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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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|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended April 30,
    2002                                               
| 
|o |  | 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                                                           |  | 95-4608339                              
|(State or other jurisdiction of
    incorporation or organization) |  | (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     þ          No     o

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     þ          No     o

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,

11,388,324 shares outstanding as of
June 7, 2002




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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|FORWARD-LOOKING STATEMENTS   
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONSOLIDATED CONDENSED BALANCE SHEETS               
|                              |                                                                                               | CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   



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##### Table of Contents



INDEX

WHEREHOUSE ENTERTAINMENT, INC.

|                                   |  |                                                                                                                  |  |      |  | 
|---------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ---- |  | 
|                                   |  |                                                                                                                  |  | Page
|                                   |  |                                                                                                                  |  |     
|FORWARD-LOOKING STATEMENTS         |  |                                                                                                                  |  |     
|PART I.  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements:                                                                                            |  |      |  | 
|                                   |  | Consolidated Condensed Balance Sheets 
    April 30, 2002 (Unaudited) and January 31, 2002                      |  |      |  | 
|                                   |  | Consolidated Condensed Statements of
    Operations  Three Months Ended April 30, 2002
    and 2001 (Unaudited) |  |      |  | 
|                                   |  | Consolidated Condensed Statements of Cash
    Flows  Three Months Ended April 30, 2002 and
    2001 (Unaudited) |  |      |  | 
|                                   |  | Notes to Consolidated Condensed Financial
    Statements (Unaudited)                                             |  |      |  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                        |  |      |  | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                   |  |      |  | 
|PART II.  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                |  |      |  | 
|Item 5.                            |  | Other Information                                                                                                |  |      |  | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                 |  |      |  | 
|SIGNATURES                         |  |                                                                                                                  |  |     

1



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##### Table of Contents






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 issuance 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 Company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 we are 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 or to reflect the
occurrence of unanticipated events.

2



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item
1.     Financial
Statements

WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED CONDENSED BALANCE
SHEETS


|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |             |             | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ----------- | ----------- |  | ---------- | ----------- | ----------- | 
|                                              |                                                                                                                                                                                                                    | April 30,                                  |            | January 31,
|                                              |                                                                                                                                                                                                                    | 2002                                       |            | 2002       
|                                              |                                                                                                                                                                                                                    |                                            |            |            
|                                              |                                                                                                                                                                                                                    | (Unaudited)                                |            |            
|ASSETS                                       
|Current assets:                               |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              | Cash and cash equivalents                                                                                                                                                                                          |                                            | $          | 5,104,000   |             |  | $          | 1,591,000   |            
|                                              | Notes and other receivables, net                                                                                                                                                                                   |                                            |            | 1,868,000   |             |  |            | 3,066,000   |            
|                                              | Inventories, net                                                                                                                                                                                                   |                                            |            | 144,283,000 |             |  |            | 148,954,000 |            
|                                              | Income taxes receivable                                                                                                                                                                                            |                                            |            | 1,777,000   |             |  |            | 306,000     |            
|                                              | Other current assets                                                                                                                                                                                               |                                            |            | 2,562,000   |             |  |            | 1,996,000   |            
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                    | Total current assets                       |            |             | 155,594,000 |  |            |             | 155,913,000 | 
|Property, equipment, and improvements, net    |                                                                                                                                                                                                                    |                                            | 39,522,000 |             |             |  | 44,539,000 |            
|Goodwill, net                                 |                                                                                                                                                                                                                    |                                            | 24,604,000 |             |             |  | 24,604,000 |            
|Notes receivable and other assets, net        |                                                                                                                                                                                                                    |                                            | 3,865,000  |             |             |  | 4,019,000  |            
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                    | Total assets                               |            | $           | 223,585,000 |  |            | $           | 229,075,000 | 
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|LIABILITIES AND SHAREHOLDERS
    EQUITY     
|Current liabilities:                          |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              | Accounts payable and bank overdraft                                                                                                                                                                                |                                            | $          | 98,973,000  |             |  | $          | 109,610,000 |            
|                                              | Accrued expenses                                                                                                                                                                                                   |                                            |            | 35,826,000  |             |  |            | 36,475,000  |            
|                                              | Store closure reserves                                                                                                                                                                                             |                                            |            | 5,989,000   |             |  |            | 6,287,000   |            
|                                              | Reorganization liabilities                                                                                                                                                                                         |                                            |            | 150,000     |             |  |            | 150,000     |            
|                                              | Current portion of long-term debt                                                                                                                                                                                  |                                            |            | 137,000     |             |  |            | 2,572,000   |            
|                                              | Current portion of leases in excess of fair
    market value                                                                                                                                                       |                                            |            | 3,071,000   |             |  |            | 3,071,000   |            
|                                              | Current portion of capital lease obligations                                                                                                                                                                       |                                            |            | 4,102,000   |             |  |            | 4,588,000   |            
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                    | Total current liabilities                  |            |             | 148,248,000 |  |            |             | 162,753,000 | 
|Line of credit                                |                                                                                                                                                                                                                    |                                            | 29,137,000 |             |             |  | 10,450,000 |            
|Long-term debt                                |                                                                                                                                                                                                                    |                                            | 184,000    |             |             |  | 191,000    |            
|Capital lease obligations                     |                                                                                                                                                                                                                    |                                            | 10,389,000 |             |             |  | 11,232,000 |            
|Leases in excess of fair market value         |                                                                                                                                                                                                                    |                                            | 13,960,000 |             |             |  | 14,729,000 |            
|Deferred rent and other long-term liabilities |                                                                                                                                                                                                                    |                                            | 4,255,000  |             |             |  | 4,343,000  |            
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                    | Total liabilities                          |            |             | 206,173,000 |  |            |             | 203,698,000 | 
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|Shareholders equity:                         |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              | Preferred stock, $.01 par value; 3,000,000 shares
    authorized; shares issued, none                                                                                                                              |                                            |            |             |             |  |            |             |            
|                                              | Common stock, $.01 par value; 24,000,000 shares
    authorized; 11,413,324 and 11,171,869 shares issued; 11,388,324
    and 11,146,869 shares outstanding at April 30, 2002 and
    January 31, 2002, respectively |                                            |            | 114,000     |             |  |            | 112,000     |            
|                                              | Additional paid-in-capital                                                                                                                                                                                         |                                            |            | 95,464,000  |             |  |            | 94,873,000  |            
|                                              | Accumulated deficit                                                                                                                                                                                                |                                            |            | (70,210,000 | )           |  |            | (61,780,000 | )          
|                                              | Treasury stock, 25,000 shares                                                                                                                                                                                      |                                            |            | (338,000    | )           |  |            | (338,000    | )          
|                                              | Notes receivable                                                                                                                                                                                                   |                                            |            | (7,618,000  | )           |  |            | (7,490,000  | )          
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                    | Total shareholders equity                 |            |             | 17,412,000  |  |            |             | 25,377,000  | 
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                    | Total liabilities and shareholders equity |            | $           | 223,585,000 |  |            | $           | 229,075,000 | 
|                                              |                                                                                                                                                                                                                    |                                            |            |             |             |  |            |            

