<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2000
[ ] 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,
11,001,421 shares outstanding as of September 6, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
INDEX
WHEREHOUSE ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
FORWARD LOOKING STATEMENTS........................................... 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -- July 31, 2000 2
(Unaudited) and January 31, 2000............................
Consolidated Condensed Statements of Operations -- Three 3
Months Ended July 31, 2000 and 1999 (Unaudited) and Six
Months Ended July 31, 2000 and 1999 (Unaudited).............
Consolidated Condensed Statements of Cash Flows -- Six 4
Months Ended July 31, 2000 and 1999 (Unaudited).............
Notes to Consolidated Condensed Financial Statements 5
(Unaudited).................................................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market 11
Risk........................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 11
Item 6. Exhibits and Reports on Form 8-K............................ 11
SIGNATURES........................................................... 12
</TABLE>
i
<PAGE> 3
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) 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; (b) loss of a
significant vendor or prolonged disruption of product supply; (c) the presence
or absence of popular new releases and products in the product categories the
registrant sells and rents; (d) changes in levels of consumer spending,
especially during seasonally significant periods; (e) changes in Federal and
state income tax rules and regulations or interpretations of existing
legislation; (f) changes in the general economic conditions in the United States
including, but not limited to, consumer sentiment about the economy in general;
(g) regulatory changes, including, without limitation, further actions by the
FTC or others relating to recently abolished minimum advertised pricing
guidelines, which may adversely affect the business in which the registrant is
engaged; (h) the ability to attract and retain key personnel; and (i) adverse
results in significant litigation matters.
The foregoing should not be construed as an exhaustive list of all factors
which could cause actual results to differ materially from those expressed in
forward-looking statements made by the registrant. You should consider the
cautionary statements contained in this section when evaluating any
forward-looking statements that 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.
1
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
2000 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,602,000 $ 4,531,000
Receivables, net.......................................... 5,376,000 10,142,000
Inventories, net.......................................... 212,036,000 247,800,000
Other current assets...................................... 1,825,000 2,306,000
Deferred taxes............................................ 21,372,000 15,932,000
------------ ------------
Total current assets.............................. 245,211,000 280,711,000
Property, equipment, and improvements, net.................. 76,422,000 82,250,000
Deferred taxes.............................................. 12,648,000 10,573,000
Intangible assets, net...................................... 36,293,000 38,075,000
Investments in unconsolidated joint ventures................ 9,603,000
Other assets, net........................................... 1,355,000 2,074,000
------------ ------------
Total assets...................................... $381,532,000 $413,683,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft....................... $134,518,000 $177,158,000
Accrued expenses.......................................... 32,395,000 34,082,000
Store closure reserves.................................... 9,821,000 11,192,000
Reorganization liabilities................................ 1,404,000 1,567,000
Current portion of leases in excess of fair market
value.................................................. 3,278,000 3,278,000
Current portion of capital lease obligations.............. 6,042,000 5,691,000
------------ ------------
Total current liabilities......................... 187,458,000 232,968,000
Line of credit.............................................. 54,405,000 31,983,000
Long-term debt.............................................. 3,794,000 3,812,000
Capital lease obligations................................... 19,546,000 22,018,000
Leases in excess of fair market value....................... 19,824,000 21,463,000
Deferred rent and other long-term liabilities............... 5,524,000 5,168,000
------------ ------------
Total liabilities................................. 290,551,000 317,412,000
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value; shares authorized:
3,000,000; shares issued: none.........................
