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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 APRIL 30, 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 JUNE 9, 2000
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2
INDEX
WHEREHOUSE ENTERTAINMENT, INC.
PAGE
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FORWARD-LOOKING STATEMENTS............................................. 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -- April 30, 2000
(Unaudited) and January 31, 2000............................ 4
Consolidated Condensed Statements of Operations -- Three
Months Ended April 30, 2000 and 1999 (Unaudited)............ 5
Consolidated Condensed Statements of Cash Flows -- Three
Months Ended April 30, 2000 and 1999 (Unaudited)............ 6
Notes to Consolidated Condensed Financial Statements
(Unaudited)................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
SIGNATURES............................................................. 13
2
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 that
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 actions by the FTC concerning minimum
advertised pricing guidelines, which may adversely affect the business in which
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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
APRIL 30, JANUARY 31,
2000 2000
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 7,747,000 $ 4,531,000
Receivables, net.......................................... 6,115,000 10,142,000
Inventories, net.......................................... 231,324,000 247,800,000
Other current assets...................................... 2,417,000 2,306,000
Deferred taxes............................................ 18,433,000 15,932,000
------------ ------------
Total current assets.............................. 266,036,000 280,711,000
Property, equipment, and improvements, net.................. 79,229,000 82,250,000
Deferred taxes.............................................. 11,183,000 10,573,000
Intangible assets, net...................................... 37,184,000 38,075,000
Investment in unconsolidated joint venture.................. 10,613,000
Other assets, net........................................... 1,230,000 2,074,000
------------ ------------
Total assets...................................... $405,475,000 $413,683,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft....................... $132,363,000 $177,158,000
Accrued expenses.......................................... 33,877,000 34,082,000
Store closure reserves.................................... 10,223,000 11,192,000
Reorganization liabilities................................ 1,408,000 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.............. 5,693,000 5,691,000
------------ ------------
Total current liabilities......................... 186,842,000 232,968,000
Line of credit.............................................. 71,952,000 31,983,000
Long-term debt.............................................. 3,803,000 3,812,000
Capital lease obligations................................... 20,529,000 22,018,000
Leases in excess of fair market value....................... 20,644,000 21,463,000
Deferred rent and other long-term liabilities............... 5,194,000 5,168,000
------------ ------------
Total liabilities................................. 308,964,000 317,412,000
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value; shares authorized:
3,000,000; none issued.................................
Common stock, $.01 par value; shares authorized:
24,000,000; shares issued: April 30, 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......................................... 8,894,000 13,562,000
Treasury stock, 25,000 shares............................. (338,000) (338,000)
Notes receivable.......................................... (6,553,000) (6,461,000)
------------ ------------
Total shareholders' equity........................ 96,511,000 96,271,000
------------ ------------
Total liabilities and shareholders' equity........ $405,475,000 $413,683,000
============ ============
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
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WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
APRIL 30, APRIL 30,
2000 1999
------------ ------------
Sale merchandise revenue.................................... $175,237,000 $173,042,000
Rental revenue, net......................................... 1,530,000 2,861,000
------------ ------------
Total revenues.................................... 176,767,000 175,903,000
Cost of sale merchandise revenue............................ 113,282,000 115,551,000
------------ ------------
Gross profit.............................................. 63,485,000 60,352,000
Selling, general and administrative expenses................ 58,117,000 59,063,000
Depreciation and amortization............................... 7,400,000 5,915,000
Loss on disposition of assets............................... 474,000
------------ ------------
Loss from operations...................................... (2,506,000) (4,626,000)
Interest expense............................................ 2,323,000 1,625,000
Interest income............................................. (121,000) (109,000)
Equity in loss from unconsolidated joint venture............ 3,072,000
------------ ------------
Loss before income taxes.................................. (7,780,000) (6,142,000)
Benefit for income taxes.................................... 3,112,000 2,457,000
------------ ------------
Net loss.................................................. $ (4,668,000) $ (3,685,000)
============ ============
Net loss per common share:
Basic..................................................... $ (0.43) $ (0.34)
============ ============
Diluted................................................... $ (0.43) $ (0.34)
============ ============
Weighted average common shares outstanding -- Basic......... 10,950,023 10,715,384
============ ============
Weighted average common shares and common equivalent shares
outstanding -- Diluted.................................... 10,950,023 10,715,384
============ ============
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
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WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
APRIL 30, APRIL 30,
2000 1999
------------ ------------
OPERATING ACTIVITIES:
Net loss.................................................... $ (4,668,000) $ (3,685,000)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation and amortization............................. 7,400,000 5,915,000
Loss on disposition of assets............................. 474,000
Rental amortization included in cost of rentals........... 1,137,000 1,427,000
Book value of rental inventory dispositions, included in
cost of rentals........................................ 151,000 372,000
Equity in loss from unconsolidated joint venture.......... 3,072,000
Changes in operating assets and liabilities:
Receivables, net....................................... 4,027,000 767,000
Inventories, net....................................... 16,355,000 3,547,000
Rental inventory purchases............................. (1,167,000) (1,885,000)
Other current assets................................... (2,612,000) (47,000)
Accounts payable, accrued expenses and other current
liabilities.......................................... (45,159,000) (26,246,000)
Store closure reserves................................. (1,788,000) (6,212,000)
Other long-term liabilities............................ 26,000 14,000
------------ ------------
Net cash used in operating activities............. (22,752,000) (26,033,000)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property, equipment and improvements............ (3,962,000) (5,004,000)
Investment in unconsolidated joint venture.................. (12,936,000)
Decrease (increase) in other assets......................... (515,000) 12,000
------------ ------------
Net cash used in investing activities............. (17,413,000) (4,992,000)
------------ ------------
FINANCING ACTIVITIES:
Net borrowings under line of credit......................... 39,969,000 27,134,000
Payments on capital lease obligations and long-term debt.... (1,496,000) (1,200,000)
Purchase of common stock.................................... (338,000)
Proceeds from sale of common stock.......................... 5,000,000
Interest on notes receivable................................ (92,000) (91,000)
------------ ------------
Net cash provided by financing activities......... 43,381,000 25,505,000
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 3,216,000 (5,520,000)
Cash and cash equivalents at beginning of the period........ 4,531,000 15,009,000
------------ ------------
Cash and cash equivalents at end of the period.............. $ 7,747,000 $ 9,489,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 2,277,000 $ 1,458,000
Income taxes........................................... $ 99,000 $ 4,908,000
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
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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 three months ended April 30, 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 as 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 59 of these
stores (44 Acquired Stores and 15 existing Wherehouse stores) as of April 30,
2000. The Company is negotiating with landlords to terminate the leases on the
remaining 11 stores.
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:
BALANCE AS OF CHARGES BALANCE AS OF
JANUARY 31, AGAINST APRIL 30,
2000 RESERVE 2000
------------- ---------- -------------
Store closure reserve -- Acquired
Stores(1).................................. $ 9,746,000 $ 969,000 $ 8,777,000
Leases in excess of fair market value........ 24,741,000 819,000 23,922,000
----------- ---------- -----------
Total.............................. $34,487,000 $1,788,000 $32,699,000
=========== ========== ===========
- ------------
(1) Consists substantially of lease termination costs.
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 for the Store closure reserve -- Existing Stores:
BALANCE AS OF CHARGES BALANCE AS OF
JANUARY 31, AGAINST APRIL 30,
2000 RESERVE 2000
------------- ------- -------------
Store closure reserve -- Existing Stores(1)....... $1,446,000 $ -- $1,446,000
========== ==== ==========
- ------------
(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 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 to
CheckOut.com in February 2000. In addition, the Company agreed to contribute an
additional $1.568 million per month to CheckOut.com up to an amount not to
exceed $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 adjusted for 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 three-month period ended April 30, 2000, the Company
recognized a loss of $3.1 million, or ($0.17) per share after taxes, related to
CheckOut.com.
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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 2000.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED APRIL 30, 2000 AND APRIL 30, 1999
Revenues
Net revenues were $176.8 million and $175.9 million for the quarters ended
April 30, 2000 (the first quarter of Fiscal 2001) and April 30, 1999 (the first
quarter of Fiscal 2000), respectively. The increase of $0.9 million in net
revenues was attributable to a same-store sales increase of $12.2 million,
offset by decreases in net revenues of $9.9 million due to store closures since
April 30, 1999 and the reduction of net rental revenue of $1.4 million.
A summary of total sale merchandise and rental revenue by category is
provided below:
TOTAL SALE MERCHANDISE AND RENTAL REVENUES
BY CATEGORY
(DOLLARS IN MILLIONS)
QUARTER ENDED
APRIL 30,
----------------
2000 1999
------ ------
Sale merchandise revenue:
Music.................................................... $151.4 $153.4
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................ 23.9 19.6
------ ------
Total sale merchandise revenue................... 175.3 173.0
Rental revenue, net........................................ 1.5 2.9
------ ------
Total revenue.................................... $176.8 $175.9
====== ======
A. Sale merchandise revenue. Sales of prerecorded music, new videocasettes,
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 first quarter of Fiscal 2001, sale merchandise
revenue represented 99.1% of aggregate revenues, compared to 98.4% during the
first quarter of Fiscal 2000, an increase of 0.7%. This increase results from
continuing improvements in music category inventory management, re-merchandising
activities which occurred in certain stores, expanded DVD selection and strong
performance in the sales of DVD, special products, and trend merchandise.
