<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 8-K/A
--------------------
[X] AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K FILED PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
DATE OF REPORT (Date of earliest event reported): October 26, 1998
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) 538-2314
(Registrant's telephone number, including area code)
<PAGE> 2
AMENDMENT NO. 1
The undersigned hereby amends the following items, financial statements,
exhibits or other portions of its Current Report on Form 8-K filed with the
Commission on November 10, 1998 (the "Current Report") as set forth herein
relating to the acquisition of Blockbuster Music from Viacom International Inc.
Pursuant to Item 7 of Form 8-K, the financial statements and pro forma financial
information filed with this Amendment were omitted from the Current Report and
are being filed herewith.
The Current Report is hereby amended by deleting Item 2 and subsections
(a) and (b) of Item 7 thereof and replacing each, in their entirety, with the
following:
2
<PAGE> 3
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On October 26, 1998, pursuant to a Stock Purchase Agreement dated as of
August 10, 1998 (the "Purchase Agreement"), Wherehouse Entertainment, Inc.
("Registrant) acquired (the "Acquisition") from Viacom International Inc.
("Seller"), all of the capital stock of certain retail music subsidiaries of
Seller (the "Acquired Business"). Pursuant to the Purchase Agreement, the base
purchase price of $114.5 million (the "Base Purchase Price") is to be adjusted
by the difference, if any, between the working capital of the Acquired Business,
as defined, (the "Working Capital") as of March 31, 1998, (the "Reference
Working Capital") and the Working Capital as of October 26, 1998 (the "Closing
Working Capital"). Based on Seller's preliminary estimate of Closing Working
Capital, the Registrant paid to Seller a preliminary purchase price of
approximately $117.7 million on October 26, 1998. On December 23, 1998, Seller
delivered an adjusted statement of the Closing Working Capital that states
Seller's position that the adjusted purchase price equals $126.5 million.
Registrant recorded an amount of $8.8 million as a potential additional amount
due to Seller, subject to the final determination of the Closing Working
Capital. The Purchase Agreement provides a mechanism for resolution of the final
purchase price based on the resolution of the Closing Working Capital, which the
Registrant expects will occur in 1999. Accordingly, the purchase price paid to
Seller is subject to potential adjustment and may ultimately be significantly
lower than $126.5 million. The Acquired Business consists of 378 Blockbuster
Music stores in 33 states.
The preliminary purchase price of $121.4 million (including direct
transaction costs of $3.7 million) was funded with a combination of excess cash
and the proceeds of a loan made pursuant to an amended loan agreement entered
into with Congress Financial Corporation (Western), the Registrant's lender.
Pursuant to a Transition License Agreement between Seller and the
Registrant, the Registrant may continue to use certain trade names, trademarks
and service marks in the conduct of the Blockbuster Music business for a limited
time. During that time, the Registrant will change the name of the stores to the
Wherehouse name. In addition, pursuant to a Transition Services Agreement, the
Registrant may utilize certain services and facilities of Seller for a
transition period of up to one year from the date of the Acquisition.
The Acquisition was accounted for under the purchase method of
accounting. The Registrant reflected the Acquisition in the October 31, 1998
balance sheet contained in its quarterly report on Form 10-Q which was filed on
December 21, 1998. The acquired assets and liabilities assumed were included at
their estimated fair values at the Acquisition date, based on preliminary
valuations and other studies that have not yet been finalized and also based on
the preliminary purchase price of $117.7 million. The October 31, 1998
consolidated condensed balance sheet has been adjusted to reflect the increased
purchase price based on Seller's Closing Working Capital statement (subject to
potential adjustment) and more current purchase price allocation information, as
follows:
3
<PAGE> 4
<TABLE>
<CAPTION>
Consolidated Condensed Balance Sheet
October 31, 1998
(unaudited)
------------------------------------
As Previously
Reported(1) As Adjusted(1)
------------- -----------
<S> <C> <C>
Current assets $ 329.4 $ 331.3
Equipment and improvements, net 69.7 70.4
Goodwill for acquisition 16.1 25.4
Other assets 31.3 32.1
------------- -----------
Total assets $ 446.5 $ 459.2
============= ===========
Accounts payable, accrued expenses
and other liabilities $ 193.1 $ 206.0
Line of credit borrowings 97.8 97.8
Store closing and other
acquisition related reserves 61.0 60.8
Equity 94.6 94.6
------------- ------------
$ 446.5 $ 459.2
============= ============
</TABLE>
(1) The changes primarily relate to the increase in the purchase price by
8.8 million.
The actual allocation of purchase price and the resulting effect on
income from operations may differ significantly from the preliminary estimates.
The excess purchase price over the net assets acquired has been assigned to
goodwill.