See Accompanying Notes to Unaudited Consolidated
Condensed Financial Statements.

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WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS


|                                                                                      |                          |                    |             |            |             |   |             |            |             | 
|------------------------------------------------------------------------------------- | ------------------------ | ------------------ | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | 
|                                                                                      |                          |                   
|                                                                                      |                          | Three Months Ended
|                                                                                      |                          |                   
|                                                                                      |                          | April 30,          |             | April 30, 
|                                                                                      |                          | 2002               |             | 2001      
|                                                                                      |                          |                    |             |           
|                                                                                      |                          |                   
|                                                                                      |                          | (Unaudited)       
|Sale merchandise revenue                                                              |                          | $                  | 116,662,000 |            |             | $ | 149,256,000 |           
|Rental revenue, net                                                                   |                          |                    | 280,000     |            |             |   | 1,301,000   |           
|                                                                                      |                          |                    |             |            |             |   |             |           
|                                                                                      |                          | Total revenues     |             |            | 116,942,000 |   |             |            | 150,557,000 | 
|Cost of sale merchandise revenue                                                      |                          |                    | 75,032,000  |            |             |   | 97,273,000  |           
|                                                                                      |                          |                    |             |            |             |   |             |           
|                                                                                      | Gross profit             |                    |             | 41,910,000 |             |   |             | 53,284,000 |            
|Selling, general and administrative expenses                                          |                          |                    | 45,298,000  |            |             |   | 52,546,000  |           
|Depreciation and amortization                                                         |                          |                    | 5,801,000   |            |             |   | 7,868,000   |           
|Loss (gain) on disposition of assets                                                  |                          |                    | 171,000     |            |             |   | (39,000     | )         
|                                                                                      |                          |                    |             |            |             |   |             |           
|                                                                                      | Loss from operations     |                    |             | (9,360,000 | )           |   |             | (7,091,000 | )          
|Interest expense                                                                      |                          |                    | 794,000     |            |             |   | 1,785,000   |           
|Interest income                                                                       |                          |                    | (246,000    | )          |             |   | (95,000     | )         
|                                                                                      |                          |                    |             |            |             |   |             |           
|                                                                                      | Loss before income taxes |                    |             | (9,908,000 | )           |   |             | (8,781,000 | )          
|Benefit for income taxes                                                              |                          |                    | (1,478,000  | )          |             |   | (3,512,000  | )         
|                                                                                      |                          |                    |             |            |             |   |             |           
|                                                                                      | Net loss                 |                    | $           | (8,430,000 | )           |   | $           | (5,269,000 | )          
|                                                                                      |                          |                    |             |            |             |   |             |           
|Net loss per common share:                                                            |                          |                    |             |            |             |   |             |           
|                                                                                      | Basic                    |                    | $           | (0.74      | )           |   | $           | (0.48      | )          
|                                                                                      |                          |                    |             |            |             |   |             |           
|                                                                                      | Diluted                  |                    | $           | (0.74      | )           |   | $           | (0.48      | )          
|                                                                                      |                          |                    |             |            |             |   |             |           
|Weighted average common shares
    outstanding  Basic                                |                          |                    | 11,350,342  |            |             |   | 11,001,421  |           
|                                                                                      |                          |                    |             |            |             |   |             |           
|Weighted average common shares and common
    equivalent shares outstanding  Diluted |                          |                    | 11,350,342  |            |             |   | 11,001,421  |           
|                                                                                      |                          |                    |             |            |             |   |             |           

See Accompanying Notes to Unaudited Consolidated
Condensed Financial Statements.

