Filed under Rules 424(b)(3) and (c)
File No. 33-51266
See also Prospectus dated October 1, 1993
Supplement to Prospectus dated October 1, 1993
SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data as
of and for the periods indicated below. The financial data was
derived from financial statements of the Predecessor (see Note
(1) below) and Wherehouse. Separate selected financial data for
WEI is not included in this report. Currently, WEI conducts no
independent operations and has no significant assets other than
the capital stock of Wherehouse. The selected financial data
should be read in conjunction with the discussion under "Manage-
ment's Discussion and Analysis of Financial Condition and Results
of Operations", below.
<TABLE>
<CAPTION>
(Dollar amounts in millions)
----------------------------------------------------------------
Company Predecessor(1)
------------------------ --------------------------------------
8 Months 4 Months
Year Ended Ended Ended
January 31, January 31, May 30, Year Ended January 31,
1994 1993 1992 1992 1991 1990
----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income statement data
- ---------------------
Revenue:
Sales $380.2 $249.1 $105.3 $358.6 $352.2 $296.8
Rental revenue 91.6 64.3 29.8 98.9 99.9 91.5
----------- ----------- -------- -------- ------- ---------
471.8 313.4 135.1 457.4 452.1 388.3
Cost and expenses:
Cost of sales 248.0 155.2 66.9 225.5 223.0 189.7
Cost of video
rentals including
amortization 50.8 24.8 7.3 30.9 43.2 41.2
Selling, general
administrative
expenses 196.6 122.9 59.9 179.1 170.1 148.5
Restructuring charges(2) 14.3 --- --- --- --- ---
Interest expense 23.5 15.7 4.9 18.0 20.0 20.9
Other income (0.3) (0.1) (0.1) (0.1) (0.3) (1.3)
----------- ----------- --------- ------- ------- ---------
532.9 318.5 138.9 453.4 456.0 398.9
----------- ----------- --------- ------- ------- ---------
(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(3) (42.1) (3.8) (2.0) 2.9 (1.2) (5.5)
Extraordinary item(4) --- --- (4.5) --- --- ---
----------- ----------- --------- ------- ------- ---------
Net (loss) income(3) ($42.1) ($3.8) ($6.5) $2.9 ($1.2) ($5.5)
Balance sheet data
- ------------------
Working capital
deficiency(5) ($0.5) ($0.5) ($30.7) ($20.5) ($30.5)
Total assets(5) 351.4 374.4 225.7 227.2 235.7
Long-term debt
(including current
portion)(5)(6) 175.1 185.1 110.0 120.5 140.2
Total shareholder's
equity(7) 50.0 62.5 3.7 1.2 2.4
Other information
- -----------------
Ratio of earnings to
fixed charges(8) (9) (9) (9) 1.11x (9) (9)
</TABLE>
(1) The Company was acquired in June 1992 by the purchase of all
of WEI's ownership interest in the Company through a merger
transaction in which Grammy Corp. was merged with and into
WEI. The transaction was accounted for using the purchase
method and the term "Predecessor" refers to the predecessor
to the Company for the period from fiscal year 1989 through
May 31, 1992. The transaction caused changes in the basis
of accounting thereby making periods of the Predecessor not
comparable to those of the Company.
(2) "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations", below.
(3) Earnings per share are omitted for the Company since it is a
wholly-owned subsidiary of WEI.
(4) The extraordinary item represents the write-off of unamor-
tized financing costs and prepayment penalties paid related
to the debt of the Predecessor that was refinanced at the
time of the Acquisition. The loss was $4.5 million, net of
an income tax benefit of $3.0 million.
(5) Certain prior year balances have been restated to conform to
current classifications.
(6) Includes $3.6 million of convertible subordinated deben-
tures.
(7) There were no cash dividends declared during any of the
periods presented above, except for cash dividends in the
amount of $.5 million, $.3 million and $.1 million paid to
WEI, the Company's sole stockholder, in fiscal years 1994,
1992 and 1989, respectively.
(8) 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.
(9) Fixed charges exceeded earnings by $10.6, $4.0, $3.8, $5.1,
and $61.1 for fiscal 1990, fiscal 1991, the four months
ended May 31, 1992, the eight months ended January 31, 1993,
and fiscal 1994, respectively.
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.
Set forth below is a summary of the Company's dollar volume
of sale revenue from fiscal 1990 through fiscal 1994.
Sales and Rental Revenue By
Merchandise Category
(dollars in millions)
Fiscal Years Ended January 31,
---------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
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
====== ====== ====== ====== ======
Merchandise sales were $380.2 million and $354.4 million
during the fiscal year ended January 31, 1994 and 1993, respec-
tively, representing an aggregate increase of 7.3% and an
increase of 1.1% on a same-store basis. The increase in same-
store merchandise sales resulted principally from increased sales
of video games and used compact disc products, which were newer
product lines for the Company, as well as from promotional
markdowns used to generate incremental sales. The Company's
sales of music cassettes continued to decline from the previous
fiscal year due to a continuing shift in consumer demand to
compact discs.
