with up to 1,200
additional store and distribution center employees added during
the peak holiday season. The Company's headquarters staff, which
numbers approximately 223, is responsible for executive and
general operating management, buying, merchandising, advertising,
finance, accounting, information systems and real estate.
TRADEMARKS
All but 46 of the Company's stores operate under the name
"The Wherehouse." The Company owns and maintains registrations
for "The Wherehouse" trademark and variations thereof in the
United States and the United Kingdom, and monitors the status of
its trademark registrations to maintain them in force and to
renew them as required.
<page-43>
SEASONALITY
The Company's business is seasonal, and, as is typical for
most retailers, its revenues peak during the Christmas holiday
season. Revenues in the fourth quarter of fiscal 1994 were
slightly more than 32% of total annual revenues.
PROPERTIES
The Company's executive offices, which are located in
Torrance, California, are governed by a lease covering 72,670
square feet of space at an annual base rent for fiscal 1994 of
approximately $1,100,000; base rental is subject to periodic
consumer price index adjustments. The lease expires in June 1996
and is subject to a renewal option for an additional term of five
years.
The Company owns a 110,000 square foot warehouse in Gardena,
California, which is subject to a mortgage in the original princi-
pal amount of $2,800,000 which matures in 1996. The majority of
the space in this facility is sub-leased until April 1997 for an
annual rental of $192,000.
The Company operates a 200,000 square foot distribution
center in Carson, California. The lease for this property
expires on April 30, 2002, subject to two five-year renewal
options. The base rent for fiscal 1994 was $792,792; rent is
subject to periodic adjustment.
All 49 stores opened through internal development or acqui-
sition during fiscal 1994 were located in leased properties. No
new stores were opened from February 1, 1994 to April 1, 1994.
As of April 1, 1994, the Company had signed lease commitments to
open two new stores and may open additional stores over the next
twelve months. See "Store Additions and Site Selection."
As of April 1, 1994, the Company owned one of its retail
locations and leased space for the remaining 346 stores. Lease
terms generally range from 10 to 25 years including renewal
options. If all leased stores' renewal options were exercised,
18 leases would expire on or before January 31, 1995, 64 would
expire between February 1, 1995 and January 31, 2000, and the
remainder would expire between February 1, 2000 and March 31,
2025. The Company does not depend on the continued existence of
any one or several of its lease agreements or store locations for
the operation of its business.
LITIGATION
In January 1988, holders (the "Debentureholders") of approx-
imately $17 million in principal amount of the Company's 6 1/4%
Convertible Subordinated Debentures (the "Debentures") commenced
the action McMahan & Company, et al. v. Wherehouse Entertainment,
Inc., et al., 88 Civ. 0321 (S.D.N.Y.). An Amended Complaint was
filed in January 1988 and a Revised Amended Complaint was filed
in June 1988. Defendants are the Company, six of its former
directors, Furman Selz, Adler & Shaykin, the former controlling
shareholder of the Company ("A&S"), WEI Acquisition Corp.
("WAC"), a corporation formed by A&S for the purpose of acquiring
the Company, and WEI.
<page-44>
An indenture between the Company and Bank of America Nation-
al Trust and Savings Association (the "Debenture Indenture"),
which sets forth the contractual rights of the Debentureholders,
provides that under certain circumstances (defined as "triggering
events") the Debentureholders will have the right to have their
Debentures redeemed by the Company at a specified redemption
price. One of the triggering events is a merger of the Company
with another company that is not approved by a majority of the
"Independent Directors" (as defined in the Debenture Indenture).
The claims in this action arose from the 1988 Acquisition of the
Company by A&S, pursuant to a merger agreement (the "1988 Acqui-
sition Agreement") that was approved by the board of directors of
the Company, including a majority of the Independent Directors.
At that time, there were approximately $48.3 million in aggregate
principal amount of Debentures outstanding.
The Amended Complaint contains seven causes of action.
Count I alleges that the Independent Directors' approval of the
1988 Acquisition Agreement violated the Debenture Indenture
because of the alleged implicit requirement in the Debenture
Indenture that the Independent Directors would not approve any
merger agreement unless the approval was in the best interests of
the Debentureholders. Count II alleges that the board of
directors' approval of the 1988 Acquisition Agreement violated
the directors' contractual duty of good faith and fair dealing to
the Debentureholders. Count III alleges that the prospectus
issued by the Company and Furman Selz in connection with the
offering of the Debentures violated Section 11 of the Securities
Act by failing to disclose that the Independent Directors
retained the right to approve any merger proposal, and thereby
prevent any right to redemption from arising, whether or not such
proposal was in the best interests of the Debentureholders.
Count IV, brought solely on behalf of Froley, Revy Investment Co.
("Froley Revy"), alleges that representatives of Furman Selz
violated Section 12(2) of the Securities Act by making material
misstatements to Froley Revy to the effect that the optional
redemption provision was a "special protection" and a "protective
covenant" for Debentureholders, without disclosing that the
directors retained the power, in their discretion, to approve a
transaction and thereby prevent any right to redemption from
arising. Count V alleges that the prospectus issued by the
Company and Furman Selz in connection with the offering of the
Debentures, as well as the oral statements specified in Count IV,
violated Section 10(b) of the Exchange Act for the reasons
specified in the descriptions of Counts III and IV. Count VI
alleges that A&S, WAC and WEI interfered with plaintiffs' alleged
contractual rights. Count VII alleges that the 1988 Acquisition
was a fraudulent conveyance in violation of New York law.
The Revised Amended Complaint seeks (a) to invalidate any
obligation of the Company to Chemical Bank, which provided
financing in connection with the 1988 Acquisition, (b) to set
aside any security interest in the Company's assets in favor of
Chemical Bank, (c) a declaration that the debt held by Chemical
Bank is secured only by the securities which the debt was
provided to purchase and (d) damages in an unspecified amount,
together with the costs of the action. Although the Revised
Amended Complaint also purported to seek an injunction barring
the 1988 Acquisition, plaintiffs never applied for such relief
and the 1988 Acquisition was consummated.
<page-45>
By opinion dated April 10, 1990, the United States Court of
Appeals for the Second Circuit (the "Second Circuit") reversed
the judgment of the United States District Court for the Southern
District of New York (the "District Court") dismissing the
federal securities law claims pursuant to Rule 56 of the Federal
Rules of Civil Procedure and dismissing the state law claims for
lack of subject matter jurisdiction. The Second Circuit, by a
vote of two to one, concluded that plaintiffs had presented
sufficient evidence to create a question of fact as to whether
the offering materials at issue and certain alleged oral communi-
cations from Furman Selz to Froley, Revy could have misled a
reasonable investor in violation of Section 10(b) of the Exchange
Act and Sections 11 and 12(2) of the Securities Act. The Second
Circuit also reinstated the pendent state law claims, and
remanded the case to the District Court. Discovery has
concluded, and defendants moved for summary judgment dismissing
plaintiffs' complaint in its entirety. Plaintiffs also moved for
partial summary judgment on their contract claims. On March 11,
1994, the United States Magistrate Judge issued a Report and
Recommendation which recommended that defendants' motion for
summary judgment be granted and that the complaints in these
action be dismissed. The final decision on the motion is to be
made by the Second Circuit Judge. Plaintiffs' objections to the
Report and Recommendation were filed with the Court in April
1994. Defendants' response in support of the Report and
Recommendation was filed on May 27, 1994 requesting that the
District Court adopt the Report. Based on proceedings to date
and the Company's discussions with its trial lawyers, the Company
believes that this action is without merit and is vigorously
defending it.
$5.7 million principal amount of the Debentures remained
outstanding as of January 31, 1994.
In January 1989, the purported class action Don Thompson v.
Wherehouse Entertainment, Inc., et al., 88 Civ. 9040 (S.D.N.Y.)
was commenced by Don Thompson, the owner of $71,000 in principal
amount of Debentures. The Company is named as a defendant along
with six of its former directors and Furman Selz. This action
has been consolidated with the McMahan action described above.
The Complaint contains five causes of action. Count I
alleges that the prospectus issued by the Company and Furman Selz
in connection with the offering of the Debentures violated
Sections 11 and 15 of the Securities Act by failing to disclose
that the Independent Directors retained the right to approve any
merger proposal, and thereby retained the power to prevent any
right of redemption from arising, whether or not such merger
proposal was in the best interests of the Debentureholders.
Count II alleges that the prospectus violated Section 10(b) of
the Exchange Act for the same reason. Count III alleges that the
Independent Directors' approval of the 1988 Acquisition Agreement
violated the Debenture Indenture due to the alleged implicit
requirement in the Debenture Indenture that the Independent
Directors would not approve any merger agreement unless such
approval was in the best interests of the Debentureholders.
Count IV alleges that the Independent Directors' approval of the
1988 Acquisition Agreement, at the direction of the Company and
the management directors, violated the contractual duty of good
faith and fair dealing that the Company and the former directors
owed to the Debentureholders. Count V alleges that the 1988
Acquisition is a fraudulent conveyance in violation of New York
law. The Complaint seeks certification of the action as a class
action and certification of plaintiff as an appropriate represen-
tative of the class. The Complaint also seeks damages in an
unspecified amount together with the costs of the action.
<page-46>
On April 24, 1992, the District Court granted the plaintiff
class certification. Discovery has concluded, and defendants
moved for summary judgment dismissing plaintiffs' complaint in
its entirety. Plaintiffs also moved for partial summary judgment
on their contract claims. On March 11, 1994, the United States
Magistrate Judge issued a Report and Recommendation which recom-
mended that defendants' motion for summary judgment be granted
and that the complaints in these actions be dismissed. The final
decision on the motion is to be made by the Second Circuit Judge.
Plaintiffs' objections to the Report and Recommendation were
filed with the Court in April 1994. Defendants' response to such
objections was filed in May 1994. Based on proceedings to date
and the Company's discussions with its trial lawyers, the Company
believes that this action is without merit and is vigorously
defending it.
Silverman, et al. v. Wherehouse Entertainment, Inc., et al.,
Del. Ch. Civ. No. 935. In October 1987, stockholders of the
Company filed a class action suit in the Delaware Chancery Court
for New Castle County, seeking an injunction to force the Company
to negotiate with Shamrock Holdings, Inc. ("Shamrock"). In
addition, former stockholders Shaul Shaulson and Harold Kramer
brought claims against the Company in Delaware Chancery Court and
in the Superior Court for the State of California for the County
of Los Angeles, respectively. The California action has been
discontinued. In January 1988, Barry Silverman, Philip Frank,
Shaul Shaulson and Harold Kramer, each a former stockholder of
the Company, filed a Motion for Leave to File a Consolidated and
Amended Complaint (for the purpose of the discussion of this
litigation, the "Amended Complaint") in Delaware Chancery Court
with respect to the Delaware class action, the Shaulson action
and the Kramer action. In the Amended Complaint, these former
stockholders abandoned their previous claim seeking to force the
Company to negotiate with Shamrock, and alleged instead, inter
alia, that the board of directors of the Company breached
fiduciary duties owed to the stockholders of the Company by
virtue of their approval of the offer of WAC to acquire the
Company (the "WAC Offer"). They also alleged in the Amended
Complaint that because the Board rejected a proposal by Shamrock
on October 13, 1987 to negotiate for a purchase by Shamrock of
all outstanding shares of common stock of the Company at a price
of $14.25 per share, subject to Shamrock's ability to obtain
financing and to complete satisfactory due diligence, and
subsequently rejected the Shamrock tender offer of $12.00 per
share, the board of directors of the Company should not then have
accepted the WAC offer for $14.00 per share. Such former stock-
holders further alleged that in deposition testimony given by
various members of the board of directors of the Company such
members of the board of directors of the Company had stated that
they believed at the time of the initial proposal by Shamrock
that the shares were worth in excess of $18.00 per share.
Plaintiffs received permission to file and serve the Amended
Complaint, and in May 1988, the Company filed its answer denying
the material allegations in the Amended Complaint and raising
affirmative defenses thereto.
<page-47>
In August 1993, the parties reached an agreement in
principle to settle the action, subject to Court approval. The
settlement agreement in principle provides for no consideration
to be paid to any former shareholders of Wherehouse, but for
plaintiffs' counsel to apply for an award of legal fees and costs
not to exceed $350,000.
As part of the Acquisition, approximately $18.75 million of
the merger consideration in connection with the Acquisition was
deferred and is subject to offset, to the extent the Company
incurs certain litigation costs, including costs and expenses
relating to the cases entitled McMahan & Company, et al. v.
Wherehouse Entertainment, Inc., et al.; Don Thompson v.
Wherehouse Entertainment, Inc., et al.; and Silverman, et al. v.
Wherehouse Entertainment, Inc., et al., as described in the
merger agreement with respect to that Acquisition.
The Company is a party to various other claims, legal
actions and complaints arising in the ordinary course of its
business. In the opinion of management, all such matters are
without merit or involve such amounts that unfavorable disposi-
tion will not have a material impact on the financial position of
the Company.
<PAGE>
<page-48>
MANAGEMENT
The following table sets forth certain information concern-
ing the persons who are directors and executive officers of the
Company and, where indicated, WEI:
Age at
April 1,
Name Position 1994
- ----------------- --------------------------------- -----
Scott Young Chief Executive Officer, 47
Chairman of the Board and
Director of the Company and WEI
Jerry E. Goldress President and Chief Operating 63
Officer
Cathy L. Wood Senior Vice President, Chief 46
Financial Officer and Secretary
of the Company and WEI
Barbara C. Brown Senior Vice President, Sales and 42
Operations
Kathy J. Ford Vice President, Controller of the 46
Company and WEI
Anne E. McLaughlin Vice President, Treasurer and 37
Assistant Secretary of the
Company and WEI
James J. Burke, Jr. Director of the Company and WEI 42
Gerald S. Armstrong Director of the Company and WEI 50
Rupinder S. Sidhu Director of the Company and WEI 37
Bradley J. Hoecker Director of the Company and WEI 32
Scott Young, Chief Executive Officer, Chairman of the Board
and Director of the Company and WEI. Mr. Young joined Wherehouse
in March 1987 as Senior Vice President, Marketing and became
Executive Vice President and Chief Operating Officer later that
year and President in 1988. Mr. Young was named Chief Executive
Officer of the Company in March 1990, and Chairman of the Board
of the Company and WEI in June 1992. Mr. Young has been a member
of the Board of Directors of the Company and WEI since March
1990. From 1984 to 1987, Mr. Young served as a consultant to the
music industry and as Senior Vice President, Marketing during the
start-up phase of Personics, Inc. From 1980 to 1984, Mr. Young
owned Franklin Music, an eight-store chain based in Atlanta.
From 1977 to 1980, he served as General Manager, Executive Vice
President of Musicland. Mr. Young currently serves as President
on the board of the National Association of Recording
Merchandisers.
<page-49>
Jerry E. Goldress, President and Chief Operating Officer.
Mr. Goldress originally joined the Company in February 1988. Mr.
Goldress was Chairman of the Board of the Company from February
1988 to June 1992 and Chief Executive Officer of the Company from
February 1988 to March 1990. Mr. Goldress was a Director of the
Company from January 1988 to June 1992. Mr. Goldress returned to
the Company in August 1993 as President and Chief Operating
Officer. Mr. Goldress is currently Chairman of Grisanti, Galef &
Goldress, Inc. (a management consulting firm) and has been
employed by that company since 1973. All positions with the
Company which have been, and which currently are, held by Mr.
Goldress have been pursuant to consulting agreements with
Grisanti, Galef & Goldress. Mr. Goldress has been a general
partner of A&S since 1987. Mr. Goldress has served in the office
of the Chairman of the Board of Best Products Co., Inc. since
June 1991. He is a Director of Dreco Energy Services Ltd. As a
management consultant, Mr. Goldress provides assistance to
businesses in financial difficulty and, in the course of
providing such assistance, is frequently appointed a director and
an executive officer of such businesses. Often such businesses
are involved in bankruptcy or other reorganization proceedings.
Cathy L. Wood, Senior Vice President, Chief Financial
Officer and Secretary of the Company and WEI. Ms. Wood joined
the Company in 1989, with responsibilities including real estate,
store design and construction. In 1991, Ms. Wood assumed respon-
sibility for strategic planning and was appointed Senior Vice
President, Planning and Development. In April 1993, Ms. Wood was
named acting Chief Financial Officer and in August 1993, Ms. Wood
was appointed Senior Vice President and Chief Financial Officer
of the Company and WEI. From 1973 to 1989, she was employed by
Mellon Bank N.A.
Barbara C. Brown, Senior Vice President, Sales and Opera-
tions of the Company. Ms. Brown joined the Company in 1973.
She became Vice President, Sales and Operations in 1986 and was
promoted to Senior Vice President in 1991. Prior to 1986, Ms.
Brown served in a variety of store operations positions including
Store Manager, District Manager, Assistant Vice President, Store
Operations, and Associate Vice President, Store Operations.
<PAGE>
Kathy J. Ford, Vice President, Controller of the Companyand
WEI. Ms. Ford has been with the Company since February 1988.
She became Vice President, Controller in June 1990 and prior to
that served as Assistant Vice President, Assistant Controller.
From 1985 to 1987, Ms. Ford was Controller of Ryan-McFarland
Corporation. Ms. Ford was employed by Deloitte Haskins & Sells
from 1979 to 1985, most recently serving as Manager of Audit
Services. She is a member of the American Institute of Certified
Public Accountants and the California Society of Certified Public
Accountants.
<page-50>
Anne E. McLaughlin, Vice President, Treasurer and Assistant
Secretary of the Company and WEI. Ms. McLaughlin has been with
the Company since August 1991. She became Vice President,
Treasurer in September 1992 and prior to that served as
Treasurer. From 1987 to 1991, Ms. McLaughlin was a Vice
President in the Corporate Banking Division of HomeFed Bank.
James J. Burke, Jr., Director of the Company and WEI since
June 1992. Mr. Burke has been a Director of MLCP since 1985 and
President and Chief Executive Officer of MLCP since 1987. Mr.
Burke was a Vice President of MLPF&S from 1983 until 1988 and has
been a First Vice President since 1988 and a Managing Director of
MLPF&S since 1985. Mr. Burke is a director of Amstar Corpora-
tion, Borg-Warner Corporation, Supermarkets General Holdings
Corporation, AnnTaylor Stores Corporation, Londontown Holdings
Corp., Oscar I Corporation and United Artists Theatre Circuit,
Inc.
Gerald S. Armstrong, Director of the Company and WEI since
April 1993. Mr. Armstrong has been a Director of MLCP since
1988, an Executive Vice President of MLCP from 1988 until 1993,
and a Partner of MLCP since 1993. Mr. Armstrong has been a
Managing Director of the Investment Banking Division of MLPF&S
since November 1988. From January to November 1988, he was
President and Chief Executive Officer of Printing Finance
Company, Inc., a printing company, and from March 1985 to January
1988, he was Executive Vice President and Chief Operating Officer
of PACE Industries, Inc., a manufacturing and printing company.
Mr. Armstrong is also a Director of AnnTaylor Stores Corporation,
London Fog Corporation, Beatrice Foods, Inc., First USA, Inc.,
Blue Bird Corporation, and World Color Press, Inc.
Rupinder S. Sidhu, Director of the Company and WEI. Mr.
