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 July 31, 1995
[ ] 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 July 31, 1995
------ --------------
Common Stock, $.01 Par Value 10
Total of 21 Pages
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INDEX
WHEREHOUSE ENTERTAINMENT, INC.
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
July 31, 1995 (Unaudited) and
January 31, 1995 3
Condensed Statements of Operations -
Three Months Ended July 31, 1995
and 1994 (Unaudited)
Six Months Ended July 31, 1995
and 1994 (Unaudited) 4
Condensed Statements of Cash Flows -
Six Months Ended July 31, 1995 and
1994 (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 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 21
<page-3>
PART I.
FINANCIAL INFORMATION
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
July 31, January 31,
1995 1995
------------ ------------
(Unaudited) Note 1
ASSETS
Current Assets
Cash $ 7,624,000 $ 1,962,000
Receivables 2,355,000 3,155,000
Taxes receivable 1,500,000 1,500,000
Merchandise inventory 100,270,000 115,639,000
Other current assets 2,180,000 2,743,000
------------ ------------
Total current assets 113,929,000 124,999,000
Rental inventory, net 17,160,000 16,093,000
Equipment and improvements,
net 45,317,000 47,535,000
Financing costs and leasehold
interests, net 7,477,000 8,317,000
Other assets 767,000 736,000
------------ ------------
Total assets $184,650,000 $197,680,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Short-term borrowings $ 44,600,000 $ 15,800,000
Accounts payable and accrued
expenses 80,384,000 105,052,000
Accrued interest 8,091,000 7,485,000
Current maturities of capital
lease obligations and long-
term debt 12,326,000 9,811,000
Long-term debt classified as
current (Note 2) 150,193,000 150,000,000
------------ ------------
Total current liabilities 295,594,000 288,148,000
Capital lease obligations and
long-term debt 3,477,000 3,893,000
Other long-term liabilities 12,140,000 10,895,000
Deferred income taxes 3,477,000 3,477,000
6 1/4% convertible subordinated
debentures (Note 2) 0 3,716,000
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 (225,709,000) (208,120,000)
------------ ------------
Total shareholder's
deficit (130,038,000) (112,449,000)
------------ ------------
Total liabilities and
shareholder's equity $184,650,000 $197,680,000
============ ============
See accompanying notes to condensed financial statements.
<page-4>
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
1995 1994 1995 1994
------------- ------------- ------------- -------------
Sales $ 82,613,000 $ 91,147,000 $164,239,000 $183,151,000
Rental revenue 22,423,000 23,177,000 44,773,000 45,037,000
------------- ------------- ------------- -------------
105,036,000 114,324,000 209,012,000 228,188,000
Cost of sales 53,707,000 58,170,000 106,068,000 118,260,000
Costs of rentals, including
amortization 10,253,000 8,250,000 18,761,000 15,517,000
------------- ------------- ------------- -------------
63,960,000 66,420,000 124,829,000 133,777,000
Selling, general and
administrative expenses 44,460,000 45,863,000 88,863,000 92,452,000
------------- ------------- ------------- -------------
(Loss) income from
operations (3,384,000) 2,041,000 (4,680,000) 1,959,000
Interest expense, net 6,774,000 5,783,000 13,039,000 11,408,000
Other (income) expense (8,000) (13,000) (130,000) (72,000)
------------- ------------- ------------- -------------
6,766,000 5,770,000 12,909,000 11,336,000
------------- ------------- ------------- -------------
Income (loss) before
income taxes (10,151,000) (3,729,000) (17,589,000) (9,377,000)
Benefit for income taxes 0 0 0 0
------------- ------------- ------------- -------------
Net income (loss) $(10,151,000) $ (3,729,000) $(17,589,000) $ (9,377,000)
============= ============= ============= =============
See accompanying notes to condensed financial statements.
