<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 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 (I.R.S. Employer I.D. No.)
of 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 December 5, 1996
----- -------------------------------
Common Stock, $.01 12,788,325
par value per share
<PAGE> 2
INDEX
Part I. - Financial Information Page No.
Item 1. - Financial Statements
Consolidated Balance Sheets -
As of October 31, 1996 and January 31, 1996 3
Consolidated Statements of Operations -
Three and Nine Months Ended October 31, 1996
and 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended October 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-8
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-16
Part II. - Other Information
Item 1. - Legal Proceedings 17
Item 6. - Exhibits and Reports on Form 8-K 17
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<PAGE> 3
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except for par value)
<TABLE>
<CAPTION>
October 31, JANUARY 31,
1996 1996
--------- ----------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 1,696 $ 611
Accounts receivable 2,508 1,085
Merchandise inventory 5,231 504
Prepaid expenses and other current assets 1,422 151
-------- --------
Total current assets 10,857 2,351
Videocassette rental inventory, net of amortization 17,709 1,509
Furnishings, equipment and leasehold improvements, net 7,456 1,235
Other assets 3,194 4,258
Intangible assets, net of accumulated amortization 86,885 6,967
Deferred tax asset 0 195
-------- --------
Total assets $126,101 $ 16,515
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 17 $ 2,091
Accounts payable 10,148 1,327
Accrued expenses and other liabilities 5,623 4,686
Income taxes 1,259 760
Advances from shareholders 0 7
-------- --------
Total current liabilities 17,047 8,871
Long-term debt (net of current portion) 16,002 7,101
Deferred tax liability 447 0
Other long-term liabilities 48 0
-------- --------
Total liabilities 33,544 15,972
Stockholders' equity:
Common stock ($0.01 par value; 12,603 shares
as of October 31, 1996, of which 12,084 shares were
outstanding and 519 shares are to be issued (see
note 5); and 4,756 shares outstanding at
January 31, 1996) 126 48
Preferred stock ($0.01 par value, 2,000 shares
authorized, no shares issued) 0 0
Additional paid in capital 91,276 911
Accumulated surplus/(deficit) 1,155 (416)
-------- --------
Total stockholders' equity 92,557 543
-------- --------
Total liabilities and stockholders' equity $126,101 $ 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 Nine months ended
October 31, October 31,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue $ 16,402 $ 2,146 $ 33,752 $ 6,661
Merchandise and other sales 2,079 644 4,818 1,307
Franchise fees 1,483 1,460 3,792 1,792
-------- -------- -------- --------
Total revenues 19,964 4,250 42,362 9,760
-------- -------- -------- --------
Operating costs and expenses:
Store operating expenses 9,780 1,539 18,784 4,577
Cost of goods sold 1,345 399 3,133 682
Amortization of videocassette and video game rental
inventory 3,752 513 6,956 1,484
General and administrative 2,931 1,403 7,623 2,176
Intangible amortization 1,046 116 2,029 138
-------- -------- -------- --------
Total operating costs and expenses 18,854 3,970 38,525 9,057
-------- -------- -------- --------
Income from operations 1,110 280 3,837 703
-------- -------- -------- --------
Interest expense 222 250 730 387
Other, net (61) 0 (129) 0
-------- -------- -------- --------
Income before provision for income taxes and
extraordinary item 949 30 3,236 316
Provision for income taxes 418 26 1,421 130
-------- -------- -------- --------
Income before extraordinary item 531 4 1,815 186
Extraordinary item (net of
income tax benefit of $156) 0 0 (244) 0
-------- -------- -------- --------
Net income $ 531 $ 4 $ 1,571 $ 186
======== ======== ======== ========
Income per common share data:
Income before extraordinary item $ 0.04 $ 0.00 $ 0.19 $ 0.04
======== ======== ======== ========
Extraordinary item $ 0.00 $ 0.00 $ (0.02) $ 0.00
======== ======== ======== ========
Net income $ 0.04 $ 0.00 $ 0.17 $ 0.04
======== ======== ======== ========
Weighted average shares outstanding 12,460 4,756 9,493 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>
Nine months ended
October 31
----------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,571 $ 186
Adjustments to reconcile net income to cash
flows provided by (used in) operating activities:
Amortization of videocassette rental inventory 6,956 1,548
Depreciation and amortization of furnishings,
equipment and leasehold improvements 680 313
Amortization of intangible assets 2,035 84
Changes in assets and liabilities:
Accounts receivable (900) (69)
Merchandise inventories (2,168) (25)
Prepaid expenses and other assets (1,097) (84)
Accounts payable 2,256 195
Accrued expenses and other liabilities (2,437) 926
Income taxes 499 50
-------- --------
Net cash provided by operating activities 7,395 3,124
