UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________
to ____________
Commission File Number 33-51266-01 Commission File Number 1-8281
WEI Holdings, Inc. Wherehouse Entertainment, Inc.
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Delaware Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
95-2647555 13-3439558
(I.R.S. Employer Identification (I.R.S. Employer Identification
Number) Number)
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue 19701 Hamilton Avenue
Torrance, California 90502-1334 Torrance, California 90502-1334
(Address of principal executive (Address of principal executive
offices including ZIP code) offices including ZIP code)
(310) 538-2314 (310) 538-2314
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Indicate by check mark whether the registrants (1) have
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
<PAGE>
Outstanding at
Issuer Class April 30, 1994
- ------ ----- --------------
WEI Holdings, Inc. Common Stock,
$.10 Par Value 2,366,113
Wherehouse
Entertainment, Inc. Common Stock,
$.01 Par Value 10
Total of 12 Pages
<PAGE>
<page-2>
INDEX
WEI HOLDINGS, INC.
WHEREHOUSE ENTERTAINMENT, INC.
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
April 30, 1994 (Unaudited) and
January 31, 1994 3
Condensed Statements of Operations -
Three Months Ended April 30, 1994 and
1993 (Unaudited) 4
Condensed Statements of Cash Flows -
Three Months Ended April 30, 1994 and
1993 (Unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<page-3>
<TABLE>
PART I.
FINANCIAL INFORMATION
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
<CAPTION>
April 30, January 31,
1994 1994
------------ ------------
(Unaudited) Note 1
<S> <C> <C>
ASSETS
Current Assets
Cash $ 2,633,000 $ 3,120,000
Receivables 2,663,000 2,802,000
Taxes receivable 5,000,000 5,000,000
Merchandise inventory 106,147,000 113,592,000
Prepaid deferred income taxes 4,402,000 4,402,000
Other current assets 2,939,000 2,573,000
------------ ------------
Total current assets 123,784,000 131,489,000
Rental inventory 12,252,000 11,689,000
Property, equipment and
improvements, net 44,734,000 47,161,000
Excess of cost over fair value
of assets acquired, net 142,004,000 142,932,000
Unamortized financing costs,
leasehold interest, net 9,549,000 9,905,000
Deferred income taxes 6,774,000 6,774,000
Other assets 1,350,000 1,425,000
------------ ------------
Total assets $340,447,000 $351,375,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Short-term borrowings $ 24,700,000 $ 4,000,000
Accounts payable and accrued
expenses 88,807,000 114,863,000
Current maturities of capital
lease obligations and long-
term debt 7,979,000 7,772,000
------------ ------------
Total current liabilities 121,486,000 126,635,000
<PAGE>
Capital lease obligations and
long-term debt 162,604,000 163,699,000
Other long-term liabilities 8,438,000 7,426,000
Convertible subordinated
debentures 3,655,000 3,635,000
Shareholder's equity
Common stock, $.01 par value,
1,000 authorized, 10 issued
and outstanding --- ---
Additional paid-in capital 95,785,000 95,855,000
Accumulated deficit (51,521,000) (45,875,000)
------------ ------------
Total shareholder's
equity 44,264,000 49,980,000
------------ ------------
Total liabilities and
shareholder's equity $340,447,000 $351,375,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
<page-4>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Three Three
Months Ended Months Ended
April 30, 1994 April 30, 1993
-------------- --------------
<S> <C> <C>
Sales $ 92,004,000 $ 80,395,000
Rental revenue 21,859,000 22,115,000
-------------- --------------
113,863,000 102,510,000
Cost of sales 60,091,000 51,513,000
Costs of rentals, including
amortization 7,267,000 6,270,000
-------------- --------------
67,358,000 57,783,000
Selling, general and
administrative expenses 46,586,000 45,221,000
-------------- --------------
Loss from operations (81,000) (494,000)
Interest expense 5,624,000 5,884,000
Other income (59,000) (261,000)
-------------- --------------
5,565,000 5,623,000
-------------- --------------
Loss before income taxes (5,646,000) (6,117,000)
Benefit for income taxes 0 (722,000)
-------------- --------------
Net loss $ (5,646,000) $ (5,395,000)
============== ==============
</TABLE>
See accompanying notes.
