<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended July 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22289
Wherehouse Entertainment, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-4608339
(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 registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No [ ]
As of July 31, 1997, 10,546,249 shares of the registrant's common stock
were issued and outstanding and 629,064 additional shares are expected to be
issued pursuant to the bankruptcy plan of reorganization discussed in Item 1
below.
<PAGE>
INDEX
WHEREHOUSE ENTERTAINMENT, INC.
Page
----
FORWARD LOOKING STATEMENTS 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
July 31, 1997 (Unaudited) and January 31, 1997 4
Condensed Statements of Operations -
Three Months Ended July 31, 1997 (New Wherehouse)
and 1996 (Old Wherehouse) (Unaudited) 5
Six Months Ended July 31, 1997 (New Wherehouse)
and 1996 (Old Wherehouse) (Unaudited) 5
Condensed Statements of Cash Flows -
Six Months Ended July 31, 1997 (New Wherehouse) and
1996 (Old Wherehouse) (Unaudited) 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Sections of this Report
containing such forward-looking statements include "Management's Discussion and
Analysis of Financial Condition and Results of Operation," under Item 2 of Part
I below. Statements in this Report which address activities, events or
developments that the registrant expects or anticipates will or may occur in the
future, including such things as the future issuance of shares, future capital
expenditures (including the amount and nature thereof), expansion and other
developments and technological trends of industry segments in which the
registrant is active, business strategies, growth of the registrant's and its
competitors' business and operations and other such matters are forward-looking
statements. Although the registrant believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions within the bounds
of its knowledge of its business, a number of factors could cause actual results
to differ materially from those expressed in any forward-looking statements,
whether oral or written, made by or on behalf of the registrant.
The registrant's operations are subject to factors outside its control.
Any one, or a combination, of these factors could materially affect the results
of the registrant's operations. These factors include: (a) changes in levels of
competition from current competitors and potential new competition from both
retail stores and alternative methods or channels of distribution such as
electronic and telephone shopping services and mail order; (b) loss of a
significant vendor or prolonged disruption of product supply; (c) the presence
or absence of popular new releases and products in the product categories the
registrant represents; (d) changes in levels of consumer spending, especially
during seasonally significant periods; (e) changes in the Federal and state
income tax rules and regulations or interpretations of existing legislation; (f)
changes in the general economic conditions in the United States, and in
particular the eight major markets served by the registrant, including, but not
limited to consumer sentiment about the economy in general; (g) changes in
availability or terms of working capital financing from vendors and lending
institutions; (h) adverse results in significant litigation matters; and (i) the
ability to attract and retain key personnel. The foregoing should not be
construed as an exhaustive list of all factors which could cause actual results
to differ materially from those expressed in forward-looking statements made by
the registrant. Forward-looking statements made by or on behalf of the
registrant are based on a knowledge of its business and the environment in which
it operates, but because of the factors listed above, actual results may differ
from those anticipated results described in those forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the registrant will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the registrant or its business or operations.
3
<PAGE>
PART I.
