SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 1-8281
Wherehouse Entertainment, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-2647555
(I.R.S. Employer Identification Number)
19701 Hamilton Avenue
Torrance, California 90502-1334
(Address of principal executive
offices including ZIP code)
(310) 538-2314
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
6 1/4% Convertible Subordinated
Debentures Due July 1, 2006
(Title of class)
American Stock Exchange
(Name of Exchange)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrants was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
All of the voting stock of registrant is held by WEI
Holdings, Inc., a Delaware corporation ("WEI"). All of the
voting stock of WEI Holdings, Inc. is held by affiliates. All
officers, directors and more than 5% stockholders of WEI
Holdings, Inc. are deemed "affiliates" of WEI Holdings, Inc. for
the purpose of determining the foregoing. The registrant,
however, does not represent that such persons, or any of them,
would be deemed "affiliates" of the registrant for any other
purpose under the Securities Exchange Act of 1934 or the
Securities Act of 1933.
As of January 31, 1995, 2,360,729 shares of WEI's common
stock and 10 shares of registrant's common stock were issued and
outstanding.
<PAGE>
<PAGE>
PART I
Item 1. BUSINESS
Wherehouse Entertainment, Inc. (the "Company" or "Where-
house") is, based upon published and other information available
to its management, in terms of both revenues and store count, one
of the largest retailers of prerecorded music and videocassettes
rentals in the western U.S. 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 techno-
logy and consumer tastes.
Recent Developments and Uncertainties
Recent developments described below have led to uncertain-
ties as to the Company's ability to continue operations as a
going concern.
The Company has a highly leveraged capital structure with
total debt outstanding at April 30, 1995 of $207.3 million,
including current portion of long-term debt and amounts outstand-
ing under the Company's revolving credit facility. During each
of its fiscal years ended January 31, 1995 and 1994, the Company
recorded significant net losses which have produced a Sharehold-
ers' Deficit of $112.5 million at January 31, 1995 (See Manage-
ment's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources"). Results of
operations and cash flows have been, and will continue to be,
affected by the increased interest expense and requirements for
debt repayments resulting from the June 1992 leveraged acquisi-
tion of the Company's parent, WEI (the "Acquisition").
In order to repay the indebtedness incurred in connection
with the Acquisition, and its other indebtedness, the Company
will be required to generate substantial operating cash flow.
The ability of the Company to generate sufficient operating cash
flows and meet its debt service obligations within the required
contractual time frames is subject to both prevailing economic
conditions and to various business and other factors including,
among others, the Company's ability to increase operating profits
and cash flows, restructure its outstanding indebtedness, and/or
obtain alternative sources of financing. The ability of the
Company to improve its operating profits and cash flows cannot be
assured. In addition, there can be no assurance that the Company
will be able to restructure its outstanding indebtedness or
obtain new financing, or that, if such measures are available,
that the terms thereof would be favorable to the Company, its
shareholders, or the holders of its outstanding debt securities.
While the Company believes that, based upon its current
level of operations, it could meet its debt service obligations
within the required contractual time frames for the remainder of
fiscal year 1996, recent factors, including those discussed in
the following paragraphs and those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" elsewhere in this document raise significant uncer-
tainties as to its ability to effect the repayment of its
outstanding indebtedness within and beyond that time frame.
During the quarter ended April 30, 1995, the Company experi-
enced an 8.9% decline in same-store revenues which it attributes
to the music industry's lack of new hit releases, a decrease in
the sales of video games and continued competitive pressures in
certain of its markets. As a result, the Company has also
experienced declining gross margins.
While the Company continues to exercise control over operat-
ing expenses and intends to manage inventory investment through
the use of improved distribution systems and other working
capital management methods, any further significant decreases in
revenues or any significant decline in gross margins will cause
the Company to default on the loan agreement covenants in fiscal
year 1996 as well as impact its liquidity. The Company had
average borrowings of $36.4 million on its revolving line of
credit during the quarter ended April 30, 1995 compared to
average borrowings of $22.6 million during the quarter ended
April 30, 1994. At April 30, 1995, the Company had borrowings of
$40.0 million compared to borrowings of $24.7 million at April
30, 1994.
The Company was not in compliance with its loan agreement
covenants at January 31, 1995, and as a result of the above
factors, among others, it appeared that the Company might not be
in compliance with certain covenants at April 30, 1995. As a
result, the Company requested and received from its senior
lenders waivers with respect to its loan agreement covenants
through May 15, 1995, and, on May 11, 1995, the lenders extended
the term of these waivers through June 30, 1995. In connection
with the extension, the lenders required that the Company and
WEI, among other things, use their best efforts to develop and
implement a plan for the restructuring of their capital struc-
ture. The Company is presently discussing further waivers of or
amendments to its bank agreement covenants for the remainder of
fiscal year 1996. However, the Company can give no assurances as
to its ability to obtain further waivers of or amendments to its
bank agreement covenants. If the Company is unable to obtain
such waivers or amendments, or is unable to satisfy the
conditions under which such waivers or amendments are issued, the
lenders could suspend or terminate the loan agreement and
accelerate the amounts then outstanding.
Should the Company be unsuccessful in obtaining additional
waivers of or satisfactory amendments to its loan agreement
covenants, or if the Company's revenues continue to decline, the
Company's ability to continue operations as a going concern would
be uncertain and its continued viability could be in jeopardy.
As a result of these and other factors, the Company's independent
auditors, Ernst & Young LLP, have included an explanatory
paragraph in their opinion on the Company's fiscal 1995 financial
statements addressing uncertainties as to the Company's ability
to continue operations as a going concern.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Going Concern, Subsequent
Events and Uncertainties".
GENERAL
Wherehouse operated 347 stores at January 31, 1995 in eleven
states under the names "The Wherehouse", "Wherehouse Entertain-
ment", "Record Shop", "Paradise Music", "Rocky Mountain Records",
"Leopolds" and "Odyssey". All but eighteen of the Company's
stores operate under "The Wherehouse" name. The "Record Shop",
"Paradise Music", and "Rocky Mountain Records" names were
acquired with the acquisitions of those stores between 1992 and
1994, and 18 of 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 the fiscal year ended January 31, 1995 ("fiscal 1995"),
sales of prerecorded music, videocassettes, video games, and
accessories accounted for 82% of revenues, and rentals of video-
cassettes, video games, and other products accounted for 18% of
revenues.
The Company has significantly expanded its retail operations
since fiscal 1991. At February 1, 1991, Wherehouse operated 263
stores. Since then, 113 stores have been opened, 48 as a result
of acquisitions and 65 as internally developed locations, while
29 have been closed, expanding the Company's operations to a net
total of 347 stores in eleven states as of January 31, 1995 (see
"Store Additions and Site Selection" below). Of the 347 stores
operating as of January 31, 1995, 274 stores were located in
strip centers or freestanding buildings and 73 were located in
malls. Approximately 90% 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.
During the 1995 fiscal year, the Company focused its efforts
towards improvement of its existing stores, rather than acquisi-
tions and new store openings. In fiscal 1996, the Company again
intends to focus on its operations and existing stores. It is
likely that the Company will not renew expiring leases for
approximately 10 to 20 stores, since, for the most part, these
stores did not have a positive contribution to earnings, and
their closure is not expected to adversely impact the financial
performance of the chain. These closures will result in a
decrease in store count during fiscal 1996 (see Item 7 - "Manage-
ment's Discussion and Analysis of Financial Condition and Results
of Operations"). In the future, the Company currently intends,
when it considers such actions to be appropriate, to open new
stores in existing or contiguous markets to replace stores where
less desirable leases are expiring.
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 1991
through fiscal 1995. The percentage of total revenues contri-
buted by merchandise sales has risen from 78% in 1991 to 82% in
1995. The number of different music titles per store ranges from
approximately 6,000 to 70,000, representing approximately 12,000
to 140,000 individual stockkeeping 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.
The Company purchases its prerecorded music from all major
suppliers, including WEA (Warner/Elektra/Atlantic Corporation),
Sony Music Distribution, Inc., CEMA Distribution, Polygram
Distribution, BMG Distribution, and UNI 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 products, principally
used CD's, 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 its used product
business significantly in fiscal 1994 and 1995.
Prerecorded videocassettes (feature films, music videos, and
self-improvement programming) represented, after music, the
Company's second largest sale product category in fiscal 1995.
As box-office hit motion pictures continue to be released to the
videocassette sell-through market at reduced prices, industry-
wide sales of this category have increased. The Company's
revenues from the sales of videocassettes, however, decreased
from fiscal 1991 through 1994 with the proliferation of competi
tors' outlets selling videocassettes and the highly competitive
pricing of the product, particularly from discounters and mass
merchandisers. In fiscal 1995, the Company utilized new pricing
and merchandising strategies designed to counter this trend and,
additionally, benefitted from a strong sell-through market.
While fiscal 1995 showed good improvement, no assurances can be
given that these improved results will continue.
The Company sells video game hardware and software, blank
audio and videocassette tapes, music and tape care products,
carrying cases, storage units, and personal electronics. The
Company also collects commissions on event tickets sold under
affiliations with Bay Area Seating Service (BASS) and Ticket-
master.
<TABLE>
Sales and Rental Revenue By
Merchandise Category
(dollars in millions)
<CAPTION>
Fiscal Years Ended January 31,
---------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Merchandise Sales
Compact discs
(including
used CDs) $239.7 $203.7 $174.3 $161.0 $135.8
Cassettes and
other music 94.2 101.9 112.7 124.5 133.8
------ ------ ------ ------ ------
Total music 333.9 305.6 287.0 285.5 269.6
New videocassettes 25.8 24.3 26.9 33.4 37.0
Video game software
and hardware,
general merchan-
dise, accessories,
ticket commis-
sions, and
other 49.8 50.3 40.6 39.7 45.7
------ ------ ------ ------ ------
Total merchandise
sales $409.5 $380.2 $354.5 $358.6 $352.2
====== ====== ====== ====== ======
Video and other
product rentals 90.1 91.6 94.0 98.8 99.9
------ ------ ------ ------ ------
TOTAL REVENUE $499.6 $471.8 $448.5 $457.4 $452.1
====== ====== ====== ====== ======
</TABLE>
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 10% of Wherehouse's rentals in fiscal 1995 were
nontheatrical titles, such as children's videos, adult videos,
workout videos, music videos, educational videos, and do-it-your-
self videos. Audiocassette books, video game players and laser
discs are also offered for rent in a few select stores. As of
January 31, 1995, 261 of Wherehouse's 347 stores offered video-
cassettes and other products for rent. On average, stores that
rent videocassettes carry approximately 6,700 units, and can
range from as few as 4,500 to as many as 14,000 units, represent-
ing from approximately 3,000 to 9,000 individual titles.
In the last half of fiscal 1995, the Company began increas-
ing its purchases of "hit" videocassettes, in order to satisfy
additional consumer demand for these popular titles, and in
December 1994, the Company raised its rental prices in the
preponderance of its stores.
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 Warner Home Video,
Video Product Distribution, Baker & Taylor Video, UNI Distribu-
tion 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 title's efficiency declines, used rental videocas-
settes 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.
The Company rents video game software and hardware in the
majority of its stores. 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 aware-
ness 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, includ-
ing radio, newspaper, direct mail, freestanding inserts, maga-
zines, and 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.
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 it has been 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 suppliers' 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 each music title as long as
that title remains in the current music catalog of a manufactur-
er. 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 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. Pricing and return policies of the
Company's major distributors are subject to change. The Company
does not believe that the net effect of changes during the past
few years has been material, nor is the Company aware of any
additional changes which might have a material, adverse effect on
the Company.
STORE ADDITIONS AND SITE SELECTION
Since fiscal year 1991, Wherehouse added a total of 84
stores 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>
Aggregate
Total Stores Stores Total Stores Square
Fiscal at Beginning _____________ at End Footage at End
Year of Period Opened Closed of Period of Period
______ ____________ ______ ______ ___________ ______________
<S> <C> <C> <C> <C> <C>
1995 347 4 4 347 2,159,000
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
</TABLE>
During the fiscal year ended January 31, 1995, the Company's
new store openings ranged in size from 1,928 to 12,000 square
feet. Initial cash investment (net of landlord's contribution)
in leasehold improvements, fixtures and equipment for these new
stores ranged from approximately $70,000 to $205,000.
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. As noted
above, the Company believes that during fiscal 1996 it will not
renew expiring leases for approximately 10 to 20 stores. 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, Where-
house 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 January 31, 1995, the Company had 274
stores located in strip centers or freestanding buildings and 73
stores located in malls. The standard size of strip center or
freestanding location is approximately 6,844 square feet, with an
approximate range of 1,500 to 25,000 square feet. Mall stores
range in size from 1,350 to 10,000 square feet of space, and most
do not offer video rental service due to the importance of con-
venience 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 the
products. The Company, which maintains an active store remodel-
ing program to keep older stores up to date, has remodelled
approximately 368 stores during the past five years, in whole or
in part, including remodels from 1993 through 1994 of substan-
tially 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.
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 Company's 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 30%. 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 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, Hollywood Entertainment and
Virgin Megastores, have recently opened stores or expanded their
retail store presence in the Company's markets. Several have
announced plans to continue that expansion. Accordingly, it can
be expected that the Company will in future periods experience
increased competition from companies with greater financial
resources than the Company, and that such competition may result
in continued pressure on revenues and 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 videocas-
sette rentals, and at a higher cost. Also, under current enter-
tainment industry distribution practices, movies are generally
available on videocassette prior to appearing on pay-per-view.
However, viewing flexibility may increase with improved techno-
logy which could negatively impact the retail store delivery of
home video and the Company's business. Notwithstanding 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.
Several major companies have announced that they are deve-
loping 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 entertainment 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 commer-
cially 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 intro-
duced, 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 is one of the largest retailers of prerecorded
music and videocassette rentals in the western U.S. The Company
believes that its major competitive advantages lie in its
convenient store locations and in its ability to offer a wider
and more up-to-date selection of inventory and to provide better
customer service.
ORGANIZATION AND EMPLOYEES
The Company's corporate offices are located in Torrance,
California. The Company maintains offices for its operating
divisions within the corporate offices and in Redwood City and
San Diego, California. The Company's distribution center is in
Carson, California.
As of January 31, 1995, the Company employed approximately
7,600 persons. Approximately 27% were full-time employees and
approximately 73% 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 220, is responsible for executive and
general operating management, buying, merchandising, advertising,
finance, accounting, information systems and real estate.
TRADEMARKS
All but 18 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, the United Kingdom, and Mexico, and has filed
trademark registrations in Japan, Korea, Thailand, and Taiwan.
The Company monitors the status of its trademark registrations to
maintain them in force and to renew them as required.
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 1995 were
slightly more than 32% of total annual revenues.
<PAGE>
<PAGE>
Item 2. PROPERTIES
The Company's executive offices, which are located in
Torrance, California, are governed by a lease covering 72,708
square feet of space at a current annual base rent of approxi-
mately $697,992. The lease expires on May 31, 1999 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 prin-
cipal amount of $2,800,000 which matures in 1996. The majority
of the space in this facility is leased until March 31, 1997 for
an annual rental of $192,000. This lease is subject to a March
31 renewal option for an additional term of three years.
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 1995 was $731,808; rent is
subject to periodic adjustment.
All 4 stores opened through internal development during
fiscal 1995 were located in leased properties. As of January 31,
1995, the Company had signed lease commitments to open three new
stores and may open additional stores over the next twelve
months. In addition, it is likely that the Company will not
renew expiring leases for approximately 10 to 20 stores. See
Item 1 - "Business".
As of January 31, 1995, 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 no leased stores' renewal options were exercised, 47
leases would expire on or before January 31, 1996, 117 would
expire between February 1, 1996 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.
Item 3. LEGAL PROCEEDINGS
(i) McMahan and Related Actions.
In January 1988, holders (the "Debentureholders") of
approximately $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.). 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.
An indenture between the Company and Bank of America
National Trust and Savings Association (the "Debenture Inden-
ture"), which sets forth the contractual rights of the Debenture-
holders, 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 major-
ity 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 Acquisition Agreement") that was approved by the board
of directors of the Company, including a majority of the Indepen-
dent Directors. At that time, there were approximately $48.3
million in aggregate principal amount of Debentures outstanding.
The Complaint, as amended, contains seven causes of
action. Count I alleges that the Independent Directors' approval
of the 1988 Acquisition Agreement violated the Debenture Inden-
ture 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 direc-
tors' approval of the 1988 Acquisition Agreement violated the
directors' contractual duty of good faith and fair dealing to the
Debentureholders. Count III alleges that defendants violated
Section 11 of the Securities Act of 1933 (the "Securities Act")
by omitting to disclose in the prospectus which was issued in
connection with the Debenture offering 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 Debenture-
holders. 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 Securities Exchange Act of 1934
(the "Exchange Act") for the reasons specified in the descrip-
tions 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 Complaint seeks, inter alia, damages in an unspeci-
fied amount, together with the costs of the action.
On May 22, 1989, United States District Court for the
Southern District of New York (the "District Court") dismissed
plaintiffs' federal securities law claims pursuant to Rule 56 of
the Federal Rules of Civil Procedure and dismissed the state law
claims for lack of subject matter jurisdiction. By opinion dated
April 10, 1990, the United States Court of Appeals for the Second
Circuit (the "Second Circuit") reversed the judgment of the
District Court and remanded the case.
Discovery has concluded, and defendants moved for
summary judgment and requested dismissal of 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 actions be dismissed.
The plaintiffs appealed that determination to the
District Court which, on August 12, 1994, adopted that portion of
the Report and Recommendation dismissing the plaintiffs' state
law claims. However, the District Court declined to adopt the
Magistrate's recommendation that plaintiffs' federal securities
law claims be dismissed. Defendants requested that the District
Court certify its order denying summary judgment for an immediate
appeal. In October 1994, the District Court granted defendants'
motion for certification. This certification entitled defendants
to request that the Second Circuit Court of Appeals certify the
Opinion for immediate appellate review. On January 3, 1995,
defendants filed a brief in the Court of Appeals requesting that
the Court reverse the District Court's rulings on plaintiffs'
federal securities law claims and enter a judgment for defendants
on those claims. Plaintiffs filed their opposition brief on
March 20, 1995. In addition, the Securities and Exchange Commis-
sion filed an amicus brief in support of plaintiffs' position on
one of the two questions which were certified for interlocutory
review. Defendant filed a reply brief on April 12, 1995 and the
appeal is currently scheduled to be argued during the week of
June 5, 1995. 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, 1995.
An action entitled Don Thompson v. Wherehouse Enter-
tainment, Inc., et al., 88 Civ. 9040 (S.D.N.Y.), which is
substantially similar to the McMahan action and which was
certified as a class action on behalf of all persons who owned
Wherehouse debentures as of December 20, 1987, has been conso-
lidated with the McMahan action.
(ii) Offset Fund.
As part of the June 1992 Acquisition of the Company and
WEI by Merrill Lynch Capital Partners and certain related
parties, approximately $18.75 million of the merger consideration
payable to the sellers 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. Where-
house Entertainment, Inc., et al.; and a case entitled Silverman,
et al. v. Wherehouse Entertainment, Inc., et al., as described in
the merger agreement with respect to that Acquisition. The
Silverman action has been settled, and all amounts payable under
the Silverman settlement (aggregating $350,000) were offset under
this provision on December 6, 1994 and paid from the defense
fund, and thus such payments did not affect the Company's cash
balances or results of operations. The fund has a current
balance, including accrued interest, of approximately $18.75
million.
(iii) Other.
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
and results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
<PAGE>
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company has only one class of common equity outstanding,
all of which is owned by WEI. WEI has only one class of common
equity outstanding, which is owned exclusively by affiliates of
MLCP and certain members of management of the Company. See Item
12 - "Security Ownership of Certain Beneficial Owners and Manage-
ment". There is no established public trading market for the
common equity of WEI.
HOLDERS
As of January 31, 1995, there was one holder of the Com-
pany's common stock and there were 14 holders of common stock,
par value $.10 per share of WEI.
DIVIDENDS
WEI has paid no dividends to its stockholders in either of
the last two fiscal years. Dividends in the amount of $184,511
and $490,339 were paid by the Company to WEI in fiscal years 1995
and 1994, respectively, solely for the purpose of providing funds
to enable WEI to purchase shares from former members of manage-
ment pursuant to the Stockholder's Agreement described in Item
13. The Company's Bank Credit Agreement among Wherehouse, as
borrower, WEI as guarantor, Bankers Trust Company, as Agent, and
Heller Financial, Inc. as Co-Agent and the Indenture relating to
the Company's 13% Senior Subordinated Notes Due 2002, Series B,
restrict the ability of WEI and the Company to pay dividends.
See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operation." Neither the Company nor WEI
has any intention of paying cash dividends on its common stock in
the foreseeable future, other than as may be made in connection
with repurchases of restricted stock in accordance with the Bank
Credit Agreement and the Indenture.
<PAGE>
<PAGE>
Item 6. 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 Item 7 -
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and with the financial statements,
including the notes thereto, included elsewhere in this report.
