<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-28072
West Coast Entertainment Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 04-3278751
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
9990 Global Road, Philadelphia, Pennsylvania 19115
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (215) 677-1000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 9, 1996
Common Stock, $.01 12,070,239
par value per share
<PAGE> 2
WEST COAST ENTERTAINMENT CORPORATION
INDEX
Part I. - Financial Information Page No.
Item 1. - Financial Statements
Consolidated Balance Sheets -
As of July 31, 1996 and January 31, 1996
Consolidated Statements of Operations -
Three and Six Months Ended July 31, 1996 and 1995
Consolidated Statements of Cash Flows -
Six Months Ended July 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Part II. - Other Information
Item 1. - Legal Proceedings
Item 6. - Exhibits and Reports on Form 8-K
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<PAGE> 3
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR PAR VALUE)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1996 1996
-------- --------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,335 $ 611
Accounts receivable 1,470 1,085
Merchandise inventory 2,752 504
Prepaid expenses and other current assets 841 151
-------- --------
Total current assets 7,398 2,351
Videocassette rental inventory, net of amortization 15,265 1,509
Furnishings, equipment and leasehold improvements, net 6,091 1,235
Other assets 1,541 4,258
Intangible assets, net of accumulated amortization 77,197 6,967
Deferred tax asset 0 195
-------- --------
Total assets $107,492 $ 16,515
======== ========
Liabilities and Stockholder's Equity:
Current liabilities:
Current portion of long-term debt $ 23 $ 2,091
Accounts payable 7,947 1,327
Accrued expenses and other liabilities 6,069 4,686
Income taxes 1,314 760
Advances from shareholders 0 7
-------- --------
Total current liabilities 15,353 8,871
Long-term debt (net of current portion) 4,502 7,101
Deferred tax liability 447 0
Other long-term liabilities 48 0
-------- --------
Total liabilities 20,350 15,972
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 48
Preferred stock ($0.01 par value, 2,000 shares
authorized, no shares issued) 0 0
Additional paid in capital 86,397 911
Accumulated surplus/(deficit) 624 (416)
-------- --------
Total stockholder's equity 87,142 543
-------- --------
Total liabilities and stockholder's equity $107,492 $ 16,515
======== ========
</TABLE>
See accompanying notes to financial statements
-3-
<PAGE> 4
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31 July 31
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
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
-4-
<PAGE> 5
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
July 31
------------------------------
1996 1995
---- ----
<S> <C> <C>
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
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<PAGE> 6
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).
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<PAGE> 7
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 (Unaudited)
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.
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
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<PAGE> 8
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 (Unaudited)
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,
(in thousands, except as share data)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
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.
-8-
<PAGE> 9
WEST COAST ENTERTAINMENT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months ended July 31, 1996 compared to Three Months ended July 31, 1995
Revenues
Revenues increased $14.9 million, or 532.1%, from $2.8 million for the three
months ended July 31, 1995 to $17.7 million for the three months ended July 31,
1996. Of this increase, approximately $1.0 million of franchise fees were
contributed by the Company's franchise-related operations following the
acquisition on July 12, 1995 of the operating assets of the West Coast
Entertainment, Incorporated companies relating to the West Coast Video franchise
system (the "franchise business") which were therefore included in the Company's
accounts for all three months of 1996 but less than one month in 1995. An
additional $13.7 million of revenue was contributed by the 172 video rental
stores purchased on May 17, 1996 from the proceeds of the Offering. The
remaining increase of $0.2 million is due to sales increases in stores owned by
the Company prior to the 172 stores acquired on May 17, 1996.
Rental revenues increased $12.8 million, or 581.8%, from $2.2 million for the
three months ending July 31, 1995 to $15.0 million for the three months ending
July, 31, 1996. This change is primarily attributable to the inclusion of
$12.6 million of rental revenues from the 172 video rental stores purchased on
May 17, 1996. The remaining increase in rental revenues of $0.2 million is due
to rental increases of stores owned by the Company prior to the 172 stores
acquired on May 17, 1996, which are recorded for a full three months in both
1995 and 1996.
Franchise fee revenues increased $0.6 million, or 200.0%, from $0.3 million for
the three months ending July 31, 1995 to $0.9 million for the three months
ending July 31, 1996 due to the acquisition of the franchise business on July
12, 1995 and which therefore was included in the Company's accounts for all
three months in 1996, but only 19 days in 1995.