Negatively impacting revenues was the closure of 45 stores since April 30, 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 14 stores closed during the three months ended April 30, 2000, sale
merchandise revenue increased by 7.6% during the first quarter of Fiscal 2001 as
compared to the first quarter of Fiscal 2000. The primary reasons for this
increase are described above.
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 first quarter of
Fiscal 2001 and $2.9 million in the first quarter of Fiscal 2000, representing a
decrease of $1.4 million or 48.3% due to increased competition in the rental
market and fewer of the Company's stores offering rental products.
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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 $113.3 million for the first quarter
of Fiscal 2001, as compared with $115.6 million for the same period last year, a
decrease of $2.3 million. As a percentage of sale merchandise revenue, cost of
sale merchandise revenue was 64.6% for the first quarter of Fiscal 2001 as
compared with 66.8% for the first quarter of Fiscal 2000. This improvement was
caused principally by a 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 $2.2 million of incremental costs in the first quarter
of Fiscal 2000 associated with the use of a third-party distributor to handle
music and sales video replenishments 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 the expansion of the Company's distribution facility was completed.
Operating Expenses
Selling, general and administrative ("SG&A") expenses for the first quarter
of Fiscal 2001 were $58.1 million, compared to $59.1 million for the first
quarter of Fiscal 2000, a decrease of $1.0 million. The decrease was principally
attributable to $2.9 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 32.8% of revenue in the first quarter
of Fiscal 2001, compared to 33.6% of revenue in the first quarter of Fiscal
2000, a decrease of 0.8%.
Depreciation and amortization expense was $7.4 million in the first quarter
of Fiscal 2001 compared to $5.9 million in the first quarter of Fiscal 2000, an
increase of $1.5 million. The increase was principally related to capital
expenditures over the last fifteen 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
POS system conversions.
Interest Expense
Interest expense for the first quarter of Fiscal 2001 was $2.3 million,
compared to $1.6 million for the first quarter of Fiscal 2000, an increase of
$0.7 million. This increase was primarily attributable to interest expense of
$1.7 million incurred due to borrowings under the Company's revolving line of
credit with Congress Financial Corporation (Western) (the "Congress Facility")
versus $1.0 million during the same period last year. Such borrowings were used
mainly for the funding of working capital.
Interest Income
Interest income for both the first 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 April 30, 2000, the Company recorded a $3.1 million charge
related to its share of the losses of CheckOut.com.
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Income Taxes
The Company recorded a tax benefit of $3.1 million for the first quarter of
Fiscal 2001 compared to $2.5 million for the first quarter of Fiscal 2000. The
tax benefit for both the first quarter of Fiscal 2001 and the first quarter of
Fiscal 2000 reflects an effective rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended April 30, 2000, the Company's net cash used
in operating activities was $22.8 million primarily due to payments for both
seasonal and non-seasonal inventory purchases resulting in a decrease in
accounts payables partially offset by decreases in inventory and accounts
receivable. Seasonal inventory purchases typically begin during the third
quarter and continue into the fourth quarter, while 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 three months ended April
30, 2000 was $17.4 million primarily due to capital expenditures totaling $4.0
million for the acquisition of property, equipment and improvements and the
$12.9 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 three months ended April
30, 2000 was $43.4 million primarily due to net borrowings under the Congress
Facility of $40.0 million and $5.0 million received from the proceeds of the
Company's sale of its common stock to affiliates of its partner in CheckOut.com,
offset by payments of $1.5 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 cumulative capital expenditures 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
To date, the Company has not experienced any significant business
disruptions and has had no delays in receiving product from its suppliers as a
result of the Y2K. While the risks associated with Y2K readiness peaked with the
change of the date from December 31, 1999 to January 1, 2000, there is a risk
that Y2K related issues could surface during the year. The Company plans to
continue to devote the necessary resources to resolve all significant Y2K issues
in a timely manner.
ITEM 3. 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 April 30, 2000, the Company's interest expense for
Fiscal 2001 would increase $0.7 million, based on the outstanding balance of the
Congress Facility at April 30, 2000. The Company does not hold any derivative
instruments and does not engage in hedging activities.
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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
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
None.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: June 14, 2000 /s/ ANTONIO C. ALVAREZ, II
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Antonio C. Alvarez, II
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: June 14, 2000 /s/ MARK A. VELARDE
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Mark A. Velarde
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: June 14, 2000 /s/ MEHDI MAHDAVI
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Mehdi Mahdavi
Vice President, Controller
(Principal Accounting Officer)
13