The Registrant plans to close or renegotiate the leases on
approximately 43 stores that are either in markets currently served by one of
the Registrant's stores or are unprofitable. The Registrant also plans to
relocate certain Acquired Business employees. The Registrant is in the
process of completing its analysis, and expects to finalize these plans, which
are preliminary, by the end of the first quarter of the fiscal year ending
January 31, 2000.
4
<PAGE> 5
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
Blockbuster Music Audited Carve-Out Financial Statements as of
December 31, 1997 and 1996 and for Each of the Three Years in
the Period Ended December 31, 1997.
(b) Pro Forma Financial Information of Registrant.
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
18 Introduction to Unaudited Pro Forma Combined
Financial Statements.
20 Unaudited Pro Forma Combined Statement of
Operations Nine Months Ended October 31, 1998.
21 Unaudited Pro Forma Combined Statement of
Operations Year Ended January 31, 1997.
</TABLE>
5
<PAGE> 6
SIGNATURE
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: January __, 1999 By: ___________________________
Robert S. Kelleher
Chief Financial Officer
Senior Vice President
6
<PAGE> 7
[PRICEWATERHOUSE COOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
JULY 16, 1998
To the Board of Directors and
Shareholders of Viacom Inc.
In our opinion, the accompanying carve-out balance sheets and the related
carve-out statements of operations and cash flows present fairly, in all
material respects, the financial position of Blockbuster Music at December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 5 to the financial statements, the Company has suffered
recurring losses from operations and is dependent on Blockbuster, a division of
Viacom International Inc., to provide financial support and liquidity to fund
its operations.
/s/ PRICEWATERHOUSECOOPERS LLP
-1-
<PAGE> 8
BLOCKBUSTER MUSIC
CARVE-OUT STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues......................................... $590,576 $597,441 $563,603
Cost of goods sold............................... 441,002 413,306 361,715
-------- -------- --------
Gross profit.................................. 149,574 184,135 201,888
Expenses:
Operating..................................... 155,779 176,277 171,453
Selling, general and administrative........... 75,713 65,633 63,527
Depreciation and amortization................. 44,619 32,281 18,168
Restructuring charge (Note 3)................. -- 31,721 --
-------- -------- --------
Total expenses............................. 276,111 305,912 253,148
Operating loss................................... (126,537) (121,777) (51,260)
Interest expense (Note 6)..................... 6,401 6,764 6,585
-------- -------- --------
Loss before income taxes......................... (132,938) (128,541) (57,845)
Income tax benefit (Note 9)................... 50,276 48,754 22,034
-------- -------- --------
Net loss......................................... $(82,662) $(79,787) $(35,811)
======== ======== ========
</TABLE>
See notes to carve-out financial statements.
-2-
<PAGE> 9
BLOCKBUSTER MUSIC
CARVE-OUT BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash......................................... $ 10,171 $ 16,688
Receivables, less allowances for doubtful
accounts of $671 (1997) and $471 (1996).... 14,485 13,497
Merchandise inventories...................... 193,245 267,242
Prepaid and other current assets............. 83 834
-------- --------
Total current assets....................... 217,984 298,261
Property and equipment, net (Note 2)........... 83,955 122,855
Deferred income taxes (Note 9)................. 32,022 46,317
Rental library................................. 1,331 2,350
Other assets................................... 230 323
-------- --------
$335,522 $470,106
======== ========
LIABILITIES AND BLOCKBUSTER EQUITY INVESTMENT
Current liabilities:
Accounts payable............................. $102,343 $130,978
Other current liabilities.................... 30,418 29,362
Gift card liability.......................... 23,804 20,936
Current portion of capital lease obligation
(Note 6)................................... 2,338 1,836
-------- --------
Total current liabilities.................. 158,903 183,112
Capital lease obligation (Note 6).............. 33,952 35,842
Other liabilities.............................. 19,903 36,196
Commitments and contingencies (Note 10)
Blockbuster equity investment (Note 7)......... 122,764 214,956
-------- --------
$335,522 $470,106
======== ========
</TABLE>
See notes to carve-out financial statements.