Sidhu has been a Director of MLCP since 1988, was a Senior Vice
President from 1988 until 1993 and has been a Partner of MLCP
since 1993. Mr. Sidhu has been a Managing Director of MLPF&S
since 1989, and was a Vice President of MLPF&S 1984 until 1988.
Mr. Sidhu is a Director of Eckerd Corporation, Clinton Mills,
Inc., John Alden Financial Corporation and First USA, Inc.
Bradley J. Hoecker, Director of the Company and WEI. Mr.
Hoecker has been a Principal of MLCP since 1993. Mr. Hoecker was
an Associate of MLCP from 1989 to 1993 and MLPF&S since 1989.
From 1984 to 1987, Mr. Hoecker was employed by Bankers Trust
Company.
Each director of the Company and WEI is elected annually and
serves until the next annual meeting or until his successor is
duly elected and qualified. Messrs. Armstrong, Sidhu, and
Hoecker serve as members of the audit committees and Messrs.
Burke, Armstrong and Sidhu serve as members of the compensation
committees of the board of directors of the Company and WEI.
Each executive officer of the Company and WEI serves at the
discretion of the board of directors of the Company and WEI,
respectively.
<page-51>
Under the Stockholders' Agreement (See "Certain Relation-
ships and Related Transactions"), if any of Scott Young, James J.
Burke, Jr., Rupinder S. Sidhu, Gerald S. Armstrong and Bradley J.
Hoecker are unwilling or unable to serve, or otherwise cease to
serve, as directors of WEI, then the shareholders of the Company
controlled by or affiliated with MLCP or one of its affiliates
(the "ML Investors") will be entitled to fill the resulting
vacancies on the board. In addition, the Stockholders' Agreement
provides that the ML Investors are entitled to nominate
successors to all WEI directors and that the stockholders of WEI
will cooperate in any removal of directors proposed by the ML
Investors.
<PAGE>
<page-52>
EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for the fiscal years ended
January 31, 1994, January 31, 1993, and January 31, 1992, the
cash compensation paid by WEI and its subsidiaries, as well as
certain other compensation paid or accrued for each such fiscal
year, to each of the five most highly compensated executive
officers of WEI (considering Mdms. Wood and Brown, Senior Vice
Presidents of the Company, and Mdm. Ford, Vice President of the
Company to be executive officers of WEI) who were officers on
January 31, 1994, and to Scott A. Hessler, former Senior Vice
President, Marketing and Merchandising of the Company, who ceased
to be an executive officer on January 18, 1994, (collectively,
the "named executive officers") in all capacities in which they
served. All compensation with respect to Mr. Goldress was paid
to Grisanti, Galef & Goldress, a management consulting firm in
which Mr. Goldress is a principal.
<PAGE>
<TABLE>
<CAPTION> SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Other Annual No. of Sec. All Other
Name and Fiscal Salary Bonus Compensation Underlying Compensation
Principal Position Year ($)(b) ($) ($) Options ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Scott Young 1994 421,155 --- 45,962(c) --- 39,484(j)
Chairman, Chief 1993 357,040 13,425 243,839(d) 67,000 25,121(k)
Executive Officer 1992 320,959 95,360 --- --- ---
Scott A. Hessler(a) 1994 260,673 --- --- --- 289,963(l)
Senior Vice President, 1993 177,981 20,143 --- 5,700 9,401(m)
Marketing and 1992 --- --- --- --- ---
Merchandising
Cathy L. Wood 1994 187,849 --- --- --- 39,799(n)
Senior Vice President, 1993 102,440 8,322 16,925(e) 5,600 39,899(o)
Chief Financial 1992 105,286 34,670 --- --- ---
Officer and Secretary
of the Company and WEI
Barbara C. Brown 1994 155,625 --- 18,457(f) --- 24,819(p)
Senior Vice President, 1993 131,348 6,022 20,009(g) 13,500 11,877(q)
Sales and Operations 1992 133,470 69,193 --- --- ---
Kathy J. Ford 1994 104,310 --- 14,707(h) --- 11,045(r)
Vice President, 1993 89,040 10,452 15,663(i) 5,205 4,269(s)
Controller 1992 83,716 31,789 --- --- ---
Jerry E. Goldress 1994 100,000 --- --- --- 150,000(t)
President, Chief 1993 105,931 --- --- --- 135,000(u)
Operating Officer 1992 275,000 --- --- --- ---
/TABLE
<PAGE>
<page-53>
(a) On January 18, 1994, Mr. Hessler ceased to be an executive
officer of the Company.
(b) Includes amounts deferred at the election of the named
executive officer pursuant to the Company's 401(k) plan.
Employees may contribute to the 401(k) plan on a pre-tax
basis, not to exceed $8,994 in fiscal 1994.
(c) Includes a $38,762 bonus to cover interest expense on Mr.
Young's Management Note (see "Certain Relationships and
Related Transactions," below), with a "gross-up" to cover
income taxes related to the bonus.
(d) Includes a $215,140 bonus to cover interest expense on loans
made by WEI to Mr. Young in connection with prior purchases
of common stock of WEI, with a "gross-up" to cover income
taxes related to the bonus.
(e) Includes a $7,128 bonus to cover interest expense on loans
made by WEI to Ms. Wood in connection with prior purchases
of common stock of WEI, with a "gross-up" to cover income
taxes as related to the bonus. Also included is a $7,200
annual automobile allowance.
(f) Includes an $11,257 bonus to cover interest expense on Ms.
Brown's Management Note (see "Certain Relationships and
Related Transactions," below), with a "gross-up" to cover
income taxes related to the bonus. Also included is a
$7,200 automobile allowance.
(g) Includes a $6,565 bonus to cover interest expense on loans
made by WEI to Ms. Brown in connection with the prior
purchases of common stock of WEI, with a "gross-up" to cover
income taxes related to the bonus. Also includes a $6,244
bonus to cover interest expense on Ms. Brown's Management
Note (see "Certain Relationships and Related Transactions,"
below), with a "gross-up" to cover income taxes related to
the bonus. Also included is a $7,200 annual automobile
allowance.
(h) Includes a $7,507 bonus to cover interest expense on Ms.
Ford's Management Note (see "Certain Relationships and
Related Transactions," below), with a "gross-up" to cover
income taxes related to the bonus. Also included is a
$7,200 annual automobile allowance.
(i) Includes a $7,200 annual automobile allowance. Also
included is a $4,299 bonus to cover interest expense on
loans made by WEI to Ms. Ford in connection with the prior
purchases of common stock of WEI, with a "gross-up" to cover
income taxes related to the bonus. Also included is a
$4,164 bonus to cover interest expense on Ms. Ford's
Management Note (see "Certain Relationships and Related
Transactions," below), with a "gross-up" to cover income
taxes related to the bonus.
<page-54>
(j) The amount shown includes $16,865 paid on behalf of Mr.
Young and his family for medical expenses not covered by the
Company's group medical insurance plan. Also included are
$14,352 of premiums paid for term life insurance and $8,268
for matching contributions to the Company's 401(k) plan made
on behalf of Mr. Young.
(k) Includes $14,352 of premiums paid for term life insurance.
Also included are $9,693 paid on behalf of Mr. Young and his
family for medical expenses not covered by the Company's
group medical insurance plan and $1,076 for matching contri-
butions to the Company's 401(k) plan made on behalf of Mr.
Young.
(l) Includes $265,000 accrued in fiscal 1994 for severance
payable to Mr. Hessler. Also included are $14,796 paid on
behalf of Mr. Hessler and his family for medical expenses
not covered by the Company's group medical insurance plan,
$7,091 of premiums paid for term life insurance and $3,076
for matching contributions to the Company's 401(k) plan made
on behalf of Mr. Hessler.
(m) Includes $8,799 paid on behalf of Mr. Hessler and his family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $602 of premiums
paid for term life insurance.
(n) Includes $21,876 paid on behalf of Ms. Wood and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $14,481 for
reimbursement of moving expenses and $3,442 of premiums
paid for term life insurance.
(o) Includes $36,457 paid on behalf of Ms. Wood and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $3,442 of
premiums paid for term life insurance.
(p) Includes $19,685 paid on behalf of Ms. Brown and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $1,828 of
premiums paid for term life insurance and $3,306 for
matching contributions to the Company's 401(k) plan made on
behalf of Ms. Brown.
(q) Includes $9,090 paid on behalf of Ms. Brown and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $1,828 of
premiums paid for term life insurance and $959 for matching
contributions to the Company's 401(k) plan made on behalf of
Ms. Brown.
(r) Includes $5,322 paid on behalf of Ms. Ford and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $3,482 of
premiums paid for term life insurance and $2,241 for
matching contributions to the Company's 401(k) plan made on
behalf of Ms. Ford.
<page-55>
(s) Includes $2,611 of premiums paid for term life insurance.
Also included are $991 paid on behalf of Ms. Ford and her
family for medical expenses and $666 for matching contribu-
tions to the Company's 401(k) plan made on behalf of Ms.
Ford.
(t) Includes payments made to Mr. Goldress's consulting company
for services related to the 1994 Re-engineering Plan.
(u) Includes a $135,000 payment made to Mr. Goldress in connec-
tion with the Acquisition.
FISCAL YEAR-END OPTION VALUES
No options were exercised by any of the named executive
officers during the last fiscal year. The following table sets
forth certain information with respect to the named executive
officers concerning the number of shares covered by both
exercisable and unexercisable stock options held as of January
31, 1994. Based upon the Board's determination of the fair
market value of WEI's Common Stock as of January 31, 1994 ($44
per share), none of these options were "in-the-money options."
<TABLE>
FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Securities
Underlying
Unexercised Options
at Fiscal Year End
Name Exercisable Unexercisable
- --------------------------------------------------
<S> <C> <C>
Scott Young 51,700 15,300
Scott A. Hessler 3,270 2,430
Cathy L. Wood 3,260 2,340
Barbara C. Brown 9,900 3,600
Kathy J. Ford 3,639 1,566
Jerry E. Goldress --- ---
</TABLE>
COMPENSATION OF DIRECTORS
The directors of the Company and WEI do not receive compen-
sation for their services as directors or as members of the
committees of the boards of directors of the Company and WEI.
<page-56>
EMPLOYMENT AGREEMENTS
Mr. Young's employment is currently governed by an employ-
ment agreement, the initial term of which will expire in June
1995, between the Company and Mr. Young. Pursuant to the
agreement, Mr. Young's employment will automatically extend for
periods of one year for up to a maximum of four additional
one-year periods, unless the Company gives Mr. Young written
notice of its intention not to renew the employment term at least
365 days prior to the then current expiration of the term. The
agreement provides for, among other things, a base salary of
$300,000 (which may be increased, but not decreased, at the
discretion of the Board of Directors of the Company, and which
shall be adjusted to account for the effects of inflation) and
annual bonuses at the discretion of the Board of Directors of the
Company. If Mr. Young is terminated for "Cause" (as defined in
the employment agreement) or Mr. Young resigns without "Good
Reason" (as defined in the employment agreement), Mr. Young is
entitled to receive unpaid "Base Salary" (as defined in the
employment agreement) and vested benefits with respect to periods
prior to the date of termination or resignation. If Mr. Young is
terminated without "Cause" or resigns with "Good Reason," he is
entitled to receive (a) twice his Base Salary; (b) a pro rata
portion of his bonus or incentive compensation for the fiscal
year during which such termination occurs; and (c) continued
coverage through the expiration date of the employment agreement
under all life, disability, medical, health and accident
insurance at the same coverage level maintained for his benefit
immediately prior to his termination or resignation. Additional-
ly, if he is terminated without "Cause," Mr. Young is entitled to
receive unpaid base salary and vested benefits with respect to
periods prior to the date of termination. The employment
agreement further provides for severance payments equal to the
sum of (x) twice Mr. Young's base salary, (y) unpaid base salary
with respect to periods prior to the date of termination and (z)
a pro rata portion of Mr. Young's bonus compensation for the
fiscal year during which such termination occurs, and benefits in
the event that Mr. Young's employment is terminated without Cause
or that Mr. Young resigns with Good Reason.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committees of the Company's
and WEI's boards of directors during fiscal year 1994 were
Messrs. Burke, Sidhu and Hoecker. The members of the compensa-
tion committees of the Company's and WEI's boards of directors
are currently Messrs. Burke, Armstrong and Sidhu.
Messrs. Burke and Sidhu are each executive officers of MLCP
and Managing Directors of Merrill Lynch & Co., Inc., and Mr.
Hoecker is a Principal of MLCP and an Associate of Merrill Lynch
& Co., Inc. Grammy Corp., WEI and MLCP are affiliates of MLPF&S.
In connection with the sale of the Company's 13% Senior Subordi-
nated Notes due 2002, Series A (the "Old Notes"), which were
exchanged by the holders thereof for Notes on December 4, 1992,
MLPF&S received a fee of $3,850,000 with respect to its activi-
ties as placement agent for the Old Notes. In addition, in
connection with the Acquisition, MLCP received a fee of $2.5
million from, and was reimbursed for the prior payment of
approximately $135,000 by, the Company, and WEI issued 1,590,909
shares of WEI Common Stock (or approximately 93% of the WEI
Common Stock outstanding as of the effective time of the Merger)
to certain limited partnerships of which MLCP or one of its
affiliates is the general partner and a wholly owned subsidiary
of Merrill Lynch & Co., Inc. (collectively, the "ML Investors").
<page-57>
On January 31, 1994, WEI raised $30 million through the
sales of shares of its Common Stock to certain of its share-
holders, all of which are funds managed by MLCP. In connection
with the sale and the concurrent restructuring of the Company's
bank credit agreement, MLCP received a fee of $300,000.
<PAGE>
<page-58>
SECURITY OWNERSHIP
THE COMPANY
The common stock of the Company is the only outstanding
class of its voting securities. WEI owns 10 shares, which
represent 100% of the issued and outstanding shares of the
Company's common stock. WEI's only business interest is its
ownership of the Company. WEI's principal executive offices are
located at c/o Wherehouse Entertainment, Inc., 19701 Hamilton
Avenue, Torrance, California 90502-1334.
WEI
The WEI Common Stock is the only outstanding class of its
voting securities. The following table sets forth, as of April
1, 1994, the number and percentage of shares of WEI Common Stock
beneficially owned by (i) each person known to WEI to be the
beneficial owner of more than 5% of the outstanding shares of WEI
Common Stock, (ii) each director of the Company and WEI, (iii)
each named executive officer, and (iv) all directors and
executive officers of the Company and WEI as a group. Unless
otherwise indicated in a footnote, each person listed below
possesses sole voting and investment power with respect to the
shares indicated as benefi-cially owned by them, subject to
community property laws where applicable.
<PAGE>
<TABLE>
<CAPTION>
Number of
Shares Percentage of
Name and Address Beneficially Outstanding WEI
of Beneficial Owner Owned Common Stock
- ----------------------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch Capital Partners, Inc.(1)(2) 1,820,458 76.9%
767 Fifth Avenue
New York, New York 10153
Merrill Lynch & Co., Inc.(1)(3) 452,269 19.1%
250 Vesey Street
North Tower - World Financial Center
New York, New York 10281
Scott Young(4) 117,986 4.9%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Scott A. Hessler(5) 4,974 0.2%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
<page-59>
Cathy L. Wood(6) 6,244 0.3%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Barbara C. Brown(7) 21,147 0.9%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Kathy J. Ford(8) 6,138 0.3%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Jerry E. Goldress --- 0.0%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
James J. Burke, Jr.(9) --- 0.0%
Merrill Lynch Capital Partners, Inc.
767 Fifth Avenue
New York, New York 10153
Gerald S. Armstrong(9) --- 0.0%
Merrill Lynch & Co., Inc.
250 Vesey Street
North Tower - World Financial Center
New York, New York 10281
Rupinder S. Sidhu(9) --- 0.0%
Merrill Lynch Capital Partners, Inc.
767 Fifth Avenue
New York, New York 10153
Bradley J. Hoecker(9) --- 0.0%
Merrill Lynch Capital Partners, Inc.
767 Fifth Avenue
New York, New York 10153
All directors and executive officers
as a group(10) (7 persons) 157,630 6.5%
</TABLE>
<PAGE>
(1) Entities affiliated with Merrill Lynch & Co., Inc.,
including MLCP, beneficially own an aggregate of 2,272,727
shares, which represents approximately 96% of the outstand-
ing WEI Common Stock.
<page-60>
(2) MLCP is a subsidiary of Merrill Lynch & Co., Inc. and an
affiliate of MLPF&S. Shares of WEI Common Stock benefi-
cially owned by MLCP are owned of record as follows:
1,103,219 (46.6% of outstanding WEI Common Stock) by Merrill
Lynch Capital Appreciation Partnership No. B-XXI, L.P.;
699,062 (29%) by ML Offshore LBO Partnership No. B-XXI; and
18,177 (0.8%) by MLCP Associates L.P. No. II. MLCP is the
indirect managing general partner of Merrill Lynch Capital
Appreciation Partnership No. B-XXI, L.P. and ML Offshore LBO
Partnership No. B-XXI and the general partner of MLCP
Associates L.P. No. II. The address for Merrill Lynch
Capital Appreciation Partnership No. B-XXI, L.P. and MLCP
Associates L.P. No. II is c/o MLCP, 767 Fifth Avenue, New
York, New York 10153. The address for ML Offshore LBO
Partnership No. B-XXI is P. O. Box 25, Roseneath, The
Grange, St. Peter Port, Guernsey Channel Island, British
Isles.
(3) Shares of WEI Common Stock beneficially owned by Merrill
Lynch & Co., Inc., excluding shares beneficially owned by
MLCP as set forth in note (2) above, are owned of record as
follows: 429,542 (18.2% of outstanding WEI Common Stock) by
ML IBK Positions, Inc.; and 22,727 (1%) by Merrill Lynch
KECALP L.P. 1991. The address for each such record holder
is 250 Vesey Street, North Tower - World Financial Center,
New York, New York 10281.
(4) Includes 51,700 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 11,226 shares of WEI Common Stock
owned by Mr. Young which are referred to as "Unvested WEI
Common Stock" in "Certain Relationships and Related
Transactions," below. Includes 7,728 shares pledged to WEI
as security for Mr. Young's Management Note (see "Certain
Relationships and Related Transactions," below).
(5) Includes 3,270 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable.
(6) Includes 3,260 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 610 shares which are referred to as
"Unvested WEI Common Stock" in "Certain Relationships and
Related Transactions," below. Includes 947 shares pledged
to WEI as security for Ms. Wood's Management Note (see
"Certain Relationships and Related Transactions", below).
(7) Includes 9,900 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 1,990 shares which are referred to as
"Unvested WEI Common Stock" in "Certain Relationships and
Related Transactions," below. Includes 2,274 shares pledged
to WEI as security for Ms. Brown's Management Note (see
"Certain Relationships and Related Transactions," below).
<page-61>
(8) Includes 3,639 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 515 shares which are referred to as
"Unvested WEI Common Stock" in "Certain Relationships and
Related Transactions," below. Includes 1,516 shares pledged
to WEI as security for Ms. Ford's Management Note (see
"Certain Relationships and Related Transactions," below).
