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 October 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 October 31, 1995
------ --------------
Common Stock, $.01 Par Value 10
Total of 21 Pages
<page-2>
INDEX
WHEREHOUSE ENTERTAINMENT, INC.
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
October 31, 1995 (Unaudited) and
January 31, 1995 3
Condensed Statements of Operations -
Three Months Ended October 31, 1995
and 1994 (Unaudited)
Nine Months Ended October 31, 1995
and 1994 (Unaudited) 4
Condensed Statements of Cash Flows -
Nine Months Ended October 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 20
SIGNATURES 21
<page-3>
PART I.
FINANCIAL INFORMATION
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
October 31, January 31,
1995 1995
------------ ------------
(Unaudited) Note 1
ASSETS
Current Assets
Cash $ 2,378,000 $ 1,962,000
Receivables 1,269,000 3,155,000
Taxes receivable 207,000 1,500,000
Merchandise inventory 116,059,000 115,639,000
Other current assets 3,997,000 2,743,000
------------ ------------
Total current assets 123,910,000 124,999,000
Rental inventory, net 13,637,000 16,093,000
Equipment and improvements,
net 42,921,000 47,535,000
Financing costs and leasehold
interests, net 7,058,000 8,317,000
Other assets 795,000 736,000
------------ ------------
Total assets $188,321,000 $197,680,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities Not Subject to Compromise
Current liabilities
Notes payable - post petition $ 18,000,000 $ ---
Notes payable - pre petition --- 15,800,000
Current portion of capital
lease obligations and long-
term debt --- 9,811,000
Accounts payable and accrued
expenses 19,189,000 112,538,000
Long-term debt classified as
current (Note 2) --- 150,000,000
------------ ------------
Total current liabilities 37,189,000 288,149,000
Capital lease obligations --- 1,880,000
Long term debt --- 2,012,000
6 1/4% Convertible subordinated
debentures (Note 2) --- 3,716,000
Deferred income taxes 3,477,000 3,477,000
Other long-term liabilities 12,762,000 10,895,000
------------ ------------
Total Liabilities Not Subject
to Compromise 53,428,000 310,129,000
Liabilities Subject to Compromise
Priority debt 2,684,000 ---
Secured debt 98,103,000 ---
Unsecured debt 176,192,000 ---
------------ ------------
Total Liabilities Subject
to Compromise 276,979,000 ---
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 (237,757,000) (208,120,000)
------------ ------------
Total shareholder's
deficit (142,086,000) (112,449,000)
------------ ------------
Total liabilities and
shareholder's equity $188,321,000 $197,680,000
============ ============
See accompanying notes to condensed financial statements.
<page-4>
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1995 1994 1995 1994
------------- ------------- ------------- -------------
Sales $ 74,817,000 $ 92,002,000 $239,056,000 $275,153,000
Rental revenue 18,283,000 20,648,000 63,055,000 65,685,000
------------- ------------- ------------- -------------
93,100,000 112,650,000 302,111,000 340,838,000
Cost of sales 46,997,000 58,099,000 153,065,000 176,360,000
Cost of rentals, including
amortization 11,280,000 8,633,000 30,041,000 24,150,000
------------- ------------- ------------- -------------
58,277,000 66,732,000 183,106,000 200,510,000
Selling, general and
administrative expenses 42,485,000 46,081,000 131,346,000 138,532,000
------------- ------------- ------------- -------------
(Loss) income from
operations (7,662,000) (163,000) (12,341,000) 1,796,000
Interest expense, net 1,087,000 5,875,000 14,127,000 17,282,000
Other (income) expense (64,000) 15,000 (194,000) (57,000)
------------- ------------- ------------- -------------
1,023,000 5,890,000 13,933,000 17,225,000
------------- ------------- ------------- -------------
Income (loss) before
reorganization costs
and income taxes (8,685,000) (6,053,000) (26,274,000) (15,429,000)
Reorganization costs
Professional fees 1,676,000 --- 1,676,000 ---
Costs related to store
closings 1,687,000 --- 1,687,000 ---
------------- ------------- ------------- -------------
3,363,000 --- 3,363,000 ---
Income (loss) before
income tax (12,048,000) (6,053,000) (29,637,000) (15,429,000)
Benefit for income taxes 0 0 0 0
------------- ------------- ------------- -------------
Net income (loss) $(12,048,000) $ (6,053,000) $(29,637,000) $(15,429,000)
============= ============= ============= =============
See accompanying notes to condensed financial statements.