-3-
<PAGE> 10
BLOCKBUSTER MUSIC
CARVE-OUT STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................... $(82,662) $(79,787) $ (35,811)
Adjustments to reconcile net loss to net cash flow
from operating activities:
Depreciation and amortization.................... 44,619 32,281 18,168
Loss on disposal of fixed assets................. 2,396 686 488
Restructuring charge............................. -- 31,721 --
Other, net....................................... 258 1,447 1,518
Changes in operating assets and liabilities:
Increase in receivables, net..................... (988) (4,848) (209)
Decrease (increase) in inventory................. 74,027 (4,785) 68,499
Decrease in rental library....................... 1,019 4,871 1,587
Decrease (increase) in prepaid expenses and
other current assets........................... 760 (918) (568)
Decrease (increase) in deferred income
taxes, net..................................... 14,295 (5,377) 9,046
(Decrease) increase in current liabilities....... (23,809) 33,882 (171,229)
Decrease in other liabilities.................... (16,294) (10,630) (6,432)
-------- -------- ---------
NET CASH FLOW FROM OPERATING ACTIVITIES.............. 13,621 (1,457) (114,943)
-------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures............................... (7,497) (25,503) (51,033)
-------- -------- ---------
NET CASH FLOW FROM INVESTING ACTIVITIES.............. (7,497) (25,503) (51,033)
-------- -------- ---------
FINANCING ACTIVITIES:
Payments on capital leases......................... (3,111) (1,900) (1,180)
Contributions (to)/from Blockbuster, net........... (9,530) 38,342 162,286
-------- -------- ---------
NET CASH FLOW FROM FINANCING ACTIVITIES.............. (12,641) 36,442 161,106
-------- -------- ---------
Net increase (decrease) in cash...................... (6,517) 9,482 (4,870)
CASH AT BEGINNING OF YEAR............................ 16,688 7,206 12,076
-------- -------- ---------
CASH AT END OF YEAR.................................. $ 10,171 $ 16,688 $ 7,206
======== ======== =========
</TABLE>
See notes to carve-out financial statements.
-4-
<PAGE> 11
BLOCKBUSTER MUSIC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
(Tabular dollars in thousands)
NOTE 1 -- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Blockbuster Music (the "Company") consists of the following four legal
entities: Blockbuster Music Holdings Corporation, Blockbuster Music Retail,
Inc., Show Industries, Inc. and Blockbuster SC Music Corporation. Blockbuster
Music Holdings Corporation is a 100% owned subsidiary of Viacom International
Inc., as well as the parent of Blockbuster Music Retail, Inc. and Show
Industries, Inc. Blockbuster SC Music Corporation is the 100% owned subsidiary
of Blockbuster SC Holding Corporation, which is 100% owned by Viacom
International Inc. Viacom International Inc. is a wholly owned subsidiary of
Viacom Inc. ("Viacom"). Viacom's investment in Blockbuster Music has been made
through Blockbuster, a division of Viacom International Inc. ("Blockbuster"),
and accordingly, has been reflected as such in the carve-out financial
statements. The Company operates throughout the southern, southeastern and
western United States as a retailer of prerecorded music, prerecorded
videocassettes and related accessories with selected stores also selling
computer software and renting videocassettes.
The accompanying carve-out financial statements and related notes reflect the
carve-out historical results of operations, financial position and cash flows
of the Company. For all periods presented, certain expenses reflected in the
carve-out financial statements include allocations of corporate expenses
from either Viacom or Blockbuster (see Note 8). These financial statements are
not necessarily indicative of results that would have occurred if the Company
had been a separate stand-alone entity during the periods presented or of
future results of the Company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could subsequently differ from those estimates.
Accounts Receivable
Accounts receivable is stated net of an allowance for doubtful accounts and
consists mainly of unsecured co-op advertising receivables due primarily from
music studios. The provision for doubtful accounts charged to expense was $1.5
million (1997), $1.0 million (1996) and $1.2 million (1995).
Inventories
Inventories consist of prerecorded music inventories and videocassettes sell
through inventory. Costs are determined using the moving weighted average
method, the use of which approximated the first-in, first-out basis.
Videocassette rental library is recorded at cost and amortized over its
estimated economic life. Videocassettes classified as base stock (first 4
copies) are amortized over 36 months and those classified as "hits" (fifth and
succeeding copies) are amortized over 6 months on a straight-line basis.
-5-
<PAGE> 12
BLOCKBUSTER MUSIC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (continued)
(Tabular dollars in thousands)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed principally
by the straightline method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Building........................ 25 years
Building improvements........... 10 years
Leasehold improvements.......... 4 to 10 years
Furniture and fixtures.......... 3 to 10 years
Equipment and other............. 3 to 10 years
</TABLE>
Balances of major classes of assets and accumulated depreciation and
amortization at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land, building and building improvements........... $ 26,965 $ 29,461
Leasehold improvements............................. 53,278 62,534
Equipment and other................................ 29,731 33,945
Furniture and fixtures............................. 30,194 33,917
-------- --------
Total........................................ 140,168 159,857
Less: accumulated depreciation and amortization.... (56,213) (37,002)
-------- --------
Property and equipment, net........................ $ 83,955 $122,855
======== ========
</TABLE>
Maintenance and repair costs are charged to expense as incurred. Renewals and
improvements that extend the useful life of the assets are capitalized.
Depreciation expense, excluding any impairment provisions, was $21.0 million
(1997), $20.2 million (1996) and $15.6 million (1995).