<PAGE>
<TABLE>
<CAPTION>
(Dollar amounts in millions)
-----------------------------------------------------------------
Company Predecessor(1)
------------------------------- -------------------------------
8 Months 4 Months
Year Ended Ended Ended Year Ended
January 31, January 31, May 30, January 31,
1995 1994 1993 1992 1992 1991
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income statement data
- ---------------------
Revenue:
Sales $409.5 $380.2 $249.1 $105.3 $358.6 $352.2
Rental revenue 90.1 91.6 64.3 29.8 98.8 99.9
--------- --------- --------- --------- --------- ---------
499.6 471.8 313.4 135.1 457.4 452.1
Cost and expenses:
Cost of sales 262.6 248.0 155.2 66.9 225.5 223.0
Cost of video
rentals including
amortization 35.0 50.8 24.8 7.3 30.9 43.2
Selling, general and
administrative
expenses 188.7 196.6 122.9 59.9 179.1 170.1
Restructuring charges(2) --- 14.3 --- --- --- ---
Goodwill impairment(2) 139.5 --- --- --- --- ---
Interest expense 23.2 23.5 15.7 4.9 18.0 20.0
Other income (0.2) (0.3) (0.1) (0.1) (0.1) (0.3)
--------- --------- --------- --------- --------- ---------
648.8 532.9 318.5 138.9 453.4 456.0
--------- --------- --------- --------- --------- ---------
(Loss) income before
income taxes (149.2) (61.1) (5.1) (3.8) 3.9 (4.0)
<PAGE>
(Benefit) provision
for income taxes 13.0 (19.1) (1.3) (1.9) 1.0 (2.8)
--------- --------- --------- --------- --------- ---------
(Loss) income before
extraordinary item(3) (162.2) (42.1) (3.8) (2.0) 2.9 (1.2)
Extraordinary item(4) --- --- --- (4.5) --- ---
--------- --------- --------- --------- --------- ---------
Net (loss) income(3) ($162.2) ($42.1) ($3.8) ($6.5) $2.9 ($1.2)
Balance sheet data
- ------------------
Working capital
(deficiency)/excess (5) ($13.8) $4.9 ($0.5) ($30.7) ($20.5)
Total assets(5) 197.1 351.4 374.4 225.7 227.2
Long-term debt
(including current
portion)(5)(6) 167.4 175.1 185.1 110.0 120.5
Total shareholder's
(deficit)/equity (7) (112.4) 50.0 62.5 3.7 1.2
Other information
- -----------------
Ratio of earnings to
fixed charges(8) (9) (9) (9) (9) 1.11x (9)
</TABLE>
<PAGE>
(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) See Item 7 "Management's Discussion and Analysis of Finan-
cial Condition and Results of Operations - Results of Opera-
tions."
(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 $.2 million, $.5 million and $.3 million paid to
WEI, the Company's sole stockholder, in fiscal years 1995,
1994 and 1992, 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 $4.0, $3.8, $5.1, $61.1
and $149.2 for fiscal 1991, the four months ended May 31,
1992, the eight months ended January 31, 1993, fiscal 1994,
and fiscal 1995, respectively.
<PAGE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended January 31, 1995 Compared to Year Ended January 31,
1994
Aggregate net revenues were $499.6 million and $471.8
million for the fiscal years ended January 31, 1995 and January
31, 1994, respectively. This increase of $27.8 million was
principally due to a 3.4% increase in same-store revenues (stores
open for at least 13 months) and the full year of revenues in
fiscal year 1995 from the stores acquired in fiscal year 1994
from The Record Shop, Inc. and from Pegasus Music and Video, Inc.
During the fiscal year ended January 31, 1995, the Company opened
4 new stores, expanded or remodeled 95 stores and closed 4
stores.
Planned decreases in store count of approximately 10-20
stores in fiscal 1996 will require same-store revenue increases
in order to generate growth in aggregate net revenues.
Merchandise sales were $409.5 million and $380.2 million
during the fiscal years ended January 31, 1995 and 1994, respec-
tively, representing an aggregate increase of 7.7% and an
increase of 4.2% on a same-store basis. (See table in Item 1 --
"Business - Merchandise Products and Supply.") The increase in
same-store merchandise sales resulted principally from increased
sales of compact discs, used compact discs and videocassettes.
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.
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, 1995 was $90.1 million, a decrease
of 1.6% from the previous fiscal year but an increase of .2% on a
same-store basis. Decreases in the rental of videocassettes and
games were partially offset by increases in the sales of previ-
ously viewed rental inventory. Same-store rental revenue
increased 6.0% in the quarter ended January 31, 1995 as compared
to the quarter ended January 31, 1994, largely due to a price
increase implemented in December 1994 as well as the maintenance
of a higher inventory of "hit" videocassettes. In spite of this
increase in same- store rental revenues, it is the Company's
belief that, as a result of the large installed base of videocas-
sette recorders ("VCR's") in California and its other major
markets, future growth in rental revenue will be primarily a
result of marketing and other competitive factors, as well as
additional store openings, expansions and remerchandising, rather
than a result of increases in the size of the videocassette
rental user market. The Company anticipates that it will
continue to experience strong competition in this area.
Although aggregate net revenues in fiscal year 1995
increased over fiscal year 1994, the Company's business and
same-store revenues may be impacted in the future by various
competitive and economic factors, including, but not limited to,
consumer tastes, new releases of music, videocassette and video
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 revenues have
been impacted by increased competition from other music and video
specialty retail chains, as well as discounters and mass merchan-
disers.
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 $14.6 million to $262.6 million for
the fiscal year ended January 31, 1995, as compared with $248.0
million for the fiscal year ended January 31, 1994. As a percen-
tage of merchandise sales revenues, cost of sales decreased 1.1%
to 64.1% for the fiscal year ended January 31, 1995 versus 65.2%
for the fiscal year ended January 31, 1994. The gross profit
percentage for merchandise sale product was 35.9% and 34.8% for
the fiscal years ended January 31, 1995 and 1994, respectively.
The 1.1% decrease in cost of sales as a percentage of merchandise
sales revenues principally resulted from decreased costs associ-
ated with inventory shrinkage and other book-to-physical adjust-
ments (0.6%); decreased costs attributable to merchandise returns
(0.5%) and various other factors (0.2%) offset by promotional
markdowns to liquidate game software and drive incremental music
sales, increased costs from changes in product mix, and lower
price points on compact discs in certain markets to meet competi-
tive pressures (0.2%). The changes in product sales mix include
the continuing shift in consumer demand from music cassettes to
lower-margin compact discs and slightly decreased margin rates
from the sale of compact discs due to promotional pricing. Video
game sale margins declined as excess supply was liquidated
through the use of higher promotional markdowns. Such decreases
in gross margins were offset, in part, by improved gross margins
for used compact discs and music video.
Cost of rentals, including amortization, decreased $15.8
million to $35.0 for the fiscal year ended January 31, 1995, as
compared with $50.8 million for the fiscal year ended January 31,
1994. As a percentage of rental revenue, cost of rentals
decreased to 38.8% for the fiscal year ended January 31, 1995
from 55.5% for the fiscal year ended January 31, 1994, a decrease
of 16.7%. The gross profit percentage for rental revenue was
61.2% and 44.5% for the fiscal years ended January 31, 1995 and
1994, respectively. The 16.7% decrease in cost of rentals,
including amortization, as a percentage of rental revenues was
principally due to a change in accounting estimate for amortizing
the cost of video rental inventory that was implemented in the
fiscal year 1994 that resulted in a $20.3 million charge (22.2%
of rental revenue) to reduce the net carrying value of existing
rental inventory at January 31, 1994, as well as decreased
shrinkage and obsolescence (1.1%) in fiscal year 1995. Offset-
ting these decreases were increased amortization, as a percentage
of rental revenue, of 5.2%, due to increased videocassette
purchases to support higher rental revenues and an increase of
2.2% in the write-off of net book value of rental dispositions
resulting from the sale of older rental inventory. All other
costs of rental decreased by a net of 0.8%.
Merchandise sales, as a percentage of aggregate net reve-
nues, increased from 80.6% in the fiscal year ended January 31,
1994 to 82.0% in the fiscal year ended January 31, 1995. 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.
Several major retail chains, including Best Buy, Blockbuster
Entertainment, Hollywood Entertainment and Virgin Megastores
increased their retail store presence in the Company's markets.
This trend is expected to continue and it is anticipated that the
Company will in future periods experience increased competition
from companies with greater financial resources than the Company,
and that such competition may result in continued pressure on
revenues and gross profit margins.
Selling, general and administrative expenses, excluding $3.4
million and $8.9 million for the amortization of purchase price
adjustments resulting from acquisitions, were $185.3 million and
$187.7 million for the fiscal years ended January 31, 1995 and
1994, respectively, a decrease of $2.4 million, or 1.3%. As a
percentage of aggregate net revenues, selling, general and
administrative expenses, excluding amortization of purchase price
adjustments, were 37.1% and 39.8% for the fiscal years ended
January 31, 1995 and 1994, respectively, a decrease of 2.7%. The
2.7% decrease was principally due to reductions in payroll
expense (2.1%). 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 other expense
control measures. Depreciation expense decreased 0.2% due to the
increase in fully depreciated assets that are still in service
partially offset by higher depreciation related to the increase
in acquisition of property, equipment and improvements in the
fiscal year ended January 31, 1995. Occupancy costs increased in
absolute dollar amount but decreased by 0.4% as a percentage of
aggregate net revenues, primarily due to decreases in the non-
cash provisions for the straight-line effect of scheduled future
rent increases ($3.5 million in fiscal year 1995 and $4.9 million
in fiscal year 1994). Absolute dollar increases in rent and
occupancy expenses are expected to continue.
In connection with the adoption of Statement of Financial
Accounting Standards No. 121, "Accounting of the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement No. 121), the Company evaluated the carrying value of
the excess cost over the fair value of net assets acquired (or
"goodwill") and fixed assets. Significant adverse changes in the
Company's business climate became apparent at the end of fiscal
year 1995 and continued to be evidenced by increased competition
and erosion of revenues and gross margins subsequent to year-end,
which led to recent operating results and forecasted future
results that were less than previously planned. These factors
led to the conclusion that there was a potential impairment in
the recorded value of goodwill and fixed assets. Accordingly,
the Company wrote off the remaining goodwill balance of $139.5
million at January 31, 1995 as an impairment in carrying value.
The annual amortization of goodwill included in selling, general
and administrative expenses was $3.7 million and $3.6 million in
fiscal years 1995 and 1994, respectively.
The loss from operations was $126.2 million for the fiscal
year ended January 31, 1995, as compared with a loss of $37.9
million for the fiscal year ended January 31, 1994. The increase
in operating loss resulted primarily from the above described
write-off of goodwill. Excluding the non-cash effects of
purchase accounting in both fiscal years and excluding both the
change in estimate for amortizing video rental inventory and the
restructuring charges (described below) in the fiscal year ended
January 31, 1994 and the goodwill impairment in the fiscal year
ended January 31, 1995, income from operations would have been
$16.7 million for the fiscal year ended January 31, 1995 compared
to $8.4 million for the fiscal year ended January 31, 1994, an
increase of $8.3 million.
Interest expense (net) decreased $0.2 million to $23.0
million, as compared with $23.2 million, for the fiscal years
ended January 31, 1995 and 1994, respectively. The decrease
resulted primarily from lower overall debt levels offset by
higher interest rates on floating rate debt. Included in
interest expense are $1.9 million and $1.7 million attributable
to the amortization of acquisition financing costs during the
fiscal years ended January 31, 1995 and 1994, respectively.
At January 31, 1995, $49.0 million of the Company's long-
term debt (29% of the total long-term debt and current portion of
long-term debt then outstanding) and the Company's revolving line
of credit provided for interest which varies with changes in the
prime rate or other similar interest rate indexes. A material
increase in the prime rate, or other applicable index rates,
could significantly increase the Company's interest expense. The
impact of any such increase is partially mitigated by an interest
rate protection agreement with a major financial institution
covering approximately 40% of the outstanding balance of the
Company's senior term loan. The fee for this interest rate cap
arrangement was $275,000, which has been paid in full, and covers
the three years ending February 1996. The Company has no future
exposure with respect to this arrangement; however, if the finan-
cial institution were to default on its obligations under the
arrangement, the Company's interest rate exposure under the Term
Facility could increase. The Company has no reason to believe
that the financial institution would not be able to perform its
obligations under the arrangement. See "Inflation", below.
The tax provision recorded by the Company on its loss before
income taxes was $13.0 million, or 8.7% of its loss before income
taxes in fiscal year 1995 versus an effective tax benefit of
$19.1 million, or 31.2% of its loss before income taxes in fiscal
year 1994. The increase in tax expense resulted primarily from
an increase in the valuation allowance for deferred tax assets.
While such tax assets are available to reduce future taxes
payable, historical tax losses in fiscal years 1994 and 1995 and
a projected tax loss for fiscal year 1996 necessitated the
increase in the reserve allowance. As a result of available net
operating loss carrybacks, the Company expects to receive an
approximate $1.5 million federal income tax refund during the
third quarter of its current fiscal year.
Based upon the current operations of the Company, and other
factors, the Company anticipates that net pre-tax losses, if any,
which may be realized during the fiscal year ending January 31,
1996 will not result in the recording of any additional tax
benefit by the Company, nor any refunds for further operating
loss carrybacks, although such tax benefits would be available to
reduce any future taxes payable under applicable Internal Revenue
Service and state regulations should the Company generate future
taxable income.
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 the 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. During fiscal 1994, the Company acquired 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.
Merchandise sales were $380.2 million and $354.4 million
during the fiscal year ended January 31, 1994 and 1993, respec-
tively, representing an aggregate increase of 7.3% and an
increase of 1.1% on a same-store basis. (See table in Item 1 --
"Business - Merchandise Products and Supply.") The increase in
same-store merchandise sales resulted principally from increased
sales of video games and used compact disc products, which were
newer product lines for the Company, as well as from promotional
markdowns used to generate incremental sales. The Company's
sales of music cassettes declined 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 decreased
with the proliferation of competitors's outlets selling videocas-
settes and the highly competitive pricing of the product, parti-
cularly from discounters and mass merchandisers.
Rental revenue includes the rental of videocassettes, video
games and game players, audiocassette books and laser discs.
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. The Company
experienced declining rental revenues, primarily due to competi-
tive factors and, to a lesser extent, to the continued maturing
of videocassettes in the Company's predominant markets, offset to
some extent by the growth in game rental products.
Cost of sales increased $25.9 million to $248.0 million for
the fiscal year ended January 31, 1994, as compared with $222.1
million for the fiscal year ended January 31, 1993. As a percen-
tage of merchandise sales revenues, cost of sales increased 2.5%
to 65.2% for the fiscal year ended January 31, 1994 versus 62.7%
for the fiscal year ended January 31, 1993. The gross profit
percentage for merchandise sale product was 34.8% and 37.3% for
the fiscal years ended January 31, 1994 and 1993, respectively.
The 2.5% increase in cost of sales as a percentage of merchandise
sales revenues principally resulted from changes in product mix
and the utilization of promotional markdowns to generate incre-
mental sales (1.1%), increased costs associated with inventory
shrinkage and other book-to-physical adjustments (1.0%), lower
prompt payment discounts from suppliers (0.3%) and various other
factors (0.1%). The changes in product sales mix included an
increase in the Company's video game sales business, which
carries lower margins than the Company's other product lines,
along with the continuing shift in consumer demand from music
cassettes to lower-margin compact discs. Additionally, margins
from sales of compact discs and from video games each declined
somewhat from the prior year. Video game sales margins declined
as excess supply necessitated higher promotional markdowns. The
decreased gross margins were offset, in part, by improved gross
margins for used compact discs, accessories and personal elec-
tronics.
Costs of rental, 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 fiscal year 1994 from 34.1% for
fiscal year 1993, an increase of 21.4%. The gross profit percen-
tage for rental revenue was 44.5% and 65.9% for fiscal years 1994
and 1993, respectively. The 21.4% increase in cost of rentals,
including amortization, as a percentage of rental revenues was
principally due to a change in accounting estimate for amortizing
the cost of video rental inventory that resulted in a $20.3
million charge (22.2% or rental revenue) to reduce the net
carrying value of existing rental inventory which was slightly
offset by other factors including, among others, a decrease in
the book value of rental dispositions resulting from the sale of
older rental inventory (0.8%). In prior years, the Company
amortized the cost of video rental inventory under an accelerated
method to its estimated salvage value. During fiscal year 1994,
the Company changed its amortization estimation method by elimi-
nating its utilization of the half-year convention and salvage
value, and by further accelerating the amortization calculation.
Merchandise sales, as a percentage of aggregate net
revenues, increased from 79.0% in fiscal year 1993 to 80.6% in
fiscal year 1994.
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 admi-
nistrative expenses, excluding amortization of purchase price
adjustments, were 39.8% and 39.0% for the fiscal years ended
January 31, 1994 and /1993, respectively, an increase of 0.8%.
The 0.8% increase in principally due to increased rent and occu-
pancy expenses resulting from contractual escalations in base
rent for existing stores, leases for new stores and stores
acquired during the year, expenses resulting from lease renewals
and increases for the straight-line effect of scheduled future
rent increases (0.9%) and increased semi-variable and payroll
expenses attributable to new stores and acquisitions, a revised
corporate salary program, and a higher administrative headcount
than during the previous fiscal year (0.5%). The increases in
selling, general and administrative expenses were offset, in
part, by a $4.2 million decrease in advertising expenditures
during fiscal year 1994 (1.0% as a percentage of net revenues) as
the Company changed its media strategy from more expensive,
image-building television to greater product emphasis utilizing
less expensive media such as radio, billboards and newspaper.
Additionally, the Company changed the gift structure of its
rental customer loyalty program, which resulted in lower
expenses. All other selling, general and administrative expenses
increased 0.4% as a percentage of net revenues. Selling, general
and administrative expenses include non-cash provisions for the
straight-line effect of scheduled future rent increases of $4.9
million and $3.5 million for the fiscal years ended 1994 and
1993, respectively.
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 was 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 the 1994 Re-Engineering Plan, the Company identi-
fied 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 interest
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 opera-
tions 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 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 1994 and 1993,
respectively.
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 years ended
1994 and 1993 differed from the statutory rate of 34% principally
due to non-deductible purchase accounting adjustments, reserve
allowances, state taxes and job tax credits.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended January 31, 1995, the Company's
net cash provided by operating activities improved by $4.0
million (from $7.1 million in fiscal year ended 1994 to $11.1
million in fiscal year ended 1995) after giving consideration to
increases in rental inventory purchases of $9.0 million.
Cash used in investing activities totaled $16.1 million as
compared to $24.8 million for the fiscal years ended January 31,
1995 and January 31, 1994, respectively. Acquisitions of
property, equipment and improvements were $15.7 million during
the fiscal year ended January 31, 1995 as compared to $11.8
million in 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 year 1995, the acquisition of new point-of-sale platforms
for the stores. Cash used in investing activities during the
fiscal year ended January 31, 1994 included approximately $12.2
million for the acquisition of 39 specialty music stores from The
Record Shop, Inc. and Pegasus Music and Video, Inc.
Cash provided by financing activities was $3.8 million as
compared to $16.4 million during fiscal years ended January 31,
1995 and 1994, 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 financ-
ing 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 decreased by approximately $13.2 million while during fiscal
1995, borrowings were increased by approximately $4.0 million.
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, 1995, the outstanding indebt-
edness was $49.0 million. This facility matures in January 1998,
with principal payments made in installments of varying amounts
(including $9.0 million due in fiscal year 1996), 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 on February 1st and August 1st. 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, 1995, the outstanding
indebtedness on this facility was $15.8 million. Furthermore,
the Company had average borrowings of $36.4 million on its
revolving line of credit during the quarter ended April 30, 1995
compared to average borrowings of $22.6 million during the
quarter ended April 30, 1994. At April 30, 1995, the Company had
borrowings of $40.0 million compared to borrowings of $24.7
million at April 30, 1994. 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 facilities 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 a result of the noncash charges
to income for goodwill impairment and the write-off of deferred
tax assets, the Company was not in compliance with the require-
ments of the leverage ratio, as defined, and obtained a waiver
with respect thereto from its lenders through May 15, 1995. As
of January 31, 1995, the Company was in compliance with all other
covenants, including the thirty day "clean- down" requirement.
As of January 31, 1995, the Company had outstanding, net of
unamortized discount, $3.7 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.
GOING CONCERN, SUBSEQUENT EVENTS AND UNCERTAINTIES
Recent developments described below have led to uncertain-
ties as to the Company's ability to continue operations as a
going concern.
The Company has a highly leveraged capital structure with
total debt outstanding at April 30, 1995 of $207.3 million,
including current portion of long-term debt and amounts outstand-
ing under the Company's revolving credit facility. During each
of its fiscal years ending January 31, 1995 and 1994, the Company
recorded significant net losses which have produced a Sharehold-
ers' Deficit of $112.5 million at January 31, 1995 (See "Manage-
ment's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources"). Results of
operations and cash flows have been, and will continue to be,
affected by the increased interest expense and requirements for
debt repayments resulting from the Acquisition.
In order to repay the indebtedness incurred in connection
with the Acquisition, and its other indebtedness, the Company
will be required to generate substantial operating cash flow.
The ability of the Company to generate sufficient operating cash
flows and meet its debt service obligations within the required
contractual time frames is subject to both prevailing economic
conditions and to various business and other factors including,
among others, the Company's ability to increase operating profits
and cash flows, restructure its outstanding indebtedness, and/or
obtain alternative sources of financing. The ability of the
Company to improve its operating profits and cash flows cannot be
assured. In addition, there can be no assurance that the Company
will be able to restructure its outstanding indebtedness or
obtain new financing, or that, if such measures are available,
that the terms thereof would be favorable to the Company, its
shareholders, or the holders of its outstanding debt securities.
While the Company believes that, based upon its current
level of operations, it could meet its debt service obligations
within the required contractual time frames for the remainder of
fiscal year 1996, recent factors, including those discussed in
the following paragraphs and those discussed above raise
significant uncertainties as to its ability to effect the
repayment of its outstanding indebtedness within and beyond that
time frame.