<page-5>
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Six
Months Ended Months Ended
July 31, 1995 July 31, 1994
-------------- --------------
OPERATING ACTIVITIES:
Net loss $(17,589,000) $ (9,377,000)
Adjustments to reconcile net loss to net
Cash provided by operating activities:
Depreciation and amortization 22,817,000 23,874,000
Book value of rental inventory dispositions 4,700,000 2,498,000
Deferred taxes 0 (480,000)
Changes in operating assets and liabilities:
Receivables 800,000 92,000
Taxes receivable 0 5,000,000
Merchandise inventory 15,369,000 9,286,000
Other current assets 563,000 209,000
Accounts payable, accrued expenses, and
other liabilities (22,817,000) (14,804,000)
Rental inventory purchases (19,828,000) (16,971,000)
-------------- --------------
Net cash used in operating activities (15,985,000) (673,000)
INVESTING ACTIVITIES:
Acquisition of property, equipment and
improvements (5,376,000) (3,877,000)
Purchase of Record Shop 0 (365,000)
Increase in other assets and intangibles (315,000) 58,000
-------------- --------------
Net cash used in investing activities (5,691,000) (4,184,000)
FINANCING ACTIVITIES:
Short-term borrowings 28,800,000 9,000,000
Dividend payments 0 (155,000)
Subordinated debenture redemptions (163,000) 0
Principal payments on capital lease obligations
and long-term debt (1,299,000) (1,776,000)
-------------- --------------
Net cash provided by financing activities 27,338,000 7,069,000
-------------- --------------
Net increase (decrease) in cash 5,662,000 2,212,000
Cash, beginning of the period 1,962,000 3,120,000
-------------- --------------
Cash, end of the period $ 7,624,000 $ 5,332,000
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11,274,000 $ 10,218,000
Net income taxes 0 (4,548,000)
See accompanying notes to condensed financial statements.
<page-6>
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements of Where-
house Entertainment, Inc. (the "Company") have been prepared by
the Company without audit. The condensed balance sheet at
January 31, 1995 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, 1995.
Certain reclassifications of balances have been made to the
1995 fiscal year amounts to conform to the 1996 fiscal year's
presentation.
2. PETITION FOR RELIEF UNDER CHAPTER 11
On August 2, 1995 (the "Petition Date"), Wherehouse Enter-
tainment, Inc. and WEI Holdings, Inc. ("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 Bankrupt-
cy 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 transac-
tions 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 bankruptcy filing and other events, the
Company, and, as applicable, WEI, are each currently in default
under various agreements governing the Revolving Line of Credit,
Variable Rate Term Note, 13% Senior Subordinated Notes and 6 1/4%
Convertible Subordinated Debentures. As a result, all unpaid
principal of, and accrued pre-petition interest on, such debt has
become immediately due and payable, and has been classified as a
current item on the Company's balance sheet. The payment of such
debt and accrued but unpaid interest thereon is prohibited during
the pendency of the Company's Chapter 11 case other than pursuant
to a court order.
As of July 31, 1995, the total principal and interest
related to the above debt was $206.3 million and $8.4 million,
respectively. At August 2, 1995, the filing date, this amount
became "Subject to Compromise" and its ultimate outcome will be
determined during the bankruptcy case.
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 is seeking approval to reject approximately 28 real
property leases. Other real property leases and certain
executory contracts may be rejected in the future subject to
Bankruptcy Court approval.
In connection with the Company's Chapter 11 case, the United
States trustee has appointed a committee for the Company's bond-
holders and other general unsecured creditors.
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 or 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.
The Company is currently involved in negotiations with a
potential lender for a debtor-in-possession ("DIP") financing
facility. The Company is seeking a DIP facility which 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. It
is anticipated that any such DIP facility will require that the
Company maintain certain financial covenants and provide certain
financial information on a periodic basis. Any agreement that is
reached between the Company and a potential lender will be
subject to Bankruptcy Court approval.