The Company's revenues from the sales of videocassettes have
decreased with the proliferation of competitors' outlets selling
videocassettes and the highly competitive pricing of the product,
particularly from discounters and mass merchandisers. The
Company has implemented new pricing and merchandising strategies
designed to counter this trend. No assurances can be given that
the Company's new strategies will be successful.
Rental revenue includes the rental of videocassettes, video
games and game players, audiocassette books and laser discs.
Approximately 75% of the Company's stores currently offer video-
cassettes and other products for rent. Rental revenue for the
fiscal year ended January 31, 1994 was $91.6 million, a decrease
of 2.6% from the previous fiscal year and a decrease of 3.3% on
a same-store basis.
In spite of the overall increase in the Company's aggregate
net revenues from fiscal 1993 to fiscal 1994, and a slight
increase in the number of stores carrying rental products from
fiscal 1993 to fiscal 1994, the Company continued to experience
declining rental revenues, primarily due to competitive factors
and, to a lesser extent, to the continued maturing of videocas-
settes in the Company's predominant markets, offset to some
extent by the growth in game rental products. It is the
Company's belief that, as a result of the large installed base of
videocassette recorders ("VCRs") in California and its other
major markets, future growth in rental revenue will be primarily
as a result of marketing and other competitive factors, as well
as additional store openings, rather than as a result of
increases in the size of the videocassette rental user market.
In connection with its 1994 Re-Engineering Plan, described below,
the Company has recently implemented new pricing and merchan-
dising strategies designed to increase rental revenue. Nonethe-
less, the Company anticipates that it will continue to experience
strong competition in this area, and no assurance can be given
that the Company's new strategies will be successful.
The Company's business and same-store revenues may be
impacted 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."
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 the utilization of the half-year convention and
salvage value, and by further accelerating the amortization
calculation. The Company believes that the revised amortization
estimate will result in better matching of rental revenue with
the cost of such rental inventory.
For the fiscal year ended January 31, 1994, the change in
the estimate for amortization of video rental inventory resulted
in an increase of $20.3 million (40% of cost of rentals) over
what the cost of rentals would have been if the change had not
been effected. It can be expected that, in future periods, cost
of rentals as a percentage of rental revenue will be somewhat
lower than that experienced in the fiscal year ended January 31,
1994.
Merchandise sales, as a percentage of aggregate net
revenues, increased from 79.0% in the fiscal year ended January
31, 1993 to 80.6% in the fiscal year ended January 31, 1994.
Should the shift in product mix from higher margin rental revenue
to lower margin merchandise sales continue, it can be expected
that the change in the mix of revenue contribution could have an
impact on profitability.
In both the music and rental markets, there has been a
recent trend towards consolidation, and several large regional
retail chains -- many similar to or direct competitors of the
Company -- have been acquired by large national retail chains.
In addition, several major retail chains, including Best Buy,
Blockbuster Entertainment and Virgin Megastores, have announced
plans to increase their retail music store presence in
California. It can thus be expected that the Company will in
future periods experience increased competition from companies
with greater financial resources than the Company, and that
competitive pressures may result in a tightening of gross profit
margins.
Selling, general and administrative expenses, excluding $8.9
million and $7.7 million for the amortization of purchase price
adjustments resulting from acquisitions, were $187.7 million and
$175.0 million for the fiscal years ended January 31, 1994 and
1993, respectively, an increase of $12.7 million, or 7.3%. As a
percentage of aggregate net revenues, selling, general and
administrative 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.
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%
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 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
accounting 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.
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
expenditures, 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.
Cash used in investing activities totaled $24.8 million as
compared to $136.1 million for the fiscal years ended January 31,
1994 and January 31, 1993, respectively. Cash used in investing
activities during the fiscal year ended January 31, 1994 included
approximately $12.2 million for the acquisitions of 39 specialty
music stores from The Record Shop, Inc. and Pegasus Music and
Video, Inc. and $11.8 million for acquisitions of property, plant
and equipment. Acquisitions of property, plant and equipment
increased $2.5 million during the fiscal year ended January 31,
1994 as compared to the prior fiscal year. Property, plant and
equipment acquisitions in both periods were used primarily for
the opening of new stores and the remodeling of existing stores,
and in fiscal 1993, funds were also used for the acquisition of
new equipment for the Company's new distribution center. During
the fiscal year ended January 31, 1993, $125.8 million of the
$136.1 million used for investing activities was due to the
Acquisition of the Company.
Cash provided by financing activities was $16.4 million as
compared to $143.5 million during fiscal years ended January 31,
1994 and 1993, respectively. On January 31, 1994, WEI raised
$30.0 million through the sale of common stock to certain of its
existing stockholders. All of these funds were contributed by
WEI to the capital of the Company and provided permanent
financing for the acquisition of stores from The Record Shop,
Inc. and Pegasus Music and Video, Inc. and for expenses
associated with those acquisitions. In addition, during fiscal
1994, borrowings were reduced by approximately $13.2 million.
During the fiscal year ended January 31, 1993, the $143.5 million
of cash provided by financing activities consisted principally of
a $70.3 million capital contribution and a net increase in
borrowings, principally for new senior subordinated debt, both of
which are attributable to the Acquisition.
