UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________
to ____________
Commission File Number 33-51266-01 Commission File Number 1-8281
WEI Holdings, Inc. Wherehouse Entertainment, Inc.
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Delaware Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
13-3439558 95-2647555
(I.R.S. Employer Identification (I.R.S. Employer Identification
Number) Number)
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue 19701 Hamilton Avenue
Torrance, California 90502-1334 Torrance, California 90502-1334
(Address of principal executive (Address of principal executive
offices including ZIP code) offices including ZIP code)
(310) 538-2314 (310) 538-2314
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Indicate by check mark whether the registrants (1) have
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Outstanding at
Issuer Class April 30, 1994
- ------ ----- --------------
WEI Holdings, Inc. Common Stock,
$.10 Par Value 2,366,113
Wherehouse
Entertainment, Inc. Common Stock,
$.01 Par Value 10
WHEREHOUSE ENTERTAINMENT, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED APRIL 30, 1994 AND APRIL 30, 1993
Aggregate net revenues for the quarter ended April 30, 1994 were
$113.9 million compared to $102.5 million for the quarter ended
April 30, 1993, an increase of 11.1%. The increase was due to an
increase in the number of stores from 315 at April 30, 1993 to
346 at April 30, 1994 and to a 5.4% increase in revenues for
same-stores (stores open for at least 13 months). The increase
in store count resulted primarily from the acquisitions of
specialty music stores from The Record Shop, Inc. and Pegasus
Music and Video, Inc. during fiscal 1994.
The Company expects in the current fiscal year to focus its
efforts towards the improvement of its existing stores and
operations, rather than acquisitions or new store openings, and,
therefore, does not anticipate a significant increase in number
of stores during the current fiscal year.
The Company will continue to opportunistically evaluate potential
acquisitions which could meet its strategic objectives, and if it
determines the same to be appropriate, the Company may, subject
to its ability to source additional capital (the availability of
which is currently uncertain), make additional acquisitions. On
a longer-term basis, the Company intends to continue its growth,
both by opening new stores in selected locations, and by
additional acquisitions.
Merchandise sales were $92.0 million and $80.4 million during the
quarters ended April 30, 1994 and 1993, respectively, represent-
ing an aggregate increase of 14.4% and an increase of 7.0% on a
same-store basis. The increase in same-store sales resulted
principally from increased sales of compact discs and of used
compact discs and video games, which are newer product lines for
the Company. The Company's sales of music cassettes declined
slightly from the comparable quarter last year due to the
continuing shift in consumer demand to compact discs. The
Company's revenues from the sales of videocassettes increased
slightly due primarily to the increase in store count.
Rental revenue includes the rental of videocassettes, video games
and game players, audiocassette books and laser discs. Approxi-
mately 75% of the Company's stores currently offer videocassettes
and other products for rent. Rental revenue was $21.9 million
and $22.1 million during the quarters ended April 30, 1994 and
1993, respectively, representing a .9% aggregate decrease and a
decrease of .3% on a same-store basis. A small percentage
decrease in the rental of videocassettes was largely offset by
increases in the rental of video games. It is the Company's
belief that the new merchandising, pricing and field management
strategies implemented during the first quarter of fiscal 1995
and during late fiscal 1994 have to date appeared to beneficially
impact the Company's competitive position in the videocassette
rental business. Nonetheless, the Company anticipates that it
will continue to experience strong competition in this area, and
no assurance can be given that on a longer-term basis the
Company's new strategies will be successful.
Cost of sales increased $8.6 million to $60.1 million for the
quarter ended April 30, 1994, as compared with $51.5 million for
the quarter ended April 30, 1993. As a percentage of sales
revenue, cost of sales increased to 65.3% in the quarter ended
April 30, 1993 from 64.1% in the quarter ended April 30, 1992.
The 1.2% 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 incremental
sales (0.6%), increased costs associated with the provision for
estimated inventory shrinkage (0.3%) and by various other factors
(0.3%). The changes in product mix include an increase in the
Company's video game sales business, which carries lower margins
than the Company's other product lines, along with the continuing
shift in consumer demand from music cassettes to lower-margin
compact discs.
