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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, 2001
[ ] 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 8, 2001
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2
INDEX
WHEREHOUSE ENTERTAINMENT, INC.
PAGE
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Forward-Looking Statements............................................ 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -- April 30, 2001
(Unaudited) and January 31, 2001............................ 2
Consolidated Condensed Statements of Operations -- Three
Months Ended April 30, 2001 and 2000 (Unaudited)............ 3
Consolidated Condensed Statements of Cash Flows -- Three
Months Ended April 30, 2001 and 2000 (Unaudited)............ 4
Notes to Consolidated Condensed Financial Statements
(Unaudited)................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 10
Item 5. Other Information........................................... 10
Item 6. Exhibits and Reports on Form 8-K............................ 10
Signatures............................................................ 11
i
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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) changes in levels of
competition from current competitors and potential new competition from both
non-traditional retailers of the registrant's products 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 represents; (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 which may adversely affect the
business in which the registrant is engaged; (h) the ability to attract and
retain key personnel; (i) adverse results in significant litigation matters; and
(j) current shortages of electricity in California, where the registrant has a
large number of retail stores, its corporate office and its distribution center.
Such electricity shortages may, in the near term, subject these locations to
rolling blackouts which could interrupt the registrant's business as well as the
increased utility costs that the registrant is likely to experience in
connection with this shortage.
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,
2001 2001
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 3,148,000 $ 2,457,000
Receivables, net.......................................... 3,335,000 1,343,000
Inventories, net.......................................... 190,858,000 197,147,000
Income taxes receivable................................... 9,825,000 9,825,000
Other current assets...................................... 2,145,000 2,401,000
Deferred taxes............................................ 7,712,000 5,983,000
------------ ------------
Total current assets.............................. 217,023,000 219,156,000
Property, equipment, and improvements, net.................. 61,562,000 67,132,000
Deferred taxes.............................................. 21,750,000 19,886,000
Intangible assets, net...................................... 33,619,000 34,510,000
Other assets, net........................................... 921,000 1,007,000
------------ ------------
Total assets...................................... $334,875,000 $341,691,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft....................... $120,497,000 $129,042,000
Accrued expenses.......................................... 34,270,000 35,468,000
Store closure reserves.................................... 8,153,000 8,421,000
Reorganization liabilities................................ 1,213,000 1,242,000
Current portion of long-term debt......................... 3,829,000 3,836,000
Current portion of leases in excess of fair market
value.................................................. 3,270,000 3,270,000
Current portion of capital lease obligations.............. 6,090,000 6,090,000
------------ ------------
Total current liabilities......................... 177,322,000 187,369,000
Line of credit.............................................. 46,180,000 35,123,000
Long-term debt.............................................. 215,000 224,000
Capital lease obligations................................... 14,661,000 16,293,000
Leases in excess of fair market value....................... 17,378,000 18,195,000
Deferred rent and other long-term liabilities............... 5,154,000 5,181,000
------------ ------------
Total liabilities................................. 260,910,000 262,385,000
------------ ------------
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, 11,026,421; shares
outstanding, 11,001,421................................ 110,000 110,000
Additional paid-in-capital................................ 94,472,000 94,453,000
Retained earnings (deficit)............................... (13,353,000) (8,084,000)
Treasury stock, 25,000 shares............................. (338,000) (338,000)
Notes receivable.......................................... (6,926,000) (6,835,000)
------------ ------------
Total shareholders' equity........................ 73,965,000 79,306,000
------------ ------------
Total liabilities and shareholders' equity........ $334,875,000 $341,691,000
============ ============
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,
2001 2000
------------ ------------
Sale merchandise revenue.................................... $149,256,000 $175,237,000
Rental revenue, net......................................... 1,301,000 1,530,000
------------ ------------
Total revenues.................................... 150,557,000 176,767,000
Cost of sale merchandise revenue............................ 97,273,000 113,282,000
------------ ------------
Gross profit.............................................. 53,284,000 63,485,000
Selling, general and administrative expenses................ 52,546,000 58,117,000
Depreciation and amortization............................... 7,868,000 7,400,000
(Gain) loss on disposition of assets........................ (39,000) 474,000
------------ ------------
Loss from operations...................................... (7,091,000) (2,506,000)
Interest expense............................................ 1,785,000 2,323,000
Interest income............................................. (95,000) (121,000)
Equity in loss from unconsolidated joint venture............ 3,072,000
------------ ------------
Loss before income taxes.................................. (8,781,000) (7,780,000)
Benefit for income taxes.................................... 3,512,000 3,112,000
------------ ------------
Net loss.................................................. $ (5,269,000) $ (4,668,000)
============ ============