FINANCIAL INFORMATION
WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31,
1997 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 28,732,000 $ 6,178,000
Receivables 1,472,000 1,932,000
Prepaid inventory deposits 0 4,486,000
Merchandise inventory 72,670,000 75,800,000
Other current assets 1,407,000 2,259,000
Rental Inventory, net (Note 5) 7,620,000 9,686,000
------------- -------------
Total current assets 111,901,000 100,341,000
Equipment and improvements, net 17,323,000 21,337,000
Reorganization value in excess of amounts allocable to
identifiable assets, net 9,238,000 9,724,000
Deferred taxes 2,130,000 0
Other taxes 278,000 340,000
------------- -------------
Total assets $ 140,870,000 $ 131,742,000
------------- -------------
------------- -------------
LIABLILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 48,860,000 $ 40,168,000
Current maturities of capital lease obligations
and long-term debt 512,000 729,000
------------- -------------
Total current liabilities 49,372,000 40,897,000
------------- -------------
Capital leases obligations and long-term debt 569,000 722,000
Notes payable 3,935,000 3,980,000
Other long-term liabilities 3,636,000 2,000,000
Shareholders' equity
Common stocks, $.01 par value, 24,000,000
authorized, 10,546,249 issued and outstanding 103,000 103,000
Additional paid-in capital 89,380,000 89,380,000
Accumulated deficit (600,000) 0
Notes Receivable (5,252,000) (5,340,000)
------------- -------------
Total shareholders' equity 83,358,000 84,143,000
------------- -------------
Total liabilities and shareholders' equity $ 104,870,000 $ 131,742,00
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to Condensed Financial Statements
4
<PAGE>
WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
New Old New Old
Wherehouse Wherehouse Wherehouse Wherehouse
------------- ------------- ------------- -------------
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
July 31, 1997 July 31, 1996 July 31, 1997 July 31, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 63,773,000 $ 68,339,000 $ 123,701,000 $ 137,712,000
Rental Revenue 14,111,000 19,331,000 27,362,000 37,449,000
------------ ------------- ------------- -------------
77,884,000 87,670,000 151,063,000 175,161,000
Cost of sales 41,474,000 44,967,000 79,753,000 89,938,000
Costs of rentals, including amortization (Note 5) 7,488,000 10,870,000 15,223,000 17,917,000
------------ ------------- ------------- -------------
48,959,000 55,837,000 94,976,000 107,855,000
Selling, general and administrative expenses 26,131,000 34,399,000 52,106,000 67,533,000
Depreciation & Amortization 2,617,000 3,325,000 5,233,000 6,908,000
------------ ------------- ------------- -------------
Income (loss) from operations 177,000 (5,891,000) (1,252,00) (7,135,000)
Interest expense 111,000 124,000 223,000 313,000
Interest income (349,000) (41,000) (538,000) (93,000)
------------ ------------- ------------- -------------
Income (loss) before reorganizaton items & income taxes 415,000 (5,974,000) (937,000) (7,355,000)
Reorganization items:
Professional fees -- 923,000 -- 1,776,000
Provision for store closing costs -- 1,113,000 -- 1,145,000
------------ ------------- ------------- -------------
-- 2,036,000 -- 2,291,000
------------ ------------- ------------- -------------
Income (loss) before income taxes 415,000 (8,010,000) (937,000) (10,276,000)
------------ ------------- ------------- -------------
Provision (benefit) for income taxes 185,000 0 (337,000) 0
------------ ------------- ------------- -------------
Net Income (loss) $ 230,000 $ (8,010,000) $ (600,000) $(10,276,000)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net Income (loss) per share $ 0.02 $ (0.06)
------------ -------------
------------ -------------
Weighted average shares outstanding 10,311,107 10,284,899
------------ -------------
------------ -------------
Number of stores at end of period 231 281
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to Condensed Financial Statements
5
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WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
New Old
Wherehouse Wherehouse
------------ -------------
Six Six
Months Ended Months Ended
July 31, 1997 July 31, 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net Loss $ (600,000) $ (10,276,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 5,233,000 6,908,000
Rental amortization, included in Cost of Rental 12,176,000 12,470,000
Book value of rental inventory dispositions,
included in Cost of Rental 2,291,000 5,447,000
Changes in operating assets and liabilites:
Receivables 460,000 (231,000)
Prepaid inventory deposits 4,486,000 5,663,000
Merchandise inventory 3,130,000 (228,000)
Other current assets 852,000 1,134,000
Accounts payable, accrued expenses and
other liabilities 9,229,000 979,000
Liabilities subject to compromise 0 (1,445,000)
Rental inventory purchases (12,668,000) (18,530,000)
------------- -------------
Net cash provided by operating activities 24,589,000 1,891,000
Investing activities:
Aquisition of property, equipment and improvements (1,727,000) (1,161,000)
Decrease (increase) in other assets and intangibles 62,000 (384,000)
------------- -------------
Net cash used in investing activities (1,655,000) (1,545,000)
Financing activities:
Principal payments on capital lease obligations
and long-term debt (370,000) (420,000)
------------- -------------
Net cash used in financing activities (370,000) (420,000)
Net increase (decrease) in cash 22,554,000 (74,000)
Cash at beginning of the period 6,178,000 7,353,000
------------- -------------
Cash at end of the period $ 28,732,000 $ 7,279,000
------------- -------------
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 60,000 $ 276,000
Income taxes 1,413,000 2,000
Reorganization items 9,248,000 2,105,000
</TABLE>
See accompanying notes to Condensed Financial Statements
6
<PAGE>
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended July 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended January 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's reports on Form 10-K
for the year ended January 31, 1997.