<page-5>
WHEREHOUSE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Nine
Months Ended Months Ended
October 31, 1995 October 31, 1994
---------------- ----------------
OPERATING ACTIVITIES:
Net loss $(29,637,000) $(15,429,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 32,831,000 34,975,000
Book value of rental inventory dispositions 9,672,000 4,884,000
Loss (gain) on disposal of fixed assets 1,610,000 ---
Gain on redemption of convertible debentures (13,000) ---
Changes in operating assets and liabilities:
Receivables 1,886,000 148,000
Taxes receivable 1,293,000 4,520,000
Merchandise inventory (420,000) (20,841,000)
Other current assets (1,254,000) 201,000
Accounts payable, accrued expenses, and
other liabilities (25,063,000) 8,587,000
Rental inventory purchases (27,585,000) (27,588,000)
-------------- --------------
Net cash used in operating activities (36,680,000) (10,543,000)
INVESTING ACTIVITIES:
Acquisition of property, equipment and
improvements (7,734,000) (10,029,000)
Purchase of Record Shop 0 (601,000)
Decrease (increase) in other assets and
intangibles (478,000) 247,000
-------------- --------------
Net cash used in investing activities (8,212,000) (10,383,000)
FINANCING ACTIVITIES:
Short-term borrowings - pre petition 29,020,000 22,950,000
Short-term borrowings - post petition 18,000,000 ---
Dividend payments 0 (160,000)
Subordinated debenture redemptions (169,000) 0
Principal payments on capital lease obligations
and long-term debt (1,543,000) (2,669,000)
-------------- --------------
Net cash provided by financing activities 45,308,000 20,121,000
-------------- --------------
Net increase (decrease) in cash 416,000 (805,000)
Cash, beginning of the period 1,962,000 3,120,000
-------------- --------------
Cash, end of the period $ 2,378,000 $ 2,315,000
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11,456,000 $ 18,867,000
Net income taxes (1,276,000) (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 Bank-
ruptcy 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 "Subject to Compromise" and has been classified as such 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 October 31, 1995, the total principal and interest
related to the above debt was $206.2 million and $8.5 million,
respectively. The ultimate outcome of the aforementioned debt
will be determined during the bankruptcy case.
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 $6.0 million higher had it continued
to accrue from the period of August 2, 1995 through October 31,
1995.
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 received approval to reject 29 real property leases
(28 store leases and one office lease). In addition, the leases
of two other stores have expired and they have been closed.
Costs related to the closure of the 28 stores totalled $1.7
million for the quarter. 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 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. This was preceded by an interim order author-
izing post-petition financing which was approved by the Court on
September 21, 1995.
The Board of Directors has authorized Jefferies & Company,
the Company's financial advisor, to develop and implement a
process to solicit interest relating to the potential sale of all
or part of the Company's assets or stock by merger, tender offer,
exchange offer, plan of reorganization, other acquisition of debt
or securities, or otherwise.
3. SUMMARY OF FINANCIAL INFORMATION OF WEI HOLDINGS, INC.
Unconsolidated summary financial information of WEI is as
follows:
October 31, January 31,
1995 1995
---------- ----------
(In Thousands)
Current assets 37 64
Total assets 37 64
Current liabilities 76 76
Deficiency in investment
in the Company 142,086 112,448
Total liabilities 142,162 112,524
Redeemable common stock 3,872 3,872
Notes receivable from
shareholders (660) (660)
Contingent shares (663) (663)
For the Nine Months Ended
October 31, October 31,
1995 1994
---------- ---------
(In Thousands)
Net income (28) 27
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 "Subject to Compromise" and has been classified as such on
the Company's balance sheet. The payment of the above 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 received approval to reject 29 real property leases
(28 store leases and one office lease). In addition, the leases
of two other stores have expired and they have been closed.
