<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________
to _______________
Commission File Number 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)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class April 30, 1996
Common Stock, $.01 Par Value 10
Total of 20 Pages
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INDEX
WHEREHOUSE ENTERTAINMENT, INC.
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
April 30, 1996 (Unaudited) and January 31, 1996 3
Condensed Statements of Operations -
Three Months Ended April 30, 1996 and 1995 (Unaudited) 4
Condensed Statements of Cash Flows -
Three Months Ended April 30, 1996 and 1995 (Unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
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PART I.
FINANCIAL INFORMATION
WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED BALANCE SHEETS
April 30 January 31
1996 1996
------------- -------------
(Unaudited) Note 1
ASSETS
Current Assets
Cash $ 6,692,000 $ 7,353,000
Receivables 1,774,000 1,583,000
Prepaid inventory deposits 4,467,000 10,880,000
Merchandise inventory 92,515,000 90,951,000
Other current assets 4,387,000 4,628,000
------------- -------------
Total current assets 109,835,000 115,395,000
Rental inventory, net 15,986,000 14,004,000
Equipment and improvements, net 33,216,000 37,687,000
Financing costs and leasehold interest, net 997,000 641,000
Other assets 718,000 800,000
------------- -------------
Total assets $ 160,752,000 $ 168,527,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued expenses 25,605,000 29,040,000
Current maturities of capital lease obligations
and long-term debt 2,657,000 2,655,000
------------- -------------
Total current liabilities 28,262,000 31,695,000
Capital lease obligations & long-term debt 1,287,000 1,498,000
Other long-term liabilities 9,857,000 9,494,000
Liabilities subject to compromise (Note 3) 276,629,000 278,857,000
Deferred income taxes 3,270,000 3,270,000
Shareholder's equity
Common stock, $.01 par value, 1,000
authorized, 10 issued and outstanding -- --
Additional paid-in capital 95,671,000 95,671,000
Accumulated deficit (254,224,000) (251,958,000)
------------- -------------
Total shareholder's deficit (158,553,000) (156,287,000)
------------- -------------
Total liabilities and shareholder's equity $ 160,752,000 $ 168,527,000
------------- -------------
------------- -------------
See accompanying notes to Condensed Financial Statements
3
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WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Three
Months Ended Months Ended
April 30, 1996 April 30, 1995
-------------- --------------
Sales $69,372,000 $ 81,626,000
Rental Revenue 18,118,000 22,350,000
------------ -------------
87,490,000 103,976,000
Cost of sales 44,971,000 52,360,000
Costs of rentals, including amortization 7,047,000 8,509,000
------------ -------------
52,018,000 60,869,000
Selling, general and administrative expenses 36,717,000 44,402,000
------------ -------------
Loss from operations (1,245,000) (1,295,000)
Interest expense 189,000 6,265,000
Other income (52,000) (122,000)
------------ -------------
Loss before reorganization items & income taxes (1,382,000) (7,438,000)
Reorganization items:
Professional fees 853,000 --
Provision for store closing costs 31,000 --
------------ -------------
884,000 --
------------ -------------
Loss before income taxes (2,266,000) (7,438,000)
------------ -------------
Benefit for income taxes 0 0
------------ -------------
Net loss $(2,266,000) $ (7,438,000)
------------ -------------
------------ -------------
See accompanying notes to Condensed Financial Statements
4
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WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
April 30, 1996 April 30, 1995
-------------- --------------
<S> <C> <C>
Operating activities:
Net loss $(2,266,000) $ (7,438,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 9,388,000 11,408,000
Book value of rental inventory dispositions 1,127,000 1,509,000
Changes in operating assets and liabilities:
Receivables (191,000) (923,000)
Prepaid inventory deposits 6,413,000
Merchandise inventory (1,564,000) 5,005,000
Other current assets 241,000 228,000
Accounts payable, accrued expenses and
other liabilities (1,555,000) (17,817,000)
Liabilities subject to compromise (2,228,000)
Rental inventory purchases (9,028,000) (9,448,000)
------------ -------------