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WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS


|                                                                                |                                              |                                                                      |                                           |           |             |             |            |            |            |            |  
|------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------------------------- | ----------------------------------------- | --------- | ----------- | ----------- | ---------- | ---------- | ---------- | ---------- | -
|                                                                                |                                              |                                                                     
|                                                                                |                                              | Three Months Ended                                                  
|                                                                                |                                              |                                                                     
|                                                                                |                                              | April 30,                                                            |                                           | April 30,
|                                                                                |                                              | 2002                                                                 |                                           | 2001     
|                                                                                |                                              |                                                                      |                                           |          
|                                                                                |                                              |                                                                     
|                                                                                |                                              | (Unaudited)                                                         
|Operating activities:                                                           |                                              |                                                                      |                                           |           |             |             |            |           
|Net loss                                                                        |                                              | $                                                                    | (8,430,000                                | )         |             | $           | (5,269,000 | )         
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                              |                                                                      |                                           |           |             |             |            |           
|                                                                                | Depreciation and amortization                |                                                                      |                                           | 5,801,000 |             |             |            | 7,868,000  |           
|                                                                                | Loss (gain) on disposition of assets         |                                                                      |                                           | 171,000   |             |             |            | (39,000    | )         
|                                                                                | Stock option compensation                    |                                                                      |                                           | 19,000    |             |             |            | 19,000     |           
|                                                                                | Interest on notes receivable                 |                                                                      |                                           | (128,000  | )           |             |            | (91,000    | )         
|                                                                                | Deferred taxes                               |                                                                      |                                           |           |             |             |            | (3,593,000 | )         
|                                                                                | Changes in operating assets and liabilities: |                                                                      |                                           |           |             |             |            |            |           
|                                                                                |                                              | Receivables, net                                                     |                                           |           | 1,317,000   |             |            |            | (1,992,000 | )         
|                                                                                |                                              | Inventories, net                                                     |                                           |           | 4,671,000   |             |            |            | 6,289,000  |           
|                                                                                |                                              | Other current assets                                                 |                                           |           | (566,000    | )           |            |            | 256,000    |           
|                                                                                |                                              | Accounts payable, accrued expenses and other
    current liabilities |                                           |           | (11,286,000 | )           |            |            | (9,743,000 | )         
|                                                                                |                                              | Income taxes receivable                                              |                                           |           | (1,471,000  | )           |            |            |            |           
|                                                                                |                                              | Store closure and leases in excess of FMV reserves                   |                                           |           | (1,067,000  | )           |            |            | (1,085,000 | )         
|                                                                                |                                              | Other long-term liabilities                                          |                                           |           | (88,000     | )           |            |            | (27,000    | )         
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|                                                                                |                                              |                                                                      | Net cash used in operating activities     |           |             | (11,057,000 | )          |            |            | (7,407,000 | )
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|Investing Activities:                                                           |                                              |                                                                      |                                           |           |             |             |            |           
|Purchase of property, equipment and improvements                                |                                              |                                                                      | (955,000                                  | )         |             |             | (1,421,000 | )         
|Decrease in other assets                                                        |                                              |                                                                      | 35,000                                    |           |             |             | 139,000    |           
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|                                                                                |                                              |                                                                      | Net cash used in investing activities     |           |             | (920,000    | )          |            |            | (1,282,000 | )
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|Financing Activities:                                                           |                                              |                                                                      |                                           |           |             |             |            |           
|Net borrowings under line of credit                                             |                                              |                                                                      | 18,687,000                                |           |             |             | 11,057,000 |           
|Payments on capital lease obligations and
    long-term debt                    |                                              |                                                                      | (3,771,000                                | )         |             |             | (1,648,000 | )         
|Exercise of warrants                                                            |                                              |                                                                      | 574,000                                   |           |             |             |            |           
|Settlement of pre-petition claims                                               |                                              |                                                                      |                                           |           |             |             | (29,000    | )         
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|                                                                                |                                              |                                                                      | Net cash provided by financing activities |           |             | 15,490,000  |            |            |            | 9,380,000  |  
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|Net increase in cash and cash equivalents                                       |                                              |                                                                      | 3,513,000                                 |           |             |             | 691,000    |           
|Cash and cash equivalents at beginning of the
    period                        |                                              |                                                                      | 1,591,000                                 |           |             |             | 2,457,000  |           
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|Cash and cash equivalents at end of the period                                  |                                              | $                                                                    | 5,104,000                                 |           |             | $           | 3,148,000  |           
|                                                                                |                                              |                                                                      |                                           |           |             |             |            |           
|Supplemental disclosures of cash flow information:                              |                                              |                                                                      |                                           |           |             |             |            |           
|                                                                                | Cash paid during the period for:             |                                                                      |                                           |           |             |             |            |            |           
|                                                                                |                                              | Interest                                                             |                                           | $         | 807,000     |             |            | $          | 2,210,000  |           
|                                                                                |                                              | Income taxes, net                                                    |                                           | $         | (23,000     | )           |            | $          | (126,000   | )         

See Accompanying Notes to Unaudited Consolidated
Condensed Financial Statements.