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 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 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, and except for loss of business which may have resulted
from the reduction in the breadth of the Company's inventory as a
result of the matters discussed below, the Company does not
believe that it has experienced any material negative impact from
its customers or employees because of the filing.
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. The
Company is currently involved in negotiations with its vendors to
set up normal terms for post petition shipments and services. In
addition, under certain circumstances, the court has allowed the
Company to enter into vendor agreements which permit returns of
inventory for credit against pre-petition indebtedness in
exchange for the granting of normal terms on a post-petition
basis. On October 12, 1995, the Company signed such an agreement
with Warner/Elektra/Atlantic Corporation ("WEA") which provides
for a credit facility of up to $6.0 million. The agreement also
requires returns of inventory to WEA of $2.2 million for credit
against pre-petition indebtedness. Similar agreements have since
been signed with CEMA Distribution, Polygram Group Distribution,
Inc. and Alliance Entertainment Corporation which provide for
credit facilities of $1.1 million to $2.0 million and require
returns of inventory for credit against pre-petition claims of
$0.3 million to $2.0 million. Changes in credit terms 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 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 borrow-
ing 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
above DIP financing facility was approved by the Bankruptcy Court
on October 19, 1995. This was preceded by an interim order
authorizing post-petition financing which was approved by the
Court on September 21, 1995.
The Company believes that the current DIP borrowing facility
is adequate to support the upcoming Christmas season, however,
there can be no assurance as to the effect which any future
changes in the Company's operations or results could have on its
liquidity.
The Board of Directors has authorized Jefferies & Company,
the Company's financial advisor, to develop and implement a
process to solicit interest relating to the potential sale of all
or part of the Company's assets or stock by merger, tender offer,
exchange offer, plan of reorganization, other acquisition of debt
or securities, or otherwise.
Since the filing, the Company has closed 30 stores (19
stores in September and 11 stores in October). Total store count
for the chain at October 31, 1995 was 316.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED OCTOBER 31, 1995 AND OCTOBER 31, 1994
Aggregate net revenues were $93.1 million and $112.7 million
for the quarters ended October 31, 1995 and 1994, respectively.
The Company believes that the decrease of $19.6 million, or
17.4%, was principally due to decreased customer traffic caused
by a lack of new, "hit" release music product, continued competi-
tive and economic pressures in certain of the Company's markets,
a shift in customer spending from traditional entertainment
products to home computer hardware and software products, the
closing of 30 stores which occurred in the months of September
and October and the loss of revenue which may have resulted from
the reduction in the breadth of the Company's inventory as a
result of the matters discussed above.
Net merchandise sales were $74.8 million versus $92.0
million for the quarters ended October 31, 1995 and 1994,
respectively, representing an overall average decrease of 18.7%.
On a same-store basis, net merchandise sales declined by 18.1%
during the quarter ended October 31, 1995 as compared to the
quarter ended October 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.
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
October 31,
1995 1994
---- ----
Net Merchandise Sales:
Music including compact discs,
cassettes and other music
configurations 62.7 76.1
Sales of new videocassettes 4.5 5.8
Video game software and hardware,
general merchandise, accessories,
ticket commissions, and other 7.6 10.2
-------- --------
Total merchandise sales 74.8 92.1
Videocassette and other rental income 18.3 20.6
-------- --------
Total revenues $ 93.1 $ 112.7
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 80% of the Company's stores currently
offer rental products. Rental income was $18.3 million versus
$20.6 million during the quarters ended October 31, 1995 and
1994, respectively, representing a decrease of $2.3 million or
11.5%. On a same-store basis rental income decreased approxi-
mately 13.1% as compared to the prior year. The Company believes
that decreases in both total and same-store rental income are
attributable 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 October 31, 1995, the Company decreased
its purchases of video rental product by $2.8 million, or 27.0%,
over purchases of such product in the same quarter of the prior
year. The decrease was primarily due to a reduction in the
number of "hit" video titles released by video distributors
during the quarter as compared to last 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 influenced 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 30 stores during the
quarter ended October 31, 1995, 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.