Cost of rentals, including amortization, increased $1.0 million
to $7.3 million for the quarter ended April 30, 1994, as compared
with $6.3 million for the quarter ended April 30, 1993. As a
percentage of rental revenue, cost of rentals increased to 33.2%
in the quarter ended April 30, 1994 from 28.4% in the quarter
ended April 30, 1993, an increase of 4.8%. The 4.8% increase in
cost of rentals, including amortization, as a percentage of
rental revenue was principally due to the change in accounting
estimate for amortization expense which was implemented in the
fourth quarter of fiscal year ending January 31, 1994 and the
acceleration of the recognition of rental amortization to earlier
interim periods (4.4%) and various other factors (0.4%). The
change in estimate for amortization expense eliminated the
utilization of salvage value and further accelerated the
amortization calculation. Beginning with the first quarter of
fiscal 1995, the Company changed its method of reporting the
amortization of rental inventory for interim periods based on
planned rental inventory purchases for the year rather than
recording cumulative amortization in the period that the rental
inventory is purchased. This new method accelerates the
recognition of rental amortization to earlier interim periods and
results in interim gross profit rates that are more reflective of
the Company's expected annual gross profit rate. However, this
method will not impact the aggregate amount of amortization
expense recorded during the fiscal year. It can be expected that
cost of rentals for the fiscal year ended 1995 as a percentage of
rental revenue will be lower than in fiscal 1994.
Merchandise sales, as a percentage of aggregate net revenues,
increased from 78.4% in the quarter ended April 30, 1993 to 80.8%
in the quarter ended April 30, 1994. Should the shift in product
mix from higher margin rental revenue to lower margin merchandise
sales continue, it can be expected that the change in the mix of
revenue contribution could have an impact on profitability.
Selling, general and administrative expenses, excluding $0.8
million and $2.2 million for the amortization of purchase price
adjustments resulting from acquisitions, were $45.8 million and
$43.0 million for the quarters ended April 30, 1994 and April 30,
1993, respectively, an increase of $2.8 million, or 6.5%. As a
percentage of aggregate net revenues, selling, general and admini-
strative expenses, excluding amortization of purchase price
adjustments, were 40.2% and 42.0% for the quarters ended April
30, 1994 and April 30, 1993, respectively, a decrease of 1.8%.
The 1.8% decrease in selling, general and administrative expenses
as a percentage of aggregate net revenues is primarily a result
of total payroll having decreased slightly while revenues grew
substantially (total payroll was 16.7% versus 18.6% as a
percentage of aggregate net revenues during the quarters ended
April 30, 1994 and 1993; respectively, a decrease of 1.9%) and
other factors such as decreased fixed costs and semi-variable
expenses (0.3%). 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. The above decreases were slightly offset by
increases in rent and other occupancy costs resulting from
contractual escalations in base rent for existing stores, leases
for new stores and stores acquired during fiscal 1994, expenses
resulting from lease renewals and increases for the straight-line
effect of scheduled future rent increases (0.4%). Selling,
general and administrative expenses include non-cash provisions
for the straight-line effect of scheduled future rent increases
of $1.0 million and $0.8 million for the quarters ended April 30,
1994 and April 30, 1993, respectively. Absolute dollar increases
in rent and occupancy expenses are expected to continue.
The loss from operations decreased to $0.1 million for the
quarter ended April 30, 1994 from a loss of $0.5 million for the
quarter ended April 30, 1993. The improvement resulted princi-
pally from (i) higher gross profit, in spite of a significant
increase in video depreciation expense and (ii) a $2.1 million
decrease in amortization of purchase accounting adjustments.
Excluding the effects of purchase accounting in both periods,
income from operations would have been $0.7 million for the
quarter ended April 30, 1994 and $2.4 million for the quarter
ended April 30, 1993 due to the significant increase in video
depreciation expense previously discussed.
Interest expense (net of other income) remained essentially flat
at $5.6 million in the quarters ended April 30, 1994 and April
30, 1993 as the benefit from lower interest rates on floating
rate debt and slightly lower average borrowings in the quarter
ended April 30, 1994 was largely offset by the receipt of
interest income on a tax refund in the quarter ended April 30,
1993.
