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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 OCTOBER 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,
10,781,570 shares outstanding as of December 3, 1999
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<PAGE> 2
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 -- October 31, 1999
(Unaudited) and January 31, 1999............................ 4
Consolidated Condensed Statements of Operations -- Three
Months Ended October 31, 1999 and 1998 (Unaudited) and Nine
Months Ended October 31, 1999 and 1998 (Unaudited).......... 5
Consolidated Condensed Statements of Cash Flows -- Nine
Months Ended October 31, 1999 and 1998 (Unaudited).......... 6
Notes to Consolidated Condensed Financial Statements
(Unaudited)................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES........................................................... 17
</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; (k) adverse results in significant
litigation matters; and (l) adverse effects of Y2K problems.
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 we may make. We do 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>
OCTOBER 31, JANUARY 31,
1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 6,111,000 $ 15,009,000
Receivables, net.......................................... 3,588,000 5,207,000
Inventories, net.......................................... 287,253,000 226,648,000
Other current assets...................................... 2,823,000 2,807,000
Deferred taxes............................................ 12,410,000 14,003,000
------------ ------------
Total current assets............................... 312,185,000 263,674,000
Property, equipment, and improvements, net.................. 78,694,000 68,531,000
Deferred taxes.............................................. 11,837,000 12,409,000
Intangible assets, net...................................... 39,165,000 41,282,000
Other assets, net........................................... 1,245,000 1,845,000
------------ ------------
Total assets....................................... $443,126,000 $387,741,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and net uncleared checks................. $168,560,000 $114,480,000
Accrued expenses.......................................... 31,721,000 43,590,000
Store closing reserves.................................... 11,379,000 25,205,000
Reorganization liabilities................................ 1,602,000 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.............. 4,574,000 4,207,000
------------ ------------
Total current liabilities.......................... 221,107,000 192,862,000
Line of credit.............................................. 78,359,000 37,349,000
Long-term debt.............................................. 4,350,000 3,837,000
Capital lease obligations................................... 21,011,000 23,546,000
Leases in excess of fair market value....................... 22,047,000 25,929,000
Deferred rent and other long-term liabilities............... 5,693,000 6,040,000
------------ ------------
Total liabilities.................................. 352,567,000 289,563,000
------------ ------------
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 and
outstanding at October 31, 1999 and January 31, 1999,
respectively............................................ 108,000 108,000
Additional paid-in-capital................................ 89,400,000 89,400,000
Retained earnings......................................... 7,756,000 14,758,000
Treasury stock, 25,000 shares............................. (338,000)
Notes receivable.......................................... (6,367,000) (6,088,000)
------------ ------------
Total shareholders' equity......................... 90,559,000 98,178,000
------------ ------------
Total liabilities and shareholders' equity......... $443,126,000 $387,741,000
============ ============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
4
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WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ----------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sale merchandise revenue........... $163,279,000 $70,496,000 $517,353,000 $197,857,000
Rental revenue, net................ 2,187,000 3,349,000 7,517,000 12,052,000
------------ ----------- ------------ ------------
Total revenues........... 165,466,000 73,845,000 524,870,000 209,909,000
Cost of sale merchandise revenue... 101,739,000 44,845,000 333,867,000 125,037,000
------------ ----------- ------------ ------------
Gross profit..................... 63,727,000 29,000,000 191,003,000 84,872,000
Selling, general and administrative
expenses......................... 59,825,000 26,907,000 179,962,000 74,476,000
Depreciation and amortization...... 5,983,000 1,780,000 17,127,000 5,072,000
------------ ----------- ------------ ------------
(Loss) income from operations.... (2,081,000) 313,000 (6,086,000) 5,324,000
Interest expense................... 2,057,000 1,199,000 5,884,000 1,418,000
Interest income.................... (95,000) (527,000) (300,000) (1,888,000)
------------ ----------- ------------ ------------
(Loss) income before income
taxes......................... (4,043,000) (359,000) (11,670,000) 5,794,000
(Benefit) provision for income
taxes............................ (1,617,000) (141,000) (4,668,000) 2,397,000
------------ ----------- ------------ ------------
Net (loss) income................ $ (2,426,000) $ (218,000) $ (7,002,000) $ 3,397,000
============ =========== ============ ============
Net (loss) income per common share:
Basic............................ $ (0.23) $ (0.02) $ (0.65) $ 0.32
