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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
[ ] 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
(IRS EMPLOYER IDENTIFICATION NUMBER)
19701 HAMILTON AVENUE, TORRANCE, CA 90502-1311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(310) 965-8300
(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 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 the plan
confirmed by a court. 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:
Common Stock, $.01 par value,
10,756,570 shares outstanding as of September 8, 1999
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INDEX
WHEREHOUSE ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
FORWARD LOOKING STATEMENTS.............................................. 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -- July 31, 1999
(Unaudited) and January 31, 1999............................ 4
Consolidated Condensed Statements of Operations -- Three
Months ended July 31, 1999 and 1998 (Unaudited) and Six
Months ended July 31, 1999 and 1998 (Unaudited)............. 5
Consolidated Condensed Statements of Cash Flows -- Six
Months ended July 31, 1999 and 1998 (Unaudited)............. 6
Notes to Consolidated Condensed Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES.............................................................. 18
</TABLE>
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 Quarterly Report
on Form 10-Q containing such forward-looking statements include "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
Item 2 of Part I below. Statements in this Quarterly Report on Form 10-Q which
address activities, events or developments that the registrant expects or
anticipates will or may occur in the future, including such things as future
issuances 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 strategy,
expansion and growth of the registrant's and its competitors' business and
operations and other such matters are forward-looking statements. You can find
many of these statements by looking for words like "believes," "expects,"
"anticipates," or similar expressions in this Quarterly Report on Form 10-Q.
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 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) possible delays and
difficulties in integrating the operations of the Acquired Business (as defined
below) with those of Wherehouse; (b) the ability to retain the customers of the
Acquired Business; (c) 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 Internet and telephone shopping services and
mail order; (d) loss of a significant vendor or prolonged disruption of product
supply; (e) the presence or absence of popular new releases and products in the
product categories the registrant sells and rents; (f) changes in levels of
consumer spending, especially during seasonally significant periods; (g) changes
in Federal and state income tax rules and regulations or interpretations of
existing legislation; (h) changes in the general economic conditions in the
United States including, but not limited to, consumer sentiment about the
economy in general; (i) regulatory changes, including the investigation of
minimum advertised pricing guidelines by the Federal Trade Commission, which may
adversely affect the business in which the registrant is engaged; (j) the
ability to attract and retain key personnel; and (k) adverse results in
significant litigation matters.
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. You should consider the
cautionary statements contained in this section when evaluating any
forward-looking statements that the registrant may make. The registrant does not
have any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report on Form 10-Q or to reflect the occurrence of unanticipated events.
3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,749,000 $ 15,009,000
Receivables, net.......................................... 2,949,000 5,207,000
Inventories, net.......................................... 212,815,000 226,648,000
Other current assets...................................... 1,880,000 2,807,000
Deferred taxes............................................ 14,003,000 14,003,000
------------ ------------
Total current assets.............................. 241,396,000 263,674,000
Property, equipment, and improvements, net.................. 73,488,000 68,531,000
Deferred taxes.............................................. 12,409,000 12,409,000
Intangible assets, net...................................... 39,517,000 41,282,000
Other assets, net........................................... 1,537,000 1,845,000
------------ ------------
Total assets...................................... $368,347,000 $387,741,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and net uncleared checks................. $104,715,000 $114,480,000
Accrued expenses.......................................... 24,950,000 43,590,000
Store closing reserves.................................... 16,409,000 25,205,000
Reorganization liabilities................................ 1,801,000 2,109,000
Current portion of leases in excess of fair market
value.................................................. 3,271,000 3,271,000
Current portion of capital lease obligations.............. 4,676,000 4,207,000
------------ ------------
Total current liabilities......................... 155,822,000 192,862,000
Line of credit.............................................. 62,844,000 37,349,000
Long-term debt.............................................. 3,803,000 3,837,000
Capital lease obligations................................... 22,434,000 23,546,000
Leases in excess of fair market value....................... 24,294,000 25,929,000
Deferred rent and other long-term liabilities............... 6,071,000 6,040,000
------------ ------------
Total liabilities................................. 275,268,000 289,563,000
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Shareholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares
authorized, none issued................................ -- --
Common stock, $.01 par value, 24,000,000 shares
authorized, 10,781,570 and 10,729,710 issued July 31,
1999 and January 31, 1999, respectively................ 108,000 108,000
Additional paid-in-capital................................ 89,400,000 89,400,000
Retained earnings......................................... 10,182,000 14,758,000
Treasury stock, 25,000 shares............................. (338,000)
Notes receivable.......................................... (6,273,000) (6,088,000)
------------ ------------
Total shareholders' equity........................ 93,079,000 98,178,000
------------ ------------
Total liabilities and shareholders' equity........ $368,347,000 $387,741,000
============ ============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
4
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WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JULY 31, JULY 31, JULY 31, JULY 31,
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sale merchandise revenue............ $181,032,000 $66,087,000 $354,074,000 $127,361,000
Rental revenue...................... 5,000,000 8,798,000 10,352,000 18,056,000
------------ ----------- ------------ ------------
Total revenues................. 186,032,000 74,885,000 364,426,000 145,417,000
------------ ----------- ------------ ------------
Cost of sale merchandise revenue.... 116,577,000 42,039,000 232,128,000 80,192,000
Cost of rentals, including
amortization...................... 2,531,000 4,581,000 5,022,000 9,353,000
------------ ----------- ------------ ------------
Total cost of revenues......... 119,108,000 46,620,000 237,150,000 89,545,000
------------ ----------- ------------ ------------
Gross profit.............. 66,924,000 28,265,000 127,276,000 55,872,000
Selling, general and administrative
expenses.......................... 61,074,000 23,943,000 120,137,000 47,569,000
Depreciation and amortization....... 5,229,000 1,649,000 11,144,000 3,292,000
------------ ----------- ------------ ------------
(Loss) income from operations..... 621,000 2,673,000 (4,005,000) 5,011,000
Interest expense.................... 2,202,000 125,000 3,827,000 219,000
Interest income..................... (96,000) (664,000) (205,000) (1,361,000)
------------ ----------- ------------ ------------
(Loss) income before income
taxes.......................... (1,485,000) 3,212,000 (7,627,000) 6,153,000