<PAGE>
<page-5>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Three
Months Ended Months Ended
April 30, 1994 April 30, 1993
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,646,000) $ (5,395,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 11,595,000 11,153,000
Book value of rental inventory dispositions 1,043,000 1,661,000
Deferred taxes (457,000)
Changes in operating assets and liabilities:
Receivables 139,000 2,100,000
Merchandise inventory 7,445,000 (6,574,000)
Other current assets (366,000) (257,000)
Accounts payable, accrued expenses, and
other liabilities (25,044,000) (20,529,000)
Rental inventory purchases (7,830,000) (7,696,000)
-------------- --------------
Net cash used in operating activities (18,664,000) (25,994,000)
INVESTING ACTIVITIES:
Acquisition of property, equipment and
improvements (1,500,000) (2,048,000)
Increase in other assets and intangibles (65,000) (241,000)
-------------- --------------
Net cash used in investing activities (1,565,000) (2,289,000)
FINANCING ACTIVITIES:
Short-term borrowings 20,700,000 29,450,000
Dividend payments (70,000)
Principal payments on capital lease obligations
and long-term debt (888,000) (4,187,000)
-------------- --------------
Net cash provided by financing activities 19,742,000 25,263,000
-------------- --------------
Net decrease in cash (487,000) (3,020,000)
Cash, beginning of the period 3,120,000 4,462,000
-------------- --------------
Cash, end of the period $ 2,633,000 $ 1,442,000
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,400,806 $ 9,473,000
Net income taxes 0 1,378,000
</TABLE>
See accompanying notes.
<PAGE>
<page-6>
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation
The unaudited condensed financial statements have been prepared
by Wherehouse Entertainment, Inc. ("Wherehouse" or the "Company")
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The balance sheet at January 31, 1994 has been
derived from the audited financial statements at that date but
does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. It is
suggested that these consolidated condensed financial statements
be read in conjunction with the financial statements and the
notes thereto included in the Company's annual report on Form 10-
K for the year ended January 31, 1994. Results of operations for
the three months ended April 30, 1994 may not be indicative of
the results that may be expected for the year ended January 31,
1995.
WEI Holdings, Inc. ("WEI") holds all of the capital stock of the
Company and, in turn, is owned by affiliates of Merrill Lynch
Capital Partners, Inc. ("MLCP") (92.4% on a fully diluted basis)
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.
Beginning with the first quarter of fiscal 1995, the Company
began recording the amortization of rental inventory for interim
periods based on planned rental inventory purchases for the year
rather than recording cumulative amortization in the period in
which the rental inventory is purchased. This change in method
of reporting accelerates the recognition of rental amortization
to earlier interim periods and results in interim gross profit
rates that are more reflective of the expected annual gross
profit rate. However, this method will not impact the aggregate
amount of amortization expense recorded during the fiscal year.
Certain reclassifications of balances have been made in the
fiscal 1994 amounts to conform to the fiscal 1995 presentation.
<PAGE>
<page-7>
WHEREHOUSE ENTERTAINMENT, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED APRIL 30, 1994 AND APRIL 30, 1993
Aggregate net revenues for the quarter ended April 30, 1994 were
$113.9 million compared to $102.5 million for the quarter ended
April 30, 1993, an increase of 11.1%. The increase was due to an
increase in the number of stores from 315 at April 30, 1993 to
346 at April 30, 1994 and to a 5.4% increase in revenues for
same-stores (stores open for at least 13 months). The increase
in store count resulted primarily from the acquisitions of
specialty music stores from The Record Shop, Inc. and Pegasus
Music and Video, Inc. during fiscal 1994.