-------- --------
Cash flows relating to investing activities:
Purchase of property and equipment (818) (74)
Purchase of videocassette rental inventory (10,394) (1,579)
Purchase of retail video stores, net of cash acquired (62,804) 0
Purchase of franchising business, net of cash acquired 0 (3,453)
Changes in other assets related to acquisitions (1,500) (689)
-------- --------
Net cash used in investing activities (75,516) (5,795)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 17,100 5,665
Repayment of long-term debt (10,273) (1,684)
Proceeds from issuance of common stock, net 63,079 0
Shareholder distributions 0 (75)
Changes in other assets related to financing (700) (689)
-------- --------
Net cash provided by financing activities 69,206 3,217
-------- --------
Net increase in cash and cash equivalents 1,085 546
Cash and cash equivalents, beginning of period 611 45
-------- --------
Cash and cash equivalents, end of period $ 1,696 $ 591
======== ========
Supplemental cash flow data:
Interest paid $ 731 $ 384
======== ========
Income taxes paid $ 1,078 $ 0
======== ========
</TABLE>
See accompanying notes to financial statements
-5-
<PAGE> 6
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 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's") 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 nine months periods ended October 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
nine month period ended October 31, 1995, the income tax provision
has 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 issued or to be issued as
contingent consideration in conjunction with the Recent Acquisitions
(Note 5) and shares to be issued in installments in conjunction with
the Early Fall Acquisitions (Note 5) have been considered outstanding
the respective acquisition dates.
2 Initial Public Offering of Common Stock and Acquisitions
On May 17, 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 required by
the terms of such debt) was required to pay a prepayment penalty of
$400,000 ($244,000 net of income tax benefit).
-6-
<PAGE> 7
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 (Unaudited)
4 Videocassette Rental Inventory
Videocassette rental inventory and related amortization are as
follows (in thousands):
<TABLE>
<CAPTION>
October 31, 1996 January 31, 1996
---------------- ----------------
<S> <C> <C>
Videocassette rental inventory $ 26,454 $3,299
Accumulated amortization 8,745 (1,790)
---------------- ----------------
$ 17,709 $ 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 (2.1 million
shares), approximately $4.7 million of acquisition costs and
approximately $2.6 million in minimum contingent consideration (of
which approximately $0.7 million and $1.9 million is to be paid in cash
and stock, respectively).
Between August 26 and October 25, 1996, the Company acquired the assets
of 21 video specialty stores (the "Early Fall Acquisitions").
Aggregate consideration of $13.6 million was paid, consisting of the
following: $8.2 million in cash and $4.9 million in shares of common
stock (0.5 million shares). Approximately $0.5 million of
acquisition costs was also paid. The shares (0.4 million)
associated with one of these 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 increased
in certain cases by the difference between the share price at
issuance date and a formulaic common share price calculated as of the
date of acquisition. Additionally, 0.1 million shares associated with
another Early Fall Acquisition are to be issued on August 26, 1997.
In both instances these common shares and other common shares to be
issued in installments have been considered outstanding as of
October 31, 1996.
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 in the Recent and Early Fall Acquisitions of $82.6 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.
Between November 15 and December 3, 1996, the Company acquired the
assets of 47 video specialty stores (the "Late Fall Acquisitions"),
including 19 stores owned by franchisees of the Company for aggregate
consideration of $27.6 million consisting of the following: $14.8
million in cash and $11.3 million in shares of common stock (1.0
million shares) and approximately $1.5 million of acquisition costs.
The company will account for these acquisitions using the purchase
method of accounting and expects to record $20.8 million of
goodwill relating to these acquisitions.
The following unaudited pro forma information presents the results of
operations as though (i) the Recent Acquisitions, the Early Fall
Acquisitions, and Late Fall 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.
-7-
<PAGE> 8
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 (Unaudited)
The following unaudited pro forma net income per share for the three
and nine month periods ended October 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 or to be issued in installments in conjunction with the
Early Fall 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 13,949,175.