(Benefit) provision for income
taxes............................. (594,000) 1,324,000 (3,051,000) 2,538,000
------------ ----------- ------------ ------------
Net (loss) income................. $ (891,000) $ 1,888,000 $ (4,576,000) $ 3,615,000
============ =========== ============ ============
Net (loss) income per common share:
Basic............................. $ (0.08) $ 0.18 $ (0.43) $ 0.34
============ =========== ============ ============
Diluted........................... $ (0.08) $ 0.16 $ (0.43) $ 0.32
============ =========== ============ ============
Weighted average common shares
outstanding-Basic................. 10,730,640 10,651,188 10,723,139 10,637,844
============ =========== ============ ============
Weighted average common shares and
common equivalent shares
outstanding-Diluted............... 10,730,640 11,695,848 10,723,139 11,402,248
============ =========== ============ ============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
5
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WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
JULY 31, JULY 31,
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income........................................... $ (4,576,000) $ 3,615,000
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization............................. 11,144,000 3,292,000
Rental amortization included in cost of rentals........... 2,909,000 6,965,000
Book value of rental inventory dispositions, included in
cost of rentals........................................ 645,000 1,054,000
Changes in operating assets and liabilities:
Receivables, net....................................... 2,258,000 369,000
Inventories, net....................................... 13,462,000 (9,293,000)
Rental inventory purchases............................. (3,183,000) (7,423,000)
Other current assets................................... 927,000 372,000
Accounts payable, accrued expenses and other current
liabilities.......................................... (29,184,000) (4,733,000)
Store closure reserves................................. (10,431,000) --
Other long-term liabilities............................ 31,000 --
------------ -----------
Net cash used in operating activities................ (15,998,000) (5,782,000)
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INVESTING ACTIVITIES:
Purchase of property, equipment and improvements............ (12,438,000) (1,441,000)
Decrease (increase) in other assets......................... 308,000 (349,000)
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Net cash used in investing activities................ (12,130,000) (1,790,000)
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FINANCING ACTIVITIES:
Net borrowings under line of credit......................... 25,495,000 --
Payments on capital lease obligations and long-term debt.... (2,104,000) (124,000)
Purchase of common stock.................................... (338,000) --
Interest on notes receivable................................ (185,000) (186,000)
------------ -----------
Net cash provided by (used in) financing
activities........................................ 22,868,000 (310,000)
------------ -----------
Net decrease in cash and cash equivalents................... (5,260,000) (7,882,000)
Cash and cash equivalents at beginning of the period........ 15,009,000 54,720,000
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Cash and cash equivalents at end of the period.............. $ 9,749,000 $46,838,000
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 3,453,000 $ 168,000
Income taxes........................................... $ 7,307,000 $ 7,709,000
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
6
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
include the accounts of Wherehouse Entertainment, Inc. and its wholly owned
subsidiaries (collectively referred to as the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
The interim unaudited consolidated condensed financial statements of the
Company have been prepared in accordance with the instructions to Form 10-Q of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by Generally Accepted Accounting
Principles ("GAAP") 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. The Company's business is
seasonal, so operating results for the six months ended July 31, 1999 are not
necessarily indicative of the results that may be expected for the Company's
fiscal year ending January 31, 2000 ("Fiscal 2000"). Certain reclassifications
have been made to the 1999 consolidated condensed financial statements to
conform to the current presentation. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the Company's fiscal year ended January 31, 1999
("Fiscal 1999").
2. ACQUISITION
On October 26, 1998, pursuant to a Stock Purchase Agreement dated as of
August 10, 1998 (the "Purchase Agreement"), the Company acquired (the
"Acquisition") from Viacom International Inc. (the "Seller") all of the capital
stock of certain retail music subsidiaries of Seller (the "Acquired Business").
The Acquired Business, which operated under the name "Blockbuster Music,"
consisted of 378 stores (the "Acquired Stores") in 33 States. During June 1999,
the Company completed the systems integration of the Acquired Stores, and all of
the Acquired Stores are currently operating under the "Wherehouse Music" name.
On September 8, 1999, the Company reached an agreement with Seller with
respect to a purchase price adjustment based on working capital plus a number of
other issues. This agreement caused the purchase price to be reduced by $6.0
million so that the final purchase price was $121.8 million, including direct
acquisition costs. The Company does not expect the finalization of the purchase
price to result in a significant change to the purchase accounting reflected in
the accompanying financial statements.
The Acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based upon their respective fair values at the Acquisition
date based on valuations and other studies. The results of operations of the
Acquired Business are reflected in the accompanying unaudited consolidated
condensed financial statements for the six months and the quarter ended July 31,
1999.
Upon the consummation of the Acquisition, the Company's senior management
began formulating its plan to close certain stores which, due to the
Acquisition, competed in the same trade areas as other stores (the "Store
Closure Plan"). The Store Closure Plan, which was finalized in January 1999,
provides for the closing of 70 stores (51 Acquired Stores and 19 existing
Wherehouse stores) located in 17 states. The Company has closed 55 of these
stores (40 Acquired Stores and 15 existing Wherehouse stores) as of July 31,
1999, and two additional existing Wherehouse stores as of September 8, 1999. The
Company is negotiating with landlords to terminate the leases on the remaining
13 stores.
7
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During Fiscal 1999, the Company recorded accruals in the purchase price
allocation for store closure reserve -- Acquired Stores and leases in excess of
fair market value. The following is a rollforward of the activity of these
reserves:
<TABLE>
<CAPTION>
ACCRUAL AS OF CHARGES BALANCE
JANUARY 31, AGAINST AS OF
1999 RESERVE JULY 31, 1999
------------- ---------- -------------
<S> <C> <C> <C>
Store closure reserve -- Acquired
Stores(1).................................. $22,612,000 $7,422,000 $15,190,000
Leases in excess of fair market value........ 29,200,000 1,635,000 27,565,000
----------- ---------- -----------
Total.............................. $51,812,000 $9,057,000 $42,755,000
=========== ========== ===========
</TABLE>
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(1) Consists substantially of lease termination costs.
During Fiscal 1999, the Company recorded accruals related to the planned
closing of 19 existing Wherehouse stores. As of July 31, 1999, the Company had
closed 15 of these stores. The following is a rollforward of the activity of the
store closure reserve -- existing stores:
<TABLE>
<CAPTION>
ACCRUAL AS OF CHARGES BALANCE
JANUARY 31, AGAINST AS OF
1999 RESERVE JULY 31, 1999
------------- ---------- -------------
<S> <C> <C> <C>
Store closure reserve -- existing
stores(1).................................. $2,593,000 $1,374,000 $1,219,000
========== ========== ==========
</TABLE>
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(1) Consists substantially of lease termination costs.