Net cash provided by (used in) operating activities 337,000 (17,476,000)
Investing activities:
Acquisition of property, equipment and improvements (392,000) (2,788,000)
Decrease (increase) in other assets and intangibles (397,000) (128,000)
------------ -------------
Net cash used in investing activities (789,000) (2,916,000)
Financing activities:
Short-term borrowings 0 24,200,000
Principal payments on capital lease obligations
and long-term debt (209,000) (1,005,000)
------------ -------------
Net cash (used in) provided by financing activities (209,000) 23,195,000
------------ -------------
Net increase (decrease) in cash (661,000) 2,803,000
Cash at beginning of the period 7,353,000 1,962,000
------------ -------------
Cash at end of the period $ 6,692,000 $ 4,765,000
------------ -------------
------------ -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 152,000 $ 9,367,000
Net income taxes 2,000 0
Reorganization items 660,000 0
</TABLE>
See accompanying notes to Condensed Financial Statements
5
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements of Wherehouse
Entertainment, Inc. (the "Company") have been prepared by the Company without
audit. The condensed balance sheet at January 31, 1996 has been derived from
the Company's audited financial statements at that date. Certain footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes
that the accompanying condensed financial statements include all adjustments
(consisting only of normal, recurring adjustments) which are considered
necessary for a fair presentation. The results of operations for any interim
period may not be indicative of the results of the entire year.
It is suggested that the accompanying unaudited condensed financial
statements be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended January
31, 1996.
2. REORGANIZATION UNDER CHAPTER 11
On August 2, 1995 (the "Petition Date"), Wherehouse Entertainment, Inc.
(hereafter referred to as Wherehouse or the Company) and WEI Holdings, Inc.
(WEI), the Company's parent, filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
Bankruptcy Court). The Chapter 11 proceedings are being jointly administered,
with the Company managing the business in the ordinary course as debtor-in-
possession subject to the control and supervision of the Bankruptcy Court.
Under Chapter 11 proceedings, litigation and actions by creditors to
collect certain claims in existence at the petition date (pre-petition) are
stayed, absent specific Bankruptcy Court authorization to pay such claims. The
Company believes that appropriate provisions have been made in the accompanying
financial statements for the pre-petition claims that could be estimated at the
date of these financial statements. Such claims are reflected in the April 30,
1996 balance sheet as "liabilities subject to compromise." Additional claims
(liabilities subject to compromise) may arise subsequent to the filing date
resulting from the rejection of executory contracts, including leases, and from
the determination of the court (or agreed to by parties-in-interest) of allowed
claims for contingencies and disputed amounts. Claims secured against the
Company's assets (secured claims) are stayed, although holders of such claims
have the right to petition the court for relief from the stay.
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The Company received approval from the Bankruptcy Court to pay or otherwise
honor employee wages and benefits and certain other pre-petition obligations
necessary for the continuing existence of the Company prior to a plan of
reorganization. Generally, unsecured debt does not accrue interest after the
petition date. In addition, the Company has determined that there is
insufficient collateral to cover the interest portion of scheduled payments on
most pre-petition debt obligations. Therefore, the Company has discontinued
accruing interest on these obligations. Contractual interest would have been
$6.5 million higher had the Company continued to accrue interest on these
obligations from February 1, 1996 through April 30, 1996.
As debtor-in-possession, the Company has the right, subject to Bankruptcy
Court approval and certain other limitations, to assume or reject certain
executory contracts, including unexpired leases. Any claim for damages
resulting from the rejection of an executory contract or an unexpired lease is
treated as a general unsecured claim in the Chapter 11 proceedings.