3. SUMMARY OF FINANCIAL INFORMATION OF WEI HOLDINGS, INC.
Unconsolidated summary financial information of WEI is as
follows:
July 31, January 31,
1995 1995
--------- ----------
(In Thousands)
Current assets 26 64
Total assets 26 64
Current liabilities 76 76
Deficiency in investment
in the Company 130,038 112,448
Total liabilities 130,114 112,524
Redeemable common stock 3,872 3,872
Notes receivable from
shareholders (660) (660)
Contingent shares (663) (663)
For the Six Months Ended
July 31, July 31,
1995 1994
---------- ---------
(In Thousands)
Net income (40) 18
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% on a fully diluted basis) and certain members
of management (9% 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.
<page-9>
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, 1995.
PETITION FOR RELIEF UNDER CHAPTER 11
On August 2, 1995 (the "Petition Date"), Wherehouse Enter-
tainment, Inc. and WEI 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 bankruptcy filing and other events, the
Company, and, as applicable, WEI, are each currently in default
under various agreements governing the Revolving Line of Credit,
Variable Rate Term Note, 13% Senior Subordinated Notes and 6 1/4%
Convertible Subordinated Debentures. As a result, all unpaid
principal of, and accrued pre-petition interest on, such debt has
become immediately due and payable, and has been classified as a
current item on the Company's balance sheet. The payment of such
debt and accrued but unpaid interest thereon is prohibited during
the pendency of the Company's Chapter 11 case other than pursuant
to a court order.
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 is currently seeking approval to reject approximately
28 real property leases. Other real property leases and certain
executory contracts may be rejected 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 or 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.
Since the filing, most of the Company's vendors including
the six major distributors (PGD, WEA, BMG, Sony, UNI and CEMA)
have continued to ship merchandise to the Company. However, many
of the Company's vendors have requested changes in the trade
credit terms offered to the Company. Where previously the
Company was paying for most vendor shipments on an average of
60-75 days, it now finds that it is being required in a majority
of its shipments to make payment on a cash-in-advance basis.
These changes have had a material impact on the Company's
liquidity, and there can be no assurance as to the effect which
any future changes in trade credit terms imposed by the Company's
vendors could have on the Company's liquidity or its operations.
On the first day of the filing, the Company sought and
received authorization from the Bankruptcy Court to continue
certain employee and customer related policies which the Company
deemed necessary for its survival. These included its policies
related to employee wages, benefits and out-of-pocket business
expenses. They also included its customer benefit programs,
including the Company's frequent renter program, its gift and
rental certificate programs and its merchandise return program.
To date, the Company does not believe that it has experienced any
material negative impact from its customers or employees because
of the filing.
The Company is currently involved in negotiations with a
potential lender for a debtor-in-possession ("DIP") financing
facility. The Company is seeking a DIP facility which 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. It
is anticipated that any such DIP facility will require that the
Company maintain certain financial covenants and provide certain
financial information on a periodic basis. Any agreement that is
reached between the Company and a potential lender will be
subject to approval by the Bankruptcy Court.
The Company considers the obtaining of an adequate DIP
facility to be critical to its ability to adequately stock its
stores in anticipation of the forthcoming Christmas season, and
currently expects to be able to conclude such a facility by late
September 1995. There are significant issues remaining to be
resolved in the negotiations, and, while the Company is optimis-
tic that these matters will be resolved, no assurance can be
given that the DIP facility will, in fact, be obtained, or if
obtained, that the terms will be reasonable to the Company. Any
significant delay in obtaining, or failure to obtain, such a
facility could materially and adversely impact the Company's
liquidity and results of operation for at least the balance of
the current fiscal year.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED JULY 31, 1995 AND JULY 31, 1994
Aggregate net revenues were $105.0 million and $114.3
million for the quarters ended July 31, 1995 and 1994, respec-
tively. The Company believes that the decrease of $9.3 million,
or 8.1%, was principally due to decreased customer traffic caused
by a lack of new, "hit" release music product and continued
competitive and economic pressures in certain of the Company's
markets. While the number of stores at July 31, 1995 was
relatively even as compared to July 31, 1994, average revenues
per store declined approximately 10.2%.