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, and,
therefore, does not anticipate a significant increase in number
of stores during 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 $92.0 million and $80.4 million during the
quarters ended April 30, 1994 and 1993, respectively, represent-
ing an aggregate increase of 14.4% and an increase of 7.0% on a
same-store basis. The increase in same-store sales resulted
principally from increased sales of compact discs and of used
compact discs and video games, which are newer product lines for
the Company. The Company's sales of music cassettes declined
slightly from the comparable quarter last year due to the
continuing shift in consumer demand to compact discs. The
Company's revenues from the sales of videocassettes increased
slightly due primarily to the increase in store count.
Rental revenue includes the rental of videocassettes, video games
and game players, audiocassette books and laser discs. Approxi-
mately 75% of the Company's stores currently offer videocassettes
and other products for rent. Rental revenue was $21.9 million
and $22.1 million during the quarters ended April 30, 1994 and
1993, respectively, representing a .9% aggregate decrease and a
decrease of .3% on a same-store basis. A small percentage
decrease in the rental of videocassettes was largely offset by
increases in the rental of video games. It is the Company's
belief that the new merchandising, pricing and field management
strategies implemented during the first quarter of fiscal 1995
and during late fiscal 1994 have to date appeared to beneficially
impact the Company's competitive position in the videocassette
rental business. Nonetheless, the Company anticipates that it
will continue to experience strong competition in this area, and
no assurance can be given that on a longer-term basis the
Company's new strategies will be successful.
Cost of sales increased $8.6 million to $60.1 million for the
quarter ended April 30, 1994, as compared with $51.5 million for
the quarter ended April 30, 1993. As a percentage of sales
revenue, cost of sales increased to 65.3% in the quarter ended
April 30, 1993 from 64.1% in the quarter ended April 30, 1992.
The increase was due to an increase in the inventory shrinkage
provision, changes in sales product mix, and slightly higher
markdowns used to spur sales. The changes in product 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.
Cost of rentals, including amortization, increased $1.0 million
to $7.3 million for the quarter ended April 30, 1994, as compared
with $6.3 million for the quarter ended April 30, 1993. As a
percentage of rental revenue, cost of rentals increased to 33.2%
in the quarter ended April 30, 1994 from 28.4% in the quarter
ended April 30, 1993. The increase was almost entirely
attributable to an increase in video depreciation expense, which
resulted from (i) the change in estimate for amortization expense
which was implemented in the fourth quarter of fiscal 1994 and
(ii) acceleration of the recognition of rental amortization to
earlier interim periods. The change in estimate for amortization
expense eliminated the utilization of salvage value and further
accelerated the amortization calculation. Beginning with the
first quarter of fiscal 1995, the Company changed its method of
reporting the amortization of rental inventory for interim
periods based on planned rental inventory purchases for the year
rather than recording cumulative amortization in the period that
the rental inventory is purchased. This new method accelerates
the recognition of rental amortization to earlier interim periods
and results in interim gross profit rates that are more
reflective of the Company's expected annual gross profit rate.
However, this method will not impact the aggregate amount of
amortization expense recorded during the fiscal year. The
increase was somewhat offset by a smaller loss on the disposition
of used videocassettes, which also resulted from the change in
the amortization estimation method and from a decrease in
amortization of purchase accounting adjustments (in the quarter
ended April 30, 1993, these adjustments aggregated $0.7 million;
there were no such adjustments in the quarter ended April 30,
1994). It can be expected that cost of rentals for the fiscal
year ended 1995 as a percentage of rental revenue will be lower
than in fiscal 1994.
<PAGE>
Merchandise sales, as a percentage of aggregate net revenues,
increased from 78.4% in the quarter ended April 30, 1993 to 80.8%
in the quarter ended April 30, 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.