3. REORGANIZATION UNDER CHAPTER 11
The Plan of Reorganization for the Company's predecessors (the
"Reorganization Plan") was confirmed by an order of the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court") entered on January
7, 1997. The effective date of the Reorganization Plan occurred on January 31,
1997 (the "Effective Date").
Since the Effective Date, the Bankruptcy Court has retained jurisdiction
over certain claims and other matters relating to the bankruptcy estates of the
Company's predecessors, but the Company has been and is free to carry out its
business without oversight by the Bankruptcy Court.
A more comprehensive summary of the Reorganization Plan is contained in the
Company's Annual Report on Form 10-K for Fiscal 1999.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 Fiscal 1999.
The results of operations for the quarter and the six months ended July 31,
1998 do not include the operating results of the Acquired Stores.
Results of Operations
FOR THE QUARTERS ENDED JULY 31, 1999 AND JULY 31, 1998
Revenues
Net revenues, on a consolidated basis, were $186.0 million and $74.9
million for the quarters ended July 31, 1999 (the second quarter of Fiscal 2000)
and July 31, 1998 (the second quarter of Fiscal 1999), respectively. The
increase of $111.1 million was primarily attributable to the addition of the
Acquired Stores, which contributed $110.0 million in net revenues during the
second quarter of Fiscal 2000.
Excluding the Acquired Stores, net revenues increased to $76.0 million
during the second quarter of Fiscal 2000 from $74.9 million during the second
quarter of Fiscal 1999. The increase was comprised of an increase in sale
merchandise revenue (defined below) of $5.0 million which was partially offset
by a decrease in rental revenue of $3.9 million.
A summary of total sale merchandise and rental revenue by category is
provided below:
SALE MERCHANDISE AND RENTAL REVENUES
BY CATEGORY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER ENDED
JULY 31,
---------------
1999* 1998
------ -----
<S> <C> <C>
Sale merchandise revenue:
Music..................................................... $161.6 $57.4
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................. 19.4 8.7
------ -----
Total sale merchandise revenue.................... 181.0 66.1
Videocassette and other rental revenue**.................... 5.0 8.8
------ -----
Total revenue..................................... $186.0 $74.9
====== =====
</TABLE>
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* Includes revenue of the Acquired Business from May 1, 1999 to July 31, 1999
** Includes sales of previously viewed videocassettes
A. Sale merchandise revenue. Sales of prerecorded music, new
videocassettes, DVDs, video game software and hardware and general merchandise
(collectively referred to as "sale merchandise") continue to represent the
greatest portion of the Company's revenues. For the second quarter of Fiscal
2000, sale merchandise revenue represented 97.3% of aggregate revenues, compared
to 88.3% during the second quarter of Fiscal 1999, an increase of 9.0%. This
increase results from the combined impact of the additional sale merchandise
revenue derived from the Acquired Business and a decrease in the number of
stores engaged in the rental business.
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Sale merchandise revenue was $181.0 million in the second quarter of Fiscal
2000 compared to $66.1 million in the second quarter of Fiscal 1999. This
increase in sale merchandise revenue was primarily attributable to the addition
of the Acquired Stores.
Management defines same-store sales as sales from stores that were open for
the full period in both periods of comparison. On a same-store basis, excluding
the Acquired Stores, sale merchandise revenue increased by 9.0% during the
second quarter of Fiscal 2000 as compared to the second quarter of Fiscal 1999.
Management believes that the increase in same-store sale merchandise revenue was
principally the result of improvements in music catalog inventory management,
new initiatives such as an expanded DVD selection, and re-merchandising
activities which occurred in certain stores. Management estimates that, on a
same-store basis, sale merchandise revenue for the Acquired Stores decreased by
0.5% during the second quarter of Fiscal 2000 compared to the same period in
Fiscal 1999. This decrease is principally due to the negative impact on revenues
of the activities associated with the integration of the Acquired Stores. Such
integration activities included store Point of Sale ("POS") system conversions
and other systems integration as well as the implementation of a name change
from "Blockbuster Music" to "Wherehouse Music" for the Acquired Stores.
B. Rental revenue. Rental revenue includes the proceeds from the rental of
videocassettes, DVDs, video games and game players, and audiocassette books, and
from the sale of previously viewed videocassettes and previously played video
games. As of July 31, 1999, 104 of the Company's stores offered rental products,
with approximately 96 of those stores offering DVDs for rental. The Acquired
Stores generally are not engaged in the rental business.
Rental revenue was $5.0 million in the second quarter of Fiscal 2000 and
$8.8 million in the second quarter of Fiscal 1999, representing a decrease of
$3.8 million or 43.2%. Management believes that, on a same-store basis,
excluding the Acquired Stores, rental revenue decreased approximately 33.5%
during the second quarter of Fiscal 2000 as compared to the same period last
year. This decrease in same-store rental revenue was primarily attributable to
an increasingly competitive rental market.
C. Competition and Economic Factors. The Company believes that in the
future its business and same-store revenues may 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, the Internet, and technological developments such as digital
downloading, as well as general economic trends impacting retailers and
consumers. In addition, in recent years the Company's sale merchandise and
rental revenues have been impacted by increased competition from other music and
video specialty chains, discounters and mass merchandisers. Historically, the
margin on rentals has been higher than the margin on sale merchandise. Should
the Company's product mix continue to shift to lower margin sale merchandise
from higher margin rental revenue, the change in the mix of revenue contribution
could have a negative impact on profitability.
Cost of Revenue
Cost of sale merchandise revenue was $116.6 million for the second quarter
of Fiscal 2000, as compared with $42.0 million for the same period last year, an
increase of $74.6 million, which was principally due to the Acquired Stores. As
a percentage of sale merchandise revenue, cost of sale merchandise revenue was
64.4% for the second quarter of Fiscal 2000 as compared with 63.6% for the
second quarter of Fiscal 1999. Such costs were negatively impacted by
approximately $0.2 million due to the incremental costs associated with the use
of a third-party distributor to handle music and sale video inventory
replenishment for the Acquired Stores and other transition-related costs. These
incremental distribution costs resulted from Seller's inability to support the
fulfillment of music product from its distribution facility, the time required
to convert the Acquired Stores to the Company's POS system, and the time
required to expand the Company's distribution facility so that it could support
the Acquired Stores. As of July 31, 1999, these incremental costs have been
discontinued. All of the Acquired Stores have been converted to the Company's
POS system, and inventory is being fulfilled through the Company's distribution
facility.