(9) Messrs. Burke, Armstrong, Sidhu and Hoecker are directors of
the Company and WEI and officers of MLCP and Merrill Lynch &
Co., Inc., and may be deemed to beneficially own all of the
2,272,727 shares of Common Stock beneficially owned by
Merrill Lynch & Co., Inc. and MLCP. Messrs. Burke,
Armstrong, Sidhu and Hoecker each disclaim beneficial
ownership of these shares.
(10) Includes 72,569 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 14,341 shares which are referred to
as "Unvested WEI Common Stock" in "Certain Relationships and
Related Transactions," below. Includes 12,465 shares
pledged to WEI as security for Management Notes.
PLEDGE OF COMMON STOCK OF THE COMPANY
As security for the term facility and the revolving credit
facility under the Bank Credit Agreement, the lenders thereunder
have been granted (i) a first priority pledge by WEI of the
capital stock of the Company and (ii) a first priority lien on
all or substantially all of WEI's and the Company's assets other
than sale inventory, except that mortgages on the real property
and leaseholds owned, directly or indirectly, by the Company have
not been granted and will be granted by the Company only as
requested by Agent and Requisite Lenders (as defined in the Bank
Credit Agreement). In addition, the Company is prohibited from
granting a security interest on any of its unencumbered assets.
If the Company fails to repay any of its outstanding indebt-
edness to the lenders under the Bank Credit Agreement or if any
other event of default should occur under the Bank Credit Agree-
ment, the Banks may, among other things, foreclose on their
security interest in the Company's capital stock and acquire
control of the Company.
<PAGE>
<page-62>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 31, 1994, certain existing stockholders of the
Company (all of which were affiliated with Merrill Lynch & Co.,
Inc.) acquired 681,818 shares of WEI Common Stock from WEI for
$30 million. In connection with the transaction and the restruc-
turing of the Company's bank credit agreement, MLCP received a
fee of $300,000. Four of the directors of the Company and WEI
are executive officers of MLCP and Merrill Lynch & Co., Inc.
In connection with the Acquisition, certain members of
management (the "Management Investors") executed new non-recourse
notes in exchange for notes originally executed by them in
connection with their purchases of shares of WEI prior to the
Acquisition. The following table sets forth the outstanding
principal balance of the notes of each of the named executive
officers (the "Management Notes"), which amounts have remained
unchanged since the beginning of the last fiscal year. The
Management Notes bear interest at the rate of 7% per annum:
Name Principal Balance
Scott Young $340,000
Scott A. Hessler 0
Cathy L. Wood 41,533
Barbara C. Brown 99,867
Kathy J. Ford 66,600
Jerry E. Goldress 0
To secure repayment of the Management Notes, each maker
pledged to WEI the number of shares of WEI Common Stock purchased
by such maker with an original purchase price greater than or
equal to 100% of the original principal amount of such maker's
Management Note.
Under a Stockholders' Agreement among WEI, certain Manage-
ment Investors and certain other shareholders of the Company (the
"Stockholders' Agreement"), a portion of the WEI Common Stock
owned by the Management Investors is deemed to be "unvested" (the
"Unvested WEI Common Stock"), and is currently held by WEI in
trust for the benefit of the Management Investors.
In connection with the Acquisition, approximately $18.75
million of the Merger consideration was deferred, and is subject
to reduction to the extent that the Company incurs certain liti-
gation costs, including costs relating to the McMahan, Thompson
and Silverman actions described in "The Company -- Litigation.".
Currently, the balance of this deferred account (including
interest thereon), net of costs incurred to date, approximates
$19.3 million. Under the Stockholders' Agreement, "vesting" of
the Unvested WEI Common stock will be based upon the percentage
of such deferred amount which is actually paid to the selling
parties in the Merger.
<page-63>
The Stockholders' Agreement provides that any shares of
Unvested WEI Common Stock remaining after the remaining deferred
amounts have been fully distributed will be cancelled, and each
Management Investor who would otherwise be entitled to such
shares of Unvested WEI Common Stock (assuming they had vested)
will have the right, exercisable within 90 days after the date of
such cancellation, to purchase a number of shares of WEI Common
Stock equal to the number of shares of Unvested WEI Common Stock
so canceled, at a cash purchase price of $44 per share.
Pursuant to the terms of the Stockholders' Agreement, all
shares of WEI Common Stock purchased in connection with the
Acquisition by the Management Investors or issued upon exercise
of options are subject to certain restrictions on transfer and
certain put and call arrangements the holder of such shares
terminates his or her employment with WEI or any of its
subsidiaries.
Management Investors have the right to put their shares and
options to WEI in the event of death, disability, retirement or
termination without cause for a "fair value price" determined in
good faith by the board of directors of WEI, less the applicable
per share exercise price, in the case of options. WEI has the
right to call shares and options held by a Management Investor if
such Management Investor's employment terminates. In the event
of termination without cause, death, disability or retirement,
such call shall be exercisable at a price equal to the fair value
price of the stock or options determined in good faith by the
board of directors of WEI, less the applicable per share exercise
price, in the case of options. In the event of termination for
cause or voluntary resignation, such call will be exercisable at
a price equal to the lower of (i) the fair value price of the
stock or options determined in good faith by the board of
directors of WEI and (ii) $44 per share (the initial cost of such
shares) plus interest thereon at 6.5% per annum, provided that
the board of directors of WEI will consider increasing such call
price (but not in excess of the fair value price of such stock or
options, determined in good faith by the board of directors of
WEI) in the case of voluntary resignation, depending on the
circumstances. Payments under the puts and calls are limited
under the Bank Credit Agreement and the Indenture, as applicable.
Under certain circumstances, WEI may issue junior subordinated
notes in payment for all or a portion of the shares acquired
under exercise of a put or call.
Pursuant to the Stockholders Agreement, and in connection
with the termination of Mr. Hessler's employment with WEI and the
Company, WEI will repurchase all of Mr. Hessler's shares and
vested options for an aggregate purchase price of $74,976 (based
on a $44 per share fair value price).
As part of the 1994 Re-engineering Plan, the Company entered
into a management consulting agreement with Grisanti, Galef &
Goldress whose chairman, Mr. Goldress, 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.
<page-64>
The Company receives credit card processing 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 to
First USA, Inc. under this agreement.
<PAGE>
<page-65>
DESCRIPTION OF THE NOTES
The Notes were issued under the Indenture dated as of June
1, 1992, as amended by a Supplemental Indenture, dated as of June
11, 1992 (the "Indenture") among the Company, Grammy Corp., as a
guarantor, and United States Trust Company of New York, as
trustee (the "Trustee").
The definition of certain terms used in the following
summary are set forth below under "--Certain Definitions."
GENERAL
The Indenture authorizes a maximum principal amount of
$110,000,000 of Notes. In connection with the Acquisition, the
Company completed a private placement of $110,000,000 of the
Series A Notes. The Notes were issued in exchange for an equal
principal amount of outstanding Series A Notes. The terms of the
Notes are identical to the Series A Notes, but since the Notes
have been registered under the Securities Act, they are generally
freely tradeable by holders thereof who are not Affiliates of the
Company.
Principal of, premium, if any, and interest on the Notes is
payable, and the Notes are exchangeable and transferable, at the
office or agency of the Company in The City of New York main-
tained for such purposes (which initially will be the corporate
trust office of the Trustee); provided, however, that payment of
interest may be made at the option of the Company by check mailed
to the person entitled thereto as shown on the security register;
provided, further, that upon compliance with the procedures set
forth in the Securities Purchase Agreement, dated as of June 11,
1992, among Grammy Corp., the Company and the purchasers of the
Series A Notes, each initial holder of Series A Notes may elect
to receive payments of principal, premium and interest with
respect to Series A Notes held by such holder by wire transfer of
immediately available funds to an account specified by such
holder. The Notes will be issued only in fully registered form
without coupons, in denominations of $1,000 and integral
multiples thereof. No service charge will be made for any
registration of transfer, exchange or redemption of Notes, except
in certain circumstances for any tax or other governmental charge
that may be imposed in connection therewith.
WEI has guaranteed, and the Company will cause its
Subsidiaries under certain circumstances (including whenever a
Subsidiary of the Company becomes a guarantor or obligor under
the Bank Credit Agreement) to, guarantee payment of the Notes on
a senior subordinated basis. See "-- Guarantees."
<page-66>
MATURITY, INTEREST AND PRINCIPAL
The Notes are obligations of the Company, limited to
$110,000,000 aggregate principal amount and will mature on August
1, 2002. Interest on the Notes will accrue at the rate of 13%
per annum and will be payable semiannually on each February 1 and
August 1, commencing August 1, 1992, to the holders of record of
Notes at the close of business on the January 15 and July 15
immediately preceding such interest payment dates. Interest on
the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date the
Notes were issued (the "Issue Date"). Interest will be computed
on the basis of a year comprised of twelve 30-day months.
REDEMPTION
OPTIONAL REDEMPTION. The Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after
August 1, 1997, at the redemption prices (expressed as percent-
ages of principal amount), set forth below, plus accrued interest
to the redemption date, if redeemed during the 12-month period
beginning August 1 of the years indicated below:
REDEMPTION
YEAR PRICE
---- ----------
1997................... 104.875%
1998................... 103.250%
1999................... 101.625%
2000 and thereafter.... 100.000%
MANDATORY REDEMPTION. The Company is required to deposit
$27,500,000 with the Trustee on each of August 1, 2000 and August
1, 2001 for the redemption of a maximum of 50% in aggregate
principal amount of the Notes at a redemption price equal to 100%
of the principal amount thereof plus accrued interest to the date
of redemption prior to maturity.
In addition, as described below, in the event of a Change of
Control, the Company is obligated, subject to certain conditions
precedent described below, to make an offer to purchase all
outstanding Notes at a redemption price of 101% of the principal
amount thereof, plus accrued interest to the date of purchase.
The Company is also obligated to make offers to purchase a
portion (calculated as set forth below) of the Notes at a redemp-
tion price of 100% of principal amount plus accrued interest to
the date of purchase with a portion of the net cash proceeds of
certain sales or other dispositions of assets. See "--Change of
Control" and "--Certain Covenants--Disposition of Proceeds of
Asset Sales."
The Company's obligation to redeem the Notes pursuant to the
mandatory sinking fund will be reduced to the extent that the
Company optionally redeems Notes, redeems Notes pursuant to an
offer made as a consequence of a Change of Control or an Asset
Sale or otherwise acquires Notes (other than through the sinking
fund payments or pursuant to a registered exchange offer).
<page-67>
SELECTION AND NOTICE. In the event that less than all of
the Notes are to be redeemed at any time, selection of Notes for
redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if
any, on which the Notes are listed or, if the Notes are not then
listed on a national securities exchange, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appro-
priate; provided, however, that no Notes of a principal amount of
$1,000 or less shall be redeemed in part. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes to be
redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof
to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original Note. On and
after the redemption date, interest will cease to accrue on Notes
or portions thereof called for redemption.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company will
be obligated to make an offer to purchase (a "Change of Control
Offer"), and will, subject to the provisions described below,
purchase, on a business day (the "Change of Control Purchase
Date") not more than 40 nor less than 20 business days following
the Change of Control Date, all of the then-outstanding Notes at
a purchase price (the "Change of Control Purchase Price") equal
to 101% of the principal amount thereof plus accrued interest, if
any, to the Change of Control Purchase Date. The Company will,
subject to the provisions described below, be required to
purchase all Notes properly tendered into the Change of Control
Offer and not withdrawn. Prior to the mailing of the notice to
holders provided for below, the Company will have (x) terminated
and repaid in full all Indebtedness under the Bank Credit Agree-
ment, or offered to terminate the commitments and repay and have
terminated the commitments of and repaid any lender under the
Bank Credit Agreement who accepts such offer, or (y) obtained the
requisite consents under the Bank Credit Agreement to permit the
repurchase of the Notes as provided for under this covenant. If a
notice has been mailed when such condition precedent has not been
satisfied, the Company will have no obligation to effect the
repurchase of Notes until such time as such condition precedent
is satisfied. Failure to mail the notice on the date specified
below or to have satisfied the foregoing condition precedent by
the date that the notice is required to be mailed will in any
event constitute a covenant Default under clause (iii) of
"--Events of Default."
In order to effect such Change of Control Offer, the Company
will, not later than the 20th business day after the Change of
Control Date, mail to each holder of Notes notice of the Change
of Control Offer, which notice will govern the terms of the
Change of Control Offer and will state, among other things, the
procedures that holders must follow to accept the Change of
Control Offer.
<page-68>
If a Change of Control Offer is made, there can be no
assurance that the Company will have available funds sufficient
to pay the Change of Control Purchase Price for all of the Notes
that might be delivered by holders of Notes seeking to accept the
Change of Control Offer. The Company will not be required to
make a Change of Control Offer upon a Change of Control if a
third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and
purchases all Notes properly tendered under such Change of
Control Offer.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act, and any other
securities laws or regulations in connection with the repurchase
of Notes pursuant to a Change of Control Offer. To the extent
that the provisions of any securities laws or regulations
conflict with the "Change of Control" provisions of the Inden-
ture, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its
obligations under such provisions of the Indenture by virtue
thereof.
"Change of Control" means the occurrence of any of the
following events: (i) any "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act), other than
MLCP and its affiliates, including certain partnerships formed by
it, that initially invested in the Company's common stock (the
"MLCP Affiliates"), is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person will be deemed to have "beneficial ownership" of
all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 30% of the total
Voting Stock of the Company or WEI, as the case may be; provided,
however, that the MLCP Affiliates "beneficially own" (as so
defined) in the aggregate a lower percentage of the Voting Stock
than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of the Company or
WEI; (ii) the Company or WEI, as the case may be, consolidates
with, or merges with or into, another person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person
consolidates with, or merges with or into, the Company or WEI, as
the case may be, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company or WEI, as the
case may be, is converted into or exchanged for cash, securities
or other property, except any such transaction where (A) the
outstanding Voting Stock of the Company or WEI, as the case may
be, is converted into or exchanged for (x) Voting Stock (other
than Redeemable Capital Stock) of the surviving or transferee
corporation or (y) cash, securities and/or other property;
provided, however, the payment of such cash, securities and/or
other property is not prohibited by the "Limitation on Restricted
Payments" covenant and (B) the holders of the Voting Stock of the
Company or WEI, as the case may be, immediately prior to such
transaction own, directly or indirectly, not less than a majority
of the Voting Stock of the surviving or transferee corporation
immediately after such transaction; (iii) during any consecutive
two-year period, individuals who at the beginning of such period
constituted the board of directors of the Company or WEI
(together with any new directors whose election by such board or
whose nomination for election by the stockholders of the Company
or WEI was approved by a vote of 66 2/3% of the directors then
still in office who were either directors at the beginning of
<page-69>
such period or whose election or nomination for election was
previously so approved) or such other directors as have been
appointed by the MLCP Affiliates cease for any reason to
constitute a majority of the board of directors of the Company or
WEI, as the case may be, then in office; or (iv) any order,
judgment or decree will be entered against the Company or WEI
decreeing the dissolution or split up of the Company or WEI and
such order will remain undischarged or unstayed for a period in
excess of sixty (60) days.
<PAGE>
SUBORDINATION
The Indebtedness represented by the Notes and the payment of
the Subordinated Obligations are subordinated in right of payment
to the prior payment in full in cash or cash equivalents of all
Senior Indebtedness, as described below.
The Indenture provides that in the event of any insolvency
or bankruptcy case or proceeding, or any receivership, liquida-
tion, reorganization or other similar case or proceeding in
connection therewith, relating to the Company or its assets, or
any liquidation, dissolution or other winding-up of the Company,
whether voluntary or involuntary, or any assignment for the
benefit of creditors or other marshalling of assets or liabili-
ties of the Company, all Senior Indebtedness must be paid in full
before any payment or distribution (excluding certain permitted
equity or subordinated securities) is made on account of the
Subordinated Obligations.
During the continuance of any default in the payment of any
Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated beyond any applicable grace period and
after receipt by the Trustee from representatives of holders of
such Designated Senior Indebtedness of written notice of such
default, no payment or distribution of any assets of the Company
of any kind or character will be made on account of the Subordi-
nated Obligations, or the purchase, redemption or other acquisi-
tion of, the Notes unless and until such default has been cured
or waived or has ceased to exist or such Designated Senior
Indebtedness will have been discharged or paid in full.
During the continuance of any nonpayment default with
respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may be accelerated (a "Non-payment Default")
and after the receipt by the Trustee from the representatives of
holders of such Designated Senior Indebtedness of a written
notice of such Non-payment Default, no payment or distribution of
any assets of the Company of any kind or character may be made by
the Company on account of the Subordinated Obligations or the
purchase, redemption or other acquisition of, the Notes for the
period specified below (the "Payment Blockage Period").
The Payment Blockage Period will commence upon the receipt
of notice of a Non-payment Default by the Trustee from the
representatives of holders of Designated Senior Indebtedness and
will end on the earliest to occur of the following events: (i)
179 days has elapsed since the receipt of such notice (provided
such Designated Senior Indebtedness will not theretofore have
been accelerated), (ii) such default is cured or waived or ceases
to exist or such Designated Senior Indebtedness is discharged or
paid in full or [iii) such Payment Blockage Period will have been
<page-70>
terminated by written notice to the Company or the Trustee from
the representatives of holders of Designated Senior Indebtedness
initiating such Payment Blockage Period, after which the Company
will promptly resume making any and all required payments in
respect of the Notes, including any missed payments. Only one
Payment Blockage Period with respect to the Notes may be
commenced within any consecutive 365-day period. No Non-payment
Default with respect to Designated Senior Indebtedness that
existed or was continuing on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior
Indebtedness initiating such Payment Blockage Period will be, or
can be, made the basis for the commencement of a second Payment
Blockage Period, unless such default has been cured or waived for
a period of not less than 90 consecutive days. In no event will
a Payment Blockage Period extend beyond 179 days from the date of
the receipt by the Trustee of the notice initiating such Payment
Blockage Period and there must be a 186 consecutive day period in
any 365-day period during which no Payment Blockage Period is in
effect.
If the Company fails to make any payment on the Notes when
due or within any applicable grace period, whether or not on
account of the payment blockage provisions referred to above,
such failure would constitute an Event of Default under the
Indenture and would enable the holders of the Notes to accelerate
the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of liquidation
or insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the holders of the
Notes and funds which would be otherwise payable to the holders
of the Notes will be paid to the holders of the Senior Indebted-
ness to the extent necessary to pay the Senior Indebtedness in
full, and the Company may be unable to meet its obligations fully
with respect to the Notes.
