<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
WEST COAST
ENTERTAINMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7841 04-3278751
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
---------------------
9990 GLOBAL ROAD
PHILADELPHIA, PA 19115
(215) 677-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------
<TABLE>
<S> <C>
T. KYLE STANDLEY COPIES TO:
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WEST COAST ENTERTAINMENT CORPORATION EDWARD YOUNG, ESQ.
9990 GLOBAL ROAD HALE AND DORR
PHILADELPHIA, PA 19115 60 STATE STREET
(215) 677-1000 BOSTON, MA 02109
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (617) 526-6000
NUMBER, INCLUDING AREA CODE, OF AGENT FOR
SERVICE)
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
---------------------
<TABLE>
<CAPTION>
==========================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT
REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTERED
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share.......................... 5,000,000 Shares $10.50 $52,500,000 $18,104
==========================================================================================================
<FN>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
amount of the registration fee. The average of the high and low prices
reported on The Nasdaq Stock Market was $10.50 on July 17, 1996.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
<CAPTION>
REGISTRATION STATEMENT
ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------------- ----------------------
<S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................ Inside Front Cover Page; Available
Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors
4. Use of Proceeds............................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............. Not Applicable
6. Dilution.................................... Not Applicable
7. Selling Security Holders.................... Not Applicable
8. Plan of Distribution........................ Plan of Distribution
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interests of Named Experts and Counsel...... Legal Matters
11. Information With Respect to the
Registrant................................ Outside Front Cover Page; Prospectus
Summary; Risk Factors; Price Range of
Common Stock; Selected Historical and Pro
Forma Combined Financial Data; Unaudited
Pro Forma Combined Condensed Financial
Statements; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Video Industry
Overview; Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Legal Matters
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 24, 1996
PROSPECTUS
5,000,000 SHARES
WEST COAST ENTERTAINMENT CORPORATION
COMMON STOCK
------------------------
This Prospectus relates to a total of 5,000,000 shares of common stock,
$.01 par value per share ("Common Stock"), of West Coast Entertainment
Corporation ("West Coast" or the "Company") which may be offered and issued from
time to time by the Company in connection with future acquisitions of other
businesses, properties or equity and/or debt securities in business combination
transactions ("Acquisitions") in accordance with Rule 415(a)(1)(viii) of
Regulation C under the Securities Act of 1933, as amended (the "Securities
Act"). These shares will ordinarily represent consideration paid upon the
acquisition of businesses or properties. The shares may also include shares to
be delivered upon the exercise or satisfaction of conversion or purchase rights
which are created in connection with acquisitions or which were previously
created or assumed by the companies whose businesses or properties are to be
acquired by West Coast. The Common Stock is quoted on the Nasdaq National Market
under the symbol "WCEC." On July 17, 1996, the last reported sales price for the
Common Stock as reported by Nasdaq was $10.375 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1996
<PAGE> 4
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL.
---------------------
West Coast Video[Registered Trademark], The Movie Buff's Movie Store[Registered
Trademark], Game Power HeadquartersSM, The Projector[Trademark], Spotlight on
Video[Trademark], Videosmith[Registered Trademark] and Palmer Video[Trademark]
are trademarks, trade names and service marks of the Company.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto, as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is hereby made to such
Registration Statement, exhibits and schedules. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be examined without charge
at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and at regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York, 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any part
thereof may be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 upon payment of the fees prescribed by the Commission.
The Common Stock is traded on Nasdaq. Information filed by the Company with
Nasdaq may be inspected at the offices of Nasdaq at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy material and other information with the
Commission. Reports, proxy material and other information concerning the Company
can be inspected and copied at the offices of the Commission and Nasdaq referred
to above.
------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 6
Unaudited Pro Forma Combined Condensed
Financial Statements................. 11
Selected Historical and Pro Forma
Combined Financial Data.............. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 26
Video Industry Overview................ 40
Business............................... 41
Management............................. 53
<CAPTION>
PAGE
----
<S> <C>
Certain Transactions................... 58
Price Range of Common Stock;
Dividends............................ 59
Plan of Distribution................... 60
Resales................................ 60
Use of Proceeds........................ 60
Principal Stockholders................. 61
Description of Capital Stock........... 63
Shares Eligible for Future Sale........ 66
Legal Matters.......................... 67
Experts................................ 67
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
2
<PAGE> 5
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information included elsewhere herein.
Except as otherwise indicated, all information herein (a) gives effect to (i)
the Company's issuance of 5,400,000 shares of Common Stock in May 1996 in an
initial public offering (the "Public Offering"), (ii) the Company's acquisition
of 172 video specialty stores in May 1996 (collectively, the "Recent
Acquisitions") and (iii) a 0.340-for-1 reverse split of the Common Stock
effective as of May 14, 1996 and (b) assumes exercise of an outstanding warrant
(the "Warrant") to acquire 192,308 shares of Common Stock. Unless the context
otherwise requires, references to "West Coast" or the "Company" include West
Coast Entertainment Corporation and its subsidiaries. References to "system-wide
revenues" include the total of Company-owned store revenues and franchised store
revenues (as distinct from franchise fees paid by the franchisees to the Company
as franchisor).
THE COMPANY
Immediately following consummation of the Recent Acquisitions in May 1996,
West Coast owned and operated 200 video specialty stores and franchised 303
additional stores. The Company believes that it is among the largest video
specialty retailers in the United States in terms of pro forma system-wide
revenues, number of franchised stores and total franchised store revenues. The
Company competes directly against major regional and national video rental
stores in most of its markets and believes it is a leading video rental
operator, in terms of number of stores, in all of the major markets in which
Company-owned stores operate. In addition, the Company believes it is one of
only two domestic video specialty franchisors that has existing franchised
stores outside North America. System-wide, approximately 60% of the Company's
stores are currently operated under the West Coast Video[Registered Trademark]
name and the remainder are operated under such names as Videosmith[Registered
Trademark] and Palmer Video[Trademark]. The Company intends to apply the West
Coast Video[Registered Trademark] name and its registered trademark The Movie
Buff's Movie Store[Registered Trademark] to all of its stores. For the fiscal
year ended January 31, 1996, the Company's pro forma revenues were $82.2 million
and pro forma net income was $4.6 million. For the three months ended April 30,
1996, the Company's pro forma revenues were $22.6 million and pro forma net
income was $1.5 million. See "Selected Historical and Pro Forma Combined
Financial Data."
In order to realize the Company's goal of maximizing revenue and
profitability, the Company has adopted a business strategy designed to (i)
achieve or maintain market dominance in its chosen markets by acquiring,
developing or franchising additional stores, (ii) realize cost savings and
efficiencies by using proven management operating systems to integrate the
stores acquired, developed or franchised, (iii) operate stores designed to
reflect specific local demographics and demonstrated customer preferences and
(iv) build customer loyalty and promote additional rentals by offering superior
customer service through a highly trained sales force having comprehensive
product knowledge.
The Company's growth strategy is to (i) pursue the acquisition of video
specialty stores in this highly fragmented industry, (ii) continue to acquire
its own existing and future franchised stores and (iii) selectively develop new
video specialty stores. Consistent with this strategy, the Company has obtained
and made borrowings under a $60.0 million bank credit facility (the "Credit
Facility"), a portion of which is currently available, subject to certain
conditions, for general corporate purposes and future acquisition financing. The
Company believes it is well-positioned to benefit from consolidation in the
industry among the approximately 28,000 video specialty stores in the United
States, approximately half of which are owned by operators of one or two stores.
In addition, as one of the largest video specialty franchisors in the United
States in terms of pro forma system-wide revenues and one of only two
domestic-based franchisors with existing franchised stores outside North
America, the Company believes it is uniquely positioned to expand through the
acquisition of its existing and future West Coast Video[Registered Trademark]
franchisees and the continuation of its international and domestic franchising
activities.
The Company has had preliminary discussions with numerous video rental
store owners at various times regarding the potential acquisition of their
stores. Management expects that some of these discussions will result in new
Acquisitions, although the Company has no agreements or commitments to acquire
stores except as described herein. On June 19, 1996, the Company announced that
it had reached agreements in principle with the owners of a total of 72 video
retail stores, subject to completion of due diligence and other closing
conditions and regulatory approvals. The Company has not entered into definitive
agreements in regard to the acquisition of any of such stores, and there can be
no assurance that it will do so.
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3
<PAGE> 6
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The Company's stores are located in 24 states and three foreign countries,
with its Company-owned stores concentrated in Ohio, Pennsylvania, New Jersey,
Massachusetts and New York. The Company's stores are designed and managed to
entertain and satisfy a broad range of customers, including movie and
interactive electronic game buffs, and carry between 7,000 and 17,000
videocassettes. Most of the Company's stores are superstores with over 4,000
square feet per store, although some are smaller, custom-designed stores,
including some which are formatted as urban boutiques containing a wide variety
of older titles ("catalog titles"). The Company believes that its ability to
customize stores to reflect local market demographics gives it a competitive
advantage over chains with limited variation in format.
According to entertainment media analyst Paul Kagan Associates, Inc.
("Kagan Associates"), the domestic video rental and sales industry has grown
from approximately $3.6 billion in revenues in 1985 to over $14 billion in 1994
and is projected to reach approximately $22 billion in 2005. Kagan Associates
estimates the revenues received by movie distributors from international home
video at $3.7 billion in 1995. In 1994, according to Kagan Associates, the home
video market was the largest single source of revenue to movie distributors,
accounting for approximately 48.6% of movie distributors' total domestic
revenues and approximately 46.1% of movie distributors' worldwide revenues.
The principal executive offices of the Company are located at 9990 Global
Road, Philadelphia, Pennsylvania 19115, and its telephone number is (215)
677-1000.
RECENT ACQUISITIONS
In May 1996, West Coast acquired a total of 172 owned and operated video
specialty stores (including 13 stores owned by franchisees of the Company) plus
franchisor's rights in regard to 20 additional stores franchised by one of the
acquired companies. The aggregate consideration paid (excluding certain fees and
contingent consideration relating to newly opened stores) was approximately
$76.4 million, consisting of approximately $52.4 million paid in cash and
approximately $24.0 million paid in shares of Common Stock (1,843,720 shares
valued for this purpose at the initial public offering price of $13.00 per
share). In addition, the Company concurrently repaid approximately $7.0 million
of outstanding indebtedness (inclusive of accrued interest and prepayment
premium). The Company has recorded approximately $67.9 million of the aggregate
purchase price of the Recent Acquisitions as goodwill. See "Business -- Recent
Acquisitions" and "Unaudited Pro Forma Combined Condensed Financial Statements."