The Company has obtained debtor-in-possession financing with a syndicate of
financial institutions whereby a $30,000,000 revolving credit facility ("DIP
facility"), which includes a letter of credit subfacility of $10,000,000, is
available to fund working capital, issue letters of credit and make certain
other payments during Chapter 11 proceedings. The DIP facility is available
through the earlier of September 1, 1997 or the effective date of a plan of
reorganization. The Company pays a commitment fee of 1/2% on the average daily
unused portion of the DIP facility. The Company had no outstanding borrowings
against the DIP facility at April 30, 1996. At April 30, 1996, the Company had
$400,000 of letters of credit outstanding.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filings, such realization of assets and
liquidation of liabilities is subject to uncertainty. While under the
protection of Chapter 11, in the normal course of business, the Company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further, a
plan of reorganization could materially change the amounts and classifications
reported in the consolidated historical financial statements, which do not give
effect to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of a plan of
reorganization. The propriety of using the going concern basis is dependent
upon, among other things, confirmation of a plan of reorganization, which must
be approved by the creditors and confirmed by the Bankruptcy Court, and its
ability to meet its business plan and generate sufficient cash flows from
operations and financial sources.
On April 29, 1996 the Company filed a proposed Plan of Reorganization (the
"Plan") with the Bankruptcy Court. The Company has until August 27, 1996 to
solicit acceptances from its creditors.
While there can be no assurance that the Plan will be confirmed by the
Bankruptcy Court in exactly the form submitted, the confirmation and
consummation of the Plan would result in a substantially different capital
structure for the Company. Such Plan contemplates the issuance of: (a) an
aggregate of $20,000,000 in principal amount of 8% unsecured notes due
January 31, 2004
7
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and (b) an aggregate of 8,000,000 shares of $.01 par value new common
stock in settlement of certain pre-petition claims.
It is probable that amendments to the Plan will be filed, some of which may
be material.
For a summary of the Plan, reference is made to Note 1 of Notes to
Financial Statements, as filed in the Company's Annual Report in Form 10-K for
the year ended January 31, 1996.
8
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3. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise include the following:
April 30, January 31,
1996 1996
--------- ------------
13% senior subordinated notes $110,000,000 $110,000,000
Variable rate term note and revolving
line of credit 91,645,000 92,170,000
Accrued interest 8,507,000 8,507,000
Lease rejection claims 6,000,000 6,000,000
Convertible subordinated debentures 5,344,000 5,344,000
Trade and other miscellaneous claims 55,133,000 56,836,000
------------ ------------
$276,629,000 $278,857,000
------------ ------------
4. SUMMARY OF FINANCIAL INFORMATION OF WEI HOLDINGS, INC.
Unconsolidated summary financial information of the Company's parent,
WEI Holdings, Inc., is as follows:
April 30, January 31,
1996 1996
--------- ------------
(In Thousands)
Current assets 38 38
Total assets 38 38
Current liabilities 76 76
Deficiency in investment in the Company 158,553 156,287
Total liabilities 158,629 156,363
Redeemable common stock 3,872 3,872
Notes receivable from shareholders (660) (660)
Contingent shares (663) (663)
For the Three Months Ended
April 30, April 30,
1996 1995
--------- ----------
(In Thousands)
Net Income 0 10
9
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WEI holds all of the capital stock of the Company and, in turn, is owned
by affiliates of Merrill Lynch Capital Partners, Inc. ("MLCP") (91.8% on a
fully diluted basis) and certain members of management (8.2% on a fully
diluted basis). Currently, WEI conducts no independent operations and has no
significant assets apart from its investment in the capital stock of the
Company.
On August 2, 1995, WEI filed a voluntary Petition for relief under
Chapter 11 of Title 11 of the United States Code. See Note 2 above.
10
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WHEREHOUSE ENTERTAINMENT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion should be read in conjunction with the financial
statements, related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's
Annual Report on Form 10-K for the year ended January 31, 1996.