2. REORGANIZATION UNDER CHAPTER 11
The Company's Plan of Reorganization, (the "Plan") was confirmed by an
order of the Bankruptcy Court entered on January 7, 1997. The effective date of
the Plan occurred on January 31, 1997.
Pursuant to the Plan, Wherehouse Entertainment, Inc. (New Wherehouse) was
incorporated on November 15, 1996, as WEI Acquisition Co. On January 31, 1997,
New Wherehouse acquired (the Acquisition) substantially all the assets of
Wherehouse Dissolution Co. (Old Wherehouse), and its parent company, WEI
Holdings, Inc.,. Prior to the Acquisition, Old Wherehouse was known as
"Wherehouse Entertainment, Inc.," and after the Acquisition, Old Wherehouse
changed its name to "Wherehouse Dissolution Co." After the Acquisition, New
Wherehouse changed its name to "Wherehouse Entertainment, Inc." New Wherehouse
and Old Wherehouse are collectively referred to as the Company or Wherehouse
where the discussion relates to the continuing business operations of Old
Wherehouse and New Wherehouse.
Since the Plan Effective Date, the Bankruptcy Court has retained
jurisdiction over certain claims and other matters relating to the Debtors'
Bankruptcy estates, but the Company has been and is free to carry out its
business without oversight by the Bankruptcy Court.
For a summary of the Plan of Reorganization, reference is made to the
Company's Annual Report on Form 10-K for the year ended January 31, 1997.
7
<PAGE>
3. FRESH START REPORTING
On January 31, 1997, the Company implemented the recommended accounting
principles for entities emerging from Chapter 11 set forth in the American
Institute of Certified Public Accountants Statement of Position (SOP) 90-7 on
Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP
90-7). This resulted in the use of fresh start reporting, since the
reorganization value, as defined, was less than the total of all post-petition
liabilities and pre-petition claims, and holders of voting shares immediately
before confirmation of the Plan received less than fifty percent of the voting
shares of the emerging entity. Under this SOP, all assets and liabilities were
restated to reflect the reorganization value of the reorganized entity, which
approximated its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure was
recast in conformity with the Plan. As such, the accompanying Company balance
sheet as of January 31, 1997, represents that of a successor company which, in
effect, is a new entity with assets, liabilities and a capital structure having
carrying values not comparable with prior periods and with no beginning retained
earnings or deficit. In addition, the Company selected certain accounting
policies adopted at New Wherehouse's inception which are not consistent with
those used by Old Wherehouse. Accordingly, the results of operations of New
Wherehouse may not be comparable to those of Old Wherehouse.
4. REVOLVING CREDIT FACILITY
Pursuant to the Plan, the Company entered into a loan and security
agreement with Congress Financial Corporation (Western) (the Congress Facility),
which provides a borrowing capacity of up to $30,000,000 with a letter of credit
subfacility of $10,000,000, subject to borrowing base limitations based upon,
among other things, the value of certain eligible merchandise inventory. The
Congress Facility prohibits the Company from declaring or paying dividends on
its classes of capital stock, including the common stock, in excess of an
aggregate of $6 million, unless certain financial performance targets set forth
in the Congress Facility are met. As of July 31, 1997, there were no borrowings
outstanding under the Congress Facility, although $700,000 of letters of credit
were outstanding.