Cost of sales decreased $11.1 million to $47.0 million for
the quarter ended October 31, 1995 versus $58.1 million for the
quarter ended October 31, 1994, representing a decrease of 19.1%.
As a percentage of net merchandise sales, costs of sales
decreased 0.3% to 63.4% during the quarter ended October 31, 1995
versus 63.7% during the quarter ended October 31, 1994. The 0.3%
decrease in cost of sales as a percentage of net merchandise
sales was principally due to reduced use of promotional markdowns
(0.8%), decreased merchandise return costs (0.5%), and other
factors (0.2%) offset by lower discounts on merchandise inventory
purchases (0.7%) and higher costs associated with inventory
shrink (0.5%). Changes in product sales mix continue, specifi-
cally 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 $11.3
million during the quarter ended October 31, 1995, an increase of
$2.7 million or 30.7%, versus $8.6 million during the quarter
ended October 31, 1994. As a percentage of rental income, cost
of rentals increased to 61.7% during the quarter ended October
31, 1995 versus 41.8% during the quarter ended October 31, 1994,
representing an increase of 19.9%. The 19.9% increase in cost of
rentals, including amortization, is primarily attributable to
costs related to increased sales of used rental inventory
(15.6%), higher amortization (3.2%) and other factors (1.1%).
Net merchandise sales as a percentage of aggregate net
revenues decreased 1.3% to 80.4% during the quarter ended October
31, 1995 versus 81.7% during the quarter ended October 31, 1994.
Several major retail chains, including Best Buy, Block-
buster, 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. Further, future revenues may be
reduced as a result of the closure of 30 stores during the
quarter ended October 31, 1995, 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.
Selling, general and administrative expenses, excluding $0.9
million for the amortization of goodwill during the quarter ended
October 31, 1994, were $42.5 million versus $45.1 million for the
quarters ended October 31, 1995 and 1994, respectively, a
decrease of $2.6 million or 5.8%.
As a percentage of aggregate net revenues, selling, general
and administrative expenses, after excluding the effects of
amortization of goodwill during the quarter ended October 31,
1994, were 45.6% during the quarter ended October 31, 1995 versus
40.1% during the quarter ended October 31, 1994, representing an
increase of 5.5%. The 5.5% increase was primarily due to
increases, as a percentage of revenue, in rent and occupancy
costs (3.5%), payroll expenses (1.8%), and other factors (0.2%).
Rent and occupancy costs increased in absolute dollars due to
higher rental expense associated with store expansions and higher
common area maintenance and real estate tax charges assessed by
landlords. 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 October 31, 1995 while
$0.9 million has been included during the quarter ended October
31, 1994.
The loss from operations was $7.7 million for the quarter
ended October 31, 1995 versus a loss of $0.2 million for the
quarter ended October 31, 1994. The increased operating losses
resulted principally from lower revenues and resulting lower
overall gross profit margins ($11.1 million) which was offset by
lower selling, general and administrative expenses ($3.4
million).
Interest expense (net of interest income) decreased $4.9
million to $1.0 million for the quarter ended October 31, 1995
versus $5.9 million for the quarter ended October 31, 1994. The
decrease was primarily due to the suspension of the accrual of
interest on the Revolving Line of Credit, Variable Rate Term
Note, 13% Subordinated Notes and 6 1/4% Convertible Subordinated
Debentures following the filing of Chapter 11. Included in
interest expense is $0.5 million attributable to the amortization
of acquisition financing costs during each of the quarters ended
October 31, 1995 and 1994.