5



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##### Table of Contents



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, 2002 are not necessarily
indicative of the results that may be expected for the
Companys fiscal year ending January 31, 2003
(Fiscal 2003). 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, 2002
(Fiscal 2002).

2.     Disposition of
Assets

On August 9, 2001, the Company completed the
sale of sixty-four (64) Wherehouse Music stores to The Music
Network (TMN) for approximately $25.7 million,
which was comprised of $21.0 million in cash and
$4.7 million in notes receivable, less approximately
$0.6 million in costs to complete the transaction. In
addition, the Company received warrants to purchase 90,440
shares or approximately 1.75% of TMN for $0.01 per share.
Management has valued these warrants at a de minimusamount. The majority of the stores sold to TMN are located
in Florida, North Carolina, South Carolina and Tennessee, with a
few located in Georgia and Alabama. As part of the transaction,
the Company also granted the rights to the Turtles Music
trade brand to TMN. The subject stores accounted for
$13.8 million in total revenues for the three months ended
April 30, 2001. The net tangible book value of the assets
sold amounted to approximately $25.3 million. In addition,
the Company wrote off approximately $3.3 million of
goodwill, attributable to the sold stores, representing the
approximate loss on disposition of assets in the accompanying
consolidated statements of operations for the year ended
January 31, 2002. The Company is also obligated to fulfill
certain lease commitments should TMN default on certain of its
lease obligations. In such an event, the Company has the right
to take back selected stores.

3.     Goodwill

Effective February 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but will
be tested at least annually for impairment. SFAS No. 142
also requires the Company to complete a transitional impairment
test.

The Company is currently in the process of
completing the transitional impairment test required by SFAS
No. 142 to determine whether there was a potential
impairment to recorded goodwill as of February 1, 2002. In
accordance with SFAS No. 142, step one of the two part
transitional impairment test requires the Company to compare the
fair value of each reporting unit with its respective carrying
amount, including goodwill. If the carrying value exceeds its
fair value, step two of the transitional impairment test will be
performed to measure the amount of impairment loss, if any. Step
one of the transitional impairment test will be completed by
July 31, 2002.

Step two of the transitional impairment test must
be completed by January 31, 2003 and the resulting
impairment loss, if any, will be recorded as a cumulative effect
of an accounting change in the consolidated

6



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

statements of operations. The amount of
impairment, if any, cannot be determined until the completion of
this process. The amount of such loss, however, could be
material to the Companys consolidated financial results.
SFAS No. 142 also requires the Company to perform an
impairment test if an event occurs or circumstances change that
would more likely than not result in an impairment loss. Such
subsequent impairment losses, if any, will be reflected in
operating income in the consolidated statements of operations in
the period the event occurs.

SFAS No. 142 also requires disclosure of the
after-tax impact to reported net income and earnings per share
of the adoption of the statement for all periods presented. The
following table recognizes the after-tax impact to the
Companys operational results of the adoption of SFAS
No. 142 as if the standard had been in effect for all
periods presented:

|                                 |  |                         |            |      |  |   |            |  
|-------------------------------- |  | ----------------------- | ---------- | ---- |  | - | ---------- | -
|                                 |  |                        
|                                 |  | Quarter Ended April 30,
|                                 |  |                        
|                                 |  | 2002                    |            | 2001
|                                 |  |                         |            |     
|Reported net loss                |  | $                       | (8,430,000 | )    |  | $ | (5,269,000 | )
|Add back goodwill amortization * |  |                         |            |      |  |   | 891,000    |  
|                                 |  |                         |            |      |  |   |            |  
|Adjusted net loss                |  | $                       | (8,430,000 | )    |  | $ | (4,378,000 | )
|                                 |  |                         |            |      |  |   |            |  
|Basic earnings per share:        |  |                         |            |      |  |   |            |  
|Reported net loss                |  | $                       | (0.74      | )    |  | $ | (0.48      | )
|Add back goodwill amortization * |  |                         |            |      |  |   | 0.08       |  
|                                 |  |                         |            |      |  |   |            |  
|Adjusted net loss                |  | $                       | (0.74      | )    |  | $ | (0.40      | )
|                                 |  |                         |            |      |  |   |            |  
|Diluted earnings per share:      |  |                         |            |      |  |   |            |  
|Reported net loss                |  | $                       | (0.74      | )    |  | $ | (0.48      | )
|Add back goodwill amortization * |  |                         |            |      |  |   | 0.08       |  
|                                 |  |                         |            |      |  |   |            |  
|Adjusted net loss                |  | $                       | (0.74      | )    |  | $ | (0.40      | )
|                                 |  |                         |            |      |  |   |            |  



---



|  |                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective February 1, 2002, the Company
    adopted SFAS No. 142 under which goodwill and intangible
    assets with indefinite lives are no longer amortized.