<TABLE>
THE OFFERING
<S> <C>
Common Stock offered by the Company................. 5,000,000 shares(1)
Common Stock to be outstanding after this
offering.......................................... 17,213,152 shares(2)
Use of Common Stock being offered................... To constitute all or a portion of the
purchase price of future Acquisitions.
See "Use of Proceeds."
Nasdaq National Market symbol....................... WCEC
<FN>
- ---------------
(1) The Company intends to seek the agreement of recipients of shares of Common
Stock in Acquisitions to restrictions on their transfer of such shares for
periods ranging from six to 18 months or to structure such transactions to
provide for issuance of shares on a deferred basis over periods of six to
18 months.
(2) Includes 1,843,720 shares of Common Stock issued to certain sellers as part
of the purchase price of the Recent Acquisitions and 192,308 shares
issuable upon exercise of the Warrant but excludes shares contingently
issuable to certain sellers of newly opened stores. See "Business -- Recent
Acquisitions." An additional 525,000 shares of Common Stock have been
reserved for future issuance under the Company's 1995 Equity Incentive
Plan, 1995 Director Stock Option Plan and 1995 Employee Stock Purchase
Plan. See "Management -- Director Compensation" and "-- Employee Stock
Plans."
</TABLE>
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4
<PAGE> 7
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<TABLE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT STORE AND PER SHARE DATA)
<CAPTION>
HISTORICAL PRO FORMA(1)
--------------------------------------------------- --------------------------
THREE MONTHS THREE
YEAR ENDED ENDED MONTHS
JANUARY 31, APRIL 30, YEAR ENDED ENDED
----------------------------- ----------------- JANUARY 31, APRIL 30,
1994 1995 1996 1995 1996 1996 1996
------ ------ ------- ------ ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................... $2,520 $6,503 $14,719 $2,675 $4,722 $82,175 $22,596
Operating income (loss)............... (44) 385 1,216 222 451 7,995 2,908
Income (loss) before income taxes..... (86) 267 576 185 175 8,442 2,666
Net income (loss)..................... (72) 204 334 135 101 4,632 1,487
Pro forma net income (loss) per
share............................... $(0.07)(2) $ 0.12(2) $ 0.06(2) $ 0.03(2) $ 0.02(2) $ 0.38(3) $ 0.12(3)
OTHER DATA:
Depreciation and amortization(4)...... $ 870 $1,628 $ 2,585 $ 612 $ 623 $19,726 $ 4,629
Purchases of videocassette rental
inventory........................... 685 1,430 2,002 537 570 18,246 4,697
STORE DATA:
Increase (decrease) in same store
revenue(5).......................... (6.1)% 14.2% 4.8% 2.3% 3.5% 1.5% 0.5%
Company-owned stores at end of
period.............................. 14 28 28 28 28 197 200
Franchised stores at end of period.... -- -- 304 308 296 310 303
------ ------ ------- ------ ------ ------- -------
Total stores at end of period... 14 28 332 336 324 507 503
====== ====== ======= ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRO
HISTORICAL FORMA(1)
---------- ---------
APRIL 30, APRIL 30,
1996 1996
---------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 207 $ 1,158
Videocassette rental inventory, net................................................... 1,693 14,317
Total assets.......................................................................... 18,606 104,779
Long-term debt, less current portion.................................................. 7,505 4,361
Total liabilities..................................................................... 17,962 18,494
Stockholders' equity.................................................................. 644 86,285
<FN>
- ---------------
(1) For a discussion of the assumptions and adjustments underlying the unaudited
pro forma combined financial data, see "Unaudited Pro Forma Combined
Condensed Financial Statements."
(2) Unaudited pro forma net income (loss) per share has been calculated for each
of the years in the three year period ended January 31, 1996 and for the
three month periods ended April 30, 1995 and 1996 by dividing the respective
unaudited pro forma net income (loss) amounts by the weighted average number
of shares of common stock outstanding (843,000, 1,693,000 and 4,756,000 at
January 31, 1994, 1995 and 1996, respectively and 4,756,000 at April 30,
1995 and 1996). Unaudited pro forma net income (loss) per share reflects an
adjustment to the consolidated statement of operations to give effect to the
merger (the "Merger") and the 0.340-for-1 reverse stock split discussed in
Notes 1 and 17 to the Company's consolidated financial statements included
elsewhere herein, as if they had occurred as of February 1, 1992.
Accordingly, the pro forma income tax provision (benefit) and pro forma net
income (loss) have been calculated as if each entity included in the
consolidated statement of operations had been included in the Company's
consolidated income tax returns and subject to corporate income taxation as
a corporation subject to taxation under Subchapter C of the Internal Revenue
Code of 1986, as amended (a "C Corporation") during all periods presented.
(3) Unaudited pro forma net income per share for the year ended January 31, 1996
and the three month period ended April 30, 1996 have been calculated by
dividing unaudited pro forma net income by the pro forma weighted average
number of shares of Common Stock outstanding after giving effect to (i) the
Merger, (ii) the issuance of shares upon formation of the Company, (iii) the
0.340-for-1 reverse stock split and the shares issued in conjunction with
the Public Offering, (iv) the shares issued in conjunction with the Recent
Acquisitions, (v) the repayment of all outstanding debt, (vi) borrowings
under the Credit Facility and (vii) the impact of the Warrant and of the
conversion of a portion of an outstanding convertible subordinated secured
note (the "Convertible Note") into 20,844 shares of Common Stock on May 17,
1996, as if all activity occurred as of February 1, 1995. See Notes 1 and 7
to the Company's consolidated financial statements. The pro forma weighted
average number of common shares used to calculate pro forma net income per
share at January 31, 1996 and April 30, 1996 was 12,322,075.
(4) Depreciation and amortization includes depreciation expense of fixed assets,
goodwill amortization expense and amortization expense of videocassette
rental inventory. The Company's policy is that videocassette rental
inventory, which includes video games, is stated at cost and is amortized
over its estimated economic life with no provision for salvage value.
Videocassettes that are considered base stock are amortized over 36 months
on a straight-line basis. New releases are amortized as follows: the first
through third copies of each title per store are amortized as base stock and
succeeding copies of each title per store are amortized over nine months on
a straight-line basis.
(5) Same store revenue is defined as the aggregate revenues from Company-owned
stores open for the entirety of the periods being compared. Increase
(decrease) reflects change from prior fiscal year.
</TABLE>
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5
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the Common
Stock offered hereby.
ABILITY TO SUSTAIN GROWTH AND MANAGE OPERATIONS
The Company's rapid growth could strain the Company's ability to manage
operations and effectively pursue its growth strategy. The Company's growth
strategy has involved (i) the acquisition from unrelated third parties in 1993
and 1994 of two chains operating 21 stores, (ii) the opening of eight new
stores, (iii) the acquisition in 1995 of the operating assets now held by the
Company and its wholly owned franchising subsidiary from West Coast Video
Entertainment, Inc., an unrelated third party, and its four unaffiliated
corporations (the "WCEI Companies"), which had a total of 305 franchised stores,
(iv) the acquisition in May 1996 of 11 chains (including four West Coast
Video[Registered Trademark] franchisees) operating 172 stores and franchising
an additional 20 stores and (v) the ongoing integration of such new stores and
operations into the Company's management information, telecommunications,
management, marketing, finance and accounting, entertainment purchasing,
distribution, retail operations and merchandising systems. Future expansion
will require the Company's existing management personnel to, among other
things, identify and analyze new markets and new site locations; locate and
negotiate with numerous potential acquirees; consummate acquisitions; arrange
for adequate equity or debt financing to fund expansion; negotiate acceptable
real estate leases and related agreements for existing stores and for stores to
be acquired or opened and develop cost-effective transition plans for acquired
stores; hire, train and assimilate store managers and other store personnel;
and address the other specific risks described in more detail below. See "--
Acquisition Risks." Accordingly, in some circumstances continued rapid growth
could have a material adverse effect on the Company's financial condition and
results of operations.
OPERATING RISKS
Competition. The video retail industry is highly competitive. The Company
competes with other video specialty stores, including stores operated by
regional and national chains, as well as other businesses, such as supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations and other retailers, that offer videos and interactive electronic
entertainment products. Many of the Company's stores compete with stores
operated by the Blockbuster Entertainment division of Viacom Inc.
("Blockbuster"), the dominant video specialty retailer in the United States.
Blockbuster and certain of the Company's non-video specialty store competitors
have significantly greater financial and marketing resources, market share and
name recognition than the Company. In addition, the Company's stores compete
with other leisure-time activities, including movie theaters, network and cable
television, live theater, sporting events and family entertainment centers. The
Company's failure to compete effectively would have a material adverse effect on
its financial condition and results of operations. See
"Business -- Competition."
Technological Obsolescence. The Company competes with pay-per-view cable
television systems ("Pay-Per-View"), in which cable television subscribers pay a
fee to see a movie or other program selected by the subscriber. Existing
Pay-Per-View services offer a limited number of channels and programs and are
generally available only to households with a converter to unscramble incoming
signals. Recently developed technologies, however, permit certain cable
companies, direct broadcast satellite companies, telephone companies and other
telecommunications companies to transmit a much greater number of movies to
homes in more markets as frequently as every five minutes. Ultimately, further
improvements in these technologies or the development of other similar
technologies could lead to the availability of a broad selection of movies to
consumers on demand, which could have a material adverse effect on the Company's
financial condition and results of operations. See "Business -- Competition."
Changes in the manner in which movies are marketed by movie studios, including
an earlier release by movie studios of movie titles to cable television or other
distribution channels, could substantially decrease the demand for video
rentals, which could have a material adverse effect on the Company's financial
condition and results of operations. See "Video Industry Overview" and
"Business -- Competition."
6
<PAGE> 9
Seasonality and Other Factors; Quarterly Fluctuations. The video and
interactive electronic entertainment products rental portions of the Company's
business are somewhat seasonal, and revenues may be affected by many factors,
including variations in the number and timing of theatrical movie releases, the
public acceptance of new release titles available for rental and sale, the
extent of competition, marketing programs, weather, the timing of long holiday
weekends, special or unusual events and other factors that may affect retailers
in general. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General Economic Trends, Quarterly Results and
Seasonality" and "Business -- Growth Strategy."
Fluctuations in Interactive Electronic Entertainment Products
Industry. Rentals and sales volumes for interactive electronic entertainment
products have fluctuated considerably in recent fiscal periods, both
industry-wide and for the Company, as a result of technological changes and the
introduction (or delay in introduction) of new products. Similar fluctuations
may occur in future periods.