Common stock, $.01 par value; shares authorized:
24,000,000; shares issued: July 31, 2000, 11,026,421;
January 31, 2000, 10,760,806........................... 110,000 108,000
Additional paid-in-capital................................ 94,398,000 89,400,000
Retained earnings......................................... 3,458,000 13,562,000
Treasury stock, 25,000 shares............................. (338,000) (338,000)
Notes receivable.......................................... (6,647,000) (6,461,000)
------------ ------------
Total shareholders' equity........................ 90,981,000 96,271,000
------------ ------------
Total liabilities and shareholders' equity........ $381,532,000 $413,683,000
============ ============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
2
<PAGE> 5
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 31, JULY 31, JULY 31, JULY 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sale merchandise revenue.......... $165,062,000 $181,032,000 $340,299,000 $354,074,000
Rental revenue, net............... 1,526,000 2,469,000 3,056,000 5,330,000
------------ ------------ ------------ ------------
Total revenues.......... 166,588,000 183,501,000 343,355,000 359,404,000
Cost of sale merchandise
revenue......................... 108,266,000 116,577,000 221,548,000 232,128,000
------------ ------------ ------------ ------------
Gross profit.................... 58,322,000 66,924,000 121,807,000 127,276,000
Selling, general and
administrative expenses......... 54,883,000 61,074,000 113,000,000 120,137,000
Depreciation and amortization..... 7,471,000 5,229,000 14,871,000 11,144,000
Loss on disposition of assets..... 191,000 665,000
------------ ------------ ------------ ------------
(Loss) income from operations... (4,223,000) 621,000 (6,729,000) (4,005,000)
Interest expense.................. 2,019,000 2,202,000 4,342,000 3,827,000
Interest income................... (97,000) (96,000) (218,000) (205,000)
Equity in loss from unconsolidated
joint venture................... 2,971,000 6,043,000
------------ ------------ ------------ ------------
Loss before income taxes........ (9,116,000) (1,485,000) (16,896,000) (7,627,000)
Benefit for income taxes.......... 3,680,000 594,000 6,792,000 3,051,000
------------ ------------ ------------ ------------
Net loss........................ $ (5,436,000) $ (891,000) $(10,104,000) $ (4,576,000)
============ ============ ============ ============
Net loss per common share:
Basic........................... $ (0.49) $ (0.08) $ (0.92) $ (0.43)
============ ============ ============ ============
Diluted......................... $ (0.49) $ (0.08) $ (0.92) $ (0.43)
============ ============ ============ ============
Weighted average common shares
outstanding -- Basic............ 11,001,421 10,730,640 10,976,004 10,723,139
============ ============ ============ ============
Weighted average common shares and
common equivalent shares
outstanding -- Diluted.......... 11,001,421 10,730,640 10,976,004 10,723,139
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE> 6
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JULY 31, JULY 31,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(10,104,000) $ (4,576,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 14,871,000 11,144,000
Loss on disposition of assets............................. 665,000
Rental amortization included in cost of rentals........... 1,849,000 2,909,000
Book value of rental inventory dispositions, included in
cost of rentals........................................ 368,000 645,000
Equity in loss from unconsolidated joint venture.......... 6,043,000
Changes in operating assets and liabilities:
Receivables, net....................................... 4,766,000 2,258,000
Inventories, net....................................... 35,432,000 13,462,000
Rental inventory purchases............................. (1,885,000) (3,183,000)
Other assets........................................... (7,044,000) 927,000
Accounts payable, accrued expenses and other current
liabilities.......................................... (44,490,000) (29,184,000)
Store closure reserves................................. (3,010,000) (10,431,000)
Other long-term liabilities............................ 356,000 31,000
------------ ------------
Net cash used in operating activities............. (2,183,000) (15,998,000)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property, equipment and improvements............ (7,073,000) (12,438,000)
Investments in unconsolidated joint venture................. (14,896,000)
Other....................................................... (21,000) 308,000
------------ ------------
Net cash used in investing activities............. (21,990,000) (12,130,000)
------------ ------------
FINANCING ACTIVITIES:
Net borrowings under line of credit......................... 22,422,000 25,495,000
Payments on capital lease obligations and long-term debt.... (2,992,000) (2,104,000)
Purchase of common stock.................................... (338,000)
Proceeds from sale of common stock.......................... 5,000,000
Interest on notes receivable................................ (186,000) (185,000)
------------ ------------
Net cash provided by financing activities......... 24,244,000 22,868,000
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 71,000 (5,260,000)
Cash and cash equivalents at beginning of the period........ 4,531,000 15,009,000
------------ ------------
Cash and cash equivalents at end of the period.............. $ 4,602,000 $ 9,749,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 4,249,000 $ 3,453,000
Income taxes........................................... $ 138,000 $ 7,307,000
Non-cash investing and financing activities:
The Company incurred capital lease obligations of
$853,000 and $1,898,000 for the purchase of certain
equipment during the six months ended July 31, 2000 and
July 31, 1999, respectively.