============ =========== ============ ============
Diluted.......................... $ (0.23) $ (0.02) $ (0.65) $ 0.29
============ =========== ============ ============
Weighted average common shares
outstanding -- Basic............. 10,756,570 10,744,108 10,734,405 10,673,265
============ =========== ============ ============
Weighted average common shares and
common equivalent shares
outstanding -- Diluted........... 10,756,570 10,744,108 10,734,405 11,517,902
============ =========== ============ ============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
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WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
OCTOBER 31, OCTOBER 31,
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income........................................... $ (7,002,000) $ 3,397,000
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization............................. 17,127,000 5,072,000
Rental amortization included in cost of rentals........... 4,108,000 9,167,000
Book value of rental inventory dispositions, included in
cost of rentals........................................ 817,000 1,565,000
Changes in operating assets and liabilities:
Receivables, net....................................... 1,619,000 (4,198,000)
Inventories, net....................................... (67,708,000) (23,491,000)
Rental inventory purchases............................. (4,420,000) (9,531,000)
Other current assets................................... (16,000) (613,000)
Accounts payable, accrued expenses and other current
liabilities.......................................... 44,425,000 18,638,000
Store closure reserves................................. (12,196,000)
Other long-term liabilities............................ (347,000)
------------ -------------
Net cash (used in) provided by operating
activities...................................... (23,593,000) 6,000
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INVESTING ACTIVITIES:
Purchase of property, equipment and improvements............ (24,643,000) (5,142,000)
Decrease (increase) in other assets......................... 600,000 (544,000)
Cash paid for business acquisition, net of cash acquired.... (117,564,000)
------------ -------------
Net cash used in investing activities............. (24,043,000) (123,250,000)
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FINANCING ACTIVITIES:
Net borrowings under line of credit......................... 41,010,000 97,823,000
Payments on capital lease obligations and long-term debt.... (1,655,000) (169,000)
Purchase of common stock.................................... (338,000)
Issuance of new stock from warrants......................... 25,000
Interest on notes receivable................................ (279,000) (280,000)
------------ -------------
Net cash provided by financing activities......... 38,738,000 97,399,000
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Net decrease in cash and cash equivalents................... (8,898,000) (25,845,000)
Cash and cash equivalents at beginning of the period........ 15,009,000 54,720,000
------------ -------------
Cash and cash equivalents at end of the period.............. $ 6,111,000 $ 28,875,000
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 5,334,000 $ 991,000
Income taxes........................................... $ 7,382,000 $ 1,362,000
Noncash investing and financing activities:
Fair value of assets acquired.......................... $ 289,134,000
Cash paid.............................................. 117,564,000
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Liabilities assumed.................................... $ 171,570,000
=============
</TABLE>
See Accompanying Notes to Unaudited 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 nine months ended October 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. SUBSEQUENT EVENT
On November 17, 1999, the Company agreed to enter into an equity investment
and strategic partnership agreement (the "Agreement") with CheckOut.com, LLC
("CheckOut.com"), an Internet content provider and e-commerce retailer of music,
movies and games, by which the Company will have an equity interest in
CheckOut.com of approximately 49%. Under the terms of the Agreement,
CheckOut.com will become the exclusive Internet website partner for the above
referenced product categories for Wherehouse Music. CheckOut.com will be
integrated into all of the Company's marketing and advertising associated with
the Company's stores nationwide. Under the terms of the Agreement, the Company
will invest up to $20.0 million in CheckOut.com over the next year. As a part of
this transaction, it is expected that CheckOut.com's other significant investor
will make a $5.0 million equity investment in the Company.
3. 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 the Seller (the "Acquired
Business"). The Acquired Business, which operated under the name "Blockbuster
Music", consisted of 378 stores (the "Acquired Stores") in 33 States. In 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 the Seller with
respect to a purchase price adjustment based on working capital, as set forth in
the Purchase Agreement, plus a settlement of certain other issues. The final
purchase price was $122.3 million, including direct acquisition costs of $4.7
million, resulting in an increase in intangible assets of $3.8 million as of
October 31, 1999.
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 for the period beginning October 26, 1998 through October 31,
1998 and for the nine months and the quarter ended October 31, 1999 are
reflected in the accompanying unaudited consolidated condensed financial
statements.