Net merchandise sales were $82.6 million versus $91.1
million for the quarters ended July 31, 1995 and 1994, respec-
tively, representing an overall average decrease of 9.3%. On a
same-store basis, net merchandise sales declined by 9.4% during
the quarter ended July 31, 1995 as compared to the quarter ended
July 31, 1994. The Company believes that decreases in total and
same-store net merchandise sales were primarily attributable to
the competitive and other factors described above. Revenue for
all product categories within merchandise sales, including music,
video games and software, and accessories were lower during the
quarter ended July 31, 1995 as compared to last year, except for
used products, which were higher.
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
July 31,
1995 1994
---- ----
Net Merchandise Sales:
Compact discs (new) $ 45.0 $ 47.9
Used products 7.2 4.5
Cassettes and other music (new) 17.7 22.8
-------- --------
Total music 69.9 75.2
Sales of new videocassettes 4.2 4.7
Video game software and hardware,
general merchandise, accessories,
ticket commissions, and other 8.5 11.2
-------- --------
Total merchandise sales 82.6 91.1
Videocassette and other rental income 22.4 23.2
-------- --------
Total revenues $ 105.0 $ 114.3
Rental income includes the rental of videocassettes, video
games and game players, audiocassette books, laserdiscs, and
sales of previously viewed videocassettes and previously played
video games. Approximately 75% of the Company's stores currently
offer rental products. Rental income was $22.4 million versus
$23.2 million during the quarters ended July 31, 1995 and 1994,
respectively, representing a decrease of $0.8 million or 3.3%.
On a same-store basis rental income decreased approximately 2.8%
as compared to the prior year. The Company believes that
decreases in both total and same-store rental income are attri-
butable to a number of factors, including the difficulties
resulting from the Company's liquidity problems in attempting to
purchase large quantities of certain "hit" titles, a lack of
"hit" releases in the game rental category, continued competition
and a general softening in rental consumer spending nationwide.
During the quarter ended July 31, 1995, the Company increased its
purchases of video rental product by $1.1 million, or 11%, over
purchases of such product in the same quarter of the prior year.
The Company believes that, due to the large installed base
of videocassette players in its major markets, future growth in
rental income will occur through marketing and other competitive
factors, and through new store openings, store expansions and
remerchandising, rather than through expansion of the videocas-
sette rental market. The Company anticipates that it will
continue to experience strong competition in the rental business.
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 influenced by increased competition
from other music and video specialty retail chains, as well as
discounters and mass merchandisers. Further, any possible store
closures that may be approved by the court during the bankruptcy
case would impact future revenues.
Cost of sales decreased $4.5 million to $53.7 million for
the quarter ended July 31, 1995 versus $58.2 million for the
quarter ended July 31, 1994, representing a decrease of 7.7%. As
a percentage of net merchandise sales, costs of sales increased
1.2% to 65.0% during the quarter ended July 31, 1995 versus 63.8%
during the quarter ended July 31, 1994. The 1.2% increase in
cost of sales as a percentage of net merchandise sales was
principally due to lower discounts on merchandise inventory
purchases (0.4%), and higher merchandise return penalties (0.4%)
and other factors(0.4%). Changes in product sales mix continue,
specifically from music cassettes to lower margin compact discs.
This has been partially offset by increases in gross margin
dollars from the sale of used products.
Cost of rentals, including amortization, increased to $10.3
million during the quarter ended July 31, 1995, an increase of
$2.0 million or 24.1%, versus $8.3 million during the quarter
ended July 31, 1994. As a percentage of rental income, cost of
rentals increased to 45.7% during the quarter ended July 31, 1995
versus 35.6% during the quarter ended July 31, 1994, representing
an increase of 10.1%. The 10.1% increase in cost of rentals,
including amortization, is primarily attributable to increased
costs from the sale of used rental inventory (7.5%), higher
amortization associated with increased rental inventory purchases
(1.3%) and other factors (1.3%).