Selling, general and administrative expenses, excluding $0.8
million and $2.2 million for the amortization of purchase price
adjustments resulting from acquisitions, were $45.8 million and
$43.0 million for the quarters ended April 30, 1994 and April 30,
1993, respectively, an increase of $2.8 million, or 6.5%. As a
percentage of aggregate net revenues, selling, general and admini-
strative expenses, excluding amortization of purchase price
adjustments, were 40.2% and 42.0% for the quarters ended April
30, 1994 and April 30, 1993, respectively. The increase in
absolute dollars is primarily attributable to increases in rent
and other occupancy costs resulting from contractual escalations
in base rent for existing stores, leases for new stores and
stores acquired during fiscal 1994, expenses resulting from lease
renewals and increases for the straight-line effect of scheduled
future rent increases. As a percentage of aggregate net
revenues, the decrease in selling, general and administrative
expenses is primarily a result of the fact that total payroll
decreased slightly while revenues grew substantially. All
categories of payroll, including stores, administrative, and
distribution center payrolls and the related payroll overhead
costs, were lower as a percentage of aggregate net revenues due
to headcount reductions and expense controls. Selling, general
and administrative expenses include non-cash provisions for the
straight-line effect of scheduled future rent increases of $1.0
million and $0.8 million for the quarters ended April 30, 1994
and April 30, 1993, respectively. Absolute dollar increases in
rent and occupancy expenses are expected to continue.
The loss from operations decreased to $0.1 million for the
quarter ended April 30, 1994 from a loss of $0.5 million for the
quarter ended April 30, 1993. The improvement resulted princi-
pally from (i) higher gross profit, in spite of a significant
increase in video depreciation expense and (ii) a $2.1 million
decrease in amortization of purchase accounting adjustments.
Excluding the effects of purchase accounting in both periods,
income from operations would have been $0.7 million for the
quarter ended April 30, 1994 and $2.4 million for the quarter
ended April 30, 1993 due to the significant increase in video
depreciation expense previously discussed.
Interest expense (net of other income) remained essentially flat
at $5.6 million in the quarters ended April 30, 1994 and April
30, 1993 as the benefit from lower interest rates on floating
rate debt and slightly lower average borrowings in the quarter
ended April 30, 1994 was largely offset by the receipt of
interest income on a tax refund in the quarter ended April 30,
1993.
<PAGE>
At April 30, 1994, $55.3 million of the Company's long-term debt
(approximately 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 40.5% of the
outstanding balance of the Company's senior term loan. See
"Inflation", below.
Based upon current operations of the Company, the Company did not
record tax benefit for the quarter ended April 30, 1994 and does
not currently anticipate doing so for the current fiscal year,
although such tax benefits are available to reduce any future
taxes payable if the Company generates future taxable income.
For the quarter ended April 30, 1993, the Company recorded an
effective tax benefit of $0.7 million or 11.8% of its loss before
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended April 30, 1994, the Company's operations
used net cash of $18.7 million compared to $26.0 million during
the quarter ended April 30, 1993. Operating cash flows in both
quarters were primarily used for the purchase of merchandise and
rental inventory and the payment of service and supply providers.
The decrease in the use of cash flow for operations was primarily
a result of reductions in merchandise inventory levels partially
offset by increases in payments to vendors and lower decreases in
receivables. The Company used $1.6 million in investing
activities in the quarter ended April 30, 1994 compared to $2.3
million for the quarter ended April 30, 1993. Expenditures in
both periods related primarily to the opening of new stores and
remodeling of existing stores.
Short-term borrowings were used to finance operations and
investing activities, as well as pay down long-term debt and
capital lease obligations in both periods.
The Company has a revolving bank line of credit in the amount of
$45.0 million which expires on January 31, 1998. At April 30,
1994, the outstanding indebtedness on the line of credit was
$24.7 million.
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.
The Company has signed lease commitments to open 2 new stores and
may open additional stores over the next twelve months. While
the Company can reasonably estimate 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.
