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Filed Pursuant to Rule 424(b)(2)
File No. 333-8683
PROSPECTUS
5,000,000 SHARES
WEST COAST ENTERTAINMENT CORPORATION
COMMON STOCK
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This Prospectus relates to a total of 5,000,000 shares of common stock,
$.01 par value per share ("Common Stock"), of West Coast Entertainment
Corporation ("West Coast" or the "Company") which may be offered and issued from
time to time by the Company in connection with future acquisitions of other
businesses, properties or equity and/or debt securities in business combination
transactions ("Acquisitions") in accordance with Rule 415(a)(1)(viii) of
Regulation C under the Securities Act of 1933, as amended (the "Securities
Act"). These shares will ordinarily represent consideration paid upon the
acquisition of businesses or properties. The shares may also include shares to
be delivered upon the exercise or satisfaction of conversion or purchase rights
which are created in connection with acquisitions or which were previously
created or assumed by the companies whose businesses or properties are to be
acquired by West Coast. At the date hereof, approximately 532,846 of the
5,000,000 shares described herein have been issued or reserved for issuance in
connection with Acquisitions which have already been consummated, and
approximately 4,467,154 shares remain available for issuance in connection with
future Acquisitions, including Acquisitions as to which West Coast has already
entered into binding acquisition agreements. The Company's Common Stock is
quoted on the Nasdaq National Market under the symbol "WCEC." On November 6,
1996, the last reported sales price for the Common Stock as reported by Nasdaq
was $11.00 per share.
This Prospectus updates and revises the information contained in all prior
prospectuses and supplements thereto, and supersedes and replaces all such prior
prospectuses and supplements.
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SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
November 8, 1996
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THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL.
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West Coast Video(R), The Movie Buff's Movie Store(R), Game Power
Headquarters(SM), The Projector(TM), Spotlight on Video(TM), Videosmith(R) and
Palmer Video(TM) are trademarks, trade names and service marks of the Company.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto, as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is hereby made to such
Registration Statement, exhibits and schedules. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be examined without charge
at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and at regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York, 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any part
thereof may be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 upon payment of the fees prescribed by the Commission.
The Common Stock is traded on Nasdaq. Information filed by the Company with
Nasdaq may be inspected at the offices of Nasdaq at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy material and other information with the
Commission. Reports, proxy material and other information concerning the Company
can be inspected and copied at the offices of the Commission and Nasdaq referred
to above.
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TABLE OF CONTENTS
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Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 7
Prospective Acquisitions............... 12
Unaudited Pro Forma Combined Condensed
Financial Statements................. 16
Selected Historical and Pro Forma
Combined Financial Data.............. 31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 33
Video Industry Overview................ 47
Business............................... 48
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Management............................. 63
Certain Transactions................... 69
Price Range of Common Stock;
Dividends............................ 70
Plan of Distribution................... 71
Resales................................ 71
Use of Proceeds........................ 72
Principal Stockholders................. 73
Description of Capital Stock........... 75
Shares Eligible for Future Sale........ 78
Legal Matters.......................... 79
Experts................................ 79
Index to Consolidated Financial
Statements........................... F-1
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information included elsewhere herein.
Except as otherwise indicated, all information herein (a) gives effect to (i)
the Company's issuance of 5,400,000 shares of Common Stock in May 1996 in an
initial public offering (the "Public Offering"), (ii) the Company's acquisition
of 172 video specialty stores in May 1996 and an additional 21 stores between
August 26 and October 23, 1996 (collectively, the "Recent Acquisitions") and
(iii) a 0.340-for-1 reverse split of the Common Stock effective as of May 14,
1996 and (b) assumes (i) the Company's acquisition of additional video specialty
stores or other businesses or assets described herein or in one or more
supplements to this Prospectus that may subsequently be delivered herewith
(collectively, the "Supplements") as being prospective acquisitions
("Prospective Acquisitions"), (ii) issuance of an estimated 519,222 shares
(subject to various adjustments and elections) of Common Stock as installment
payments in connection with certain Recent Acquisitions (the "Installment
Shares") and (iii) exercise of an outstanding warrant (the "Warrant") to acquire
192,308 shares of Common Stock. Unless the context otherwise requires,
references to "West Coast" or the "Company" include West Coast Entertainment
Corporation and its subsidiaries. References to "system-wide revenues" include
the total of Company-owned store revenues and franchised store revenues (as
distinct from franchise fees paid by the franchisees to the Company as
franchisor).
THE COMPANY
On October 1, 1996, after giving effect to consummation of the Recent
Acquisitions, West Coast owned and operated 219 video specialty stores and
franchised 286 additional stores. The Company believes that it is among the
largest video specialty retailers in the United States in terms of pro forma
system-wide revenues, number of franchised stores and total franchised store
revenues. The Company competes directly against major regional and national
video rental stores in most of its markets and believes it is a leading video
rental operator, in terms of number of stores, in all of the major markets in
which Company-owned stores operate. In addition, the Company believes it is one
of only two domestic video specialty franchisors that has existing franchised
stores outside North America. System-wide, approximately 60% of the Company's
stores, exclusive of stores to be acquired in Prospective Acquisitions as
described in the Supplements, are currently operated under the West Coast
Video(R) name and the remainder are operated under such names as Videosmith(R)
and Palmer Video(TM). The Company intends to apply the West Coast Video(R) name
and its registered trademark The Movie Buff's Movie Store(R) to all of its
stores. For the fiscal year ended January 31, 1996, the Company's pro forma
revenues were $110.0 million and pro forma net income was $5.4 million. For the
six months ended July 31, 1996, the Company's pro forma revenues were $58.4
million and pro forma net income was $3.3 million. See "Selected Historical and
Pro Forma Combined Financial Data."
In order to realize the Company's goal of maximizing revenue and
profitability, the Company has adopted a business strategy designed to (i)
achieve or maintain market dominance in its chosen markets by acquiring,
developing or franchising additional stores, (ii) realize cost savings and
efficiencies by using proven management operating systems to integrate the
stores acquired, developed or franchised, (iii) operate stores designed to
reflect specific local demographics and demonstrated customer preferences and
(iv) build customer loyalty and promote additional rentals by offering superior
customer service through a highly trained sales force having comprehensive
product knowledge.
The Company's growth strategy is to (i) pursue the acquisition of video
specialty stores in this highly fragmented industry, (ii) continue to acquire
its own existing and future franchised stores and (iii) selectively develop new
video specialty stores. Consistent with this strategy, the Company has obtained
and made borrowings under a $65.0 million bank credit facility (the "Credit
Facility"), a portion of which is currently available, subject to certain
conditions, for general corporate purposes and acquisition financing. The
Company believes it is well-positioned to benefit from consolidation in the
industry among the approximately 28,000 video specialty stores in the United
States, approximately half of which are owned by operators of one or two stores.
In addition, as one of the largest video specialty franchisors in the United
States in terms of pro forma system-wide revenues and one of only two
domestic-based franchisors with existing franchised stores outside North
America, the Company believes it is uniquely positioned to expand through the
acquisition of its existing and future West Coast Video(R) franchisees and the
continuation of its international and domestic franchising activities.
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The Company has had preliminary discussions with numerous video rental
store owners at various times regarding the potential acquisition of their
stores. Management expects that some of these discussions will result in new
Acquisitions, although the Company has no agreements or commitments to acquire
stores except as described herein or in the Supplements. On June 19, 1996, the
Company announced that it had reached agreements in principle with the owners of
a total of 72 video retail stores, subject to completion of due diligence and
other closing conditions and regulatory approvals. The Company has since
acquired a total of 21 video retail stores. It expects to acquire an additional
49 stores in the Prospective Acquisitions in November 1996 and thereafter
(including 19 stores owned by West Coast Video(R) franchisees). Except as
described herein or in the Supplements, the Company has not entered into
definitive agreements in regard to the acquisition of any stores, and there can
be no assurance that it will do so.
At the date hereof, the Company's stores are located in 24 states and three
foreign countries, with its Company-owned stores concentrated in Ohio,
Pennsylvania, New Jersey, Massachusetts and New York. The Company's stores are
designed and managed to entertain and satisfy a broad range of customers,
including movie and interactive electronic game buffs, and carry between 7,000
and 17,000 videocassettes. Most of the Company's stores are superstores with
over 4,000 square feet per store, although some are smaller, custom-designed
stores, including some which are formatted as urban boutiques containing a wide
variety of older titles ("catalog titles"). The Company believes that its
ability to customize stores to reflect local market demographics gives it a
competitive advantage over chains with limited variation in format.
According to entertainment media analyst Paul Kagan Associates, Inc.
("Kagan Associates"), the domestic video rental and sales industry has grown
from approximately $3.6 billion in revenues in 1985 to over $14 billion in 1994
and is projected to reach approximately $22 billion in 2005. Kagan Associates
estimates the revenues received by movie distributors from international home
video at $3.7 billion in 1995. In 1994, according to Kagan Associates, the home
video market was the largest single source of revenue to movie distributors,
accounting for approximately 46.1% of movie distributors' worldwide revenues.
The principal executive offices of the Company are located at 9990 Global
Road, Philadelphia, Pennsylvania 19115, and its telephone number is (215)
677-1000.
RECENT ACQUISITIONS
Between May 17 and October 23, 1996, West Coast acquired a total of 193
owned and operated video specialty stores (including 14 stores owned by West
Coast Video(R) franchisees) plus franchisor's rights in regard to 20 additional
stores franchised by one of the acquired companies. The aggregate consideration
paid or to be paid(excluding certain fees and contingent consideration relating
to newly opened stores) was approximately $90.2 million, which is expected to
consist of approximately $60.7 million paid or to be paid in cash and
approximately $29.5 million paid or to be paid in shares of Common Stock (2.4
million shares valued for this purpose at their respective dates of issuance at
prices ranging from $9.113 to $13.00 per share, with a weighted average of
$12.16 per share). In May 1996, the Company repaid approximately $7.0 million of
outstanding indebtedness (inclusive of accrued interest and prepayment premium)
and has subsequently borrowed approximately $14.2 million under the Credit
Facility. The Company has recorded approximately $82.6 million of the aggregate
purchase price of the Recent Acquisitions as goodwill. See "Business -- Recent
Acquisitions" and "Unaudited Pro Forma Combined Condensed Financial Statements."
PROSPECTIVE ACQUISITIONS
The Company expects to acquire a total of 49 owned and operated video
specialty stores (including 19 stores owned by West Coast Video(R) franchisees)
between November 1996 and May 1997 for aggregate consideration (excluding costs
related to such Prospective Acquisitions, and subject to various adjustments and
elections) of $26.1 million, which is expected to consist of $14.8 million
payable in cash and $11.3 million payable in shares of Common Stock to be valued
on the basis of trading prices prior to consummation of such Prospective
Acquisitions. The cash portion of the aggregate purchase price will be financed
with borrowings under the Credit Facility. The Company expects to record
approximately $20.8 million of the aggregate purchase price as goodwill. See
"Prospective Acquisitions" and "Unaudited Pro Forma Combined Condensed Financial
Statements."
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THE OFFERING
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Common Stock offered by the Company................. 5,000,000 shares(1)
Common Stock to be outstanding after this
offering.......................................... 17,083,863 shares(2)
Use of Common Stock being offered................... To constitute all or a portion of the
purchase price of Acquisitions. See
"Use of Proceeds."
Nasdaq National Market symbol....................... WCEC
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(1) The Company intends to seek the agreement of recipients of shares of Common
Stock in Acquisitions to restrictions on their transfer of such shares for
periods ranging from six to 18 months or to structure such transactions to
provide for issuance of shares on a deferred basis over periods of six to 18
months.
(2) Includes 1,906,735 shares of Common Stock issued to certain sellers as part
of the purchase price of the Recent Acquisitions, an estimated 519,222
Installment Shares (subject to various adjustments and elections) issuable
in the future as installment payments in connection with certain Recent
Acquisitions, and an estimated 4,467,154 shares available for issuance in
connection with the Prospective Acquisitions and future Acquisitions, but
excludes 192,308 shares issuable upon exercise of the Warrant and an as yet
undetermined number of shares contingently issuable to certain sellers of
newly opened stores. See "Business -- Recent Acquisitions" and
"-- Franchising." An additional 525,000 shares of Common Stock have been
reserved for future issuance under the Company's 1995 Equity Incentive Plan,
1995 Director Stock Option Plan and 1995 Employee Stock Purchase Plan. See
"Management -- Director Compensation" and "-- Employee Stock Plans."
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus Summary, under the captions "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," elsewhere in this Prospectus and in the
Supplements relate to future events and expectations and as such constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following considerations:
The Company's rapid growth, particularly its acquisition in May 1996 of 11
chains operating 172 video specialty stores and franchising an additional 20
stores and its subsequent acquisition of four chains operating 21 stores, could
strain the Company's ability to manage operations, integrate newly acquired
stores into its systems and effectively pursue its growth strategy. The Company
competes with many others, including Blockbuster Entertainment, having
significantly greater financial and marketing resources, market share, and name
recognition than the Company. Further developments in competing technologies
could have a material adverse effect upon the video retail industry and the
Company. Industry and Company revenues are somewhat seasonal and may be affected
by many factors, including variation in the acceptance of new release titles
available for rental and sale, the extent of competition, marketing programs,
weather, the timing of any holiday weekends, special or unusual events and other
factors that may affect retailers in general. There can be no assurance that
stores already acquired or acquired in the future will perform as expected or
that the prices paid for such stores will prove to be advantageous. The costs of
integrating newly acquired stores into the Company's systems may vary from the
amounts set forth in Management's Discussion and Analysis of Financial Condition
and Results of Operations. Acquisitions of stores within the exclusive
territories of existing West Coast Video(R) franchised stores may require the
Company to relocate or sell such acquired stores, assist the franchisee to
relocate, grant the franchisee additional franchises or territorial or other
rights, agree to terminate the franchise or include the franchisee's stores in
the Company's intended program of acquisitions. The Company's management does
not have significant experience in operating a company as large as the Company
now is. The Company's Common Stock has traded publicly only since May 14, 1996
and no prediction can be made as to future price levels for such stock. See
"Risk Factors."
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT STORE AND PER SHARE DATA)
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HISTORICAL PRO FORMA(1)
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SIX MONTHS ENDED SIX
YEAR ENDED MONTHS
JANUARY 31, JULY 31, YEAR ENDED ENDED
------------------------------ ----------------- JANUARY 31, JULY 31,
1994 1995 1996 1995 1996 1996 1996
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STATEMENT OF OPERATIONS DATA:
Revenue.................................. $2,520 $6,503 $14,719 $5,510 $22,399 $110,017 $58,378
Operating income (loss).................. (44) 385 1,216 397 2,727 10,731 6,956
Income (loss) before income taxes and
extraordinary item..................... (86) 267 576 260 2,287 9,735 5,857
Income (loss) before extraordinary
item................................... (72) 204 334 164 1,284 5,403 3,268
Pro forma income (loss) before
extraordinary item per share........... $(0.07)(2) $ 0.12(2) $ 0.06(2) $ 0.16(2) 0.03(2) 0.39(3) 0.24(3)
OTHER DATA:
Depreciation and amortization(4)......... $ 870 $1,628 $ 2,585 $1,187 $ 4,563 28,081 14,494
Purchases of videocassette rental
inventory.............................. 685 1,430 2,002 1,065 5,395 25,147 14,352
STORE DATA:
Increase (decrease) in same store
revenue(5)............................. (6.1)% 14.2% 4.8% 0.5% 0.6% 0.9% 0.1%
Company-owned stores at end of period.... 14 28 28 28 201 265 269
Franchised stores at end of period....... -- -- 304 307 295 291 276
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Total stores at end of period...... 14 28 332 335 496 556 545
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PRO
HISTORICAL FORMA(1)
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JULY 31, JULY 31,
1996 1996
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BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 2,335 $ 2,261
Videocassette rental inventory, net.................................................. 15,265 19,289
Total assets......................................................................... 107,492 147,237
Long-term debt, less current portion................................................. 4,502 27,841
Total liabilities.................................................................... 20,350 44,575
Stockholders' equity................................................................. 87,142 102,662
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(1) For a discussion of the assumptions and adjustments underlying the unaudited
pro forma combined financial data, see "Unaudited Pro Forma Combined
Condensed Financial Statements."
(2) Unaudited pro forma income (loss) before extraordinary item per share has
been calculated for each of the years in the three year period ended January
31, 1996 and for the six month periods ended July 31, 1995 and 1996 by
dividing the respective unaudited pro forma income (loss) before
extraordinary item amounts by the weighted average number of shares of
common stock outstanding (843,000, 1,693,000 and 4,756,000 at January 31,
1994, 1995 and 1996, respectively and 4,756,000 and 7,957,000 at July 31,
1995 and 1996, respectively). Unaudited pro forma income (loss) before
extraordinary item per share reflects an adjustment to the consolidated
statement of operations to give effect to the merger (the "Merger") and the
0.340-for-1 reverse stock split discussed in Notes 1 and 17 to the Company's
consolidated financial statements, as if they had occurred as of February 1,
1992. Accordingly, the pro forma income tax provision (benefit) and pro
forma income (loss) have been calculated as if each entity included in the
consolidated statement of operations had been included in the Company's
consolidated income tax returns and subject to corporate income taxation as
a corporation subject to taxation under Subchapter C of the Internal Revenue
Code of 1986, as amended (a "C Corporation") during all periods presented.
In addition, shares to be issued as contingent consideration in conjunction
with the Recent Acquisitions have been considered outstanding since May 17,
1996.
(3) Unaudited pro forma income per share for the year ended January 31, 1996 and
the six month period ended July 31, 1996 have been calculated by dividing
unaudited pro forma income by the pro forma weighted average number of
shares of Common Stock outstanding after giving effect to (i) the Merger,
(ii) the issuance of shares upon formation of the Company, (iii) the
0.340-for-1 reverse stock split and the shares issued in conjunction with
the Public Offering, (iv) the shares issued and to be issued in conjunction
with the Pro Forma Recent Acquisitions (as defined under "Unaudited Pro
Forma Combined Condensed Financial Statements"), (v) the repayment of all
outstanding debt, (vi) borrowings under the Credit Facility, (vii) the
impact of the Warrant and of the conversion of a portion of an outstanding
convertible subordinated secured note (the "Convertible Note") into 20,844
shares of Common Stock, and (viii) the issuance of shares in connection with
the Pro Forma Prospective Acquisitions (as defined under "Unaudited Pro
Forma Combined Condensed Financial Statements") as if all activity occurred
as of February 1, 1995. The pro forma weighted average number of common
shares used to calculate pro forma income per share at January 31, 1996 and
July 31, 1996 was 13,829,748.
(4) Depreciation and amortization includes depreciation expense of fixed assets,
goodwill amortization expense and amortization expense of videocassette
rental inventory. The Company's policy is that videocassette rental
inventory, which includes video games, is stated at cost and is amortized
over its estimated economic life with no provision for salvage value.
Videocassettes that are considered base stock are amortized over 36 months
on a straight-line basis. New releases are amortized as follows: the first
through third copies of each title per store are amortized as base stock and
succeeding copies of each title per store are amortized over nine months on
a straight-line basis.
(5) Same store revenue is defined as the aggregate revenues from Company-owned
stores open for the entirety of the periods being compared. Increase
(decrease) reflects change from prior fiscal year.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the Common
Stock offered hereby.
ABILITY TO SUSTAIN GROWTH AND MANAGE OPERATIONS
The Company's rapid growth could strain the Company's ability to manage
operations and effectively pursue its growth strategy. The Company's growth
strategy has involved (i) the acquisition from unrelated third parties in 1993
and 1994 of two chains operating 21 stores, (ii) the opening of eight new
stores, (iii) the acquisition in 1995 of the operating assets now held by the
Company and its wholly owned franchising subsidiary from West Coast Video
Entertainment, Inc., an unrelated third party, and its four unaffiliated
corporations (the "WCEI Companies"), which had a total of 305 franchised stores,
(iv) the acquisition in May 1996 of 11 chains (including four West Coast
Video(R) franchisees) operating 172 stores and franchising an additional 20
stores, (v) the subsequent acquisition of four chains operating 21 stores and
(vi) the ongoing integration of such new stores and operations into the
Company's management information, telecommunications, management, marketing,
finance and accounting, entertainment purchasing, distribution, retail
operations and merchandising systems. Future expansion will require the
Company's existing management personnel to, among other things, identify and
analyze new markets and new site locations; locate and negotiate with numerous
potential acquirees; consummate acquisitions; arrange for adequate equity or
debt financing to fund expansion; negotiate acceptable real estate leases and
related agreements for existing stores and for stores to be acquired or opened
and develop cost-effective transition plans for acquired stores; hire, train and
assimilate store managers and other store personnel; and address the other
specific risks described in more detail below. See "-- Acquisition Risks."
Accordingly, in some circumstances continued rapid growth could have a material
adverse effect on the Company's financial condition and results of operations.
OPERATING RISKS
Competition. The video retail industry is highly competitive. The Company
competes with other video specialty stores, including stores operated by
regional and national chains, as well as other businesses, such as supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations and other retailers, that offer videos and interactive electronic
entertainment products. Many of the Company's stores compete with stores
operated by the Blockbuster Entertainment division of Viacom Inc.
("Blockbuster"), the dominant video specialty retailer in the United States.
Blockbuster and certain of the Company's non-video specialty store competitors
have significantly greater financial and marketing resources, market share and
name recognition than the Company. In addition, the Company's stores compete
with other leisure-time activities, including movie theaters, network and cable
television, live theater, sporting events and family entertainment centers. The
Company's failure to compete effectively would have a material adverse effect on
its financial condition and results of operations. See
"Business -- Competition."
Technological Obsolescence. The Company competes with pay-per-view cable
television systems ("Pay-Per-View"), in which cable television subscribers pay a
fee to see a movie or other program selected by the subscriber. Existing
Pay-Per-View services offer a limited number of channels and programs and are
generally available only to households with a converter to unscramble incoming
signals. Recently developed technologies, however, permit certain cable
companies, direct broadcast satellite companies, telephone companies and other
telecommunications companies to transmit a much greater number of movies to
homes in more markets as frequently as every five minutes. Ultimately, further
improvements in these technologies or the development of other similar
technologies could lead to the availability of a broad selection of movies to
consumers on demand, which could have a material adverse effect on the Company's
financial condition and results of operations. See "Business -- Competition."
Changes in the manner in which movies are marketed by movie studios, including
an earlier release by movie studios of movie titles to cable television or other
distribution channels, could substantially decrease the demand for video
rentals, which could have a material adverse effect on the Company's financial
condition and results of operations. See "Video Industry Overview" and
"Business -- Competition."
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Seasonality and Other Factors; Quarterly Fluctuations. The video and
interactive electronic entertainment products rental portions of the Company's
business are somewhat seasonal, and revenues may be affected by many factors,
including variations in the number and timing of theatrical movie releases, the
public acceptance of new release titles available for rental and sale, the
extent of competition, marketing programs, weather, the timing of long holiday
weekends, special or unusual events and other factors that may affect retailers
in general. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General Economic Trends, Quarterly Results and
Seasonality" and "Business -- Growth Strategy."
Fluctuations in Interactive Electronic Entertainment Products
Industry. Rental and sales volumes for interactive electronic entertainment
products have fluctuated considerably in recent fiscal periods, both
industry-wide and for the Company, as a result of technological changes and the
introduction (or delay in introduction) of new products. Similar fluctuations
may occur in future periods.
Effects of Increased Minimum Wage. Congress has passed legislation raising
the federal minimum wage from $4.25 per hour to $4.75 per hour, commencing
October 1, 1996 and $5.15 per hour, commencing October 1, 1997. Many of the
Company's part-time store-level employees are paid at or slightly above the
minimum wage. The new legislation materially increases the Company's employment
costs and may have a material adverse effect on the Company's financial
condition and results of operations.
ACQUISITION RISKS
Integration. The success of the Company's growth strategy is dependent
upon its ability to achieve cost savings in connection with Acquisitions
(including the Recent Acquisitions and any future Acquisitions) and otherwise
successfully integrate acquired operations. There can be no assurance, however,
that the Company will be able to achieve such savings or successfully integrate
acquired operations (including the operations comprising the Recent Acquisitions
and any future Acquisitions) into its existing operations. There can be no
assurance that the Recent Acquisitions or future Acquisitions will not have a
material adverse effect upon the Company's operating results while the
operations of the acquired businesses are being integrated into the Company's.
Once integrated, acquired operations may not achieve levels of revenues or
profitability comparable to those achieved by the Company's existing operations
or otherwise perform as expected.
Identification of and Competition for Acquisitions. The Company's growth
strategy includes future Acquisitions. There can be no assurance that the
Company will be able to identify suitable acquisition targets and complete
Acquisitions in either existing or new markets. In addition, certain of the
Company's competitors may seek to acquire some of the same video specialty
stores that the Company seeks to acquire. Such competition for Acquisitions
would increase acquisition prices and related costs and result in fewer
acquisition opportunities, which could have a material adverse effect on the
Company's growth.
Risk that Future Acquisitions Will Not Be Consummated; Misrepresentations
and Breaches by Sellers. While certain of the future Acquisitions may be
scheduled to close substantially concurrently with one another, there can be no
assurance that any of such Acquisitions will be consummated. If one or more of
such Acquisitions does not close, any shares registered in this offering
allocated thereto may be used for the acquisition of other video specialty
stores. See "Use of Proceeds." There is no assurance that the Company would be
able to use such shares to acquire other video specialty stores on acceptable
terms. In consummating Acquisitions, the Company has relied and will rely upon
certain representations, warranties and indemnities made by the sellers with
respect to each of the Acquisitions, as well as its own due diligence
investigation. There can be no assurance that such representations and
warranties will be true and correct, that the Company's due diligence will
uncover all material adverse facts relating to the operations and financial
condition of the stores acquired or that all of the conditions to the Company's
obligations to consummate Acquisitions will be satisfied. Any material
misrepresentations could have a material adverse effect on the Company's
financial condition and results of operations. In addition, the Company has the
ability to waive certain conditions to its obligations to consummate
Acquisitions.
Financing Growth Strategy. The Company currently intends to finance future
Acquisitions, as well as new store openings, primarily from borrowings under
credit facilities, including the Credit Facility, from the
8
<PAGE> 9
net proceeds from the sale of debt or equity securities, and from cash from
operations. Acquisitions may also be made by issuing Company securities
(including the shares offered hereby) to the sellers. There can be no assurance
that the Company will be able to sell debt or equity securities on reasonable
terms. The inability to raise sufficient cash could inhibit implementation of
the Company's growth strategy. The Credit Facility contains various restrictive
covenants which may also inhibit the Company's ability to finance its growth
strategy. At present, such covenants will permit the borrowings described herein
in connection with the Prospective Acquisitions but will not permit subsequent
further borrowings unless and until certain modifications to the terms of the
Credit Facility, now being discussed with the lenders, are agreed to. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- The Company."
Certain Formulaic Purchase Prices; Purchase Obligations. The purchase
prices for certain Recent Acquisitions contained components that are to be
determined over 12 or 18-month periods after the respective opening dates of 19
stores on the basis of certain financial measurements for such stores over the
final 12 months of such periods. See "Recent Acquisitions." The purchase price
for certain stores which the Company may acquire under an option agreement
described below will have as one of its components an adjustment based upon the
future net operating cash flow of four stores, one of which the Company has
already acquired and three of which the Company is acquiring in one of the
Prospective Acquisitions. The purchase prices for other future Acquisitions may
contain similar components. If such components of such purchase prices are
materially more than is initially expected, the Company will have to deploy more
cash or issue more shares of Common Stock than it budgeted for such purpose.
Subject to the satisfaction of certain conditions, the Company may be
required under the terms of certain cross-purchase and area development and
option agreements to purchase all of the assets of up to 35 stores during a
period commencing in 1997 and ending in 2001 at the election of the owners at
formulaic purchase prices based upon future net operating cash flow of such
stores, which cannot be estimated at present. The purchase prices of four such
stores will be payable in shares of Common Stock and the other purchase prices
will be payable partly in cash with the balance, at the Company's election,
payable in cash or in shares of Common Stock. See "Prospective Acquisitions,"
"Business -- Franchising" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- The
Company."
RISKS ASSOCIATED WITH FRANCHISE OPERATIONS
On October 23, 1996, the Company had 202 franchisees operating 286
franchised stores before Prospective Acquisitions. It obtains franchise-related
revenues from an initial fee and the sale of initial supplies and from ongoing
fees and royalties based on a percentage of franchisees' gross revenues, as
reported monthly by franchisees to the Company. No assurance can be given that
the Company will continue to market and sell new franchises or operate its
franchise operations at profitable levels. In addition, no assurance can be
given that desirable locations and acceptable leases can be obtained for new
franchisees. The Company monitors franchisees' compliance with ongoing
obligations on the basis of monthly revenue and ordered inventory reports. The
Company's standard franchise agreement generally also grants the Company the
right to audit the books and records of franchisees at any time. No assurance
can be given, however, that all franchisees will operate their stores in
accordance with the Company's operating guidelines and in compliance with all
material provisions of the franchise agreement, and the failure of franchisees
to so operate their stores could have a material adverse effect on the Company's
business. The standard franchise agreement gives the Company the choice of
seeking legal remedies, which could be time-consuming and expensive, and
terminating the franchisee, which would diminish the Company's revenue until
such time, if ever, as a new franchisee replaces the terminated franchisee.
Franchisees are not required to purchase supplies or inventory from the Company.
The standard franchise agreement further provides that a franchisee may
have rights to an exclusive territory within which other franchised or
Company-owned stores will not be set up or operated. The Company has discussed
with ten West Coast Video(R) franchisees the terms on which twelve of the stores
acquired in the Recent Acquisitions, which are located within such franchisees'
exclusive territories, are to be integrated into the Company's system;
possibilities include, but are not limited to, relocating such an acquired store
or selling
9
<PAGE> 10
it to a third party, assisting the franchisee to relocate, granting the
franchisee additional franchises or territorial or other rights, terminating the
franchise, or including the franchisee's stores in the intended program of
Company acquisitions of franchisees' stores described under "Business - Growth
Strategy - Continue to Acquire West Coast Franchisee Stores." Through the date
of this Prospectus, the Company has agreed to close two newly acquired stores,
to extend the term of one franchise agreement by one year, to grant one
franchisee a 50% rebate on one year's franchise fee and another franchisee a
rebate of four months' franchise fees coupled with a reduction in the amount of
a personal guaranty, to terminate two franchises and to purchase one franchised
store. Discussions with the remaining three franchisees are continuing in regard
to the possible relocation of one owned and operated store and the possible
acquisition of three franchised stores. Furthermore, two of the stores to be
acquired in the Prospective Acquisitions are located within existing
franchisees' exclusive territories. The Company expects to discuss with such
franchisees the terms on which the stores to be acquired are to be integrated
into the Company's system. Although the Company does not expect that any such
method of integration of such stores will have a material adverse effect, there
can be no assurance in this regard.
In addition, the Company is subject to the Federal Trade Commission's Trade
Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures" (the "FTC Franchise Rule") and
state laws and regulations that govern the offer and sale of franchises. In
order to offer and sell franchises, the Company is required by the FTC Franchise
Rule to furnish each prospective franchisee a current franchise offering
circular prior to the sale of a franchise. In addition, 13 states at present
require a franchisor to comply with registration or filing requirements prior to
offering a franchise in the state and to provide a prospective franchisee with a
current franchise offering circular complying with the state's laws, prior to
the sale of the franchise, and five other states require written notice prior to
the offer of a franchise (collectively, the "Registration States"). The Company
is currently registered in all of the Registration States, other than New York
where an application is pending, and is currently entitled to sell franchises in
all other states in compliance with the FTC Franchise Rule. The Company has
submitted post-effective amendments in all Registration States, other than New
York, to reflect its latest franchise offering. Violations of the FTC Franchise
Rule and the franchise offering requirements of the Registration States could
result in civil penalties against the Company and civil and criminal penalties
against the executive officers of the Company. No assurance can be given that
the Company will not be required to cease offering and selling franchises in
certain states because of future changes in franchise laws or the Company's
inability to comply with existing or future franchise laws or until its
franchise offering circular is updated.
This Prospectus does not constitute, and shall not be construed as, an
offer to sell a West Coast Video(R) franchise. Such offers may be made only by
an offering circular in compliance with state laws and the FTC Franchise Rule.
The description of the franchises set forth in this Prospectus is not intended
to be a complete description of the business of a franchisee of West Coast
Franchising Company.
RELIANCE ON KEY PERSONNEL; EXPERIENCE OF MANAGEMENT
The Company's operations are dependent on the continued efforts of T. Kyle
Standley, its President and Chief Executive Officer, and its other key
employees. If any of these individuals become unwilling or unable to continue
their employment or association with the Company, or if the Company is unable to
attract and retain other skilled employees, the Company's business could be
materially and adversely affected. The Company does not currently maintain key
man life insurance coverage on any of its executives. Certain key members of the
Company's management group joined the Company upon consummation of the Public
Offering. No Company executive had previous significant experience operating a
company as large, in terms of stores or annual revenues, as the Company. See
"Management."
CONTROL BY THE PRINCIPAL EXECUTIVES
At October 1, 1996, Ralph W. Standley III and certain members of his
family, including T. Kyle Standley, in the aggregate, beneficially owned 31.5%
of the Company's outstanding Common Stock. As a result, these stockholders
voting together are effectively able to elect a majority of the Company's
directors
10
<PAGE> 11
and control the Company. These stockholders voting together could delay or
prevent a change in control of the Company or a business combination involving
the Company that is favored by other stockholders. See "-- Anti-Takeover
Provisions," "Management," "Principal Stockholders" and "Description of Capital
Stock."
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock, $.01 par value per share ("Preferred Stock"), in one
or more series and to determine the price, rights, preferences and privileges of
the shares of each such series without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring or preventing a change of control of the Company. In
addition, certain provisions in the Company's Certificate of Incorporation, as
amended, and Restated By-laws (the "By-laws") relating to supermajority
stockholder approval of mergers and certain similar transactions, restrictions
on calling special meetings of stockholders, restrictions on amendments to the
By-laws and prohibitions against action by majority written consent of the
stockholders may discourage or make more difficult any attempt by a person or
group of persons to obtain control of the Company.
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of a corporation's voting stock. See "Description of Capital
Stock -- Preferred Stock" and "-- Delaware Law and Certain Charter and By-Law
Provisions." The provisions of Section 203 may have the effect of delaying or
preventing changes in control or management of the Company, which could
adversely affect the market price of the Company's Common Stock and deprive
stockholders of an opportunity to receive a premium for their shares.
LIMITED TRADING HISTORY; POTENTIAL VOLATILITY OF STOCK PRICE
The Company's Common Stock has traded on the Nasdaq National Market only
since May 14, 1996. Prior to the Public Offering, there was no public market for
the Common Stock. The initial public offering price was determined through
negotiations between the Company and the representatives of the underwriters in
the Public Offering. There can be no assurance that an active trading market
will be sustained and no prediction can be made as to future trading prices.
Under the pricing formula described in "Business-Prospective Acquisitions,"
the number of shares of Common Stock to be issued to the seller in each of the
Prospective Acquisitions will be a function of trading prices prior to
consummation of the Prospective Acquisition, subject to subsequent adjustment as
therein described. Accordingly, no prediction can be made as to the number of
shares of Common Stock to be issued or as to the dilutive effects of such
issuance.
SPECIAL RISKS FOR PROSPECTIVE SELLERS
The Company reserves the right to negotiate the final terms of the asset
purchase agreements for the Prospective Acquisitions, which may vary from the
summaries contained herein. The owners of the businesses to be acquired by the
Company in the Prospective Acquisitions will not know the exact numbers of
shares of Common Stock to be issued to them at the time that they enter into the
definitive asset purchase agreement, unless the closing occurs shortly after
signing the asset purchase agreement.
11
<PAGE> 12
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of the Common Stock in the
public market, or the perception that the sale of a substantial number of shares
might occur, could have a material adverse effect on the prevailing market price
of the Common Stock or the ability of the Company to raise capital through a
public offering of its equity securities. At October 1, 1996, the Company had
outstanding (assuming no exercise of the Warrant and no issuance of the
Installment Shares) 12,083,683 shares of Common Stock, of which the 5,400,000
shares sold in the Public Offering are freely tradeable without restriction or
further registration under the Securities Act, except for those shares held by
"affiliates" (as defined in Rule 144 under the Securities Act) of the Company.
An additional 13,624 shares issued in connection with a Recent Acquisition have
been so registered, but are subject to contractual restrictions on transfer
until April 1, 1997. None of the remaining 6,670,239 outstanding shares of
Common Stock (collectively, the "Restricted Shares"), have been registered under
the Securities Act, and they may be resold only upon registration under, or in
compliance with an exemption from the registration requirements of, the
Securities Act. Holders of 2,285,458 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144, as currently in effect, subject to the manner
of sale, volume, notice and information requirements of Rule 144, beginning in
February 1997, holders of 2,470,826 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144 beginning in July 1997 and holders of 1,913,955
Restricted Shares will be eligible to sell such shares pursuant to Rule 144
beginning in May 1998. The Securities and Exchange Commission has sought public
comment on the advisability of shortening the applicable holding periods under
Rule 144 by one year. If such a change in Rule 144 were to be effected, the
respective dates set forth above would be February 1996 and July 1996 (each
subject to certain lock-up agreements) and May 1997. The Company has granted to
holders of Restricted Shares and the Warrant to purchase shares of Common Stock
certain demand and piggyback registration rights. See "Description of Capital
Stock -- Registration Rights," "Shares Eligible for Future Sale," "Management"
and "Certain Transactions."
PROSPECTIVE ACQUISITIONS
The Company has entered or expects to enter into definitive asset purchase
agreements with 12 selling groups (collectively, the "Prospective Sellers") to
acquire a total of 49 video specialty stores (including 19 stores owned by West
Coast Video(R) franchisees) between November 1996 and May 1997 for aggregate
consideration (excluding costs related to such Prospective Acquisitions, and
subject to various adjustments and elections) of $26,107,089, which is expected
to consist of $14,824,712 payable in cash and $11,282,377 payable in shares of
Common Stock to be valued in accordance with the average of either the closing
or bid and asked prices of Common Stock on Nasdaq over a 15 trading-day period
ending one to three trading days before the closing date (approximately
1,035,836 shares if the formula price ranges from $10.69 to $11.00 per share,
the range of formula prices which have been assumed for the purposes of the
Unaudited Pro Forma Combined Condensed Financial Statements contained herein; if
the range of formula prices is more or less than such amounts per share, the
number of shares will be proportionately adjusted). The cash portion of the
purchase price will be financed with borrowings under the Credit Facility and/or
cash flow from operations. The terms of the Prospective Acquisitions were
negotiated at arm's length.
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<PAGE> 13
Stores to be Acquired. Set forth below is a brief description of the
Prospective Acquisitions:
<TABLE>
<CAPTION>
NUMBER OF
OWNED AND
NAMES OF SELLER(S) OPERATED STORES LOCATIONS
- -------------------------------------- --------------- --------------------------------------
<S> <C> <C>
Reel Entertainment, Inc. Lafayette, Lake Charles and Hammond,
("Reel Entertainment").............. 3 Louisiana
First Choice Video, Inc. ("First Springfield and Urbana, Ohio
Choice Video")...................... 4
Ohio Entertainment Corp. Dayton, Miamisburg, and Huber Heights,
("Ohio Entertainment").............. 5 Ohio
Wellesley Entertainment, Inc. Wellesley, Medford, Peabody,
("Wellesley Entertainment")......... 6 Billerica, and Everett, Massachusetts
Franexco, Inc. and Great American Tappan, New York and Teaneck, Tenafly,
Video Realty, Inc. ("Great Washington Township, Closter,
American").......................... 10 Hackensack, Midland Park, Landing,
Morris Plains, and Fairlawn, New
Jersey
L.A. Video, Inc. ("LA Video")......... 2 West Carrollton and Sidney, Ohio
Pottstown Video, Inc., Coventry Video, Pottstown, Coventry, Pennsburg,
Inc., Pennsburg W.C. Video, Inc., Shamokin, Berwick, Danville,
Shamokin W.C. Video, Inc., Berwick Bloomsburg, Boyerstown, Audubon and
W.C. Video, Inc., Danville W.C. Spring Ford, Pennsylvania
Video, Inc., Bloomsburg W.C. Video,
Inc., Family Country Video, Inc.,
Audubon West Coast Video, Inc., and
Spring Ford W.C. Video, Inc.
("Curran")*......................... 10
Broad & Park Video, Inc. Trenton, New Jersey
("DeCaro")*......................... 1
Wright Turn Entertainment, Inc., Miami Beach and Hollywood, Florida
Wright Turn Entertainment II, Inc.,
and Wright Turn Video, Inc.
("Weiss")*.......................... 3
Dogwood Hill Enterprises, Inc. Richboro, Pennsylvania
("Knight")*......................... 1
Shree-Dutt Video, Inc. Bala Cynwyd, Pennsylvania
("Patel")*.......................... 1
Alex Jordan Corporation, Cochise Philadelphia and Sharon Hill,
Corporation and Kyle David Corp. Pennsylvania
("Weisberg")*....................... 3
--
Total....................... 49
===========
</TABLE>
- ---------------
* West Coast Video(R) franchisee
The 49 stores typically range in size from 1,800 to 7,800 square feet and
employ approximately 104 persons full-time and approximately 360 persons
part-time. The leases for the stores generally do not vary in important respects
from the typical lease for the Company's existing stores.
Giving effect to the Prospective Acquisitions, the Company will have owned
and operated or franchised stores in 24 states and three foreign countries.
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<PAGE> 14
Consideration to be Paid. The following table sets forth the consideration
to be paid for the stores to be acquired in connection with the Prospective
Acquisitions. Total compensation is a fixed amount; the number of shares of
Common Stock to be issued varies with the market price.
<TABLE>
<CAPTION>
CASH COMMON STOCK
PROSPECTIVE -------------------- ------------------------
SELLER AMOUNT %(1) AMOUNT %(1) TOTAL
----------- ----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
Reel Entertainment........... $ 900,000 70.6% $ 375,000 29.4% $ 1,275,000(2)
First Choice Video........... 1,000,500 46.1% 1,170,906(3)(4) 53.9% 2,171,406(5)
Ohio Entertainment........... 2,605,000 53.7% 2,245,000(3)(6) 46.3% 4,850,000(5)
Wellesley Entertainment...... 1,102,500 50.0% 1,102,500(7) 50.0% 2,205,000
Great American(10)........... 3,300,000 60.0% 2,200,000(9) 40.0% 5,500,000(5)
LA Video..................... 130,000 22.8% 440,000(3)(4) 77.2% 570,000(5)
Curran(5).................... 2,647,440 61.9% 1,628,293(7) 38.1% 4,275,733(10)
De Caro(5)................... 255,000 60.0% 170,000(7) 40.0% 425,000(10)
Weiss(5)(11)(12)............. 1,620,000 60.0% 1,080,000(7) 40.0% 2,700,000(10)
Knight(5).................... 432,272 59.9% 288,928(7) 40.1% 721,200(10)
Patel(5)..................... 178,750 55.0% 146,250(7) 45.0% 325,000(10)
Weisberg(5).................. 653,250 60.0% 435,500(7) 40.0% 1,088,750(10)
----------- ----------- -----------
$14,824,712 $11,282,377 $26,107,089
=========== =========== ===========
</TABLE>
- ---------------
(1) Percentage of total consideration for each Prospective Acquisition
represented by the cash component and by the stock component, respectively.
(2) $300,000 of cash and $125,000 of stock, valued in accordance with the
average closing price of Common Stock on Nasdaq over a 15-trading day
period ending three trading days before the closing date, will be delivered
at the closing of each of these three stores. These closings are currently
expected to occur on or about December 2, 1996 and March 3 and May 1, 1997.
The shares to be delivered at the three closings will be subject to
restrictions on resale for three, six and three months, respectively. At
its election, the Company may substitute cash for stock at any or all of
the closings for the three stores.
(3) The value of each share of stock for this purpose is the average of the bid
and asked prices of a share of the Company's Common Stock on Nasdaq over a
15-day trading period ending one trading day before the closing date.
(4) 40% of these shares will be delivered on the first anniversary of the
closing date and the remaining 60% will be delivered 18 months after the
closing date.
(5) Subject to subsequent adjustment in certain cases based upon proration for
rental prepayments, other prepaid expenses and certain assumed liabilities.
(6) The shares to be issued to this seller can be resold only in accordance
with the following schedule: one-third commencing six months after the
closing date, an additional one-third commencing 12 months after the
closing date, and an additional one-third commencing 18 months after the
closing date.
(7) The value of each share of stock for this purpose is the average of the
closing prices of a share of the Company's Common Stock on Nasdaq over a
15-day trading period ending three trading days before the closing date.
The shares to be issued to this seller can be resold only in accordance
with the following schedule: 40% commencing 12 months after the closing
date, and the balance commencing 18 months after the closing date.
(8) $3,300,000 of cash and $2,200,000 of stock will be delivered on January 3,
1997.
(9) The value of each share of stock for this purpose is the average of the
closing prices of a share of the Company's Common Stock on Nasdaq over a
15-day trading period ending 3 trading days before the closing date. The
shares to be issued to this seller may only be resold commencing 12 months
after the closing date.
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<PAGE> 15
(10) Excludes a total of approximately $1,036,261 (11.1% of the purchase price
payable to the sellers in these acquisitions), of which amount $829,009 is
payable to the former owner of the WCEI Companies and $103,626 is payable
to each of Jules E. Gardner and Kenneth R. Graffeo, two former executive
officers of the WCEI Companies (who are now executive officers of the
Company), pursuant to the terms of the acquisition by West Coast
Franchising of the franchise-related operating assets of those companies in
July 1995. See "Certain Transactions."
(11) $300,000 of cash will be delivered on the closing date. The balance of the
cash will be delivered on or before November 15, 1996. On January 3, 1997,
40% of the shares will be delivered and the remaining 60% will be delivered
on January 5, 1998.
(12) An executive officer of the Company, Donald Weiss, is a director of, and an
investor in, this seller. See "Certain Transactions."
Financial statements for certain of the Prospective Acquisitions are
contained elsewhere in this Prospectus. Certain pro forma data contained in this
Prospectus has been presented as of and for the Company's fiscal year ended
January 31, 1996 and the six months ended July 31, 1996. Included in this data
is financial data of such Prospective Sellers as of and for the year ended
December 31, 1995 and the six months ended June 30, 1996.
Puts and Calls on Additional Stores. In addition, to the Prospective
Acquisitions, it is possible, but not yet probable, that the Company will
acquire additional video specialty stores pursuant to the following
arrangements.
In August 1996 the Company entered into a cross purchase agreement with the
sellers of the Picture Show chain (see "Business -- Recent Acquisitions"), under
which such sellers have the right to require the Company to buy, and the Company
has the right to require such sellers to sell, up to four additional stores
operated or to be operated by such sellers. Such options are exercisable at
specified times between August 1997 and October 2000. The purchase prices for
such additional stores will be equal to 3.5 times their respective net operating
cash flow (as defined) for specified periods and will be payable by delivery.
For a description of certain puts and calls with respect to up to 31
franchised stores which are to be developed in the future under an area
development agreement, see "Business -- Franchising."
15
<PAGE> 16
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1996 AND SIX MONTHS ENDED JULY 31, 1996
Pro Forma Recent Acquisitions. Substantially concurrently with the
completion of the Public Offering of stock on May 17, 1996, the Company acquired
in eleven Recent Acquisitions (the "May 1996 Acquisitions") 172 owned and
operated video specialty stores, plus the rights of one acquired company as
franchisor of an additional 20 franchised stores, for aggregate consideration of
approximately $84.4 million, consisting of the following: $52.5 million in cash,
approximately $24.6 million in shares of Common Stock (1.9 million shares valued
for this purpose at the initial public offering price of $13.00 per share),
approximately $4.7 million in acquisition costs and approximately $2.6 million
in minimum contingent consideration (of which approximately $1.4 million and
$1.2 million is to be paid in cash and stock, respectively). These Recent
Acquisitions are accounted for using the purchase method of accounting.
Between August 26 and October 1, 1996, the Company acquired in two other
Recent Acquisitions (the "Pro Forma Fall 1996 Acquisitions") the assets of 19
owned and operated video specialty stores for approximately $13.1 million
consisting of $7.9 million in cash and $4.7 million in shares of Common Stock
(519,223 shares valued for this purpose at a price ranging from $9.113 to $9.177
per share) and approximately $0.5 million in Acquisition costs. A portion of the
shares (427,047) associated with one of the Pro Forma Fall 1996 Acquisitions are
to be issued in three equal installments (six, twelve and eighteen months from
the Acquisition date) and the number of shares issuable will be adjusted in
certain cases by the difference between the formula price on the acquisition
date and the closing value of the Company's common stock on the issuance date.
Any difference will be due and payable to the Seller, at the Company's option,
in cash or additional common stock. See note 4 to the table which appears under
"Business -- Recent Acquisitions -- Consideration Paid -- Fall 1996
Acquisitions." The Pro Forma Fall 1996 Acquisitions were accounted for as
purchases and the Company recorded $11.6 million of related goodwill. Except as
otherwise expressly indicated, the pro forma information contained herein
includes financial data and other information about the Pro Forma Fall 1996
Acquisitions, as well as financial data and other information about the May 1996
Acquisitions, under the caption and defined term "Pro Forma Recent
Acquisitions". The Fall 1996 Acquisitions included two Acquisitions of
businesses (each of which owned and operated one video specialty store) which
were excluded from the pro forma information as they were not material to the
Unaudited Pro Forma Combined Condensed Financial Statements for the year ended
January 31, 1996 and the six months ended July 31, 1996.
Pro Forma Prospective Acquisitions. The Company expects to acquire the
assets of 44 owned and operated video specialty stores that are described under
"Prospective Acquisitions -- Stores to be Acquired" (the "Pro Forma Prospective
Acquisitions"), for aggregate consideration (subject to subsequent adjustment)
of $27.6 million, consisting of the following: $14.8 million in cash, $11.3
million in shares of Common Stock (approximately 988,449 shares at an assumed
formula price as defined, ranging from $10.69 to $11.00 per share) and
approximately $1.5 million in acquisition costs. The Pro Forma Prospective
Acquisitions will be accounted for using the purchase method of accounting. The
Prospective Acquisitions include two acquisitions of businesses (which in total
own and operate four video specialty stores) whose results were not material and
therefore are not included in the unaudited pro forma combined condensed
financial statements for the year ended January 31, 1996 and the six months
ended July 31, 1996.
The following unaudited pro forma combined condensed financial statements
reflect (i) the consummation of the Recent Acquisitions, (ii) the completion of
the Public Offering at a purchase price of $13.00 per share and the application
of the net proceeds therefrom, (iii) the borrowing of $14.2 million under the
Credit Facility and the use of such funds to refinance approximately $3.1
million of previously existing indebtedness and pay approximately $11.1 million
of the cash portion of the purchase price for the Recent Acquisitions, (iv) the
assumed consummation of the Pro Forma Prospective Acquisitions on the terms
described in this Prospectus and (v) the assumed borrowing of $13.6 million
under the Credit Facility to pay the cash portion of the purchase price of the
Pro Forma Prospective Acquisitions (collectively, the "Pro Forma Transactions").
The unaudited pro forma combined balance sheet at July 31, 1996 gives effect to
the Pro Forma Transactions as if each had occurred at that date. The unaudited
pro forma combined statements of operations for the year
16
<PAGE> 17
ended January 31, 1996 and six months ended July 31, 1996 give effect to the Pro
Forma Transactions as if each had occurred at February 1, 1995.
In the opinion of the Company's management, all adjustments necessary to
present fairly such unaudited pro forma combined condensed financial statements
have been made based on the terms and structure of the Pro Forma Transactions.
In the opinion of the Company's management, the purchase prices have been
preliminarily allocated to all significant tangible and intangible assets in
accordance with APB 16 and the final allocation is not expected to differ
materially from the allocation reflected in the unaudited pro forma combined
condensed financial statements. In connection with the preliminary allocation of
purchase prices, no value has been assigned to the various employment
arrangements entered into between the Company and certain prior owners of the
entities acquired. Such employment contracts were entered into with respect only
to those prior owners who remain in the employment of the Company. Such
contracts serve to identify the new or proposed salary arrangements with
previous owners at competitive market rates. In assessing the value of
non-competition arrangements, the Company considered the significant competitive
pressure that now exists in all geographic markets and the fact that the
industry is undergoing a significant consolidation by large operators with more
economic substance which acts as a deterrent to others seeking to enter the
market. Accordingly, the Company does not believe these arrangements possess any
significant value. The Company believes, however, that changes in the
composition of the assets acquired and the liabilities assumed in connection
with the Recent Acquisitions and the Pro Forma Prospective Acquisitions will
occur due to changes in the ordinary course of business of the video specialty
stores acquired; however, the terms of the agreements relating to the Recent
Acquisitions and the Pro Forma Prospective Acquisitions provide that operations
of these stores are to continue in the ordinary course of business until the
date of their acquisition. Therefore, the Company believes any related change in
adjustments should not be material to the unaudited pro forma combined condensed
financial statements.
The unaudited pro forma combined condensed financial statements do not
purport to represent what the Company's results of operations or financial
position would actually have been had the Pro Forma Transactions occurred on
either of the dates set forth above or to project the Company's results of
operations for any future period.
The unaudited pro forma financial information should be read in connection
with the accompanying notes, the historical financial statements and notes
thereto of the Company, certain of the sellers of the 191 stores in the Pro
Forma Recent Acquisitions (the "Sellers"), and certain of the sellers of the 44
stores to be acquired in the Pro Forma Prospective Acquisitions, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
17
<PAGE> 18
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
RECENT PROSPECTIVE PRO FORMA COMPANY
WEST COAST ACQUISITIONS(1) ACQUISITIONS(1) ADJUSTMENTS PRO FORMA(2)
---------- --------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................. $ 2,335 $ 622 $ 606 $ (1,202)(3)
23,339(4)
(23,439)(5) $ 2,261
Accounts and other receivables.... 1,470 2 75 1,547
Merchandise inventories........... 2,752 20 249 3,021
Prepaid expenses and other current
assets.......................... 841 0 4,225 (4,130)(3) 936
-------- ---- ------ ------- --------
Total current assets............ 7,398 644 5,155 (5,432) 7,765
Videocassette rental inventory,
net............................... 15,265 1,332 3,807 (1,115)(5) 19,289
Furnishings, equipment and leasehold
improvements, net................. 6,091 565 1,885 8,541
Other assets........................ 1,541 134 496 (63)(3) 2,108
Intangible assets................... 77,197 123 88 32,336(5)
(210)(3) 109,534
-------- ---- ------ ------- --------
Total assets.................... $107,492 $ 2,798 $11,431 $ 25,516 $147,237
======== ==== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt............................ $ 23 $ 0 $ 1,049 $ (1,049)(3) $ 23
Accounts payable.................. 7,947 902 1,639 (1,936)(3) 8,552
Accrued expenses and other
liabilities..................... 6,069 179 827 (852)(3) 6,223
Income taxes...................... 1,314 0 37 (37)(3) 1,314
Advances from stockholders........ 0 707 330 (1,037)(3) --
-------- ---- ------ ------- --------
Total current liabilities....... 15,353 1,788 3,882 (4,911) 16,112
Deferred tax liability............ 447 0 51 (51)(3) 447
Long-term debt.................... 4,502 0 1,799 (1,799)(3)
23,339(4) 27,841
Other long-term liabilities....... 48 211 305 (389)(3) 175
-------- ---- ------ ------- --------
Total liabilities............... 20,350 1,999 6,037 16,189 44,575
Stockholders' equity:
Common stock........................ 121 157 227 (369)(5) 136
Preferred stock..................... -- -- -- -- --
Additional paid-in capital.......... 86,397 227 1,381 1,483(3)
12,414(5) 101,902
Treasury stock...................... 0 (304) (81) 385(5) --
Loans to stockholders............... 0 (62) 0 62(3) --
Accumulated surplus (deficit)....... 624 781 3,867 (4,648)(5) 624
-------- ---- ------ ------- --------
Total stockholders' equity...... 87,142 799 5,394 9,327 102,662
-------- ---- ------ ------- --------
Total liabilities and
stockholders' equity.......... $107,492 $ 2,798 $11,431 $ 25,516 $147,237
======== ==== ====== ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
18
<PAGE> 19
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JULY 31, 1996
(1) Pro Forma Recent Acquisitions and Pro Forma Prospective Acquisitions include
the following (in thousands):
<TABLE>
<CAPTION>
VIDEOCASSETTE
CURRENT RENTAL TOTAL CURRENT TOTAL
ASSETS INVENTORY ASSETS LIABILITIES LIABILITIES
------- ------------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(A) PRO FORMA RECENT ACQUISITIONS (PRO
FORMA FALL 1996 ACQUISITIONS):
JJ Video, Inc., Picture Show Video,
Inc., Picture Show
Video-Gardenside, Inc., Picture
Show Video #4, Inc., and Picture
Show Video-Winchester, Inc. ...... $ 69 $ 360 $ 702 $ 970 $ 970
------ ------ ------- ------ ------
Large Corporation, Lyndhurst Video,
Inc., Kearny Video, Inc., New
Milford Video, Inc., Hillside
Video, Inc., Hack Video, Inc.,
Bell Video, Inc., Bergen Video,
Inc., Harris Video, Inc., Rahway
Video, Inc., Wall Video, Inc.,
Mont Video, Inc., Super Video of
Park Ridge, Inc., Emerson Video,
LLC, and Super Video Mgt. Co. .... 575 972 2,096 818 1,029
------ ------ ------- ------ ------
TOTAL PRO FORMA FALL 1996
ACQUISITIONS......................... $ 644 $ 1,332 $ 2,798 $ 1,788 $ 1,999
====== ====== ======= ====== ======
(B) PRO FORMA PROSPECTIVE ACQUISITIONS:
5 UNAFFILIATED SELLING GROUPS:
L.A. Video, Inc. ................. $ 10 $ 298 $ 381 $ 116 $ 260
------ ------ ------- ------ ------
First Choice Video, Inc. ......... 100 509 785 306 373
------ ------ ------- ------ ------
Ohio Entertainment Corporation.... 286 515 1,118 405 580
------ ------ ------- ------ ------
Franexco, Inc. and Affiliate...... 4,031 231 4,986 1,037 1,216
------ ------ ------- ------ ------
Wellesley Entertainment, Inc. .... 9 497 834 945 1,327
------ ------ ------- ------ ------
WEST COAST FRANCHISEES:
AFFILIATED GROUP-WEISS:
Wright Turn Video, Inc. .......... 23 118 374 185 341
Wright Turn Entertainment,
Inc. ........................... 202 162 395 99 99
Wright Turn Entertainment-II,
Inc. ........................... 33 136 206 86 212
------ ------ ------- ------ ------
258 416 975 370 652
------ ------ ------- ------ ------
AFFILIATED GROUP-CURRAN:
Coventry Video, Inc. and Pottstown
Video, Inc. .................... 133 112 308 205 307
Curran, Skypala, Zimmerman W.C.
Video Group..................... 210 522 1,084 402 966
------ ------ ------- ------ ------
343 634 1,392 607 1,273
====== ====== ======= ====== ======
UNAFFILIATED FRANCHISEES:
Dogwood Hill Enterprises, Inc. ...... 33 195 250 49 123
------ ------ ------- ------ ------
Alex Jordon, Cochise Corp. and Klye
David Corp. ...................... 57 306 455 45 45
------ ------ ------- ------ ------
Broad and Park Video, Inc. .......... 28 206 255 2 188
------ ------ ------- ------ ------
TOTAL PRO FORMA PROSPECTIVE
ACQUISITIONS............... $ 5,155 $ 3,807 $11,431 $ 3,882 $ 6,037
====== ====== ======= ====== ======
</TABLE>
See Index to Consolidated Financial Statements set forth in this
Registration Statement for cross-reference to historical financial statements of
certain of the Sellers.
19
<PAGE> 20
(2) See the introductory paragraphs under "Unaudited Pro Forma Combined
Condensed Financial Statements."
(3) Reflects the elimination of certain assets and liabilities of certain
Sellers which, in accordance with the various purchase and sale agreements,
was not acquired by the Company, as follows (in thousands):
<TABLE>
<S> <C> <C>
Cash....................................................... $1,202
Prepaid expenses and other current assets.................. 4,130
Other assets............................................... 63
Intangible Assets.......................................... 210
------
Total assets not acquired........................ $5,605
------
Accounts payable........................................... $1,936
Accrued expenses and other liabilities..................... 852
Income taxes payable....................................... 37
Current portion of long-term debt.......................... 1,049
Advances from stockholders................................. 1,037
Deferred tax liability..................................... 51
Long-term debt............................................. 1,799
Other long-term liabilities................................ 389
------
Total liabilities not acquired................... $7,150
------
Net liabilities not acquired..................... $1,545
======
</TABLE>
The increase of additional paid-in capital of $1.49 million reflects the
$1.55 million of net liabilities not acquired less the elimination of loans to
stockholders in the amount of $0.06 million.
(4) Reflects the increase in borrowing under the Credit Facility to finance a
portion of the purchase price of the Pro Forma Fall 1996 Acquisitions and
the Pro Forma Prospective Acquisitions.
(5) Reflects (i) the allocation of purchase price paid in connection with the
Acquisitions based on the fair value of the assets and liabilities acquired
and (ii) the elimination of historical stockholders' equity relating to the
entities acquired in connection with the Pro Forma Fall 1996 Acquisitions
and Pro Forma Prospective Acquisitions. The purchase price paid in
connection with the Pro Forma Fall 1996 Acquisitions and Pro Forma
Prospective Acquisitions is $39.0 million, which consists of: $21.4 million
in cash, $15.6 million in Common Stock (1,507,672 shares valued at a price
ranging from $9.113 to $11.00 per share) and $2.0 million in acquisition
costs (of which $0.1 million had been accrued at July 31, 1996). The pro
forma effect of these transactions is as follows (in thousands):
<TABLE>
<S> <C> <C>
Cash portion of purchase price........................... $21,405
Fees and expenses paid prior to July 31,
1996......................................... 2,034
-------
Net cash change........................................ $23,439
=======
</TABLE>
At July 31, 1996, other assets included $0.1 million of the unpaid fees and
expenses associated with the Acquisitions.
20
<PAGE> 21
The allocation of purchase price is as follows (in thousands):
<TABLE>
<CAPTION>
HISTORICAL VALUE FAIR PRO-FORMA
OF NET ASSETS VALUE NET ASSETS
ACQUIRED ADJUSTMENT ACQUIRED
----------------- ----------- ----------
<S> <C> <C> <C>
Cash......................................... $ 26 $ 26
Accounts receivable.......................... 77 77
Merchandise inventories...................... 269 269
Prepaid expenses............................. 102 102
Videocassette rental inventory............... 5,139 (1,115) 4,024
Furnishings, equipment and leasehold
improvements, net.......................... 2,450 2,450
Other assets................................. 567 567
Goodwill..................................... -- 32,336 32,336
------ ------- -------
Total................................... $ 8,630 $31,221 $ 39,851
Accounts payable............................. $ 605 $ 605
Accrued expenses and other liabilities....... 161 161
Other long-term liabilities.................. 127 127
------ ------- -------
Total liabilities....................... $ 893 -- $ 893
------ ------- -------
Total........................................ $ 7,737 $31,221 $ 38,958
====== ======= =======
</TABLE>
These transactions had the following effect on stockholders' equity (in
thousands):
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY RETAINED
STOCK CAPITAL STOCK EARNINGS
------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Elimination of historical stockholders'
equity................................... $(384) $ (1,608) $ 385 $(4,648)
Elimination of historical stockholder's
equity reflected in note(3).............. (1,483)
Shares issued as partial consideration for
Acquisitions............................. 15 15,505
----- -------- ---- -------
Net changes in stockholders' equity........ $(369) $ 12,414 $ 385 $(4,648)
===== ======== ==== =======
</TABLE>
21
<PAGE> 22
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS(1)(2)
YEAR ENDED JANUARY 31, 1996 AND THE SIX MONTHS ENDED JULY 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1996(3)
---------------------------------------------------------------------------------
HISTORICAL
-------------------------------------------------------
PRO FORMA PRO FORMA
WEST PRIOR RECENT PROSPECTIVE PRO FORMA COMPANY
COAST ACQUISITIONS ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA
------ ------------ ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenues............................. $9,209 $ 0 $ 65,032 $ 15,033 $ (927) $ 88,347
Franchise fees.............................. 3,211 3,260 1,475 0 (2,036) 5,910
Merchandise and other sales................. 2,299 502 10,384 2,629 (54) 15,760
------ ------ ------- ------ ------- -------
Total revenue............................. 14,719 3,762 76,891 17,662 (3,017)(4) 110,017
Operating costs and expenses:
Store operating costs....................... 6,234 0 37,020 8,785 (5,135)(5) 46,904
Cost of goods sold.......................... 1,384 622 9,271 1,343 (2,722)(6) 9,898
Amortization of videocassette and video game
rental inventory.......................... 1,972 0 17,683 4,699 (3,316)(7) 21,038
General and administrative.................. 3,659 2,728 9,002 2,208 (1,849)(8) 15,748
Intangible amortization..................... 254 0 67 62 5,315(9) 5,698
------ ------ ------- ------ ------- -------
Total operating costs/expenses............ 13,503 3,350 73,043 17,097 (7,707) 99,286
------ ------ ------- ------ ------- -------
Operating income.............................. 1,216 412 3,848 565 4,690 10,731
Interest expense.............................. 640 213 649 203 255(10) 1,960
Other, net.................................... 0 0 (764) (481) 281(11) (964)
------ ------ ------- ------ ------- -------
Income before provision for income taxes and
extraordinary item.......................... 576 199 3,963 843 4,154 9,735
Income taxes.................................. 242 0 571 51 3,468(12) 4,332
------ ------ ------- ------ ------- -------
Income before extraordinary item.............. $ 334 $ 199 $ 3,392 $ 792 $ 686 $ 5,403
====== ====== ======= ====== ======= =======
Pro forma income before extraordinary item per
share....................................... $ 0.06(13) $ 0.39(14)
====== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, 1996(3)
-------------------------------------------------------------------
HISTORICAL
-----------------------------------------
PRO FORMA PRO FORMA
WEST RECENT PROSPECTIVE PRO FORMA COMPANY
COAST ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA
------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenues............................... $17,371 $ 23,233 $8,478 $ (319) $48,763
Franchise fees................................ 2,310 115 0 (602) 1,823
Merchandise and other sales................... 2,718 3,784 1,303 (13) 7,792
------- ------- ------ ------- -------
Total revenue............................... 22,399 27,132 9,781 (934)(4) 58,378
Operating costs and expenses:
Store operating costs......................... 9,004 12,626 4,934 (1,849)(5) 24,797
Cost of goods sold............................ 1,787 3,205 699 (1,202)(6) 4,489
Amortization of videocassette and video game
rental inventory............................ 3,204 5,767 2,822 (675)(7) 11,118
General and administrative.................... 4,688 2,679 1,116 (334)(8) 8,149
Intangible amortization....................... 989 34 28 1,818(9) 2,869
------- ------- ------ ------- -------
Total operating costs/expenses.............. 19,672 24,313 9,599 (2,242) 51,422
------- ------- ------ ------- -------
Operating income................................ 2,727 2,819 182 1,308 6,956
Interest expense................................ 508 196 108 302(10) 1,116
Other, net...................................... (68) 180 (157) 108(11) (17)
------- ------- ------ ------- -------
Income before provision for income taxes and
extraordinary item............................ 2,287 2,441 231 898 5,857
Income taxes.................................... 1,003 383 (3) 1,206 2,589
------- ------- ------ ------- -------
Income before extraordinary item................ $ 1,284 $ 2,058 $ 234 $ (308) $ 3,268
======= ======= ====== ======= =======
Pro forma income before extraordinary item per
share......................................... $ 0.16(13) $ 0.24(14)
======= =======
</TABLE>
22
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF OPERATIONS
(1) Pro Forma Recent Acquisitions and Pro Forma Prospective Acquisitions include
the following historical financial data for the year ended January 31, 1996
(in thousands):
<TABLE>
<CAPTION>
OPERATING NET
RENTAL OTHER TOTAL INCOME INCOME
REVENUE REVENUE REVENUE (LOSS) (LOSS)
------- ------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
(A) PRO FORMA RECENT ACQUISITIONS
(I) PRO FORMA MAY 1996 ACQUISITIONS:
PALMER CORPORATION AND SUBSIDIARIES (Unaudited).... $17,297 $ 6,067 $23,364 $ (166) $ 233
------- ------- ------- ------ ------
RED GIRAFFE:
American Video, Inc. and Red Giraffe Video,
Inc........................................... 8,557 987 9,544 631 482
Lancaster Group, Inc............................. 1,239 189 1,428 39 6
------- ------- ------- ------ ------
9,796 1,176 10,972 670 488
------- ------- ------- ------ ------
MASSACHUSETTS FRANCHISEES:
New Age Entertainment, Inc. ..................... 3,592 405 3,997 12 (43)
HB Associates, Inc............................... 2,381 374 2,755 29 (5)
Best Entertainment, Inc.......................... 1,327 225 1,552 271 270
Video Innovators, Inc............................ 774 73 847 69 29
------- ------- ------- ------ ------
8,074 1,077 9,151 381 251
------- ------- ------- ------ ------
5 OTHER UNAFFILIATED SELLING GROUPS:
A-Z Video Systems, Inc. (Unaudited).............. 3,382 178 3,560 213 21
------- ------- ------- ------ ------
Showtime, Inc.................................... 3,475 436 3,911 (56) (63)
------- ------- ------- ------ ------
Video Giant, Inc................................. 4,906 305 5,211 189 110
------- ------- ------- ------ ------
VIDEO VIDEO:
Video Video of Parsippany, Inc., Video Video of
Chatham, Inc. and Video Video Management
Corporation (Unaudited)....................... 1,078 202 1,280 3 (50)
Video Video of Westfield, Inc. (Unaudited)....... 706 140 846 (91) (114)
------- ------- ------- ------ ------
1,784 342 2,126 (88) (164)
------- ------- ------- ------ ------
VIDEOLAND:
Anthony Cocca's Videoland, Inc................... 3,999 484 4,483 532 514
Vidko, Inc. (Unaudited).......................... 522 27 549 135 135
Kobie-Co Movie Outlet............................ 2,637 306 2,943 499 481
------- ------- ------- ------ ------
7,158 817 7,975 1,166 1,130
------- ------- ------- ------ ------
Total Pro Forma May, 1996 Acquisitions... $55,872 $10,398 $66,270 $ 2,309 $2,006
------- ------- ------- ------ ------
(II) PRO FORMA FALL, 1996 ACQUISITIONS:
PICTURE SHOW:
JJ Video, Inc., Picture Show Video, Inc., Picture
Show Video-Gardenside, Inc., Picture Show
Video #4, Inc., and Picture Show
Video-Winchester, Inc......................... 1,886 177 2,063 275 188
------- ------- ------- ------ ------
SUPER VIDEO:
Large Corporation, Lyndhurst Video Inc., Kearny
Video Inc., New Milford Video Inc., Hillsdale
Video Inc., Hack Video Inc., Bell Video Inc.,
Bergen Video Inc., Harris Video Inc., Rahway
Video Inc., Wall Video Inc., Mont Video Inc.,
Super Video of Park Ridge, Inc., Emerson Video
LLC and Super Video Mgt. Co................... 7,274 1,284 8,558 1,264 1,198
------- ------- ------- ------ ------
Total Pro Forma Fall Acquisitions.................. $ 9,160 $ 1,461 $10,621 $ 1,539 $1,386
------- ------- ------- ------ ------
TOTAL PRO FORMA RECENT ACQUISITIONS................ $65,032 $11,859 $76,891 $ 3,848 $3,392
======= ======= ======= ====== ======
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
OPERATING NET
RENTAL OTHER TOTAL INCOME INCOME
REVENUE REVENUE REVENUE (LOSS) (LOSS)
------- ------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
(B) PRO FORMA PROSPECTIVE ACQUISITIONS:
5 UNAFFILIATED SELLING GROUPS:
L.A. Video Inc................................... 439 49 488 90 71
------- ------- ------- ------ ------
First Choice Video, Inc.......................... 1,618 196 1,814 134 96
------- ------- ------- ------ ------
Ohio Entertainment Corporation................... 1,843 166 2,009 209 213
------- ------- ------- ------ ------
Franexco, Inc. and Affiliate..................... 2,687 500 3,187 (80) 264
------- ------- ------- ------ ------
Wellesley Entertainment, Inc..................... 1,956 700 2,657 (71) (117)
------- ------- ------- ------ ------
WEST COAST FRANCHISES:
AFFILIATED GROUP-WEISS:
Wright Turn Video, Inc........................... 437 75 512 31 (26)
Wright Turn Entertainment, Inc................... 707 66 773 (47) (5)
Wright Turn Entertainment-II, Inc................ 480 108 588 (53) (53)
------- ------- ------- ------ ------
1,624 249 1,873 (69) (84)
AFFILIATED GROUP-CURRAN:
Coventry Video, Inc. and Pottstown Video, Inc.... 605 83 688 (34) 12
Curran, Skypala, Zimmerman, W.C. Video Group..... 2,280 364 2,644 295 264
------- ------- ------- ------ ------
2,885 447 3,332 261 276
UNAFFILIATED FRANCHISES:
Dogwood Hill Enterprises, Inc.................... 511 74 584 54 38
------- ------- ------- ------ ------
Alex Jordan, Cochise Corp. and Kyle David
Corp.......................................... 998 214 1,212 27 27
------- ------- ------- ------ ------
Broad and Park Video, Inc........................ 472 34 506 10 8
------- ------- ------- ------ ------
1,980 322 2,302 91 73
------- ------- ------- ------ ------
TOTAL PRO FORMA PROSPECTIVE ACQUISITIONS $15,033 $ 2,629 $17,662 $ 565 $ 792
======= ======= ======= ====== ======
</TABLE>
- ---------------
Included within Other Revenue, which consists primarily of merchandise revenue,
is royalty and advertising income of $1,446 relating to Palmer Corporation and
$29 relating to American Video, Inc. and Red Giraffe Video, Inc.
See historical financial statements of certain Pro Forma Recent Acquisitions and
Pro Forma Prospective Acquisitions contained elsewhere in this Prospectus.
24
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF OPERATIONS
(1) Pro Forma Recent Acquisitions and Pro Forma Prospective Acquisitions include
the following unaudited historical financial data for the six month period
ended July 31, 1996 (in thousands):
<TABLE>
<CAPTION>
OPERATING NET
RENTAL OTHER TOTAL INCOME INCOME
REVENUE REVENUE REVENUE (LOSS) (LOSS)
------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
(A) PRO FORMA RECENT ACQUISITIONS:
(I) PRO FORMA MAY, 1996 ACQUISITIONS:
PALMER CORPORATION AND SUBSIDIARIES:............... $ 5,469 $1,584 $ 7,052 $ 814 $ 121
------- ------ ------- ------ -----
RED GIRAFFE:
American Video, Inc. and Red Giraffe Video,
Inc........................................... 2,686 260 2,946 164 94
Lancaster Group, Inc. ........................... 354 53 407 11 2
------- ------ ------- ------ -----
3,040 313 3,353 175 96
------- ------ ------- ------ -----
MASSACHUSETTS FRANCHISEES:
New Age Entertainment, Inc....................... 1,283 125 1,407 81 54
HB Associates, Inc............................... 814 121 936 168 172
Best Entertainment, Inc.......................... 437 74 510 167 174
Video Innovators, Inc............................ 307 47 355 (13) (7)
------- ------ ------- ------ -----
2,841 367 3,208 403 393
------- ------ ------- ------ -----
3 OTHER UNAFFILIATED SELLING GROUPS:
A-Z Video Systems, Inc........................... 1,136 50 1,188 252 154
------- ------ ------- ------ -----
Showtime, Inc.................................... 1,115 158 1,272 (9) (12)
------- ------ ------- ------ -----
Video Giant, Inc. ............................... 1,511 160 1,671 (555) (346)
------- ------ ------- ------ -----
VIDEO VIDEO:
Video Video of Parsippany, Inc., Video Video of
Chatham, Inc. and Video Video Management
Corporation................................... 353 61 414 35 4
Video Video of Westfield, Inc.................... 204 32 236 11 (10)
------- ------ ------- ------ -----
557 93 650 46 (6)
------- ------ ------- ------ -----
VIDEOLAND:
Anthony Cocca's Videoland, Inc................... 1,633 66 1,699 345 355
Vidko, Inc....................................... 175 9 184 65 67
Kobie-Co Movie Outlet............................ 859 95 954 227 226
------- ------ ------- ------ -----
2,667 170 2,837 637 648
------- ------ ------- ------ -----
Total Pro Forma May, 1996 Acquisitions............. $18,336 $2,895 $21,231 $ 1,763 $ 1,048
------- ------ ------- ------ -----
(II) PRO FORMA FALL ACQUISITIONS:
PICTURE SHOW:
JJ Video, Inc., Picture Show Video, Inc., Picture
Show Video-Gardenside Inc., Picture Show Video #
4, Inc., and Picture Show Video-Winchester,
Inc.............................................. 936 75 1,011 126 126
------- ------ ------- ------ -----
SUPER VIDEO:
Large Corporation, Lyndhurst Video Inc., Kearny
Video Inc., New Milford Video Inc., Hillsdale
Video Inc., Hack Video Inc., Bell Video Inc.,
Bergen Video Inc., Harris Video Inc., Rahway
Video Inc., Wall Video Inc., Mont Video Inc.,
Super Video of Park Ridge, Inc., Emerson Video
LLC and Super Video Mgt. Co...................... 3,961 929 4,890 930 884
------- ------ ------- ------ -----
Total Pro Forma Fall 1996 Acquisitions:............ $ 4,897 $1,004 $ 5,901 $ 1,056 $ 1,010
------- ------ ------- ------ -----
TOTAL PRO FORMA RECENT ACQUISITIONS................ $23,233 $3,899 $27,132 $ 2,819 $ 2,058
======= ====== ======= ====== =====
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
OPERATING NET
RENTAL OTHER TOTAL INCOME INCOME
REVENUE REVENUE REVENUE (LOSS) (LOSS)
------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
(B) PRO FORMA PROSPECTIVE ACQUISITIONS:
5 UNAFFILIATED SELLING GROUPS:
L.A. Video, Inc............................... $ 321 $ 36 $ 357 $ 74 $ 64
------- ------ ------- ------ -----
First Choice Video, Inc....................... 846 102 948 (30) (14)
------- ------ ------- ------ -----
Ohio Entertainment Corporation................ 1,366 151 1,517 371 370
------- ------ ------- ------ -----
Franexco, Inc. and Affiliate.................. 1,780 318 2,098 (376) (227)
------- ------ ------- ------ -----
Wellesley Entertainment, Inc.................. 995 286 1,281 2 (16)
------- ------ ------- ------ -----
WEST COAST FRANCHISEES:
AFFILIATED GROUP WEISS:
Wright Turn Video, Inc........................... 230 40 270 31 11
Wright Turn Entertainment, Inc................... 331 34 365 99 24
Wright Turn Entertainment-II, Inc................ 230 49 279 (5) (5)
------- ------ ------- ------ -----
791 123 914 125 30
------- ------ ------- ------ -----
AFFILIATED GROUP-CURRAN:
Coventry Video, Inc. and Pottstown Video, Inc.... 252 28 280 (68) (47)
Curran, Skypale, Zimmerman W.C. Video Group...... 1,178 113 1,291 77 71
------- ------ ------- ------ -----
1,430 141 1,571 9 24
UNAFFILIATED FRANCHISES:
Dogwood Hill Enterprises, Inc.................... 253 28 281 19 15
------- ------ ------- ------ -----
Alex Jordan, Cochise Corp. and Kyle David
Corp.......................................... 472 100 572 (15) (15)
------- ------ ------- ------ -----
Broad and Park Video, Inc........................ 224 18 242 3 3
------- ------ ------- ------ -----
TOTAL PRO FORMA PROSPECTIVE ACQUISITIONS........... $ 8,478 $1,303 $ 9,781 $ 182 $ 234
======= ====== ======= ====== =====
</TABLE>
- ---------------
Included within Other Revenue, which consists primarily of merchandise revenue,
is royalty and advertising income of $394 relating to Palmer Corporation and $8
relating to American Video, Inc. and Red Giraffe Video, Inc.
See Index to Consolidated Financial Statements set forth in this Prospectus for
cross-reference to historical financial statements.
(2) See the introductory paragraphs under "Unaudited Pro Forma Combined
Condensed Financial Statements."
(3) West Coast includes the historical results of operations of the Company.
Prior Acquisitions include the results of operations of the WCEI Companies
prior to the acquisition thereof by the Company. Pro Forma Recent
Acquisitions and Pro Forma Prospective Acquisitions include the historical
results of operations of the Sellers.
26
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JANUARY 31, ENDED
1996 JULY 31,1996
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
--------------- -------------
<S> <C> <C> <C>
(4) Adjustment consists of the following (in thousands):
a. To record the elimination of franchisee fees recorded by
the WCEI Companies received from the Massachusetts
Franchisees, as such amounts will be considered
intercompany transactions upon acquisition................ $ 915 $ 331
b. To eliminate rental revenues ($927 for the year ended
January 31, 1996, and $319 for the six months ended July 31,
1996) and merchandise sales ($54 for the year ended
January 31, 1996 and $13 for the six months ended July 31,
1996) included in the historical financial statements of
certain Sellers relating to stores not being acquired
pursuant to the Pro Forma Recent Acquisitions............. 981 332
c. To conform the classification used by a Seller for
advertising reimbursements with those used by the Company (see
corresponding adjustments 5(f) and 6(b)). ................ 1,121 271
------- -------
$ 3,017 $ 934
======= =======
(5) Adjustment consists of the following (in thousands):
a. To record the elimination of franchisee fees paid by the
Massachusetts Franchisees to the WCEI Companies, as such
amounts will be considered intercompany transactions upon
acquisition............................................... $ 915 $ 331
b. To record the change in historical compensation, including
fringe benefits related to owners of certain Sellers. (In
negotiating the Pro Forma Recent Acquisitions and the Pro
Forma Prospective Acquisitions, employment agreements were
entered into in those specific instances where an owner
was to be retained. In all other situations, the asset
purchase agreements specifically exclude employment
reference as such individuals will not be employed by the
Company. The net adjustment includes $1,468 for the year
ended January 31, 1996 and $630 for the six months ended
July 31, 1996 related to those owners to be retained, at
lower compensation levels, and $1,225 for the year ended
January 31, 1996 and $536 for the six months ended July
31, 1996 related to those owners not to be retained.) .... 2,693 1,165
c. To eliminate store operating costs included in the
historical financial statements of the Sellers relating to
stores not acquired in association with the Pro Forma
Recent Acquisitions....................................... 953 373
d. To record the reduction in depreciation expense as a
result of depreciating the acquired furnishings, equipment and
leasehold improvements over their estimated remaining
useful lives.............................................. 1,415 368
e. To conform the method of accounting for handling fees
under a revenue sharing agreement with the method used by the
Company................................................... 148 37
f. To conform the classification used by a Seller for fees
payable under a revenue sharing agreement with those used by
the Company (see offsetting adjustment 4(c) and 6(b)). ... (989) (425)
------- -------
$ 5,135 $ 1,849
======= =======
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JANUARY 31, ENDED
1996 JULY 31,1996
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
--------------- -------------
<S> <C> <C> <C>
(6) Adjustment consists of the following (in thousands):
a. To eliminate the cost of goods sold included in the
historical financial statements of the Sellers relating to
merchandise sales of the stores not acquired in
association with the Pro Forma Recent Acquisitions........ $ 23 $ 14
b. To conform the classification used by a Seller for
advertising reimbursements, fees payable under a revenue
sharing agreement and cost of previously viewed tape sales
with those used by the Company (see corresponding
adjustments 4(c), 5(f) and 7(g)). ........................ 2,699 1,188
------- -------
$ 2,722 $ 1,202
======= =======
(7) Adjustment consists of the following (in thousands):..........
a. To record a decrease in videocassette rental inventory
amortization expense resulting from the allocations of
purchase price to videocassette rental tapes of the
acquired entities, based on current replacement cost for
bulk purchases of used tapes, as well as the assignment of
a three year amortizable life which serves to extend the
remaining economic useful lives of videocassette rental
tapes acquired. Replacement cost for bulk purchases of
used tapes is significantly less than the cost of new tape
purchases. As a result, future amortization relating to
these tapes, on a per tape basis, will be significantly
less than the amortization relating to new tape purchases.