PETITION FOR RELIEF UNDER CHAPTER 11
On August 2, 1995 (the "Petition Date"), the Company and WEI, the
Company's parent, filed a voluntary petition for relief under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court for
the District of Delaware in Wilmington, seeking to reorganize under Chapter
11. In Chapter 11, the Company and WEI will continue to manage their
respective affairs and operate their businesses as debtors-in-possession
while they attempt to develop a reorganization plan that will restructure and
allow their emergence from Chapter 11. As debtors-in-possession in Chapter
11, neither the Company nor WEI may engage in transactions outside of the
ordinary course of business without approval, after notice and hearing, of
the Bankruptcy Court.
As of the Petition Date, payment of pre-petition liabilities to the
senior lenders, bondholders and unsecured creditors of the Company and WEI,
and pending litigation against the Company and/or WEI are stayed while they
continue their business operations as debtors-in-possession.
As a result of the filing, the accrual of interest on the Revolving Line
of Credit, Variable Rate Term Note, 13% Senior Subordinated Notes and 6 1/4%
Convertible Subordinated Debentures was suspended effective August 1, 1995.
Interest expense on the above debt would have been $6.5 million higher had it
continued to accrue from the period of February 1, 1996 through April 30,
1996.
In accordance with the Bankruptcy Code, the Company can seek court
approval for the rejection of pre-petition executory contracts, including
real property leases. Any such rejection may give rise to a pre-petition
claim for damages pursuant to the Bankruptcy Code. In connection with the
Chapter 11 proceedings, the Company reviewed all of its store operating
results and as a consequence of that process the Company requested and
received approval to reject 63 real property leases (62 store leases and one
office lease). In addition, five other stores have been closed since the
filing. Other property leases and certain executory contracts may be
rejected in the future subject to Bankruptcy Court approval.
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Since the filing, the Company has also obtained lease concessions,
primarily reductions in base rent and other charges, for a number of its
leases. Based upon these reductions, the Company sought and obtained Court
approval for the assumption of 23 renegotiated store leases on February 27,
1996. In addition, two other store leases were assumed prior to the sale of
those stores in March 1996. Other real property leases and certain executory
contracts may be assumed in the future subject to Bankruptcy Court approval.
As a result of the reorganization proceedings, the Company may sell or
otherwise realize assets and liquidate or settle liabilities for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. Except as noted, the financial statements do not give
effect to any adjustments to the carrying value of assets, or amounts and
classification of liabilities that might be necessary as a consequence of
these matters.
On September 25, 1995, the Company completed negotiations with Bankers
Trust Company, as Agent, for a debtor-in-possession ("DIP") financing
facility. The DIP facility provides a borrowing capacity of up to $30.0
million in revolving loans and letters of credit, subject to borrowing base
limitations based upon, among other things, the value of merchandise
inventory. The DIP facility also requires that the Company maintain certain
financial covenants and provide certain financial information on a periodic
basis. A final order authorizing borrowing on the DIP financing facility was
approved by the Bankruptcy Court on October 19, 1995. As of April 30, 1996,
the Company was in compliance with all DIP facility covenants or had obtained
appropriate waivers.
On April 29, 1996 the Company filed a proposed Plan of Reorganization
(the "Plan") with the Bankruptcy Court, see Note 2 to Notes to Condensed
Financial Statements, above. There can be no assurance that the Plan will be
confirmed by the Bankruptcy Court in exactly the form submitted. The Company
has until August 27, 1996 to solicit acceptances to the Plan from its
creditors.
Since the filing, the Company has closed 68 stores (49 stores during
fiscal year 1996 and 19 stores during the quarter ended April 30, 1996).
Total store count at April 30, 1996 was 282.
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RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED APRIL 30, 1996 AND APRIL 30, 1995
Net revenues were $87.5 million and $104.0 million for the quarters
ended April 30, 1996 and 1995, respectively. The Company believes that the
decrease of $16.5 million, or 15.9%, was principally due to the closing of 53
stores during fiscal year 1996 and 19 stores during the months of February
and March of fiscal year 1997, as well as continued competitive and economic
pressures in certain of the Company's markets.