Property and equipment includes capital leases of $32.3 million as of December
31, 1997 and $31.7 million as of December 31, 1996, net of accumulated
amortization of $8.5 million and $5.5 million, respectively. Amortization
expense related to capital leases was $2.9 million (1997), $2.9 million (1996)
and $2.6 million (1995).
ADVERTISING EXPENSES
Advertising costs are expensed in the month incurred, net of reimbursements from
vendors. Net advertising expenses were $5.0 million (1997), $11.0 million (1996)
and $13.8 million (1995).
IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFAS 121 requires that the Company
assess long-lived assets for impairment whenever there is an indication that
the carrying amount of the asset may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash flows
generated by those assets to the assets' net carrying value. The amount of the
impairment loss will generally be measured as the difference between the net
book value of the assets and the estimated fair value of the related assets (See
Note 4).
-6-
<PAGE> 13
BLOCKBUSTER MUSIC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (continued)
(Tabular dollars in thousands)
GIFT CARD LIABILITY
Gift card liability is recorded at the time of issuance and the liability is
relieved and revenue recognized upon redemption of the gift cards at any
Blockbuster video or music stores.
REVENUE RECOGNITION
Revenues are primarily recognized at the time of sale or rental.
INCOME TAXES
Income taxes are provided based on the liability method of accounting pursuant
to SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred income taxes
are recorded to reflect the tax benefit and consequences of future years
differences between the tax bases of assets and liabilities and their financial
reporting basis. SFAS 109 also requires that deferred tax assets be reduced by
a valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
NOTE 3 - RESTRUCTURING AND OTHER CHARGES.
In the second quarter of 1997, the Company recorded a pre-tax charge of $42.6
million which consists primarily of $42.4 million, associated with the
reduction in carrying value of excess retail inventory. This charge has been
classified as cost of sales in the accompanying carve-out Statements of
Operations.
During the fourth quarter of 1996, the Company adopted a plan to close 45
unprofitable domestic music retail stores. In addition, Blockbuster and the
Company adopted a plan to relocate their corporate headquarters. As a result of
such plans, the Company recognized total charges aggregating approximately
$44.4 million. The Company recognized approximately $3.5 million, classified as
cost of sales, related to inventory impairment and approximately $9.2 million,
included in depreciation and amortization expense, related to fixed asset
impairment. These impairment write-offs were taken as of December 31, 1996. The
remaining amount of $31.7 million has been classified as a restructuring charge
in the accompanying carve-out Statements of Operations and primarily relates to
lease termination costs and other costs associated with the corporate
relocation. Through December 31, 1997, the Company charged approximately $14.0
million against these liabilities. The Company expects to substantially
complete the activities related to the music retail store closings by the end
of 1998.
-7-
<PAGE> 14
BLOCKBUSTER MUSIC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (continued)
(Tabular dollars in thousands)
NOTE 4 - IMPAIRMENT EVALUATION
The Company recognized a non-cash impairment charge of $9.2 million in 1996
primarily related to the disposal of certain long-lived assets pursuant to the
restructuring plan. At December 31, 1997, the Company recognized an additional
impairment charge of $20.7 million related to underperforming stores. These
charges were included in depreciation expense in the accompanying carve-out
Statements of Operations.
NOTE 5 - DEPENDENCE UPON BLOCKBUSTER
The Company's capital expenditures and its working capital requirements are
funded by cash advances from Blockbuster. The Company has accumulated losses
since 1995. As described in Note 3, during the fourth quarter 1996 the Company
implemented a plan to close 45 unprofitable domestic music retail stores.
Management believes that the closure of these unprofitable stores in
conjunction with certain other actions will improve its operating performance,
however, there can be no assurance that results of operations will improve. As
a result, the Company continues to be dependent upon Blockbuster to fund its
operations and capital expenditures.
NOTE 6 - CAPITAL LEASE OBLIGATION
Interest expense related to capital leases was $6.4 million, $6.8 million and
$6.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the carrying amount of capital lease
obligations approximates estimated fair value.
NOTE 7 - BLOCKBUSTER EQUITY INVESTMENT
An analysis of the Blockbuster equity investment activity follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance as of the beginning of the year....................... $214,956 $256,401 $129,926
Net loss...................................................... (82,662) (79,787) (35,811)
(Contributions to) and distributions from
Blockbuster, net........................................... (9,530) 38,342 162,286
-------- -------- --------
Balance as of the end of the year............................. $122,764 $214,956 $256,401
======== ======== ========
</TABLE>
Blockbuster funds the working capital requirements of the Company.
Blockbuster's equity investment includes accumulated deficit as well as any
payables and receivables due to/from Blockbuster resulting from cash transfers
and other intercompany activity.
-8-
<PAGE> 15
BLOCKBUSTER MUSIC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (continued)
(Tabular dollars in thousands)
NOTE 8 - RELATED PARTY TRANSACTIONS
Viacom/Blockbuster provides the Company with certain general and administrative
services, including insurance, legal, tax, treasury, technology systems and
support, accounting and other corporate functions. In addition, the Company
shares certain distribution functions and facilities with Blockbuster.