<TABLE>
<CAPTION>
Pro Forma
Three months ended Nine months ended
October 31, October 31,
----------- -----------
(in thousands, except per share data)
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pro forma revenues $26,805 $28,268 $84,067 $81,254
Pro forma net income 1,469 2,128 5,219 5,489
Pro forma net income per share $ 0.11 $ 0.15 $ 0.37 $ 0.39
</TABLE>
6 Long Term Debt
On May 17, 1996 the Company obtained a $60,000,000 Credit Facility
(the "Credit 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 Credit Facility. Borrowings under the
Credit Facility are available for working capital, capital
expenditures, refinancing of existing indebtedness, and for certain
permitted acquisition financing. As of October 31, 1996 the Company had
$16,000,000 outstanding under the Facility.
On July 31, 1996 the Company received a commitment from the Bank to
increase the Credit 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 October 31, 1996).
Additionally, the Credit Facility provides for a commitment fee
payable quarterly, computed as 0.375-0.5% of the unused portion of the
available Credit 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 Credit Facility is secured by a first security interest in
substantially all of the Company's assets, including the stock of its
subsidiaries, and provides for certain restrictive covenants, including
among others compliance with certain financial tests and ratios and
dividend restrictions.
7 Subsequent Event
On December 11, 1996, the Company signed a letter of intent to acquire
the assets and business of a Canadian franchisor of 63 video specialty
stores located throughout Canada, for an estimated purchase price of
approximately $7 million.
-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 October 31, 1996 compared to Three Months ended October 31,
- ------------------------------------------------------------------------------
1995
- ----
Revenues
- --------
Revenues increased $15.7 million, or 365.1%, from $4.3 million for the three
months ended October 31, 1995 to $20.0 million for the three months ended
October 31, 1996. This change resulted from an increase in rental revenues of
$14.3 million and an increase of $1.4 million in merchandise and other sales,
attributable to the acquisition of 193 video specialty stores on the following
dates: 172 on May 17, 1996, 5 on August 26, 1996, 14 on September 30,
1996, 1 on October 1, 1996, and 1 on October 25, 1996.
Rental revenues increased $14.3 million, or 681.0%, from $2.1 million for the
three months ended October 31, 1995 to $16.4 million for the three months
ended October, 31, 1996. This change is primarily attributable to the
inclusion of $14.2 million of rental revenues from the 193 video specialty
stores purchased since May 17, 1996 as described above. The remaining increase
in rental revenues of $0.1 million is due to rental increases at the 28 stores
owned by the Company for a full three months in both 1995 and 1996 ("same
stores").
Merchandise and other sales increased $1.4 million, or 200.0%, from $0.7 million
for the three months ended October 31, 1995 to $2.1 million for the three
months ended October 31, 1996, primarily due to $1.6 million of merchandise and
other sales contributed by the 193 video specialty stores purchased since May
17, 1996. The remaining decrease of $0.2 million is attributable to same store
operations and was caused by lower volume of merchandise sales to franchisees.
Franchise fee revenues were almost identical in the fiscal quarters ended
October 31, 1996 and October 31, 1995.
As a result of the Company's acquisition activities, the mix of its revenue
sources changed dramatically to approximately 82% rental, 11% merchandising and
7% franchising during the quarter ended October 31, 1996, from approximately
49%, 16% and 35%, respectively, during the quarter ended October 31, 1995.
Store Operating Expenses
- ------------------------
Store operating expenses net of amortization of videocassette rental inventory
increased $8.2 million, or 512.5%, from $1.6 million for the three months ended
October 31, 1995 to $9.8 million for the three months ended October 31, 1996. As
a percentage of total revenues, store operating expenses increased 11.8
percentage points from 37.2% for the three months ended October 31, 1995 to
49.0% for the three months ended October 31, 1996. However, as a percentage of
rental revenues and merchandise and other sales (excluding franchise fees),
store operating costs decreased 4.1 percentage points from 57.1% for the three
months ended October 31, 1995 to 53.0% for the three months ended October 31,
1996. This reflects lower operating costs as a percent of revenue for the 193
video specialty stores purchased since May 17, 1996. In addition, the franchise
business, which involves virtually no store operating expenses, contributed $1.5
million of total revenue ($1.3 million of franchise fees and $0.2 million of
merchandise and other sales) during the period.