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Excluding the impact of this $0.2 million of non-recurring incremental
costs, cost of sale merchandise revenue, as a percentage of sale merchandise
revenue, would have been 64.3% for the second quarter of Fiscal 2000 as compared
with 63.6% for the second quarter of Fiscal 1999, an increase of 0.7%. Such
increase is entirely attributable to higher cost of sale merchandise revenue
incurred by the Acquired Stores which, in turn, is attributable to higher
shrinkage accruals, as well as higher unit costs for the Acquired Stores prior
to the conversion to the Company's POS system.
Cost of rentals on a consolidated basis, including amortization, was $2.5
million for the second quarter of Fiscal 2000 as compared with $4.6 million for
the second quarter of Fiscal 1999, a decrease of $2.1 million. As a percentage
of rental revenue, cost of rentals decreased to 50.6% for the second quarter of
Fiscal 2000 from 52.1% for the second quarter of Fiscal 1999, a decrease of
1.5%. The decrease in cost of rentals as a percentage of rental revenue was
primarily due to the favorable impact of an increase in revenue sharing programs
and improved rental efficiencies.
Operating Expenses
Selling, general and administrative ("SG&A") expenses, on a consolidated
basis, for the second quarter of Fiscal 2000 were $61.1 million, compared to
$23.9 million for the second quarter of Fiscal 1999, an increase of $37.2
million. The increase was principally related to the operating expenses of the
Acquired Stores and costs related to the development and launch of the Company's
Internet site, partially offset by lower store payroll and other store expenses
in the existing Wherehouse stores.
SG&A expenses were 32.8% of revenue in the second quarter of Fiscal 2000,
compared to 32.0% of revenue in the second quarter of Fiscal 1999, an increase
of 0.8%. During the second quarter of Fiscal 2000, the Company incurred
non-recurring costs related to the integration of the Acquired Stores of
approximately $2.4 million. The non-recurring integration costs were principally
related to the name change of the Acquired Stores and the conversion of those
stores to the Company's POS system. The name change and POS conversion of the
Acquired Stores was completed by July 1999.
Excluding the non-recurring integration costs of approximately $2.4
million, SG&A expenses would have been 31.5% of revenue in the second quarter of
Fiscal 2000, compared to 32.0% of revenue in the second quarter of Fiscal 1999,
a decrease of 0.5%. Such decrease in SG&A expenses as a percentage of revenues
is due primarily to lower corporate overhead and distribution expense as a
percentage of revenue.
Depreciation and amortization expense was $5.2 million in the second
quarter of Fiscal 2000 compared to $1.7 million in the second quarter of Fiscal
1999, an increase of $3.5 million. The increase is principally related to
depreciation and amortization expense for the Acquired Stores of $2.8 million.
Income From Operations
During the second quarter of Fiscal 2000, the Company recorded income from
operations of $0.6 million, as compared to $2.7 million for the second quarter
of Fiscal 1999. The $2.1 million decrease was principally due to non-recurring
costs related to the integration of the Acquired Stores totaling $2.6 million
and the decrease in gross profit resulting from the decline in rental revenue.
The non-recurring costs of $2.6 million include incremental distribution costs
of approximately $0.2 million and integration costs related to the Acquisition
of $2.4 million. Excluding these non-recurring costs, income from operations
would have been $3.2 million.
Interest Expense
Interest expense for the second quarter of Fiscal 2000 was $2.2 million,
compared to $0.1 million for the second quarter of Fiscal 1999, an increase of
$2.1 million. This increase was primarily attributable to increased borrowings
under the Company's revolving line of credit with Congress Financial Corporation
(Western) (the "Congress Facility"). Such borrowings were used mainly to finance
a portion of the cost of the Acquisition and to fund working capital.
11
<PAGE> 12
Interest Income
Interest income for the second quarter of Fiscal 2000 was $0.1 million, as
compared to $0.7 million for the second quarter of Fiscal 1999. The decrease of
$0.6 million was the result of a decline in short-term investments of excess
cash. Such excess cash was used mainly to finance a portion of the cost of the
Acquisition.
Income Taxes
The Company recorded a tax benefit of $0.6 million for the second quarter
of Fiscal 2000 compared to a tax provision of $1.3 million for the second
quarter of Fiscal 1999. The tax benefit for the second quarter of Fiscal 2000
represents an effective rate of 40.0%, which the Company estimates will be its
effective rate for Fiscal 2000.
EBITDA
EBITDA represents income (loss) from operations, plus depreciation and
amortization. Management believes that, due to the combined format of rental
product and sale merchandise, a more appropriate calculation of EBITDA
(hereinafter referred to as "Adjusted EBITDA") should include the net difference
between rental amortization plus the book value of rental dispositions, versus
rental inventory purchased during the period. The Company has included certain
information concerning Adjusted EBITDA because management believes it would be
useful information for certain investors and analysts to analyze operating
performance and to determine the Company's ability to service debt.
Adjusted EBITDA for the second quarter of Fiscal 2000 was $6.3 million
compared to $4.9 million for the second quarter of Fiscal 1999. During the
second quarter of Fiscal 2000, the Company incurred certain incremental and
non-recurring costs related to the Acquisition. Excluding non-recurring
incremental distribution costs of $0.2 million and non-recurring integration
costs of $2.4 million, Adjusted EBITDA for the second quarter of Fiscal 2000
would have been $8.9 million. The increase in Adjusted EBITDA was principally
due to the EBITDA contributed by the Acquired Stores.
The method of calculating Adjusted EBITDA set forth above may be different
from calculations of EBITDA employed by other companies and, accordingly, may
not be directly comparable to such other computations. Adjusted EBITDA should
not be viewed as a substitute for GAAP measurements such as net income or cash
flow from operations, rather it is presented as supplementary information.
FOR THE SIX MONTHS ENDED JULY 31, 1999 AND JULY 31, 1998
Revenues
Net revenues, on a consolidated basis, were $364.4 million and $145.4
million for the six months ended July 31, 1999 and July 31, 1998, respectively.
The increase of $219.0 million was primarily attributable to the addition of the
Acquired Stores, which contributed $216.9 million in net revenues during the six
months ended July 31, 1999.