4.     Impairment of
Long-Lived Assets

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting
and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a
business. The Company adopted SFAS No. 144 as of
February 1, 2002 and such adoption did not have a
significant impact on the Companys results of operations
or financial position.

5.     Income
Taxes

The Company accounts for income taxes under an
asset and liability approach that requires the recognition of
deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in the
Companys consolidated financial statements or income tax
returns. Management provides a valuation allowance for deferred
income tax assets when it is more likely than not that all or a
portion of such deferred income tax assets will not be realized.
In Fiscal 2002, the Company recorded a valuation allowance for
its total deferred income tax assets in the amount of
$34.9 million as a result of

7



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

recurring losses from operations. Such valuation
allowance will be reversed when the Company returns to
profitability at levels sufficient to realize such deferred
income tax assets.

The Company recorded a net income tax benefit of
$1,478,000 in the first quarter of Fiscal 2003 representing the
recognition of $1,568,000 of tax refunds, partially offset by
payment of certain state franchise taxes. These tax refunds
resulted from the Job Creation and Worker Assistance act, passed
on March 6, 2002, which extended the Companys ability
to carryback net operating losses from two to five years.

6.     Litigation

In January, 2001, the Company was sued in the Los
Angeles Superior Court by a former store manager, claiming
alleged failure to pay overtime wages to herself and all
similarly situated salaried store employees. The Complaint does
not specify any amount of the claims, either individually or on
behalf of the class. Thereafter, the Complaint was amended to
add three additional named plaintiffs. The amended Complaint
seeks relief on behalf of both store managers and assistant
managers going back to 1997. The Companys motions to
strike the class action allegations have been denied. In
October, 2001, a second class action suit was filed with respect
to store managers and assistant managers by different named
plaintiffs and different lawyers. It also seeks overtime pay
and, in addition, asserts claims for meal break and rest break
penalties. The plaintiffs in the two suits have filed a
consolidated complaint. A limited amount of discovery has been
conducted to date. The Company believes the allegations in both
suits are without merit and intends to vigorously defend itself
in these matters. 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 July 18, 2001, the Santa Clara County,
California Superior Court entered a $7.6 million judgment
against the Company in a personal injury lawsuit encaptioned
Peterson, et al. v. Shapell Industries (the Peterson
Lawsuit). While the Company was insured for this judgment,
its insurer, Reliance Insurance Company, was ordered liquidated
by the State of Pennsylvania on October 3, 2001. As such,
it is unknown at present whether, and to what extent, assets of
the insurer will be available to the Company subsequent to a
formal liquidation proceeding. Pending this outcome,
Californias Insurance Guarantee Fund (CIGA)
has engaged appellate counsel on behalf of the Company. CIGA has
also facilitated the posting of an appellate bond to stay
execution of the Peterson judgment pending the outcome of the
Companys appeal. The Company was required by the bonding
company to provide an $11.4 million letter of credit as
security for the appellate bond. Based on the advice of legal
counsel, management believes that it is reasonably possible that
it will either prevail on appeal or be successful in an
alternative legal strategy and, accordingly, has not recorded a
liability for the judgment in the accompanying financial
statements.

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.

8



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##### Table of Contents






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 2002.

Results of Operations

For the
Quarters Ended April 30, 2002 and April 30,
2001



| |         
| | --------
| | Revenues

Total revenues were $116.9 million and
$150.6 million for the quarters ended April 30, 2002
(the first quarter of Fiscal 2003) and April 30, 2001 (the
first quarter of Fiscal 2002), respectively. The decrease of
$33.7 million was primarily attributable to decreases in
net revenues of $19.0 million due to the closure of 31
stores since February 1, 2001 and the sale of
64 stores in the third quarter of Fiscal 2002, same store
sales decreases in net revenues of $13.7 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


|                          |                                                                                                                                            |                                |     |      |       |  |     |       |       | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --- | ---- | ----- |  | --- | ----- | ----- | 
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | Quarter Ended                 
|                          |                                                                                                                                            | April 30,                     
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | 2002                           |     | 2001
|                          |                                                                                                                                            |                                |     |     
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | (Dollars in                   
|                          |                                                                                                                                            | millions)                     
|Sale merchandise revenue: |                                                                                                                                            |                                |     |      |       |  |     |      
|                          | Music                                                                                                                                      |                                | $   | 90.3 |       |  | $   | 124.2 |      
|                          | Other, principally sales of new videocassettes,
    DVDs, video game software and hardware, general merchandise and
    ticket commissions |                                |     | 26.3 |       |  |     | 25.1  |      
|                          |                                                                                                                                            |                                |     |      |       |  |     |      
|                          |                                                                                                                                            | Total sale merchandise revenue |     |      | 116.6 |  |     |       | 149.3 | 
|Rental revenue, net       |                                                                                                                                            |                                | 0.3 |      |       |  | 1.3 |      
|                          |                                                                                                                                            |                                |     |      |       |  |     |      
|                          |                                                                                                                                            | Total revenue                  |     | $    | 116.9 |  |     | $     | 150.6 | 
|                          |                                                                                                                                            |                                |     |      |       |  |     |      