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
4
<PAGE> 7
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
include the accounts of Wherehouse Entertainment, Inc. and its wholly owned
subsidiaries (collectively referred to as the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
The interim unaudited consolidated condensed financial statements of the
Company have been prepared in accordance with the instructions to Form 10-Q of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by Generally Accepted Accounting
Principles ("GAAP") for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The Company's business is
seasonal, so operating results for the six months ended July 31, 2000 are not
necessarily indicative of the results that may be expected for the Company's
fiscal year ending January 31, 2001 ("Fiscal 2001"). 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, 2000 ("Fiscal 2000").
2. ACQUISITION
On October 26, 1998, the Company acquired (the "Acquisition") all of the
capital stock of certain retail music subsidiaries of Viacom International Inc.
(the "Seller"). The acquired business consisted of 378 stores (the "Acquired
Stores") in 33 states. In June 1999, the Company completed the systems
integration of the Acquired Stores, which are currently operating under the
"Wherehouse Music" name.
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 its other stores (the "Store
Closure Plan"). The Store Closure Plan, which was finalized in January, 1999,
anticipated the closing of 70 stores (51 Acquired Stores and 19 existing
Wherehouse stores) located in 17 states. The Company has closed 60 of these
stores (45 Acquired Stores and 15 existing Wherehouse stores) as of July 31,
2000. The Company is negotiating with landlords to terminate the leases on the
remaining 10 stores.
5
<PAGE> 8
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the fiscal year ended January 31, 1999 ("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>
BALANCE AS OF CHARGES BALANCE AS OF
JANUARY 31, AGAINST JULY 31,
2000 RESERVE 2000
------------- ---------- -------------
<S> <C> <C> <C>
Store closure reserve -- Acquired
Stores(1).......................... $ 9,746,000 $1,371,000 $ 8,375,000
Leases in excess of fair market
value.............................. 24,741,000 1,639,000 23,102,000
----------- ---------- -----------
Total...................... $34,487,000 $3,010,000 $31,477,000
=========== ========== ===========
</TABLE>
---------------
(1) Consists substantially of lease termination costs.
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>
BALANCE AS OF CHARGES BALANCE AS OF
JANUARY 31, AGAINST JULY 31,
2000 RESERVE 2000
------------- ---------- -------------
<S> <C> <C> <C>
Store closure reserve -- Existing
Stores(1)........................... $1,446,000 $ -- $1,446,000
========== ========== ==========
</TABLE>
---------------
(1) Consists substantially of lease termination costs.
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
In response to the growth in electronic commerce and the future potential
for on-line sales of prerecorded music and video product, the Company launched
its own Internet commerce site, "Wherehousemusic.com," on May 10, 1999. In
November of 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. This Agreement was finalized on February 16, 2000. In exchange
for a 49% interest in CheckOut.com, the Company contributed $9.8 million in
February of 2000, and agreed to contribute up to an additional $1.568 million
per month up to an aggregate amount not to exceed an additional $9.8 million.
Under the terms of the Agreement, CheckOut.com is the exclusive Internet website
partner for music, movies and games for Wherehouse Music. As a result, the
Company merged the operation of its own Internet website, Wherehousemusic.com,
with that of CheckOut.com. As a part of the CheckOut.com transaction, the
Company sold 250,000 shares of its common stock to affiliates of its partner in
CheckOut.com for $5.0 million in cash.
The Company accounts for its investment in CheckOut.com under the equity
method of accounting and reports this investment under the caption "Investment
in unconsolidated joint venture". Under the equity method, the investment is
carried at cost of the acquisition plus the Company's equity in undistributed
earnings or losses since the acquisition. Equity in losses of the unconsolidated
joint venture is recognized according to the Company's 49% ownership. For the
six month period ended July 31, 2000, the Company recognized a loss of $6.0
million related to the joint venture. As of July 31, 2000, the Company's total
cash investment in the joint venture amounted to $14.9 million.