Excluding the Acquired Stores, net revenues increased to $147.5 million for
the six months ended July 31, 1999 from $145.4 million for the six months ended
July 31, 1998. The increase was comprised of an increase in sale merchandise
revenue of $10.0 million which was partially offset by a decrease in rental
revenue of $7.9 million.
12
<PAGE> 13
A summary of total sale merchandise and rental revenue by category is
provided below:
SALE MERCHANDISE AND RENTAL REVENUES
BY CATEGORY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
----------------
1999* 1998
------ ------
<S> <C> <C>
Sale merchandise revenue:
Music..................................................... $315.0 $111.2
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................. 39.0 16.1
------ ------
Total sale merchandise revenue.................... 354.0 127.3
Videocassette and other rental revenue**.................... 10.4 18.1
------ ------
Total revenue..................................... $364.4 $145.4
====== ======
</TABLE>
- ---------------
* Includes revenue of the Acquired Business from February 1, 1999 to July 31,
1999
** Includes sales of previously viewed videocassettes
A. Sale merchandise revenue. For the six months ended July 31, 1999, sale
merchandise revenue represented 97.1% of aggregate revenues, compared to 87.6%
for the six months ended July 31, 1998, an increase of 9.5%. This increase
results from the combined impact of the additional sale merchandise revenue
derived from the Acquired Business and a decrease in the number of stores
engaged in the rental business.
Sale merchandise revenue was $354.0 million for the six months ended July
31, 1999 compared to $127.3 million for the six months ended July 31, 1998. This
increase in sale merchandise revenue was primarily attributable to the addition
of the Acquired Stores.
On a same-store basis, excluding the Acquired Stores, sale merchandise
revenue increased by 9.2% for the six months ended July 31, 1999, as compared to
the six months ended July 31, 1998. Management believes that the increase in
same-store sale merchandise revenue was principally the result of improvements
in music catalog inventory management, new initiatives such as an expanded DVD
selection, and re-merchandising activities which occurred in certain stores.
Management estimates that, on a same-store basis, sale merchandise revenue for
the Acquired Stores decreased by 1.7% during the six months ended July 31, 1999
compared to the same period in Fiscal 1999. This decrease is principally due to
the negative impact on revenues of activities associated with the integration of
the Acquired Stores. Such integration activities included store POS system
conversions and other systems integration as well as the implementation of a
name change from "Blockbuster Music" to "Wherehouse Music" for the Acquired
Stores.
B. Rental revenue. Rental revenue was $10.4 million for the six months
ended July 31, 1999 and $18.1 million for the six months ended July 31, 1998,
representing a decrease of $7.7 million or 42.5%. Management believes that, on a
same-store basis, excluding the Acquired Stores (which generally are not engaged
in the rental business), rental revenue decreased approximately 34.1% during the
six months ended July 31, 1999 as compared to the same period last year. This
decrease in same-store rental revenue was primarily attributable to an
increasingly competitive rental market.
Cost of Revenue
Cost of sale merchandise revenue was $232.1 million for the six months
ended July 31, 1999, as compared with $80.2 million for the same period last
year, an increase of $151.9 million which was principally due to the Acquired
Stores. As a percentage of sale merchandise revenue, cost of sale merchandise
revenue was 65.5% for the six months ended July 31, 1999 as compared with 63.0%
for the six months ended July 31, 1998. Such costs were negatively impacted by
approximately $2.5 million due to the incremental costs associated with the use
of a third-party distributor to handle music and sale video inventory
replenishment for the Acquired Stores and other transition-related costs. These
incremental distribution costs resulted from
13
<PAGE> 14
Seller's inability to support the fulfillment of music product from its
distribution facility, the time required to convert the Acquired Stores to the
Company's POS system, and the time required to expand the Company's distribution
facility so that it could support the Acquired Stores. As of July 31, 1999,
these incremental costs have been discontinued. All of the Acquired Stores have
been converted to the Company's POS system, and inventory is being fulfilled
through the Company's distribution facility.
Excluding the impact of this $2.5 million of non-recurring incremental
costs, cost of sale merchandise revenue, as a percentage of sale merchandise
revenue, would have been 64.8% for the six months ended July 31, 1999 as
compared with 63.0% for the six months ended July 31, 1998, an increase of 1.8%.
Such increase is entirely attributable to higher cost of sale merchandise
revenue incurred by the Acquired Stores which, in turn, is attributable to
higher shrinkage accruals for the Acquired Stores, as well as higher unit
purchase costs for the Acquired Stores prior to the conversion to the Company's
POS system.
Cost of rentals on a consolidated basis, including amortization, was $5.0
million for the six months ended July 31, 1999 as compared with $9.4 million for
the six months ended July 31, 1998, a decrease of $4.4 million. As a percentage
of rental revenue, cost of rentals decreased to 48.5% for the six months ended
July 31, 1999 from 51.8% for the six months ended July 31, 1998, a decrease of
3.3%. The decrease in cost of rentals as a percentage of rental revenue was
primarily due to the favorable impact of an increase in revenue sharing programs
and improved rental efficiencies.
Operating Expenses
SG&A expenses, on a consolidated basis, for the six months ended July 31,
1999 were $120.1 million, compared to $47.6 million for the six months ended
July 31, 1998, an increase of $72.5 million. The increase was principally
related to the operating expenses of the Acquired Stores and costs related to
the development and launch of the Company's Internet site, partially offset by
lower store payroll and other store expenses in the existing Wherehouse stores.
SG&A expenses were 33.0% of revenue in the six months ended July 31, 1999,
compared to 32.7% of revenue in the six months ended July 31, 1998, an increase
of 0.3%. During the six months ended July 31, 1999, the Company incurred
non-recurring costs related to the integration of the Acquired Stores of
approximately $5.2 million. The non-recurring integration costs were principally
related to the name change of the Acquired Stores and the conversion of those
stores to the Company's POS system.
Excluding the non-recurring integration costs of approximately $5.2
million, SG&A expenses would have been 31.5% of revenue in the six months ended
July 31, 1999, compared to 32.7% of revenue in the six months ended July 31,
1998, a decrease of 1.2%. Such decrease in SG&A expenses as a percentage of
revenues is due primarily to lower corporate overhead and distribution expense
as a percentage of revenue.
Depreciation and amortization expense was $11.1 million in the six months
ended July 31, 1999 compared to $3.3 million in the six months ended July 31,
1998, an increase of $7.8 million. The increase is principally related to
depreciation and amortization expense for the Acquired Stores of $5.6 million.