In addition, to the extent the acquired tapes have book
values lower than newly purchased tapes, sales of the
acquired tapes should result in higher operating income
than sales of new tape purchases. These favorable effects
resulting from purchase accounting will diminish with the
passage of time and will not extend beyond the three year
period subsequent to acquisition which is the period over
which these tapes will be amortized. The Company believes
that there will be no changes to future revenue associated
with base stock inventory acquired and therefore there is
no corresponding pro forma adjustment to revenue
necessary. The Company believes that its method of
amortization, as well as that of the entities being
acquired, results in an appropriate matching of tape
amortization expense with the revenue received from the
associated rental of such tapes........................... 3,905 1,167
b. To conform classification used by a Seller for cost of
previously viewed tape sales with those used by the Company
(see corresponding adjustment 6(b))....................... (589) (492)
------- -------
$ 3,316 $ 675
======= =======
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JANUARY 31, ENDED
1996 JULY 31,1996
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
--------------- -------------
<S> <C> <C> <C>
(8) Adjustment consists of the following (in thousands):..........
a. To record the change in historical compensation, including
fringe benefits related to owners of certain entities to be
acquired. (In negotiating the Pro Forma Recent
Acquisitions, employment agreements were entered into in
those specific instances where an owner was to be
retained. In all other situations, the asset purchase
agreements specifically exclude employment reference as
such individuals will not be employed by the Company. The
net adjustment includes $330 for the year ended January
31, 1996 and $75 for the six months ended July 31, 1996
related to those owners to be retained at lower
compensation levels and $215 for the year ended January
31, 1996 and $0 for the six months ended July 31, 1996
related to those owners not to be retained.) ............. $ 545 $ 75
------- -------
b. To record the elimination of historical compensation and
related fringe benefits totaling $1,047 for the year ended
January 31, 1996 and $248 for the six months ended July
31, 1996, and lease expense totaling $201 for the year
ended January 31, 1996 and $11 for the six months ended
July 31, 1996. (The Company believes its pre-existing
corporate infrastructure is sufficient to handle the
operations being acquired without retaining certain
general and administrative employees of certain entities
to be acquired. As a result, the Company entered into
agreements with certain Sellers relating to the
termination of existing employees and the assumption of a
lease arrangement by the former owners upon
acquisition.) ............................................ 1,248 259
c. To eliminate general and administrative costs included in
the historical financial statements of the Sellers relating to
a business not acquired in association with the Prior
Acquisitions.............................................. 56 --
------- -------
$ 1,849 $ 334
======= =======
(9) Adjustment consists of the following (in thousands):
a. To record goodwill amortization relating to the excess of
the estimated purchase price, including related acquisition
costs, over the estimated fair value of assets acquired in
the Recent Acquisitions and the Pro Forma Prospective
Acquisition, (20 years on a straight-line basis).......... $ 5,125 $ 1,818
b. To record the amortization of intangibles, principally
franchise agreements, resulting from the acquisition of the
WCEI Companies (15 years on a straight-line basis)........ 190 --
------- -------
$ 5,315 $ 1,818
======= =======
(10) Adjustment consists of the following (in thousands):
a. To eliminate historical interest expense due to the
partial use of offering proceeds to extinguish outstanding
borrowings................................................ $ 1,705 $ 678
b. To record interest expense related to borrowings under the
Credit Facility at the lending bank's base rate (7% at January
31, 1996 and July 31, 1996)............................... (1,960) (980)
------- -------
$ (255) $ (302)
======= =======
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JANUARY 31, ENDED
1996 JULY 31,1996
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
--------------- -------------
<S> <C> <C> <C>
(11) Adjustment consists of the following (in thousands):
a. To eliminate minority shareholder interest acquired as
part of the Pro Forma Recent Acquisitions................. $ 62 $ 27
b. To eliminate investment income generated from investments
not acquired (in thousands)............................... (343) (135)
------- -------
$ (281) $ (108)
======= =======
(12) Adjustment consists of the following (in thousands):
a. To reflect the estimated effect on the income tax
provision as if the Prior, Pro Forma Recent and Pro Forma
Prospective Acquisitions had been taxed as C
corporations. ............................................ $ 1,306 $ 812
b. To reflect the income tax effect on the pro forma
adjustments (4) through (11) above at an effective tax rate
of 39%, exclusive of non-deductible goodwill totaling
$1,389 for the year ended January 31, 1996 and $695 for the
six months end July 31, 1996 .............................. 2,162 394
------- -------
$ 3,468 $ 1,206
======= =======
(13) Unaudited pro forma income before extraordinary item per share
has been calculated for the year ended January 31, 1996 and
the six month period ended July 31, 1996 by dividing the
unaudited pro forma income before extraordinary item amount by
the weighted average number of shares of common stock
outstanding (4,756,000 at January 31, 1996 and (7,957,000)
July 31, 1996). Unaudited pro forma income before
extraordinary item reflects an adjustment to the consolidated
statement of operations to give effect to the Merger and the
0.340-for-1 reverse stock split as if they had occurred as of
February 1, 1992. Accordingly, the pro forma income tax
provision and pro forma income before extraordinary item have
been calculated as if each entity included in the consolidated
statement of operations had been included in the Company's
consolidated income tax returns and subject to corporate
income taxation as a C Corporation during all periods
presented. In addition, shares to be issued as contingent
consideration in conjunction with the May 1996 Acquisitions
have been considered outstanding since May 17, 1996.
(14) Unaudited pro forma income per share for the year ended
January 31, 1996 and the six month period ended July 31, 1996
have been calculated by dividing unaudited pro forma income by
the pro forma weighted average number of shares of Common
Stock outstanding after giving effect to (i) the Merger, (ii)
the issuance of shares upon formation of the Company, (iii)
the 0.340-for-1 reverse stock split and the shares issued in
conjunction with the Public Offering, (iv) the shares issued
and to be issued in conjunction with the Pro Forma Recent
Acquisitions, (v) repayment of all existing outstanding debt,
(vi) borrowings under the Credit Facility, (vii) the impact of
the Warrant and a portion of the Convertible Note, and (viii)
issuance of shares in connection with the Pro Forma
Prospective Acquisitions, as if all activity occurred as of
February 1, 1995. See Notes 1 and 7 to the Company's
consolidated financial statements. The pro forma weighted
average number of common shares used to calculate pro forma
income per share at January 31, 1996 and July 31, 1996, was
13,829,748.
</TABLE>
30
<PAGE> 31
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The selected historical financial data presented under the captions
Statement of Operations Data for the six month periods ended July 31, 1995 and
1996, and Balance Sheet data at July 31, 1996 have been derived from unaudited
consolidated financial statements of the Company, appearing elsewhere herein.
The selected historical financial data presented under the captions Statement of
Operations Data for the three years ended January 31, 1996, and Balance Sheet
Data at January 31, 1996 and January 31, 1995 have been derived from the
Company's consolidated financial statements, appearing elsewhere in the
Prospectus, which were audited by Price Waterhouse LLP. The selected historical
financial data presented under the captions Statement of Operations Data for the
year ended January 31, 1993 and Balance Sheet Data at January 31, 1994 and
January 31, 1993, have been derived from the Company's consolidated statement of
operations and balance sheet, which were audited by Price Waterhouse LLP and not
included in this Prospectus. The selected historical financial data presented
under the captions Statement of Operations Data and Balance Sheet Data at and
for the year ended January 31, 1992 have been derived from unaudited financial
statements of the Company which have not been included in this Prospectus. The
unaudited pro forma financial data presented under the captions Statement of
Operations Data and Balance Sheet Data at and for the year ended January 31,
1996, and at and for the six month period ended July 31, 1996 have been derived
from the unaudited pro forma combined condensed financial statements, appear
elsewhere herein. The unaudited pro forma combined financial data do not purport
to represent what the Company's results of operations and financial position
would actually have been had the Pro Forma Recent Acquisitions, the Public
Offering, or the Pro Forma Prospective Acquisitions actually occurred at the
dates indicated, or to project the Company's results of operations or financial
position for any future period. The Selected Historical and Pro Forma Combined
Financial Data set forth below should be read in conjunction with the financial
statements and notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Unaudited Pro Forma Combined
Condensed Financial Statements" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED JULY 31
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------- ------ -------
(IN THOUSANDS, EXCEPT STORE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $ 921 $1,120 $2,520 $6,503 $14,719 $5,510 $22,399
Operating costs and expenses............ 995 1,225 2,564 6,118 13,503 5,113 19,672
----- ----- ------ ------ ------- ------ ------
Operating income (loss)................. (74) (105) (44) 385 1,216 397 2,727
Interest expense, net and other......... 26 45 42 118 640 137 440
----- ----- ------ ------ ------- ------ ------
Income (loss) before income taxes and
extraordinary item.................... (100) (150) (86) 267 576 260 2,287
Income taxes (benefit).................. -- -- (14) 63 242 96 1,003
----- ----- ------ ------ ------- ------ ------
Income (loss) before extraordinary
item.................................. $ (100) $ (150) $ (72) $ 204 $ 334 $ 164 $ 1,284
===== ===== ====== ====== ======= ====== ======
Pro forma income (loss) before
extraordinary item per share.......... $(0.35)(2) $(0.36)(2) $(0.07)(2) $ 0.12(2) $ 0.06(2) $ 0.16(2) $ 0.03(2)
OTHER DATA:
Depreciation and amortization(4)........ $ 512 $ 418 $ 870 $1,628 $ 2,585 $1,187 $ 4,563
Purchases of videocassette rental
inventory............................. 232 471 685 1,430 2,002 1,065 5,395
STORE DATA:
Increase (decrease) in same store
revenue(5)............................ -- 14.9% (6.1)% 14.2% 4.8% 0.5% 0.6%
Company-owned stores at end of period... 6 8 14 28 28 28 201
Franchised stores at end of period...... -- -- -- -- 304 307 295
----- ----- ------ ------ ------- ------ ------
Total stores at end of period........... 6 8 14 28 332 335 496
===== ===== ====== ====== ======= ====== ======
<CAPTION>
PRO FORMA(1)
-------------------------------
SIX MONTHS
YEAR ENDED ENDED
JAN. 31, 1996 JULY 31, 1996
------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $ 110,017 $58,378
Operating costs and expenses............ 99,286 51,422
------- --------
Operating income (loss)................. 10,731 6,956
Interest expense, net and other......... 996 1,099
------- --------
Income (loss) before income taxes and
extraordinary item.................... 9,735 5,857
Income taxes (benefit).................. 4,332 2,589
------- --------
Income (loss) before extraordinary
item.................................. $ 5,403 3,268
======= ========
Pro forma income (loss) before
extraordinary item per share.......... $ 0.39(3) $ 0.24(3)
OTHER DATA:
Depreciation and amortization(4)........ $ 28,081 $14,494
Purchases of videocassette rental
inventory............................. 25,147 14,352
STORE DATA:
Increase (decrease) in same store
revenue(5)............................ 0.9% 0.1%
Company-owned stores at end of period... 265 269
Franchised stores at end of period...... 291 276
------- --------
Total stores at end of period........... 556 545
======= ========
</TABLE>
(footnotes on following page)
31
<PAGE> 32
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------- PRO FORMA(1)
JANUARY 31, ------------
------------------------------------------------ JULY 31, JULY 31,
1992 1993 1994 1995 1996 1996 1996
----- ----- ----- ------ ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ -- $ 23 $ 12 $ 45 $ 611 $ 2,335 $ 2,261
Videocassette rental inventory,
net............................. 67 162 388 1,464 1,509 15,265 19,289
Total assets...................... 216 360 770 3,631 16,515 107,492 147,237
Long-term debt, less current
portion......................... 328 302 332 738 7,101 4,502 27,841
Total liabilities................. 656 906 1,338 3,266 15,972 20,350 44,575
Stockholders' equity.............. (440) (546) (568) 365 543 87,142 102,662
</TABLE>
- ---------------
(1) For a discussion of the assumptions and adjustments underlying the unaudited
pro forma combined financial data, see "Unaudited Pro Forma Combined
Condensed Financial Statements."
(2) Unaudited pro forma income (loss) before extraordinary item per share has
been calculated for each of the years in the five year period ended January
31, 1996 and for each of the six month periods ended July 31, 1995 and 1996
by dividing the respective unaudited pro forma income (loss) before
extraordinary item amounts by the weighted average number of shares of
common stock outstanding (289,000, 418,000, 843,000, 1,693,000 and
4,756,000, as of January 31, 1992, 1993, 1994, 1995 and 1996, respectively
and 4,756,000 as of July 31, 1995 and 1996). Unaudited pro forma income
(loss) before extraordinary item reflects an adjustment to the consolidated
statement of operations to give effect to the Merger and the 0.340-for-1
reverse stock split as if they had occurred as of February 1, 1992.
Accordingly, the pro forma income tax provision (benefit) and pro forma
income (loss) before extraordinary item have been calculated as if each
entity included in the consolidated statement of operations had been
included in the Company's consolidated income tax returns and subject to
corporate income taxation as a C Corporation during all periods presented.
(3) Unaudited pro forma income (loss) before extraordinary item per share for
the year ended January 31, 1996 and the six month period ended July 31, 1996
have been calculated by dividing unaudited pro forma income by the pro forma
weighted average number of shares of Common Stock outstanding after giving
effect to (i) the Merger, (ii) the issuance of shares upon formation of the
Company, (iii) the 0.340-for-1 reverse stock split and the shares issued in
conjunction with the Public Offering, (iv) the shares issued and to be
issued in conjunction with the Recent Acquisitions, (v) repayment of all
existing outstanding debt, (vi) borrowings under the Credit Facility, (vii)
the impact of the Warrant and a portion of the Convertible Note and (viii)
the issuance of shares in connection with the Pro Forma Prospective
Acquisition (as defined under "Unaudited Pro Forma Combined Condensed
Financial Statements"), as if all activity occurred as of February 1, 1995.
See Notes 1 and 7 to the Company's consolidated financial statements. The
pro forma weighted average number of common shares used to calculate pro
forma income per share at January 31, 1996 and July 31, 1996, was
13,829,748.
(4) The Company's policy is that videocassette rental inventory, which includes
video games, is stated at cost and is amortized over its estimated economic
life with no provision for salvage value. Videocassettes that are considered
base stock are amortized over 36 months on a straight-line basis. New
releases are amortized as follows: the first through third copies of each
title per store are amortized as base stock and succeeding copies of each
title per store are amortized over nine months on a straight-line basis.
(5) Same store revenue is defined as the aggregate revenues from Company-owned
stores open for the entirety of the periods being compared. Increase
(decrease) reflects change from prior fiscal year.
32
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has experienced rapid growth in revenue primarily as a result
of acquiring video specialty store chains, opening new stores and increasing
existing store revenues. The number of stores owned and operated by the Company
increased from one at June 30, 1989 to 28 at January 31, 1996, while during the
same period the number of franchised stores increased from none to 304. Until
1993, all of the Company's stores were located in Ohio. After acquiring the
Videosmith(R) chain in 1994, the Company owned and operated stores in Ohio and
Massachusetts. In 1995, the acquisition of the franchise-related operating
assets of the WCEI Companies provided the Company with 305 franchised stores
located principally in Pennsylvania, New Jersey, Illinois, Maryland,
Massachusetts, Ohio and Florida as well as purchasing, management information
and retail operations systems developed specifically to manage video specialty
stores. On October 1, 1996, after giving effect to consummation of the Recent
Acquisitions, the Company owned and operated 219 stores and was the franchisor
of 286 stores. The Recent Acquisitions significantly increased the number of
stores in Pennsylvania, Ohio, New Jersey and New York and expanded the Company's
stores to a total of 24 states. Consummation of the Prospective Acquisitions in
November 1996 will increase the number of stores in New Jersey, Ohio,
Pennsylvania, Massachusetts, Louisiana, Florida and New York.
Historically, the Company's revenues have been derived primarily from the
rental of videocassettes and video games together with sales of previously
viewed videocassettes, ("rental revenues"), while lesser amounts have been
derived from payments from franchisees ("franchise fees") and sales of
videocassettes, miscellaneous merchandise and other sales ("merchandise and
other sales"). Acquisitions of franchised stores and stores with differing
levels of merchandise and other sales compared with rental revenues have had,
and may in the future have, an effect on the Company's mix of revenue
components. See "-- Pro Forma Results of Operations." The Company believes that
convenience, selection, customer service, weather and, to a lesser extent, price
are the most significant factors in determining rental volumes. Significant
increases in rental revenues largely depend upon the appeal of new releases
coming from motion picture producers and video game developers. Management plans
and executes various buying, marketing and operating strategies so as to take
maximum advantage of those competitive factors which are under its control. The
Franchise arrangement calls for the Company to receive franchise fee payments
monthly in arrears from its approximately 300 franchised stores. The franchise
fee payment due from each franchisee is equal to 7% of the aggregate revenues
from all of the franchisee's stores for the prior month, of which 2% of such
aggregate revenues has been devoted to paying marketing and advertising costs.
Merchandise and other sales are derived primarily from new videocassettes sold
directly to customers, sales of supplies to franchisees, video game sales and
the sale of confectionery and other movie-related merchandise.
Store operating expenses generally consist of expenses incurred at the
store level, including amortization of videocassette and video game rental
inventory, personnel expense, lease expense and utility expense and
depreciation. For purposes of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," videocassette and video game
rental inventory amortization expense has been removed from store operating
expenses and discussed separately. Videocassette and video game rental inventory
amortization expense is a substantial component of total expenses and will vary
depending on the amortization policy adopted. The Company's policy is to state
videocassette rental inventory, which includes video games, at cost and amortize
inventory over its estimated economic life with no provision for salvage value.
Videocassettes that are base stock are amortized over 36 months on a
straight-line basis. New release videocassettes are amortized as follows: the
first through third copies of each title per store are amortized as base stock
and succeeding copies of each title per store are amortized over nine months on
a straight-line basis. The Company believes that its method of amortization, as
well as that of the entities being acquired, results in an appropriate matching
of tape amortization expense with the revenue received from the associated
rental of such tapes.
Cost of sales is a smaller component of total expenses consisting primarily
of costs associated with purchasing videocassettes to be sold directly to
customers, supplies to be sold to franchisees, video games and confectionery
items. General and administrative expenses are non-store level expenses and
include general corporate expenses such as marketing and advertising, personnel,
administration, legal and accounting and amortization expenses. These functions
are primarily performed at the Company's headquarters in Philadelphia,
Pennsylvania.
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<PAGE> 34
Intangible assets are primarily comprised of franchise rights and goodwill.
Franchise rights are amortized on a straight-line basis over 15 years, the
estimated remaining economic life of such rights. Goodwill is amortized on a
straight-line basis over 20 years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, on a historical
basis and on a pro forma basis, statement of operations data and other data
expressed as a percentage of total revenue and the number of stores open at the
end of each period.
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------ PRO FORMA
SIX MONTHS ---------------------------
ENDED SIX MONTHS
YEAR ENDED JANUARY 31, JULY 31, YEAR ENDED ENDED JULY
------------------------ -------------- JANUARY 31, 31,
1994 1995 1996 1995 1996 1996 1996
----- ----- ----- ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Rental revenues...................... 89.2% 86.2% 62.6% 81.9% 77.6% 80.3% 83.5%
Franchise fees....................... -- -- 21.8 6.1 10.3 5.4 3.1
Merchandise and other sales.......... 10.8 13.8 15.6 12.0 12.1 14.3 13.4
----- ----- ----- ----- ----- ----- -----
Total.............................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Operating costs and expenses:
Store operating expenses(1).......... 51.7 52.7 42.3 55.6 40.2 42.6 42.5
Cost of sales........................ 1.7 5.9 9.4 5.1 8.0 9.0 7.7
Amortization of videocassette and
video game rental inventory(2)..... 31.1 22.1 13.4 17.6 14.3 19.1 19.0
General and administrative........... 17.2 13.4 24.9 14.1 20.9 14.3 14.0
Intangible amortization.............. -- -- 1.7 .4 4.4 5.2 4.9
----- ----- ----- ----- ----- ----- -----
Total.............................. 101.7 94.1 91.7 92.8 87.8 90.2 88.1
----- ----- ----- ----- ----- ----- -----
Operating income (loss).............. (1.7) 5.9 8.3 7.2 12.2 9.8 11.9
Non-operating (income) expense,
net................................ 1.7 1.8 4.4 2.5 2.0 0.9 1.9
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item................. (3.4) 4.1 3.9 4.7 10.2 8.9 10.0
Provision (benefit) for income
taxes.............................. (0.5) 1.0 1.6 1.7 4.5 4.0 4.4
----- ----- ----- ----- ----- ----- -----
Income (loss) before extraordinary
item............................... (2.9)% 3.1% 2.3% 3.0% 5.7% 4.9% 5.6%
===== ===== ===== ===== ===== ===== =====
OTHER DATA:
Purchases of videocassette rental
inventory.......................... 27.2% 22.0% 13.6% 19.3% 24.1% 22.9% 24.6%
STORE DATA:
Increase (decrease) in same store
revenue(3)......................... (6.1)% 14.2% 4.8% 0.5% 0.6% 0.9% 0.1%
Company-owned stores open at end of
period............................. 14 28 28 28 201 265 269
Franchised stores open at end of
period............................. -- -- 304 307 295 291 276
----- ----- ----- ----- ----- ----- -----
Total stores open at end of period... 14 28 332 335 496 556 545
===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Exclusive of amortization of videocassette and video game rental inventory.
(2) The Company's tape amortization policy requires that videocassette rental
inventory, which includes video games, is stated at cost and is amortized
over its estimated economic life with no provision for salvage value.
Videocassettes that are considered base stock are amortized over 36 months
on a straight-line basis. New releases are amortized as follows: the first
through third copies of each title per store are amortized as base stock and
succeeding copies of each title per store are amortized over nine months on
a straight-line basis.
(3) Same store revenue is defined as the aggregate revenues from Company-owned
stores open for the entirety of the periods being compared. Increase
(decrease) reflects change from prior fiscal year, or equivalent three month
period.
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<PAGE> 35
PRO FORMA RESULTS OF OPERATIONS
Pro forma results of operations are not necessarily indicative of what the
Company's results of operations would have been had the Company actually made
the Pro Forma Recent Acquisitions or the Pro Forma Prospective Acquisitions
reflected in the Pro Forma Statement of Operations Data on the dates indicated,
nor do they purport to project future results of operations. Any significant
acquisitions in future periods could impact the future mix of rental revenues,
franchise fees and merchandise and other sales and (because each such component
of revenues involves different types of expenses) the future mix of expenses and
the Company's operating margins. See "Risk Factors -- Acquisition Risks."
Revenues. Rental revenues represented 80.3% and 83.5% of pro forma total
revenues for the year ended January 31, 1996 and for the six months ended July
31, 1996, respectively, as compared with 62.6% and 77.6% of historical total
revenues for the same periods. Merchandise and other sales represented 14.3% and
13.4%, respectively, of total revenues for the year ended January 31, 1996 and
for the six months ended July 31, 1996, respectively, on a pro forma basis as
compared with 15.6% and 12.1%, respectively, on a historical basis and franchise
fees represented 5.4% and 3.1% of total revenues on a pro forma basis for the
year ended January 31, 1996 and for the six months ended July 31, 1996,
respectively, as compared with 21.8% and 10.3%, respectively, on a historical
basis. These differences reflect the fact that the primary revenue source for
the businesses acquired in the May, 1996 Acquisitions and the Pro Forma Fall
1996 Acquisitions and the businesses to be acquired in the Pro Forma Prospective
Acquisitions is rental revenue. The Company believes that future Acquisitions,
if any, of owned and operated stores (particularly Acquisitions of existing West
Coast Video(@) franchised stores) should increase rental revenues as a
percentage of total revenues.
Store Operating Expenses. Store operating expenses represented 42.6% and
42.5%, respectively, of pro forma total revenues for the year ended January 31,
1996 and for the six months ended July 31, 1996, respectively, as compared with
42.3% and 40.2%, respectively, of historical total revenues for the same
periods. In the future, a change in the mix of the number of Company-owned and
franchised stores should result in a change in store operating expenses as a
percentage of total revenues, since franchising operations involve no store
operating expenses.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game inventory was 19.1% and
19.0% of total pro forma revenues for the year ended January 31, 1996 and for
the six months ended July 31, 1996, respectively, compared to 13.4% and 14.3%,
respectively, of historical total revenues for the same periods, because the
rental of purchased stocks of videocassettes and video games constitutes a
larger component of the Company's business on a pro forma basis than on an
historical basis. Pro forma and historical amortization of videocassette and
video game rental inventory as a percentage of rental revenue were approximately
the same within each period.
General and Administrative Expenses. General and administrative expenses
were 14.3% and 14.0% of pro forma total revenues for the year ended January 31,
1996 and for the six months ended July 31, 1996, respectively, as compared with
24.9% and 20.9%, respectively, of total historical revenues during the same
periods. This difference was due primarily to a consolidation of the
administrative function on a pro forma basis so that the incremental increase in
revenues was greater than the incremental increase in general and administrative
costs. The Company believes that its current general and administrative
infrastructure can support additional Acquisitions without major augmentation
which should result in improving general and administrative expense margins.
Income before extraordinary item. Income before extraordinary item was
4.9% and 5.6% of revenues on a pro forma basis for the year ended January 31,
1996 and for the six months ended July 31, 1996, respectively, as compared with
2.3% and 5.7%, respectively, for the Company historically during the same
periods.
HISTORICAL RESULTS OF OPERATIONS FOR THE COMPANY
The Company's revenues constituted 13.4% and 38.4% of pro forma combined
total revenues for the fiscal year ended January 31, 1996 and for the six months
ended July 31, 1996, respectively.
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<PAGE> 36
SIX MONTHS ENDED JULY 31, 1996 COMPARED TO SIX MONTHS ENDED JULY 31, 1995
Revenues. Revenues increased $16.9 million, or 307.3%, from $5.5 million
for the six months ended July 31, 1995 to $22.4 million for the six months ended
July 31, 1996. Of this increase approximately $2.9 million was contributed by
the franchise business which was acquired by the Company on July 12, 1995 and
which was therefore included in the Company's accounts for all six months of
1996 but less than one month in 1995. An additional $13.7 million of revenues
was contributed by the 172 video rental stores purchased on May 17, 1996 from
the proceeds of the Offering. The remaining increase of $0.3 million of revenues
is due to sales increases in stores owned by the Company prior to the 172 stores
acquired on May 17, 1996.
Rental revenues increased $12.9 million, or 286.7%, from $4.5 million for
the six months ended July 31, 1995 to $17.4 million for the six months ended
July 31, 1996, primarily due to $12.6 million of rental revenues contributed by
the 172 video rental stores purchased on May 17, 1996. The remaining increase in
rental revenues of $0.3 million is due to rental increases of the stores owned
by the Company prior to the 172 stores acquired on May 17, 1996 for a full six
months in both 1995 and 1996.
Franchise fee revenues increased $2.0 million, or 666.7%, from $0.3 million
for the six months ended July 31, 1995 to $2.3 million for the six months ended
July 31, 1996 due to the acquisition of the franchise business on July 12, 1995
and which was therefore included in the Company's accounts for all six months in
1996 but only for 19 days in 1995.
Merchandise and other sales increased $2.0 million, or 285.7%, from $0.7
million for the six months ended July 31, 1995 to $2.7 million for the six
months ended July 31, 1996, primarily due to $1.1 million of merchandise and
other sales contributed by the 172 video rental stores purchased on May 17,
1996. The remaining difference of $0.9 million relates to the franchise business
whose merchandise and other sales only contributed 19 days of revenues in 1995
as compared to all 6 months in 1996.
Store Operating Expenses. Store operating expenses net of amortization of
videocassette rental inventory increased $6.0 million, or 200.0%, from $3.0
million for the six months ended July 31, 1995 to $9.0 million for the six
months ended July 31, 1996. As a percentage of total revenues, store operating
expenses decreased 14.3 percentage points from 54.5% for the six months ended
July 31, 1995 to 40.2% for the six months ended July 31, 1996. In addition, as a
percentage of rental revenues and merchandise and other sales (excluding
franchise fees), store operating costs decreased 12.9 percentage points from
57.7% for the six months ended July 31, 1995 to 44.0% for the six months ended
July 31, 1996. This reflects lower operating costs as a percent of revenue for
the 172 video rental stores purchased on May 17, 1996. In addition, the
franchise business contributed $3.2 million of total revenues ($2.3 million of
franchise fees and $0.9 million of merchandise and other sales) during the
period which involve virtually no store operating expenses.
Cost of Sales. Cost of sales increased $1.5 million, or 500.0%, from $0.3
million for the six months ended July 31, 1995 to $1.8 million for the six
months ended July 31, 1996, primarily as a result of an increase in sales of
merchandise and other sales due to the acquisition of the franchise business on
July 12, 1995 and the acquisition on May 17, 1996 of 172 video rental stores. As
a percentage of merchandise and other sales, cost of sales increased by 23.8
percentage points from 42.9% for the six months ended July 31, 1995 to 66.7% for
the six months ended July 31, 1996. This was primarily due to the acquisition of
the franchise business which had an increase in merchandise sales of $0.9
million for the six month period ended July 31, 1996 as compared to the 19 days
the franchise business was owned during the six month period ended July 31,
1995. Sales to franchisees are made at substantially lower margins. For the six
months ended July 31, 1996, sales to franchisees represented 34.4% of all
merchandise and other sales as compared to 4.8% for the six months ended July
31, 1995.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased by $2.2 million, or 220.0%, from $1.0 million for the six months ended
July 31, 1995 to $3.2 million for the six months ended July 31, 1996, primarily
as a result of the acquisition of the 172 video rental stores which were
acquired on May 17, 1996. As a percentage of rental revenues this amortization
decreased 3.8 percentage points from 22.2% for the six months ended July 31,
1995 to 18.4% for the six months ended July 31, 1996. This is primarily due to
the bulk purchases of used tapes acquired in
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<PAGE> 37
conjunction with the 172 video rental stores acquired on May 17, 1996 as more
fully explained in Note 4 to the Consolidated Financial Statements.
General and Administrative Expense. General and administrative expenses,
including intangible amortization, increased $4.9 million, or 612.5%, from $0.8
million for the six months ended July 31, 1995 to $5.7 million for the six
months ended July 31, 1996. As a percentage of total revenues, general and
administrative expenses increased 10.9 percentage points from 14.5% for the six
months ended July 31, 1995 to 25.4% for the six months ended July 31, 1996. A
significant part of the increases both in dollars and percentage of sales is due
to $1.0 million or a 0.5% increase in amortization of goodwill associated with
the July, 1995 acquisition of the franchise business and the May, 1996
acquisition of 172 video rental stores. The remaining dollar and percentage
increases are primarily related to the additional personnel and non-store
operating costs which were absorbed from the acquisitions of the 172 video
rental stores and the franchise business. General and administrative expenses of
the franchise business are historically higher than the video rental store
business because the principal cost of its business is the administrative cost
of providing support services to franchisees.
Non-Operating Expense. Net non-operating expense increased $0.3 million,
or 300.0%, from $0.1 million for the six months ended July 31, 1995 to $0.4
million for the six months ended July 31, 1996. Interest expense comprises
almost all of this net amount. As a percentage of total revenues, interest
expense increased 0.4 percentage points from 1.8% for the six months ended July
31, 1995 to 2.2% for the six months ended July 31, 1996. This increase is
attributable to additional interest expense incurred in connection with the
acquisitions of the franchise business and the acquisition of the 172 video
rental stores.
Extraordinary Item. For the six months ended July 31, 1996, the
extraordinary item increased $0.4 million ($0.2 million net of taxes) to $0.4
million. In conjunction with the early extinguishment of a portion of the
previously outstanding subordinated debt the Company was required by terms of
the note upon completion of the Offering to pay a prepayment penalty of $0.4
million.
Net Income. As a result of the foregoing, net income increased $0.8
million, or 400.0%, for the six months ended July 31, 1996 from $0.2 million for
the six months ended July 31, 1995.
YEAR ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED JANUARY 31, 1995
Revenues. Revenues increased $8.2 million, or 126.2%, from $6.5 million
for the year ended January 31, 1995 to $14.7 million for the year ended January
31, 1996. Of this increase, approximately $4.2 million was contributed by the 14
Boston-based Videosmith(R) stores, which were acquired by the Company on August
5, 1994 and were therefore included in the Company's accounts for all 12 months
of the fiscal year ended January 31, 1996 but less than six months of the fiscal
year ended January 31, 1995. An additional $3.2 million of franchise fees and
$0.7 million of associated product sales were contributed by the Company's
franchise-related operations following the acquisition on July 12, 1995 of the
franchise business. The video game store acquired from the WCEI Companies
contributed an additional $0.3 million of merchandise and other sales. Revenues
from the Company's other video stores decreased $0.2 million reflecting the
closing of one store, a delay in opening another store and changes in sources of
supply.
Rental revenues increased $3.6 million, or 64.3%, from $5.6 million for the
year ended January 31, 1995 to $9.2 million for the year ended January 31, 1996,
due primarily to having 12 months of revenues, as compared to less than six
months of revenues, from the Videosmith(R) stores and also to an increase of
$0.2 million in revenues from the Company's stores. Increases occurred primarily
in Videosmith(R) stores, principally as a result of continuing growth in two
stores, the elimination of a closely situated competitor from one market and a
change of management personnel early in 1995 in a third store. During the last
six and one half months of the year ended January 31, 1996, as a result of the
acquisition of the franchise business, franchise fees became, for the first
time, a source of revenue for the Company and generated 21.8% of total revenues
for the entire period. Merchandise and other sales increased $1.4 million, or
156.3%, from $0.9 million for the year ended January 31, 1995 to $2.3 million
for the year ended January 31, 1996. In the six and one half months following
the Company's acquisition of the franchise business, sales of supplies to
franchisees amounted to $0.7 million and retail sales at the video game store
acquired from the WCEI Companies amounted to an additional $0.3 million.
Merchandise and other sales also grew faster than rental revenues
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<PAGE> 38
during the period because the Company owned the Videosmith(R) stores for all 12
months of the year (compared to less than six months of the prior year) and
merchandise and other sales accounted for a larger percentage of total revenues
for the Videosmith(R) stores (14.7%) than for the Company's other video
specialty stores (6.3%) due to Videosmith(R)'s historical emphasis on
merchandise and other sales in comparison with most other chains in the
industry.
Store Operating Expenses. Store operating expenses net of amortization of
videocassette rental inventory increased $2.8 million, or 81.7%, from $3.4
million for the fiscal year ended January 31, 1995 to $6.2 million for the
fiscal year ended January 31, 1996, reflecting 12 months of operations for the
Videosmith(R) stores and the acquisition of the video game store for six and one
half months. As a percentage of total revenues, store operating expenses
decreased 10.4 percentage points from 52.7% for the fiscal year ended January
31, 1995 to 42.3% for the fiscal year ended January 31, 1996. This decrease was
primarily an effect of the acquisition of the franchise business, which
contributed $3.9 million of revenues during the period but involved no store
operating expenses. As a percentage of rental revenues and merchandise and other
sales (excluding franchise fees), store operating costs increased 1.5 percentage
points, from 52.7% for the year ended January 31, 1995 to 54.2% for the year
ended January 31, 1996, due primarily to higher occupancy and payroll costs per
store in metropolitan Boston as compared to Ohio.
Cost of Sales. Cost of sales increased $1.0 million, or 262.3%, from $0.4
million for the year ended January 31, 1995 to $1.4 million for the year ended
January 31, 1996, primarily as a result of the acquisition of the franchise
business (which accounted for $0.8 million of the increase) and the expansion of
the Company's product sales resulting from the Videosmith(R) acquisition (which
accounted for $0.1 million of the increase). As a percentage of total revenues,
cost of sales increased by 3.5 percentage points, from 5.9% for the year ended
January 31, 1995 to 9.4% for the year ended January 31, 1996, due primarily to a
change in the mix of total revenues in favor of merchandise and other sales and
the acquisition of the franchise business. The franchise business had
merchandise and other sales that were 24.0% of its total revenues, which is
higher than the comparable percentage for the Company historically. As a
percentage of merchandise and other sales, cost of sales increased by 17.6
percentage points, from 42.6% for the year ended January 31, 1995 to 60.2% for
the year ended January 31, 1996, primarily because sales to franchisees (which
represent 69.0% of the total merchandise and other sales of the franchise
business) are made at substantially lower margins.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of videocassette and video game rental inventory increased $0.6
million, or 37.3%, from $1.4 million for the fiscal year ended January 31, 1995
to $2.0 million for the fiscal year ended January 31, 1996, due to the expansion
of the Company's rental business through the Videosmith(R) acquisition which
occurred on August 5, 1994. As a percentage of total revenues, amortization of
videocassette and video game rental inventory decreased 8.7 percentage points
from 22.1% for the fiscal year ended January 31, 1995 to 13.4% for the fiscal
year ended January 31, 1996 primarily as a result of a change in the mix of
total revenues in favor of franchise fees and merchandise and other sales. As a
percentage of rental revenues, amortization of videocassette and video game
rental inventory decreased 4.2 percentage points from 25.6% for the year ended
January 31, 1995 to 21.4% for the year ended January 31, 1996, due primarily to
the difference in the ratio of videocassette purchases to rental revenues
between the Videosmith(R) stores (a ratio of approximately 18%) and the
Company's other stores (a ratio of approximately 27%), which reflects the
greater than industry-average demand for the rental of film classics and other
catalog titles, as compared to new releases and video games, at Videosmith(R)
stores.
General and Administrative Expenses. General and administrative expenses,
including intangible amortization, increased $3.1 million, or 349.8%, from $0.9
million for the fiscal year ended January 31, 1995 to $4.0 million for the
fiscal year ended January 31, 1996, reflecting increased head count and
non-store operating costs acquired from the WCEI Companies of $2.8 million and
approximately $0.4 million of general and administrative expenses attributable
to including 12 months (rather than less than six months), of Videosmith(R)
operations. As a percentage of total revenues, general and administrative
expenses increased 13.2 percentage points from 13.4% for the fiscal year ended
January 31, 1995 to 26.6% for the fiscal year ended January 31, 1996, primarily
as a result of the acquisition of the franchise business, whose general and
administrative expenses equalled 65.8% of its total revenues because the
principal cost of this business is the administrative cost of providing support
services to franchisees.
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<PAGE> 39
Non-Operating Expense, Net. Non-operating expense, net, increased $0.5
million, or 442.4%, from $0.1 million for the fiscal year ended January 31, 1995
to $0.6 million for the fiscal year ended January 31, 1996. As a percentage of
total revenues, non-operating expense, net, increased 2.6 percentage points from
1.8% for the fiscal year ended January 31, 1995 to 4.4% for the fiscal year
ended January 31, 1996 due to approximately $0.5 million of additional interest
expense incurred in connection with the Videosmith(R) acquisition and the
acquisition of the franchise business from the WCEI Companies.
Net Income. As a result of the foregoing, particularly the acquisition of
the franchise business and the inclusion of 12 months of Videosmith(R)
operations, net income increased $0.1 million, from $0.2 million for the year
ended January 31, 1995 to $0.3 million for the year ended January 31, 1996.
YEAR ENDED JANUARY 31, 1995 COMPARED TO YEAR ENDED JANUARY 31, 1994
Revenues. Revenues increased $4.0 million, or 158.1%, from $2.5 million
for the year ended January 31, 1994 to $6.5 million for the year ended January
31, 1995. Of this increase, approximately $3.8 million was a result of the
Company's acquisition of the 14 Videosmith(R) stores on August 5, 1994. The
remaining $0.2 million is attributable to revenue increases at the Company's
Nostalgia Ventures stores.
Rental revenues accounted for 86.2%, and merchandise and other sales
accounted for 13.8%, of total revenues for the year ended January 31, 1995,
compared with 89.2% and 10.8%, respectively, for the year ended January 31,
1994. The Company had no franchise fee revenues during either year. Merchandise
and other sales increased faster than rental revenues because the Videosmith(R)
stores had a higher ratio of merchandise and other sales to rental revenues than
the Company's other stores due to Videosmith(R)'s historical emphasis on
merchandise and other sales in comparison with most other chains in the
industry.
Store Operating Expenses. Store operating expenses increased $2.1 million,
or 163.4%, from $1.3 million in the year ended January 31, 1994 to $3.4 million
in the year ended January 31, 1995, reflecting the inclusion of the store
operating expenses of the 14 Videosmith(R) stores for six months in the year
ended January 31, 1995 (as compared to no portion of the year ended January 31,
1994). As a percentage of total revenues, store operating expenses increased 1.0
percentage point from 51.7% in the year ended January 31, 1994 to 52.7% in the
year ended January 31, 1995. This increase was primarily the result of higher
occupancy and payroll costs per store in metropolitan Boston as compared with
Ohio.
Cost of Sales. Cost of sales increased $0.4 million, or 768.2%, from $0.04
million for the year ended January 31, 1994 to $0.4 million for the year ended
January 31, 1995, reflecting the sales activities of the Videosmith(R) stores.
As a percentage of total revenues, cost of sales increased by 4.2 percentage
points, from 1.7% for the year ended January 31, 1994 to 5.9% for the year ended
January 31, 1995, due primarily to a change in the mix of total revenues in
favor of merchandise and other sales in accordance with Videosmith(R)'s
historical emphasis on such sales. As a percentage of merchandise and other
sales, cost of sales increased by 26.4 percentage points, from 16.2% for the
year ended January 31, 1994 to 42.6% for the year ended January 31, 1995, due
primarily to differences in product mix between the Videosmith(R) stores and the
Company's other stores.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased $0.6 million, or 83.2%, from $0.8 million in the year ended January
31, 1994 to $1.4 million in the year ended January 31, 1995, reflecting the
rental activities of the Videosmith(R) stores that were acquired in August 1994.
As a percentage of total revenues, amortization of videocassette and video game
rental inventory decreased 9.0 percentage points from 31.1% in the year ended
January 31, 1994 to 22.1% in the year ended January 31, 1995, and as a
percentage of rental revenues, amortization of videocassette and video game
rental inventory decreased 9.3 percentage points, from 34.9% for the year ended
January 31, 1994 to 25.6% for the year ended January 31, 1995. These decreases
were primarily due to the lower ratio of videocassette purchases to
videocassette rental revenue between the Videosmith(R) stores during such period
(a ratio of approximately 15%) and the Company's other stores (a ratio of
approximately 35%), which reflects the greater than industry-average demand for
the rental of film classics and other catalog titles, as compared to new
releases and video games, at Videosmith(R) stores.
General and Administrative Expenses. General and administrative expenses
increased $0.5 million, or 101%, from $0.4 million in the year ended January 31,
1994 to $0.9 million in the year ended January 31,
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<PAGE> 40
1995. As percentage of total revenues, general and administrative expenses
decreased 3.8 percentage points from 17.2% of revenues in the year ended January
31, 1994 to 13.4% in the year ended January 31, 1995, primarily as a result of
reduced legal expenses. The Videosmith(R) stores had general and administrative
expenses of 13.8% of revenues in the year ended January 31, 1995.
Non-Operating Expense, Net. Non-operating expense, net, increased $0.06
million from $0.04 million in the fiscal year ended January 31, 1994 to $0.1
million in the fiscal year ended January 31, 1995. As a percentage of total
revenues, non-operating expense, net, increased 0.1 percentage points from 1.7%
of revenues during the year ended January 31, 1994 to 1.8% during the year ended
January 31, 1995 as a result of the additional interest expense incurred in
connection with the Videosmith(R) acquisition.
Net Income. As a result of the foregoing, particularly the Videosmith(R)
acquisition, net income increased $0.3 million, or 300.0%, from a loss of $0.1
million in the year ended January 31, 1994 to a profit of $0.2 million in the
year ended January 31, 1995.
HISTORICAL RESULTS OF OPERATIONS FOR PALMER VIDEO
Palmer Video's revenues constituted 21.2% and 12.1% of pro forma combined
total revenues for the fiscal year ended January 31, 1996 and for the six months
ended July 31, 1996, respectively.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Revenues. Revenues increased $1.1 million, or 4.9% from $22.5 million for
the year ended March 31, 1995 to $23.6 million for the year ended March 31,
1996, primarily due to an increase in rental revenues offset by a decrease in
wholesale revenue. Rental revenue increased $1.4 million or 8.6% from $16.3
million for the year ended March 31, 1995 to $17.7 million for the year ended
March 31, 1996. This increase was due to an increase in same store rental
revenues. Merchandise sales decreased $0.4 million or 8.3% from $4.8 million for
the year ended March 31, 1995 to $4.4 million for the year ended March 31, 1996.
This decrease resulted from a decrease in wholesale sales to franchisees of $0.5
million partially offset by an increase in retail sales of $0.1 million. Royalty
and other revenue (which consists primarily of franchise royalties and
advertising revenue) increased $0.1 million or 7.1% from $1.4 million for the
year ended March 31, 1995 to $1.5 million for the year ended March 31, 1996
primarily due to an increase in advertising revenue.
Store Operating Expenses. Store operating expenses increased $0.8 million
or 7.5% from $10.7 million for the year ended March 31, 1995 to $11.5 million
for the year ended March 31, 1996. As a percentage of total revenues, store
operating expenses increased 1.1 percentage points from 47.6% for the year ended
March 31, 1995 to 48.7% for the year ended March 31, 1996. This increase was
primarily due to payroll, advertising, supplies and other costs associated with
opening of new stores which are expensed in the period incurred.
Cost of Sales. Cost of sales increased $0.7 million or 16.7% from $4.2
million for the year ended March 31, 1995 to $4.9 million for the year ended
March 31, 1996. As a percentage of total revenues, cost of sales increased 2.1
percentage points from 18.7% for the year ended March 31, 1995 to 20.8% for the
year ended March 31, 1996. This increase was primarily due to an increase in
revenue-sharing videocassette leasing fees, which are included in cost of sales
rather than in purchases of videocassettes or the amortization of such
purchases.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
decreased $0.5 million, or 12.2% from $4.1 million for the year ended March 31,
1995 to $3.6 million for the year ended March 31, 1996. As a percentage of total
revenues, amortization of videocassette and video game rental inventory
decreased 2.9 percentage points from 18.2% for the year ended March 31, 1995 to
15.3% for the year ended March 31, 1996. This decrease in total amortization
expense was primarily a result of increased revenue-sharing videocassette
leasing fees (which increased cost of sales) and a decrease in videocassettes
purchased.
General and Administrative Expenses. General and administrative expenses
decreased $0.2 million or 6.1% from $3.3 million for the year ended March 31,
1995 to $3.1 million for the year ended March 31, 1996.
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As a percentage of total revenues, general and administrative expenses decreased
1.6 percentage points from 14.7% for the year ended March 31, 1995 to 13.1% for
the year ended March 31, 1996. This decrease was primarily due to reducing
general and administrative employees head count while revenues increased.
Non-Operating Income, Net. Non-operating income, net, increased $0.8
million, from a loss of $0.2 million for the year ended March 31, 1995 to $0.6
million for the year ended March 31, 1996. This increase was primarily due to a
settlement of bank debt of $0.8 million.
Net Income. As a result of the foregoing, net income increased $0.8
million, from a loss of $0.3 million for the year ended March 31, 1995 to $0.5
million for the year ended March 31, 1996.
YEAR ENDED MARCH 31, 1995 COMPARED TO YEAR ENDED MARCH 31, 1994
Revenues. Revenues increased $0.3 million, or 1.4%, from $22.2 million for
the year ended March 31, 1994 to $22.5 million for the year ended March 31,
1995. This increase was primarily due to an increase in merchandise sales and
royalty revenue offset by a decrease in rental revenue. Rental revenue decreased
$0.4 million, or 2.4%, from $16.7 million for the year ended March 31, 1994 to
$16.3 million for the year ended March 31, 1995, reflecting a decrease in
revenues per store. Merchandise sales increased $0.5 million, or 11.6%, from
$4.3 million for the year ended March 31, 1994 to $4.8 million for the year
ended March 31, 1995. This increase was primarily due to an increase in retail
sales of $0.3 million and an increase in wholesale sales of $0.2 million.
Royalty and other revenue increased $0.2 million, or 16.7%, from $1.2 million
for the year ended March 31, 1994 to $1.4 million for the year ended March 31,
1995. This increase consisted primarily of a $0.1 million increase in royalty
revenue due to the receipt of past due royalties from franchisees.
Store Operating Expenses. Store operating expenses increased $0.3 million,
or 2.9%, from $10.4 million for the year ended March 31, 1994 to $10.7 million
for the year ended March 31, 1995. As a percentage of total revenues, store
operating expenses increased 0.8 percentage points from 46.8% for the year ended
March 31, 1994 to 47.6% for the year ended March 31, 1995. This increase was
primarily due to store closings and new store start-up and operating expenses of
new stores.
Cost of Sales. Cost of sales decreased $0.4 million, or 8.7% from $4.6
million for the year ended March 31, 1994 to $4.2 million for the year ended
March 31, 1995. As a percentage of total revenues, cost of sales decreased 2.0
percentage points from 20.7% for the year ended March 31, 1994 to 18.7% for the
year ended March 31, 1995. This decrease was primarily due to a decrease in
revenue-sharing videocassette leasing fees which are included in cost of sales.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
decreased $0.3 million, or 6.8%, from $4.4 million for the year ended March 31,
1994 to $4.1 million for the year ended March 31, 1995. As a percentage of total
revenues, amortization of videocassette and video game rental inventory
decreased 1.6 percentage points from 19.8% for the year ended March 31, 1994 to
18.2% for the year ended March 31, 1995. This decrease in total amortization
expense was primarily the result in a decrease in videocassettes purchased.
General and Administrative Expenses. General and administrative expenses
decreased $0.4 million, or 10.8%, from $3.7 million for the year ended March 31,
1994 to $3.3 million for the year ended March 31, 1995. As a percentage of total
revenues, general and administrative expenses decreased 2.0 percentage points
from 16.7% for the year ended March 31, 1994 to 14.7% for the year ended March
31, 1995. This decrease was primarily due to a reduction in salaries, insurance
premiums and bad debt expenses and generally greater cost efficiencies.
Non-Operating Expense, Net. Non-operating expense, net, remained
relatively constant at $0.2 million for the year ended March 31, 1994 and for
the year ended March 31, 1995.
Net Income. As a result of the foregoing, net loss decreased $0.5 million,
from a loss of $0.8 million for the year ended March 31, 1994 to a loss of $0.3
million for the year ended March 31, 1995.
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HISTORICAL RESULTS OF OPERATIONS FOR RED GIRAFFE
The consolidated pro forma revenues of American Video, Inc. and Red Giraffe
Video, Inc. (as used in this section, "Red Giraffe") constituted 10.0% and 5.7%
of pro forma combined total revenues for the year ended January 31, 1996 and for
the six months ended July 31, 1996, respectively.
THREE MONTHS ENDED APRIL 3, 1996 COMPARED TO THREE MONTHS ENDED MARCH 29,
1995.
Revenues. Rental and product sale revenues increased $0.2 million and
$0.005 million, respectively, or 9% and 2%, respectively, from $2.2 million and
$0.215 million, respectively, for the quarter ended March 29, 1995 to $2.4
million and $0.220 million, respectively, for the quarter ended April 3, 1996.
The increase in rental revenue for the quarter ended April 3, 1996 is
attributable to the opening of five new stores, one each in September, November
and December 1995 and January and February 1996. The increase in product sales
resulted from the opening of such five new stores. This increase, however, was
offset in part by a decline in same store sales (stores open the entire period
of both quarters) of 10%, 2% of which is attributable to the inclusion of New
Year's Eve and New Year's Day in the first quarter of 1995 but not 1996, and the
remainder is due to competitive factors and unusually strong revenues during the
quarter ended March 29, 1995.
Store Operating Expenses. Store operating expenses increased $0.3 million,
or 25%, from $1.2 million for the three months ended March 29, 1995 to $1.5
million for the three months ended April 3, 1996. As a percentage of total
revenues, store operating expenses increased 7.7 percentage points from 50% for
the three months ended March 29, 1995 to 57.7% for the three months ended April
3, 1996. These increases were primarily attributable to additional labor and
occupancy costs associated with new store development and to increased
participation in a revenue-sharing videocassette leasing program during 1996
when compared to 1995.
Cost of Sales. Cost of sales increased $0.01 million, or 6.3%, from $0.16
million for the three months ended March 29, 1995 to $0.17 million for the three
months ended April 3, 1996. As a percentage of product sales, cost of sales
increased 4.6 percentage points, from 72.7% for the three months ended March 29,
1995 to 77.3% for the three months ended April 3, 1996. This change resulted
principally from price reductions put in place by management to increase sales
volume.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased $0.04 million, or 6.7%, from $0.60 million for the three months ended
March 29, 1995 to $0.64 million for the three months ended April 3, 1996. As a
percentage of total revenues, amortization of videocassette and video game
rental inventory declined 0.4 percentage from 25.0% for the three months ended
March 29, 1995 to 24.6% for the three months ended April 3 ,1996, primarily due
to increased revenues, along with an increased percentage of base stock
amortization created by new store development.
General and Administrative Expenses. General and administrative expenses
increased $0.05 million or 25% from $0.15 million for the three months ended
March 29, 1995 to $0.20 million for the three months ended April 3, 1996. As a
percentage of total revenues, general and administrative expenses increased 1.6
percentage points, from 6.2% for the three months ended March 29, 1995 to 7.8%
for the three months ended April 3, 1996. This was primarily due to
approximately $37,000 of non-recurring legal and accounting costs associated
with the proposed sale of the Company's assets to West Coast and a previously
considered acquisition.
Non-Operating Expenses, Net. Non-operating expense, comprised principally
of interest expense, increased $0.012 million or 30.8%, from $0.039 million for
the three months ended March 29, 1995 to $0.051 million for the three months
ended April 3, 1996. As a percentage of total revenues, non-operating expense
increased 0.4 percentage points, from 1.6% for the three months ended March 29,
1995 to 2.0% for the three months ended April 3, 1996, as a result of increased
borrowings to finance the acquisition of additional inventory and equipment.
Net Income. As a result of the foregoing, net income decreased $0.2
million or 66.7%, from $0.3 million for the three months ended March 29, 1995 to
$0.1 million for the three months ended April 3, 1996.
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YEAR ENDED JANUARY 3, 1996 COMPARED TO YEAR ENDED DECEMBER 28, 1994
Revenues. Rental and product sale revenues increased $0.9 million and $0.3
million, respectively, or 11.7% and 55.6%, respectively, from $7.7 million and
$0.6 million, respectively, for the year ended December 28, 1994 to $8.6 million
and $0.9 million, respectively, for the year ended January 3, 1996. The increase
in rental revenues for the year ended January 3, 1996 is attributable to the
opening of five new stores, one each in October 1994 and February, September,
November and December 1995. The increase in product sales resulted from the
opening of such five new stores as well as from the continuing increased
emphasis on such sales by management. The decrease in rental revenues from 93%
of total revenues for the year ended December 28, 1994 to 90% for the year ended
January 3, 1996 resulted from the continuing initiative undertaken by management
to increase product sale revenues which caused product sale revenues to increase
more than rental revenues.
Store Operating Expenses. Store operating expenses increased $0.8 million,
or 18.3%, from $4.5 million for the year ended December 28, 1994 to $5.3 million
for the year ended January 3, 1996, due primarily to an increased participation
in a revenue-sharing videocassette leasing program during 1995. As a percentage
of total revenues, store operating expenses increased 1.4 percentage points from
53.9% for the year ended December 28, 1994 to 55.3% for the year ended January
3, 1996. Excluding the effect of participation in a revenue-sharing
videocassette leasing program, store operating costs would have declined as a
percentage of revenues from 53.6% in the fiscal year ended December 28, 1994 to
52.7% in the fiscal year ended January 3, 1996.
Cost of Sales. Cost of sales increased $0.1 million, or 61.8%, from $0.3
million for the year ended December 28, 1994 to $0.4 million for the year ended
January 3, 1996. As a percentage of product revenues, cost of sales increased
1.7 percentage points from 43.4% for the year ended December 28, 1994 to 45.1%
for the year ended January 3, 1996. The increase in the percentage resulted
principally from price reductions put in place by management in connection with
the increased emphasis on such sales as previously discussed.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased $0.2 million, or 8.3%, from $2.2 million for the year ended December
28, 1994 to $2.4 million for the year ended January 31, 1996, primarily due to
the addition of four new stores in 1995. As a percentage of total revenues,
amortization of videocassette and video game rental inventory declined 1.6
percentage points from 26.6% for the year ended December 28, 1994 to 25.0% for
the year ended January 3, 1996, primarily due to increased revenues, along with
an increased percentage of base stock amortization created by new store
development.
General and Administrative Expenses. General and administrative expenses
increased $0.2 million, or 25.7%, from $0.6 million for the year ended December
28, 1994 to $0.8 million for the year ended January 3, 1996. As a percentage of
total revenues, general and administrative expenses increased 0.7 percentage
points, from 7.9% for the year ended December 28, 1994 to 8.6% for the year
ended January 3, 1996. This was due primarily to approximately $100,000 of
nonrecurring legal and accounting costs associated with the proposed sale of the
Company's assets to West Coast and a previously considered acquisition. If these
nonrecurring costs had not been incurred, general and administrative expenses
would have decreased as a percentage of revenues.
Non-Operating Expense, Net. Non-operating expense, net, remained constant
from the year ended December 28, 1994 to the year ended January 3, 1996.
Net Income. As a result of the foregoing, net income decreased $0.1
million, or 15%, from $0.6 million for the year ended December 28, 1994 to $0.5
million for the year ended January 3, 1996.
YEAR ENDED DECEMBER 28, 1994 COMPARED TO YEAR ENDED DECEMBER 29, 1993
Revenues. Rental and product sale revenues increased $0.7 million and $0.2
million, respectively, or 9.5% and 38.5%, respectively, from $7.0 million and
$0.4 million, respectively, for the year ended December 29, 1993 to $7.7 million
and $0.6 million, respectively, for the year ended December 28, 1994. The
increase in rental revenues was primarily attributable to an increase in the
average number of stores being
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operated by the Company and a 1.1% increase in same store volume. The increase
in product sales principally related to the increase in the average number of
stores in operation as previously discussed, coupled with the increased emphasis
on such sales by management. The decrease in rental revenues from 94.0% of total
revenues for the year ended December 29, 1993 to 92.6% for the year ended
December 28, 1994 resulted from the initiative implemented by management to
increase the level of product sales.
Store Operating Expenses. Store operating expenses increased $0.3 million,
or 6.9%, from $4.2 million for the year ended December 29, 1993 to $4.5 million
for the year ended December 28, 1994. As a percentage of revenues, store
operating expenses decreased 2.2 percentage points from 56.1% for the year ended
December 29, 1993 to 53.9% for the year ended December 28, 1994. This was due
primarily to increased efficiencies from higher store volumes and a decreased
participation in a revenue-sharing videocassette leasing program as compared to
1993.
Cost of Sales. Cost of sales increased slightly in total dollars for the
year ended December 29, 1993 when compared to the year ended December 28, 1994
and increased as a percentage of total revenues from 2.9% for the fiscal year
ended December 29, 1993 to 3.2% for the fiscal year ended December 28, 1994. As
a percentage of total product sale revenues, cost of sales decreased 5.2
percentage points from 48.6% for the year ended December 29, 1993 to 43.4% for
the year ended December 28, 1994. This decrease was primarily the result of a
shift in sales mix, particularly an increased emphasis on previously viewed
movies and concessions from the fiscal year ended December 29, 1993 to the
fiscal year ended December 28, 1994 causing a corresponding shift in costs.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased $0.4 million, or 19.2%, from $1.8 million for the year ended December
29, 1993 to $2.2 million for the year ended December 28, 1994. As a percentage
of revenues, amortization of videocassette and video game rental inventory
increased 2.6 percentage points from 24.8% in the year ended December 29, 1993
to 26.6% for the year ended December 28, 1994 primarily as a result of the
significant increase in the level of purchases of videocassette rental
inventory.
General and Administrative Expenses. General and administrative expenses
decreased $0.02 million, or 2.3%, from $0.7 million for the year ended December
29, 1993 to $0.6 million for the year ended December 28, 1994. As a percentage
of total revenues, general and administrative expenses decreased from 8.9% for
the year ended December 29, 1993 to 7.9% for the year ended December 28, 1994.
This occurred primarily as a result of the revenue growth previously discussed
without a corresponding increase in general and administrative expenses.
Non-Operating Expense, Net. Non-operating expense, net, remained
relatively constant during the year ended December 28, 1994 and the year ended
December 29, 1993.
Net Income. As a result of the foregoing, net income increased $0.2
million, or 52.5%, from $0.4 million for the year ended December 29, 1993 to
$0.6 million for the year ended December 28, 1994 primarily due to increased
revenues without a proportionate increase in costs.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
For the fiscal year ended January 31, 1996, the Company had net cash
provided by operating activities of $3.1 million, net cash used in investing
activities of $5.6 million (consisting primarily of cash used to acquire
businesses of $3.5 million and cash used to purchase videocassette rental
inventory of $2.0 million) and net cash provided by financing activities of $3.0
million, resulting in a net increase in cash and cash equivalents of $0.6
million.
For the six months ended July 31, 1996, the Company had net cash provided
by operating activities of $4.9 million, net cash used in investing activities
of $60.5 million (consisting primarily of cash used to purchase videocassette
rental inventory of $5.4 million, and $54.9 million of net cash paid for the
acquisitions of new video rental stores acquired on May 17, 1996) and net cash
provided by financing activities of $57.7
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million (consisting of net repayment of debt of $9.2 million offset by $4.5
million net borrowings from the Credit Facility (as described below), $0.7
million in fees paid relating the Credit Facility and $63.1 million in net
proceeds from the issuance of Common Stock (in the Public Offering on May 17,
1996) resulting in a net increase in cash and cash equivalents of $1.7 million.
Prior to May 1996, the Company funded its operations and acquisitions
through cash provided by operating activities, bank loans guaranteed by its
existing stockholders, loans and lines of credit from videocassette and
interactive electronic entertainment products suppliers, and financing provided
by sellers in connection with certain acquisitions. On May 17, 1996 the Company
raised net proceeds of $63.1 million in the Offering, refinanced its outstanding
bank debt through the $65 million Credit Facility, paid down all of its other
outstanding indebtedness, and consummated the Recent Acquisitions (see "Business
- -- Recent Acquisitions"), which it expects will increase its future flows of
cash provided by operating activities. The Company expects to meet its
short-term liquidity requirements through net cash provided by operations and
borrowings under the Credit Facility. Management believes that these sources of
cash will be sufficient to meet the Company's operating needs for at least the
next 12 months.
The Company expects to finance the acquisition and development of
additional stores and the build-out of new stores and leasehold improvements in
acquired and new stores with cash provided by operations, seller financing,
issuance of additional equity shares and by accessing proceeds of the $65
million Credit Facility from PNC Bank, National Association ("PNC Bank") (see
"Risk Factors -- Acquisition Risks -- Financing Growth Strategy"). The Company
expects to fund the Prospective Acquisitions by issuing approximately 1,047,973
shares of Common Stock at an assumed formula price of $10.71 per share, subject
to increase or decrease if the price determined under the pricing formula is
less or more than $10.71 per share, and by borrowing approximately $13.6 million
under the Credit Facility. The Credit Facility consists of a two-year revolving
credit facility followed by a three-year term loan. Borrowings under the
facility are available for working capital, capital expenditures, refinancing of
existing indebtedness and for certain permitted acquisition financing. The
maximum amount available for borrowing at any time will equal 2.75 times the
Company's operating cash flow (as defined for the purposes of the Credit
Facility) during the previous four quarters. At the Company's option, interest
rates will vary from either PNC Bank's base rate, as defined, to 1% above such
base rate, or from the Eurodollar rate, as defined, to 2.5% above such
Eurodollar rate, in each case depending on the ratio of the Company's total debt
to operating cash flow, as defined. Borrowings are secured by a first security
interest in substantially all of the Company's assets, including the stock of
its subsidiaries. Borrowings are subject to various conditions including
compliance with certain financial tests and ratios.
Build-out costs for new stores are expected to range from $200,000 to
$250,000 per store. The aggregate costs of converting acquired stores to West
Coast signage and format are expected to be approximately $3.2 million over an
18-month period ending in November 1997, with respect to the Recent Acquisitions
made in May, 1996, and in the case of the Pro Forma Fall 1996 Acquisitions and
the Prospective Acquisitions are expected to be approximately $0.3 million over
the 18-month periods following consummation of the Pro Forma Fall 1996
Acquisition and the Prospective Acquisitions. The aggregate costs of upgrading
West Coast's management information systems and integrating acquired stores onto
such systems are expected to be approximately $0.9 million over the 18-month
period ending in November 1997. Over the next two years the Company will make
additional payments of cash and Common Stock, currently estimated for the
purpose of the Company's pro forma financial statements at $2.6 million in the
aggregate, to the sellers of 19 stores purchased in connection with the Recent
Acquisitions at formulaic purchase prices based on certain financial
measurements for such stores in future periods. The Company has options to
purchase an additional four stores at similar formulaic prices. Under certain
cross-purchase and area development and option agreements described in this
Supplement under "Prospective Acquisitions" and "Business -- Franchising," the
Company will be entitled to acquire (and, subject to certain conditions, will be
required to acquire, if the owners so elect) all of the assets of up to 35
stores operated or to be operated by such owners during a period commencing in
1997 and ending in 2001. The purchase prices will be equal to specified
multiples of the stores' net operating cash flow; the purchase prices of four
such stores will be payable in shares of Common Stock and the other purchase
prices will be payable partly in cash, and the balance, at the Company's
election, in cash or in shares of Common Stock.
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The Company may also seek additional debt financing or equity capital
through private or public offerings of securities. The availability of debt
financing or equity capital will depend upon prevailing market conditions, the
market price of the Common Stock and other factors over which the Company has no
control, as well as the Company's financial condition and results of operations.
The number of shares of Common Stock to be issued in connection with the
Prospective Acquisition will also be affected by such factors, since such number
will be determined in accordance with a formula based on trading prices of the
Common Stock. There can be no assurance that funds will be available in
sufficient amounts to finance the acquisition or opening of enough video
specialty stores to sustain the Company's recent rates of growth.
Videocassette and interactive electronic entertainment product rental
inventories are treated as noncurrent assets under generally accepted accounting
principles because they are not assets which are reasonably expected to be
completely realized in cash or sold in the normal business cycle. Although the
rental of this inventory generates the major portion of the Company's revenue,
the classification of these assets as noncurrent results in their exclusion from
working capital. The aggregate amount payable for this inventory, however, is
reported as a current liability until paid and, accordingly, is included in the
computation of working capital. Consequently, the Company believes working
capital is not an appropriate measure of its liquidity. Due to the accounting
treatment of videocassette and interactive electronic entertainment products
rental inventory as a noncurrent asset, the Company expects to operate with a
working capital deficit following this offering.
PALMER VIDEO
Prior to its acquisition by West Coast in May 1996, Palmer Video financed
its operations primarily from internal cash flow and bank debt. The Company
assumed and repaid $0.9 million of outstanding liabilities of Palmer Video upon
consummation of the Recent Acquisition of Palmer Video.
RED GIRAFFE
Prior to its acquisition by West Coast in May 1996, Red Giraffe financed
its operations primarily from cash flows from operations and bank financing. The
Company assumed and repaid $2.7 million of Red Giraffe's outstanding long-term
debt upon consummation of the Recent Acquisition of Red Giraffe.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY
The Company's results of operations are generally affected by economic
trends in its market area but results to date have not been impacted by
inflation. If a period of high inflation is encountered, the Company believes
that it will be able to pass on its higher costs to its customers.
A concentration of new store openings and the related pre-opening costs in
any particular fiscal quarter could have an adverse impact on the financial
results for that quarter, leading to fluctuating quarterly financial results,
which could adversely impact the Company's Common Stock price.
The videocassette and interactive electronic entertainment products rental
business is somewhat seasonal, with revenues in early Spring generally being
lower due in part to the change in Daylight Savings Time and improved weather,
and revenues in early Fall generally being lower due in part to the start of
school, the football season and the new television season.
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VIDEO INDUSTRY OVERVIEW
According to Kagan Associates, domestic video retail industry revenues
exceeded $14 billion in 1994, with industry revenues projected to grow to
approximately $22 billion by 2005. Of the total domestic revenues in 1994, video
rental revenues were approximately $9.4 billion and video sales revenues were
approximately $4.6 billion.
The industry is characterized by a high degree of fragmentation, with only
nine chains in 1995, including the Company, reported to be operating in excess
of 100 video specialty stores, and the average chain operating fewer than 50
stores. In recent years the video retail industry has begun to consolidate as
regional chains and smaller video specialty store operations are acquired by
operators with greater access to capital. The Company believes that although
video specialty store revenues will continue to grow as consumers rent and
purchase prerecorded videos, a greater rate of growth will occur among video
specialty store operators engaged in a program of acquiring competitors.
In 1995, according to Kagan Associates, the home video market was the
largest single source of revenue to movie distributors, accounting for
approximately 46.2% of movie distributors' worldwide revenues in 1994. Due to
the high production cost of films today, the Company believes that without home
video revenues, most films would have been unprofitable. Furthermore, in order
to quickly recoup the large theatrical marketing budgets that often exceed a
film's production cost, most films are released simultaneously in a large number
of theaters. This broad exposure usually results in most theaters playing the
film only for a few weeks before replacing it with another release.
Movie studios seek to maximize their revenues by releasing movies in
sequential release date windows to various movie distribution channels. These
distribution channels currently include, in release date order (with approximate
1994 revenues to the motion picture distributors shown in parentheses), movie
theaters ($5.7 billion), video specialty stores ($8.1 billion) and other media
including Pay-Per-View and similar services ($0.2 billion), pay television ($1.7
billion), domestic basic cable television ($0.4 billion) and domestic network
and syndicated television ($0.5 billion).
Sales of prerecorded videos have grown at a cumulative annual growth rate
of 9.9% for the three-year period ending December 31, 1995, but in 1995 still
only represented approximately 33% of video retail industry revenues from all
distribution channels. Movie studios influence the relative levels of video
rentals versus sales by setting wholesale video prices. The movie studios
typically set the initial wholesale price of prerecorded videos at between $50
and $65, which encourages rental rather than sale. In order to maximize revenues
to the studios, after approximately six to twelve months the studios will often
lower the price of these same videos to between $15 and $20, which encourages
their purchase. In addition, a relatively small number of titles that are
believed to have broader consumer appeal, such as Toy Story, Twister and
Independence Day, are wholesaled initially by the studios at between $12 and
$17, which also encourages their purchase rather than rental. While much of this
type of product is heavily promoted as "sell-through" titles by all types of
mass market retailers, the video specialty stores offer this product both for
sale and rental and thus also attract the customer who prefers to rent rather
than buy despite a title's relatively low purchase price.
The Company believes, based on its own practices and information provided
by the sellers in the Recent Acquisitions, that video specialty stores typically
purchase a majority of the films that were released in the box office regardless
of their success in attracting theatre viewers. The Company believes that many
of its customers are predisposed to view a specific film as a result of its
marketing campaign, but due to its short playing time at a local theater, they
will often rent or purchase the prerecorded home video version of that film. In
addition, the Company believes consumers are more apt to view films that were
not box office hits on rented videos than on any other medium because video
specialty stores provide the opportunity to browse and make an impulse choice
among a very broad selection of film titles at a low price. Therefore, video
specialty stores represent a reliable revenue source for a majority of the film
output of the major movie studios.
The Company believes that it will become increasingly likely that certain
major studios will begin to release their films on new digital video discs
("DVD") within the next three to six months. Video discs and video disc players
function like videocassettes and VCRs but provide a higher quality video image
by using digital technology. To the extent that this format becomes popular with
consumers, the video retail industry could also carry film titles in this format
for both rental and sale, thereby creating an additional revenue base.
47
<PAGE> 48
BUSINESS
GENERAL
On October 1, 1996, after giving effect to consummation of the Recent
Acquisitions, West Coast owned and operated 219 video specialty stores and
franchised 286 video specialty stores located in 24 states, principally in the
Northeast and Midwest, and three foreign countries. The Company believes that it
is among the largest video specialty retailers in the United States in terms of
pro forma system-wide revenues, number of franchised stores and total franchised
store revenues. The Company competes directly against major regional and
national video rental stores in most of its markets and believes it is a leading
video rental operator, in terms of number of stores, in all of the major markets
in which Company-owned stores operate. In addition, the Company believes it is
one of only two domestic video specialty franchisors that has existing
franchised stores outside North America. Prior to May 17, 1996, the Company
owned and operated 28 stores and was the franchisor of another 296 stores; the
Recent Acquisitions involved an additional 193 owned and operated stores
(including 14 stores which were theretofore owned by franchisees of the Company)
plus the rights of one of the acquired companies as franchisor of 20 franchised
stores. See "-- Recent Acquisitions." System-wide, approximately 60% of the
Company's stores, exclusive of stores to be acquired in the Prospective
Acquisitions, are currently operated under the West Coast Video(R) name and the
remainder are operated under such names as Videosmith(R) and Palmer Video(TM).
The Company intends to extend the West Coast Video(R) name and logo and its
registered trademark The Movie Buff's Movie Store(R), as soon as practicable, to
those stores which currently operate under other trade names. For the fiscal
year ended January 31, 1996, the Company's pro forma revenues were $110.0
million and pro forma net income was $5.4 million. For the six months ended July
31, 1996, the Company's pro forma revenues were $58.4 million and pro forma net
income was $3.3 million. See "Selected Historical and Pro Forma Combined
Financial Data."
The Company's stores are designed and managed to create an atmosphere that
enhances the appreciation of movies, children's video programming and
interactive electronic entertainment products. To achieve this, the Company has
developed several store format templates in order to appeal to the varying
demographic preferences of its customers. These formats take into account the
population density and demographic profile of each store's targeted geographic
region. Each of the Company's stores rents and sells videocassettes and
interactive electronic game products and also sells certain popular electronic
accessories and a variety of confectionery items. Sites for the Company's stores
within each designated trade area are selected on the basis of such factors as
visibility, ready accessibility (particularly for evening drivetime parking),
signage and adaptability of existing structures to the Company's requirements,
as well as cost considerations.
The Company has grown to its present size primarily through the
acquisitions of the Premiere Video/Nostalgia Ventures and Videosmith(R)
specialty store chains in April 1993 and August 1994, respectively, through the
acquisition of its West Coast Video(R) operating assets and franchising
capability in July 1995 and through the Recent Acquisitions in May 1996 and
thereafter. See "-- Development of the Company," and "-- Recent Acquisitions."
Although single stores and small chains, as a whole, currently have the largest
share of the video retail market, the Company believes that large regional and
national chains will substantially increase their market share and account for
the majority of future industry growth due to their greater capital resources,
their ability to achieve economies of scale in areas such as purchasing,
advertising and administration and their announced expansion plans.
The Company believes that there are a significant number of attractive
acquisition targets, including West Coast Video(R) franchisees, and/or store
sites available in its selected markets. The Company also believes that the net
proceeds of the Public Offering have enabled it to accelerate its planned
expansion, enhance its ability to complete acquisitions and permit it to
negotiate favorable terms for store acquisitions and new store openings. The key
factors that the Company considers in determining its rate of expansion include
store location and historical or projected profitability of stores as well as
the availability of adequate financing.
On June 19, 1996, the Company announced that it had reached agreements in
principle with the owners of a total of 72 video retail stores, subject to
completion of due diligence and other closing conditions and regulatory
approvals. The Company has since acquired a total of 21 video retail stores. It
expects to acquire an
48
<PAGE> 49
additional 49 stores in the Prospective Acquisitions in November 1996 and
thereafter (including 19 stores owned by West Coast Video(R) franchisees).
Except as described in the Supplements, the Company has not entered into
definitive agreements in regard to the acquisition of any stores, and there can
be no assurance that it will do so.
RECENT ACQUISITIONS
On May 17, 1996, the Company acquired from seven selling groups and four
West Coast Video(R) franchisees a total of 172 video specialty stores (including
13 stores owned by franchisees of the Company), plus franchisor's rights in
regard to 20 franchised stores (the "May 1996 Acquisitions"). Between August 26
and October 23, 1996, the Company acquired from four selling groups a total of
21 video specialty stores, including one store owned by a Company franchisee
(the "Fall 1996 Acquisitions;" the May 1996 Acquisitions and the Fall 1996
Acquisitions together comprise the Recent Acquisitions).
The Company intends to extend the West Coast Video(R) name and logo and its
registered trademark The Movie Buff's Movie Store(R), as soon as practicable, to
the acquired stores (other than the 14 West Coast Video(R) franchised stores,
which already operate under the West Coast Video(R) trade name).
The Company also intends to integrate the acquired stores into the
Company's management information, telecommunications, management, marketing,
finance and accounting, entertainment purchasing, distribution, retail
operations and merchandising systems as soon as is feasible, at an estimated
cost of $0.9 million over an 18 month period following closing of the Recent
Acquisitions. The Company expects the aggregate costs of converting the acquired
stores to West Coast signage and format to be approximately $3.2 million through
March 1998.
The terms of the Recent Acquisitions were negotiated at arm's length. In
connection with the Recent Acquisitions, certain of the Sellers and their
affiliates entered into consulting and/or employment agreements with the
Company. These include one person who has become Executive Vice
President -- Corporate Retail Operations and Development and a director of the
Company and nine other persons who have become Vice Presidents or Regional Vice
Presidents, but have not become executive officers or directors, at annual
salaries ranging from $82,500 to $210,000.
May 1996 Acquisitions. Set forth below is a brief description of each of
the May 1996 Acquisitions:
<TABLE>
<CAPTION>
NUMBER OF OWNED
NAME OF SELLER(S) AND OPERATED STORES LOCATIONS
----------------- ------------------- ---------
<S> <C> <C>
Palmer Corporation and certain
affiliates ("Palmer Video").......... 43(1) New York and New Jersey
American Video, Inc. and certain
affiliates (collectively, "Red
Giraffe")............................ 31 Indiana, Kentucky and Ohio
4 unaffiliated West Coast Video(R)
franchisees (the "Massachusetts
Franchisees")........................ 13(2)(3) Massachusetts
5 other unaffiliated selling groups.... 85(4) Pennsylvania, Ohio, New Jersey,
Virginia, Arkansas, Oklahoma,
Texas, Louisiana and Florida
---
Total........................ 172
===
</TABLE>
- ---------------
(1) Includes (a) one store owned by 142nd Retail Associates, a partnership in
which the Company acquired the 51% partnership interest theretofore owned by
a subsidiary of Palmer Corporation while the remaining 49% partnership
interests continue to be owned by their present owners, William J. Krasny
and Cosmo Robles, neither of whom is affiliated with Palmer Corporation or
the Company, and (b) one store owned by 38th Retail Associates Limited
Partnership, in which the Company acquired the 50% general partnership
interest theretofore owned by a subsidiary of Palmer Corporation while the
remaining 50%
49
<PAGE> 50
limited partnership interest continues to be owned by the estate of Abraham
Stelnik, which is not affiliated with Palmer Corporation or the Company.
(2) Includes four stores owned by HB Associates, Inc., two stores owned by Best
Entertainment, Inc., six stores owned by New Age Entertainment, Inc. and one
store owned by Video Innovators, Inc.
(3) Excludes four Massachusetts Franchisee stores which the Company has an
option to purchase in or before August 1996, January 1997, March 1997 and
July 1997, respectively.
(4) Consists of 46 stores owned by Vidko, Inc., Kobie-Co Movie Outlet and
Anthony Cocca's Videoland, Inc. (collectively, "Videoland"), 12 stores owned
by Video Giant, Inc. ("Video Giant"), 12 stores owned by A-Z Video Systems,
Inc. ("A-Z Video"), 12 stores owned by Showtime, Inc. ("Showtime Video") and
three stores owned by certain corporations under common control ("Video
Video").
Financial statements for certain of the sellers named above are contained
in this Prospectus.
Fall 1996 Acquisitions. Set forth below is a brief description of each of
the Fall 1996 Acquisitions:
<TABLE>
<CAPTION>
NUMBER OF OWNED
AND OPERATED
NAME OF SELLER(S) STORES LOCATIONS
- -------------------------------------- --------------- --------------------------------------
<S> <C> <C>
JJ Video Inc., Picture Show Video, Cincinnati, Ohio (2 stores),
Inc., Picture Show Video #4, Inc., Lexington, Kentucky (2 stores) and
Picture Show Video-Gardenside, Inc. Winchester, Kentucky (1 store)
and Picture Show Video-Winchester,
Inc. ("Picture Show")............... 5
Group of 15 entities under common Lyndhurst, Kearny, New Milford,
control, each doing business under Hillsdale, Hackensack, Wayne,
the name Super Video Stores ("Super Bergenfield, Belleville, Harrison,
Video")............................. 14 Rahway, Wallington, Montclair, Park
Ridge and Emerson, New Jersey
Reel Entertainment, Inc. ("Reel
Entertainment")..................... 1 Baton Rouge, Louisiana
One West Coast Video(R) franchisee
(the "Columbus Franchisee")*........ 1* Columbus, Ohio
--
Total....................... 21
==
</TABLE>
- ---------------
* This former West Coast Video(R) franchised store is expected to be reopened
for business as an owned and operated store during the fourth quarter of 1996.
The 21 stores typically range in size from 2,300 to 5,800 square feet and
employ approximately 41 persons full-time and approximately 175 persons
part-time. The leases for the stores generally do not vary in important respects
from the typical lease for the Company's existing stores.
After making the Fall 1996 Acquisitions, the Company has 219 owned and
operated stores and 286 franchised stores located in 25 states and three foreign
countries.
Consideration Paid. In connection with the Recent Acquisitions, the
Company paid or undertook to pay aggregate consideration (excluding related
costs and certain contingent consideration, and subject to various adjustments
and elections) of $90.2 million, which is expected to consist of $60.7 million
paid in cash and $29.5 million paid or to be paid in shares of Common Stock (2.4
million shares valued for this purpose at an average of $12.16 per share,
reflecting average trading prices at the times of the respective closings.).
50
<PAGE> 51
May 1996 Acquisitions. The following table sets forth the consideration
paid for the stores acquired in connection with the May 1996 Acquisitions and
the related indebtedness for borrowed money of the Sellers that was assumed and
repaid by the Company concurrently with the closing of the May 1996
Acquisitions:
<TABLE>
<CAPTION>
CASH COMMON STOCK
-------------------- -------------------- TYPE OF
AMOUNT %(1) AMOUNT %(1) TOTAL(2) ACQUISITION
----------- ---- ----------- ---- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Palmer Video......................... $10,039,444 50 % $10,039,484 50% $20,078,928(3) Merger
Red Giraffe.......................... 11,486,250(4) 70 % 4,838,886 30% 16,325,136(4)(5) Asset Purchase
4 Massachusetts Franchisees.......... 11,675,000(6) 100 % 11,675,000(6) Asset Purchase
5 Other Unaffiliated Selling Groups:
A-Z Video(7)....................... 4,300,000 100 % 4,300,000 Asset Purchase
Showtime Video..................... 3,500,000 100 % 3,500,000(5) Stock Purchase
Video Giant........................ 1,738,547 18 % 7,932,067 82% 9,670,614(5) Merger
Video Video........................ 2,500,000 100 % 2,500,000 Asset Purchase
Videoland.......................... 7,200,000 80 % 1,800,006 20% 9,000,006(5) Asset Purchase
----------- ----------- -----------
Total............................ $53,439,241 $24,610,443 $77,049,684
=========== =========== ===========
</TABLE>
- ---------------
(1) Percentage of total consideration for each of the May 1996 Acquisitions
represented by the cash component and by the stock component (if any),
respectively.
(2) Subject to subsequent post-closing adjustment based upon the amount by which
each Seller's working capital, as defined, or cash available at closing, or
the amount of sick pay and vacation pay then accrued, exceeded or was less
than a specified amount and the amount of certain prepaid rentals, insurance
premiums and other prepaid expenses. Management believes that these
adjustments will not be material. A portion of the total purchase price was
used to pay certain outstanding accounts payable of certain Sellers.
(3) Excludes approximately $921,000 of liabilities of this Seller paid at
closing by the Company in accordance with the terms of the Merger Agreement.
(4) Includes $2.7 million of indebtedness for borrowed money of the Red Giraffe
group which was assumed and repaid by the Company.
(5) Includes certain payments of cash and/or Common Stock to be made to these
Sellers at specified times following the respective opening dates of certain
newly opened stores included in the May 1996 Acquisitions (four Red Giraffe
stores, two Showtime Video stores, one Video Giant store and 12 Videoland
stores) in an amount determined on the basis of certain financial
measurements for such stores for specified 12-month or other periods. The
amount to be paid for the Video Giant store has been determined to be
$670,614, consisting of $28,531 paid in cash and $642,083 paid in shares of
Common Stock (49,391 shares valued for this purpose at the initial public
offering price in the Public Offering of $13.00 per share). In addition to
the amounts described above, in preparing the pro forma financial statements
contained herein, the Company estimated the total of all such contingent
payments for the remaining 18 stores at $2.6 million. Upon consummation of
the May 1996 Acquisition of Showtime Video, the Company advanced $250,000 to
such Seller to defray certain build-out and operating expenses of these
stores; such advances will be applied as an offset against payments, if any,
made in respect of newly opened stores.
(6) Excludes $1,295,925 (11.1% of the purchase price payable to the Sellers in
these Recent Acquisitions) paid to the former owner of the WCEI Companies
and Jules E. Gardner and Kenneth R. Graffeo, two former executive officers
of the WCEI Companies (who are now executive officers of the Company),
pursuant to the terms of the acquisition by the Company of the
franchise-related operating assets of the WCEI Companies in July 1995.
(7) An executive officer of the Company, Donald R. Thomas, was an executive of,
and had a 2% equity interest in, this seller.
A portion of the net proceeds of the Public Offering, together with $1.7
million of borrowings under the Credit Facility, was used to finance the cash
portion of the purchase price of the May 1996 Acquisitions ($53.4 million,
subject to adjustment as described in the notes to the above table) and
approximately
51
<PAGE> 52
$3.5 million of acquisition costs and $0.3 million relating to the acceleration
of obligations to the former owners of the WCEI Companies (including the amounts
described in note (6) to the above table).