Cost of Sales
- -------------
Cost of sales increased $0.9 million, or 225.0%, from $0.4 million for the three
months ended October 31, 1995 to $1.3 million for the three months ended October
31, 1996, primarily as a result of an increase in sales volume of merchandise
and other sales due to the acquisition of the franchise business on July 12,
1996 and the acquisition of 193 video specialty stores since May 17, 1996. As a
percentage of merchandise and other sales (on an exact dollar computation basis
as rounding to the nearest hundred thousand distorts the computation
significantly), cost of sales increased 2.7 percentage points from 62%
-9-
<PAGE> 10
WEST COAST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
- ---------------------------------
for the three months ended October 31, 1995 to 64.7% for the three months ended
October 31, 1996 primarily due to a change in sales mix.
Amortization of Videocassette and Video Game Rental Inventory
- -------------------------------------------------------------
Amortization of videocassette and video game rental inventory increased $3.3
million, or 660.0%, from $0.5 million for the three months ended October 31,
1995 to $3.8 million for the three months ended October 31, 1996. This
increase is primarily due to the acquisition of the 193 video specialty stores
since May 17, 1996. As a percentage of rental revenues, this amortization
decreased 0.6 percentage points, from 23.8% for the three months ended October
31, 1995 to 23.2% for the three months ended October 31, 1996. This is
primarily due to the bulk purchase of used tapes acquired in conjunction with
the 193 video specialty stores acquired since May 17, 1996 as more fully
explained in Note 4 to the Consolidated Financial Statements.
General and Administrative Expense
- ----------------------------------
General and administrative expenses increased $1.5 million, or 107.1%, from $1.4
million for the three months ended October 31, 1995 to $2.9 million for the
three months ended October 31, 1996. As a percentage of total revenues
(exclusive of franchise fees, which are associated with higher general and
administrative expenses) general and administrative expenses decreased 34.3%
percentage points from 50.0% for the three months ended October 31, 1995 to
15.7% for the three months ended October 31, 1996 reflecting the ability of the
Company's administrative staff to operate an increasing number of corporate
stores, as well as a change in the mix of revenues between rental revenues and
merchandise sales (which have lower general and administrative costs than
franchise fees) and franchise fees.
Intangible Amortization
- -----------------------
Intangible amortization expense increased $1.0 million or 1000.0% from $0.1
million for the three months ended October 31, 1995 to $1.1 million for the
three months ended October 31, 1996. As a percentage of total revenues
intangible amortization increased 3.2 percentage points from 2.3% for the three
months ended October 31, 1995 to 5.5% for the three months ended October 31,
1996. These increases are entirely related to amortization of goodwill
associated with the acquisition of the 193 video specialty stores since May 17,
1996.
Non-Operating Expense
- ---------------------
Net non-operating expense decreased $0.1 million, or 33.3%, from $0.3 million
for the three months ended October 31, 1995 to $0.2 million for the three
months ended October 31, 1996. Interest expense comprises substantially all of
this net amount which remained constant in each quarter. In 1995 lower
borrowings at higher rates offset higher borrowings in 1996 at lower rates.
Borrowings during the three months ended October 31, 1995 were principally made
to fund the acquisition of the franchise business and were repaid upon
consummation of the Offering. Borrowings during the three months ended October
31, 1996 have been used principally to fund the acquisition of additional video
specialty stores. As a percentage of total revenues, interest expense decreased
5.5 percentage points from 7.0% for the three months ended October 31, 1995, to
1.5% for the three months ending October 31, 1996. Miscellaneous other income
increased by $0.1 million to $0.1 million for the three months ended October
31, 1996.
Net Income
- ----------
As a result of the foregoing, net income increased $0.5 million to $0.5 million
for the three months ended October 31, 1996.
Nine Months ended October 31, 1996 compared to Nine Months ended October 31,
- ----------------------------------------------------------------------------
1995
- ----
Revenues
- --------
Revenues increased $32.6 million, or 332.7%, from $9.8 million for the nine
months ended October 31, 1995 to $42.4 million for the nine months ended
October 31, 1996. Most of this increase was composed of
-10-
<PAGE> 11
WEST COAST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
- ---------------------------------
a $27.1 million increase in rental revenues and another $3.5 million increase in
merchandise and other sales primarily due to the acquisition of 193 video
specialty stores on the following dates: 172 stores on May 17, 1996, 5 on
August 26, 1996, 14 on September 30, 1996, 1 on October 1, 1996, and 1 on
October 25, 1996.