Merchandise sales as a percentage of aggregate net revenues
decreased 1.0% to 78.7% during the quarter ended July 31, 1995
versus 79.7% during the quarter ended July 31, 1994.
Several major retail chains, including Best Buy, Blockbust-
er, Hollywood Video and Virgin Megastores have 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 its own, and that such
competition will result in continued pressure on revenues and
gross profit margins. In addition, any possible store closures
that may be approved by the court during the bankruptcy case
would impact future revenues.
Selling, general and administrative expenses, excluding $0.9
million for the amortization of goodwill during the quarter ended
July 31, 1994, were $44.4 million versus $44.9 million for the
quarters ended July 31, 1995 and 1994, respectively, a decrease
of $0.5 million or 1.1%.
In spite of selling, general and administrative costs having
decreased in total dollars, the Company's lower overall aggregate
revenue base during the quarter, and the nature of fixed and
semi-variable costs included in the Company's overhead structure,
led to increased selling, general and administrative costs as a
percentage of aggregate net revenues. As a percentage of aggre-
gate net revenues, selling, general and administrative expenses,
after excluding the effects of amortization of goodwill during
the quarter ended July 31, 1994, were 42.3% during the quarter
ended July 31, 1995 versus 39.3% during the quarter ended July
31, 1994, representing an increase of 3.0%. The 3.0% increase
was principally due to increased rent and occupancy costs (1.5%),
increased advertising expenses (0.8%), increased semi-variable
expenses (0.6%) and other factors (0.1%). Rent and occupancy
costs increased in absolute dollars due to higher rental expense
associated with store expansions and higher common area mainte-
nance and real estate tax charges assessed by landlords. Semi-
variable expenses increased in absolute dollars due to legal and
consulting costs related to the bankruptcy filing. Increases in
legal and consulting costs are expected to continue in future
periods as a result of the bankruptcy. Reductions in rent and
occupancy costs may occur during the bankruptcy case as a result
of the rejection of certain real property leases.
During the fourth quarter of fiscal 1995 the Company adopted
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"). In connection with the
adoption of Statement No. 121 in the fiscal year ended January
31, 1995, the Company wrote-off its remaining excess cost over
the fair value of net assets acquired (or "goodwill") due to an
impairment in the carrying value. Accordingly, no goodwill
amortization has been included in selling, general and admini-
strative expenses during the quarter ended July 31, 1995 while
$0.9 million has been included during the quarter ended July 31,
1994.
The loss from operations was $3.4 million for the quarter
ended July 31, 1995 versus income of $2.0 million for the quarter
ended July 31, 1994. The increased operating losses resulted
principally from lower revenues and resulting lower overall gross
profit margins ($6.8 million) which was offset by lower selling,
general and administrative expenses ($1.4 million).
Interest expense (net of interest income) increased $1.0
million to $6.8 million for the quarter ended July 31, 1995
versus $5.8 million for the quarter ended July 31, 1994, repre-
senting an absolute dollar increase of 17%. The increase was
primarily attributable to higher average borrowings on the
revolving line of credit. Included in interest expense is $0.5
million attributable to the amortization of acquisition financing
costs during each of the quarters ended July 31, 1995 and 1994.
Based upon current operations of the Company and other
factors, the Company did not record an income tax benefit for the
quarters ended July 31, 1995 and 1994, 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, 1996 will not
result in the recording of any additional tax benefit by the
Company. Further, any net operating loss carryforwards prior to,
and subsequent to the filing date, may be severely reduced by the
bankruptcy case. Under certain circumstances, the Company could
incur significant tax liabilities from the forgiveness of indebt-
edness as a result of the bankruptcy case, the eventual outcome
of which is unknown at this time.