Fall 1996 Acquisitions. In connection with the Fall 1996 Acquisitions, the
Company paid or undertook to pay aggregate consideration (excluding costs
related to the Fall 1996 Acquisitions, and subject to various adjustments and
elections) of $13,105,182, which is expected to consist of $8,221,182 paid or to
be paid in cash and $4,884,000 paid or to be paid in shares of Common Stock
valued in accordance with the average of either the closing or the bid and asked
prices of Common Stock on Nasdaq over a 15 trading-day period ending one to
three trading days before the closing date (92,176 shares at an average formula
price of $9.113 per share, in the case of Picture Show, 427,046 shares at an
average formula price of $9.177 per share, in the case of Super Video, and
13,624 shares at any average formula price of $9.175 per share, in the case of
Reel Entertainment, for a total of 532,846 shares at a weighted average formula
price of $9.166 per share). The cash portion of the purchase price was financed
with borrowings under the Company's credit facility.
The following table sets forth the consideration paid for the assets of
each chain of stores acquired in connection with the Fall 1996 Acquisitions:
<TABLE>
<CAPTION>
CASH COMMON STOCK
-------------------- -------------------
PROSPECTIVE SELLER AMOUNT %(1) AMOUNT %(1) TOTAL
- -------------------------------------- ---------- ----- ---------- ---- -----------
<S> <C> <C> <C> <C> <C>
Picture Show.......................... $1,240,000 59.6% $ 840,000(2) 40.4% $ 2,080,000
Super Video........................... 6,640,982(3) 62.9% 3,919,000(4) 37.1% 10,559,982
Reel Entertainment.................... 300,000 70.6% 125,000 29.4% 425,000(5)
Columbus Franchisee................... 40,200 100.0% 40,200
---------- ---------- ----------
Total....................... $8,221,182 $4,884,000 $13,105,182
========== ========== ==========
</TABLE>
- ---------------
(1) Percentage of total consideration for each Fall 1996 Acquisition represented
by the cash component and by the stock component, respectively.
(2) These 92,176 shares will be delivered on August 26, 1997.
(3) Includes $399,982 of liabilities assumed by the Company and adjustments for
certain prepaid expenses.
(4) One-third, or 142,349, of these shares will be delivered on March 30, 1997,
another one-third on September 30, 1997, and the remaining one-third on
March 30, 1998. The consideration payable on March 30, 1997, as well as half
of the consideration payable on September 30, 1997, will be subject to
redetermination based on the closing price of Common Stock on Nasdaq on each
such issuance date, if such closing price is less than the originally
determined average price ($9.177 per share). The additional consideration to
be paid to this Fall 1996 Seller in such event would be payable, at the
Company's election, in cash and/or in shares of Common Stock valued for this
purpose on the basis of the subsequent closing price.
(5) Subject to subsequent adjustment based upon proration for rental prepayments
and other prepaid expenses.
BUSINESS STRATEGY
The key elements of the Company's business strategy are as follows:
Achieve or Maintain Market Dominance. On October 1, after giving effect to
the Recent Acquisitions, the Company operated or franchised 505 video specialty
stores located principally in the Northeast and Midwest. The Company intends to
initially focus its acquisition, store expansion and franchising efforts
primarily in those areas where its stores are currently located so as to
maximize market share. The Company believes that by achieving or maintaining
market leadership positions or positions of significant concentration within the
regions in which it presently competes, the Company will be able to maximize
operating efficiencies in inventory management, marketing, distribution,
training and store supervision.
52
<PAGE> 53
Realize Cost Savings By Integrating Stores Using Proven Management
Operating Systems. The Company intends to realize greater cost savings and
efficiencies by integrating the stores acquired, developed or franchised using
proven management systems. The Company has developed software systems for the
purposes of monitoring and managing store inventory, sales, purchases and
customer membership. These proven systems allow the Company to facilitate the
integration of stores the Company acquired in the Recent Acquisitions and
additional stores it acquires, builds or franchises. In addition, such systems
allow the Company to monitor rental trends and manage sales and rental turnover
so as to satisfy customer demand for an extensive selection of new releases as
well as catalog titles while maximizing store profitability. By coordinating all
buying decisions through its software systems, the Company obtains volume
discounts and cooperative advertising credits that would otherwise be
unavailable to its individual stores. To increase customer satisfaction and
store profitability, rentals and sales are then monitored on a regular basis
utilizing the Company's point-of-sale ("POS") management information system
which enables the Company to reallocate videocassettes and interactive
electronic entertainment products among stores. See "Risk Factors -- Acquisition
Risks -- Integration."
Operate Differentiated Store Formats. The Company has developed several
store formats designed to appeal to the varying demographic preferences of its
customers and to meet varying real estate market conditions. These formats vary
in terms of square footage, store design and lay-out. While several of its
competitors have chosen uniform, chain-wide store formats and locations, the
Company believes that having available store formats that take into account
population density and other demographic characteristics is critical in allowing
penetration into market areas that do not conform to uniform, chain-wide
standards. Most of the Company's stores are superstores with over 4,000 square
feet per store, although some are smaller, custom-designed stores, including
some which are formatted as urban boutiques containing a wide variety of catalog
titles. The Company's stores carry between 7,000 and 17,000 videocassettes.
The Company has developed an innovative template and proprietary support
system that operates as a store within a store under the Game Power
HeadquartersSM trade name. These interactive electronic departments range from
400 square feet to 1,800 square feet and allow the stores to rent, sell, buy and
trade interactive electronic entertainment software for various game cartridge
platforms and personal computers. The departments also have kiosks providing a
"Try Before You Buy" entertainment environment while promoting new game hardware
formats and software introductions.
Provide Superior Customer Service. The Company believes its sales force's
appreciation and understanding of movies, children's video programming and
interactive electronic entertainment products can result in a higher level of
service than most of its competitors. One criterion used in the Company's
recruitment and selection of employees is their general knowledge in regard to
movies and electronic games. In addition, employees undergo continuous training
to increase their knowledge about the store's video titles and about cinema and
electronic games in general. The Company believes that the implementation of
this strategy in the stores which it acquires can result in higher sales per
customer, higher overall customer satisfaction, higher customer loyalty, lower
employee turnover levels and higher catalog title inventory turnover.
GROWTH STRATEGY
Historically, the Company's growth has resulted from the acquisition of
existing video retail store chains and the opening and franchising of new
stores, as well as increases in existing store sales. The key elements of the
Company's growth strategy are as follows:
Pursue Acquisitions in Highly Fragmented Industry. The Company acquired
two video specialty store chains in 1993 and 1994, the operating assets of the
nation's second-largest franchisor of video specialty stores in 1995 and 193
additional owned and operated stores and franchisor's rights with respect to 20
franchised stores in 1996. It believes that its most significant opportunity for
growth over the next several years will continue to be the acquisition of
existing video retailers. The industry remains highly fragmented with
approximately 28,000 video retailers in the United States, approximately half of
which are operated by operators of one or two stores. Existing video retailers
typically have an established customer base and favorable location. The criteria
for acquisition candidates includes store location and demographics, profitabil-
53
<PAGE> 54
ity, store sales volume, store size and store management personnel. In addition,
the Company seeks acquisition candidates that can realize expense reductions and
more efficient store management through integration into the Company's
information and inventory management systems and marketing and advertising
programs. The Company has already had preliminary discussions with numerous
video retail store owners at various times regarding the potential acquisition
of their stores. Management expects that some of these discussions will result
in new Acquisitions, although the Company has no agreements or commitments to
acquire stores other than as described herein. On June 19, 1996, the Company
announced that it had reached agreements in principle with the owners of a total
of 72 video retail stores, subject to completion of due diligence and other
closing conditions and regulatory approvals. The Company has since acquired a
total of 21 video retail stores. It expects to acquire an additional 49 stores
in the Prospective Acquisitions in November 1996 and thereafter (including 19
stores owned by West Coast Video(R) franchisees). Except as described herein or
in the Supplements, the Company has not entered into definitive agreements in
regard to the acquisition of any stores, and there can be no assurance that it
will do so.
Continue to Acquire West Coast Franchisee Stores. The Company intends to
pursue the acquisition of individual or small chains of video specialty stores
within the West Coast Video(R) franchising system. As franchisor, the Company
maintains a right of first refusal to purchase these stores and intends to
selectively acquire these stores in the future at prices which it considers to
be reasonable where it believes that it can increase store revenues by deploying
its own capital, human and other resources and can achieve a higher return to
the Company on store operations by fully integrating the stores into the
Company's operating systems, thereby managing costs and generating operating
profits that exceed the Company's franchise royalty fees from such stores. West
Coast Video(R) franchisee-owned stores are typically of high quality and conform
with the Company's own video retail strategy. Consistent with this strategy, as
part of the Recent Acquisitions, the Company acquired 14 video retail stores
located in Massachusetts and Ohio which had theretofore been owned and operated
by unaffiliated franchisees and expects to acquire an additional 19 stores from
franchisees in the Prospective Acquisitions.
Selectively Develop New Stores. The Company plans to open new video retail
stores in locations where acquisition of existing stores is impracticable but
favorable store location studies indicate a substantial probability of success
for a new store. In addition, the Company plans to grow in certain geographic
areas, including internationally, through franchising and believes that its
existing operating systems can be successfully applied to numerous other
franchisees. The Company currently has 9 franchised stores in Canada, one in
Curacao and two in Peru and has another store under development out of a planned
20 additional stores in Peru and certain neighboring countries pursuant to an
area development agreement.
See "Risk Factors -- Acquisition Risks."
54
<PAGE> 55
MANAGEMENT OPERATING SYSTEMS
The Company's management operating systems have been developed and tested
over years of franchise experience. Management believes that these systems,
whose costs are already being met by franchise royalty payments, will allow the
Company to grow at considerably less incremental general and administrative
expense than would otherwise ordinarily be incurred. At October 1, 1996 the West
Coast corporate staff included 69 professionals working in the following
capacities:
<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENT EMPLOYEES
-------------------------------------------------------------------------- ---------
<S> <C>
Marketing/Movie Management................................................ 16
Purchasing/Materials Management........................................... 4
M.I.S./Telecommunications................................................. 5
Retail Operations/Store Development....................................... 12
Accounting................................................................ 19
Distribution Services..................................................... 5
Executive Administration.................................................. 6
Corporate Office Services................................................. 2
--
Total........................................................... 69
==
</TABLE>
Marketing/Movie Management. The Company currently has in place a
centralized professional marketing department supporting all of the Company's
video specialty stores. The Company's in-house art department provides the
resources of a full service agency and utilizes an integrated computerized
system for in-house scanning, page layout and mechanical production,
illustrations and color printing. Management believes this in-house creative
development has resulted in substantial cost savings and enhanced production
efficiencies for the Company's owned and operated stores and franchised stores.
The Company develops an extensive semi-annual marketing campaign several
months in advance of its six-month implementation period. The store managers'
kits for these campaigns provide national and regional promotions and media
flight schedules in a format that is designed to facilitate local store
customization. The campaigns have earned a wide variety of national awards from
the Video Software Dealers Association in the past five years, including "Best
Overall Campaign," "Best Community Service" and "Best Special Media/Special
Events." These campaigns have increased the familiarity of existing and
potential customers with the Company and are also intended to increase customer
rental and purchase transactions and frequency of visits.
The Company uses radio and newspaper advertising and direct mail
solicitation to promote its business in the markets in which the Company
competes and uses television advertising in those metropolitan areas where the
Company is a dominant player. The marketing department has a dedicated staff
that publishes and distributes a proprietary, full color monthly consumer
magazine, "Spotlight on Video(TM)," which promotes new releases and special
offers exclusive to the Company.
The costs of the Company's marketing department are funded in part by a
contribution from West Coast's franchisees that is earmarked for advertising and
marketing. Such contribution is equal to 1% of the franchisees' gross revenues.
Another 1% contribution is spent on local advertising. In addition to these
contributions, the Company offsets the costs of its advertising with cooperative
advertising funds and market development funds made available by movie studios
and suppliers to promote certain videocassettes. The Company expects that it
will receive increased amounts of these third-party funds as the Company grows.
Purchasing. The Company believes that the consistent selection of movies
that appeal to the consumer is a significant feature of its operations. The
Company's movie and electronic entertainment purchasers each have, on average,
eight years of industry experience, including Videosmith's purchaser of
"sell-through" video titles who has five years of experience in that capacity.
The rental entertainment purchasers use computerized purchasing models that
analyze data in regard to the sales and rental performance of individual titles
from the Company's stores on-line through the Company's POS systems. The Company
also publishes a proprietary monthly publication, "The Projector(TM)," for owned
and operated stores and franchised stores that projects suggested purchase
quantities on a title-by-title basis for stores of varying demographic profiles
and rental
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volume levels. The Company believes its purchasing department has considerable
specific expertise in evaluating, finding distribution sources for and
purchasing independent, arthouse, foreign and other highly entertaining films
that are frequently not noticed or are ignored by other video specialty chains.
M.I.S./Telecommunications. The Company has developed, at considerable
expense, proprietary POS software with continuous inventory and customer
database and extensive management reporting capabilities. Nearly all of its
franchisees utilize such POS software. In addition, the Management Information
Systems department provides a broad range of services to management as well as
to owned and operated stores and franchised stores. Such services include:
management of various relational databases which aid in movie and interactive
electronic entertainment products purchasing, store site evaluation and
selection and customer profiling and targeting; on-line POS and other store and
corporate software maintenance, service and repair; technical support for the
installation of store computer hardware and software; maintenance of hardware
support agreements; on-line verification of franchisee revenues for royalty
audit purposes; Company and franchisee staff POS system training; and
enhancement and upgrading of POS software.
Retail Operations. The Company has developed, at considerable time and
expense, comprehensive retail operations policy and procedure manuals to achieve
standardization among its Company-owned stores, as well as its franchisees. In
addition, the Company's retail operations group works directly with both
corporate and franchisee stores to provide assistance on a broad range of
operational issues including: competitive strategies; product pricing; revenue
enhancement; expense management; risk management; loss prevention for security
and safety systems; new site analysis and selection; remerchandising and
renovation plans and analysis. The retail operations group provides training and
orientation to new franchisees as well as ongoing training programs. The retail
operations group has also developed a detailed timetable and manual and provides
direct assistance in the opening of new franchised stores as well as owned and
operated stores, including obtaining permits/licenses, financing equipment,
providing opening checklists and store configuration options, formulating
construction guidelines, initiating vendor contacts, helping to manage and meet
exterior signage specifications and wage and hiring guidelines, and developing
professional service and vendor contacts.
STORE LOCATIONS
The following table lists the number of stores owned and franchised by the
Company in each state or foreign country at October 1, 1996, including the
stores acquired through the Recent Acquisitions but excluding the stores to be
acquired in the Prospective Acquisitions. More than 80% of the Company's owned
and operated stores, and more than 80% of its franchised stores, are located in
the Northeast and Midwest.
<TABLE>
<CAPTION>
NUMBER OF
OWNED AND NUMBER OF TOTAL
STATE OR FOREIGN COUNTRY OPERATED STORES FRANCHISED STORES STORES
- ------------------------------------------------------ --------------- ----------------- ------
<S> <C> <C> <C>
Ohio.................................................. 38 12 50
Pennsylvania.......................................... 36 104 140
New Jersey............................................ 47 69 116
Massachusetts......................................... 27 14 41
Kentucky.............................................. 17 -- 17
New York.............................................. 16 5 21
Indiana............................................... 13 1 14
Virginia.............................................. 12 2 14
Arkansas.............................................. 4 -- 4
Oklahoma.............................................. 3 -- 3
Texas................................................. 2 3 5
Louisiana............................................. 3 3 6
Florida............................................... 1 13 14
Illinois.............................................. -- 15 15
Maryland.............................................. -- 13 13
California............................................ -- 5 5
Delaware.............................................. -- 4 4
Minnesota............................................. -- 3 3
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
NUMBER OF
OWNED AND NUMBER OF TOTAL
STATE OR FOREIGN COUNTRY OPERATED STORES FRANCHISED STORES STORES
- ------------------------------------------------------ --------------- ----------------- ------
<S> <C> <C> <C>
Arizona............................................... -- 2 2
Oregon................................................ -- 2 2
Connecticut........................................... -- 1 1
Maine................................................. -- 1 1
Michigan.............................................. -- 1 1
Tennessee............................................. -- 1 1
Canada................................................ -- 9 9
Curacao............................................... -- 1 1
Peru.................................................. -- 2 2
--- --- ---
Total....................................... 219 286 505
=== === ===
</TABLE>
PRODUCTS
The Company's primary source of revenue is the rental of videocassettes.
The Company's stores feature between 7,000 and 17,000 videocassettes. At
present, the Company generally rents new release titles for $2.00 to $3.00 for
one day, depending on the age and popularity of the title, while catalog titles
rent for $1.00 to $2.00 for one day. Video games generally rent for $3.00 for
one day. The Company regularly reviews and determines its rental prices for
titles based on the length of time each title has been available on
videocassette and the frequency of rentals for each title. Movie titles are
classified into a variety of thematic categories, including certain categories
which are custom tailored to local tastes and demographic profiles, and are
displayed alphabetically within those categories. The Company attempts to keep
available within each store sufficient numbers of current popular titles, as
well as a significant selection of catalog titles, to satisfy customer demand.
West Coast also offers videocassettes for sale. Generally, previously
viewed videocassettes are sold for $7.99 to $11.99 beginning 12 weeks after a
new title is released to video specialty stores. Sales of new videocassettes
consist primarily of children's and family titles generally priced at $15.99 to
$20.99. Based on anticipated growth in the overall market for videocassette
sales, planned improvements in the Company's videocassette sales merchandising
and the reported revenue mix of other video retailers, the Company expects its
per store sales of new (and, to a lesser extent, used) videocassettes to
increase.
In addition to video rentals and sales, West Coast also rents and sells
interactive electronic entertainment products compatible with various game
hardware platforms and personal computers. Kagan Associates estimates that
domestic interactive electronic entertainment software revenue will increase
from approximately $5.7 billion in 1995 to approximately $8.8 billion in 2002.
The Company expects per store rental revenue of interactive electronic
entertainment products to increase because of an overall rise in the popularity
of CD-ROM and new hardware formats. As a result, the Company believes that its
Game Power HeadquartersSM format will experience significant growth in the next
several years.
SUPPLIERS
The Company's suppliers of rental videocassette and interactive electronic
entertainment products include Ingram Entertainment, Inc. ("Ingram"), Waxworks,
Inc., Rentrak Corporation, Star Video Entertainment, Inc. and Baker and Taylor
Information and Entertainment Services. Prior to consummation of the Recent
Acquisitions, West Coast purchased approximately 50% of its rental videocassette
products from Ingram under a contract that expires in July 2002. Under this
contract, following the Recent Acquisitions the Company must purchase at least
50% of its annual requirements for such products during each of the first two
years of the contract, the lesser of 30% of its annual requirements or $25
million during the third through fifth years of the contract and the lesser of
25% of its annual requirements or $25 million during the last two years of the
contract.
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<PAGE> 58
The Company currently receives marketing funds and an advertising allowance
from Ingram based upon a percentage of its videocassette and interactive
electronic entertainment products purchases. In addition, the Company currently
has an unsecured open account with outstanding amounts due 60 days from invoice
for all rental, sell-through and game product purchases and 90 days from invoice
for all sell-through product intended for new store openings and Christmas
catalog product. If the relationship with Ingram were terminated, the Company
believes that it could readily obtain its required inventory of videocassette
and interactive electronic entertainment products from alternative suppliers at
prices and on terms comparable to those with Ingram.
FRANCHISING
The Company currently receives franchise fees from West Coast Video(R)
franchisees equal to approximately 7% of each franchisee's monthly gross
revenues, subject to stated monthly minimum royalties. Of this amount, the
Company has devoted an amount equal to 2% of such monthly gross revenues to
direct and indirect advertising and marketing programs. The Company also
receives a one-time fee upon execution of the franchise agreement. Franchisees
are not required to purchase their initial inventory or supplies from the
Company, although they sometimes do so. Thereafter, franchisees purchase
virtually all of their movie and interactive game product from unaffiliated
suppliers.
Franchisees are entitled to develop West Coast Video(R) stores at approved
locations within a specified geographic area under the terms of a standard
franchise agreement. The exclusivity accorded to a franchisee generally does not
extend beyond a radius of three miles from each franchised location, with
franchisees in urban locations often being limited to a one-half to one mile
radius. Franchises are typically awarded for a term of ten years, subject to the
franchisee's right to renew for additional ten-year periods.
The Company provides training for the franchisee's managers and other store
personnel. Franchisees are required to meet the Company's quality control
standards in regard to store appearance and size of videocassette inventory,
among other things. The Company provides advice about title selection, initial
promotional advertising, posters and brochures.
Each franchise owner has sole responsibility for all operational decisions
and financing commitments relating to the store, including monthly rent,
utilities and payroll. Franchisees are required to indemnify West Coast against
claims arising from the franchisee's operations and to provide specified amounts
of insurance coverage. The Company does not currently provide any form of credit
enhancement for any of its franchisees' operations.
The franchise agreement requires the Company's express written agreement to
any transfer of a franchise or any sale of a controlling interest in a
franchisee. The agreement also authorizes the Company at any time to inspect and
monitor the franchisee's operations and audit its books and records. The Company
is entitled to terminate a franchise for a material breach of the terms of the
franchise agreement, subject to compliance with certain state laws regarding
termination for cause, prior notice and similar matters. Between acquiring the
assets of WC Franchise in July 1995 and September 30, 1996, the Company
terminated 35 franchisees.
Under the terms of an area development agreement with respect to Peru and
certain contiguous South American countries, the area developer will pay the
Company a development fee of up to $175,000 over a five-year period, based on
the achievement of certain specified milestones, as well as license fees equal
to 3% of the revenues of each of its franchised stores.
On October 1, 1996 the Company and the seller of the Reel Entertainment
stores entered into an area development agreement and a related option agreement
with respect to a total of up to 31 franchised stores to be located in Louisiana
and portions of southern Mississippi. The developer, which will have exclusive
rights to a defined territory in the Louisiana area, paid the Company $100,000
upon execution of the agreements, will pay an additional $69,000 on October 1,
1997 and an additional $25,000 on October 1, 1998 and will pay up to an
additional $31,000 as stores are opened. The option agreement gives the Company
the right to acquire, at specified times, the assets of specified numbers of the
franchised stores, during a 39-month period commencing on October 1, 1998, at a
purchase price equal to approximately 4.5 times the stores' aggregate
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net operating cash flow, as defined in the option agreement. A portion of the
purchase price of each tranche of eight or more stores, equal to the lesser of
$2.0 million or 50% of such purchase price, will be payable in cash and the
balance will be payable, at the Company's election, in cash or in shares of
Common Stock. The price to be used in calculating the number of shares to be
issued will be the average closing price of Common Stock over the 15 trading-day
period ending on the third trading day prior to the closing date of the store in
question. The purchase price for the first tranche of stores may be reduced or
increased based upon the Net Operating Cash Flow (as defined) for the four
stores acquired or to be acquired from Reel Entertainment under the Asset
Purchase Agreement dated October 1, 1996. Subject to the satisfaction of certain
conditions, the area development agreement also gives the franchisee the right,
during a 39-month period commencing on April 1, 1998, to require the Company to
acquire between eight and 31 of such stores at specified times at the same price
and on the same terms as described above, as well as any additional stores
acquired by the franchisee, the acquisition of which was approved by the
Company.
See "Risk Factors -- Risks Associated with Franchise Operations."
COMPETITION
The video retail industry is highly competitive. The Company competes with
other video specialty stores, including stores operated by regional and national
chains, such as Blockbuster, and with other businesses, such as supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations and other retailers, that offer videos and interactive electronic
entertainment products. Certain of the Company's competitors, including
Blockbuster, have significantly greater financial and marketing resources,
market share and name recognition than the Company. The Company believes that,
apart from Blockbuster, neither the Company nor any other video specialty store
chain accounts for 2% or more of industry-wide revenues. In addition, the
Company's stores compete with other leisure-time activities, including movie
theaters, network and cable television, live theater, sporting events and family
entertainment centers. However, many of these have a higher per person cost than
the rental of a video.
The Company believes the principal competitive factors among participants
in the video retail industry are store location and visibility, title selection,
the number of copies of each new release available and customer service. While
the Company does not believe that price is a significant competitive factor
among video retailers, it is a significant factor relative to competition with
movie theaters and other forms of entertainment. The Company's goal is to offer
a higher level of service, greater title selection and more copies of new
releases than its competitors to foster more frequent visits and video rentals
by customers.
The Company's stores also compete with Pay-Per-View cable television
systems, in which home subscribers pay a fee to see programming selected by the
subscriber. Existing Pay-Per-View services offer a limited number of channels
and programming and are generally available only to households with a converter
to unscramble incoming signals. While recently developed technologies permit
certain telecommunications companies to transmit a much greater number of movies
to homes in more markets as frequently as every five minutes, the Company
believes that substantial technological developments will be necessary to allow
such alternatives to match the low price, viewing convenience (in terms of
stopping, restarting and rerunning the programs) and selection available through
video rental. Furthermore, the Company believes that movie studios have a
significant interest in maintaining the movie rental business because the sale
of video rental units typically represents the studios' largest source of
revenues. According to Kagan Associates, the home video market was the largest
single source of revenue to movie distributors, accounting for approximately
46.1% of movie distributors' worldwide revenues in 1994. For further information
concerning competition within the industry, see "Video Industry Overview."
EMPLOYEES
At October 1, 1996, the Company had 2,793 employees, including 2,665 in
retail stores and the remainder in corporate administrative and warehousing
operations. Of such employees, 612 were full-time and 2,181 were part-time.
Staffing requirements for West Coast stores range from six to 12 employees,
depending
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<PAGE> 60
on size, and typically include one store manager and one or two assistant
managers. Store managers report directly either to a Regional Vice President (of
which the Company currently has seven and soon to be increased to eight due to
the Prospective Acquisitions) or, in regions with many stores, to a district
manager who, in turn, reports to a Regional Vice President. The Company believes
that its employee relations are good. None of the Company's employees is
represented by a labor union. Consummation of the Prospective Acquisitions is
expected to add approximately 104 full-time and 360 part-time employees.
PROPERTIES
The Company's corporate headquarters is located in Philadelphia,
Pennsylvania, at 9990 Global Road and in an adjacent building at 490 Red Lion
Road and consists of approximately 10,500 square feet in the Global Road
building and 6,500 square feet on the second floor of the Red Lion Road
building. Approximately 11,000 square feet of warehouse space is located at the
Red Lion Road building. Currently, annual rentals for these facilities are
$53,000, $32,824 and $28,176, respectively, plus taxes, insurance and utilities.
These facilities are leased pursuant to an agreement which expires on December
31, 1996, with an option to renew for an additional three-month period. The
Company is currently negotiating for a more centralized facility to which to
relocate the corporate office, outside of the Philadelphia city limits but
within reasonable commuting distance for its employees.
The Company also rents 1,250 square feet of office space at 685 Delaware
Avenue, Suite 115, Marion, Ohio for its Ohio operations, under a lease for the
period ending December 31, 1996 (which is currently expected to be extended for
an additional year) for an annual rental of $12,000, plus taxes, insurance and
utilities, and 2,400 square feet of office space at 1266 Commonwealth Avenue,
Boston, Massachusetts for its Massachusetts operations, with a lease for the
period ending August 31, 1997, for an annual rental of $31,500, plus taxes,
insurance and utilities, with two five-year renewal options. Office and
warehouse facilities for Regional Vice Presidents' operations is typically
located in premises leased by a conveniently located store within each region.
The Company believes that such facilities are adequate for current and future
operations.
The Company leases all of its video specialty stores. The leases for the
Company's stores generally have an initial term of five to ten years or more and
provide one or more options to renew for additional terms of similar lengths.
The leases with respect to the remaining stores generally have an initial term
of five years and provide one or two options to renew for an additional term of
three to five years. Rents for the renewal terms are typically at pre-negotiated
rates. The majority of the leases contain percentage rental provisions which
only apply based upon high thresholds of in-store gross sales revenues. The
Company has not to date paid material amounts of percentage rentals. The Company
is responsible for taxes, insurance and utilities under most leases. The Company
expects that future stores will also occupy leased premises.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, trade names and service marks
including West Coast Video(R), The Movie Buff's Movie Store(R), Game Power
HeadquartersSM, The ProjectorTM, Spotlight on VideoTM and Videosmith(R), as well
as Palmer Video, Red Giraffe and other trade names under which certain recently
acquired stores are currently conducting business pending their transition to
the West Coast Video(R)
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name and signage. The Company also owns its own IRIS version and source code of
the West Coast Video(R) and Game Power HeadquartersSM software.
LEGAL PROCEEDINGS
The Company was served with a Demand for Arbitration (the "Demand") by a
Game Power Headquarters(SM) franchisee on January 22, 1996 (Interactive
Associates, L.C., Inter Active Electronics Corporation, BSMS Acquisitions, Inc.
and RKT Acquisitions Company, American Arbitration Association, Case No. 54 114
000 33 96). The Demand alleges that one of the WCEI Companies, as predecessor
franchisor of video game stores, engaged in acts of fraud and misrepresentation,
breach of contract and unfair and deceptive trade practices, first by misstating
its intentions in regard to developing and supporting a network of stand-alone
video game stores, thereby inducing the franchisee to incur substantial
development expenses, and then by failing to deliver promised support, including
design plans and specifications, opening inventory and computer hardware and
software. The Demand seeks compensatory damages in excess of $355,000. The
Company has denied the material allegations of the Demand and intends to
vigorously defend against this action.
On March 20, 1996, a Complaint was filed against the Company in the
Superior Court of the State of California in and for the City and County of
Santa Clara, Anderson & Wells, Sundance Venture Partners, L.P., and Murphy's
Express v. R.K.T. Acquisition Co., West Coast Entertainment Corporation, and
Does 1 through 10 (Case No. CV756743). Plaintiffs claim that the Company failed
to close an $800,000 bridge financing loan from Sundance Venture Partners, L.P.
("Sundance") which plaintiffs allege would have entitled Sundance, as lender, to
warrants for Company common stock worth $420,000 (valued at a share price
equivalent to the price at which the Company subsequently offered its stock in a
public offering) and Anderson & Wells to a $60,000 placement fee. Based on these
assertions, the Complaint alleges breach of contract, breach of the covenant of
good faith and fair dealing and interference with economic relations against the
Company due to its purported failure to close the loan. The Company has denied
the material allegations in the Complaint and plans to defend vigorously against
plaintiffs' claims.
The Company is a defendant, together with Ralph W. Standley III and T. Kyle
Standley, in a lawsuit brought in the United States District Court for the
Eastern District of Pennsylvania on July 3, 1995 entitled Salvador v. R.K.T.
Acquisitions, Inc. (No. 95-6241). The plaintiff claims that he was offered
employment by the Company and is entitled to a salary and various types of
finder's fees and other incentives. On the basis of discovery to date, the suit
seeks to recover employee compensation in excess of $750,000, finder's fees in
excess of $1,250,000, and punitive damages in an unspecified amount. The matter
has been set for trial in early November 1996. The Company has denied the
material allegations in this matter and plans to defend vigorously against
plaintiff's claims.
DEVELOPMENT OF THE COMPANY
West Coast Entertainment Corporation is a Delaware corporation established
by Ralph W. Standley III and T. Kyle Standley in February 1995 (originally under
the name RKT Acquisition Co.) for two purposes: (i) to combine four corporations
(the "Predecessor Corporations") through which the Standley family had
theretofore conducted their video store business and (ii) to acquire
substantially all of the operating assets relating to franchise operations of
West Coast Video Entertainment, Inc., an unrelated third party, and its four
affiliated corporations. In July 1995 each of the four Predecessor Corporations,
Giant Video Corporation ("GVC"), Nostalgia Ventures, Inc. ("NVI"), G.V.
Management Corp. ("GVMC") and Videosmith (DE) Incorporated ("VDI"), merged with
and into the Company in the Merger. As a result of the Merger, the former
stockholders of the four Predecessor Corporations became stockholders of the
Company. Simultaneously, the Company, through its wholly-owned subsidiary WC
Franchise, a Delaware corporation, acquired substantially all of the
franchise-related operating assets of the WCEI Companies for $4.0 million in
cash and $4.4 million principal amount of promissory notes and also agreed to
make $500,000 of noncompetition payments and pay certain subsequent fees as
described under "-- Recent Acquisitions."
The Company's growth since 1995 is described under "-- Recent
Acquisitions."
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The four Predecessor Corporations that were merged into the Company had
previously conducted their respective operations under substantially common
ownership. See Notes 1 and 11 to the Company's consolidated financial
statements. GVC, an Ohio corporation, was incorporated in 1989 and opened its
first video specialty store in Dayton, Ohio in June 1989. In April 1993 all of
the outstanding stock of NVI, an Ohio corporation with seven stores in the
Greater Dayton area, was acquired by the controlling stockholders of GVC from
unrelated third parties for $100,000 in cash and $108,000 principal amount of
promissory notes accompanied by a $256,000 noncompetition payment. In August
1994 the controlling stockholders of NVI, together with certain other investors,
acquired from an unrelated third party through VS Acquisition Corp., a newly
formed Delaware corporation ("VSAC"), all of the outstanding stock of VDI, the
parent of Videosmith Incorporated, a Massachusetts corporation with 14 stores in
Massachusetts, for $1.9 million in cash. Shortly thereafter, VSAC merged with
and into VDI. In May 1992 the controlling stockholders of GVC formed an Ohio
corporation, GVMC, which provided management services to certain of the other
corporations. In February 1992 over three years prior to the acquisition of its
franchise-related operating assets by the Company, one of the WCEI Companies
filed for protection under Chapter 11 of the Federal Bankruptcy Code due to the
financial condition of its owned and operated video specialty stores, as
distinct from its franchising operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, other key executives and directors of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- ---- ---------------------------------------------
<S> <C> <C>
Ralph W. Standley, III(1)............... 58 Chairman of the Board of Directors
T. Kyle Standley(1)..................... 33 President, Chief Executive Officer and
Director
Donald R. Thomas........................ 52 Chief Operating Officer and Director
Kenneth R. Graffeo...................... 38 Executive Vice President-Marketing
Peter Balner............................ 49 Executive Vice President-Corporate Retail
Operations and Development and Director
Jules E. Gardner........................ 35 Executive Vice President-Franchise Operations
Richard G. Kelly........................ 42 Executive Vice President, Chief Financial
Officer
Donald Weiss............................ 54 Executive Vice President-Business Development
Jerry L. Misterman...................... 50 Vice President, Chief Accounting Officer
M. Trent Standley....................... 32 Vice President, Secretary and Director
James B. Dinneen, Jr.(2)................ 34 Director
C. Stewart Forbes(3).................... 56 Director
Wesley F. Hoag(1)(2)(3)................. 39 Director
</TABLE>
- ---------------
(1) Member of the Acquisitions Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Ralph W. Standley III has served as the Chairman of the Board of West Coast
and its principal predecessors for the past five years. He also served as
President of two such predecessors, NVI and VDI, and as Secretary of two other
predecessors, GVI and GVMC, from the date of their inception or acquisition by
West Coast through July 1995. Ralph W. Standley III is the father of T. Kyle
Standley and M. Trent Standley.
T. Kyle Standley has served as the President and Chief Executive Officer
and a Director of West Coast and its predecessors since its inception in
February 1995. Previously, he served as an executive officer of two of West
Coast's predecessors, GVC and GVMC, commencing in 1991. Mr. Standley was
director of research at Colliers International Property Consultants from 1989 to
1991, and prior thereto was a financial analyst at Paine Webber Incorporated.
Mr. Thomas has served as Chief Operating Officer since he joined the
Company in May 1995. Mr. Thomas has also served as Chairman of the Board of
Directors and Executive Consultant since 1985 to A-Z Video, a chain of 12
company-owned and 21 licensed video specialty stores; Chairman of the Board of
Directors, President and Chief Executive Officer of Club Donatello Owners
Association, a hotel-condominium owners association in San Francisco, since
early 1994; and as President of D.R. Thomas Enterprises, Ltd., a management
consulting firm, since 1991. From 1990 through 1992, Mr. Thomas also served as
Senior Vice President of Creative Strategies Research International, Inc., a
high-technology market research and management consulting firm.
Mr. Graffeo has served as Executive Vice President-Marketing since he
joined the Company in July 1995 in connection with the acquisition by WC
Franchise of certain franchise-related operating assets. Prior thereto, Mr.
Graffeo served West Coast Entertainment, Inc. as its Executive Vice President
from December 1993 until July 1995 and as Vice President-Marketing from December
1992 through December 1993. From July 1990 through December 1992, Mr. Graffeo
served as Director of Marketing for West Coast Video Enterprises, Inc. Both West
Coast Entertainment, Inc. and West Coast Video Enterprises, Inc. were WCEI
Companies previously engaged in the franchising and ownership and operation of
video specialty stores. From 1986 to 1990, Mr. Graffeo served as a
Vice-President of Marketing Services for Geographic Marketing Group, a
BBDO/Tracy Locke Company, a domestic marketing group, with direct responsibility
for the marketing
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campaigns of brands such as Kraft General Foods and Pepsi-Cola. From 1980 to
1986, Mr. Graffeo was employed by Coca-Cola Co. Inc., where he served in various
marketing and brand management positions.
Mr. Balner has served as President and Chief Executive Officer of Palmer
Video, a rental video retailer, since December 1981. Mr. Balner has received
numerous awards, including "Retailer of the Year" in 1989 and 1993 and "Video
Man of the Year" in 1989, and was inducted into the "Video Hall of Fame" in
1992. Mr. Balner has served on the Board of Directors of the Video Software
Dealers Association since 1993.
Mr. Gardner has served as Executive Vice President-Franchise Operations
since he joined the Company in July 1995 in connection with the acquisition by
WC Franchise of certain franchise-related operating assets, and has served as
President of WC Franchise Company since July, 1995. Prior to July 1995, Mr.
Gardner served as Chief Operating Officer for West Coast Entertainment, Inc.
from November 1992. From July 1990 through November 1992, Mr. Gardner was a Vice
President of West Coast Video Enterprises, Inc. with responsibility for
marketing video specialty store franchises. On February 25, 1992, West Coast
Video Enterprises, Inc., of which Mr. Gardner was an executive officer, filed
for protection under Chapter 11 of the Federal Bankruptcy Code. Prior to 1990,
Mr. Gardner also coordinated the national sales and distribution efforts of
Sorbee International, a manufacturer of sugar-free candies.
Mr. Kelly joined the Company in July, 1996. Previously he was a director of
Moore, Stephens, Reilly, P.C. for the past three years, and, since 1990, a
director of Gillis & Kelly, P.C. which was merged with Moore, Stephens, Reilly,
P.C. Mr. Kelly is a Certified Public Accountant whose responsibilities at such
firms included the direction of the mergers and acquisitions group.
Mr. Weiss has served as Executive Vice President-Business Development of
the Company since September 1996. From May 1996 to August 1996, Mr. Weiss served
as Vice President-Franchise Development of the Company. From November of 1992
until April 1996, he served as Vice President-
Franchising Development of WCEI. From August 1991 to October 1992, Mr. Weiss
served as Vice President-Franchising Development of West Coast Enterprises,
Inc., and from March 1989 to July 1991, he served as Executive Director of
Franchise Development of West Coast Enterprises, Inc.
Mr. Misterman has served as Vice President-Finance of the Company since
mid-July 1995 and as Chief Financial Officer of WC Franchise, a wholly owned
subsidiary of the Company, since the acquisition by WC Franchise of certain
franchise-related operating assets in July 1995. Prior to and until July 1995,
Mr. Misterman served as Chief Financial Officer of each of the WCEI Companies,
of Sorbee International, a manufacturer of sugar-free candies, from March 1989,
and of Medical Products Labs, a manufacturer and distributor of fluoride-related
sugar-free dental products, from March 1990. Prior to 1990, Mr. Misterman's
experience included serving as the Chief Financial Officer of the Seven-Up
Bottling Group of Philadelphia Inc., Corporate Controller and Assistant
Treasurer of Aydin Corporation, a manufacturer of electronic communications
systems and equipment, and also as Chief Financial Officer of Providers Benefit
Company, a manager and operator of several primary health care facilities and a
finance company. On February 25, 1992, West Coast Video Enterprises, Inc., of
which Mr. Misterman was an executive officer, filed for protection under Chapter
11 of the Federal Bankruptcy Code.
M. Trent Standley has served as a Vice President, Secretary and a Director
of West Coast since May 1995. He also served as President of one of West Coast's
predecessors, GVI, from 1989 to 1995, as Vice President of two other
predecessors, VDI from 1994 to 1995 and GVMC from 1992 to 1995, and as Secretary
of a fourth predecessor, NVI, from 1993 to 1995.
Mr. Dinneen has served the Company as a Director since August 1995. Since
January 1995, Mr. Dinneen has served as Managing Director of Merion Capital
Management, LLC, an investment management company. From 1991 to 1994, Mr.
Dinneen served as Assistant to the President of WSR Corporation, an auto parts
retailer, with responsibility for general management and strategic planning
functions. Prior to 1991, Mr. Dinneen served as a financial analyst for Merrill
Lynch Capital Partners, Inc.
Mr. Forbes has served as President of Colliers International Property
Consultants since 1979.
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<PAGE> 65
Mr. Hoag has served as General Counsel and Chief Operating Officer of R.
Meeder & Associates, Inc., a registered investment adviser ("Meeder"), since
July 1993, and since April 1994 has served as Vice President of The Flex-Funds
and The Flex-Partners, investment companies sponsored by Meeder. From 1984 to
1993, Mr. Hoag was an attorney at the law firm of Porter, Wright, Morris &
Arthur.
Executive officers of the Company are generally elected by the Board of
Directors on an annual basis and serve at the discretion of the Board of
Directors. Directors serve for one-year terms, until the next Annual Meeting of
Stockholders and until their respective successors are duly elected and
qualified.
Mr. Dinneen has been elected as a director of the Company pursuant to an
agreement with the former stockholders (other than members of the Standley
Family) of VDI and NVI (the "Non-Standley Investors") in connection with the
merger of each of VDI and NVI with and into the Company in July 1995. The
agreement will terminate when the Non-Standley Investors own less than 475,469
shares, which equals one half of the shares of Common Stock acquired by them in
the merger.
DIRECTOR COMPENSATION
Non-employee directors of the Company receive an annual stipend of $10,000
and all directors are reimbursed for their out-of-pocket expenses incurred in
connection with their attendance at Board and committee meetings.
Under the Company's 1995 Director Stock Option Plan (the "Director Option
Plan"), upon the consummation of the Public Offering, each of Messrs. Dinneen,
Forbes and Hoag, the Company's non-employee directors, was granted an option to
purchase 3,000 shares of Common Stock at an exercise price per share equal to
the public offering price. In addition, each non-employee director initially
elected to the Board of Directors in the future will be granted an option, upon
his or her initial election as a director, to purchase 3,000 shares of Common
Stock. Each non-employee director will also receive a subsequent grant of an
option for 1,000 shares on the date of each Annual Meeting of Stockholders at
which such director is reelected as a director of the Company, beginning with
the Annual Meeting for the year ending January 31, 1997. All options granted
under the Director Option Plan have or will have an exercise price equal to the
fair market value of the Common Stock on the date of grant, will vest over a
three-year period, provided the optionholder continues to serve as a director of
the Company, and will expire ten years from the date of grant (subject to
earlier termination in the event the optionee ceases to serve as a director of
the Company). The total number of shares of Common Stock that may be issued
under the Director Option Plan is 50,000 shares.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain information concerning the annual
and long-term remuneration paid to or accrued for the Chief Executive Officer
and each of the other four most highly compensated executive officers of the
Company whose salaries and bonuses exceeded $100,000 for services rendered
during the year ended January 31, 1996 (the "Named Executives") together with
similar information in regard to such remuneration paid to or accrued for the
Named Executives for services rendered during the year ended January 31, 1995.
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<PAGE> 66
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
FISCAL YEAR ENDED ---------------------
NAME AND PRINCIPAL POSITION JANUARY 31, SALARY BONUS
- ------------------------------------------------ ----------------- -------- --------
<S> <C> <C> <C>
Ralph W. Standley III 1996 $117,923
Chairman of the Board......................... 1995 $ 52,000 $ 34,000
T. Kyle Standley 1996 $ 43,795
President and Chief Executive Officer......... 1995 $ 26,000 $ 30,000
Kenneth R. Graffeo(2)
Executive Vice President...................... 1996 $200,000
Jules E. Gardner(2)
Executive Vice President...................... 1996 $200,000
Jerry L. Misterman(2)
Vice President-Finance........................ 1996 $118,750
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total of annual salary and bonuses for the executive officer for the fiscal
year.
(2) This executive officer joined the Company in July 1995.
The Company expects to pay higher amounts of executive compensation to
Ralph W. Standley III and T. Kyle Standley in the year ending January 31, 1997
and subsequent years as its operations expand. Estimates of such amounts have
been reflected in the pro forma combined financial data set forth elsewhere in
this Prospectus.
Option Grants and Year-End Option Values
To date, the Company has not granted any employee stock options. Future
grants will be made at the discretion of the Compensation Committee.
Employment Agreements
In connection with the purchase by WC Franchise of substantially all the
operating assets pertaining to franchising operations of the WCEI Companies, WC
Franchise entered into employment agreements with each of Messrs. Gardner,
Graffeo and Misterman. Each of these agreements has a two-year term which
expires in July 1997. Under such agreements, these employees serve WC Franchise
as its President, Executive Vice President-Marketing and Vice President-Finance,
respectively. Messrs. Gardner, Graffeo and Misterman are also executive officers
of the Company.
These agreements provide for annual salaries of $200,000 to each of Messrs.
Gardner and Graffeo, and $118,750 to Mr. Misterman. All reasonable travel,
entertainment and other expenses incurred in connection with the performance of
their employment duties are reimbursable by the Company.
Under each agreement, the employee's employment may be terminated by the
Company in the event that the employee fails to perform his respective duties
for a certain period of time, for cause, upon the death or disability of the
employee or at the election of the employee upon two months' written notice
provided to the Company. In the event that the Company moves the employee's
primary place of employment to a location beyond a 40 mile radius of its present
Philadelphia site and the employee elects to terminate his employment for such
reason, then the Company is obligated to pay each such terminating employee the
balance of any salary and benefits which he would have been entitled to receive
had he remained employed for the remainder of the term of the respective
agreement.
The Company has entered into a one-year employment agreement with Mr.
Balner which became effective upon consummation of the Acquisition of Palmer
Video, pursuant to which Mr. Balner serves as Executive Vice President-Corporate
Retail Operations and Development at an annual salary of $210,000.
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<PAGE> 67
Except that Mr. Balner's agreement does not provide for termination benefits if
his primary place of employment is moved, such agreement is substantially
similar in all other material respects to those of Messrs. Gardner, Graffeo and
Misterman.
The agreements generally prohibit each employee from competing with the
Company during his term of employment by the Company and for two years
thereafter, and contain customary confidentiality and invention assignment
provisions in favor of the Company. The agreements require the Company to
indemnify each employee to the fullest extent permitted under the Delaware
General Corporation Law for liabilities incurred by each employee in the
performance of his duties.
EMPLOYEE STOCK PLANS
1995 Equity Incentive Plan. The Company's 1995 Equity Incentive Plan (the
"Equity Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company in July 1995. The Equity Plan enables the Company to
grant options to purchase Common Stock, to make awards of restricted Common
Stock, and to issue certain other equity-related securities of the Company to
employees of and consultants to the Company. The total number of shares of
Common Stock which may be issued under the Equity Plan is 350,000 shares. Stock
options entitle the optionee to purchase Common Stock from the Company for a
specified exercise price as determined by the Board of Directors, during a
period specified in the applicable option agreement. Restricted stock awards
entitle the recipient to purchase Common Stock from the Company under terms
which provide for vesting over a period of time and a right of repurchase in
favor of the Company with respect to the unvested portion of the Common Stock
subject to the award upon the termination of the recipient's employment or other
relationship with the Company. The maximum number of shares with respect to
which options or awards may be granted to any employee under the Equity Plan may
not exceed 90,000 shares of Common Stock during any calendar year.
Under the Equity Plan, the Company may grant options that are intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") ("incentive stock
options"), or options not intended to qualify as incentive stock options
("nonstatutory options"). Incentive stock options may only be granted to
employees of the Company. Stock options granted under the Equity Plan will be
nontransferable, and it is expected that they will generally become exercisable
over a four-year period and expire ten years after the date of grant (subject to
earlier termination in the event of the termination of the optionee's employment
with the Company).
The Equity Plan is administered by the Compensation Committee of the Board
of Directors, which selects the persons to whom stock options and restricted
stock awards are granted and determines the number of shares of Common Stock
covered by the option or award, its exercise price or purchase price, its
vesting schedule and (in the case of stock options) its expiration date.
1995 Employee Stock Purchase Plan. The Company's 1995 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and
approved by the stockholders of the Company in November 1995. The Purchase Plan
authorizes the issuance of up to a total of 125,000 shares of Common Stock to
participating employees through a series of semiannual offerings. Offering
periods will commence on each November 1, beginning November 1, 1996, and May 1
and terminate on the following April 30 and October 31, respectively. The
maximum number of shares available in each offering is 25,000 shares. The
Purchase Plan will terminate when the maximum number of shares issuable under
the Purchase Plan has been purchased by participating employees. Any employee,
including an employee who is a director, of the Company or a participating
subsidiary is eligible to participate in an offering if, on the first day of the
applicable offering, he or she is regularly employed by the Company or the
subsidiary for more than 20 hours a week and has been so employed for more than
five months in a calendar year. The price at which employees may purchase Common
Stock in an offering is 85% of the closing price of the Common Stock on the
Nasdaq National Market on the day the offering commences or on the day the
offering terminates, whichever is lower. An employee may elect to have up to 10%
of his or her qualifying compensation withheld for the purpose of purchasing
stock under the Purchase Plan. On the date an offering commences, each
participating employee is
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<PAGE> 68
deemed to have been granted an option to purchase up to the number of whole
shares determined by dividing 12% of such employee's compensation for the
immediately prior six-month period by 85% of the fair market value of the Common
Stock on the date the offering commences. Unless the participant elects to
withdraw from the offering, each participant who continues to be employed by the
Company on the date such offering terminates is deemed to have exercised the
option and purchased on such date such number of shares (subject to the maximum
number covered by his or her option) as may be purchased with the amount of his
or her payroll deductions at the offering price. If the total number of shares
of Common Stock that would otherwise be purchased in the offering with the
accumulated payroll deductions exceeds the number of shares available during the
offering, the available shares will be allocated on a pro rata basis to
participating employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Immediately following the completion of the Public Offering, the Company
established a Compensation Committee consisting of Messrs. Forbes and Hoag. The
Board of Directors did not previously have a Compensation Committee; instead,
the functions of the Compensation Committee were performed by the Board of
Directors as a whole. For information concerning certain transactions and
relationships among the Company and the members of the Board of Directors, see
"Certain Transactions."
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<PAGE> 69
CERTAIN TRANSACTIONS
In July 1994, in connection with its formation, VSAC, one of the Company's
predecessors, issued 13 shares of its Common Stock to each of Ralph W. Standley
III, T. Kyle Standley and M. Trent Standley for cash payments of $2,000 each. In
August 1994, in connection with the acquisition by VSAC of all of the capital
stock of VDI, VSAC issued (i) an additional 414 shares of its Common Stock to
Ralph W. Standley III and an additional 402 shares of its Common Stock to each
of T. Kyle Standley and M. Trent Standley for an aggregate cash payment of
$194,000 each and (ii) 279 shares of its Series A Convertible Preferred Stock to
James B. Dinneen, Jr. for a cash payment of $100,000. In September 1994, VSAC
was merged with and into VDI and VDI issued shares of its Common Stock and
Series A Convertible Preferred Stock to the stockholders of VSAC in
consideration for the cancellation of their capital stock of VSAC.
In February 1995, in connection with its formation and initial
capitalization, the Company issued a total of 1,028,460 shares of Common Stock
to Ralph W. Standley III (342,840 of which shares Mr. Standley subsequently
transferred to the Ralph W. Standley III Irrevocable Trust), 1,028,460 shares of
Common Stock to T. Kyle Standley and 228,547 shares of Common Stock to M. Trent
Standley for cash payments of $4,500, $4,500 and $1,000, respectively.
In July 1995, in connection with the merger of NVI, GVC, GVMC and VDI into
the Company, the Company issued a total of 611,379 shares of Common Stock to
Ralph W. Standley III, 64,304 shares of Common Stock to Ralph W. Standley III's
wife, 407,465 shares of Common Stock to T. Kyle Standley, 436,411 shares of
Common Stock to M. Trent Standley and 172,956 shares of Common Stock to Mr.
Dinneen, reflecting the value of each such person's stockholdings in such four
entities, in consideration for cancellation of their capital stock in such four
entities.
The Company has entered into employment agreements with Messrs. Graffeo,
Gardner, Misterman and Balner. See "Management -- Employment Agreements."
Two corporations, 51% of whose outstanding stock was owned by Mr. Gardner
and 40% by Mr. Graffeo, operated two West Coast Video(R) stores from July 1991
through October 1993 and October 1995, respectively, under royalty-free license
agreements from the WCEI Companies (prior to July 1995) and WC Franchise
(thereafter). Had standard royalties and advertising fees not been waived, such
stores would have paid the franchisors approximately $59,800 during fiscal 1992,
approximately $64,480 during fiscal 1993, approximately $34,800 during fiscal
1994 and $33,280 during fiscal 1995. The two stores were sold to unrelated third
parties which had already become West Coast Video(R) franchisees.
For a description of the agreement with the Non-Standley Investors,
pursuant to which Mr. Dinneen has been elected a director of the Company, see
"Management -- Executive Officers and Directors." For a description of a
registration rights agreement to which Mr. Dinneen is a party, see "Description
of Capital Stock -- Registration Rights."
In May 1996, the Company granted certain stock options to Messrs. Dinneen,
Forbes and Hoag under the Director Option Plan. See "Management -- Director
Compensation."
The Company paid an aggregate purchase price of $9,156,781, consisting of
$4,578,391 in cash and 352,184 shares of Common Stock, to Peter Balner in
connection with the Recent Acquisition by the Company of all outstanding stock
of Palmer Video owned by him, together with an additional $2,289,196, consisting
of $436,686 in cash and 142,501 shares of Common Stock, payable to two family
trusts of which Mr. Balner is trustee.
The Company paid an aggregate purchase price of $4,300,000 in cash to A-Z
Video in connection with the Recent Acquisition of 12 video specialty stores.
Mr. Thomas, the Chief Operating Officer and a Director of the Company, was
Chairman of the Board of A-Z Video and owned 2% of its outstanding capital
stock.
In May 1996, the Company repaid approximately $3.1 million of indebtedness
to a financial institution, all of which had been guaranteed by Ralph W.
Standley III, T. Kyle Standley and M. Trent Standley.
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<PAGE> 70
In May 1996, the Company repaid $216,781 of principal of and accrued
interest on a convertible note to Mr. Gardner. Mr. Graffeo elected to convert an
additional $216,781 of principal and accrued interest into 20,844 shares of
Common Stock. Each of Messrs. Graffeo and Gardner had a 10% interest in such
note, which was issued to West Coast Video Enterprises, Inc. in July 1995 as
part of the purchase price for the franchise-related assets of that corporation
which were acquired by the Company's wholly owned subsidiary, WC Franchise.
In July 1995, the Company also agreed to pay to each of Messrs. Graffeo and
Gardner 1.11% (and the WCEI Companies 8.88%) of the total purchase price paid by
the Company to the seller in connection with the acquisition of the stock or
assets of any company which was a West Coast Video(R) franchisee as of July 12,
1995. Under this agreement, the Recent Acquisition of stores from the
Massachusetts Franchisees resulted in a payment of approximately $130,000 to
each such individual. Information about any such fees payable in connection with
the Prospective Acquisitions or future Acquisitions may be found under
"Prospective Acquisitions" or in the Supplements.
The Company expects to pay an aggregate purchase price of $2,700,000 to the
sellers of the Weiss stores in one of the Prospective Acquisitions. Mr. Weiss,
an Executive Vice President of the Company, is an investor in, and director of,
such sellers of the Weiss stores and will receive $1,100,000 of such
consideration.
The Company has adopted a policy requiring all future transactions between
the Company and its officers, directors and affiliates to be on terms no less
favorable to the Company than could be obtained from unrelated third parties and
to be approved by a majority of the disinterested members of the Company's Board
of Directors.
PRICE RANGE OF COMMON STOCK; DIVIDENDS
The Company's Common Stock has traded on Nasdaq's National Market System
under the symbol "WCEC" since May 14, 1996. The Company believes that
approximately three dealers are engaged in making a market in the Company's
Common Stock. The following table sets forth, for the fiscal period indicated,
the high and low sales prices for the Company's Common Stock as reported by
Nasdaq.
<TABLE>
<CAPTION>
SALE PRICES
-------------
FISCAL YEAR ENDING JANUARY 31, 1997 HIGH LOW
---------------------------------------------------------------------- ---- ----
<S> <C> <C>
Second Quarter
(from May 14, 1996 through July 31, 1996)........................... 13 1/2 9 1/4
Third Quarter
(from August 1, 1996 through October 21, 1996)...................... 11 1/2 7 5/8
</TABLE>
There were approximately 52 record owners of the Company's Common Stock as
of October 1, 1996. The last reported sales price for the Common Stock on Nasdaq
on October , 1996 was $ per share.
For the foreseeable future, the Company expects to retain its earnings to
finance the expansion and development of its business. The payment of dividends
is within the discretion of the Company's Board of Directors and will depend on
the earnings, capital requirements, restrictions in future credit agreements and
the operating and financial condition of the Company, among other factors. The
Credit Facility contains a covenant prohibiting the payment of dividends without
the lender's consent. There can be no assurance that the Company will ever pay
dividends in the future.
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<PAGE> 71
PLAN OF DISTRIBUTION
Shares of common stock will be offered in connection with West Coast's (or
a subsidiary's) acquisition of businesses, properties or equity and/or debt
securities in business combination transactions from time to time. A maximum of
5,000,000 shares of common stock may be issued and sold pursuant to this
prospectus. These shares will ordinarily represent consideration paid directly
upon the acquisition of businesses, properties or securities, in some cases
together with additional consideration consisting of cash, debt or other
securities (which may be convertible into shares covered by this Prospectus) or
assumption by the Company of liabilities of the businesses being acquired, or a
combination thereof. The shares may also include shares to be delivered upon the
exercise or satisfaction of conversion or purchase rights which are created in
connection with acquisitions or which were previously created or assumed by the
companies whose businesses or properties are acquired by West Coast (or a
subsidiary).
For a description of the businesses and assets to be acquired in the
Prospective Acquisitions, see "Prospective Acquisitions" and the Supplements.
RESALES
Shares offered hereby may generally be resold by the persons acquiring them
without further registration under the Securities Act of 1933 (the "Act"),
unless such persons are "affiliates" or "underwriters" within the meaning of the
Act. Such transfer restrictions are distinct from and in addition to any
transfer restrictions which may be contained in the acquisition agreements for
all or some future acquisitions. The Company intends to seek the agreement of
recipients of shares of Common Stock in Acquisitions to restrictions on their
transfer of such shares for periods ranging from six to 18 months or to
structure such transactions to provide for issuance of shares on a deferred
basis over periods of six to 18 months.
The shares to be issued at the closing of the Ohio Entertainment
Acquisition can be resold only in accordance with the following schedule:
one-third commencing six months after the closing date, an additional one-third
commencing twelve months after the closing date and the remaining one-third
commencing 18 months after the closing date. The shares to be issued at the
closings of each of the Wellesley Entertainment, Curran, DeCaro, Weiss, Knight,
Patel, and Weisburg Acquisitions can be resold only in accordance with the
following schedule: 40% commencing twelve months after the closing date and the
remaining 60% commencing 18 months after the closing date. The shares to be
issued at the closing of the Great American Acquisition will become freely
tradable twelve months after the closing date.
The shares issued to Reel Entertainment, Inc. on October 1, 1996 will
become freely tradable on April 1, 1997. The shares to be issued at the three
successive closings of the Prospective Acquisition of Reel Entertainment will be
subject to restrictions on resale for three, six and three months, respectively,
so that such shares are currently expected to become freely tradable in equal
installments on or about March 2, August 1 and September 3, 1997.
All Installment Shares to be issued in connection with the Recent
Acquisitions of Super Video and Picture Show will be issued in installments
ranging from six to 18 months following closing and may be freely resold
commencing on the respective dates of issuance.
Any shares to be issued upon consummation of the purchase of any of up to
31 stores pursuant to the option agreement with Reel Entertainment will become
freely tradable in six equal installments on the closing date for such stores
and three, six, nine, twelve and 15 months thereafter. The shares to be issued
in connection with each of the First Choice Acquisition and the LA Video
Acquisition will be issued in installments on the twelfth and eighteenth months
after the closing, and may be freely resold commencing on the respective dates
of issuance.
Any person receiving shares offered hereby who is an "affiliate" of West
Coast may be subject to certain limitations on resale. An "affiliate" is a
person who directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with the Company. In the absence
of a special relationship between West Coast and a person who receives shares
from West Coast in an acquisition
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<PAGE> 72
transaction (such as election of such person to West Coast's board of directors
or ownership by such person of a significant percentage of West Coast's
outstanding common stock), such a person generally would not be considered an
"affiliate" of West Coast within the meaning of the Act. Therefore, the
limitations on resale applicable to affiliates would not apply to such person.
Any person receiving shares offered hereby who is an "underwriter" of West
Coast may also be subject to certain limitations upon resale. An "underwriter"
includes a person who purchases West Coast shares with a view to the
distribution of such shares, or an affiliate of a company or business acquired
by West Coast. Although an "underwriter" may otherwise be subject to certain
resale limitations, if such person complies with the "safe harbor" provisions of
Rule 145(d), he or she may freely resell shares so long as certain conditions
are met. For example, a person who receives common shares from West Coast in a
typical acquisition transaction is deemed to be an "underwriter" as defined by
the Act, but such person is generally free under the Securities Act to sell such
shares at any time by complying with Rule 145(d), which requires that the amount
of common shares which may be sold by such person in any three-month period may
not exceed the greater of (i) 1% of the West Coast common shares outstanding as
shown by the most recent report or statement published by West Coast, or (ii)
the average weekly trading volume in West Coast common shares reported on Nasdaq
during the four calendar weeks preceding the order to sell. Such sales must also
be made in "brokers' transactions," which are ordinary sales through a broker
acting as agent without special commission arrangements or selling efforts.
Persons receiving shares in connection with acquisitions may also be subject to
contractual restrictions on resale entered into in connection with such
acquisitions.
In order for affiliates or underwriters not protected by Rule 145(d) to
resell shares offered hereby, West Coast would have to agree (i) to provide an
opinion to the effect that an exemption applies to such resale, (ii) to amend
the registration statement of which this prospectus is a part to permit such
resales, or (iii) to file a new registration statement which includes the shares
proposed to be resold. Unless a written agreement obligates West Coast to do so,
it does not expect that it will agree to provide such opinion, amendment or
registration.
USE OF PROCEEDS
The proceeds of the sale of shares offered hereby, to the extent such
proceeds consist of the assets of acquired businesses, will be added to the
assets of West Coast. Cash proceeds, if any, will be added to the general funds
of West Coast and may be used for general corporate purposes, including capital
expenditures and working capital requirements.
For a description of the businesses and assets to be acquired in the
Prospective Acquisitions, see "Prospective Acquisitions" and the Supplements.
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<PAGE> 73
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 1, 1996 by (i) each person
who is known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director and nominee, (iii) each Named
Executive and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
NAME AND ADDRESS OF ------------------------
BENEFICIAL OWNER NUMBER PERCENT(2)
- -------------------------------------------------------------------- --------- ----------
<S> <C> <C>
5% STOCKHOLDERS:
Ralph W. Standley III(3)(4)(5).................................... 1,361,322 11.3%
Ralph W. Standley III Irrevocable Trust(3)(5)..................... 342,819 2.8
T. Kyle Standley(3)(5)............................................ 1,435,934 11.9
M. Trent Standley(3).............................................. 664,958 5.5
OTHER EXECUTIVE OFFICERS:
Peter Balner(6)................................................... 352,184 2.9
Palmer Corporation
1767 Morris Avenue
Union, NJ 07083-3598
Jules E. Gardner(3)............................................... -- --
Kenneth R. Graffeo(3)............................................. 20,844 *
Donald R. Thomas(3)............................................... -- --
Richard G. Kelly(3)............................................... -- --
Donald Weiss(3)(7)................................................ -- --
OTHER DIRECTORS:
James B. Dinneen, Jr.(8).......................................... 172,955 1.4
Merion Capital Management
767 Third Avenue, 27th Floor
New York, NY 10017
C. Stewart Forbes................................................. -- --
Colliers International
84 State Street, 5th Floor
Boston, MA 02109
Wesley F. Hoag.................................................... -- --
R. Meeder & Associates
P.O. Box 7177
Dublin, OH 43017
All directors and executive officers as a group
(13 persons)(4)(5)(6)............................................. 4,351,016 36.0
</TABLE>
- ---------------
* Less than 1%
(1) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise indicated. In accordance with the
rules of the Securities and Exchange Commission, each stockholder is deemed
to beneficially own any shares subject to stock options or warrants which
are currently exercisable or which become exercisable, or convertible
securities which are currently exercisable or which become exercisable,
within 60 days after October 1, 1996, and any reference in these footnotes
to shares subject to stock options held by the person or entity in question
refers to stock options which are currently exercisable or which become
exercisable within 60 days after October 1, 1996. The
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<PAGE> 74
inclusion herein of shares listed as beneficially owned does not constitute
an admission of beneficial ownership. The number and percentage of
outstanding shares owned after this offering assumes none of the listed
stockholders will purchase additional shares in this offering.
(2) Number of shares deemed outstanding includes shares outstanding as of
October 1, 1996 and any shares subject to stock options held by the person
or entity in question that are currently exercisable or exercisable within
60 days following October 1, 1996.
(3) These holders have an address c/o the Company, 9990 Global Road,
Philadelphia, Pennsylvania 19115.
(4) Includes 1,297,018 shares held by a revocable trust over which this
stockholder has sole voting and dispositive power; also includes 64,304
shares owned by this stockholder's wife as to which this stockholder
disclaims beneficial ownership.
(5) Voting and dispositive power over 342,820 shares owned by this trust is
shared by T. Kyle Standley and John H. Chory, Esq., as co-trustees. The
beneficiaries of the trust are Ralph W. Standley III's issue, who include T.
Kyle Standley and M. Trent Standley. The number of shares in the column next
to Ralph W. Standley III's name excludes these shares.
(6) Excludes 142,501 shares of Common Stock to be acquired by two family trusts,
over which Mr. Balner has no voting or dispositive power, in connection with
the Acquisition of Palmer Video by the Company.
(7) Excludes an estimated 40,000 shares ($440,000 at $11.00 per share) to be
issued to Mr. Weiss upon the closing of a Prospective Acquisition.
(8) All of these shares are held by a charitable remainder trust, over which Mr.
Dinneen shares voting power, and is the sole income beneficiary.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock and 2,000,000 shares of Preferred Stock. As of October 1, 1996,
there were outstanding (i) 12,083,863 shares of Common Stock held by
approximately 52 stockholders of record, (ii) the Warrant, which provides for
the purchase of 192,308 shares of Common Stock and (iii) options issued pursuant
to the Director Option Plan to purchase a total of 9,000 shares of Common Stock.
The Company is also obligated under the terms of the acquisition agreements for
certain Recent Acquisitions to issue an estimated 519,222 Installment Shares
(subject to certain adjustments and elections, as described under
"Business -- Recent Acquisitions") to certain Sellers between March 30, 1997 and
March 30, 1998.
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Certificate of Incorporation, as amended (the "Certificate of
Incorporation") and Restated By-laws (the "By-Laws") is believed to be complete
in all material respects. For further details, see the Company's Certificate of
Incorporation and By-laws included as exhibits to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the outstanding shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to preferential dividend rights, if
any, of any outstanding series of Preferred Stock. Upon the liquidation,
dissolution or winding-up of the Company, holders of Common Stock are entitled
to receive ratably the net assets of the Company available for distribution
after the payment of all debts and other liabilities of the Company. Holders of
Common Stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of Common Stock are, and the shares offered hereby will
be, when issued and paid for, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of holders of shares of any series of
Preferred Stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 2,000,000 shares of Preferred Stock, in one or more
series. Each such series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights.
The stockholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject to
the rights of holders of any Preferred Stock issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
Preferred Stock.
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WARRANT
In July 1995, the Company issued the Warrant to Resource Holdings, Inc., a
subsidiary of Ingram. The Warrant entitles its holder to purchase a number of
shares equal to $1,750,000 divided by 70% of the initial public offering price
per share in the Public Offering (192,308 shares). The exercise price of the
Warrant is 70% of such initial public offering price. The exercise price may be
paid (i) in cash or by certified check, (ii) upon the surrender of the documents
evidencing certain indebtedness owed by the Company to Resource Holdings Inc. or
(iii) by a combination of methods (i) and (ii). The Warrant expires on July 12,
2000. See Note 7 to the Company's consolidated financial statements. The Company
has granted certain registration rights relating to the shares of Common Stock
issuable upon exercise of the Warrant. See "-- Registration Rights."
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to approve the sale or exchange of all or substantially all of a
corporation's assets or the merger or consolidation of a corporation with or
into any other corporation, or to amend a corporation's certificate of
incorporation or by-laws, unless a corporation's certificate of incorporation or
by-laws, as the case may be, requires a greater percentage. The Company's
Certificate of Incorporation and By-laws require the affirmative vote of the
holders of at least two-thirds of the shares of capital stock of the Company
issued and outstanding and entitled to vote to approve the sale or exchange of
all or substantially all of the Company's assets or the merger or consolidation
of the Company with or into any other corporation (except for mergers or
consolidations which do not result in a substantial change in ownership of the
Company's outstanding capital stock). The Company's Certificate of Incorporation
and By-laws also require the affirmative vote of the holders of at least 75% of
the shares of capital stock of the Company issued and outstanding and entitled
to vote to amend or repeal such provision and certain of the provisions
described in the next two paragraphs.
The Company's By-laws also provide that any action required or permitted to
be taken by the stockholders of the Company may be taken without a meeting only
by the unanimous written consent of stockholders, and that special meetings of
stockholders may be called only by the Board of Directors or the President of
the Company. In addition, stockholders wishing to nominate a candidate for
election as a director or bring other business before a meeting of stockholders
must comply with certain advance notice and informational requirements in the
Company's By-laws. The foregoing provisions could have the effect of delaying
until the next stockholders' meeting stockholder actions which are favored by
the holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take unilateral action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent unless it had acquired 100% of the Company's outstanding
voting stock.
The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability to the
Company or its stockholders for monetary damages for a breach of fiduciary duty,
except in circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or
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omissions which involve intentional misconduct or a knowing violation of law.
The Company's Certificate of Incorporation also contains provisions obligating
the Company to indemnify its directors and officers to the fullest extent
permitted by the General Corporation Law of Delaware. The Company believes that
these provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
REGISTRATION RIGHTS
Certain securityholders of the Company (collectively the "Rightsholders"),
who together own or have the right to acquire a total of 2,987,273 shares of
Common Stock (the "Registrable Shares") are parties to agreements with the
Company under which they have certain rights with respect to the registration of
the Registrable Shares under the Securities Act for resale to the public. These
agreements provide that in the event the Company proposes to register any of its
Common Stock under the Securities Act for its own account or otherwise, the
Rightsholders are entitled to include their Registrable Shares in such
registration, subject to certain conditions and limitations, which include the
right of the managing underwriter of any such offering to exclude some or all of
the Registrable Shares from such registration. In addition, certain of the
Rightsholders have demand registration rights under which, beginning in May
1997, they may require the Company to register all or part of their Registrable
Shares for resale to the public under the Securities Act, subject to certain
conditions and limitations. The Company is required to bear the expenses of
certain registrations (except underwriting discounts and commissions).
The Company is prohibited, pursuant to this agreement, from subsequently
granting registration rights to a third party which are more favorable to such
party than those rights enjoyed by the Rightsholders, unless approved by
Rightsholders who own more than 50% of the Registrable Shares.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
At October 1, 1996, the Company had outstanding 12,083,863 shares of Common
Stock (before giving effect to any future issuance of the Installment Shares or
exercise of the Warrant). Of these shares, 5,413,624 shares are freely tradeable
without restriction under the Securities Act except that 13,624 of such shares
may not be resold until April 1996 and except that shares owned by "affiliates"
of the Company are subject to certain restrictions. None of the remaining
6,670,239 outstanding shares of Common Stock (collectively, the "Restricted
Shares"), including Restricted Shares to be issued in connection with the
exercise of the Warrant, have been registered under the Securities Act, and they
may be resold publicly only upon registration under the Securities Act or in
compliance with an exemption from the registration requirements of the
Securities Act.
SALES OF RESTRICTED SECURITIES
At present, Rule 144 provides generally that if two years have elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company. If three years
have elapsed since the later of the date of acquisition of restricted shares of
Common Stock from the Company or from any affiliate of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale, such person would
be entitled to sell such shares without regard to the limitations described
above. Holders of 2,285,458 Restricted Shares will be eligible to sell such
shares pursuant to Rule 144 under the Securities Act, subject to the manner of
sale, volume, notice and information requirements of Rule 144, beginning in
February 1997, holders of 2,470,826 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144 beginning in July 1997 and holders of 1,913,955
Restricted Shares will be eligible to sell such shares pursuant to Rule 144
beginning in May 1998. The Commission has recently sought public comment on the
advisability of shortening the applicable holding periods under Rule 144 by one
year. If such a change in Rule 144 were to be effected, the respective dates
referred to above would be February 1996 and July 1996 (subject to the lock-up
agreements referred to below) and May 1997.
LOCK-UP AGREEMENTS
Pursuant to the terms of lock-up agreements with the Underwriters, the
Company, executive officers, directors and certain stockholders of the Company,
who hold in the aggregate approximately 4,618,000 shares of Common Stock, have
agreed not to offer, sell, offer to sell, contract to sell, assign, pledge,
grant any option to purchase or otherwise dispose of or transfer any Common
Stock of the Company, or any other security of the Company, convertible into, or
exchangeable or exercisable for, Common Stock until November 7, 1996 (the
"Lock-up Period"), without the prior written consent of Jefferies & Company,
Inc. ("Jefferies"), except that (a) the Company may issue (i) Common Stock or
options to purchase Common Stock under the 1995 Equity Incentive Plan, the 1995
Director Option Plan or the 1995 Employee Stock Purchase Plan, (ii) Common Stock
upon the exercise of presently outstanding warrants and (iii) Common Stock in
connection with the Company's express strategy of growth through acquisitions
provided that such Common Stock is restricted and is not tradeable prior to the
expiration of the Lock-up Period and (b) the executive officers, directors and
certain stockholders of the Company may make bona fide gifts to donees who agree
to be bound by the foregoing restrictions. See "Underwriting."
REGISTRATION RIGHTS
The Company intends to file registration statements under the Securities
Act later in 1996 registering the shares of Common Stock reserved for issuance
under the Company's 1995 Equity Incentive Plan, 1995 Director Stock Option Plan
and 1995 Employee Stock Purchase Plan. See "Management -- Director
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Compensation" and "-- Employee Stock Plans." The Company has granted demand and
piggyback registration rights to certain holders of certain Restricted Shares
and to the holder of the Warrant in connection with certain offerings of
securities made by the Company or its affiliates. See "Description of Capital
Stock -- Registration Rights." Shares registered under registration statements
will be available for sale in the open market, unless such shares are subject to
vesting restrictions imposed by the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Hale and Dorr, Boston, Massachusetts. John H. Chory, a partner of
Hale and Dorr, shares voting and dispositive power, as a co-trustee of the Ralph
W. Standley III Irrevocable Trust, with respect to 342,820 shares of Common
Stock owned by such trust.
EXPERTS
The financial statements of each of West Coast Entertainment Corporation;
New Age Entertainment, Inc. (one of the Massachusetts Franchisees); HB
Associates, Inc. (one of the Massachusetts Franchisees); Video Innovators, Inc.
(one of the Massachusetts Franchisees); Best Entertainment, Inc. (one of the
Massachusetts Franchisees); Showtime, Inc.; Video Giant, Inc.; Anthony Cocca's
Videoland, Inc.; Vidko, Inc.; Kobie-Co Movie Outlet; and Videosmith Incorporated
have been included herein and in the Registration Statement in reliance on the
reports of Price Waterhouse LLP, independent accountants, as of the dates and
for the periods indicated in their reports appearing elsewhere herein, except as
they relate to the unaudited twelve month period ended December 31, 1995 of
Vidko, Inc., and on the authority of said firm as experts in auditing and
accounting.
The financial statements of each of Lancaster Group, Inc. (a member of the
Red Giraffe group) and Palmer Corporation and subsidiaries and the combined
financial statements of Large Corporation, Lyndhurst Video Inc., Kearny Video
Inc., New Milford Video Inc., Hillsdale Video Inc., Hack Video Inc., Bell Video
Inc., Bergen Video Inc., Harris Video Inc., Rahway Video Inc., Wall Video Inc.,
Mont Video Inc., Super Video of Park Ridge, Inc., Emerson Video LLC and Super
Video Mgt. Co. (members of the Super Video group) have been included herein and
in the Registration Statement in reliance on the reports of KPMG Peat Marwick
LLP, independent certified public accountants, as of the dates and for the
periods indicated in their reports appearing elsewhere herein, and on the
authority of said firm as experts in auditing and accounting.
The combined financial statements of American Video, Inc. (a member of the
Red Giraffe group) and Red Giraffe Video, Inc. have been included herein and in
the Registration Statement in reliance on the report of Carpenter & Mountjoy,
PSC, independent certified public accountants, as of the dates and for the
periods indicated in their report appearing elsewhere herein, and on the
authority of said firm as experts in auditing and accounting.
The combined financial statements of West Coast Entertainment, Inc., and
affiliates have been included herein and in the Registration Statement in
reliance on the report of Miller, Glusman, Footer & Magarick, P.C., independent
certified public accountants, as of the dates and for the periods indicated in
their report appearing elsewhere herein, and on the authority of said firm as
experts in auditing and accounting.
The financial statements of the sellers in the Picture Show Acquisition (JJ
Video, Inc., Picture Show Video, Inc., Picture Show Video #4, Inc., Picture Show
Video -- Gardenside, Inc. and Picture Show Video -- Winchester, Inc.) have been
included herein and will be included in the Registration Statement in reliance
on the report of Messrs. Switzer, McGaughey & Company, P.S.C., certified public
accountants, as of the dates and for the periods indicated in their reports
appearing elsewhere herein, and on the authority of said firm as experts in
auditing and accounting.
The financial statements of L.A. Video, Inc. DBA First Choice Video and
First Choice Video, Inc. have been included herein and will be included in the
Registration Statement in reliance on the reports of Dohner, Louis and Stephens,
Inc., independent certified public accountants, as of the dates and for the
periods
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indicated in their reports appearing elsewhere herein and on the authority of
said firm as experts in auditing and accounting.
The financial statements of Ohio Entertainment Corporation have been
included herein and will be included in the Registration Statement in reliance
on the reports of Kamphaus, Henning and Hood, independent certified public
accountants, as of the dates and for the periods indicated in their reports
appearing elsewhere herein and on the authority of said firm as experts in
auditing and accounting.
The combined financial statements of Franexco, Inc. and Affiliate have been
included herein and will be included in the Registration Statement in reliance
on the report of J.H. Cohn LLP, independent public accountants, as of the dates
and for the periods indicated in their report appearing elsewhere herein and on
the authority of said firm as experts in auditing and accounting.
The combined financial statements of Curran, Skupala, Zimmerman W.C. Video
Group and the combined financial statements of Coventry Video, Inc. and
Pottstown Video, Inc. have been included herein and will be included in the
Registration Statement in reliance on the reports of Kurtz, McNaney and Company,
independent certified public accountants, as of the dates and for the periods
indicated in their reports appearing elsewhere herein and on the authority of
said firm as experts in auditing and accounting.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
This Index relates to the financial statements set forth in this Prospectus
of (i) West Coast Entertainment Corporation (the "Company"), (ii) its previously
acquired businesses ("Prior Acquisitions") (iii) certain companies whose stock
or assets were acquired by the Company or which were merged into West Coast on
May 17, 1996, concurrently with the consummation of the Public Offering and
which were acquired between August 26 and October 1, 1996, which companies are
identified under the caption "Recent Transactions" (the "Recent Acquisitions")
and certain companies whose assets the Company expects to acquire, which
companies are identified as "Prospective Acquisitions."
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THE REGISTRANT
West Coast Entertainment Corporation
Report of Independent Accountants.............................................. F-6
Consolidated Balance Sheet..................................................... F-7
Consolidated Statement of Operations........................................... F-8
Consolidated Statement of Cash Flows........................................... F-9
Consolidated Statement of Stockholders' Equity/(Deficit)....................... F-10
Notes to the Consolidated Financial Statements................................. F-11
Interim Financial Statements................................................... F-24
PRIOR ACQUISITIONS
Videosmith Incorporated
Report of Independent Accountants.............................................. F-30
Balance Sheet.................................................................. F-31
Statement of Operations........................................................ F-32
Statement of Stockholder's Equity.............................................. F-33
Statements of Cash Flows....................................................... F-34
Notes to Financial Statements.................................................. F-35
West Coast Entertainment, Inc. and Affiliates
Report of Independent Certified Public Accountants............................. F-39
Combined Balance Sheets........................................................ F-40
Combined Statements of Operations.............................................. F-41
Combined Statements of Changes in Stockholders' Deficiency..................... F-42
Combined Statements of Cash Flows.............................................. F-43
Notes to Combined Financial Statements......................................... F-44
RECENT ACQUISITIONS (EXCLUDING A-Z VIDEO, VIDEO VIDEO AND REEL ENTERTAINMENT)
PALMER VIDEO
Palmer Corporation and Subsidiaries
Independent Auditors' Report................................................. F-48
Consolidated Balance Sheets.................................................. F-49
Consolidated Statements of Operations........................................ F-50
Consolidated Statements of Cash Flows........................................ F-51
Consolidated Statements of Stockholders' Equity.............................. F-52
Notes to Consolidated Financial Statements................................... F-53
RED GIRAFFE
American Video, Inc. and Red Giraffe Video, Inc.
Independent Auditor's Report................................................. F-61
Combined Balance Sheets...................................................... F-62
Combined Statements of Income................................................ F-63
Combined Statements of Stockholders' Equity.................................. F-64
Combined Statements of Cash Flows............................................ F-65
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Notes to Combined Financial Statements....................................... F-66
Interim Financial Statements................................................. F-70
Lancaster Group, Inc.
Independent Auditors' Report................................................. F-74
Balance Sheets............................................................... F-75
Statements of Operations..................................................... F-76
Statements of Stockholders' Equity (Deficit)................................. F-77
Statements of Cash Flows..................................................... F-78
Notes to Financial Statements................................................ F-79
Interim Financial Statements................................................. F-82
4 MASSACHUSETTS FRANCHISEES
New Age Entertainment, Inc.
Report of Independent Accountants............................................ F-86
Balance Sheet................................................................ F-87
Statement of Operations...................................................... F-88
Statements of Cash Flows..................................................... F-89
Statement of Stockholders' Equity............................................ F-90
Notes to Financial Statements................................................ F-91
Interim Financial Statements................................................. F-95
HB Associates, Inc.
Report of Independent Accountants............................................ F-99
Balance Sheet................................................................ F-100
Statement of Operations...................................................... F-101
Statement of Cash Flows...................................................... F-102
Statement of Stockholders' Equity............................................ F-103
Notes to Financial Statements................................................ F-104
Interim Financial Statements................................................. F-108
Best Entertainment, Inc.
Report of Independent Accountants............................................ F-112
Balance Sheet................................................................ F-113
Statement of Operations...................................................... F-114
Statement of Cash Flows...................................................... F-115
Statement of Stockholders' Equity............................................ F-116
Notes to Financial Statements................................................ F-117
Interim Financial Statements................................................. F-121
Video Innovators, Inc.
Report of Independent Accountants............................................ F-125
Balance Sheet................................................................ F-126
Statement of Operations...................................................... F-127
Statement of Cash Flows...................................................... F-128
Statement of Stockholders' Equity............................................ F-129
Notes to the Financial Statements............................................ F-130
Interim Financial Statements................................................. F-134
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OTHER UNAFFILIATED SELLING GROUPS:
SHOWTIME VIDEO
Showtime, Inc.
Report of Independent Accountants............................................ F-138
Balance Sheet................................................................ F-139
Statement of Operations...................................................... F-140
Statement of Cash Flows...................................................... F-141
Statement of Stockholder's Equity............................................ F-142
Notes to Financial Statements................................................ F-143
Interim Financial Statements................................................. F-146
VIDEO GIANT
Video Giant, Inc.