"Senior Indebtedness" means the principal of, premium, if
any, and interest on any Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which
the same is outstanding expressly provides that such Indebtedness
will not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Indebtedness"
will include the principal of, premium, if any, and interest
(including interest that would accrue but for the filing of a
petition initiating any proceeding under any state or federal
bankruptcy laws, whether or not such claim is allowable in such
proceeding) on all obligations (including, without limitation,
reimbursement obligations under letters of credit) of every
nature of the Company from time to time owed to the lenders under
the Bank Credit Agreement, including, without limitation,
principal of and interest on, and all fees and expenses payable
under the Bank Credit Agreement. Notwithstanding the foregoing,
"Senior Indebtedness" will not include (i) Indebtedness evidenced
by the Notes, (ii) Indebtedness that is expressly subordinate or
junior in right of payment to any Indebtedness of the Company,
including, without limitation, the Debentures, (iii) Indebtedness
which, when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is without
recourse to the Company, (iv) Indebtedness which is represented
by Redeemable Capital Stock, (v) Indebtedness for goods,
materials or services purchased in the ordinary course of
business or other current liabilities (other than any current
liabilities owing under the Bank Credit Agreement or the current
<page-71>
portion of any long term Indebtedness which would constitute
Senior Indebtedness but for the operation of this clause (v)),
(vi) Indebtedness of or amounts owed by the Company for
compensation to employees or for services rendered to the
Company, (vii) any liability for federal, state, local or other
taxes owed or owing by the Company, (viii) Indebtedness of the
Company to a Subsidiary of the Company or any other Affiliate of
the Company or any of such Affiliate's Subsidiaries, other than
Indebtedness owed to MLPF&S thereof by reason of its ownership of
securities of the Company acquired in the ordinary course of its
trading or underwriting activities, whether such securities are
held by it for its own account or as nominee, (ix) that portion
of any Indebtedness which at the time of issuance is issued in
violation of the Indenture and (x) amounts owing under leases
(including operating lease obligations and capitalized lease
obligations).
"Designated Senior Indebtedness" means (i) all Senior
Indebtedness under the Bank Credit Agreement and (ii) any other
Senior Indebtedness which, at the time of the incurrence of such
Indebtedness is specifically designated in the instrument
evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" by the Company.
On April 30, 1994, the Company had approximately $82.9
million of Senior Indebtedness outstanding and an additional
$19.9 million aggregate principal amount of availability of
Senior Indebtedness under its Revolving Credit Facility. The
Indenture limits, but does not prohibit, the incurrence by the
Company of additional Indebtedness which is senior to the Notes
and prohibits the incurrence by the Company and its Subsidiaries
of Indebtedness which is subordinated in right of payment to any
other Indebtedness of the Company or such Subsidiary, as the case
may be, and senior in right of payment to the Notes.
GUARANTEES
WEI has guaranteed the Company's obligations under the
Notes. In addition, if any Subsidiary of the Company becomes a
guarantor or obligor in respect of Indebtedness of the Company or
any of its Subsidiaries, the Company's obligations under the
Notes will be guaranteed by such Subsidiary. See "--Certain
Covenants--Limitation on Guarantees by Subsidiaries." At
present, the Company has no Subsidiaries. Subject to the
subordination provisions described above, if the Company defaults
in payment of the principal of, premium, if any, or interest on
the Notes, WEI and each other Guarantor will be obligated to duly
and punctually pay the same.
The Indebtedness evidenced by each Guarantee (including the
payment of principal of, premium, if any, and interest on the
Notes) will be subordinated on the same basis to Guarantor Senior
Indebtedness (defined with respect to the Indebtedness of a
Guarantor as defined with respect to Indebtedness of the Company)
as the Notes are subordinated to Senior Indebtedness. See
"--Subordination." As of April 30, 1994, Guarantor Senior
Indebtedness with respect to WEI was approximately $80.8 million.
<page-72>
CERTAIN COVENANTS
The Indenture contains the following covenants, among
others:
LIMITATION ON INDEBTEDNESS. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume, guarantee or in
any manner become liable for the payment of any Indebtedness
(including any Acquired Indebtedness) other than Permitted
Indebtedness; provided, however, that the Company will be
permitted to, directly or indirectly, create, incur, assume,
guarantee or become directly or indirectly liable for the payment
of any Indebtedness (including Acquired Indebtedness), if (a) at
the time of such event and after giving effect thereto, the
Adjusted Cash Flow Coverage Ratio of the Company is at least
equal to the ratio set forth below for the fiscal year indicated
below for which such Adjusted Cash Flow Coverage Ratio is
calculated:
FISCAL YEAR
BEGINNING
FEBRUARY 1 RATIO
----------- ---------
1993.................. 3.45:1.0
1994.................. 3.45:1.0
1995 and thereafter... 4.15:1.0
and (b) except in the case of Senior Indebtedness or Acquired
Indebtedness, such Indebtedness (i) has an Average Life to Stated
Maturity greater than the remaining Average Life to Stated
Maturity of the Notes, (ii) has a Stated Maturity for its final
scheduled principal payment that is subsequent to the Stated
Maturity for the final scheduled principal payment of the Notes
and (iii) is subordinated to the Notes in the same manner and to
the same extent that the Notes are subordinated to Senior
Indebtedness.
"Permitted Indebtedness" means, without duplication (i)
Indebtedness of the Company and the Guarantors under the Bank
Credit Agreement in an aggregate principal amount at any one time
outstanding not to exceed the sum of (A) $65,000,000 with respect
to Indebtedness under the Term Facility, less principal payments
made by the Company in respect of the Term Facility, (B) with
respect to Indebtedness under the Revolving Credit Facility and
the Letter of Credit Facility (as defined in the Indenture) (for
the purposes set forth therein on the Issue Date), the greater of
(I) $45,000,000 and (II) the lesser of (a) $65,000,000 and (b)
the aggregate amount of Indebtedness which may be incurred under
the maximum advance rates and the definition of "Borrowing Base"
under the Bank Credit Agreement, less, in the case of this clause
(B), the amount by which the aggregate commitment under the
Revolving Credit Facility at any time has been permanently
reduced to the extent that any repayments required to be made in
connection with effecting such permanent reduction have been
made, and (C) any Indebtedness incurred under the Bank Credit
Agreement pursuant to and in compliance with either (x) clause
(a) of the covenant described in this section or (y) clause (xii)
below; (ii) Indebtedness in respect of reimbursement obligations
under a letter of credit prepaid by WEI to secure the payment of
the Deferred Purchase Price (the "Letter of Credit") to the
extent that cash has been applied to prepay such reimbursement
obligations (provided that to the extent such cash represents the
proceeds of Indebtedness, such Indebtedness is in compliance with
the covenant described under "--Limitation on Indebtedness");
(iii) Indebtedness of the Company and the Guarantors under the
Indenture, the Notes and the Guarantees; (iv) Indebtedness of the
Company or any Subsidiary of the Company not otherwise referred
to in this definition that is outstanding on the Issue Date,
except Indebtedness required to be repaid under the Merger
Agreement or the Securities Purchase Agreement; (v) Indebtedness
of the Company or any Subsidiary of the Company in respect of
performance bonds, bankers' acceptances, letters of credit of the
Company or any Subsidiary of the Company (other than the Letter
of Credit and other letters of credit issued to the Company
pursuant to the Bank Credit Agreement) and surety bonds provided
by the Company or any Subsidiary of the Company in the ordinary
course of business and consistent with past practice, not to
exceed at any given time $5,000,000 in the aggregate; (vi)
Indebtedness of any Subsidiary of the Company to the Company or
any wholly-owned Subsidiary of the Company which is not subordi-
nated in right of payment to any Indebtedness of such Subsidiary;
(vii) Indebtedness of the Company to any wholly-owned Subsidiary
of the Company which is unsecured and subordinated in right of
payment from and after such time as the Notes will become due and
payable (whether at Stated Maturity, by acceleration or other-
wise) to the payment and performance of the Company's obligations
under the Indenture or the Notes; (viii) any renewals, exten-
sions, substitutions, refundings, refinancings or replacements of
any Indebtedness described in the preceding clauses (i), (iii)
and (v) above, so long as such renewal, extension, substitution,
refunding, refinancing or replacement does not result (a) in an
increase in the aggregate principal amount of the outstanding
Indebtedness represented thereby and (b) in the case of Senior
Indebtedness or Guarantor Senior Indebtedness of any Guarantor
does not reduce the Average Life to Stated Maturity of such
Indebtedness and, in the case of the Notes or any extension,
renewal, refunding, refinancing or replacement of the Notes, in a
reduction of the Stated Maturity of any payment of principal
thereof; (ix) any guarantees of Indebtedness by a Subsidiary of
the Company entered into in compliance with the covenant under
the Indenture described under "-- Limitations on Guarantees by
Subsidiaries"; (x) Indebtedness (a) incurred in connection with
or arising out of capitalized lease obligations in an aggregate
amount not to exceed $10,000,000 at any time outstanding or (b)
represented by purchase money obligations, in each case for
personal property acquired after the Issue Date in the ordinary
course of business of the Company as it exists on the date hereof
or reasonably related thereto; provided, however, clause (a) will
also apply to (I) properties under operating leases in existence
as of the Issue Date to the extent reclassified as a capitalized
lease obligation after the Issue Date and (II) the incurrence of
capitalized lease obligations in respect of equipment and
fixtures in the Distribution Center to the extent owned on the
Issue Date; (xi) Interest Rate Protection Obligations of the
Company covering Indebtedness of the Company (which Indebtedness
(A) bears interest at fluctuating interest rates and (B) is
otherwise permitted to be incurred under this covenant) to the
extent the notional principal amount of such Interest Rate
Protection Obligations does not exceed the principal amount of
the Indebtedness to which such Interest Rate Protection Obliga-
tions relate; and (xii) Indebtedness not described by any other
clause of this definition, not to exceed an aggregate principal
amount at any time outstanding of $20,000,000, whether incurred
under the Bank Credit Agreement by reason of subclause (i)(C)(y)
above or otherwise than under the Bank Credit Agreement.
<page-74>
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides
that the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, do any of the following:
(i) declare or pay any dividend on, or make any
distribution or payment in respect of, or purchase, redeem or
otherwise acquire or retire for value, any Capital Stock of the
Company or of any Affiliate of the Company (other than (x) the
declaration or payment of dividends by the Company or any of its
Subsidiaries payable solely in the Capital Stock (other than
Redeemable Capital Stock) of the Company or such Subsidiary, as
the case may be, (y) the declaration or payment by any Subsidiary
of the Company of dividends or other distributions to the extent
declared or paid to the Company or a wholly-owned Subsidiary of
the Company or (z) the purchase, redemption, acquisition or
retirement by any wholly-owned Subsidiary of the Company of its
Capital Stock),
(ii) make any principal payment on, or redeem,
repurchase, defease or otherwise acquire or retire for value,
prior to any scheduled principal payment, scheduled sinking fund
payment or other Stated Maturity, Indebtedness of the Company or
any Guarantor which is subordinated in right of payment to, the
Notes or the Guarantees (whether pursuant to its terms or by
operation of law) (collectively, "Subordinated Indebtedness"),
(iii) make any Investment (other than a Permitted
Investment) in any person (other than a wholly-owned U.S.
Subsidiary of the Company that is a Guarantor or that becomes a
Guarantor concurrently with such Investment), or
(iv) make any payments of cash, securities and/or
other property upon conversion or exchange of Capital Stock in
connection with a transaction referred to in the exception to
clause (ii) of the definition of "Change of Control" (such
payments or Investments described in the preceding clauses (i),
(ii), (iii) and (iv) are collectively referred to as "Restricted
Payments"), unless at the time of and after giving effect to the
proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, shall be the Fair Market Value of
the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to such Restricted
Payment) (1) no Default or Event of Default will have occurred
and be continuing and (2) the aggregate amount of all Restricted
Payments declared or made after the Issue Date will not exceed
the sum of (A) 50% of the aggregate Adjusted Consolidated Net
Income of the Company accrued on a cumulative basis during the
period beginning on the Issue Date and ending on the last day of
the Company's last fiscal quarter ending prior to the date of
such proposed Restricted Payment (or, if such aggregate cumula-
tive Adjusted Consolidated Net Income shall be a loss, minus 100%
of such loss) plus (B) the aggregate net proceeds, including the
Fair Market Value of property other than cash, received by the
Company either (x) as capital contributions to the Company after
the Issue Date or (y) from the issuance or sale of Capital Stock
(excluding Redeemable Capital Stock, but including Capital Stock
issued upon the conversion of convertible debt and from the
exercise of options, warrants or rights to purchase Capital Stock
(other than Redeemable Capital Stock)) of the Company to any
person (other than to an Affiliate or a Subsidiary of the
Company) after the Issue Date and (3) the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebted-
ness) in accordance with the provisions set forth under
"--Limitation on Indebtedness" (assuming a market rate of
<page-74>
interest with respect to such additional Indebtedness). In
valuing the aggregate net proceeds received by the Company upon
the issuance of Capital Stock upon the conversion of convertible
debt or the exercise of options, warrants or rights for purposes
of the preceding clause (2)(B) will be the net proceeds received
upon the issuance of the convertible debt, options, warrants or
rights plus the incremental amount received by the Company upon
the conversion or exercise thereof.
None of the foregoing provisions of this covenant will be
deemed to prohibit (i) the payment of any dividend within 60 days
after the date of its declaration, if at the date of declaration
such payment would be permitted by the provisions of the
Indenture; (ii) so long as no Default or Event of Default shall
have occurred and be continuing, the redemption, repurchase or
other acquisition or retirement of any shares of any class of
Capital Stock of the Company or any Subsidiary of the Company in
exchange for, or out of the net proceeds of, a substantially
concurrent issue and sale of other shares of Capital Stock (other
than Redeemable Capital Stock) of the Company to any person
(other than to a Subsidiary of the Company); (iii) so long as no
Default or Event of Default will have occurred and be continuing,
any redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness made by exchange for, or out of the net
proceeds of, a substantially concurrent issue and sale of (A)
Capital Stock (other than Redeemable Capital Stock) of the
Company or (B) Indebtedness of the Company or any Guarantor so
long as such Indebtedness (a) is subordinated to Senior Indebted-
ness and the Notes or Guarantor Senior Indebtedness and the
Guarantees of such Guarantor, as the case may be, in the same
manner and at least to the same extent as the Subordinated
Indebtedness so purchased, exchanged, redeemed, repurchased,
acquired or retired, (b) has no Stated Maturity earlier than the
Stated Maturity for the final scheduled principal payment of the
Notes and (c) has an Average Life to Stated Maturity greater than
the remaining Average Life to Stated Maturity of the Notes; (iv)
dividends paid or intercompany loans made by the Company to WEI
for the purpose of paying operating expenses of WEI arising in
the ordinary course of business, including, without limitation,
for the payment of its taxes, provided that such dividends and
loans shall not exceed $500,000 in the aggregate per fiscal year;
(v) so long as no Default or Event of Default will have occurred
and be continuing, dividends or intercompany loans made by the
Company to WEI for repurchases made, or for repayments of
principal made on junior subordinated notes issued, pursuant to
put and call provisions with respect to WEI Common Stock or
options therefor, in an amount not to exceed $2,000,000 in any
fiscal year (exclusive of amounts referred to in the following
proviso) or $10,000,000 in the aggregate (exclusive of amounts
referred to in the following proviso); provided that such dollar
limitations shall not restrict the Company from distributing to
WEI the proceeds of key man life insurance maintained by it for
such purposes; (vi) dividends or intercompany loans of funds made
by the Company to WEI for payment to the former stockholders,
warrantholders and optionholders of WEI pursuant to the Merger
Agreement as in effect on the Issue Date; (vii) conversions,
redemptions or repurchases of Debentures into cash either (x) in
accordance with their terms as in effect on the Issue Date or (y)
at the option of the Company or (z) as required by any judgment,
order or decree of any court or regulatory or administrative
agency; provided that (A) the Company shall apply Debentures
previously acquired by it or any of its Affiliates against its
sinking fund obligations in respect of the Debentures to the
greatest extent practicable, (B) in the case of the foregoing
clauses (y) and (z), no Default or Event of Default shall have
occurred and be continuing at the time of, or after giving effect
to, such conversion, redemption or repurchase, and (C) in the
<page-76>
case of the foregoing clause (y), such conversion, redemption or
repurchase shall reduce the Deferred Purchase Price to the extent
thereof; (viii) dividends or intercompany loans made by the
Company to WEI to permit WEI to pay interest on the junior
subordinated notes or (ix) Investments not otherwise permitted in
accordance with the provisions set forth under this section in an
aggregate amount not to exceed $1,000,000 at any time. All
Restricted Payments made in accordance with the preceding clauses
(i), (ii), (iii) (other than clause (B) thereof), (iv), (v)
(other than the proviso thereof), (vii) (to the extent such
payment is in excess of the amount payable in respect of the
Debentures in accordance with their terms and does not reduce the
Deferred Purchase Price) and (ix) shall each be counted for
purposes of computing amounts expended pursuant to clause (2) of
the immediately preceding paragraph.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture
provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, conduct any business
or enter into or suffer to exist any transaction or series of
related transactions (including, without limitation, the sale,
transfer, disposition, purchase, exchange or lease of assets,
property or services) with, or for the benefit of, any Affiliate
of the Company (other than a wholly-owned Subsidiary of the
Company) unless (i) such transaction or series of transactions is
on terms that are no less favorable to the Company or such
Subsidiary of the Company, as the case may be, than would be
available in a comparable transaction in arm's-length dealings
with an unrelated third party, (ii) the Company delivers an
Officers' Certificate to the Trustee certifying that such
transaction complies with clause (i) above and (iii) with respect
to a transaction or series of transactions involving aggregate
payments or value equal to or greater than $10,000,000, the
Company will have obtained a written opinion of an Independent
Financial Advisor that such transaction or transactions are fair
to the Company or such Subsidiary, as the case may be, from a
financial point of view. This foregoing covenant will not apply
to (a) the payment of reasonable and customary regular fees to
directors of the Company or any of its Subsidiaries, (b) any
customary provision for the indemnification of officers or
directors of the Company or key man life insurance, (c) trans-
actions involving the Management Investors pursuant to the terms
of the equity financing documents or any employment agreement in
effect on the Issue Date or (d) the payment of fees to Merrill
Lynch & Co., Inc. and MLPF&S for consulting, investment banking
or financial advisory services rendered by such person to the
Company or any of its Subsidiaries.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture
provides that the Company will not, and will not permit any of
its Subsidiaries to, make any Asset Sale unless (i) the Company
or such Subsidiary receives consideration at the time of such
Asset Sale at least equal to the Fair Market Value of the shares
and/or assets subject to such Asset Sale and (ii) at least 75% of
the consideration for any such Asset Sale is cash and/or cash
equivalents. To the extent the Net Cash Proceeds of any Asset
Sale are not required to be applied to repay, and permanently
reduce the commitments under, any outstanding Indebtedness under
the Bank Credit Agreement as required by the terms thereof or are
not so applied, then the Company may, within six months of the
Asset Sale, invest Net Cash Proceeds in properties and assets
which replace the properties and assets that were the subject of
the Asset Sale or in properties and assets (including inventory)
that will be used in the business of the Company and its wholly-
owned Subsidiaries existing on the Issue Date or in businesses
reasonably related thereto, provided, however, that the aggregate
<page-77>
amount of Net Cash Proceeds so invested (exclusive of Net Cash
Proceeds from the sale or disposition of inventory outside of the
ordinary course of business) while the Notes are outstanding may
not exceed $20,000,000. The amount of such Net Cash Proceeds
neither used to repay Indebtedness under the Bank Credit
Agreement nor permitted to be invested and so invested as set
forth above is referred to herein as "Excess Proceeds."