FOR THE SIX MONTHS ENDED JULY 31, 1995 AND JULY 31, 1994
Aggregate net revenues for the six months ended July 31,
1995 were $209.0 million compared to $228.2 million for the six
months ended July 31, 1994, a decrease of 8.4%. The Company
believes that the decrease was principally due to decreased
customer traffic caused by a lack of new, "hit" release music
product and continued competitive and economic pressures in
certain of the Company's markets. While the number of stores at
July 31, 1995 was relatively even as compared to July 31, 1994,
average revenues per store declined approximately 8.4%.
Merchandise sales were $164.2 million and $183.2 million
during the six months ended July 31, 1995 and 1994, respectively,
representing an aggregate decrease of 10.4% and a decrease of
10.5% on a same-store basis. The decrease in same-store sales
resulted principally from decreased sales of new music, accessor-
ies and video games offset by increases in sales of used music
products and pre-recorded video.
Net Merchandise Sales and Rental Revenues
By Merchandise Category
(Dollar Amounts in Millions)
Six Months Ended
July 31,
1995 1994
--------------------------
Net Merchandise Sales:
Compact discs (new) $ 87.6 $ 94.3
Used products 14.3 9.1
Cassettes and other music (new) 35.0 45.1
------- -------
Total Music 136.9 148.5
Sales of new videocassettes 10.5 9.8
Video game software and
hardware, general
merchandise, accessories,
ticket commissions, and
other 16.8 24.9
------- -------
Total merchandise sales 164.2 183.2
Videocassette and other
rental income 44.8 45.0
------- -------
Total Revenues $209.0 $228.2
Rental revenue was $44.8 million and $45.0 million for the
six months ended July 31, 1995 and 1994, respectively, represent-
ing a 0.4% aggregate decrease and a decrease of 0.3% on a same-
store basis. Decreases in the rental of videocassettes and video
games were offset by increases in revenue from the sale of used
videocassettes and other rental products.
Cost of sales decreased $12.2 million to $106.1 million for
the six months ended July 31, 1995, as compared with $118.3
million for the six months ended July 31, 1994. As a percentage
of merchandise sales revenue, cost of sales for the six months
ended July 31, 1995 was 64.6% which was even with the six months
ended July 31, 1994. During the first six months, reductions in
the utilization of promotional markdowns to generate incremental
sales were offset by changes in product mix and increases in
merchandise return penalties. Changes in product mix include the
continuing shift in consumer demand from music cassettes to
lower-margin compact discs.
Cost of rentals increased $3.3 million to $18.8 million for
the six months ended July 31, 1995 compared to $15.5 million for
the six months ended July 31, 1994. As a percentage of rental
revenue, cost of rentals increased to 41.9% for the six months
ended July 31, 1995 from 34.5% for the six months ended July 31,
1994. The 7.4% increase was primarily attributable to increased
costs from the sale of used rental inventory (4.9%), higher
amortization associated with increased rental inventory purchases
(1.6%), and other factors (0.9%).
Merchandise sales, as a percentage of aggregate net
revenues, decreased from 80.3% in the six months ended July 31,
1994 to 78.6% in the six months ended July 31, 1995.
Selling, general and administrative expenses, excluding $1.2
million and $3.6 million for the amortization of purchase price
adjustments resulting from acquisitions, were $87.7 million and
$88.9 million for the six months ended July 31, 1995 and 1994,
respectively, a decrease of $1.2 million, or 1.3%. As a percen-
tage of aggregate net revenues, selling, general and administra-
tive expenses, excluding amortization of purchase price adjust-
ments, were 42.0% and 39.0% for the six months ended July 31,
1995 and 1994, respectively. The 3.0% increase was primarily a
result of increases in rent and occupancy costs (1.7%) caused by
contractual escalations in base rent for existing stores, lease
renewals and new leases. Reductions in rent and occupancy costs
may occur during the bankruptcy case as a result of the rejection
of certain real property leases. The remaining increase in
selling, general and administrative expenses came from advertis-
ing expense (0.5%), semi-variable expenses (0.5%) and other
factors (0.3%). Semi-variable expenses increased due to legal
and consulting costs related to the filing. Increases in legal
and consulting costs are expected to continue in future periods
as a result of the bankruptcy. All categories of payroll,
including stores, administrative, and distribution center
payrolls and the related payroll overhead costs, were even with
last year as a percentage of aggregate net revenues due to
headcount reductions and other expense control measures.