7
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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,
anticipates the closing of 70 stores (51 Acquired Stores and 19 existing
Wherehouse stores) located in 17 states. The Company has closed 59 of these
stores (42 Acquired Stores and 17 existing Wherehouse stores) as of October 31,
1999. Two additional stores are scheduled to be closed by January 31, 2000. The
Company is negotiating with landlords to terminate the leases on the remaining
nine stores.
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 AS OF
JANUARY 31, AGAINST OCTOBER 31,
1999 RESERVE ADJUSTMENTS(2) 1999
------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Store closure reserve -- Acquired
Stores(1)............................. $22,612,000 $ 8,200,000 $4,083,000 $10,329,000
Leases in excess of fair market value... 29,200,000 2,453,000 1,429,000 25,318,000
----------- ----------- ---------- -----------
Total......................... $51,812,000 $10,653,000 $5,512,000 $35,647,000
=========== =========== ========== ===========
</TABLE>
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(1) Consists substantially of lease termination costs.
(2) Adjustments relating to certain lease settlement costs decreased intangible
assets by $3.3 million, net of deferred income taxes as of October 31, 1999.
During Fiscal 1999, the Company recorded accruals related to the planned
closing of 19 existing Wherehouse stores. The following is a rollforward of the
activity of the store closure reserve -- existing stores:
<TABLE>
<CAPTION>
ACCRUAL AS OF CHARGES BALANCE AS OF
JANUARY 31, AGAINST OCTOBER 31,
1999 RESERVE 1999
------------- ---------- -------------
<S> <C> <C> <C>
Store closure reserve -- Existing Stores(1)........... $2,593,000 $1,543,000 $1,050,000
========== ========== ==========
</TABLE>
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(1) Consists substantially of lease termination costs.
4. 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 nine months ended October
31, 1998 include the operating results of the Acquired Stores from October 26,
1998 to October 31, 1998.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Revenues
Net revenues were $165.5 million and $73.8 million for the quarters ended
October 31, 1999 (the third quarter of Fiscal 2000) and October 31, 1998 (the
third quarter of Fiscal 1999), respectively. The increase of $91.7 million was
attributable to the addition of the Acquired Stores, which contributed $98.7
million in net revenues during the third quarter of Fiscal 2000 compared to $6.7
million for the period from October 26, 1998 to October 31, 1998.
Excluding the Acquired Stores, net revenues decreased to $66.8 million
during the third quarter of Fiscal 2000 from $67.1 million during the third
quarter of Fiscal 1999. The decrease of $0.3 million was attributable to a $1.1
million decline in net rental revenue offset by an increase in sale merchandise
revenue (defined below) of $0.8 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
OCTOBER 31,
----------------
1999* 1998**
------ ------
<S> <C> <C>
Sale merchandise revenue:
Music....................................................... $143.9 $60.4
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................. 19.4 10.1
------ -----
Total sale merchandise revenue.................... 163.3 70.5
Rental revenue, net......................................... 2.2 3.3
------ -----
Total revenue..................................... $165.5 $73.8
====== =====
</TABLE>
- ---------------
* Includes revenue of the Acquired Business from August 1, 1999 to October 31,
1999.
** Includes revenue of the Acquired Business from October 26, 1998 to October
31, 1998.
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 third quarter of Fiscal
2000, sale merchandise revenue represented 98.7% of aggregate revenues, compared
to 95.5% during the third quarter of Fiscal 1999, an increase of 3.2%. 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.
9
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Sale merchandise revenue was $163.3 million in the third quarter of Fiscal
2000 compared to $70.5 million in the third quarter of Fiscal 1999. This
increase in sale merchandise revenue was 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 closed 9 Wherehouse stores during the nine months ended October 31, 1999 and
the Acquired Stores, sale merchandise revenue increased by approximately 5.0%
during the third quarter of Fiscal 2000 as compared to the third quarter of
Fiscal 1999. Management believes that the increase in same-store sale
merchandise revenue was principally the result of continuing 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 6.5% during the third quarter of Fiscal 2000
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, including the implementation of a name change from
"Blockbuster Music" to "Wherehouse Music".
B. Rental revenue, net. Rental revenue, net 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 net of cost of rentals. Rental revenue, net was $2.2 million
in the third quarter of Fiscal 2000 and $3.3 million in the third quarter of
Fiscal 1999, representing a decrease of $1.1 million or 34.7% due to increased
competition in the rental market and fewer of the Company's stores offering
rental products.