Effects of Increased Minimum Wage. Proposals currently before the United
States Congress include plans which would raise the federal minimum wage from
$4.25 per hour to an amount between $5.15 and $6.50 per hour over periods
ranging from three months to two years. Many of the Company's part-time store-
level employees are paid at or slightly above the minimum wage. The passage of
such a proposal, or similar proposals in those states in which the Company's
operations are concentrated, could materially increase the Company's employment
costs and could have a material adverse effect on the Company's financial
condition and results of operations.
ACQUISITION RISKS
Integration. The success of the Company's growth strategy is dependent
upon its ability to achieve cost savings in connection with Acquisitions
(including the Recent Acquisitions and any future Acquisitions) and otherwise
successfully integrate acquired operations. There can be no assurance, however,
that the Company will be able to achieve such savings or successfully integrate
acquired operations (including the operations comprising the Recent Acquisitions
and any future Acquisitions) into its existing operations. There can be no
assurance that the Recent Acquisitions or future Acquisitions will not have a
material adverse effect upon the Company's operating results while the
operations of the acquired businesses are being integrated into the Company's.
Once integrated, acquired operations may not achieve levels of revenues or
profitability comparable to those achieved by the Company's existing operations
or otherwise perform as expected.
Identification of and Competition for Acquisitions. The Company's growth
strategy includes future Acquisitions. There can be no assurance that the
Company will be able to identify suitable acquisition targets and complete
Acquisitions in either existing or new markets. In addition, certain of the
Company's competitors may seek to acquire some of the same video specialty
stores that the Company seeks to acquire. Such competition for Acquisitions
would increase acquisition prices and related costs and result in fewer
acquisition opportunities, which could have a material adverse effect on the
Company's growth.
Risk that Future Acquisitions Will Not Be Consummated; Misrepresentations
and Breaches by Sellers. While certain of the future Acquisitions may be
scheduled to close substantially concurrently with one another, there can be no
assurance that any of such Acquisitions will be consummated. If one or more of
such Acquisitions does not close, any shares registered in this offering
allocated thereto may be used for the acquisition of other video specialty
stores. See "Use of Proceeds." There is no assurance that the Company would be
able to use such shares to acquire other video specialty stores on acceptable
terms. In consummating Acquisitions, the Company has relied and will rely upon
certain representations, warranties and indemnities made by the sellers with
respect to each of the Acquisitions, as well as its own due diligence
investigation. There can be no assurance that such representations and
warranties will be true and correct, that the Company's due diligence will
uncover all material adverse facts relating to the operations and financial
condition of the stores acquired or that all of the conditions to the Company's
obligations to consummate Acquisitions will be satisfied. Any material
misrepresentations could have a material adverse effect on the Company's
financial condition and results of operations. In addition, the Company has
waived, and expects that it may in the future waive, certain conditions to its
obligations to consummate Acquisitions.
7
<PAGE> 10
Financing Growth Strategy. The Company currently intends to finance future
Acquisitions, as well as new store openings, primarily from the net proceeds
from the sale of debt or equity securities, cash from operations and borrowings
under credit facilities, including the Credit Facility. Acquisitions may also be
made by issuing Company securities (including the shares offered hereby) to the
sellers. There can be no assurance that the Company will be able to sell debt or
equity securities on reasonable terms. The inability to raise sufficient cash
could inhibit implementation of the Company's growth strategy. The Credit
Facility contains various restrictive covenants which may also inhibit the
Company's ability to finance its growth strategy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- The Company."
Certain Formulaic Purchase Prices. The purchase prices for certain Recent
Acquisitions contained components that are to be determined over 12 or 18-month
periods after the respective opening dates of 19 stores on the basis of certain
financial measurements for such stores over the final 12 months of such periods.
See "Business -- Recent Acquisitions." The purchase prices for future
Acquisitions may contain similar components. If such components of the purchase
prices are materially more than is currently expected, the Company will have to
deploy more cash or issue more shares of Common Stock than it is currently
budgeting for such purpose.
RISKS ASSOCIATED WITH FRANCHISE OPERATIONS
Upon consummation of the Recent Acquisitions, the Company had 203
franchisees operating 303 franchised stores. It obtains franchise-related
revenues from an initial fee and the sale of initial supplies and from ongoing
fees and royalties based on a percentage of franchisees' gross revenues, as
reported monthly by franchisees to the Company. No assurance can be given that
the Company will continue to market and sell new franchises or operate its
franchise operations at profitable levels. In addition, no assurance can be
given that desirable locations and acceptable leases can be obtained for new
franchisees. The Company monitors franchisees' compliance with ongoing
obligations on the basis of monthly revenue and ordered inventory reports. The
Company's standard franchise agreement generally also grants the Company the
right to audit the books and records of franchisees at any time. No assurance
can be given, however, that all franchisees will operate their stores in
accordance with the Company's operating guidelines and in compliance with all
material provisions of the franchise agreement, and the failure of franchisees
to so operate their stores could have a material adverse effect on the Company's
business. The standard franchise agreement gives the Company the choice of
seeking legal remedies, which could be time-consuming and expensive, and
terminating the franchisee, which would diminish the Company's revenue until
such time, if ever, as a new franchisee replaces the terminated franchisee.
Franchisees are not required to purchase supplies or inventory from the Company.
The standard franchise agreement further provides that a franchisee may
have rights to an exclusive territory within which other franchised or
Company-owned stores will not be set up or operated. The Company is currently
discussing with ten West Coast Video[Registered Trademark] franchisees the
terms on which twelve of the stores acquired in the Recent Acquisitions, which
are located within such franchisees' exclusive territories, will be integrated
into the Company's system; possibilities include, but are not limited to,
relocating such an acquired store or selling it to a third party, assisting the
franchisee to relocate, granting the franchisee additional franchises or
territorial or other rights, or including the franchisee's stores in the
intended program of Company acquisitions of franchisees' stores described under
"Business -- Growth Strategy -- Continue to Acquire West Coast Franchisee
Stores." Although the Company does not expect that any such method of
integration of such stores will have a material adverse effect, there can be no
assurance in this regard.
In addition, the Company is subject to the Federal Trade Commission's Trade
Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures" (the "FTC Franchise Rule") and
state laws and regulations that govern the offer and sale of franchises. In
order to offer and sell franchises, the Company is required by the FTC Franchise
Rule to furnish each prospective franchisee a current franchise offering
circular prior to the sale of a franchise. In addition, 13 states at present
require a franchisor to comply with registration or filing requirements prior to
offering a franchise in the state and to provide a prospective franchisee with a
current franchise offering circular complying with the state's
8
<PAGE> 11
laws, prior to the sale of the franchise, and five other states require written
notice prior to the offer of a franchise (collectively, the "Registration
States"). The Company is currently in the process of registering in all of the
Registration States and is currently entitled to sell franchises in all other
states in compliance with the FTC Franchise Rule. Violations of the FTC
Franchise Rule and the franchise offering requirements of the Registration
States could result in civil penalties against the Company and civil and
criminal penalties against the executive officers of the Company. No assurance
can be given that the Company will not be required to cease offering and selling
franchises in certain states because of future changes in franchise laws or the
Company's inability to comply with existing or future franchise laws or until
its franchise offering circular is updated.
This Prospectus does not constitute, and shall not be construed as, an
offer to sell a West Coast Video[Registered Trademark] franchise. Such offers
may be made only by an offering circular in compliance with state laws and the
FTC Franchise Rule. The description of the franchises set forth in this
Prospectus is not intended to be a complete description of the business of a
franchisee of West Coast Franchising Company.
RELIANCE ON KEY PERSONNEL; EXPERIENCE OF MANAGEMENT
The Company's operations are dependent on the continued efforts of T. Kyle
Standley, its President and Chief Executive Officer, and its other key
employees. If any of these individuals become unwilling or unable to continue
their employment or association with the Company, or if the Company is unable to
attract and retain other skilled employees, the Company's business could be
materially and adversely affected. The Company does not currently maintain key
man life insurance coverage on any of its executives. Certain key members of the
Company's management group joined the Company upon consummation of the Public
Offering. No Company executive had previous significant experience operating a
company as large, in terms of stores or annual revenues, as the Company. See
"Management."
CONTROL BY THE PRINCIPAL EXECUTIVES
At July 1, 1996, Ralph W. Standley III and certain members of his family,
including T. Kyle Standley, in the aggregate, beneficially owned 31.6% of the
Company's outstanding Common Stock. As a result, these stockholders voting
together are effectively able to elect a majority of the Company's directors and
control the Company. These stockholders voting together could delay or prevent a
change in control of the Company or a business combination involving the Company
that is favored by other stockholders. See "-- Anti-Takeover Provisions,"
"Management," "Principal Stockholders" and "Description of Capital Stock."
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock, $.01 par value per share ("Preferred Stock"), in one
or more series and to determine the price, rights, preferences and privileges of
the shares of each such series without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring or preventing a change of control of the Company. In
addition, certain provisions in the Company's Certificate of Incorporation, as
amended, and Restated By-laws (the "By-laws") relating to supermajority
stockholder approval of mergers and certain similar transactions, restrictions
on calling special meetings of stockholders, restrictions on amendments to the
By-laws and prohibitions against action by majority written consent of the
stockholders may discourage or make more difficult any attempt by a person or
group of persons to obtain control of the Company.
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of a corporation's voting stock. See "Description of Capital
Stock -- Preferred Stock" and
9
<PAGE> 12
"-- Delaware Law and Certain Charter and By-Law Provisions." The provisions of
Section 203 may have the effect of delaying or preventing changes in control or
management of the Company, which could adversely affect the market price of the
Company's Common Stock and deprive stockholders of an opportunity to receive a
premium for their shares.
LIMITED TRADING HISTORY; POTENTIAL VOLATILITY OF STOCK PRICE
The Company's Common Stock has traded on the Nasdaq National Market only
since May 14, 1996. Prior to the Public Offering, there was no public market for
the Common Stock. The initial public offering price was determined through
negotiations between the Company and the representatives of the underwriters in
the Public Offering. There can be no assurance that an active trading market
will be sustained or that the market price of the Common Stock will not decline
below the initial public offering price from time to time or permanently.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of the Common Stock in the
public market, or the perception that the sale of a substantial number of shares
might occur, could have a material adverse effect on the prevailing market price
of the Common Stock or the ability of the Company to raise capital through a
public offering of its equity securities. At July 1, 1996, the Company had
outstanding 12,213,152 shares of Common Stock, of which the 5,400,000 shares
sold in the Public Offering are freely tradeable without restriction or further
registration under the Securities Act, except for those shares held by
"affiliates" (as defined in Rule 144 under the Securities Act) of the Company.