Report of Independent Accountants............................................ F-150
Balance Sheet................................................................ F-151
Statement of Operations...................................................... F-152
Statement of Cash Flows...................................................... F-153
Statement of Stockholders' Equity............................................ F-154
Notes to Financial Statements................................................ F-155
Interim Financial Statements................................................. F-158
VIDEOLAND
Anthony Cocca's Videoland, Inc.
Report of Independent Accountants............................................ F-162
Balance Sheet................................................................ F-163
Statement of Operations...................................................... F-164
Statement of Cash Flows...................................................... F-165
Statement of Stockholders' Equity............................................ F-166
Notes to Financial Statements................................................ F-167
Interim Financial Statements................................................. F-171
Vidko, Inc.
Report of Independent Accountants............................................ F-175
Balance Sheet................................................................ F-176
Statement of Operations...................................................... F-177
Statement of Cash Flows...................................................... F-178
Statement of Stockholders' Equity............................................ F-179
Notes to Financial Statements................................................ F-180
Interim Financial Statements................................................. F-183
Kobie-Co Movie Outlet
Report of Independent Accountants............................................ F-187
Balance Sheet................................................................ F-188
Statement of Operations...................................................... F-189
Statement of Cash Flows...................................................... F-190
Statement of Owner's Equity.................................................. F-191
Notes to Financial Statements................................................ F-192
Interim Financial Statements................................................. F-196
SUPER VIDEO
Large Corporation, Lyndhurst Video Inc., Kearny Video Inc., New Milford Video Inc.,
Hillsdale Video Inc., Hack Video Inc., Bell Video Inc., Bergen Video Inc., Harris
Video Inc., Rahway Video Inc., Wall Video Inc., Mont Video Inc., Super Video of
Park Ridge, Inc., Emerson Video, LLC and Super Video Mgt. Co.
Independent Auditors' Report...................................................... F-200
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Combined Balance Sheets........................................................... F-201
Combined Statements of Income..................................................... F-202
Combined Statements of Stockholders' Equity (Deficit)............................. F-203
Combined Statements of Cash Flows................................................. F-204
Notes to Combined Financial Statements............................................ F-205
Interim Combined Financial Statements............................................. F-212
PICTURE SHOW
JJ Video, Inc., Picture Show Video, Inc., Picture Show Video #4, Inc., Picture Show
Video-Gardenside, Inc. and Picture Show Video-Winchester, Inc.
Independent Accountants' Report................................................... F-216
Combined Balance Sheets........................................................... F-217
Combined Income Statement......................................................... F-218
Combined Statement of Stockholders' Equity........................................ F-219
Combined Statement of Cash Flow................................................... F-220
Notes to the Combined Financial Statements........................................ F-221
Interim Financial Statements...................................................... F-225
PROSPECTIVE ACQUISITIONS (EXCLUDING REEL ENTERTAINMENT, WELLESLEY ENTERTAINMENT,
DECARO, WEISS, KNIGHT, PATEL, AND WEISBERG)
L.A. VIDEO
L.A. Video, Inc. DBA First Choice Video
Independent Auditors' Report...................................................... F-233
Balance Sheets.................................................................... F-234
Statements of Operations.......................................................... F-235
Statements of Shareholders' Equity................................................ F-236
Statements of Cash Flows.......................................................... F-237
Notes to Financial Statements..................................................... F-238
Interim Financial Statements...................................................... F-241
FIRST CHOICE VIDEO
First Choice Video, Inc.
Independent Auditors' Report...................................................... F-249
Balance Sheets.................................................................... F-250
Statements of Operations.......................................................... F-251
Statements of Shareholders' Equity................................................ F-252
Statements of Cash Flows.......................................................... F-253
Notes to Financial Statements..................................................... F-254
Interim Financial Statements...................................................... F-259
OHIO ENTERTAINMENT
Ohio Entertainment Corporation
Independent Auditors' Report................................................. F-268
Balance Sheet................................................................ F-269
Statement of Operations...................................................... F-270
Statement of Cash Flows...................................................... F-271
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Statement of Stockholders' Equity............................................ F-272
Notes to Financial Statements................................................ F-273
Interim Financial Statements................................................. F-277
GREAT AMERICAN
Franexco, Inc. and Affiliate
Report of Independent Public Accountants..................................... F-281
Combined Balance Sheets...................................................... F-282
Combined Statements of Operations and Retained Earnings...................... F-283
Combined Statements of Cash Flows............................................ F-284
Notes to Combined Financial Statements....................................... F-285
CURRAN
Curran, Skypala, Zimmerman W. C. Video Group
Report of Independent Certified Public Accountants........................... F-293
Combined Balance Sheets...................................................... F-294
Combined Statements of Operations............................................ F-295
Combined Statements of Stockholders' Equity.................................. F-296
Combined Statements of Cash Flows............................................ F-297
Notes to Combined Financial Statements....................................... F-298
Interim Financial Statements................................................. F-305
Coventry Video, Inc. and Pottstown Video, Inc.
Report of Independent Certified Public Accountants........................... F-317
Combined Balance Sheets...................................................... F-318
Combined Statements of Operations............................................ F-319
Combined Statements of Stockholders' Equity.................................. F-320
Combined Statements of Cash Flows............................................ F-321
Notes to Combined Financial Statements....................................... F-322
Interim Financial Statements................................................. F-327
</TABLE>
F-5
<PAGE> 86
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
West Coast Entertainment Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
(deficit) present fairly, in all material respects, the financial position of
West Coast Entertainment Corporation, formerly the combined companies of Giant
Video Corporation, Nostalgia Ventures, Inc., Videosmith, Inc., and G.V.
Management Corporation, at January 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
March 12, 1996
Boston, Massachusetts
F-6
<PAGE> 87
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1995 1996
------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 45 $ 611
Accounts receivable................................................... -- 1,085
Merchandise inventories............................................... 288 504
Prepaid expenses and other current assets............................. 162 151
Receivable from stockholder........................................... 30 --
------ -------
Total current assets.......................................... 525 2,351
Videocassette rental inventory, net..................................... 1,464 1,509
Furnishings, equipment and leasehold improvements, net.................. 1,299 1,235
Other assets............................................................ 269 4,258
Intangible assets (net of accumulated amortization of $254,000 at
January 31, 1996)..................................................... -- 6,967
Deferred tax asset...................................................... 74 195
------ -------
$3,631 $16,515
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................... $ 859 $ 2,091
Accounts payable...................................................... 735 1,327
Accrued expenses...................................................... 495 4,686
Income taxes.......................................................... 397 760
Advances from stockholders............................................ 42 7
------ -------
Total current liabilities..................................... 2,528 8,871
Long-term debt.......................................................... 738 7,101
------ -------
Total liabilities............................................. 3,266 15,972
Commitments (Note 14)
Stockholders' equity:
Common stock, $0.01 par value, 25,000 shares authorized, 7,273, and
14,000 shares issued and outstanding at January 31, 1995 and 1996,
respectively....................................................... 73 140
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares
issued............................................................. -- --
Additional paid-in capital............................................ 819 819
Accumulated deficit................................................... (527) (416)
------ -------
Total stockholders' equity.................................... 365 543
------ -------
$3,631 $16,515
====== =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-7
<PAGE> 88
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Revenues:
Rental revenue................................................ $2,248 $5,606 $ 9,209
Merchandise sales............................................. 272 897 2,299
Franchise fees................................................ -- -- 3,211
------ ------ -------
2,520 6,503 14,719
------ ------ -------
Costs and expenses:
Store operating expenses...................................... 2,086 4,866 8,206
Cost of goods sold............................................ 44 382 1,384
General and administrative.................................... 434 870 3,913
------ ------ -------
2,564 6,118 13,503
------ ------ -------
Income (loss) from operations................................... (44) 385 1,216
------ ------ -------
Interest expense................................................ 42 118 640
------ ------ -------
Income (loss) before provision for income taxes................. (86) 267 576
Provision (benefit) for income taxes............................ (14) 63 242
------ ------ -------
Net income (loss)............................................. $ (72) $ 204 $ 334
====== ====== =======
Unaudited pro forma data:
Income (loss) before income taxes............................. $ (86) $ 267 $ 576
Income tax provision (benefit)................................ (29) 63 275
------ ------ -------
Net income (loss)............................................. $ (57) $ 204 $ 301
====== ====== =======
Net income (loss) per share................................... $ (.07) $ .12 $ .06
====== ====== =======
Weighted average number of common shares...................... 843 1,693 4,756
====== ====== =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-8
<PAGE> 89
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ (72) $ 204 $ 334
Adjustments to reconcile net income (loss) to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory............ 784 1,436 1,972
Depreciation and amortization of furnishings, equipment
and leasehold improvements.............................. 86 192 359
Amortization of intangible assets......................... 254
Changes in assets and liabilities:
Accounts receivable..................................... -- -- (262)
Merchandise inventories................................. 2 4 64
Prepaid expenses and other assets....................... (77) (66) (3,522)
Accounts payable........................................ 75 27 115
Accrued expenses........................................ 140 (190) 3,575
Current taxes........................................... 36 135 363
Deferred taxes.......................................... 43 (117) (121)
------ ------- -------
Net cash provided by operating activities................. 1,017 1,625 3,131
------ ------- -------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired.............. 3 (1,734) (3,453)
Purchases of property and equipment.......................... (6) (47) (95)
Purchases of videocassette rental inventory.................. (685) (1,430) (2,002)
------ ------- -------
Net cash used in investing activities..................... (688) (3,211) (5,550)
------ ------- -------
Cash flows from financing activities:
Proceeds from long-term debt................................. 189 1,410 5,565
Repayment of long-term debt.................................. (479) (474) (2,352)
Proceeds (repayments) from advances from stockholders........ -- 34 (5)
Shareholder contribution (distributions)..................... (50) 649 (223)
------ ------- -------
Net cash used in financing activities..................... (340) 1,619 2,985
------ ------- -------
Net increase (decrease) in cash and cash equivalents........... (11) 33 566
------ ------- -------
Cash and cash equivalents, beginning of period................. 23 12 45
------ ------- -------
Cash and cash equivalents, end of period....................... $ 12 $ 45 $ 611
====== ======= =======
Supplemental cash flow data:
Interest paid................................................ $ 42 $ 118 $ 332
====== ======= =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-9
<PAGE> 90
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1993................ 1,419,571 $ 15 $ (3) $(558) $ (546)
Shares issued -- Nostalgia Ventures,
Inc. .................................... 1,272,725 12 88 -- 100
Net loss................................... -- -- -- (72) (72)
S Corporation distribution................. -- -- -- (50) (50)
----------- ---- ---- ----- -----
Balance at January 31, 1994................ 2,692,296 27 85 (680) (568)
Shares issued -- Videosmith, Inc........... 4,580,505 46 734 -- 780
Net income................................. -- -- -- 204 204
S Corporation distribution................. -- -- -- (51) (51)
----------- ---- ---- ----- -----
Balance at January 31, 1995................ 7,272,801 73 819 (527) 365
Shares issued -- West Coast Entertainment
Corporation.............................. 6,727,200 67 -- -- 67
Net income................................. -- -- -- 334 334
S Corporation distribution................. -- -- -- (223) (223)
----------- ---- ---- ----- -----
Balance at January 31, 1996................ 14,000,001 $140 $819 $(416) $ 543
=========== ==== ==== ===== =====
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-10
<PAGE> 91
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND BUSINESS
West Coast Entertainment Corporation (the "Company") was incorporated in
the State of Delaware in February 1995 for the purpose of conducting business as
an owner and operator as well as a franchisor of videocassette rental stores.
Upon incorporation, 10,000 shares were issued to the Company's then existing
shareholders. On July 12, 1995, in connection with an anticipated initial public
offering (the "Offering"), Giant Video, Inc., G.V. Management Corporation,
Nostalgia Ventures, Inc. and Videosmith, Inc. were merged into the Company.
These four entities were individually formed or acquired over the past several
years and were under substantial common ownership and common day-to-day
management prior to the merger. In accordance with the plan of merger, the
Company declared a 672.72-for-1 stock split with respect to its 10,000 shares
issued and outstanding and issued and exchanged 7,272,801 shares of its common
stock for all of the outstanding common stock of the above four entities. In
addition, the stockholders of the above four entities own all of the Company's
shares of common stock outstanding (14,000,001) prior to the Offering. The
financial statements of the above four entities have been combined and included
in the accompanying consolidated financial statements from the date of the
respective entity's acquisition or inception, at its historical cost, determined
as of such date. The par value and number of shares outstanding have been
retroactively adjusted to appropriately reflect the merger transaction as well
as the fact that the entities were acquired or formed at various times during
the past several years.
The consolidated financial statements of the Company include the accounts
and transactions of the following companies:
<TABLE>
<S> <C>
Giant Video, Inc. For the years ended January 31, 1994, 1995 and 1996.
G.V. Management Corporation For the years ended January 31, 1994, 1995, 1996.
Nostalgia Ventures, Inc. For the period from April 3, 1993 (the date the company was
acquired by the above noted stockholders) to January 31, 1994,
for the years ended January 31, 1995 and 1996.
Videosmith, Inc. For the period from August 5, 1994 (the date the company was
acquired by the above noted stockholders) to January 31, 1995
and for the year ended January 31, 1996.
West Coast Franchising For the period from July 12, 1995 (the date of inception) to
Company January 31, 1996 (see Note 11).
</TABLE>
As of January 31, 1996, the Company owns and operates 28 video rental
stores and is a franchisor of a chain of 304 video stores.
Unaudited pro forma data included in the consolidated statement of
operations reflect certain adjustments to give effect to the income tax
implications of the merger transaction. Unaudited pro forma data, as adjusted,
reflect certain supplemental adjustments to the consolidated statement of
operations to give effect to the income tax implications of the merger
transaction and application of the estimated proceeds of the Offering (see Note
16).
As certain of the combined entities were Subchapter S Corporations and were
not subject to federal and state income taxes, historical per share data is not
considered meaningful and, accordingly, has not been presented.
F-11
<PAGE> 92
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Consolidation
All significant intercompany balances and transactions have been eliminated
in the accompanying consolidated financial statements.
Classification
Certain prior year balances have been reclassified to conform with current
year classifications.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game. Franchise fees, related to the sale of franchises, are recognized
when the stores are opened for business. Post-sale franchise fees are recognized
based on stated percentages of franchisee revenue as defined in the franchise
agreements.
Franchising Costs
Direct costs relating to franchise sales for which revenue has not been
recognized is deferred until the related revenue is recognized.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of the sale. The Company believes that its method of amortization
results in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
F-12
<PAGE> 93
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as
incurred.
Intangible Assets
Intangible assets are primarily comprised of franchise rights and a
covenant not-to-compete. Franchise rights are amortized on a straight-line basis
over 15 years, the estimated remaining economic life of such rights. The
covenant not-to-compete is amortized on a straight-line basis over the term of
the agreement.
Income Taxes
Income taxes for financial reporting purposes are recorded in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). SFAS 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of the Company's assets and liabilities. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance.
Prior to the effective date of the merger transaction discussed in Note 1,
Nostalgia Ventures, Inc. and Videosmith, Inc. were subject to tax as C
corporations, while Giant Video, Inc., and G.V. Management Corporation had
elected to be treated as S corporations for federal and state income tax
purposes. Under the provisions of Subchapter S, a pro rata portion of each
entity's taxable income is allocated to each individual shareholder.
Accordingly, no provision for income taxes relating to Giant Video, Inc., and
G.V. Management Corporation is included in the accompanying consolidated
statement of operations for any period prior to the effective date of the
merger.
Concurrent with the merger transaction, the assets received from the merged
S corporations became subject to C corporation tax. As such, the income tax
expense included in the accompanying consolidated statement of operations
subsequent to the effective date of the merger includes normal corporate level
federal and state income taxes. The deferred tax attributes arising from the
conversion to C Corporation status totalled $72,000, resulting in the
recognition of a deferred tax asset.
3. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Videocassette rental inventory................................... $ 2,494 $ 3,299
Accumulated amortization......................................... (1,030) (1,790)
------- -------
$ 1,464 $ 1,509
======= =======
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$784,000, $1,436,000 and $1,972,000 for the years ended January 31, 1994, 1995
and 1996, respectively.
F-13
<PAGE> 94
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furnishings, equipment and leasehold improvements comprise the following
(in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------------
1995 1996
------ ------
<S> <C> <C>
Furniture and fixtures............................................. $ 561 $ 634
Equipment and vehicles............................................. 73 220
Leasehold improvements............................................. 1,216 1,291
------- -------
1,850 2,145
Accumulated depreciation and amortization.......................... (551) (910)
------- -------
$1,299 $1,235
======= =======
</TABLE>
Depreciation and amortization totaled $86,000, $192,000 and $359,000 for
the years ended January 31, 1994, 1995 and 1996, respectively.
5. NON-CURRENT OTHER ASSETS
Non-Current other assets is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
---------------
1995 1996
---- ------
<S> <C> <C>
Deferred expenses relating to the initial public offering and
pending acquisitions.............................................. $146 $4,109
Other............................................................... 123 149
---- ------
$269 $4,258
==== ======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
---------------
1995 1996
---- ------
<S> <C> <C>
Accrued wages and taxes............................................. $212 $ 259
Property taxes payable.............................................. 33 --
Sales taxes......................................................... 58 102
Accrued rent........................................................ 77 126
Accrued professional fees........................................... -- 3,006
Accrued advertising expenses........................................ -- 267
Accrued interest expenses........................................... 10 318
Accrued finder's fee................................................ -- 200
Other............................................................... 105 408
---- ------
$495 $4,686
==== ======
</TABLE>
F-14
<PAGE> 95
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Revolving credit facility................................................ $ -- $ 1,166
Senior bank term loan.................................................... -- 2,250
11% subordinated secured note payable.................................... -- 1,400
10% second subordinated secured convertible note payable................. -- 2,000
10% second subordinated secured note payable............................. -- 2,000
Unsecured non-interest bearing $500 obligation due to the former owner of
West Coast Video, less unamortized discount of $118 based on an imputed
interest rate of 10%. Monthly installments of $8.3 are required
beginning in July 1995 and continuing through June 2000. (See Note
11).................................................................... -- 340
Bank term loan, interest at prime plus 1.75% (10.25% at January 31,
1995), secured by the assets and common stock of Videosmith, Inc., and
limited guarantees of $750 by the stockholders of Videosmith, Inc.
Payable in monthly installments of $20.8 plus interest beginning on
September 5, 1994 and continuing through July 5, 1998.................. 938 --
Note payable to the Company's principal supplier of video rental tapes,
secured by the inventory sold to the Company by the supplier, with
interest at prime plus 4% (12.5% at January 31, 1995), payable in
monthly installments of principal plus interest of $10.4 through
October 1996........................................................... 208 --
10% note payable to the landlord of Giant Video Inc.'s six stores,
secured by all of the assets and stock of Giant Video, Inc. Interest
and principal is payable in various monthly installments through July
1995................................................................... 170 --
10% note payable to former shareholder of Nostalgia Ventures, Inc.,
secured by the assets and common stock of Nostalgia Ventures, Inc.,
with principal and interest due in monthly installments of $8.9 through
March 1996............................................................. 110 --
Various notes payable due in monthly installments with interest rates
varying from prime plus 2% to 4%....................................... 171 36
------- -------
1,597 9,192
Less: current portion.................................................... (859) (2,091)
------- -------
$ 738 $ 7,101
======= =======
</TABLE>
Effective July 12, 1995, and in connection with the merger transaction
discussed in Note 1, the Company refinanced borrowings that were in existence at
that time. In addition, on that date, the Company issued certain notes payable
in connection with an acquisition (see Note 11). A summary of the various credit
facilities follows.
SENIOR DEBT
On July 12, 1995, the Company entered into a $3,000,000 senior bank term
loan (the "Term Loan") and a $1,250,000 bank revolving credit facility (the
"Facility"), both of which bear interest at prime + 1/2% (8 3/4% at January 31,
1996) through July 11, 1996 and at prime thereafter. Under the terms of this
arrangement, quarterly principal payments of $375,000 are required on the Term
Loan beginning October 1, 1995 and ending July 11, 1997. Borrowings under the
Facility are limited to the borrowing base of 75% of eligible outstanding
franchisee fee receivables plus $500,000 (the "Overadvance") through April 29,
1996. The
F-15
<PAGE> 96
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Overadvance decreases to $333,333 for the period April 30, 1996 through May 30,
1996 and to $166,667 for the period May 31, 1996 through June 29, 1996 and is $0
thereafter. The Facility expires on July 11, 1997 and provides for a commitment
fee payable quarterly, computed as 1/2% of the average unused Facility during
the preceding quarter.
The senior borrowings are secured by a first security interest in the
assets and common stock of the Company and contain certain restrictive
covenants, including the maintenance of 1) minimum tangible net worth, 2)
maximum ratio of debt to tangible net worth and 3) a minimum fixed charge
coverage ratio. In addition, dividend declarations are restricted under the
terms of the agreement.
SUBORDINATED DEBT
On July 12, 1995, the Company entered into a $1,400,000, 11% subordinated
secured note payable with a primary supplier of video tape rentals. In
accordance with the terms of the note, all interest accruing through July 12,
1997 shall be compounded annually and added to the outstanding principal balance
of the note. Commencing on October 12, 1997, and continuing until all principal
and accrued interest are paid in full, interest payments shall be made
quarterly. Principal payments of $110,000, $180,000 and $190,000 are payable on
October 12, 1997, January 12, 1998 and April 12, 1998, respectively. All
remaining unpaid principal and accrued interest is due and payable in full on
July 12, 1998. The note also provides for a subordinated security interest in
the common stock and assets of the Company and contains restrictive covenants
similar to those included in the Senior Debt as described above.
In conjunction with this note the Company issued a detachable warrant
entitling the holder to purchase shares of the Company's common stock. The
warrant is exercisable beginning on the earlier of the Offering date or July 12,
1997 and expires on July 12, 2000. The number of shares that can be acquired is
equal to the quotient obtained by dividing $1.75 million by the exercise price
per share. The exercise price per share is dependent on the timing of the
Offering as outlined below:
<TABLE>
<CAPTION>
EXERCISE
OFFERING DATE PRICE/SHARE($)
-------------------------------------- ---------------------
<S> <C>
On or before January 12, 1996......... 80% of IPO price
January 13, 1996-July 12, 1996........ 70% of IPO price
July 13, 1996-July 12, 1997........... 60% of IPO price
</TABLE>
In the event that the Offering does not occur on or before July 13, 1997,
the number of shares that can be acquired is equal to 6.25% of the common stock
outstanding on the exercise date. The exercise price of the warrant after July
12, 1997 is equal to $1,400,000 and the company has the right, upon such
exercise, to redeem the interest for $300,000. Upon the occurrence of a Private
Sale Event, as defined in the warrant, the holder of the warrant is entitled to
acquire 875,000 shares of the Company's common stock at an exercise price of
$1.60 per share. The warrants may be exercised for cash, presentation of the
related note payable, or a combination of the two. The Company has determined
that the value of the warrant is insignificant at the date of issuance.
On March 5, 1996, the Company entered into an $800,000, 12% subordinated
secured note payable with the same primary supplier of video tape rentals
referred to above. In accordance with the terms of the note, all interest which
accrues through February 1, 1999 shall be compounded annually and added to the
outstanding principal balance of the note on February 1 of each year. Equal
quarterly principal and accrued interest payments commence on April 1, 1999
continuing through January 1, 2000. In the event that the Company prepays the
note in whole or in part prior to August 1, 1997, a prepayment penalty of
$400,000 will be due to the lender. Prepayment is mandatory upon the occurrence
of an initial public stock offering or a change of control event, as defined in
the note. The note also provides for a subordinated security interest in the
common
F-16
<PAGE> 97
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock and assets of the Company and contains restrictive covenants similar to
those included in the Senior Debt as described above.
Also, on July 12, 1995, and in connection with the acquisition of West
Coast Entertainment Inc., West Coast Video Enterprises, Inc., West Coast
Services, Inc., Game Power Headquarters, Inc., and Premier Advertising, Inc.
(the "Acquired Businesses"), the Company issued a $2,000,000 10% second
subordinated secured convertible note payable (the "convertible note"), a
$2,000,000 10% second subordinated secured note payable (the "subordinated
note") and a $500,000 unsecured non-interest bearing note to the former
shareholder of the Acquired Businesses.
In accordance with the terms of the convertible note, repayment of
principal and interest is dependent upon the Company's ability to successfully
undertake the Offering on or before January 31, 1997 (the "conversion date"). If
the Offering occurs on or before the conversion date, all principal together
with unpaid interest accrued thereon shall be paid in full out of the proceeds
of the IPO. However, the holder of the convertible note may elect to convert
some or all of the outstanding principal, together with interest accrued
thereon, into the number of shares of the Company's common stock as determined
by dividing the appropriate amount of principal and interest so converted by 80%
of the Offering price per share.
If the Company's Offering does not occur by the conversion date, the entire
outstanding principal balance shall be converted into shares of the Company's
stock using an agreed upon formula, not to exceed 49% of the total outstanding
share value at the conversion date. Interest payments are not required until
January 31, 1997 at which point the holder of the convertible note can elect to
convert such amounts into shares of the Company's stock in conjunction with the
conversion of the principal discussed above or to receive a lump sum payment. In
the event that the Company does not have adequate available cash at that time or
such payment would be precluded by the Senior Debt or the Subordination
Agreements, such payment shall be made on July 31, 1997 along with any
additional interest accruing through that date.
The Company may, at its option, prepay all or any portion of the
outstanding principal and/or interest without penalty and without discount, with
the exception of the last $50,000 of principal which can be prepaid only with
the consent of the holder.
In accordance with the terms of the subordinated note, principal payments
are required to be made in 16 monthly installments of $125,000 beginning on July
31, 1997 or, at the Company's election on September 30, 1997. Interest will
accrue on the subordinated note at 10% per annum, compounded annually, however,
no interest payments accruing on the original borrowing are required until
January 31, 1997, at which point all interest shall be paid in one lump sum
subject to the Company having adequate cash balances available and the terms of
the Senior Debt and the Subordination Agreements. In the event that the interest
payment is not made on January 31, 1997, such payment shall be made 50% on July
31, 1997 and 50% on August 31, 1997 along with the additional interest accruing
through those dates. Monthly interest payments on the remaining unpaid principal
will begin on either February 28, 1997 or September 30, 1997.
The Company may prepay all or any portion of the principal and/or interest
at any time without penalty and without discount.
The convertible note and the subordinated note provide the holder with a
second subordinated security position with respect to the assets and common
stock of the Company. In addition, the notes contain certain restrictive
covenants similar to those described in the Senior Debt.
In the event that the Company is unable to complete the offering, it is
management's intention to reduce its present cost structure and restructure its
obligations.
F-17
<PAGE> 98
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal due on long-term debt for each of the years following January 31,
1996 is as follows:
<TABLE>
<S> <C>
1997............................................................. $2,091,000
1998............................................................. 4,668,000
1999............................................................. 2,311,000
2000............................................................. 91,000
2001............................................................. 31,000
----------
$9,192,000
==========
</TABLE>
In March 1996, the Company received a commitment for a $60 million credit
facility from PNC Bank, National Association, contingent upon completion of the
Offering.
8. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
---------------
1995 1996
----- -----
<S> <C> <C>
Current:
Federal................................................... $ 139 $ 176
State..................................................... 41 187
----- -----
180 363
----- -----
Deferred:
Federal................................................... (100) (112)
State..................................................... (17) (9)
----- -----
(117) (121)
----- -----
Tax provision............................................... $ 63 $ 242
===== =====
</TABLE>
F-18
<PAGE> 99
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. The temporary differences which give rise
to deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax asset:
Intangible amortization........................................ $ 10 $ --
Videocassette rental inventory amortization.................... 668 --
Furnishings, equipment and leasehold improvement
depreciation................................................ 588 596
Recognized built-in loss carryforward.......................... 126 812
Write-off of fixed assets...................................... 94 --
Expense accruals............................................... -- 165
State NOL carryforward......................................... -- 66
Acquisition costs.............................................. -- 21
Other.......................................................... 25 19
------- -------
1,511 1,679
Deferred tax asset valuation allowance........................... (1,437) (1,484)
------- -------
$ 74 $ 195
======= =======
</TABLE>
As a result of a change in ownership of Videosmith, Inc. at August 4, 1994,
there is an annual limitation on the use of net unrealized built-in losses. Such
limitation applies only to those built-in losses recognized for income tax
purposes in the five-year period beginning with the date of the ownership
change. The use of such losses is limited to approximately $45,000 per year for
the carryforward period, generally 15 years subsequent to the year recognized,
and are subject to certain consolidated tax return limitations, including
Videosmith's separate company taxable income. A majority of the temporary
differences noted above at January 31, 1996 are comprised of net unrealized
built-in losses that have not been recognized for income tax reporting purposes.
Management anticipates that approximately 68% of such unrealized built-in losses
will be recognized on a tax return basis within the five year period.
Management believes that it is more likely than not that it will generate
taxable income sufficient to realize a portion of the tax benefit associated
with the future deductible temporary differences identified above. This belief
is based upon a review of all available evidence, including historical operating
results and projections of future taxable income, recognizing the limitations
discussed above.
F-19
<PAGE> 100
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
--------------
1995 1996
----- ----
<S> <C> <C>
Income at statutory rate of 34%...................................... $ 93 $196
State tax expense, net of federal benefit.......................... 25 58
Amount not subject to federal income tax due to S Corporation
status.......................................................... 28 (33)
Change in valuation allowance...................................... (102) 47
Nondeductible intangible amortization.............................. 11 11
Deferred tax asset due to conversion to C Corporation status....... -- (72)
Reserve for contingency............................................ -- 22
Other.............................................................. 8 13
----- ----
$ 63 $242
===== ====
</TABLE>
9. RELATED PARTY TRANSACTIONS
The principal stockholders have from time to time loaned the Company funds
for working capital purposes. No interest is charged on these loans.
10. LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
2002. Minimum future rental payments under these leases as of January 31, 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING OPERATING LEASES
-------------------------------------------------------------- ----------------
<S> <C>
1997........................................................ $1,652
1998........................................................ 1,411
1999........................................................ 864
2000........................................................ 492
2001........................................................ 185
Thereafter.................................................. 237
------
Future minimum payments....................................... $4,841
======
</TABLE>
Rent expense totalled approximately $427,000, $939,000 and $1,947,000 for
the years ended January 31, 1994, 1995 and 1996, respectively.
11. ACQUISITIONS
All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
NOSTALIGIA VENTURES
On April 2, 1993, the stockholders discussed in Note 1 acquired 100% of the
outstanding stock of Nostalgia Ventures, Inc. and entered into a three year
non-competition agreement with the former owner of
F-20
<PAGE> 101
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nostalgia Ventures, Inc. The purchase price was $464,000, consisting of cash of
$100,000, short-term debt of $108,000 and a note payable of $256,000.
VIDEOSMITH, INC.
On August 4, 1994, V.S. Acquisition Corporation acquired 100% of the
outstanding stock of Xtra-vision Corporation and its wholly owned subsidiary,
Videosmith, Inc. The purchase price of $2,042,000 was paid in cash. V.S.
Acquisition Corporation, Xtra-vision Corporation and Videosmith Inc., merged on
September 20, 1994 to form Videosmith Inc.
WEST COAST FRANCHISING COMPANY
On July 12, 1995, West Coast Franchising Company, a wholly-owned subsidiary
of the Company, acquired the business, assets and certain liabilities of West
Coast Entertainment, Inc., West Coast Video Enterprises, Inc., West Coast
Services, Inc., Game Power Headquarters, Inc., and Premier Advertising, Inc.
(the "Acquired Businesses"). West Coast Franchising Company operates as a
franchisor of 307 chain stores under the trade name of West Coast Video involved
in the sale and rental of videocassettes, recorders, related equipment and
supplies.
The cost of the Acquired Businesses was approximately $8.6 million,
comprising cash of $4 million, a $2 million second subordinated secured
convertible note payable, a $2 million second subordinated secured note payable
(see Note 7) and acquisition costs of $200,000. Additionally, the Company
entered into a five year, non-interest bearing arrangement Agreement with the
former owner of the Acquired Businesses. Under the Agreement the Company is
required to make equal monthly payments over five years totalling $500,000 to
the former owner (see Note 7). In addition, in connection with the acquisition,
the Company entered into an arrangement to pay the former owner and certain key
executives of the Acquired Businesses a fee in the event that the Company
purchases the assets or stock of any Franchisee of the Acquired Businesses. The
remaining obligation under the Agreement is required to be reduced by 80% of any
fee paid under the arrangement within the five year period.
The allocation of the purchase price associated with the above acquisitions
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
NOSTALGIA VIDEOSMITH ACQUIRED
VENTURES INC. BUSINESSES
--------- ---------- ----------
<S> <C> <C> <C>
Working capital..................................... $ 124 $ (334) $1,075
Videocassette rental inventory...................... 199 1,082 --
Furnishings, equipment and leasehold improvements... 101 1,285 200
Intangible assets................................... 130 -- 7,221
Other............................................... (90) 9 86
---- ------ ------
$ 464 $2,042 $8,582
==== ====== ======
</TABLE>
SUMMARY
The following unaudited pro forma information presents the results of
operations as though acquisition of Videosmith Inc. and the Acquired Businesses
had occurred as of February 1, 1994 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Revenues......................................................... $20,746 $18,482
Net income (loss)................................................ (76) 414
</TABLE>
F-21
<PAGE> 102
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EQUITY INCENTIVE PLANS
Effective July 5, 1995, the Company adopted and the stockholders approved
the 1995 Equity Incentive Plan. Under the terms of this plan, the Board of
Directors is authorized to grant options at an exercise price that is not less
than the fair market value of a share of the Company's common stock at the date
of grant. The exercise and expiration dates for options granted under this plan
shall be set forth in the agreement evidencing such option with the exception of
the expiration date for Incentive Stock Options, which shall be no later than 10
years after the date on which the option is granted. In addition, the Board of
Directors can grant restricted stock awards which shall consist of the sale and
issuance by the Company, and the purchase by the recipient, of shares of the
Company's common stock. The price at which shares of the Company's common stock
are sold to recipients of such awards is at the discretion of the Board of
Directors. The Company has reserved 350,000 shares of common stock for issuance
under the plan. As of January 31, 1996, no awards have been granted under this
plan.
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1995. The Purchase Plan authorizes
the issuance of up to a total 125,000 shares of Common Stock to participating
employees through a series of semiannual offerings. Offering periods will
commence on each July 1, beginning July 1, 1996, and January 1 and terminate on
the following June 30 and December 31, respectively. The maximum number of
shares available in each offering is 25,000 shares. The price at which employees
may purchase Common Stock in an offering is 85% of the closing price of the
Common Stock on the day the offering commences or on the day the offering
terminates, whichever is lower.
The Company's 1995 Director Stock Option Plan (the "Director Option Plan")
was adopted by the Board of Directors in November 1995. Under the Director
Option Plan, upon the effectiveness of the Offering, the Company's non-employee
directors will be granted an option to purchase 9,000 shares of Common Stock at
an exercise price per share equal to the public offering price. In addition,
each non-employee director initially elected to the Board of Directors in the
future will be granted an option, upon his or her initial election as a
director, to purchase 9,000 shares of Common Stock. Each non-employee director
will also receive a subsequent grant of an option for 3,000 shares on the date
of each Annual Meeting of Stockholders at which such director is reelected as a
director of the Company, beginning with the Annual Meeting for the year ending
January 31, 1997. All options granted under the Director Option Plan have or
will have an exercise price equal to the fair market value of the Common Stock
on the date of grant, will vest over a three-year period, provided the
optionholder continues to serve as a director of the Company, and will expire
ten years from the date of grant. The total number of shares of Common Stock
that may be issued under the Director Option Plan is 50,000 shares.
13. PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 2,000,000 shares of Preferred Stock, in one or more series. Each
such series of Preferred Stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges as shall be determined by the Board of Directors, which may include,
among others, dividend rights, voting rights, redemption and sinking fund
provisions, liquidation preferences, conversion rights and preemptive rights.
The rights of the holders of Common Stock will be subject to the rights of
holders of any Preferred Stock issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of the outstanding voting stock of the Company. The Company has not issued any
shares of Preferred Stock as of January 31, 1996.
F-22
<PAGE> 103
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS
On July 12, 1995, the Company entered into a contract with a supplier of
video rental products that requires the Company to purchase, at a discount, its
requirements for such products over the ensuing seven year period as follows:
<TABLE>
<S> <C>
July 12, 1995-July 12, 1997...... 50% of annual requirements
July 13, 1997-July 12, 2000...... lesser of 30% of annual requirements or $25
million
July 13, 2000-July 12, 2002...... lesser of 25% of annual requirements or $25
</TABLE> million
15. LITIGATION
The Company is involved in litigation that is incidental to the operation
of its business. The Company believes that the outcome of such litigation will
not materially affect the Company's financial position or results of operations.
16. UNAUDITED PRO FORMA INFORMATION
Unaudited pro forma information reflects an adjustment to the consolidated
statement of operations for each of the years in the three year period ended
January 31, 1996. Such adjustment gives effect to the merger transaction
discussed in Note 1, as if it had occurred as of February 1, 1992. Accordingly,
the pro forma income tax provision (benefit) and proforma net income have been
calculated as if each entity included in the consolidated statement of
operations had been included in the Company's consolidated income tax returns
and subject to corporate income taxation as a C Corporation during all periods
presented.
Unaudited pro forma net income (loss) per share has been calculated for the
respective periods by dividing the respective unaudited pro forma net income
amounts by the weighted average number of shares of common stock outstanding
effected for the 0.340 reverse stock split discussed in Note 17.
17. SUBSEQUENT EVENT (UNAUDITED)
On May 14, 1996 the Board of Directors approved a 0.340-to-1 reverse stock
split of the Company's Common Stock. The consolidated financial statements have
not been retroactively adjusted to reflect the split. On a post-split basis the
number of shares of common stock outstanding as of January 31, 1996 and 1995 is
4,756,292 and 2,470,827, respectively. See Note 16 regarding the effect of the
split on unaudited pro forma net income (loss) per share.
F-23
<PAGE> 104
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR PAR VALUE)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31,
1996
------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................................. $ 2,335
Accounts receivable....................................................... 1,470
Merchandise inventory..................................................... 2,752
Prepaid expenses and other current assets................................. 841
--------
Total current assets................................................. 7,398
Videocassette rental inventory, net of amortization............................ 15,265
Furnishings, equipment and leasehold improvements, net......................... 6,091
Other assets................................................................... 1,541
Intangible assets, net of accumulated amortization............................. 77,197
Deferred tax asset............................................................. 0
--------
Total assets......................................................... $107,492
========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Current portion of long-term debt......................................... $ 23
Accounts payable.......................................................... 7,947
Accrued expenses and other liabilities.................................... 6,069
Income taxes.............................................................. 1,314
Advances from shareholders................................................ 0
--------
Total current liabilities............................................ 15,353
Long-term debt (net of current portion)........................................ 4,502
Deferred tax liability......................................................... 447
Other long-term liabilities.................................................... 48
--------
Total liabilities.................................................... 20,350
STOCKHOLDER'S EQUITY:
Common stock ($0.01 par value, 12,070 shares outstanding at July 31, 1996
and 4,756 shares outstanding at January 31, 1996)........................ 121
Preferred stock ($0.01 par value, 2,000 shares authorized, no shares
issued).................................................................. 0
Additional paid in capital................................................ 86,397
Accumulated surplus/(deficit)............................................. 624
--------
Total stockholder's equity........................................... 87,142
--------
Total liabilities and stockholder's equity........................... $107,492
========
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE> 105
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31 JULY 31
------------------- -------------------
1996 1995 1996 1995
------- ------ ------- ------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Rental revenue............................ $14,957 $2,164 $17,371 $4,515
Merchandise and other sales............... 1,787 339 2,718 663
Franchise fees............................ 933 332 2,310 332
------- ------ ------- ------
Total revenues....................... 17,677 2,835 22,399 5,510
Operating costs and expenses:
Store operating expenses.................. 7,531 1,500 9,004 3,064
Cost of goods sold........................ 1,094 151 1,787 283
Amortization of videocassette and video
game rental inventory................... 2,818 455 3,204 971
General and administrative................ 3,102 532 4,688 773
Intangible amortization................... 856 22 989 22
------- ------ ------- ------
Total operating costs and expenses... 15,401 2,660 19,672 5,113
------- ------ ------- ------
Income from operations......................... 2,276 175 2,727 397
Interest expense............................... 223 100 508 137
Other, net..................................... (59) 0 (68) 0
------- ------ ------- ------
Income before provision for income taxes and
extraordinary item........................... 2,112 75 2,287 260
Provision for income taxes..................... 929 46 1,003 96
------- ------ ------- ------
Income before extraordinary item............... 1,183 29 1,284 164
Extraordinary item (net of income tax benefit
of $156)..................................... (244) 0 (244) 0
------- ------ ------- ------
Net income..................................... $ 939 $ 29 $ 1,040 $ 164
======= ====== ======= ======
Income per common share data:
Income before extraordinary item............... $ 0.11 $ 0.01 $ 0.16 $ 0.03
======= ====== ======= ======
Extraordinary item............................. ($ 0.02) $ 0.00 ($ 0.03) $ 0.00
======= ====== ======= ======
Net income..................................... $ 0.09 $ 0.01 $ 0.13 $ 0.03
======= ====== ======= ======
Weighted average shares outstanding............ 11,089 4.756 7,957 4.756
======= ====== ======= ======
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE> 106
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31
----------------------
1996 1995
-------- -------
<S> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income..................................................... $ 1,040 $ 164
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities:
Amortization of videocassette rental inventory................. 3,204 971
Depreciation and amortization of furnishings, equipment and
leasehold improvements........................................ 370 193
Amortization of intangible assets.............................. 989 23
Changes in assets and liabilities:
Accounts receivable............................................ 131 39
Merchandise inventories........................................ 135 11
Prepaid expenses and other assets.............................. (486) (23)
Accounts payable............................................... 534 154
Accrued expenses and other liabilities......................... (1,991) 214
Income taxes................................................... 554 50
-------- -------
Net cash provided by operating activities................. 4,480 1,796
-------- -------
Cash flows from investing activities:
Purchase of property and equipment............................. (141) (65)
Purchase of videocassette rental inventory..................... (5,395) (1,065)
Purchase of retail video stores, net of cash acquired.......... (54,932) 0
Purchase of franchising business, net of cash acquired......... 0 (3,453)
Changes in other assets related to acquisitions................ 0 (177)
-------- -------
Net cash used in investing activities..................... (60,468) (4,760)
-------- -------
Cash flows from financing activities:
Proceeds from long-term debt................................... 5,600 5,665
Repayment of long-term debt.................................... (10,267) (1,684)
Proceeds from issuance of common stock, net.................... 63,079 0
Shareholder distributions...................................... 0 (39)
Changes in other assets related to financing................... (700) (177)
-------- -------
Net cash provided by financing activities................. 57,712 3,765
-------- -------
Net increase in cash and cash equivalents........................... 1,724 801
Cash and cash equivalents, beginning of period...................... 611 45
-------- -------
Cash and cash equivalents, end of period............................ $ 2,335 $ 846
======== =======
Supplemental cash flow data:
Interest paid.................................................. $ 508 $ 137
======== =======
Income taxes paid.............................................. $ 293 $ 0
======== =======
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE> 107
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes included in West Coast
Entertainment Corporation's ("the Company") registration statement on Form S-1
as declared effective by the SEC on May 9, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three and six month periods ended July 31, 1996 are not necessarily
indicative of the results to be expected for the year ending January 31, 1997.
For purposes of determining income per common share data for the three and
six month periods ended July 31, 1995 the income tax provisions have been
adjusted as if each entity included in the consolidated statement of operations
had been included in the Company's consolidated income tax returns and subject
to corporate income taxation as a C corporation from February 1, 1995 to July
12, 1995.
Income per common share data has been calculated utilizing the weighted
average number of common shares outstanding after giving effect to the
0.340-for-1 reverse stock split, which was approved by the Board of Directors on
May 14, 1996, as if it had occurred as of February 1, 1995. In addition, shares
to be issued as contingent consideration in conjunction with the Recent
Acquisitions (Note 5) have been considered outstanding since May 17, 1996.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND ACQUISITIONS
On May 14, 1996 the Company completed an initial public offering of
5,400,000 shares of common stock at $13.00 per share ("the Offering"). The net
proceeds of the offering after deducting applicable issuance costs and expenses,
were $63.1 million. The proceeds were used to fund the acquisitions discussed in
Note 5 and repay approximately $9.6 million in long-term debt.
3. EXTRAORDINARY ITEM
In conjunction with the early extinguishment of a portion of the previously
outstanding subordinated debt the Company as called for by the terms of the note
upon completion of the Offering was required to pay a prepayment penalty of
$400,000 ($244,000 net of income tax benefit).
F-27
<PAGE> 108
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows (in
thousands):
<TABLE>
<CAPTION>
JULY 31, 1996 JANUARY 31, 1996
-------------- -----------------
<S> <C> <C>
Videocassette rental inventory............................ $ 20,258 $ 3,299
Accumulated amortization.................................. $ (4,993) $(1,790)
------- -------
$ 15,265 $ 1,509
======= =======
</TABLE>
Videocassette rental inventory amortization expense resulting from the
allocation of purchase price to videocassette rental tapes of the acquired
entities is based on current replacement cost for bulk purchases of used tapes
as well as the assignment of a three year amortizable life which serves to
extend the remaining economic useful lives of videocassette rental tapes
acquired. Replacement cost for bulk purchases of used tapes is significantly
less than the cost of new tape purchases. As a result, future amortization
relating to these tapes, on a per tape basis, will be significantly less than
the amortization relating to new tape purchases. In addition, to the extent the
acquired tapes have book values lower than newly purchased tapes, sales of the
acquired tapes should result in higher operating income than sales of new tape
purchases. The favorable effects resulting from purchase accounting will
diminish with the passage of time and will not extend beyond the three year
period subsequent to acquisition which is the period over which these tapes will
be amortized.
5 ACQUISITIONS
On May 17, 1996 the Company acquired 172 video specialty stores ("the
Recent Acquisitions"), including 13 stores owned by franchisees of the Company.
Taking into account certain adjustments and calculation of certain contingent
payments, the aggregate consideration of $84.3 million was paid consisting of
the following: $52.5 million in cash, approximately $24.5 million in shares of
common stock (1.9 million shares), approximately $4.7 million of acquisition
costs and approximately $2.6 million in minimum contingent consideration (of
which approximately $1.4 million and $1.2 million is to be paid in cash and
stock, respectively). The purchase method of accounting was used to record the
acquisitions. The excess of the cost over the estimated fair value of the assets
acquired of $71.0 million will be amortized over 20 years on a straight-line
basis. The results of operations of the acquired stores have been included in
operations of the Company since the date of acquisition.
The following unaudited pro forma information presents the results of
operations as though (i) the Recent Acquisitions had occurred as of the
beginning of the periods presented, (ii) each entity included in the
consolidated statement of operations had been included in the Company's
consolidated income tax returns and subject to corporate income taxation as a C
corporation during all periods presented, (iii) the acquisition of a business
acquired on July 12, 1995 had occurred on February 1, 1995, (iv) the repayment
of all previously existing outstanding debt had occurred as of the beginning of
the periods reported, and (v) the borrowings under the new credit facility had
occurred as of the beginning of the periods presented.
F-28
<PAGE> 109
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma net income per share for the three and
six month periods ended July 31, 1996 and 1995 was calculated by dividing the
respective unaudited pro forma net income by the pro forma weighted average
number of shares of Common Stock outstanding after giving effect to (i) the
0.340-for-1 reverse stock split approved by the Board of Directors on May 14,
1996, and the shares issued in conjunction with the Offering, (ii) the shares
issued or to be issued as contingent consideration in conjunction with the
Recent Acquisitions and (iii) the impact of a detachable warrant with a primary
supplier of videocassettes and a portion of a convertible note which was
converted into shares of the Company's common stock as if the Offering of common
stock had occurred on the first day of the periods presented. The pro forma
weighted average number of common shares used to calculate pro forma net income
per share is 12,322,075.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT AS SHARE DATA)
Pro forma revenues.................................... $20,300 $19,254 $42,896 $40,840
Pro forma net income.................................. 1,441 1,125 2,928 2,379
Pro forma net income per share........................ $ 0.12 $ 0.09 $ 0.24 $ 0.19
</TABLE>
6 LONG TERM DEBT
On May 17, 1996 the Company obtained a $60,000,000 Credit Facility ("the
Facility") from a bank, which consists of a two year revolving credit facility
followed by a three year term loan. In association with the borrowing the
Company paid a fee of $700,000 on May 17, 1996 which has been recorded in other
long term assets and will be amortized over the term of the Facility. Borrowings
under the Facility are available for working capital, capital expenditures,
refinancing of existing indebtedness, and for certain permitted acquisition
financing. As of July 31, 1996 the Company had $4,500,000 outstanding under the
Facility.
On July 31, 1996 the Company received a commitment from the Bank to
increase the Facility to $65,000,000 effective August 5, 1996.
Borrowings are limited to 2.75 times the Company's operating cash flow, as
defined, during the previous four quarters. At the Company's option, interest
rates vary from either the Bank's base rate, as defined, to 1% above such base
rate, or from the Eurodollar rate, as defined, to 2.5% above such Eurodollar
rate (7.0% at July 31, 1996). Additionally, the Facility provides for a
commitment fee payable quarterly, computed as 0.375-0.5% of the unused portion
of the available Facility during the previous quarter. In each case the rate is
dependent on the ratio of the Company's total debt to operating cash flow for
the preceding quarter.
The Facility is secured by a first security interest in substantially all
of the Company's assets, including the stock of its subsidiaries and contain
certain restrictive covenants, including among others compliance with certain
financial tests and ratios and dividend restrictions.
F-29
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Videosmith Incorporated
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholder's equity present fairly, in all
material respects, the financial position of Videosmith Incorporated at August
4, 1994, and the results of its operations and its cash flows for the period
from January 30, 1994 through August 4, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The financial statements of the Company for the years ended January 29,
1994 and January 31, 1993 were audited by the other independent accountants
whose report dated March 11, 1994 expressed an unqualified opinion on those
statements.
PRICE WATERHOUSE LLP
Boston, Massachusetts
November 10, 1995
F-30
<PAGE> 111
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 4,
1994
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 308,149
Merchandise inventories........................................................ 229,660
Prepaid expenses and other current assets...................................... 191,884
----------
Total current assets................................................... 729,693
Videocassette rental inventory, net............................................ 848,271
Furnishings and equipment, net................................................. 1,752,819
Other non-current assets....................................................... 54,383
----------
Total non-current assets............................................... 2,655,473
----------
Total assets........................................................... $3,385,166
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long term debt.............................................. $ 17,315
Accounts payable............................................................... 476,706
Accrued expenses............................................................... 286,086
Income taxes payable........................................................... 226,837
----------
Total current liabilities.............................................. 1,006,944
Long-term debt................................................................... 45,163
----------
Total liabilities...................................................... 1,052,107
Stockholder's equity
Common stock, $1 par value, 300,000 shares authorized, 9,075 shares issued and
outstanding................................................................. 9,075
Additional paid-in capital..................................................... 1,590,903
Retained earnings.............................................................. 733,081
----------
Total stockholder's equity............................................. 2,333,059
----------
$3,385,166
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-31
<PAGE> 112
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 30, 1994
TO AUGUST 4, 1994
-----------------
<S> <C>
Revenues..................................................................... $ 3,826,215
----------
Costs and expenses:
Operating expenses......................................................... 3,221,313
General and administrative................................................. 521,282
----------
3,742,595
----------
Income from operations.................................................. 83,620
----------
Interest expense............................................................. 3,000
----------
Income before provision for income taxes................................ 80,620
Provision for income taxes................................................... 226,837
----------
Net loss................................................................ $ (146,217)
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-32
<PAGE> 113
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 30, 1994.................. $9,075 $2,220,925 $ 879,298 $ 3,109,298
Forgiveness of receivable from parent........ -- (630,022) -- (630,022)
Net income................................... -- -- (146,217) (146,217)
------ ---------- --------- ----------
Balance at August 4, 1994.................... $9,075 $1,590,903 $ 733,081 $ 2,333,059
====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-33
<PAGE> 114
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 30, 1994
TO AUGUST 4, 1994
-----------------
<S> <C>
Cash flows from operating activities
Net loss................................................................... $ (146,217)
Adjustments to reconcile net income to net cash flows provided by (used in)
operating activities:
Amortization of videocassette rental inventory.......................... 592,408
Depreciation and amortization of furnishings and equipment.............. 196,528
Change in operating assets and liabilities:
Merchandise inventories............................................... (59,744)
Prepaid expenses and other assets..................................... (34,717)
Income taxes payable.................................................. 99,425
Accounts payable...................................................... 239,070
Accrued expenses and other liabilities................................ 159,236
----------
Net cash provided by operating activities.......................... 1,045,989
----------
Cash flows from investing activities
Purchases of furnishings and equipment..................................... (8,594)
Purchases of videocassette rental inventory................................ (617,513)
----------
Net cash used in investing activities.............................. (626,107)
----------
Cash flows from financing activities
Increase in amount receivable from parent.................................. (151,318)
Repayments of long-term debt............................................... (12,558)
----------
Net cash used in financing activities.............................. (163,876)
----------
Net increase in cash and cash equivalents.................................... 256,006
Cash and cash equivalents, at beginning of period............................ 52,143
----------
Cash and cash equivalents, at end of period.................................. $ 308,149
==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest..................................... $ 50,561
==========
Cash paid during the period for income taxes................................. $ 125,000
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-34
<PAGE> 115
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The financial statements present the results of Videosmith Incorporated
(the "Company"), a wholly-owned subsidiary of Xtra-vision Corporation (the
"Parent"), itself a wholly-owned subsidiary of Xtra-vision plc, a publicly held
Irish company. The Company operates 14 video rental stores in Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game. Late charges are recognized when payment is received.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
All rental tapes are carried at their residual value of $6 per tape. All
tapes purchased are written down to their residual value in the month of
purchase. The Company believes that its method of amortization results in an
appropriate matching of tape amortization expense with the revenue received from
the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 10 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms of
leased items (primarily 3 to 4 years) and leasehold improvements (10 years),
using the straight-line method. Repair and maintenance costs are expensed as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
The Company is included in its parent's consolidated federal and state
income tax returns and its taxes are calculated as if it was filing a separate
return.
F-35
<PAGE> 116
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at August 4, 1994 consist of the
following:
<TABLE>
<S> <C>
Prepaid rent...................................................... $ 97,024
Other............................................................. 94,860
--------
$191,884
========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and furnishings at August 4, 1994, consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE
---------
<S> <C> <C>
Computers............................................. 5 years $ 460,356
Furniture and fixtures................................ 7 years 854,765
Leasehold improvements................................ 10 years 2,796,999
----------
4,112,120
Less accumulated depreciation......................... 2,359,301
----------
$1,752,819
==========
</TABLE>
Depreciation charged to income during the period from January 30, through
August 4, 1994, amounted to $196,528.
5. ACCRUED EXPENSES
Accrued expenses at August 4, 1994 consist of the following:
<TABLE>
<S> <C>
Coupon accrual.................................................... $ 26,510
Sales taxes payable............................................... 49,640
Accrued payroll................................................... 37,689
Accrued accounting expense........................................ 20,109
Accrued rent...................................................... 18,384
Other............................................................. 133,754
--------
$286,086
========
</TABLE>
6. NOTE PAYABLE
Note payable at August 4, 1994, comprises the following:
<TABLE>
<S> <C>
Unsecured note payable to Trustee of Security Realty Trust with
interest at prime plus 2% payable through October 1998......... $62,478
Less amount payable within one year.............................. 17,315
-------
$45,163
=======
</TABLE>
7. RELATED PARTY TRANSACTIONS
A receivable from the parent totalling $630,022 was forgiven by the Company
during the period ending August 4, 1994.
F-36
<PAGE> 117
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASE COMMITMENTS
The Company's stores, office space, and certain equipment used in the
business are leased. The Company operates seven of its stores on the basis of a
minimum rent and a percentage of net sales when sales exceed a certain base
amount. At August 4, 1994, future minimum lease payments required under
operating leases in excess of one year were as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1996........................................................... $1,307,463
1997........................................................... 1,291,349
1998........................................................... 1,153,235
1999........................................................... 581,433
2000........................................................... 256,575
Thereafter..................................................... 265,232
----------
Future minimum payments........................................ $4,855,287
==========
</TABLE>
Rent expense totalled approximately $544,952 for the period from January
30, 1994 through August 4, 1994.
9. INCOME TAXES
At August 4, 1994, the deferred tax asset amounts to approximately $1.3
million. The Company has not recorded this asset because in management's view,
the current conditions in the industry and the past financial performance of the
Company do not make it more likely than not that the asset would be recovered
against future taxable book income. Accordingly, a valuation reserve of the
entire amount of the asset has been established to reduce it to zero. In view of
the change in ownership of the Company's immediate parent company, there is a
limitation which applies to built-in losses recognized in the five year period
beginning with the ownership change.
The components of income tax expense for the period from January 30, 1994
through August 4, 1994 are:
<TABLE>
<S> <C>
Income tax expense
Current:
Federal.................................................... $174,501
State...................................................... 52,336
--------
$226,837
========
</TABLE>
Deferred income taxes as of August 4, 1994, reflect the impact of
"temporary differences" between amounts of assets, and liabilities for financial
reporting purposes and such amount as measured by tax laws.
F-37
<PAGE> 118
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The timing differences which give rise to the deferred tax assets and
liabilities, are as follows at August 4, 1994:
<TABLE>
<S> <C>
Deferred tax asset:
Videocassettes rental amortization.......................... $ 866,021
Furnishings and equipment depreciation...................... 364,734
Write-off of fixed assets................................... 94,221
Other....................................................... 19,130
-----------
1,344,106
Deferred tax asset valuation allowance........................ (1,344,106)
-----------
$ --
===========
</TABLE>
A reconciliation of the tax expense for financial statement purposes and
the expected statutory federal rate of 35% is as follows:
<TABLE>
<S> <C>
Federal statutory income tax at 35%............................. $ 28,217
State income taxes, net of federal benefit...................... 5,135
Timing differences for which no deferred tax asset is
established................................................... 192,601
Other........................................................... 884
--------
$226,837
========
</TABLE>
10. SUBSEQUENT EVENT
Effective August 5, 1995, Xtra-vision plc entered into an agreement to sell
100% of the outstanding stock of the Company's Parent to V.S. Acquisition
Corporation.
F-38
<PAGE> 119
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
West Coast Entertainment, Inc. and Affiliates
We have audited the accompanying combined balance sheets of West Coast
Entertainment, Inc.; West Coast Video Enterprises, Inc. and its wholly owned
subsidiary, National Video, Inc.; West Coast Services, Inc.; Interactive
Electronics Corporation d/b/a Game Power Headquarters; Game Power Headquarters,
Inc.; and Premier Advertising, Inc. (collectively known as "the Companies") as
of December 31, 1993 and 1994 and July 12, 1995, and the related combined
statements of operations, changes in stockholders' deficiency and cash flows for
the years and period then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies as of December 31, 1993 and 1994 and July 12, 1995, and the combined
results of their operations and their cash flows for the years and period then
ended, in conformity with generally accepted accounting principles.
MILLER, GLUSMAN, FOOTER & MAGARICK, P.C.
Certified Public Accountants
January 26, 1996
Philadelphia, Pennsylvania
F-39
<PAGE> 120
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994 AND JULY 12, 1995
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JULY 12,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash (Note 1)..................................... $ 545,391 $ 414,464 $ 511,489
Accounts receivable, net of allowance for doubtful
accounts approximating $10,000 in 1993 and
$91,000 in 1994 and 1995....................... 928,850 1,119,929 869,679
Inventories (Note 1).............................. 391,493 524,718 341,300
Prepaid expenses and other current assets......... 22,752 11,977 39,847
----------- ----------- -----------
Total current assets...................... 1,888,486 2,071,088 1,762,315
Due from affiliates (Note 6)........................ 42,928 42,928 42,928
Property and equipment, net (Notes 1 and 2)......... 313,802 273,895 254,408
Other assets........................................ 201,273 172,145 57,173
----------- ----------- -----------
$ 2,446,489 $ 2,560,056 $ 2,116,824
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt (Note 4)........ $ 511,827 $ 594,043 $ 475,997
Notes payable, stockholders (Note 3).............. 158,172 309,729 237,939
Accounts payable and accrued expenses............. 1,027,638 1,111,504 826,688
Other............................................. 45,000 80,000 25,000
----------- ----------- -----------
Total current liabilities................. 1,742,637 2,095,276 1,565,624
----------- ----------- -----------
Long-term debt, net of current portion (Note 4)..... 3,643,736 3,110,387 2,881,147
----------- ----------- -----------
Commitments (Note 7)
Stockholders' deficiency:
Common stock (Note 5)............................. 787,000 787,000 787,000
Additional paid-in capital........................ 2,564,000 2,714,000 2,714,000
Accumulated deficit............................... (6,290,884) (6,146,607) (5,830,947)
----------- ----------- -----------
Total stockholders' deficiency............ (2,939,884) (2,645,607) (2,329,947)
----------- ----------- -----------
$ 2,446,489 $ 2,560,056 $ 2,116,824
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE> 121
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
-------------------------- JULY 12,
1993 1994 1995
---------- ----------- ------------
<S> <C> <C> <C>
Revenues (Note 1):
Franchise and royalty fees......................... $7,079,779 $ 6,848,813 $3,660,385
Product sales...................................... 1,729,547 3,568,140 782,614
---------- ----------- ----------
8,809,326 10,416,953 4,442,999
---------- ----------- ----------
Costs and expenses
(Notes 6 and 7):
Cost of product sales........................... 1,516,247 3,177,829 703,815
Operating expenses.............................. 6,455,991 6,795,569 3,208,829
---------- ----------- ----------
7,972,238 9,973,398 3,912,644
---------- ----------- ----------
Income from operations.......................... 837,088 443,555 530,355
Interest expense, net................................ (264,714) (362,917) (215,043)
Other income (expense)............................... (32,717) 63,639 348
---------- ----------- ----------
Net income........................................... $ 539,657 $ 144,277 $ 315,660
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE> 122
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
<TABLE>
<CAPTION>
COMMON STOCK
(SEE NOTE 5)
---------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993..... 1,006,000 $486,000 $2,465,000 $(6,755,541) $(3,804,541)
Issuance of common stock..... 2,000 301,000 99,000 -- 400,000
Distributions................ -- -- -- (75,000) (75,000)
Net income................... -- -- -- 539,657 539,657
--------- -------- ---------- ----------- -----------
Balance, December 31, 1993... 1,008,000 787,000 2,564,000 (6,290,884) (2,939,884)
Contribution of capital...... -- -- 150,000 -- 150,000
Net income................... -- -- -- 144,277 144,277
--------- -------- ---------- ----------- -----------
Balance, December 31, 1994... 1,008,000 787,000 2,714,000 (6,146,607) (2,645,607)
Net income................... -- -- -- 315,660 315,660
--------- -------- ---------- ----------- -----------
Balance, July 12, 1995....... 1,008,000 $787,000 $2,714,000 $(5,830,947) $(2,329,947)
========= ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE> 123
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
----------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 539,657 $ 144,277 $ 315,660
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for bad debts........................ -- 36,366 --
Gain on sale of assets......................... (42,032) -- --
Depreciation and amortization.................. 95,693 147,792 40,677
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable....................... (359,906) (227,446) 250,250
Inventories............................... (327,742) (133,224) 183,418
Prepaid expenses and other current
assets.................................. (2,497) 10,775 (27,870)
Other assets.............................. (179,335) 29,128 114,972
Increase (decrease) in liabilities:
Accounts payable and accrued expenses..... 113,086 83,866 (284,816)
Other current liabilities................. 45,000 35,000 (55,000)
--------- --------- ---------
Total adjustments.............................. (657,733) (17,743) 221,631
--------- --------- ---------
Net cash provided by (used in) operating
activities................................... (118,076) 126,534 537,291
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............... (209,340) (107,885) (21,190)
Net advances to affiliates........................ (10,167) -- --
--------- --------- ---------
Net cash used in investing activities.......... (219,507) (107,885) (21,190)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock................... 400,000 -- --
Proceeds from additional paid-in capital.......... -- 150,000 --
Net repayments of long-term debt.................. (2,089,437) (451,133) (2,319,076)
Proceeds from notes payable, stockholders......... 158,172 151,557 1,900,000
Distributions to stockholders..................... (75,000) -- --
--------- --------- ---------
Net cash used in financing activities.......... (1,606,265) (149,576) (419,076)
--------- --------- ---------
Net increase (decrease) in cash..................... (1,943,848) (130,927) 97,025
Cash, beginning of period........................... 2,489,239 545,391 414,464
--------- --------- ---------
Cash, end of period................................. $ 545,391 $ 414,464 $ 511,489
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE> 124
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the accounts of West Coast
Entertainment, Inc. ("Entertainment"); West Coast Video Enterprises, Inc.
("Enterprises") and its wholly owned subsidiary, National Video, Inc.
("National"); West Coast Services, Inc. ("Services"); Interactive Electronics
Corporation d/b/a Game Power Headquarters ("Interactive"); Game Power
Headquarters, Inc. ("Game Power"); and Premier Advertising, Inc. (hereafter
collectively known as "the Companies"). Significant intercompany accounts and
transactions have been eliminated in the combined financial statements.
The results for the 1995 period reflect a material decline in product sales
as a result of de-emphasis and/or elimination of certain product lines and a
significant decline in franchise and royalty fees as a result of an overall
decline in the number of new franchises sold. To offset these revenue declines,
the Companies instituted a significant cost-reduction program resulting in an
overall increase in net income for the period ended July 12, 1995.
The Companies (1) sell and service video franchises, which operate outlets
for the rental and sale of video cassettes, electronic games and related
accessories, (2) distribute operational and ancillary sale items to franchise
stores, and (3) sell merchandise to video and game stores.
Pursuant to an asset purchase agreement ("the Purchase Agreement") which
became effective July 12, 1995, the Companies agreed to sell substantially all
of their assets and certain liabilities to BSMS Acquisition Co., Inc. ("the
Buyer").
During 1994, Interactive effected a statutory merger with Game Power under
the tax-free reorganization regulations of the Internal Revenue Code. Under the
terms of the merger agreement, the surviving company, Game Power, acquired 100%
of the stock of Interactive.
During 1992, Enterprises filed for bankruptcy protection under Chapter 11
of the U.S. Bankruptcy Code, and later submitted a Plan of Reorganization that
became effective January 1993. As disclosed in Note 4, certain liabilities
incurred in connection with the Plan of Reorganization were not assumed by the
Buyer under the terms of the Purchase Agreement.
Cash
The Companies maintain their cash accounts at several financial
institutions in Philadelphia, PA. Balances at these institutions are insured by
the Federal Deposit Insurance Corporation up to $100,000. Uninsured balances
approximated $285,000 as of July 12, 1995.
Inventories
Merchandise, consisting primarily of video cassettes and games, and
computer inventories are stated at the lower of cost, using the first-in,
first-out method, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the terms of the leases
or service lives of the improvements.
F-44
<PAGE> 125
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Franchise fees, related to the sale of franchises, are recognized when the
stores are opened for business. Royalty and advertising income are recognized
based on 5% and 2%, respectively, of franchisee revenue as defined in the
franchise agreement. Sales to video and game stores are recognized when goods
are shipped.
Income Taxes
The Companies, except for National and Game Power, have elected
S-corporation status for federal and state income tax purposes. Consequently,
taxable income flows through and is taxed to the stockholders on their
individual income tax returns. Accordingly, no provision for federal and state
income taxes has been made in the accompanying combined financial statements.
National and Game Power have available unused federal net operating loss
carryforwards, expiring through 2009, aggregating approximately $165,000 and
$281,000 as of December 31, 1993 and 1994, respectively, and $281,000 as of July
12, 1995. A valuation allowance has been provided for the full amount of the
resulting deferred tax asset.
Reclassification
Certain items in the 1993 and 1994 combined financial statements have been
reclassified to conform to the 1995 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Equipment..................................... $1,065,566 $1,082,503 $1,096,172
Furniture and fixtures........................ 125,111 147,797 147,797
Computer equipment............................ 58,590 81,961 81,961
Leasehold improvements........................ 61,375 106,266 113,787
---------- ---------- ----------
1,310,642 1,418,527 1,439,717
Accumulated depreciation and amortization..... 996,840 1,144,632 1,185,309
---------- ---------- ----------
$ 313,802 $ 273,895 $ 254,408
========== ========== ==========
</TABLE>
Depreciation and amortization expense were approximately $96,000 and
$148,000 for the years 1993 and 1994, respectively; and approximately $41,000
for the 1995 period.
3. NOTES PAYABLE, STOCKHOLDERS
A demand note payable in the approximate amount of $158,000, $210,000 and
$183,000 at December 31, 1993 and 1994 and July 12, 1995, respectively, to one
stockholder bears interest at the prime rate (8.75% at July 12, 1995). The
remaining note payable to another stockholder is non-interest bearing and
payable in monthly installments through November 1995. The notes payable to the
stockholders were not assumed by the Buyer as part of the Purchase Agreement.
F-45
<PAGE> 126
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consisted of:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Note payable, bank(a)......................... $3,163,264 $3,071,964 $1,116,525
Note payable, stockholder(b).................. -- -- 1,894,647
Due to affiliate(c)........................... 399,250 180,250 81,780
Creditor settlements(d)....................... 593,049 452,216 264,192
---------- ---------- ----------
4,155,563 3,704,430 3,357,144
Less current portion.......................... 511,827 594,043 475,997
---------- ---------- ----------
$3,643,736 $3,110,387 $2,881,147
========== ========== ==========
</TABLE>
- ---------------
(a) Repayment terms under a February 1995 refinancing agreement, called for (1)
an immediate payment of $1.9 million, and (2) monthly principal payments of
$10,000 plus interest at prime plus 2% (10.75% at July 12, 1995). The
remaining balance was paid in full from the proceeds of the Purchase
Agreement.
(b) Note payable, stockholder, with monthly principal payments of $20,200,
including interest at 11.925%. The remaining balance was not assumed by the
Buyer as part of the Purchase Agreement.
(c) Represents amounts due to an affiliated entity (not included in the combined
Companies) that assumed $600,000 of the amount due to the bank under the
Plan of Reorganization (see Note 1). Payment terms called for monthly
principal payments of $18,250 plus interest at prime plus 1%. This liability
was not assumed by the Buyer as part of the Purchase Agreement.
(d) Consists of amounts payable to various franchisees, limited partners of
affiliated partnerships and unsecured creditors under the terms of the Plan
of Reorganization (see Note 1). This liability was not assumed by the Buyer
as part of the Purchase Agreement.
5. COMMON STOCK
Common stock consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Entertainment
No par value
Authorized -- 1,000,000 shares
Issued and outstanding -- 5,000 shares........... $ 475,000 $ 475,000 $ 475,000
Enterprises
Class A
Authorized -- 8,000,000 shares
Issued and outstanding -- none................... -- -- --
Class B
$.01 par value
Authorized -- 2,000,000 shares
Issued and outstanding -- 1,000,000 shares....... 10,000 10,000 10,000
Services(a)
$1 par value
Authorized, issued and outstanding -- 1,000
shares........................................... 1,000 1,000 1,000
</TABLE>
F-46
<PAGE> 127
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED PERIOD ENDED
DECEMBER 31, JULY 12,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interactive/Game Power (a)
No par value
Authorized, issued and outstanding -- 1,000
shares........................................... $ 300,000 $ 300,000 $ 300,000
Premier
$1 par value
Authorized, issued and outstanding -- 1,000
shares........................................... 1,000 1,000 1,000
---------- ---------- ----------
787,000 787,000 787,000
Combined additional paid-in capital................... 2,564,000 2,714,000 2,714,000
---------- ---------- ----------
Combined capitalization............................... $3,351,000 $3,501,000 $3,501,000
========== ========== ==========
</TABLE>
- ---------------
(a) Issued during 1993.
6. RELATED PARTY TRANSACTIONS
The Companies make and receive non-interest bearing temporary cash advances
to and from affiliated companies not included in the Purchase Agreement and the
accompanying combined financial statements.
The Companies lease certain facilities and equipment under operating leases
with related parties (not included in the Purchase Agreement and the
accompanying combined financial statements) which were terminated on July 12,
1995. Rent expense under these leases aggregated approximately $111,000 and
$150,000 for the years 1993 and 1994, respectively; and approximately $37,000
for the 1995 period.
7. LEASE COMMITMENTS
The Companies leased their facilities and certain equipment under operating
leases. Except for the Game Power lease, which was assumed by the Buyer, all
other leases were terminated on July 12, 1995.
Rent expense (including amounts to related parties) approximated $171,000
and $242,000 for the years 1993 and 1994, respectively; and approximately
$63,000 for the 1995 period.
F-47
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
The Stockholders
Palmer Corporation:
We have audited the accompanying consolidated balance sheets of Palmer
Corporation and subsidiaries as of March 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Palmer
Corporation and subsidiaries at March 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 2 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for videocassette rental inventory.
KPMG PEAT MARWICK LLP
Princeton, New Jersey
June 27, 1996
F-48
<PAGE> 129
PALMER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (note 2)....................................... $ 259,849 $ 466,558
Marketable equity securities............................................. -- 5,870
Accounts receivables, less allowance for doubtful accounts of $68,000 in
1996
and 1995.............................................................. 263,481 379,313
Merchandise inventories (note 3)......................................... 2,085,240 1,864,104
Prepaid expenses......................................................... 24,202 203,245
Notes receivable -- current portion, less allowance for doubtful accounts
of none in 1996, $51,400 in 1995 (note 4)............................. 158,417 145,756
---------- ----------
Total current assets............................................. 2,791,189 3,064,846
Videocassette rental inventory, net........................................ 3,235,629 3,568,049
Property and equipment, net (note 5)....................................... 1,421,350 1,728,156
Intangible assets, net of amortization of $202,872 and $168,233,
respectively (note 2).................................................... 232,119 266,758
Other assets............................................................... 18,500 --
Notes receivable -- less current portion (note 4).......................... 159,022 136,806
Due from affiliated companies.............................................. 138,032 36,189
Cash surrender value of officers' life insurance, net...................... 72,168 98,865
Security deposits.......................................................... 303,839 301,481
---------- ----------
$8,371,848 $9,201,150
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable -- bank (note 7)............................................ $ -- $ 600,000
Accounts payable......................................................... 2,535,034 2,747,170
Accrued expenses......................................................... 821,291 1,187,655
Current installments of long-term debt (note 8).......................... 45,554 320,770
Advances from stockholders (note 9)...................................... 249,250 310,000
Income taxes payable..................................................... 356,081 53,988
Sales tax payable........................................................ 126,506 112,744
---------- ----------
Total current liabilities........................................ 4,133,716 5,332,327
Long-term debt, less current portion (note 8).............................. 148,406 192,143
Deferred rent.............................................................. 995,718 1,036,399
---------- ----------
5,277,840 6,560,869
---------- ----------
Minority interest.......................................................... 60,918 30,137
---------- ----------
Commitments and contingencies (note 12)
Stockholders' equity (note 11):
Convertible preferred stock, par value $1 per share; authorized 400,000
shares; issued and outstanding 400,000 shares (note 11)............... 400,000 400,000
Common stock, no par value; authorized 100,000,000 shares; issued and
outstanding 197,450 shares, respectively.............................. 2,087,842 2,087,842
Retained earnings........................................................ 693,401 245,455
---------- ----------
3,181,243 2,733,297
Less treasury stock (14.835 of pre-replacement shares and 250 of
post-replacement shares in 1996 and 14.835 of pre-replacement shares
in 1995, at cost)..................................................... 148,153 123,153
---------- ----------
Total stockholders' equity....................................... 3,033,090 2,610,144
---------- ----------
$8,371,848 $9,201,150
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE> 130
PALMER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Movie rentals..................................... $17,733,546 $16,343,066 $16,682,587
Merchandise sales................................. 4,373,215 4,797,189 4,297,596
Royalties and other revenue....................... 1,461,095 1,356,283 1,247,277
----------- ----------- -----------
23,567,856 22,496,538 22,227,460
----------- ----------- -----------
Operating costs and expenses:
Store operating expenses.......................... 11,500,400 10,659,393 10,351,566
Amortization of videocassette rental inventory.... 3,639,008 4,147,925 4,412,558
Cost of sales -- movie rentals (note 9)........... 1,471,234 503,247 --
Cost of sales -- merchandise sales................ 3,359,207 3,681,728 4,601,999
General and administrative expenses............... 3,054,095 3,289,407 3,705,045
----------- ----------- -----------
23,023,944 22,281,700 23,071,168
----------- ----------- -----------
Operating income (loss)................... 543,912 214,838 (843,708)
----------- ----------- -----------
Minority interest in net income of subsidiary....... (72,777) (64,611) (48,566)
----------- ----------- -----------
Other income (expense):
Interest income................................... 11,307 26,849 7,886
Interest expense.................................. (50,940) (160,544) (283,648)
Settlement of litigation (note 7)................. 771,000 -- --
Other............................................. (146,178) (87,652) 53,937
----------- ----------- -----------
585,189 (221,347) (221,825)
----------- ----------- -----------
Income (loss) before income taxes......... 1,056,324 (71,120) (1,114,099)
Income tax expense (benefit) (note 10).............. 542,228 217,613 (287,392)
----------- ----------- -----------
Net income (loss)......................... $ 514,096 $ (288,733) $ (826,707)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE> 131
PALMER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 514,096 $ (288,733) $ (826,707)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................... 531,340 615,055 639,166
Amortization of videocassette rental inventory.............. 3,639,008 4,147,925 4,412,558
Increase in allowance for doubtful accounts................. -- 8,440 (78,136)
Bad debt expense related to notes receivable................ -- 48,732 51,400
Loss on disposal of fixed assets............................ -- 105,187 13,664
Minority interest........................................... 30,781 (440) (74,707)
Settlement of litigation.................................... (771,000) -- --
Changes in assets and liabilities:
Marketable securities..................................... 5,870 -- (5,870)
Accounts receivable....................................... 115,832 (2,528) 329,732
Merchandise inventories................................... (221,136) (746,580) 93,942
Prepaid expenses.......................................... 179,043 (136,578) 96,668
Notes receivable.......................................... (34,877) (17,601) 57,309
Prepaid and refundable income taxes....................... -- 316,591 (308,679)
Other assets.............................................. (18,500) 5,850 1,800
Due from affiliated companies............................. (101,843) (36,189) --
Cash surrender value of officers' life insurance.......... 26,697 43,262 18,226
Security deposits......................................... (2,358) 25,222 35,260
Accounts payable.......................................... (212,136) 64,628 216,804
Accrued expenses.......................................... (195,364) (95,683) 615,650
Income taxes payable...................................... 302,093 53,988 (123,649)
Sales tax payable......................................... 13,762 (16,100) 37,483
Deferred rent............................................. (40,681) 61,995 70,918
-------- -------- --------
Net cash provided by operating activities................. 3,760,627 4,156,443 5,272,832
Cash flows from investing activities:
Purchases of videocassette rental inventory, net.............. (3,306,588) (4,054,606) (4,562,453)
Purchase of equipment......................................... (189,895) (431,449) (417,213)
Purchase of intangible assets................................. -- (59,020) --
-------- -------- --------
Net cash used in investing activities.................. (3,496,483) (4,545,075) (4,979,666)
-------- -------- --------
Cash flows from financing activities:
Repayment of notes payable.................................... (318,953) (737,922) (379,209)
Proceeds from note payable.................................... -- 7,530 --
Proceeds from issuance of common stock........................ -- 1,745,000 --
Purchase of treasury stock.................................... (25,000) -- --
Repayment of advances from stockholders....................... (60,750) (213,288) (5,162)
Partnership capital drawings, net of contributions............ (66,150) (15,000) (171,933)
-------- -------- --------
Net cash provided by (used in) financing activities.... (470,853) 786,320 (556,304)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............ (206,709) 397,688 (263,138)
Cash and cash equivalents, beginning of year.................... 466,558 68,870 332,008
-------- -------- --------
Cash and cash equivalents, end of year.......................... $ 259,849 $ 466,558 $ 68,870
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 59,990 $ 138,738 $ 263,645
Income taxes.............................................. 170,015 167,540 7,800
======== ======== ========
</TABLE>
Noncash transaction:
During 1996, the Company was released from $600,000 of bank debt and $171,000 of
related accrued interest.
During 1995, the Company wrote-off notes receivable of $100,132 that were fully
reserved.
See accompanying notes to consolidated financial statements.
F-51
<PAGE> 132
PALMER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
----------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993
(unaudited)..................... $ 400,000 $ 342,842 $1,547,828 $(123,153) $ 2,167,517
Partnership drawings............ -- -- (171,933) -- (171,933)
Net loss........................ -- -- (826,707) -- (826,707)
-------- ---------- ---------- --------- ----------
Balance, March 31, 1994........... 400,000 342,842 549,188 (123,153) 1,168,877
Issuance of common stock
(note 11).................... -- 1,745,000 -- -- 1,745,000
Partnerships drawings, net of
capital contributions........ -- -- (15,000) -- (15,000)
Net loss........................ -- -- (288,733) -- (288,733)
-------- ---------- ---------- --------- ----------
Balance, March 31, 1995........... 400,000 2,087,842 245,455 (123,153) 2,610,144
Partnerships drawings net of
capital contributions........ -- -- (66,150) -- (66,150)
Purchase of treasury stock...... -- -- -- (25,000) (25,000)
Net income...................... -- -- 514,096 -- 514,096
-------- ---------- ---------- --------- ----------
Balance, March 31, 1996........... $ 400,000 2,087,842 693,401 148,153 3,033,090
======== ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-52
<PAGE> 133
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
(1) ORGANIZATION
The consolidated financial statements include the accounts of the Company,
Palmer Corporation, its wholly-owned subsidiaries, Palmer Video Corporation,
Casablanca Distributing Corporation, Palmer Investment Corporation, its 51%
owned subsidiary 142nd Retail Associates ("142nd"), 135th Retail Associates
("135th") which was 85% owned by Palmer Video Corporation through March 1, 1995,
at which time the entire interest was purchased by Palmer Investment
Corporation, and its 50% owned subsidiary 38th Retail Associates ("38th")
(together "The Company"). All significant intercompany transactions and balances
have been eliminated in consolidation.
Palmer Video Corporation ("Video") owns and operates all 100% owned company
stores. At March 31, 1996 and 1995, Video owned 41 and 39 such stores,
respectively. During March 31, 1996 and 1995, 3 and 2 new stores were opened,
none and 2 stores were purchased and 1 and 3 stores were closed, respectively.
In addition, Video also functions as the franchisor company. At March 31, 1996
and 1995, there were 22 and 23 franchised stores in operation, including certain
stores in which the Company owns a majority interest.
Casablanca Distributing Corporation ("Casa") is a wholesaler of video
cassettes and accessories supplying company-owned, franchisees and independent
stores.
Palmer Investment Corporation ("Investment") is the holding company for all
partial equity interests in company-owned stores. At March 31, 1996 and 1995,
Investment holds a 51% interest in 142nd and a 50% interest in 38th.
142nd and 38th were organized as partnerships to own and operate two
majority owned stores.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash equivalents:
Cash equivalents consist of highly liquid investments, such as money market
accounts and a certificate of deposit with an original maturity of three months
or less.
Merchandise inventory:
Merchandise inventory consisting primarily of prerecorded videocassettes
and accessories, are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method and with market defined as the lower of
replacement cost or realizable value.
Videocassette rental inventory:
Videocassette rental inventory, which includes video games, is recorded at
cost, and amortized over their estimated economic life with no provision for
salvage value. For the period from April 1, 1993 through March 31, 1994
videocassettes were amortized over 36 months on an accelerated basis. Effective
April 1, 1994, the Company changed its method of amortization. Videocassettes
which are considered base stock are amortized over 36 months on a straight-line
basis. Purchases of new release videocassettes are amortized whereby the tenth
and any succeeding copies of each title are amortized over nine months on an
accelerated basis; the fourth through ninth copies of each title per store are
amortized over 36 months on an accelerated basis; and copies one through three
of each title are amortized as base stock. Management is of the opinion that the
new method of amortization is a more appropriate matching of the cost per tape
with its related revenue. The effect of the change in method of amortization
caused a decrease in amortization expense in 1995 of $80,305.
F-53
<PAGE> 134
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense related to videocassette rental inventory totaled
$3,639,008, $4,147,925 and $4,412,558 for the years ended March 31, 1996, 1995
and 1994, respectively. As videocassettes are sold or retired, the applicable
cost and accumulated amortization are eliminated from the accounts, and any gain
or loss is recorded.
Property and equipment:
Property and equipment are recorded at cost and depreciated primarily using
the straight-line method of depreciation over estimated useful lives as follows:
<TABLE>
<S> <C>
Furniture and fixtures................... 5 to 7 years
Equipment................................ 3 to 5 years
Leasehold improvements and signs......... Shorter of estimated useful life or lease
term
</TABLE>
Revenue recognition:
Movie rental and merchandise revenue is recognized at the time of rental or
sale. Royalty fees, earned based upon the franchisee's sales, are recorded as
revenue in the period when they are received.
Store opening costs:
Store opening costs, which consist primarily of payroll, advertising and
supplies, are expensed as incurred.