During the quarter ended April 30, 1995, the Company
experienced an 8.9% decline in same-store revenues which it
attributes to the music industry's lack of new hit releases, a
decrease in the sales of video games and continued competitive
pressures in certain of its markets. As a result, the Company
has also experienced declining gross margins. While the Company
continues to exercise control over operating expenses and intends
to manage inventory investment through the use of improved
distribution systems and other working capital management
methods, any further significant decline in revenues or any
significant decreases in gross margins will result in a default
of the loan agreement covenants in fiscal year 1996 as well as
have a negative impact on its liquidity.
The Company is in the process of attempting to renegotiate
its loan agreements to allow it greater flexibility in meeting
certain of the financial covenants contained in the agreements,
however, there is no assurance that these negotiations will be
successful. The Company was not in compliance with its loan
agreement covenants at January 31, 1995, and as a result of the
above factors, among others, it appeared that the Company might
not be in compliance with certain covenants at April 30, 1995.
The Company requested and received from its senior lenders
waivers with respect to its loan agreement covenants through May
15, 1995, and, on May 11, 1995, the lenders extended the term of
these waivers through June 30, 1995. In connection with the
extension, the lenders required that the Company and WEI, among
other things, use their best efforts to develop and implement a
plan for the restructuring of their capital structure.
The financial statements have been prepared assuming that
the Company will continue as a going concern. The Company is
presently discussing further waivers of or amendments to its bank
agreement covenants for the remainder of fiscal year 1996.
However, the Company can give no assurances as to its ability to
obtain further waivers of or amendments to its bank agreement
covenants. If the Company is unable to obtain such waivers or
amendments, or is unable to satisfy the conditions under which
such waivers or amendments are issued, the lenders could suspend
or terminate the loan agreement and accelerate the amounts then
outstanding. Should the Company be unsuccessful in obtaining
additional waivers of or satisfactory amendments to its loan
agreement covenants, or if the Company's revenues continue to
decline, the Company's ability to continue operations as a going
concern would be uncertain and its continued viability could be
in jeopardy.
The financial statements do not include any adjustments that
might result from the outcome of these uncertainties, except for
$40 million of debt covered by the terms of the loan agreement
and $110 million of debt covered by senior indebtedness which
have been reclassified as current liabilities as of January 31,
1995. As a result of these and other factors, the Company's
independent auditors, Ernst & Young LLP, have included an
explanatory paragraph in their opinion on the Company's fiscal
1995 financial statements addressing uncertainties as to the
Company's ability to continue operations as a going concern.
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
The Company believes that inflation has not had a material
effect on 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 from interest rate fluctuations is
partially mitigated by an interest rate protection agreement with
a major financial institution covering approximately 40% of the
outstanding balance of the senior term loan through February,
1996. Such agreement limits the net interest cost to the Company
outside a specified range on the amounts covered by the agree-
ment.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements and Financial
Statement Schedules appearing on page F-0 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concern-
ing the persons who are directors and executive officers of the
Company:
Age at
April 30,
Name Position 1995
- ----------------- --------------------------------- -----
Jerry E. Goldress Chief Executive Officer, Chairman 64
of the Board and Director
Barbara C. Brown Senior Vice President, Sales and 43
Operations
Stephen P. Brown Senior Vice President, General 37
Merchandise Manager
Kathy J. Ford (a) Vice President, Chief Financial 47
Officer and Assistant Secretary
James J. Burke, Jr. Director 43
Gerald S. Armstrong Director 51
Rupinder S. Sidhu Director 38
Bradley J. Hoecker Director 33
--- (b) (c)
(a) Effective May 2, 1995, Kathy Ford became Vice President,
Chief Financial Officer of the Company. Prior to that, Ms.
Ford held the position of Vice President, Controller and
presently serves as Assistant Secretary.
(b) Does not include Scott Young who resigned on March 1, 1995.
Mr. Young held the position of Chief Executive Officer,
Chairman of the Board and Director of the Company. Upon Mr.
Young's resignation from these positions, Mr. Goldress was
elected Chief Executive Officer, Chairman of the Board and
Director of the Company.
(c) Does not include Anne McLaughlin who resigned as Vice
President, Treasurer and Secretary of the Company on April
19, 1995.
<PAGE>
Jerry E. Goldress, Chief Executive Officer, Chairman of the
Board and Director of the Company and WEI. Mr. Goldress origin-
ally 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.
In June 1994, Mr. Goldress assumed the position of Acting Chief
Financial Officer. On March 1, 1995, Mr. Goldress was elected
Chief Executive Officer, Chairman of the Board and Director of
the Company and WEI. 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, Inc. Mr. Goldress has been a general
partner of A&S since 1987. 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.
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. Ms.
Brown is the spouse of Mr. Stephen P. Brown, Senior Vice Presi-
dent, General Merchandise Manager.
Stephen P. Brown, Senior Vice President, General Merchandise
Manager of the Company. Mr. Brown joined the Company in 1980.
He became Vice President, Merchandise Allocation and Distribution
in 1993 and was promoted to Senior Vice President, General Merch-
andise Manager in 1994. Prior to 1993, Mr. Brown served in a
variety of store operations positions including Store Manager,
District Manager, Regional Manager, and Assistant Vice President,
Store Operations. Mr. Brown is the spouse of Ms. Barbara C.
Brown, Senior Vice President, Sales and Operations.
Kathy J. Ford, Vice President, Chief Financial Officer and
Assistant Secretary of the Company and WEI. Ms. Ford has been
with the Company since February 1988. She became Vice President,
Chief Financial Officer effective May 2, 1995, and prior to that
served as Vice President, Controller and as Assistant Vice
President, Assistant Controller. She is a member of the American
Institute of Certified Public Accountants and the California
Society of Certified Public Accountants.
James J. Burke, Jr., Director of the Company and WEI since
June 1992. Mr. Burke is a partner of Stonington Partners, Inc.
("SPI") and a consultant to MLCP. Mr. Burke has also been a
Director of MLCP since 1987 and a Managing Partner of MLCP from
199 to 1994, and President of MLCP from 1987 to 1994. Mr. Burke
was a Vice President of Merrill Lynch Pierce Fenner & Smith
Incorporated ("MLPF&S") from 1983 until 1988 and was a First Vice
President from 1988 to July 1994 and a Managing Director of
MLPF&S from 1985 to July 1994. Mr. Burke is a director of Amstar
Corporation, Borg-Warner Security Corporation, Supermarkets
General Holdings Corporation, AnnTaylor Stores Corporation, Path-
mark Stores, Inc., World Color Press, Inc. and United Artists
Theatre Circuit, Inc.
Gerald S. Armstrong, Director of the Company and WEI since
April 1993. Mr. Armstrong has been a partner and Director of SPI
since 1993 and is a consultant to MLCP. 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 from 1993 to July
1994. Mr. Armstrong was a Managing Director of the Investment
Banking Division of MLPF&S from November 1988 to July 1994. 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, 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 partner of SPI since 1993 and is a consultant to
MLCP. Mr. Sidhu has also been a Director of MLCP since 1987, was
a Senior Vice President of MLCP from 1987 until 1993 and was a
Partner of MLCP from 1993 to July 1994. Mr. Sidhu was a Managing
Director of MLPF&S from 1989 to July 1994, and was a Vice Presi-
dent of MLPF&S from 1984 until 1988. Mr. Sidhu is a Director of
Eckerd Corporation, Clinton Mills, Inc., First USA Bank and First
USA, Inc.
Bradley J. Hoecker, Director of the Company and WEI. Mr.
Hoecker has been a principal of SPI since 1993 and is a consul-
tant to MLCP. Mr. Hoecker was a Principal of MLCP from 1993 to
July 1994. Mr. Hoecker was an Associate of MLCP from 1989 to
1993 and of MLPF&S from 1989 to July 1994. 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.
Under the Stockholders' Agreement (See Item 13 of this
Annual Report), if any of the directors are unwilling or unable
to serve, or otherwise cease to serve, as directors of WEI, then
the shareholders of WEI 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>
Item 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for the fiscal years ended
January 31, 1995, January 31, 1994, and January 31, 1993, 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 Mdm. Brown and Mr. 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, 1995 (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,
Inc., 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 ($)(c) ($) ($) Options ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jerry E. Goldress (a) 1995 375,000 --- --- --- ---
Chairman, Chief 1994 100,000 --- --- --- 150,000 (m)
Executive Officer 1993 105,931 --- --- --- 135,000 (n)
Barbara C. Brown 1995 165,000 --- 18,457 (d) --- 7,212 (o)
Senior Vice President, 1994 155,625 --- 18,457 (e) --- 23,191 (p)
Sales and Operations 1993 131,348 6,022 20,009 (f) 13,500 12,735 (q)
Stephen P. Brown 1995 114,615 --- --- --- 4,242 (r)
Senior Vice President, 1994 84,629 500 --- --- 15,219 (s)
General Merchandise 1993 57,558 2,311 --- 1,735 1,212 (t)
Manager
Kathy J. Ford 1995 110,500 --- 14,707 (g) --- 4,893 (u)
Vice President, 1994 104,310 --- 14,707 (h) --- 10,005 (v)
Chief Financial 1993 89,040 10,452 15,663 (i) 5,205 5,400 (w)
Officer, and
Assistant Secretary
Scott Young (b) 1995 421,147 --- 45,962 (j) --- 31,125 (x)
Chairman, Chief 1994 421,155 --- 45,962 (k) --- 35,428 (y)
Executive Officer 1993 357,040 13,425 243,839 (l) 67,000 26,007 (z)
/TABLE
<PAGE>
(a) Mr. Goldress was elected Chairman and Chief Executive
Officer on March 1, 1995. During all of fiscal 1995 and
until March 1, 1995, he served as President and Chief
Operating Officer. From June 1994 until March 1, 1995, he
served as Acting Chief Financial Officer.
(b) Mr. Young resigned as Chairman and Chief Executive Officer
on March 1, 1995.
(c) 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 $9,240 in fiscal 1995.
(d) Includes an $11,257 bonus to cover interest expense on Ms.
Brown's Management Note (see Item 13, below), with a "gross-
up" to cover income taxes related to the bonus. Also
included is a $7,200 automobile allowance.
(e) Includes an $11,257 bonus to cover interest expense on Ms.
Brown's Management Note (see Item 13, below), with a "gross-
up" to cover income taxes related to the bonus. Also
included is a $7,200 automobile allowance.
(f) 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 Item 13, below), with a "gross-up" to cover income
taxes related to the bonus. Also included is a $7,200
annual automobile allowance.
(g) Includes a $7,507 bonus to cover interest expense on Ms.
Ford's Management Note (see Item 13, 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 Item 13, 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
Item 13, below), with a "gross-up" to cover income taxes
related to the bonus.
(j) Includes a $38,762 bonus to cover interest expense on Mr.
Young's Management Note (see Item 13, below), with a "gross-
up" to cover income taxes related to the bonus.
(k) Includes a $38,762 bonus to cover interest expense on Mr.
Young's Management Note (see Item 13, below), with a "gross-
up" to cover income taxes related to the bonus.
(l) 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.
(m) Includes payments made to Mr. Goldress's consulting company
for services related to the 1994 Re-engineering Plan.
(n) Payment made to Mr. Goldress in connection with the Acquisi-tion.
(o) Includes $3,622 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 $1,762 for
matching contributions to the Company's 401(k) plan made on
behalf of Ms. Brown.
(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 $1,678 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 $1,817 for
matching contributions to the Company's 401(k) plan made on
behalf of Ms. Brown.
(r) Includes $1,032 paid on behalf of Mr. Brown and his family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $2,079 of
premiums paid for term life insurance and $1,131 for
matching contributions to the Company's 401(k) plan made on
behalf of Mr. Brown.
(s) Includes $14,273 paid on behalf of Mr. Brown and his family
for medical expenses not covered by the Company's group
medical insurance plan. Also included is $946 for matching
contributions to the Company's 401(k) plan made on behalf of
Mr. Brown.
(t) Includes $1,212 for matching contributions to the Company's
401(k) plan made on behalf of Mr. Brown.
(u) Includes $194 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 $1,217 for matching contribu-
tions to the Company's 401(k) plan made on behalf of Ms.
Ford.
(v) 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 $1,201 for
matching contributions to the Company's 401(k) plan made on
behalf of Ms. Ford.
(w) Includes $2,611 of premiums paid for term life insurance.
Also included are $992 paid on behalf of Ms. Ford and her
family for medical expenses and $1,797 for matching contri-
butions to the Company's 401(k) plan made on behalf of Ms.
Ford.
(x) Includes $12,821 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 $3,952 for
matching contributions to the Company's 401(k) plan made on
behalf of Mr. Young.
(y) 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 $4,211 for
matching contributions to the Company's 401(k) plan made on
behalf of Mr. Young.
(z) 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 $1,962 for matching contri-
butions to the Company's 401(k) plan made on behalf of Mr.
Young.
<PAGE>
<PAGE>
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table sets forth information regarding WEI
stock options granted in fiscal year 1995:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Potential
Total Realizable
Number of Options/ Value of Assumed
Securities SAR's Exercise Annual Rates of
Underlying to or Stock Price
Options/ Employees Base Appreciation
SAR's in Price Expira- for Option Term(b)
Granted Fiscal ($/ tion --------------------
Name (#) Year Share) Date 5%($) 10%($)
- -------- --------- -------- ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jerry E.
Goldress 30,000(a) 100.00% $44.00 10/1/03 $720,000 $1,833,000
(a) Represents options that were fully vested on the date of
grant. Such options are non-transferable other than to Mr.
Goldress' estate.
(b) No market exists for WEI's Common Stock. While the Company
believes that the market values of WEI's Common Stock would
be substantially below the $44.00 per share exercise price,
potential realizable values are based upon the $44.00 price.
</TABLE>
FISCAL YEAR-END OPTION VALUES
No options were exercised by any of the named executive
officers during fiscal 1995. 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, 1995. No
market exists for WEI's Common Stock. The Company believes that
at January 31, 1995, none of these options were "in-the-money
options."
<PAGE>
<TABLE>
FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Securities
Underlying
Unexercised Options
at Fiscal Year End
Name Exercisable Unexercisable
- --------------------------------------------------
<S> <C> <C>
Jerry E. Goldress 30,000 ---
Barbara C. Brown 9,900 3,600
Stephen P. Brown 1,213 522
Kathy J. Ford 3,639 1,566
Scott Young 51,700 15,300
</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.
EMPLOYMENT AGREEMENTS
Prior to his resignation on March 1, 1995, Mr. Young's
employment was governed by an employment agreement between the
Company and Mr. Young. The agreement provided for, among other
things, a base salary of $300,000 (which could be increased, but
not decreased, at the discretion of the Board of Directors of the
Company, and which was to be adjusted to account for the effects
of inflation) and annual bonuses at the discretion of the Board
of Directors of the Company. The employment agreement provided
that he would receive severance payments equal to his base salary
for a period of two years, unpaid base salary with respect to
periods prior to the date of termination and a pro rata portion
of Mr. Young's bonus compensation for the fiscal year during
which such termination occurs, with continued welfare benefit
coverage until the expiration of the employment agreement. The
Company and Mr. Young are presently engaged in discussions
regarding the settlement of his employment contract.
Mr. Goldress serves as Chairman of the Board and Chief
Executive Officer of the Company under a consulting agreement, as
amended, effective March 1, 1995 with Grisanti, Galef & Goldress,
Inc., a management consulting firm in which Mr. Goldress is a
principal. The consulting agreement expires on October 1, 1997,
and provides for monthly consulting fees totaling $450,000 per
year and a $50,000 payment upon execution of the contract, which
sum was paid on April 7, 1995.
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 1995 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.
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>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
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 Common Stock, par value $0.01 per share of WEI (the "WEI
Common Stock") is the only outstanding class of its voting
securities. The following table sets forth, as of January 31,
1995, 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 beneficially 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 77.1%
767 Fifth Avenue
New York, New York 10153
Merrill Lynch & Co., Inc.(1)(3) 452,269 19.2%
250 Vesey Street
North Tower - World Financial Center
New York, New York 10281
Jerry E. Goldress(4) 30,000 1.3%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Barbara C. Brown(5) 21,147 0.9%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Stephen P. Brown(6) 1,909 0.1%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Kathy J. Ford(7) 6,138 0.3%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Scott Young(8) 117,986 4.9%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
<PAGE>
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) (8 persons) 177,180 7.2%
</TABLE>
<PAGE>
(1) Entities affiliated with Merrill Lynch & Co., Inc., includ-
ing MLCP, beneficially own an aggregate of 2,272,727 shares,
which represents approximately 96% of the outstanding WEI
Common Stock at January 31, 1995.
(2) MLCP is a subsidiary of Merrill Lynch Group, Inc. which is
wholly-owned by Merrill Lynch & Co., both of which are
affiliates of MLPF&S. Shares of WEI Common Stock are
beneficially owned by MLCP and owned of record (and benefi-
cially) 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
(and beneficially) 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) Mr. Goldress' options have been granted pursuant to an
agreement dated January 17, 1995 by and between Mr. Goldress
and WEI. The options are non-qualified and have not been
issued pursuant to the WEI Management Stock Option Plan.
Mr. Goldress' options are fully vested and exercisable, and
the term of the options expire on October 1, 2003.
(5) Includes 9,900 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Also includes 1,990 shares which are referred
to as "Unvested WEI Common Stock" in Item 13 of this Annual
Report and 2,274 shares pledged to WEI as security for Ms.
Brown's Management Note (see Item 13 of this Annual Report).
(6) Includes 1,213 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Also includes 134 shares which are referred to
as "Unvested WEI Common Stock" in Item 13 of this Annual
Report and 302 shares pledged to WEI as security for Mr.
Brown's Management Note (see Item 13 of this Annual Report).
(7) Includes 3,639 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Also includes 515 shares which are referred to
as "Unvested WEI Common Stock" in Item 13 of this Annual
Report and includes 1,516 shares pledged to WEI as security
for Ms. Ford's Management Note (see Item 13 of this Annual
Report).
(8) Includes 51,700 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Also includes 11,226 shares of WEI Common
Stock owned by Mr. Young which are referred to as "Unvested
WEI Common Stock" in Item 13 of this Annual Report and 7,728
shares pledged to WEI as security for Mr. Young's Management
Note (see Item 13 of this Annual Report).
(9) Messrs. Burke, Armstrong, Sidhu and Hoecker are directors of
the Company and WEI and officers of MLCP and Merrill Lynch &
Co., Inc. Messrs. Burke, Armstrong and Sidhu are each
directors of MLCP and may be deemed to beneficially own all
of the 1,820,458 shares of Common Stock beneficially owned
by MLCP. Furthermore, MLCP is part of a group of affiliates
of Merrill Lynch & Co. that beneficially owns 2,272,727
shares of the Company's common stock. Messrs. Burke,
Armstrong, and Sidhu each disclaim beneficial ownership of
these shares.
(10) Includes 67,252 shares subject to vested options under the
WEI Management Stock Option Plan which are currently exer-
cisable. Includes 13,865 shares which are referred to as
"Unvested WEI Common Stock" in Item 13 of this Annual
Report. 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 (see Item 7 of this
Annual Report), 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.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the Acquisition described in Item 1 of
this Annual Report, certain members of management (the "Manage-
ment 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 follow-
ing 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 begin-
ning of the last fiscal year. The Management Notes bear interest
at the rate of 7% per annum:
Name Principal Balance
Scott Young $340,000
Barbara C. Brown 99,867
Kathy J. Ford 66,600
Stephen P. Brown 13,300
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, 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 Manage-
ment 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 Item 3 of this Annual Report.
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.
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 in the event that 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 shall 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 direc-
tors 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.
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. During fiscal 1995, $375,000 was paid under this agree-
ment. Subsequent to January 31, 1995 and in connection with the
resignation of Scott Young as Chief Executive Officer of the
Company, the Company amended its consulting agreement with
Grisanti, Galef & Goldress. The amended agreement expires on
October 1, 1997 and provides for a $50,000 payment upon execution
and specifies monthly payments totaling $450,000 per year.
<PAGE>
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) Documents filed as part of this report.
1. Financial statements.
See Index to Financial Statements and Financial Statement
Schedules which appears on page F-0 hereof.
2. Financial statement schedules.
See Index to Financial Statements and Financial Statement
Schedules which appears on page F-0 hereof.
All other schedules are omitted as the required information
is inapplicable or the information is presented in the consoli-
dated financial statements or related notes.
3. Exhibits
2.1 Merger Agreement, dated as of May 5, 1992, by
and among Grammy Corp., WEI, the Company and
A&S. Incorporated by reference to Exhibit 1
of the Company's Current Report on Form 8-K
dated May 6, 1992.
3.1 Restated Certificate of Incorporation of the
Company. Incorporated be reference to Exhi-
bit 3.1 of the Company's Annual Report on
Form 10-K for the year ended January 31, 1988
(the "1988 Report").
3.2 By-laws of the Company. Incorporated by
reference to Exhibit 3.2 of the 1988 Report.
3.3 Restated Certificate of Incorporation of WEI.
Incorporated by reference to Exhibit 2.2 of
the Company's Registration statement on Form
S-1, Registration No. 335166 (the "Registra-
tion Statement").
3.4 By-laws of WEI. Incorporated by reference to
Exhibit 3.4 of the Registration Statement.
4.1 Indenture, dated as of June 15, 1986, between
the Company and Bank of America National
Trust and Savings Association. Incorporated
by reference to Exhibit 4(a) of the Company's
Registration Statement on Form S-2, Registra-
tion No. 33-6485.
4.2 First Supplemental Indenture, dated as of
February 11, 1988, between the Company and
Bank of America National Trust and Savings
Association. Incorporated by reference to
Exhibit 4.2 of the 1988 Report.
4.3 Specimen of 13% Senior Subordinated Notes due
2002, Series B. Incorporated by reference to
Exhibit 4.3 of the Registration Statement.