None of the remaining 6,813,152 outstanding shares of Common Stock
(collectively, the "Restricted Shares"), have been registered under the
Securities Act, and they may be resold only upon registration under, or in
compliance with an exemption from the registration requirements of, the
Securities Act. Holders of 2,285,466 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144, as currently in effect, subject to the manner
of sale, volume, notice and information requirements of Rule 144, beginning in
February 1997, holders of 2,470,826 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144 beginning in July 1997 and holders of 2,056,860
Restricted Shares will be eligible to sell such shares pursuant to Rule 144
beginning in May 1998. The Securities and Exchange Commission has sought public
comment on the advisability of shortening the applicable holding periods under
Rule 144 by one year. If such a change in Rule 144 were to be effected, the
respective dates set forth above would be February 1996 and July 1996 (each
subject to certain lock-up agreements) and May 1997. The Company has granted to
holders of Restricted Shares and the Warrant to purchase shares of Common Stock
certain demand and piggyback registration rights. See "Description of Capital
Stock -- Registration Rights," "Shares Eligible for Future Sale," "Management"
and "Certain Transactions."
10
<PAGE> 13
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1996 AND THREE MONTHS ENDED APRIL 30, 1996
Substantially concurrently with the completion of the Public Offering of
stock on May 17, 1996, the Company acquired in the Recent Acquisitions 172 owned
and operated video specialty stores, plus the rights of one acquired company as
franchisor of an additional 20 franchised stores, for aggregate consideration of
approximately $84.0 million, consisting of the following: $52.4 million in cash,
approximately $24.0 million in shares of Common Stock (1,843,720 shares valued
for this purpose at the initial public offering price of $13.00 per share),
approximately $4.2 million in acquisition costs and approximately $3.4 million
in minimum contingent consideration (of which approximately $2.0 million and
$1.4 million is to be paid in cash and stock, respectively). The Recent
Acquisitions are accounted for using the purchase method of accounting.
The following unaudited pro forma combined condensed financial statements
reflect (i) the consummation of the Recent Acquisitions, (ii) the completion of
the Public Offering at the purchase price of $13.00 per share and the
application of the net proceeds therefrom and (iii) the borrowing of $4.4
million under the Credit Facility and the use of such funds to refinance
approximately $3.1 million of previously existing indebtedness and pay
approximately $1.3 million of the cash portion of the purchase price for the
Recent Acquisitions (collectively, the "Pro Forma Transactions"). The unaudited
pro forma combined balance sheet at April 30, 1996 gives effect to the Pro Forma
Transactions as if each had occurred at that date. The unaudited pro forma
combined statements of operations for the year ended January 31, 1996 and three
months ended April 30, 1996 give effect to the Pro Forma Transactions as if each
had occurred at February 1, 1995.
In the opinion of the Company's management, all adjustments necessary to
present fairly such unaudited pro forma combined condensed financial statements
have been made based on the terms and structure of the Pro Forma Transactions.
In the opinion of the Company's management, the purchase prices have been
preliminarily allocated to all significant tangible and intangible assets in
accordance with APB 16 and the final allocation is not expected to differ
materially from the allocation reflected in the unaudited pro forma combined
condensed financial statements. In connection with the preliminary allocation of
purchase prices, no value has been assigned to the various employment
arrangements entered into between the Company and certain prior owners of the
entities acquired. Such employment contracts were entered into with respect only
to those prior owners who remain in the employment of the Company. Such
contracts serve to identify the new salary arrangements with previous owners at
competitive market rates. In assessing the value of non-competition
arrangements, the Company considered the significant competitive pressure that
now exists in all geographic markets and the fact that the industry is
undergoing a significant consolidation by large operators with more economic
substance which acts as a deterrent to others seeking to enter the market.
Accordingly, the Company does not believe these arrangements possess any
significant value. The Company believes, however, that changes in the
composition of the assets acquired and the liabilities assumed in connection
with the Recent Acquisitions occurred due to changes in the ordinary course of
business of the video specialty stores acquired; however, the terms of the
agreements relating to the Recent Acquisitions provided that operations of these
stores were to continue in the ordinary course of business until the date of
their acquisition. Therefore, the Company believes any related change in
adjustments should not be material to the unaudited pro forma combined condensed
financial statements.
The unaudited pro forma combined condensed financial statements do not
purport to represent what the Company's results of operations or financial
position would actually have been had the Pro Forma Transactions occurred on
either of the dates set forth above or to project the Company's results of
operations for any future period.
The unaudited pro forma financial information should be read in connection
with the accompanying notes, the historical financial statements and notes
thereto of the Company and certain of the sellers of the 172 stores (the
"Sellers") and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
11
<PAGE> 14
<TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
APRIL 30, 1996
(IN THOUSANDS)
<CAPTION>
RECENT PRO FORMA COMPANY
WEST COAST ACQUISITIONS(1) ADJUSTMENTS PRO FORMA(2)
---------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 207 $ 2,200 $ 56,519 (3)
(259)(4)
(56,159)(5)
(1,350)(6) $ 1,158
Accounts and other receivables............ 1,064 448 (99)(4) 1,413
Merchandise inventories................... 538 3,037 -- 3,575
Prepaid expenses and other current
assets................................. 40 497 (229)(4)
183 (5) 491
------- ------- -------- --------
Total current assets................... 1,849 6,182 (1,394) 6,637
Videocassette rental inventory, net....... 1,693 12,224 (129)(4)
529 (5) 14,317
Furnishings, equipment and leasehold
improvements, net...................... 1,164 5,743 (545)(4) 6,362
Other assets.............................. 6,871 1,410 (2,612)(3)
(93)(4)
(3,312)(5) 2,264
Intangible assets......................... 6,834 232 67,938 (5) 75,004
Deferred tax asset........................ 195 69 (69)(4) 195
------- ------- -------- --------
Total assets........................... $18,606 $25,860 $ 60,313 $104,779
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 2,091 $ 1,881 $ (2,006)(3)
(1,881)(4)
(67)(5) $ 18
Accounts payable.......................... 1,597 5,937 -- 7,534
Accrued expenses and other liabilities.... 5,971 3,736 (2,870)(3)
(1,323)(4)
904 (5)
(1,350)(6) 5,068
Income taxes.............................. 798 656 (656)(4) 798
Advances from stockholders'............... -- 900 (900)(4) --
------- ------- -------- --------
Total current liabilities.............. 10,457 13,110 (10,149) 13,418
Deferred tax liability.................... -- 486 170(5) 656
Long-term debt............................ 7,505 2,646 (2,889)(3)
(2,646)(4)
(255)(5) 4,361
Other long-term liabilities............... -- 1,054 (995)(4) 59
------- ------- -------- --------
Total liabilities...................... 17,962 17,296 (16,764) 18,494
------- ------- -------- --------
Stockholders' equity:
Common stock................................ 48 5,968 54(3)
(5,950)(5) 120
Additional paid-in capital.................. 911 1,031 61,618 (3)
5,689 (4)
17,231 (5) 86,480
Treasury stock.............................. -- (210) 210 (5) --
Loans to stockholders....................... -- (1,289) 1,289 (4) --
Accumulated surplus (deficit)............... (315) 3,064 (3,064)(5) (315)
------- ------- -------- --------
Total stockholders' equity............. 644 8,564 77,077 86,285
------- ------- -------- --------
Total liabilities and stockholders'
equity............................... $18,606 $25,860 $ 60,313 $104,779
======= ======= ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
12
<PAGE> 15
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
APRIL 30, 1996
<TABLE>
(1) Recent Acquisitions include the following (in thousands):
<CAPTION>
VIDEOCASSETTE
CURRENT RENTAL TOTAL CURRENT TOTAL
ASSETS INVENTORY ASSETS LIABILITIES LIABILITIES
------- ------------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
PALMER CORPORATION AND SUBSIDIARIES... $2,791 $ 3,236 $ 8,372 $ 4,134 $ 5,278
------ ------- ------- ------- -------
RED GIRAFFE:
American Video, Inc. and Red
Giraffe Video, Inc. ........... 614 2,579 4,557 1,969 3,599
Lancaster Group, Inc. ........... 76 149 551 244 567
------ ------- ------- ------- -------
690 2,728 5,108 2,213 4,166
------ ------- ------- ------- -------
MASSACHUSETTS FRANCHISEES:
New Age Entertainment, Inc. ..... 132 768 1,550 821 1,193
HB Associates, Inc. ............. 183 393 884 447 470
Best Entertainment, Inc. ........ 163 373 589 125 125
Video Innovators, Inc. .......... 102 173 594 523 530
------ ------- ------- ------- -------
580 1,707 3,617 1,916 2,318
------ ------- ------- ------- -------
5 OTHER UNAFFILIATED SELLING GROUPS:
A-Z Video Systems, Inc. ......... 131 530 1,108 1,196 1,196
------ ------- ------- ------- -------
Showtime, Inc. .................. 365 632 1,288 604 610
------ ------- ------- ------- -------
Video Giant, Inc. ............... 753 1,031 2,147 328 814
------ ------- ------- ------- -------
VIDEO VIDEO:
Video Video of Parsippany, Inc.,
Video Video of Chatham, Inc.
and Video Video Management
Corporation.................... 110 224 528 733 733
Video Video of Westfield, Inc. .. 30 106 160 629 629
------ ------- ------- ------- -------
140 330 688 1,362 1,362
------ ------- ------- ------- -------
VIDEOLAND:
Anthony Cocca's Videoland,
Inc. .......................... 315 1,375 2,182 984 1,015
Vidko, Inc. ..................... 111 140 275 76 76
Kobie-Co Movie Outlet............ 306 515 1,075 297 461
------ ------- ------- ------- -------
732 2,030 3,532 1,357 1,552
------ ------- ------- ------- -------
$6,182 $12,224 $25,860 $13,110 $17,296
====== ======= ======= ======= =======
</TABLE>
See Index to Consolidated Financial Statements set forth in this
Registration Statement for cross-reference to historical financial statements of
certain of the Sellers.
(2) See the introductory paragraphs under "Unaudited Pro Forma Combined
Condensed Financial Statements".
13
<PAGE> 16
<TABLE>
(3) Reflects the net proceeds received by the Company in connection with the
Public Offering of common stock on May 17, 1996 (and the use of a portion
thereof), as follows (in thousands):
<S> <C> <C>
Gross proceeds from offering..................................... $70,200
Less: total fees and expenses.................................... $(8,745)
Fees and expenses paid prior to April 30, 1996.............. 940
-------
Fees and expenses to be paid from offering proceeds............ (7,805)
Repayment of current portion of long-term debt................... $(2,006)
Repayment of long-term debt...................................... (7,040)
Accrued interest................................................. (481)
-------
Repayment of debt and accrued interest......................... (9,527)
Borrowings of long-term debt under the Credit Facility......... 4,351
Payment of commitment fee for Credit Facility.................. (700)
-------
Net cash change................................................ $56,519
=======
</TABLE>
At April 30, 1996, (a) Other assets included $3.3 million of the fees and
expenses associated with the offering and (b) Accrued expenses and other
liabilities included $0.5 million of interest and $2.4 million of fees and
expenses. The pro forma adjustments reflect elimination of these items. Other
assets also include the $0.7 million payment of the bank commitment fee for the
Credit Facility.