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.
Cost of Revenue
Cost of sale merchandise revenue was $101.7 million for the third quarter
of Fiscal 2000, as compared with $44.8 million for the same period last year, an
increase of $56.9 million, which was principally due to the Acquired Stores. As
a percentage of sale merchandise revenue, cost of sale merchandise revenue was
62.3% for the third quarter of Fiscal 2000 as compared with 63.6% for the third
quarter of Fiscal 1999. Such decrease was due principally to changes in product
sales mix and lower inventory unit costs incurred subsequent to the Acquired
Stores conversion to the Company's POS system.
Operating Expenses
Selling, general and administrative ("SG&A") expenses for the third quarter
of Fiscal 2000 were $59.8 million, compared to $26.9 million for the third
quarter of Fiscal 1999, an increase of $32.9 million. The increase was
principally related to the operating expenses of the Acquired Stores.
SG&A expenses were 36.2% of revenue in the third quarter of Fiscal 2000,
compared to 36.4% of revenue in the third quarter of Fiscal 1999, a decrease of
0.2%. The 0.2% decrease in SG&A expenses as a percentage of revenues is due
primarily to a reduction in corporate overhead offset by increased shipping and
freight charges for inventory being sent to store locations, primarily
consisting of non-recurring incremental distribution costs of $1.4 million
related to the Acquired Stores.
Depreciation and amortization expense was $6.0 million in the third quarter
of Fiscal 2000 compared to $1.8 million in the third quarter of Fiscal 1999, an
increase of $4.2 million. The increase is principally related to depreciation
expense of the Acquired Stores and amortization expense of intangible assets
related to the Acquisition.
10
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Interest Expense
Interest expense for the third quarter of Fiscal 2000 was $2.1 million,
compared to $1.2 million for the third quarter of Fiscal 1999, an increase of
$0.9 million. This increase was primarily attributable to interest expense of
$1.4 million incurred due to 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 for the funding of working capital.
Interest Income
Interest income for the third quarter of Fiscal 2000 was $0.1 million, as
compared to $0.5 million for the third quarter of Fiscal 1999. The decrease of
$0.4 million was the result of a decline in short-term investments of excess
cash. Such excess cash was used mainly to pay down the Company's borrowings
under the Congress Facility.
Income Taxes
The Company recorded a tax benefit of $1.6 million for the third quarter of
Fiscal 2000 compared to $0.1 million for the third quarter of Fiscal 1999. The
tax benefit for the third 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 and certain non-recurring costs related to the
Acquisition, a more appropriate calculation of EBITDA (hereinafter referred to
as "Adjusted EBITDA") should include an adjustment for such non-recurring costs
and the net difference between rental amortization plus the book value of rental
dispositions less 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 third quarter of Fiscal 2000 was $4.0 million
compared to $2.9 million for the third quarter of Fiscal 1999. During the third
quarter of Fiscal 2000, the Company incurred certain incremental and
non-recurring costs related to the Acquisition and Y2K remediation. Excluding
non-recurring incremental distribution costs of $1.4 million and additional Y2K
remediation costs of $0.2 million, Adjusted EBITDA for the third quarter of
Fiscal 2000 would have been $5.6 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 NINE-MONTH PERIODS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Revenues
Net revenues were $524.9 million and $209.9 million for the nine months
ended October 31, 1999 and October 31, 1998, respectively. The increase of
$315.0 million was attributable to the addition of the Acquired Stores, which
contributed $315.5 million in net revenues during the nine-months ended October
31, 1999 compared to $6.7 million for the period from October 26, 1998 to
October 31, 1998 partially offset by a decrease in net rental revenue of $4.5
million.
Excluding the Acquired Stores, net revenues increased to $209.4 million
during the third quarter of Fiscal 2000 from $203.2 million during the third
quarter of Fiscal 1999. The increase of $6.2 million is attributable to an
increase in sale merchandise revenue of $10.7 million offset by a $4.5 million
decline in net rental revenue.
11
<PAGE> 12
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>
NINE MONTHS ENDED
OCTOBER 31,
------------------
1999* 1998**
------- -------
<S> <C> <C>
Sale merchandise revenue:
Music..................................................... $458.9 $171.6
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................. 58.5 26.3
------ ------
Total sale merchandise revenue.................... 517.4 197.9
Rental revenue, net......................................... 7.5 12.0
------ ------
Total revenue..................................... $524.9 $209.9
====== ======
</TABLE>
- ---------------
* Includes revenue of the Acquired Business from February 1, 1999 to October
31, 1999.