Rental revenues increased $27.1 million, or 404.5%, from $6.7 million for the
nine months ended October 31, 1995 to $33.8 million for the nine months ended
October 31, 1996, primarily due to $26.7 million of rental revenues contributed
by the 193 acquired stores purchased since May 17, 1996 as described above. The
remaining increase in rental revenues of $0.4 million is due to same store
rental increases.
Merchandise and other sales increased $3.5 million, or 269.2%, from $1.3 million
for the nine months ended October 31, 1995 to $4.8 million for the nine months
ended October 31, 1996, primarily due to $2.7 million of merchandise and other
sales contributed by the 193 video specialty stores purchased since May 17,
1996. The remaining difference of $0.8 million relates to the franchise
business whose merchandise and other sales only contributed approximately 3.5
months of revenues in 1995 as compared to all nine months in 1996.
Franchise fee revenues increased $2.0 million, or 111.1%, from $1.8 million for
the nine months ended October 31, 1995 to $3.8 million for the nine months
ended October 31, 1996. Because the franchise business was acquired on July 12,
1995, it was included in the Company's accounts for all nine months in 1996 but
only for approximately 3.5 months in 1995. Average monthly franchise fee
revenues decreased approximately 18% from the nine months ended October 31,
1995 to the nine months ended October 31, 1996 due to a slow down in royalty
payments from franchisees which accounts for approximately three-fourths of
the 18% decrease. Some of this decline in royalty payments relates to
franchised stores purchased on May 17, 1996. The remaining one-fourth of the
18% decrease is due to lower average monthly payments from franchisees due to a
decline in their business.
As a result of the Company's acquisition activities, the mix of its revenue
sources changed to approximately 80% rental, 11% merchandising and 9%
franchising during the nine months ended October 31, 1996 from 68%, 13% and
19%, respectively, during the nine months ended October 31, 1996.
Store Operating Expenses
- ------------------------
Store operating expenses net of amortization of videocassette rental inventory
increased $14.2 million, or 308.7%, from $4.6 million for the nine months ended
October 31, 1995 to $18.8 million for the nine months ended October 31, 1996. As
a percentage of total revenues, store operating expenses decreased 2.6
percentage points from 46.9% for the nine months ended October 31, 1995 to 44.3%
for the nine months ended October 31, 1996. In addition, as a percentage of
rental revenues and merchandise and other sales (excluding franchise fees),
store operating costs decreased 8.8 percentage points from 57.5% for the nine
months ended October 31, 1995 to 48.7% for the nine months ended October 31,
1996. This decrease reflects lower operating costs as a percent of revenue for
the 193 video specialty stores purchased since May 17, 1996. In addition, the
franchise business, which involves virtually no store operating expenses,
contributed $4.9 million of total revenues ($3.8 million of franchise fees and
$1.1 million of merchandise and other sales) during the period.
Cost of Sales
- -------------
Cost of sales increased $2.5 million, or 357.1%, from $0.7 million for the nine
months ended October 31, 1995 to $3.2 million for the nine months ended October
31, 1996, primarily as a result of an increase in sales volume of merchandise
and other sales due to the acquisition of the franchise business on July 12,
1995 and the acquisition of the 193 video specialty stores since May 17, 1996.
As a percentage of merchandise and other sales, cost of sales increased by 12.9
percentage points from 53.8% for the nine months ended October 31, 1995 to 66.7%
for the nine months ended October 31, 1996. This was primarily due to the
acquisition of the franchise business which was owned for the entire nine month
period ended October 31, 1996 as compared to approximately 3.5 months during the
nine month period ended October 31, 1995. Sales to franchisees are made at
substantially lower margins than retail sales.
-11-
<PAGE> 12
WEST COAST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
- ---------------------
Amortization of Videocassette and Video Game Rental Inventory
- -------------------------------------------------------------
Amortization of videocassette and video game rental inventory increased by $5.5
million, or 366.7%, from $1.5 million for the nine months ended October 31, 1995
to $7.0 million for the nine months ended October 31, 1996, primarily as a
result of the acquisition of the 193 video specialty stores which were acquired
since May 17, 1996. As a percentage of rental revenues this amortization
decreased 1.7 percentage points from 22.4% for the nine months ended October
31, 1995 to 20.7% for the nine months ended October 31,1996. This is primarily
due to the bulk purchases of used tapes acquired in conjunction with the 193
video specialty stores acquired since May 17, 1996 as more fully explained in
Note 4 to the Consolidated Financial Statements.