4.4 Indenture, dated as of June 11, 1992, among
Grammy Corp., the Company and the Trustee
relating to the Notes. Incorporated by
reference to Exhibit 4(e) of the Company's
Quarterly Report on Form 10-Q for the quarter
ended April 30, 1992 (the "1992 10-Q").
4.5 Supplemental Indenture, dated as of June 11,
1992, among the Company, WEI and the Trustee
relating to the Notes. Incorporated by
reference to Exhibit 4.5 of the Registration
Statement.
4.6 Securities Purchase Agreement, dated as of
June 11, 1992, among Grammy Corp., the
Company and the purchasers of the Old Notes.
Incorporated by reference to Exhibit 4(f) of
the 1992 10-Q.
4.7 Securities Purchase Assumption Agreement,
dated as of June 11, 1992, executed by the
Company and WEI. Incorporated by reference
to Exhibit 4.7 of the Registration Statement.
4.8 Registration Rights Agreement, dated as of
June 11, 1992, among Grammy Corp., the
Company and the purchasers of the Old Notes.
Incorporated by reference to Exhibit 4(g) of
the 1992 10-Q.
4.9 Registration Rights Assumption Agreement,
dated as of June 11, 1992, executed by the
Company and WEI relating to the Old Notes.
Incorporated by reference to Exhibit 4.9 of
the Registration Statement.
10.1* Employment Agreement, dated as of June 11,
1992, between the Company and Scott Young.
Incorporated by reference to Exhibit 10.1 of
the Company's Annual Report on Form 10-K for
the year ended January 31, 1993 ("The 1993
Report").
10.2 Office lease dated as of October 23, 1985, by
and between the Company, as lessee, and
Patrician Associates, Inc. and OMA Harbor
Tech H. Associates, as lessors. Incorporated
by reference to Exhibit 10(u) of the Compa-
ny's Report on Form 10-K for the seven months
ended January 31, 1986.
10.3 Single Tenant Industrial Lease, dated Novem-
ber 5, 1991, by and between Watson Land
Company, as lessor, and the Company, as
lessee. Incorporated by reference to Exhibit
10.6 of the 1992 Report.
10.4* WEI Holdings, Inc. 1988 Employee Stock
Purchase and Option Plan. Incorporated by
reference to Exhibit 10.33 of the Annual
Report on Form 10-K for the year ended
January 31, 1989.
10.5* WEI Holdings, Inc. 1990 Employee Stock
Purchase and Option Plan. Incorporated by
reference to Exhibit 10.37 of the 1991
Report.
10.6 Escrow Agreement, dated June 11, 1992, among
A&S, as Representative, WEI and Chase Manhat-
tan Bank, N.A., as Escrow Agent. Incorporated
by reference to Exhibit 10.24 of the Regis-
tration Statement.
10.7 ML Stock Subscription Agreement, dated as of
June 11, 1992, among Grammy Corp. and the ML
Investors listed in Schedule I thereto.
Incorporated by reference to Exhibit 10.25 of
the Registration Statement.
10.8* Management Stock Subscription Agreement,
dated as of June 11, 1992, among Grammy Corp.
and the Management Investors listed on the
signature pages thereto. Incorporated by
reference to Exhibit 10.26 of the Registra-
tion Statement.
10.9 Form of Management Note. Incorporated by
reference to Exhibit 10.27 of the Registra-
tion Statement.
10.10 Form of Stock Pledge Agreement. Incorporated
by reference to Exhibit 10.28 of the Regis-
tration Statement.
10.11* Stockholders' Agreement, dated as of June 11,
1992, among WEI, the Management Investors
listed in Schedule I thereto and the ML
Investors listed in Schedule II thereto.
Incorporated by reference to Exhibit 10.29 of
the Registration Statement.
10.12* WEI Management Stock Option Plan, effective
June 11, 1992. Incorporated by reference to
Exhibit 10.30 of the Registration Statement.
10.13* Form of Incentive Option Agreement. Incorpo-
rated by reference to Exhibit 10.31 of the
Registration Statement.
10.14* Form of Performance Option Agreement. Incor-
porated by reference to Exhibit 10.32 of the
Registration Statement.
10.15 Bank Credit Agreement, dated as of June 11,
1992, among the Company, WEI and Bankers
Trust Company, as Agent and Heller Financial,
Inc. as Co-Agent, including all exhibits
thereto. Incorporated by reference to Exhi-
bit 4(a) of the 1992 10-Q.
10.16 Borrower Security Agreement, dated as of June
11, 1992, by and between the Company and
Bankers Trust Company, as collateral agent
for and representative of the Lenders. Incor-
porated by reference to Exhibit 4(b) of the
1992 10-Q.
10.17 Holdings Security Agreement, dated as of June
11, 1992, by and between WEI and Bankers
Trust Company, as collateral agent for and
representative of the Lenders. Incorporated
by reference to Exhibit 4(c) of the 1992
10-Q.
10.18 Holdings Pledge Agreement, dated as of June
11, 1992, by and between WEI and Bankers
Trust Company, as collateral agent for a
representative of the Lenders. Incorporated
by reference to Exhibit 4(d) of the 1992
10-Q.
10.19 First Amendment to Credit Agreement dated
November 17, 1992, 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 10.40 of the 1993 Report.
10.20 Second Amendment to Credit Agreement dated
August 17, 1993, 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 10.44 of the Company's Quarterly
Report on Form 10-Q for the quarter ended
July 31, 1993 (the "1993 10-Q").
10.21 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").
10.22* Fiscal 1993 Corporate Incentive Compensation
Plan. Incorporated by reference to Exhibit
10.41 of the 1993 Report.
10.23 Master Lease Agreement dated October 13,
1992, between United States Leasing Corpora-
tion, as Lessor, and the Company, as Lessee.
Incorporated by reference to Exhibit 10.42 of
the 1993 Report.
10.24 Equipment Lease Agreement dated December 21,
1992, between General Electric Capital Corpo-
ration, as Lessor, and the Company, as
Lessee. Incorporated by reference to Exhibit
10.43 of the 1993 Report.
10.25 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 1994 Report.
10.26 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
1994 Report.
10.27 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
1994 Report.
10.28 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
1994 Report.
10.29 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 1994 Report.
10.30 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 1994 Report.
10.31* Fiscal 1994 Corporate Incentive Compensation
Plan. Incorporated by reference to Exhibit
10.39 of the 1994 Report.
10.32 Letter agreement, dated May 11, 1994, between
the Company and GGG, Inc. Incorporated by
reference to Exhibit 10.40 of the Company's
Quarterly Report on Form 10-Q for the quarter
ended April 30, 1994 (the "1994 10-Q").
10.33** Resignation of Employment Agreement, dated
June 15, 1994, between the Company and Cathy
L. Wood.
10.34** Amendment to consulting agreement, dated
April 5, 1995, between the Company and
Grisanti, Galef & Goldress, Inc.
10.35** Amendment to WEI Management Stock Option
Plan, dated January 18, 1995.
10.36** Limited Waiver Regarding Maximum Permitted
Leverage Ratio, dated April 12, 1995, between
the Company, WEI, Bankers Trust Company,
Individually and as Agent, Heller Financial,
Inc., United States National Bank of Oregon,
and Prime Income Trust.
10.37** Agreement dated July 1, 1994, between The
Future Now, Inc. and the Company.
10.38** Fifth Amendment to Lease dated December 23,
1994, by and between the Company, as lessee,
and Patrician Associates, Inc. and OMA Harbor
Tech H. Associates, as lessors.
10.39* Fiscal 1995 Corporate Incentive Compensation
** Plan.
10.40** Non-Qualified Stock Options Agreement dated
January 17, 1995, between WEI and Jerry E.
Goldress.
10.41** Limited Waiver, dated May 11, 1995, between
the Company, WEI, Bankers Trust Company,
Individually and as Agent, Heller Financial,
Inc., United States National Bank of Oregon,
and Prime Income Trust.
12.1** Computation of ratio of earnings to fixed
charges.
21.1 Subsidiaries of the Company and WEI.
27.0** Financial Data Schedule.
(b) Current Reports on Form 8-K.
A Current Report on Form 8-K, dated March 1, 1995, was
filed by the Company with the Securities and Exchange Commission
on March 3, 1995 to report under "Item 5. - Other Events" the
resignation of the Company's Chairman and Chief Executive
Officer.
A Current Report on Form 8-K, dated April 13, 1995, was
filed by the Company with the Securities and Exchange Commission
on April 14, 1995 to report under "Item 5. - Other Events" the
Company's preliminary year-end results.
_______________
* Management contract or compensatory plan or arrangement
** Filed herewith
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrants has duly caused
this report to be signed on its behalf by the undersigned, there-
unto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: May 15, 1995 By: /s/ Jerry E. Goldress
------------------------------
Jerry E. Goldress
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:
WHEREHOUSE ENTERTAINMENT, INC.
Signature Title Date
- --------- ----- ----
/s/ Jerry E. Goldress Chairman of the Board, May 15, 1995
- ------------------------ Chief Executive Officer
Jerry E. Goldress and Director
(Principal Executive
(Officer)
/s/ Kathy J. Ford Vice President, Chief May 15, 1995
- ------------------------ Financial Officer and
Kathy J. Ford Assistant Secretary
(Principal Financial
and Accounting Officer)
/s/ James J. Burke, Jr. Director May 15, 1995
- ------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong Director May 15, 1995
- ------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu Director May 15, 1995
- ------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker Director May 15, 1995
- ------------------------
Bradley J. Hoecker
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAS NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to the
security holders of the registrant.
<PAGE>
Financial Statements
Wherehouse Entertainment, Inc.
January 31, 1995
with Report of Independent Auditors
<PAGE>
<page-F-0>
WHEREHOUSE ENTERTAINMENT, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
January 31, 1995
CONTENTS
Report of Independent Auditors...............................F-1
Financial Statements
Balance Sheets at January 31, 1995 and 1994 (Company)........F-3
Statements of Operations for the years ended
January 31, 1995 and 1994 (Company) and the
Eight (Company) and Four Month (Predecessor)
Periods ended January 31, 1993 and May 31, 1992,
respectively...............................................F-5
Statements of Changes in Shareholder's (Deficit)
Equity for the years ended January 31, 1995
and 1994 (Company) and the Eight (Company)
and Four Month (Predecessor) Periods ended
January 31, 1993 and May 31, 1992,
respectively...............................................F-6
Statements of Cash Flows for the years ended
January 31, 1995 and 1994 (Company) and the
Eight (Company) and Four Month (Predecessor)
Periods ended January 31, 1993 and May 31, 1992,
respectively...............................................F-7
Notes to Financial Statements ...............................F-9
Financial Statement Schedule for the years ended January 31, 1995
and 1994 (Company) the Eight (Company) and Four Month (Predeces-
sor) Periods ended January 31, 1993 and May 31, 1992, respec-
tively
VIII Valuation and Qualifying Accounts....................F-27
All other schedules have been omitted because they are not
required under the related instructions or are inapplicable, or
because the required information is included elsewhere in the
financial statements.
F-0<PAGE>
<page-F-1>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wherehouse Entertainment, Inc.
We have audited the accompanying balance sheets of Wherehouse
Entertainment, Inc. as of January 31, 1995 and 1994 (Company) and
the related statements of operations, shareholder's (deficit)
equity, and cash flows for the years ended January 31, 1995 and
1994 and the eight months ended January 31, 1993 (Company) and
the four months ended May 31, 1992 (Predecessor). Our audits
also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibil-
ity is to express an opinion on these financial statements and
schedule 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, 1995 and 1994
(Company), and the results of its operations and its cash flows
for the years ended January 31, 1995 and 1994, the eight months
ended January 31, 1993 (Company), the four months ended May 31,
1992 (Predecessor) in conformity with generally accepted
accounting principles. Also, in our opinion, the related finan-
cial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
F-1
<PAGE>
<page-F-2>
The accompanying financial statements have been prepared assuming
that Wherehouse Entertainment, Inc. will continue as a going
concern. As more fully described in Note 2, the Company has
incurred recurring operating losses and was in violation of a
loan covenant at January 31, 1995. Although the lender waived
the violation through June 30, 1995, the Company is projecting
future violations of covenants under the loan agreements. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. As a result of the
violation of the loan covenant and projected future violations
under loan agreements, $150,000,000 of debt has been reclassified
as a current liability as of January 31, 1995. The financial
statements do not include any additional adjustments to reflect
the possible future effects on the recoverability and classi-
fication of assets or the amounts and classification of other
liabilities that may result from the outcome of this uncertainty.
As discussed on Note 1 to the financial statements, in 1995 the
Company changed its method of accounting for the impairment of
long-lived assets.
ERNST & YOUNG LLP
April 14, 1995, except for Note 2,
as to which the date is May 11, 1995
F-2
<PAGE>
<page-F-3>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
BALANCE SHEETS
<CAPTION>
January 31
1995 1994
----------------------------
<S> <C> <C>
Assets (Note 6)
Current assets:
Cash $ 1,962,000 $ 3,120,000
Receivables 3,155,000 2,802,000
Taxes receivable 1,500,000 5,000,000
Merchandise inventory 115,639,000 113,592,000
Deferred income taxes (Note 8) - 4,402,000
Other current assets 2,743,000 2,573,000
----------------------------
Total current assets 124,999,000 131,489,000
Rental inventory, net of
accumulated amortization of
$40,984,000 (1995) and
$38,966,000 (1994) 16,093,000 11,689,000
Equipment and improvements,
at cost (Note 6):
Leasehold improvements 29,911,000 25,136,000
Data processing equipment and
software 22,368,000 19,813,000
Store and office fixtures and
equipment 22,207,000 20,273,000
Buildings and improvements 1,492,000 1,495,000
Land 683,000 683,000
----------------------------
76,661,000 67,400,000
Accumulated depreciation and
amortization 29,126,000 20,239,000
----------------------------
47,535,000 47,161,000
Intangible assets:
Excess of cost over fair value
of net assets acquired, net
of accumulated amortization
of $5,873,000 (1994) - 142,932,000
<PAGE>
Financing costs and leasehold
interests, net of accumulated
amortization of $2,815,000 (1995)
and $1,226,000 (1994) 8,317,000 9,905,000
----------------------------
8,317,000 152,837,000
Deferred income taxes (Note 8) - 6,774,000
Other assets 736,000 1,425,000
----------------------------
Total assets $197,680,000 $351,375,000
============================
See accompanying notes.
</TABLE>
F-3
<PAGE>
<page-F-4>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
BALANCE SHEETS
<CAPTION>
January 31
1995 1994
----------------------------
<S> <C> <C>
Liabilities and shareholder's
(deficit) equity
Current liabilities:
Short-term borrowings (Note 5) $ 15,800,000 $ 4,000,000
Accounts payable and bank
overdraft 74,984,000 80,935,000
Interest payable 7,772,000 8,122,000
Sales taxes payable 3,004,000 3,025,000
Other accrued expenses 26,778,000 22,781,000
Current portion of capital
lease obligations and
long-term debt (Note 6) 9,811,000 7,772,000
Long-term debt classified as
current (Notes 2 and 6) 150,000,000 -
----------------------------
Total current liabilities 288,149,000 126,635,000
Long-term debt (Note 6) 3,892,000 163,699,000
Other long-term liabilities 10,895,000 7,426,000
Convertible subordinated
debentures (Note 7) 3,716,000 3,635,000
Deferred income taxes (Note 8) 3,477,000 -
Commitments and contingencies
(Notes 9, 10 and 11)
Shareholder's (deficit) equity:
Common stock, $.01 par value,
1,000 shares authorized,
10 issued and outstanding - -
Additional paid-in capital 95,671,000 95,855,000
Accumulated deficit (208,120,000) (45,875,000)
----------------------------
Total shareholder's (deficit)
equity (112,449,000) 49,980,000
----------------------------
Total liabilities and
shareholder's (deficit) equity $197,680,000 $351,375,000
============================
</TABLE>
F-4
<PAGE>
<page-F-5>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Company Predecessor
--------------------------------------------- ------------
Eight Months Four Months
Ended Ended
Year Ended January 31, January 31, May 31,
1995 1994 1993 1992
--------------------------------------------- ------------
<S> <C> <C> <C> <C>
Sales $ 409,484,000 $380,202,000 $249,113,000 $105,349,000
Rental Revenue 90,141,000 91,584,000 64,293,000 29,762,000
--------------------------------------------- ------------
499,625,000 471,786,000 313,406,000 135,111,000
Cost of sales 262,616,000 247,997,000 155,172,000 66,904,000
Cost of rentals, including
amortization 34,973,000 50,837,000 24,805,000 7,272,000
--------------------------------------------- ------------
297,589,000 298,834,000 179,977,000 74,176,000
Selling, general and
administrative expenses 188,740,000 196,622,000 122,877,000 59,851,000
Restructuring charges
(Note 3) - 14,259,000 - -
Goodwill impairment 139,493,000 - - -
--------------------------------------------- ------------
(Loss) income from
operations (126,197,000) (37,929,000) 10,552,000 1,084,000
Interest expense 23,194,000 23,525,000 15,703,000 4,928,000
Other income (153,000) (318,000) (44,000) (9,000)
--------------------------------------------- ------------
23,041,000 23,207,000 15,659,000 4,919,000
--------------------------------------------- ------------
Loss before income
taxes (149,238,000) (61,136,000) (5,107,000) (3,835,000)
--------------------------------------------- ------------
Provision (benefit) for
income taxes (Note 8) 13,007,000 (19,077,000) (1,291,000) (1,859,000)
--------------------------------------------- ------------
Loss before extraordinary
item (162,245,000) (42,059,000) (3,816,000) (1,976,000)
Extraordinary item less
income taxes (Note 1) - - - 4,526,000
--------------------------------------------- ------------
Net loss $(162,245,000) $ (42,059,000) $ (3,816,000) $(6,502,000)
============================================= ============
See accompanying notes.
</TABLE>
F-5
<PAGE>
<page-F-6>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S (DEFICIT) 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, 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)
-----------------------------------------------------------------
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
Dividend - - (184,000) - (184,000)
Net loss - - - (162,245,000) (162,245,000)
-----------------------------------------------------------------
Balance, January 31, 1995 10 $ - $ 95,671,000 $(208,120,000) $(112,449,000)
=================================================================
See accompanying notes.
</TABLE>
F-6
<PAGE>
<page-F-7>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Company Predecessor
------------------------------------------ ------------
Eight Months Four Months
Ended Ended
Year Ended January 31, January 31, May 31,
1995 1994 1993 1992
------------------------------------------ ------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $(162,245,000) $ (42,059,000) $ (3,816,000) $ (6,502,000)
Adjustments to reconcile net
loss to net cash provided
by (used in) operating
activities:
Depreciation and
amortization 47,142,000 70,530,000 33,197,000 11,911,000
Extraordinary item -
write-off of unamortized
acquisition financing costs - - - 5,430,000
Book value of rental
inventory dispositions 8,866,000 6,983,000 8,251,000 2,669,000
Noncash portion of
restructuring charges - 13,590,000 - -
Write-off of goodwill 139,493,000 - - -
Other (3,000) 32,000 62,000 9,000
Deferred taxes 14,653,000 (14,667,000) (3,395,000) (1,738,000)
Changes in operating assets
and liabilities:
Receivables (353,000) 1,087,000 206,000 (2,400,000)
Taxes receivable 3,500,000 (4,555,000) - -
Merchandise inventory (2,047,000) (3,135,000) (24,423,000) (224,000)
Other current assets (170,000) (750,000) 394,000 (458,000)
Accounts payable, accrued
expenses and other
liabilities 1,497,000 10,279,000 37,259,000 (27,896,000)
Rental inventory
purchases (39,201,000) (30,222,000) (20,294,000) (7,917,000)
------------------------------------------ ------------
Net cash provided by (used in)
operating activities 11,132,000 7,113,000 28,441,000 (27,116,000)
Investing activities
Payment for purchase of Company,
net of cash acquired - - (125,796,000) -
Proceeds from sale of assets 4,000 1,042,000 - -
Acquisition of property,
equipment and improvements (15,667,000) (11,784,000) (6,374,000) (2,935,000)
Purchase of certain assets of
The Record Shop, Inc. (735,000) (6,745,000) - -
Purchase of certain assets of
Pegasus Music and Video, Inc. - (5,502,000) - -
Decrease (increase) in other
assets and intangibles 262,000 (1,844,000) (1,028,000) 39,000
------------------------------------------ ------------
Net cash used in investing
activities (16,136,000) (24,833,000) (133,198,000) (2,896,000)
</TABLE>
F-7
<PAGE>
<page-F-8>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
Company Predecessor
------------------------------------------ ------------
Eight Months Four Months
Ended Ended
Year Ended January 31, January 31, May 31,
1995 1994 1993 1992
------------------------------------------ ------------
<S> <C> <C> <C> <C>
Financing activities
Short-term borrowings
(payments), net $ 11,800,000 $ (2,550,000) $ (19,527,000) $ 37,700,000
Long-term debt - - 175,000,000 -
Principal payments on
capital lease obligations
and long-term debt (7,769,000) (10,582,000) (116,907,000) (3,462,000)
Equity contribution - 30,000,000 70,273,000
Capital contribution - - 380,000 -
Dividend paid to WEI
Holdings, Inc. (185,000) (490,000) - -
------------------------------------------ ------------
Net cash provided by
financing activities 3,846,000 16,378,000 109,219,000 34,238,000
------------------------------------------ ------------
Net (decrease) increase
in cash (1,158,000) (1,342,000) 4,462,000 4,226,000
Cash at beginning of period 3,120,000 4,462,000 - 171,000
------------------------------------------ ------------
Cash at end of period $ 1,962,000 $ 3,120,000 $ 4,462,000 $ 4,397,000
========================================== ============
<PAGE>
Supplemental disclosure of
cash flow information:
Cash paid (received)
during the period for:
Interest $ 20,554,000 $ 22,448,000 $ 5,643,000 $ 4,271,000
Income taxes (5,146,000) 164,000 (63,000) 4,762,000
Supplemental disclosure of noncash investing and financing activities:
Capital lease obligations of $483,000 in the twelve months ended January 31, 1994
and $3,545,000 in the eight months ended January 31, 1993 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.