** Includes revenue of the Acquired Business from October 26, 1998 to October
31, 1998.
A. Sale merchandise revenue. For the nine months ended October 31, 1999,
sale merchandise revenue represented 98.6% of aggregate revenues, compared to
94.3% for the nine months ended October 31, 1998, an increase of 4.3%. 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 $517.4 million for the nine months ended
October 31, 1999 compared to $197.9 million for the nine months ended October
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 9 Wherehouse stores closed during the
nine month period ended October 31, 1999 and the Acquired Stores, sale
merchandise revenue increased by approximately 7.9% for the nine months ended
October 31, 1999, as compared to the nine months ended October 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
2.9% during the nine-months ended October 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 conversions to the Company's POS system 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, net. Rental revenue, net was $7.5 million for the nine
months ended October 31, 1999 and $12.0 million for the nine months ended
October 31, 1998, representing a decrease of $4.5 million or 36.7% due to the
increased competition in the rental market and fewer of the Company's stores
offering rental products.
Cost of Revenue
Cost of sale merchandise revenue was $333.9 million for the nine months
ended October 31, 1999, as compared with $125.0 million for the same period last
year, an increase of $208.9 million, which was due to the Acquired Stores. As a
percentage of sale merchandise revenue, cost of sale merchandise revenue was
64.5% for the nine months ended October 31, 1999 as compared with 63.2% for the
nine months ended October 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
12
<PAGE> 13
replenishment for the Acquired Stores, and other transition-related costs. These
incremental distribution costs resulted from the 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 were
discontinued. All of the Acquired Stores have been converted to the Company's
POS system and inventory for the Acquired Stores is being fulfilled through the
Company's distribution facility on the same basis that inventory is fulfilled at
the existing Wherehouse stores.
Excluding the impact of this $2.5 million non-recurring incremental cost,
cost of sale merchandise revenue, as a percentage of sale merchandise revenue,
would have been 64.1% for the nine months ended October 31, 1999 as compared
with 63.2% for the nine months ended October 31, 1998, an increase of 0.9%. 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.
Operating Expenses
SG&A expenses for the nine months ended October 31, 1999 were $180.0
million, compared to $74.5 million for the nine months ended October 31, 1998,
an increase of $105.5 million. This increase was principally related to the
operating expenses of the Acquired Stores.
SG&A expenses were 34.3% of revenue in the nine months ended October 31,
1999, compared to 35.5% of revenue in the nine months ended October 31, 1998, a
decrease of 1.2%. During the nine months ended October 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, principally
related to the name change of the Acquired Stores and the conversion of those
stores to the Company's POS system, were offset by decreases in corporate
overhead and distribution expense as a percentage of revenue.
Depreciation and amortization expense was $17.1 million in the nine months
ended October 31, 1999 compared to $5.1 million in the nine months ended October
31, 1998, an increase of $12.0 million. This increase is principally related to
depreciation expense of the Acquired Stores and amortization expense of
intangible assets related to the Acquisition.
Interest Expense
Interest expense for the nine months ended October 31, 1999 was $5.9
million, compared to $1.4 million for the nine months ended October 31, 1998, an
increase of $4.5 million. This increase was primarily attributable to interest
expense of $4.0 million incurred due to borrowings under the Congress Facility.
Such borrowings were used mainly to finance a portion of the cost of the
Acquisition and for the funding of working capital.
Interest Income
Interest income for the nine months ended October 31, 1999 was $0.3
million, as compared to $1.9 million for the nine months ended October 31, 1998.
The decrease of $1.6 million was the result of a decline in short-term
investments of excess cash. Such excess cash was used mainly to pay down the
Company's borrowings under the Congress Facility.
Income Taxes
The Company recorded a tax benefit of $4.7 million for the nine months
ended October 31, 1999 compared to a tax provision of $2.4 million for the nine
months ended October 31, 1998. The tax benefit for the nine months ended October
31, 1999 represents an effective rate of 40.0%, which the Company estimates will
be its effective rate for Fiscal 2000.
13
<PAGE> 14
EBITDA
Adjusted EBITDA for the nine months ended October 31, 1999 was $11.5
million compared to $12.1 million for the nine months ended October 31, 1998.