Intangible assets:
Intangible assets consist of the cost of acquired businesses in excess of
the market value of the net tangible assets acquired. The cost in excess of the
market value of the net tangible assets is amortized on a straight-line basis
over 15 years.
Income taxes:
The Company files a consolidated Federal income tax return with its
wholly-owned subsidiaries. Income taxes are not payable or provided for by the
Partnerships. Partners are taxed individually on their share of the partnership
earnings or losses.
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," (Statement 109) deferred income taxes are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Pension plan:
The Company has a 401(k) retirement plan covering all eligible employees.
Employer contributions, if any, are determined by an annual resolution of the
Board of Directors and cannot exceed the maximum amount allowable as a tax
deduction under the Internal Revenue Code and regulations. In addition, each
qualified participant may make voluntary contributions to the plan on a pre-tax
basis by salary reductions which cannot exceed 15% of eligible compensation. In
1996 and 1995, the Company did not contribute to the plan.
F-54
<PAGE> 135
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments:
Statement of Financial Accounting Standards SFAS No 107, "Disclosure about
Fair Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company believes that there is no
material difference between the fair value and the reported amounts of financial
instruments in the consolidated balance sheets.
(3) MERCHANDISE INVENTORIES
Merchandise inventories for the years ended March 31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Video cassettes for resale.................................. $ 1,835,264 $ 1,442,947
Video accessories/supplies.................................. 221,609 377,524
Blank video tapes........................................... 28,367 43,633
---------- ----------
$ 2,085,240 $ 1,864,104
========== ==========
</TABLE>
(4) NOTES RECEIVABLE
Notes receivable as of March 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Various installment notes -- receivable in monthly
installments aggregating $1,505 and $1,128 in 1996 and
1995, including interest at 10% per annum for periods
expiring through May 1999................................. $ 31,996 $ 156,439
Various installment notes -- receivable in consecutive
monthly installments aggregating $6,754 and $5,934 in 1996
and 1995, respectively, including interest at 9% per annum
through
March 1999................................................ 208,657 46,895
Various installment notes -- receivable in consecutive
monthly installments aggregating $1,725 in 1996 and $595
in 1995, including interest at 8% per annum through March
2001...................................................... 76,786 79,228
-------- --------
317,439 282,562
Less current portion...................................... 158,417 145,756
-------- --------
$ 159,022 $ 136,806
======== ========
</TABLE>
F-55
<PAGE> 136
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1996 and 1995 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $2,952,299 $2,799,241
Machinery and equipment..................................... 1,812,672 1,775,835
Leasehold improvements...................................... 543,849 543,849
---------- ----------
5,308,820 5,118,925
Accumulated depreciation and amortization................... 3,887,470 3,390,769
---------- ----------
$1,421,350 $1,728,156
========== ==========
</TABLE>
Depreciation and amortization expense related to property and equipment
amounted to $495,898 and $591,391 for the years ended March 31, 1996 and 1995,
respectively.
(6) ACQUISITIONS
On March 1, 1995, Video purchased assets with a book value of $178,231,
assumed liabilities with a book value of $204,188 for $35,000 which was paid in
cash at the closing. The transaction resulted in an increase to Video's goodwill
of $60,069. These assets and liabilities were previously owned by 135th Retail
Associates, which was previously a franchise store.
On March 31, 1995, Video acquired the assets (primarily video rental
cassettes) of Legends Inc. for $82,000. In addition, Video assumed the existing
occupancy lease.
(7) NOTE PAYABLE -- BANK
The advances from the bank aggregating $600,000 at March 31, 1995 were in
the form of demand notes payable with interest ranging from 1% to 1 1/2% above
the bank's base rate, as defined. The notes are unsecured.
Demand was made on the note payable -- bank and accrued interest and was
referred to legal counsel. The Company alleges that the bank breached a
commitment to advance additional funds under a line of credit and has filed a
lender liability action.
In June 1995, the Company and the bank agreed to settle the aforementioned
dispute. The settlement terms release the Company from all obligations and cause
no funds to be exchanged between the parties.
F-56
<PAGE> 137
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LONG-TERM DEBT
Long-term debt as of March 31, 1996 and 1995 consists of the following
components:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Promissory note -- payable in consecutive monthly principal
installments of $33,333 through November 1995, plus interest
at 2% above the bank's prevailing base rate (as defined) (9%
at March 31, 1995)........................................... $ -- $267,589
Installment loans -- payable in monthly installments of $2,262
and $3,051 in 1996 and 1995, including interest at various
rates, collateralized by various company assets, for periods
through November 1997........................................ 16,694 41,407
Installment agreement payable in monthly installments of $3,500
in 1996 and 1995, including interest at 8%................... 177,266 203,917
-------- --------
193,960 512,913
Less current maturities........................................ 45,554 320,770
-------- --------
$148,406 $192,143
======== ========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
MARCH 31
----------------------------------------------------------
<S> <C>
1997.................................................... $ 45,554
1998.................................................... 31,259
1999.................................................... 33,852
2000.................................................... 36,661
2001.................................................... 39,704
Thereafter.............................................. 6,930
--------
$193,960
========
</TABLE>
(9) ADVANCES FROM STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
At March 31, 1996 and 1995, the Company has been advanced $249,250 and
$310,000, respectively, from its stockholders, which is payable on demand plus
interest at 10%.
On December 16, 1994, Video entered into an agreement to lease video rental
cassettes from a vendor whose parent became a stockholder in December 1994. The
agreement is effective for the period January 1, 1995 to December 31, 2004. The
agreement stipulates that the Company is required to lease a minimum number of
video rental cassettes from the vendor for the purposes of subsequent rental or
sale. Based on rental and sales volume, the Company is required to remit to the
vendor a stipulated percentage of the volume. Based on the agreement, the
Company paid $1,471,234 and $503,247 to the vendor in 1996 and 1995,
respectively.
Based on the terms of the agreement, the Company, at its own option, is
able to terminate the agreement if certain revenue percentage increases are not
achieved in the first twelve month period of the agreement. If the Company
elects to terminate the agreement, the parent of the vendor can require the
Company to reacquire the parent's common shares acquired in December, 1994 at
the same price that the shares were originally issued (see note 11).
The Company also has a consulting agreement with a stockholder. The
agreement calls for annual payments of $42,000 through May 2001. Such amounts
have been present valued at a discount rate of 8% and are included in the
long-term debt in the accompanying balance sheet.
F-57
<PAGE> 138
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME TAXES
As discussed in note 2, the Company adopted Statement 109 effective April
1, 1992. The components of the provision for income tax expense (benefit) as of
March 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal......................................... $400,015 $205,000 $(291,491)
State........................................... 142,213 12,613 4,099
-------- -------- ---------
Total current provision (benefit)....... $542,228 $217,613 $(287,392)
======== ======== =========
</TABLE>
A reconciliation of the Federal income tax rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Income tax expense benefit at statutory rate...... $359,190 $(24,181) $(378,794)
Amortization of goodwill.......................... 11,777 8,046 15,187
Officer's life insurance.......................... 31,280 37,400 23,525
Meals and entertainment........................... 13,600 5,780 5,768
Increase (decrease) in valuation allowance for
Federal deferred tax assets..................... 140,767 229,208 (12,708)
State and local taxes, net of federal benefit..... 93,861 -- --
Other............................................. (108,247) (38,640) 59,630
-------- -------- ---------
$542,228 $217,613 $(287,392)
======== ======== =========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Deferred tax assets:
Accruals for officers' salaries............................. $176,193 $ 156,623
Deferred rent............................................... 397,690 413,938
Net operating loss carryforwards............................ -- 13,665
Allowance for doubtful accounts............................. 27,159 27,159
Other....................................................... 16,681 17,448
-------- ---------
Total gross deferred tax assets.......................... 617,723 628,833
Less valuation allowance.................................... (404,332) (252,637)
-------- ---------
Net deferred tax assets.................................. 213,391 376,196
-------- ---------
Deferred tax liabilities:
Videocassette rental inventory, principally due to
differences in amortization.............................. 96,828 220,891
Accumulated depreciation.................................... 88,329 118,284
Other....................................................... 28,234 37,021
-------- ---------
Total gross deferred tax liability....................... 213,391 376,196
-------- ---------
Net deferred taxes....................................... $ -- $ --
======== =========
</TABLE>
F-58
<PAGE> 139
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Convertible Preferred Stock:
In 1988 the Company authorized and issued 400,000 shares of Series A
Convertible Preferred Stock (Preferred Stock). The total proceeds received by
the Company were $400,000. The Preferred Stock does not pay dividends and the
shareholders are not entitled to any voting privileges. The preferred
shareholders have liquidation preferences senior to the common stockholders and
are entitled to $1 per preferred share upon the occurrence of certain defined
events, including, among other things, a voluntary or involuntary dissolution of
the Company through a merger or consolidation with another party. The Preferred
Stock shareholders also have the option to convert their shares into common
stock upon the occurrence of one of the following events: (i) an initial public
offering of the Company's common stock; (ii) the proposed sale of 30%, or more,
of the Company's common stock or assets; or (iii) that date which is two years
from the sale of the Preferred Stock. The Preferred Stock converts into that
number of common stock shares, ranging from 2% to 4% of the common stock
outstanding immediately prior to the conversion, based upon certain defined
criteria. The Company maintains a reserve of such number of common stock shares
necessary to convert the Preferred Stock at all times. As of March 31, 1995 no
conversion options have been exercised.
Common Stock:
In December 1994 the Company issued replacement shares of common stock to
the then current shareholders. The effect of this action caused the 156,868 then
outstanding common stock shares to be replaced with 180,000 shares. All holders
maintained their proportional ownership share.
On December 16, 1994 the Company executed a Stock Purchase Agreement (the
Agreement) with a private investor (the Investor) whereby the Company sold
10,000 shares of its common stock, representing approximately 5% of the then
outstanding shares of common stock, for total proceeds of $1,000,000. The
Agreement includes an anti-dilution provision that mandates if the Preferred
Stock is converted into common stock the Company will issue that number of
shares of common stock to the Investor that would maintain its proportionate
equity ownership that existed immediately prior to the conversion, at no
additional cost to the Investor. The Company and the Investor also entered into
a registration and piggyback registration agreement related to these shares. In
addition, the Company executed a Right of First Refusal and Co-sale Agreement
(the Co-sale Agreement) that is in effect from the aforementioned date until the
date that the common stock of the Company is registered under the Securities and
Exchange Act of 1934 (the Option Period). The Co-sale Agreement states that if
the Company sells additional shares of its common stock, the Investor shall have
an option to purchase that number of common stock shares sold during the Option
Period that would allow the Investor to maintain its proportionate equity
ownership that existed immediately prior to the common stock sale, at a per
share price equal to those sold. Furthermore, if certain common stock
shareholders propose to transfer their common stock (Proposed Common Shares) to
parties other than the Company or the Investor, the Investor shall have the
option to participate in the proposed transfer on the same terms and conditions
as the certain common stock shareholders and include in the transfer that number
of shares by which the Co-sale agreement allows the Proposed Common Shares to be
reduced.
In December 1994, the Company sold an additional 7,450 shares of its common
stock, representing approximately 4% of the then outstanding shares of common
stock, to individual investors at a price of $100 per share aggregating $745,000
in proceeds to the Company.
(12) COMMITMENTS AND CONTINGENCIES
The Company leases their facilities and certain equipment under operating
leases expiring on various dates through 2005. Several of the leases are
subject to scheduled rental increases based on a defined
F-59
<PAGE> 140
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
formula the effect of which has been reflected in the accompanying consolidated
financial statements. Rental expense for the years ended March 31, 1996 and 1995
aggregated $4,267,443 and $4,373,818, respectively.
Future minimum rental commitments under noncancelable operating leases
(with terms of one year or more) consisted of the following at March 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
--------------------------------------------------------
<S> <C>
1997.................................................. $ 4,262,214
1998.................................................. 4,020,314
1999.................................................. 3,201,377
2000.................................................. 2,247,188
2001.................................................. 1,275,674
Thereafter.............................................. 1,977,648
-----------
$16,984,415
===========
</TABLE>
In addition, the leases provide for escalation clauses for increases in
real estate taxes and building maintenance.
At March 31, 1995, the Company was contingently liable under outstanding
letters of credit in the amount of $15,587, which were being held as additional
security deposits for various store locations. There were no such contingent
liabilities at March 31, 1996.
(13) SUBSEQUENT EVENT
On May 17, 1996 the Company merged with RKT Subsidiary Corp., a
wholly-owned subsidiary of West Coast Video.
F-60
<PAGE> 141
INDEPENDENT AUDITOR'S REPORT
Board of Directors
American Video, Inc. and Red Giraffe Video, Inc.
Louisville, Kentucky
We have audited the accompanying combined balance sheets of American Video,
Inc. and Red Giraffe Video, Inc. as of January 3, 1996, December 28, 1994, and
December 29, 1993, and the related combined statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of American
Video, Inc. and Red Giraffe Video, Inc. as of January 3, 1996, December 28,
1994, and December 29, 1993, and the results of their combined operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
CARPENTER & MOUNTJOY, PSC
Louisville, Kentucky
March 4, 1996
F-61
<PAGE> 142
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
---------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash -- Note J...................................... $ 427,548 $ 56,104 $ 203,676
Accounts receivable -- Note A....................... 58,189 15,662 8,626
Merchandise and supplies inventories --
Notes A and D.................................... 271,201 273,259 217,568
Preopening costs, net -- Note A..................... 44,664 18,846 9,220
Prepaid expenses.................................... 109,586 38,223 19,712
---------- ---------- ----------
Total current assets........................ 911,188 402,094 458,802
Videocassette Rental Inventory, net--
Notes A, D and K.................................... 2,426,242 2,326,304 2,418,550
Furnishings and Equipment, net--
Notes A, B, and D................................... 1,097,457 969,804 1,076,526
Other Assets -- Note C................................ 113,088 112,071 131,907
---------- ---------- ----------
Total....................................... $4,547,975 $3,810,273 $4,085,785
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt -- Note D......... $ 878,064 $ 588,000 $ 588,000
Note payable-stockholders -- Note H................. 113,000 272,961 272,961
Checks written in excess of bank balance............ -- 55,349 --
Accounts payable.................................... 723,416 813,104 457,671
Accrued expenses.................................... 303,397 143,219 205,542
---------- ---------- ----------
Total current liabilities................... 2,017,877 1,872,633 1,524,174
Long-Term Debt--Note D................................ 1,601,144 980,265 1,568,327
Commitments and Contingencies--Notes E and I.......... -- -- --
Stockholders' Equity
Common stock, no par value, 350,000 shares
authorized, 8,398 shares issued and outstanding
4,000 nonvoting shares authorized, 1 share issued
and outstanding.................................. 1,383,459 1,383,459 1,383,459
Common stock, no par value, 350,000 shares
authorized, 8,398 shares issued and
outstanding...................................... 192,000 192,000 192,000
Retained deficit -- Note K.......................... (646,505) (618,084) (582,175)
---------- ---------- ----------
Total stockholders' equity.................. 928,954 957,375 993,284
---------- ---------- ----------
Total....................................... $4,547,975 $3,810,273 $4,085,785
========== ========== ==========
</TABLE>
See notes to combined financial statements
F-62
<PAGE> 143
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER DECEMBER
JANUARY 3, 28, 29,
1996 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Revenues
Video rental......................................... $8,557,200 $ 7,658,130 $ 6,993,357
Product sales........................................ 957,639 615,469 444,434
Royalty fees......................................... 28,689 -- --
---------- ---------- ----------
Total revenue................................ 9,543,528 8,273,599 7,437,791
Cost and Expenses
Store operating expenses............................. 5,279,564 4,462,133 4,174,195
Tape amortization -- Notes A and K................... 2,383,667 2,200,000 1,846,039
Cost of product sales................................ 432,361 267,154 216,201
General and administrative........................... 816,950 649,763 665,072
---------- ---------- ----------
Total cost and expenses...................... 8,912,542 7,579,050 6,901,507
---------- ---------- ----------
Income from operations....................... 630,986 694,549 536,284
Interest Expense....................................... (153,757) (144,396) (164,183)
Other, net............................................. 4,350 17,251 --
---------- ---------- ----------
Income before provision for income taxes..... 481,579 567,404 372,101
Provision for Income Taxes -- Note G................... -- -- --
---------- ---------- ----------
Net Income................................... $ 481,579 $ 567,404 $ 372,101
========== ========== ==========
</TABLE>
See notes to combined financial statements
F-63
<PAGE> 144
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED STOCKHOLDERS'
STOCK DEFICIT EQUITY
---------- ----------- -------------
<S> <C> <C> <C>
Balance at December 30, 1992......................... $1,631,459 $(1,034,199) $ 597,260
Prior period adjustment -- Note K.................. -- 79,923 79,923
Treasury stock purchase............................ (56,000) -- (56,000)
Net income......................................... -- 372,101 372,101
---------- ----------- ---------
Balance at December 29, 1993......................... 1,575,459 (582,175) 993,284
Distributions paid................................. -- (603,313) (603,313)
Net income......................................... -- 567,404 567,404
---------- ----------- ---------
Balance at December 28, 1994......................... 1,575,459 (618,084) 957,375
Distributions paid................................. -- (510,000) (510,000)
Net income......................................... -- 481,579 481,579
---------- ----------- ---------
Balance at January 3, 1996........................... $1,575,459 $ (646,505) $ 928,954
========== =========== =========
</TABLE>
See notes to combined financial statements
F-64
<PAGE> 145
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income........................................ $ 481,579 $ 567,404 $ 372,101
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of videocassette rental
inventory.................................... 2,383,667 2,200,000 1,846,039
Depreciation and amortization.................. 402,519 501,566 514,222
Loss on write off of assets.................... -- -- 33,261
Change in assets and liabilities
Accounts receivable.......................... (42,527) (7,036) (4,655)
Merchandise and supplies inventories......... 2,058 (55,688) (57,926)
Prepaid expenses and other assets............ (168,758) (28,303) 22,955
Bank overdraft............................... (55,349) 55,349 --
Accounts payable............................. (89,688) 355,432 (156,075)
Accrued expenses............................. 160,178 (62,323) (150,279)
----------- ----------- -----------
Net cash provided by operating
activities.............................. 3,073,679 3,526,401 2,419,643
Cash Flows From Investing Activities
Purchase of property and equipment................ (459,613) (374,843) (165,779)
Purchase of videocassette rental inventory........ (2,483,605) (2,107,755) (1,668,824)
----------- ----------- -----------
Net cash used by investing activities..... (2,943,218) (2,482,598) (1,834,603)
Cash Flows From Financing Activities
Borrowings from bank.............................. 1,450,000 -- --
Repayment of long-term debt....................... (539,056) (588,062) (588,061)
Stockholder loans................................. 113,000 -- 113,000
Repayment of stockholder loans.................... (272,961) -- --
Distributions paid................................ (510,000) (603,313) --
Treasury stock purchase........................... -- -- (56,000)
----------- ----------- -----------
Net cash provided (used) by financing
activities.............................. 240,983 (1,191,375) (531,061)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents....................................... 371,444 (147,572) 53,979
Cash and Cash Equivalents, Beginning of the Year.... 56,104 203,676 149,697
----------- ----------- -----------
Cash and Cash Equivalents, End of the Year.......... $ 427,548 $ 56,104 $ 203,676
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest.......... $ 149,947 $ 148,024 $ 231,587
=========== =========== ===========
Supplemental Disclosure of Noncash Investing and
financing activities:
Stockholder notes payable contributed to
capital........................................ $ -- $ -- $ 374,400
=========== =========== ===========
</TABLE>
See notes to combined financial statements
F-65
<PAGE> 146
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JANUARY 3, 1996, DECEMBER 28, 1994 AND DECEMBER 29, 1993
NOTE A -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Red Giraffe Video, Inc. an Indiana corporation,
operates as a franchisor of video tape rental and sale superstores. Red Giraffe
Video, Inc. had 28 franchised stores as of January 3, 1996. American Video, Inc.
d/b/a Red Giraffe, a Kentucky corporation, operates as franchisee of Red Giraffe
Video, Inc. American Video, Inc. had 25 stores in operation at January 3, 1996.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Revenue Recognition: Revenue is recognized at the time of rental or sales
of videocassettes or video games.
Intercompany Accounts and Transactions: All intercompany accounts and
transactions have been eliminated in combination.
Fiscal Year: American Video, Inc. has a fiscal year which ends on the
Wednesday closest to December 31. Red Giraffe Video, Inc. has a fiscal year
which ends on December 31. Red Giraffe Video, Inc. had no financial activity on
December 31 to the Wednesday closest to December 31, therefore, all results
reflect the year-end date of American Video, Inc.
Accounts Receivable: American Video, Inc. and Red Giraffe Video, Inc.
consider accounts receivable to be fully collectible and as such, no allowance
for doubtful accounts has been recorded. Any accounts determined to be
uncollectible will be charged to operations when that determination is made.
Merchandise and Supply Inventories: Merchandise and supply inventories
consist primarily of pre-recorded and blank videocassette tapes held for sale
and are stated at the lower of cost (first-in, first-out method) or market.
Preopening Costs: Preopening costs consist of costs incurred in opening a
store, and are amortized over twelve months from the store opening.
Video Rental Tapes: Videocassette rental inventory, which includes video
games, is stated at cost and is amortized over its estimated economic life with
no provision for salvage value. Videocassettes that are considered base stock
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies of each
title maintained in each store are amortized as base stock and the fourth and
succeeding copies of each title maintained in each store are amortized over nine
months on a straight-line basis (see Note K). The Company believes that its
method of amortization results in an appropriate matching of tape amortization
expense with the revenue received from the associated rental of such tapes.
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER DECEMBER
JANUARY 3, 28, 29,
1996 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Videocassette rental inventory.............. $ 7,496,600 $ 6,134,935 $ 5,327,648
Accumulated amortization.................... (5,070,358) (3,808,631) (2,909,098)
----------- ----------- -----------
$ 2,426,242 $ 2,326,304 $ 2,418,550
=========== =========== ===========
</TABLE>
Equipment and Improvements: Equipment and improvements are recorded at
cost. Depreciation of equipment is provided using the straight-line depreciation
method over five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the useful lives of the related assets
or lease term, including the option period, if management intends to renew the
lease.
F-66
<PAGE> 147
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER DECEMBER
JANUARY 3, 28, 29,
1996 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Office and store equipment.................. $ 3,142,993 $ 2,755,209 $ 2,418,402
Leasehold improvements...................... 781,662 722,840 716,625
Rental equipment............................ 70,963 57,997 56,443
----------- ----------- -----------
Total............................. 3,995,618 3,536,046 3,191,470
Less accumulated depreciation and
amortization.............................. (2,898,161) (2,566,242) (2,114,944)
----------- ----------- -----------
Net equipment and improvements.............. $ 1,097,457 $ 969,804 $ 1,076,526
=========== =========== ===========
</TABLE>
NOTE C -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY
3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
--------- ------------ ------------
<S> <C> <C> <C>
Security deposits............................... $ 62,000 $ 51,277 $ 37,915
Loan fees....................................... 17,852 9,577 22,339
Franchisee organizational materials............. 33,236 51,217 71,653
-------- -------- --------
Total................................. $ 113,088 $112,071 $131,907
======== ======== ========
</TABLE>
Loan fees are amortized over the life of the loan. Franchisee
organizational materials are amortized over five years.
NOTE D -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is payable to a bank in monthly installments on principal
plus interest through October 30, 2000. Interest is computed at the prime rate
plus 1/2% (effective rate of 9.0% at January 3, 1996). The borrowings are
secured by all video rental tapes, equipment and improvements, merchandise
inventories and the personal guarantees of certain stockholders.
Aggregate annual principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------
<S> <C>
January 1, 1997........................................................ $ 878,064
December 31, 1997...................................................... 731,144
December 30, 1998...................................................... 290,000
December 29, 1999...................................................... 290,000
January 3, 2001........................................................ 290,000
----------
Total........................................................ $2,479,208
==========
</TABLE>
F-67
<PAGE> 148
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- COMMITMENTS
The Company occupies stores, warehouse and office facilities under
noncancelable operating leases which expire at various dates through 2000. Many
of the operating lease agreements have options for renewal for terms that range
up to fifteen years. Future annual minimum payments under leases with terms in
excess of one year are:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------
<S> <C>
January 1, 1997........................................................ $1,252,730
December 31, 1997...................................................... 1,060,213
December 30, 1998...................................................... 800,052
December 29, 1999...................................................... 579,885
January 3, 2001........................................................ 316,885
----------
Total........................................................ $4,009,765
==========
</TABLE>
Rent expense under these leases amounted to $1,385,461, $1,190,783 and
$997,495, for the years ending January 3, 1996, December 28, 1994, and December
29, 1993, respectively.
These minimum payments do not include amounts payable for related common
areas, real estate taxes, repairs and maintenance, utilities and other such
charges. Three of the leases provide for additional contingent rentals based
upon sales in excess of a predetermined amount. No such percentage rentals were
paid or accruable for the year ended January 3, 1996.
Substantially all of the leases are renewable at increased rates based upon
the Consumer Price Index. Certain of the leases are guaranteed by certain
stockholders.
NOTE F -- RELATED PARTY TRANSACTIONS
American Video, Inc. and Red Giraffe Video, Inc. are related companies
through common ownership of both companies. Furthermore, American Video, Inc. is
a franchisee of Red Giraffe Video, Inc. Royalties paid by American Video, Inc.
amounted to $285,451, $247,384 and $227,665 for the years ended January 3, 1996,
December 28, 1994 and December 29, 1993, respectively. All of these balances
were eliminated in these combined financial statements.
NOTE G -- INCOME TAXES
The Companies have elected S corporation status under the Internal Revenue
Code of 1986 and as such, no provision has been made for income taxes. Taxes on
the net income of each Company is the responsibility of the stockholders.
Although, local income taxes are payable by the Company, no accrual has been
made as this amount is considered immaterial at January 3, 1996.
NOTE H -- NOTES PAYABLE TO STOCKHOLDERS
At January 3, 1996, American Video, Inc. had notes payable to two
stockholders totaling $113,000. The notes are payable on demand with interest
accruing at 9.5%. At December 29, 1993 and December 28, 1994, American Video,
Inc. had notes payable to two stockholders totaling $272,961. The notes were
payable on demand and had a stated interest at 10% and 8%, respectively.
NOTE I -- SUBSEQUENT EVENT
The stockholders of American Video, Inc. and Red Giraffe Video, Inc. have
entered into an agreement to sell substantially all of the assets and
liabilities of the Companies to an unrelated third party subject to terms
F-68
<PAGE> 149
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and obligations to perform acts within a specified period of time. Pursuant to
the completion of the sale, the Companies will pay a portion of the proceeds to
certain members of its management. No provision has been made in these financial
statements as a result of the sale or any payments which may be made to
management.
NOTE J -- CONCENTRATION OF CREDIT RISK
The Companies maintain cash at several financial institutions. Balances at
the institutions are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. At January 3, 1996, the Companies uninsured cash balance was
approximately $250,000.
NOTE K -- CHANGE IN ACCOUNTING FOR VIDEOCASSETTE RENTAL INVENTORY
Related to the initial public offering of West Coast Entertainment
Corporation, the Company has changed its method of videocassette tape
amortization to more closely resemble the methods used by other video store
chains.
The effect on net income for each of the years presented is as follows:
<TABLE>
<CAPTION>
INCREASE
YEAR ENDED (DECREASE)
----------------------------------------------------------------------- ---------
<S> <C>
January 3, 1996........................................................ $(450,330)
December 28, 1994...................................................... $(553,186)
December 29, 1993...................................................... $(516,062)
</TABLE>
The cumulative effect on years prior to 1993 was an increase in retained
earnings of $79,923.
F-69
<PAGE> 150
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
COMBINED BALANCE SHEET (UNAUDITED)
APRIL 3, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash........................................................................... $ 129,566
Accounts receivable............................................................ 52,903
Merchandise and supplies inventories........................................... 270,929
Preopening costs, net.......................................................... 60,780
Prepaid expenses............................................................... 99,438
----------
Total current assets................................................... 613,616
Videocassette Rental Inventory, net--Note B.................................... 2,579,088
Furnishings and Equipment, net................................................. 1,240,907
Other assets................................................................... 123,395
----------
Total.................................................................. $4,557,006
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.............................................. $ 922,664
Note payable-stockholders...................................................... 140,500
Accounts payable............................................................... 682,810
Accrued expenses............................................................... 223,084
----------
Total current liabilities.............................................. 1,969,058
Long-Term Debt................................................................... 1,629,529
----------
Total liabilities...................................................... 3,598,587
Stockholders' Equity
American Video, Inc.--Common stock, no par value, 350,000 shares authorized,
8,398 shares issued and outstanding; 4,000 nonvoting shares authorized, 1
share issued and outstanding................................................ 1,383,459
Red Giraffe Video, Inc.--Common stock, no par value, 350,000 shares authorized,
8,398 shares issued and outstanding......................................... 192,000
Retained deficit............................................................... (617,040)
----------
Total stockholders' equity............................................. 958,419
----------
Total.................................................................. $4,557,006
==========
</TABLE>
See accountant's review report and notes to the financial statements.
F-70
<PAGE> 151
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
---------------------
APRIL 3 MARCH 29
1996 1995
--------- ---------
<S> <C> <C>
REVENUES
Video rental........................................................ $2,351,653 $2,196,661
Product sales....................................................... 220,698 215,385
Royalty fees........................................................ 8,434 --
--------- ---------
TOTAL REVENUE.................................................... 2,580,785 2,412,046
COST AND EXPENSES
Store operating expenses............................................ 1,458,531 1,159,874
Tape amortization................................................... 637,964 595,917
Cost of product sales............................................... 170,882 157,428
General and administrative.......................................... 199,053 153,321
--------- ---------
TOTAL COST AND EXPENSES.......................................... 2,466,430 2,066,540
--------- ---------
INCOME FROM OPERATIONS........................................... 114,355 345,506
INTEREST EXPENSE...................................................... (51,959) (36,386)
OTHER, NET............................................................ 1,050 (2,637)
--------- ---------
NET INCOME....................................................... 63,446 306,483
========= =========
</TABLE>
See accountant's review report and notes to the financial statements.
F-71
<PAGE> 152
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
COMBINED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------
APRIL 3 MARCH 29
1996 1995
----------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss).............................................. $ 63,446 $ 306,483
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of videocassette rental inventory.............. 637,964 595,917
Depreciation and amortization............................... 93,811 100,482
Changes in assets and liabilities
Accounts receivable....................................... 21,786 (66,747)
Merchandise and supplies inventories...................... 272 17,633
Prepaid expenses and other assets......................... (32,167) (46,735)
Cash overdraft............................................ -- (55,349)
Accounts payable.......................................... (40,606) (136,265)
Accrued expenses.......................................... (80,313) 26,646
----------- ---------
Net cash provided by operating activities.............. 664,193 742,065
Cash Flows From Investing Activities
Purchase of furnishings and equipment.......................... (221,309) (126,633)
Purchases of videocassette rental inventory.................... (790,870) (468,489)
----------- ---------
Net cash used by investing activities.................. (1,012,179) (595,122)
----------- ---------
Cash Flows From Financing Activities
Borrowings from bank........................................... 377,500 --
Repayment of long-term debt.................................... (304,515) (147,015)
Stockholder loans.............................................. 27,500 --
Distributions Paid............................................. (33,981) --
Related company loans.......................................... (16,500) --
----------- ---------
Net cash provided (used) by financing activities....... 50,004 (147,015)
Net Decrease in Cash and Cash Equivalents........................ $ (297,982) $ (72)
Cash, Beginning of Period........................................ 427,548 56,104
----------- ---------
Cash, End of Period.............................................. $ 129,566 $ 56,032
=========== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest....................... $ 51,959 $ 56,032
=========== =========
</TABLE>
See accountant's review report and notes to the financial statements.
F-72
<PAGE> 153
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 3, 1996 AND MARCH 29, 1995
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been presented in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Companies' audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended April 3, 1996 and March 29, 1995, are not
necessarily indicative of the results to be expected for the full year.
NOTE B -- VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
<CAPTION>
APRIL 3,
1996
-----------
<S> <C>
Videocassette rental inventory................................. $ 8,287,470
Accumulated amortization....................................... (5,708,382)
-----------
$ 2,579,088
==========
</TABLE>
NOTE C -- SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-73
<PAGE> 154
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lancaster Group, Inc.:
We have audited the accompanying balance sheets of Lancaster Group, Inc. as
of December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lancaster Group, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in note 2 to the financial statements, in 1994 the Company
changed its method of accounting for videocassettes and games.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 23, 1996
F-74
<PAGE> 155
LANCASTER GROUP, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 81,894 $ 66,896
Merchandise inventories............................................ 10,833 25,632
Other.............................................................. 164 29,999
--------- ---------
Total current assets....................................... 92,891 122,527
Videocassette and game rental inventory, net of amortization (note
2)................................................................. 142,603 182,455
Property and equipment, net (note 3)................................. 354,295 461,064
--------- ---------
$ 589,789 $ 766,046
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt (note 4).................... $ 134,867 $ 127,607
Accounts payable................................................... 58,542 102,690
Accrued expenses................................................... 48,971 12,127
Liquidating dividends payable...................................... 1,200 --
--------- ---------
Total current liabilities.................................. 243,580 242,424
Long-term debt less current installments (note 4).................... 358,232 493,099
--------- ---------
Total liabilities.......................................... 601,812 735,523
Stockholders' equity (deficit):
Common stock, no par value; 3,000 shares authorized; 2,000 shares
issued and outstanding.......................................... 435,635 435,635
Capital repayment.................................................. (48,869) --
Accumulated deficit................................................ (398,789) (405,112)
--------- ---------
Net stockholders' equity (deficit)......................... (12,023) 30,523
--------- ---------
$ 589,789 $ 766,046
========= =========
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE> 156
LANCASTER GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Rentals revenues..................................... $1,238,809 $1,193,540 $ 523,197
Merchandise sales.................................... 189,018 130,309 65,449
---------- ---------- ---------
1,427,827 1,323,849 588,646
---------- ---------- ---------
Operating costs and expenses:
Store operating expenses............................. 782,957 721,029 419,493
Amortization of videocassette and game rental
inventory......................................... 289,978 298,849 119,046
Cost of sales........................................ 178,529 101,055 69,988
General and administrative expenses.................. 137,734 52,136 62,771
---------- ---------- ---------
1,389,198 1,173,069 671,298
---------- ---------- ---------
Operating income (loss).............................. 38,629 150,780 (82,652)
Other expenses:
Interest............................................. 32,306 25,200 18,827
---------- ---------- ---------
Net income (loss)...................................... $ 6,323 $ 125,580 $(101,479)
========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE> 157
LANCASTER GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
TOTAL
COMMON CAPITAL ACCUMULATED STOCKHOLDERS'
STOCK REPAYMENT DEFICIT EQUITY (DEFICIT)
-------- --------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 (unaudited)... $ 13,101 $ -- $(429,213) $ (416,112)
Conversion of debt to equity............. 422,534 -- -- 422,534
Net loss................................. -- -- (101,479) (101,479)
-------- ------- -------- --------
Balance at December 31, 1993............... 435,635 -- (530,692) (95,057)
Net income............................... -- -- 125,580 125,580
-------- ------- -------- --------
Balance at December 31, 1994............... 435,635 -- (405,112) 30,523
Net income............................... -- -- 6,323 6,323
Liquidating dividends.................... -- (48,869) -- (48,869)
-------- ------- -------- --------
Balance at December 31, 1995............... $435,635 $ (48,869) $(398,789) $ (12,023)
======== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE> 158
LANCASTER GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 6,323 $125,580 $(101,479)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 423,763 412,308 151,790
Loss on sale of equipment........................... 2,073 -- --
Transfer of equipment to officer in lieu of
salary............................................ 14,000 -- --
Change in assets and liabilities:
(Increase) decrease in merchandise inventories.... 14,799 (11,321) (11,218)
(Increase) decrease in other assets............... 29,835 1,376 (30,675)
Increase (decrease) in accounts payable........... (44,148) (1,615) 98,507
Increase in accrued expenses...................... 36,844 3,387 2,241
-------- -------- ---------
Total adjustments.............................. 477,166 404,135 210,645
-------- -------- ---------
Net cash provided by operating activities...... 483,489 529,715 109,166
-------- -------- ---------
Cash flows from investing activities:
Purchases of videocassette rental inventory, net....... (250,126) (405,833) (180,306)
Purchases of equipment................................. (43,089) (240,537) (127,859)
-------- -------- ---------
Net cash used in investing activities.......... (293,215) (646,370) (308,165)
-------- -------- ---------
Cash flows from financing activities:
Repayment of notes payable............................. (127,607) (72,000) --
Liquidating dividends paid............................. (47,669) -- --
Proceeds from note payable............................. -- 224,286 215,233
-------- -------- ---------
Net cash provided by (used in) financing
activities................................... (175,276) 152,286 215,233
-------- -------- ---------
Net increase in cash........................... 14,998 35,631 16,234
Cash at beginning of year................................ 66,896 31,265 15,031
-------- -------- ---------
Cash at end of year...................................... $ 81,894 $ 66,896 $ 31,265
======== ======== =========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest............................................ $ 32,355 $ 22,325 $ --
======== ======== =========
Noncash conversion of debt and accrued interest to
equity................................................. $ -- $ -- $ 422,534
======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE> 159
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. THE COMPANY
Lancaster Group, Inc., a Kentucky corporation, owns and operates video
specialty stores located in Southern Indiana and Louisville, Kentucky. As of
December 31, 1995 and 1994, the Company operated three stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merchandise Inventory
Merchandise inventory consisting primarily of prerecorded videocassettes,
video games, and candy, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Videocassette and Game Rental Inventory
Videocassette and game rental inventory, which includes video games, is
recorded at cost, and amortized over their estimated economic life with no
provision for salvage value. For the period from January 1, 1993 through
December 31, 1993 videocassettes and games were amortized over 36 months on an
accelerated basis. Effective January 1, 1994, the Company changed its method of
amortization. Videocassettes which are considered base stock are amortized over
36 months on a straight-line basis. Purchases of new release videocassettes and
video games are amortized whereby the tenth and any succeeding copies of each
title per store are amortized over nine months on an accelerated basis; the
fourth through ninth copies of each title per store are amortized over 36 months
on an accelerated basis; and copies one through three of each title per store
are amortized as base stock. The adoption of this change in the method of
amortization decreased net income for the years ended December 31, 1995 and 1994
by approximately $4,200 and $13,500, respectively. The Company believes that its
method of amortization results in an appropriate matching of tape amortization
expense with the revenue received from the associated rental of such tapes.
Amortization expense related to videocassette rental inventory totaled
$289,978, $298,849 and $119,046 and for the years ended December 31, 1995, 1994
and 1993, respectively.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Furniture and fixtures................... 5 years
Equipment................................ 5 years
Leasehold improvements and signs......... Shorter of estimated useful life or lease
term
</TABLE>
Revenue Recognition
Revenue is recognized at the time of rental or sale.
Income Taxes
The Company's shareholders have elected "S" Corporation status for income
tax purposes. An "S" Corporation is generally not taxed at the federal or state
level on the Company's taxable income. The distributive share of taxable income,
certain gains, losses and other items are passed through to each shareholder.
Accordingly, there is no provision for federal and state income taxes. The
Company does provide for various local municipality income taxes, which are
classified as general and administrative expenses in the accompanying statements
of operations.
F-79
<PAGE> 160
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 483,826 $ 501,692
Equipment.................................................... 8,315 7,796
Leasehold improvements and signs............................. 169,594 137,820
--------- ---------
661,735 647,308
Accumulated depreciation..................................... (307,440) (186,244)
--------- ---------
$ 354,295 $ 461,064
========= =========
</TABLE>
4. LONG-TERM DEBT
Long-term debt as of December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Notes payable to former shareholders due 11-1-99, bearing
interest at 4.98% -- 6.87%, secured by substantially all
assets of the Company........................................ $493,099 $620,706
Less current installments.................................... 134,867 127,607
-------- --------
Long-term debt less current installments............. $358,232 $493,099
======== ========
</TABLE>
Total maturities of long-term debt for the five years subsequent to
December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................. $134,867
1997.............................................. 142,550
1998.............................................. 150,683
1999.............................................. 64,999
--------
$493,099
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
leases expiring on various dates through 1999. Rental expense for the years
ended December 31, 1995, 1994, and 1993, aggregated $165,568, $149,300, and
$112,246, respectively.
F-80
<PAGE> 161
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental commitments under noncancelable operating leases
(with terms of one year or more) consisted of the following at December 31,
1995:
<TABLE>
<S> <C>
1996.............................................. $165,927
1997.............................................. 103,509
1998.............................................. 57,175
1999.............................................. 12,000
</TABLE>
6. RELATED PARTY
The Company rents office space and certain office equipment from an officer
and shareholder of the Company. Rent expense paid to this person was $3,600,
$3,600 and $3,400 for the years ended December 31, 1995, 1994 and 1993,
respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995, the carrying amounts of cash, accounts payable and
accrued expenses approximate fair value because of the short-term maturity of
these instruments.
It is not practical to estimate the fair value of the notes payable to
former shareholders as these related party transactions were not made at market
rates.
8. SALE AGREEMENT
On January 10, 1996, the Company's shareholders agreed to sell the Company
to West Coast Entertainment Corporation.
F-81
<PAGE> 162
LANCASTER GROUP, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------
<S> <C>
ASSETS
Current assets:
Cash................................................................... $ 57,333
Merchandise inventories................................................ 16,516
Other.................................................................. 1,960
---------------
Total current assets................................................ 75,809
Videocassette and game rental inventory, net of amortization............. 148,822
Property and equipment, net.............................................. 326,325
---------------
$ 550,956
===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt................................. $ 136,747
Accounts payable....................................................... 55,134
Accrued expenses....................................................... 51,619
---------------
Total current liabilities........................................... 243,500
Long-term debt less current installments................................. 323,332
---------------
Total liabilities................................................... 566,832
Stockholders' equity (deficit)
Common stock, no par value: 3,000 shares authorized; 2,000 shares
issued and outstanding.............................................. 435,635
Capital repayment........................................................ (53,869)
Accumulated deficit...................................................... (397,642)
---------------
Net Stockholders' equity (deficit).................................. (15,876)
---------------
$ 550,956
===============
</TABLE>
See accompanying notes to financial statements
F-82
<PAGE> 163
LANCASTER GROUP, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues:
Rental revenue..................................................... $339,838 $309,875
Merchandise sales.................................................. 53,625 46,943
-------- --------
393,463 356,818
-------- --------
Operating costs and expenses:
Store operating expenses........................................... 196,007 205,853
Amortization of videocassette and game rental inventory............ 80,221 66,130
Cost of sales...................................................... 40,811 37,409
General and administrative expenses................................ 49,036 39,308
-------- --------
366,075 348,700
-------- --------
Operating income................................................... 27,388 8,118
Other expenses:
Interest........................................................... (7,142) (6,971)
-------- --------
Net income........................................................... $ 20,246 $ 1,147
======== ========
</TABLE>
See accompanying notes to financial statements
F-83
<PAGE> 164
LANCASTER GROUP, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 20,246 $ 1,147
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................. 109,153 95,747
Change in assets and liabilities:
(Increase) decrease in merchandise inventories.............. 6,717 (5,683)
(Increase) in other assets.................................. (10,834) (2,997)
(Decrease) in accounts payable.............................. (90,097) (3,408)
Increase in accrued expenses................................ 54,369 2,648
-------- --------
Total adjustments........................................ 69,308 86,307
-------- --------
Net cash provided by operating activities................ 89,554 87,454
-------- --------
Cash flows provided from investing activities:
Purchases of videocassette rental inventory, net.............. (28,789) (72,349)
Purchases of equipment........................................ (26,317) (1,647)
-------- --------
Net cash used in investing activities.................... (55,106) (73,996)
-------- --------
Cash flows provided from financing activities:
Repayment of notes payable.................................... (33,019) (33,019)
Liquidating dividends paid.................................... -- (5,000)
-------- --------
Net cash used in investing activities.................... (33,019) (38,019)
-------- --------
Net increase (decrease) in cash.......................... 1,429 (24,561)
Cash at beginning of period........................................ 66,896 81,894
-------- --------
Cash at end of period.............................................. $ 68,325 $ 57,333
======== ========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest........................ $ 7,142 $ 6,971
======== ========
</TABLE>
See accompanying notes to financial statements
F-84
<PAGE> 165
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................ $ 794,779
Accumulated amortization...................................... (645,957)
--------------
$ 148,882
===========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996 the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-85
<PAGE> 166
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of New Age Entertainment, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of New Age Entertainment, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 2, 1996
F-86
<PAGE> 167
NEW AGE ENTERTAINMENT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,231 $ 79,831
Merchandise inventory..................................... 57,796 78,185
Prepaid expenses and other assets......................... 6,435 4,397
---------- ----------
94,462 162,413
Videocassette rental inventory, net......................... 599,695 822,508
Furnishings and equipment, net.............................. 207,210 564,346
Other assets................................................ 105,971 100,399
---------- ----------
$1,007,338 $1,649,666
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 95,872 $ 114,653
Current portion of obligations under capital leases....... 12,500 28,994
Trade accounts payable.................................... 206,357 490,520
Accruals and other liabilities............................ 179,323 248,408
Advances from stockholders................................ 42,390 38,572
---------- ----------
Total current liabilities......................... 536,442 921,147
---------- ----------
Long-term debt.............................................. 84,120 370,415
Obligations under capital leases............................ 25,000 38,615
---------- ----------
645,562 1,330,177
---------- ----------
Commitments (Note 10)
Stockholders' equity:
Common stock, no par value, 15,000 shares authorized, 600
shares issued and outstanding at December 31, 1993 and
1994, 1,000 shares issued and outstanding at December
31, 1995............................................... -- --
Additional paid-in capital................................ 600 40,600
Loan to stockholder....................................... -- (39,407)
Retained earnings......................................... 361,176 318,296
---------- ----------
Total stockholders' equity........................ 361,776 319,489
---------- ----------
$1,007,338 $1,649,666
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-87
<PAGE> 168
NEW AGE ENTERTAINMENT, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental revenue............................... $2,533,663 $3,018,277 $3,592,222
Merchandise sales............................ 322,134 384,899 404,909
---------- ---------- ----------
2,855,797 3,403,176 3,997,131
---------- ---------- ----------
Cost and expenses:
Operating expenses........................... 2,501,635 2,978,185 3,539,512
Cost of sales................................ 90,036 95,994 154,959
General and administrative................... 129,019 209,254 290,300
---------- ---------- ----------
2,720,690 3,283,433 3,984,771
---------- ---------- ----------
Income from operations............... 135,107 119,743 12,360
Interest expense............................... 22,980 20,008 55,240
Other, net..................................... 356 2,331 --
---------- ---------- ----------
Net income (loss).................... $ 111,771 $ 97,404 $ (42,880)
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-88
<PAGE> 169
NEW AGE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 111,771 $ 97,404 $ (42,880)
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental
inventory.................................... 891,813 1,198,881 1,430,131
Amortization of franchise fees................. 4,667 4,667 4,667
Depreciation and amortization of furnishings
and equipment................................ 34,562 50,468 98,664
Loss on disposal of fixed assets............... -- 2,250 --
Changes in assets and liabilities:
Merchandise inventories...................... -- -- (20,389)
Prepaid expenses and other assets............ 54,186 (31,543) 2,943
Accounts payable............................. 71,711 49,685 284,163
Accruals and other liabilities............... 17,531 48,562 69,085
----------- ----------- -----------
Net cash provided by operating
activities.............................. 1,186,241 1,420,374 1,826,384
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............... (91,725) (8,800) (406,319)
Purchases of videocassette rental inventory....... (1,017,122) (1,296,378) (1,652,944)
----------- ----------- -----------
Net cash used in investing activities..... (1,108,847) (1,305,178) (2,059,263)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt...................... 33,698 158,309 391,689
Loans from stockholders........................... 10,000 -- 34,500
Repayment of long-term debt....................... (90,739) (126,914) (86,613)
Repayment of stockholder loans.................... (19,573) (69,840) (38,318)
Principal repayments on capital lease
obligations.................................... -- (12,500) (19,372)
Repayment of principal on note receivable......... -- -- 593
Distributions..................................... -- (57,987) --
----------- ----------- -----------
Net cash (used in) provided by financing
activities.............................. (66,614) (108,932) 282,479
----------- ----------- -----------
Net increase in cash and cash equivalents........... 10,780 6,264 49,600
----------- ----------- -----------
Cash and cash equivalents, beginning of period...... 13,187 23,967 30,231
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 23,967 $ 30,231 $ 79,831
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......... $ 19,830 $ 23,158 $ 55,240
=========== =========== ===========
Supplemental disclosure of noncash investing and
financing activities:
Fixed assets purchased under capital leases....... $ 50,000 $ -- $ 49,481
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-89
<PAGE> 170
NEW AGE ENTERTAINMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... -- $ 600 $209,988 $ 210,588
Net income.................................... -- -- 111,771 111,771
------ ------- -------- --------
Balance at December 31, 1993.................. -- 600 321,759 322,359
Distributions................................. -- -- (57,987) (57,987)
Net income.................................... -- -- 97,404 97,404
------ ------- -------- --------
Balance at December 31, 1994.................. -- 600 361,176 361,776
Issuance of shares............................ -- 40,000 -- 40,000
Net loss...................................... -- -- (42,880) (42,880)
------ ------- -------- --------
Balance at December 31, 1995.................. -- $ 40,600 $318,296 $ 358,896
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-90
<PAGE> 171
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
New Age Entertainment, Inc. (the "Company") owns and operates eight
videocassette rental stores, located in Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 4 to 10 years) of leased items using the straight-line method. Repair
and maintenance costs are expensed as incurred.
Income Taxes
The Company has elected to be treated as a Subchapter S corporation for
income tax purposes. Accordingly, the income of the Company is taxed at the
shareholder level and no provision for income taxes has been made in the
accompanying financial statements.
F-91
<PAGE> 172
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Videocassette rental inventory.............................. $1,195,153 $1,663,708
Accumulated amortization.................................... (595,458) (841,200)
---------- ----------
$ 599,695 $ 822,508
========== ==========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$891,813, $1,198,881, and $1,430,131 for the years ended December 31, 1993,
1994, and 1995, respectively.
4. FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 161,896 $ 289,381
Equipment and vehicles....................................... 101,326 111,180
Leasehold improvements....................................... 45,433 363,894
--------- ---------
308,655 764,455
Accumulated depreciation and amortization.................... (101,445) (200,109)
--------- ---------
$ 207,210 $ 564,346
========= =========
</TABLE>
Depreciation and amortization expense was $34,562, $50,468, and $98,664 for
the years ended December 31, 1993, 1994, and 1995, respectively.
The Company has $37,500 and $67,609 as of December 31, 1994 and 1995,
respectively, of furnishing and equipment under capital leases. Accumulated
amortization on these assets was $12,500 and $31,872 at December 31, 1994 and
1995, respectively. Amortization on the leased assets included in the
depreciation charge was $12,500 and $19,372 in the years ended December 31, 1994
and 1995, respectively.
5. OTHER LONG TERM ASSETS
Other long term assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Lease deposits................................................. $ 66,957 $ 68,384
Franchise fees, net............................................ 30,930 26,264
Prepaid software lease deposit, net............................ 8,000 5,667
Other.......................................................... 84 84
-------- --------
$105,971 $100,399
======== ========
</TABLE>
Franchise fees are amortized over the life of the franchise. Amortization
expense was $4,667 in each of the years ended December 31, 1993, 1994, and 1995.
Prepaid software deposit is amortized over the life of the lease.
Amortization expense was $333 for the year ended December 31, 1993 and $2,000
for the years ended December 31, 1994 and 1995, respectively.
F-92
<PAGE> 173
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUALS AND OTHER LIABILITIES
Accruals and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Accrued rent................................................... $ 73,273 $ 99,323
Accrued bonus.................................................. -- 22,658
Accrued payroll................................................ 35,478 19,625
Sales tax payable.............................................. 7,394 13,946
Accrued consultancy fees....................................... 25,000 --
Other.......................................................... 38,178 92,856
-------- --------
$179,323 $248,408
======== ========
</TABLE>
7. ADVANCES FROM STOCKHOLDER
Advances from stockholders are unsecured and have no fixed repayment date
other than those advances governed by agreements. All stockholder notes are due
to be paid in full by the end of 1997. The advances bear interest at rates of
interest ranging from 8.5% to 11.0%.
8. LOAN TO STOCKHOLDER
The loan to stockholder represents a loan for the purchase of shares in the
company. The loan bears interest at 10% and is repayable quarterly with the last
installment due in October 2005.
9. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
-------- ---------
<S> <C> <C>
Note Payable.................................................. $158,311 $ 467,590
Auto loan..................................................... 21,681 17,478
-------- ---------
179,992 485,068
Less: Current portion......................................... (95,872) (114,653)
-------- ---------
$ 84,120 $ 370,415
======== =========
</TABLE>
Principal due on long-term debt for each of the years following December
31, 1995 is as follows:
<TABLE>
<S> <C>
1996...................................................... $114,653
1997...................................................... 122,825
1998...................................................... 110,000
1999...................................................... 110,000
2000...................................................... 27,590
Thereafter................................................ --
--------
$485,068
========
</TABLE>
In November 1994, the Company signed a $158,311 note to finance the opening
of a new store. In February 1995, the Company renegotiated the outstanding note
payable and borrowed an additional $391,689.
F-93
<PAGE> 174
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The note is secured by the Company's current assets, and is repayable in equal
monthly installment until March 30, 2000. Interest is calculated on the loan at
2% over the prime rate of interest.
In April 1993, the Company purchased a vehicle under a $27,798 loan
agreement with a bank. The loan is secured by the vehicle purchased and is
repayable in 48 equal monthly installments. Interest on the loan is calculated
at 10.25%.
10. LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
2001. In addition, the Company leases computer and office equipment under
capital lease arrangements. Minimum future rental payments under these leases as
of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
----------- -------- ----------
<S> <C> <C>
1996....................................................... $ 36,159 $ 490,915
1997....................................................... 36,159 462,168
1998....................................................... 12,236 396,048
1999....................................................... -- 304,980
2000....................................................... -- 143,360
Thereafter................................................. -- 432,360
-------- ----------
Future minimum payments...................................... 84,554 $2,229,831
=========
Less amount representing interest............................ (16,945)
--------
Present value of future minimum lease payments, including
current portion of $28,994................................. $ 67,609
========
</TABLE>
Rent expense totalled approximately $397,644, $458,182, and $531,370 for
the years ended December 31, 1993, 1994, and 1995, respectively.
11. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-94
<PAGE> 175
NEW AGE ENTERTAINMENT, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 51,989
Merchandise inventory........................................................ 77,175
Prepaid expenses and other assets............................................ 2,878
----------
Total current assets................................................. 132,042
Videocassette rental inventory, net.......................................... 768,137
Furnishings and equipment, net............................................... 552,449
Other assets................................................................. 97,051
----------
$1,549,679
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt............................................ $ 115,901
Current portion of obligations under capital leases.......................... 28,994
Trade accounts payable....................................................... 403,157
Accruals and other liabilities............................................... 251,688
Advances from stockholders................................................... 21,163
----------
Total current liabilities............................................ 820,903
Long-term debt................................................................. 342,138
Obligations under capital leases............................................... 30,324
----------
Total liabilities.................................................... 1,193,365
----------
Stockholders' equity:
Common stock, no par value, 15,000 shares authorized, 1,000 shares issued and
outstanding............................................................... --
Additional paid-in capital................................................... 40,600
Loan to stockholder.......................................................... (38,799)
Retained earnings............................................................ 354,513
----------
Total stockholders' equity........................................... 356,314
----------
$1,549,679
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-95
<PAGE> 176
NEW AGE ENTERTAINMENT, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
-------- ----------
<S> <C> <C>
Revenues
Rental revenue..................................................... $812,035 $1,122,887
Merchandise sales.................................................. 127,227 110,069
-------- ----------
939,262 1,232,956
-------- ----------
Costs and expenses
Store operating expenses........................................... 856,196 1,056,835
Cost of goods sold................................................. 49,988 43,151
General and administrative......................................... 79,779 77,443
-------- ----------
985,963 1,177,429
-------- ----------
Income (loss) from operations.............................. (46,701) 55,527
Interest expense..................................................... 5,878 19,310
-------- ----------
Net income (loss).......................................... $(52,579) $ 36,217
======== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-96
<PAGE> 177
NEW AGE ENTERTAINMENT, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ (52,579) $ 36,217
Adjustments to reconcile net income (loss) to cash flows provided
by (used in) operating activities
Amortization of videocassette rental inventory.................. 311,089 508,371
Amortization of franchise fees.................................. 1,166 1,166
Depreciation and amortization of furnishings and equipment...... 24,307 25,399
Changes in assets and liabilities
Merchandise inventory......................................... 545 1,010
Prepaid expenses and other assets............................. 1,347 3,701
Accounts payable.............................................. 35,186 (87,363)
Accruals and other liabilities................................ 23,313 3,280
--------- ---------
Net cash provided by operating activities.................. 344,374 491,781
--------- ---------
Cash flows from investing activities
Purchases of furnishings and equipment............................. (247,289) (13,502)
Purchases of videocassette rental inventory........................ (382,027) (454,000)
--------- ---------
Net cash used in investing activities...................... (629,316) (467,502)
--------- ---------
Cash flows from financing activities
Proceeds from long-term debt....................................... 391,689 --
Repayment of long-term debt........................................ (1,010) (27,030)
Repayment of stockholder loans..................................... (5,171) (17,409)
Principal repayments on capital lease obligations.................. (3,126) (8,290)
Repayment of principal on note receivable.......................... -- 608
--------- ---------
Net cash provided by (used in) financing activities........ 382,382 (52,121)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 97,440 (27,842)
--------- ---------
Cash and cash equivalents, beginning of period....................... 30,231 79,831
--------- ---------
Cash and cash equivalents, end of period............................. $ 127,671 $ 51,989
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 5,878 $ 19,310
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-97
<PAGE> 178
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $1,704,208
Accumulated amortization....................................... (936,071)
----------
$ 768,137
==========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-98
<PAGE> 179
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of HB Associates, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of HB Associates, Inc. at December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 19, 1996
F-99
<PAGE> 180
HB ASSOCIATES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 81,462 $143,958
Merchandise inventory................................................ 43,600 55,880
Prepaid expenses and other current assets............................ 8,379 6,737
-------- --------
Total current assets......................................... 133,441 206,575
Videocassette rental inventory, net.................................... 344,685 390,916
Furnishings, equipment and leasehold improvements, net................. 293,258 267,672
Other assets........................................................... 65,898 56,487
-------- --------
$837,282 $921,650
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................... $ 31,066 $ 36,480
Current portion of obligations under capital leases.................. 32,117 23,626
Accounts payable..................................................... 158,821 370,348
Accrued expenses..................................................... 62,984 67,703
Advances from stockholders........................................... 70,400 70,400
-------- --------
Total current liabilities.................................... 355,388 568,557
Long-term debt....................................................... 48,674 16,520
Obligations under capital leases..................................... 47,938 24,317
-------- --------
Total liabilities............................................ 452,000 609,394
Commitments (Note 10)
Stockholders' equity:
Common stock, no par value, 1,000 shares authorized, 300 shares
issued and outstanding............................................ -- --
Additional paid-in capital........................................... 80,850 80,850
Retained earnings.................................................... 304,432 231,406
-------- --------
Total stockholders' equity................................... 385,282 312,256
-------- --------
$837,282 $921,650
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-100
<PAGE> 181
HB ASSOCIATES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rental revenue....................................... $1,817,359 $2,238,839 $2,381,050
Merchandise sales.................................... 219,811 294,071 374,157
---------- ---------- ----------
2,037,170 2,532,910 2,755,207
---------- ---------- ----------
Costs and expenses:
Operating expenses................................... 1,655,385 1,964,453 2,291,237
Cost of sales........................................ 199,830 250,048 316,126
General and administrative........................... 94,427 104,859 119,169
---------- ---------- ----------
1,949,642 2,319,360 2,726,532
---------- ---------- ----------
Income from operations....................... 87,528 213,550 28,675
Interest expense....................................... 18,783 32,827 33,901
---------- ---------- ----------
Net income (loss)............................ $ 68,745 $ 180,723 $ (5,226)
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-101
<PAGE> 182
HB ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (deficit).................................. $ 68,745 $ 180,723 $ (5,226)
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory..... 430,059 594,348 817,621
Depreciation of furnishings, equipment and
leasehold improvements........................... 36,569 57,438 58,015
Amortization of franchise fees..................... 3,251 19,561 7,857
Loss on disposal of fixed assets................... -- 20,620 --
Changes in assets and liabilities:
Merchandise inventory............................ (10,645) (12,997) (12,280)
Prepaid expenses and other assets................ 16,604 6,607 3,196
Accounts payable................................. 70,089 (38,311) 211,527
Accrued expenses................................. 39,235 13,552 4,719
--------- --------- ----------
Net cash provided by operating activities..... 653,907 841,541 1,085,429
Cash flows from investing activities:
Purchases of videocassette rental inventory........... (468,053) (654,060) (863,852)
Purchases of furnishings, equipment and leasehold
improvements....................................... (21,087) (48,879) (32,429)
--------- --------- ----------
Net cash used in investing activities......... (489,140) (702,939) (896,281)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from stockholder loans....................... 39,000 34,000 --
Repayment of long-term debt........................... (30,212) (35,093) (26,740)
Repayment of stockholder loans........................ (10,000) (6,000) --
Principal repayments on capital lease obligations..... (11,998) (27,554) (32,112)
Distributions to shareholders......................... (137,900) (36,150) (67,800)
--------- --------- ----------
Net cash used in financing activities......... (151,110) (70,797) (126,652)
--------- --------- ----------
Net increase in cash and cash equivalents............... 13,657 67,805 62,496
--------- --------- ----------
Cash and cash equivalents, beginning of period.......... -- 13,657 81,462
--------- --------- ----------
Cash and cash equivalents, end of period................ $ 13,657 $ 81,462 $ 143,958
========= ========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 17,621 $ 28,919 $ 33,901
========= ========= ==========
Supplemental disclosure of noncash investing and
financing activities:
Purchase of fixed assets under capital lease
obligations........................................ $ 73,314 $ 12,000 $ --
========= ========= ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-102
<PAGE> 183
HB ASSOCIATES INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993................... -- $ 80,850 $ 229,014 $ 309,864
Net income................................... -- -- 68,745 68,745
S Corporation distribution................... -- -- (137,900) (137,900)
------ ------- -------- --------
Balance at December 31, 1993................. -- 80,850 159,859 240,709
Net income................................... -- -- 180,723 180,723
S Corporation distribution................... -- -- (36,150) (36,150)
------ ------- -------- --------
Balance at December 31, 1994................. -- 80,850 304,432 385,282
Net loss..................................... -- -- (5,226) (5,226)
S Corporate distribution..................... -- -- (67,800) (67,800)
------ ------- -------- --------
Balance at December 31, 1995................. -- $ 80,850 $ 231,406 $ 312,256
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-103
<PAGE> 184
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
HB Associates, Inc. (the "Company") owns and operates 5 videocassette
rental stores, located in Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation is provided over the estimated useful lives (5 to 7 years) of
furnishings and equipment and, for leasehold improvements, over the lesser of
the estimated useful lives or lease terms (primarily 4 to 10 years) using the
straight-line method. Repair and maintenance costs are expensed as incurred.
Other Assets
Included in other assets are franchise fees which are stated at cost less
the related accumulated amortization. Franchise fees are amortized on a straight
line basis over the life of the franchise agreement (7 to 10 years).
F-104
<PAGE> 185
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be treated as an S corporation for income tax
purposes. Accordingly, the income of the Company is taxed at the shareholder
level and, accordingly, no provision for income taxes has been made in the
accompanying financial statements.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------ ------
<S> <C> <C>
Prepaid insurance................................................. $6,364 $6,362
Other............................................................. 2,015 375
------ ------
$8,379 $6,737
====== ======
</TABLE>
4. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory.............................. $ 734,730 $ 984,739
Accumulated amortization.................................... (390,045) (593,823)
--------- ---------
$ 344,685 $ 390,916
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$430,059, $594,348, and $817,621 for the years ended December 31, 1993, 1994 and
1995, respectively.
5. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furnishings, equipment and leasehold improvements comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures...................................... $ 57,489 $ 57,489
Equipment and vehicles...................................... 225,223 251,529
Leasehold improvements...................................... 148,167 154,290
--------- ---------
430,879 463,308
Accumulated depreciation.................................... (137,621) (195,636)
--------- ---------
$ 293,258 $ 267,672
========= =========
</TABLE>
At December 31, 1994 and 1995, the Company had $120,926 and $85,514,
respectively, of fixed assets held under capital leases. Accumulated
depreciation on these assets was $29,327 and $21,660 at December 31, 1994 and
1995, respectively.
Depreciation expense totaled $36,569, $57,438 and $58,015 for the years
ended December 31, 1993, 1994 and 1995, respectively.
F-105
<PAGE> 186
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
Other assets comprise of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- -------
<S> <C> <C>
Franchise fees.................................................. $40,666 $32,809
Lease deposits.................................................. 22,196 18,907
Other........................................................... 3,036 4,771
------- -------
$65,898 $56,487
======= =======
</TABLE>
Accumulated amortization on franchise fees was $29,334 and $37,191 at
December 31, 1994 and 1995, respectively. Amortization expense was $3,251,
$19,561 and $7,857 for the years ended December 31, 1993, 1994 and 1995,
respectively.
7. ACCRUED EXPENSES
Accrued expenses comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Accrued salaries................................. $ 8,978 $17,964
Other............................................ 54,006 49,739
------- -------
$62,984 $67,703
======= =======
</TABLE>
8. ADVANCES FROM STOCKHOLDERS
Advances from stockholders are unsecured and have no fixed repayment dates.
Interest on shareholder loans is calculated at 6.7%.
9. LONG-TERM DEBT
Long-term debt comprises a note payable which is repayable in equal monthly
installments of principal and interest with payments applied first to accrued
interest. Any amounts not paid in accordance with the above repayment schedule
are due in full in May 1997. Interest on the note is prime plus two and three-
quarters of a percent (11.25% at December 31, 1995). The note is secured by a
first security interest in substantially all of the Company's fixed assets.
The schedule repayments of long-term debt using the interest rate in effect
(10.75%) at December 31, 1995, is as follows:
<TABLE>
<S> <C>
1996....................................... $36,480
1997....................................... 16,520
-------
$53,000
=======
</TABLE>
F-106
<PAGE> 187
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases extending until 2001. In addition, the Company leases computer and office
equipment under capital lease arrangements. Minimum future rental payments under
these leases as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
----------- -------- ----------
<S> <C> <C>
1996....................................................... $ 30,344 $ 368,153
1997....................................................... 19,960 346,802
1998....................................................... 5,791 252,100
1999....................................................... 2,104 226,100
2000....................................................... -- 163,498
Thereafter................................................. -- 36,875
-------- ----------
Future minimum payments...................................... 58,199 $1,393,528
==========
Less amount representing interest............................ (10,260)
--------
Present value of future minimum lease payments, including
current portion of $23,626................................. $ 47,939
========
</TABLE>
Rent expense totalled approximately $242,892, $340,974 and $356,119 for the
years ended December 31, 1993, 1994, and 1995, respectively.
11. PENSION AND PROFIT SHARING PLANS
In 1993, the Company adopted a non-contributory, defined contribution
retirement plan for eligible employees. Contributions to the plan are based on a
fixed percentage of employees' annual compensation. Expense related to this plan
totalled $15,000, $15,000 and $25,000 for the years ended December 31, 1993,
1994 and 1995, respectively. Benefits under this plan vest in annual increments
of 20%.
In 1993, the Company initiated a profit sharing plan for eligible
employees. Contributions to the plan are determined solely at management's
discretion, and were $15,000, $6,000 and $5,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
12. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-107
<PAGE> 188
HB ASSOCIATES, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $118,988
Merchandise inventory........................................................ 56,211
Prepaid expenses and other current assets.................................... 8,182
--------
Total current assets................................................. 183,381
Videocassette rental inventory, net.......................................... 393,117
Furnishings, equipment and leasehold improvements, net....................... 252,672
Other assets................................................................. 54,671
--------
$883,841
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt............................................ $ 36,374
Current portion of obligations under capital leases.......................... 23,626
Accounts payable............................................................. 234,465
Accrued expenses............................................................. 82,466
Advances from stockholders................................................... 70,400
--------
Total current liabilities............................................ 447,331
Long-term debt............................................................... 8,444
Obligations under capital leases............................................. 14,401
--------
Total liabilities.................................................... 470,176
--------
Stockholders' equity
Common stock, no par value, 1,000 shares authorized, 300 shares issued and
outstanding............................................................... --
Additional paid-in capital................................................... 80,850
Retained earnings............................................................ 332,815
--------
Total stockholders' equity........................................... 413,665
--------
$883,841
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-108
<PAGE> 189
HB ASSOCIATES, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $651,109 $713,204
Merchandise sales.................................................... 109,547 106,968
-------- --------
760,656 820,172
-------- --------
Costs and expenses
Store operating expenses............................................. 540,053 561,296
Cost of sales........................................................ 94,814 97,089
General and administrative........................................... 32,403 44,334
-------- --------
667,270 702,719
-------- --------
Income from operations....................................... 93,386 117,453
Interest expense....................................................... 5,540 2,544
-------- --------
Net income................................................... $ 87,846 $114,909
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-109
<PAGE> 190
HB ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 87,846 $ 114,909
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of videocassette rental inventory.................. 200,895 163,155
Depreciation of furnishings, equipment and leasehold
improvements................................................... 15,025 15,000
Amortization of franchise fees.................................. 1,965 1,965
Changes in assets and liabilities
Merchandise inventory......................................... (19,361) (331)
Prepaid expenses and other assets............................. (3,493) (1,594)
Accounts payable.............................................. 70,706 (135,883)
Accrued expenses.............................................. 4,249 14,763
--------- ---------
Net cash provided by operating activities.................. 357,832 171,984
--------- ---------
Cash flows from investing activities
Purchases of videocassette rental inventory........................ (215,963) (165,356)
--------- ---------
Net cash used in investing activities...................... (215,963) (165,356)
--------- ---------
Cash flows from financing activities
Repayment of long-term debt........................................ (4,246) (8,182)
Principal repayments on capital lease obligations.................. (9,039) (9,916)
Distributions to stockholders...................................... (13,050) (13,500)
--------- ---------
Net cash used in financing activities...................... (26,335) (31,598)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 115,534 (24,970)
--------- ---------
Cash and cash equivalents, beginning of period....................... 81,462 143,958
--------- ---------
Cash and cash equivalents, end of period............................. $ 196,996 $ 118,988
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 5,540 $ 2,544
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-110
<PAGE> 191
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $1,046,342
Accumulated amortization....................................... (653,225)
---------
$ 393,117
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-111
<PAGE> 192
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Best Entertainment, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Best Entertainment Inc. at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 29, 1996
F-112
<PAGE> 193
BEST ENTERTAINMENT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 23,675 $ 55,083
Merchandise inventory................................................ 57,350 28,237
-------- --------
Total current assets......................................... 81,025 83,320
Videocassette rental inventory, net.................................. 375,571 384,945
Furnishings, equipment and leasehold improvements, net............... 47,175 32,649
Other assets......................................................... 62,667 23,054
-------- --------
$566,438 $523,968
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.................................... $ 25,304 $ --
Current portion of obligations under capital leases.................. 5,434 --
Accounts payable..................................................... 54,290 111,655
Accrued expenses..................................................... 21,012 24,698
Payroll and sales tax payable........................................ 8,526 5,154
-------- --------
Total current liabilities.................................... 114,566 141,507
Long-term debt......................................................... 18,239 --
Commitments (Note 8)
Stockholders' Equity
Common stock, no par value, 15,000 shares authorized, 100 shares
issued and outstanding............................................ -- --
Additional paid-in capital........................................... 63,000 63,000
Retained earnings.................................................... 370,633 319,461
-------- --------
Total stockholders' equity................................... 433,633 382,461
-------- --------
$566,438 $523,968
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-113
<PAGE> 194
BEST ENTERTAINMENT, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rental............................................... $1,173,865 $1,310,309 $1,327,301
Merchandise.......................................... 160,073 184,965 225,098
---------- ---------- ----------
1,333,938 1,495,274 1,552,399
---------- ---------- ----------
Cost and expenses:
Store operating expenses............................. 993,058 1,071,024 1,018,714
Cost of goods sold................................... 105,648 101,731 171,074
General and administrative........................... 101,649 107,898 91,396
---------- ---------- ----------
1,200,355 1,280,653 1,281,184
---------- ---------- ----------
Income from operations....................... 133,583 214,621 271,215
---------- ---------- ----------
Interest expense....................................... 10,367 6,216 1,305
---------- ---------- ----------
Net income................................... $ 123,216 $ 208,405 $ 269,910
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-114
<PAGE> 195
BEST ENTERTAINMENT, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 123,216 $ 208,405 $ 269,910
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory..... 300,690 402,333 453,400
Depreciation of furnishings, equipment and
leasehold improvements........................... 28,644 26,073 24,723
Amortization of franchise fees..................... 7,000 7,000 7,000
Changes in assets and liabilities:
Merchandise inventory............................ 191 (634) 29,113
Other assets..................................... 1,188 (1,170) --
Accounts payable................................. 19,924 7,295 57,365
Accrued expenses................................. 17,537 (19,286) 3,686
Payroll and sales tax payables................... (4,141) 265 (3,372)
--------- --------- ---------
Net cash provided by operating activities..... 494,249 630,281 841,825
--------- --------- ---------
Cash flows from investing activities:
Purchases of furnishings, equipment and leasehold
improvements....................................... (5,820) (6,566) (5,819)
Purchases of videocassette rental inventory........... (377,176) (439,755) (466,939)
--------- --------- ---------
Net cash used in investing activities......... (382,996) (446,321) (472,758)
--------- --------- ---------
Cash flows from financing activities:
Proceeds (repayments) from advances from
stockholders....................................... 12,019 (12,019) --
Repayment of long-term debt........................... (50,003) (64,557) (29,199)
Principal repayments on capital lease obligations..... (8,937) (9,997) (5,434)
Shareholder distributions............................. (37,725) (128,050) (303,026)
--------- --------- ---------
Net cash used in financing activities......... (84,646) (214,623) (337,659)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 26,607 (30,663) 31,408
--------- --------- ---------
Cash and cash equivalents, beginning of period.......... 27,731 54,338 23,675
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 54,338 $ 23,675 $ 55,083
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 10,367 $ 6,644 $ 1,305
========= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-115
<PAGE> 196
BEST ENTERTAINMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993............. -- $ 63,000 $ 204,787 $ 267,787
S Corporation distribution............. (37,725) (37,725)
Net income............................. 123,216 123,216
---- ------- --------- ---------
Balance at December 31, 1993........... -- 63,000 290,278 353,278
S Corporation distribution............. (128,050) (128,050)
Net income............................. 208,405 208,405
---- ------- --------- ---------
Balance at December 31, 1994........... -- 63,000 370,633 433,633
S Corporation distribution............. (321,082) (321,082)
Net income............................. 269,910 269,910
---- ------- --------- ---------
Balance at December 31, 1995........... -- $ 63,000 $ 319,461 $ 382,461
==== ======= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-116
<PAGE> 197
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Best Entertainment Inc. (the "Company") owns and operates 2 videocassette
rental stores under franchise agreements with West Coast Video Corporation. The
stores are located in Somerville and Revere, Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation is provided over the estimated useful lives (5 to 7 years) of
furnishings and equipment and, for leasehold improvements, over the lesser of
the estimated useful lives or lease terms (primarily 5-10 years), using the
straight-line method. Repair and maintenance costs are expensed as incurred.
Other Assets
Included in other assets are franchise fees, which are stated at cost less
the related accumulated amortization. Franchise fees are amortized using the
straight line method over the life of the franchise agreements (7-10 years).
F-117
<PAGE> 198
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be treated as an S corporation for income tax
purposes. Accordingly, the income of the Company is taxed at the shareholder
level and, accordingly, no provision for income taxes has been made in the
accompanying financial statements.
3. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory............................... $ 833,265 $ 898,075
Accumulated amortization..................................... (457,694) (513,130)
--------- ---------
$ 375,571 $ 384,945
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$300,690, $402,333 and $453,400 for the years ended December 31, 1993, 1994, and
1995, respectively.
4. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furnishings, equipment and leasehold improvements comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 51,260 $ 51,713
Equipment and vehicles....................................... 103,411 108,777
Leasehold improvements....................................... 22,893 22,893
--------- ---------
177,564 183,383
Accumulated depreciation..................................... (130,389) (150,734)
--------- ---------
$ 47,175 $ 32,649
========= =========
</TABLE>
Depreciation expense totaled $28,644, $26,073, and $24,723 for the years
ended December 31, 1993, December 31, 1994 and December 31, 1995, respectively.
5. OTHER ASSETS
Other assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Franchise fees................................................. $ 70,000 $ 65,000
Less: accumulated amortization................................. (35,000) (42,000)
------- --------
35,000 23,000
Key-person life insurance policy -- cash surrender value....... 27,400 --
Other assets................................................... 267 54
------- --------
$ 62,667 $ 23,054
======= ========
</TABLE>
On December 28, 1995, title to the life insurance policy was transferred to
the stockholders of the Company for no consideration.
F-118
<PAGE> 199
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt comprises the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- ----
<S> <C> <C>
Note payable -- Allied Lending Corporation........................ $ 26,804 $ --
Note payable -- Metropolitan Bank and Trust Company............... 2,395 --
Phoenix Home Life Mutual Insurance Company........................ 9,344 --
Loan from West Coast Corporation.................................. 5,000 --
-------- ----
Total debt.............................................. 43,543 --
Less: current portion............................................. (25,304) --
-------- ----
Total long term debt.................................... $ 18,239 $ --
======== ====
</TABLE>
Borrowings from the Allied Lending Corporation comprised a note payable
which was secured by the tangible assets of the Revere store and was due in
monthly installments through May 2, 1997. The Company accelerated payments due
on the note resulting in full settlement of the obligation during the year ended
December 31, 1995. Interest was paid at a variable rate based on one of several
prime rates (10.50% at December 31, 1994.)
Borrowings from the Metropolitan Bank and Trust Company were secured by the
tangible assets of the Somerville store and were due in monthly installments
through April 5, 1995. Interest was paid at a variable rate based on 2% plus the
bank's prime rate.
Borrowings with Phoenix Mutual Life Insurance Corporation comprised a loan
against a life insurance policy on one of the stockholders. Interest was accrued
at a fixed rate of 8%. On December 28, 1995, title to the life insurance policy
was transferred to the stockholders of the Company, together with all
obligations under this loan agreement.
The loan from West Coast Corporation for $5,000 related to unpaid franchise
fees outstanding since April 1991. The loan was interest free and was forgiven
by West Coast Corporation during the year ended December 31, 1995. As a result,
the loan and the franchise fee asset were both reduced by this amount at
December 31, 1995.
7. RELATED PARTY TRANSACTIONS
The Company leases retail space for one of its stores from a realty trust
in which the principal trustees are relatives of the Company's shareholders.
Rent expense related to this lease totaled $74,208, $84,715, and $78,698 for the
years ended December 31, 1993, 1994 and 1995, respectively.
F-119
<PAGE> 200
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASE COMMITMENTS
The Company leases its retail space under operating leases extending until
the year 2000. Both store leases contain renewal options ranging up to 15 years
and generally require the Company to pay utilities, insurance, taxes and common
area maintenance costs. Minimum future rental payments under these leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------
<S> <C>
1996.................................................... $106,086
1997.................................................... 110,653
1998.................................................... 115,420
1999.................................................... 94,997
2000.................................................... 86,218
</TABLE>
Rent expense totalled $107,449, $121,159, and $117,662 for the years ended
December 31, 1993, 1994, and 1995, respectively.
9. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-120
<PAGE> 201
BEST ENTERTAINMENT, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $133,046
Merchandise inventory........................................................ 29,737
--------
Total current assets................................................. 162,783
Videocassette rental inventory, net.......................................... 373,059
Furnishings, equipment and leasehold improvements, net....................... 29,431
Other assets................................................................. 23,915
--------
$589,188
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 97,653
Accrued expenses............................................................. 27,021
--------
Total current liabilities............................................ 124,674
--------
Stockholders' equity
Common stock, no par value, 15,000 shares authorized,
100 shares issued and outstanding......................................... --
Additional paid-in capital................................................... 63,000
Retained earnings............................................................ 401,514
--------
Total stockholders' equity........................................... 464,514
--------
$589,188
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-121
<PAGE> 202
BEST ENTERTAINMENT, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $354,461 $381,598
Merchandise sales.................................................... 58,971 65,461
-------- --------
413,432 447,059
-------- --------
Costs and expenses
Store operating expenses............................................. 275,218 267,430
Cost of goods sold................................................... 47,105 39,416
General and administrative........................................... 20,850 24,494
-------- --------
343,173 331,340
-------- --------
Income from operations....................................... 70,259 115,719
-------- --------
Interest expense....................................................... 1,359 --
-------- --------
Net income................................................... $ 68,900 $115,719
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-122
<PAGE> 203
BEST ENTERTAINMENT, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 68,900 $ 115,719
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of videocassette rental inventory.................. 155,680 162,448
Depreciation of furnishings, equipment and leasehold
improvements................................................... 2,909 3,218
Amortization of franchise fees.................................. 1,750 1,750
Changes in assets and liabilities
Merchandise inventory......................................... 5,000 (1,500)
Other assets.................................................. 54 (2,611)
Accounts payable.............................................. (2,898) (14,002)
Accrued expenses.............................................. (5,025) (2,831)
--------- ---------
Net cash provided by operating activities.................. 226,370 262,191
--------- ---------
Cash flows from investing activities
Purchase of furnishings, equipment and leasehold improvements...... (10,207) --
Purchases of videocassette rental inventory........................ (101,761) (150,562)
--------- ---------
Net cash used in investing activities...................... (111,968) (150,562)
--------- ---------
Cash flows from financing activities
Proceeds from short-term borrowings................................ 9,344 --
Repayment of long-term debt........................................ (16,193) --
Principal repayments on capital lease obligations.................. (5,434) --
Shareholder distributions.......................................... (67,596) (33,666)
--------- ---------
Net cash used in financing activities...................... (79,879) (33,666)
--------- ---------
Net increase in cash and cash equivalents............................ 34,523 77,963
--------- ---------
Cash and cash equivalents, beginning of period....................... 23,675 55,083
--------- ---------
Cash and cash equivalents, end of period............................. $ 58,198 $ 133,046
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 1,359 $ --
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-123
<PAGE> 204
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
Videocassette rental inventory................................... $ 906,875
Accumulated amortization......................................... (533,816)
---------
$ 373,059
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-124
<PAGE> 205
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Video Innovators, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Video Innovators, Inc. at December
31, 1995 and 1994 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 20, 1996
F-125
<PAGE> 206
VIDEO INNOVATORS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 49,147 $ 59,903
Accounts receivable.................................................. 1,733 3,124
Merchandise inventories.............................................. 28,837 31,847
Other current assets................................................. 50,000 --
Due from stockholders................................................ 10,412 46,486
-------- --------
Total current assets......................................... 140,129 141,360
-------- --------
Videocassette rental inventory, net.................................... 89,603 139,771
Furnishings and equipment, net......................................... 100,754 199,155
Deferred tax asset..................................................... 18,940 48,816
Other assets........................................................... 27,475 39,443
-------- --------
$376,901 $568,545
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 25,224 $101,809
Accrued expenses and other liabilities............................... 50,311 83,904
Accrued rent......................................................... -- 24,287
Current portion of obligations under capital leases.................. -- 1,975
Dividends payable.................................................... -- 30,770
Income tax payable................................................... 86,620 164,767
Deferred tax liabilities............................................. 9,499 --
Due to stockholders.................................................. 20,719 8,244
-------- --------
Total current liabilities.................................... 192,373 415,756
-------- --------
Accrued rent........................................................... 79,250 75,771
Obligations under capital leases....................................... -- 7,677
Commitments (Note 6)
Stockholders' equity:
Common stock, $.01 par value, 2,400 shares authorized, 2,400 shares
issued and outstanding............................................ 24 24
Additional paid-in capital........................................... 19,976 19,976
Retained earnings.................................................... 85,278 49,341
-------- --------
Total stockholders' equity................................... 105,278 69,341
-------- --------
$376,901 $568,545
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-126
<PAGE> 207
VIDEO INNOVATORS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rental revenue........................................... $601,436 $744,138 $774,229
Merchandise sales........................................ 46,424 66,388 72,932
-------- -------- --------
647,860 810,526 847,161
-------- -------- --------
Costs and expenses:
Operating expenses....................................... 348,995 433,852 429,596
Cost of sales............................................ 36,342 51,971 57,122
General and administrative............................... 205,980 258,333 291,409
-------- -------- --------
591,317 744,156 778,127
-------- -------- --------
Income from operations........................... 56,543 66,370 69,034
Other (income) expense, net................................ 5,155 (16,466) 859
-------- -------- --------
Income before provision for income tax........... 51,388 82,836 68,175
Provision for income taxes................................. 24,073 30,665 38,772
-------- -------- --------
Net income....................................... $ 27,315 $ 52,171 $ 29,403
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-127
<PAGE> 208
VIDEO INNOVATORS, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 27,315 $ 52,171 $ 29,403
Adjustments to reconcile net income to cash flows
provided by operating activities:
Amortization of organizational costs............... 5,320 5,320 5,320
Amortization of videocassette rental inventory..... 190,314 242,457 240,978
Depreciation and amortization of furnishings and
equipment........................................ 16,210 24,599 27,045
Deferred tax provision (benefit)................... (10,461) (6,860) (39,375)
Changes in assets and liabilities:
Accounts receivable.............................. (1,184) (549) (1,391)
Merchandise inventories.......................... (4,132) (10,459) (3,010)
Other current assets............................. 1,756 (50,000) 50,000
Other assets..................................... (4,138) (6,000) (17,288)
Accounts payable................................. 7,375 (3,904) 76,585
Accrued expenses................................. (30,534) 14,361 33,593
Income tax payable............................... 34,534 37,525 78,147
Accrued rent..................................... 30,630 24,310 20,808
--------- --------- ---------
Net cash provided by operating activities..... 263,005 322,971 500,815
--------- --------- ---------
Cash flows from investing activities:
Loan to stockholders.................................. -- (10,412) (36,074)
Purchases of property and equipment................... (11,364) (13,311) (114,446)
Purchases of videocassette rental inventory........... (205,733) (241,653) (291,146)
--------- --------- ---------
Net cash used in investing activities......... (217,097) (265,376) (441,666)
--------- --------- ---------
Cash flows from financing activities:
Repayment of capital lease obligation................. -- -- (1,348)
Repayment of stockholder debt......................... (13,299) (35,982) (12,475)
Dividends paid........................................ -- (43,272) (34,570)
--------- --------- ---------
Net cash used in financing activities......... (13,299) (79,254) (48,393)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 32,609 (21,659) 10,756
--------- --------- ---------
Cash and cash equivalents, beginning of period.......... 38,197 70,806 49,147
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 70,806 $ 49,147 $ 59,903
========= ========= =========
Cash paid for interest.................................. -- -- $ 859
Non-cash transactions:
Dividend payable...................................... -- -- $ 30,770
Obligation under capital lease........................ -- -- $ 11,000
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-128
<PAGE> 209
VIDEO INNOVATORS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993...................... $ 24 $ 19,976 $ 49,064 $ 69,064
Net income...................................... 27,315 27,315
--- ------- -------- --------
Balance at December 31, 1993.................... 24 19,976 76,379 96,379
Net income...................................... 52,171 52,171
Dividends....................................... (43,272) (43,272)
--- ------- -------- --------
Balance at December 31, 1994.................... 24 19,976 85,278 105,278
Net income...................................... 29,403 29,403
Dividends....................................... (65,340) (65,340)
--- ------- -------- --------
Balance at December 31, 1995.................... $ 24 $ 19,976 $ 49,341 $ 69,341
=== ======= ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-129
<PAGE> 210
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Video Innovators, Inc. (the "Company") owns and operates one videocassette
rental store, located in Brookline, MA. During 1995 the Company was preparing
for the opening of its second store in January 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and any succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory............................... $ 305,121 $ 461,137
Accumulated amortization..................................... (215,518) (321,366)
--------- ---------
$ 89,603 $ 139,771
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$190,314, $242,457 and $240,978 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-130
<PAGE> 211
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided over the estimated useful lives (five
to seven years) of furnishings and equipment and over the lesser of the
estimated useful lives or lease terms (five to ten years) of leased items and
leasehold improvements using the straight-line method. Repair and maintenance
costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
Organizational Costs
Included in other assets at December 31, 1994 and 1995 are $9,751 and
$4,431 of organizational costs, net of accumulated amortization of $16,847 and
$22,167, respectively. This asset is being amortized on a straight-line basis
over 5 years. Amortization of $5,320 was charged to expense in each of the years
ended December 31, 1993, 1994, and 1995, respectively.
3. FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Furniture and fixtures......................................... $ 57,832 $ 91,817
Equipment and vehicles......................................... 20,607 39,189
Leasehold improvements......................................... 71,906 144,785
-------- --------
150,345 275,791
Accumulated depreciation and amortization...................... (49,591) (76,636)
-------- --------
$100,754 $199,155
======== ========
</TABLE>
Depreciation and amortization expenses were $16,210, $24,599, and $27,045
for the years ended December 31, 1993, 1994, 1995, respectively.
4. SHORT-TERM BORROWINGS
The Company has available unsecured lines of credit from a domestic bank
approximating $25,000 at December 31, 1994 and December 31, 1995.
F-131
<PAGE> 212
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Current
Federal........................................... $ 24,769 $26,639 $ 56,551
State............................................. 9,765 10,886 21,596
34,534 37,525 78,147
-------- ------- --------
Deferred
Federal........................................... (8,182) (5,365) (31,537)
State............................................. (2,279) (1,495) (7,838)
-------- ------- --------
(10,461) (6,860) (39,375)
-------- ------- --------
$ 24,073 $30,665 $ 38,772
======== ======= ========
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Videocassette rental library................................... $ -- $ 9,529
Rent........................................................... 18,940 34,469
Depreciation................................................... -- 2,797
Other temporary differences.................................... -- 2,021
------- -------
$18,940 $48,816
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Videocassette rental library................................... $ 9,499 $ --
------ -------
9,499 --
------ -------
Net deferred tax asset......................................... $ 9,441 $48,816
====== =======
</TABLE>
F-132
<PAGE> 213
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Income tax at statutory rate.......................... $17,472 $28,165 $23,180
State tax expense, net of federal income tax
benefit............................................. 5,778 7,644 6,838
Provision for contingencies........................... 5,077 6,567 13,951
Benefit of graduated rates............................ (6,616) (7,779) (5,607)
Other items........................................... 2,362 (3,932) 410
------- ------- -------
$24,073 $30,665 $38,772
======= ======= =======
</TABLE>
6. RELATED PARTY TRANSACTIONS
Under the terms of an Investors Agreement with the stockholders, each
stockholder of the Company agreed to make interest-free loans to the Company.
The notes payable to stockholders are due on demand and totaled $20,719 and
$8,244 at December 31, 1994 and 1995, respectively.
The Company leases a store facility from a stockholder in connection with
the operations of the West Coast Video business located in Brookline, MA. Rent
expense charged to operations for these facilities totaled $100,150 for each of
the three years in the period ended for December 31, 1995.
The amounts due from stockholders are payable on demand and bear no
interest.
7. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases extending until October 31, 2005. In addition, the Company leases
computer equipment under capital lease arrangements. Minimum future rental
payments under these leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
-------------------------------------------------------------- ------- ----------
<S> <C> <C>
1996.......................................................... $ 2,940 $ 197,725
1997.......................................................... 2,940 204,525
1998.......................................................... 2,940 176,250
1999.......................................................... 2,940 97,875
Thereafter.................................................... 737 644,343
------- ----------
Future minimum payments....................................... 12,497 $1,320,718
==========
Less amounts representing interest............................ 2,845
-------
Present value of future minimum lease payments, including
current portion of $1,975................................... $ 9,652
=======
</TABLE>
Rent expense totalled approximately $100,150, $100,150, and $116,705 for
the years ended December 31, 1993, 1994, and 1995, respectively.
8. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-133
<PAGE> 214
VIDEO INNOVATORS, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents....................................................... $ 19,824
Accounts receivable............................................................. 3,836
Merchandise inventory........................................................... 31,947
Due from stockholders........................................................... 46,486
--------
Total current assets.................................................... 102,093
Videocassette rental inventory, net............................................. 172,531
Furnishings and equipment, net.................................................. 227,691
Deferred tax asset.............................................................. 48,816
Other assets.................................................................... 42,690
--------
$ 593,821
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................................ $ 182,163
Accrued expenses and other liabilities.......................................... 27,250
Accrued rent.................................................................... 111,228
Current portion of obligations under capital leases............................. 2,031
Dividends payable............................................................... 30,770
Income tax payable.............................................................. 161,118
Due to stockholders............................................................. 8,244
--------
Total current liabilities............................................... 522,804
Obligations under capital leases.................................................. 7,149
--------
Total liabilities....................................................... 529,953
--------
Stockholders' equity
Common stock, $10 par value, 2,400 shares authorized,
issued and outstanding....................................................... 24
Additional paid-in capital...................................................... 19,976
Retained earnings............................................................... 43,868
--------
Total stockholders' equity.............................................. 63,868
--------
$ 593,821
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-134
<PAGE> 215
VIDEO INNOVATORS, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $188,556 $269,369
Merchandise sales.................................................... 26,289 41,738
-------- --------
214,845 311,107
-------- --------
Costs and expenses
Store operating expenses............................................. 94,291 168,519
Cost of sales........................................................ 20,506 32,556
General and administrative........................................... 68,099 118,915
-------- --------
182,896 319,990
-------- --------
Income (loss) from operations................................ 31,949 (8,883)
Interest expense....................................................... 225 239
-------- --------
Income (loss) before provision (benefit) for income tax...... 31,724 (9,122)
Provision (benefit) for income taxes................................... 18,083 (3,649)
-------- --------
Net income (loss)............................................ $ 13,641 $ (5,473)
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-135
<PAGE> 216
VIDEO INNOVATORS, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
-------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................... $ 13,641 $ (5,473)
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of organizational costs............................. 1,330 1,330
Amortization of videocassette rental inventory................... 41,535 94,089
Depreciation and amortization of furnishings and equipment....... 6,400 14,815
Changes in assets and liabilities
Merchandise inventory.......................................... (987) (100)
Accounts receivable............................................ 255 (712)
Other assets................................................... (855) (4,577)
Accounts payable............................................... 12,721 80,354
Accrued expenses and other liabilities......................... (11,460) (56,654)
Income tax payable............................................. 18,083 (3,649)
Accrued rent................................................... 1,762 11,170
-------- ---------
Net cash provided by operating activities................... 82,425 130,593
-------- ---------
Cash flows from investing activities
Loan to stockholders................................................ (10,491) --
Purchases of furnishings and equipment.............................. -- (43,351)
Purchases of videocassette rental inventory......................... (51,423) (126,849)
-------- ---------
Net cash used in investing activities....................... (61,914) (170,200)
-------- ---------
Cash flows from financing activities
Repayment of capital lease obligations.............................. -- (472)
-------- ---------
Net cash used in financing activities....................... -- (472)
-------- ---------
Net increase (decrease) in cash and cash equivalents.................. 20,511 (40,079)
-------- ---------
Cash and cash equivalents, beginning of period........................ 49,147 59,903
-------- ---------
Cash and cash equivalents, end of period.............................. $ 69,658 $ 19,824
======== =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest............................ $ 225 $ 239
======== =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-136
<PAGE> 217
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $ 507,897
Accumulated amortization....................................... (335,366)
---------
$ 172,531
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-137
<PAGE> 218
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Showtime, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholder's equity present fairly, in all
material respects, the financial position of Showtime, Inc. at December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 22, 1996
F-138
<PAGE> 219
SHOWTIME, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 145,019 $ 164,377
Merchandise inventories........................................... 299,600 221,374
Prepaid expenses and other assets................................. 1,201 1,732
---------- ----------
Total current assets...................................... 445,820 387,483
Videocassette rental inventory, net................................. 818,989 766,200
Furnishings and equipment, net...................................... 105,174 233,185
Other assets........................................................ 35,636 59,801
Deferred income taxes............................................... 57,372 20,161
---------- ----------
$1,462,991 $1,466,830
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current obligation under capital leases........................... $ -- $ 11,340
Accounts payable.................................................. 235,993 303,684
Accrued expenses and other liabilities............................ 71,918 78,400
Income tax payable................................................ 60,665 820
Amounts due to shareholder........................................ 346,357 379,466
---------- ----------
Total current liabilities................................. 714,933 773,710
---------- ----------
Obligations under capital leases.................................. -- 7,639
---------- ----------
Total liabilities......................................... 714,933 781,349
Commitments (Note 7)
Stockholder's equity:
Class A, common stock, $.10 par value, 10,000 shares authorized,
4,000 shares issued and outstanding............................ 400 400
Class B, common stock, $.10 par value, 2,000 shares authorized,
1,000 shares issued............................................ 100 100
Additional paid-in capital........................................ 566,624 566,624
Retained earnings................................................. 242,934 180,357
---------- ----------
810,058 747,481
Less: Treasury stock at cost -- 1,000 Class B common
shares.................................................. 62,000 62,000
---------- ----------
Total stockholder's equity................................ 748,058 685,481
---------- ----------
$1,462,991 $1,466,830
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-139
<PAGE> 220
SHOWTIME, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $2,942,287 $3,330,078 $3,474,569
Merchandise.......................................... 711,820 602,001 436,032
---------- ---------- ----------
3,654,107 3,932,079 3,910,601
---------- ---------- ----------
Cost and expenses:
Store operating expenses............................. 2,576,184 3,006,288 3,040,000
Cost of goods sold................................... 569,456 589,637 348,826
General and administrative........................... 212,783 380,752 578,190
---------- ---------- ----------
3,358,423 3,976,677 3,967,016
---------- ---------- ----------
Income (loss) from operations..................... 295,684 (44,598) (56,415)
---------- ---------- ----------
Interest expense....................................... 25,802 23,924 21,871
---------- ---------- ----------
Income (loss) before provision for income taxes... 269,882 (68,522) (78,286)
Provision/(benefit) for income taxes................... 95,428 (35,952) (15,709)
---------- ---------- ----------
Net income (loss)................................. $ 174,454 $ (32,570) $ (62,577)
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-140
<PAGE> 221
SHOWTIME, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 174,454 $ (32,570) $ (62,577)
Adjustments to reconcile net income (loss) to cash
flows provided by operating activities:
Deferred income taxes........................... 25,778 (48,437) 37,211
Amortization of videocassette rental
inventory..................................... 812,976 1,063,070 1,098,413
Depreciation and amortization of furnishings and
equipment..................................... 62,554 64,931 90,517
Loss on disposal of furnishings and equipment... 450 7,600 --
Changes in assets and liabilities:
Prepaid expenses and other assets............. 20,470 (617) (1,154)
Merchandise inventories....................... 19,010 49,802 78,226
Other assets.................................. (7,740) 1,517 (24,165)
Accounts payable.............................. 38,527 (36,393) 67,691
Income tax payable............................ 49,216 11,449 (59,845)
Accrued expenses and other liabilities........ (16,272) 1,930 6,482
---------- ----------- -----------
Net cash provided by operating
activities............................... 1,179,423 1,082,282 1,230,799
---------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................ (60,407) (46,156) (196,650)
Purchases of videocassette rental inventory........ (868,219) (1,070,039) (1,045,624)
---------- ----------- -----------
Net cash (used in) investing activities.... (928,626) (1,116,195) (1,242,274)
---------- ----------- -----------
Cash flows from financing activities:
Loan from shareholder.............................. -- 5,533 33,109
Repayment of long-term debt........................ (119,001) (5,000) (2,276)
---------- ----------- -----------
Net cash provided by (used in) financing
activities............................... (119,001) 533 30,833
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 131,796 (33,380) 19,358
---------- ----------- -----------
Cash and cash equivalents, beginning of period....... 46,603 178,399 145,019
---------- ----------- -----------
Cash and cash equivalents, end of period............. $ 178,399 $ 145,019 $ 164,377
========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........... $ 25,802 $ 20,210 $ 21,925
========== =========== ===========
Cash paid during the period for income taxes....... $ 27,836 $ 1,036 $ 6,928
========== =========== ===========
Supplemental disclosure of noncash financing
activities:
</TABLE>
During 1995, capital lease obligations of $21,878 were incurred in
connection with lease agreements for office equipment.
The accompanying notes are an integral
part of the financial statements.
F-141
<PAGE> 222
SHOWTIME, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDER'S
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993........ $500 $ 566,624 $101,050 $(62,000) $ 606,174
Net income........................ 174,454 174,454
---- -------- -------- -------- --------
Balance at December 31, 1993...... 500 566,624 275,504 (62,000) 780,628
Net loss.......................... (32,570) (32,570)
---- -------- -------- -------- --------
Balance at December 31, 1994...... 500 566,624 242,934 (62,000) 748,058
Net loss.......................... (62,577) (62,577)
---- -------- -------- -------- --------
Balance at December 31, 1995...... $500 $ 566,624 $180,357 $(62,000) $ 685,481
==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-142
<PAGE> 223
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Showtime, Inc. (the "Company"), owns and operates 12 videocassette rental
stores, located primarily in Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 5 to 7 years) of leased items using the straight-line method. Repair
and maintenance costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and
F-143
<PAGE> 224
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tax credit carryforwards. Deferred tax expense represents the change in the
deferred tax asset or liability balances.
3. VIDEOCASSETTE RENTAL INVENTORY AND RELATED AMORTIZATION ARE AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Videocassette rental inventory............................ $ 4,800,115 $ 5,285,391
Accumulated amortization.................................. (3,981,126) (4,519,191)
----------- -----------
$ 818,989 $ 766,200
=========== ===========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$812,976, $1,063,070, and $1,098,413 for the years ended December 31, 1993,
1994, and 1995, respectively.
4. FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 502,023 $ 502,674
Equipment and vehicles....................................... 135,660 330,101
Leasehold improvements....................................... 21,559 44,995
--------- ---------
659,242 877,770
Accumulated depreciation and amortization.................... (554,068) (644,585)
--------- ---------
$ 105,174 $ 233,185
========= =========
</TABLE>
Depreciation and amortization expense were $62,554, $64,931, and $90,517
for the years ended December 31, 1993, 1994, and 1995, respectively.
5. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Current
Federal........................................... $57,498 $ 8,928 $(42,133)
State............................................. 12,152 3,557 (10,787)
------- -------- --------
69,650 12,485 (52,920)
------- -------- --------
Deferred
Federal........................................... 23,064 (43,338) 31,088
State............................................. 2,714 (5,099) 6,123
------- -------- --------
25,778 (48,437) 37,211
------- -------- --------
$95,428 $(35,952) $(15,709)
======= ======== ========
</TABLE>
F-144
<PAGE> 225
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax asset:
Amortization on rental inventory................................. $57,372 $20,161
======= =======
</TABLE>
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Income tax at statutory rate -- 34%................. $91,760 $(23,297) $(26,617)
State tax expense, net of federal income tax
benefit........................................... 10,734 (2,753) (3,731)
Impact of graduated rates........................... (7,066) (9,902) 14,639
------- -------- --------
$95,428 $(35,952) $(15,709)
======= ======== ========
</TABLE>
6. AMOUNTS DUE TO SHAREHOLDER
Amounts due to shareholder represent demand loans made by the sole
shareholder to the Company. The loan bears interest at 7%, which is payable on
August 31 each year.
7. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases extending until 2003. Minimum future rental payments under these leases
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------------------------------------------------
<S> <C>
1996............................................ $ 422,520
1997............................................ 362,800
1998............................................ 233,040
1999............................................ 227,520
2000............................................ 227,520
Thereafter...................................... 536,554
----------
Future minimum payments.............................. $2,009,954
=========
</TABLE>
During the year ended December 31, 1995, the Company incurred capital lease
obligations of $21,878 in connection with a lease agreement for office
equipment.
Rent expense totalled approximately $607,119, $687,442, and $705,295 for
the years ended December 31, 1993, 1994, and 1995, respectively.
8. SUBSEQUENT EVENTS
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment. The sale is contingent upon the completion of the initial public
offering of West Coast Entertainment's common stock.
F-145
<PAGE> 226
SHOWTIME, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash......................................................................... $ 205,592
Merchandise inventory........................................................ 151,631
Prepaid expenses and other current assets.................................... 3,464
Current income taxes receivable.............................................. 4,375
----------
Total current assets................................................. 365,062
Videocassette rental inventory, net.......................................... 632,237
Furnishings and equipment, net............................................... 210,556
Other assets................................................................. 59,801
Deferred income taxes........................................................ 20,161
----------
$1,287,817
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current obligation under capital leases...................................... $ 11,340
Accounts payable............................................................. 226,835
Accrued expenses and other liabilities....................................... 48,939
Amounts due to shareholder................................................... 316,945
----------
Total current liabilities............................................ 604,059
Obligations under capital leases............................................... 6,070
----------
Total liabilities.................................................... 610,129
----------
Stockholder's equity
Class A, common stock, $.10 par value, 10,000 shares authorized,
4,000 shares issued and outstanding....................................... 400
Class B, common stock, $.10 par value, 2,000 shares authorized,
1,000 shares issued....................................................... 100
Additional paid-in capital................................................... 566,624
Retained earnings............................................................ 172,564
----------
739,688
Less: Treasury stock at cost -- 1,000 Class B common shares............... 62,000
----------
Total stockholder's equity........................................... 677,688
----------
$1,287,817
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-146
<PAGE> 227
SHOWTIME, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues
Rental revenue.................................................... $ 834,716 $ 976,259
Merchandise sales................................................. 168,427 138,406
---------- ----------
1,003,143 1,114,665
---------- ----------
Costs and expenses
Store operating expenses.......................................... 741,950 956,756
Cost of goods sold................................................ 113,327 110,039
General and administrative........................................ 30,619 54,020
---------- ----------
885,896 1,120,815
---------- ----------
Income (loss) from operations............................. 117,247 (6,150)
---------- ----------
Interest expense.................................................... 4,901 6,838
---------- ----------
Income (loss) before provision (benefit) for income
taxes................................................... 112,346 (12,988)
Provision (benefit) for income taxes................................ 22,544 (5,195)
---------- ----------
Net income (loss)......................................... $ 89,802 $ (7,793)
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-147
<PAGE> 228
SHOWTIME, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ 89,802 $ (7,793)
Adjustments to reconcile net income (loss) to cash flows provided
by
(used in) operating activities
Amortization of videocassette rental inventory................ 274,703 402,886
Depreciation and amortization of furnishings and equipment.... 22,629 22,629
Changes in assets and liabilities
Prepaid expenses and other assets.......................... 317 (1,732)
Merchandise inventory...................................... 89,513 69,743
Accounts payable........................................... (34,392) (76,849)
Current taxes.............................................. (38,121) (5,195)
Accrued expenses and other liabilities..................... 51,974 (29,461)
--------- ---------
Net cash provided by operating activities.................. 456,425 374,228
--------- ---------
Cash flows from investing activities
Purchases of videocassette rental inventory........................ (246,000) (268,923)
--------- ---------
Net cash used in investing activities......................... (246,000) (268,923)
--------- ---------
Cash flows from financing activities
Repayment of loan from shareholder................................. (229,458) (62,521)
Principal repayments on capital lease obligations.................. -- (1,569)
--------- ---------
Net cash used in financing activities......................... (229,458) (64,090)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. (19,033) 41,215
--------- ---------
Cash and cash equivalents, beginning of period....................... 145,019 164,377
--------- ---------
Cash and cash equivalents, end of period............................. $ 125,986 $ 205,592
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 4,901 $ 6,838
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-148
<PAGE> 229
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory....................................... $ 5,282,452
Accumulated amortization............................................. (4,650,215)
-----------
$ 632,237
===========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold its business to West Coast Entertainment
Corporation.
F-149
<PAGE> 230
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Video Giant, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Video Giant, Inc. at December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 19, 1996
F-150
<PAGE> 231
VIDEO GIANT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 571,783 $ 695,994
Merchandise inventories........................................... 72,094 13,536
Prepaid expenses and other current assets......................... 59,330 20,958
---------- ----------
Total current assets...................................... 703,207 730,488
Videocassette rental inventory, net................................. 1,309,239 1,210,228
Furnishings, equipment and leasehold improvements, net.............. 365,482 395,533
Other assets........................................................ 29,507 29,367
---------- ----------
$2,407,435 $2,365,616
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 101,777 $ 140,920
Accrued expenses.................................................. 134,173 42,428
Current income taxes payable...................................... 211,135 132,033
---------- ----------
Total current liabilities................................. 447,085 315,381
Deferred tax liability............................................ 505,573 486,011
---------- ----------
Total liabilities......................................... 952,658 801,392
Commitments (Note 7)
Stockholders' equity:
Common stock, $0.01 par value, 500,000 shares authorized, 125,000
shares issued and outstanding.................................. 1,250 1,250
Additional paid-in capital........................................ 48,750 48,750
Retained earnings................................................. 1,404,777 1,514,224
---------- ----------
Total stockholders' equity................................ 1,454,777 1,564,224
---------- ----------
$2,407,435 $2,365,616
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-151
<PAGE> 232
VIDEO GIANT, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $3,033,117 $4,516,812 $4,906,137
Merchandise.......................................... 160,983 162,852 304,842
---------- ---------- ----------
3,194,100 4,679,664 5,210,979
---------- ---------- ----------
Costs and expenses:
Store operating expenses............................. 2,264,304 3,029,200 4,432,799
Cost of goods sold................................... 110,982 143,863 248,873
General and administrative........................... 293,663 320,336 340,617
---------- ---------- ----------
2,668,949 3,493,399 5,022,289
---------- ---------- ----------
Income from operations............................ 525,151 1,186,265 188,690
---------- ---------- ----------
Interest expense....................................... 47,423 25,228 2,907
---------- ---------- ----------
Income before provision for income taxes.......... 477,728 1,161,037 185,783
Provision for income taxes............................. 192,851 467,230 76,336
---------- ---------- ----------
Net income........................................ $ 284,877 $ 693,807 $ 109,447
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-152
<PAGE> 233
VIDEO GIANT, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 284,877 $ 693,807 $ 109,447
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory.... 562,174 866,762 1,588,788
Depreciation and amortization of furnishings,
equipment and leasehold improvements............ 87,676 123,543 155,901
Changes in assets and liabilities:
Merchandise inventories......................... (19,302) (792) 58,558
Prepaid expenses and other assets............... (28,973) 38,503 38,512
Accounts payable................................ 99,343 (14,187) 39,143
Accrued expenses................................ (2,143) 111,166 (91,745)
Current taxes................................... 98,468 112,667 (79,102)
Deferred taxes.................................. 94,383 354,563 (19,562)
---------- ---------- ----------
Net cash provided by operating activities.... 1,176,503 2,286,032 1,799,940
---------- ---------- ----------
Cash flows from investing activities:
Purchases of furnishings, equipment and leasehold
improvements...................................... (107,998) (216,999) (185,952)
Purchases of videocassette rental inventory.......... (638,950) (1,673,174) (1,489,777)
---------- ---------- ----------
Net cash used in investing activities........ (746,948) (1,890,173) (1,675,729)
---------- ---------- ----------
Cash flows from financing activities:
Repayment of stockholder loans.................... (338,640) (322,667) --
---------- ---------- ----------
Net increase in cash and cash equivalents.............. 90,915 73,192 124,211
---------- ---------- ----------
Cash and cash equivalents, beginning of period......... 407,676 498,591 571,783
---------- ---------- ----------
Cash and cash equivalents, end of period............... $ 498,591 $ 571,783 $ 695,994
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............. $ 47,423 $ 25,228 $ 2,907
========== ========== ==========
Cash paid during the period for income taxes......... $ -- $ -- $ 175,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-153
<PAGE> 234
VIDEO GIANT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... $1,250 $ 48,750 $ 426,093 $ 476,093
Net income.................................... -- -- 284,877 284,877
------ ------- ---------- ----------
Balance at December 31, 1993.................. 1,250 48,750 710,970 760,970
Net income.................................... -- -- 693,807 693,807
------ ------- ---------- ----------
Balance at December 31, 1994.................. 1,250 48,750 1,404,777 1,454,777
Net income.................................... -- -- 109,447 109,447
------ ------- ---------- ----------
Balance at December 31, 1995.................. $1,250 $ 48,750 $1,514,224 $1,564,224
====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-154
<PAGE> 235
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Video Giant, Inc. (the "Company") owns and operates twelve videocassette
rental stores, located primarily in the southern regions of the USA.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost determined by the first-in, first-out method, and is amortized over its
estimated economic life with no provision for salvage value. Videocassettes that
are considered base stock are amortized over 36 months on a straight-line basis.
New release videocassettes are amortized as follows: the first through third
copies of each title per store are amortized as base stock and the fourth and
succeeding copies of each title per store are amortized over nine months on a
straight-line basis. The unamortized cost, if any, of videocassette rental
inventory that is sold is charged to operations at the time of sale. The Company
believes that its method of amortization results in an appropriate matching of
tape amortization expense with the revenue received from the associated rental
of such tapes.
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
F-155
<PAGE> 236
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
3. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Videocassette rental inventory............................ $ 2,562,293 $ 3,127,557
Accumulated amortization.................................. (1,253,054) (1,917,329)
----------- -----------
$ 1,309,239 $ 1,210,228
=========== ===========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$562,174, $866,762, and $1,588,788 for the years ended December 31, 1993, 1994,
and 1995, respectively.
4. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furnishings, equipment and leasehold improvements comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 379,156 $ 455,721
Equipment and vehicles...................................... 422,069 531,256
Leasehold improvements...................................... 42,109 42,309
--------- ----------
843,334 1,029,286
Accumulated depreciation.................................... (477,852) (633,753)
--------- ----------
$ 365,482 $ 395,533
========= ==========
</TABLE>
Depreciation expense totaled $87,676, $123,543, and $155,901 for the years
ended December 31, 1993, 1994, and 1995, respectively.
5. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 78,872 $ 90,246 $ 76,814
State............................................ 19,596 22,421 19,084
-------- -------- --------
98,468 112,667 95,898
-------- -------- --------
Deferred:
Federal.......................................... 82,175 308,700 (17,031)
State............................................ 12,208 45,863 (2,531)
-------- -------- --------
94,383 354,563 (19,562)
-------- -------- --------
$192,851 $467,230 $ 76,336
======== ======== ========
</TABLE>
F-156
<PAGE> 237
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes as of December 31, 1994 and 1995 reflect the impact
of "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. The
temporary differences which give rise to the deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax asset:
Bonus accrual.............................................. $ 40,200 $ --
--------- ---------
40,200 --
--------- ---------
Deferred tax liabilities:
Videocassette rental amortization.......................... (525,816) (486,011)
Other...................................................... (19,957) --
--------- ---------
(545,773) (486,011)
--------- ---------
$(505,573) $(486,011)
========= =========
</TABLE>
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Income tax at statutory rate of 35%................. $167,205 $406,363 $65,024
State tax expense, net of federal income tax
benefit........................................ 20,673 44,385 10,759
Other............................................... 4,973 16,482 553
-------- -------- -------
$192,851 $467,230 $76,336
======== ======== =======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The principal stockholder has from time to time loaned the Company funds
for working capital purposes and to fund new store opening costs. Interest on
these short term loans was charged at a rate of 10%.
7. LEASE COMMITMENTS
The Company leases its facilities and equipment under operating leases
extending until 2001. Minimum future rental payments under these leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING LEASES
----------------------------------------- ---------
<S> <C>
1996..................................... $406,420
1997..................................... 321,810
1998..................................... 239,495
1999..................................... 206,850
2000..................................... 170,280
Thereafter............................... 23,100
</TABLE>
Rent expense totalled $423,392, $460,346, and $506,510 for the years ended
December 31, 1993, 1994, and 1995, respectively.
8. SUBSEQUENT EVENT
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment. The sale is contingent upon the completion of the initial public
offering of West Coast Entertainment's common stock.
F-157
<PAGE> 238
VIDEO GIANT, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 694,657
Merchandise inventory........................................................ 12,460
Prepaid expenses and other current assets.................................... 23,228
Current income taxes receivable.............................................. 22,230
----------
Total current assets................................................. 752,575
Videocassette rental inventory, net.......................................... 1,030,696
Furnishings, equipment and leasehold improvements, net....................... 334,600
Other assets................................................................. 29,367
----------
$2,147,238
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 177,669
Accrued expenses............................................................. 150,729
----------
Total current liabilities............................................ 328,398
Deferred tax liability......................................................... 486,011
----------
Total liabilities.................................................... 814,409
----------
Stockholders' equity
Common stock, $0.01 par value, 500,000 shares authorized, 125,000 shares
issued and outstanding.................................................... 1,250
Additional paid-in capital................................................... 48,750
Retained earnings............................................................ 1,282,829
----------
Total stockholders' equity........................................... 1,332,829
----------
$2,147,238
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-158
<PAGE> 239
VIDEO GIANT, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues
Rental revenue.................................................... $1,244,485 $1,323,211
Merchandise sales................................................. 136,473 141,258
---------- ----------
1,380,958 1,464,469
---------- ----------
Costs and expenses
Store operating expenses.......................................... 1,188,105 1,690,248
Cost of goods sold................................................ 64,944 60,526
General and administrative........................................ 93,660 99,353
---------- ----------
1,346,709 1,850,127
---------- ----------
Income (loss) from operations.................................. 34,249 (385,658)
---------- ----------
Interest expense.................................................... 2,907 --
---------- ----------
Income (loss) before provision (benefit) for income taxes...... 31,342 (385,658)
Provision (benefit) for income taxes................................ 12,806 (154,263)
---------- ----------
Net income (loss).............................................. $ 18,536 $ (231,395)
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-159
<PAGE> 240
VIDEO GIANT, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ 18,536 $(231,395)
Adjustments to reconcile net income (loss) to cash flows provided
by (used in) operating activities
Amortization of videocassette rental inventory..................... 521,639 536,458
Depreciation and amortization of furnishings, equipment and
leasehold improvements......................................... 58,491 70,933
Changes in assets and liabilities
Merchandise inventory......................................... 19,780 1,076
Prepaid expenses and other assets............................. 18,703 (2,270)
Accounts payable.............................................. 36,585 36,749
Accrued expenses.............................................. (80,175) 108,301
Current taxes................................................. 12,806 (154,263)
--------- ---------
Net cash provided by operating activities.................. 606,365 365,589
--------- ---------
Cash flows from investing activities
Purchases of furnishings, equipment and leasehold improvements..... (130,859) (10,000)
Purchases of videocassette rental inventory........................ (351,922) (356,926)
--------- ---------
Net cash used in investing activities...................... (482,781) (366,926)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 123,584 (1,337)
--------- ---------
Cash and cash equivalents, beginning of period....................... 571,783 695,994
--------- ---------
Cash and cash equivalents, end of period............................. $ 695,367 $ 694,657
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 2,907 $ --
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-160
<PAGE> 241
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $ 3,123,156
Accumulated amortization....................................... (2,092,460)
-----------
$ 1,030,696
===========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold its business to West Coast Entertainment
Corporation.
F-161
<PAGE> 242
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Anthony Cocca's Videoland, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholder's equity present fairly, in all
material respects, the financial position of Anthony Cocca's Videoland, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 16, 1996
F-162
<PAGE> 243
ANTHONY COCCA'S VIDEOLAND, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 90,428 $ 161,211
Accounts receivable............................................... 24,364 51,607
Merchandise inventories........................................... 125,952 174,304
---------- ----------
Total current assets...................................... 240,744 387,122
Videocassette rental inventory, net................................. 981,732 1,414,650
Furnishings and equipment, net...................................... 370,927 473,473
Other assets........................................................ 22,367 24,117
---------- ----------
$1,615,770 $2,299,362
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt................................................... $ 60,958 $ 51,958
Lines of credit................................................... 8,690 3,862
Current portion of long-term debt................................. 111,837 82,261
Accounts payable.................................................. 600,470 903,655
Accrued expenses and other liabilities............................ 153,578 164,748
Amounts due to shareholder........................................ 71,326 99,927
---------- ----------
Total current liabilities................................. 1,006,859 1,306,411
---------- ----------
Long-term debt...................................................... 144,882 62,418
---------- ----------
Commitments (Note 8)
Stockholder's equity:
Common stock, $10 par value, 100 shares authorized,
100 shares issued and outstanding.............................. 1,000 1,000
Additional paid-in capital........................................ 217,697 217,697
Retained earnings (deficit)....................................... 245,332 711,836
---------- ----------
Total stockholder's equity................................ 464,029 930,533
---------- ----------
$1,615,770 $2,299,362
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-163
<PAGE> 244
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $2,125,496 $3,026,048 $3,999,302
Merchandise.......................................... 166,148 313,835 483,598
---------- ---------- ----------
2,291,644 3,339,883 4,482,900
---------- ---------- ----------
Costs and expenses:
Operating expenses................................... 2,099,106 2,311,335 3,231,676
Cost of goods sold................................... 117,747 222,190 295,555
General and administrative........................... 389,623 354,997 420,858
---------- ---------- ----------
2,606,476 2,888,522 3,948,089
---------- ---------- ----------
(Loss)/income from operations................ (314,832) 451,361 534,811
---------- ---------- ----------
Interest expense....................................... 24,201 33,280 20,827
---------- ---------- ----------
Net income (loss)............................ $ (339,033) $ 418,081 $ 513,984
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-164
<PAGE> 245
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)/income................................. $ (339,033) $ 418,081 $ 513,984
Adjustments to reconcile net income to cash flows
provided by operating activities:
Amortization of videocassette rental
inventory.................................... 957,617 1,339,747 1,811,846
Depreciation and amortization of furnishings
and equipment................................ 55,773 75,445 97,178
Changes in assets and liabilities:
Accounts receivable.......................... (7,327) (4,346) (27,243)
Merchandise inventories...................... (52,418) (43,685) (48,352)
Other assets................................. 10,108 (22,367) (1,750)
Accounts payable............................. 414,422 (17,623) 303,185
Accrued expenses............................. 94,448 2,849 11,170
----------- ----------- -----------
Net cash provided by operating
activities.............................. 1,133,590 1,748,101 2,660,018
----------- ----------- -----------
Cash flows from investing activities:
Purchases of videocassette rental inventory....... (1,101,677) (1,583,881) (2,244,764)
Purchases of property and equipment............... (181,888) (111,601) (199,724)
----------- ----------- -----------
Net cash used in investing activities..... (1,283,565) (1,695,482) (2,444,488)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt....................... (39,856) (96,703) (112,040)
Borrowings under lines of credit.................. 191,269 69,284 --
Repayment of lines of credit...................... (3,251) (6,556) (4,828)
Repayment of short-term debt...................... -- -- (9,000)
Amounts due to shareholder........................ -- -- 28,601
Distributions..................................... -- -- (47,480)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 148,162 (33,975) (144,747)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (1,813) 18,644 70,783
----------- ----------- -----------
Cash and cash equivalents, beginning of period...... 73,597 71,784 90,428
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 71,784 $ 90,428 $ 161,211
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......... $ 24,201 $ 33,280 $ 20,827
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-165
<PAGE> 246
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... $1,000 $ 217,697 $ 166,284 $ 384,981
Net loss...................................... -- -- (339,033) (339,033)
------ -------- --------- ---------
Balance at December 31, 1993.................. 1,000 217,697 (172,749) 45,948
Net income.................................... -- -- 418,081 418,081
------ -------- --------- ---------
Balance at December 31, 1994.................. 1,000 217,697 245,332 464,029
Net income.................................... -- -- 513,984 513,984
Distributions................................. -- -- (47,480) (47,480)
------ -------- --------- ---------
Balance at December 31, 1995.................. $1,000 $ 217,697 $ 711,836 $ 930,533
====== ======== ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-166
<PAGE> 247
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Anthony Cocca's Videoland, Inc. (the "Company") owns and operates 22
videocassette rental stores as of December 1995, located primarily in Ohio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lessor of the estimated useful lives or lease terms of
leased items using the straight-line method. Repair and maintenance costs are
expensed as incurred.
Income Taxes
The Company has elected to be treated as a Subchapter S corporation for
income tax purposes. Accordingly, the income of the Company is taxed at the
shareholder level and no provision for income taxes has been made in the
accompanying financial statements.
F-167
<PAGE> 248
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Videocassette rental inventory............................ $ 4,461,618 $ 6,106,097
Accumulated amortization.................................. (3,479,886) (4,691,447)
----------- -----------
$ 981,732 $ 1,414,650
=========== ===========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$957,617, $1,339,747, and $1,811,846 for the years ended December 31, 1993,
1994, and 1995, respectively.
4. FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 470,300 $ 624,024
Equipment and vehicles....................................... 104,830 150,830
--------- ---------
575,130 774,854
Accumulated depreciation and amortization.................... (204,203) (301,381)
--------- ---------
$ 370,927 $ 473,473
========= =========
</TABLE>
Depreciation and amortization expense were $55,773, $75,445, and $97,178
for the years ended December 31, 1993, 1994 and 1995, respectively.
5. BORROWINGS
Borrowings consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
SHORT-TERM DEBT
In 1993 the Company had a commitment from a bank for a $100,000 line of
credit bearing interest at prime plus 1.5% (10% at December 31,
1995). The line of credit was available through May 30, 1994 at which
time any amounts borrowed became payable upon demand. The line of
credit is secured by inventory, equipment, accounts receivable, and a
second mortgage on personal property of the stockholder. The Company
is making monthly principal payments of $1,000 plus interest. ....... $ 60,958 $ 51,958
======== ========
LINES OF CREDIT
The Company has a line of credit agreement with a bank that allows for
borrowings up to $20,000. Borrowings under the agreement bear
interest at the 91 day T-bill rate plus 4.5% (9.41% at December 31,
1995) and are secured by an equity mortgage. ........................ $ 8,690 $ 3,862
======== ========
LONG-TERM DEBT
On May 30, 1994, the borrowings of $197,760 under a $200,000 line of
credit agreement with a bank became a note payable due in monthly
principal installments of $5,556 plus interest at prime plus 1.5%
(10% at December 31, 1995), due in June, 1997, secured by inventory,
equipment, accounts receivable, and a second mortgage on personal
property of the stockholder. ........................................ $164,425 $ 97,549
</TABLE>
F-168
<PAGE> 249
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
-------- --------
<S> <C> <C>
Mortgage payable to a bank due in equal monthly installments of $574
including interest at 13.7%, due in October 2003, secured by the
building used as the Company's warehouse. ........................... 37,007 34,437
Note payable to a bank in monthly principal installments of $1,283,
plus interest at prime plus 3% (11.5% at December 31, 1995), due in
March 1996, secured by a mortgage on personal property of the
stockholder. ........................................................ 17,846 2,450
Note payable to a bank in monthly installments of $1,182 including
interest at 10.5%, due in September 1996, secured by a mortgage on
the Company's corporate headquarters. ............................... 22,616 10,243
Note payable to a bank, in monthly installments of $1,507 including
interest at prime plus 1% (9.5% at December 31, 1994), due in
November 1995, secured by certain fixed assets, accounts receivables
and certain personal assets of the stockholder. ..................... 8,775 --
Note payable to a bank in monthly installments of $775 including
interest at 11.75%, due in February 1995, secured by a personal asset
of the
stockholder. ........................................................ 1,497 --
Note payable to a bank in monthly installments of $650 including
interest at the banks base rate plus 1% (9% at December 31, 1994),
due in June 1995, secured by computer equipment. .................... 3,311 --
Note payable to a bank in monthly installments of $316 including
interest at 8.25%, due in April 1995, secured by a vehicle. ......... 1,242 --
-------- --------
Total long-term debt......................................... 256,719 144,679
Less: Current portion of long-term debt...................... 111,837 82,261
-------- --------
$144,882 $ 62,418
======== ========
</TABLE>
Principal due on long-term debt for each of the years following December
31, 1995 is as follows:
<TABLE>
<S> <C>
1996............................................................... $82,261
1997............................................................... 34,139
1998............................................................... 3,677
1999............................................................... 4,144
2000............................................................... 4,671
Thereafter......................................................... 15,787
</TABLE>
6. RELATED PARTY TRANSACTIONS
Leases
The Company leased its administrative headquarters and warehouse facility
from the sole stockholder of the Company. Rent expense for these locations was
approximately $21,000, $25,800 and $30,600 for the years ended December 31,
1993, 1994, and 1995, respectively.
The Company leased a store location from the sole stockholder of the
Company for two months ended February 28, 1993. Rent expense for this location
was approximately $800. Since March 1993, the Company has leased this store
location from a partnership, 50% of which is owned by the sole stockholder of
the Company. Rent expense for this location was approximately $21,500, $25,800
and $25,800 for the ten months ended December 31, 1993, and for the years ended
December 31, 1994 and 1995, respectively.
The Company leases two store locations from the sole stockholder of the
Company. Rent expense for these locations was approximately $32,436, $53,886 and
$55,836 for the years ended December 31, 1993, 1994, and 1995, respectively.
F-169
<PAGE> 250
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases one store location from a partnership, 50% of which is
owned by the sole stockholder of the Company. Rent expense for this location was
approximately $4,000 and $6,000 for the nine months ended December 31, 1994 and
the year ended December 31, 1995, respectively.
7. DUE TO STOCKHOLDER
In 1992, the sole stockholder loaned the Company approximately $71,000 for
operating purposes. The balance increased by $28,601 in 1995 due to an
additional loan to the Company from the sole stockholder in connection with the
purchase of four new stores. The loan is non-interest bearing.
8. LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
2001. Minimum future rental payments under these leases as of December 31, 1995
is as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING LEASES
----------------------------------------------------------------- ----------
<S> <C>
1996........................................................... $ 668,131
1997........................................................... 640,086
1998........................................................... 560,445
1999........................................................... 484,925
2000........................................................... 221,536
Thereafter..................................................... 10,659
----------
Future minimum payments........................................ $2,585,782
=========
</TABLE>
Rent expense totalled approximately $274,408, $391,846 and $606,246 for the
years ended December 31, 1993, 1994, and 1995, respectively.
9. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-170
<PAGE> 251
ANTHONY COCCA'S VIDEOLAND, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 108,808
Accounts receivable.......................................................... 58,655
Merchandise inventory........................................................ 147,465
----------
Total current assets................................................. 314,928
Videocassette rental inventory, net.......................................... 1,374,785
Furnishings and equipment, net............................................... 467,921
Other assets................................................................. 24,117
----------
$2,181,751
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt.............................................................. $ 48,958
Current portion of long-term debt............................................ 78,953
Accounts payable............................................................. 683,739
Accrued expenses and other liabilities....................................... 78,206
Amounts due to shareholder................................................... 94,033
----------
Total current liabilities............................................ 983,889
Long-term debt................................................................. 31,576
----------
Total liabilities.................................................... 1,015,465
----------
Stockholders' equity
Common stock, $10 par value, 100 shares authorized,
100 shares issued and outstanding......................................... 1,000
Additional paid-in capital................................................... 217,697
Retained earnings............................................................ 947,589
----------
Total stockholders' equity........................................... 1,166,286
----------
$2,181,751
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-171
<PAGE> 252
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues
Rental revenue.................................................... $1,001,551 $1,429,894
Merchandise sales................................................. 59,010 58,592
---------- ----------
1,060,561 1,488,486
---------- ----------
Costs and expenses
Store operating expenses.......................................... 818,820 1,206,372
Cost of goods sold................................................ 23,604 23,437
General and administrative........................................ 11,801 18,277
---------- ----------
854,225 1,248,086
---------- ----------
Income from operations.................................... 206,336 240,400
---------- ----------
Interest expense.................................................... 8,054 4,647
---------- ----------
Net income................................................ $ 198,282 $ 235,753
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-172
<PAGE> 253
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 198,282 $ 235,753
Adjustments to reconcile net income to cash flows provided by
(used in) operating activities
Amortization of videocassette rental inventory.................. 374,361 449,034
Depreciation and amortization of furnishings and equipment...... 14,232 18,537
Changes in assets and liabilities
Accounts receivable........................................... (28,516) (7,048)
Merchandise inventory......................................... 63,567 26,839
Other assets.................................................. 22,367 --
Accounts payable.............................................. (62,319) (219,916)
Accrued expenses and other liabilities........................ (109,080) (86,542)
--------- ---------
Net cash provided by operating activities.................. 472,894 416,657
--------- ---------
Cash flows from investing activities
Purchases of videocassette rental inventory........................ (420,411) (409,169)
Purchases of furnishings and equipment............................. (13,548) (12,985)
--------- ---------
Net cash used in investing activities...................... (433,959) (422,154)
--------- ---------
Cash flows from financing activities
Repayment of long-term debt........................................ (24,583) (34,150)
Repayment of short-term debt....................................... (9,690) (6,862)
Amounts due to shareholder......................................... -- (5,894)
--------- ---------
Net cash used in financing activities...................... (34,273) (46,906)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 4,662 (52,403)
--------- ---------
Cash and cash equivalents, beginning of period....................... 90,428 161,211
--------- ---------
Cash and cash equivalents, end of period............................. $ 95,090 $ 108,808
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 8,054 $ 4,647
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-173
<PAGE> 254
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
<S> <C>
Videocassette rental inventory.................................. $ 6,311,225
Accumulated amortization........................................ (4,936,440)
-----------
$ 1,374,785
===========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-174
<PAGE> 255
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Vidko, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Vidko, Inc. at December 31, 1994
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 8, 1995
F-175
<PAGE> 256
VIDKO, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 69,351 $ 75,452
Merchandise inventories.............................................. 10,619 12,189
Due from affiliates.................................................. 3,676 25,000
-------- --------
Total current assets.............................................. 83,646 112,641
Videocassette rental inventory, net.................................... 78,871 136,936
Furnishings and equipment, net......................................... 29,184 21,522
Other assets........................................................... 3,900 3,900
-------- --------
$195,601 $274,999
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 24,195 $ 24,740
Accrued expenses and other liabilities............................... 16,515 35,607
Distributions payable................................................ -- 60,000
Due to affiliates...................................................... -- 547
-------- --------
Total current liabilities......................................... 40,710 120,894
-------- --------
Commitments (Note 5)................................................... -- --
Stockholders' equity:
Common stock, no par value, 750 shares authorized,
100 shares issued and outstanding................................. -- --
Additional paid-in capital........................................... 45,849 45,849
Retained earnings.................................................... 109,042 108,256
-------- --------
Total stockholders' equity........................................ 154,891 154,105
-------- --------
$195,601 $274,999
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-176
<PAGE> 257
VIDKO, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental.................................................. $179,656 $390,517 $ 521,930
Merchandise............................................. 3,476 5,903 27,461
-------- -------- --------
183,132 396,420 549,391
-------- -------- --------
Costs and expenses:
Store operating expenses................................ 99,161 197,096 243,323
Cost of goods sold...................................... 2,746 4,663 21,694
General and administrative.............................. 58,508 121,440 149,028
-------- -------- --------
160,415 323,199 414,045
-------- -------- --------
Net income........................................... $ 22,717 $ 73,221 $ 135,346
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-177
<PAGE> 258
VIDKO, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 22,717 $ 73,221 $ 135,346
Amortization of videocassette rental inventory......... 38,376 84,060 115,398
Depreciation and amortization of furnishings and
equipment........................................... 6,429 10,310 11,797
Changes in assets and liabilities:
Merchandise inventories............................. (10,852) 2,012 (1,570)
Accounts payable.................................... 16,367 3,785 545
Accrued expenses.................................... 6,454 2,854 19,092
Other assets........................................ -- (1,100) --
-------- --------- ---------
79,491 175,142 280,608
-------- --------- ---------
Cash flows from investing activities:
Amounts due from affiliates, net....................... 2,000 2,324 (21,324)
Purchases of property and equipment.................... (15,101) (10,432) (4,135)
Purchases of videocassette rental inventory............ (56,340) (124,638) (173,463)
-------- --------- ---------
Net cash used in investing activities.......... (69,441) (132,746) (198,922)
Cash flows from financing activities:
Proceeds from affiliate borrowings, net................ (5,055) (2,948) 547
Stockholder distribution............................... -- -- (76,132)
Stockholder contributions.............................. -- 5,830 --
Proceeds from issuance of common stock................. -- -- --
-------- --------- ---------
Net cash used in financing activities.......... (5,055) 2,882 (75,585)
-------- --------- ---------
Net increase in cash and cash equivalents................ 4,995 45,278 6,101
-------- --------- ---------
Cash and cash equivalents, beginning of period........... 19,078 24,073 69,351
-------- --------- ---------
Cash and cash equivalents, end of period................. $ 24,073 $ 69,351 $ 75,452
======== ========= =========
Supplemental disclosure of noncash investing and
financing activities:
Fair value of fixed assets contributed from
stockholders........................................ $ 18,610 -- --
Fair value of inventory contributed from
stockholders........................................ $ 12,409 -- --
Shareholder's distributions declared but not paid...... -- -- $ 60,000
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-178
<PAGE> 259
VIDKO, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
---------- --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1993............................. $ 40,019 $ 13,104 $ 53,123
Net income............................................. -- 22,717 22,717
------- --------- ---------
Balance at December 31, 1993........................... 40,019 35,821 75,840
Contributions from stockholders........................ 5,830 -- 5,830
Net income............................................. -- 73,221 73,221
------- --------- ---------
Balance at December 31, 1994........................... 45,849 109,042 154,891
Distributions (unaudited).............................. -- (136,132) (136,132)
Net income (unaudited)................................. -- 135,346 135,346
------- --------- ---------
Balance at December 31, 1995 (unaudited)............... $ 45,849 $ 108,256 $ 154,105
======= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-179
<PAGE> 260
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO DECEMBER 31, 1995)
1. DESCRIPTION OF BUSINESS
Vidko, Inc. (the "Company") owns and operates three videocassette rental
stores, located primarily in Central Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994
-------- 1995
---------
(UNAUDITED)
<S> <C> <C>
Videocassette rental inventory................................ $141,820 $ 253,666
Accumulated amortization...................................... (62,949) (116,730)
-------- ---------
$ 78,871 $ 136,936
======== =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$38,376, $84,060 and $115,398 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-180
<PAGE> 261
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 3 years) of leased items using the straight-line method. Repair and
maintenance costs are expensed as incurred.
Income Taxes
The Company has elected to be treated as a Subchapter S corporation for
income tax purposes. Accordingly, the income of the Company is taxed at the
shareholder level and, accordingly, no provision for income taxes has been made
in the accompanying financial statements.
Unaudited Interim Financial Information
The balance sheet as of December 31, 1995, and the statements of
operations, of stockholders' equity and of cash flows for the year ended
December 31, 1995 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of these financial statements have been
included. Such adjustments consisted only of normal recurring items.
3. FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994
-------- 1995
--------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures......................................... $ 5,134 $ 8,934
Equipment and vehicles......................................... 31,714 32,049
Leasehold improvements......................................... 12,485 12,485
-------- --------
49,333 53,468
Accumulated depreciation and amortization...................... (20,149) (31,946)
-------- --------
$ 29,184 $ 21,522
======== ========
</TABLE>
Depreciation and amortization expense were $6,429, $10,310 and $11,797 for
the years ended December 31, 1993, 1994 and 1995, respectively.
4. RELATED PARTY TRANSACTIONS
The Company has entered into several agreements and transactions with
affiliate parties which may have resulted in different financial results had
they been with unrelated parties. It is the opinion of management that any
economic differences resulting from these transactions would be immaterial.
5. LEASE COMMITMENTS
The Company leases its facilities under operating leases, including one
contingent rental lease, extending through January 31, 1997. Future minimum
payments for 1996 total $15,325.
Rent expense totalled approximately $32,600, $53,609, and $79,240 for the
years ended December 31, 1993, 1994 and 1995, respectively.
F-181
<PAGE> 262
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-182
<PAGE> 263
VIDKO, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31,
1996
-------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 73,898
Merchandise inventory........................................................ 11,984
Due from affiliates.......................................................... 25,000
--------
Total current assets................................................. 110,882
Videocassette rental inventory, net.......................................... 139,934
Furnishings and equipment, net............................................... 20,677
Other assets................................................................. 3,900
--------
$ 275,393
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 40,783
Accrued expenses and other liabilities....................................... 25,016
Distributions payable........................................................ 10,000
--------
Total current liabilities............................................ 75,799
--------
Stockholders' equity
Common stock, no par value, 750 shares authorized,
100 shares issued and outstanding......................................... --
Additional paid-in capital................................................... 45,849
Retained earnings............................................................ 153,745
--------
Total stockholders' equity........................................... 199,594
--------
$ 275,393
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-183
<PAGE> 264
VIDKO, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $130,254 $152,881
Merchandise sales.................................................... 6,855 8,046
-------- --------
137,109 160,927
-------- --------
Costs and expenses
Store operating expenses............................................. 64,771 83,087
Cost of goods sold................................................... 5,415 6,561
General and administrative........................................... 24,690 25,790
-------- --------
94,876 115,438
-------- --------
Net income................................................... $ 42,233 $ 45,489
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-184
<PAGE> 265
VIDKO, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income........................................................... $ 42,233 $ 45,489
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of videocassette rental inventory.................... 34,547 56,853
Depreciation and amortization of furnishings and equipment........ 992 845
Changes in assets and liabilities
Merchandise inventory........................................... (1,531) 205
Accounts payable................................................ 5,684 16,043
Accrued expenses and other liabilities.......................... (3,183) (10,591)
-------- --------
Net cash provided by operating activities.................... 78,742 108,844
-------- --------
Cash flows from investing activities
Amounts due from affiliates, net..................................... (21,324) --
Purchases of videocassette rental inventory.......................... (41,639) (59,851)
-------- --------
Net cash used in investing activities........................ (62,963) (59,851)
-------- --------
Cash flows from financing activities
Amounts paid to affiliates........................................... -- (547)
Stockholder distribution............................................. -- (50,000)
-------- --------
Net cash used in financing activities........................ -- (50,547)
-------- --------
Net increase (decrease) in cash and cash equivalents................... 15,779 (1,554)
-------- --------
Cash and cash equivalents, beginning of period......................... 69,351 75,452
-------- --------
Cash and cash equivalents, end of period............................... $ 85,130 $ 73,898
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-185
<PAGE> 266
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $ 270,026
Accumulated amortization....................................... (130,092)
---------
$ 139,934
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-186
<PAGE> 267
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kobie-Co Movie Outlet
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of owner's equity present fairly, in all
material respects, the financial position of Kobie-Co Movie Outlet, at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1996
F-187
<PAGE> 268
KOBIE-CO MOVIE OUTLET
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $114,847 $ 210,120
Accounts receivable................................................ 1,766 1,856
Merchandise inventories............................................ 54,303 82,654
Prepaid expenses and other current assets.......................... 2,417 6,934
Due from affiliates................................................ 63,172 12,231
-------- ----------
236,505 313,795
Videocassette rental inventory, net.................................. 267,503 482,921
Furnishings and equipment, net....................................... 82,378 184,871
Other assets......................................................... -- 75,022
-------- ----------
$586,386 $1,056,609
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $116,399 $ 156,680
Accrued expenses and other current liabilities..................... 62,202 81,905
Due to affiliates.................................................. 5,264 25,000
Short-term borrowings.............................................. 75,000 5,000
Current portion of obligations under capital leases................ 2,607 --
Current portion of long-term debt.................................. -- 109,909
-------- ----------
Total current liabilities.................................. 261,472 378,494
-------- ----------
Long-term debt....................................................... -- 142,150
Commitments (Note 7)
Partnership capital:
Owner's equity..................................................... 103,936 122,267
Retained earnings.................................................. 220,978 413,698
-------- ----------
Total partnership capital.................................. 324,914 535,965
-------- ----------
$586,386 $1,056,609
======== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-188
<PAGE> 269
KOBIE-CO MOVIE OUTLET
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $1,159,633 $1,354,010 $2,637,361
Merchandise.......................................... 136,963 142,797 305,932
---------- ---------- ----------
1,296,596 1,496,807 2,943,293
---------- ---------- ----------
Costs and expenses:
Operating expenses................................... 526,628 490,183 1,294,226
Cost of goods sold................................... 107,545 121,699 221,314
General and administrative........................... 501,595 473,572 928,632
---------- ---------- ----------
1,135,768 1,085,454 2,444,172
---------- ---------- ----------
Income from operations............................ 160,828 411,353 499,121
---------- ---------- ----------
Interest income........................................ (780) (695) (1,867)
Interest expense....................................... 4,855 8,044 22,449
Other expense (income), net............................ (1,480) 4,224 (2,533)
---------- ---------- ----------
Net income........................................ $ 158,233 $ 399,780 $ 481,072
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-189
<PAGE> 270
KOBIE-CO MOVIE OUTLET
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 158,233 $ 399,780 $ 481,072
Amortization of videocassette rental inventory........ 340,024 312,654 849,705
Depreciation and amortization of furnishings and
equipment.......................................... 24,297 33,746 55,460
Amortization of covenant not to compete............... -- -- 2,000
Loss on asset disposal................................ -- 114 --
Changes in assets and liabilities:
Account receivable................................. 504 405 (90)
Merchandise inventories............................ (20,493) (13,703) (28,351)
Prepaid expenses and other current assets.......... 134 3,273 (4,517)
Other assets....................................... -- -- 24,655
Accounts payable................................... 81,843 25,366 40,281
Accrued expenses................................... (12,128) (18,355) 19,460
--------- --------- ---------
Net cash provided by operating activities..... 572,414 743,280 1,439,675
--------- --------- ---------
Cash flows from investing activities:
Due from affiliates, net.............................. (11,862) (33,859) 23,441
Purchases of property and equipment................... (53,705) (26,758) (71,703)
Purchases of videocassette rental inventory........... (350,343) (410,684) (879,301)
Acquisition of stores................................. -- -- (25,000)
--------- --------- ---------
Net cash used in investing activities......... (415,910) (471,301) (952,563)
--------- --------- ---------
Cash flows from financing activities:
Due to affiliates, net................................ (337) (2,399) 19,736
Net borrowings under line-of credit agreement......... 1,170 19,500 (42,500)
Distributions......................................... (142,315) (248,758) (288,352)
Principal repayments on capital lease obligations..... (15,205) (6,844) (6,107)
Proceeds from long-term debt.......................... 12,852 -- 17,500
Repayment of long-term debt........................... (17,696) (13,814) (92,116)
--------- --------- ---------
Net cash used in financing activities......... (161,531) (252,315) (391,839)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (5,027) 19,664 95,273
--------- --------- ---------
Cash and cash equivalents, beginning of period.......... 100,210 95,183 114,847
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 95,183 $ 114,847 $ 210,120
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 4,855 $ 8,044 $ 22,449
Supplemental disclosure of noncash investing and
financing activities:
Net assets contributed by owner....................... $ -- $ -- $ 18,331
Net assets and liabilities assumed in store
acquisition........................................ $ -- $ -- $ 43,331
Net assets and liabilities offset with affiliate...... $ -- $ -- $ 27,500
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-190
<PAGE> 271
KOBIE-CO MOVIE OUTLET
STATEMENT OF OWNER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
OWNER'S RETAINED STOCKHOLDERS'
EQUITY EARNINGS EQUITY
-------- --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1993............................. $ 97,273 $ 54,041 $ 151,314
Contributions.......................................... 6,663 -- 6,663
Net income............................................. -- 158,233 158,233
Distributions.......................................... -- (142,318) (142,318)
-------- --------- ---------
Balance at December 31, 1993........................... 103,936 69,956 173,892
Net income............................................. -- 399,780 399,780
Distributions.......................................... -- (248,758) (248,758)
-------- --------- ---------
Balance at December 31, 1994........................... 103,936 220,978 324,914
Contributions.......................................... 18,331 -- 18,331
Net income............................................. -- 481,072 481,072
Distributions.......................................... -- (288,352) (288,352)
-------- --------- ---------
Balance at December 31, 1995........................... $122,267 $ 413,698 $ 535,965
======== ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-191
<PAGE> 272
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Kobie-Co Movie Outlet (the "Company") owns and operates ten videocassette
rental stores, located primarily in Northeast Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release Videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory is charged to operations at the time of
sale. The Company believes that its method of amortization results in an
appropriate matching of tape amortization expense with the revenue received from
the associated rental of such tape.
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory............................... $ 546,723 $ 985,031
Accumulated amortization..................................... (279,220) (502,110)
--------- ---------
$ 267,503 $ 482,921
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$340,024, $312,654 and $849,705 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-192
<PAGE> 273
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (five to seven years) of
furnishings and equipment and over the lesser of the estimated useful lives or
lease terms (primarily three years) of leased items using the straight-line
method. Repair and maintenance costs are expensed as incurred.
Upon sale or retirement, the costs and related accumulated depreciation or
amortization are eliminated from the respective accounts and any resulting gain
or loss is included in income.
Income Taxes
The Company has elected to be treated as a general partnership for income
tax purposes for the three years ended December 31, 1995. Accordingly, the
income of the Company is taxed at the partnership level for those years, and no
provision for income tax has been made in the accompanying financial statements.
3. FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 87,909 $ 91,968
Equipment and vehicles....................................... 51,668 165,998
Leasehold improvements....................................... 63,866 103,430
--------- ---------
203,443 361,396
Accumulated depreciation and amortization.................... (121,065) (176,525)
--------- ---------
$ 82,378 $ 184,871
========= =========
</TABLE>
Depreciation and amortization expense were $24,297, $33,746 and $55,460 for
the years ended December 31, 1993, 1994 and 1995, respectively.
4. SHORT-TERM BORROWINGS
The Company has available additional unsecured lines of credit from various
domestic banks approximating $25,000 and $45,000 for the years ended December
31, 1994 and December 31, 1995, respectively. The short-term borrowings
outstanding at the end of December 31, 1994 and 1995 represent bank borrowings
under these lines of credit. The Company's working capital needs were fulfilled
by borrowing under these lines of credit, which were on terms and at interest
rates generally extended to companies of comparable credit worthiness.
F-193
<PAGE> 274
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Long-term debt consists of the following:
10.00% note payable to bank, payable in monthly
installments of $242 commencing September of 1995................. $ -- $ 6,531
10.00% note payable to bank, payable in monthly installments of
$381.62 commencing November of 1995............................... -- 9,417
10% note payable to former owners of Mortgage I in monthly
installments of $7,260.12 commencing February of 1995............. -- 163,232
10% note payable to former owners of Montage II in monthly
installments of $564.68 commencing February of 1995............... -- 12,696
Consulting fee payable to former owners of Montage I and Montage II
in monthly installments of $2,610.26 commencing February of
1995.............................................................. -- 60,183
-------- --------
-- 252,059
Less: current portion................................................ -- 109,909
-------- --------
$ -- $142,150
======== ========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company leases various store facilities from an affiliate company
through common ownership. Rent expense charged to operations for these
facilities totaled $24,100, $58,200 and $78,600 for December 31, 1993, 1994 and
1995, respectively.
In 1994, an owner of the company assumed both the ownership of a vehicle
previously owned by the Company and its related debt. The net book value and
outstanding debt, at the date of transfer, of this assumed asset were $15,394
and $15,280, respectively.
Amounts due to affiliates and amounts due from affiliates are due on
demand, bearing no interest.
The Company has entered into several other agreements and transactions with
affiliate parties which may have resulted in different financial results. It is
the opinion of management that any economic differences resulting from these
transactions would be immaterial.
On January 1, 1995, one of the two partners of the Company purchased the
remaining partnership interest in the Company from the other partner.
Effective January 1, 1995, the Company acquired substantially all of the
net assets of Montage I, a company 50% owned by a previous partner in the
Company. Refer to Note 7 for further information regarding this transaction.
The owner of the Company had a 50% ownership in Montage II, a company
consisting of two stores. Effective January 1, 1995, the owner of the Company
purchased the remaining ownership interest in Montage II. The owner contributed
the net assets of Montage II in exchange for $25,000 in cash.
7. ACQUISITION
On January 1, 1995, the Company acquired substantially all of the net
assets and entered into a five-year non-competition agreement with the owner of
Montage I, a company consisting of four stores, in exchange for a note payable
to the previous owners in the amount of $225,000. The acquisition was accounted
for as a
F-194
<PAGE> 275
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purchase, and Montage I was merged into the Company. Operations of Montage I
have been included in the accompanying financial statements from the date of
acquisition.
The allocation of the purchase price associated with the above acquisition
is summarized as follows:
<TABLE>
<CAPTION>
MONTAGE
I
--------
<S> <C>
Videocassette rental inventory.................................... $125,000
Furnishings, equipment and leasehold improvements................. 75,000
Intangibles....................................................... 25,000
--------
$225,000
========
</TABLE>
8. LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
December 31, 1999. Minimum future rental payments under these leases as of
December 31, 1995 is as follows:
<TABLE>
<S> <C>
1996.............................................................. $271,493
1997.............................................................. 217,029
1998.............................................................. 109,400
1999.............................................................. 78,600
Thereafter........................................................ --
--------
Future minimum payments........................................... $676,522
========
</TABLE>
Rent expense totalled approximately $132,868, $152,199 and $334,570 for the
years ended December 31, 1993, 1994 and 1995, respectively.
9. DISTRIBUTIONS
The Company is a partnership. Current year distributions were made to one
of the two partners. If the Company is sold, the proceeds of such sale are to be
distributed equally between the two partners.
10. SUBSEQUENT EVENTS
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-195
<PAGE> 276
KOBIE-CO MOVIE OUTLET
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31,
1996
-------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................................. $ 237,189
Merchandise inventory..................................................... 62,422
Prepaid expenses and other current assets................................. 3,301
Due from affiliates....................................................... 3,162
----------
Total current assets.............................................. 306,074
Videocassette rental inventory, net....................................... 515,152
Furnishings and equipment, net............................................ 185,517
Other assets.............................................................. 68,300
----------
$ 1,075,043
==========
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities
Accounts payable.......................................................... $ 187,113
Accrued expenses and other current liabilities............................ 31,240
Due to affiliates......................................................... 25,000
Current portion of long-term debt......................................... 53,684
----------
Total current liabilities......................................... 297,037
Long-term debt.............................................................. 163,955
----------
Total liabilities................................................. 460,992
----------
Partnership Capital:
Owners' equity............................................................ 122,267
Retained earnings......................................................... 491,784
----------
Total partnership capital......................................... 614,051
----------
$ 1,075,043
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-196
<PAGE> 277
KOBIE-CO MOVIE OUTLET
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $686,855 $752,565
Merchandise sales.................................................... 66,360 83,926
-------- --------
753,215 836,491
-------- --------
Costs and expenses
Store operating expenses............................................. 373,607 378,764
Cost of goods sold................................................... 48,443 59,998
General and administrative........................................... 201,841 239,580
-------- --------
623,891 678,342
-------- --------
Income from operations....................................... 129,324 158,149
-------- --------
Interest income........................................................ (205) (439)
Interest expense....................................................... 9,202 7,252
-------- --------
Net income........................................................ $120,327 $151,336
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-197
<PAGE> 278
KOBIE-CO MOVIE OUTLET
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income.......................................................... $ 120,327 $151,336
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of videocassette rental inventory................... 236,202 217,440
Depreciation and amortization of furnishings and equipment....... 13,790 7,703
Amortization of covenant not to compete.......................... 500 500
Changes in assets and liabilities
Merchandise inventory.......................................... (6,331) 20,232
Prepaid expenses and other current assets...................... (19,212) 5,489
Other assets................................................... 23,914 6,222
Accounts payable............................................... 24,062 30,433
Accrued expenses and other current liabilities................. (27,966) (50,665)
-------- ---------
Net cash provided by operating activities................... 365,286 388,690
-------- ---------
Cash flows from investing activities
Due from affiliates, net............................................ 25,924 9,069
Purchases of property and equipment................................. (64,855) (8,349)
Purchases of videocassette rental inventory......................... (196,887) (249,671)
Acquisition of stores............................................... (25,000) --
-------- ---------
Net cash used in investing activities....................... (260,818) (248,951)
-------- ---------
Cash flows from financing activities
Due to affiliates, net.............................................. (5,264) --
Distributions....................................................... (16,000) (73,250)
Principal repayments on capital lease obligations................... (6,107) --
Proceeds from long-term debt........................................ 17,500 --
Repayment of long-term debt......................................... (17,662) (39,420)
-------- ---------
Net cash used in financing activities....................... (27,533) (112,670)
-------- ---------
Net increase in cash and cash equivalents............................. 76,935 27,069
-------- ---------
Cash and cash equivalents, beginning of period........................ 114,847 210,120
-------- ---------
Cash and cash equivalents, end of period.............................. $ 191,782 $237,189
======== =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest............................ $ 9,202 $ 7,252
Supplemental disclosure of noncash investing and financing activities
Net assets contributed by owner..................................... $ 18,331 $ --
Net assets and liabilities assumed in store acquisition............. $ 43,331 $ --
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-198
<PAGE> 279
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
Videocassette rental inventory................................... $1,063,842
Accumulated amortization......................................... (548,690)
---------
$ 515,152
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-199
<PAGE> 280
INDEPENDENT AUDITORS' REPORT
The Stockholders
Large Corporation, Lyndhurst Video Inc., Kearny
Video Inc., New Milford Video Inc., Hillsdale
Video Inc., Hack Video Inc., Bell Video Inc.,
Bergen Video Inc., Harris Video Inc., Rahway
Video Inc., Wall Video Inc., Mont Video Inc.,
Super Video of Park Ridge, Inc., Emerson Video,
LLC and Super Video Mgt. Co.:
We have audited the accompanying combined balance sheets of Large
Corporation, Lyndhurst Video Inc., Kearny Video Inc., New Milford Video Inc.,
Hillsdale Video Inc., Hack Video Inc., Bell Video Inc., Bergen Video Inc.,
Harris Video Inc., Rahway Video Inc., Wall Video Inc., Mont Video Inc., Super
Video of Park Ridge, Inc., Emerson Video, LLC and Super Video Mgt. Co. as of
December 31, 1995 and 1994 and the related combined statements of income,
stockholders' equity (deficit) and cash flows for the years then ended. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Large Corporation,
Lyndhurst Video Inc., Kearny Video Inc., New Milford Video Inc., Hillsdale Video
Inc., Hack Video Inc., Bell Video Inc., Bergen Video Inc., Harris Video Inc.,
Rahway Video Inc., Wall Video Inc., Mont Video Inc., Super Video of Park Ridge,
Inc., Emerson Video, LLC and Super Video Mgt. Co. as of December 31, 1995 and
1994, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Princeton, New Jersey
March 15, 1996
F-200
<PAGE> 281
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 688,434 722,746
Accounts receivable............................................. 5,185 1,997
---------- ---------
Total current assets....................................... 693,619 724,743
---------- ---------
Videocassette rental inventory, net.................................. 884,184 510,486
Property and equipment, net (note 3)................................. 502,449 364,061
Other assets......................................................... 126,775 93,889
---------- ---------
$2,207,027 1,693,179
========= ========
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities:
Note payable (note 4)........................................... $ 400,000 525,000
Accounts payable................................................ 837,071 788,210
Accrued expenses................................................ 110,002 77,137
Notes payable to stockholders (note 5).......................... -- 213,000
---------- ---------
Total current liabilities.................................. 1,347,073 1,603,347
Deferred rent........................................................ 204,609 168,274
---------- ---------
1,551,682 1,771,621
---------- ---------
Stockholders' equity (deficit) (notes 10 and 11):
Common stock, no par value per share; authorized 131,000 shares;
29,535 and 26,314 issued shares, and 13,677 and 10,456
outstanding shares in 1995 and 1994, respectively.............. 142,060 50,060
Additional paid-in capital...................................... 226,438 226,438
Retained earnings (accumulated deficit)......................... 667,096 (51,062)
---------- ---------
1,035,594 225,436
Less:
Notes receivable from stockholder (note 8)...................... (76,371) --
Less treasury stock, at cost.................................... (303,878) (303,878)
---------- ---------
Total stockholders' equity (deficit)....................... 655,345 (78,442)
---------- ---------
$2,207,027 1,693,179
========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-201
<PAGE> 282
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Revenues:
Movie rentals................................................... $7,274,275 5,922,416
Merchandise sales............................................... 1,283,695 1,305,505
---------- ---------
8,557,970 7,227,921
---------- ---------
Operating costs and expenses:
Store operating expenses........................................ 4,088,968 3,459,645
Amortization of videocassette rental inventory.................. 1,180,322 880,376
Cost of sales................................................... 1,407,862 1,437,303
General and administrative expenses............................. 617,263 510,965
---------- ---------
7,294,415 6,288,289
---------- ---------
Operating income........................................... 1,263,555 939,632
---------- ---------
Other income (expense):
Other........................................................... 7,409 73,271
Interest income................................................. 13,905 12,359
Interest expense................................................ (38,642) (27,103)
---------- ---------
(17,328) 58,527
---------- ---------
Income before income taxes................................. 1,246,227 998,159
Income taxes (note 6)................................................ 48,069 27,017
---------- ---------
Net income................................................. $1,198,158 971,142
========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-202
<PAGE> 283
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NOTE
RETAINED RECEIVABLE TOTAL
ADDITIONAL EARNINGS TREASURY FROM STOCKHOLDERS'
COMMON PAID-IN (ACCUMULATED STOCK, STOCK- EQUITY
STOCK CAPITAL DEFICIT) AT COST HOLDER (DEFICIT)
-------- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993....... $ 48,060 226,438 (22,204) (303,878) -- (51,584)
Net income....................... -- -- 971,142 -- -- 971,142
Cash dividends paid.............. -- -- (1,000,000) -- -- (1,000,000)
Acquisition of Wall Video Inc.... 1,000 -- -- -- -- 1,000
Establishment of Mont Video
Inc............................ 1,000 -- -- -- -- 1,000
-------- ---------- ------------ -------- ---------- ----------
Balance, December 31, 1994....... 50,060 226,438 (51,062) (303,878) -- (78,442)
Net income....................... -- 1,198,158 -- -- 1,198,158
Cash dividends paid.............. -- (480,000) -- -- (480,000)
Exercised of stock option........ 90,000 -- -- -- (90,000) --
Establishment of Super Video of
Park Ridge, Inc................ 1,000 -- -- -- -- 1,000
Establishment of Emerson Video,
LLC............................ 1,000 -- -- -- -- 1,000
Payment on note receivable from
shareholder.................... -- -- -- -- 13,629 13,629
-------- ---------- ------------ -------- ---------- ----------
Balance, December 31, 1995....... $142,060 226,438 667,096 (303,878) (76,371) 655,345
======== ======= ========== ======== ======= =========
</TABLE>
See accompanying notes to combined financial statements.
F-203
<PAGE> 284
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $ 1,198,158 971,142
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 1,341,242 1,025,293
Loss on disposal of assets................................ 19,132 --
Changes in assets and liabilities:
Accounts receivable.................................. (3,188) (1,997)
Other assets......................................... (32,886) (40,384)
Accounts payable..................................... 48,861 168,511
Accrued expenses..................................... 32,865 (100,942)
Deferred rent........................................ 36,335 7,035
----------- ----------
Total adjustments............................... 1,442,361 1,057,516
----------- ----------
Net cash provided by operating activities....... 2,640,519 2,028,658
----------- ----------
Cash flows from investing activities:
Purchases of videocassette rental inventory, net............... (1,554,020) (1,182,778)
Purchase of equipment.......................................... (318,440) (170,480)
----------- ----------
Net cash used in investing activities........... (1,872,460) (1,353,258)
----------- ----------
Cash flows from financing activities:
Payment on note receivable from stockholder.................... 13,629 --
Repayment of notes payable..................................... (213,000) --
Proceeds from note payable..................................... 600,000 525,000
Payment on note payable........................................ (725,000) --
Proceeds from issuance of common stock......................... 2,000 2,000
Cash dividends paid............................................ (480,000) (1,000,000)
----------- ----------
Net cash used in financing activities........... (802,371) (473,000)
----------- ----------
Net increase (decrease) in cash and cash equivalents................ (34,312) 202,400
Cash and cash equivalents, beginning of year........................ 722,746 520,346
----------- ----------
Cash and cash equivalents, end of year.............................. $ 688,434 722,746
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 39,111 27,649
Income taxes.............................................. 22,928 387
========== =========
Supplemental disclosure of noncash activity:
In 1995, the Company issued shares of its common stock to a
stockholder in exchange for a note receivable in the amount of
$90,000 (note 8)
</TABLE>
See accompanying notes to combined financial statements.
F-204
<PAGE> 285
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) ORGANIZATION
Large Corporation, Lyndhurst Video Inc., Kearny Video Inc., New Milford
Video Inc., Hillsdale Video Inc., Hack Video Inc., Bell Video Inc., Bergen Video
Inc., Harris Video Inc., Rahway Video Inc., Wall Video Inc., Mont Video Inc.,
Super Video of Park Ridge, Inc., Emerson Video, LLC and Super Video Mgt. Co.
(collectively the Company or the Companies), each a New Jersey corporation, own
and operate video specialty stores located primarily in northern New Jersey. All
of such Companies are commonly owned and therefore combined in the accompanying
financial statements. As of December 31, 1995, the Company operated fourteen
stores, three of which began operations during 1995. As of December 31, 1994,
the Company operated eleven stores.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Videocassette rental inventory
Videocassette rental inventory, which includes video games, is recorded at
cost, and amortized over its estimated economic life with no provision for
salvage value. Copies one through three of each title per store are amortized as
base stock over 36 months on a straight-line basis. The fourth through ninth
copies of each title per store are amortized over 36 months on an accelerated
basis. The tenth and any additional copies of each title per store are amortized
over nine months on an accelerated basis.
Amortization expense related to videocassette rental inventory totaled
$1,180,322 and $880,376 for the years ended December 31, 1995 and 1994,
respectively. As videocassettes are sold or retired, the applicable cost and
accumulated amortization are eliminated from the accounts, and any gain or loss
is recorded.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Furniture and fixtures......................... 5 years
Equipment...................................... 5 years
Leasehold improvements......................... Shorter of estimated useful
life or lease term
</TABLE>
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized. Gains and
losses on dispositions are reflected in income.
Revenue recognition
Revenue is recognized at the time of rental or sale.
Store opening costs
Store opening costs, which consist primarily of payroll, advertising and
supplies, are expensed as incurred.
F-205
<PAGE> 286
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
Income taxes
All of the Companies, except Emerson Video, LLC, have elected to be treated
as an "S" corporation for Federal tax purposes under Subchapter S of the
Internal Revenue Code. Accordingly, no provisions for Federal income taxes are
required for those entities and the results of operations for those entities are
included pro rata in the individual income tax returns of their stockholders.
For state income tax purposes Super Video Mgt. Co., Lyndhurst Video Inc.,
Kearny Video Inc., New Milford Video Inc., Hillsdale Video Inc., Hack Video Inc.
and Super Video of Park Ridge, Inc. have elected to be treated as an "S"
corporation, under the tax regulations of the State of New Jersey while the
remaining entities (excluding Emerson Video, LLC) are treated as C-corporations
under the tax regulations of the State of New Jersey.
Statement of Financial Accounting Standards No. 109, (Statement 109)
"Accounting for Income Taxes" requires a change from the deferred method under
APB Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Fair value of financial instruments
Statement of Financial Accounting Standards SFAS No 107, "Disclosure about
Fair Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company believes that there is no
material difference between the fair value and the reported amounts of financial
instruments in the combined balance sheets.
Use of estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Companies consider all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
F-206
<PAGE> 287
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994 are comprised of the
following:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Furniture and fixtures............................................ $ 464,286 326,849
Equipment......................................................... 243,638 200,016
Leasehold improvements............................................ 407,046 291,774
----------- --------
1,114,970 818,639
Less accumulated depreciation..................................... 612,521 454,578
----------- --------
$ 502,449 364,061
========= =======
</TABLE>
(4) NOTE PAYABLE
The Company has obtained a $750,000 line of credit from a bank. The
interest rate on the line of credit is prime plus 1-1/2% (9.5% as of December
31, 1995). As of December 31, 1995, the Companies have borrowed $400,000
($525,000 at December 31, 1994). The line is secured by substantially all assets
of the Companies and the personal guarantee of each of the stockholders.
(5) NOTES PAYABLE TO STOCKHOLDERS
At December 31, 1994, the Company had notes payable to stockholders as
follows:
<TABLE>
<S> <C>
Promissory note payable December 31, 1995 to a stockholder, with interest
payable monthly at 10%................................................. $ 98,415
Promissory note payable December 31, 1995 to a stockholder, with interest
payable monthly at 10%................................................. 98,415
Promissory note payable December 31, 1995 to a stockholder, with interest
payable monthly at 10%................................................. 16,170
---------
$ 213,000
========
</TABLE>
All such notes were paid in full during 1995.
(6) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1995 and 1994 are
primarily net operating loss carryforwards.
These items amounted to approximately $58,000 in 1995 and 1994, and are
offset by a valuation allowance for a similar amount due to the uncertainty of
their recoverability.
F-207
<PAGE> 288
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
The current and deferred income tax expense for the years ended December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
State income tax:
Current................................................ $ 48,069 27,017
Deferred............................................... -- --
-------- -------
$ 48,069 27,017
======= ======
</TABLE>
A reconciliation of the difference between what the annual tax provision
would have been if computed on the state income tax rate of 9% and what was
actually provided for financial reporting purposes, as shown in the foregoing
summary for the years ended December 31, 1995 and 1994, respectively, are as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
State income tax expense....................................... $112,160 89,834
Effect of corporations taxed at different rates................ (70,181) (90,439)
Increase (decrease) in valuation allowance..................... -- 24,293
Other.......................................................... 6,090 3,329
-------- -------
$ 48,069 27,017
======== =======
</TABLE>
The Companies have net operating losses for state purposes totaling
approximately $230,000 which expire 2005 through 2010.
(7) COMMITMENTS
Each of the Companies occupy premises for store and office space under
operating leases. Certain of the leases require the stores to pay all operating
expenses and real estate taxes. Minimum rental commitments for the next five
years and in the aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996....................................................... $1,196,415
1997....................................................... 1,014,748
1998....................................................... 905,405
1999....................................................... 813,805
2000....................................................... 343,485
Thereafter................................................. 1,065,822
----------
$5,339,680
=========
</TABLE>
Rent expense, including store operating expenses and real estate taxes,
charged to operations for the year ended December 31, 1995 and 1994 amounted to
$1,206,075 and $971,286, respectively.