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 (including the clean
down requirement whereby all borrowing on the revolving line of
credit must be repaid for 30 continuous days) over the next
twelve months. Debt service requirements are expected to be
funded through internal cash flow or through refinancing in
outlying years.
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 40.5% of the
outstanding balance of the senior term loan at April 30, 1994.
Such agreement limits the net interest cost to the Company
outside a specified range on the amounts covered by the
agreement.
<PAGE>
<page-11>
PART II
OTHER INFORMATION
Item 5. Other Information
On June 7, 1994, Cathy L. Wood, the Senior Vice
President, Chief Financial Officer and Secretary of the Company
and WEI, resigned from all positions which she held with the
Company and WEI. The Company is conducting a search for a new
Chief Financial Officer. Pending the selection of a new Chief
Financial Officer, Jerry E. Goldress, the President and Chief
Operating Officer, of the Company and WEI, has been appointed
acting Chief Financial Officer of the Company and WEI.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.40 Letter Agreement dated May 11, 1994 between
the Company and GGG, Inc.
(b) Current Reports on Form 8-K
No Current Reports on Form 8-K were filed during the
quarter ended April 30, 1994.
<PAGE>
<page-12>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, each of the Registrants have duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WEI HOLDINGS, INC.
Date: June 10, 1994 /s/ Scott Young
--------------------------
SCOTT YOUNG
Chairman of the Board and Chief
Executive Officer and Director
(Principal Executive Officer)
Date: June 10, 1994 /s/ Jerry E. Goldress
--------------------------
JERRY E. GOLDRESS
President and Chief Operating
Officer and Acting Chief
Financial Officer
(Principal Financial Officer)
Date: June 10, 1994 /s/ Kathy J. Ford
--------------------------
KATHY J. FORD
Vice President, Controller
(Principal Accounting Officer)
WHEREHOUSE ENTERTAINMENT, INC.
Date: June 10, 1994 /s/ Scott Young
--------------------------
SCOTT YOUNG
Chairman of the Board and Chief
Executive Officer and Director
(Principal Executive Officer)
Date: June 10, 1994 /s/ Jerry E. Goldress
--------------------------
JERRY E. GOLDRESS
President and Chief Operating
Officer and acting Chief
Financial Officer
(Principal Financial Officer)
Date: June 10, 1994 /s/ Kathy J. Ford
--------------------------
KATHY J. FORD
Vice President, Controller
(Principal Accounting Officer)
Exhibit 10.40
(Wherehouse Entertainment, Inc. Letterhead)
May 11, 1994
GGG, Inc.
Post Office Box 5240
Incline Village, Nevada 89452
Re: Contract Terms
Dear Jerry:
The following are terms of the contract as agreed upon between
GGG, Inc. (Goldress) and Wherehouse Entertainment.
1) President and Chief Operating Officer: If we choose that
Goldress not retain this title and function, we owe him the
termination provisions of his contract.
2) Change of Control: Control is not "changed" as long as
Merrill Lynch Capital Partners controls the Board of
Directors and thus the Company, even if MLCP's economic
ownership is less than 50%. If control does change as
defined above, we owe termination provisions of Goldress'
contract.
3) Base Compensation: $300,000 per annum for three days a week
of work; $400,000 for four days a week. We will employ
Goldress for four days a week for the present time with the
expectation that we will revert to three days a week (and
thus the lower annual base compensation) upon the hiring of
a CFO.
4) Goldress participates in the regular Company performance-
based bonus plan for senior management.
5) Termination Provisions: The remainder of the contract;
however, no more than $600,000 (two years base compensation
at the $300,000 per annum rate), nor less than $400,000.
6) Contract Effective Date: October 1, 1993
7) Term: Three (3) years
8) Options as previously agreed to: 30,000 shares at 444 per
share.
Sincerely,
/s/ Scott Young /s/ Jerry E. Goldress
- -------------------- ------------------------
Scott Young GGG, Inc.
Chairman and CEO Jerry E. Goldress, CEO
cc: Board of Directors