See accompanying notes.
</TABLE>
F-8
<PAGE>
<page-F-9>
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
January 31, 1995
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 sharehold-
ers' 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 (91.8%) and
certain members of management (8.2%) on a fully diluted basis at
January 31, 1995. Currently, WEI conducts no independent opera-
tions 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.
F-9
<page-F-10>
1. Basis of Presentation and Significant Accounting Policies
(continued)
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 acceler-
ated 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 carry-
ing value of existing rental inventory. The charge was accounted
for as a change in estimate and was recorded as additional amor-
tization expense included in "cost of rentals" on the accompany-
ing 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 amortization, 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-10
<PAGE>
<page-F-11>
1. Basis of Presentation and Significant Accounting Policies
(continued)
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 - 10 *
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 10 years.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess cost over the fair value of net assets acquired (or good-
will) was amortized on a straight-line basis over 40 years,
through January 31, 1995. In connection with the adoption of
Statement of Financial Accounting Standards No. 121, "Accounting
of the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (Statement No. 121), during the fourth quarter
of fiscal year 1995, management reviewed the recoverability of
the carrying value of long-lived assets, primarily goodwill and
fixed assets, based upon a 20 year cash flow analysis.
F-11
<PAGE>
<page-F-12>
1. Basis of Presentation and Significant Accounting Policies
(continued)
Management identified significant adverse changes in the
Company's business climate late in the fourth quarter of the year
ended January 31, 1995 that persisted subsequent to year end.
These changes were largely due to increasing competition in the
Company's marketplace, which led to recent operating results and
forecasted future results that were less than previously planned.
These factors led to the conclusion that there was a potential
impairment in the recorded value of goodwill and fixed assets.
Management's estimate of undiscounted cash flows over the reduced
life amounts to less than the recorded value of goodwill, indi-
cating impairment of the goodwill under the provisions of State-
ment No. 121. Management's estimate, however, indicated that the
carrying value of fixed assets was recoverable over their
remaining useful lives.
An impairment loss of $139,493,000 is included in the accompany-
ing 1995 statement of operations, representing the difference
between the estimated discounted cash flows (at 11.5% per year)
and the recorded value of goodwill. The discount rate of 11.5%
represents the Company's weighted average interest rate in effect
on the revolving line of credit, variable rate term note, and the
13% senior subordinated notes at January 31, 1995.
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.
Advertising Costs
The Company expenses nonreimbursable advertising costs as costs
are incurred. The amount charged to advertising expense during
the years ended January 31, 1995, 1994 and 1993 were $5,704,000,
$5,743,000 and $8,874,000, respectively.
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 state-
ment and tax basis of assets and liabilities and are measured at
the enacted tax rates that will be in effect when these differ-
ences reverse.
F-12
<page-F-13>
1. Basis of Presentation and Significant Accounting Policies
(continued)
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 1994
amounts to conform to the 1995 presentation.
2. GOING CONCERN AND SUBSEQUENT EVENTS
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in
the accompanying financial statements, the Company incurred net
losses of $162,245,000 and $42,059,000 for the years ended
January 31, 1995 and 1994, respectively, and there is a share-
holder's deficit of $112,449,000 at January 31, 1995. During the
quarter ending April 30, 1995, the Company experienced a decline
in same-store revenues. Continued declines will cause the
Company to be in default of its loan agreements in fiscal year
1996. The Company is in the process of renegotiating its loan
agreements to allow it greater flexibility in meeting the finan-
cial covenants contained in these loan agreements, and has
received waivers through June 30, 1995, for any defaults in
financial covenants at January 31, 1995 and for those violations
that might occur through June 30, 1995. As a result of the
violation of the loan covenant and the projected future viola-
tions under loan agreements, $150,000,000 of debt has been
reclassified as a current liability as of January 31, 1995. The
financial statements do not include adjustments relating to the
recoverability and classification of the recorded carrying value
of assets or the amounts or classification of other liabilities
that might be necessary should the Company be unable to success-
fully renegotiate its loan agreements and continue as a going
concern.
F-13
<PAGE>
<page-F-14>
3. 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.
4. ACQUISITIONS
During June 1993 and January 1994, the Company agreed to acquire
a maximum of 31 store locations (17 at the initial closing) and
related assets of The Record Shop, Inc. (Record Shop) and 15
retail stores from Pegasus Music & Video, Inc. (Pegasus) (15 at
the initial closing), respectively. The aggregate consideration
for transferred assets during fiscal 1994, 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
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 over fair value of net assets acquired
(goodwill). The goodwill balances at January 31, 1995 related to
these acquisitions were included in the goodwill impairment loss
recognized in the year ended January 31, 1995 as described in
Note 1. Aggregate 1994 revenues of the acquired companies from
the date of acquisition was $11,768,000. The net effect of the
consolidated operations was not significant to the year ended
January 31, 1994.
F-14
<PAGE>
<page-F-15>
5. NOTES PAYABLE AND CREDIT ARRANGEMENTS WITH FINANCIAL
INSTITUTIONS
As of January 31, 1995, 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 6).
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.
The Company is also subject to a commitment fee of 1/2% on used
borrowings under the line. The weighted average interest rate
for the years ended January 31, 1995 and 1994 were 7.65% and
6.28%, respectively. In addition, the credit agreement provides
for a "clean down" period of 30 days during each fiscal year,
whereby all borrowings must be repaid. The Company satisfied the
"clean down" period during the year ended January 31, 1995.
Available borrowings at January 31, 1995 were $28,800,000.
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, 1995, the Company had $400,000 of letters of credit
outstanding.
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
Descriptions 1995 1994
- ----------------------------------------------------------------
10-5/8% promissory note $ 1,890,000 $ 1,927,000
Variable rate term note (Note 2) 49,000,000 56,000,000
13% senior subordinated notes
(Note 2) 110,000,000 110,000,000
Other 195,000 224,000
Capital lease obligations (Note 9) 2,618,000 3,320,000
---------------------------
163,703,000 171,471,000
Less current portion:
Scheduled repayments (9,811,000) (7,772,000)
Long-term debt classified
as current (Note 2) (150,000,000) -
---------------------------
$ 3,892,000 $163,699,000
===========================
F-15
<page-F-16>
6. Long-Term Debt (continued)
Long-term debt at January 31, 1995 matures as follows, excluding
amounts payable under acceleration clauses as a result of
defaults, if any:
1996 $ 9,811,000
1997 19,646,000
1998 23,747,000
1999 258,000
2000 138,000
Thereafter 110,103,000
-------------
Total $163,703,000
=============
Required payments on capital lease obligations are disclosed in
Note 9.
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 $3,109,000 at January 31, 1995.
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, 1995, the Company's borrowing rates ranged from
8.813% to 9.063%. Interest on the term note is payable quarter-
ly. The Company has an interest rate protection agreement with a
major financial institution covering 40% of the outstanding
balance of the term note. 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 addi-
tional flexibility. In connection with this amendment, MLCP
received a fee of $300,000.
F-16
<page-F-17>
6. Long-Term Debt (continued)
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: $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 activi-
ties 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.
Financial Covenants
The variable rate term note, as amended, and the 13% senior
subordinated notes agreements include various restrictive cove-
nants, including covenants requiring the maintenance of certain
financial ratios such as minimum consolidated adjusted EBITDAV
(as defined), maximum leverage, and minimum fixed charge cover-
age. An acceleration of payments in excess of $5 million
occasioned by default under the variable term note is an event of
default under the subordinated note agreement. 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 Agree-
ment on the variable term note. At January 31, 1995, the Company
was in violation of the maximum leverage ratio and was in
compliance with all such remaining amended covenants. The
Company obtained a waiver of the violation of the maximum
leverage ratio and a waiver of all covenant requirements for the
quarter ended April 30, 1995 through June 30, 1995.
As a result of the violation of the loan covenant and the
projected future violations under loan agreements, $150,000,000
of debt covered by the terms of the loan agreements has been
reclassified as a current liability as of January 31, 1995.
F-17
<page-F-18>
6. Long-Term Debt (continued)
Fair Market Value
The fair market value of the 13% senior subordinated notes was
approximately $50,600,000 at January 31, 1995. The fair market
values of the Company's capital lease obligations, all other
long-term debt, short-term borrowings, convertible subordinated
debentures and related interest rate protection agreement as of
January 31, 1995 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.
7. 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 subor-
dinated 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 Acquisition, the subor-
dinated 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. There were no redemp-
tions in fiscal years 1995, 1994 or 1993. At January 31, 1995,
the principal amount of subordinated debentures was $3,716,000,
net of discount of $1,951,000.
Refer to Note 10 for a discussion of litigation associated with
these convertible subordinated debentures.
F-18
<PAGE>
<page-F-19>
8. INCOME TAXES
The provision (benefit) for income taxes includes:
<TABLE>
<CAPTION>
Company Predecessor
--------------------------------------- -----------
Eight Four
Months Months
Ended Ended
Year Ended January 31, January 31, May 31,
1995 1994 1993 1992
-------------------------------------- ------------
<S> <C> <C> <C> <C>
Current:
Federal $(1,500,000) $ (4,390,000) $ 1,659,000 $ 40,000
State - (20,000) 445,000 (161,000)
-------------------------------------- -----------
(1,500,000) (4,410,000) 2,104,000 (121,000)
Deferred:
Federal (5,057,000) (14,164,000) (2,694,000) (1,327,000)
State (2,249,000) (4,114,000) (701,000) (411,000)
Valuation
Allowance 21,813,000 3,611,000 - -
-------------------------------------- ------------
14,507,000 (14,667,000) (3,395,000) (1,738,000)
------------------------- ----------- ------------
$13,007,000 $(19,077,000) $(1,291,000) $(1,859,000)
====================================== ============
</TABLE>
F-19
<PAGE>
<page-F-20>
8. Income Taxes (continued)
The provision (credit) for deferred taxes relates to the following items:
<TABLE>
<CAPTION>
Company Predecessor
------------------------------------------ ------------
Eight Months Four Months
Ended Ended
Year Ended January 31, January 31, May 31,
1995 1994 1993 1992
------------------------------------------ ------------
<S> <C> <C> <C> <C>
Depreciation $ (65,000) $ (8,595,000) $(2,389,000) $ (405,000)
State taxes 3,000 (117,000) 129,000 242,000
Merchandise and video inventory 2,280,000 (4,636,000) (1,257,000) (81,000)
Debt discount (32,000) (29,000) (15,000) (8,000)
Leases (1,428,000) (2,168,000) (559,000) (830,000)
Employee benefits (182,000) (175,000) (6,000) (49,000)
Tax credit carryovers (433,000) (3,260,000) (309,000) (600,000)
Prepaid expense (363,000) (54,000) 633,000 -
Expenses associated with early
extinguishment of debt - - 403,000 -
Accrued liabilities (154,000) 1,563,000 - -
Operating loss carryover (3,328,000) (816,000) - -
Other (148,000 - (25,000) (7,000)
Deductible goodwill (3,456,000) 9,000 - -
Valuation allowance 21,813,000 3,611,000 - -
------------------------------------------ ------------
$ 14,507,000 $(14,667,000) $(3,395,000) $(1,738,000)
========================================== ============
</TABLE>
F-20
<PAGE>
<page-F-21>
8. Income Taxes (continued)
A reconciliation of the difference between the federal statutory rate
and the effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
Company Predecessor
------------------------------------------ ------------
Eight Months Four Months
Ended Ended
Year Ended January 31, January 31, May 31,
1995 1994 1993 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) 30.5 2.5 16.9 7.0
Job tax credits (2.1) (1.5) (5.5) (15.7)
State taxes, net of federal
benefit (1.0) (4.0) (3.2) (5.8)
Other 0.7 (0.1) 0.5 -
Valuation allowance 14.6 5.9 - -
---------------------------- ------------ ------------
8.7% (31.2)% (25.3)% (48.5)%
============================ ============ ============
<\table)
F-21
<PAGE>
<page-F-22>
8. Income Taxes (continued)
The components of net deferred income tax assets at January 31,
1995 are as follows:
Net current deferred income tax assets:
Merchandise inventory $ 2,612,000
Vacation liability 1,383,000
Other accrued liabilities 370,000
Prepaid expenses 51,000
------------
4,416,000
Net long-term deferred income tax
assets (liabilities):
Convertible subordinated debenture discount $ (657,000)
Video rental inventory 1,987,000
Equipment and improvements 1,670,000
Leasehold interests 356,000
Store closure liability 215,000
Average rent liability 4,373,000
Federal/state operating loss carryover 1,275,000
Federal/state credit carryovers 8,487,000
Deferred compensation 119,000
Other accrued liabilities (4,147,000)
Capital leases 453,000
Goodwill 3,400,000
------------
17,531,000
21,947,000
------------
Valuation allowance for deferred tax assets (25,424,000)
------------
Net deferred income tax liability $ 3,477,000
============
The Company has a carryover benefit for job tax and alternative
minimum tax credits of $8,161,000 which will expire by 2010 and
federal net operating loss carryovers of $2,334,000 expiring in
2010. For financial reporting purposes, the benefit has been
included as a deferred tax asset at January 31, 1995.
During the year ended January 31, 1995, the valuation allowance
for deferred tax assets increased by $21,813,000 from $3,611,000
at January 31, 1994 to $25,424,000. Included in this increase is
$13,976,000 related to an increase in the beginning of the year
valuation allowance as a result of revisions in the Company's
projected taxable income.
F-22
<page-F-23>
9. 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 2013
with renewal options for certain leases. Certain leases provide
for payment of real estate taxes and additional rents based on a
percentage of sales.
Future minimum annual lease payments under capital and operating
leases at January 31, 1995 are payable as follows:
Capital Operating
Leases Leases
-------------------------------
1996 $ 880,000 $ 40,859,000
1997 879,000 37,343,000
1998 776,000 35,090,000
1999 255,000 33,149,000
2000 123,000 30,468,000
Thereafter - 159,331,000
-------------------------------
Total future minimum lease
payments 2,913,000 $336,240,000
================
Less amounts representing
interest 295,000
------------
Present value of future
minimum lease payments 2,618,000
Less current portion 738,000
------------
Long-term obligations under
capital leases $1,880,000
============
Rental expense charged to operations was approximately
$43,331,000 in fiscal 1995, $42,285,000 in fiscal 1994,
$25,056,000 in the eight month period ended January 31, 1993 and
$11,733,000 in the four month period ended May 31, 1992. In
addition, real estate taxes and additional rents based on percen-
tage of sales were approximately $3,158,000 in fiscal 1995,
$2,881,000 in fiscal 1994, $1,548,000 in the eight month period
ended January 31, 1993 and $708,000 in the four month period
ended May 31, 1992. The Company subleases a portion of its
warehouse in Gardena, California, for an annual rent of $192,000
through March 31, 1997.
Included in equipment and improvements are assets held under
capital leases with an original cost to the Company of $4,067,000
at January 31, 1995 and 1994.
F-23
<PAGE>
<page-F-24>
9. Commitments (continued)
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
reengineering project and then as Chairman of the Board and Chief
Executive Officer of the Company. The current agreement, as
amended on April 5, 1995 and effective as of March 1, 1995,
specifies monthly payments of $37,500 and is effective through
October 1, 1997. Amounts paid under this agreement were $375,000
and $250,000 during fiscal 1995 and 1994, respectively. Upon
signing the amendment, an additional $50,000 was paid.
Prior to the Acquisition, the Company had another agreement with
this same company which specified monthly payments of approxi-
mately $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. An additional $135,000 was paid in connec-
tion 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.
10. 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, which lawsuit was
settled for $350,000 and paid out of the deferred merger consi-
deration discussed below. 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.
F-24
<PAGE>
<page-F-25>
10. Contingencies (continued)
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.
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 or results of opera-
tions of the Company.
11. 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
$27,000 of expense in 1995 and $20,000 in fiscal 1994 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 $381,000 in 1995 and
$477,000 in 1994 for matching costs and administrative costs
under the 401(k) Plan.
F-25
<page-F-26>
12. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarterly financial information (unaudited) is as follows (in
thousands):
</TABLE>
<TABLE>
<CAPTION>
Net Revenue Gross Profit Net Loss
--------------------------------------------------
<S> <C> <C> <C>
1995 - Quarter Ended
April 30 $113,863 $46,505 $ (5,648)
July 30 114,324 47,904 (3,729)
October 31 112,651 45,919 (6,052)
January 31 158,787 61,708 $(146,816)
1994 - Quarter Ended
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)
</TABLE>
13. SUMMARY FINANCIAL INFORMATION OF WEI HOLDINGS, INC.
Unconsolidated summary financial information of the Company's
parent, WEI Holdings, Inc. is as follows:
January 31
1995 1994
------------------
(In Thousands)
Current assets $ 64 $ 68
Total assets 64 50,048
Current liabilities 76 170
Deficiency in investment in
the Company 112,448 --
Total liabilities 112,524 170
Redeemable common stock 3,872 4,140
Notes receivable from shareholders (660) (728)
Contingent shares (663) (702)
Net income (exclusive of the net 37 44
loss of the Company)
WEI has no material assets apart from its ownership of all of the
outstanding capital stock of Wherehouse Entertainment, Inc. WEI
does not have income from operations.
F-26<PAGE>
<page-F-27>
<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,
1995 $38,966,000 $26,831,000 $24,813,000 $40,984,000
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
(1) Accumulated amortization on disposition of video rental tapes.
</TABLE>
F-27
[Wherehouse Letterhead]
June 15, 1994
Ms. Cathy Wood
RE: RESIGNATION OF EMPLOYMENT
Dear Cathy:
It is with great regret that I confirm your mutually agreed upon
resignation from Wherehouse Entertainment, Inc. ("WEI") effec-
tive June 10, 1994. Under these circumstances, we will provide
you with a measure of protection during the months ahead, and in
return, you acknowledge that we have no further obligation to
you, and that you will make no claims, other than those contained
in this letter.
1. You will remain employed through June 10, 1994. Seven days
following the signing of this agreement, we will pay you
twelve full months of your current base salary
($175,000.00), less standard deductions, payable in one lump
sum inclusive of your four weeks vacation.
2. One June 12, 1995, we will pay you an additional six months
of your current base salary ($87,500.00), less standard
deductions, payable in one lump sum.
3. We will extend your current standard group medical insurance
coverage (not including Execucare), at our expense, for a
twelve-month period, beginning June 11, 1994. Beginning on
June 11, 1995, your normal ability to exercise options under
COBRA will come into effect; you will receive more informa-
tion about COBRA directly from Human Resources.
4. You agree to sell all of your shares of WEI common stock,
performance options, incentive options to WEI on or before
June 22, 1994. You agree to accept a gross sale price of
$33.00 per share for all shares of your WEI common stock;
you currently hold and will be selling back 2,984 shares of
WEI common stock. WEI will make one payment without
interest for such common stock on or before June 22, 1994.
Cathy Wood
June 15, 1994
Page Two
5. In exchange for items 1 through 4, you agree that we are
released from any obligations to you, and from any claims
that you may have. The terms of this release by you are
formalized by the following General Release: You hereby
release and discharge Wherehouse Entertainment, Inc., and
each of its representatives including, without limitation,
agents, employees, directors, shareholders, officers,
attorneys, insurers, affiliates, assigns and successors, and
each of them, from any and all claims, demands, sums of
money, actions, rights, causes of action, obligations and
liabilities of any kind or nature whatsoever, whether known
or unknown, present or future which you had or claim to have
had, now have or claim to have, or hereafter may have or
assert to have, including without limitation, claims as a
result of the termination of your employment with WEI. You
further understand and agree that:
a. this letter constitutes a voluntary waiver of any and
all rights and claims you have against WEI as of the
date of the execution of this letter, including rights
or claims arising under the Federal Age Discrimination
in Employment Act of 1967, 29 U.S.C., Section 621, et
seq.;
b. you have waived rights or claims pursuant to this
letter and in exchange for consideration, the value of
which exceeds payment or remuneration to which you were
already entitled;
c. you are hereby advised to consult with an attorney
concerning this letter prior to executing it;
d. you have been afforded a period of at least 21 days to
consider the terms of this letter, and in the event you
should decide to execute this letter in less than 21
days, you have done so only after conferring with an
attorney of your choice and with the express under-
standing that you have been given and declined the
opportunity to consider this letter for a full 21 days;
and
Cathy Wood
June 15, 1994
Page Three
e. you may revoke the agreements contained in this letter
at any time during the seven (7) days following the
date of execution of this letter, and the agreements in
this letter shall not become effective or enforceable
until such revocation period has expired.
6. We will assign to you, without charge, any life insurance
policy now owned by WEI which insures your life.
7. All rights under the California Civil Code section 1542, are
hereby expressly waived by you. Section 1542 of the
California Civil Code reads as follows: "A general release
does not extend to claims which the creditor does not know
or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially
affected his settlement." Except for the obligations
contained in this letter, you are completely severing your
relationship with WEI, and are releasing all rights you may
have, known or unknown.
8. You agree that you will have not any contact whatsoever with
any bank or other financial institution with which WEI
currently has a business relationship, until WEI has had a
chance to contact that particular institution. You agree as
well that you will not, directly or indirectly, by any
manner or means, in public or in private, disparage, demean,
insult, or defame WEI, or any person associated with WEI. W
agree that we will not, directly or indirectly, by any
manner or means, in public or in private, disparage, demean,
insult or defame you.