At December 31, 1995 and 1994, Super Video Mgt. Co. had $77,400 of open
letters of credit for security deposits on three store leases.
F-208
<PAGE> 289
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
(8) RELATED PARTY TRANSACTIONS
On May 20, 1995, a stockholder of the Company exercised an option to
purchase 90,000 shares of common stock. In connection therewith, the Company
issued a note receivable from the stockholder for a principal amount of $90,000
bearing interest at 6.42% per year, payable in monthly installments through May
20, 1998.
Certain stockholders of the Companies are shareholders in 495 Kearny Ave.
Corp., General Partner to 495 Kearny Ave. Associates, Limited Partnership, which
owns the store premises leased by Kearny Video Inc. Rent expense for the Kearny
store for the years ended December 31, 1995 and 1994 was $116,796 and $109,546,
respectively.
(9) EMPLOYEE BENEFIT PLAN
Super Video Mgt. Co. adopted a 401(k) plan (the Plan) effective January 1,
1992. The Plan covers substantially all employees. Matching contributions and
profit sharing contributions to the Plan will be made at the discretion of
management. There were no contributions to the Plan for the years ended December
31, 1995 and 1994.
F-209
<PAGE> 290
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
(10) COMMON STOCK
Included in common stock in the accompanying combined balance sheets is the
stock of Large Corporation, Lyndhurst Video Inc., Kearny Video Inc., New Milford
Video Inc., Hillsdale Video Inc., Hack Video Inc., Bell Video Inc., Bergen Video
Inc., Harris Video Inc., Rahway Video Inc., Wall Video Inc., Mont Video Inc.,
Super Video of Park Ridge, Inc., Emerson Video, LLC and Super Video Mgt. Co. The
amounts outstanding as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- -------
<S> <C> <C>
LargeCorporation, common stock, no par value, 10,000 shares
authorized,
813.5 and 769 shares outstanding in 1995 and 1994, respectively.... $ 30,412 24,120
Lyndhurst Video Inc., common stock, no par value, 10,000 shares
authorized, 813.5 and 769 shares outstanding in 1995 and 1994,
respectively....................................................... 17,781 4,724
Kearny Video Inc., common stock, no par value, 10,000 shares
authorized, 813.5 and 769 shares outstanding in 1995 and 1994,
respectively....................................................... 12,415 3,464
New Milford Video Inc., common stock, no par value, 10,000 shares
authorized, 813.5 and 769 shares outstanding in 1995 and 1994,
respectively....................................................... 17,310 4,364
Hillsdale Video Inc., common stock, no par value, 10,000 shares
authorized, 813.5 and 769 shares outstanding in 1995 and 1994,
respectively....................................................... 17,963 4,724
Super Video Mgt. Co., common stock, no par value, 10,000 shares
authorized, 813.5 and 769 shares outstanding in 1995 and 1994,
respectively....................................................... 16,080 1,664
Hack Video Inc., common stock, no par value, 10,000 shares
authorized, 5,130 and 4,887 shares outstanding in 1995 and 1994,
respectively....................................................... 12,926 1,000
Bergen Video Inc., common stock, no par value, 10,000 shares
authorized, 106 and 99 shares outstanding in 1995 and 1994,
respectively....................................................... 1,070 1,000
Bell Video Inc., common stock, no par value, 10,000 shares
authorized, 106
and 99 shares outstanding in 1995 and 1994, respectively........... 5,611 1,000
Harris Video Inc., common stock, no par value, 10,000 shares
authorized; 106 and 99 shares outstanding in 1995 and 1994,
respectively....................................................... 5,282 1,000
Rahway Video Inc., common stock, no par value, 10,000 shares
authorized,
106 and 99 shares outstanding in 1995 and 1994, respectively....... 1,070 1,000
Wall Video Inc., common stock, no par value, 10,000 shares
authorized, 1,071 and 1,000 shares outstanding in 1995 and 1994,
respectively....................................................... 1,070 1,000
Mont Video Inc., common stock, no par value 10,000 shares authorized,
1,071 and 1,000 shares outstanding in 1995 and 1994,
respectively....................................................... 1,070 1,000
SuperVideo of Park Ridge, Inc., common stock, no par value 1,000
shares authorized, 1,000 shares outstanding in 1995 (none in
1994).............................................................. 1,000 --
Emerson Video, LLC, 100 units issued and outstanding in 1995 (none in
1994).............................................................. 1,000 --
--------- -------
$ 142,060 50,060
======== ======
</TABLE>
F-210
<PAGE> 291
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
(11) TREASURY STOCK
Included in treasury stock in the accompany combined balance sheets is the
treasury stock of Large Corporation, Lyndhurst Video Inc., Kearny Video Inc.,
New Milford Video Inc., Hillsdale Video Inc., Super Video Mgt. Co. and Hack
Video Inc. The amounts included in the treasury stock, at cost, as of December
31, 1995 and 1994 are as follows:
<TABLE>
<S> <C>
Large Corporation, 1,550 shares................................ $ 27,450
Lyndhurst Video Inc., 1,550 shares............................. 61,000
Kearny Video Inc., 1,550 shares................................ 39,650
New Milford Video Inc., 1,550 shares........................... 54,900
Hillsdale Video Inc., 1,550 shares............................. 61,000
Super Video Mgt. Co., 1,550 shares............................. 9,150
Hack Video Inc., 6,558 shares.................................. 50,728
---------
$ 303,878
========
</TABLE>
F-211
<PAGE> 292
INTERIM COMBINED FINANCIAL STATEMENTS
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 573,730
Accounts receivable........................................................ 998
-------------
Total current assets.................................................. 574,728
Videocassette rental inventory, net............................................. 971,765
Furnishings and equipment, net.................................................. 426,158
Other assets.................................................................... 123,441
-------------
$ 2,096,092
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 639,092
Accrued expenses and other liabilities..................................... 179,198
-------------
Total current liabilities............................................. 818,290
Deferred Rent................................................................... 211,088
-------------
Total liabilities..................................................... 1,029,378
-------------
Stockholders' equity:
Common stock, no par value, 131,000 shares authorized, 29,535 shares issued
and 13,677 shares outstanding............................................. 142,060
Additional paid-in capital................................................. 226,438
Retained earnings.......................................................... 1,064,178
-------------
1,432,676
Less:
Notes receivable from stockholder.......................................... (62,084)
Treasury stock, at cost.................................................... (303,878)
-------------
Total stockholders' equity............................................ 1,066,714
-------------
$ 2,096,092
==========
</TABLE>
See accompanying notes to combined financial statements.
F-212
<PAGE> 293
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues
Rental revenue................................................. $3,960,961 $3,346,317
Merchandise sales.............................................. 929,114 670,232
---------- ----------
4,890,075 4,016,549
---------- ----------
Operating Costs and expenses
Store operating expenses....................................... 1,947,859 1,773,870
Amortization of videocassette rental inventory................. 745,363 605,826
Cost of goods sold............................................. 993,599 578,093
General and administrative..................................... 273,587 307,018
---------- ----------
3,960,408 3,264,807
---------- ----------
Operating Income.......................................... 929,667 751,742
Interest Income..................................................... 8,364 6,402
Interest Expense.................................................... -- (22,650)
---------- ----------
Income Before Taxes................................................. 938,031 735,494
Income Taxes........................................................ 54,363 21,315
---------- ----------
Net Income................................................ $ 883,668 $ 714,179
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-213
<PAGE> 294
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ 883,668 $ 714,179
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 821,654 691,817
Changes in assets and liabilities:
Accounts receivable.................................... 4,187 (2,003)
Other assets........................................... 3,334 (36,220)
Accounts payable....................................... (197,979) (15,477)
Accrued expenses....................................... 69,196 --
Deferred rent.......................................... 6,479 15,389
---------- ----------
Total adjustments................................. 706,871 653,506
---------- ----------
Net cash provided by operating activities......... 1,590,539 1,367,685
Cash flows from investing activities:
Purchases of videocassette rental inventory, net................. (832,944) (732,550)
Purchase of equipment............................................ -- (194,577)
---------- ----------
Net cash used in investing activities............. (832,944) (927,127)
---------- ----------
Cash flows from financing activities:
Payment on note receivable from stockholder...................... 14,287 --
Repayment of notes payable....................................... (400,000) (230,000)
Proceeds from issuance of common stock........................... -- 2,000
Cash dividends paid.............................................. (486,586) (480,000)
---------- ----------
Net cash used in financing activities............. (872,299) (708,000)
---------- ----------
Net increase (decrease) in cash and cash equivalents.................. (114,704) (267,442)
---------- ----------
Cash and cash equivalents, beginning of period........................ 688,434 722,746
Cash and cash equivalents, end of period.............................. $ 573,730 $ 455,304
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-214
<PAGE> 295
LARGE CORPORATION, LYNDHURST VIDEO INC.,
KEARNY VIDEO INC., NEW MILFORD VIDEO INC.,
HILLSDALE VIDEO INC., HACK VIDEO INC.,
BELL VIDEO INC., BERGEN VIDEO INC., HARRIS
VIDEO INC., RAHWAY VIDEO INC., WALL VIDEO INC.,
MONT VIDEO INC., SUPER VIDEO OF PARK RIDGE, INC.,
EMERSON VIDEO, LLC AND SUPER VIDEO MGT. CO.
JUNE 30, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Companies' audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the six month periods ended June 30, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
Videocassette rental inventory......................................... $ 3,959,030
Accumulated amortization............................................... 2,987,265
----------
$ 971,765
==========
</TABLE>
3. SUBSEQUENT EVENT
On August 23, 1996 the Companies' entered into a definitive agreement to
sell substantially all of its assets to West Coast Entertainment Corporation.
F-215
<PAGE> 296
The Board of Directors and Shareholders
JJ Video, Inc., Picture Show Video, Inc.,
Picture Show Video #4, Inc.,
Picture Show Video-Gardenside, Inc.
and Picture Show Video-Winchester, Inc.
We have audited the accompanying combined balance sheets of JJ Video, Inc.,
Picture Show Video, Inc., Picture Show Video #4, Inc., Picture Show
Video-Gardenside, Inc. and Picture Show Video-Winchester, Inc. as of December
31, 1995 and 1994, and the related combined statements of income, stockholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of JJ Video, Inc.,
Picture Show Video, Inc., Picture Show Video #4, Inc., Picture Show
Video-Gardenside, Inc. and Picture Show Video-Winchester, Inc. as of December
31, 1995 and 1994 and the combined results of operations and its cash flows for
each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/S/ SWITZER, MCGAUGHEY & COMPANY,
PSC
------------------------------------
Switzer, McGaughey & Company, PSC
Lexington, Kentucky
August 21, 1996
F-216
<PAGE> 297
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 1).................................................. $ 65,161 $ 103,342
Accounts Receivable (Note 2)................................... 1,350 64,729
Inventory (Note 1)............................................. 24,608 15,789
---------- ----------
Total Current Assets...................................... 91,119 183,860
Video Cassette Rental Inventory, Net (Note 1)....................... 379,077 502,623
Equipment and Improvements, Net (Notes 1 and 3)..................... 152,309 169,858
Other Assets (Notes 1 and 4)........................................ 167,724 234,764
---------- ----------
TOTAL ASSETS.............................................. $ 790,229 $1,091,105
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses.......................... 263,164 293,158
Note Payable -- Shareholder (Note 5)........................... 787,803 966,661
Current Maturities of Long Term Debt........................... -- 22,707
---------- ----------
Total Current Liabilities................................. 1,050,967 1,282,526
LONG TERM LIABILITIES:
Long Term Debt Less Current Maturities......................... -- 13,843
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock (Note 6).......................................... 15,100 15,100
Retained Earnings (Deficit).................................... (275,838) (220,364)
---------- ----------
Total Stockholders' Equity................................ (260,738) (205,264)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $ 790,229 $1,091,105
========== ==========
</TABLE>
See notes to the combined financial statements.
F-217
<PAGE> 298
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
COMBINED INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Retail Video Rentals............................... $1,885,766 $1,592,377 $1,164,313
Product Sales...................................... 177,455 113,922 69,341
---------- ---------- ----------
Total Revenue............................ 2,063,221 1,706,299 1,233,654
Cost and Expenses:
Store Operating Costs......................... 955,715 855,614 580,598
Video Tape Amortization (Note 1).............. 685,068 466,063 384,179
Cost of Sales................................. 77,605 28,889 3,027
General and Administrative.................... 69,683 98,019 106,973
---------- ---------- ----------
Total Costs and Expenses................. 1,788,071 1,448,585 1,074,777
Income from Operations................... 275,150 257,714 158,877
Other Expenses:
Interest...................................... 86,624 75,087 51,488
---------- ---------- ----------
NET INCOME......................................... $ 188,526 $ 182,627 107,389
========= ========= =========
</TABLE>
See notes to the combined financial statements.
F-218
<PAGE> 299
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
RETAINED STOCKHOLDERS'
COMMON PAID IN EARNINGS EQUITY
STOCK CAPITAL (DEFICIT) (DEFICIT)
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1992........................... $15,100 $ 10,100 $ (370,780) $(345,580)
1993 Net Income............................... 107,389 107,389
Repayment of Paid in Capital.................. -- (10,000) -- (10,000)
------- -------- ---------- -------------
Balance,
December 31, 1993........................... 15,100 100 (263,391) (248,191)
1994 Net Income............................... -- -- 182,627 182,627
Repayment of Paid in Capital.................. -- (100) -- (100)
Shareholder Distributions..................... -- -- (139,600) (139,600)
------- -------- ---------- -------------
Balance,
December 31, 1994........................... 15,100 -- (220,364) (205,264)
1995 Net Income............................... -- -- 188,526 188,526
Shareholder Distributions..................... -- -- (244,000) (244,000)
------- -------- ---------- -------------
Total......................................... $15,100 $ -- $ (275,838) (260,738)
======= ======== ========= ==========
</TABLE>
See notes to the combined financial statements.
F-219
<PAGE> 300
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
COMBINED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- ----------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income........................................ $ 188,526 $ 182,627 $ 107,389
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Video Tapes....................... 685,068 466,063 384,179
Depreciation...................................... 27,859 32,870 27,279
Amortization of Intangible Assets................. 67,040 35,994 2,700
Loss on Sale of Equipment......................... -- 999 --
Changes in Assets and Liabilities:
Accounts Receivable............................... 63,379 (64,111) (350)
Inventory......................................... (8,818) (8,230) (1,587)
Accounts Payable and Accrued Expenses............. (29,994) 120,475 20,257
--------- ----------- ---------
Net Cash Provided by Operating Activities.... 993,060 766,687 539,867
Cash Flows from Investing Activities:
Purchase of Intangible Assets..................... -- (256,424) --
Purchase of Equipment and Improvements............ (10,312) (43,084) (71,995)
Purchase of Video Cassette Rental Inventory....... (561,522) (773,520) (370,134)
Proceeds from the Sale of Equipment............... -- 52,000 --
Building Deposits................................. -- (3,000) --
========= =========== =========
Net Cash Used in Investing Activities........ $(571,834) $(1,024,028) $(442,129)
Cash Flows from Financing Activities:
Shareholder Distributions......................... (244,000) (139,600) --
Proceeds from Long Term Debt...................... -- -- 66,248
Repayment of Long Term Debt....................... (36,550) (21,486) (8,213)
Shareholder Loan Advances......................... 7,500 770,000 160,000
Shareholder Loan Payments......................... (186,357) (321,592) (283,841)
Return of Paid in Capital......................... -- (100) (10,000)
--------- ----------- ---------
Net Cash Provided by (Used in) Financing
Activities................................. (459,407) 287,222 (75,806)
--------- ----------- ---------
Increase (Decrease) in Cash............................ (38,181) 29,881 21,932
Cash at Beginning of Year.............................. 103,342 73,461 51,529
--------- ----------- ---------
Cash at End of Year.................................... $ 65,161 $ 103,342 $ 73,461
========= =========== =========
Supplemental Disclosures:
Cash Paid During the Year for:
Interest..................................... $ 106,419 $ 41,598 $ 25,465
========= =========== =========
</TABLE>
See notes to the combined financial statements.
F-220
<PAGE> 301
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The company operates five non-franchised video specialty stores located in
Lexington, Kentucky (2 locations), Cincinnati, Ohio (2 locations) and
Winchester, Kentucky. Each location is operated as a separate corporation and
all have elected to be S corporations for income tax purposes. The store in
Winchester, Kentucky and one of the Lexington stores began operations in June of
1994.
Combining of Financial Statements
These financial statements combine the accounts of the following
corporations which are related through common majority ownership and management.
All significant intercompany transactions have been eliminated.
<TABLE>
<CAPTION>
CORPORATION LOCATION
----------- --------------
<S> <C>
JJ Video, Inc..................................................... Lexington, KY
Picture Show Video, Inc........................................... Cincinnati, OH
Picture Show Video #4, Inc........................................ Cincinnati, OH
Picture Show Video Gardenside, Inc................................ Lexington, KY
Picture Show Video Winchester, Inc................................ Winchester, KY
</TABLE>
Concentration of Vendors
The company purchases substantially all of its video cassettes for rental
and retail sales from one vendor, Wax Works, Inc.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the balance sheet dates
and the reported amounts of revenue and expenses during the years then ended.
Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the time of rental or sales of video cassettes or
video games.
Cash
The company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
Inventory
Merchandise and supply inventory primarily consisting of prerecorded video
cassettes are stated at the lower of cost or market value. Cost of the inventory
is determined using the first-in, first-out (FIFO) method.
Video Rental Tapes
Video cassette rental inventory (including video games) is recorded at cost
and amortized over its estimated useful life with no provision for salvage
value. Video cassettes that are considered catalog tapes are amortized over 36
months on a straight-line basis. New release video cassettes are amortized as
follows:
F-221
<PAGE> 302
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
10% of new release video cassettes are amortized as catalog tapes
(straight-line for 36 months)
90% of new release video cassettes are amortized over 9 months on a
straight-line basis.
The company believes that its method of amortization results in an
appropriate matching of tape amortization with tape rental revenue.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Video Rental Tapes.................................... $1,104,215 $ 994,383 $ 507,473
Accumulated Amortization.............................. (725,138) (491,760) (312,307)
---------- --------- ---------
Video Rental Tapes, Net............................... $ 379,077 $ 502,623 $ 195,166
========== ========= =========
</TABLE>
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided
for over the estimated useful lives of the assets using the straight line
method.
Intangible Assets
Intangible assets include organizational costs, non-compete agreements and
value assigned in two purchase agreements as a premium value for lease
locations. The costs of intangible assets are being amortized on a straight-line
basis over various lives not exceeding five years.
Amortization expense for intangible assets was $67,040, $35,994 and $2,700
for the years ended December 31, 1995, 1994 and 1993, respectively.
Income Taxes
Each of the corporations combined in these financial statements have
elected to be treated as an S corporation for income tax purposes. Accordingly,
the income (loss) of the corporations is reported and taxed at the shareholder
level and, therefore, there are no corporate level federal or state income taxes
provided for in these financial statements.
NOTE 2 -- RELATED PARTY RECEIVABLES
At December 31, 1994 accounts receivable included $63,379 due from two
corporations controlled by the principal stockholder. This amount was repaid in
1995.
NOTE 3 -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Equipment & Improvements............................. $ 266,369 $256,057 $279,221
Accumulated Depreciation............................. (114,060) (86,199) (66,578)
------------ ------------ ------------
Net Equipment & Improvements......................... $ 152,309 $169,858 $212,643
========== ========== ==========
</TABLE>
Depreciation expense was $27,859, $32,870 and $27,279 for the years ended
December 31, 1995, 1994 and 1993, respectively.
F-222
<PAGE> 303
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 4 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Organizational Expenses............................................... $ 5,424 $ 5,424
Non-Compete Agreements -- Cost........................................ 14,500 14,500
Lease Assignment Value................................................ 250,000 250,000
--------- --------
Total Cost.................................................. $ 269,924 $269,924
Less Accumulated Amortization......................................... (113,384) (46,344)
--------- --------
Net Intangible Assets............................................ 156,540 223,580
Building Deposits..................................................... 11,184 11,184
--------- --------
Total Other Assets............................................... $ 167,724 $234,764
========= ========
</TABLE>
NOTE 5 -- SHAREHOLDER LOANS
The principal stockholder of the corporations has advanced the company
funds on a revolving line of credit basis. The loans are unsecured to the
principal stockholder and due on demand. A bank which has loaned the principal
stockholder funds to make the shareholder loans has a secured interest in
substantially all of the assets of the corporations. The shareholder loans bear
interest at various rates, currently ranging from Prime + 1% to 10.00%.
Balances due on the shareholder loans are as follows:
<TABLE>
<S> <C>
December 31, 1995.............................................. $787,803
========
December 31, 1994.............................................. $966,661
========
December 31, 1993.............................................. $518,263
========
</TABLE>
NOTE 6 -- COMMON STOCK
All the corporations have issued no par value common stock. The following
schedule details the authorized and issued shares of the corporations.
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING
SHARES SHARES AMOUNT
---------- ----------- -------
<S> <C> <C> <C>
JJ Video, Inc.............................................. 1,000 111 $15,100
Picture Show Video, Inc.................................... 1,000 100 --
Picture Show Video #4, Inc................................. 1,000 100 --
Picture Show Video-Gardenside, Inc......................... 1,000 111 --
Picture Show Video-Winchester, Inc......................... 1,000 111 --
---------- --- -------
Total................................................. 5,000 533 $15,100
======== ========= =======
</TABLE>
F-223
<PAGE> 304
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 7 -- OPERATING LEASE AGREEMENTS
The company has operating leases for the building facilities it occupies
which expire at various dates through June 30, 2001. Some of the leases have
option for renewal for varying terms. Minimum future rental payments under these
leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996........................................................... $ 244,168
1997........................................................... 194,920
1998........................................................... 142,271
1999........................................................... 107,730
2000........................................................... 111,150
Thereafter..................................................... 56,540
---------
Total..................................................... $ 856,779
========
</TABLE>
The company is currently operating on a month-to-month basis at its St.
Bernard location in Cincinnati. The current monthly obligation is $3,100.
Rent expense was $292,491, $255,796 and $193,955 for the years ended
December 31, 1995, 1994 and 1993, respectively.
NOTE 8 -- DEFERRED PAYMENTS
On June 23, 1994, Picture Show Video-Gardenside, Inc. and Picture Show
Video-Winchester, Inc. purchased existing assets of two Movie Warehouse video
stores. As part of this purchase agreement, the company agreed to pay to Movie
Warehouse a monthly payment of $1,250 ($625 per corporation) commencing on
August 1, 1994 with the final payment due on July 31, 1996. These payments have
been included in store operating costs. At December 31, 1995, $8,750 was
remaining to be paid under the agreement.
NOTE 9 -- SUBSEQUENT EVENTS
The corporations and its stockholders have entered into negotiations with
West Coast Entertainment Corporation to sell substantially all the assets of the
corporations combined in these financial statements.
In January, 1996, one of the corporations entered into an operating lease
agreement for a vehicle. The monthly obligation is $2,061 for a period of 24
months.
In June, 1996, one of the corporations entered into an operating lease
agreement for a vehicle. The monthly obligation is $832 for a period of 36
months.
F-224
<PAGE> 305
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Shareholders
JJ Video, Inc., Picture Show Video, Inc.,
Picture Show Video #4, Inc.,
Picture Show Video-Gardenside, Inc.
and Picture Show Video-Winchester, Inc.
We have reviewed the accompanying combined balance sheets of JJ Video,
Inc., Picture Show Video, Inc., Picture Show Video #4, Inc., Picture Show
Video-Gardenside, Inc. and Picture Show Video-Winchester, Inc. as of June 30,
1996 and 1995, and the related combined statements of income, stockholders'
equity (deficit), and cash flows for each of the six month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying combined financial statements for them to be
in conformity with generally accepted accounting principles.
/S/ SWITZER, MCGAUGHEY & COMPANY,
PSC
------------------------------------
Switzer, McGaughey & Company, PSC
Lexington, Kentucky
August 23, 1996
F-225
<PAGE> 306
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
COMBINED BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 1)................................................. $ 47,833 $ 11,789
Accounts Receivable (Note 2).................................. 1,350 1,350
Inventory (Note 1)............................................ 19,498 20,199
-------- --------
Total Current Assets..................................... 68,681 33,338
Video Cassette Rental Inventory, Net (Note 1)...................... 360,126 442,137
Equipment and Improvements, Net (Notes 1 and 3).................... 138,855 158,318
Other Assets (Notes 1 and 4)....................................... 134,212 201,245
-------- --------
TOTAL ASSETS............................................. $ 701,874 $ 835,038
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses......................... $ 262,517 $ 273,901
Note Payable -- Shareholder (Note 5).......................... 707,456 841,762
-------- --------
Total Current Liabilities................................ 969,973 1,115,663
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock (Note 6)......................................... 15,100 15,100
Retained Earnings (Deficit)................................... (283,199) (295,725)
-------- --------
Total Stockholders' Equity (Deficit)..................... (268,099) (280,625)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $ 701,874 $ 835,038
======== ========
</TABLE>
See accompanying notes and Accountants' Review Report.
F-226
<PAGE> 307
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Retail Video Rentals............................................ $ 936,349 $ 932,836
Product Sales................................................... 74,862 96,333
---------- ----------
Total Revenue......................................... 1,011,211 1,029,169
Cost and Expenses:
Store Operating Costs...................................... 472,614 471,421
Video Tape Amortization (Note 1)........................... 278,261 335,409
Cost of Sales.............................................. 55,937 43,122
General and Administrative................................. 39,821 28,922
---------- ----------
Total Costs and Expenses.............................. 846,633 878,874
Income from Operations................................ 164,578 150,295
Other Expenses:
Interest................................................... 38,939 45,656
---------- ----------
NET INCOME...................................................... 125,639 104,639
Retained Earnings (Deficit),
Beginning of Period........................................ (275,838) (220,364)
Shareholder Distributions....................................... (133,000) (180,000)
---------- ----------
Retained Earnings (Deficit),
End of Period.............................................. $ (283,199) $ (295,725)
========= =========
</TABLE>
See accompanying notes and Accountants' Review Report.
F-227
<PAGE> 308
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
COMBINED STATEMENT OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income.................................................. $ 125,639 $ 104,639
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Amortization of Video Tapes................................. 278,261 335,409
Depreciation................................................ 14,949 13,679
Amortization of Intangible Assets........................... 33,512 33,519
Changes in Assets and Liabilities:
Accounts Receivable......................................... -- 63,379
Inventory................................................... 5,110 (4,410)
Accounts Payable and Accrued Expenses....................... (647) (19,257)
--------- ---------
Net Cash Provided by Operating Activities.............. 456,824 526,958
Cash Flows from Investing Activities:
Purchase of Equipment and Improvements...................... (1,496) (2,140)
Purchase of Video Cassette Rental Inventory................. (259,308) (274,922)
--------- ---------
Net Cash Used in Investing Activities.................. (260,804) (277,062)
Cash Flows from Financing Activities:
Shareholder Distributions................................... (133,000) (180,000)
Repayment of Long Term Debt................................. -- (36,550)
Shareholder Loan Payments................................... (80,348) (124,899)
--------- ---------
Net Cash Used In Financing Activities.................. (213,348) (341,449)
--------- ---------
Decrease in Cash................................................. (17,328) (91,553)
Cash at Beginning of Period...................................... 65,161 103,342
--------- ---------
Cash at End of Period............................................ $ 47,833 $ 11,789
========= =========
Supplemental Disclosures:
Cash Paid During the Period for:
Interest............................................... $ 25,675 $ 30,774
========= =========
</TABLE>
See accompanying notes and Accountants' Review Report.
F-228
<PAGE> 309
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The company operates five non-franchised video specialty stores located in
Lexington, Kentucky (2 locations), Cincinnati, Ohio (2 locations) and
Winchester, Kentucky. Each location is operated as a separate corporation and
all have elected to be S corporations for income tax purposes. The store in
Winchester, Kentucky and one of the Lexington stores began operations in June of
1994.
Combining of Financial Statements
These financial statements combine the accounts of the following
corporations which are related through common majority ownership and management.
All significant intercompany transactions have been eliminated.
<TABLE>
<CAPTION>
CORPORATION LOCATION
----------- --------------
<S> <C>
JJ Video, Inc.................................................. Lexington, KY
Picture Show Video, Inc........................................ Cincinnati, OH
Picture Show Video #4, Inc..................................... Cincinnati, OH
Picture Show Video-Gardenside, Inc............................. Lexington, KY
Picture Show Video-Winchester, Inc............................. Winchester, KY
</TABLE>
Concentration of Vendors
The company purchases substantially all of its video cassettes for rental
and retail sales from one vendor, Wax Works, Inc.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the balance sheet dates
and the reported amounts of revenue and expenses during the years then ended.
Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the time of rental or sales of video cassettes or
video games.
Cash
The company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
Inventory
Merchandise and supply inventory primarily consisting of prerecorded video
cassettes are stated at the lower of cost or market value. Cost of the inventory
is determined using the first-in, first-out (FIFO) method.
F-229
<PAGE> 310
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996 AND 1995
Video Rental Tapes
Video cassette rental inventory (including video games) is recorded at cost
and amortized over its estimated useful life with no provision for salvage
value. Video cassettes that are considered catalog tapes are amortized over 36
months on a straight-line basis. New release video cassettes are amortized as
follows:
10% of new release video cassettes are amortized as catalog tapes
(straight-line for 36 months)
90% of new release video cassettes are amortized over 9 months on a
straight-line basis.
The company believes that its method of amortization results in an
appropriate matching of tape amortization with tape rental revenue.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Video Rental Tapes................................................. $1,153,158 $1,048,255
Accumulated Amortization........................................... (793,032) (606,118)
---------- ----------
Video Rental Tapes, Net............................................ $ 360,126 $ 442,137
========== ==========
</TABLE>
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided
for over the estimated useful lives of the assets using the straight line
method.
Intangible Assets
Intangible assets include organizational costs, non-compete agreements and
value assigned in two purchase agreements as a premium value for lease
locations. The costs of intangible assets are being amortized on a straight-line
basis over various lives not exceeding five years.
Amortization expense for intangible assets was $33,512 and $33,519 for the
six months ended June 30, 1996 and 1995, respectively.
Income Taxes
Each of the corporations combined in these financial statements have
elected to be treated as an S corporation for income tax purposes. Accordingly,
the income (loss) of the corporations is reported and taxed at the shareholder
level and, therefore, there are no corporate level federal or state income taxes
provided for in these financial statements.
NOTE 2 -- RELATED PARTY RECEIVABLES
At December 31, 1994 accounts receivable included $63,379 due from two
corporations controlled by the principal stockholder. This amount was repaid
during the first six months of 1995.
F-230
<PAGE> 311
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996 AND 1995
NOTE 3 -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
--------- --------
<S> <C> <C>
Equipment & Improvements.............................................. $ 267,862 $258,196
Accumulated Depreciation.............................................. (129,007) (99,878)
--------- --------
Net Equipment & Improvements.......................................... $ 138,855 $158,318
========= ========
</TABLE>
Depreciation expense was $14,949 and $13,679 for the six months ended June
30, 1996 and 1995, respectively.
NOTE 4 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
--------- --------
<S> <C> <C>
Organizational Expenses........................................... $ 5,424 $ 5,424
Non-Compete Agreements -- Cost.................................... 14,500 14,500
Lease Assignment Value............................................ 250,000 250,000
--------- --------
Total Cost................................................... $ 269,924 $269,924
Less Accumulated Amortization..................................... (146,896) (79,863)
--------- --------
Net Intangible Assets........................................ 123,028 190,061
Building Deposits................................................. 11,184 11,184
--------- --------
Total Other Assets........................................... $ 134,212 $201,245
========= ========
</TABLE>
NOTE 5 -- SHAREHOLDER LOANS
The principal stockholder of the corporations has advanced the company
funds on a revolving line of credit basis. The loans are unsecured to the
principal stockholder and due on demand. A bank which has loaned the principal
stockholder funds to make the shareholder loans has a secured interest in
substantially all of the assets of the corporations. The shareholder loans bear
interest at various rates, currently ranging from Prime + 1% to 10.00%.
Balances due on the shareholder loans are as follows:
<TABLE>
<S> <C>
June 30, 1996.................................................. $ 707,456
========
June 30, 1995.................................................. $ 841,762
========
</TABLE>
F-231
<PAGE> 312
JJ VIDEO, INC., PICTURE SHOW VIDEO, INC.,
PICTURE SHOW VIDEO #4, INC., PICTURE SHOW VIDEO-
GARDENSIDE, INC. AND PICTURE SHOW VIDEO-WINCHESTER, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996 AND 1995
NOTE 6 -- COMMON STOCK
All the corporations have issued no par value common stock. The following
schedule details the authorized and issued shares of the corporations.
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING
SHARES SHARES AMOUNT
---------- ----------- -------
<S> <C> <C> <C>
JJ Video, Inc.............................................. 1,000 111 $15,100
Picture Show Video, Inc.................................... 1,000 100 --
Picture Show Video #4, Inc................................. 1,000 100 --
Picture Show Video-Gardenside, Inc......................... 1,000 111 --
Picture Show Video-Winchester, Inc......................... 1,000 111 --
----- --- -------
Total................................................. 5,000 533 $15,100
===== === =======
</TABLE>
NOTE 7 -- OPERATING LEASE AGREEMENTS
The company has operating leases for the building facilities it occupies
and two automobiles which expire at various dates through June 30, 2001. Some of
the leases have option for renewal for varying terms. Minimum future rental
payments under these leases as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1997................................................................ $254,944
1998................................................................ 194,297
1999................................................................ 130,972
2000................................................................ 109,440
2001................................................................ 112,860
Thereafter.......................................................... --
--------
Total............................................................... $802,513
========
</TABLE>
The company is currently operating on a month-to-month basis at its St.
Bernard location in Cincinnati. The current monthly obligation is $3,100.
Rent expense was $141,972 and $147,916 for the six months ended June 30,
1996 and 1995, respectively.
NOTE 8 -- DEFERRED PAYMENTS
On June 23, 1994, Picture Show Video-Gardenside, Inc. and Picture Show
Video-Winchester, Inc. purchased existing assets of two Movie Warehouse video
stores. As part of this purchase agreement, the company agreed to pay to Movie
Warehouse a monthly payment of $1,250 ($625 per corporation) commencing on
August 1, 1994 with the final payment due on July 31, 1996. These payments have
been included in store operating costs. At June 30, 1996, $1,250 was remaining
to be paid under the agreement.
NOTE 9 -- SUBSEQUENT EVENTS
The corporations and its stockholders have entered into negotiations with
West Coast Entertainment Corporation to sell substantially all the assets of the
corporations combined in these financial statements.
F-232
<PAGE> 313
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders
L.A. Video, Inc.
Dba First Choice Video
West Carrollton, Ohio
We have audited the accompanying balance sheets of L.A. Video, Inc., Dba
First Choice Video (an S corporation) as of December 31, 1995 and 1994, and the
related statements of operations, shareholders' equity and cash flows for the
year ended December 31, 1995 and the period from inception (September 1, 1994)
through December 31, 1994. These statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of L.A. Video, Inc., Dba First
Choice Video at December 31, 1995 and 1994, and the results of its operations
and its cash flows for the year ended December 31, 1995 and the period from
inception (September 1, 1994) through December 31, 1994.
Dohner, Louis and Stephens, Inc.
Dayton, Ohio
August 22, 1996
F-233
<PAGE> 314
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Petty cash........................................................... $ 600 $ 300
Prepaid rent......................................................... 6,008
Merchandise inventory................................................ 263 263
-------- --------
Total current assets.............................................. $ 6,871 $ 563
-------- --------
Property and Equipment
Fixtures and equipment............................................... $ 32,382 $ 15,346
Leasehold improvements............................................... 15,784 8,284
-------- --------
Total............................................................. $ 48,166 $ 23,630
Less: accumulated depreciation....................................... (9,058) (1,445)
-------- --------
Total property and equipment...................................... $ 39,108 $ 22,185
-------- --------
Other Assets
Videocassette inventory.............................................. $272,950 $ 88,221
Deposits............................................................. 5,788 2,888
Organization costs................................................... 608 764
Goodwill............................................................. 4,806
Noncompetition agreement............................................. 21,250
Consulting agreement................................................. 21,250
-------- --------
Total other assets................................................ $326,652 $ 91,873
-------- --------
Total Assets................................................. $372,631 $114,621
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank overdraft....................................................... $ 12,179 $ 5,957
Accounts payable..................................................... 16,089 22,387
Accounts payable -- related party.................................... 7,016 6,436
Notes payable........................................................ 34,053 64,882
Accrued expenses..................................................... 10,504 3,632
Current portion of long-term debt.................................... 52,196 3,536
-------- --------
Total current liabilities......................................... $132,037 $106,830
-------- --------
Long-Term Debt
Notes and lease payable.............................................. $222,579 $ 10,115
Less: Current portion above.......................................... (52,196) (3,536)
-------- --------
Total long-term debt.............................................. $170,383 $ 6,579
-------- --------
Shareholders' Equity
Common stock, no par, 750 shares authorized, 100 shares issued and
outstanding....................................................... $ 1,000 $ 1,000
Retained earnings.................................................... 69,211 212
-------- --------
Total shareholders' equity........................................ $ 70,211 $ 1,212
-------- --------
Total Liabilities & Shareholders' Equity..................... $372,631 $114,621
======== ========
</TABLE>
See accompanying notes to financial statements
F-234
<PAGE> 315
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND PERIOD FROM INCEPTION (SEPTEMBER 1, 1994)
THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Revenues
Rental revenue........................................................ $439,029 $64,122
Merchandise sales..................................................... 48,800 7,100
-------- --------
Total revenues..................................................... $487,829 $71,222
-------- --------
Operating Costs and Expenses
Store operating expenses.............................................. $175,168 $44,924
Cost of goods sold.................................................... 36,600 5,325
Amortization of videocassette rental inventory........................ 153,711 14,107
General and administrative expenses................................... 32,088 4,082
-------- --------
Total operating costs and expenses................................. $397,567 $68,438
-------- --------
Operating Income........................................................ $ 90,262 $ 2,784
Interest Expense........................................................ (19,263) (2,572)
-------- --------
Net Income.............................................................. $ 70,999 $ 212
======== ========
</TABLE>
See accompanying notes to financial statements
F-235
<PAGE> 316
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
PERIOD FROM INCEPTION (SEPTEMBER 1, 1994)
THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
Balance at September 1, 1994................................ $ -0- $ -0- $ -0-
Common Stock, no par value, 100 shares issued............. 1,000 1,000
Net Income................................................ 212 212
------ ------- -------
Balance at December 31, 1994................................ $1,000 $ 212 $ 1,212
Net Income................................................ 70,999 70,999
Distributions to shareholders............................. (2,000) (2,000)
------ ------- -------
Balance at December 31, 1995................................ $1,000 $ 69,211 $70,211
====== ======= =======
</TABLE>
See accompanying notes to financial statements
F-236
<PAGE> 317
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
PERIOD FROM INCEPTION (SEPTEMBER 1, 1994)
THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income......................................................... $ 70,999 $ 212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 179,174 15,577
(Increase) decrease in:
Prepaid assets................................................ (6,008)
Deposits...................................................... (2,900) (2,888)
Organization costs............................................ (790)
Increase (decrease) in:
Accounts payable and overdraft................................ 505 34,781
Accrued taxes and expenses.................................... 6,872 3,632
--------- ---------
Net cash provided by operating activities....................... $ 248,642 $ 50,524
--------- ---------
Cash Flows From Investing Activities
Purchases of property and equipment................................ $ (2,035) $ (11,372)
Purchases of videocassette rental inventory........................ (225,942) (102,591)
--------- ---------
Net cash used by investing activities........................... $(227,977) $(113,963)
--------- ---------
Cash Flows From Financing Activities
Proceeds from long-term debt....................................... $ 12,065
Repayments of long-term debt....................................... (27,536) $ (2,143)
Repayments of related party loans.................................. (2,894) (2,532)
Proceeds from related party loans.................................. 67,414
Proceeds from sale of stock........................................ 1,000
Shareholder distributions.......................................... (2,000)
--------- ---------
Net cash provided (used) by financing activities................ $ (20,365) $ 63,739
--------- ---------
Increase in Cash..................................................... $ 300 $ 300
Cash at Beginning of Year or Period.................................. 300
--------- ---------
Cash at End of Year or Period........................................ $ 600 $ 300
========= =========
</TABLE>
See accompanying notes to financial statements
F-237
<PAGE> 318
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company operates in the videocassette rental and sales industry through
video stores located in Sidney, Ohio and West Carrollton, Ohio.
Property and Equipment
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 3 to 5 years). Repair and maintenance costs are expensed as
incurred. Depreciation expense amounted to $7,613 and $1,445 for 1995 and 1994,
respectively.
Revenue Recognition
Revenue is recognized at the time of rental or sale.
Income Taxes
The Company's shareholders have elected "S" Corporation status for income
tax purposes. An "S" Corporation is generally not taxed at the federal or state
level on the Company's taxable income. The distributive share of taxable income,
certain gains, losses and other items are passed through to each shareholder.
Accordingly, there is no provision for federal and state income taxes. The
Company does provide for various local municipality income taxes, which are
classified as general and administrative expenses in the accompanying statements
of operations.
Intangible Assets
Intangible assets consist of goodwill, a non-compete agreement, a
consulting agreement and organization costs. These costs are being amortized on
a straight-line basis over periods ranging from two to fifteen years. The
amortization of intangible assets amounted to $17,850 in 1995 and $26 in 1994.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Merchandise Inventory
The Company values its merchandise inventory at the lower of cost or market
using the first-in, first-out method.
F-238
<PAGE> 319
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of the sale. The Company believes that its method of amortization
results in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes. Videocassette rental
inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- -------
<S> <C> <C>
Videocassette rental inventory.................................. $319,331 $89,636
Accumulated amortization........................................ (46,381) (1,415)
-------- -------
$272,950 $88,221
======== =======
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$153,711 and $14,107 for the years ended December 31, 1995 and 1994,
respectively.
Classification
Certain prior period balances have been reclassified to conform with
current year classifications.
NOTE B -- NOTES PAYABLE
The notes payable classified as current are due to shareholders and are
unsecured, due on demand and require interest to be paid annually at 10.25%.
NOTE C -- LONG-TERM DEBT
The details of long-term debt as of December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Payable to bank, principal of $4,000 plus interest at prime plus
1.0% (9.0% at December 31, 1995) payable monthly, secured by
corporate assets.............................................. $216,000
Capital lease, monthly payments of $417 include interest at
17.2%......................................................... 6,579 $10,115
-------- -------
Total long-term debt............................................ $222,579 $10,115
Less: Current portion........................................... (52,196) (3,536)
-------- -------
Net long-term debt.............................................. $170,383 $ 6,579
======== =======
</TABLE>
F-239
<PAGE> 320
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The long-term debt as of December 31, 1995, is due as follows:
<TABLE>
<S> <C>
1996...................................................................... $ 52,196
1997...................................................................... 50,383
1998...................................................................... 48,000
1999...................................................................... 48,000
2000...................................................................... 24,000
--------
$222,579
========
</TABLE>
NOTE D -- LEASE COMMITMENTS
The Company leases its West Carrollton, Ohio facility under a one year
operating lease which expired September 15, 1995. The Company opted to renew the
lease for another year. An additional one-year renewal option remains. Rental
expense under this lease for 1995 and 1994 was $33,440 and $11,583,
respectively.
The Company leases its Sidney, Ohio facility under a five year operating
lease which expires on June 4, 2000. There is an option to renew this lease for
an additional five years. Rent expense under this lease for 1995 was $20,300.
The following is a schedule by years of future minimum lease payments
required under these leases as of December 31, 1995.
<TABLE>
<S> <C>
1996....................................................................... $65,830
1997....................................................................... 36,700
1998....................................................................... 37,200
1999....................................................................... 37,200
2000....................................................................... 15,500
</TABLE>
Fixtures and equipment include $12,258 of assets held under long-term
capital leases. Accumulated depreciation of these assets amounted to $2,553 and
$511 as of December 31, 1995 and 1994, respectively.
NOTE E -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the periods for:
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Interest.......................................................... $17,923 $2,572
Income taxes...................................................... -0- -0-
</TABLE>
In 1995 noncash transactions, the Company purchased the assets of Sidney
Video Etc., Inc. for $200,000 and refinanced $27,935 of notes payable to a
shareholder.
In 1994 noncash transactions, the Company entered into a three year capital
lease for $12,258.
NOTE F -- SUBSEQUENT EVENTS
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment.
F-240
<PAGE> 321
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Shareholders
L.A. Video, Inc.
Dba First Choice Video
West Carrollton, Ohio
We have reviewed the accompanying balance sheets and the related statements
of operations, shareholders' equity and cash flows of L.A. Video, Inc., Dba
First Choice Video (an S corporation) as of June 30, 1996 and 1995, and for the
six month periods then ended. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
Dayton, Ohio
August 22, 1996
F-241
<PAGE> 322
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
BALANCE SHEETS
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash................................................................. $ 4,400 $ 1,131
Prepaid rent......................................................... 6,107 6,008
Merchandise inventory................................................ 264 264
-------- --------
Total current assets................................................. $ 10,771 $ 7,403
-------- --------
Property and Equipment
Fixtures and equipment............................................... $ 32,382 $ 30,420
Leasehold improvements............................................... 15,784 15,784
-------- --------
Total............................................................. $ 48,166 $ 46,204
Less: accumulated depreciation....................................... (13,888) (4,857)
-------- --------
Total property and equipment...................................... $ 34,278 $ 41,347
-------- --------
Other Assets
Videocassette rental inventory....................................... $297,774 $224,694
Deposits............................................................. 5,788 5,788
Organization costs................................................... 530 686
Goodwill............................................................. 4,640 4,972
Noncompetition agreement............................................. 13,750 28,750
Consulting agreement................................................. 13,750 28,750
-------- --------
Total other assets................................................ $336,232 $293,640
-------- --------
Total Assets................................................. $381,281 $342,390
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 12,756 $ 9,226
Notes payable........................................................ 34,053 34,053
Accounts payable -- related party.................................... 7,016 7,016
Accrued expenses..................................................... 9,803 10,236
Current portion of long-term debt.................................... 52,571 51,852
-------- --------
Total current liabilities......................................... $116,199 $112,383
-------- --------
Long-Term Debt
Notes and lease payable.............................................. $196,571 $248,422
Less: Current portion above.......................................... (52,571) (51,852)
-------- --------
Total long-term debt.............................................. $144,000 $196,570
-------- --------
Shareholders' Equity
Common stock, no par, 750 shares authorized, 100 shares issued and
outstanding....................................................... $ 1,000 $ 1,000
Retained earnings.................................................... 120,082 32,437
-------- --------
Total shareholders' equity........................................ $121,082 $ 33,437
-------- --------
Total Liabilities & Shareholders' Equity..................... $381,281 $342,390
======== ========
</TABLE>
See accompanying notes and accountants' report
F-242
<PAGE> 323
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
AMOUNTS
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $321,330 $153,649
Merchandise sales.................................................... 35,800 17,100
-------- --------
Total revenues.................................................... $357,130 $170,749
-------- --------
Operating Costs and Expenses
Store operating expenses............................................. $120,040 $ 60,082
Cost of goods sold................................................... 26,850 12,825
Amortization of videocassette rental inventory....................... 116,432 48,334
General and administrative expenses.................................. 19,733 12,305
-------- --------
Total operating costs and expenses................................ $283,055 $133,546
-------- --------
Operating Income....................................................... $ 74,075 $ 37,203
Interest Expense....................................................... (10,204) (4,978)
-------- --------
Net Income............................................................. $ 63,871 $ 32,225
======== ========
</TABLE>
See accompanying notes and accountants' report
F-243
<PAGE> 324
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
Balance at January 1, 1995................................. $1,000 $ 212 $ 1,212
Net Income............................................... 32,225 32,225
------ -------- --------
Balance at June 30, 1995................................... $1,000 $ 32,437 $ 33,437
====== ======== ========
Balance at January 1, 1996................................. $1,000 $ 69,211 $ 70,211
Net Income............................................... 63,871 63,871
Distributions to shareholders............................ (13,000) (13,000)
------ -------- --------
Balance at June 30, 1996................................... $1,000 $120,082 $ 121,082
====== ======== ========
</TABLE>
See accompanying notes and accountants' report
F-244
<PAGE> 325
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income.......................................................... $ 63,871 $ 32,225
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 136,506 54,353
(Increase) decrease in:
Prepaid assets................................................. (100) (6,008)
Deposits....................................................... (2,900)
Increase (decrease) in:
Accounts payable and overdraft................................. (15,512) (18,538)
Accrued taxes and expenses..................................... (701) 6,604
--------- --------
Net cash provided by operating activities........................ $ 184,064 $ 65,736
--------- --------
Cash Flows From Investing Activities
Purchases of property and equipment................................. $ (74)
Purchases of videocassette rental inventory......................... $(141,256) (72,309)
--------- --------
Net cash used by investing activities............................ $(141,256) $(72,383)
--------- --------
Cash Flows From Financing Activities
Proceeds from long-term debt........................................ $ 12,065
Repayments of long-term debt........................................ $ (26,008) (1,693)
Repayments of related party loans................................... (2,894)
Shareholder distributions........................................... (13,000)
--------- --------
Net cash provided (used) by financing activities................. $ (39,008) $ 7,478
--------- --------
Increase in Cash...................................................... $ 3,800 $ 831
Cash at Beginning of Period........................................... 600 300
--------- --------
Cash at End of Period................................................. $ 4,400 $ 1,131
========= ========
</TABLE>
See accompanying notes and accountants' report
F-245
<PAGE> 326
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company operates in the videocassette rental and sales industry through
video stores located in Sidney, Ohio and West Carrollton, Ohio.
Property and Equipment
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 3 to 5 years). Repair and maintenance costs are expensed as
incurred. Depreciation expense amounted to $4,830 and $3,413 for 1996 and 1995,
respectively.
Revenue Recognition
Revenue is recognized at the time of rental or sale.
Income Taxes
The Company's shareholders have elected "S" Corporation status for income
tax purposes. An "S" Corporation is generally not taxed at the federal or state
level on the Company's taxable income. The distributive share of taxable income,
certain gains, losses and other items are passed through to each shareholder.
Accordingly, there is no provision for federal and state income taxes. The
Company does provide for various local municipality income taxes, which are
classified as general and administrative expenses in the accompanying statements
of operations.
Intangible Assets
Intangible assets consist of goodwill, a non-compete agreement, a
consulting agreement and organization costs. These costs are being amortized on
a straight-line basis over periods ranging from two to fifteen years. The
amortization of intangible assets amounted to $15,244 in 1996 and $2,606 in
1995.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Merchandise Inventory
The Company values its merchandise inventory at the lower of cost or market
using the first-in, first-out method.
F-246
<PAGE> 327
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of the sale. The Company believes that its method of amortization
results in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes. Videocassette rental
inventory and related amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Videocassette rental inventory............................... $407,929 $244,342
Accumulated amortization..................................... (110,155) (19,648)
-------- --------
$297,774 $224,694
======== ========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$116,432 and $48,334 for the six months ended June 30, 1996 and 1995,
respectively.
Classification
Certain prior period balances have been reclassified to conform with
current year classifications.
NOTE B -- NOTES PAYABLE
The notes payable classified as current are due to shareholders and are
unsecured, due on demand and require interest to be paid annually at 10.25%.
NOTE C -- LONG-TERM DEBT
The details of long-term debt as of June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payable to bank, principal of $4,000 plus interest at prime
plus 1.0% (9.0% at June 30, 1996) payable monthly, secured by
corporate assets............................................. $192,000 $240,000
Capital lease, monthly payments of $417 include interest at
17.2%........................................................ 4,571 8,422
-------- --------
Total long-term debt........................................... $196,571 $248,422
Less: Current portion.......................................... (52,571) (51,852)
-------- --------
Net long-term debt............................................. $144,000 $196,570
======== ========
</TABLE>
The long-term debt as of June 30, 1996, is due as follows:
<TABLE>
<S> <C>
June 30, 1997............................................................. $ 52,571
June 30, 1998............................................................. 48,000
June 30, 1999............................................................. 48,000
June 30, 2000............................................................. 48,000
June 30, 2001............................................................. - 0 -
--------
$196,571
========
</TABLE>
F-247
<PAGE> 328
L.A. VIDEO, INC.
DBA FIRST CHOICE VIDEO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- LEASE COMMITMENTS
The Company leases its West Carrollton, Ohio facility under a one year
operating lease which expired September 15, 1995. The Company opted to renew the
lease for another year. An additional one-year renewal option remains. Rental
expense under this lease for 1996 and 1995 was $18,647 and $11,893,
respectively.
The Company leases its Sidney, Ohio facility under a five year operating
lease which expires on June 4, 2000. There is an option to renew this lease for
an additional five years. Rent expense under this lease for 1996 and 1995 was
$17,600 and $5,800, respectively.
The following is a schedule by years of future minimum lease payments
required under these leases as of June 30, 1996.
<TABLE>
<S> <C>
June 30, 1997.............................................................. $45,020
June 30, 1998.............................................................. 37,200
June 30, 1999.............................................................. 37,200
June 30, 2000.............................................................. 15,500
June 30, 2001.............................................................. -0 -
</TABLE>
Fixtures and equipment include $12,258 of assets held under long-term
capital leases. Accumulated depreciation of these assets amounted to $3,575 and
$1,533 as of June 30, 1996 and 1995, respectively.
NOTE E -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the periods for:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Interest.......................................................... $10,204 $4,978
Income taxes...................................................... -0 - -0 -
</TABLE>
In 1995 noncash transactions, the Company purchased the assets of Sidney
Video Etc., Inc. for $200,000 and refinanced $27,935 of notes payable to a
shareholder.
NOTE F -- SUBSEQUENT EVENTS
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment.
F-248
<PAGE> 329
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders
First Choice Video, Inc.
Springfield, Ohio
We have audited the accompanying balance sheets of First Choice Video, Inc.
as of March 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for the three years ended March 31, 1996.
These statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Choice Video, Inc. at
March 31, 1996 and 1995, and the results of its operations and its cash flows
for the three years ended March 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note B to the financial statements, on April 1, 1993 the
Company changed its methods of accounting for videocassette rental inventory and
property and equipment.
DOHNER, LOUIS, STEPHENS, INC.
Dayton, Ohio
August 22, 1996
F-249
<PAGE> 330
FIRST CHOICE VIDEO, INC.
BALANCE SHEETS
MARCH 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current Assets
Cash........................................................................... $ 27,431 $ 18,674
Accounts receivable, net of allowances......................................... 1,700 1,700
Installment notes receivable................................................... 54,984 71,168
Merchandise inventory.......................................................... 1,935 1,935
Prepaid rent................................................................... 13,265
Deferred property taxes........................................................ 5,603 5,603
-------- --------
Total current assets......................................................... $104,918 $ 99,080
-------- --------
Property and Equipment
Rental and office equipment.................................................... $ 78,093 $ 73,618
Automotive equipment........................................................... 76,655 44,225
Furniture and fixtures......................................................... 51,335 47,760
Leasehold improvements......................................................... 40,792 40,792
-------- --------
Total cost................................................................... $246,875 $206,395
Less: Accumulated depreciation................................................. 119,878 92,255
-------- --------
Undepreciated cost........................................................... $126,997 $114,140
-------- --------
Other Assets
Videocassette rental inventory................................................. $494,255 $448,222
Deposits....................................................................... 2,232 2,232
Installment notes receivable................................................... 69,600 89,698
-------- --------
Total other assets........................................................... $566,087 $540,152
-------- --------
Total Assets............................................................ $798,002 $753,372
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................................... $ 56,156 $ 75,610
Bank overdraft................................................................. 6,659
Accrued taxes and expenses..................................................... 122,625 114,299
Notes payable.................................................................. 130,177 117,354
Deferred federal income tax.................................................... 12,413 10,746
Current portion of long-term debt.............................................. 15,898 92,083
-------- --------
Total current liabilities.................................................... $343,928 $410,092
-------- --------
Long-Term Debt
Total long-term debt........................................................... $ 72,086 $135,301
Less: Current portion above.................................................... (15,898) (92,083)
-------- --------
Net long-term debt........................................................... $ 56,188 $ 43,218
-------- --------
Deferred federal income tax...................................................... $ 14,721 $ 13,350
-------- --------
Shareholders' Equity
Common stock, no par value, 750 shares authorized, 200 shares issued, 120
shares outstanding........................................................... $ 45,787 $ 45,787
Additional paid in capital..................................................... 54,724 54,724
Retained earnings.............................................................. 363,391 266,938
-------- --------
$463,902 $367,449
Less: Treasury stock, 80 shares at cost........................................ (80,737) (80,737)
-------- --------
Total shareholders' equity................................................... $383,165 $286,712
-------- --------
Total Liabilities and Shareholders' Equity.............................. $798,002 $753,372
======== ========
</TABLE>
See accompanying notes
F-250
<PAGE> 331
FIRST CHOICE VIDEO, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Rental revenue....................................... $1,617,634 $1,448,586 $1,372,310
Merchandise sales.................................... 179,700 160,900 152,500
Affiliate revenue.................................... 16,400 17,613 15,212
---------- ---------- ----------
Total revenues.................................... $1,813,734 $1,627,099 $1,540,022
---------- ---------- ----------
Operating Costs and Expenses
Store operating expenses............................. $ 724,552 $ 711,845 $ 774,752
Cost of goods sold................................... 134,775 120,675 114,375
Amortization of videocassette rental inventory....... 528,447 432,361 357,268
General and administrative expenses.................. 292,125 296,559 171,089
---------- ---------- ----------
Total operating costs and expenses................ $1,679,899 $1,561,440 $1,417,484
---------- ---------- ----------
Operating Income....................................... $ 133,835 $ 65,659 $ 122,538
---------- ---------- ----------
Non-Operating Income (Expenses)
Interest expense..................................... $ (19,876) $ (18,499) (31,364)
Interest income...................................... 11,435 10,508 11,958
Miscellaneous income................................. 8,917 26,633
Gain on sale of assets............................... 245,610 142,819
---------- ---------- ----------
Total non-operating income (expenses)............. $ (8,441) $ 246,536 $ 150,046
---------- ---------- ----------
Income Before Income Taxes and Cumulative Effect of
Accounting Changes................................... $ 125,394 $ 312,195 $ 272,584
Provision for Income Taxes............................. 28,941 89,709 60,474
---------- ---------- ----------
Income Before Cumulative Effect of Accounting
Changes.............................................. $ 96,453 $ 222,486 $ 212,110
---------- ---------- ----------
Cumulative Effect on Prior Years of Accounting Changes
(less applicable tax of $12,269)..................... (69,524)
---------- ---------- ----------
Net Income............................................. $ 96,453 $ 222,486 $ 142,586
========== ========== ==========
</TABLE>
See accompanying notes
F-251
<PAGE> 332
FIRST CHOICE VIDEO, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993..................... $45,787 $ 54,724 $(98,134) $(58,737) $ (56,360)
Net Income................................ 142,586 142,586
Purchase of 54 Treasury Shares, at Cost... (22,000) (22,000)
------- ------- -------- -------- --------
Balance, March 31, 1994..................... $45,787 $ 54,724 $ 44,452 $(80,737) $ 64,226
Net Income................................ 222,486 222,486
------- ------- -------- -------- --------
Balance, March 31, 1995..................... $45,787 $ 54,724 $266,938 $(80,737) $ 286,712
Net Income................................ 96,453 96,453
------- ------- -------- -------- --------
Balance, March 31, 1996..................... $45,787 $ 54,724 $363,391 $(80,737) $ 383,165
======= ======= ======== ======== ========
</TABLE>
See accompanying notes
F-252
<PAGE> 333
FIRST CHOICE VIDEO, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income............................................ $ 96,453 $ 222,486 $ 142,586
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 556,070 452,638 467,273
Gain on sale of assets............................. (4,331) (245,610) (142,819)
(Increase) decrease in:
Accounts receivable.............................. 425 425
Employee advances................................ 1,100
Prepaid and deferred assets...................... (13,265) 2,384 5,493
Deposits......................................... 510
Increase (decrease) in:
Accounts payable and overdraft................... (12,795) 15,128 (16,621)
Accrued taxes and expenses....................... 8,326 20,988 (16,617)
Deferred liabilities............................. 3,038 1,658 (23,799)
--------- --------- ---------
Net cash provided by operating activities.......... $ 633,496 $ 470,097 $ 417,531
--------- --------- ---------
Cash Flows From Investing Activities
Repayments on notes receivable........................ $ 40,612 $ 324,083 $ 269,142
Purchases of property and equipment................... (40,481) (70,669) (25,979)
Purchases of videocassette rental inventory........... (574,479) (606,740) (477,351)
Net cash used by investing activities.............. $(574,348) $(353,326) $(234,188)
Cash Flows From Financing Activities
Purchases of treasury stock........................... $ (5,116)
Net decrease in short-term debt....................... (6,475)
Proceeds from long-term debt.......................... $ 32,431 $ 29,961
Repayments of long-term debt.......................... (95,646) (143,212) (260,280)
Proceeds from related party loans..................... 32,000 69,000 94,687
Repayments of related party loans..................... (19,176) (60,395) (3,027)
--------- --------- ---------
Net cash used by financing activities.............. $ (50,391) $(104,646) $(180,211)
--------- --------- ---------
Increase in Cash........................................ $ 8,757 $ 12,125 $ 3,132
Cash at Beginning of Year............................... $ 18,674 6,549 3,417
--------- --------- ---------
Cash at End of Year..................................... $ 27,431 $ 18,674 $ 6,549
========= ========= =========
</TABLE>
See accompanying notes
F-253
<PAGE> 334
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company operates in the videocassette rental and sales industry through
video stores located in Springfield, Ohio, and Urbana, Ohio. As of March 31,
1996, the Company owns and operates four video rental stores and has affiliation
agreements with several additional video rental stores.
Depreciation
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as
incurred. Depreciation expense amounted to $27,623, $19,967 and $26,712 for the
years ending March 31, 1996, 1995 and 1994, respectively.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of property and equipment,
inventory and installment notes receivable for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.
Merchandise Inventory
The Company values its merchandise inventory at the lower of cost or market
using the first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of the sale. The Company believes that its method of amortization
results in an appropriate matching of tape amortization expense with
F-254
<PAGE> 335
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996 AND 1995
the revenue received from the associated rental of such tapes. Videocassette
rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Videocassette rental inventory.................... $1,973,199 $1,719,569 $ 1,453,849
Accumulated amortization.......................... (1,478,944) (1,271,347) (1,105,284)
---------- ---------- -----------
$ 494,255 $ 448,222 $ 348,565
========= ========= ==========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$528,447, $432,361 and $357,268 for the years ended March 31, 1996, 1995 and
1994, respectively.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game. Affiliate revenue is recognized for each period that the affiliation
agreements are in place.
Classification
Some prior year balances have been reclassified to conform with current
year classifications.
NOTE B -- ACCOUNTING CHANGES
On April 1, 1993, the Company changed its methods of amortizing
videocassette rental inventory and depreciating property and equipment. These
new methods are fully described in Note A above. The Company believes that these
new methods result in a closer matching of costs and revenues. The cumulative
effect of these changes on prior years of $69,524 is a one-time charge to income
during the year ended March 31, 1994.
NOTE C -- DEFERRED PROPERTY TAXES
The deferred property taxes reported as a current asset represent property
taxes not yet allocated to expense due to the period covered in the tax return.
These taxes will be amortized on a monthly basis through the end of the calendar
year.
NOTE D -- NOTES PAYABLE
The notes payable classified as current are unsecured and due on demand, as
follows:
<TABLE>
<CAPTION>
MARCH 31
---------------------
1996 1995
-------- --------
<S> <C> <C>
Shareholder, interest at the applicable federal interest rate
paid annually................................................ $124,177 $104,354
Employees, interest at the applicable federal interest rate
paid annually................................................ 6,000 13,000
-------- --------
$130,177 $117,354
======== ========
</TABLE>
F-255
<PAGE> 336
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996 AND 1995
NOTE E -- LONG-TERM DEBT
The details of long-term debt as of March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes Payable
Payable to bank, principal of $5,740 plus interest at prime
plus 1.0% (9.0% at March 31, 1995) payable monthly,
secured by all corporate assets........................... $ 69,798
Payable to former shareholder, monthly payments of $1,809
include interest at 8%, unsecured......................... 14,048
Payable to bank, monthly payments of $598 include interest at
7.24%, secured by automobile.............................. $ 21,589 26,987
Payable to bank, monthly payments of $669 include interest at
8.75%, secured by automobile.............................. 29,786
Capital lease, monthly payments of $635 include interest at
16.962%................................................... 20,711 $ 24,468
-------- --------
Total long-term debt........................................... $ 72,086 $135,301
Less: Current portion.......................................... (15,898) (92,083)
-------- --------
Net long-term debt............................................. $ 56,188 $ 43,218
======== ========
</TABLE>
The long-term debt as of March 31, 1996, is due as follows:
<TABLE>
<S> <C>
1997..................................................................... $15,898
1998..................................................................... 17,661
1999..................................................................... 19,656
2000..................................................................... 14,956
2001..................................................................... 3,915
-------
......................................................................... $72,086
=======
</TABLE>
NOTE F -- INCOME TAXES
The federal income tax provision for the years ended March 31, 1996, 1995
and 1994 consists of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Currently payable..................................... $25,903 $79,134 $41,970
Deferred taxes due to temporary differences........... 3,038 10,575 18,504
------- ------- -------
Total....................................... $28,941 $89,709 $60,474
======= ======= =======
</TABLE>
F-256
<PAGE> 337
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996 AND 1995
The deferred federal income taxes reported on the Company's balance sheets
consist of the following components at March 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Current deferred tax liability:
Inventory...................................................... $ 7,457 $ 4,175
Notes receivable............................................... 5,191 6,657
Accrued interest............................................... (235) (86)
------- -------
Net current deferred tax liability............................... $12,413 $10,746
======= =======
Long-term deferred tax liability:
Notes receivable............................................... $10,440 $10,041
Accumulated depreciation....................................... 4,281 3,309
------- -------
Net long-term deferred tax liability............................. $14,721 $13,350
======= =======
</TABLE>
NOTE G -- LEASE COMMITMENTS
The Company leases all of its retail and office facilities under several
non-cancelable operating leases, which in certain cases contain renewal options.
Rental expense for the years ended March 31, 1996, 1995 and 1994 was $166,635,
$213,170 and $303,226, respectively.
The following is a schedule by years of future minimum lease payments
required under these leases as of June 30, 1996.
<TABLE>
<S> <C>
1997...................................................................... $122,800
1998...................................................................... 108,414
1999...................................................................... 82,164
2000...................................................................... 58,764
2001...................................................................... - 0 -
Thereafter................................................................ -0 -
</TABLE>
Rental and office equipment includes $25,948 of assets held under long-term
capital leases. Accumulated depreciation of these assets amounted to $2,162 and
$6,487 as of March 31, 1996 and 1995, respectively.
NOTE H -- AFFILIATION AGREEMENTS
The Company has entered into affiliation agreements with several additional
video stores. Under these agreements, the affiliate obtains the right to use the
"First Choice Video" name and to capitalize upon the operating techniques of the
Company. The agreements call for a $200 monthly ongoing affiliation fee. Either
party may terminate the agreement with sixty days written notice.
NOTE I -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the years for:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest.............................................. $18,881 $20,875 $30,081
Income taxes.......................................... 65,007 99,854 9,486
</TABLE>
During 1995, the Company purchased $25,948 of equipment by entering into a
capital lease agreement for the same amount.
F-257
<PAGE> 338
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996 AND 1995
On November 8, 1993, the Company purchased treasury stock in exchange for
$22,000 in notes payable to the two former shareholders.
NOTE J -- PENSION PLAN
The Company sponsors a simplified employee pension plan which covers all
employees who meet eligibility requirements. The Company authorized
contributions of $51,620 and $40,543 for the years ended March 31, 1996 and
1995. The Company's policy is to fund the contributions within the time
requirements of the Internal Revenue Service.
NOTE K -- CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risk consist principally of installment notes receivable. These notes are due
from purchasers of former Company-owned stores who continue to operate in the
videocassette rental and sales industry.
NOTE L -- TREASURY STOCK
On November 8, 1993, the Company purchased 54 shares of First Choice Video,
Inc. common stock from two shareholders. Treasury stock has been recorded for
the cost of the shares repurchased.
NOTE N -- SUBSEQUENT EVENTS
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment.
F-258
<PAGE> 339
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Shareholders
First Choice Video, Inc.
Springfield, Ohio
We have reviewed the accompanying balance sheets and the related statements
of operations, shareholders' equity and cash flows of First Choice Video, Inc.
as of June 30, 1996 and 1995, and for the three-month periods then ended. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be
in conformity with generally accepted accounting principles.
Dayton, Ohio
August 22, 1996
F-259
<PAGE> 340
FIRST CHOICE VIDEO, INC.
BALANCE SHEETS
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash................................................................. $ 20,396 $ 9,520
Accounts receivable, net of allowances............................... 1,700 1,700
Installment notes receivable......................................... 58,649 71,497
Merchandise inventory................................................ 1,935 1,935
Prepaid rent......................................................... 13,461
Deferred property taxes.............................................. 3,736 3,736
-------- --------
Total current assets.............................................. $ 99,877 $ 88,388
-------- --------
Property and Equipment
Rental and office equipment.......................................... $ 78,874 $ 74,468
Automotive equipment................................................. 76,655 44,224
Furniture and fixtures............................................... 51,335 47,760
Leasehold improvements............................................... 40,792 40,792
-------- --------
Total cost........................................................ $247,656 $207,244
Less: Accumulated depreciation....................................... 126,933 98,200
-------- --------
Undepreciated cost................................................ $120,723 $109,044
-------- --------
Other Assets Videocassette rental inventory............................ $509,213 $440,149
Deposits............................................................. 2,232 2,232
Installment notes receivable......................................... 52,931 77,833
-------- --------
Total other assets................................................ $564,376 $520,214
-------- --------
Total Assets................................................. $784,976 $717,646
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 50,617 $ 42,599
Bank overdraft....................................................... 16,177 23,275
Accrued taxes and expenses........................................... 92,993 81,387
Notes payable........................................................ 117,436 109,302
Deferred federal income tax.......................................... 12,413 11,377
Current portion of long-term debt.................................... 16,317 70,841
-------- --------
Total current liabilities......................................... $305,953 $338,781
-------- --------
Long-Term Debt
Total long-term debt................................................. $ 68,265 $110,706
Less: Current portion above.......................................... 16,317 70,841
-------- --------
Net long-term debt................................................ $ 51,948 $ 39,865
-------- --------
Deferred federal income tax............................................ $ 14,721 $ 13,866
-------- --------
Shareholders' Equity
Common stock, no par value, 750 shares authorized, 200 shares issued,
120 shares outstanding............................................ $ 45,787 $ 45,787
Additional paid in capital........................................... 54,724 54,724
Retained earnings.................................................... 392,580 305,360
-------- --------
$493,091 $405,871
Less: Treasury stock, 80 shares at cost.............................. (80,737) (80,737)
-------- --------
Total shareholders' equity........................................ $412,354 $325,134
-------- --------
Total Liabilities and Shareholders' Equity................... $784,976 $717,646
======== ========
</TABLE>
See accompanying notes and accountants' report
F-260
<PAGE> 341
FIRST CHOICE VIDEO, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
AMOUNTS
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $404,684 $365,257
Merchandise sales.................................................... 45,000 40,600
Affiliate revenue.................................................... 4,400 5,086
-------- --------
Total revenue..................................................... $454,084 $410,943
-------- --------
Operating Costs and Expenses
Store operating expenses............................................. $178,874 $154,003
Cost of goods sold................................................... 33,750 30,450
Amortization of videocassette rental inventory.................... 143,802 126,340
General and administrative expenses............................... 57,626 48,224
-------- --------
Total operating costs and expenses................................ $414,052 $359,017
-------- --------
Operating Income....................................................... $ 40,032 $ 51,926
-------- --------
Non-Operating Income (Expenses)
Interest expense..................................................... $ (4,313) $ (4,459)
Interest income...................................................... 2,189 2,432
-------- --------
Total non-operating income (expenses)............................. $ (2,124) $ (2,027)
-------- --------
Income Before Income Taxes............................................. $ 37,908 $ 49,899
Provision for Income Taxes............................................. 8,719 11,477
-------- --------
Net Income............................................................. $ 29,189 $ 38,422
======== ========
</TABLE>
See accompanying notes and accountants' report
F-261
<PAGE> 342
FIRST CHOICE VIDEO, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996..................... $45,787 $ 54,724 $363,391 $(80,737) $ 383,165
Net Income................................ 29,189 29,189
------- ------- -------- -------- --------
Balance, June 30, 1996...................... $45,787 $ 54,724 $392,580 $(80,737) $ 412,354
======= ======= ======== ======== ========
Balance, March 31, 1995..................... $45,787 $ 54,724 $266,938 $(80,737) $ 286,712
Net Income................................ 38,422 38,422
------- ------- -------- -------- --------
Balance, June 30, 1995...................... $45,787 $ 54,724 $305,360 $(80,737) $ 325,134
======= ======= ======== ======== ========
</TABLE>
See accompanying notes and accountants' report
F-262
<PAGE> 343
FIRST CHOICE VIDEO, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income......................................................... $ 29,189 $ 38,422
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................... 150,857 132,285
(Increase) decrease in:
Prepaid and deferred assets................................... 1,671 1,867
Increase (decrease) in:
Accounts payable and overdraft................................ 3,979 (9,736)
Accrued taxes and expenses.................................... (29,635) (32,916)
Deferred liabilities............................................ 1,147
--------- --------
Net cash provided by operating activities.......................... $ 156,061 $ 131,069
--------- --------
Cash Flows From Investing Activities
Repayments on notes receivable..................................... $ 13,004 $ 11,536
Purchases of property and equipment................................ (781) (849)
Purchases of videocassette rental inventory........................ (158,757) (118,263)
--------- --------
Net cash used by investing activities........................... $(146,534) $(107,576)
--------- --------
Cash Flows From Financing Activities
Repayments of long-term debt....................................... (3,821) (19,414)
Repayments of related party loans.................................. (12,741) (13,233)
--------- --------
Net cash used by financing activities........................... $ (16,562) $ (32,647)
--------- --------
Increase (Decrease) in Cash.......................................... $ (7,035) $ (9,154)
Cash at Beginning of Year............................................ 27,431 18,674
--------- --------
Cash at End of Period................................................ $ 20,396 $ 9,520
========= ========
</TABLE>
See accompanying notes and accountants' report
F-263
<PAGE> 344
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company operates in the videocassette rental and sales industry through
video stores located in Springfield, Ohio, and Urbana, Ohio. As of June 30,
1996, the Company owns and operates four video rental stores and has affiliation
agreements with several additional video rental stores.
Depreciation
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as
incurred. Depreciation expense amounted to $7,055 and $5,945 for the three
months ending June 30, 1996 and 1995, respectively.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of property and equipment,
inventory and installment notes receivable for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.
Merchandise Inventory
The Company values its merchandise inventory at the lower of cost or market
using the first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of the sale. The Company believes that its method of amortization
results in an appropriate matching of tape amortization expense with
F-264
<PAGE> 345
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the revenue received from the associated rental of such tapes. Videocasette
rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Videocassette rental inventory............................ $ 2,046,093 $ 1,753,444
Accumulated amortization.................................. (1,536,880) (1,313,295)
----------- -----------
$ 509,213 $ 440,149
========== ==========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$148,302 and $126,340 for the three months ended June 30, 1996 and 1995,
respectively.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game. Affiliate revenue is recognized for each period that the affiliation
agreements are in place.
Classification
Some prior period balances have been reclassified to conform with current
period classifications.
NOTE B -- DEFERRED PROPERTY TAXES
The deferred property taxes reported as a current asset represent property
taxes not yet allocated to expense due to the period covered in the tax return.
These taxes will be amortized on a monthly basis through the end of the calendar
year.
NOTE C -- NOTES PAYABLE
The notes payable classified as current are unsecured and due on demand, as
follows:
<TABLE>
<CAPTION>
JUNE 30
---------------------
1996 1995
-------- --------
<S> <C> <C>
Shareholder, interest at the applicable federal interest rate
paid annually................................................ $114,936 $101,302
Employees, interest at the applicable federal interest rate
paid annually................................................ 2,500 8,000
-------- --------
$117,436 $109,302
======== ========
</TABLE>
F-265
<PAGE> 346
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- LONG-TERM DEBT
The details of long-term debt as of June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payable to bank, principal of $5,740 plus interest at prime
plus 1.0% (9.0% at June 30, 1995) payable monthly, secured by
all corporate assets......................................... $ 52,578
Payable to former shareholder, monthly payments of $1,809
include interest at 8%, unsecured............................ 8,867
Payable to bank, monthly payments of $598 include interest at
7.24%, secured by automobile................................. $ 20,177 25,674
Payable to bank, monthly payments of $669 include interest at
8.75%, secured by automobile................................. 28,420
Capital lease, monthly payments of $635 include interest at
16.962%...................................................... 19,668 23,587
-------- --------
Total long-term debt........................................... $ 68,265 $110,706
Less: Current portion.......................................... (16,317) (70,841)
-------- --------
Net long-term debt............................................. $ 51,948 $ 39,865
======== ========
</TABLE>
The long-term debt as of June 30, 1996, is due as follows:
<TABLE>
<S> <C>
June 30, 1997.............................................................. $16,317
June 30, 1998.............................................................. 18,138
June 30, 1999.............................................................. 20,194
June 30, 2000.............................................................. 11,637
June 30, 2001.............................................................. 1,979
-------
$68,265
=======
</TABLE>
NOTE E -- INCOME TAXES
The federal income tax provision for the periods ended June 30, 1996 and
1995 consists of the following components:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Currently payable................................................. $8,719 $10,330
Deferred taxes due to temporary differences....................... -0- 1,147
------ -------
Total................................................... $8,719 $11,477
====== =======
</TABLE>
The deferred federal income taxes reported on the Company's balance sheets
consist of the following components at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Current deferred tax liability:
Inventory...................................................... $ 7,457 $ 4,806
Notes receivable............................................... 5,191 6,657
Accrued interest............................................... (235) (86)
------- -------
Net current deferred tax liability............................. $12,413 $11,377
======= =======
Long-term deferred tax liability:
Notes receivable............................................... $10,440 $10,041
Accumulated depreciation....................................... 4,281 3,825
------- -------
Net long-term deferred tax liability........................... $14,721 $13,866
======= =======
</TABLE>
F-266
<PAGE> 347
FIRST CHOICE VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- LEASE COMMITMENTS
The Company leases all of its retail and office facilities under several
noncancelable operating leases, which in certain cases contain renewal options.
Rental expense for the periods ended June 30, 1996 and 1995 was $39,410 and
$39,753, respectively.
The following is a schedule by years of future minimum lease payments
required under these leases as of June 30, 1996.
<TABLE>
<S> <C>
March 31, 1997............................................................ $ 92,100
March 31, 1998............................................................ 108,414
March 31, 1999............................................................ 82,164
March 31, 2000............................................................ 58,764
March 31, 2001............................................................ -0-
Thereafter................................................................ -0-
</TABLE>
Rental and office equipment includes $25,948 of assets held under long-term
capital leases. Accumulated depreciation of these assets amounted to $3,243 and
$7,568 as of June 30, 1996 and 1995, respectively.
NOTE G -- AFFILIATION AGREEMENTS
The Company has entered into affiliation agreements with several additional
video stores. Under these agreements, the affiliate obtains the right to use the
"First Choice Video" name and to capitalize upon the operating techniques of the
Company. The agreements call for a $200 monthly ongoing affiliation fee. Either
party may terminate the agreement with sixty days written notice.
NOTE H -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the periods for:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Interest......................................................... $ 2,813 $ 3,389
Income taxes..................................................... 19,411 39,100
</TABLE>
NOTE I -- PENSION PLAN
The Company sponsors a simplified employee pension plan which covers all
employees who meet eligibility requirements. The Company's policy is to fund the
contributions within the time requirements of the Internal Revenue Service.
NOTE J -- CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risk consist principally of installment notes receivable. These notes are due
from purchasers of former Company-owned stores who continue to operate in the
videocassette rental and sales industry.
NOTE K -- SUBSEQUENT EVENTS
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment.
F-267
<PAGE> 348
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholder
Ohio Entertainment Corporation
Dayton, Ohio
We have audited the accompanying balance sheets of Ohio Entertainment
Corporation as of December 31, 1994 and 1995 and the related statements of
operations, stockholder's equity and cash flows for the three years ended
December 31, 1995. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ohio Entertainment
Corporation at December 31, 1994 and 1995, and the results of its operations and
its cash flows for the three years ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1993 the Company
changed its methods of accounting for videocassette rental inventory and
furnishings, equipment and leasehold improvements.
Kamphaus, Henning & Hood
Certified Public Accountants, Inc.
August 9, 1996
F-268
<PAGE> 349
OHIO ENTERTAINMENT CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 60,057 $ 169,908
Merchandise inventories............................................ 10,177 26,221
-------- ----------
Total Current Assets....................................... 70,234 196,129
Videocassette rental inventory, net.................................. 243,698 482,110
Furnishings, equipment, vehicles and leasehold improvements, net..... 166,183 323,482
Other assets......................................................... 16,172 17,023
Intangible assets, net............................................... 32,634 7,311
-------- ----------
$528,921 $1,026,055
======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable................................................... $ 64,788 $ 178,414
Accrued expenses................................................... 7,390 18,200
Advances from stockholder.......................................... 259,801 224,801
Demand line of credit.............................................. 0 420,000
-------- ----------
Total Current Liabilities.................................. 331,979 841,415
-------- ----------
Stockholder's Equity:
Common stock, no par value, 100 shares authorized, issued and
outstanding at December 31, 1994 and 1995, respectively......... 500 500
Retained earnings.................................................. 196,442 184,140
-------- ----------
Total Stockholder's Equity................................. 196,942 184,640
-------- ----------
$528,921 $1,026,055
======== ==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements.
F-269
<PAGE> 350
OHIO ENTERTAINMENT CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental Revenue............................................ $595,029 $ 873,439 $1,576,271
Merchandise sales......................................... 46,672 75,091 166,151
Late charges and other revenue............................ 59,269 144,655 266,748
-------- ---------- ----------
Total revenues.................................... 700,970 1,093,185 2,009,170
Costs and Expenses:
Store operating expenses.................................. 471,350 789,785 1,588,173
Cost of goods sold........................................ 6,658 15,022 44,988
General and administrative................................ 129,726 135,495 166,677
-------- ---------- ----------
Total costs and expenses.......................... 607,734 940,302 1,799,838
Income from operations...................................... 93,236 152,883 209,332
Other income (expense)...................................... (10,444) 13,894 23,938
Interest expense............................................ 345 813 19,983
Income before provision for income taxes and the effect of
changes in accounting principles.......................... 82,447 165,964 213,287
Provision for income taxes.................................. 0 0 0
Net income before the effect of changes in accounting
principles................................................ 82,447 165,964 213,287
Cumulative effect on prior years of changes in accounting
principles (less applicable income taxes of $-0-)......... 29,249 0 0
-------- ---------- ----------
Net Income........................................ $111,696 $ 165,964 $ 213,287
======== ========== ==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-270
<PAGE> 351
OHIO ENTERTAINMENT CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income........................................... $ 111,696 $ 165,964 $ 213,287
Adjustments to reconcile net income to cash flows
provided by operating activities:
Amortization of videocassette rental inventory.... 113,043 272,438 561,553
Depreciation and amortization of furnishings,
equipment, vehicles, leasehold improvements and
intangible
assets.......................................... 46,734 60,861 101,655
Loss on sale of fixed assets...................... 10,660 0 0
Changes in Assets and Liabilities:
Merchandise inventories......................... (4,470) (470) (16,044)
Prepaid expenses and other assets............... 0 (10,161) (851)
Accounts payable................................ 32,411 29,460 113,626
Accrued expenses................................ 2,452 (3,954) 10,810
--------- --------- -----------
Net Cash Provided by Operating Activities.... 312,526 514,138 984,036
--------- --------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of fixed assets................... 220 0 0
Purchases of property and equipment.................. (38,515) (102,468) (233,631)
Purchases of videocassette rental inventory.......... (198,289) (324,336) (799,965)
Net Cash Used in Investing Activities............. (236,584) (426,804) (1,033,596)
--------- --------- -----------
Cash Flows from Financing Activities:
Proceeds from demand line of credit.................. 0 0 420,000
Repayment of long-term debt.......................... (1,219) (8,781) 0
Repayments of advances from stockholder.............. (57,588) (9,424) (35,000)
Stockholder distributions............................ 0 (51,481) (225,589)
Net Cash Provided (Used) in Financing
Activities...................................... (58,807) (69,686) 159,411
--------- --------- -----------
Net Increase in Cash and Cash Equivalents.............. 17,135 17,648 109,851
Cash and Cash Equivalents, Beginning of Period......... 25,274 42,409 60,057
--------- --------- -----------
Cash and Cash Equivalents, End of Period............... $ 42,409 $ 60,057 $ 169,908
========= ========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............. $ 345 $ 813 $ 19,983
========= ========= ===========
Supplemental disclosure of noncash investing and
financing activities:
Fixed assets purchased under installment loan........ $ 10,000 $ 0 $ 0
========= ========= ===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-271
<PAGE> 352
OHIO ENTERTAINMENT CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TOTAL
--------------- EARNINGS STOCKHOLDER'S
SHARES AMOUNT (DEFICIT) EQUITY (DEFICIT)
------ ------ --------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.......................... 100 $500 $ (29,737) $ (29,237)
Net Income............................................ 0 0 111,696 111,696
S Corporation Distribution............................ 0 0 0 0
------ ------ --------- ----------------
Balance at December 31, 1993.......................... 100 500 81,959 82,459
Net Income............................................ 0 0 165,964 165,964
S Corporation Distribution............................ 0 0 (51,481) (51,481)
------ ------ --------- ----------------
Balance at December 31, 1994.......................... 100 500 196,442 196,942
Net Income............................................ 0 0 213,287 213,287
S Corporation Distribution............................ 0 0 (225,589) (225,589)
------ ------ --------- ----------------
Balance at December 31, 1995.......................... 100 $500 $ 184,140 $ 184,640
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-272
<PAGE> 353
OHIO ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. BASIS OF PRESENTATION AND BUSINESS
Ohio Entertainment Corporation (the "Company") was incorporated in the
State of Ohio on August 7, 1992 for the purpose of conducting business as an
owner and operator of videocassette rental stores located in the Dayton, Ohio
area. Upon incorporation, 100 shares of common stock were issued to Mr. Ronald
L. Davis. At December 31, 1995, the Company owned and operated (5) five stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. For the period of August 7, 1992 to December 31, 1992,
videocassettes were amortized over 36 months on an accelerated basis. Effective
January 1, 1993, the Company changed its method of amortization. Videocassettes
which are considered base stock are amortized over 36 months on a straight-line
basis. New release videocassettes are amortized as follows: the first through
third copies of each title per store are amortized as base stock and the fourth
and succeeding copies of each title per store are amortized over nine months on
a straight line basis. The unamortized cost, if any, of videocassette rental
inventory that is sold is charged to operations at the time of the sale. The
effect of the change in method of amortization resulted in a decrease in
amortization expense of $11,779. The Company believes that the new method of
amortization results in a more appropriate matching of tape amortization expense
with the revenue received from the associated rental of such tapes. As
videocassettes are sold or retired, the applicable cost and accumulated
amortization are eliminated from the accounts, and any gain or loss is recorded.