6
<PAGE> 9
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 2000.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED JULY 31, 2000 AND JULY 31, 1999
Revenues
Total revenues were $166.6 million and $183.5 million for the quarters
ended July 31, 2000 (the second quarter of Fiscal 2001) and July 31, 1999 (the
second quarter of Fiscal 2000), respectively. The decrease of $16.9 million was
attributable to decreases in net revenues of $8.6 million due to store closures
since July 31, 1999, same-store sale decreases of $7.3 million and the reduction
of net rental revenue of $1.0 million.
A summary of total sale merchandise and rental revenue by category is
provided below:
SALE MERCHANDISE AND RENTAL REVENUES
BY CATEGORY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER ENDED
JULY 31,
----------------
2000 1999
------ ------
<S> <C> <C>
Sale merchandise revenue:
Music.................................................... $143.6 $161.6
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................ 21.5 19.4
------ ------
Total sale merchandise revenue................... 165.1 181.0
Rental revenue, net........................................ 1.5 2.5
------ ------
Total revenue.................................... $166.6 $183.5
====== ======
</TABLE>
A. Sale merchandise revenue. Sales of prerecorded music, new
videocassettes, DVDs, video game software and hardware and general merchandise
(collectively referred to as "sale merchandise") continue to represent the
greatest portion of the Company's revenues. For the second quarter of Fiscal
2001, sale merchandise revenue represented 99.1% of aggregate revenues, compared
to 98.7% during the second quarter of Fiscal 2000, an increase of 0.5%. This
increase results from the continuing decline in rental revenue, net discussed
below. Negatively impacting revenues was the closure of 40 stores since July 31,
1999.
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 six stores closed during the three months ended July 31, 2000, sale
merchandise revenue decreased by approximately 4.2% during the second quarter of
Fiscal 2001 as compared to the second quarter of Fiscal 2000. Management
believes this decline is primarily attributable to the combination of: the
favorable sales impact of grand opening promotions which took place at all of
the Acquired Stores during the second quarter of Fiscal 2000; and, a weak summer
release schedule in Fiscal 2001.
B. Rental revenue, net. Rental revenue, net includes the proceeds from the
rental of videocassettes, DVDs, video games and game players, and from the sale
of previously viewed videocassettes and previously played video games, net of
cost of rentals. Rental revenue, net was $1.5 million in the second quarter of
Fiscal 2001 and $2.5 million in the second quarter of Fiscal 2000, representing
a decrease of $1.0 million or 38.2% due to increased competition in the rental
market and fewer of the Company's stores offering rental products.
7
<PAGE> 10
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 Sale Merchandise Revenue
Cost of sale merchandise revenue was $108.3 million for the second quarter
of Fiscal 2001, as compared with $116.6 million for the same period last year, a
decrease of $8.3 million. As a percentage of sale merchandise revenue, cost of
sale merchandise revenue was 65.6% for the second quarter of Fiscal 2001 as
compared with 64.4% for the second quarter of Fiscal 2000. The increase was
caused principally by a change in product mix as certain products which have
higher unit costs increased as a percentage of total sales. In addition, there
have been vendor price increases on CDs.
Operating Expenses
Selling, general and administrative ("SG&A") expenses for the second
quarter of Fiscal 2001 were $54.9 million, compared to $61.1 million for the
second quarter of Fiscal 2000, a decrease of $6.2 million. The decrease was
principally attributable to store closures since July 31, 1999 and $2.4 million
of Acquisition related integration costs in the prior year, partially offset by
increases in freight and other distribution costs in Fiscal 2001. SG&A expenses
were 32.9% of revenue in the second quarter of Fiscal 2001, compared to 33.3% of
revenue in the second quarter of Fiscal 2000, a decrease of 0.4%.
Depreciation and amortization expense was $7.5 million in the second
quarter of Fiscal 2001 compared to $5.2 million in the second quarter of Fiscal
2000, an increase of $2.3 million. The increase is principally related to
capital expenditures over the last twelve months for the acquisition of
property, equipment and improvements to support remerchandising activities,
facilities improvements, and systems improvements including new POS systems for
the Acquired Stores.
Interest Expense
Interest expense for the second quarter of Fiscal 2001 was $2.0 million,
compared to $2.2 million for the second quarter of Fiscal 2000, a decrease of
$0.2 million. This decrease was 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") versus $1.6
million during the same period last year. Such borrowings were used for the
funding of working capital and, in Fiscal 2001, to fund the investment in
CheckOut.com.