Viacom/Blockbuster has charged the Company for the Company's share of these
services in the amount of $15.7 million (1997), $17.4 million (1996) and $13.3
million (1995) and these charges have been included in selling, general and
administrative expenses in the accompanying carve-out Statements of Operations.
See also Note 11 for pension plan and additional employee benefit costs charged
by Viacom to the Company.
Management believes that the methodologies used to allocate charges for the
services described above are reasonable.
The Company is charged a royalty fee of 5% of its revenues from Blockbuster for
use of the Blockbuster name and the amount is included in selling, general and
administrative expenses in the accompanying carve-out Statements of Operations.
The Company, through the normal course of business, is involved in transactions
with companies owned by or affiliated with Viacom which did not have a material
impact on the financial position or results of operations presented herein.
NOTE 9 - INCOME TAXES
The Company has been included in consolidated federal, state and local income
tax returns filed by Viacom. However, the tax benefit reflected in the
carve-out Statements of Operations and deferred tax assets reflected in the
carve-out Balance Sheets have been prepared as of such benefits were computed
on a separate return basis. Tax losses generated by the Company have been
utilized by Viacom to reduce its consolidated taxable income. These amounts
have been reflected in Blockbuster equity investment in the carve-out Balance
sheets.
Components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal ................................. $49,138 $34,286 $ 36,228
State and local ......................... 6,451 4,665 5,187
------- ------- --------
55,589 38,951 41,415
Deferred .................................. (5,313) 9,803 (19,381)
------- ------- --------
$50,276 $48,754 $ 22,034
======= ======= ========
</TABLE>
-9-
<PAGE> 16
BLOCKBUSTER MUSIC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (continued)
(Tabular dollars in thousands)
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on losses before income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate..................... 35.0% 35.0% 35.0%
State and local taxes, net of federal
tax benefit............................... 2.8 2.9 3.2
Other, net.................................. -- -- (.1)
---- ---- ----
Effective tax rate................ 37.8% 37.9% 38.1%
==== ==== ====
</TABLE>
The following is a summary of the deferred tax accounts in accordance with SFAS
109:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Current deferred tax assets................ $ 1,228 $ 1,999
------- -------
Noncurrent deferred tax assets:
Property and equipment................... 8,936 8,133
Restructuring and purchase reserves...... 18,826 32,411
Other.................................... 3,032 3,774
------- -------
Noncurrent deferred tax assets............. 30,794 44,318
------- -------
Deferred tax assets........................ $32,022 $46,317
======= =======
</TABLE>
The tax benefit recognized and the deferred taxes recorded in the accompanying
carve-out financial statements may not necessarily reflect the tax benefit or
deferred taxes of the Company had it been a separate stand-alone Company during
the periods presented.
Note 10 - COMMITMENTS AND CONTINGENCIES
The Company has long term noncancelable lease commitments for various real
property and office space which expire at various dates. Certain leases contain
renewal and escalation clauses for a proportionate share of operating expenses.
-10-
<PAGE> 17
BLOCKBUSTER MUSIC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (continued)
At December 31, 1997, minimum rental payments under noncancelable leases are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
<S> <C> <C>
1998...................................... $ 57,819 $ 8,665
1999...................................... 50,862 9,065
2000...................................... 43,211 9,303
2001...................................... 38,104 9,072
2002...................................... 34,742 8,671
2003 and thereafter....................... 94,252 24,787
-------- --------
Total minimum lease payments.............. $318,990 69,593
========
Less amount representing interest......... (33,303)
--------
Present value of net minimum payments..... $ 36,290
========
</TABLE>
Rent expense was $49.8 million (1997), $52.8 million (1996) and $47.3 million
(1995). Contingent rentals, which are calculated as a percentage of revenue,
were $1.3 million (1997), $1.1 million (1996) and $1.0 million (1995).
Subtenant rental income was $1.2 million (1997), $.6 million (1996) and $.4
million (1995). Future minimum capital lease payments have not been reduced by
future minimum subtenant rental income of $7.9 million.
The Company is involved in ordinary and routine litigation incidental to its
business. Management believes that any ultimate liability resulting from those
actions or claims will not have a material adverse effect on the Company's
results of operations, financial position or liquidity.
NOTE 11 - PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Viacom has a noncontributory defined benefit pension plan covering substantially
all of its employees, including the employees of the Company during 1997 and
1996. Retirement benefits are based principally on years of service and salary.
Viacom/Blockbuster also offers participation in a 401(k) savings plan to the
employees of the Company and has charged the Company for pension and 401(k)
savings plan expense $.5 million (1997), $.7 million (1996) and $.7 million
(1995). These charges have been included in selling, general and administrative
expenses in the accompanying carve-out Statements of Operations.