Net loss per common share:
Basic..................................................... $ (0.48) $ (0.43)
============ ============
Diluted................................................... $ (0.48) $ (0.43)
============ ============
Weighted average common shares outstanding -- Basic......... 11,001,421 10,950,023
============ ============
Weighted average common shares and common equivalent shares
outstanding -- Diluted.................................... 11,001,421 10,950,023
============ ============
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,
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net loss.................................................... $(5,269,000) $(4,668,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 7,868,000 7,400,000
(Gain) loss on disposition of assets...................... (39,000) 474,000
Rental amortization included in cost of rentals........... 916,000 1,137,000
Book value of rental inventory dispositions, included in
cost of rentals........................................ 126,000 151,000
Loss on investment in joint venture....................... 3,072,000
Stock option compensation................................. 19,000
Interest on notes receivable.............................. (91,000) (92,000)
Deferred taxes............................................ (3,593,000) (3,111,000)
Changes in operating assets and liabilities:
Receivables, net....................................... (1,992,000) 4,027,000
Inventories, net....................................... 6,089,000 16,355,000
Rental inventory purchases............................. (842,000) (1,167,000)
Other current assets................................... 256,000 (111,000)
Accounts payable, accrued expenses and other current
liabilities........................................... (9,743,000) (45,000,000)
Store closure and leases in excess of FMV reserves..... (1,085,000) (1,788,000)
Other long-term liabilities............................ (27,000) 26,000
----------- -----------
Net cash used in operating activities............. (7,407,000) (23,295,000)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property, equipment and improvements............ (1,421,000) (3,962,000)
Investment in joint venture................................. (12,936,000)
Decrease in other assets.................................... 139,000 95,000
----------- -----------
Net cash used in investing activities............. (1,282,000) (16,803,000)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings under line of credit......................... 11,057,000 39,969,000
Payments on capital lease obligations and long-term debt.... (1,648,000) (1,496,000)
Proceeds from sale of common stock.......................... 5,000,000
Settlement of pre-petition claims........................... (29,000) (159,000)
----------- -----------
Net cash provided by financing activities......... 9,380,000 43,314,000
----------- -----------
Net increase in cash and cash equivalents................... 691,000 3,216,000
Cash and cash equivalents at beginning of the period........ 2,457,000 4,531,000
----------- -----------
Cash and cash equivalents at end of the period.............. $ 3,148,000 $ 7,747,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 2,210,000 $ 2,277,000
Income taxes, net...................................... $ (126,000) $ 99,000
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, 2001 are not
necessarily indicative of the results that may be expected for the Company's
fiscal year ending January 31, 2002 ("Fiscal 2002"). 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, 2001 ("Fiscal 2001").
2. E-COMMERCE
In response to the growth in electronic commerce for 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. In addition,
commencing March 2000, amounts of up to $1.568 million per month were
contributed for a total investment of approximately $20.0 million. Under the
terms of the Agreement, CheckOut.com was the Company's exclusive Internet
website partner for music, movies and games. As a result, the Company merged the
operation of its own Internet website, Wherehousemusic.com, with that of
CheckOut.com. CheckOut.com was integrated into all of the Company's marketing
and advertising associated with the Company's stores nationwide. 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. In
addition, during the year ended January 31, 2000 the Company loaned CheckOut.com
$5.0 million. The loan was repaid by Checkout.com in Fiscal 2001.
For the three-month period ended April 30, 2000, the Company recognized a
loss of $3.1 million related to the joint venture. As of April 30, 2000, the
Company's investment in the joint venture amounted to $12.9 million. As a result
of significant operating losses experienced by CheckOut.com subsequent to
February 2000, CheckOut.com ceased operation of its Internet site in February
2001. For the year ended January 31, 2001, a $20.6 million loss on investment in
joint venture was recorded by the Company which included $11.1 million
representing the Company's share in the joint venture's operating losses and
$9.5 million representing a loss due to the impairment in value of the remaining
investment.
3. LITIGATION
In January 2001, the Company was sued in the Los Angeles Superior Court by
a former employee, claiming alleged failure to pay overtime wages to herself and
all salaried store employees similarly situated. The Complaint does not specify
any amount of the claims, either individually or on behalf of the class. The
Company's motion to strike the class action allegations was denied by the trial
court and a request by the Company for discretionary preliminary appellate court
review of the trial court's ruling was denied. The Company believes the
allegations are without merit and intends to vigorously defend itself in this
matter.
5
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
However, no assurance can be provided as to its outcome. Management does not
believe an adverse judgment against the Company would result in a material
impact to the consolidated financial statements.
On June 4, 2001, the Company received a copy of an Order entered by a
Pennsylvania state court with respect to Reliance Insurance Company
("Reliance"). Reliance was the Company's general and umbrella liability
insurance carrier for the one-year period ended August 1, 1998. The Order stated
that Reliance was placed in "Rehabilitation" under Pennsylvania's Insurance
Department Act, and that all actions pending against Reliance are stayed and all
actions pending against an insured of Reliance are stayed for at least 60 days.