Interest Income
Interest income for both the second quarter of Fiscal 2001 and the first
quarter of Fiscal 2000 was $0.1 million. Interest income is related to
short-term investments of excess cash.
Equity in Loss from Unconsolidated Joint Venture
The Company has a 49% interest in the CheckOut.com joint venture and
accounts for this investment under the equity method of accounting. For the
three months ended July 31, 2000, the Company recognized a $3.0 million loss
related to its share of the losses of CheckOut.com.
8
<PAGE> 11
Income Taxes
The Company recorded a tax benefit of $3.7 million for the second quarter
of Fiscal 2001 compared to $0.6 million for the second quarter of Fiscal 2000.
The tax benefit for both the second quarter of Fiscal 2001 and the first quarter
of Fiscal 2000 represents an effective rate of 40.0%.
FOR THE SIX MONTHS ENDED JULY 31, 2000 AND JULY 31, 1999
Revenues
Total revenues were $343.4 million and $359.4 million for the six months
ended July 31, 2000 and July 31, 1999, respectively. The decrease of $16.0
million was primarily attributable to decreases in net revenues of $18.5 million
due to store closures since July 31, 1999 and the reduction of net rental
revenue of $2.2 million, offset by same-store sale increases of $4.7 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>
SIX MONTHS ENDED
JULY 31,
----------------
2000 1999
------ ------
<S> <C> <C>
Sale merchandise revenue:
Music.................................................... $295.0 $315.1
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................ 45.3 39.0
------ ------
Total sale merchandise revenue................... 340.3 354.1
Rental revenue, net........................................ 3.1 5.3
------ ------
Total revenue.................................... $343.4 $359.4
====== ======
</TABLE>
B. Sale merchandise revenue. For the six months ended July 31, 2000, sale
merchandise revenue represented 99.1% of aggregate revenues, compared to 98.5%
during the six months ended July 31, 1999, an increase of 0.6%. This increase
results from the continuing decline in rental revenue, net discussed below.
Negatively impacting revenues was the closure of 40 stores since July 31, 1999.
On a same-store basis, excluding the 20 stores closed during the six months
ended July 31, 2000, sale merchandise revenue increased by approximately 1.4%
during the six months ended July 31, 2000 as compared to the same period last
year. The primary reasons for this increase are continuing improvements in music
category inventory management, re-merchandising activities which occurred in
certain stores, and strong performance in the sales of DVD, special products,
and trend merchandise offset by declines primarily attributable to the
combination of: the favorable sales impact of grand opening promotions which
took place at all the Acquired Stores during the second quarter of Fiscal 2000;
and, weak summer release schedule in Fiscal 2001.
C. Rental revenue, net. Rental revenue, net was $3.1 million in the six
months ended July 31, 2000 and $5.3 million in the six months ended July 31,
1999, representing a decrease of $2.2 million or 42.7% due to increased
competition in the rental market and fewer of the Company's stores offering
rental products.
Cost of Sale Merchandise Revenue
Cost of sale merchandise revenue was $221.5 million for the six months
ended July 31, 2000 as compared with $232.1 million for the same period last
year, a decrease of $10.6 million. As a percentage of sale merchandise revenue,
cost of sale merchandise revenue was 65.1% for the six months ended July 31,
2000 as compared with 65.6% for the six months ended July 31, 1999. The
improvement was caused principally by a
9
<PAGE> 12
change in product mix as used music merchandise, which is sold at a higher gross
profit margin, was added to the Acquired Stores, partially offset by vendor
price increases on new CDs. Costs were negatively impacted by approximately $2.5
million of incremental costs in the six months ended July 31, 1999 associated
with the use of a third-party distributor to handle music and sales video
replenishment and other costs related to the transition of the Acquired Stores
to Wherehouse Music stores. These incremental distribution costs resulted from
the Seller's inability to support the fulfillment of the Acquired Stores sale
merchandise product from its distribution facility. These incremental costs were
discontinued by July of 1999, when all the Acquired Stores were converted to the
Company's POS system and expansion of the Company's distribution facility was
completed.