Net merchandise sales were $69.4 million versus $81.6 million for the
quarters ended April 30, 1996 and 1995, respectively, representing an overall
decrease of 15.0%. On a same-store basis, however, net merchandise sales
declined by 7.0% during the quarter ended April 30, 1996 as compared to the
quarter ended April 30, 1995. These decreases in total and same-store net
merchandise sales are primarily attributable to the competitive and other
factors described above. Total net sales of music products, video games and
software, and accessories decreased in virtually all of the principal
categories of these products that are carried by the Company, except for
sales of used compact discs.
A summary of total net merchandise sales and rental revenues, by product
category, is provided below:
NET MERCHANDISE SALES AND RENTAL REVENUES
BY MERCHANDISE CATEGORY
(DOLLAR AMOUNTS IN MILLIONS)
Quarter Ended
April 30,
1996 1995
------ ------
Net Merchandise Sales:
Compact discs (including used compact discs) $46.7 $ 49.7
Cassettes and other music 12.1 17.3
----- ------
Total music 58.8 67.0
Sales of new videocassettes 5.0 6.3
Video game software and hardware, general
merchandise, accessories, ticket commissions
and other 5.6 8.3
----- ------
Total merchandise sales 69.4 81.6
Videocassette and other rental income 18.1 22.4
----- ------
Total revenues $87.5 $104.0
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Rental income includes the rental of videocassettes, video games and
game players, audiocassette books, and laserdiscs; and sales of previously
viewed videocassettes and previously played video games. Approximately 231
of the Company's stores currently offer rental products. Rental income was
$18.1 million versus $22.4 million during the quarters ended April 30, 1996
and 1995, respectively, representing a decrease of $4.3 million or 18.9%. On
a same-store basis rental income decreased approximately 14.6% as compared to
the prior year. The Company believes that the decrease in same-store rental
income was attributable to continued competition and general softening in
rental consumer spending nationwide. During the quarter ended April 30,
1996, the Company decreased its purchases of video rental product by $0.4
million or 4.4% versus the same quarter of the prior year.
The Company believes that in the future its business will continue to be
impacted 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 more recent years the
Company's revenues have been impacted by increased competition from other
music and video specialty retail chains, as well as discounters and mass
merchandisers. Further, future revenues may be reduced as a result of the
closure of 68 stores since the bankruptcy filing, and as a result of the
closure of any additional stores that may be approved by the Court during the
remainder of the bankruptcy case.
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Cost of sales decreased $7.4 million to $45.0 million for the quarter
ended April 30, 1996 versus $52.4 million for the quarter ended April 30,
1995, representing a decrease of 14.1%. As a percentage of net merchandise
sales, costs of sales increased 0.7% to 64.8% during the quarter ended April
30, 1996 versus 64.1% during the quarter ended April 30, 1995. The 0.7%
increase in cost of sales as a percentage of net merchandise sales was
principally due to increased merchandise return costs and lower prompt
payment discounts on merchandise inventory purchases.
Cost of rentals, including amortization, decreased to $7.0 million
during the quarter ended April 30, 1996, a decrease of $1.5 million or 17.2%,
versus $8.5 million during the quarter ended April 30, 1995. As a percentage
of rental income, cost of rentals increased to 38.9% during the quarter ended
April 30, 1996 versus 38.1% during the quarter ended April 30, 1995,
representing an increase of 0.8%. The 0.8% increase in cost of rentals,
including amortization, is primarily attributable to higher amortization and
shrinkage as a percentage of revenue offset by other factors.
Merchandise sales as a percentage of aggregate net revenues increased
0.8% to 79.3% during the quarter ended April 30, 1996 versus 78.5% during the
quarter ended April 30, 1995.