On the date on which the aggregate amount of Excess Proceeds
equals or exceeds $5,000,000 (the "Asset Sale Event"), the
Company will be obligated to make an offer (an "Asset Sale
Offer") to purchase from all holders of the Notes, on a day not
more than 40 business days thereafter, the maximum principal
amount (expressed as a multiple of $1,000) of Notes that may be
purchased with the aggregate Excess Proceeds at a price, payable
in cash, equal to 100% of the principal amount of the Notes plus
accrued interest, if any, to the date of purchase (the "Asset
Sale Offer Price"). An Asset Sale Offer will be required to be
kept open for a period of at least 20 business days. To the
extent that an Asset Sale Offer is not fully subscribed to, the
Company will be entitled to retain the unutilized portion of the
Excess Proceeds and the amount so retained will no longer
constitute Excess Proceeds under this covenant.
Whenever Excess Proceeds received by the Company exceed
$5,000,000, such Excess Proceeds will, prior to the purchase of
Notes, be set aside by the Company in a separate account pending
(i) deposit with the depositary of the amount required to
purchase the Notes tendered in an Asset Sale Offer or (ii)
delivery by the Company of the Asset Sale Offer Price to the
holders of the Notes validly tendered and not withdrawn pursuant
to an Asset Sale Offer. Such Excess Proceeds may be invested in
temporary cash investments, as directed by the Company, having a
maturity date which is not later than the earliest possible date
for purchase or redemption of Notes pursuant to the Asset Sale
Offer. The Company shall be entitled to any interest or dividends
accrued, earned or paid on such temporary cash investments.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act, and any other
securities laws or regulations in connection with the repurchase
of Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with
the "Disposition of Proceeds of Asset Sales" provisions of the
Indenture, the Company will comply with the applicable securities
laws and regulations and shall not be deemed to have breached its
obligations under such provisions of the Indenture by virtue
thereof.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Inden-
ture provides that the Company will not, and will not permit any
of its Subsidiaries directly or indirectly to, enter into any
arrangement with any person (other than the Company or any
wholly-owned Subsidiary of the Company) providing for the leasing
by the Company or any Subsidiary of the Company of any real or
tangible personal property which has been or is to be sold or
transferred by the Company or any Subsidiary of the Company to
such person in contemplation of such leasing (a "Sale and
Leaseback Transaction"). Notwithstanding the foregoing, the
Company and its Subsidiaries may enter into Sale and Leaseback
Transactions with respect to (a) the Distribution Center and the
equipment and fixtures therein to the extent owned on the Issue
Date and (b) property and equipment acquired or constructed after
the Issue Date, provided, however, that (i) except with respect
to the Distribution Center and the equipment and fixtures
therein, such Sale and Leaseback Transaction under this clause
(b) will be deemed to be the incurrence of Indebtedness of the
Company for the purposes of the "Limitation on Indebtedness"
covenant and after giving pro forma effect thereto by treating
all obligations to pay rent or other amounts as capitalized lease
obligations, the Company shall be in compliance with clause (a)
of the "Limitation on Indebtedness" covenant of the Indenture,
(ii) assuming such Sale and Leaseback Transaction had been a
secured financing, the Indebtedness represented by the net
proceeds received by the Company from such Sale and Leaseback
Transaction will not be secured by any property or assets of the
Company or its Subsidiaries other than the property so acquired
and (iii) such property and equipment shall continue to be used
in the ordinary course of business in lines of business related
to the Company's business, as the same may exist on or after the
Issue Date.
LIMITATION ON LIENS. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries to,
create, incur, assume or suffer to exist any Lien of any kind,
other than Permitted Liens, upon any of its property or assets,
whether now owned or acquired after the Issue Date, or any income
or profits therefrom.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The
Indenture provides that neither the Company nor any Guarantor
will directly or indirectly create, incur, assume, guarantee or
in any other manner become liable with respect to any Indebted-
ness (other than the Notes and the Guarantees) that is
subordinate in right of payment to any Indebtedness of the
Company or of such Guarantor, as the case may be, unless such
Indebtedness is subordinate in right of payment to the Notes or
such Guarantee, as the case may be, in the same manner and at
least to the same extent as the Notes are subordinated to Senior
Indebtedness or as such Guarantee is subordinated to Senior
Guarantor Indebtedness, as the case may be.
LIMITATION ON GUARANTEES BY SUBSIDIARIES. The Indenture
provides that the Company will not permit any of its Subsidi-
aries, directly or indirectly, to guarantee the payment of any
Indebtedness of WEI, the Company or any Subsidiary of the Company
unless (i) such Subsidiary (A) is a Guarantor or (B) simultan-
eously executes and delivers a supplemental indenture to the
Indenture pursuant to which it will become a Guarantor under the
Indenture and (ii) such Subsidiary waives and will not in any
manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other
rights against the Company, WEI or any Subsidiary of the Company
as a result of any payment by such Subsidiary under its Guaran-
tee. Notwithstanding the foregoing, any Guarantee by a Subsidi-
ary of the Company shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon
any sale, exchange or transfer, to any person not an Affiliate of
the Company, of all of the Capital Stock of such Subsidiary, or
all or substantially all of the assets of such Subsidiary,
pursuant to a transaction which is in compliance with the
Indenture (including the covenant "Disposition of Proceeds of
Asset Sales" of the Indenture).
RESTRICTIONS ON PREFERRED STOCK OF SUBSIDIARIES. The
Indenture provides that the Company will not permit any of its
Subsidiaries to issue any Preferred Stock (other than to the
Company or to a wholly-owned Subsidiary of the Company) or permit
any person (other than the Company or a wholly-owned Subsidiary
of the Company) to own any Preferred Stock of any Subsidiary of
the Company.
<page-79>
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to
exist, or enter into any agreement with any person that would
cause to become effective, any consensual encumbrance or
restriction of any kind, on the ability of any Subsidiary of the
Company to (a) pay dividends, in cash or otherwise, or make any
other distribution on or in respect of its Capital Stock or any
other interest or participation in, or measured by, its profits,
(b) pay any Indebtedness owed to the Company or any other
Subsidiary of the Company, (c) make loans or advances to the
Company or any other Subsidiary of the Company or (d) transfer
any of its property or assets to the Company or any other
Subsidiary of the Company, except (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into
on the Issue Date other than those required to be discharged
under the Merger Agreement; (ii) any encumbrance or restriction
existing under the Bank Credit Agreement as in effect on the
Issue Date; (iii) any encumbrance or restriction with respect to
a Subsidiary of the Company that is not a Subsidiary of the
Company on the Issue Date, in existence at the time such person
becomes a Subsidiary of the Company (but not created in
contemplation thereof); and (iv) any encumbrance or restriction
existing under any agreement that refinances or replaces the
agreements containing the restrictions in the foregoing clauses
(i) through (iii); provided, however, that the terms and
conditions of any such restrictions permitted under this clause
(iv) are not materially less favorable to the holders of the
Notes than those under or pursuant to the agreement evidencing
the Indebtedness refinanced.
TRANSFER OF ASSETS TO CERTAIN SUBSIDIARIES. The Indenture
provides that (a) the Company will not, and will not permit any
of its wholly-owned Subsidiaries to, sell, convey, transfer,
lease or otherwise dispose of any of its assets or property to
any Subsidiary that is not a wholly-owned U.S. Subsidiary and (b)
the Company will not, and will not permit any of its Subsidiaries
that is a Guarantor to, sell, convey, transfer, lease or other-
wise dispose of any of its assets or property to any Subsidiary
of the Company that is not a U.S. Subsidiary and a Guarantor.
Notwithstanding the foregoing, the Company and its Subsidiaries
may (i) sell inventory in the ordinary course of business (which
shall be as determined in good faith by the Company) and consis-
tent with past practices of the Company and its Subsidiaries (A)
for Fair Market Value and (B) for consideration consisting solely
of cash or cash equivalents and (ii) declare and pay dividends
permitted under the "Limitation on Restricted Payments" covenant
of the Indenture.
REPORTS. So long as any of the Notes are outstanding, the
Company will furnish to the holders of the Notes all quarterly
and annual financial reports that the Company is required to file
with the Commission under the Exchange Act (or similar reports in
the event that the Company is not at the time required to file
such reports with the Commission).
<PAGE>
<page-80>
MERGER, SALE OF ASSETS, ETC.
Neither the Company nor any Guarantor will, in any trans-
action or series of transactions, merge or consolidate with or
into, or sell, assign, transfer, lease or otherwise dispose of
all or substantially all of its properties and assets as an
entirety to, any person or persons, and the Company will not
permit any of its Subsidiaries to enter into any such transaction
or series of transactions if such transaction or series of
transactions, in the aggregate, would result in a sale, assign-
ment, transfer, lease or other disposition of all or substan-
tially all of the properties and assets of the Company and its
Subsidiaries on a consolidated basis to any other person or
persons, unless at the time and after giving effect thereto (i)
either (A) if the transaction or transactions is a merger or
consolidation involving the Company or a Guarantor, the Company
or such Guarantor, as the case may be, will be the surviving
person of such merger or consolidation, or (B) the person formed
by such consolidation or into which the Company or a Guarantor,
as the case may be, is merged or to which the properties and
assets of the Company or a Guarantor, as the case may be, substan-
tially as an entirety, are transferred (any such surviving person
or transferee person being the "Surviving Entity") will be a
corporation organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia
and will expressly assume by a supplemental indenture executed
and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company or such Guarantor, as
the case may be, under the Notes and the Indenture, and in each
case, the Indenture will remain in full force and effect; (ii)
immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of
such transaction or series of transactions), no Default or Event
of Default will have occurred and be continuing and, except if
such transaction or series of transactions involves only the
Company and one or more Guarantors, the Company or the Surviving
Entity, as the case may be, after giving effect to such trans-
action or series of transactions on a pro forma basis, could
incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the first paragraph of the covenants
described in "--Certain Covenants--Limitation on Indebtedness"
described herein (assuming a market rate of interest with respect
to such additional Indebtedness); (iii) immediately after giving
effect to such transaction or series of transactions on a pro
forma basis, the Consolidated Net Worth of the Company, or the
Surviving Entity, as the case may be, is at least equal to the
Consolidated Net Worth of the Company immediately before such
transaction or series of transactions; and (iv) each Guarantor,
unless it is the other party to the transaction or transactions
described above, will have by supplemental indenture confirmed
that its Guarantee will apply to obligations of the Company or
the Surviving Entity, as the case may be, under the Indenture and
the Notes.
In connection with any consolidation, merger, transfer,
lease or other disposition contemplated hereby, the Company and,
in the case of a transaction involving a Guarantor, such
Guarantor, will deliver, or cause to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each
stating that such consolidation, merger, transfer, lease or other
disposition and the supplemental indenture in respect thereto
comply with the requirements under the Indenture.
<page-81>
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company in accordance with
the foregoing, in which the Company or the Guarantor, as the case
may be, is not the continuing corporation, the successor corpo-
ration formed by such a consolidation or into which the Company
or such Guarantor is merged or to which such transfer is made,
will succeed to, and be substituted for, and may exercise every
right and power of, the Company or such Guarantor under the
Indenture with the same effect as if such successor corporation
had been named as the Company or Guarantor therein.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of the principal of or
premium, if any, when due and payable, on any of the Notes (at
its Stated Maturity, upon optional redemption, required purchase,
sinking fund, scheduled principal payment or otherwise); or
(ii) default in the payment of an installment of
interest on any of the Notes, when due and payable, for 30 days;
or
(iii) the Company or any Guarantor fails to comply
with any of its obligations described under "Consolidation,
Merger, Conveyance, Transfer or Lease" or "--Change of Control";
or
(iv) the Company or any Guarantor fails to perform
or observe any other term, covenant or agreement contained in the
Notes, the Guarantees or the Indenture (other than a default
specified in (i), (ii) or (iii) above) for a period of 30 days
after written notice of such failure requiring the Company to
remedy the same shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by the holders of
25% in aggregate principal amount of the Notes then outstanding;
or
(v) default or defaults under one or more
agreements, indentures or instruments under which the Company or
any Subsidiary of the Company or any Guarantor then has outstand-
ing Indebtedness in excess of $5,000,000 in the aggregate and
either (a) such Indebtedness is already due and payable in full
or (b) such default or defaults result in the acceleration of the
maturity of such Indebtedness; or
(vi) any Guarantee ceases to be in full force and
effect or is declared null and void or any Guarantor denies that
it has any further liability under any Guarantee, or gives notice
to such effect (other than by reason of the termination of the
Indenture or the release of any such Guarantee in accordance with
"--Certain Covenants--Limitation on Guarantees by Subsidiaries")
and such condition will have continued for a period of 30 days
after written notice of such failure requiring the Guarantor and
the Company to remedy the same shall have been given (x) to the
Company by the Trustee or (y) to the Company and the Trustee by
the holders of 25% in aggregate principal amount of the Notes
then outstanding; or
<page-82>
(vii) one or more judgments, orders or decrees of
any court or regulatory or administrative agency for the payment
of money in excess of $5,000,000 either individually or in the
aggregate, shall have been entered against the Company or any
Subsidiary of the Company or any Guarantor or any of their
respective properties and shall not be discharged and there
shall have been a period of 60 consecutive days during which a
stay of enforcement of such judgment, order or decree, by reason
of a pending appeal or otherwise, will not be in effect; or
(viii) certain events of bankruptcy, insolvency or
reorganization with respect to WEI, the Company or any Subsidiary
of the Company that is a "significant subsidiary" as defined in
Rule 1-02 of Regulation S-X under the Securities Act and the
Exchange Act (as such regulation is in effect on the date hereof)
shall have occurred; or
(ix) either (i) the agent under the Bank Credit
Agreement or (ii) if the Bank Credit Agreement shall no longer be
in full force and effect, any holder of at least $5,000,000 in
aggregate principal amount of Indebtedness of the Company or any
of its Subsidiaries shall commence judicial proceedings to fore-
close upon assets of the Company or any of its Subsidiaries
having an aggregate Fair Market Value, individually or in the
aggregate, in excess of $5,000,000 or shall have exercised any
right under applicable law or applicable security documents to
take ownership of any such assets in lieu of foreclosure.
If an Event of Default (other than as specified in clause
(viii)) shall occur and be continuing, the Trustee, by notice to
the Company, or the holders of at least 25% in aggregate
principal amount of the Notes then outstanding, by notice to the
Trustee and the Company, and the Trustee upon the request of the
holders of at least 25% in the aggregate principal amount of the
Notes then outstanding shall declare the principal of, premium,
if any, and accrued interest on all of the outstanding Notes due
and payable immediately, upon which declaration, all amounts
payable in respect of the Notes shall be immediately due and
payable; provided, however, that so long as the Bank Credit
Agreement shall be in full force and effect, if an Event of
Default shall have occurred and be continuing (other than an
Event of Default under clause (viii)), any such acceleration
shall not be effective until the earlier to occur of (x) five
business days following delivery of a notice of such acceleration
to the agent under the Bank Credit Agreement and (y) the acceler-
ation of any Indebtedness under the Bank Credit Agreement. If an
Event of Default specified in clause (viii) above occurs and is
continuing, then the principal of, premium, if any, and accrued
interest on all of the outstanding Notes shall ipso facto become
and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of Notes.
Notwithstanding the preceding paragraph, in the event of a
declaration of acceleration in respect of the Notes because an
Event of Default specified in clause (v) shall have occurred and
be continuing, such declaration of acceleration shall be automa-
tically annulled if the Indebtedness that is the subject of such
Event of Default has been discharged or paid or the requisite
holders thereof have rescinded their declaration of acceleration
in respect of such Indebtedness, and written notice of such
discharge or rescission, as the case may be, shall have been
given to the Trustee by the Company or by the requisite holders
of such Indebtedness or a trustee, fiduciary or agent for such
holders, within 60 days after such declaration of acceleration in
respect of the Notes and no other Event of Default has occurred
which has not been cured or waived during such 60-day period.
<PAGE>
<page-83>
After a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been
obtained by the Trustee, the holders of a majority in aggregate
principal amount of the outstanding Notes, by written notice to
the Company and the Trustee, may rescind such declaration if (a)
the Company has paid or deposited with the Trustee a sum suffi-
cient to pay (i) all sums paid or advanced by the Trustee under
the Indenture and the reasonable compensation, expenses, disburse-
ments and advances of the Trustee, its agents and counsel, (ii)
all overdue interest on all Notes, (iii) the principal of and
premium, if any, on any Notes which have become due otherwise
than by such declaration of acceleration and interest thereon at
the rate borne by the Notes, and (iv) to the extent that payment
of such interest is lawful, interest upon overdue interest at the
rate borne by the Notes; and (b) all Events of Default, other
than the nonpayment of principal of, premium, if any, and
interest on the Notes that has become due solely by such
declaration of acceleration, have been cured or waived.
The holders of not less than a majority in aggregate
principal amount of the outstanding Notes may on behalf of the
holders of all the Notes waive any past defaults under the
Indenture, except a default in the payment of the principal of,
premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each
Note outstanding.
No holder of any of the Notes has any right to institute any
proceeding with respect to the Indenture or any remedy there-
under, unless the holders of at least 25% in aggregate principal
amount of the outstanding Notes have made written request, and
offered reasonable indemnity, to the Trustee to institute such
proceeding as Trustee under the Notes and the Indenture, the
Trustee has failed to institute such proceeding within 15 days
after receipt of such notice and the Trustee, within such 15-day
period, has not received directions inconsistent with such
written request by holders of a majority in aggregate principal
amount of the outstanding Notes. Such limitations do not apply,
however, to a suit instituted by a holder of a Note for the
enforcement of the payment of the principal of, premium, if any,
or interest on such Note on or after the respective due dates
expressed in such Note.
During the existence of an Event of Default, the Trustee is
required to exercise such rights and powers vested in it under
the Indenture and use the same degree of care and skill in its
exercise thereof as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties
of the Trustee, in case an Event of Default shall occur and be
continuing, the Trustee under the Indenture is not under any
obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders
unless such holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning
the rights of the Trustee, the holders of a majority in aggregate
principal amount of the outstanding Notes have the right to
direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust
or power conferred on the Trustee under the Indenture.
<page-84>
The Company is required to furnish to the Trustee annual and
quarterly statements as to the performance by the Company and the
Guarantors of their respective obligations under the Indenture
and as to any default in such performance. The Company is also
required to notify the Trustee within five business days of any
event which is, or after notice or lapse of time or both would
become, an Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate
the obligations of the Company and the Guarantors with respect to
the outstanding Notes ("defeasance"). Such defeasance means that
the Company shall be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding Notes, except
for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (ii) the
Company's obligations to issue temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed,
lost or stolen Notes and maintain an office or agency for
payments in respect of the Notes, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the
defeasance provisions of the Indenture. In addition, the Company
may, at its option and at any time, elect to terminate the
obligations of the Company and any Guarantor with respect to
certain covenants that are set forth in the Indenture, some of
which are described under "--Certain Covenants," and any omission
to comply with such obligations shall not constitute a Default or
an Event of Default with respect to the Notes ("covenant
defeasance").