Operating Expenses
SG&A expenses for the six months ended July 31, 2000 were $113.0 million,
compared to $120.1 million for the six months ended July 31, 1999, a decrease of
$7.1 million. The decrease was principally attributable to store closures since
July 31, 1999 and $5.2 million of Acquisition related integration costs in the
prior year, partially offset by increases in freight and other distribution
costs in Fiscal 2001. SG&A expenses were 32.9% of revenue in the six months
ended July 31, 2000, compared to 33.4% of revenue for the same period last year,
a decrease of 0.5%.
Depreciation and amortization expense was $14.9 million in the six months
ended July 31, 2000 compared to $11.1 million in the six months ended July 31,
1999, an increase of $3.8 million. The increase is principally related to
capital expenditures over the last twelve months for the acquisition of
property, equipment and improvements to support name changes and remerchandising
activities related to the Acquired Stores and systems improvements including
improvements to support POS system conversions.
Interest Expense
Interest expense for the six months ended July 31, 2000 was $4.3 million,
compared to $3.8 million for the six months ended July 31, 1999, an increase of
$0.5 million. This increase was attributable to interest expense of $3.1 million
incurred due to borrowings under the Congress Facility versus $2.6 million
during the same period last year. Such borrowings were used for the funding of
working capital and, in Fiscal 2001, to fund the investment in CheckOut.com.
Interest Income
Interest income for both the six months ended July 31, 2000 and July 31,
1999 was $0.2 million. Interest income is related to short-term investments of
excess cash.
Equity in Loss from Unconsolidated Joint Venture
For the six months ended July 31, 2000, the Company recognized a $6.0
million loss related to its share of the losses of CheckOut.com.
Income Taxes
The Company recorded a tax benefit of $6.8 million for the six months ended
July 31, 2000 compared to $3.1 million for the six months ended July 31, 1999.
The tax benefit for both the six months ended July 31, 2000 and July 31, 1999
represents an effective rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 2000, the Company's net cash used in
operating activities was $2.2 million. Payments for both seasonal and
non-seasonal inventory purchases resulting in a decrease in accounts payable
were substantially offset by decreases in inventory and accounts receivable.
Seasonal inventory purchases typically begin during the third quarter and
continue into the fourth quarter, while
10
<PAGE> 13
payment is typically due near the beginning of the following year. Non-seasonal
inventory purchases are made throughout the year and fluctuate with the timing
and strength of new releases.
Net cash used in investing activities during the six months ended July 31,
2000 was $22.0 million primarily due to capital expenditures totaling $7.1
million for the acquisition of property, equipment and improvements and the
$14.9 million invested in CheckOut.com. Financing of capital expenditures has
generally been provided by cash from operations and borrowings under the
Congress Facility.
Net cash provided by financing activities for the six months ended July 31,
2000 was $24.2 million primarily due to net borrowings under the Congress
Facility of $22.4 million and $5.0 million received from the proceeds of sale of
common stock to affiliates of its partner in CheckOut.com, offset by payments of
$3.0 million on capital lease obligations and long-term debt.
The Company believes that cash on hand, cash flow from operations and the
availability of lease financing, together with borrowings available under the
Congress Facility, will be adequate to support existing operations and the
planned capital expenditures of the Company for Fiscal 2001.
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 capital expenditures and the building of inventory for the
holiday season. Management believes that inflation has not had a material effect
on its operations and its internal and external sources of liquidity and working
capital.
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 2001 as
compared to the rate at July 31, 2000, the Company's interest expense for Fiscal
2001 would increase $0.5 million based on the outstanding balance of the
Congress Facility at July 31, 2000. The Company does not hold any derivative
instruments and does not engage in hedging activities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of its business. In the opinion of management,
all such matters are without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial position and
results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None.
11
<PAGE> 14
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: September 13, 2000 /s/ ANTONIO C. ALVAREZ, II
--------------------------------------------------------
ANTONIO C. ALVAREZ, II
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: September 13, 2000 /s/ MARK A. VELARDE
--------------------------------------------------------
MARK A. VELARDE
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: September 13, 2000 /s/ MEHDI MAHDAVI
--------------------------------------------------------
MEHDI MAHDAVI
Vice President, Controller
(Principal Accounting Officer)
</TABLE>
12