At April 30, 1994, $55.3 million of the Company's long-term debt
(approximately 33% of total long-term debt then outstanding) and
the Company's revolving line of credit provided for interest
which varies with changes in the prime rate or other similar
interest rate indexes. A material increase in the prime rate, or
other applicable index rates, could significantly increase the
Company's interest expense. The impact of any such increase is
partially mitigated by an interest rate protection agreement with
a major financial institution covering approximately 40.5% of the
outstanding balance of the Company's senior term loan. See
"Inflation", below.
Based upon current operations of the Company, the Company did not
record tax benefit for the quarter ended April 30, 1994 and does
not currently anticipate doing so for the current fiscal year,
although such tax benefits are available to reduce any future
taxes payable if the Company generates future taxable income.
For the quarter ended April 30, 1993, the Company recorded an
effective tax benefit of $0.7 million or 11.8% of its loss before
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended April 30, 1994, the Company's operations
used net cash of $18.7 million compared to $26.0 million during
the quarter ended April 30, 1993. Operating cash flows in both
quarters were primarily used for the purchase of merchandise and
rental inventory and the payment of service and supply providers.
The decrease in the use of cash flow for operations was primarily
a result of reductions in merchandise inventory levels partially
offset by increases in payments to vendors and lower decreases in
receivables. The Company used $1.6 million in investing
activities in the quarter ended April 30, 1994 compared to $2.3
million for the quarter ended April 30, 1993. Expenditures in
both periods related primarily to the opening of new stores and
remodeling of existing stores.
Short-term borrowings were used to finance operations and
investing activities, as well as pay down long-term debt and
capital lease obligations in both periods.
The Company has a revolving bank line of credit in the amount of
$45.0 million which expires on January 31, 1998. At April 30,
1994, the outstanding indebtedness on the line of credit was
$24.7 million.
The Company is highly leveraged, and results of operations have
been, and will continue to be, affected by the increased interest
expense and amortization of goodwill.
The Company has signed lease commitments to open 2 new stores and
may open additional stores over the next twelve months. While
the Company can reasonably estimate the cost to open a new store,
the actual number and types of stores opened will depend upon the
Company's ability to locate and obtain appropriate sites and upon
its financial position. The Company may, subject to its ability
to source additional capital, make additional acquisitions if it
determines such acquisitions to be appropriate.
Management believes that current cash flows from operations and
borrowings under the revolving credit facility will be adequate
to meet the Company's liquidity requirements (including the clean
down requirement whereby all borrowing on the revolving line of
credit must be repaid for 30 continuous days) over the next
twelve months. Debt service requirements are expected to be
funded through internal cash flow or through refinancing in
outlying years.
INFLATION
Inflation has not had a material effect on the Company, its
operations and its internal and external sources of liquidity and
working capital. However, interest rate increases, beyond
current levels, could have an impact on the Company's operations.
The impact on the Company of interest rate fluctuations is
partially mitigated by an interest rate protection agreement with
a major financial institution covering approximately 40.5% of the
outstanding balance of the senior term loan at April 30, 1994.
Such agreement limits the net interest cost to the Company
outside a specified range on the amounts covered by the
agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, each of the Registrants have duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WEI HOLDINGS, INC.
Date: August 26, 1994 /s/ Scott Young
--------------------------
SCOTT YOUNG
Chairman of the Board and Chief
Executive Officer and Director
(Principal Executive Officer)
Date: August 26, 1994 /s/ Jerry E. Goldress
--------------------------
JERRY E. GOLDRESS
President and Chief Operating
Officer and Acting Chief
Financial Officer
(Principal Financial Officer)
Date: August 26, 1994 /s/ Kathy J. Ford
--------------------------
KATHY J. FORD
Vice President, Controller
(Principal Accounting Officer)
WHEREHOUSE ENTERTAINMENT, INC.
Date: August 26, 1994 /s/ Scott Young
--------------------------
SCOTT YOUNG
Chairman of the Board and Chief
Executive Officer and Director
(Principal Executive Officer)
Date: August 26, 1994 /s/ Jerry E. Goldress
--------------------------
JERRY E. GOLDRESS
President and Chief Operating
Officer and acting Chief
Financial Officer
(Principal Financial Officer)
Date: August 26, 1994 /s/ Kathy J. Ford
--------------------------
KATHY J. FORD
Vice President, Controller
(Principal Accounting Officer)