9. Finally, it is important that we agree that this letter
contains the entire agreement and understanding between us
concerning the matters contained in this letter, than it is
intended as the final statement by us on these topics, and
that it supersedes and replaces all prior negotiations,
practices, proposed agreements, and agreements, written,
oral or implied, concerning the matters contained in this
letter.
Cathy Wood
June 15, 1994
Page Four
Again, it is with sincere regret that this decision has been
made. If the terms contained in this letter are acceptable to
you, please sign where indicated below, and return the signed
copy to Renee Nesland, Assistant Vice President of Human
Resources, by June 22, 1994.
Please accept my personal best wishes for your every success in
the future.
Sincerely,
/s/ Jerry Goldress
Jerry Goldress
President and Chief Operating Officer
AGREED AND ACCEPTED:
/s/ Cathy Wood
- ---------------------
Cathy Wood
MEMORANDUM
DATE: April 5, 1995
TO: Jerry Goldress
FROM: Bradley Hoecker
RE: Consulting Agreement
Per our conversation with Jerry Armstrong, I would like to
address the following issues as they pertain to your GGG, Inc.
consulting agreement.
- You are to add Chairman of the Board and Chief
Executive Officer to your title.
- Effective March 1, 1995, your base will be $450,000 per
year.
- You will receive a $50,000 signing bonus when this
amendment to your contract is completed.
- The termination date of your contract will be extended
to October 1, 1997.
You have asked us to review your option plan and it is our intent
to do so in the context of reviewing the plan for all the
employees.
I have asked each of the directors to sign this offer sheet to
indicate our agreement and total support of this offer. If you
have questions, feel free to call any of us.
This amendment becomes effective with your signature.
/s/ James J. Burke, Jr.
-------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong
-------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu
-------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker
-------------------------
Bradley J. Hoecker
/s/ Jerry E. Goldress
- --------------------------
Jerry E. Goldress, CEO
GGG, Inc.
AMENDMENT TO MANAGEMENT STOCK OPTION PLAN
I, Anne E. McLaughlin, do hereby certify that
I am the duly elected or appointed, qualified and
acting Secretary of WEI HOLDINGS, INC., a Delaware
corporation (the "Corporation"), and that the Board of
Directors of the Corporation on January 17, 1995,
adopted and approved the amendments to the WEI
Holdings, Inc. Management Stock Option Plan, effective
June 11, 1992 (the "Plan"), set forth below. Such
amendments were effective immediately upon adoption and
approval by the Board. All capitalized terms not
defined herein have the respective meaning given to
them in the Plan.
1. The first sentence of Section 3(a) of the Plan is
amended to add the words "or greater than" after the words "equal
to" and before the words "the Fair Value Price".
2. The first sentence of Section 3(b) of the Plan is
amended to add the words "or greater than" after the words "equal
to" and before the words "the Fair Value Price".
3. The second sentence of Section 3(b) of the Plan is
amended to delete the date "1997" and replace it with the date
"1998".
4. Section 3(b) of the Plan is amended to restate
subsection (ii) of the last proviso thereof to read in its
entirety as follows:
(ii) on the first to occur of (A) the seventh anniver-
sary of the effective date of this Plan, (B) the date the ML
Investors (as defined in the Stockholders' Agreement) cease to
hold in the aggregate at least 75% of the Shares on a fully
diluted basis or (C) the occurrence of a public offering of any
securities of the Corporation.
5. Section 3(c) of the Plan is restated to read in
its entirety as follows:
(c) Upon the first to occur of (i) the sale or other
disposition (direct or indirect, pursuant to a merger, reorgani-
zation, consolidation, liquidation or similar transaction
involving WEI, in one transaction or a series of related trans-
actions) of Shares by the ML Investors, or any of them, repre-
senting in the aggregate more than 75% of the Shares held by them
as of the effective date of this Plan, (ii) the seventh anniver-
sary of this Plan, and (iii) the occurrence of a public offering
of any securities of the Corporation, (x) all Incentive Options
that have not theretofore been granted pursuant to this Plan
shall be granted, and (y) all Performance Options that have not
theretofore been granted pursuant to this Plan shall be granted,
effective as of such date, to all Management Investors (as
defined in the Stockholders' Agreement) then employed by the
Corporation or any of its subsidiaries, pro rata in proportion to
the number of Shares and Options to Amendment to Management Stock
Option Plan purchase Shares then held by them, at a per share
exercise price equal to the Fair Value Price per share at such
date of grant. Such Performance Options shall be vested immedi-
ately upon grant.
6. The chart on page 2 of Schedule I to the Plan is
restated in its entirety as follows:
Fiscal Performance
Year Options Annual Annual Cumulative Cumulative
Ending Eligible for HEBITDA HEBITDA HEBITDA HEBITDA
1/31 Vesting Threshold* Target* Threshold* Target*
- ------ ----------- --------- -------- ---------- ----------
1995 22.5% 35.00 37.00 -- --
1996 22.5% 42.70 45.00 79.10 82.00
1997 22.5% 48.50 51.00 128.40 133.00
1998 22.5% 52.90 56.00 182.30 189.00
* Dollars in Millions
7. The first sentence under the heading "Vesting of
Performance Options Granted After the Effective Date" in Schedule
I to the Plan is amended to delete the date "10997" and to
replace it with the date "1998".
8. The chart on page 3 of Schedule I to the Plan is
restated in its entirety as follows:
Fiscal
Year Performance Options Granted in
Ending Fiscal Year Ending January 31
- ------ -------------------------------------------------------
1/31 1993 1994 1995 1996 1997 1998
- ------ ---- ---- ---- ---- ---- ----
1993 20% -- -- -- -- --
1994 20 25% -- -- -- --
1995 22.5 25 25% -- -- --
1996 22.5 25 25 33% -- --
1997 22.5 25 25 33 50% --
1998 22.5 25 25 33 50 100%
IN WITNESS WHEREOF, I have hereunto subscribed my name
on this 18th day of January, 1995.
/s/ Anne E. McLaughlin
----------------------------
Secretary
LIMITED WAIVER REGARDING
MAXIMUM LEVERAGE RATIO
April 12, 1995
WEI Holdings, Inc.
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as
of June 11, 1992, as amended by that certain First Amendment to
Credit Agreement dated as of November 17, 1992, that certain
Second Amendment to Credit Agreement dated as of August 17, 1993
and that certain Third Amendment and Limited Waiver to Credit
Agreement dated as of January 27, 1994 (as so amended, the
"Credit Agreement") among WEI Holdings, Inc. ("Holdings"), Where-
house Entertainment, Inc. ("Borrower"), the lenders party thereto
("Lenders") and Bankers Trust Company, as agent for Lenders
("Agent"). Capitalized terms used herein without definition
shall have the meanings assigned to such terms in the Credit
Agreement.
Holdings and Borrower have informed Agent and Lenders that
they will not satisfy the requirements of Section 6.6B of the
Credit Agreement relating to the maximum permitted leverage ratio
for the fourth Fiscal Quarter of Fiscal Year 1995. At the
request of Holdings and Borrower, the undersigned Lenders,
constituting Requisite Lenders under the Credit Agreement, hereby
waive until May 15, 1995 compliance with the provisions of
Section 6.6B of the Credit Agreement with respect to the fourth
Fiscal Quarter of Fiscal Year 1995.
Without limiting the generality of the provisions of
subsection 10.7 of the Credit Agreement, the waiver set forth
herein shall be limited precisely as written and relates solely
to the noncompliance by Holdings and Borrower with the provisions
of Section 6.6B of the Credit Agreement in the manner, to the
extent and for the period described above, and nothing in this
Limited Waiver shall be deemed to (a) constitute a waiver of
compliance by Holdings or Borrower with respect to (i) Section
6.6B of the Credit Agreement in any other instance or (ii) any
other term, provision or condition of the Credit Agreement or any
other instrument or agreement referred to therein, (b) prejudice
any right or remedy that Agent of any Lender may now have (except
to the extent such right or remedy was based upon existing
defaults that will not exist after giving effect to this Limited
Waiver) or may have in the future under or in connection with the
Credit Agreement or any other instrument or agreement referred to
therein or (c) create any obligation on the part of Agent or any
Lender to renew or extend the waiver contained herein. Except as
expressly set forth herein, the terms, provisions and conditions
of the Credit Agreement and the other Loan Documents shall remain
in full force and effect and in all other respects are hereby
ratified and confirmed.
In order to induce Lenders to enter into this Limited
Waiver, each of Holdings and Borrower, by its execution of a
counterpart of this Limited Waiver, represents and warrants that
after giving effect to this Limited Waiver (a) no Event of
Default exists under the Credit Agreement, (b) all representa-
tions and warranties contained in the Credit Agreement and the
other Loan Documents are true, correct and complete in all
material respects on and as of the date hereof except to the
extent such representations and warranties specifically relate to
an earlier date, in which case they are true, correct and
complete in all material respects on and as of such earlier date,
and (c) Holdings and Borrower have performed all agreements to be
performed on their part as set forth in the Credit Agreement.
This Limited Waiver may be executed in any number of
counterparts and by different parties hereto in separate counter-
parts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall
constitute but one and the same instrument. The limited waiver
set forth herein shall become effective as of the date hereof
upon the execution of counterparts hereof by Holdings, Borrower
and Lenders constituting Requisite Lenders and receipt by Agent
of written or telephonic notification of such execution and
authorization of delivery thereof.
[Remainder of page intentionally left blank]
<page-S-1>
THIS LIMITED WAIVER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.
LENDERS:
BANKERS TRUST COMPANY, individually
and as Agent
By: /s/ Mary Jo Jolly
-----------------------------
Title: Mary Jo Jolly
Assistant Vice President
HELLER FINANCIAL, INC.
By: /s/ K. Craig Gallehugh
-----------------------------
Title: Vice President
PRIME INCOME TRUST
By:
-----------------------------
Title:
UNITED STATES NATIONAL BANK
OF OREGON
By:
-----------------------------
Title:
AGREEMENT
This Agreement (the "Agreement") is made and entered
into as of this first day of July, 1994 by and between The Future
Now, Inc., an Ohio corporation, with a place of business at 18872
Bardeen Way, Irvine, California 92715 ("TFN"), and Wherehouse
Entertainment, Inc., a Delaware corporation, with a place of
business at 19701 Hamilton Avenue, Torrance, California 90502
("Client"), with respect to the following facts:
A. Client currently has a point of sale system for its
chain of retail music and video stores (the "Existing POS
System"). To operate the Existing POS System, Client uses a
certain software package (the "Merlin Software").
B. Client desires TFN to transition Client's current POS
Software to a modem supportable hardware which will meet Client's
requirements for a new point of sale system ("New POS System")
for Client's chain of music and video retail stores.
C. Client desires to purchase from TFN certain computer
hardware, software and other equipment and to obtain from TFN
certain services in connection with the installation and opera-
tion of such computer hardware, software and other equipment for
the New POS System and TFN desires to sell such equipment and
provide such services to Client.
NOW, THEREFORE, TFN and Client hereby agree as follows:
1. Services and Scope of Work.
1.1 Services. TFN agrees to provide to
Client the services (the "Services") required to develop and
implement the New POS System including, without limitation,
designing and developing the New POS System and converting the
Merlin Software to operate the New POS System. The Services
shall be provided in accordance with the provisions of this
Agreement.
1.2 The Proposal. The request for proposal
of Client, dated April 13, 1994 which has previously been
delivered to TFN (the "RFP"), and TFN's written response thereto
delivered to Client (the "Response") are hereby incorporated
herein by reference and shall constitute part of this Agreement
as if fully set forth herein. In the event that the RFP and the
Response conflict with this Agreement, the terms and conditions
of this Agreement shall control.
1.3 The Project. TFN will meet with Client
to evaluate the Client's needs for computer hardware, other
equipment, and software (collectively the "POS System Equipment")
and the Services in connection with the POS System. A detailed
description of all of the POS System Equipment and the Services,
which Client agrees to acquire from TFN and TFN agrees to supply
to Client, shall be set forth in written project specifications
which shall be comprised of the RFP, the Response, the amendments
thereto, the rollout schedule, the price lists, the form of main-
tenance agreement between Client and Hewlett Packard, and certain
other addendums (collectively, "Project Specifications") which
the parties hereto will initial and upon intialling thereof shall
be deemed incorporated herein by reference and shall constitute a
part of this Agreement as if fully set forth herein. The Project
Specifications shall include, among other things, an implementa-
tion plan showing milestones, the responsibilities of both
parties, a description of all items to be delivered to Client,
including without limitation, computer hardware, other equipment
and software (including, without limitation the conversions from
the Merlin Software), the Services, designs, reports, studies,
documentations or other materials (the "Deliverables") to be
provided by TFN, references to the appropriate specifications for
each Deliverable, acceptance criteria and warranties for each
Deliverable other than those set forth herein, if any, a schedule
of performance, a schedule of payments, and a statement of
purchase prices for all POS System Equipment and the applicable
TFN rates by labor category and other information required or
deemed necessary by the parties hereto.
1.4 The Modification of Services and POS System
Equipment. Client may at any time request a modification to the
scope of the Services and the POS System Equipment by written
request to TFN specifying the desired modifications to the same
degree of specificity as in the original specifications. TFN
shall submit to Client time and cost estimates for such modifica-
tions within five (5) business days following receipt of such
request. If accepted in writing by Client, TFN shall perform
such modified Services and provide the modified POS System Equip-
ment subject to such time and cost estimates. The performance of
such modified Services and the sale of such modified POS System
Equipment by TFN shall be governed by the terms and conditions of
this Agreement.
2. Term of Agreement.
2.1 Term. This Agreement shall commence on the
date first above written and shall continue in full force and
effect thereafter unless and until terminated in accordance with
the provisions of this Agreement or until satisfactory completion
of the services provided for herein based on the acceptance
criteria set forth herein and in the Project Specifications.
2.2 Termination By Client For Breach. In addi-
tion to all other remedies which Client may have as set forth in
this Agreement or otherwise provided at law or in equity, for any
material breach or failure of performance by TFN, Client may
terminate this Agreement if within thirty (30) days after giving
of written notice to TFN of such breach or failure, TFN has not
cured such breach or failure.
2.3 Termination By TFN For Breach. In addition
to all other remedies which TFN may have as set forth in this
Agreement or otherwise provided at law or in equity, for any
material breach or failure of performance by Client, TFN may
terminate this Agreement if within thirty (30) days after giving
written notice of such breach or failure, Client has not cured
such breach or failure.
2.4 Termination Without Cause. Notwithstanding
anything in Sections 2.2 and 2.3 hereof to the contrary, either
party may terminate this Agreement without cause by giving the
other party thirty (30) days prior written notice of its election
to terminate this Agreement. In such case, Client agrees to pay
to TFN for all work performed by TFN at the rates set forth
herein or previously agreed to in writing by Client and TFN and
for all other costs incurred by TFN with Client's approval up to
the effective date of termination.
2.5 Actions Upon Termination. After receipt of a
notice of termination (the "Termination Notice") pursuant to
Sections 2.2, 2.3 or 2.4 hereof and except as otherwise directed
in writing by Client, TFN shall:
(i) stop work on the date and to the extent
specified in the Termination Notice;
(ii) place no further orders or subcontracts
for materials, services or facilities, except as may be necessary
for completion of such portion of work as is not terminated;
(iii) terminate all orders and subcontracts to
the extent they relate to the performance of work terminated by
the notice of termination;
(iv) settle, with the approval of Client, all
outstanding liabilities and claims arising out of termination or
of orders and subcontracts, the cost of which would be reimburs-
able in whole or in part, in accordance with the provisions of
this Agreement;
(v) transfer title or license to Client (to
the extent that title or license has not already been trans-
ferred) and deliver in the manner, at the times, and to the
extent directed thereby the fabricated or unfabricated parts,
work in process, completed work, supplies and other material
produced as part of, or acquired in respect to the performance
of, the work terminated by the Termination Notice; and
(vi) deliver to Client, and cause its
employees to deliver to Client, all materials relating to Client
or this Agreement, or obtained or developed in the course of
performance of this Agreement, or containing or derived from
Client's "Confidential Information" (as that term is defined
herein). A certificate evidencing compliance with this provision
shall, if requested by Client, accompany such material.
3. Payments for POS System Equipment.
3.1 Payment for POS System Equipment.
3.1.1 The purchase price for all POS System
Equipment sold to Client by TFN shall be set forth in detail in
the Project Specifications. Such purchase price shall not be
increased as a result of increases in the purchase price paid by
TFN for such POS System Equipment imposed upon TFN by the
manufacturers or suppliers thereof. In the event that such
manufacturers or suppliers reduce the prices of the POS System
Equipment sold to TFN, which in turn, is to be resold to Client,
from those published prices in existence at the time of the
creation of the Project Specifications, the purchase price
charged by TFN to Client for the applicable POS System Equipment
shall be reduced dollar for dollar by the amount of such
decreases. Also, in the event that the manufacturers or suppli-
ers of the POS System Equipment or of the software, upgrade such
POS System Equipment or software before delivery thereof to
Client, the upgraded POS System Equipment shall be provided to
Client without any increase in the agreed upon purchase price.
However, Client shall pay all costs of additional engineering
hours required to engineer the tools and processes to go forward
and incorporate the upgraded software or equipment into the then
current design plan so that the upgraded POS System Equipment and
software may operate as part of the New POS System in accordance
with the specifications set forth in the Project Specifications.
3.1.2 Client has been guaranteed specific
pricing for the POS System Equipment and software by TFN and its
supplier. However, this guarantee is contingent upon the Client
issuing periodic Purchase Orders substantially at the times set
forth on the attached Exhibit A. In the event that TFN does not
receive a timely purchase order, Client understands and agrees
that it will forfeit its guaranteed pricing and will be subject
to the then current manufacturers' list prices.
3.1.3 TFN agrees to advise Client of any
decrease in pricing for the POS System Equipment or software
which occurs prior to delivery of the POS System Equipment or
software and will allow Client to purchase said POS System
Equipment or software at the lower prices.
3.2 TFN's Fees for all Services. The fees
charged to Client for all Services provided by TFN to Client
pursuant to this Agreement shall be set forth in detail in the
Project Specifications. In the event that TFN incurs any cost
overruns in connection with providing such Services, such
overruns shall be adsorbed by TFN without TFN having the right to
reduce the quality or quantity of the Services. All fees for
services provided that are not in the original scope of work will
be paid by Client.
3.3 Payments to TFN.
3.3.1 Conversion/Port Process Costs/Payments.
Client shall issue three (3) purchase orders (the "Purchase
Orders") to initiate the conversion of Client's current Merlin
Software to modem supportable software and hardware which will
operate the New POS System as described in the Project Specifi-
cations (the "Conversion/Port Process"). Each Purchase Order
shall be in the amount of $70,000.00 (unless otherwise agreed to
by the parties in writing). Client shall have thirty (30) days
after issuing each Purchase Order in which to make payment to
TFN. Each payment is subject to successful completion and
provisional acceptance by Client of the Conversion/Port Process
at which time the port shall have the same functionality as the
Existing POS System. Testing of the port process/conversion
shall be done in accordance with the procedures set forth in
Exhibit B attached hereto. Upon completion of the Conversion/
Port Process, Client shall execute a Provisional Acceptance
Certificate in the form attached hereto as Exhibit C in which
Client provisionally accepts the Conversion/Port Process in order
for TFN to begin the installation of the New POS System Equipment
at the individual store locations of Client. Notwithstanding
anything herein to the contrary, Client's provisional acceptance
of the Conversion/Port Process (i) shall not constitute Client's
final acceptance of the Conversion/Port Process and Client has
the right to continue to test the same and (ii) shall not relieve
TFN from its obligations to correct any defects or "bugs" in the
Conversion/Port Process identified by the Client as provided
herein and in the Project Specifications.
3.3.2 Client Store Conversion/Payment. Client
shall be invoiced separately for the cost of applicable POS
System Equipment, software and the Services performed to deliver
and install the equipment and software for the specific Client
store in order for that store to access and utilize the converted
Merlin Software. Client shall be invoiced for each Client store
upon verification and acceptance by the respective Store Manager,
or other authorized representative of Client, that the POS System
Equipment and software satisfy the acceptance criteria set forth
in Exhibit D. Upon TFN's completion of the installation, the
Store Manager or other authorized representative of Client shall
be available for the performance of the testing of the New POS
System for that specific Client store location. The system test
for each location shall be made in accordance with the procedures
set forth on Exhibit D. Upon completion of a successful test,
the Store Manager, or other authorized representative of Client,
shall immediately execute the Acceptance Certificate set forth in
Exhibit D. TFN shall invoice Client for each location upon
execution of the Acceptance Certificate. Client shall pay said
invoice within thirty (30) days of the date thereof. All
payments shall be made directly to the specific bank account of
TFN designated in writing by TFN (the "Lockbox Account"). In the
event Client pays said invoice earlier than thirty (30) days of
the invoice date, Client shall be entitled to a discount of
.00025 of the amount of said invoice for each day earlier than
thirty (30) days after said invoice date that said payment is
made. Upon calculation of any discount owed by TFN to Client,
TFN shall either promptly pay said discount amount to Client or
credit the amount of said discount against subsequent invoice
amounts. No invoice shall be dated earlier than the date it is
mailed (by first class mail) or personally delivered to Client.
3.3.3 Payment Security/Default. In the event that
Client fails to pay any invoice within thirty (30) days of its
date and upon ten (10) days prior notice of delinquency, TFN may,
at its discretion, (i) cease delivery of all equipment and
performance of all service until the delinquent payments are
brought current, and (ii) charge Client interest on such delin-
quent invoice at a rate equal to .00025 of the face amount of the
delinquent invoice for each day after said thirty (30) days until
payment is made.
3.3.4 Date Payments Credited. The date any payment
is credited to the Lockbox Account shall be deemed the date said
payment is made.