General and Administrative Expense
- ----------------------------------
General and administrative expenses increased $5.4 million, or 245.5%, from $2.2
million for the nine months ended October 31, 1995 to $7.6 million for the
nine months ended October 31, 1996. The increase is primarily related to the
additional personnel and non-store operating costs which were absorbed from
the acquisitions of the 193 video specialty stores and the franchise business.
As a percentage of total revenues, however, general and administrative
expenses decreased 4.5 percentage points from 22.4% for the nine months ending
October 31, 1995 to 17.9% for the nine months ending October 31, 1996
reflecting the ability of the Company's administrative staff to operate an
increasing number of corporate stores, as well as a change in the mix of
rental revenues and merchandise sales (which have lower general and
administrative costs than franchise fees) and franchise fees.
Intangible Amortization
- -----------------------
Intangible amortization expense increased $1.9 million, or 1900.0%, from $0.1
million for the nine months ended October 31, 1995 to $2.0 million for the nine
months ended October 31, 1996. As a percentage of total revenues, intangible
amortization increased 3.5 percentage points from 1.2 for the nine months ended
October 31, 1995 to 4.7% for the nine months ended October 31, 1996. These
increases are entirely related to amortization of goodwill associated with the
acquisition of the 193 video specialty stores since May 17, 1996.
Non-Operating Expense
- ---------------------
Net non-operating expense increased $0.2 million, or 50.0%, from $0.4 million
for the nine months ended October 31, 1995 to $0.6 million for the nine months
ended October 31, 1996. Interest expense comprises almost all of this net
amount. However, as a percentage of total revenues, interest expense decreased
2.4 percentage points from 4.1% for the nine months ended October 31, 1995
to 1.7% for the nine months ended October 31, 1996. The increase in dollars
is attributable to additional interest expense incurred in connection with the
acquisition of the franchise business and the acquisition of the 193 video
specialty stores.
Extraordinary Item
- ------------------
For the nine months ended October 31, 1996, the Company incurred an
extraordinary item of $0.4 million ($0.2 million net of taxes) because, in
conjunction with the early extinguishment of a portion of the previously
outstanding subordinated debt, the Company was required by terms of the debt
to pay a prepayment penalty of $400,000 upon completion of the Offering. No
extraordinary items were incurred during the nine months ended October 31, 1995.
Net Income
- ----------
As a result of the foregoing, net income increased $1.4 million, or 700.0%, for
the nine months ended October 31, 1996 from $0.2 million for the nine months
ended October 31, 1995 to $1.6 million for the three months ended October 31,
1996.
-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. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are meant to identify forward-looking statements.
The Company's rapid growth, particularly its acquisition of 193 video specialty
stores between May 17, 1996 and October 25, 1996, 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(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, 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.
-13-
<PAGE> 14
WEST COAST ENTERTAINMENT CORPORATION
PRO FORMA RESULTS OF OPERATIONS
- -------------------------------
Three Months ended October 31, 1996 compared to Three Months ended October 31,
- ------------------------------------------------------------------------------
1995
- ----
Revenues
- --------
Pro forma revenues decreased by $1.5 million, or 5.3%, from $28.3 million for
the three months ended October 31, 1995 to $26.8 million for the three months
ended October 31, 1996. This decrease in revenues is due to a $0.8 million
decrease in same store sales primarily due to a soft September rental movie
release schedule and a concentration of October's strong titles at the end of
the month. In addition, both franchise fee revenues ($0.3 million) and
merchandise sales ($0.6 million) to franchisees decreased primarily due to a
decrease in franchise stores resulting from the acquisition of 33 franchise
stores since May, 1996.
Net Income
- ----------
Pro forma net income decreased by $0.6 million, or 28.6%, from $2.1 million for
the three months ended October 31, 1995 to $1.5 million for the three months
ended October 31, 1996. This decrease is principally due to a 5.3% decrease in
revenues as stated above. At the same time, operating expenses decreased by
$0.5 million or 2.0% for the three months ended October 31, 1996. This
decrease in operating expenses is primarily the result of cost reductions
associated with the acquisition and consolidation of the 193 video specialty
stores acquired since May 17, 1996.
Nine Months ended October 31, 1996 compared to Nine Months ended October 31,
- ------------------------------------------------------------------------------
1995
- ----
Revenues
- --------
Pro forma revenues increased by $2.8 million, or 3.4%, from $81.3 million for
the nine months ended October 31, 1995 to $84.1 for the nine months ended
October 31, 1996. This increase was mainly due to new stores that were opened
during or after the nine months ended October 31, 1995. In addition, same store
revenues increased by $0.2 million for the nine months ended October 31, 1996
compared to the nine months ended October 31, 1995.