Reorganization costs for the quarter include costs related
to the bankruptcy case including professional fees for legal and
financial advisors, as well as costs associated with the closure
of 28 stores. Reorganization costs 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 October 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 NINE MONTHS ENDED OCTOBER 31, 1995 AND OCTOBER 31, 1994
Aggregate net revenues for the nine months ended October 31,
1995 were $302.1 million compared to $340.8 million for the nine
months ended October 31, 1994, a decrease of 11.4%. 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, economic pressures in certain
of the Company's markets, the closing of 30 stores which occurred
in the months of September and October and the loss of revenue
which may have resulted from the reduction in the breadth of the
Company's inventory as a result of the matters discussed above.
Net merchandise sales were $239.1 million and $275.2 million
during the nine months ended October 31, 1995 and 1994, respec-
tively, representing a decrease on an aggregate and same-store
basis of 13.1%. The decrease in same-store sales resulted
principally from decreased sales of new music, pre-recorded
video, accessories and video games offset by increases in sales
of used music products.
Net Merchandise Sales and Rental Revenues
By Merchandise Category
(Dollar Amounts in Millions)
Nine Months Ended
October 31,
1995 1994
--------------------------
Net Merchandise Sales:
Music including compact discs,
cassettes and other music
configurations 199.7 224.6
Sales of new videocassettes 14.9 15.5
Video game software and
hardware, general
merchandise, accessories,
ticket commissions, and
other 24.4 35.0
------- -------
Total merchandise sales 239.0 275.1
Videocassette and other
rental income 63.1 65.7
------- -------
Total Revenues $302.1 $340.8
Rental revenue was $63.1 million and $65.7 million for the
nine months ended October 31, 1995 and 1994, respectively,
representing a 4.0% aggregate decrease and a decrease of 4.4% 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 $23.3 million to $153.1 million for
the nine months ended October 31, 1995, as compared with $176.4
million for the nine months ended October 31, 1994. As a
percentage of merchandise sales revenue, cost of sales for the
nine months ended October 31, 1995 was 64.0% which was slightly
lower than the nine months ended October 31, 1994. During the
first nine 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 $5.8 million to $30.0 million for
the nine months ended October 31, 1995 compared to $24.2 million
for the nine months ended October 31, 1994. As a percentage of
rental revenue, cost of rentals increased to 47.6% for the nine
months ended October 31, 1995 from 36.8% for the nine months
ended October 31, 1994. The 10.8% increase was primarily
attributable to costs related to increased sales of used rental
inventory (7.9%), higher amortization (2.1%), and other factors
(0.8%).
Net merchandise sales, as a percentage of aggregate net
revenues, decreased from 80.7% in the nine months ended October
31, 1994 to 79.1% in the nine months ended October 31, 1995.
Selling, general and administrative expenses, excluding the
effects of amortization of goodwill during the nine months ended
October 31, 1994, were $131.3 million and $135.7 million for the
nine months ended October 31, 1995 and 1994, respectively, a
decrease of $4.4 million, or 3.2%. As a percentage of aggregate
net revenues, selling, general and administrative expenses,
excluding amortization of goodwill, were 43.5% and 39.8% for the
nine months ended October 31, 1995 and 1994, respectively. The
3.7% increase was primarily a result of increases, as a percen-
tage of revenue, in rent and occupancy costs (2.1%) 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 expense came from payroll
expense (0.6%), advertising (0.5%) and other factors (0.5%).
Loss from operations was $12.3 million for the nine months
ended October 31, 1995 compared to income from operations of $1.8
million for the nine months ended October 31, 1994, a decrease in
operating income of $14.1 million. This decrease resulted
primarily from lower revenues and gross profit margins ($21.3
million), offset by lower selling, general and administrative
expenses ($7.2 million).
Interest expense (net of other income) decreased from $17.2
million for the nine months ended October 31, 1994 to $13.9
million for the nine months ended October 31, 1995, largely due
to the suspension of the accrual of interest on the Revolving
Line of Credit, Variable Rate Term Note, 13% Senior Subordinated
Note, and 6 1/4 % Convertible Subordinated Debentures following
the filing of Chapter 11. Included in interest expense is $1.4
million attributable to the amortization of acquisition financing
costs during each of the nine month periods ended October 31,
1995 and 1994.