In order to exercise either defeasance or covenant defeas-
ance, (i) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the holders of the Notes, cash in
United States dollars, U.S. Government Obligations (as defined in
the Indenture), or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding Notes to redemption or
maturity; (ii) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that the holders of the outstand-
ing Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such defeasance or covenant defeasance had not
occurred (in the case of defeasance, such opinion must refer to
and be based upon a ruling of the Internal Revenue Service or a
change in applicable federal income tax laws); (iii) no Default
or Event of Default shall have occurred and be continuing on the
date of such deposit; (iv) such defeasance or covenant defeasance
shall not cause the Trustee to have a conflicting interest with
respect to any securities of the Company or any Guarantor; (v)
such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any
material agreement or instrument to which the Company or any
Guarantor is a party or by which it is bound; (vi) the Company
shall have delivered to the Trustee an opinion of counsel to the
effect that (A) the trust funds will not be subject to any rights
of holders of Senior Indebtedness, including, without limitation,
those arising under the Indenture and (B) after the 91st day
following the deposit, the trust funds
<page-85>
will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors'
rights generally; and (vii) the Company shall have delivered to
the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent under the Indenture to
either defeasance or covenant defeasance, as the case may be,
have been complied with and if any other Indebtedness of the
Company or any Guarantor is then outstanding or committed, such
defeasance or covenant defeasance will not violate the provisions
of the agreements or instruments evidencing such Indebtedness;
(viii) neither the Company nor any Subsidiary of the Company is
an "insolvent person" within the meaning of any applicable
Bankruptcy Law on the date of deposit or at any time during the
period ending on the 91st day after the date of deposit; (ix) the
Company shall have delivered to the Trustee an Officer's
Certificate stating that the deposit made by the Company pursuant
to the defeasance or covenant defeasance was not made by the
Company with the intent of preferring the holders of the Notes or
any Guarantor over the other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding creditors
of the Company or others and (x) if the Bank Credit Agreement is
in effect, the Company shall have delivered to the Trustee a
certificate from the representative under the Bank Credit
Agreement that defeasance or covenant defeasance does not
constitute a violation of the Bank Credit Agreement.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of
further effect (except as to surviving rights or registration of
transfer or exchange of the Notes, as expressly provided for in
the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid
and Notes for whose payment money has theretofore been deposited
in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust)
have been delivered to the Trustee for cancellation or (b) all
Notes not theretofore delivered to the Trustee for cancellation
have become due and payable and the Company or any Guarantor has
irrevocably deposited or caused to be deposited with the Trustee
funds in an amount sufficient to pay and discharge the entire
Indebtedness on the Notes not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, and
interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee
to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (ii) the Company or any Guarantor
has paid all other sums payable under the Indenture by the
Company and the Guarantors; and (iii) the Company and each of the
Guarantors have delivered to the Trustee irrevocable instructions
to apply the deposited money toward payment of the Notes at the
Stated Maturities and the Redemption Dates thereof and an
officers' certificate and an opinion of counsel each stating that
all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied
with.
<page-86>
AMENDMENTS AND WAIVERS
From time to time, the Company and the Guarantors, when
authorized by resolutions of their boards of directors and each
Guarantor, and the Trustee may, without the consent of the
holders of any outstanding Notes, amend, waive or supplement the
Indenture or the Notes for certain specified purposes, including,
among other things, curing ambiguities, defects or
inconsistencies, qualifying, or maintaining the qualification of,
the Indenture under the Trust Indenture Act of 1939, or making
any change that does not adversely affect the rights of any
holder; provided, however, that the Company has delivered to the
Trustee an Opinion of Counsel stating that such change does not
adversely affect the rights of any holder. Other amendments and
modifications of the Indenture or the Notes may be made by the
Company, the Guarantors and the Trustee with the written consent
of the holders of not less than a majority of the aggregate
principal amount of the outstanding Notes; provided, however,
that no such modification or amendment may, without the consent
of the holder of each outstanding Note affected thereby, (i)
reduce the principal amount of, extend the fixed maturity of or
alter the redemption provisions of, the Notes, (ii) change the
currency in which any Notes or any premium or the interest
thereon is payable, (iii) reduce the percentage in principal
amount of outstanding Notes that must consent to an amendment,
supplement or waiver or consent to take any action under the
Indenture or the Notes, (iv) impair the right to institute suit
for the enforcement of any payment on or with respect to the
Notes, (v) waive a default in payment with respect to the Notes
in accordance with the Indenture, (vi) following (a)(x) the
failure to mail or the mailing of the notice required for a
Change of Control Offer and (y) satisfaction of the condition
precedent to the mailing of such notice prior to the date
specified for the mailing of such notice or (b) the occurrence of
an Asset Sale, alter the Company's obligation to purchase the
Notes pursuant to a Change of Control Offer or Asset Sale Offer
in accordance with the Indenture or waive any default in the
performance thereof, (vii) reduce or change the rate or time for
payment of interest on the Notes, (viii) affect the ranking of
the Notes, (ix) release any Guarantor from any of its obligations
under its Guarantee or the Indenture, (x) modify any of the
provisions in the Indenture relating to Amendments and Waiver,
Waiver of Past Defaults, Unconditional Rights of Holders to
Institute Certain Suits and Compliance Certificates and Opinions,
except to increase any such percentage or to provide that certain
other provisions of the Indenture cannot be modified or waived
without the consent of the holder of each Note affected thereby;
or (xi) consent to the assignment or transfer by the Company or
any Guarantor of any of their rights and obligations under the
Indenture, the Notes or the Guarantees.
GOVERNING LAW
The Indenture and the Notes and the Guarantees are governed
by the laws of the State of New York, without regard to the
principles of conflicts of law.
<PAGE>
<page-87>
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person (i)
assumed in connection with an Asset Acquisition from such person
or (ii) existing at the time such person becomes a Subsidiary of
any other person (other than any Indebtedness incurred in connec-
tion with, or in contemplation of, such Asset Acquisition or such
person becoming such a Subsidiary).
"Adjusted Cash Flow Coverage Ratio" means, with respect to
any person, the ratio of the aggregate amount of Consolidated
Cash Flow Available for Fixed Charges of such person for the four
full fiscal quarters immediately preceding the date of the
transaction (the "Transaction Date") giving rise to the need to
calculate the Adjusted Cash Flow Coverage Ratio (such four full
fiscal quarter period being referred to herein as the "Four
Quarter Period") to the aggregate amount of Consolidated Fixed
Charges of such person for the Four Quarter Period. In addition
to and without limitation of the foregoing, for purposes of this
definition, "Consolidated Cash Flow Available for Fixed Charges"
and "Consolidated Fixed Charges" will be calculated after giving
effect on a pro forma basis for the period of such calculation to
(i) the incurrence of any Indebtedness of such person or any of
its Subsidiaries giving rise to the need to make such calculation
and any incurrence of other Indebtedness at any time subsequent
to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence occurred on the first day
of the Four Quarter Period and (ii) any Asset Sales or Asset
Acquisitions (including, without limitation, any Asset Acquisi-
tion giving rise to the need to make such calculation as a result
of such person or one of its Subsidiaries (including any person
who becomes a Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired
Indebtedness) occurring during the Four Quarter Period or at any
time subsequent to the last day of the Four Quarter Period and on
or prior to the Transaction Date, as if such Asset Sale or Asset
Acquisition occurred on the first day of the Four Quarter Period.
If such person or any of its Subsidiaries directly or indirectly
guarantees Indebtedness of a third person, the preceding sentence
will give effect to the incurrence of such guaranteed Indebted-
ness as if such person or any subsidiary of such person had
directly incurred or otherwise assumed such guaranteed Indebted-
ness. Furthermore, in calculating "Consolidated Fixed Charges"
for purposes of determining the denominator (but not the
numerator) of this "Adjusted Cash Flow Coverage Ratio," (1)
interest on Indebtedness determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined
thereafter will be deemed to accrue at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on
the Transaction Date; (2) if interest on any Indebtedness
actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the Transaction Date
will be deemed to have been in effect during the Four Quarter
Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent
such interest is covered by agreements relating to Interest Rate
Protection Obligations, will be deemed to accrue at the rate per
annum resulting after giving effect to the operation of such
agreements.
<page-88>
"Adjusted Consolidated Net Income" means, with respect to
the Company for any period, (i) the Consolidated Net Income of
the Company for such period, plus (ii) the amount of any
Consolidated Non-cash Charges of the Company, attributable to the
purchase method of accounting treatment in accordance with
Accounting Principles Board Opinion No. 16 dated August 1970,
entitled "Business Combinations," and on a basis consistent with
the Company's audited financial statements for the fiscal year
ended January 31, 1992, plus (iii) the amount of any FAS 13 Rent
Expense reducing Consolidated Net Income of the Company for such
period, plus (iv) the amount of any Special Charge reducing
Consolidated Net Income of the Company for such period, less (v)
the proceeds of any key man life insurance referred to in, and
applied as contemplated by, the proviso of clause (v) of the next
to last paragraph of the covenant "Limitation on Restricted
Payments" to the extent included in Consolidated Net Income.
"Affiliate" means, with respect to any specified person, (i)
any other person directly or indirectly controlling or controlled
by or under direct or indirect common control with such specified
person or (ii) any other person that owns, directly or indirect-
ly, 5% or more of any class or series of such person's, or the
parent of such person's, Capital Stock or any officer, director
or Affiliate of any such other person or with respect to any
natural other person, any person having a relationship with such
other person by blood, marriage or adoption not more remote than
first cousin. For the purposes of this definition, "control"
when used with respect to any specified person means the power to
direct the management and policies of such person, directly or
indirectly, whether through the ownership of Voting Stock, by
contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (i) an Investment by the Company
or any Subsidiary of the Company in any other person pursuant to
which such person will become a Subsidiary of the Company or any
Subsidiary of the Company or will be merged with the Company or
any Subsidiary of the Company or (ii) the acquisition by the
Company or any Subsidiary of the Company of the assets of any
person which constitute substantially all of the assets of such
person, or any division, or line of business of such person.
"Asset Sale" means any direct or indirect sale, issuance,
conveyance, transfer, lease or other disposition to any person
other than the Company or a wholly-owned Subsidiary of the
Company, in one transaction or a series of related transactions,
of (i) any Capital Stock of any Subsidiary of the Company; (ii)
all or substantially all of the properties and assets of any
division or line of business of the Company or any Subsidiary of
the Company; or (iii) any other properties or assets of the
Company or any Subsidiary of the Company other than in the
ordinary course of business. For the purposes of this
definition, the term "Asset Sale" will not include (i) any sale,
issuance, conveyance, transfer, lease or other disposition of
properties or assets that is governed by the provisions described
under "-- Merger, Sale of Assets, etc.," (ii) any sale, transfer,
lease or other disposition of the Company's distribution center
no. 2, located in Gardena, California and an identified store in
each of San Mateo, California and Tucson, Arizona, (iii) any
sale, transfer, lease or other disposition of any interest in any
store operated by the Company or any of its Subsidiaries which
has not had positive contribution to the Company's Consolidated
Net Income, determined on a stand alone basis, for two of the
three fiscal years of the Company immediately preceding such
transaction, provided, however, all such sales, transfers, leases
and dispositions referred to in this clause (iii) do not exceed
$5,000,000 in the aggregate after the Issue Date, or (iv) any
Sale and Leaseback Transaction entered into in compliance with
the covenant "Limitation on Sale and Leaseback Transactions."
<page-89>
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient
obtained by dividing (i) the sum of the products of (a) the
number of years from such date to the date or dates of each
successive scheduled principal payment (including, without
limitation, any sinking fund requirements) of such Indebtedness
multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Bank Credit Agreement" means the Credit Agreement dated as
of June 11, 1992 by and among the Company, WEI, Bankers Trust
Company, as agent and as lender, and Heller Financial, Inc., as
co-agent and as lender, and the other lender parties thereto as
in effect on the date hereof, and as such agreement may be
amended, renewed, extended, substituted, refinanced, replaced,
supplemented or otherwise modified from time to time, and
includes any agreement (i) extending the maturity of all or any
portion of the Indebtedness thereunder, (ii) adding additional
borrowers or guarantors thereunder and (iii) increasing the
amount to be borrowed thereunder; provided, however, that in the
case of clauses (i), (ii) and (iii), any such agreement is not
prohibited under the Indenture.
"Capital Stock" means, with respect to any person, any and
all shares, interests, participations, rights in or other
equivalents (however designated) of such person's capital stock,
and any rights (other than debt securities convertible into
capital stock), warrants or options exchangeable for or converti-
ble into such capital stock.
"Consolidated Cash Flow Available for Fixed Charges" means,
with respect to any person for any period, the sum of, without
duplication, the amounts for such period, taken as a single
accounting period, of (i) Adjusted Consolidated Net Income, (ii)
Consolidated Non-cash Charges, (iii) Consolidated Interest
Expense and (iv) Consolidated Income Tax Expense; provided,
however, that if, during such period, such person or any of its
Subsidiaries will have made any Asset Sales or Asset Acquisi-
tions, Consolidated Cash Flow Available for Fixed Charges for
such person and its Subsidiaries for such period will be reduced
(in the case of an Asset Sale) or increased (in the case of an
Asset Acquisition) by an amount equal to the Consolidated Cash
Flow Available for Fixed Charges directly attributable to the
assets which are the subject of such Asset Sales or Asset
Acquisitions during such period.
"Consolidated Fixed Charges" means, with respect to any
person for any period, the sum of, without duplication, the
amounts for such period of (i) Consolidated Interest Expense; and
(ii) the aggregate amount of dividends and other distributions
paid or accrued during such period in respect of Preferred Stock
of such person and its subsidiaries on a consolidated basis;
provided, however, that if, during such period, such person or
any of its Subsidiaries will have made any Asset Sales or Asset
Acquisitions, Consolidated Fixed Charges for such person and its
Subsidiaries for such period will be reduced (in the case of an
Asset Sale) or increased (in the case of an Asset Acquisition) by
an amount equal to the Consolidated Fixed Charges directly
attributable to the assets which are the subject of such Asset
Sales or Asset Acquisitions during such period.
<page-90>
"Consolidated Income Tax Expense" means, with respect to any
person for any period, the provision for federal, state, local
and foreign income taxes of such person and its Subsidiaries for
such period as determined on a consolidated basis in accordance
with GAAP consistently applied.
"Consolidated Interest Expense" means, with respect to any
person for any period, without duplication, the sum of (a) the
interest expense of such person and its Subsidiaries for such
period as determined on a consolidated basis in accordance with
GAAP consistently applied, including, without limitation, (i) any
amortization of debt discount, (ii) the net cost under Interest
Rate Protection Obligations (including any amortization of
discounts), (iii) the interest portion of any deferred payment
obligation and (iv) all accrued interest, but excluding, in any
event deferred financing costs, and (b) one-third of the aggre-
gate amount of the capitalized lease obligations paid, accrued
and/or scheduled to be paid or accrued by such person and its
Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any person
for any period, the consolidated net income (or loss) of such
person and its Subsidiaries for such period as determined in
accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication,
(i) all extraordinary gains or losses (net of fees and expenses
relating to the transaction giving rise thereto), (ii) the
portion of net income (or loss) of such person and its Subsidi-
aries allocable to minority interests in unconsolidated persons
to the extent that cash dividends or distributions have not
actually been received by such person or one of its Subsidiaries,
(iii) net income (or loss) of any person combined with such
person or one of its Subsidiaries in a "pooling of interests"
basis attributable to any period prior to the date of combina-
tion, (iv) any gain or loss, net of taxes, realized upon the
termination of any employee pension benefit plan, (v) gains or
losses in respect of any Asset Sales by such person or one of its
Subsidiaries (net of fees and expenses relating to the transac-
tion giving rise thereto), and (vi) the net income of any
Subsidiary of such person to the extent that the declaration of
dividends or similar distributions by that Subsidiary of that
income is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instru-
ment, judgment, decree, order, statute, rule or governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any person
at any date, the consolidated stockholders' equity of such person
less the amount of such stockholders' equity attributable to
Redeemable Capital Stock of such person and its Subsidiaries, as
determined in accordance with GAAP consistently applied.
"Consolidated Non-cash Charges" means, with respect to any
person for any period, the aggregate depreciation and amortiza-
tion (including, without limitation, the amortization of such
person's rental library) and other non-cash expenses of such
person and its Subsidiaries (other than Special Charges) reducing
net income for such period, determined on a consolidated basis in
accordance with GAAP consistently applied.
<page-91>
"Default" means any event that is, or after notice or
passage of time or both would be, an Event of Default.
"Employee Stock Loan Interest Bonus" means the annual or
other bonuses to be paid to employees of the Company in an
aggregate amount equal, on an after-tax basis, to the interest
payments owed by such employees to WEI pursuant to notes issued
by such employees pursuant to the 1988 and 1990 Employee Stock
Purchase and Option Plans or any other notes (including the
Management Notes) made by employees of the Company or any of its
Subsidiaries under any other stock or compensation plan or in
connection with the Merger, in each case to the extent such
amounts are subsequently received by WEI as interest payments on
such Notes and then contributed to the Company as capital
contributions.
"Fair Market Value" means, with respect to any asset, the
price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a willing
buyer, neither of which is under pressure or compulsion to
complete the transaction. Fair Market Value will be determined
by the Board of Directors of the Company acting in good faith and
will be evidenced by a Board Resolution thereof delivered to the
Trustee.
"FAS 13 Rent Expense" means the non-cash rent expense of the
Company and its Subsidiaries required to be recorded on the
consolidated income statement of the Company in accordance with
Statement of Financial Accounting Standards No. 13--Accounting
for Leases, as the same may be in effect from time to time.
<page-91>
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the
accounting profession of the United States, which are applicable
as of the date of determination.
"Guarantee" means the guarantee by WEI and any additional
guarantees created pursuant to the provisions of the Indenture of
the Company's Indenture obligations pursuant to the guarantee
included in the Indenture.
"Guarantor" means each issuer of a Guarantee.
"Indebtedness" means, with respect to any person, without
duplication, (i) all indebtedness of such person for borrowed
money or for the deferred purchase price of property or services,
excluding any trade payables and other accrued current liabili-
ties incurred in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of
such person in connection with any letters of credit, bankers
acceptance or other similar credit transaction and in connection
with any agreement to purchase, redeem, exchange, convert or
<page-92>
otherwise acquire for value any Capital Stock of such person, or
any warrants, rights or options to acquire such Capital Stock,
now or hereafter outstanding, (ii) all obligations of such person
evidenced by bonds, notes, debentures or other similar instru-
ments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect
to property acquired by such person (even if the rights and
remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such
property), but excluding trade accounts payable arising in the
ordinary course of business, (iv) every obligation of such person
issued or contracted for as payment in consideration of the
purchase by such person or an Affiliate of such person of Capital
Stock or all or substantially all of the assets of another person
or a merger or consolidation to which such person or an Affiliate
of such person was a party, (v) all capitalized lease obligations
of such person, (vi) all Indebtedness referred to in the
preceding clauses of other persons and all dividends of other
persons, the payment of which is secured by (or for which the
holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon property (including,
without limitation, accounts and contract rights) owned by such
person, even though such person has not assumed or become liable
for the payment of such Indebtedness (the amount of such obliga-
tion being deemed to be the lesser of the value of such property
or asset or the amount of the obligation so secured), (vii) all
guarantees of Indebtedness by such person, (viii) all Redeemable
Capital Stock valued at the greater of its voluntary or involun-
tary maximum fixed repurchase price plus accrued dividends, (ix)
all obligations under or in respect of currency exchange
contracts and Interest Rate Protection Obligations of such person
and (x) any amendment, supplement, modification, deferral,
renewal, extension or refunding of any liability of the types
referred to in clauses (i) through (ix) above. For purposes
hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price will
be calculated in accordance with the terms of such Redeemable
Capital Stock as if such Redeemable Capital Stock were purchased
on any date on which Indebtedness will be required to be deter-
mined pursuant to the Indenture, and if such price is based upon,
or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value to be determined in good faith by
the board of directors of the issuer of such Redeemable Capital
Stock.