Viacom/Blockbuster also provided other employee benefits to the Company's
employees, including certain postemployment benefits, medical, dental, life and
disability insurance costs.
Management believes that the methodologies used to allocate pension and other
employee benefit charges to the Company are reasonable.
-11-
<PAGE> 18
WHEREHOUSE ENTERTAINMENT, INC.
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The historical Blockbuster Music audited carve-out financial statements
as of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 (the "Carve-Out Financial Statements") relate to certain
operations, some of which are not part of the Acquired Business. During the year
ended December 31, 1997, Blockbuster Music closed approximately seventy (70)
under-performing stores. In addition, approximately forty-three (43)
under-performing stores were closed between January 1, 1998 and the Acquisition
date. Accordingly, the Carve-Out Financial Statements include significant
amounts for store closing costs, reserves for occupancy costs related to stores
closed or targeted to be closed, costs related to inventory lower of cost or
market and obsolescence reserves, and other expenses which may not relate to the
Acquired Business. The Registrant has attempted to present the historical
information of the Acquired Business; however, information related to certain
costs was not available at a level of detail adequate to support the
presentation. Accordingly, the unaudited pro forma operating results include
certain adjustments based on information available to the Registrant which are
described more fully in the Notes to the Unaudited Pro Forma Combined Financial
Statements.
Prior to the Acquisition, Blockbuster Music operated as a component of
Blockbuster Entertainment Group ("BEG") and certain overhead costs and other
expenses were allocated to Blockbuster Music by the Seller and BEG. Accordingly,
the unaudited pro forma operating results are based, in part, on the Carve-Out
Financial Statements, internal store operating statements, other internal
financial information provided by the Seller, and overhead allocation
adjustments that the Registrant believes are required for a fair presentation.
Pursuant to the Purchase Agreement, Seller delivered an initial adjusted
statement of the Closing Working Capital on December 23, 1998 that states
Seller's position that the adjusted purchase price equals $126.5 million.
Accordingly, the Registrant has reflected such adjusted purchase price and
recorded an amount of $8.8 million, due to Seller, subject to adjustment upon
the final determination of the Closing Working Capital, in its unaudited
consolidated condensed balance sheet. See Item 2. The Purchase Agreement
provides a mechanism for resolution of the final purchase price based on the
resolution of the Closing Working Capital, which the Registrant expects will
occur in 1999. Based on the results of the Registrant's challenges to Seller's
initial adjusted statement of Closing Working Capital, the purchase price of the
Acquired Business may be significantly lower than $126.5 million.
The Acquisition was accounted for under the purchase method of
accounting. Based on preliminary analyses, the Registrant recorded the acquired
assets and liabilities assumed at their estimated fair values at the Acquisition
date, based on preliminary valuations and other studies that have not yet been
finalized. A preliminary allocation of the purchase price has been made to major
categories of assets and liabilities based on the Registrant's estimates. The
preliminary allocation of the purchase price includes, among other things,
capitalized
-12-
<PAGE> 19
lease obligations for real estate leases of the acquired stores, store leases in
excess of fair market value, and acquired store closing and other reserves of
approximately $31.8 million, $33.1 million and $20.1 million, respectively. The
actual allocation of purchase price and the resulting effect on income from
operations may differ significantly from the preliminary estimates. The excess
purchase price over the net assets acquired has been assigned to goodwill.
The operations of the Acquired Business for the twelve months ended
December 31, 1997 have been combined with the Registrant's operations for the
fiscal year ended January 31, 1998 and the operations of the Acquired Business
for the nine months ended October 25, 1998 have been combined with the
Registrant's operations for the nine months ended October 31, 1998. These
unaudited pro forma combined statements of operations give effect to
the Acquisition as if it had occurred on February 1, 1997. The unaudited
consolidated condensed balance sheet gives effect to the Acquisition as if it
had occurred on October 31, 1998. The unaudited pro forma adjustments described
in the accompanying notes are based upon currently available information and
reflect preliminary estimates and assumptions that management believes are
reasonable in the circumstances.
The unaudited pro forma combined financial statements are not
necessarily indicative of what the financial position or results of operations
would have been if the Acquisition had occurred on the above-mentioned dates.
Additionally, they are not indicative of future results of operations or
financial position. No attempt has been made to quantify, in the pro forma
financial statements, additional costs that may be incurred as a result of the
Acquisition. The unaudited pro forma combined financial statements should be
read in conjunction with the Registrant's historical consolidated financial
statements and notes thereto, along with the Blockbuster Music Carve-Out
Financial Statements as of December 31, 1997 and 1996, and for each of the
three years ended December 31, 1997.