Reorganization costs for the period include costs related to
the bankruptcy case including professional fees for legal and
financial advisors, as well as costs associated with the closure
of 28 stores. Reorganization costs 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 October 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 $26.1 million
to $36.7 million during the nine months ended October 31, 1995
from $10.5 million during the nine months ended October 31, 1994.
The increase was principally due to a higher net loss ($11.9
million), a decrease in accounts payable related to major changes
in vendor terms ($33.7 million), and other factors ($0.9
million), offset by reductions in merchandise inventory ($20.4
million).
Cash used in investing activities decreased by $2.2 million
to $8.2 million during the nine months ended October 31, 1995
from $10.4 million during the nine months ended October 31, 1994
principally due to decreased acquisitions of property, equipment
and improvements. The Company intends to carefully review its
capital spending in light of its Chapter 11 filing. Any addi-
tional capital expenditures will be subject to future availabi-
lity of funds and other liquidity concerns.
Cash provided by financing activities increased by $25.2
million to $45.3 million during the nine months ended October 31,
1995 from $20.1 million during the nine months ended October 31,
1994 principally due to increased short-term borrowings under the
Company's $30.0 million D.I.P. borrowing facility. The increased
borrowings were primarily the result of decreased revenues and
margins and changes in trade credit terms as noted previously.
The Company believes that the current DIP borrowing facility
is adequate to support the upcoming Christmas season, however,
there can by no assurance as to the effect which any future
changes in the Company's operations or results could have on its
liquidity.
As of October 31, 1995 the Company has not signed any lease
commitments to open new stores during the next twelve months, or
any other material commitments outside of those referenced
earlier.
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, each 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, seeking to reorganize under 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-posses-
sion, 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. On September
29, 1995, the Court signed an order approving the rejection of 29
real property leases (28 store leases and one office lease). On
September 21, 1995, the Court approved an interim order which
authorized the use of post-petition financing. Subsequently, on
September 25, 1995, the Company completed negotiations with
Bankers Trust Company, as Agent, for a 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
certain requirements and covenants. A final order authorizing
borrowings on the DIP financing facility was approved by the
Bankruptcy Court on October 19, 1995. In addition, on October
19, 1995, the Court approved an order authorizing return of
inventory to vendors for credit against their pre-petition
claims, pursuant to section 546(g) of the Bankruptcy Code.
(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. On September 27, 1995,
defendants filed a petition for a rehearing requesting that the
Court of Appeals vacate its ruling on plaintiffs' Section 10(b)
claim. The Company believes that this action is without merit
and is vigorously defending it.
<page-19>
(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
quarters ended April 30, 1995 and July 31, 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.
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 October 31, 1995) and 6 1/4%
Convertible Subordinated Debentures ($5.5 million in principal
and accrued interest as of October 31, 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. This application was approved and on September 14,
1995, the Company's 6 1/4% debentures were delisted from the
American Stock Exchange. 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.
<page-20>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.2 Debtor-In-Possession Credit Agreement, dated
as of September 25, 1995, among the Company, WEI, and Bankers
Trust Company, as Agent, including all exhibits thereto.
27.0 Financial Data Schedule
(b) Current Reports on Form 8-K
A Current Report on Form 8-K, dated September 29, 1995,
was filed by the Company with the Securities and Exchange Commis-
sion on October 3, 1995 to report under "Item 5. - Other Events"
the Company's obtaining a $30 million revolving credit facility
from Bankers Trust Company.
<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: December 15, 1995 /s/ Jerry E. Goldress
--------------------------
JERRY E. GOLDRESS
Chairman of the Board,
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: December 15, 1995 /s/ Henry Del Castillo
--------------------------
HENRY DEL CASTILLO
Senior Vice President,
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)