Loss From Operations
During the six months ended July 31, 1999, the Company recorded a loss from
operations of $4.0 million, as compared to income from operations of $5.0
million for the six months ended July 31, 1998. The $9.0 million decrease was
principally due to non-recurring costs related to the integration of the
Acquired Stores totaling $7.7 million and the decrease in gross profit resulting
from the decline in rental revenue. The non-recurring costs of $7.7 million
include incremental distribution costs of approximately $2.5 million and
integration costs related to the Acquisition of $5.2 million. Excluding these
non-recurring costs, income from operations would have been $3.7 million.
Interest Expense
Interest expense for the six months ended July 31, 1999 was $3.8 million,
compared to $0.2 million for the six months ended July 31, 1998, an increase of
$3.6 million. This increase was primarily attributable to
14
<PAGE> 15
increased borrowings under the Congress Facility. Such borrowings were used
mainly to finance a portion of the cost of the Acquisition and to fund working
capital.
Interest Income
Interest income for the six months ended July 31, 1999 was $0.2 million, as
compared to $1.4 million for the six months ended July 31, 1998. The decrease of
$1.2 million was the result of a decline in short-term investments of excess
cash. Such excess cash was used mainly to finance a portion of the cost of the
Acquisition.
Income Taxes
The Company recorded a tax benefit of $3.1 million for the six months ended
July 31, 1999 compared to a tax provision of $2.5 million for the six months
ended July 31, 1998. The tax benefit for the six months ended July 31, 1999
represents an effective rate of 40.0%, which the Company estimates will be its
effective rate for Fiscal 2000.
EBITDA
Adjusted EBITDA for the six months ended July 31, 1999 was $7.5 million
compared to $9.2 million for the six months ended July 31, 1998. During the six
months ended July 31, 1999, the Company incurred certain non-recurring
incremental costs related to the Acquisition. Excluding non-recurring
incremental distribution costs of $2.5 million and non-recurring integration
costs of $5.2 million, Adjusted EBITDA for the six months ended July 31, 1999
would have been $15.2 million. The increase in Adjusted EBITDA was principally
due to the EBITDA contributed by the Acquired Stores.
The method of calculating Adjusted EBITDA set forth above may be different
from calculations of EBITDA employed by other companies and, accordingly, may
not be directly comparable to such other computations. Adjusted EBITDA should
not be viewed as a substitute for GAAP measurements such as net income or cash
flow from operations, rather it is presented as supplementary information.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 1999, the Company's net cash used in
operating activities was $16.0 million, as compared to $5.8 million net cash
used in operating activities during the six months ended July 31, 1998, an
increase of $10.2 million. The increase in cash flow used in operations was
primarily due to a reduction in accounts payable, accrued expenses, and other
store closing reserves, as well as the loss from operations, partially offset by
a decrease in inventory, resulting from the Company's inventory reduction
activities.
Net cash used in investing activities increased to $12.1 million during the
six months ended July 31, 1999 from $1.8 million during the six months ended
July 31, 1998, an increase of $10.3 million. The increase in cash used in
investing activities was primarily due to capital expenditures totaling $12.4
million related mainly to the acquisition of property, equipment and
improvements to support the POS and other systems conversion, name change, and
re-merchandising activities related to the Acquired Stores. Financing of capital
expenditures has generally been provided by cash from operations and borrowings
under the Congress Facility.
Net cash provided by financing activities was $22.9 million for the six
months ended July 31, 1999, as compared to cash used in financing activities of
$0.3 million for the six months ended July 31, 1998. The increase of $23.2
million was primarily due to net borrowings under the Congress Facility of $25.5
million, partially offset by $2.1 million in payments on capital lease
obligations and long-term debt.
The Company believes that cash on hand, cash flow from operations and the
availability of lease financing, together with borrowings available under the
Congress Facility, will be adequate to support existing operations and the
planned capital expenditures of the Company for Fiscal 2000.
15
<PAGE> 16
SEASONALITY AND INFLATION
The Company's business is seasonal, and revenues and operating income are
highest during the fourth quarter of the Company's fiscal year. Working capital
and related bank borrowings in prior years were usually lowest during the period
beginning with the end of the Christmas holiday season and ending with the close
of the Company's fiscal year. Beginning in February, working capital and related
bank borrowings have historically trended upward during the year until the
fourth quarter. Borrowings have historically been highest in October and
November due to cumulative capital expenditures for new stores and the building
of inventory for the holiday season.
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.
IMPACT OF THE YEAR 2000
The Company has been actively addressing the internal system concerns
related to the Year 2000 ("Y2K") problem, and in January 1999 the Company
created a Y2K Project Committee. This committee established guidelines for and
directs the Y2K efforts. The primary objective of this committee is to ensure
the Company's ability to operate with its internal systems in the Year 2000. The
secondary objective is to assess all non-Information Technology ("IT")
departments and external vendors' state-of-readiness and Y2K compliance.
(1) THE COMPANY'S STATE OF READINESS
Internal IT Systems -- The Company has purchased and installed new
financial and distribution center management systems, all of which have been
confirmed to be Y2K compliant. The Company's existing merchandising system was
remediated by an external vendor and 95% of the remediated software has been
installed. The remaining 5% will be installed by the end of September 1999. The
Company also plans to replace the remediated software with a new system during
the first half of calendar 2000, but in the meantime expects to be able to
utilize its remediated existing merchandising system. The existing store POS
application has been remediated and installed at all of the Company's stores.
The existing store POS hardware operating system is not Y2K compliant. The
Company has replaced the non-compliant hardware operating systems with Y2K
compliant equipment in approximately 100 stores and expects to complete the
installation in the remaining stores during the quarter ending October 31, 1999.
External Vendors -- The Company is aware of significant Y2K remediation
work being performed by its major vendors. The Y2K Project Committee initiated
communication with the Company's significant suppliers regarding their Y2K
readiness. The Company intends to focus extensively on its second tier suppliers
in the quarter ending October 31, 1999.
(2) THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Company does not consider the replacement of its corporate systems as a
Y2K expense because installation of the new major corporate systems is required
to address additional business functionality. Costs relating to the remediation
of the Company's existing mainframe-based corporate system, performed as a
contingency measure, of approximately $1.8 million were recorded in Fiscal 1999.
The Company's internal personnel and other resources performed the store POS
software remediation. The Wherehouse POS hardware operating system upgrade is
expected to cost between $1.5 million and $2.0 million, principally for new POS
related hardware. The Company's internal personnel will handle all other
projects.