Merchandise and other sales increased $1.5 million, or 500.0%, from $0.3
million for the three months ending July 31, 1995 to $1.8 million for the month
ending 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 $0.4 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 400.0%, from $1.5 million for the three months ended
July 31, 1995 to $7.5 million for the three months ended July 31, 1996. As a
percentage of total revenues, store operating expenses decreased 11.2 percentage
points from 53.6% for the three months ended July 31, 1995 to 42.4% for the
three 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 15.4 percentage points, from 60.0% for the three
months ended July 31, 1995 to 44.6% for the three 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 $1.3 million of total revenue ($0.9 million of franchise fees and
$0.4 million of merchandise and other sales) during the period, which involve
virtually no store operating expenses.
-9-
<PAGE> 10
WEST COAST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
Cost of Sales
Cost of sales increased $1.0 million, or 1000.0%, from $0.1 million for the
three months ended July 31, 1995 to $1.1 million for the three 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 27.8 percentage points
from 33.3% for the three months ended July 31, 1995 to 61.1% for the three
months ended July 31, 1996. This was primarily due to the acquisition of the
franchise business which had an increase in merchandise sales of $0.4 million
for the three month period ended July 31, 1996 as compared to the 19 days the
franchise business was owned during the three months ended July 31, 1996. Sales
to franchisees are made at substantially lower margins. Sales to franchisees
represented 22.2% of all merchandise and other sales as compared to 9.4% for the
three months ended July 31, 1995.
Amortization of Videocassette and Video Game Rental Inventory
Amortization of videocassette and video game rental inventory increased $2.3
million, or 20.0%, from $0.5 million in the prior year period to $2.8 million
for the three months ended July 31, 1995. As a percentage of rental revenues,
this amortization decreased 4.0 percentage points, from 22.7% for the three
months ended July 31, 1995 to 18.7% for the three months ended July 31, 1996.
This is primarily due to the bulk purchase of used tapes acquired in
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 $3.5 million, or 700.0%, from $0.5 million in the three months ended
July 31, 1995 to $4.0 million in the three months ended July 31, 1996. As a
percentage of total revenues, general and administrative expenses increased 4.7
percentage points from 17.9% for the three months ended July 31, 1995 to 22.6%
for the three months ended July 31, 1996. A significant part of the increases
both in dollars and percentage of sales is due to $0.9 million or a 0.9%
increase in amortization of goodwill associated with the July 12, 1995
acquisition of the franchise business and the May 17, 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 franchisee
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 $0.1 million or 100.0% from $0.1 million for
the three months ended July 31, 1995 to $0.2 million for the three months ended
July 31, 1996. Interest expense comprises almost all of this net amount. As a
percentage of total revenues, interest expense decreased 2.5 percentage points
from 3.6% for the three months ended July 31, 1995, to 1.1% for the three
months ended July 31, 1996. This increase is attributable to additional
interest expense incurred in connection with the acquisition of the franchise
business and the acquisition of 172 video rental stores.
Extraordinary Item
For the three months ended July 31, 1996, the extraordinary item increased $0.4
million ($0.2 million net of income tax benefit) 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 $400,000.
Net Income
As a result of the foregoing, net income increased $0.9 million to $0.9 million
for the three months ended July 31, 1996.
-10-
<PAGE> 11
WEST COAST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (Continued)
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.
-11-
<PAGE> 12
WEST COAST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
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 invetory 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 acquistion 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 conjunction with the 172 video rental stores acquired
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 income tax) to $0.4 million. In conjunction with
the early extinguishment of a benefit 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 $400,000.
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.
-12-
<PAGE> 13
WEST COAST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
Certain Factors That May Affect Future Results:
The following important factors, among others, could cause actual results of
operations to differ materially from any forward-looking statements made in this
Quarterly Report on Form 10-Q or any forward-looking statements made elsewhere
by management of the Company from time to time.
The Company's rapid growth, particularly its acquisition in May 1996 of 11
chains operating 172 video rental stores and franchising an additional 20
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
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 significantly from the amounts assumed for
purposes of the Company's pro forma financial statements. Acquisitions of
stores within the exclusive territories of existing West Coast Video
franchised stores may require the Company to relocate or sell such acquired
stores, assist the franchisee to relocate, grant the franchise additional
franchises or territorial or other rights, 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.