While management has not yet had an opportunity to review and analyze the Order,
the Order and the stay may apply to a personal injury lawsuit, Peterson v.
Shappel Industries, Inc., et al., in which the Company is one of several named
defendants and which relates to an event that occurred during the period the
Company was insured by Reliance. The Company cannot estimate at this time the
impact, if any, which might result from Reliance being placed into
Rehabilitation.
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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 2001.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED APRIL 30, 2001 AND APRIL 30, 2000
Revenues
Total revenues were $150.6 million and $176.8 million for the quarters
ended April 30, 2001 (the first quarter of Fiscal 2002) and April 30, 2000 (the
first quarter of Fiscal 2001), respectively. The decrease of $26.2 million was
primarily attributable to decreases in net revenues of $6.0 million due to store
closures since April 30, 2000, same store sale decreases in net revenues of
$20.0 million and the reduction of net rental revenue of $0.2 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)
QUARTER ENDED
APRIL 30,
----------------
2001 2000
------ ------
Sale merchandise revenue:
Music..................................................... $124.2 $151.4
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................. 25.1 23.9
------ ------
Total sale merchandise revenue.................... 149.3 175.3
Rental revenue, net......................................... 1.3 1.5
------ ------
Total revenue..................................... $150.6 $176.8
====== ======
A. Sale merchandise revenue. Sales of prerecorded music, new
videocassettes, DVDs, and video game software and hardware (collectively
referred to as "sale merchandise") continue to represent the greatest portion of
the Company's revenues. Sale merchandise revenue represented 99.1% of aggregate
revenues, for both the first quarter of Fiscal 2002 and the first quarter of
Fiscal 2001. Negatively impacting revenues were the decline in same store sales,
discussed below, and the closure of 34 stores since April 30, 2000.
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 13 stores closed during the three months ended April 30, 2001, sale
merchandise revenue decreased by approximately 11% during the first quarter of
Fiscal 2002 as compared to the first quarter of Fiscal 2001 The primary reasons
for the decrease were a weak new release schedule for music products that
continued during the first quarter of Fiscal 2002, and competition from certain
"big-box" retailers selling selected new music releases at or below cost.
Partially offsetting these decreases were increased sales of DVD and used music.
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 $1.3 million in the first quarter of
Fiscal 2002 and $1.5 million in the first quarter of Fiscal 2001, representing a
decrease of $0.2 million or 13.3% 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. These factors include, but are not limited to,
consumer tastes, new releases of music, videocassette and video game titles
available for sale or rental, the increasing popularity of the Internet as an
avenue for retailing and other direct-to-consumer alternatives, 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, consumer
electronics superstores, discounters and mass merchandisers. Consolidation
continues to occur in the home entertainment industry and the Company continues
to study industry developments in developing its own strategies.
Cost of Sale Merchandise Revenue
Cost of sale merchandise revenue was $97.3 million for the first quarter of
Fiscal 2002, as compared with $113.3 million for the same period last year, a
decrease of $16.0 million. As a percentage of sale merchandise revenue, cost of
sale merchandise revenue was 65.2% for the first quarter of Fiscal 2002 as
compared with 64.7% for the first quarter of Fiscal 2001. Sales of higher margin
new music product as a percentage of total revenues continued to decrease in the
first quarter of Fiscal 2002, while sales of lower gross profit margin DVD
product continued to increase. In addition, increases in unit costs for various
music products and decreases in DVD sales prices also caused gross profit
margins to decrease.
Operating Expenses
Selling, general and administrative ("SG&A") expenses for the first quarter
of Fiscal 2002 were $52.5 million, compared to $58.1 million for the first
quarter of Fiscal 2001, a decrease of $5.6 million. The decrease includes a
reduction of $2.9 million in operating expenses at the Company's stores due to
store closures. The decrease is also due to reduction in corporate and
distribution costs. SG&A expenses were 34.9% of revenue in the first quarter of
Fiscal 2002, compared to 32.8% of revenue in the first quarter of Fiscal 2001,
an increase of 2.1%.
Depreciation and amortization expense was $7.9 million in the first quarter
of Fiscal 2002 compared to $7.4 million in the first quarter of Fiscal 2001, an
increase of $0.5 million. The increase is principally related to capital
expenditures over the last twelve months for the acquisition of property,
equipment and system improvements.
Interest Expense
Interest expense for the first quarter of Fiscal 2002 was $1.8 million,
compared to $2.3 million for the first quarter of Fiscal 2001, a decrease of
$0.5 million. This decrease was primarily attributable to lower average
borrowings under the Company's revolving line of credit with Congress Financial
Corporation (Western) (the "Congress Facility"). Also contributing to the
decline was a reduction in the average interest rates paid by the Company on its
borrowings under the Congress Facility of approximately 44 basis points in the
first quarter of Fiscal 2002 as compared to the first quarter of Fiscal 2001.