During the nine months ended October 31, 1999, the Company incurred certain
non-recurring incremental costs related to the Acquisition. Excluding non-
recurring incremental distribution costs of $3.9 million, non-recurring
integration costs of $5.2 million, and additional Y2K remediation costs of $0.2
million, Adjusted EBITDA would have been $20.8 million.
The method of calculating Adjusted EBITDA used by the Company 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 nine months ended October 31, 1999, the Company's net cash used
in operating activities was $23.6 million primarily due to an increase in
inventory levels and the settlement of store closing reserves partially offset
by an increase in accounts payable and accrued expenses. The increase in
inventory and accounts payable is a result of normal seasonal patterns.
Net cash used in investing activities during the nine months ended October
31, 1999 was $24.0 million primarily due to capital expenditures totaling $24.6
million for the acquisition of property, equipment and improvements to support
the POS systems conversion, distribution facility improvements, 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 used in investing activities during the
nine months ended October 31, 1998 included $117.6 million in cash paid for the
Acquisition.
Net cash provided by financing activities for the nine months ended October
31, 1999 was $38.7 million primarily due to net borrowings under the Congress
Facility. At October 31, 1998, cash provided by financing activities included
net borrowings under the Congress Facility of $97.8 million which was used
primarily to finance the acquisition of the Acquired Stores.
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.
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.
14
<PAGE> 15
(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 has been tested and installed. The Company
also plans to install a new merchandising system, which is Y2K compliant, in
early 2000. Until such installation is complete, the Company expects to be able
to utilize its existing remediated merchandising system. The existing store POS
application has been remediated, tested, and installed at all of the Company's
stores. The existing store POS hardware operating system is Y2K compliant. The
Company has replaced the systems with Y2K compliant equipment in all existing
stores. As such, all the stores' hardware and software IT Systems are Y2K
compliant.
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 has focused extensively on its second tier suppliers in
the third quarter of Fiscal 2000.
(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 of approximately $1.8
million, performed as a contingency measure, were recorded in Fiscal 1999. The
Company's internal personnel and other resources performed the store POS
software remediation. The POS operating system upgrade cost approximately $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 plans to devote the necessary resources to resolve all significant
Y2K issues in a timely manner. However, there can be no absolute assurance that
there will not be a material adverse effect on the Company if third parties do
not convert their systems in a timely manner and in a way that is compatible
with the Company's systems. The Company believes the most likely risks are
delays in receiving merchandise from vendors, shipping product to stores,
accessing various types of information or communicating effectively with
financial institutions or vendors. In the event vendors, suppliers or service
providers suffer significant disruption as a result of Y2K compliance failures,
the Company has developed a contingency plan which includes alternate vendors,
suppliers and service providers.
(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 has been 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 October 31, 1999, the Company's interest expense for
Fiscal 2000 would increase $0.4 million based on the outstanding balance of the
Congress Facility at October 31, 1999. The Company does not hold any derivative
instruments and does not engage in hedging activities.
15
<PAGE> 16
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 November 16, 1999, the Fourth Amendment to the Amended and Restated Loan
and Security Agreement ("Fourth Amendment") was entered into between the Company
and its subsidiaries and Congress Financial Corporation (Western). The Fourth
Amendment provides for, among other things, (i) an increase in the ability of
the Company to make certain investments provided that such investments do not
exceed an aggregate amount of $50.0 million, (ii) the ability to sell common
stock of Wherehouse Entertainment, Inc. provided that the consideration received
be in cash or the amount of stock issued is less than 15% of the outstanding
common stock of Wherehouse Entertainment, Inc. at the time of issuance, and
(iii) consent, subject to certain conditions, to any future merger,
consolidation or sale of assets of Wherehouse.com, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Fourth Amendment to the Amended and Restated Loan and
Security Agreement dated as of November 16, 1999 between the
Company and its subsidiaries and Congress Financial
Corporation (Western).
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None.
16
<PAGE> 17
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.