The Company's operations used net cash of $1.3 million for
the year ended January 31, 1993 compared to the generation of
$29.5 million for the year ended January 31, 1992. The decrease
was primarily a result of an increase in merchandise inventory
due to the introduction of new product lines and the expansion of
certain existing product lines, the introduction of a value
pricing strategy for videocassette rentals, and the extended
economic recession in California. In addition to the changes in
inventory, other factors affecting working capital were: (i) an
increase in receivables partially related to insurance receiv-
ables, the timing of credit card receipts at year-end, and
reimbursement from landlords, and (ii) an increase in accounts
payable and accrued expenses related primarily to increases in
interest and sales taxes payable, offset by slight decreases in
accounts payable and other accrued expenses. The increase in
interest payable was attributable to higher debt levels and a
change in the timing of the due date for interest on subordinated
debt. The sales taxes payable increase was also attributable to
timing differences on the due date. Video rental purchases were
less during fiscal 1993 than in the prior year due to more
efficient utilization by the Company of the videocassette rental
inventory.
Cash used in investing activities totalled $136.1 million
compared to $14.2 million in the 1993 and 1992 fiscal years,
respectively. The $136.1 million included $125.8 million to
complete the Acquisition of the Company. The remainder was used
primarily for opening new stores, remodeling existing stores, and
acquiring fixtures and equipment for the new distribution center.
Capital expenditures, including equipment under capital leases,
totalled $12.9 million in fiscal 1993, up $1.2 million from
fiscal 1992.
Cash provided by financing activities was $143.5 million
compared to $16.9 million of cash used in financing activities in
the 1993 and 1992 fiscal years, respectively. The $143.5 million
consisted primarily of a $70.3 million capital contribution and a
net increase in borrowings, principally for new senior
subordinated debt, both of which were related to the Acquisition.
The Company's institutional indebtedness currently includes
the following:
i) a senior term loan in the original principal amount of
$65.0 Million. As of January 31, 1994, the outstanding indebted-
ness was $56.0 million. This facility matures in January 1998,
with principal payments made in installments of varying amounts,
and with interest payments due quarterly on prime-based
borrowings and upon maturity for Eurodollar-based borrowings.
Borrowings under the term loan bear interest at Prime plus 1.5%
or Eurodollar plus 3.0%.
ii) $110 Million in Senior Notes (the "Notes"). The Notes
mature in August, 2002 and bear interest at 13% per annum,
payable semi-annually. The Company is required to make sinking
fund payments in August 2000 and August 2001 of $27.5 million
each to allow for the redemption of a maximum of 50% in principal
amount of the Notes at a price equal to 100% of the principal
amount redeemed plus accrued interest thereon.
iii) revolving line of credit in the amount of $45.0
million. Borrowings under the facility bear interest at the same
rates as the term loan. As of January 31, 1994, the outstanding
indebtedness on this facility was $4.0 million. Within the
capacity of the revolving line of credit, the Company has a $10.0
million swingline facility to accommodate daily fluctuations in
its working capital. Borrowings under the swingline bear
interest at the rate of prime plus 1.0%. Both of these facili-
ties mature in January 1998.
These debt agreements require the Company to meet certain
restrictive covenant tests at periodic intervals, and, as is
customary for such borrowings, include such factors as mainte-
nance of financial ratios and limitations on dividends, capital
expenditures, transactions with affiliates, and other indebted-
ness, and, under the revolving line of credit and swingline
facility, a thirty day "clean-down", during which borrowings
thereunder are not permitted. As of January 31, 1994, the
Company was in compliance with all such covenants. The Company
did not satisfy the entire "clean-down" period during the year
ended January 31, 1994 and obtained a waiver with respect thereto
from its lenders.
As of January 31, 1994, the Company had outstanding, net of
unamortized discount, $3.6 million of its 6 1/4% convertible
subordinated debentures, issued July 1986, representing $5.7
million in principal amount. These debentures mature in July
2006; all sinking fund payment obligations of the Company, for
the balance of the term of the debentures, have been satisfied.
The Company is highly leveraged, and results of operations
have been, and will continue to be, affected by the increased
interest expense and amortization of goodwill recorded in
connection with the Acquisition.
As of April 1, 1994, the Company has signed lease commit-
ments to open two new stores and may open additional stores over
the next twelve months. While the Company can reasonably esti-
mate the cost to open a new store, the actual number and types of
stores opened will depend upon the Company's ability to locate
and obtain appropriate sites and upon its financial position.
See "Results of Operations", above. The Company may, subject to
its ability to source additional capital, make additional acqui-
sitions if it determines such acquisitions to be appropriate.
While certain expenditures during the next twelve months
will be higher than in prior periods, management believes that
current cash flows from operations and borrowings under the
revolving credit facility will be adequate to meet the Company's
liquidity requirements. Debt service requirements are expected
to be funded through internal cash flow or through refinancing in
outlying years.
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.
The date of this Prospectus Supplement is May 16, 1994.