5. RENTAL INVENTORY AMORTIZATION
On January 31, 1997, the Company adopted a more accelerated method of
amortization under which rental inventory is amortized using the straight-line
method over a three-month period with a salvage value of $3.00 per unit. The
previous method amortized rental inventory over a three year period for video
cassettes and a two year period for video games.
8
<PAGE>
WHEREHOUSE ENTERTAINMENT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 Operation contained in the Company's Reports on Form
10-K for the year ended January 31, 1997.
RESULTS OF OPERATION
FOR THE QUARTERS ENDED JULY 31, 1997 AND JULY 31, 1996
Net revenues were $77.9 million and $87.7 million for the quarters ended
July 31, 1997 and 1996, respectively. The Company believes that the decrease of
$9.8 million, or 11.2%, was principally due to the closing of underperforming
stores during fiscal year ended January 31, 1997 as well as continued
competitive and economic pressures in certain of the Company's markets.
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,
1997 1996
------ ------
Net Merchandise Sales:
Music $ 55.8 $ 59.4
Other, principally sales of new video
cassettes, video game software and hardware,
general merchandise and ticket commissions. 8.0 8.9
------ ------
Total merchandise sales $ 63.8 $ 68.3
------ ------
Rental Revenue
Video cassette and other rental income 13.3 19.3
Video cassette liquidation 0.8 0
------ ------
Total rental revenue 14.1 19.3
------ ------
Total revenues $ 77.9 $ 87.7
------ ------
------ ------
The sale of pre-recorded music, new video cassettes, video game software
and hardware and general merchandise continue to represent the greatest portion
of the Company's revenues.
9
<PAGE>
For the quarter ended July 31, 1997, net merchandise sales represented 81.9% of
aggregate revenues. On a same-store basis, net merchandise sales increased by
7.3% during the quarter ended July 31, 1997, as compared to the quarter ended
July 31, 1996. Net merchandise sales were $63.8 million versus $68.3 million
for the quarters ended July 31, 1997 and 1996, respectively, representing an
overall decrease of 6.7%. The decrease of 6.7% was largely the result of the
closure of underperforming stores during the fiscal year ended January 31, 1997.
Rental income includes the rental of video cassettes, video games and game
players, and audio cassette books; and sales of previously viewed video
cassettes and previously played video games. Approximately 174 of the Company's
stores currently offer rental products. Rental income was $14.1 million versus
$19.3 million during the quarters ended July 31, 1997 and 1996, respectively,
representing a decrease of $5.2 million or 27.0%. On a same-store basis, rental
income decreased approximately 22.5% as compared to the prior year. The
Company believes that the decrease in same-store rental income was primarily
attributable to continued competition and a general softening in rental video
spending nationwide. During the quarter ended July 31, 1997, the Company
decreased its purchases of video rental product by $3.4 million or 34.9% versus
the same quarter of the prior year.
Included in rental income for the quarter ended July 31, 1997 is $0.8
million of liquidation income from the liquidation of excess video catalog
inventory as a result of a rental merchandising project undertaken to improve
rental efficiency. The Company may experience continued video liquidations in
future quarters of the current fiscal year.
Cost of sales decreased $3.5 million to $41.5 million for the quarter ended
July 31, 1997 versus $45.0 million for the quarter ended July 31, 1996,
representing a decrease of 7.8%. As a percentage of net merchandise sales,
costs of sales decreased 0.8% to 65.0% during the quarter ended July 31, 1997
versus 65.8% during the quarter ended July 31, 1996. The 0.8% decrease in cost
of sales as a percentage of net merchandise sales was principally due to higher
prompt payment discounts in the current quarter.