<TABLE>
<S> <C>
Date: December 15, 1999 /s/ ANTONIO C. ALVAREZ, II
--------------------------------------------------------
ANTONIO C. ALVAREZ, II
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: December 15, 1999 /s/ MARK A. VELARDE
--------------------------------------------------------
MARK A. VELARDE
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: December 15, 1999 /s/ MEHDI MAHDAVI
--------------------------------------------------------
MEHDI MAHDAVI
Vice President, Controller
(Principal Accounting Officer)
</TABLE>
17
<PAGE> 1
FOURTH AMENDMENT
TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
AND CONSENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT AND CONSENT (this "Amendment"), dated as of November 16, 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, by a Second
Amendment dated as of May 14, 1999, and as further amended by a Third Amendment
dated as of August 31, 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, if the aggregate
amount of cash consideration or real and other personal property
consideration relating to Investments made pursuant to this
Section 9.10 does not (1) exceed Twenty Million Dollars
i($20,000,000) (the "Investment Basket"), provided that Borrower
has at the time of such Investment or Distribution or entering
into a commitment therefor, after giving effect to such
Investment or Distribution, Excess Availability of at least
Twenty Million Dollars ($20,000,000) under the Tranche
<PAGE> 2
A Line, or (2) exceed Fifty Million Dollars
($50,000,000) (the "Investment Cap"), provided that, Borrower
has at the time of such Investment or Distribution or entering
into a commitment therefor, after giving effect to such
Investment or Distribution, Excess Availability of at least
Thirty Million Dollars ($30,000,000) under the Tranche A Line;
provided that in the case of each of clause (1) or (2), at the
time of such Investment or Distribution, after giving effect to
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, with respect to
an Investment hereunder, such Investment is an Investment in a
Person with a line of business similar to Borrower's business;
provided further that, the Investment Basket shall automatically
be increased by the amount of any proceeds from the sale of
equity securities of Borrower (not to exceed the Investment
Cap);"
2. Amendment to Number of Interest Periods. Subclause (iv) of
clause (b) of Section 3.1 of the Loan Agreement is amended to read in its
entirety as follows:
"(iv) no more than six (6) Interest Periods may be in effect at
any one time,"
3. Amendment Regarding Sale of Wherehouse Stock. Clause (b) of
Section 9.7 of the Loan Agreement is amended by adding the parenthetical phrase
"(other than stock of Wherehouse Entertainment, Inc., provided that the
consideration is in cash or the amount of stock issued is less than 15% of the
outstanding common stock of Wherehouse Entertainment, Inc. at the time of such
issuance)" after the word "stock" at the end of the fourth line of Section 9.7.
4. Consent and Waiver. Subject to the terms and conditions set
forth herein, and in reliance on the representations and warranties of Borrower
herein contained, Lender hereby consents to any future merger, consolidation or
sale of assets of Wherehouse.com, Inc. and waives compliance by Borrower with
the terms of Section 9.7 with regard to any such merger, consolidation or sale
of assets, provided that Lender receives a pledge agreement between Lender and
Borrower, in form reasonably satisfactory to Lender relating to any securities
received by Borrower in connection with such future merger, consolidation or
sale of assets of Wherehouse.com, Inc. (which pledge agreement may grant a right
of first refusal to the issuer of such securities), provided further that, the
net book value of the assets of Wherehouse.com, Inc. transferred in one or more
such mergers, consolidations or sales of assets is less than $1,000,000 in the
aggregate. Furthermore, upon any such merger, consolidation or sale of assets of
Wherehouse.com, Inc., Lender hereby waives compliance by Wherehouse.com, Inc. of
the terms of Section 9.1.
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;
<PAGE> 3
(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");
(e) Fee. Lender shall have received an amendment fee in the
amount of $15,500.
6. 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 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.
7. 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.
<PAGE> 4
8. 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.
9. 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.
(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: _________________________________
Name: D.B. Laughton
Title: SVP
WHEREHOUSE ENTERTAINMENT, INC.
By: _________________________________
Name: Charles Fuertsch
Title: Vice President, Treasurer
<PAGE> 5
WHEREHOUSE.COM, INC.
By: _________________________________
Name: Charles Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE SUBSIDIARY I CO., INC.
By: _________________________________
Name: Charles Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE SUBSIDIARY II CO., INC.
By: _________________________________
Name: Charles Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE SUBSIDIARY III CO., INC.
By: _________________________________
Name: Charles Fuertsch
Title: Vice President, Treasurer
<PAGE> 6
CONSENT
Dated as of November 16, 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: _________________________________
Name: Charles Fuertsch
Title: Vice President, Treasurer
WHEREHOUSE HOLDING II CO., INC.
By: _________________________________
Name: Charles Fuertsch
Title: Vice President, Treasurer
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0
0
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