-13-
<PAGE> 20
WHEREHOUSE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 1998
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
WHEREHOUSE BLOCKBUSTER
ENTERTAINMENT, INC. MUSIC PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS PRO FORMA(1)
------------------ ----------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 222,955 $ 361,045 $ 584,000
Cost of revenues 138,083 260,296 398,379
Selling, general and administrative expenses 74,016 130,334 $ (8,703)(3) 195,647
------------ ------------ ------------ -----------
Earnings (loss) before interest, taxes,
depreciation and amortization 10,856 (29,585) 8,703 (10,026)(2)
Depreciation and amortization 5,533 14,624 (6,210)(4) 13,947
Interest expense, net of interest (income) (471) 3,141 2,815 (5) 5,485
Provision (benefit) for income taxes 2,397 0 (14,446)(6) (12,049)
------------ ------------ ------------ -----------
Net income (loss) $ 3,397 $ (47,350) $ 26,544 $ (17,409)
============ ============ ============ ===========
Basic net income (loss) per share $ 0.32 $ (1.63)
============ ===========
Diluted net income (loss) per share $ 0.29 $ (1.63)
============ ===========
Weighted average number of shares
outstanding--Basic 10,673,265 10,673,265
============ ===========
Weighted average number of shares
and common equivalent share outstanding--
Diluted 11,517,902 10,673,265
============ ===========
</TABLE>
* Relates to nine months ended October 25, 1998.
(1) The Registrant acquired 378 stores. At January 1, 1997, Blockbuster Music
operated 491 stores. Underperforming stores closed during the year ended
December 31, 1997 and the 10 months ended October 31, 1998, totaled 70 and
43 stores, respectively. The operating losses, as well as reserves for
store closing costs relating to stores that were not included in the
Acquisition, are included in the historical results of operations as well
as the pro forma.
(2) EBITDA is defined as net income before net interest expense, income tax
expense, and depreciation and amortization. Pro forma EBITDA for the nine
months ended October 31, 1998 was impacted by the following items related
to Blockbuster Music:
Higher shrinkage charged to cost of goods sold $ 7.6 (a)
Higher distribution costs related to the
consolidation of facilities 1.2 (b)
Loss on closed store retirement of assets 1.7 (c)
------
$10.5
(a) Blockbuster Music consolidated its distribution center with that of BEG
in the first quarter of 1998. During the nine months ended October 31,
1998, Blockbuster Music continued to close stores and was in the
process of being sold. As a result of these activities, cost of goods
sold for the nine months ended October 31, 1998 was significantly
higher as a percent to sales than in the previous fiscal year,
resulting in a decrease to EBITDA of $7.6 million.
(b) Blockbuster Music moved to a consolidated distribution center in the
first quarter of 1998. During the prior year it operated a separate
distribution center. The distribution center cost for the nine months
ended October 31, 1998 was higher as a percent to sales than that of
the prior year. The Registrant believes that, due to the costs
associated with the move and inefficiencies created by such a move, the
higher distribution costs resulted in a decrease to EBITDA of $1.2
million.
(c) Costs of $1.7 million are reflected in Seller's internal financial
statements related to stores not acquired.
The Company believes that EBITDA provides useful information regarding the
Company's ability to service debt but should not be considered in isolation
or as a substitute for the combined statement of operations prepared in
accordance with the generally accepted accounting principles or as a
measure of the Company's operating performance, profitability or liquidity.
While EBITDA is frequently used as a measure of operations and the ability
to meet debt service requirements, it is not necessarily comparable to
other similarly titled captions of other companies due to differences and
methods of calculation.
(3) Pro forma adjustments to selling, general and administrative expenses
include the following:
Royalty fee charged to Blockbuster Music.
Registrant is not required to pay such fee ($ 16.5)
Decrease of rent expense due to the application
of purchase accounting (2.1)
Blockbuster Music was not charged for Viacom/BEG
overhead allocations during 1998.
Amount is estimated based on prior year's ratio
of allocated overhead to net revenues 9.9
------
$ 8.7
======
(4) The application of purchase accounting is expected to impact
depreciation and amortization expense as follows:
Reduction in depreciation and amortization expense ($7.5)(a)
Goodwill amortization 1.3 (b)
------
($6.2)
======
(a) To record the adjustment to depreciation and amortization expense
required to give effect to the valuation of fixtures and equipment at
estimated fair value. Fixtures and equipment are expected to be
depreciated over 3 to 7 years and leasehold improvements are expected
to be amortized over 10 years or the remaining life of the lease,
whichever is shorter.
(b) To record amortization expense, on a straight-line basis, of goodwill
resulting from the Acquisition. For pro forma purposes, a 15 year life
has been used for goodwill.
(5) To record interest expense on borrowings to finance the Acquisition and the
reduction in interest income on the cash portion of the purchase price.