Several major retail chains, including Best Buy, Blockbuster
Entertainment, Hollywood Entertainment and Virgin Megastores have increased
their retail store presence in the Company's markets. This trend may
continue and it is anticipated the Company will in future periods experience
increased competition from companies with greater financial resources than
its own, and that such competition will result in continued pressure on
revenues and gross profit margins.
Selling, general and administrative expenses, were $36.7 million versus
$44.4 million for the quarters ended April 30, 1996 and 1995, respectively, a
decrease of $7.7 million or 17.3%. As a percentage of net revenues, selling,
general and administrative expenses, were 42.0% during the quarter ended
April 30, 1996 versus 42.7% during the quarter ended April 30, 1995,
representing a decrease of 0.7%. The 0.7% decrease was principally due to a
reduction in advertising expense. During the quarter, rent and occupancy
costs decreased in absolute dollars by $2.3 million. Further decreases may
be experienced as a result of the rejection of additional real property
leases during the bankruptcy case.
Interest expense (net of interest income) decreased $6.1 million to $0.2
million for the quarter ended April 30, 1996 versus $6.3 million for the
quarter ended April 30, 1995. The decrease was primarily attributable to the
suspension of the accrual of interest following the filing of bankruptcy on
August 2, 1995, as noted previously.
Reorganization items include costs related to the bankruptcy case
including professional fees for legal and financial advisors, costs related
to the closing of stores, and the estimated cost associated with the
rejection of certain executory contracts. For the quarter, the Company
reported total reorganization items of $0.9 million which was primarily
comprised of
15
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professional fees. Reorganization items are expected to continue in future
periods as a result of the bankruptcy case.
Based upon current operations of the Company and other factors, the
Company did not record an income tax benefit for the quarters ended April 30,
1996 and 1995, and does not anticipate doing so for the remainder of the
current fiscal year. The Company anticipates that pre-tax losses, if any,
which may be realized during the fiscal year ending January 31, 1997 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 the Company to reduce any future taxes payable under
applicable Internal Revenue Service and state regulations should the Company
generate future taxable income. Under certain circumstances, the Company
could incur significant tax liabilities from the forgiveness of indebtedness
as a result of the bankruptcy case, the eventual outcome of which is unknown
at this time.
The Company is currently under audit by the Internal Revenue Service
("IRS") for tax years January 31, 1993, 1994, and 1995, and by the California
Franchise Tax Board ("FTB") for tax years January 31, 1992, 1993 and 1994.
The Company believes that it has made adequate provision in the financial
statements for these two audits.
In conjunction with the above-mentioned audits, the IRS and FTB have
filed proofs of claim in the bankruptcy court in the amounts of $52.1 million
and $10.6 million, respectively, for allegedly unpaid income taxes during the
years under audit. These claims, if allowed, would become pre-petition claims
and as such would be paid out at the end of the bankruptcy case. While the
Company believes that the ultimate allowed amount of these claims will
constitute a small fraction of the claimed amount, there can be no assurance
as to the final outcome of these claims.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended April 30, 1996, the Company's net cash used in
operating activities declined by $17.8 million to cash provided of $0.3
million from cash used of $17.5 million, due to lower decreases in accounts
payable, accrued expenses and other liabilities of $16.3 million, a decrease
in prepaid inventory deposits of $6.4 million and other factors ($1.7
million). Offsetting the above items was a lower decrease in merchandise
inventory of $6.6 million.
Cash used in investing activities decreased by $2.1 million to $0.8
million during the quarter ended April 30, 1996 from $2.9 million during the
quarter ended April 30, 1995, principally due to decreased acquisitions of
property, equipment and improvements. While at the present time the Company
does not have any plans that materially alter the level of its planned
capital spending, such capital spending will be subject to future
availability of funds and other liquidity concerns.
Cash provided by financing activities decreased by $23.4 million from
$23.2 million provided during the quarter ended April 30, 1995 to $0.2
million used in the quarter ended April 30, 1996 principally due to decreased
short-term borrowings.