Net Income
- ----------
Pro forma net income decreased by $0.3 million, or 5.5%, from $5.5 million for
the nine months ended October 31, 1995 to $5.2 million for the nine months ended
October 31, 1996. This is primarily the result of the increase in revenues of
$2.8 million as stated above. This revenue increase was partially offset by a
decrease in other income of $0.8 million related to a 1995 legal settlement.
The final component of the $2.3 million change is primarily due to an increase
in operating expenses related to new stores that were opened during or after
the nine months ended October 31, 1995.
-14-
<PAGE> 15
WEST COAST ENTERTAINMENT CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the nine months ended October 31, 1996, the Company had net cash provided
by operating activities of $7.2 million, net cash used in investing activities
of $75.3 million (consisting primarily of cash used to purchase videocassette
rental inventory of $10.4 million and $63.1 million of net cash paid for the
acquisitions of 193 new video specialty stores acquired since May 17, 1996 and
net cash provided by financing activities of $69.2 million (consisting of net
repayment of debt of $10.3 million offset by $17.1 million net borrowings from
the Credit Facility (as described below), $0.7 million in fees paid relating to
the Credit Facility and $63.1 million in net proceeds from the issuance of
common stock in the Offering on May 17, 1996) resulting in a net increase in
cash and cash equivalents of $1.1 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 certain of the Recent Acquisitions,
which it expects will increase its future flows of cash provided by operating
activities. The Company has subsequently consummated additional acquisitions.
The aggregate purchase price of the Recent Acquisitions has been financed
through borrowings under the Credit Facility and through issuance of shares of
common stock to certain of the sellers. 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.
In general, 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 to sellers, issuance of additional debt or
equity securities in public or private offerings, 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 Credit 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.
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
specialty stores to sustain the Company's recent rates of growth. The Company
is currently considering making an underwritten public offering of debt
securities during the first quarter of 1997 in an amount that has not yet been
determined, but would probably be in the range of $100 million. The net
proceeds of such an offering would be used primarily to finance future
acquisitions. Offers and sales of such securities would be made only by means
of a prospectus.
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 $2.8 million over an
11-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 $1.0 million over such period.
Since May 1996, the Company has paid $505,214 in cash and $2,292,083 in Common
Stock (199,291 shares valued for this purpose at $11.50 per share as provided
in the original acquisition agreements) to the Sellers of thirteen of the
stores that were purchased in May 1996 at formulaic purchase prices based on
certain financial measurements for such stores in various periods. 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 $0.4 million in
the aggregate, to the sellers of the six other stores purchased at formulaic
purchase prices. The Company has options to purchase an additional three stores
during 1997 at similar formulaic prices and options exercisable between 1997
and 2001 to purchase a total of 55 stores at formulaic prices; the owners of
such stores have options to sell such stores to the Company at the same prices.
The Company has recently entered into definitive agreements to purchase
additional stores and franchisor's rights with respect to additional stores.
Additional prospective acquisitions are under negotiation.
-15-
<PAGE> 16
WEST COAST ENTERTAINMENT CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (continued)
- -------------------------------
Videocassette and interactive electronic entertainment product rental
inventories are treated as non-current 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 non-current 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 non-current asset, the
Company expects to operate with a working capital deficit following this
offering.
-16-
<PAGE> 17
WEST COAST ENTERTAINMENT CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The trial date for the previously disclosed litigation with Richard
Salvadore has been set for March, 1997.
On November 28, 1996 the Company settled, and dismissed with
prejudice, the previously disclosed litigation with Anderson E. Wells,
Sundance Venture Partners, L.P. and Murphy's Express.
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
10.70+ Asset Purchase Agreement dated August 23, 1996 by and
among West Coast Entertainment Corporation, a Delaware
corporation (the "Company") and J.J. Video Inc. - Film
Festival ("JJ"), Picture Show Video - Gardenside, Inc.
("Gardenside"), Picture Show Video - Winchester, Inc.
("Winchester"), Picture Show Video No. 4, Inc.
("Brentwood") and Picture Show Video, Inc. Bernard ("St.
Bernard," and collectively with JJ, Gardenside,
Winchester and Brentwood, the "Seller") and Charles
Johnson, as amended.