A.Sale
merchandise revenue. Sale merchandise revenue includes
prerecorded music, new videocassettes, DVDs, and video game
software and hardware (collectively referred to as sale
merchandise). 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 31 stores
closed since February 1, 2001 and the 64 stores sold
during the third quarter of Fiscal 2002, sale merchandise
revenue decreased by approximately 10.5% during the first
quarter of Fiscal 2003 as compared to the first quarter of
Fiscal 2002. Management believes the decrease in same-store
sales is primarily attributable to (i) continuing negative
industry trends in the new music category, including CD
burning and free downloads of music from the
Internet; (ii) a relatively weak new music release schedule
year-over-year; and (iii) increased competition from mass
merchandisers and specialty electronics chains selling new music
and DVD releases at or below cost, all of which was partially
offset by increases in 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 $0.3 million in the first quarter
of Fiscal 2003 and $1.3 million in the first quarter of
Fiscal 2002, representing a decrease of $1.0 million or
76.9% as the Company tests alternative rental concepts.

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##### Table of Contents



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,
DVD, 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 and the
use of CD burners to copy, 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. The Company
continues to study industry trends and issues in developing its
own strategies.



| |                                 
| | --------------------------------
| | Cost of Sale Merchandise Revenue

Cost of sale merchandise revenue was
$75.0 million for the first quarter of Fiscal 2003, as
compared with $97.3 million for the same period last year,
a decrease of $22.3 million. As a percentage of sale
merchandise revenue, cost of sale merchandise revenue was 64.3%
for the first quarter of Fiscal 2003 as compared with 65.2% for
the first quarter of Fiscal 2002. This 0.9% improvement is
primarily attributable to increased pricing of new music and
DVDs and an increased proportion of used music sales with higher
margins, partially offset by (i) decreases in sales prices
related to several mid-line new music promotional events; and
(ii) other changes in product line mix.



| |                   
| | ------------------
| | Operating Expenses

SG&A expenses for the first quarter of Fiscal
2003 were $45.3 million, compared to $52.5 million for
the first quarter of Fiscal 2002, a decrease of
$7.2 million. This decrease reflects a reduction of (i)
$5.7 million in operating expenses at stores that have been
closed and/or sold since the first quarter of Fiscal 2002; and
(ii) $1.5 million in savings related to the impact of
cost restructuring efforts. SG&A expenses were 38.7% of
revenue in the first quarter of Fiscal 2003, compared to 34.9%
of revenue in the first quarter of Fiscal 2002, an increase of
3.8%. Such increase was caused by the fixed nature of store
occupancy and other expenses and inflationary increases in
payroll costs, partially offset by the impact of cost
restructuring efforts.

Depreciation and amortization expense was
$5.8 million in the first quarter of Fiscal 2003 compared
to $7.9 million in Fiscal 2001, a decrease of
$2.1 million. The decrease is principally related to the
sale of certain assets to TMN (see Note 2 in Item 1 above)
and the discontinuation of the amortization of goodwill as a
result of the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, effective February 1, 2002.



| |                 
| | ----------------
| | Interest Expense

Interest expense for the three months ended
April 30, 2002 was $0.8 million, compared to
$1.8 million for the three months ended April 30,
2001, a decrease of $1.0 million. This decrease was
partially attributable to lower average borrowings under 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 382
basis points in the first quarter of Fiscal 2003 as compared to
the first quarter of Fiscal 2002. Borrowings under the Congress
Facility were used for the funding of working capital.



| |                
| | ---------------
| | Interest Income

Interest income for the first quarter of Fiscal
2003 was $0.2 compared to $0.1 for the first quarter of Fiscal
2002. The increase in interest income is attributable to the
notes receivable related to the sale of 64 of the Companys
stores. Interest income also includes notes receivable from
shareholders.



| |             
| | ------------
| | Income Taxes

The income tax benefit of $1.5 million for
the first quarter of Fiscal 2003 reflects the recognition of
$1.6 million of tax refunds, partially offset by certain
state franchise taxes. These tax refunds resulted from the

10



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##### Table of Contents



Job Creation and Worker Assistance act, passed on
March 6, 2002, which extended the Companys ability to
carry back net operating losses from two to five years.


Liquidity and Capital Resources

During the first quarter of Fiscal 2003 and the
first quarter of Fiscal 2002, the Companys net cash used
in operating activities was $11.1 million and
$7.4 million, respectively. The most significant use of
cash during the first quarter of Fiscal 2003 and Fiscal 2002 was
related to a decrease in accounts payable, accrued expenses and
other current liabilities of $11.3 million and
$9.7 million, respectively. Seasonal inventory purchases
typically begin during the third quarter and continue into the
fourth quarter, with significant payments 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
first quarter of Fiscal 2003 and the first quarter of Fiscal
2002 was primarily due to capital expenditures for the
acquisition of property, equipment and improvements. Financing
for capital expenditures has generally been provided by cash
from operations and borrowings under its revolving line of
credit facility with Congress Financial (Western) (the
Facility).