<TABLE>
These transactions had the following pro forma effect on stockholders'
equity (in thousands):
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN CAPITAL
------ ---------------
<S> <C> <C>
Increase due to issuance of shares........................ $54 $70,146
Increase due to conversion of a portion of the Convertible
Note.................................................... -- 217
Decrease due to offering expenses......................... -- (8,745)
--- -------
Net change........................................... $54 $61,618
=== =======
</TABLE>
<TABLE>
(4) Reflects the elimination of certain assets and liabilities of certain
Sellers which, in accordance with the various purchase and sale agreements,
were not acquired by the Company, as follows (in thousands):
<S> <C> <C>
Cash............................................................... $ 259
Accounts receivable................................................ 99
Prepaid expenses................................................... 229
Videocassette rental inventory, net................................ 129
Furnishings, equipment and leasehold improvements, net............. 545
Other assets....................................................... 93
Deferred taxes..................................................... 69
------
Total assets not acquired........................................ $1,423
Current portion of long-term debt.................................. $1,881
Accrued expenses and other liabilities............................. 1,323
Income taxes payable............................................... 656
Advances from stockholders......................................... 900
Long-term debt..................................................... 2,646
Other long-term liabilities........................................ 995
------
Total liabilities not acquired................................... $8,401
------
Net liabilities not acquired..................................... $6,978
======
</TABLE>
The increase in additional paid-in capital of $5.7 million reflects the
$7.0 million of net liabilities not acquired less the elimination of loans to
stockholders in the amount of $1.3 million.
14
<PAGE> 17
<TABLE>
(5) Reflects (i) the allocation of purchase price paid in connection with the
Recent Acquisitions based on the fair value of the assets and liabilities
acquired, (ii) the elimination of historical stockholders' equity relating
to the entities acquired in connection with the Recent Acquisitions and
(iii) the acceleration of amounts due to the former owner of the WCEI
Companies. The purchase price paid in connection with the Recent
Acquisitions is $84.0 million, which consists of: $52.4 million in cash,
approximately $24.0 million in Common Stock (1,843,720 shares valued at the
initial public offering price of $13 per share), approximately $4.2 million
in acquisition costs ($0.8 million which had been prepaid and $2.5 million
which had been accrued at April 30, 1996) and approximately $3.4 million in
minimum contingent consideration. The pro forma effect of these transactions
is as follows (in thousands):
<S> <C> <C>
Cash portion of purchase price..................................... $52,410
Plus: Fees and expenses paid from offering proceeds................ 4,243
Fees and expenses paid prior to April 30, 1996................ (816)
-----
Net fees and expenses paid from offering proceeds................ 3,427
Payments of obligations to former owner of the WCEI Companies
(Short-term portion)............................................. 67
Payment of obligations to former owner of the WCEI Companies
(Long-term portion).............................................. 255
-----
Total payment of obligations to former owner of
the WCEI Companies.......................................... 322
-------
Net cash change.................................................. $56,159
=======
</TABLE>
At April 30, 1996 Other assets included $3.3 million of the fees and
expenses associated with the Recent Acquisitions, of which $2.5 was unpaid
as of April 30, 1996. The pro forma adjustment to Accrued expenses and
other liabilities reflects $3.4 million to reflect accrual of minimum
contingent consideration, offset by the elimination of unpaid fees and
expenses.
<TABLE>
The preliminary allocation of purchase price (subject to final
determination of certain adjustments) is as follows (in thousands):
<CAPTION>
HISTORICAL VALUE FAIR PRO FORMA
OF NET ASSETS VALUE NET ASSETS
ACQUIRED ADJUSTMENT ACQUIRED
---------------- ---------- ----------
<S> <C> <C> <C>
Cash...................................... $ 1,941 $ 1,941
Merchandise inventories................... 3,037 3,037
Accounts receivable....................... 349 349
Prepaid expenses.......................... 268 183 451
Videocassette rental inventory, net....... 12,095 529 12,624
Furnishings, equipment and leasehold
improvements, net....................... 5,198 5,198
Other assets.............................. 1,317 1,317
Goodwill.................................. 232 67,938 68,170
------- ------- -------
Total................................... $24,437 $68,650 $93,087
Accounts payable.......................... $ 5,937 $ 5,937
Accrued expenses and other liabilities.... 2,413 2,413
Deferred tax liability.................... 486 170 656
Other long-term liabilities............... 59 59
------- ------- -------
Total liabilities....................... $ 8,895 $ 170 $ 9,065
------- ------- -------
Total................................... $15,542 $68,480 $84,022
======= ======= =======
</TABLE>
15
<PAGE> 18
<TABLE>
These transactions had the following effect on stockholders' equity (in thousands):
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY RETAINED
STOCK CAPITAL STOCK EARNINGS
-------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Elimination of historical stockholders' equity.... $(5,968) $(1,031) $210 $(3,064)
Elimination of historical stockholders' equity
reflected in note (4)........................... (5,689)
Shares issued as partial consideration for Recent
Acquisitions.................................... 18 23,951
------- ------- ---- -------
Net change in stockholders' equity................ $(5,950) $17,231 $210 $(3,064)
======= ======= ==== =======
</TABLE>
(6) Represents repayment at closing of $1.3 million of accrued liabilities of
one of the Sellers and payment of certain build-out costs relating to an
additional store to be acquired by the Company, pursuant to certain
acquisition agreements.
16
<PAGE> 19
<TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1996 AND THE THREE MONTHS ENDED APRIL 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED JANUARY 31, 1996 THREE MONTHS ENDED APRIL 30, 1996
-------------------------------------------------------------- -----------------------------------------------
HISTORICAL HISTORICAL
------------------------------------ ---------------------
WEST PRIOR RECENT PRO FORMA COMPANY WEST RECENT PRO FORMA COMPANY
COAST ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA COAST ACQUISITIONS ADJUSTMENTS PRO FORMA
------- ------------ ------------ ----------- --------- ------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental
revenues... $ 9,209 $ -- $55,872 $ (927) $64,154 $2,414 $16,054 $ (319) $18,149
Franchise
fees....... 3,211 3,260 1,475 (1,595) 6,351 1,377 115 (402) 1,090
Merchandise
and other
sales...... 2,299 502 8,923 (54) 11,670 931 2,439 (13) 3,357
------- ------ ------- ------- ------- ------ ------- ------- -------
Total
revenue... 14,719 3,762 66,270 (2,576)(4) 82,175 4,722 18,608 (734)(4) 22,596
Operating costs
and expenses:
Store
operating
costs...... 6,234 -- 32,042 (3,164)(5) 35,112 1,473 8,963 (987)(5) 9,449
Cost of goods
sold....... 1,384 622 7,786 (2,133)(6) 7,659 693 1,947 (710)(6) 1,930
Amortization
of
videocassette
and video
game rental
inventory.. 1,972 -- 15,818 (3,100)(7) 14,690 386 4,419 (872)(7) 3,933
General and
administra-
tive....... 3,659 2,728 8,315 (1,849)(8) 12,853 1,586 2,079 (334)(8) 3,331
Intangible
amortiza-
tion....... 254 -- -- 3,612 (9) 3,866 133 -- 912 (9) 1,045
------- ------ ------- ------- ------- ------ ------- ------- -------
Total
operating
costs and
expenses. 13,503 3,350 63,961 (6,634) 74,180 4,271 17,408 (1,991) 19,688
------- ------ ------- ------- ------- ------ ------- ------- -------
Operating
income....... 1,216 412 2,309 4,058 7,995 451 1,200 1,257 2,908
Interest
expense...... 640 213 523 (1,018)(10) 358 285 146 (341)(10) 90
Other, net..... -- -- (743) (62)(11) (805) (9) 188 (27)(11) 152
------- ------ ------- ------- ------- ------ ------- ------- -------
Income before
provision for
income
taxes........ 576 199 2,529 5,138 8,442 175 866 1,625 2,666
Income taxes... 242 -- 523 3,045 (12) 3,810 74 167 938 (12) 1,179
------- ------ ------- ------- ------- ------ ------- ------- -------
Net income..... $ 334 $ 199 $ 2,006 $ 2,093 $ 4,632 $ 101 $ 699 $ 687 $ 1,487
======= ====== ======= ======= ======= ====== ======= ======= =======
Pro forma net
income per
share........ $ 0.06 -- -- -- $ 0.38 $ 0.02 -- -- $ 0.12
======= ======= ====== =======
</TABLE>
17
<PAGE> 20
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
(1) Recent Acquisitions include the following historical financial data for the
year ended January 31, 1996 (in thousands):
<CAPTION>
OPERATING NET
RENTAL OTHER TOTAL INCOME INCOME
REVENUE REVENUE REVENUE (LOSS) (LOSS)
------- ------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
PALMER CORPORATION AND SUBSIDIARIES (Unaudited).... $17,297 $ 6,067 $23,364 $ (166) $ 233
------- ------- ------- ------ ------
RED GIRAFFE:
American Video, Inc. and Red Giraffe Video,
Inc. ......................................... 8,557 987 9,544 631 482
Lancaster Group, Inc. ........................... 1,239 189 1,428 39 6
------- ------- ------- ------ ------
9,796 1,176 10,972 670 488
------- ------- ------- ------ ------
MASSACHUSETTS FRANCHISEES:
New Age Entertainment, Inc. ..................... 3,592 405 3,997 12 (43)
HB Associates, Inc. ............................. 2,381 374 2,755 29 (5)
Best Entertainment, Inc. ........................ 1,327 225 1,552 271 270
Video Innovators, Inc. .......................... 774 73 847 69 29
------- ------- ------- ------ ------
8,074 1,077 9,151 381 251
------- ------- ------- ------ ------
5 OTHER UNAFFILIATED SELLING GROUPS:
A-Z Video Systems, Inc. (Unaudited).............. 3,382 178 3,560 213 21
------- ------- ------- ------ ------
Showtime, Inc. .................................. 3,475 436 3,911 (56) (63)
------- ------- ------- ------ ------
Video Giant, Inc. ............................... 4,906 305 5,211 189 110
------- ------- ------- ------ ------
VIDEO VIDEO:
Video Video of Parsippany, Inc., Video Video of
Chatham, Inc. and Video Video Management
Corporation (Unaudited)....................... 1,078 202 1,280 3 (50)
Video Video of Westfield, Inc. (Unaudited)....... 706 140 846 (91) (114)
------- ------- ------- ------ ------
1,784 342 2,126 (88) (164)
------- ------- ------- ------ ------
VIDEOLAND:
Anthony Cocca's Videoland, Inc. ................. 3,999 484 4,483 532 514
Vidko, Inc. (Unaudited).......................... 522 27 549 135 135
Kobie-Co Movie Outlet............................ 2,637 306 2,943 499 481
------- ------- ------- ------ ------
7,158 817 7,975 1,166 1,130
------- ------- ------- ------ ------
$55,872 $10,398 $66,270 $2,309 $2,006
======= ======= ======= ====== ======
<FN>
- ---------------
Included within Other Revenue, which consists primarily of merchandise revenue,
is royalty and advertising income of $1,446 relating to Palmer Corporation and
$29 relating to American Video, Inc. and Red Giraffe Video, Inc.