10.71+ Instrument of Evidence of Indebtedness dated August 23,
1996 between Company and Seller.
10.72+ Cross Purchase Agreement dated August 23, 1996 with
Respect to Additional Stores between Charles Johnson and
the Company.
10.73+ Asset Purchase Agreement dated September 30, 1996 by and
among the Company, Steven Matsakis, Hal Greene and Brian
Miller (collectively, the "Principals" and individually,
a "Principal"), and 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, Super Video Management Co., Inc. and Large
Corporation (collectively, the "Super Video Sellers,"
and individually, a "Super Video Seller").
10.74+ Instrument of Evidence of Indebtedness dated September
30, 1996 between the Company and the Super Video
Sellers.
10.75+ Asset Purchase Agreement dated October 1, 1996 among the
Company, Reel Entertainment, T. George Solomon, Jr. and
Bank One Equity Investors, Inc.
10.76+ Area Development Agreement dated October 1, 1996 between
West Coast Franchising Company and Reel Entertainment,
Inc.
10.77+ Retail Store Option Agreement dated October 1, 1996
between the Company and Reel Entertainment, Inc.
27.0 Financial Data Schedule
- ---------------
+ Incorporated by reference to Exhibits 1 through 8 to the Company's Current
Report on Form 8-K dated September 30, 1996.
(b) Reports on Form 8-K
On October 15, 1996, the Company filed a Current Report on Form
8-K dated September 30, 1996, stating that it had acquired from three
unaffiliated selling groups the assets of three businesses for total
consideration of approximately $8.2 million (including approximately
$4.9 million in shares of its Common Stock) and had entered into an
arrangement with one of such sellers, whereby such seller will develop
retail video stores as a franchisee of the Company, which stores the
Company will have the option or the obligation to purchase under
certain circumstances.
-17-
<PAGE> 18
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: December 17, 1996 By: /s/ T. Kyle Standley
---------------------------------
T. Kyle Standley, President and
Chief Executive Officer
(Principal Executive Officer)
Date: December 17, 1996 By: /s/ Richard G. Kelly
---------------------------------
Richard G. Kelly, Chief Financial
Officer
(Principal Financial Officer)
Date December 17, 1996 By: /s/ Jerry L. Misterman
---------------------------------
Jerry L. Misterman, Chief
Accounting Officer
(Principal Accounting Officer)
<PAGE> 19
EXHIBIT INDEX
EXHIBIT DESCRIPTION
10.70+ Asset Purchase Agreement dated August 23, 1996 by and among
West Coast Entertainment Corporation, a Delaware corporation
formerly known as RKT Acquisition Co. (the "Company") and
J.J. Video Inc. - Film Festival ("JJ"), Picture Show Video -
Gardenside, Inc. ("Gardenside"), Picture Show Video -
Winchester, Inc. ("Winchester"), Picture Show Video No. 4, Inc.
("Brentwood") and Picture Show Video, Inc. Bernard ("St.
Bernard," and collectively with JJ, Gardenside, Winchester and
Brentwood, the "Seller") and Charles Johnson, as amended.
10.71+ Instrument of Evidence of Indebtedness dated August 23, 1996
between Company and Seller.
10.72+ Cross Purchase Agreement dated August 23, 1996 with Respect to
Additional Stores between Charles Johnson and the Company.
10.73+ Asset Purchase Agreement dated September 30, 1996 by and among
the Company, Steven Matsakis, Hal Greene and Brian Miller
(collectively, the "Principals" and individually, a
"Principal"), and 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, Super Video Management Co., Inc.
and Large Corporation (collectively, the "Super Video Sellers,"
and individually, a "Super Video Seller").
10.74+ Instrument of Evidence of Indebtedness dated September 30, 1996
between the Company and the Super Video Sellers.
10.75+ Asset Purchase Agreement dated October 1, 1996 among the
Company, Reel Entertainment, T. George Soloman, Jr. and Bank
One Equity Investors, Inc.
10.76+ Area Development Agreement dated October 1, 1996 between West
Coast Franchising Company and Reel Entertainment, Inc.
10.77+ Retail Store Option Agreement dated October 1, 1996 between the
Company and Reel Entertainment, Inc.
27.0 Financial Data Schedule
- ---------------
+ Incorporated by reference to Exhibits 1 through 8 to the Company's Current
Report on Form 8-K dated September 30, 1996.
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