"Independent Financial Advisor" means a reputable account-
ing, appraisal or investment banking firm (i) which does not
have, and whose directors, officers or employees do not have, a
direct or indirect financial interest in the Company and (ii)
which, in the reasonable judgment of the board of directors of
the Company, is qualified to perform the task for which such firm
has been engaged hereunder and disinterested and independent with
respect to the Company and its officers, directors and
Affiliates.
"Interest Rate Protection Obligations" means the obligations
of any person pursuant to any arrangement with any other person
whereby, directly or indirectly, such person is entitled to
receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a
stated notional amount in exchange for periodic payments made by
such person calculated by applying a fixed or a floating rate of
interest on the same notional amount and will include without
limitation, interest rate swaps, caps, floors, collars and
similar agreements.
"Investment" means, with respect to any person, any direct
or indirect advance, loan or other extension of credit or capital
contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for
the account or use of others or otherwise), or any purchase or
acquisition by such person of any Capital Stock, bonds, notes,
debentures or other securities, evidences of Indebtedness or
assets issued or owned by, any other person. Investments will
exclude extensions of trade credit on commercially reasonable
terms in accordance with normal trade practices.
"Lien" means any mortgage, charge, pledge, lien (statutory
or other), privilege, security interest, hypothecation, cessation
and transfer, lease of real property, assignment for security,
claim, deposit arrangement, or preference or priority or other
encumbrance upon or with respect to any property of any kind,
whether real, personal or mixed, movable or immovable, now owned
or hereafter acquired. A person will be deemed to own subject to
a Lien any property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agree-
ment, capital lease or other title retention agreement.
"Net Cash Proceeds" means, with respect to any Asset Sale,
the proceeds thereof in the form of cash or cash equivalents
including payments in respect of deferred payment obligations
when received in the form of cash or cash equivalents (except to
the extent that such obligations are financed or sold with
recourse to the Company or any Subsidiary of the Company) net of
(i) brokerage commissions and other reasonable fees and expenses
(including fees and expenses of legal counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all
taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any person (other than the Company or any
Subsidiary of the Company) owning a beneficial interest in the
assets subject to the Asset Sale and (iv) appropriate amounts to
be provided by the Company or any Subsidiary of the Company, as
the case may be, as a reserve required in accordance with GAAP
consistently applied against any liabilities associated with such
Asset Sale and retained by the Company or any Subsidiary of the
Company, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an officers' certificate
delivered to the Trustee.
"Permitted Investment" means (i) Investments in any of the
Notes; (ii) temporary cash investments; (iii) Investments
received in connection with the bankruptcy or reorganization of
suppliers and in settlement of delinquent obligations of, and
other disputes with, customers and suppliers, in each case
arising in the ordinary course of business; and (iv) Investments
by the Company or any Subsidiary of the Company in another
person, if as a result of such Investment (A) such other person
becomes a wholly-owned Subsidiary of the Company or (B) such
other person is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, the Company
or a wholly-owned Subsidiary of the Company.
<page-94>
"Permitted Liens" means:
(i) any Lien existing as of the Issue Date (other
than any Lien required to be discharged under the Merger
Agreement);
(ii) (A) any Lien securing any Senior Indebtedness
of the Company or any Guarantor Senior Indebtedness incurred
under the Bank Credit Agreement and (B) any Lien securing any
Senior Indebtedness of the Company in respect of the Letter of
Credit (other than pledges of any evidence of Indebtedness
described in clause (vi) of the definition of "Permitted
Indebtedness" unless such evidence of Indebtedness is also
pledged to secure the Company's and WEI's Indenture obligations
on a subordinated basis);
(iii) any Lien securing purchase money obligations,
capitalized lease obligations or other Indebtedness permitted
under the covenant of the Indenture described under "--Certain
Covenants--Limitation on Indebtedness"; provided, however, that
(a) such Indebtedness will not be secured by any property or
assets of the Company or any Subsidiary other than the property
and assets so acquired and (b) the Lien securing such Indebted-
ness will be created within 90 days of such acquisition;
(iv) any Lien with respect to any Acquired Indebt-
edness; provided, however, that any such Lien only extends to the
assets that were subject to such Lien prior to the related
acquisition by the Company or one of its Subsidiaries;
(v) Liens securing Indebtedness which is incurred
to refinance Indebtedness which (a) has been secured by a Lien
permitted under the Indenture and (b) is permitted to be
refinanced under the Indenture; provided, however, that such
Liens do not extend to or cover any property or assets of the
Company or any of its Subsidiaries not securing the Indebtedness
so refinanced; and
(vi) any Lien arising by reason of (a)(i) any
judgment, decree or order of any court, securing the payment of
money not in excess of $5,000,000, either individually or in the
aggregate, or (ii) any other judgment, decree or order of any
court securing the payment of money in excess of $5,000,000 so
long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of
such judgment, decree or order will not have been finally
terminated or the period within which such proceedings may be
initiated will not have expired; (b) taxes not yet delinquent or
which are being contested in good faith; (c) security for payment
of workmen's compensation or other insurance or other types of
social security; (d) good faith deposits in connection with
tenders, contracts (other than contracts for the payment of
money) or leases; (e) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds; (f) certain
surveys, exceptions, title defects, encumbrances, easements,
reservations of, or rights of others for, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar
purposes or zoning or other restrictions as to the use of real
property not interfering with the ordinary conduct of the
business of the Company or any of its Subsidiaries; or (g)
operation of law in favor of carriers, warehousemen, mechanics,
materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business for sums which are not yet delinquent
or are being contested in good faith by negotiations or by
appropriate proceedings which suspend the collection thereof.
<page-95>
"Preferred Stock" means, with respect to any person, any and
all shares, interests, participations or other equivalents
(however designated) of such person's preferred or preference
stock whether now outstanding, or issued after the date of the
Indenture, and including, without limitation, all classes and
series of preferred or preference stock.
"Redeemable Capital Stock" means any class or series of
Capital Stock that, either by its terms, by the terms of any
security into which it is convertible or exchangeable, or by
contract or otherwise, is or upon the happening of an event or
passage of time would be, required to be redeemed prior to the
final stated maturity of the Notes or is redeemable at the option
of the holder thereof at any time prior to such maturity, or is
convertible into or exchangeable for debt securities at any time
prior to such maturity.
"Special Charges" means, with respect to the Company and its
Subsidiaries, (i) severance and recruiting expenses associated
with the hiring of new senior management of the Company to the
extent incurred prior to the Issue Date, (ii) any management or
other fees paid to any of the former stockholders of WEI or any
of their affiliates to the extent paid prior to the Issue Date,
(iii) certain legal expenses which, if incurred prior to the
Issue Date, are of the type that would have been funded or which,
if incurred after the Issue Date, are funded in a manner that
would have reduced or reduces the Deferred Purchase Price, (iv)
any Employee Stock Loan Interest Bonus and (v) cash or non-cash
charges, if any, arising as a result of a grant, exercise or
repurchase of any options issued under the Management Stock
Option Plan or otherwise arising from the issuance or repurchase
of shares of WEI Common Stock or options to or from the Manage-
ment Investors, in each case to the extent reducing Consolidated
Net Income of the Company and its Subsidiaries, including,
without limitation, amortization of compensation expense
associated with the foregoing.
"Stated Maturity" means, with respect to any Note or any
installment of interest thereon, the dates specified in such Note
as the fixed date on which the principal of such Note or such
installment of interest is due and payable, and when used with
respect to any other Indebtedness, means the date specified in
the instrument governing such Indebtedness as the fixed date on
which the principal of such Indebtedness or any installment of
interest is due and payable.
"Subordinated Obligations" means any principal of, premium,
if any, and interest on the Notes payable pursuant to the terms
of the Notes or the Indenture or upon acceleration, including
amounts received upon the exercise of rights of rescission or
other rights of action (including claims for damages) or other-
wise, to the extent relating to the purchase price of the Notes
or amounts corresponding to such principal, premium, if any, or
interest on the Notes.
"Subsidiary" means, with respect to any person, any other
person of which a majority of the equity ownership or the Voting
Stock is, at the time, owned, directly or indirectly, by such
person.
<page-96>
"U.S. Subsidiary" means a Subsidiary of the Company that is
organized under the laws of the United States of America, any
State thereof or the District of Columbia.
"Voting Stock" means any class or classes of Capital Stock
pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority
of the board of directors, managers or trustees of any persons
(irrespective of whether or not, at the time, stock of any other
class or classes will have, or might have, voting power by reason
of the happening of any contingency).
<PAGE>
<page-97>
DESCRIPTION OF THE SENIOR BANK FINANCING
The following description of the Bank Credit Agreement does
not purport to be complete and is subject to, and qualified in
its entirety by reference to, all of the provisions of the Bank
Credit Agreement, and the amendments thereto, a copy of each of
which is attached as an exhibit to the Registration Statement.
See "Available Information."
Bankers Trust Company, as agent, and Heller Financial, Inc.,
as co-agent (collectively, the "Banks"), provided senior bank
financing in connection with the Acquisition in the maximum
aggregate principal amount of up to $110 million pursuant to the
Bank Credit Agreement.
Under the Bank Credit Agreement, the Banks provided senior
bank financing of up to $110 million pursuant to two facilities.
These facilities, which are described below, are hereinafter
referred to as the "Senior Bank Facilities." Borrowings under
the Senior Bank Facilities are hereinafter referred to as
"Loans."
The following is a description of the principal terms and
conditions of the Bank Credit Agreement:
THE SENIOR BANK FACILITIES
Under the Bank Credit Agreement, the Banks provided a term
loan facility (the "Term Facility") in an aggregate amount of $65
million and with a final maturity of January 31, 1998, to be used
to finance the Acquisition, including the Deferred Purchase
Price. The Term Facility will be repaid in quarterly install-
ments and in the following aggregate annual amounts (an aggregate
of $3 million was already repaid on February 1, 1993 for fiscal
year 1993 and an aggregate of $6.0 million was already repaid
during fiscal year 1994, and an aggregate of $0.7 million was
already repaid during fiscal year 1995):
AMOUNT
FISCAL YEAR TO BE REPAID
----------- ------------
1995.......................... 6.3 million
1996.......................... 9.0 million
1997.......................... 17.0 million
1998.......................... 23.0 million
--------------
$55.3 million
Of the $65 million available under the Term Facility,
approximately $18.8 million was borrowed to prepay the letter of
credit executed by WEI (the "Letter of Credit") securing the
payment of the Deferred Purchase Price. Such prepaid amounts
will be available to WEI and the Company for the funding of
certain litigation costs and other expenses and, to the extent
remaining after the final disposition of certain litigation, to
pay the former stockholders, warrantholders and optionholders of
WEI the Deferred Purchase Price.
<page-98>
The Bank Credit Agreement also provides for a revolving
credit working capital facility (the "Revolving Credit Facility")
of up to $45 million to be used for general corporate purposes.
Approximately $22.5 million of the Revolving Credit Facility was
used to refinance existing working capital indebtedness of the
Company and to fund certain transaction costs incurred in connec-
tion with the Acquisition. The maximum amount available under
the Revolving Credit Facility is based on an advance rate to be
determined against Eligible Inventory and Eligible Receivables
(as such terms are defined in the Bank Credit Agreement) of the
Company (the "Borrowing Base"). The Bank Credit Agreement
requires that borrowings under the Revolving Credit Facility be
reduced to zero for 30 consecutive days of each twelve-month
period. The Revolving Credit Facility will terminate upon the
earlier of January 31, 1998, or the repayment of borrowings under
the Term Facility. At April 30, 1994, the Company had approxi-
mately $24.7 million of borrowings outstanding under the
Revolving Credit Facility.
INTEREST PAYMENTS
Interest on Loans are payable at one of the following rates,
at the Company's option (subject to the terms of the Bank Credit
Agreement): (i) the Prime Lending Rate plus 1.5% per annum
("Prime Rate Loans") or (ii) the Reserve Adjusted Eurodollar Rate
plus 3.00% per annum, available for one-, two-, three-, and, if
available, six-month periods ("Eurodollar Loans"). Interest on
Prime Rate Loans is payable quarterly and on Eurodollar Loans on
the last day of selected interest periods (and at the end of
every three months, in the case of interest periods of longer
than three months) and upon prepayment; in either case such
interest is payable in arrears and computed on the basis of a
360-day year. The interest rate applicable to the Eurodollar
Loans is subject to reductions (in a maximum aggregate amount of
1% per annum) in the event that the Company achieves and
maintains certain specified levels of debt reduction and minimum
ratios of Consolidated Free Cash Flow (as defined in the Bank
Credit Agreement) to Consolidated Fixed Charges.
PREPAYMENTS
The Bank Credit Agreement requires prepayment of the Loans
in amounts equal to (i) 75% of Consolidated Excess Cash Flow (as
defined in the Bank Credit Agreement), (ii) the net cash proceeds
of Asset Sales with cash proceeds of $1,000,000 or more in the
aggregate (other than up to $4 million of cash proceeds from the
sale of the Company's distribution center in Gardena, Califor-
nia), (iii) the net cash proceeds from the issuance or sale of
equity or debt, other than the sale of the Notes or of shares of
WEI Common Stock to the Company's management, (iv) the value of
surplus assets of a pension plan returned to WEI or any of its
subsidiaries, net of transaction costs (including taxes payable
thereon) incurred in obtaining any such return and (v) the amount
necessary to reduce borrowings and letters of credit issued under
the Revolving Credit Facility to a level commensurate with the
Company's Borrowing Base. Such prepayments required pursuant to
(i), (ii), (iii) or (iv) above will be applied first to pay
interest on the principal amount so prepaid, second to pay down
scheduled repayments of principal under the Term Facility ratably
reducing the scheduled repayment amounts for dates occurring in
<page-99>
fiscal 1997 and fiscal 1998, up to an aggregate of $18 million
for all such prepayments, and thereafter by ratably reducing
scheduled repayment of principal for dates occurring after the
prepayment, and third to permanently prepay and reduce the
Revolving Credit Facility commitment. In the case of a mandatory
prepayment resulting from an Asset Sale, the Company has the
option of permanently prepaying and reducing the Revolving Credit
Facility to the extent that such Asset Sale reduces the Borrowing
Base. In addition, the Company may voluntarily prepay amounts
outstanding under the Senior Bank Facility in whole or in part at
any time without premium or penalty (provided that Eurodollar
Loans are prepayable only on the last day of the related interest
period), subject to compliance with certain notice requirements
and minimum prepayment amounts.
SECURITY INTERESTS
As security for the Senior Bank Facility, the Banks have been
granted (i) a first priority pledge by WEI of the capital stock
of the Company and (ii) a first priority lien on all or substan-
tially all of WEI's and the Company's assets, including intangi-
bles, machinery, equipment, fixtures, receivables and mortgages
on all of the real property owned, directly or indirectly, by the
Company (if requested by the Agent and the Requisite Lenders) but
not including sale inventory. In addition, the Company is
prohibited from placing a security interest on any of its
unencumbered assets.
GUARANTEES
WEI has guaranteed all payments and performance obligations
of the Company with respect to the Senior Bank Facilities.
COVENANTS
In addition to customary affirmative covenants, the Bank
Credit Agreement contains certain negative covenants, including
the following: (i) WEI and its subsidiaries will not incur any
indebtedness other than: the Notes; certain indebtedness existing
at the Effective Time, including the Debentures; purchase money
debt for personal property not to exceed $8 million; indebtedness
with respect to capital leases not to exceed $8 million; junior
subordinated notes of WEI issued in connection with the repur-
chase of common stock and options from Management Investors; and
up to $5 million of additional indebtedness; (ii) WEI and its
subsidiaries will not pay any dividend, or make any redemption,
sinking fund or similar payments to its stockholders, other than
(a) dividends to WEI to repurchase common stock and options from
Management Investors, including dividends to WEI to pay interest
on or to repay principal of, junior subordinated notes issued in
connection with such repurchases, not to exceed $2 million per
fiscal year or $5 million (plus the proceeds of issuances of
equity after the Effective Time) in the aggregate, (b) dividends
or intercompany loans to WEI to pay operating expenses, not
exceeding $300,000 per fiscal year and (c) dividends or loans to
<page-100>
WEI to fund payments required under or in connection with the
Merger Agreement; (iii) in any fiscal year, WEI and its subsidi-
aries will not make any expenditures to purchase or otherwise
acquire property, plant or equipment in excess of an amount
specified for each fiscal year in the Bank Credit Agreement;
provided, however, that to the extent that any unutilized part of
that amount is no greater than 25% of that year's capital expen-
diture allocation, such unutilized part may be used in the
following year to make such purchases; (iv) WEI and its subsidi-
aries will not incur guarantees or contingent liabilities in an
aggregate principal amount exceeding $2 million except for
guaranties relating to the endorsement of negotiable instruments
made in the ordinary course of business, guaranties of the Senior
Bank Facilities and the Notes, certain interest rate agreements,
certain guaranties of capital lease obligations and certain other
specified contingent obligations; (v) the Company will not make
any repayments on the Notes or on the Debentures, other than to
the extent required by the Subordinated Debt Documents (as
defined in the Bank Credit Agreement) or the indenture relating
to the Debentures; (vi) WEI and its subsidiaries will not grant
any security interest, lien, charge or encumbrance, other than
pursuant to the security agreements, pledge agreement and other
instruments or documents entered into under the Bank Credit
Agreement and granting liens on property of WEI or any of its
subsidiaries to the Agent for its and the Banks' benefit,
permitted purchase money obligations incurred in the ordinary
course of business and other specifically permitted liens; and
(vii) the Company will not make any investments except (a)
investments in cash equivalents, (b) investments existing at
closing and set forth in the Bank Credit Agreement, (c) invest-
ments in certain notes delivered to WEI by Management Investors,
(d) other investments not to exceed an aggregate of $500,000 at
any time, and (e) certain other investments specifically
permitted under the Bank Credit Agreement.
In addition, WEI and its subsidiaries will also be required
to satisfy certain financial covenants, including maintenance of
minimum amounts of Consolidated Adjusted EBITDAV (as defined in
the Bank Credit Agreement), a fixed charge coverage ratio at
minimum levels specified for each fiscal quarter in the Bank
Credit Agreement, and a leverage ratio at less than or equal to a
level specified for each fiscal quarter in the Bank Credit
Agreement. The Company is in compliance with all of such cove-
nants as a result of amendments to the Bank Credit Agreement,
dated August 17, 1993 and January 27, 1994, which provide the
Company with more operating flexibility given current economic
conditions and the seasonality of the Company's business. If the
California economy continues to worsen the Company may need
additional covenant relief. The Bank Credit Agreement will also
prohibit or restrict certain mergers and other fundamental
changes, sales of assets, sale and leaseback transactions,
transactions with stockholders and affiliates and amendments or
waivers of the terms of the Notes.