</TABLE>
See Index to Consolidated Financial Statements set forth in this Prospectus for
cross-reference to historical financial statements of certain of the Sellers.
18
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
Recent Acquisitions include the following unaudited historical financial
data for the three month period ended April 30, 1996 (in thousands):
<CAPTION>
OPERATING NET
RENTAL OTHER TOTAL INCOME INCOME
REVENUE REVENUE REVENUE (LOSS) (LOSS)
------- ------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
PALMER CORPORATION AND SUBSIDIARIES:................ $ 4,788 $1,397 $ 6,185 $ 540 $ 81
------- ------ ------- ------ -----
RED GIRAFFE:
American Video, Inc. and Red Giraffe Video,
Inc. .......................................... 2,352 229 2,581 114 63
Lancaster Group, Inc. ............................ 310 47 357 8 1
------- ------ ------- ------ -----
2,662 276 2,938 122 64
------- ------ ------- ------ -----
MASSACHUSETTS FRANCHISEES:
New Age Entertainment, Inc. ...................... 1,123 110 1,233 56 36
HB Associates, Inc. .............................. 713 107 820 117 115
Best Entertainment, Inc. ......................... 382 65 447 116 116
Video Innovators, Inc. ........................... 269 42 311 (9) (5)
------- ------ ------- ------ -----
2,487 324 2,811 280 262
------- ------ ------- ------ -----
5 OTHER UNAFFILIATED SELLING GROUPS:
A-Z Video Systems, Inc............................ 995 45 1,040 175 103
------- ------ ------- ------ -----
Showtime, Inc..................................... 976 139 1,115 (6) (8)
------- ------ ------- ------ -----
Video Giant, Inc. ................................ 1,323 141 1,464 (386) (231)
------- ------ ------- ------ -----
VIDEO VIDEO:
Video Video of Parsippany, Inc., Video Video of
Chatham, Inc. and Video Video Management
Corporation.................................... 309 54 363 24 3
Video Video of Westfield, Inc..................... 179 28 207 8 (7)
------- ------ ------- ------ -----
488 82 570 32 (4)
------- ------ ------- ------ -----
VIDEOLAND:
Anthony Cocca's Videoland, Inc.................... 1,430 58 1,488 240 236
Vidko, Inc........................................ 153 8 161 45 45
Kobie-Co Movie Outlet............................. 752 84 836 158 151
------- ------ ------- ------ -----
2,335 150 2,485 443 432
------- ------ ------- ------ -----
$16,054 $2,554 $18,608 $1,200 $ 699
======= ====== ======= ====== =====
<FN>
- ---------------
Included within Other Revenue, which consists primarily of merchandise revenue,
is royalty and advertising income of $394 relating to Palmer Corporation and $8
relating to American Video, Inc. and Red Giraffe Video, Inc.
</TABLE>
See Index to Consolidated Financial Statements set forth in this Prospectus for
cross-reference to historical financial statements of certain of the Sellers.
(2) See the introductory paragraphs under "Unaudited Pro Forma Combined
Condensed Financial Statements."
(3) West Coast includes the historical results of operations of the Company.
Prior Acquisitions include the results of operations of the WCEI Companies
prior to the acquisition thereof by the Company. Recent Acquisitions
includes the historical results of operations of the Sellers.
19
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JANUARY 31, 1996 APRIL 30,1996
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
---------------- -------------
<S> <C> <C> <C>
(4) Adjustment consists of the following (in thousands):
a. To record the elimination of franchisee fees recorded by
the WCEI Companies received from the Massachusetts
Franchisees, as such amounts will be considered
intercompany transactions upon acquisition................ $ 474 $ 131
b. To eliminate rental revenues ($927 for the year ended
January 31, 1996, and $319 for the three months ended April
30, 1996) and merchandise sales ($54 for the year ended
January 31, 1996 and $13 for the three month period ended
April 30, 1996) included in the historical financial
statements of certain Sellers relating to stores not being
acquired pursuant to the Recent Acquisitions.............. 981 332
c. To conform the classification used by a Seller for
advertising reimbursements with those used by the Company (see
corresponding adjustments 5(f) and 6(b)). ................ 1,121 271
------ -----
$2,576 $ 734
====== =====
(5) Adjustment consists of the following (in thousands):
a. To record the elimination of franchisee fees paid by the
Massachusetts Franchisees to the WCEI Companies, as such
amounts will be considered intercompany transactions upon
acquisition............................................... $ 474 131
b. To record the change in historical compensation, including
fringe benefits related to owners of certain Sellers. (In
negotiating the Recent Acquisitions, employment agreements
were entered into in those specific instances where an
owner was to be retained. In all other situations, the
asset purchase agreements specifically exclude employment
reference as such individuals will not be employed by the
Company. The net adjustment includes $988 for the year
ended January 31, 1996 and $523 for the three month period
ended April 30, 1996 related to those owners to be
retained, at lower compensation levels, and $364 for the
year ended January 31, 1996 and $106 for the three month
period ended April 30, 1996 related to those owners not to
be retained.) ............................................ 1,353 629
c. To eliminate store operating costs included in the
historical financial statements of the Sellers relating to
stores not acquired in association with the Recent
Acquisitions.............................................. 953 373
d. To record the reduction in depreciation expense as a
result of depreciating the acquired furnishings, equipment and
leasehold improvements over their estimated remaining
useful lives.............................................. 1,225 242
e. To conform the method of accounting for handling fees
under a revenue sharing agreement with the method used by the
Company................................................... 148 37
f. To conform the classification used by a Seller for fees
payable under a revenue sharing agreement with those used by
the Company (see offsetting adjustment 4(c) and 6(b)). ... (989) (425)
------ -----
$3,164 $ 987
====== =====
(6) Adjustment consists of the following (in thousands):
a. To eliminate the cost of goods sold included in the
historical financial statements of the Sellers relating to
merchandise sales of the stores not acquired in
association with the Recent Acquisitions.................. $ 23 $ 14
b. To conform the classification used by a Seller for
advertising reimbursements and fees payable under a revenue
sharing agreement with those used by the Company (see
corresponding adjustments 4(c) and 5(f)). ................ 2,110 696
------ -----
$2,133 $ 710
====== =====
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
JANUARY 31, ENDED
1996 APRIL 30,1996
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
--------------- -------------
<S> <C> <C> <C>
(7) Adjustment consists of the following (in thousands):
- To record a decrease in videocassette rental inventory
amortization expense resulting from the allocations of
purchase price to videocassette rental tapes of the
acquired entities, based on current replacement cost for
bulk purchases of used tapes, as well as the assignment of
a three year amortizable life which serves to extend the
remaining economic useful lives of videocassette rental
tapes acquired. Replacement cost for bulk purchases of used
tapes is significantly less than the cost of new tape
purchases. As a result, future amortization relating to
these tapes, on a per tape basis, will be significantly
less than the amortization relating to new tape purchases.
In addition, to the extent the acquired tapes have book
values lower than newly purchased tapes, sales of the
acquired tapes should result in higher operating income
than sales of new tape purchases. These favorable effects
resulting from purchase accounting will diminish with the
passage of time and will not extend beyond the three year
period subsequent to acquisition which is the period over
which these tapes will be amortized. The Company believes
that there will be no changes to future revenue associated
with base stock inventory acquired and therefore there is
no corresponding pro forma adjustment to revenue necessary.
The Company believes that its method of amortization, as
well as that of the entities being acquired, results in an
appropriate matching of tape amortization expense with the
revenue received from the associated rental of such
tapes...................................................... $3,100 $872
====== ====
(8) Adjustment consists of the following (in thousands):
a. To record the change in historical compensation, including
fringe benefits related to owners of certain entities to be
acquired. (In negotiating the Recent Acquisitions,
employment agreements were entered into in those specific
instances where an owner was to be retained. In all other
situations, the asset purchase agreements specifically
exclude employment reference as such individuals will not
be employed by the Company. The net adjustment includes
$330 for the year ended January 31, 1996 and $75 for the
three month period ended April 30, 1996 related to those
owners to be retained at lower compensation levels and
$215 for the year ended January 31, 1996 and $0 for the
three month period ended April 30, 1996 related to those
owners not to be retained.) .............................. $ 545 $ 75
b. To record the elimination of historical compensation and
related fringe benefits totaling $1,047 for the year ended
January 31, 1996 and $248 for the three months ended April
30, 1996, and lease expense totaling $201 for the year
ended January 31, 1996 and $11 for the three month period
ended April 30, 1996. (The Company believes its
pre-existing corporate infrastructure is sufficient to
handle the operations being acquired without retaining
certain general and administrative employees of certain
entities to be acquired. As a result, the Company entered
into agreements with certain Sellers relating to the
termination of existing employees and the assumption of a
lease arrangement by the former owners upon
acquisition.) ............................................ 1,248 259
c. To eliminate general and administrative costs included in
the historical financial statements of the Sellers relating to
a business not acquired in association with the Prior
Acquisitions.............................................. 56 --
------ ----
$1,849 $334
====== ====
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JANUARY 31, 1996 APRIL 30,1996
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
---------------- -------------
<S> <C> <C> <C>
(9) Adjustment consists of the following (in thousands):
a. To record goodwill amortization relating to the excess of
the estimated purchase price, including related acquisition
costs, over the estimated fair value of assets acquired in
the Recent Acquisitions (20 years on a straight-line
basis).................................................... $3,422 $912
b. To record the amortization of intangibles, principally
franchise agreements, resulting from the acquisition of the
WCEI Companies (15 years on a straight-line basis)........ 190 --
------ ----
$3,612 $912
====== ====
(10) Adjustment consists of the following (in thousands):
a. To eliminate historical interest expense due to the
partial use of offering proceeds to extinguish outstanding
borrowings................................................ $1,376 $431
b. To record interest expense related to borrowings under the
Credit Facility at the lending bank's base rate (8.25% at
January 31, 1996 and at April 30, 1996)................... (358) (90)
------ ----
$1,018 $341
====== ====
(11) Adjustment consists of the following (in thousands):
- To eliminate minority shareholder interest acquired as part
of the Recent Acquisitions................................. $ 62 $ 27
====== ====
(12) Adjustment consists of the following (in thousands):
a. To reflect the estimated effect on the income tax
provision as if the Prior Acquisitions and Recent Acquisitions
had been taxed as C corporations. ........................ $ 517 $358
b. To reflect the income tax effect on the pro forma
adjustments (4) through (11) above at an effective tax rate of
39%, exclusive of non-deductible goodwill totaling $1,347
for the year ended January 31, 1996 and $355 for the three
month period ended April 30, 1996 ........................ 2,528 580
------ ----
$3,045 $938
====== ====
(13) Unaudited pro forma net income per share has been calculated
for the year ended January 31, 1996 and the three month period
ended April 30, 1996 by dividing the unaudited pro forma net
income amount by the weighted average number of shares of
common stock outstanding (4,756,000 at January 31, 1996 and
April 30, 1996). Unaudited pro forma net income reflects an
adjustment to the consolidated statement of operations to give
effect to a merger discussed more fully in the company's
consolidated financial statements included elsewhere herein
(the "Merger") and the 0.340-for-1 reverse stock split as if
they had occurred as of February 1, 1992. Accordingly, the pro
forma income tax provision and pro forma net income have been
calculated as if each entity included in the consolidated
statement of operations had been included in the Company's
consolidated income tax returns and subject to corporate
income taxation as a C Corporation during all periods
presented.