(3) THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company has completed a detailed risk assessment of its major systems.
The Company is relying on its existing remediated merchandising system which has
been tested for Y2K compliance. However, if the Company experiences problems
with this system, it could result in delays in providing inventory to stores.
16
<PAGE> 17
(4) THE COMPANY'S CONTINGENCY PLANS
The Company has developed contingency plans for the merchandising,
financial, distribution center management, and POS hardware operating systems.
New application software has been installed for financial, and distribution
center management systems, and remediation will be done on the POS hardware
operating system. As a contingency plan, the Company is preparing the newly
acquired merchandising system for implementation. The new merchandising system
will be installed if the remediated mainframe merchandising system fails.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to risks resulting from interest rate fluctuations
since interest on the Company's borrowings under the Congress Facility are based
on variable rates. If the Eurodollar rate were to increase 1% in Fiscal 2000 as
compared to the rate at July 31, 1999, the Company's interest expense for Fiscal
2000 would increase $0.6 million based on the outstanding balance of the
Congress Facility at July 31, 1999. The Company does not hold any derivative
instruments and does not engage in hedging activities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of its business. In the opinion of management,
all such matters are without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial position and
results of operations of the Company.
ITEM 5. OTHER INFORMATION
On August 31, 1999, the Third Amendment to the Amended and Restated Loan
and Security Agreement ("Third Amendment") was entered into between the Company
and its subsidiaries and Congress Financial Corporation (Western). The Third
Amendment, among other things, permits the Company to make certain investments
provided that such investments do not exceed an aggregate amount of $20.0
million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.1 Third Amendment to the Amended and Restated Loan and
Security Agreement dated as of August 31, 1999 between
Wherehouse and its subsidiaries and Congress Financial
Corporation (Western).
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
17
<PAGE> 18
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 14, 1999
/s/ ANTONIO C. ALVAREZ, II
--------------------------------------
ANTONIO C. ALVAREZ, II
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: September 14, 1999
/s/ MEHDI MAHDAVI
--------------------------------------
MEHDI MAHDAVI
Vice President, Controller
(Principal Accounting Officer)
18
<PAGE> 1
EXHIBIT 10.1
THIRD AMENDMENT
TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(this "AMENDMENT"), dated as of August 31, 1999, is entered into between
CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation ("LENDER"),
on the one hand, and WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation,
WHEREHOUSE.COM, INC., a California corporation, WHEREHOUSE SUBSIDIARY I CO.,
INC., a Delaware corporation, WHEREHOUSE SUBSIDIARY II CO., INC., a California
corporation, and WHEREHOUSE SUBSIDIARY III CO., INC., a Delaware corporation
(collectively, "BORROWER"), on the other.
RECITALS
A. Borrower and Lender have previously entered into an Amended and Restated
Loan and Security Agreement dated as of October 26, 1998, as amended by a First
Amendment dated as of November 30, 1998 and as further amended by a Second
Amendment dated as of May 14, 1999 (the "LOAN AGREEMENT"), pursuant to which
Lender has made certain loans and financial accommodations available to
Borrower. Terms used herein without definition shall have the meanings ascribed
to them in the Loan Agreement.
B. Borrower and Lender wish to amend the Loan Agreement on the terms and
conditions set forth in this Amendment. Borrower is entering into this Amendment
with the understanding and agreement that, except as specifically provided
herein, none of Lender's rights or remedies as set forth in the Loan Agreement
is being waived or modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment to Covenant Regarding Investments. Clause (f) of Section 9.10
of the Loan Agreement is amended to read in its entirety as follows:
"(f) Investments or Distributions such that, after giving effect to
such Investment or Distribution, Borrower has Excess Availability of at
least Twenty Million Dollars ($20,000,000) under the Tranche A Line,
provided that, at the time of such Investment or Distribution there is no
Event of Default and no event that with notice or passage of time or both
would be an Event of Default, provided further that, the aggregate amount
of such Investments does not exceed Twenty Million Dollars ($20,000,000)
during the term of this Agreement; provided further that, at the time of
such Investment, such Investment is an Investment in a Person with a
similar line of business as Borrower;"
<PAGE> 2
2. Amendment Regarding Financial Statements. Clause (i) of Section 9.6(a)
of the Loan Agreement is amended to read in its entirety as follows:
"(i) within thirty (30) days after the end of each fiscal month other
than April, July, October, and January, monthly unaudited consolidated
financial statements (including balance sheets, statements of income and
loss and statements of shareholders' equity), and for each fiscal month
ending April 30, July 31, October 31, and January 31, promptly upon the
delivery by Borrower of its quarterly report on Form 10-Q to the Securities
and Exchange Commission, but in no event later than fifty (50) days after
the end of such April, July, October or January, monthly unaudited
consolidated financial statements (including balance sheets, statements of
income and loss and statements of shareholders' equity), provided that if
Borrower is not required to file such reports with the Securities and
Exchange Commission, Borrower shall provide such monthly financial
statements within forty-five (45) days after the end of each April, July,
October and January;"
3. Amendment Regarding Annual Financial Statements. Clause (iii) of Section
9.6(a) of the Loan Agreement is amended to read in its entirety as follows:
"(iii) promptly upon the delivery of the same to the Securities and
Exchange Commission, but in no event later than one hundred five (105) days
after the end of the fiscal year, audited consolidated financial statements
(including in each case balance sheets, statements of income and loss,
statements of cash flow and statements of shareholders' equity), and the
accompanying notes thereto, all in reasonable detail, fairly presenting the
financial position and the results of the operations of Borrower and its
subsidiaries as of the end of and for such fiscal year, together with the
opinion of independent certified public accountants, which accountants
shall be an independent accounting firm selected by Borrower and reasonably
acceptable to Lender, that such financial statements have been prepared in
accordance with GAAP, and present fairly the financial condition and
results of operations of Borrower and its subsidiaries as of the end of and
for the fiscal year then ended, provided that if Borrower is not required
to file such financial statements and opinions with the Securities and
Exchange Commission, Borrower shall provide all such financial statements
and opinions within ninety (90) days after the end of the fiscal year."