EVENTS OF DEFAULT
The Bank Credit Agreement describes certain events of
default, including, without limitation, the following: (i) the
failure of WEI or its subsidiaries to pay principal on the Loans
when due or failure to pay any interest or other amounts due
under the Bank Credit Agreement within five days after the due
date; (ii) any failure by WEI or its subsidiaries to pay
principal or interest on any indebtedness or contingent obliga-
tion in an individual or aggregate principal amount in excess of
<PAGE>
<page-101>
$2.5 million or more, after any applicable grace period, or any
breach or default by WEI or its subsidiaries of any term of any
indebtedness or contingent obligation in an individual or aggre-
gate principal amount of $2.5 million or more, that gives the
holder of such indebtedness or contingent obligation a right to
accelerate such indebtedness or obligation; (iii) any default by
WEI or its subsidiaries in the performance or observance of
certain conditions and covenants of the Bank Credit Agreement;
(iv) any representation or warranty made by WEI or its subsidi-
aries in any document delivered in connection with the Bank
Credit Agreement proving to be false in any material respect; (v)
the rendering of a judgment which remains unvacated, unbonded or
unstayed for a period of 60 days against, or a voluntary settle-
ment by, WEI or any of its subsidiaries which exceeds, in any
individual amount, $2.5 million, other than with respect to a
judgement or settlement in any of the Cases to the extent that
the amount prepaid with respect to the Letter of Credit is
available to pay such amount; (vi) certain events of bankruptcy
or insolvency of WEI or its subsidiaries; (vii) the occurrence of
certain events of a change of control; (viii) any default by WEI
or its subsidiaries in the performance of or compliance with any
term in the Bank Credit Agreement, other than those specifically
referred to in other events of default therein, which has not
been cured or waived by the Banks after 30 days' notice of such
default; (ix) any order decreeing the dissolution of WEI or the
Company or any of their respective subsidiaries that remains in
full force and effect for over 60 days; (x) an ERISA Event (as
defined in the Bank Credit Agreement) that results in liability
to WEI in excess of $1 million; (xi) the existence of unfunded
benefit liabilities exceeding $1 million; (xii) any guaranty
granted by any party in connection with the Bank Credit Agreement
ceases to be in full force and effect or any guarantor denies
that it has liability under a guaranty granted in connection with
the Bank Credit Agreement; (xiii) the security interests or
priority thereof granted pursuant to or in connection with the
Bank Credit Agreement are or become impaired; (xiv) the failure
of the Company or any obligee of the Notes to comply with the
subordination provisions contained in the documents relating to
the issuance of the Notes; and (xv) certain events of default or
breaches in connection with the agreement relating to the Letter
of Credit or Article VIII of the Merger Agreement relating to the
Deferred Purchase Price.
FEES
The Company has agreed to pay a commitment fee of 0.50% per
annum on the unused portion of the Revolving Credit Facility,
payable quarterly in arrears and at maturity, and computed on the
basis of a 360-day year commencing on the date of the consumma-
tion of the Acquisition, and an aggregate 3.00% per annum standby
letter of credit fee on letters of credit issued under the Bank
Credit Agreement (inclusive of the 0.50% fee payable on the
unused portion of the Revolving Credit Facility represented by
the amount of such letters of credit).
<PAGE>
<page-102>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the opinion of Wachtell,
Lipton, Rosen & Katz, counsel to the Company, as to the material
federal income tax consequences expected to apply to the owner-
ship and disposition of Notes under currently applicable law.
The discussion does not cover all aspects of federal taxation
that may be relevant to, or the actual tax effect that any of the
matters described herein will have on, particular purchasers, and
does not address state, local, foreign or other tax laws.
Further, the federal income tax treatment of a holder of the
Notes may vary depending on his particular situation. Certain
holders (including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, taxpayers subject to the
alternative minimum tax and foreign persons) may be subject to
special rules not discussed below. The description assumes that
holders of the Notes will hold the Notes as "capital assets"
(generally, property held for investment purposes) within the
meaning of Section 1221 of the Code.
Certain provisions of the Code that are applicable to the
acquisition, ownership and disposition of the Notes have been
enacted recently or substantially modified by recent legislation.
No ruling from the Internal Revenue Service has been or will be
requested in any tax matter concerning this offering.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS
TO THE PRECISE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES
OF THE EXCHANGE OF OWNING AND DISPOSING OF THE NOTES.
INTEREST PAYMENTS ON THE NOTES.
Interest on the Notes will be includible in a holder's gross
income (except to the extent attributable to accrued interest at
the time of purchase) as ordinary income for federal income tax
purposes in accordance with his tax method of accounting.
TAX BASIS
A holder's adjusted tax basis in a Note purchased by such
holder will be equal to the price paid for such Note (determined
by taking into account accrued interest at the time of purchase),
increased by market discount previously included in income by the
holder and reduced by any principal payments received by such
holder with respect to a Note and by amortized bond premium. See
"--Market Discount and Bond Premium."
SALE, EXCHANGE OR RETIREMENT
Upon the sale, exchange or retirement of a Note, a holder
will recognize taxable gain or loss, if any, equal to the
difference between the amount realized on the sale, exchange or
retirement and such holder's adjusted tax basis in such Note.
Such gain or loss will be a capital gain or loss (except to the
extent of any accrued market discount), and will be a long-term
capital gain or loss if the Note has been held for more than one
year at the time of such sale, exchange or retirement. See
"--Market Discount and Bond Premium."
<page-103>
MARKET DISCOUNT AND BOND PREMIUM
Holders should be aware that the market discount provisions
of the Code may affect the Notes. These rules generally provide
that a holder who purchases Notes for an amount which is less
than their principal amount will be considered to have purchased
the Notes at a "market discount" equal to the amount of such
differences. Such holder will be required to treat any gain
realized upon the disposition of the Notes as interest income to
the extent of the market discount that is treated as having
accrued during the period that such holder held such Notes,
unless an election is made to include such market discount in
income on a current basis. A holder of a Note who acquires the
Note at a market discount and who does not elect to include
market discount in income on a current basis may also be required
to defer the deduction of a portion of the interest on any
indebtedness incurred or continued to purchase or carry the Note
until it disposes of such Note in a taxable transaction.
If a holder's tax basis in a Note immediately after acquisi-
tion exceeds the stated redemption price at maturity of such
Note, such holder may be eligible to elect to deduct such excess
as amortizable bond premium pursuant to Section 171 of the Code.
Purchasers of the Notes should consult their own tax
advisors as to the application to such purchasers of the market
discount and bond premium rules.
HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING AND
DISPOSING OF THE NOTES, INCLUDING THE APPLICATION OF FEDERAL,
STATE, LOCAL AND FOREIGN TAX LAWS AND POSSIBLE FUTURE CHANGES IN
SUCH FEDERAL TAX LAWS.
<PAGE>
<page-104>
PLAN OF DISTRIBUTION
This Prospectus is to be used by MLPF&S in connection with
offers and sales of the Notes in market-making transactions at
negotiated prices relating to prevailing market prices at the
time of sale. MLPF&S may act as principal or agent in such
transactions. MLPF&S has no obligation to make a market in the
Notes, and may discontinue its market-making activities at any
time without notice, at its sole discretion.
The Company does not currently intend to apply for listing
of the Notes on any securities exchange. Therefore, any trading
that does develop will occur on the over-the-counter market. The
Company has been advised by MLPF&S that it intends to make a
market in the Notes but it has no obligation to do so and any
market-making may be discontinued at any time. No assurance can
be given that an active public market for the Notes will develop.
MLPF&S acted as placement agent in connection with the
original private placement of the Series A Notes and received a
placement fee of $3,850,000. MLPF&S is affiliated with entities
that beneficially own a majority of the voting power of the
capital stock of WEI, the Company's parent company. See
"Security Ownership." For other information regarding the
involvement of MLPF&S and its affiliates in connection with the
Acquisition and their equity ownership in BBC, see "Management"
and "Certain Relationships and Related Transactions."
The Company and WEI have, jointly and severally, agreed to
indemnify MLPF&S against certain liabilities under the Securities
Act or to contribute to payments that MLPF&S may be required to
make in respect of such liabilities.
LEGAL MATTERS
Certain legal matters related to the Notes and the WEI
Guarantee being offered hereby were passed upon for the Company
upon issuance of the Notes, by Wachtell, Lipton, Rosen & Katz,
New York, New York.
<page-104>
EXPERTS
The financial statements of Wherehouse Entertainment, Inc.
at January 31, 1994 and 1993 (Company), and for the year ended
January 31, 1994, and each of 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 (Predeces-
sor) appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young, independent auditors, as set forth
in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in
accounting and auditing.
<PAGE>
<page-F-0>
INDEX TO FINANCIAL STATEMENTS
Wherehouse Entertainment, Inc.:
Financial Statements
Report of Independent Auditors...............................F-1
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
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 16(b). 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.
Los Angeles, California
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, convertible subordinated
debentures and related interest rate protection agreement as of
January 31, 1994 are estimated to be the same as the amounts
reported for such debt in the Company's balance sheet at that
date. The Company's debt was primarily entered into in conjunc-
tion 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>
No dealer, salesperson or other individual has been author-
ized to give any information or to make any representation other
than those contained in this Prospectus in connection with the
offer made by this Prospectus and, if given or made, such
information or representations must not be relied upon as having
been authorized by the Company. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circum-
stance create an implication that there has been no change in the
affairs of the Company since the date hereof. This Prospectus
does not constitute an offer or solicitation by anyone in any
state in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make
such offer or solicitation.
WHEREHOUSE ENTERTAINMENT, INC.
13% SENIOR SUBORDINATED NOTES
DUE 2002, SERIES B
PROSPECTUS
June 3, 1994
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
1. (a) Securities sold.
In connection with the acquisition of the Company by Grammy
Corp., on June 11, 1992, Grammy Corp. issued 1,708,570 shares of
common stock to certain institutional investors and members of
the management of the Company for an aggregate price of
$73,300,000. By virtue of the Merger of Grammy Corp. with and
into WEI on June 11, 1992, each share of Grammy Corp. common
stock was automatically converted into a share of common stock of
WEI. In addition, on June 11, 1992 the Company sold $110 million
of the Series A Notes.
(b) Underwriters and other purchasers.
There were no underwriters involved in the sales of
securities described in (a) above. MLPF&S acted as placement in
connection with the sale of the Series A Notes.
<PAGE>
(c) Consideration.
See (a) above.
(d) Exemption from registration claimed.
The foregoing securities were not offered or sold in
transactions involving any public offering and, accordingly, were
exempt from registration under Section 4(2) of the Securities Act
of 1933. Purchasers of securities represented to the Company
that such purchasers were accredited investors of such term in
defined in Regulation D of the Securities Act.
2. (a) Securities sold.
On January 31, 1994, WEI issued and sold 681,818 shares of
common stock to certain institutional investors for an aggregate
price of $30,000,000.
(b) Underwriters and other purchasers.
There were no underwriters involved in the sales of
securities described in (a) above. MLPF&S acted as placement
agent in connection with the sale of the shares of common stock.
(c) Consideration.
See 2.(a) above.
(d) Exemption from registration claimed.
The foregoing securities were not offered or sold in trans-
actions involving any public offering and, accordingly, were
exempt from registration under section 4(2) of the Securities Act
of 1933. Purchasers of securities represented to the Company
that such purchasers were accredited investors as such term in
defined in Regulation D of the Securities Act.
<PAGE>
<PAGE>
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
Exhibit
Number Description
- ------- -----------
10.45 Third Amendment to Credit Agreement dated January 27,
1994, between the Company, WEI, Bankers Trust Company,
Individually and as Agent, Heller Financial, Inc.,
United States National Bank of Oregon, and Allstate
Prime Income Trust. Incorporated by reference to
Exhibit 10.27 of the Company's Annual Report on Form
10-K for the year ended January 31, 1994 (the "1994
Report").
10.46 Agreement of Purchase and Sale, dated as of May 10,
1993, between the Company and The Record Shop, Inc.
Incorporated by reference to Exhibit 10.32 of the
Company's 1994 Report.
10.47 First Amendment to Agreement of Purchase and Sale,
dated as of May 28, 1993, between the Company and The
Record Shop, Inc. Incorporated by reference to Exhibit
10.33 of the Company's 1994 Report.
10.48 Second Amendment to Agreement of Purchase and Sale,
dated as of June 18, 1993, between the Company and The
Record Shop, Inc. Incorporated by reference to Exhibit
10.34 of the Company's 1994 Report.
10.49 Third Amendment to Agreement of Purchase and Sale,
dated as of June 21, 1993, between the Company and The
Record Shop, Inc. Incorporated by reference to Exhibit
10.35 of the Company's 1994 Report.
10.50 Agreement of Purchase and Sale, dated as of November
19, 1993, between the Company and Pegasus Music and
Video, Inc. and Kevin S. Garn. Incorporated by
reference to Exhibit 10.36 of the Company's 1994
Report.
10.51 First Amendment to Agreement of Purchase and Sale,
dated as of January 14, 1994, between the Company and
Pegasus Music and Video, Inc. and Kevin S. Garn.
Incorporated by reference to Exhibit 10.37 of the
Company's 1994 Report.
<PAGE>
10.52 Separation from Employment Agreement and Mutual General
Release, dated April 28, 1994, between the Company and
Scott A. Hessler. Incorporated by reference to Exhibit
10.38 of the Company's 1994 Report.
10.53 Fiscal 1994 Corporate Incentive Compensation Plan.
Incorporated by reference to Exhibit 10.39 of the
Company's 1994 Report.
12.1 Computation of ratio of earnings to fixed charges.
Incorporated by reference to Exhibit 12.1 of the
Company's 1994 Report.
21.1 Subsidiaries of the Company and WEI. Incorporated by
reference to Exhibit 21.1 of the Company's 1994 Report.
24.1 Consent of Ernst & Young.
(b) Financial Statement Schedules.
The following financial statement schedules of the Company
are filed herewith:
SCHEDULES
V Property, Plant and Equipment
VI Accumulated Depreciation and Amortization of Property, Plant
and Equipment
VIII Valuation and Qualifying Accounts
IX Short-Term Borrowings
X Supplementary Income Statement Information
<PAGE>
<PAGE>
Item 17. UNDERTAKINGS
Each of the undersigned registrants hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement;
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent post-
effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in the registration statement or any material
change to such information in the registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(4) That, insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provision, or otherwise, the
registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrants
of expenses incurred or paid by a director, officer or control-
ling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudica-
tion of such issue.
<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: June 3, 1994 By: /s/ Scott Young
-----------------------------
Scott Young
Chairman of the Board,
Chief Executive Officer
and Director
(Principal Executive
Officer)
WHEREHOUSE ENTERTAINMENT, INC.
Date: June 3, 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 Board, June 3, 1994
- ------------------------ Chief Executive Officer
Scott Young and Director
(Principal Executive
(Officer)
/s/ Cathy L. Wood Senior Vice President, June 3, 1994
- ------------------------ Chief Financial Officer
Cathy L. Wood and Secretary
(Principal Financial
Officer)
/s/ Kathy J. Ford Vice President, Controller June 3, 1994
- ------------------------ (Principal Accounting
Kathy J. Ford Officer)
/s/ James J. Burke, Jr. Director June 3, 1994
- ------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong Director June 3, 1994
- ------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu Director June 3, 1994
- ------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker Director June 3, 1994
- ------------------------
Bradley J. Hoecker
WHEREHOUSE ENTERTAINMENT, INC.
Signature Title Date
- --------- ----- ----
/s/ Scott Young Chairman of the Board, June 3, 1994
- ------------------------ Chief Executive Officer
Scott Young and Director
(Principal Executive
(Officer)
/s/ Cathy L. Wood Senior Vice President, June 3, 1994
- ------------------------ Chief Financial Officer
Cathy L. Wood and Secretary
(Principal Financial
Officer)
/s/ Kathy J. Ford Vice President, Controller June 3, 1994
- ------------------------ (Principal Accounting
Kathy J. Ford Officer
/s/ James J. Burke, Jr. Director June 3, 1994
- ------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong Director June 3, 1994
- ------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu Director June 3, 1994
- ------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker Director June 3, 1994
- ------------------------
Bradley J. Hoecker
<PAGE>
<page-S-1>
<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>
S-1<PAGE>
<page-S-2>
<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>
S-2
<PAGE>
<page-S-3>
<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>
S-3<PAGE>
<page-S-4>
<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>
S-4
<PAGE>
<page-S-5>
<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>
S-5
<PAGE>
<page-S-6>
<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>
S-6
<PAGE>
<page-S-7>
<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>
S-7
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
10.45 Third Amendment to Credit Agreement dated
January 27, 1994, between the Company, WEI,
Bankers Trust Company, Individually and as
Agent, Heller Financial, Inc., United States
National Bank of Oregon, and Allstate Prime
Income Trust. Incorporated by reference to
Exhibit 10.27 of the Company's Annual Report
on Form 10-K for the year ended January 31,
1994 (the "1994 Report").
10.46 Agreement of Purchase and Sale, dated as of
May 10, 1993, between the Company and The
Record Shop, Inc. Incorporated by reference
to Exhibit 10.32 of the Company's 1994 Report.
10.47 First Amendment to Agreement of Purchase and
Sale, dated as of May 28, 1993, between the
Company and The Record Shop, Inc. Incorpo-
rated by reference to Exhibit 10.33 of the
Company's 1994 Report.
10.48 Second Amendment to Agreement of Purchase and
Sale, dated as of June 18, 1993, between the
Company and The Record Shop, Inc. Incorpo-
rated by reference to Exhibit 10.34 of the
Company's 1994 Report.
10.49 Third Amendment to Agreement of Purchase and
Sale, dated as of June 21, 1993, between the
Company and The Record Shop, Inc. Incorpo-
rated by reference to Exhibit 10.35 of the
Company's 1994 Report.
10.50 Agreement of Purchase and Sale, dated as of
November 19, 1993, between the Company and
Pegasus Music and Video, Inc. and Kevin S.
Garn. Incorporated by reference to Exhibit
10.36 of the Company's 1994 Report.
10.51 First Amendment to Agreement of Purchase and
Sale, dated as of January 14, 1994, between
the Company and Pegasus Music and Video, Inc.
and Kevin S. Garn. Incorporated by reference
to Exhibit 10.37 of the Company's 1994 Report.
10.52 Separation from Employment Agreement and
Mutual General Release, dated April 28, 1994,
between the Company and Scott A. Hessler.
Incorporated by reference to Exhibit 10.38 of
the Company's 1994 Report.
10.53 Fiscal 1994 Corporate Incentive Compensation
Plan. Incorporated by reference to Exhibit
10.39 of the Company's 1994 Report.
12.1 Computation of ratio of earnings to fixed
charges. Incorporated by reference to Exhibit
12.1 of the Company's 1994 Report.
21.1 Subsidiaries of the Company and WEI. Incorpo-
rated by reference to Exhibit 21.1 of the
Company's 1994 Report.
24.1 Consent of Ernst & Young.
<PAGE>
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated April 22, 1994, in
Post-Effective Amendment No. 2 to the Registration Statement
(Form S-1 No. 33-51266) and related Prospectus of Wherehouse
Entertainment, Inc. (Wherehouse) and WEI Holdings, Inc. (WEI) for
the registration of $110,000,000 of Wherehouse's 13% Senior
Subordinated Notes due 2002, Series B, and WEI's Guarantee of the
13% Senior Subordinated Notes due 2002, Series B.
Los Angeles, California
June 2, 1994