4. Personnel.
4.1 Project Manager and Project Coordinator. TFN
shall appoint a qualified member of its staff to act as project
manager, whose duties shall be to act as liaison between Client
and TFN and who shall have day to day responsibility for the
Project, and a project coordinator whose duties shall be to
coordinate the project and who shall have the overall responsi-
bility for the project. The selection of the individuals to act
as project manager and project coordinator shall be subject to
the reasonable approval of Client. TFN hereby initially appoints
and Client agrees to the following personnel: Project Manager -
Wade Walker; Project Coordinator - Tim Kor.
4.2 Other TFN Staff. TFN shall also provide
adequate staff to successfully complete all of the Services which
it is obligated to provide to Client pursuant to this Agreement.
4.3 Review Meetings. TFN shall hold review
meetings at Client's request at Client's headquarters to discuss
the current status of the Project and the Project Manager or
designated representative shall be required to attend all of such
meetings.
4.4 Work Rules; Cooperation. TFN's personnel and
subcontractors, will comply with Client's security regulations
including, without limitation, any procedure which Client person-
nel and consultants are normally asked to follow provided Client
informs TFN in advance of such regulations. Unless otherwise
agrees to by the parties hereto, TFN's personnel and subcontrac-
tors shall observe the working hours, working rules and policies
of Client while working on Client's premises provided Client
informs TFN of such rules and policies. TFN agrees to reasonably
cooperate and to provide any reasonable assistance to Client in
investigation of any security breaches which may involve TFN or
TFN's employees or subcontractors.
5. Taxes
TFN shall bill and Client shall pay the amount of any sales
use, excise or similar taxes assessed on the sale of any POS
System Equipment by TFN to Client or the performance of any
Services by TFN to Client as provided hereunder.
6. Confidentiality.
6.1 Confidential Information. Each party acknow-
ledges and agrees that it and its employees or agents may, during
the term of this Agreement, be exposed to or acquire information
which is proprietary to or confidential to the other party
hereto. Each party agrees to hold such information (the "Confi-
dential Information") in strict confidence and not to copy,
reproduce, sell, assign, license, market, transfer or otherwise
dispose of, give or disclose such Confidential Information to
third parties or to use such Confidential Information for any
purpose whatsoever except as otherwise specifically provided for
herein and to advise each of its employees and agents of their
obligations to keep such information confidential. The provi-
sions of this Section shall not apply to:
(i) information which at the time of
disclosure is, or without fault of the other party hereto,
becomes available to the public by publication or otherwise;
(ii) information which either party can show
was in its possession at the time of disclosure and was not
originally acquired, directly or indirectly, from the other party
hereto pursuant to this Agreement or otherwise;
(iii) information received from a third party
which had a right to transmit the same without violation of any
secrecy agreement of the party; or
(iv) such information which is required to be
disclosed pursuant to court order or by law.
6.2 Injunctive Relief. The parties hereto
acknowledge that breach of Section 6.1 hereof, will give rise to
irreparable injury to the other party hereto, inadequately
compensable in damages. Accordingly, the party, whose Confiden-
tial Information is used or disclosed contrary to the provisions
hereof, may seek and obtain injunctive relief against the breach
or threatened breach of the covenants set forth in Section 6.1
hereof, in addition to any other legal remedies which may be
available. The parties hereto acknowledge and agree that the
covenants contained in Section 6.1 hereof are necessary for the
protection of legitimate business interests of the beneficiaries
of such covenants and are reasonable in scope and content.
7. Acceptance.
7.1 Port Procedures/Merlin Software Conversion:
TFN will transition the Client's current Merlin Software to modem
supportable software and hardware which will operate the New POS
System. Upon completion of the conversion, TFN and Client will
review and test the Conversion/Port Process to determine if the
new software can perform the functions described in the Project
Specifications and that it has the same functionality as the
Existing POS System. The procedures attached hereto as Exhibit B
will be utilized by TFN and Client in order to determine whether
a successful conversion of the Merlin Software has been
performed. Client shall have until the 46th day after TFN has
fully installed the New POS System in all of Client's stores to
complete its testing of the Conversion/Port Process. Upon final
testing and acceptance, the Client will execute the Acceptance
Certificate, a copy of which is set forth in Exhibit E.
7.2 Client Store Location New POS System Instal-
lation. TFN shall deliver and install the necessary POS System
Equipment and software for the respective Client store location.
Upon TFN's completion of the installation, the Store Manager or
other authorized representative of Client, shall be available for
the performance of the testing of the New POS System for that
specific Client store location. The system test for each loca-
tion shall be made in accordance with the procedures set forth on
Exhibit D. Upon completion of a successful test, the Store
Manager, or other authorized representative of Client shall
immediately execute the Acceptance Certificate set forth in
Exhibit D.
8. Indemnity and Insurance.
8.1 Indemnity.
8.1.1 As used in this Section, "Client Indem-
nified Parties" shall mean Client, its subsidiaries, parent
corporation and other affiliates, and the officers, employees and
agents thereof. TFN agrees to and hereby does, indemnify, defend
and save and hold the Client Indemnified Parties harmless at all
times in the event that any Client Indemnified Party shall at any
time or from time to time suffer any damage, liability, loss,
cost, expense, claim, settlement or cause of action (including,
without limitation, reasonable attorneys' fees) arising out of,
resulting from or in connection with, or shall pay or become
obligated to pay any sum on account of (i) any breach or failure
of TFN to perform its obligations hereunder; (ii) any breach of
TFN's representations and warranties set forth herein; (iii)
personal injury or damage to property arising out of the furnish-
ing, performance or use of the Services or any Deliverables
provided hereunder; (iv) any claim brought by a third party of
any Deliverable; (v) any claim for payment of compensation,
salary or benefits asserted by an employee or subcontractor of
TFN; (vi) any claim arising out of TFN's failure to comply with
any applicable law or regulation, and (vii) the infringement or
alleged infringement of any patent, copyright, trade secret or
other proprietary right of any third party, arising out of the
acquisition, use or receipt by Client of any of the Deliverables
other than any infringement resulting from third party vendor of
TFN such as Hewlett Packard not owning all requisite rights to
the Deliverables sold or provided by it through TFN to the
Client. Notwithstanding the foregoing, the Client Indemnified
Parties shall not be entitled to indemnification hereunder for
any damage, liability, loss, cost, expense, claim, settlement or
cause of action arising out of or resulting from or in connection
with (i) Client's failure to obtain the right to modify the
Merlin Software or (ii) Client's gross negligence or willful
misconduct.
8.1.2 As used in this Section, "TFN Indemni-
fied Parties" shall mean TFN, its subsidiaries, parent corpora-
tion, if any, and other affiliates, and the officers, employees
and agents thereof. Client agrees to and hereby does, indemnify,
defend and save and hold the TFN Indemnified Parties harmless at
all times in the event that any TFN Indemnified Party shall at
any time or from time to time suffer any damage, liability, loss,
cost, expense, claim settlement or cause of action (including,
without limitation, reasonable attorneys' fees) arising out of,
resulting from or in connection with, or shall pay or become
obligated to pay any sum on account of (i) any breach or failure
by Client to perform its obligations hereunder; (ii) any breach
of Client's representations and warranties set forth herein;
(iii) any claim brought by Client's licensor of the Merlin
Software or any other third party, claiming that Client does not
have the right to modify the Merlin Software in the manner and to
the extent contemplated by the Project Specifications; (iv) any
claim for payment of compensation, salary or benefits asserted by
an employee or subcontractor of Client; and (v) any claim arising
out of Client's failure to comply with any applicable law or
regulation. Notwithstanding the foregoing, the TFN Indemnified
Parties shall not be entitled to indemnification hereunder for
any damage, liability, loss, cost, expense, claim, settlement or
cause of action arising out of or resulting from or in connection
with TFN's gross negligence or willful misconduct.
8.1.3 Whenever any claim shall arise for
indemnification pursuant to this Section 8.1, the party seeking
indemnification (the "Indemnified Party") shall promptly notify
the other party (the "Indemnifying Party") of the claim, and when
known, the facts constituting the basis for such claim provided,
however, that failure of the Indemnified Party to provide the
Indemnifying Party with such notice shall not excuse or affect
the Indemnifying Party's indemnification obligations hereunder
unless the failure to provide such notice shall actually
prejudice the Indemnifying Party. The Indemnified Party shall
have the right to control the defense of any suit, action,
investigation or proceeding using one or more counsel reasonably
satisfactory to the Indemnifying Party; however, the Indemnified
Party shall not settle any such suit, action, investigation,
claim or proceeding without the consent of the Indemnifying Party
which shall not be unreasonably withheld.
8.2 Insurance. TFN shall procure and maintain
for itself and its employees all insurance coverages as required
by Federal or state law, including workers' compensation
insurance. TFN also agrees to maintain $2 million general
liability, $2 million automobile liability and $2 million
professional liability coverage underwritten by an insurer
reasonably acceptable to Client. TFN agrees to provide Client
with certificates of insurance evidencing such coverage and
naming Client as an additional insured. Said certificates will
include a provision whereby thirty (30) days notice must be
received by Client prior to coverage cancellation by either TFN
or the applicable insurer.
9. Proprietary Rights, Title and Risk of Loss.
9.1 Title to Deliverables. Title to any Deliver-
able (other than Services) shall pass from TFN to Client upon
payment therefor by Client.
9.2 Risk of Loss. Risk of loss to any Deliver-
able (other than Services) shall pass to Client upon delivery
thereof to Client's premises as specified in the Project Specifi-
cations.
9.3 Proprietary Rights. Upon payment by Client,
all work performed hereunder, including but not limited to, the
development, modification or enhancement of systems computer
programs, software, operating instructions, design concepts and
all other documentation developed for or relating to Client and
all documents, data and other information prepared for Client by
TFN, its employees or agents, shall belong to Client. However,
excluded from Client's exclusive ownership are the following:
9.3.1 Software subject to third party non-exclu-
sive license agreements (but excluding all such third party
licenses);
9.3.2 Information which is the public domain;
9.3.3 Generic ideas, concepts, know-how and
techniques within the computer design, support and consulting
business generally;
9.3.4 General computer consulting knowledge
and information which TFN had or acquired during the performance
of its services for Client and which do not include the Confiden-
tial Information of Client ("TFN's Knowledge"); and
9.3.5 Rights of manufacturers of the POS
System Equipment (hardware, software and materials) supplied by
TFN.
TFN hereby grants to Client a perpetual, royalty free, assign-
able, non-exclusive license to use in any manner, which Client
may determine, in its sole and absolute discretion, TFN's
Knowledge contained in the services performed for Client. For
the avoidance of doubt TFN hereby agrees and acknowledges that as
a result of the transfer of the proprietary rights from TFN to
Client as provided above, TFN (i) shall have no right to and will
not design, license and/or sell a point of sale system having
substantially the same functionality as the New POS System to any
other person or entity and (ii) TFN shall no right to use,
exploit, sell or disclose the Merlin Software, as modified by TFN
pursuant hereto.
10. Warranties.
10.1 TFN's Warranties.
10.1.1 TFN warrants that: (i) TFN shall comply
with all applicable laws and regulations; (ii) in rendering the
Services, it and its employees have all necessary rights,
authorizations, or licenses to provide the Services hereunder and
to provide all related materials and services required under this
Agreement or any agreements entered into pursuant hereto; (iii)
each of its employees assigned to perform Services hereunder
shall have the proper skill, training and background so as to be
able to perform in a competent and professional manner and that
all work will be so performed in accordance with the Project
Specifications; (iv) Client shall receive good and valid title to
all Deliverables provided under this Agreement, free and clear of
all liens, security interests or other encumbrances (except for
any applicable manufacturers' licenses); (v) TFN has obtained for
Client all third party licenses (other than to the Merlin Soft-
ware) necessary for Client to operate the New POS System in
accordance with the Project Specifications and all of said
licenses are enforceable; (vi) the Services and the New POS
System conform to the objectives set forth in the Project Speci-
fications; (vii) all POS System Equipment will be new and unused,
except for normal testing and use in the setup and installation
thereof; and (viii) TFN shall pass through all manufacturers'
warranties and indemnities to Client.
10.1.2. In the event that Client notifies TFN at
any time prior to the end of the forty-five (45) day period
commencing upon TFN's installation of the New POS System in all
of the Client's stores that (i) the New POS System does not have
the same functionality as the Existing POS System or does not
meet the specifications set forth in the Project Specifications
and/or (ii) there are defects or "bugs" in the Conversion/Port
Process provided by or through TFN, TFN, at its sole cost and
expense, shall promptly alter or modify the New POS System to
cause such system to meet the same functionability as the
Existing POS System and to meet the specifications set forth in
the Project Specifications and/or TFN, at its sole cost and
expense, shall promptly remedy such defects and/or "bugs."
10.2 Client's Warranties. Client warrants that:
(i) it has the title or license to use and convert the Merlin
Software in accordance with the Project Specifications; (ii) it
has the necessary approvals and authorizations to enter into this
contract; and (iii) it has the funding available to pay for the
POS System Equipment, software and other Deliverables and
services to be supplied by TFN.
11. Reference to Court-Appointed Referee.
In order to expedite any legal action initiated as a result
of a dispute in connection with this Agreement other than an
action seeking equitable relief as contemplated by Section 6.2
hereof, upon a request by one of the parties hereto the parties
shall stipulate to a mutually acceptable referee in Los Angeles
County, California to hear and decide the dispute within six (6)
months of initiation of any such action. Such action shall be
governed by the procedures set forth in Chapter 6 of Title 8 of
Part 2 of the California Code of Civil Procedure (commencing at
Section 638). The referee will preside over the dispute in the
usual and customary manner as a judge would at any court proceed-
ing and shall have all the powers of a judge. All relevant
provisions of the California Code of Civil Procedure, including
discovery, shall be applicable to the proceeding. If the parties
cannot agree on the appointment of a referee, the appointment
shall be made by the Superior Court of the County of Los Angeles,
California pursuant to Section 640 of California Code of Civil
Procedure. As part of the stipulation, the parties shall agree
that any decision rendered by the referee shall be appealable.
Unless overturned or modified on appeal the parties hereto agree
that any decision of such referee shall be binding on both of
them. The cost of the referee shall be equally divided between
the parties.
12. Miscellaneous.
12.1 Maintenance. TFN has proposed to Client a
plan in which it can select an extended warranty/maintenance
program which maintenance program will begin the day after the
manufacturers' one (1) year warranty ends. Client may select the
extended warranty/maintenance program is desires and is required
to issue a separate Purchase Order for said program. The
extended warranty/maintenance programs will be provided directly
by the manufacturer and must be ordered within the time frames
communicated by TFN to Client in order to preserve the special
pricing TFN obtained for Client.
12.2 Other Deliverables. Other equipment, soft-
ware, products or deliverables not specified in the Project
Specifications which Client desires to purchase (i.e., Data
Dictionary) must be ordered by Client via a separate Purchase
Order as such equipment, software, products or deliverables are
not included in this Agreement. TFN will assist Client in
obtaining pricing and ordering the other equipment, software,
products or deliverables which it desires.
12.3 Time of the Essence. TFN acknowledges and
agrees that time is of the essence for all of its obligations
hereunder.
12.4 Advertising. Without the prior written
consent of Client, TFN shall not use the Client's name or any of
its trademarks or service marks in any promotional, sales and/or
marketing materials and endeavors, including, without limitations
television and radio commercials, advertisements and the like.
12.5 Waiver of Right of Jury Trial.
TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH
CANNOT BE WAIVED, THE PARTIES HERETO EACH HEREBY IRREVOCABLY
WAIVE AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS PLAIN-
TIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO A TRIAL BY JURY IN
ANY FORM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, CAUSE OF
ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER OR
REMEDY UNDER OR IN CONNECTION WITH OR ARISING OUT OF OR BASED
UPON THIS AGREEMENT, OR THE SUBJECT MATTER HEREOF OR ANY RELA-
TIONSHIP BETWEEN THE PARTIES HERETO EXISTING IN CONNECTION
HEREWITH, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING
OR WHETHER IN CONTRACT OR TORT OR OTHERWISE.
12.6 Survival of Provisions. The covenants set
forth in Sections 6, 8, 9 and 10 shall survive the termination of
this Agreement.
12.7 Notices. Any notice or communication from
one party to the other concerning the terms of this Agreement
shall be in writing and shall be delivered personally or sent by
certified first class mail, return receipt requested, postage
prepaid or by courier to the address specified herein or such
other address as either party may in the future specify in
writing to the other. All notices and other communications shall
be deemed delivered upon receipt thereof. Until notice is given
as provided herein, all notices or other communications shall be
directed as follows:
If to TFN:
The Future Now, Inc.
18872 Bardeen Way
Irvine, California 92715
Attention: Tim Kor
and to:
Norma Skoog, General Counsel
The Future Now, Inc.
8044 Montgomery Road, Suite 601
Cincinnati, Ohio 45236
If to the Client:
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Attention: Anne McLaughlin
with a copy to:
Roy Shults, Esq.
Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
12.8 Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of California.
12.9 Amendment. This Agreement may be modified or
amended only by a writing signed by bother parties hereto.
12.10 Entire Agreement. This Agreement, the
Project Specifications to be attached hereto and all exhibits and
schedules attached hereto set forth the entire agreement and
understanding of the parties hereto concerning the subject matter
of this Agreement and supersede all prior agreements, arrange-
ments and understandings regarding such subject matter between
the parties hereto.
12.11 Independent Contractor. TFN is acting, in
performance of this Agreement, as an independent contractor. TFN
shall provide under this Agreement the services of only those
personnel who are employees or subcontractors of TFN for federal
tax purposes. Personnel supplied by TFN hereunder are not
Client's employees or agents and TFN assumes full responsibility
for their acts. TFN shall be solely responsible for the payment
of compensation of TFN's employees assigned to perform services
hereunder and such employees shall be informed that they are not
entitled to the provision of any Client employee benefits.
Client shall not be responsible for the payment of workers'
compensation, disability benefits and unemployment insurance or
for withholding and paying employment taxes by any TFN employee,
but such responsibility shall be solely that of TFN.
12.12 Assignment. This Agreement shall be binding
upon the parties' successors and permitted assigns. Neither
party may assign this Agreement or any of its rights or obliga-
tions hereunder without the prior written consent of the other,
which consent will not be reasonably withheld, and such unauthor-
ized attempted assignment shall be void, except that, without the
consent of the other party, each party hereto may assign this
Agreement or any of its rights or obligations hereunder upon
written notice to the other party to any subsidiary, parent
corporation or any of its other affiliated companies or to any
corporation, partnership, other entity or person who acquires all
or substantially all of the assets of the assigning party. A
change in the ownership of TFN or Client shall not constitute an
assignment for purposes of this Section.
12.13 Waiver. A failure of either party to exer-
cise any right provided for herein, shall not be deemed to be a
waiver of any other right hereunder.
12.14 Force Majeure. Neither party shall be liable
to the other for any delay or failure to perform due to any fire
or any earthquake, floor or other natural disaster. Performance
time shall be considered extended for a period of time equivalent
to the time lost because of any such delay. No payment shall be
made by Client for any fees or expenses incurred by TFN by reason
of such delay and TFN shall use its best efforts to perform its
obligations during such period of delay.
12.15 Severability. In the event any one or more
provisions of this Agreement is invalid or otherwise unenforce-
able, the enforceability of the remaining provisions shall be
unimpaired.
12.16 Attorneys' Fees. In the event suit is
brought to enforce or interpret any part of this Agreement or the
rights or obligations of any party hereto, the prevailing party
shall be entitled to recover as an element of such party's costs
of suit, and not as damages, reasonable attorneys' fees to be
fixed by the court or the referee pursuant to Section 11 hereof,
if one is so appointed. The prevailing party shall be the party
who is entitled to recover its costs of suit whether or not suit
proceeds to final judgment. A party not entitled to recover its
costs, shall not recover attorney's fees. No sum for attorneys'
fees shall be counted and calculated in the amount of judgment
for purposes of determining whether a party is entitled to
recover its costs or attorneys' fees.
12.17 Headings. The headings contained in this
Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
THE FUTURE NOW, INC.
By: /s/ Norma Skoog
-------------------------
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ Anne E. McLaughlin
--------------------------
V.P., Treasurer
<PAGE>
EXHIBIT B
Acceptance Testing Procedures for
Successful Conversion of Merlin Software
The following testing will be done to determine whether
there has been a successful conversion/port process of the Merlin
Software:
1. Port Code
2. Test Code
3. Send converted software to Client personnel to
perform quality assurance testing.
4. Set up a mock medium size Client store (i.e., 10
users) and run tests for a two week period.
5. Install New POS System into five (5) pilot stores.
Test the five (5) pilot stores for a period of two (2) weeks.
6. Install New POS System into twenty (20) additional
stores during November, 1994, to further establish that there is
the same functionality. Testing to run through January 15, 1995.
<PAGE>
EXHIBIT C
Provisional Conversion Acceptance Certificate
I, __________________________, the ______________________ of
Wherehouse Entertainment, Inc. ("Wherehouse"), am authorized to
provisionally accept on behalf of Wherehouse, The Future Now,
Inc.'s port process/conversion of the Merlin Software. It is the
position of Wherehouse that the initial testing has shown the New
POS System to have all of the functionality of the Merlin
Software.
Further, by the provisional acceptance of the port process/
conversion, Wherehouse further authorizes The Future Now, Inc. to
begin installation of the New POS System at all of the Wherehouse
individual store locations.
This provisional acceptance certificate does not represent
final acceptance by Wherehouse of the Conversion/Port Process and
the New POS System. Wherehouse shall be free to continue to test
the Conversion/Port Process until a period ending 45 days after
the New POS System has been installed in all of the Wherehouse's
individual store locations.
WHEREHOUSE ENTERTAINMENT, INC.