4. Reincorporation. Lender hereby consents to the reincorporation of
Wherehouse.com, Inc. by means of a statutory merger of Wherehouse.com, Inc. with
and into a corporation formed under the laws of one of the States of the United
States of America, provided that each of the following conditions is satisfied
prior to such merger:
(a) Formation. The surviving corporation shall have been formed for the
purpose of the merger and shall not have conducted any business prior to the
merger;
<PAGE> 3
(b) No Liens. Lender shall have received evidence satisfactory to it that
the surviving corporation is not subject to any liens and has not entered into
any agreements with or granted any rights to any Person other than
Wherehouse.com, Inc.
(c) Security Documents. The surviving corporation shall execute and deliver
all agreements, instruments and documents requested by Lender in order to
maintain Lender's first priority security interest in the assets of
Wherehouse.com, Inc.
(d) Searches to Reflect. Lender shall have received certified searches
reflecting the filing of UCC-1 financing statements showing the surviving
corporation as debtor and Lender as secured party in such jurisdictions as
Lender may request, and such searches to reflect shall be satisfactory to
Lender;
(e) No Conflict. The merger shall not conflict with or violate, constitute
a default under, or confer rights on any other Person under the charter
documents of Wherehouse.com, Inc or the surviving corporation, any law or
regulation to which either of them is subject, or any agreement, understanding,
judgment, stipulation, or court order binding upon either of them or to which
either of them is a party.
5. Effectiveness of this Amendment. Lender must have received the following
items, in form and content acceptable to Lender, before this Amendment is
effective and before Lender is required to extend any credit to Borrower as
provided for by this Amendment:
(a) Amendment. This Amendment fully executed in a sufficient number of
counterparts for distribution to Lender and Borrower;
(b) Authorizations. Evidence that the execution, delivery and performance
by Borrower and each guarantor or subordinating creditor of this Amendment and
any instrument or agreement required under this Amendment have been duly
authorized;
(c) Representations and Warranties. The representations and warranties set
forth in the Loan Agreement must be true and correct;
(d) Consents. Counterparts of the Consent appended hereto (the "CONSENT")
executed on behalf of each of Wherehouse Holding I Co., Inc., a Delaware
corporation and Wherehouse Holding II Co., Inc., a Delaware corporation
("GUARANTORS", and together with Borrower, each a "LOAN PARTY" and collectively
the "LOAN PARTIES"); and
(e) Fee. Lender shall have received an amendment fee in the amount of
$15,500.
5. Representations and Warranties. Borrower represents and warrants as
follows:
(a) Authority. Each Loan Party has the requisite corporate power and
authority to execute and deliver this Amendment or the Consent, as applicable,
and to perform its obligations hereunder and under the Financing Agreements (as
amended or modified hereby) to
<PAGE> 4
which it is a party. The execution, delivery and performance by Borrower of this
Amendment and by each other Loan Party of the Consent, and the performance by
each Loan Party of each Financing Agreement (as amended or modified hereby) to
which it is a party have been duly approved by all necessary corporate action of
such Loan Party and no other corporate proceedings on the part of such Loan
Party are necessary to consummate such transactions.
(b) Enforceability. This Amendment has been duly executed and delivered by
Borrower. The Consent has been duly executed and delivered by each Guarantor.
This Amendment and each Financing Agreement (as amended or modified hereby) is
the legal, valid and binding obligation of each Loan Party hereto or thereto,
enforceable against such Loan Party in accordance with its terms, and is in full
force and effect.
(c) Representations and Warranties. The representations and warranties
contained in each Financing Agreement (other than any such representations or
warranties that, by their terms, are specifically made as of a date other than
the date hereof) are correct on and as of the date hereof as though made on and
as of the date hereof.
(d) No Default. No event has occurred and is continuing that constitutes an
Event of Default.
6. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California governing contracts only to be performed in that
State.
7. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment or the Consent by
telefacsimile shall be effective as delivery of a manually executed counterpart
of this Amendment or the Consent.
8. Reference to and Effect on the Financing Agreements.
(a) Upon and after the effectiveness of this Amendment, each reference in
the Loan Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Loan Agreement, and each reference in the other
Financing Agreements to "the Loan Agreement", "thereof" or words of like import
referring to the Loan Agreement, shall mean and be a reference to the Loan
Agreement as modified and amended hereby.
(b) Except as specifically amended above, the Loan Agreement and all other
Financing Agreements, are and shall continue to be in full force and effect and
are hereby in all respects ratified and confirmed and shall constitute the
legal, valid, binding and enforceable obligations of Borrower to Lender.
<PAGE> 5
(c) The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as a waiver of any right, power or
remedy of Lender under any of the Financing Agreements, nor constitute a waiver
of any provision of any of the Financing Agreements.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first above written.
CONGRESS FINANCIAL CORPORATION (WESTERN)
By: /s/ D.B. LAUGHTON
---------------------------------
Name: D.B. Laughton
Title: SVP
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ C.M. FUERTSCH
---------------------------------
Name: C.M. Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE.COM, INC.
By: /s/ C.M. FUERTSCH
---------------------------------
Name: C.M. Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE SUBSIDIARY I CO., INC.
By: /s/ C.M. FUERTSCH
---------------------------------
Name: C.M. Fuertsch
Title: Vice President, Treasurer
<PAGE> 6
WHEREHOUSE SUBSIDIARY II CO., INC.
By: /s/ C.M. FUERTSCH
---------------------------------
Name: C.M. Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE SUBSIDIARY III CO., INC.
By: /s/ C.M. FUERTSCH
---------------------------------
Name: C.M. Fuertsch
Title: Vice President, Treasurer
<PAGE> 7
CONSENT
Dated as of August 31, 1999
The undersigned, as Guarantors under their respective Guarantee, each dated
as of October 26, 1998 (as such terms are defined in and under the Loan
Agreement referred to in the foregoing Amendment), each hereby consents and
agrees to said Amendment and hereby confirms and agrees that its respective
Guarantee is, and shall continue to be in, in full force and effect and is
hereby ratified and confirmed in all respects except that, upon the
effectiveness of, and on and after the date of said Amendment, each reference in
each such Guarantor's Guarantee to the "Loan Agreement", "thereunder", "thereof"
or words of like import referring to the Loan Agreement, shall mean and be a
reference to the Loan Agreement as amended or modified by the said Amendment.
WHEREHOUSE HOLDING I CO., INC.
By: /s/ C.M. FUERTSCH
---------------------------------
Name: C.M. Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE HOLDING II CO., INC.
By: /s/ C.M. FUERTSCH
---------------------------------
Name: C.M. Fuertsch
Title: Vice President, Treasurer
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<PERIOD-START> FEB-01-1999
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