Furnishings, Equipment, Vehicles and Leasehold Improvements
Furnishings, equipment, vehicles and leasehold improvements are stated at
cost. For the period of August 7, 1992 to December 31, 1992, furnishings,
equipment, vehicles and leasehold improvements were depreciated on an
accelerated basis over various periods of (3) three years to (39) thirty-nine
years. Effective January 1, 1993, the Company changed its method of depreciating
furnishings, equipment, vehicles and leasehold improvements. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives (5 to 7 years) of furnishings, equipment and vehicles for leasehold
improvements, over
F-273
<PAGE> 354
OHIO ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the lesser of the estimated useful lives or lease terms (primarily 3 to 10
years). The effect of the change in method of depreciation resulted in a
decrease in depreciation expense of $17,470. Repair and maintenance costs are
expensed as incurred.
Intangible Assets
Intangible assets are primarily comprised of organizational costs and a
covenant not-to-compete. Organizational cost are amortized on a straight-line
basis over 5 years. The covenant not-to-compete is amortized on a straight-line
basis over the term of the agreement. Amortization totalled $29,656, $29,656 and
$25,322 for the years ended December 31, 1993, 1994 and 1995, respectively.
Income Taxes
The Company's stockholder has elected "S" Corporation status for income tax
purposes. An "S" Corporation is generally not taxed at the federal or state
level on the Company's taxable income. The distributive share of taxable income,
certain gains, losses and other items are passed through to the stockholder.
Accordingly, there is no provision for federal and state income taxes. The
Company does provide for various local municipality income taxes, which are
classified as general and administrative expenses in the accompanying statements
of operations.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
3. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- ----------
<S> <C> <C>
Videocassette rental inventory.............................. $ 543,600 $1,061,071
Accumulated amortization.................................... (299,902) (578,961)
--------- ----------
$ 243,698 $ 482,110
</TABLE>
Amortization expense related to videocassette rental inventory totalled
$113,043, $272,438 and $561,553 for the years ended December 31, 1993, 1994, and
1995, respectively.
F-274
<PAGE> 355
OHIO ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. FURNISHINGS, EQUIPMENT, VEHICLES AND LEASEHOLD IMPROVEMENTS
Furnishings, equipment, vehicles and leasehold improvements comprise the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Furniture and fixtures......................................... $ 70,270 $168,095
Equipment and vehicles......................................... 88,189 180,518
Leasehold improvements......................................... 58,618 101,679
-------- --------
217,077 450,292
Less: Accumulated depreciation and amortization................ (50,894) (126,810)
-------- --------
$166,183 $323,482
======== ========
</TABLE>
Depreciation and amortization totalled $17,078, $31,205, and $76,333 for
the years ended December 31, 1993, 1994 and 1995, respectively.
5. NON-CURRENT OTHER ASSETS
Non-current other assets is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Prepaid rent..................................................... $ 3,442 $ 0
Tax deposits..................................................... 10 10
Rental deposits.................................................. 9,842 14,759
Maintenance agreement, net....................................... 2,878 2,254
------- -------
$16,172.. $17,023
======= =======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
Accrued wages and taxes........................................... $ 0 $ 3,296
Sales taxes....................................................... 7,390 14,904
------ -------
$7,390.. $18,200
====== =======
</TABLE>
7. DEMAND LINE OF CREDIT
The Company has a $500,000 demand line of credit with Star Bank, Dayton,
Ohio used primarily for working capital and expansion purposes. The demand line
of credit is renewable annually and currently matures on October 10, 1996. It
requires interest only payments until October 10, 1996 with the principal to be
repaid over a period not to exceed forty eight (48) months. The demand line of
credit bears interest of prime plus .50% (9.00% at December 31, 1995). The
demand line of credit is secured by all assets of the Company and is personally
guaranteed by the Company's President and sole stockholder. The amount
outstanding under the demand line of credit was $0 and $420,000 at December 31,
1994 and 1995, respectively.
F-275
<PAGE> 356
OHIO ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Effective February 29, 1996, the Company paid the demand line of credit
down to $300,000 and signed a $300,000 three (3) year note payable with a
required monthly principal payment of $8,333 plus accrued interest at prime plus
.50%.
8. RELATED PARTY TRANSACTIONS
The sole stockholder has from time to time advanced the Company funds for
working capital purposes. No interest is charged on these advances. The balance
of these advances was $259,801 and $224,801 at December 31, 1994 and 1995,
respectively. The advances to the stockholder are subordinated to the Company's
Bank for the borrowings outstanding under the demand line of credit mentioned in
Note #7.
The Company rents retail store space and equipment from its President and
sole stockholder. Rent expense paid to this person was $0, $0 and $2,700 for the
years ended December 31, 1993, 1994 and 1995, respectively.
9. LEASE COMMITMENTS
The Company leases its stores and certain warehouse storage facilities
under operating leases extending until 2005. Minimum future rental payments
under these leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING LEASES
-------------------------------------------------------------------- ----------------
<S> <C>
1996................................................................ $ 291,401
1997................................................................ 291,401
1998................................................................ 206,151
1999................................................................ 85,971
2000................................................................ 73,200
Thereafter.......................................................... 390,000
-------
Future Minimum Payments............................................. $1,338,124
=======
</TABLE>
Rent expense totalled approximately $67,186, $83,595 and $181,252 for the
years ended December 31, 1993, 1994 and 1995, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995, the carrying amounts of cash, accounts payable, and
accrued expenses approximate fair value because of the short-term maturity of
these instruments.
It is not practical to estimate fair value of the advances from stockholder
as these related party transactions were not made at market rates.
11. SUBSEQUENT EVENT -- SALE AGREEMENT (UNAUDITED)
On July 29, 1996, the Company's stockholder agreed to sell the Company to
West Coast Entertainment Corporation.
F-276
<PAGE> 357
OHIO ENTERTAINMENT CORPORATION
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1996
----------
<S> <C>
Current Assets:
Cash and cash equivalents.................................................... $ 254,769
Merchandise inventories...................................................... 31,274
----------
Total Current Assets................................................. 286,043
Videocassette rental inventory, net.......................................... 514,505
Furnishings, equipment, vehicles and leasehold improvements, net............. 295,035
Other assets................................................................. 17,013
Intangible assets, net....................................................... 5,483
----------
$1,118,079
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............................................ $ 99,996
Accounts payable............................................................. 189,463
Accrued expenses............................................................. 16,012
Advances from stockholder.................................................... 99,801
Demand line of credit........................................................ 0
----------
Total Current Liabilities:........................................... 405,272
Long-term debt, less current portion above..................................... 175,004
----------
Total Liabilities.................................................... 580,276
Stockholders' Equity:
Common stock, no par value, 100 shares authorized, issued and outstanding at
June 30, 1996............................................................. 500
Retained earnings.............................................................. 537,303
----------
Total Stockholders' Equity........................................... 537,803
----------
$1,118,079
==========
</TABLE>
See Notes to Financial Statements
F-277
<PAGE> 358
OHIO ENTERTAINMENT CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1995 1996
-------- ----------
<S> <C> <C>
Revenues:
Rental Revenue..................................................... $680,228 $1,154,611
Merchandise sales.................................................. 78,213 150,800
Late charges and other revenue..................................... 115,378 211,120
-------- ----------
Total revenues.................................................. 873,819 1,516,531
Costs and Expenses:
Store operating expenses........................................... 682,745 1,058,739
Costs of goods sold................................................ 19,364 32,187
General and administrative......................................... 144,586 55,022
-------- ----------
Total costs and expenses........................................ 846,695 1,145,948
-------- ----------
Income from operations............................................... 27,124 370,583
Other income......................................................... 13,422 14,057
Interest expense..................................................... 5,823 14,507
-------- ----------
Income before provision for income taxes............................. 34,723 370,133
Provision for income taxes........................................... 0 0
-------- ----------
Net Income...................................................... $ 34,723 $ 370,133
======== ==========
</TABLE>
See Notes to Financial Statements
F-278
<PAGE> 359
OHIO ENTERTAINMENT CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income......................................................... $ 34,723 $ 370,133
Adjustments to reconcile net income to cash flows provided by
operating activities:
Amortization of videocassette rental inventory.................. 235,334 375,250
Depreciation and amortization of furnishings, equipment,
vehicles, leasehold improvements and intangible assets......... 50,011 46,406
Changes in Assets and Liabilities:
Merchandise inventories......................................... (6,029) (5,054)
Prepaid expenses and other assets............................... (4,475) 10
Accounts payable................................................ 55,129 11,049
Accrued expenses................................................ 3,722 (2,188)
--------- ---------
Net Cash Provided by Operating Activities.......................... 368,415 795,606
Cash Flows From Investing Activities:
Purchases of property and equipment................................ (162,266) (16,131)
Purchases of videocassette rental inventory........................ (371,842) (407,644)
--------- ---------
Net Cash Used in Investing Activities........................... (534,108) (423,775)
Cash Flows From Financing Activities:
Proceeds from long-term debt....................................... 0 300,000
Repayment of demand line of credit................................. 0 (420,000)
Repayment of long-term debt........................................ 0 (25,000)
Proceeds from demand line of credit................................ 300,000 0
Repayments of advances from stockholder............................ (15,000) (125,000)
Stockholder distributions.......................................... (74,492) (16,970)
--------- ---------
Net Cash Provided (Used) in Financing Activities................ 210,508 (286,970)
--------- ---------
Net Increase in Cash and Cash Equivalents............................ 44,815 84,861
Cash and Cash Equivalents, Beginning of Period....................... 60,057 169,908
--------- ---------
Cash and Cash Equivalents, End of Period............................. $ 104,872 $ 254,769
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................... $ 5,823 $ 14,507
========= =========
</TABLE>
See Notes to Financial Statements.
F-279
<PAGE> 360
OHIO ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the six month period ended June 30, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996
----------
<S> <C>
Videocassette rental inventory................................... $1,262,697
Accumulated amortization......................................... 748,192
---------
$ 514,505
=========
</TABLE>
3. SUBSEQUENT EVENT
During 1996, the Company is negotiating to sell substantially all of the
Company's assets and certain of its liabilities to West Coast Entertainment
Corporation.
F-280
<PAGE> 361
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Franexco, Inc. and Affiliate
We have audited the accompanying combined balance sheets of Franexco, Inc.
and Affiliate as of December 31, 1995 and 1994, and the related combined
statements of income and retained earnings and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Franexco, Inc. and
Affiliate as of December 31, 1995 and 1994, and their results of operations and
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As described in Notes 1, 2 and 10 to the combined financial statements, the
Company has changed its method of valuing certain investments in marketable
securities effective as of January 1, 1994, changed its method of amortizing
video cassettes effective as of January 1, 1993 and adjusted certain amounts
reflected in the unaudited financial statements it originally issued as of and
for the years ended December 31, 1995, 1994 and 1993 as a result of subsequent
audits.
J. H. COHN LLP
Roseland, New Jersey
October 15, 1996
F-281
<PAGE> 362
FRANEXCO, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
JUNE 30, ---------- ----------
1996
----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 230,269 $ 774,325 $ 175,364
Investments in marketable securities................. 2,465,643 2,948,351 3,027,095
Investment in investment partnership................. 1,012,517
Merchandise inventories.............................. 90,429 68,740 42,415
Advances to officer.................................. 47,444 65,085 59,619
Loans to stockholder................................. 95,437 56,479
Other current assets................................. 89,064 63,237 71,533
---------- ---------- ----------
Total current assets......................... 4,030,803 3,976,217 3,376,026
Video cassette rental inventories, net of accumulated
amortization......................................... 231,241 351,933 226,769
Equipment and improvements, at cost, net of accumulated
depreciation and amortization........................ 634,429 554,020 360,051
Other assets........................................... 89,291 96,984 79,822
---------- ---------- ----------
Totals....................................... $4,985,764 $4,979,154 $4,042,668
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
7% note payable due December 1996.................... $ 40,000 $ 40,000
Note payable to bank................................. 425,000 235,000
Accounts payable..................................... 432,413 369,426 $ 237,936
Accrued expenses and other current liabilities....... 139,579 152,503 131,798
Loans from stockholder............................... 86,718
---------- ---------- ----------
Total current liabilities.................... 1,036,992 796,929 456,452
7% note payable due December 1996...................... 40,000
Deferred rent payable.................................. 136,526 110,526 67,648
Other liabilities...................................... 42,000
---------- ---------- ----------
Total liabilities............................ 1,215,518 907,455 564,100
---------- ---------- ----------
Commitments
Stockholder's equity:
Common stock......................................... 3,519 3,519 3,519
Additional paid-in capital........................... 2,784 2,784 2,784
Retained earnings.................................... 3,236,918 3,464,281 3,199,943
Net unrealized gains on available for sale
securities........................................ 527,025 601,115 272,322
---------- ---------- ----------
Total stockholder's equity................... 3,770,246 4,071,699 3,478,568
---------- ---------- ----------
Totals....................................... $4,985,764 $4,979,154 $4,042,668
========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-282
<PAGE> 363
FRANEXCO, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues:
Rental............................... $1,779,924 $1,200,034 $2,687,144 $1,964,179 $1,958,350
Sales................................ 317,862 214,112 500,278 344,634 247,526
---------- ---------- ---------- ---------- ----------
Totals....................... 2,097,786 1,414,146 3,187,422 2,308,813 2,205,876
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Amortization of video cassette rental
inventories....................... 809,466 500,848 1,010,077 658,404 809,273
Cost of sales........................ 189,786 188,395 255,060 165,778 179,481
Store operating expenses............. 1,204,553 693,838 1,592,431 1,169,171 1,126,481
General and administrative
expenses.......................... 270,001 213,512 410,275 408,980 460,013
---------- ---------- ---------- ---------- ----------
Totals....................... 2,473,806 1,596,593 3,267,843 2,402,333 2,575,248
---------- ---------- ---------- ---------- ----------
Operating loss......................... (376,020) (182,447) (80,421) (93,520) (369,372)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Dividend and interest income......... 48,148 54,807 113,095 153,848 158,096
Interest expense..................... (15,635) (1,400) (7,462) (2,849) (20,026)
Realized gains on sale of marketable
securities........................ 86,887 9,114 230,006 65,719 177,551
Other................................ 29,257 21,440 15,820 11,529 59
---------- ---------- ---------- ---------- ----------
Totals....................... 148,657 83,961 351,459 228,247 315,680
---------- ---------- ---------- ---------- ----------
Income (loss) before state income
taxes................................ (227,363) (98,486) 271,038 134,727 (53,692)
Provision for state income taxes....... 6,700 3,000
---------- ---------- ---------- ---------- ----------
Net income (loss)...................... (227,363) (98,486) 264,338 131,727 (53,692)
RETAINED EARNINGS
Balance, beginning of period........... 3,464,281 3,199,943 3,199,943 3,068,216 3,121,908
---------- ---------- ---------- ---------- ----------
Balance, end of period................. $3,236,918 $3,101,457 $3,464,281 $3,199,943 $3,068,216
========== ========== ========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-283
<PAGE> 364
FRANEXCO, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------
1996 1995 1995 1994 1993
----------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)........................ $ (227,363) $ (98,486) $ 264,338 $ 131,727 $ (53,692)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of video cassette rental
inventories......................... 809,466 500,848 1,010,077 658,404 809,273
Depreciation and amortization......... 91,975 55,867 130,763 77,904 82,831
Realized gains on sales of
securities.......................... (86,887) (9,114) (230,006) (65,719) (177,551)
Equity in earnings of investment
partnership......................... (20,884)
Loss on abandonment of equipment...... 6,964
Deferred rent expense................. 26,000 25,000 42,878 17,871 9,261
Changes in operating assets and
current liabilities:
Merchandise inventories............. (21,689) 10,031 (26,325) (59) (6,770)
Other current assets................ (25,827) (2,692) 8,296 (19,169) (25,631)
Other assets........................ 7,693 2,500 (17,162) (6,156) (779)
Accounts payable.................... 62,987 60,224 131,490 44,939 121,236
Accrued expenses and other current
liabilities...................... (8,924) (46,875) 12,505 77,216 (70,399)
Other liabilities................... 42,000
----------- --------- ----------- ----------- -----------
Net cash provided by operating
activities..................... 648,547 497,303 1,326,854 923,922 687,779
----------- --------- ----------- ----------- -----------
Investing activities:
Purchases of equipment and
improvements.......................... (172,384) (101,216) (324,732) (172,568) (112,374)
Purchases of video cassette rental
inventories........................... (688,774) (425,743) (1,135,241) (704,337) (735,033)
Sales and maturities of marketable
securities............................ 509,298 315,212 2,978,485 1,455,277 1,472,093
Investments in:
Marketable securities................. (427,732) (411,476) (2,332,741) (1,343,598) (1,268,898)
Investment partnership................ (581,695)
Loans to officer......................... 17,641 (3,612) (5,466) (38,061) (12,608)
----------- --------- ----------- ----------- -----------
Net cash used in investing
activities..................... (1,343,646) (626,835) (819,695) (803,287) (656,820)
----------- --------- ----------- ----------- -----------
Financing activities:
Proceeds from bank loan.................. 190,000 235,000
Proceeds of loans from stockholder....... 62,425 49,344 161,571 101,215 203,182
Repayments of loans from stockholder..... (101,382) (63,386) (304,769) (176,295) (153,003)
----------- --------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 151,043 (14,042) 91,802 (75,080) 50,179
----------- --------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.............................. (544,056) (143,574) 598,961 45,555 81,138
Cash and cash equivalents, beginning of
period................................... 774,325 175,364 175,364 129,809 48,671
----------- --------- ----------- ----------- -----------
Cash and cash equivalents, end of period... $ 230,269 $ 31,790 $ 774,325 $ 175,364 $ 129,809
=========== ========= =========== =========== ===========
Supplemental disclosure of cash flow data:
Income taxes paid........................ $ 6,600 $ 943 $ 300 $ 5,769
=========== =========== =========== ===========
Interest paid............................ $ 15,635 $ 1,400 $ 7,462 $ 2,849 $ 20,026
=========== ========= =========== =========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-284
<PAGE> 365
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES:
Business:
Franexco, Inc. rents and sells video cassettes and related equipment and
accessories through stores located in Bergen County, New Jersey and Rockland
County, New York that are known as the "Great American Video Stores." The stores
are leased by Great American Video Realty, Inc., its commonly-owned affiliate.
There were ten stores in operation at June 30, 1996 and eight, six and five
stores in operation at December 31, 1995, 1994 and 1993, respectively.
Principles of combination:
The accompanying financial statements combine the accounts of Franexco,
Inc. and its commonly-owned affiliate. All intercompany balances and
transactions are eliminated in combination. As used herein, the "Company" refers
to Franexco, Inc. together with its affiliate.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Cash equivalents:
The Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents.
Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents and
accounts receivable. The Company maintains its cash in bank deposit accounts the
balances of which, at times, may exceed Federally insured limits. Exposure to
credit risk is reduced by placing such deposits in high quality financial
institutions. Concentrations of credit risk with respect to accounts receivable
are limited due to the large number of customers comprising the Company's
customer base and generally short payment terms.
Investments in marketable securities and investment partnership:
Effective as of January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("SFAS 115") and classified all of
its directly-owned marketable debt and equity securities as of and subsequent to
that date as "available for sale." Available for sale securities are recorded at
fair value, with unrealized gains and losses, net of related tax effects,
reported as a separate component of stockholder's equity. Prior to the adoption
of SFAS 115, investments in marketable debt securities were generally carried at
cost, and investments in marketable equity securities were carried at the lower
of cost or market value. The cost of securities sold is based on the specific
identification method.
The investment in an investment partnership is carried pursuant to the
equity method whereby the Company's equity in the earnings of the partnership is
reflected in other income.
F-285
<PAGE> 366
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
Merchandise inventories:
Merchandise inventories consisting primarily of prerecorded video
cassettes, video games and accessories are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
Video cassette rental inventories:
Video cassette rental inventories, which include video games, are recorded
at cost and amortized over their economic life with no provision for salvage
value. Video cassettes which are considered base stock are amortized over 36
months on a straight-line basis. New release video cassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The Company believes that
its method of amortization results in an appropriate matching of amortization
expense with the revenues received from the associated rental of video
cassettes.
Property and equipment:
Property and equipment are recorded at cost. Depreciation is provided based
on the estimated useful lives of the assets using straight-line and declining
balance methods. Leasehold improvements are amortized over the lesser of the
useful lives of the improvements or the remaining life of the lease.
Deferred lease costs:
Deferred lease costs (which are included in other assets) are amortized on
a straight-line basis over the terms of the leases.
Revenue recognition:
Revenue is recognized at the time of rental or sale of a video cassette or
video game.
Advertising:
The Company expenses the cost of advertising and promotions as incurred.
Advertising costs charged to operations approximated $30,000, $19,000 and
$34,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Income taxes:
The Company has elected to be treated as an "S" Corporation under the
applicable sections of the Internal Revenue Code. Under these sections,
corporate income or loss is allocated to the stockholder for inclusion in his
personal income tax returns. Accordingly, there is no provision for Federal
income tax in the accompanying combined financial statements.
The Company has also elected to be treated as an "S" Corporation for state
income tax purposes. However, the states in which the Company operates impose a
tax on "S" Corporation income at a reduced rate and, accordingly, the
accompanying combined financial statements include the effects of the provisions
for state income taxes.
The Company accounts for state income taxes pursuant to the asset and
liability method which requires deferred income tax assets and liabilities to be
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect
F-286
<PAGE> 367
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Unaudited interim financial information:
In the opinion of management, the accompanying unaudited combined financial
statements reflect all adjustments, consisting only of normal recurring
accruals, necessary to present fairly the financial position of the Company as
of June 30, 1996, and its results of operations and cash flows for the six
months ended June 30, 1996 and 1995. Results of operations for the six months
ended June 30, 1996 are not necessarily indicative of the results of operations
for the full year ending December 31, 1996.
NOTE 2 -- INVESTMENTS IN MARKETABLE SECURITIES:
At December 31, 1995 and 1994, the Company's investments in marketable
securities were classified as available for sale and, accordingly, carried at
fair value. The portfolio of marketable securities was comprised as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Fair value:
Equity securities......................................... $1,876,899 $1,153,951
U.S. Treasury notes....................................... 1,071,452 1,873,144
---------- ----------
Totals............................................ $2,948,351 $3,027,095
========== ==========
</TABLE>
Additional information about the Company's portfolio of marketable
securities at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Amortized cost:
Equity securities......................................... $1,338,195 $ 889,507
U.S. Treasury notes....................................... 994,041 1,858,466
---------- ----------
Totals............................................ $2,332,236 $2,747,973
========== ==========
Unrealized gains:
Equity securities......................................... $ 538,704 $ 264,444
U.S. Treasury notes....................................... 77,411 14,678
---------- ----------
Totals............................................ 616,115 279,122
Deferred state income taxes............................... 15,000 6,800
---------- ----------
Net unrealized gains.............................. $ 601,115 $ 272,322
========== ==========
</TABLE>
Substantially all of the U.S. Treasury notes mature during the years ending
December 31, 1998 and 1999.
Gross unrealized gains totaled $665,249 and $326,987 and gross unrealized
losses totaled $49,134 and $47,865 at December 31, 1995 and 1994, respectively.
The unrealized gains, net of the unrealized losses and deferred state income
taxes, are shown as a separate component of stockholder's equity in the
accompanying combined balance sheets. A net unrealized gain of $656,922 was
recorded as a separate component of stockholder's equity as of January 1, 1994,
the effective date of the adoption of SFAS 115. The net unrealized
F-287
<PAGE> 368
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
gain increased by $336,993 and decreased by $369,600 in the years ended December
31, 1995 and 1994, respectively.
Information with respect to sales of marketable securities during the years
ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Sales proceeds................................. $2,978,485 $1,445,277 $1,472,093
Gross realized gains........................... 368,024 173,444 226,819
Gross realized losses.......................... (138,018) (107,725) (49,268)
Net realized gains............................. 230,006 65,719 177,551
</TABLE>
During the six months ended June 30, 1996, the Company transferred
marketable securities with a fair market and carrying value of $409,938 to, and
received an equity interest in, an investment partnership. As a result of the
exchange, the Company recorded a realized loss of $26,539. The exchange was a
noncash transaction that is not reflected in the accompanying combined statement
of cash flows for that period.
NOTE 3 -- VIDEO CASSETTE RENTAL INVENTORIES:
At December 31, 1995 and 1994, video cassette rental inventories and
related amortization consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Video cassette rental inventory............................. $1,765,347 $1,463,123
Accumulated amortization.................................... (1,413,414) (1,236,354)
---------- ----------
Totals............................................ $ 351,933 $ 226,769
========== ==========
</TABLE>
NOTE 4 -- LOANS TO AND FROM RELATED PARTIES:
The balances of advances to officer and loans to and from stockholder
reflected in the accompanying balance sheets arose from noninterest bearing
advances and loans made from time to time. Although advances and loans are
without specific due dates, they are intended to be short-term and have been
classified as current assets or liabilities.
NOTE 5 -- EQUIPMENT AND IMPROVEMENTS:
At December 31, 1995 and 1994, equipment and improvements consisted of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Furniture and fixtures........................... 7 years $510,484 $401,084
Computer equipment............................... 5 years 87,406 38,992
Leasehold improvements........................... 5-10 years 373,428 206,511
--------
971,318 646,587
Less accumulated depreciation and amortization... 417,298 286,536
-------- --------
Totals................................. $554,020 $360,051
======== ========
</TABLE>
F-288
<PAGE> 369
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
NOTE 6 -- NOTE PAYABLE TO BANK:
The note payable to bank is due on demand, bears interest at a specified
prime rate (8.75% at December 31, 1995) and is secured by the Company's
portfolio of marketable securities. In addition, the Company's stockholder has
guaranteed the payment of the note and pledged certain marketable securities as
collateral.
NOTE 7 -- COMMITMENTS:
Lease commitments:
The Company is obligated under various lease agreements for rental of
office and retail store space under operating leases that expire through
February 2006. Certain leases contain renewal options and require the Company to
pay occupancy costs. Rent expense charged to operations was $477,072, $400,626
and $362,615 in the years ended December 31, 1995, 1994 and 1993, respectively.
Future minimum lease payments under these noncancelable leases in years
subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
1996..................................................................... $ 742,095
1997..................................................................... 762,326
1998..................................................................... 656,970
1999..................................................................... 638,205
2000..................................................................... 488,520
Thereafter............................................................... 1,819,134
----------
Total.................................................................. $5,107,250
==========
</TABLE>
Employment agreement:
Pursuant to an employment agreement dated January 1, 1996, the Company is
obligated to pay an executive officer annual compensation of $200,000 in 1996,
with increases of 15% for each additional year the agreement is in effect. The
agreement is cancelable by either party upon at least 60 days notice prior to
January 1st of any year.
The agreement also requires the Company to pay the executive officer a net
bonus equal to 750% of his annual compensation upon sale of the Company's video
store operations.
NOTE 8 -- COMMON STOCK:
Franexco, Inc. is authorized to issue 200 shares of common stock without
par value, of which 102 shares had been issued at June 30, 1996 and December 31,
1995 and 1994. Great American Video Realty, Inc. is authorized to issue 2,500
shares of common stock without par value, of which none had been issued at June
30, 1996 and December 31, 1995 and 1994.
F-289
<PAGE> 370
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
NOTE 9 -- PROVISION FOR INCOME TAXES:
A reconciliation of income taxes and credits based on pre-tax income and
losses and the Federal statutory rate to the Company's effective rate for the
years ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Federal statutory income tax rate........................... 34.0% 34.0% (34.0)%
Increase (decrease) resulting from:
State income taxes, net of Federal tax benefit............ 6.1 5.9
"S" Corporation income not subject to Federal or state
tax.................................................... (38.4) (38.4) 34.0
Other..................................................... .7 .7
----- ----- -----
Effective rate......................................... 2.4% 2.2% --%
===== ===== =====
</TABLE>
Deferred state tax assets and liabilities as of December 31, 1995 and 1994
and deferred state tax provisions and credits for the years ended December 31,
1995, 1994 and 1993 were immaterial.
NOTE 10 -- CHANGES IN ACCOUNTING METHODS AND OTHER CHANGES:
As further explained in Notes 1 and 2, the Company changed its method of
accounting for marketable securities on a prospective basis and recorded a net
unrealized holding gain as a separate component of stockholder's equity
effective as of January 1, 1994 in accordance with SFAS 115.
During the six months ended June 30, 1996, the Company adopted the policies
for the amortization of the cost of video cassettes set forth in Note 1 to
achieve a more appropriate matching of amortization expense with the revenues
received from the associated rental of video cassettes. In the unaudited
combined financial statements as of and for the six months ended June 30, 1995
and as of and for the years ended December 31, 1995, 1994 and 1993 originally
issued by the Company (the "Unaudited Financial Statements"), the cost of video
cassettes had been amortized (i) over four years with 50% amortized in the first
year or (ii) over a period of 18 months. Since the accompanying combined
financial statements have been prepared in conjunction with the proposed sale of
the Company's video store operations (see Note 13) and a related public offering
of securities, they have been retroactively restated as if the new amortization
method for video cassettes had been adopted effective as of January 1, 1993. The
accompanying combined financial statements have also been retroactively restated
to eliminate the effects of various revenues and expenses that were over or
under accrued in the Unaudited Financial Statements. Certain accounts previously
presented in the Unaudited Financial Statements have also been reclassified to
conform with the 1996 presentation.
The effects of the adoption of the new policies related to the amortization
of the cost of video cassettes and the restatements to eliminate the effects of
over and under accruals of various revenues and expenses on
F-290
<PAGE> 371
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
net income or loss and retained earnings as originally reflected in the
Unaudited Financial Statements are summarized below:
<TABLE>
<CAPTION>
AS OF OR
FOR THE
SIX MONTHS AS OF OR FOR THE
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ----------------------------------------
1995 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) as originally
reported................................ $ 155,011 $ 216,671 $ 110,715 $ (4,239)
--------- -------- -------- ----------
Effect of retroactive change in method of
amortizing video cassettes.............. (155,054) 96,505 42,852 (152,069)
Net effect of eliminating over and under
accruals of various revenues and
expenses................................ (98,443) (48,838) (21,840) 102,616
--------- -------- -------- ----------
Totals.................................. (253,497) 47,667 21,012 (49,453)
--------- -------- -------- ----------
Net income (loss) as restated............. $ (98,486) $ 264,338 $ 131,727 $ (53,692)
========= ======== ======== ==========
Retained earnings as originally
reported................................ $3,594,159 $3,655,819 $3,439,148 $3,328,433
Total adjustments to net income (loss).... (253,497) 47,667 21,012 (49,453)
Cumulative effect as of beginning of
period.................................. (239,205) (239,205) (260,217) (210,764)
--------- -------- -------- ----------
Retained earnings as restated............. $3,101,457 $3,464,281 $3,199,943 $3,068,216
========= ======== ======== ==========
</TABLE>
NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's material financial instruments at December 31, 1995 for which
disclosure of estimated fair value is required by certain accounting standards
consisted of cash and cash equivalents, marketable securities, advances to an
officer, notes payable and advances from the stockholder. The fair value of cash
was equal to its carrying value because of its liquidity and short-term
maturity. The fair value of the Company's marketable securities is equal to the
carrying value. The fair value of the notes payable approximated their aggregate
carrying value due to their short-term maturity and/or variable interest rate.
There is no practical method that can be used to determine the fair value of the
amounts receivable from the officer or payable to the stockholder because of the
related party nature of such loans.
NOTE 12 -- PROPOSED SALE OF VIDEO STORE OPERATIONS:
In September 1996, the Company's stockholder entered into a letter of
intent with West Coast Entertainment, Corp. ("West Coast") pursuant to which the
stockholder agreed to sell the Company's video store operations and
substantially all of the related assets and liabilities to West Coast.
Consummation of the sale is subject to the satisfaction by each party of
numerous terms and conditions.
F-291
<PAGE> 372
FRANEXCO, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
NOTE 13 -- UNAUDITED PRO FORMA INCOME TAX INFORMATION:
Unaudited pro forma income tax information as if the Company had been a "C"
corporation subject to Federal and state income taxes follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
JUNE 30, ENDED
---------------------- DECEMBER 31,
1996 1995 1995
--------- -------- ------------
<S> <C> <C> <C>
Income (loss) before income taxes............... $(227,363) $(98,486) $271,038
Pro forma provision (credit) for income taxes... (77,000) (27,000) 104,000
--------- -------- --------
Pro forma net income (loss)..................... $(150,363) $(71,486) $167,038
========= ======== ========
</TABLE>
F-292
<PAGE> 373
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Curran, Skypala, Zimmerman W. C. Video Group
Boyertown, Pennsylvania
We have audited the accompanying combined balance sheets of Curran,
Skypala, Zimmerman W. C. Video Group as of December 31, 1994 and 1995, and the
related combined statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1993, 1994, and 1995. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies as of December 31, 1993, 1994 and 1995, and the combined results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, the Company changed
its method of accounting for videocassettes and video games.
/s/ Kurtz, McNaney & Company
KURTZ, McNANEY & COMPANY
Certified Public Accountants
Reading, Pennsylvania
September 20, 1996
F-293
<PAGE> 374
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 31,
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents......................................... $ 164,717 $ 141,110
Merchandise Inventory............................................. 22,000 21,000
Amounts Due from Stockholders..................................... 27,000 84,521
---------- ----------
Total Current Assets...................................... 213,717 246,631
Videocassette Rental Inventory, Net................................. 519,697 507,538
Furnishings and Equipment, Net...................................... 287,425 256,666
Other Assets........................................................ 62,553 55,010
---------- ----------
Total..................................................... $1,083,392 $1,065,845
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-Term Debt................................................... $ 5,000 $ 25,780
Current Portion of Long-Term Debt................................. 174,850 160,395
Trade Payables.................................................... 197,111 124,512
Accruals and Other Liabilities.................................... 90,458 92,689
Amounts Due to Affiliates......................................... 14,000 0
---------- ----------
Total Current Liabilities................................. 481,419 403,376
Long-Term Debt...................................................... 542,454 525,541
---------- ----------
Total Liabilities......................................... 1,023,873 928,917
Stockholders' Equity
Common Stock...................................................... 1,708 1,463
Additional Paid-In Capital........................................ 0 9,962
Retained Earnings................................................. 57,811 125,503
---------- ----------
Total Stockholders' Equity................................ 59,519 136,928
---------- ----------
Total............................................................... $1,083,392 $1,065,845
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-294
<PAGE> 375
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental Revenue....................................... $1,157,507 $1,970,613 $2,279,603
Merchandise Sales.................................... 101,805 231,386 364,278
---------- ---------- ----------
Total........................................ 1,259,312 2,201,999 2,643,881
Cost and Expenses:
Operating Expenses................................... 579,403 941,356 1,097,314
Cost of Sales........................................ 325,630 791,714 846,694
General and Administrative........................... 193,213 363,260 404,889
---------- ---------- ----------
Income from Operations....................... 161,066 105,669 294,984
Interest Expense....................................... 20,894 39,241 56,846
Other Expense (Income), Net............................ (9,037) (42,476) (25,621)
---------- ---------- ----------
Net Income................................... $ 149,209 $ 108,904 $ 263,759
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-295
<PAGE> 376
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY (DEFICIT)
------ ---------- -------- ----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... $1,300 $ 0 $ 43,934 $ 45,234
Distributions................................. 0 0 (149,526) (149,526)
Issuance of Shares............................ 8 0 0 8
Net Income.................................... 0 0 149,209 149,209
------ ------ --------- ---------
Balance at December 31, 1993.................. 1,308 0 43,617 44,925
Distributions................................. 0 0 (94,710) (94,710)
Issuance of Shares............................ 400 0 0 400
Net Income.................................... 0 0 108,904 108,904
------ ------ --------- ---------
Balance at December 31, 1994.................. 1,708 0 57,811 59,519
Distributions................................. (248) 0 (196,067) (196,315)
Issuance of Shares............................ 3 9,962 0 9,965
Net Income.................................... 0 0 263,759 263,759
------ ------ --------- ---------
Balance at December 31, 1995.................. $1,463 $9,962 $125,503 $ 136,928
====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-296
<PAGE> 377
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income.............................................. $ 149,209 $ 108,904 $ 263,759
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Amortization of Videocassette Rental Inventory........ 261,617 615,690 687,517
Amortization of Franchise Fees and Organization....... 9,473 10,311 11,761
Depreciation and Amortization of Furnishings and
Equipment.......................................... 17,620 40,185 57,149
Changes in Assets and Liabilities:
Merchandise Inventories............................ (10,000) (9,000) 1,000
Prepaid Expenses and Other Assets.................. 236 (5,043) (57,521)
Accounts Payable................................... 29,967 101,277 (72,599)
Accruals and Other Liabilities..................... 24,941 38,912 (11,769)
--------- --------- ---------
Net Cash Provided by (Used in) Operating
Activities.................................. 483,063 901,236 879,297
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of Property and Equipment................... (96,807) (132,591) (22,401)
Purchases of Videocassette Rental Inventory........... (431,732) (793,570) (657,416)
Purchase of Other Assets.............................. (43,046) (8,500) (25,000)
--------- --------- ---------
Net Cash Provided by (Used in) Investing
Activities.................................. (571,585) (934,661) (704,817)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from Short-Term Debt -- Net.................. 0 (28,000) 20,780
Proceeds from Long-Term Debt.......................... 300,000 375,000 50,000
Loans from Stockholders............................... 0 121,500 92,540
Repayment of Long-Term Debt........................... (72,183) (219,333) (180,429)
Repayment of Stockholder Loans........................ 0 0 (18,479)
Distributions......................................... (149,526) (94,710) (162,499)
--------- --------- ---------
Net Cash Provided by (Used in) Financing
Activities.................................. 78,291 154,457 (198,087)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents.... (10,231) 121,032 (23,607)
Cash and Equivalents, Beginning of Year................. 53,916 43,685 164,717
--------- --------- ---------
Cash and Cash Equivalents, End of Year.................. $ 43,685 $ 164,717 $ 141,110
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest.............. $ 21,250 $ 40,306 $ 58,674
========= ========= =========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Fixed Assets Purchased Financed with Long-Term Debt... $ 0 $ 0 $ 25,000
========= ========= =========
Fixed Assets (Net) Distributed to Shareholder......... $ 0 $ 0 $ 21,299
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-297
<PAGE> 378
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Curran, Skypala, Zimmerman W. C. Video Group includes the accounts of the
following companies:
Family Country Video, Inc.
Danville W. C. Video, Inc.
Berwick W. C. Video, Inc.
Park Towne Video, Inc.
Bloomsburg W. C. Video, Inc.
Shamokin W. C. Video, Inc.
C + V Group Inc.
Springford W.C. Video, Inc.
The group owns and operates seven videocassette rental stores, located in
Pennsylvania.
Family Country Video, Inc. operated two videocassette rental stores. During
1995, Family Country Video, Inc. went through a corporate reorganization. Due to
this reorganization, after December 31, 1995 the Company owns and operates one
videocassette rental store.
Danville W. C. Video, Inc. started business during August 1993 and operated
one videocassette rental store. During October 1995, the Company discontinued
operations. The assets and operations of this Company were merged into Shamokin
W. C. Video, Inc.
Berwick W. C. Video, Inc. started business during August 1993 and operated
one videocassette rental store. During October 1995, the Company discontinued
operations. The assets and operations of this Company were merged into Shamokin
W. C. Video, Inc.
Park Towne W. C. Video, Inc. operates one videocassette rental store.
Bloomsburg W. C. Video, Inc. started business during January 1994. The
Company operates one videocassette rental store.
Shamokin W. C. Video, Inc. started business during January 1994. The
Company operated one videocassette rental store. On October 17, 1995, the
Company obtained the Danville W. C. Video, Inc. videocassette rental store and
the Berwick W. C. Video, Inc. videocassette rental store. Currently, the Company
operates three videocassette rental stores.
C + V Group Inc. started business during November 1995. The Company
operates one videocassette rental store.
Springford W.C. Video, Inc. started business during March, 1996. The assets
pf Park Towne W.C. Video, Inc. were merged into this Company. Currently, the
Company operates one videocassette rental store.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-298
<PAGE> 379
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape and amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 4 to 10 years) of leased items using the straight-line method. Repair
and maintenance costs are expensed as incurred.
Inter Company Transactions
Inter company transactions and balances have been eliminated in the
combination.
Income Taxes
Family Country Video, Inc., Park Towne Video, Inc., Bloomsburg W. C. Video,
Inc. and Shamokin W. C. Video, Inc. have elected to be treated as Subchapter S
corporations for income tax purposes. Accordingly, the income of these companies
is taxed at the shareholder level. Therefore, there will be no provision for
income taxes made in the accompanying financial statements for the above
companies.
NOTE 3 -- VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Videocassette Rental Inventory................................ $1,022,967 $1,118,554
Accumulated Amortization...................................... 503,270 611,016
---------- ----------
$ 519,697 $ 507,538
========== ==========
</TABLE>
F-299
<PAGE> 380
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Amortization expense related to videocassette rental inventory totaled
$261,617, $615,690, and $687,517 for the years ended December 31, 1993, 1994,
and 1995, respectively.
NOTE 4 -- FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Furniture, Fixtures and Equipment................................ $303,601 $300,692
Leasehold Improvements........................................... 131,014 111,522
-------- --------
Total....................................................... 434,615 412,214
Accumulated Depreciation and Amortization........................ 147,190 155,548
-------- --------
Net Furnishings and Equipment.................................... $287,425 $256,666
======== ========
</TABLE>
Depreciation and amortization expense was $17,620, $40,185, and $57,149 for
the years ended December 31, 1993, 1994, and 1995, respectively.
NOTE 5 -- OTHER LONG-TERM ASSETS
Other long-term debt assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Lease Deposits..................................................... $10,850 $13,850
Franchise Fees, Net................................................ 44,125 34,167
Organization Expense, Net.......................................... 7,578 6,993
------- -------
$62,553 $55,010
======= =======
</TABLE>
Franchise fees are amortized over the life of the franchise. Organization
expenses are amortized over five years.
Amortization expense was $9,473, $10,311 and $11,761 for the years ended
December 31, 1993, 1994, and 1995, respectively.
NOTE 6 -- SHORT-TERM DEBT
Short-term debt represents notes payable - bank. The advances from the
bank, aggregating $5,000 and $25,780 at December 31, 1994 and 1995,
respectively, were in the form of demand notes payable with interest at 9 3/4%.
The notes are secured by the assets of the Companies and the personal guarantees
of the Companies' shareholders and their spouses.
F-300
<PAGE> 381
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- ACCRUALS AND OTHER LIABILITIES
Accruals and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Accrued Royalty.................................................... $12,796 $25,466
Accrued Payroll.................................................... 30,258 22,895
Withheld and Accrued Payroll Taxes................................. 18,586 15,161
Sales Tax Payable.................................................. 25,948 15,052
Distribution Payable............................................... 0 12,517
Other.............................................................. 2,870 1,598
------- -------
$90,458 $92,689
======= =======
</TABLE>
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Promissory note -- payable in consecutive monthly principal
installments of $2,000 through May 1995 plus interest at
10 1/2%. The note was secured by the assets of Family Country
Video, Inc. and the personal guarantees of the stockholders and
their spouses.................................................. $ 9,813 $ 0
Promissory note -- payable in consecutive monthly principal
installments of $3,250 through September 1995 plus interest at
8%. The note was secured by the assets of Family Country Video,
Inc. and the personal guarantees of the stockholders and their
spouses........................................................ 26,497 0
Promissory note -- payable in consecutive monthly installments of
$2,083 through September 1998 plus interest at the bank's prime
rate plus 1 1/4%. However, so long as the Company is not in
default, the rate shall not exceed 8 3/4% or be less than 7%.
The note is secured by the assets of Shamokin W. C. Video, Inc.
and the personal guarantees of the stockholders and their
spouses........................................................ 90,945 65,945
Promissory note -- payable in consecutive monthly installments of
$2,083 through September 1998 plus interest at the bank's prime
rate plus 1 1/4%. However, so long as the Company is not in
default, the rate shall not exceed 8 3/4% or be less than 7%.
The note is secured by the assets of Shamokin W. C. Video, Inc.
and the personal guarantees of the stockholders and their
spouses........................................................ 93,650 68,650
Promissory note -- payable in consecutive monthly installments of
$812 through September 1998 plus interest at 9 3/4%. The note
is secured by the assets of Shamokin W. C. Video, Inc. and the
personal guarantees of the stockholders and their spouses...... 35,910 25,750
</TABLE>
F-301
<PAGE> 382
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------- -------
<S> <C> <C>
Promissory note -- payable in consecutive monthly installments of
$1,150 through January 1997 plus interest at the bank's prime
rate plus 1 3/4%. The note is secured by the assets of Park
Towne Video, Inc. and the personal guarantees of the
stockholders and their spouses................................. 42,550 28,750
Promissory note -- payable in consecutive monthly installments of
$2,917 through March 1999 plus interest at the bank's prime
rate plus 1 1/4%. However, so long as the Company is not in
default, the interest rate shall not exceed 8.9% or be less
than 7%. The note is secured by the assets of Shamokin W. C.
Video, Inc. and the pro rata personal guarantees of the
stockholders and their spouses................................. 148,940 113,740
Promissory note -- payable in consecutive monthly installments of
$2,500 through November 1999 plus interest at the bank's prime
rate plus 1%. However, so long as the Company is not in
default, the interest rate shall not exceed 10%. The note is
secured by the assets of Bloomsburg W. C. Video, Inc. and the
personal guarantees of the stockholders and their spouses...... 147,500 117,500
Promissory note -- payable in consecutive monthly installments of
$833 through August 2000 plus interest at 9 7/8%. The note is
secured by the assets of C+V Group Inc. and the personal
guarantees of specific stockholders and their spouses.......... 0 48,040
Promissory note -- payable in consecutive monthly installments of
$1,000 through October 1997. The note is secured by the
personal guarantees of specific stockholders of C+V Group
Inc............................................................ 0 22,000
Loans payable from stockholders. There are no specified repayment
terms or due dates............................................. 121,500 195,561
------- -------
717,305 685,936
Less Current Maturities........................................ 174,850 160,395
------- -------
$542,454 $525,541
======= =======
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1996............................................... $160,395
1997............................................... 158,548
1998............................................... 117,011
1999............................................... 44,719
2000............................................... 9,702
Thereafter.............................................. 195,561
--------
$685,936
========
</TABLE>
NOTE 9 -- CONCENTRATION OF CREDIT RISK
The Companies maintain cash at several financial institutions. Balances at
the institutions are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. During the year the Companies cash
F-302
<PAGE> 383
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
balance may exceed $100,000. At December 31, 1995, the Companies' uninsured cash
balance was approximately $-0-.
NOTE 10 -- CHANGE IN ACCOUNTING FOR VIDEOCASSETTE RENTAL INVENTORY
The Company has changed its method of videocassette tape amortization to
more closely resemble the methods used by other video store chains.
The effect on net income for each of the years presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, INCREASE
----------------------------------------------------------- -------
<S> <C>
1995.................................................. $32,513
1994.................................................. $76,193
1993.................................................. $82,337
</TABLE>
The cumulative effect on years prior to 1993 was an increase in retained
earnings of $81,188.
NOTE 11 -- LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
2001. Minimum future rental payments under these leases as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------
<S> <C>
1996................................................. $216,733
1997................................................. 220,233
1998................................................. 154,731
1999................................................. 76,000
2000................................................. 33,003
--------
Future Minimum Payments................................... $700,700
========
</TABLE>
Rent expense totalled approximately $75,601, $125,731 and $165,361 for the
years ended December 31, 1993, 1994 and 1995, respectively.
NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995, the carrying amounts of cash, accounts payable and
accrued expenses approximate fair value because of the short-term maturity of
these instruments.
At December 31, 1995, the carrying amounts of long-term debt approximate
fair value.
NOTE 13 -- SUBSEQUENT EVENT
(1) The Company and its stockholders have entered into negotiations with
West Coast Entertainment Corporation to sell all of their shares of outstanding
common stock.
(2) The Stockholders of the combined group formed a new Corporation during
1996. This Corporation opened a store in Springford, Pennsylvania. During 1996
the Company merged the assets of Park Towne W.C. Video, Inc. into this new
Corporation. Also, the Company closed the Park Towne Pennsylvania videocassette
rental store.
F-303
<PAGE> 384
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- COMMON STOCK
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
Family Country Video, Inc.
No Par Value; Stated Value $1; Authorized -- 300; Issued and
Outstanding at December 31, 1994 -- 300 Shares at December
31, 1995 -- 100 Shares....................................... $ 300 $ 100
Danville W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized -- 4; Issued and
Outstanding at December 31, 1994 -- 4 Shares; at December 31,
1995 -- 0 Shares............................................. 4 0
Berwick W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized -- 4; Issued and
Outstanding at December 31, 1994 -- 4 Shares; at December 31,
1995 -- 0 Shares............................................. 4 0
Park Towne Video, Inc.
No Par Value; Stated Value $1; Authorized -- 1,000; Issued and
Outstanding at December 31, 1994 -- 1,000 Shares; at December
31, 1995 -- 1,000 Shares..................................... 1,000 1,000
Bloomsburg W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized -- 200; Issued and
Outstanding at December 31, 1994 -- 200 Shares; at December
31, 1995 -- 180 Shares....................................... 200 180
Shamokin W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized -- 200; Issued and
Outstanding at December 31, 1994 -- 200 Shares; at December
31, 1995 -- 180 Shares....................................... 200 180
C + V Group Inc.
No Par Value; Stated Value $1; Authorized -- 3; Issued and
Outstanding at December 31, 1994 -- 0 Shares; at December 31,
1995 -- 3 Shares............................................. 0 3
------ -------
Total Combined Common Stock............................. 1,708 1,463
Combined Additional Paid-In Capital..................... 0 9,962
------ -------
Combined Capitalization............................ $1,708 $11,425
====== =======
</TABLE>
F-304
<PAGE> 385
ACCOUNTANTS' REVIEW REPORT
Stockholders and Board of Directors
Curran, Skypala, Zimmerman W. C. Video Group
Boyertown, Pennsylvania
We have reviewed the accompanying combined balance sheets of Curran,
Skypala, Zimmerman W. C. Video Group as of June 30, 1995 and 1996, and the
related combined statements of operations, stockholders' equity and cash flows
and supplementary information for the six months then ended. These combined
financial statements are the responsibility of the companies' management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial statements consists primarily of applying analytical review procedures
to financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying combined financial statements in order for
them to be in conformity with generally accepted accounting principles.
KURTZ, McNANEY & COMPANY
Certified Public Accountants
Reading, Pennsylvania
September 20, 1996
F-305
<PAGE> 386
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1995 1996
-------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents.......................................... $ 64,945 $ 58,453
Merchandise Inventory.............................................. 22,000 23,500
Prepaid Expenses and Other Assets.................................. 1,772 1,206
Amounts Due from Stockholders...................................... 21,000 126,474
-------- ----------
Total Current Assets....................................... 109,717 209,633
Videocassette Rental Inventory, Net.................................. 518,942 521,471
Furnishings and Equipment, Net....................................... 267,152 308,348
Other Assets......................................................... 55,254 44,554
-------- ----------
Total................................................................ $951,065 $1,084,006
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-Term Debt.................................................... $ 56,813 $ 15,326
Current Portion of Long-Term Debt.................................. 143,297 196,182
Trade Payables..................................................... 152,079 107,446
Accruals and Other Liabilities..................................... 78,711 73,894
Advances from Affiliates........................................... 14,000 8,479
-------- ----------
Total Current Liabilities.................................. 444,900 401,327
Long-Term Debt....................................................... 445,933 564,199
-------- ----------
Total...................................................... 890,833 965,526
Stockholders' Equity:
Common Stock....................................................... 1,708 1,463
Additional Paid-In Capital......................................... 0 9,962
Retained Earnings............................................... 58,524 107,055
-------- ----------
Total Stockholders' Equity................................. 60,232 118,480
-------- ----------
Total................................................................ $951,065 $1,084,006
======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
See Accountants' Review Report
F-306
<PAGE> 387
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues:
Rental Revenue.................................................... $1,173,123 $1,177,988
Merchandise Sales................................................. 164,397 113,303
---------- ----------
1,337,520 1,291,291
Cost and Expenses:
Operating Expenses................................................ 597,471 601,637
Cost of Sales..................................................... 405,543 436,522
General and Administrative........................................ 209,466 176,209
---------- ----------
Income from Operations.................................... 125,040 76,923
Interest Expense.................................................... 27,184 29,410
Other, Net.......................................................... (18,857) (23,039)
---------- ----------
Net Income................................................ $ 116,713 $ 70,552
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
See Accountants' Review Report
F-307
<PAGE> 388
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994................... $1,708 $ 0 $ 57,811 $ 59,519
Distributions.................................. 0 0 (116,000) (116,000)
Net Income..................................... 0 0 116,713 116,713
------ ------ --------- ---------
Balance at June 30, 1995....................... $1,708 $ 0 $ 58,524 $ 60,232
====== ====== ========= =========
Balance at December 30, 1995................... $1,463 $9,962 $ 125,503 $ 136,928
Distributions.................................. 0 0 (89,000) (89,000)
Net Income..................................... 0 0 70,552 70,552
------ ------ --------- ---------
Balance at June 30, 1996....................... $1,463 $9,962 $ 107,055 $ 118,480
====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
See Accountants' Review Report
F-308
<PAGE> 389
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
COMBINED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income........................................................... $ 116,713 $ 70,552
Adjustments to Reconcile Net Income to Cash Flows Provided by
Operating Activities:
Amortization of Videocassette Rental Inventory..................... 304,839 342,344
Amortization of Franchise Fees and Organization Expense............ 7,301 7,800
Depreciation and Amortization of Furnishings and Equipment......... 27,269 28,500
Loss on Abandonment of Leasehold Improvements...................... 0 16,019
Changes in Assets and Liabilities:
Merchandise Inventories......................................... 0 (2,500)
Prepaid Expenses and Other Assets............................... (4,228) (43,159)
Accounts Payable................................................ (45,032) (8,587)
Accruals and Other Liabilities.................................. (11,747) (18,795)
--------- ---------
Net Cash Provided by (Used in) Operating Activities........ 395,115 392,174
--------- ---------
Cash Flows from Investing Activities:
Purchases of Property and Equipment................................ (6,996) (96,000)
Purchases of Videocassette Rental Inventory........................ (295,630) (353,822)
--------- ---------
Net Cash Provided by (Used in) Investing Activities........ (302,626) (449,822)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from Short-Term Debt -- Net............................... 51,813 (10,454)
Proceeds from Long-Term Debt....................................... 0 198,359
Repayment of Long-Term Debt........................................ (128,074) (123,914)
Distributions...................................................... (116,000) (89,000)
--------- ---------
Net Cash Provided by (Used in) Financing Activities........ (192,261) (25,009)
--------- ---------
Net (Decrease) in Cash and Cash Equivalents.......................... (99,772) (82,657)
Cash and Equivalents, Beginning of Period............................ 164,717 141,110
--------- ---------
Cash and Cash Equivalents, End of Period............................. $ 64,945 $ 58,453
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest........................... $ 27,395 $ 28,957
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
See Accountants' Review Report
F-309
<PAGE> 390
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Curran, Skypala, Zimmerman W. C. Video Group includes the accounts of the
following companies:
Family Country Video, Inc.
Danville W. C. Video, Inc.
Berwick W. C. Video, Inc.
Park Towne Video, Inc.
Bloomsburg W. C. Video, Inc.
Shamokin W. C. Video, Inc.
C + V Group Inc.
Springford W.C. Video, Inc.
The group owns and operates seven videocassette rental stores, located in
Pennsylvania.
Family Country Video, Inc. operated two videocassette rental stores. During
1995, Family Country Video, Inc. went through a corporate reorganization. Due to
this reorganization, after December 31, 1995 the Company owns and operates one
videocassette rental store.
Danville W. C. Video, Inc. started business during August 1993 and operated
one videocassette rental store. During October 1995, the Company discontinued
operations. The assets and operations of this Company were merged into Shamokin
W. C. Video, Inc.
Berwick W. C. Video, Inc. started business during August 1993 and operated
one videocassette rental store. During October 1995, the Company discontinued
operations. The assets and operations of this Company were merged into Shamokin
W. C. Video, Inc.
Park Towne W. C. Video, Inc. operated one videocassette rental store.
During 1996 the Company discontinued operations. The assets and operations of
this Company were merged into Springford W. C. Video, Inc.
Bloomsburg W. C. Video, Inc. started business during January 1994. The
Company operates one videocassette rental store.
Shamokin W. C. Video, Inc. started business during January 1994. The
Company operated one videocassette rental store. On October 17, 1995, the
Company obtained the Danville W. C. Video, Inc. videocassette rental store and
the Berwick W. C. Video, Inc. videocassette rental store. Currently, the Company
operates three videocassette rental stores.
C + V Group Inc. started business during November, 1995. The company
operates one videocassette rental store.
Springford W.C. Video, Inc. started business during March, 1996. The assets
of Park Towne W.C. Video, Inc. were merged into this Company. Currently, the
Company operates one videocassette rental store.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial
F-310
<PAGE> 391
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape and amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 4 to 10 years) of leased items using the straight-line method. Repair
and maintenance costs are expensed as incurred.
Inter Company Transactions
Inter company transactions and balances have been eliminated in the
combination.
Income Taxes
Family Country Video, Inc., Park Towne Video, Inc., Bloomsburg W. C. Video,
Inc., Springford W.C. Video, Inc., Shamokin W. C. Video, Inc. and Springford
W.C. Video, Inc. have elected to be treated as Subchapter S corporations for
income tax purposes. Accordingly, the income of these companies is taxed at the
shareholder level. Therefore, there will be no provision for income taxes made
in the accompanying combined financial statements for the above companies.
F-311
<PAGE> 392
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Videocassette Rental Inventory.............................. $1,306,156 $1,474,337
Accumulated Amortization.................................... 787,214 952,866
---------- ----------
$ 518,942 $ 521,471
========== ==========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$304,839, and $342,344 for the six months ended June 30, 1995 and 1996,
respectively.
NOTE 4 -- FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Furniture, Fixtures and Equipment.............................. $310,597 $307,848
Leasehold Improvements......................................... 131,014 182,604
-------- --------
Total................................................ 441,611 490,452
Accumulated Depreciation and Amortization...................... 174,459 182,104
-------- --------
Net Furnishings and Equipment.................................. $267,152 $308,348
======== ========
</TABLE>
Depreciation and amortization expense was $27,269 and $28,500 for the six
months ended June 30, 1995 and 1996, respectively.
NOTE 5 -- OTHER LONG-TERM ASSETS
Other long-term assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Lease Deposits................................................... $30,100 $10,250
Franchise Fees, Net.............................................. 19,125 29,167
Organization Expense, Net........................................ 6,029 5,137
------- -------
$55,254 $44,554
======= =======
</TABLE>
Franchise fees are amortized over the life of the franchise. Organization
expenses are amortized over five years.
Amortization expense was $7,301 and $7,800 for the six months ended June
30, 1995 and 1996, respectively.
NOTE 6 -- SHORT-TERM DEBT
Short-term debt represents notes payable -- bank. The advances from the
bank, aggregating $56,813 and $15,326 at June 30, 1995 and 1996, respectively,
were in the form of demand notes payable with interest that varies with the
bank's prime rates. The notes are secured by the assets of the Companies and the
personal guarantees of the Companies' shareholders and their spouses.
F-312
<PAGE> 393
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- ACCRUALS AND OTHER LIABILITIES
Accruals and other liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1995 1996
------- -------
<S> <C> <C>
Accrued Royalty.................................................... $11,764 $12,303
Accrued Payroll.................................................... 28,038 24,102
Withheld and Accrued Payroll Taxes................................. 17,410 12,959
Sales Tax Payable.................................................. 16,912 12,013
Distribution Payable............................................... 0 12,517
Other.............................................................. 4,587 0
------- -------
$78,711 $73,894
======= =======
</TABLE>
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following components:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Promissory note -- payable in consecutive monthly principal
installments of $3,250 through September 1995 plus interest at
8%. The note was secured by the assets of Family Country Video,
Inc. and the personal guarantees of the stockholders and their
spouses........................................................ $ 4,496 $ 0
Promissory note -- payable in consecutive monthly installments of
$2,083 through September 1998 plus interest at the bank's prime
rate plus 1 1/4%. However, so long as the Company is not in
default, the rate shall not exceed 8 3/4% or be less than 7%.
The note is secured by the assets of Shamokin W. C. Video, Inc.
and the personal guarantees of the stockholders and their
spouses........................................................ 78,445 53,445
Promissory note -- payable in consecutive monthly installments of
$2,083 through September 1998 plus interest at the bank's prime
rate plus 1 1/4%. However, so long as the Company is not in
default, the rate shall not exceed 8 3/4% or be less than 7%.
The note is secured by the assets of Shamokin W.C. Video, Inc.
and the personal guarantees of the stockholders and their
spouses........................................................ 81,150 56,150
Promissory note -- payable in consecutive monthly installments of
$812 through September 1998 plus interest at 9 3/4%. The note
is secured by the assets of Shamokin W. C. Video, Inc. and the
personal guarantees of the stockholders and their spouses...... 30,965 19,078
Promissory note -- payable in consecutive monthly installments of
$1,150 through January 1997 plus interest at the bank's prime
rate plus 1 3/4%. The note is secured by the assets of
Springford W. C. Video, Inc. and the personal guarantees of the
stockholders and their spouses................................. 35,650 26,617
Promissory note -- payable in consecutive monthly installments of
$2,917 through March 1999 plus interest at the bank's prime
rate plus 1 1/4%. However, so long as the Company is not in
default, the interest rate shall not exceed 8.9% or be less
than 7%. The note is secured by the assets of Shamokin W. C.
Video, Inc. and the pro rata personal guarantees of the
stockholders and their spouses................................. 128,324 96,240
</TABLE>
F-313
<PAGE> 394
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
-------- --------
<S> <C> <C>
Promissory note -- payable in consecutive monthly installments of
$2,500 through November 1999 plus interest at the bank's prime
rate plus 1%. However, so long as the Company is not in
default, the interest rate shall not exceed 10%. The note is
secured by the assets of Bloomsburg W. C. Video, Inc. and the
personal guarantees of the stockholders and their spouses...... $132,500 $102,498
Promissory note -- payable in consecutive monthly installments of
$833 through August 2000 plus interest at 9 1/3%. The note is
secured by the assets of C+V Group Inc. and the personal
guarantees of specific stockholders and their spouses.......... 0 43,974
Promissory note -- payable in consecutive monthly installments of
$1,000 through October 1997. The note is secured by the
personal guarantees of specific stockholders of C+V Group
Inc............................................................ 0 16,000
Promissory note -- payable in consecutive monthly installments of
$2,550 through January 2001 plus interest at the Bank's prime
rate plus 1%. The note is secured by the assets of Springford
W.C. Video, Inc. and the personal quarantees of the
stockholders and their spouses................................. 0 137,459
Loans payable from stockholders. There are no specified repayment
terms or due dates............................................. 97,700 208,920
589,230 760,381
-------- --------
Less Current Maturities................................ 143,297 196,182
-------- --------
$445,933 $564,199
======== ========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
JUNE 30,
---------------
<S> <C>
1997...................................................... $196,182
1998...................................................... 176,713
1999...................................................... 106,435
2000...................................................... 53,098
2001...................................................... 19,033
Thereafter................................................ 208,920
--------
.......................................................... $760,381
========
</TABLE>
NOTE 9 -- CONCENTRATION OF CREDIT RISK
The Companies maintain cash at several financial institutions. Balances at
the institutions are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. During the period, the Companies' cash balance may exceed
$100,000. At June 30, 1996, the Companies' uninsured cash balance was
approximately $0.
F-314
<PAGE> 395
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
2001. Minimum future rental payments under these leases as of June 30, 1996 are
as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
JUNE 30,
-------------
<S> <C>
1997................................................... $218,483
1998................................................... 193,407
1999................................................... 104,240
2000................................................... 80,000
2001................................................... 9,667
--------
Future Minimum Payments................................... $605,797
========
</TABLE>
Rent expense totalled approximately $79,668 and $103,294 for the six months
ended June 30, 1995 and 1996, respectively.
NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996, the carrying amounts of cash, accounts payable and
accrued expenses approximate fair value because of the short-term maturity of
these instruments.
At June 30, 1996, the carrying amounts of long-term debt approximate fair
value.
NOTE 12 -- SUBSEQUENT EVENT
The Company and its stockholders have entered into negotiations with West
Coast Entertainment Corporation to sell all of their shares of outstanding
common stock.
F-315
<PAGE> 396
CURRAN, SKYPALA, ZIMMERMAN W. C. VIDEO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- COMMON STOCK
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
------------------
1995 1996
------ -------
<S> <C> <C>
Family Country Video, Inc.
No Par Value; Stated Value $1; Authorized 300;
Issued and Outstanding;
at June 30,1995 -- 300 Shares;
at June 30,1996 -- 100 Shares................................ $ 300 $ 100
Danville W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized 4;
Issued and Outstanding;
at June 30,1995 -- 4 Shares;
at June 30,1996 -- 0 Shares.................................. 4 0
Berwick W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized 4;
Issued and Outstanding;
at June 30,1995 -- 4 Shares;
at June 30,1996 -- 0 Shares.................................. 4 0
Park Towne Video, Inc.
No Par Value; Stated Value $1; Authorized 1000;
Issued and Outstanding;
at June 30,1995 -- 1,000 Shares;
at June 30,1996 -- 1,000 Shares.............................. 1,000 1,000
Bloomsburg W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized 200;
Issued and Outstanding;
at June 30,1995 -- 200 Shares;
at June 30,1996 -- 180 Shares................................ 200 180
Shamokin W.C. Video, Inc.
No Par Value; Stated Value $1; Authorized 200;
Issued and Outstanding;
at June 30,1995 -- 200 Shares;
at June 30,1996 -- 180 Shares................................ 200 180
C & V Group, Inc.
No Par Value; Stated Value $1; Authorized 3;
Issued and Outstanding;
at June 30,1995 -- 0 Shares;
at June 30,1996 -- 3 Shares.................................. 0 3
------ -------
Combined Total Common Stock....................................... 1,708 1,463
Combined Additional Paid-In-Capital............................... 0 9,962
------ -------
Combined Capitalization........................................... $1,708 $11,425
====== =======
</TABLE>
See Accountants' Review Report
F-316
<PAGE> 397
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Coventry Video, Inc. and Pottstown Video, Inc.
Boyertown, Pennsylvania
We have audited the accompanying combined balance sheets of Coventry Video,
Inc. and Pottstown Video, Inc. as of March 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended March 31, 1994, 1995, and 1996. These financial statements are the
responsibility of the Companys' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Coventry Video, Inc.
and Pottstown Video, Inc. as of March 31, 1995 and 1996 and the results of their
operations and their cash flows for the years ended March 31, 1994, 1995 and
1996 in conformity with generally accepted accounting principles.
As discussed in Note 7 to the financial statements, the Company changed its
method of accounting for videocassettes and video games.
KURTZ, MCNANEY & COMPANY
Certified Public Accountants
Reading, Pennsylvania
September 20, 1996
F-317
<PAGE> 398
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH MARCH
31, 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................ $ 12,619 $ 28,852
Merchandise inventory................................................ 2,462 1,625
Prepaid expenses and other assets.................................... 7,359 17,619
Amounts due from affiliates.......................................... 21,206 25,245
Amounts due from stockholders........................................ 7,216 558
-------- --------
Total current assets......................................... 50,862 73,899
Videocassette rental inventory, net.................................... 127,783 114,071
Furnishings and equipment, net......................................... 53,193 71,989
Other assets........................................................... 12,007 13,355
-------- --------
Total assets................................................. $243,845 $273,314
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Short-term debt...................................................... $ 0 $ 2,231
Current portion of long-term debt.................................... 27,426 23,900
Trade payables....................................................... 51,777 57,397
Accruals and other liabilities....................................... 3,628 5,428
Advances from stockholders........................................... 0 7,005
-------- --------
Total current liabilities.................................... 82,831 95,961
Long-term debt......................................................... 114,496 143,470
Total liabilities............................................ 197,327 239,431
STOCKHOLDER'S EQUITY:
Common stock (Conventry Video, Inc.: $1 par,
1,000 shares authorized, issued, and
outstanding; Pottstown Video, Inc.: $1 par,
1,000 shares authorized, issued, and outstanding)................. 2,000 2,000
Additional paid-in capital........................................... 80,555 80,555
Retained earnings.................................................... (36,037) (48,672)
-------- --------
Total stockholder's equity................................... 46,518 33,883
-------- --------
Total liabilities and stockholder's equity................... $243,845 $273,314
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-318
<PAGE> 399
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Revenues:
Rental revenue.......................................... $605,305 $ 537,803 $544,856
Merchandise sales....................................... 82,814 57,311 33,289
-------- --------- --------
Total revenues.................................. 688,119 595,114 578,145
Operating costs and expenses:
Operating expenses...................................... 368,605 350,837 311,043
Cost of goods sold...................................... 261,568 251,903 186,852
General and administrative.............................. 90,435 96,473 96,433
-------- --------- --------
Total operating costs and expenses.............. 720,608 699,213 594,328
-------- --------- --------
Income (loss) from operations............................. (32,489) (104,099) (16,183)
Interest expense.......................................... 15,917 7,598 7,300
Other (expense) income.................................... 61,041 66,571 37,397
-------- --------- --------
Provision for income taxes................................ 0 650 0
-------- --------- --------
Net income (loss)......................................... $ 12,635 $ (45,776) $ 13,914
======== ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-319
<PAGE> 400
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDER'S
COMMON PAID-IN EARNINGS EQUITY
STOCK CAPITAL (DEFICIT) (DEFICIT)
------ ---------- -------- --------
<S> <C> <C> <C> <C>
Balance at April 1, 1993......................... $2,000 $ 80,555 $ 43,190 $125,745
Distributions.................................... 0 0 (60,000) (60,000)
Net income....................................... 0 0 13,914 13,914
------ ------- --------- ---------
Balance at March 31, 1994........................ 2,000 80,555 (2,896) 79,659
Distributions.................................... 0 0 0 0
Net income....................................... 0 0 (45,776) (45,776)
------ ------- --------- ---------
Balance at March 31, 1995........................ 2000 80,555 (48,672) 33,883
Distributions.................................... 0 0 0 0
Net income....................................... 0 0 12,635 12,635
------ ------- --------- ---------
Balance at March 31, 1996........................ $2,000 $ 80,555 $(36,037) $ 46,518
====== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-320
<PAGE> 401
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
net income............................................ $ 12,635 $ (45,776) $ 13,914
Adjustment to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory........ 154,958 143,034 98,394
Amortization of franchise fees........................ 1,349 1,498 1,499
Depreciation and amortization of furnishings.......... 24,860 24,143 19,389
Changes in assets and liabilities.......................
Merchandise inventories............................... (837) 0 0
Prepaid expenses and other assets..................... (16,008) (16,733) 57,235
Accounts payable...................................... (5,620) 12,857 7,496
Accrued expenses...................................... 15,954 (2,527) (3,925)
--------- --------- ---------
Net cash provided by operating activities..... 187,291 116,496 194,002
Cash flows from investing activities:
Purchases of property and equipment................... (6,092) (51,882) (2,850)
Purchases of videocassette rental inventory........... 171,984 (155,382) (112,399)
--------- --------- ---------
Net cash used in investing activities......... (178,076) (207,264) (115,249)
Cash flows from financing activities:
Proceeds from long-term debt.......................... 0 140,000 0
Proceeds from short-term debt, net.................... 2,231 0
Repayment of long-term debt........................... (25,448) (33,323) (24,074)
Distributions......................................... 0 0 (60,000)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. (25,448) 108,908 (84,074)
--------- --------- ---------
Net increase in cash and cash equivalents............... (16,233) 18,140 (5,321)
Cash and cash equivalents, beginning of period.......... 28,852 10,712 16,033
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 12,619 $ 28,852 $ 10,712
--------- --------- ---------
Supplementary disclosure of cash flow information:
Cash paid during the year for interest................ $ 15,982 $ 7,375 $ 7,560
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-321
<PAGE> 402
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Coventry Video, Inc. and Pottstown Video, Inc. (the Company) own and
operate two videocassette rental stores
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Combined Financial Statements
For each period presented, the combined financial statements include
Coventry Video, Inc.'s financial position as of March 31 and the results of its
operations and its cash flow for the fiscal year ending March 31 and Pottstown
Video, Inc.'s Financial position as of December 31 and the results of its
operations and its cash flows for the fiscal year ending December 31. The
difference in reporting periods is due to differing fiscal year-ends for these
entities.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape and amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lesser of the estimated useful
F-322
<PAGE> 403
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
lives or lease terms (primarily 4 to 10 years) of leased items using the
straight-line method. Repair and maintenance costs are expensed as incurred.
Income Taxes
Coventry Video, Inc. accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of other
assets and liabilities. Deferred tax assets are recognized, net of any valuation
allowance, for deductible temporary differences and net operating loss and tax
credit carryforwards. Deferred tax expense represents the change in the deferred
tax asset or liability balances.
Pottstown Video, Inc. has elected to be treated as a Subchapter S
corporation for income tax purposes. Accordingly, the income of this company is
taxed at the shareholder level. Therefore, there will be no provision for income
taxes made in the accompanying financial statements for the above company.
NOTE 3 -- VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Videocassette Rental Inventory............................... $ 374,269 $ 394,960
Accumulated Amortization..................................... (260,198) (267,177)
--------- ---------
$ 114,071 $ 127,783
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$98,394, $143,034, and $154,958 for the years ended March 31, 1994, 1995, and
1996, respectively.
NOTE 4 -- FURNISHINGS AND EQUIPMENT
Furnishings and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Furniture, Fixtures and Equipment............................ $ 137,992 $ 144,084
Leasehold Improvements....................................... 64,864 64,864
--------- ---------
Total.............................................. 202,856 208,948
Accumulated Depreciation and Amortization.................... (130,867) (155,755)
--------- ---------
Net Furnishings and Equipment........................... $ 71,989 $ 53,193
========= =========
</TABLE>
Depreciation and amortization expense was $19,389, $24,143, and $24,860 for
the years ended March 31, 1994, 1995, and 1996, respectively.
F-323
<PAGE> 404
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- OTHER LONG-TERM ASSETS
Other long-term debt assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Lease Deposits................................................... $10,414 $10,414
Loan Fees, Net................................................... 397 199
Franchise Fees, Net.............................................. 2,544 1,394
------- -------
$13,355 $12,007
======= =======
</TABLE>
Loan fees are amortized over the life of the loan. Amortization expense was
$199, $199, and $199 for the years ended March 31, 1994, 1995 and 1996,
respectively. Franchise fees are amortized over the life of the franchise.
Amortization expense was $1,300, $1,299, $1,150 for the years ended December 31,
1993, 1994 and 1995, respectively.
NOTE 6 -- DEBT
Short-term debt represented a note payable -- bank. The advances from the
bank, aggregating $2,231 and $0 at December 31, 1994 and 1995, respectively,
were in the form of demand notes payable with interest at 9 3/4% and 9 1/2% at
December 31, 1994 and 1995 respectively. The note was secured by the assets of
the company and the personal guarantees of the company's shareholders.
Long-term debt consists of the following components:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Promissory note -- payable in consecutive 59 monthly installments
of $2,252 including interest at 9%. The balance of the note is
due September 1999. The note is secured by the assets of the
Company and the personal guarantees of the stockholders. ...... $140,000 $124,960
Promissory note -- payable in consecutive 60 monthly installments
of $1,056 including interest at 9 3/4%. The note is secured by
the assets of the Company and the personal guarantees of the
stockholders. ................................................. $ 27,370 $ 16,962
Less Current Maturities.......................................... (23,900) (27,426)
-------- --------
$143,470 $114,496
======== ========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1997........................................................... $ 27,426
1998........................................................... 24,388
1999........................................................... 20,128
2000........................................................... 69,980
--------
$ 141,922
========
</TABLE>
NOTE 7 -- CHANGE IN ACCOUNTING FOR VIDEOCASSETTE RENTAL INVENTORY
The Company has changed its method of videocassette tape amortization to
more closely resemble the methods used by other video store chains.
F-324
<PAGE> 405
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The effect on net income for each of the years presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED INCREASE
MARCH 31, (DECREASE)
- ---------- ----------
<S> <C> <C>
1996............................................................... (17,531)
1995............................................................... (20,053)
1994............................................................... 18,651
</TABLE>
The cumulative effect on years prior to 1994 was a decrease in retained
earnings of $24,034.
NOTE 8 -- LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
2001. Minimum future rental payments under these leases as of March 31, 1996 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
- -----------
<S> <C> <C>
1997................................................................ $ 82,369
1998................................................................ 65,439
1999................................................................ 28,138
--------
Future Minimum Payments............................................. $175,946
========
</TABLE>
Rent expense totalled approximately $50,419, $77,039, and $90,653 for the
years ended March 31, 1994, 1995 and 1996, respectively.
NOTE 9 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1996, the carrying amounts of cash, accounts payable and
accrued expenses approximate fair value because of the short-term maturity of
these instruments.
At March 31, 1996, the carrying amounts of long-term debt approximate fair
value.
NOTE 10 -- INCOME TAXES
As discussed in Note 2, Coventry Video, Inc. adopted SFAS 109. The Coventry
Video, Inc. provision for income tax for the year ended March 31, 1995 & 1996
include the following:
<TABLE>
<CAPTION>
CURRENTLY PAYABLE 1995 1996
---------------------------------------------------------------------- ---- ----
<S> <C> <C>
Federal............................................................... $521 $0
State................................................................. 129 0
--
----
650 0
--
----
Deferred Taxes........................................................ 0 0
--
----
$650 $0
==== ==
</TABLE>
A full valuation allowance has been provided against deferred tax assets of
approximately $12,000 and $16,000 at March 31, 1995 and 1996, respectively,
related primarily to depreciation and net operations loss carryforwards.
F-325
<PAGE> 406
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the Coventry Video, Inc. provision for income
taxes and the amount determined by applying the U.S. federal statutory rate to
income before income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1994 1995 1996
------ ---- ----
<S> <C> <C> <C>
Income tax at statutory rate -- 34%.......................... (1,927) 442 (189)
State taxes, net of Federal Benefit.......................... (374) 85 (37)
Increase in valuation allowance.............................. 2,201 126
Non-deductible items......................................... 100 123 100
------ --- ----
0 650 0
====== === ====
</TABLE>
NOTE 11 -- SUBSEQUENT EVENT
The Company and its stockholders have entered into negotiations with West
Coast Entertainment Corporation to sell all of their shares of outstanding
common stock.
F-326
<PAGE> 407
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1996
--------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 13,977
Merchandise inventory........................................................... 1,712
Due from affiliates............................................................. 117,095
--------
Total current assets.................................................... 132,784
Videocassette rental inventory, net............................................... 111,871
Furnishings and equipment, net.................................................... 43,879
Other assets...................................................................... 19,140
--------
Total assets............................................................ $307,674
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt............................................... $ 27,834
Trade payables.................................................................. 73,217
Advances from stockholders...................................................... 97,069
Accruals and other liabilities.................................................. 6,505
--------
Total current liabilities............................................... 204,625
--------
Long-term debt.................................................................... 102,135
--------
Total liabilities....................................................... 306,760
STOCKHOLDERS' EQUITY:
Common stock (Coventry Video: $1 par,
1,000 shares authorized, issued and
outstanding; Pottstown Video; $1 par,
1,000 shares authorized, issued, and outstanding)............................ 2,000
Additional paid-in capital...................................................... 80,555
Retained earnings............................................................... (81,641)
--------
Total stockholders' equity.............................................. 914
--------
Total liabilities and stockholders' equity.............................. $307,674
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-327
<PAGE> 408
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Rental revenue....................................................... $113,629 $147,630
Merchandise sales.................................................... 12,561 27,781
-------- --------
Total revenues............................................... 126,190 175,411
Operating costs and expenses:
Store operating expenses............................................. 88,648 95,647
Cost of goods sold................................................... 65,769 78,669
General and administrative........................................... 10,708 18,616
-------- --------
Total operating costs and expenses........................... 165,125 192,932
-------- --------
Income from operations................................................. (38,935) (17,521)
Interest expense....................................................... 3,119 3,836
Other income, net...................................................... 11,446 8,368
-------- --------
Net income............................................................. (30,608) (12,989)
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-328
<PAGE> 409
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $(30,608) $(12,989)
Adjustment to reconcile net income to cash flows provided by operating
activities:
Amortization of videocassette rental inventory....................... 32,468 32,800
Amortization of franchise fees and organization expense.............. 337 337
Depreciation and amortization of furnishings and equipment........... 6,350 6,056
Changes in assets and liabilities:
Prepaid expenses and other assets.................................... 4,266 8,003
Accounts payable..................................................... 27,846 (683)
Accruals and other liabilities....................................... 6,500 14,580
-------- --------
Net cash provided by operating activities.................... 47,159 48,104
Cash flows from investing activities:
Purchases of property and equipment.................................. (1,284) 0
Purchases of videocassette rental inventory.......................... (32,334) (41,144)
-------- --------
Net cash used in investing activities........................ (33,618) (41,144)
Cash flows from financing activities:
Repayment of short-term debt......................................... 0 (1,252)
Loans from stockholders.............................................. 2,000 3,000
Repayment of long-term debt.......................................... (7,952) (6,104)
-------- --------
Net cash provided by (used in) financing activities.......... (5,952) (4,356)
-------- --------
Net increase (decrease) in cash and cash equivalents................... 7,589 2,604
Cash and cash equivalents, beginning of period......................... 6,388 2,529
-------- --------
Cash and cash equivalents, end of period............................... $ 13,977 $ 5,133
======== ========
Supplementary disclosure of cash flow information:
Cash paid during the period for interest............................. $ 478 $ 758
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-329
<PAGE> 410
COVENTRY VIDEO, INC. AND POTTSTOWN VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited combined financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the Companys' unaudited combined financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
As described in the audited combined financial statements included
elsewhere herein, for each year presented, the combined financial statements as
of and for the years ended March 31 include the financial position of Pottstown
Video, Inc. as of December 31 and the results of its operations and cash flows
for the years then ended. As such, the results of operations of Pottstown Video,
Inc. for the period from January 1 to March 31 have not been presented
separately herein. Net income (loss) for Pottstown Video, Inc. for the quarter
ended March 31, 1995 and 1996 was $9,076 and ($6,438), respectively.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim combined financial information have been included.
Such adjustments consisted only of normal recurring items. The results of
operations for the three month periods ended June 30, 1995 and 1996 are not
necessarily indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
Videocassette rental inventory.......................................... $ 352,656
Accumulated amortization................................................ (240,785)
----------
$ 111,871
==========
</TABLE>
3. SUBSEQUENT EVENT
In November, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-330