Net cash provided by financing activities for the
first quarter of Fiscal 2003 was $15.5 million which
included net borrowings under the Facility of
$18.7 million, the exercise of warrants of
$0.6 million and payments of $3.8 million on capital
lease obligations and long-term debt. Net cash provided by
financing activities for the first quarter of Fiscal 2002 was
due to net borrowings under the Facility partially offset by
payments on capital lease obligations.

As of April 30, 2002, there was an
outstanding loan balance of $29.1 million and a letter of credit
outstanding in the amount of $11.4 million under the
Facility. On November 29, 2001, the Company was required to
post a letter of credit of $11.4 million as security for an
appellate bond issued to stay execution of the judgment in the
Peterson Lawsuit, (see Note 6 in Item 1 above.), pending
the outcome of the Companys appeal. The Company estimates
that availability under its revolving line as of
January 31, 2002 and April 30, 2002 was
$59.0 million and $34.1 million, respectively. This
decline in availability since January 31, 2002 is mainly
due to the Companys seasonal fluctuations of merchandise
inventory on which the Facility is based.

The Facility provides for a revolving credit line
of up to $155,000,000, including a letter of credit subfacility
of $10,000,000 (which amount can be increased at the discretion
of the financial institution), expiring on October 31,
2003, with a year-to-year renewal thereafter. The Company has
executed a term sheet with Congress Financial and, upon
execution of the Facility amendment envisioned by the term
sheet, the Facility will be, among other things, extended until
October 31, 2005.

The Facility bears interest at the prime rate
(4.75% at April 30, 2002) plus 0.5%, or at the
Companys election, an adjusted Eurodollar rate (1.87% at
April 30, 2002) plus 1.75%. The Companys borrowing
availability under the Facility is subject to limitations based
upon, among other things, the value of certain eligible
merchandise inventory.

In addition to the interest payable, the Company
pays an Unused Line Fee. The fee is 0.375% per annum calculated
upon the amount by which $120.0 million exceeds the average
daily principal balance of the outstanding loans and letter of
credit during the immediately preceding month.

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 2003.

11



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##### Table of Contents



Contractual Obligations

The following is a summary of commitments of the
Company as of April 30, 2002:

|                         |                  |                                    |   |           |       |             |   |         |      |            |   |       |       |  |   |      |      |  |   |      |      | 
|------------------------ | ---------------- | ---------------------------------- | - | --------- | ----- | ----------- | - | ------- | ---- | ---------- | - | ----- | ----- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                         |                  |                                   
|                         |                  | Payments Due By Period            
|                         |                  |                                   
|                         |                  | Total                              |   | 1 Year(a) |       | 2 - 4 Years |   | 5 Years |      | Thereafter
|                         |                  |                                    |   |           |       |             |   |         |      |           
|                         |                  |                                   
|                         |                  | (Dollar amounts in millions)      
|Contractual Obligations: |                  |                                    |   |           |       |             |   |         |      |            |   |       |       |  |   |      |      |  |   |     
|                         | Long-term debt   |                                    | $ | 0.3       |       |             | $ | 0.1     |      |            | $ | 0.2   |       |  | $ |     |      |  | $ |     |     
|                         | Line of credit   |                                    |   | 29.1      |       |             |   |        |      |            |   | 29.1  |       |  |   |     |      |  |   |     |     
|                         | Capital leases   |                                    |   | 17.0      |       |             |   | 3.9     |      |            |   | 9.2   |       |  |   | 1.5  |      |  |   | 2.4  |     
|                         | Operating leases |                                    |   | 184.8     |       |             |   | 38.9    |      |            |   | 104.1 |       |  |   | 14.8 |      |  |   | 27.0 |     
|                         |                  |                                    |   |           |       |             |   |         |      |            |   |       |       |  |   |      |      |  |   |     
|                         |                  | Total contractual cash obligations |   | $         | 231.2 |             |   | $       | 42.9 |            |   | $     | 142.6 |  |   | $    | 16.3 |  |   | $    | 29.4 | 
|                         |                  |                                    |   |           |       |             |   |         |      |            |   |       |       |  |   |      |      |  |   |     



---



|    |                                                
|--- | -----------------------------------------------
|(a) | reflects remaining commitments for Fiscal 2003.

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.

Critical Accounting Policies

The Companys significant accounting
policies are described in Note 1 to our consolidated financial
statements as filed in the Companys annual report on
Form 10-K for the fiscal year ended January 31, 2002.
The Companys discussion and analysis of financial
condition and results of operations are based upon its
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of the financial statements
requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, expenses,
and related disclosure of contingent assets and liabilities. On
an on-going basis, the Company will evaluate the estimates that
it has made. These estimates have been based upon historical
experience and on various other assumptions that the Company
believes to be reasonable under the circumstances. Actual
results may differ from these estimates under different
conditions or using different assumptions. The Company believes
its most critical accounting policies include its policies with
respect to inventories, intangible assets, store closure and
fair market value reserves, income taxes, litigation, and vendor
receivables. These policies are discussed in Item 7 of the
Companys annual report on Form 10-K for the fiscal
year ended January 31, 2002.