By _________________________ Date ____________________
Name _______________________
Title _______________________
<PAGE>
EXHIBIT D
Installation Testing Checklist
After installation is complete, the following checklist is to be
run:
Check off Test Description
- --------- --------------------------------------------------
HP9000 computer secured to fixture as per diagrams
in the Installation Guide.
Console terminal installed and operational.
Verify that all files were transferred successful-
ly (file counts match the PERTEC file counts for
all files except SYS.* and SYMEN).
UPS installed and PowerCheck software operational.
The command is - "/PC".
System Printer operational. Have the store
manager or associate print an employee listing or
an end of day report to verify that the system
printer is operational.
Bar code printer operational. Have the store
manager or associate print at least ten bar codes
all at once.
Remote support modem operational. Have Merlin
Operations dial-in to the system to verify the
dial-in capability.
Verify that the time and date are correct on the
system. The command is "date".
Modem dial-out capability operational. Log in as
root and enter the command "ppl-sv netblazer" once
the ppl is successful, enter the command "ping
polar". Once the ping begins working, enter "^C"
to cancel the ping. The ppl will time out after
one minute.
Verify that the QJC-1000 tape drive is working by
inserting the cpio backup tape into the drive,
login as root and enter the command "et-f/bin/
fullbin hh:mm" where hh:mm is the current time
plus three minutes. Instruct the manager to place
this tape in the store safe when the backup is
complete. This is the full recovery in the
event that the system crashes and needs a full
recovery.
Verify that each terminal works. This is verified
by doing the following:
- Verify that each terminal (T1 through
T32) is defined as a Wyse30
Use the terminal options menu on
the Merlin system.
- Verify that each slave printer for
terminals T1 through T32 is an OKI182.
- Print an employee (associate) listing on
the slave printer of each terminal.
- Re-print a receipt on the slave printer
of each terminal.
Log off the console terminal.
<PAGE>
EXHIBIT E
Acceptance Certificate
I, __________________________, the ________________________
of Wherehouse Entertainment, Inc. ("Wherehouse"), am authorized
to accept the New POS System on behalf of Wherehouse. I hereby
accept the New POS System.
WHEREHOUSE ENTERTAINMENT, INC.
By: _____________________________ Date: _________________
Name: ___________________________
Title: __________________________
OMA Job No. 2265-10
Wherehouse
FIFTH AMENDMENT TO LEASE
THIS FIFTH AMENDMENT TO LEASE (this "Fifth Amendment") is
entered into as of this 23rd day of December, 1994, by and
between Patrician Associates, Inc., a California corporation and
OMA Harbor Tech H. Associates, a California limited partnership
(collectively, "Lessor") and Wherehouse Entertainment, Inc., a
Delaware corporation, with reference to the following facts and
circumstances:
A. WHEREAS, Lessor and Lessee heretofore entered into that
certain Standard Office Lease - Net dated October 23, 1985 (the
"Original Lease"), concerning to those certain premises commonly
referred to as the entire second floor of the building located at
19701 Hamilton Avenue, Torrance, California.
B. WHEREAS, the Original Lease was subsequently modified
pursuant to the terms of (i) that certain Acceptance and First
Amendment to Lease dated July 14, 1986, (ii) that certain Second
Amendment to Lease dated August, 1986, (iii) that certain Third
Amendment to Lease dated November, 1986, and (iv) that certain
Acceptance and Fourth Amendment to Lease dated June, 1987. As
amended by the foregoing amendments, the Original Lease shall
hereinafter be referred to as the "Lease." Pursuant to the Third
Amendment to Lease, the Premises were expanded to include a
portion of the first floor of the subject building.
C. WHEREAS, Lessor and Lessee desire to further amend the
Lease, as hereinafter provided.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Lessor
and Lessee hereby agree as follows:
1. Extension of Original Term. The Original Term of the
Lease, which is presently scheduled to expire on June 9, 1996,
shall be extended, such that the Original Term shall instead
expire on May 31, 1999.
2. Reduction of Base Rent. Effective as of January 1,
1995, the monthly Base Rent payable under the Lease shall be
reduced to $58,166.00.
3. Reaffirmation. Except as expressly modified herein,
the Lease is hereby reaffirmed and ratified by Lessor and Lessee
in its entirety.
THIS SPACE INTENTIONALLY LEFT BLANK
<page-2>
IN WITNESS WHEREOF, Lessee and Lessor have executed this
Fifth Amendment as of the day and year first written above.
LESSEE: WHEREHOUSE ENTERTAINMENT, INC., a Delaware
corporation
By /s/ Scott Young
-----------------------
Name Printed Scott Young
Title Chairman and CEO
LESSOR: PATRICIAN ASSOCIATES, INC., a California
corporation
By /s/ John N. Urban
-----------------------
Name Printed John N. Urban
Title Vice President
By /s/ Ronald B. Franklin
-----------------------
Name Printed Ronald N. Franklin
Title Vice President
and
OMA HARBOR TECH H. ASSOCIATES,
a California limited partnership
By /s/ Donald W. Koch
-----------------------
Name Printed Donald W. Koch
Title Vice President
By /s/ Myra K. Roages
------------------------
Name Printed Myra K. Roages
Title Secretary
FISCAL YEAR '95
WHEREHOUSE ENTERTAINMENT, INC.
HOME OFFICE
PARTNERSHIP
PROGRAM
<PAGE>
<PAGE>
DATE: OCTOBER 3, 1994
FROM: RENEE NESLAND
AVP HUMAN RESOURCES
RE: FY'95 HOME OFFICE BONUS PLAN
This year's Home Office Bonus is a cooperative program with the
field organization. This year's bonus is driven off only one
factor... year end HEBIT. The measurement period for the HEBIT
is February 1, 1994 to January 31, 1995. The HEBIT targets and
bonus pool dollars have been structured to reflect our Company
Profit Formula. When rolled up, the factors equal the agreed
upon profit target expected by our owners and banks.
A bonus will be paid only if the Company exceeds its agreed upon
HEBIT (Historically Adjusted Earnings Before Interest and Taxes)
plan. HEBIT must exceed $23 million dollars to begin to qualify
for Home Office Bonus Distribution. The Home Office Bonuses will
be paid on or about April 15, 1995.
Attached you will find the details of the FY'95 Bonus Program
including your bonus potential.
<page-1>
WHEREHOUSE ENTERTAINMENT, INC.
HOME OFFICE BONUS PLAN
The maximum bonus pool potential is $550,000. This $550,000 is
composed of:
o 11% of the HEBIT dollars between $23 and $25 million;
and
o 17% of the HEBIT dollars between $25 and $27 million
This pool will be allocated among eligible participants according
to their maximum percent (%) potential. Your maximum bonus
potential is 8% of your base pay. (A calculation example is on
page 2). Unallocated dollars in the bonus pool will be discre-
tionary dollars to be awarded by the CEO.
DISTRIBUTION CRITERIA:
1. An Associate must be employed by the Company on the day the
bonuses are distributed. Any associate whose employment
with the company terminates for any reason whatsoever before
the bonus distribution date, shall forfeit any bonus
payment. In the event of death, disability or a normal
retirement, the Associate or his/her estate, will be
entitled to the appropriate bonus earned.
2. Any Associate who has been placed on disciplinary probation,
who has received a final warning, or who has received an
overall unsatisfactory performance appraisal from his
supervisor for the fiscal year ending January 31, 1995 will
not be eligible to receive any bonus payment.
3. Bonus payment for any participating Associate who did not
hold his or her position for the entire measurement period,
will be pro-rated.
4. All bonus payments will be paid out by payroll checks, less
applicable taxes and other deductions.
<page-2>
WHEREHOUSE ENTERTAINMENT, INC.
Home Office Bonus Plan
Page 2
5. Bonuses may be paid out as long as the Company is not in
violation of Bank and subdebt payments and covenant require-
ments. If, as a result of unanticipated changes in the
capital requirements of the Company or other unanticipated
future events of a material nature, the Board of Directors
of the Company believes, in its sole discretion, the payment
of the bonuses contemplated by this Plan would be inappro-
priate, the Plan may be amended in whole or part with
approval of a majority vote of the Board of Directors of the
Company.
ASSUMPTION
Eligible participant: $50,000 annual salary
8% bonus potential
CALCULATION
Bonus Pool at $25 million HEBIT
[11% of dollars between $23 and $25 million] = $220,000
$220,000 is 40% of the $550,000 Bonus Pool
[% Potential Bonus] = 8%
8% x $50,000 [Annual Salary] = $4,000 [Maximum Bonus]
$4000 [Maximum Bonus] x 40% = $1,600 [Bonus]
WEI HOLDINGS, INC.
19701 Hamilton Avenue
Torrance, California 90509
January 17, 1995
Mr. Jerry E. Goldress
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90509
Re: Non-qualified Stock Options
Dear Jerry:
I am pleased to confirm the grant to you of an option to
purchase 30,000 shares of common stock, $.10 par value per share,
(the "Common Stock"), of WEI Holdings, Inc. (the "Corporation")
at a per share exercise price of $44, upon the terms and condi-
tions that follows (the "Option").
1. The Option is fully vested and exercisable in full
immediately. The term of the Option shall expire on October 1,
2003.
2. The Option shall not be transferred (other than to your
estate), assigned, pledged or hypothecated in any way, and shall
not be subject to execution, attachment or similar process.
3. The Option shall be exercised by giving written notice
to the Corporation at its execution offices. Payment shall be
made in full in cash. The Corporation shall collect from you all
federal and state taxes, if any, required to be withheld in
connection with an exercise of the Option prior to delivery of
any shares upon such exercise. In addition, you agree to take
such actions and to execute such documents in connection with the
exercise of the Option as counsel for the Corporation may reason-
ably deem necessary for compliance with all applicable laws,
rules and regulations, including federal and state securities
laws.
4. All shares of Common Stock issued upon exercise of the
Option shall not be transferable (other than to your estate),
assignable, pledged or hypothecated in any way, and shall not be
subject to execution, attachment or similar process, prior to the
occurrence of an Initial Public Offering (as defined in the
Stockholders' Agreement among the Corporation, ML Investors (as
defined therein) and certain others party thereto, dated as of
June 11, 1992 (the "Stockholders' Agreement"), a copy of which
has previously been provided to you.)
<page-2>
WEI Holdings, Inc.
Page 2
5. The Corporation acknowledges that you are not a party
to the Stockholders' Agreement. Notwithstanding the previous
sentence, the Corporation agrees to provide you, in connection
with the shares of Common Stock issuable upon exercise of the
Option, with the incidental registration rights contained in
Section 5.2 of the Stockholders' Agreement, to the extent that
such rights do not conflict with any other registration rights
granted by the Corporation at any time, and you and the Corpora-
tion agree to comply with the provisions of Sections 5.3 through
5.5 of the Stockholders' Agreement in connection with any such
registration.
6. The Option is a non-qualified stock option and is not
intended to constitute an incentive stock option. You acknow-
ledge that the Option is not being granted pursuant to the WEI
Holdings, Inc. Management Stock Option Plan effective June 11,
1992, as amended (the "Plan," a copy of which was previously
provided to you), or any other plan or program of the Corpora-
tion.
7. The grant of the Option and the issuance of shares of
Common Stock upon the exercise thereof are expressly conditioned
upon compliance with all applicable laws, rules and regulations,
including federal and state securities laws, and agreements to
which the Corporation is a party, and, if the Corporation is
unable to comply therewith after making reasonable effort to do
so, it may decline to allow the exercise of the option until it
is able to effect such compliance. If it is ultimately deter-
mined, in the sole judgment of the Corporation, that it cannot
reasonably effect such compliance, the Corporation shall have no
liability to you herewith.
8. You agree that you will acquire the shares of Common
Stock issuable upon exercise of the Option for investment
purposes only and not with a view to resale or other distribution
thereof to the public in violation of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and will not dispose of
any such shares in any transaction that, in the opinion of
counsel to the Corporation, would violate the Exchange Act, or
the rules and regulations thereunder, or any applicable state
securities, or "blue sky," laws.
9. In the event of the declaration of any stock dividend
on the Common Stock or in the event of any reorganization,
merger, consolidation, acquisition, separation, recapitalization,
split-up, combination or exchange of the Common Stock or like
adjustment, the number of shares issuable upon exercise of the
Option, and the exercise price of the Option, shall be adjusted
by appropriate changes in the Option (including the substitution
of cash or other property for shares). Any such adjustment to
the Option or exercise price shall be made by action of the Board
of Directors or the Compensation Committee of the Corporation,
whose determination shall be conclusive.
<page-3>
WEI Holdings, Inc.
Page 3
10. You acknowledge that you shall not have any rights as a
stockholder with respect to the Option or the shares of Common
Stock issuable upon exercise of the Option until such shares are
issued and paid in full, and that nothing in this Agreement shall
be deemed to confer on you any right to employment with the
Corporation.
11. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
If you agree with the terms set forth in this letter, please
execute and return the enclosed copy of this letter, at which
time this letter (including the grant of the Option) shall
constitute a binding agreement between the parties hereto.
Very truly yours,
WEI HOLDINGS, INC.
By: /s/ Anne E. McLaughlin
-----------------------------
Anne E. McLaughlin
Vice President, Treasurer
and Secretary
AGREED AND ACCEPTED:
/s/ Jerry E. Goldress
- --------------------------
Jerry E. Goldress
LIMITED WAIVER
May 11, 1995
WEI Holdings, Inc.
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as
of June 11, 1992, as amended by that certain First Amendment to
Credit Agreement dated as of November 17, 1992, that certain
Second Amendment to Credit Agreement dated as of August 17, 1993
and that certain Third Amendment and Limited Waiver to Credit
Agreement dated as of January 27, 1994 (as so amended, the
"Credit Agreement") among WEI Holdings, Inc. ("Holdings"), Where-
house Entertainment, Inc. ("Borrower"), the lenders party thereto
("Lenders") and Bankers Trust Company, as agent for Lenders
("Agent"). Capitalized terms used herein without definition
shall have the meanings assigned to such terms in the Credit
Agreement.
Holdings and Borrower have informed Agent and Lenders that
they (a) do not satisfy the requirements of Section 6.6B of the
Credit Agreement for the fourth Fiscal Quarter of Fiscal Year
1995, (b) may not satisfy the requirements of Sections 6.6A, B
and C of the Credit Agreement for the first Fiscal Quarter of
Fiscal Year 1996 and (c) will not be able to satisfy the require-
ment of Section 5.1(iii) to deliver an unqualified audit opinion
with respect to the financial statements for Fiscal Year 1995.
At the request of Holdings and Borrower, the undersigned Lenders,
constituting Requisite Lenders under the Credit Agreement, hereby
waive until June 30, 1995 compliance with the provisions of (i)
Section 6.6B of the Credit Agreement with respect to the fourth
Fiscal Quarter of Fiscal Year 1995, (ii) Sections 6.6A, B and C
of the Credit Agreement with respect to the first Fiscal Quarter
of Fiscal Year 1996 and (c) Section 5.1(iii) relating to the
deliver of an unqualified audit opinion with respect to the
financial statements for Fiscal Year 1995; provided that during
the period (the "Waiver Period") beginning on the date hereof and
ending on June 30, 1995, Holdings and Borrower shall use their
best efforts to develop and implement a plan for the
restructuring of their capital structure. In furtherance of the
foregoing and as continuing condition to the effectiveness of
this Limited Waiver, Holdings and Borrower hereby agree on the
last Business Day of each week during the Waiver Period to
deliver to Agent and Lenders a written report describing the
steps taken by Holdings and Borrower pursuant to the foregoing
proviso during such week and proposed to be taken by Holdings and
Borrower pursuant to the foregoing proviso during such week and
proposed to be taken by Holdings and Borrower during the
following week, to deliver to the Agent and Lenders by June 10,
1995 a proposed term sheet outlining a capital restructuring by
the Borrower, to consult with Agent and Lenders concerning such
actions and proposed actions and to promptly provide such other
information and data with respect to Holdings' and Borrower's
effort to restructure their debt obligations as Agent or any
Lender may request from time to time.
Without limiting the generality of the provisions of
subsection 10.7 of the Credit Agreement, the waiver set forth
herein shall be limited precisely as written and relates solely
to the noncompliance by Holdings and Borrower with the provisions
of Sections 5.1(iii) and 6.6A, B and C of the Credit Agreement in
the manner, to the extent for the period described above, and
nothing in this Limited Waiver shall be deemed to (a) constitute
a waiver of compliance by Holdings or Borrower with respect to
(i) Section 5.1(iii) or 6.6A, B or C of the Credit Agreement in
any other instance or (ii) any other term, provision or condition
of the Credit Agreement or any other instrument or agreement
referred to therein, (b) prejudice any right or remedy that Agent
or any Lender may now have (except to the extent such right or
remedy was based upon existing defaults that will not exist after
giving effect to this Limited Waiver) or may have in the future
under or in connection with the Credit Agreement or any other
instrument or agreement referred to therein or (c) create any
obligation on the part of Agent or any Lender to renew or extend
the waiver contained herein. Except as expressly set forth
herein, the terms, provisions and conditions of the Credit Agree-
ment and the other Loan Documents shall remain in full force and
effect and in all other respects are hereby ratified and
confirmed.
In order to induce Lenders to enter into this Limited
Waiver, each of Holdings and Borrower, by its execution of a
counterpart of this Limited Waiver, represents and warrants that
after giving effect to this Limited Waiver (a) no Event of
Default exists under the Credit Agreement, (b) all representa-
tions and warranties contained in the Credit Agreement and the
other Loan Documents are true, correct and complete in all
material respects on and as of the date hereof except to the
extent such representations and warranties specifically relate to
an earlier date, in which case they were true, correct and
complete in all material respects on and as of such earlier date,
and (c) Holdings and Borrower have performed all agreements to be
performed on their part as set forth in the Credit Agreement.
This Limited Waiver may be executed in any number of coun-
terparts and by different parties hereto in separate counter-
parts, and each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall
constitute but one and the same instrument. The limited waiver
set forth herein shall become effective as of the date hereof
upon the execution of counterparts hereof by Holdings, Borrower
and Lenders constituting Requisite Lenders and receipt by Agent
of written or telephonic notification of such execution and
authorization of delivery thereof.
[Remainder of page intentionally left blank]
<PAGE>
<page-S-1>
THIS LIMITED WAIVER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.
LENDERS:
BANKERS TRUST COMPANY, individually
and as Agent
By: /s/ Robert R. Telesca
-----------------------------
Title: Assistant Vice President
HELLER FINANCIAL, INC.
By: /s/ L. Hayes
-----------------------------
Title: Assistant Vice President
PRIME INCOME TRUST
By: /s/ Rafael Scolari
-----------------------------
Title: Vice President
UNITED STATES NATIONAL BANK
OF OREGON
By: /s/
-----------------------------
Title:
S-1
<PAGE>
<page-S-2>
BORROWER:
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ Kathy J. Ford
------------------------------
Title: Vice President
Chief Financial Officer
HOLDINGS:
WEI HOLDINGS, INC.
By: /s/ Kathy J. Ford
------------------------------
Title: Assistant Secretary
S-2
Ratio of Earnings to Fixed Charges
(Amounts in thousands except for ratio)
<TABLE>
<CAPTION>
For the For the
Four Eight
Fiscal Years Months Months Fiscal Years
------------------ May 31, Jan. 31, -------------------
FY 91 FY 92 1992 1993 FY 94 FY 95
Actual Actual Actual Actual Actual Actual
-------- -------- -------- -------- -------- ---------
Predecessor Company
---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES
Interest expense $ 18,416 $ 15,876 $ 4,165 $ 14,190 $ 21,826 $ 21,126
Amortization of
deferred financing
costs 1,620 2,176 763 1,513 1,699 1,916
-------- -------- -------- -------- -------- ---------
Total interest expense 20,036 18,052 4,928 15,703 23,525 23,041
Interest portion of
rental expense 15,715 17,249 4,858 9,537 14,536 15,143
-------- -------- -------- -------- -------- ---------
Total fixed charges $ 35,751 $ 35,301 $ 9,786 $ 25,240 $ 38,061 $ 38,184
======== ======== ======== ======== ======== =========
EARNINGS
Income from continuing
operations before
income tax $ (3,978) $ 3,948 $ (3,835) $ (5,107) $(61,136) $(149,238)
Total fixed charges 35,751 35,301 9,786 25,240 38,061 38,184
-------- -------- -------- -------- -------- ---------
$ 31,773 $ 39,249 $ 5,951 $ 20,133 $(23,075) $(111,053)
Ratio of earnings to Inade- Inade- Inade- Inade- Inade-
fixed charges quate quate quate quate quate
earnings 1.11 earnings earnings earnings earnings
======== ======== ======== ======== ======== =========
Amount of coverage
deficiency $ 3,978 $ $ 3,835 $ 5,107 $ 61,136 $ 149,238
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING INFORMATION HAS BEEN EXTRACTED FROM THE FINANCIAL STATEMENTS IN
THE FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1995.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> JAN-31-1995
<CASH> 1,962
<SECURITIES> 0
<RECEIVABLES> 3,155
<ALLOWANCES> 0
<INVENTORY> 115,639
<CURRENT-ASSETS> 124,999
<PP&E> 76,661
<DEPRECIATION> 29,126
<TOTAL-ASSETS> 197,680
<CURRENT-LIABILITIES> 288,149
<BONDS> 113,716
<COMMON> 0
0
0
<OTHER-SE> (112,449)
<TOTAL-LIABILITY-AND-EQUITY> 197,680
<SALES> 409,484
<TOTAL-REVENUES> 499,625
<CGS> 297,589
<TOTAL-COSTS> 625,822
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,041
<INCOME-PRETAX> (149,238)
<INCOME-TAX> 13,007
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (162,245)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