Cost of rental, including amortization, decreased to $7.5 million during
the quarter ended July 31, 1997, a decrease of $3.4 million or 31.1%, versus
$10.9 million during the quarter ended July 31, 1996. As a percentage of rental
income, cost of rentals decreased to 53.1% during the quarter ended July 31,
1997 versus 56.2% during the quarter ended July 31, 1996, representing a
decrease of 3.1%. The 3.1% decrease in cost of rentals is the result of a
higher than normal charge for video liquidation in the prior year, which more
than offsets the current year impact of the adoption of a more accelerated
method of amortization of rental product, and a decrease in rental revenue. If
Old Wherehouse had adopted this accelerated method of amortization as of January
31, 1996, cost of rentals during the quarter ended July 31, 1996 would have been
lower (and gross profit higher) by approximately $1.2 million since a
significant portion of the charge taken in that quarter would have been
recognized as of January 31, 1997 as a result of the change in method.
10
<PAGE>
Merchandise sales as a percentage of aggregate net revenues increased 3.9%
to 81.9% during the quarter ended July 31, 1997 versus 78.0% during the quarter
ended July 31, 1996.
Several major retail chains, including Best Buy, Hollywood Video and
Blockbuster Entertainment have increased their retail store presence in the
Company's markets. The Company may continue to experience increased competition
and such competition may result in continued pressure on revenues and gross
profit margins.
Selling, general and administrative expenses, were $26.1 million versus
$34.4 million for the quarters ended July 31, 1997 and 1996, respectively, a
decrease of $8.3 million or 24.0%. As a percentage of net revenues, selling,
general and administrative expenses, were 33.6% during the quarter ended July
31, 1997 versus 39.2% during the quarter ended July 31, 1996, representing a
decrease of 5.6%. The 5.6% decrease was principally due to reductions in
rent and occupancy costs through landlord concessions, decreases in non-music
advertising spending and other corporate expense categories.
Income from operations for the quarter ended July 31, 1997 was $0.2
million as compared to a loss from operations of $5.9 million for the quarter
ended July 31, 1996, an improvement of $6.1 million. As mentioned
previously, the Company adopted an accelerated method of amortization for
rental inventory at January 31, 1997. If the Company had adopted the
accelerated method at January 31, 1996, loss from operations for the quarter
ended July 31, 1996 would have been $4.7 million. Excluding the impact of
the change in the method of amortization of rental inventory, income from
operations for the period ended July 31, 1997 was $4.9 million higher than
that experienced for the period ended July 31, 1996. The improvement in
income from operations was primarily the result of the closure of
underperforming stores during the fiscal year ended January 31, 1997,
reductions in rent and occupancy costs, decreases in non-music advertising
expense, and increased merchandise sales that more than offset the decline in
rental revenue.
Reorganization items include costs related to the bankruptcy case including
professional fees for legal and financial advisors, costs related to the closing
of stores, and the estimated cost associated with the rejection of certain
executory contracts. For the quarter ended July 31, 1996, the Company reported
total reorganization items of $2.0 million.
The Company recorded a tax provision of $0.2 million for the quarter ended
July 31, 1997, but did not record any tax benefit for the quarter ended July 31,
1996. The provision represents an effective tax rate of 40% which the Company
estimates will be its effective tax rate for the year ended January 31, 1998.
The Company is currently under audit by the California Franchise Tax Board
("FTB") for tax years January 31, 1992, 1993 and 1994. The Company believes
that it has made adequate provision in the financial statements for this audit.
11
<PAGE>
FOR SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1996
Net revenues were $151.1 million and $175.2 million for the six months
ended July 31, 1997 and 1996, respectively. The Company believes that the
decrease of $24.1 million, or 13.8%, was principally due to the closing of
underperforming stores during the fiscal year ended January 31, 1997 as well as
continued competitive and economic pressures in certain of the Company's
markets.