Interest expense is calculated at an average interest rate of 8.0%. Each
0.125% change in interest rates in respect of the line of credit facility
would increase or decrease pro forma interest expense by $0.1 million. In
addition, interest expense includes $0.2 million for interest on
capitalized store leases.
(6) To provide for the income tax benefit in pro forma adjustments resulting
from the loss incurred by the Acquired Business at an estimated combined
statutory tax rate of 40.9%. The pro forma adjustments assume that no
valuation reserves would be required under SFAS 109 "Accounting for
Income Taxes".
-14-
<PAGE> 21
WHEREHOUSE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
WHEREHOUSE BLOCKBUSTER
ENTERTAINMENT, INC. MUSIC PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS PRO FORMA(1)
------------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 327,425 $ 590,576 $ 918,001
Cost of revenues 203,534 441,002 644,536
Selling, general and administrative expenses 104,738 231,492 $ (34,598)(3)(4) 301,632
------------ ------------ ------------- ------------
Earnings (loss) before interest, taxes,
depreciation and amortization 19,153 (81,918) 34,598 (28,167)(2)
Depreciation and amortization 7,130 44,619 (15,505)(5) 36,244(8)
Interest expense, net of interest (income) (1,052) 6,401 4,032 (6) 9,381
Provision (benefit) for income taxes 5,373 (50,276) 14,722 (7) (30,181)
------------ ------------ ------------ ------------
Net income (loss) $ 7,702 $ (82,662) $ 31,349 $ (43,611)
============ ============ ============ ============
Basic net income (loss) per share $ 0.74 $ (4.19)
============ ============
Diluted net income (loss) per share $ 0.71 $ (4.19)
============ ============
Weighted average number of shares
outstanding-Basic 10,420,557 10,420,557
============ ============
Weighted average number of shares
and common equivalent share
outstanding-Diluted 10,894,862 10,420,557
============ ============
</TABLE>
* Relates to the fiscal year ended December 31, 1997.
(1) The Registrant acquired 378 stores. At January 1, 1997, Blockbuster Music
operated 491 stores. Underperforming stores closed during the year ended
December 31, 1997 and the 10 months ended October 31, 1998, totaled 70 and
43 stores, respectively. The operating losses, as well as reserves for store
closing costs relating to stores that were not included in the Acquisition,
are included in the historical results of operations as well as the pro
forma. Viacom/BEG provided Blockbuster Music with certain general and
administrative services and other corporate functions for which it charged
Blockbuster Music $15.7 million during 1997.
(2) EBITDA is defined as net income before net interest expense, income tax
expense and depreciation and amortization expense. Pro forma EBITDA for the
year ended January 31, 1998 was impacted by the following items related to
Blockbuster Music:
Pre-tax charge associated with excess retail
inventory made during the second quarter
of 1997 $ 42.4
Net costs related to the stores closed during
fiscal 1997 and costs associated with stores
not acquired 9.9
------
$ 52.3
======
The Company believes that EBITDA provides useful information regarding the
Company's ability to service debt but should not be considered in isolation
or as a substitute for the combined statement of operations prepared in
accordance with the generally accepted accounting principles, or as a
measure of the Registrant's operating performance, profitability or
liquidity. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to
differences and methods of calculation.
-15-
<PAGE> 22
(3) Blockbuster Music was charged a royalty fee of $29.1 million during 1997.
Registrant is not required to pay such a fee.
(4) The application of purchase accounting is expected to decrease rent expense
based on the Acquired Business lease obligations in excess of fair market
value by $5.5 million.
(5) The application of purchase accounting is expected to impact depreciation
and amortization expense as follows:
A $17.2 million reduction to depreciation and amortization
expense required to give effect to the valuation of fixtures and
equipment and improvements at estimated fair value. Fixtures and
equipment are expected to be depreciated over 3 to 7 years and leasehold
improvements are expected to be amortized over 10 years or the remaining
life of the lease, whichever is shorter.
Goodwill amortization expense of $1.7 million resulting from the
Acquisition. Goodwill is amortized, on a straight-line basis, over a
15 year life.
(6) To record interest expense on borrowings to finance the Acquisition and the
reduction in interest income on the cash portion of the purchase price.
Interest expense is calculated at an average interest rate of 8.0%. Each
0.125% change in interest rates in respect of the line of credit facility
would increase or decrease pro forma interest expense by $0.1 million. In
addition, interest expense includes $0.9 million for bridge loan fees
related to the Acquisition and $0.3 million for interest on capitalized
store leases.
(7) To provide for the income tax benefit in pro forma adjustments resulting
from the loss incurred by the Acquired Business at an estimated combined
statutory tax rate of 40.9%. The pro forma adjustments assume that no
valuation reserves would be required under SFAS 109 "Accounting for
Income Taxes".
(8) Includes property and equipment impairment charge of $20.7 million related
to underperforming stores.
-16-