PRO FORMA RESULTS OF OPERATIONS
Three Months ended July 31, 1996 compared to Three Months ended July 31, 1995
Revenues
Revenues increased by $1.0 million, or 5.2%, from $19.3 million for the three
months ended July 31, 1995 to $20.3 million for the three months ended July 31,
1996. This increase in revenues was mainly due to the opening of additional
stores after the three months ended July 31, 1995. In addition, comparative
stores had an increase of $0.1 million for the three months ended July 31, 1996
compared to the three months ended July 31, 1995.
Net Income
Pro Forma net income increased by $0.3 million, or 27.3%, from $1.1 million for
the three months ended July 31, 1995 to $1.4 million for the three months ended
July 31, 1996. This increase is principally due to a 5.2% increase in revenues
as stated above. In addition, operating expenses decreased by $0.2 million or
1.1% for the three months ended July 31, 1996. This decrease in operating
expenses is primarily the result of cost reductions associated with the
acquisition and consolidation of the 172 video rental stores on May 17, 1996.
Six Months ended July 31, 1996 compared to Six Months ended July 31, 1995
Revenues
Revenues increased by $2.0 million, or 4.9%, from $40.9 million for the six
months ended July 31, 1995 to $42.9 for the six months ended July 31, 1996.
This increase was mainly due to new stores that were opened during or after
the six months period ended July 31, 1995. In addition, same store revenues
increased by $0.2 million for the six months ended July 31, 1996 compared to
the six months ended July 31, 1995.
Net Income
Net Income increased by $0.5 million, or 20.8%, from $2.4 million for the six
months ended July 31, 1995 to $2.9 million for the six months ended July 31,
1996. This increase was primarily due to the increase in revenues of 4.9% as
stated above. In addition, operating expenses as a percent of revenue decreased
by 4.0 percentage points from 91.0% for the six months ended July 31, 1995 to
87.0% for the six months ended July 31, 1996. This was mainly due to new stores
that were opened during or after the six months period ended July 31, 1995 with
a lower corresponding increase in expenses.
-13-
<PAGE> 14
WEST COAST ENTERTAINMENT CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended July 31, 1996, the Company had net cash provided by
operating activities of $4.5 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 million (consisting of net repayment
of debt of $9.2 million offset by $4.5 million net borrowings for the Facility
(as described below), $0.7 million in fees paid relating to the Facility and
$63.1 million net proceeds from the issuance of Common Stock via the Offering on
May 14, 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 14, 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, 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 Credit Facility from
PNC Bank, National Association ("PNC Bank"). The Credit Facility consists of a
two-year revolving 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 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 $2.3 million over a
14-month period through November 1997. The aggregate costs of upgrading West
Coast's management information systems and integrating acquired stores into such
systems are expected to be approximately $0.9 million over such period. Over the
next two years the Company will make additional payments in cash and Common
Stock, currently estimated for the purpose of the Company's pro forma financial
statements at $3.4 million in the aggregate, to the sellers of 19 stores being
purchased in connection with the 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.
-14-
<PAGE> 15
WEST COAST ENTERTAINMENT CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (continued)
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. There can
be no assurance that funds will be available in sufficient amounts to finance
the acquisition or opening of enough video rental 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.
-15-
<PAGE> 16
WEST COAST ENTERTAINMENT CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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. 95-624I). 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 September or October 1996.
The Company has denied the material allegations in this matter
and plans to defend vigorously against plaintiff's claims.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of the Security Holders
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 - Financial Data Schedule
-16-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WEST COAST ENTERTAINMENT
CORPORATION
Date: September 16, 1996 By: /s/ T. Kyle Standley
--------------------
T. Kyle Standley, President and
Chief Executive Officer
(Principal Executive Officer)
Date: September 16, 1996 By: /s/ Richard G. Kelly
--------------------
Richard G. Kelly, Chief Financial Officer
(Principal Financial Officer)
Date: September 16, 1996 By: /s/ Jerry L. Misterman
----------------------
Jerry L. Misterman, Chief Accounting Officer
(Principal Accounting Officer)
-17-
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