</TABLE>
22
<PAGE> 25
<TABLE>
<S> <C>
(14) Unaudited pro forma net income per share for the year ended
January 31, 1996 and the three month period ended April 30,
1996 has been calculated by dividing unaudited pro forma net
income by the pro forma weighted average number of shares of
Common Stock outstanding after giving effect to (i) the
Merger, (ii) the issuance of shares upon formation of the
Company, (iii) the 0.340-for-1 reverse stock split and the
shares issued in conjunction with this offering, (iv) the
shares issued in conjunction with the Recent Acquisitions, (v)
repayment of all existing outstanding debt, (vi) borrowings
under the Credit Facility and (vii) the impact of the Warrant
and a portion of the Convertible Note, as if all activity
occurred as of February 1, 1995. See Notes 1 and 7 to the
Company's consolidated financial statements. The pro forma
weighted average number of common shares used to calculate pro
forma net income per share at January 31, 1996 and April 30,
1996, is 12,322,075.
</TABLE>
23
<PAGE> 26
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The selected historical financial data presented under the captions
Statement of Operations Data for the three month periods ended April 30, 1995
and 1996, and Balance Sheet data at April 30, 1996 have been derived from
unaudited consolidated financial statements of the Company, appearing elsewhere
herein. The selected historical financial data presented under the captions
Statement of Operations Data for the three years ended January 31, 1996, and
Balance Sheet Data at January 31, 1996 and January 31, 1995 have been derived
from the Company's consolidated financial statements, appearing elsewhere
herein, which were audited by Price Waterhouse LLP. The selected historical
financial data presented under the captions Statement of Operations Data for the
year ended January 31, 1993 and Balance Sheet Data at January 31, 1994 and
January 31, 1993, have been derived from the Company's consolidated statement of
operations and balance sheet, which were audited by Price Waterhouse LLP and not
included in this Prospectus. The selected historical financial data presented
under the captions Statement of Operations Data and Balance Sheet Data at and
for the year ended January 31, 1992 have been derived from unaudited financial
statements of the Company which have not been included in this Prospectus. The
unaudited pro forma financial data presented under the captions Statement of
Operations Data and Balance Sheet Data at and for the year ended January 31,
1996, have been derived from the unaudited pro forma combined condensed
financial statements, certain of which appear elsewhere herein. The unaudited
pro forma combined financial data do not purport to represent what the Company's
results of operations and financial position would actually have been had the
Recent Acquisitions or the Public Offering actually occurred at the dates
indicated, or to project the Company's results of operations or financial
position for any future period. The Selected Historical and Pro Forma Combined
Financial Data set forth below should be read in conjunction with the financial
statements and notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Unaudited Pro Forma Combined
Condensed Financial Statements" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------------------------
THREE MONTHS
YEAR ENDED JANUARY 31, ENDED APRIL 30
------------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------- ------ ------
(IN THOUSANDS, EXCEPT STORE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $ 921 $1,120 $2,520 $6,503 $14,719 $2,675 $4,722
Operating costs and expenses............. 995 1,225 2,564 6,118 13,503 2,453 4,271
------ ------ ------ ------ ------- ------ ------
Operating income (loss).................. (74) (105) (44) 385 1,216 222 451
Interest expense, net and other.......... 26 45 42 118 640 37 276
------ ------ ------ ------ ------- ------ ------
Income (loss) before income taxes........ (100) (150) (86) 267 576 185 175
Income taxes (benefit)................... -- -- (14) 63 242 50 74
------ ------ ------ ------ ------- ------ ------
Net income (loss)........................ $ (100) $ (150) $ (72) $ 204 $ 334 $ 135 $ 101
====== ====== ====== ====== ======= ====== ======
Pro forma net income (loss) per share.... $(0.35)(2) $(0.36)(2) $(0.07)(2) $ 0.12(2) $ 0.06(2) $ 0.03(2) $ 0.02(2)
OTHER DATA:
Depreciation and amortization(4)......... $ 512 $ 418 $ 870 $1,628 $ 2,585 $ 612 $ 623
Purchases of videocassette rental
inventory.............................. 232 471 685 1,430 2,002 537 570
STORE DATA:
Increase (decrease) in same store
revenue(5)............................. -- 14.9% (6.1)% 14.2% 4.8% 2.3% 3.5%
Company-owned stores at end of period.... 6 8 14 28 28 28 28
Franchised stores at end of period....... -- -- -- -- 304 308 296
------ ------ ------ ------ ------- ------ ------
Total stores at end of period............ 6 8 14 28 332 336 324
====== ====== ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(1)
-------------------------------
THREE MONTHS
ENDED
YEAR ENDED APRIL 30,
JAN. 31, 1996 1996
------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $82,175 $22,596
Operating costs and expenses............. 74,180 19,688
------- -------
Operating income (loss).................. 7,995 2,908
Interest expense, net and other.......... (447) 242
------- -------
Income (loss) before income taxes........ 8,442 2,666
Income taxes (benefit)................... 3,810 1,179
------- -------
Net income (loss)........................ $ 4,632 $ 1,487
======= =======
Pro forma net income (loss) per share.... $ 0.38(3) $ 0.12(3)
OTHER DATA:
Depreciation and amortization(4)......... $19,726 $ 4,629
Purchases of videocassette rental
inventory.............................. 18,246 $ 4,697
STORE DATA:
Increase (decrease) in same store
revenue(5)............................. 1.5% 0.5%
Company-owned stores at end of period.... 197 200
Franchised stores at end of period....... 310 303
------- -------
Total stores at end of period............ 507 503
======= =======
</TABLE>
(footnotes on following page)
24
<PAGE> 27
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------------
PRO FORMA(1)
JANUARY 31, ------------
------------------------------------------------ APRIL 30, APRIL 30,
1992 1993 1994 1995 1996 1996 1996
----- ----- ------ ------ ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents......... $ -- $ 23 $ 12 $ 45 $ 611 $ 207 $ 1,158
Videocassette rental inventory,
net............................. 67 162 388 1,464 1,509 1,693 14,317
Total assets...................... 216 360 770 3,631 16,515 18,606 104,779
Long-term debt, less current
portion......................... 328 302 332 738 7,101 7,505 4,361
Total liabilities................. 656 906 1,338 3,266 15,972 17,962 18,494
Stockholders' equity.............. (440) (546) (568) 365 543 644 86,285
<FN>
- ---------------
(1) For a discussion of the assumptions and adjustments underlying the unaudited
pro forma combined financial data, see "Unaudited Pro Forma Combined
Condensed Financial Statements."
(2) Unaudited pro forma net income (loss) per share has been calculated for each
of the years in the five year period ended January 31, 1996 and for each of
the three month periods ended April 30, 1995 and 1996 by dividing the
respective unaudited pro forma net income (loss) amounts by the weighted
average number of shares of common stock outstanding (289,000, 418,000,
843,000, 1,693,000 and 4,756,000, as of January 31, 1992, 1993, 1994, 1995
and 1996, respectively and 4,756,000 as of April 30, 1995 and 1996).
Unaudited pro forma net income (loss) reflects an adjustment to the
consolidated statement of operations to give effect to the Merger and the
0.340-for-1 reverse stock split as if they had occurred as of February 1,
1992. Accordingly, the pro forma income tax provision (benefit) and pro
forma net income (loss) have been calculated as if each entity included in
the consolidated statement of operations had been included in the Company's
consolidated income tax returns and subject to corporate income taxation as
a C Corporation during all periods presented.
(3) Unaudited pro forma net income per share for the year ended January 31, 1996
has been calculated by dividing unaudited pro forma net income by the
weighted average number of shares of Common Stock outstanding after giving
effect to (i) the Merger, (ii) the issuance of shares upon formation of the
Company, (iii) the 0.340-for-1 reverse stock split and the shares issued in
conjunction with this offering, (iv) the shares issued in conjunction with
the Recent Acquisitions, (v) the repayment of all existing outstanding debt,
(vi) borrowings under the Credit Facility and (vii) the impact of the
Warrant, as if all activity occurred as of February 1, 1995. See Notes 1 and
7 to the Company's consolidated financial statements. The pro forma weighted
average number of common shares used to calculate pro forma net income per
share at January 31, 1996 and April 30, 1996 is 12,322,075.
(4) The Company's policy is that videocassette rental inventory, which includes
video games, is stated at cost and is amortized over its estimated economic
life with no provision for salvage value. Videocassettes that are considered
base stock are amortized over 36 months on a straight-line basis. New
releases are amortized as follows: the first through third copies of each
title per store are amortized as base stock and succeeding copies of each
title per store are amortized over nine months on a straight-line basis.
(5) Same store revenue is defined as the aggregate revenues from Company-owned
stores open for the entirety of the periods being compared. Increase
(decrease) reflects change from prior fiscal year.