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)
Six Months Ended
July 31,
1997 1996
----- -----
Net Merchandise Sales:
Music $ 107.6 $ 117.7
Other, principally sales of new video cassettes,
video game software and hardware, general
merchandise and ticket commissions 16.1 20.0
----- -----
Total merchandise sales $ 123.7 $ 137.7
------ ------
Rental revenue
Video cassette and other rental income 26.0 37.3
Video cassette liquidation 1.4 0.1
----- -----
Total rental revenue 27.4 37.4
----- -----
Total revenues $ 151.1 $ 175.2
------ ------
------ ------
The sale of pre-recorded music, new video cassettes, video game software
and hardware and general merchandise continue to represent the greatest portion
of the Company's revenues. For the six months ended July 31, 1997, net
merchandise sales represented 81.9% of aggregate revenues. On a same-store
basis, net merchandise sales increased by 4.0% during the six months ended July
31, 1997, as compared to the six months ended July 31, 1996. Net merchandise
sales were $123.7 million versus $137.7 million for the six months ended July
31, 1997 and 1996, respectively, representing an overall decrease of 10.2%. The
decrease of 10.2% was largely the result of the closure of underperforming
stores during the fiscal year ended January 31, 1997.
Rental income includes the rental of video cassettes, video games and game
players, and audio cassette books; and sales of previously viewed video
cassettes and previously played video games. Approximately 174 of the Company's
stores currently offer rental products. Rental income was $27.4 million versus
$37.4 million during the six months ended July 31, 1997 and 1996, respectively,
representing a decrease of $10.0 million or 26.9%. On a same-store basis rental
income decreased approximately 21.3% as compared to the prior year. The
Company
12
<PAGE>
believes that the decrease in same-store rental income was primarily
attributable to continued competition and a general softening in rental video
spending nationwide. During the six months ended July 31, 1996, the Company
decreased its purchases of video rental product by $5.9 million or 31.6% versus
the same six months of the prior year.
Included in rental income for the six months ended July 31, 1997 is $1.4
million of liquidation income from the liquidation of excess video catalog
inventory as a result of a rental merchandising project undertaken to improve
rental efficiency. The Company may experience continued video liquidations
during the remainder of the current fiscal year.
Cost of sales decreased $10.1 million to $79.8 million for the six months
ended July 31, 1997 versus $89.9 million for the six months ended July 31, 1996,
representing a decrease of 11.3%. As a percentage of net merchandise sales,
costs of sales decreased 0.8% to 64.5% during the six months ended July 31, 1997
versus 65.3% during the six months ended July 31, 1996. The 0.8% decrease in
cost of sales as a percentage of net merchandise sales was principally due to
higher prompt payment discounts.
Cost of rentals, including amortization, decreased to $15.2 million during
the six months ended July 31, 1997, a decrease of $2.7 million or 15.0%, versus
$17.9 million during the six months ended July 31, 1996. As a percentage of
rental income, cost of rentals increased to 55.6% during the six months ended
July 31, 1997 versus 47.8% during the six months ended July 31, 1996,
representing an increase of 7.8%. The 7.8% increase in cost of rentals is
primarily due to a decrease in rental income during the period and the adoption
by New Wherehouse of a more accelerated amortization method versus the method
used by Old Wherehouse. If Old Wherehouse had adopted this accelerated method
of amortization as of January 31, 1996, cost of rentals during the six months
ended July 31, 1996 would have been higher (and gross profit lower) by
approximately $1.6 million.
Merchandise sales as a percentage of aggregate net revenues increased 3.3%
to 81.9% during the six months ended July 31, 1997 versus 78.6% during the six
months ended July 31, 1996.