While the Company believes that the current DIP borrowing facility (see
Note 2 under Notes to Condensed Financial Statements) is adequate to support
operations for the remainder of the current fiscal year, there can be no
assurance as to the effect which any future changes in the Company's operations
(such as closed stores or material changes in interest rates) may
16
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have on its liquidity.
As of April 30, 1996 the Company has not signed any lease commitments to
open new stores during the next twelve months, or any other material
commitments outside those referenced earlier.
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 expenditures 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.
17
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(i) Bankruptcy filing.
On February 27, 1996, the Bankruptcy Court approved the assumption
by the Company and WEI of 25 of the Company's renegotiated store leases
pursuant to section 365(a) of the U.S. Bankruptcy Code. By a series of
orders dated February 29, 1996, March 8, 1996 and May 16, 1996, the
Bankruptcy Court approved the rejection of seventeen store leases, bringing
the total number of leases rejected during the chapter 11 case to 63 leases
(covering 62 stores and one administrative office). On March 29, 1996, the
Bankruptcy Court approved the rejection of the Company's long distance
telecommunications services contract with its former provider, ADNET.
By the order dated March 4, 1996, the Bankruptcy Court set May 15,
1996 as the bar date by which all proofs of claims for any prepetition claim
against the Company or WEI must be filed with the Bankruptcy Court. On May
13, 1996, the Bankruptcy Court supplemented this order to provide that, as to
any lessors of non-residential real property, such creditors may file a
claim, whether arising prepetition or postpetition, on the later of May 15,
1996 or thirty days after an order is entered approving the rejection or
assumption of such lessor's lease.
On March 6, 1996, the Bankruptcy Court authorized the employment
and retention of Troop Meisinger Steuber & Pasich, LLP as special corporate
counsel to the Company and WEI NUNC PRO TUNC to August 2, 1995. On April 1,
1996, the Bankruptcy Court approved the retention and employment of two
additional professionals, Herbert Mines Associates, Inc. as executive search
firm and American Appraisal Associates, Inc. as appraiser to the Company and
WEI.
On March 25, 1996, the Bankruptcy Court approved the sale of two of
the Company's stores in Utah and the assumption and assignment of the two
stores leases for such stores to the buyer in connection with such sale.
On April 29, 1996, the Company and WEI filed a Chapter 11 Plan of
Reorganization ("Plan") with the Bankruptcy Court. On May 15, 1996, the
Company and WEI filed a Disclosure Statement for the Plan.
On May 16, 1996, the Bankruptcy Court granted the Debtors' motion
to extend the Debtors' exclusive periods pursuant to section 1121 of the U.S.
Bankruptcy Code to file a plan and to obtain acceptances for such a plan
through June 28, 1996 and August 27, 1996, respectively. The Bankruptcy
Court also signed an interim order extending the time within
18
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which the Company must assume or reject its nonresidential real property
leases. A motion to extend such period through August 27, 1996 is currently
pending before the Bankruptcy Court and is scheduled for a hearing on June
18, 1996.
(ii) McMahan and Related Actions.
On March 14, 1996, defendants filed a petition for certiorari in
the United States Supreme Court requesting that the court reverse the Second
Circuit's ruling that plaintiffs may seek to recover benefit-of-the-bargain
damages under Section 10(b) of the Exchange Act. On May 13, 1996 defendants'
petition for certiorari was denied.
The McMahan case and the related Don Thompson case are scheduled
for trial on August 5, 1996. The Company believes that this action is
without merit and is vigorously defending it.
(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 disposition will not have a material impact on the financial
position and results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants have duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: June 14, 1996 /s/ Jerry E. Goldress
----------------------
JERRY E. GOLDRESS
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: June 14, 1996 /s/ Henry Del Castillo
-----------------------
HENRY DEL CASTILLO
Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting
Officer)
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