Borrowings under the Congress Facility were used mainly for the funding of
working capital and in the first quarter of Fiscal 2001, to fund the investment
in CheckOut.com.
Interest Income
Interest income for both the first quarter of Fiscal 2002 and the first
quarter of Fiscal 2001 was $0.1 million. Interest income is related to notes
receivable from shareholders.
Loss from Investment in Joint Venture
The Company had a 49% interest in the CheckOut.com joint venture and
accounted for this investment under the equity method of accounting. For the
three months ended April 30, 2000, the Company recognized
8
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a $3.1 million loss related to its share of the losses of CheckOut.com.
CheckOut.com continued to experience significant operating losses and ceased
operations of its Internet site in February 2001.
Income Taxes
The Company recorded a tax benefit of $3.5 million for the first quarter of
Fiscal 2002 compared to $3.1 million for the first quarter of Fiscal 2001. The
tax benefit is commensurate with the increase in loss before income tax.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended April 30, 2001 and the three months ended
April 30, 2000, the Company's net cash used in operating activities was $7.4
million and $23.3 million, respectively. The most significant use of cash during
the first quarter of Fiscal 2002 was related to the reduction of accounts
payable, accrued expenses and other liabilities of $9.7 million which was offset
by a reduction in inventories, net of $6.1 million. Seasonal inventory purchases
typically begin during the third quarter and continue into the fourth quarter,
while payment is typically due in the first quarter of the fiscal 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, 2001 was $1.3 million primarily due to capital expenditures totaling $1.4
million for the acquisition of property, equipment and improvements. Financing
of capital expenditures has generally been provided by cash from operations and
borrowings under the Congress Facility. During the three months ended April 30,
2000, net cash used in investing activities included $12.9 million invested in
the Company's joint venture with CheckOut.com.
Net cash provided by financing activities for the three months ended April
30, 2001 was $9.4 million due to net borrowings under the Congress Facility of
$11.1 million, offset primarily by payments of $1.6 million on capital lease
obligations and long-term debt.
As of April 30, 2001, there was an outstanding loan balance of $46.2
million and there were no outstanding letters of credit under the Congress
Facility. The Company estimates that its availability under its revolving line
of credit at April 30, 2001 was $66.1 million.
The Company believes that cash on hand, cash flow from operations,
including planned inventory reductions during Fiscal 2002, 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 2002.
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. 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.
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 2002 as
compared to the rate at April 30, 2001, the Company's interest expense for
Fiscal 2002 would increase $0.5 million based on the outstanding balance of the
Congress Facility at April 30, 2001. 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
In January 2001, the Company was sued in the Los Angeles Superior Court by
a former employee, claiming alleged failure to pay overtime wages to herself and
all salaried store employees similarly situated. The Complaint does not specify
any amount of the claims, either individually or on behalf of the class. The
Company's motion to strike the class action allegations was denied by the trial
court and a request by the Company for discretionary preliminary appellate court
review of the trial court's ruling was denied. The Company believes the
allegations are without merit and intends to vigorously defend itself in this
matter. However, no assurance can be provided as to its outcome. Management does
not believe an adverse judgment against the Company would result in a material
impact to the consolidated financial statements.
On June 4, 2001, the Company received a copy of an Order entered by a
Pennsylvania state court with respect to Reliance Insurance Company
("Reliance"). Reliance was the Company's general and umbrella liability
insurance carrier for the one-year period ended August 1, 1998. The Order stated
that Reliance was placed in "Rehabilitation" under Pennsylvania's Insurance
Department Act, and that all actions pending against Reliance are stayed and all
actions pending against an insured of Reliance are stayed for at least 60 days.
While management has not yet had an opportunity to review and analyze the Order,
the Order and the stay may apply to a personal injury lawsuit, Peterson v.
Shappel Industries, Inc., et al., in which the Company is one of several named
defendants and which relates to an event that occurred during the period the
Company was insured by Reliance. The Company cannot estimate at this time the
impact, if any, which might result from Reliance being placed into
Rehabilitation.
In addition to the Company is a party to various other 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
Nothing to report
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
None
(b) Reports on Form 8-K
None.
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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 13, 2001 /s/ ANTONIO C. ALVAREZ, II
--------------------------------------------------------
Antonio C. Alvarez, II
Chairman of the Board and
Chief Executive Officer, and Director
(Principal Executive Officer)
Date: June 13, 2001 /s/ MARK A. VELARDE
--------------------------------------------------------
Mark A. Velarde
Executive Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
Date: June 13, 2001 /s/ MEHDI MAHDAVI
--------------------------------------------------------
Mehdi Mahdavi
Vice President, Controller
(Principal Accounting Officer)
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