Loss from operations was $4.7 million for the six months
ended July 31, 1995 compared to income from operations of $2.0
million for the six months ended July 31, 1994, a decrease in
operating income of $6.7 million. The increased operating losses
resulted primarily from lower revenues and resulting lower
overall gross profit margins ($10.2 million) which was offset by
lower selling, general and administrative expenses ($1.1 million)
and a decrease in amortization of purchase accounting adjustments
($2.4 million). Excluding the effects of purchase accounting in
both periods, the Company would have had a loss from operations
of $3.5 million for the six months ended July 31, 1995 and income
from operations of $5.6 million for the six months ended July 31,
1994.
Interest expense (net of other income) increased from $11.3
million for the six months ended July 31, 1994 to $12.9 million
for the six months ended July 31, 1995, largely due to higher
average borrowings on the revolving line of credit in the six
months ended July 31, 1995. Included in interest expense is $0.9
million attributable to the amortization of acquisition financing
costs during each of the six month periods ended July 31, 1995
and 1994.
At July 31, 1995, $92.7 million of the Company's debt was
subject to 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 signifi-
cantly increase the Company's interest expense. The impact of
any such increase is partially mitigated by an interest rate
protection arrangement with a major financial institution
covering approximately 41.0% of the outstanding balance of the
Company's senior term loan. See "Inflation" below.
Based upon current operations of the Company and other
factors, the Company did not record an income tax benefit for the
quarters ended July 31, 1995 and 1994, 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, 1996 will not
result in the recording of any additional tax benefit by the
Company. Further, any net operating loss carryforwards prior to,
and subsequent to the filing date, may be severely reduced by the
bankruptcy case. Under certain circumstances, the Company could
incur significant tax liabilities from the forgiveness of indebt-
edness as a result of the bankruptcy case, the eventual outcome
of which is unknown at this time.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities increased by $15.3 million
to $16.0 million during the six months ended July 31, 1995 from
$0.7 million during the six months ended July 31, 1994. The
increase was principally due to a higher net loss ($8.2 million),
a decrease in accounts payable related to major changes in vendor
terms ($8.0 million), a reduction in taxes collected related to a
one-time income tax refund received in the prior year ($5.0
million), offset by reductions of inventory ($6.0 million) and
other factors ($0.1 million).
Cash used in investing activities increased by $1.5 million
to $5.7 million during the six months ended July 31, 1995 from
$4.2 million during the six months ended July 31, 1994 princi-
pally due to increased acquisitions of property, equipment and
improvements. Property and equipment acquisitions and improve-
ments were primarily attributable to the acquisition of new,
in-store point- of-sale platforms, and the opening of new retail
stores. The Company intends to carefully review its capital
spending in light of its Chapter 11 filing. Any additional
capital expenditures will be subject to future availability of
funds and other liquidity concerns.
Cash provided by financing activities increased by $20.2
million to $27.3 million during the six months ended July 31,
1995 from $7.1 million during the six months ended July 31, 1994
principally due to increased short-term borrowings under the
Company's $45.0 million revolving bank line of credit. The
increased borrowings were primarily the result of decreased
revenues and margins and changes in trade credit terms as noted
below.
As of July 31, 1995 the Company has signed lease commitments
to open one (1) new store during the next twelve months. Other
than these lease commitments, there were no other material
commitments as of July 31, 1995.