Selling, general and administrative expenses, were $52.1 million versus
$67.5 million for the six months ended July 31, 1997 and 1996, respectively,
a decrease of $15.4 million or 22.8%. As a percentage of net revenues,
selling, general and administrative expenses, were 34.5% during the six
months ended July 31, 1997 versus 38.5% during the six months ended July 31,
1996, representing a decrease of 4.0%. The 4.0% decrease was principally due
to the closure of underperforming stores during the fiscal year ended January
31, 1997, reductions in rent and occupancy costs through landlord
concessions, decreases in non-music advertising spending and other corporate
expense categories.
Loss from operations for July 31, 1997 was $1.3 million as compared to $7.1
million for July 31, 1996, an improvement of $5.8 million. As mentioned
previously, the Company adopted an accelerated method of amortization for rental
inventory at January 31, 1997. If the Company had adopted the accelerated
method at January 31, 1996, loss from operations for the six months
13
<PAGE>
ended July 31, 1996 would have been $8.7 million. Excluding the impact of
the change in the method of amortization of rental inventory, loss from
operations for the six months ended July 31, 1997 was $7.4 million lower than
that experienced for the six months ended July 31, 1996. The improvement in
loss from operations was primarily the result of the closure of
underperforming stores during the fiscal year ended January 31, 1997,
reductions in rent and occupancy costs, decreases in non-music advertising
expense, and increased merchandising sales that more than offset the decline
in rental revenue.
Reorganization items include costs related to the bankruptcy case including
professional fees for legal and financial advisors, costs related to the closing
of stores, and the estimated costs associated with the rejection of certain
executory contracts. For the six months ended July 31 , 1996, the Company
reported total reorganization items of $2.9 million.
The Company recorded a tax benefit of $0.3 million for the six months ended
July 31, 1997 but did not record any tax benefit for six months ended July 31,
1996. Should Wherehouse realize pre-tax income in future quarters it will be
subject to Federal and State tax. The benefit represents an effective tax rate
of 40% which the Company estimates will be its effective tax rate for the year
ended January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 1997, the Company's net cash provided
by operating activities increased by $22.7 million to $24.6 million from $1.9
million for the corresponding six months of the prior fiscal year, primarily due
to a reduction in operating losses, increases in payables and accrued expenses,
decreases in merchandise inventory and lower purchases of rental inventory.
Cash used in investing activities increased by $0.2 million to $1.7 million
during the six months ended July 31, 1997 from $1.5 million during the six
months ended July 31, 1996, principally due to increased acquisitions of
property, equipment and improvements, offset by lower increases in other assets
and intangibles.
Cash used in financing activities was approximately even for the six months
ended July 31, 1997 as compared to the six months ended July 31, 1996.
The Company believes that the current borrowing facility (see Note 4 under
Notes to Condensed Financial Statements) is adequate to support existing
operations for the remainder of the current fiscal year.
The Company expects to make additional payments to creditors, professionals
and others of up to $4.3 million through the end of the fiscal year under its
Plan of Reorganization.
14
<PAGE>
As of July 31, 1997 the Company has not signed any lease commitments to
open new stores during the next twelve months.
SEASONALITY
The Company's business is seasonal, and revenues and operating income are
highest during the fourth quarter. Bank borrowings have historically been
highest in October and November due to the building of inventory for the holiday
season.
INFLATION
The Company believes that, except for changes in the minimum wage mandated
by the Federal government, inflation has not had a material effect on its
operations and its internal and external sources of liquidity and working
capital.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(i) Other.
The Company is a party to various other claims, legal actions and
companies arising in the ordinary course of its business. In the opinion of
management, all such matters are without merit or involve such amounts that
unfavorable disposition will not have a material impact on the financial
position an results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each of the
Registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: September ___, 1997 /s/ Antonio C. Alvarez
---------------------------------
ANTONIO C. ALVAREZ
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: September ____, 1997 /s/ Robert S. Kelleher
-----------------------------------
ROBERT S. KELLEHER
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
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