Recent Accounting Pronouncements

Effective February 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but will
be tested at least annually for impairment. SFAS No. 142
also requires the Company to complete a transitional impairment
test.

The Company is currently in the process of
completing the transitional impairment test required by SFAS
No. 142 to determine whether there was a potential
impairment to recorded goodwill as of February 1, 2002. In
accordance with SFAS No. 142, step one of the two part
transitional impairment test requires the

12



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##### Table of Contents



Company to compare the fair value of each
reporting unit with its respective carrying amount, including
goodwill. If the carrying value exceeds its fair value, step two
of the transitional impairment test will be preformed to measure
the amount of impairment loss, if any. Step one of the
transitional impairment test will be completed by July 31,
2002.


Step two of the transitional impairment test must
be completed by January 31, 2003 and the resulting impairment
loss, if any, will be recorded as a cumulative effect of
accounting change in the consolidated statements of operations.
The amount of impairment cannot be determined until the
completion of this process. The amount of such loss, however,
could be material to the Companys consolidated financial
results. SFAS No. 142 also requires the Company to perform
an impairment test if an event occurs or circumstances change
that would more likely than not result in an impairment loss.
Such subsequent impairment losses, if any, will be reflected in
operating income in the consolidated statements of operations in
the period the event occurs.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting
and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a
business. The Company adopted SFAS No. 144 as of
February 1, 2002 and such adoption did not have a
significant impact on the Companys results of operations
or financial position.




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 2003
as compared to the rate at April 30, 2002, the
Companys interest expense for Fiscal 2003 would increase
$0.3 million based on the outstanding balance of the
Congress Facility at April 30, 2002. The Company does not
hold any derivative instruments and does not engage in hedging
activities.




PART II.     OTHER
INFORMATION




Item 1.     Legal
Proceedings

As discussed above, in January, 2001, the Company
was sued in the Los Angeles Superior Court by a former store
manager, claiming alleged failure to pay overtime wages to
herself and all similarly situated salaried store employees. The
Complaint does not specify any amount of the claims, either
individually or on behalf of the class. Thereafter, the
Complaint was amended to add three additional named plaintiffs.
The amended Complaint seeks relief on behalf of both store
managers and assistant managers going back to 1997. The
Companys motions to strike the class action allegations
have been denied. In October, 2001, a second class action suit
was filed with respect to store managers and assistant managers
by different named plaintiffs and different lawyers. It also
seeks overtime pay and, in addition, asserts claims for meal
break and rest break penalties. The plaintiffs in the two suits
have filed a consolidated complaint. A limited amount of
discovery has been conducted to date. The Company believes the
allegations in both suits are without merit and intends to
vigorously defend itself in these matters. 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 July 18, 2001, the Santa Clara County,
California Superior Court entered a $7.6 million judgment
against the Company in a personal injury lawsuit encaptioned
Peterson, et al. v. Shapell Industries (the Peterson
Lawsuit). While the Company was insured for this judgment,
its insurer, Reliance Insurance Company, was ordered liquidated
by the State of Pennsylvania on October 3, 2001. As such,
it is unknown at present whether, and to what extent, assets of
the insurer will be available to the Company subsequent to a
formal liquidation proceeding. Pending this outcome,
Californias Insurance Guarantee Fund (CIGA)
has engaged appellate counsel on behalf of the Company. CIGA has
also facilitated the posting of an appellate

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bond to stay execution of the Peterson judgment
pending the outcome of the Companys appeal. The Company
was required by the bonding company to provide an
$11.4 million letter of credit as security for the
appellate bond. Based on the advice of legal counsel, management
believes that it is reasonably possible that it will either
prevail on appeal or be successful in an alternative legal
strategy and, accordingly, has not recorded a liability for the
judgment in the accompanying financial statements.


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

On June 10, 2002, Jerry Comstock joined the
Company as its new Chief Executive Officer replacing Antonio C.
Alvarez. Mr. Comstock comes to the Company from Metromedia
Restaurant Group where he served the past four years as
President of the Bennigans Restaurant chain.
Mr. Alvarez will continue in his role as Non-Executive
Chairman of the Board of Directors of the Company.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

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.           
|
| | /s/ LARRY C. GAINES                      
| |                                          
| | Larry C. Gaines                          
| | President and Chief Operating
    Officer
| | (Principal Executive Officer)            

Date: June 14, 2002



| |                              
| | -----------------------------
| | /s/ MARK A. VELARDE          
| |                              
| | Mark A. Velarde              
| | Executive Vice President,    
| | Chief Financial Officer and  
| | Chief Administrative Officer 
| | (Principal Financial Officer)

Date: June 14, 2002



| |                               
| | ------------------------------
| | /s/ MEHDI MAHDAVI             
| |                               
| | Mehdi Mahdavi                 
| | Vice President, Controller    
| | (Principal Accounting Officer)

Date: June 14, 2002

15