For a discussion of recent developments and uncertainties
effecting the Company's liquidity and capital resources, see Note
2 to the Condensed Financial Statements and "Petition for Relief
Under Chapter 11" above.
<page-18>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
(i) Bankruptcy Proceedings.
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.
(ii) McMahan and Related Actions.
For a further description of developments with respect
to McMahan & Co., et al. v. Wherehouse Entertainment et al., and
certain related litigation, see Item 1 of Part II of the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1995.
On September 13, 1995, the Second Circuit Court of
Appeals issued an opinion reversing in part and affirming in part
the District Court's order denying defendants' motion for summary
judgment on plaintiffs' federal securities law claims. The Court
of Appeals held that the District Court's refusal to dismiss
plaintiffs' claim for an alleged violation of Section 11 of the
Securities Act was based on an incorrect application of the law
and directed the District Court to address evidence submitted by
defendants in support of their motion for summary judgment on
plaintiffs' Section 11 claim. With respect to plaintiffs' claim
for an alleged violation of Section 10(b) of the Exchange Act,
the Court held that plaintiffs may seek to recover a "benefit-of-
the-bargain" measure of damages. The Court denied plaintiffs'
cross-petition to appeal from the District Court's order
dismissing their state law claims. The Company believes that
this action is without merit and is vigorously defending it.
(iii) Other Litigation.
For a further description of developments with respect
to other claims, legal actions and complaints, see Item 1 of Part
II of the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1995.
As a result of the bankruptcy filing, discussed above,
all proceedings in other currently pending litigation against the
Company and WEI are currently stayed.
<page-19>
Item 3. DEFAULTS UPON SENIOR SECURITIES.
As a result, among other things, of the bankruptcy
filing, the Company is currently in default under the indentures
governing the 13% Senior Subordinated Notes ($117.2 million in
principal and accrued interest as of August 2, 1995) and 6 1/4%
Convertible Subordinated Debentures ($5.6 million in principal
and accrued interest as of August 2, 1995).
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 1, 1995, WEI Holdings, Inc., the sole stock-
holder of the Company, acting by written consent, elected each of
the following persons as a Director of the Company, each to serve
until the next annual meeting of the stockholders of the Company,
and until his successor is duly elected and qualified:
Gerald S. Armstrong
James J. Burke, Jr.
Jerry E. Goldress
Bradley J. Hoecker
Rupinder S. Sidhu
Item 5. OTHER INFORMATION.
On August 24, 1995, the American Stock Exchange, Inc.,
in accordance with the provisions of Rule 12d2-2 under Section 12
of the Securities Exchange Act of 1934, filed an application with
the Securities and Exchange Commission to strike the 6 1/4%
debentures of the Company from listing and registration on the
Exchange. Upon approval of the application, the Company intends
to file a Form 15 with the Securities and Exchange Commission, as
a result of which the Company will, with respect to these
securities, cease to be obligated to file Exchange Act reports.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Change of Control Agreements, dated as of
July 10, 1995, between Registrant and each of
its senior executive officers, with schedule
required by instruction (2) to item 601(a) of
Regulation S-K identifying the parties
thereto and certain other details.
27.0 Financial Data Schedule
(b) Current Reports on Form 8-K
A Current Report on Form 8-K, dated August 2, 1995, was
filed by the Company with the Securities and Exchange Commission
on August 4, 1995 to report under "Item 3. - Bankruptcy Receiver-
ship" the Company's filing with the United States Bankruptcy
Court in Delaware for protection under Chapter 11 of the U.S.
Bankruptcy laws.
<page-21>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: September 20, 1995 /s/ Jerry E. Goldress
--------------------------
JERRY E. GOLDRESS
Chairman of the Board,
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: September 20, 1995 /s/ Henry Del Castillo
--------------------------
HENRY DEL CASTILLO
Senior Vice President,
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)