</TABLE>
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since 1989, the Company has experienced rapid growth in revenue primarily
as a result of acquiring video specialty store chains, opening new stores and
increasing existing store revenues. The number of stores owned and operated by
the Company increased from one at June 30, 1989 to 28 at January 31, 1996, while
during the same period the number of franchised stores increased from none to
304. Until 1993, all of the Company's stores were located in Ohio. After
acquiring the Videosmith[Registered Trademark] chain in 1994, the Company owned
and operated stores in Ohio and Massachusetts. In 1995, the acquisition of the
franchise-related operating assets of the WCEI Companies provided the Company
with 305 franchised stores located principally in Pennsylvania, New Jersey,
Illinois, Maryland, Massachusetts, Ohio and Florida as well as purchasing,
management information and retail operations systems developed specifically to
manage video specialty stores. Upon consummation of the Recent Acquisitions,
the Company owned and operated 200 stores and was the franchisor of 303 stores.
The Recent Acquisitions significantly increased the number of stores in
Pennsylvania, Ohio, New Jersey and New York and expanded the Company's stores
to a total of 25 states.
Historically, the Company's revenues have been derived primarily from the
rental of videocassettes and video games together with sales of previously
viewed videocassettes, ("rental revenues"), while lesser amounts have been
derived from payments from franchisees ("franchise fees") and sales of
videocassettes, miscellaneous merchandise and other sales ("merchandise and
other sales"). Acquisitions of franchised stores and stores with differing
levels of merchandise and other sales compared with rental revenues have had,
and may in the future have, an effect on the Company's mix of revenue
components. See "-- Pro Forma Results of Operations." The Company believes that
convenience, selection, customer service, weather and, to a lesser extent, price
are the most significant factors in determining rental volumes. Significant
increases in rental revenues largely depend upon the appeal of new releases
coming from motion picture producers and video game developers. Management plans
and executes various buying, marketing and operating strategies so as to take
maximum advantage of those competitive factors which are under its control. The
Company receives franchise fee payments monthly in arrears from its
approximately 300 franchised stores. The franchise fee payment due from each
franchisee is equal to 7% of the aggregate revenues from all of the franchisee's
stores for the prior month, of which 2% of such aggregate revenues has been
devoted to paying marketing and advertising costs. Merchandise and other sales
are derived primarily from new videocassettes sold directly to customers, sales
of supplies to franchisees, video game sales and the sale of confectionery and
other movie-related merchandise.
Store operating expenses generally consist of expenses incurred at the
store level, including amortization of videocassette and video game rental
inventory, personnel expense, lease expense and utility expense and
depreciation. For purposes of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," videocassette and video game
rental inventory amortization expense has been removed from store operating
expenses and discussed separately. Videocassette and video game rental inventory
amortization expense is a substantial component of total expenses and will vary
depending on the amortization policy adopted. The Company's policy is to state
videocassette rental inventory, which includes video games, at cost and amortize
inventory over its estimated economic life with no provision for salvage value.
Videocassettes that are base stock are amortized over 36 months on a
straight-line basis. New release videocassettes are amortized as follows: the
first through third copies of each title per store are amortized as base stock
and succeeding copies of each title per store are amortized over nine months on
a straight-line basis. The Company believes that its method of amortization, as
well as that of the entities being acquired, results in an appropriate matching
of tape amortization expense with the revenue received from the associated
rental of such tapes.
Cost of sales is a smaller component of total expenses consisting primarily
of costs associated with purchasing videocassettes to be sold directly to
customers, supplies to be sold to franchisees, video games and confectionery
items. General and administrative expenses are non-store level expenses and
include general corporate expenses such as marketing and advertising, personnel,
administration, legal and accounting and amortization expenses. These functions
are primarily performed at the Company's headquarters in Philadelphia,
Pennsylvania.
Intangible assets are primarily comprised of franchise rights and goodwill.
Franchise rights are amortized on a straight-line basis over 15 years, the
estimated remaining economic life of such rights. Goodwill is amortized on a
straight-line basis over 20 years.
26
<PAGE> 29
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth for the periods indicated, on a historical
basis and on a pro forma basis, statement of operations data and other data
expressed as a percentage of total revenue and the number of stores open at the
end of each period.
<CAPTION>
HISTORICAL
------------------------------------------ PRO FORMA
THREE MONTHS ---------------------------
ENDED YEAR
YEAR ENDED JANUARY 31, APRIL 30, ENDED THREE MONTHS
------------------------ -------------- JANUARY 31, ENDED APRIL 30,
1994 1995 1996 1995 1996 1996 1996
----- ----- ----- ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Rental revenues...................... 89.2% 86.2% 62.6% 87.9% 51.1% 78.1% 80.3%
Franchise fees....................... -- -- 21.8 -- 29.2 7.7 4.8
Merchandise and other sales.......... 10.8 13.8 15.6 12.1 19.7 14.2 14.9
----- ----- ----- ----- ----- ----- -----
Total.............................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Operating costs and expenses:
Store operating expenses(1).......... 51.7 52.7 42.3 58.5 31.1 42.7 41.8
Cost of sales........................ 1.7 5.9 9.4 4.9 14.7 9.3 8.5
Amortization of videocassette and
video game rental inventory(2)..... 31.1 22.1 13.4 19.3 8.2 17.9 17.4
General and administrative........... 17.2 13.4 24.9 9.0 33.6 15.7 14.7
Intangible amortization.............. -- -- 1.7 -- 2.8 4.7 4.7
----- ----- ----- ----- ----- ----- -----
Total.............................. 101.7 94.1 91.7 91.7 90.4 90.3 87.1
----- ----- ----- ----- ----- ----- -----
Operating income (loss).............. (1.7) 5.9 8.3 8.3 9.6 9.7 12.9
Non-operating (income) expense,
net................................ 1.7 1.8 4.4 1.4 5.9 (0.5) 1.1
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes.... (3.4) 4.1 3.9 6.9 3.7 10.2 11.8
Provision (benefit) for income
taxes.............................. (0.5) 1.0 1.6 1.9 1.6 4.6 5.2
----- ----- ----- ----- ----- ----- -----
Net income (loss).................... (2.9)% 3.1% 2.3% 5.0% 2.1% 5.6% 6.6%
===== ===== ===== ===== ===== ===== =====
OTHER DATA:
Purchases of videocassette rental
inventory.......................... 27.2% 22.0% 13.6% 20.1% 12.1% 22.2% 20.8%
STORE DATA:
Increase (decrease) in same store
revenue(3)......................... (6.1)% 14.2% 4.8% 2.3% 3.5% 1.5% 0.5%
Company-owned stores open at end of
period............................. 14 28 28 28 28 197 199
Franchised stores open at end of
period............................. -- -- 304 308 296 310 303
----- ----- ----- ----- ----- ----- -----
Total stores open at end of period... 14 28 332 336 324 507 502
===== ===== ===== ===== ===== ===== =====
<FN>
- ---------------
(1) Exclusive of amortization of videocassette and video game rental inventory.
(2) The Company's tape amortization policy requires that videocassette rental
inventory, which includes video games, is stated at cost and is amortized
over its estimated economic life with no provision for salvage value.
Videocassettes that are considered base stock are amortized over 36 months
on a straight-line basis. New releases are amortized as follows: the first
through third copies of each title per store are amortized as base stock and
succeeding copies of each title per store are amortized over nine months on
a straight-line basis.
(3) Same store revenue is defined as the aggregate revenues from Company-owned
stores open for the entirety of the periods being compared. Increase
(decrease) reflects change from prior fiscal year, or equivalent three month
period.
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
Pro forma results of operations are not necessarily indicative of what the
Company's results of operations would have been had the Company actually made
the Recent Acquisitions reflected in the Pro Forma Statement of Operations Data
on the dates indicated, nor do they purport to project future results of
27
<PAGE> 30
operations. Any significant acquisitions in future periods could impact the
future mix of rental revenues, franchise fees and merchandise and other sales
and (because each such component of revenues involves different types of
expenses) the future mix of expenses and the Company's operating margins. See
"Risk Factors -- Acquisition Risks."
Revenues. Rental revenues represented 78.1% and 80.3% of pro forma total
revenues for the year ended January 31, 1996 and for the three months ended
April 30, 1996, respectively, as compared with 62.6% and 51.1% of historical
total revenues for the same periods. Merchandise and other sales represented
14.2% and 14.9%, respectively, of total revenues for the year ended January 31,
1996 and for the three months ended April 30, 1996, respectively, on a pro forma
basis as compared with 15.6% and 19.7%, respectively, on a historical basis and
franchise fees represented 7.7% and 4.8% of total revenues on a pro forma basis
for the year ended January 31, 1996 and for the three months ended April 30,
1996, respectively, as compared with 21.8% and 29.2%, respectively, on a
historical basis. These differences reflect the fact that the primary revenue
source for the companies acquired in the Recent Acquisitions is rental revenue.
The Company believes that future Acquisitions, if any, of owned and operated
stores (particularly Acquisitions of existing West Coast Video(R) franchised
stores) should increase rental revenues as a percentage of total revenues.
Store Operating Expenses. Store operating expenses represented 42.7% and
41.8%, respectively, of pro forma total revenues for the year ended January 31,
1996 and for the three months ended April 30, 1996, respectively, as compared
with 42.3% and 31.1%, respectively, of historical total revenues for the same
periods. In the future, a change in the mix of the number of Company-owned and
franchised stores should result in a change in store operating expenses as a
percentage of total revenues, since franchising operations involve no store
operating expenses.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game inventory was 17.9% and
17.4% of total pro forma revenues for the year ended January 31, 1996 and for
the three months ended April 30, 1996, respectively, compared to 13.4% and 8.2%,
respectively, of historical total revenues for the same periods, because the
rental of purchased stocks of videocassettes and video games constitutes a
larger component of the Company's business on a pro forma basis than on an
historical basis. Pro forma and historical amortization of videocassette and
video game rental inventory as a percentage of rental revenue were approximately
the same within each period.
General and Administrative Expenses. General and administrative expenses
were 15.7% and 14.7% of pro forma total revenues for the year ended January 31,
1996 and for the three months ended April 30, 1996, respectively, as compared
with 24.9% and 33.6%, respectively, of total historical revenues during the same
periods. This difference was due primarily to a consolidation of the
administrative function on a pro forma basis so that the incremental increase in
revenues was greater than the incremental increase in general and administrative
costs. The Company believes that its current general and administrative
infrastructure can support additional Acquisitions without major augmentation
which should result in improving general and administrative expense margins.
Net Income. Net income was 5.6% and 6.6% of revenues on a pro forma basis
for the year ended January 31, 1996 and for the three months ended April 30,
1996, respectively, as compared with 2.3% and 2.1%, respectively, for the
Company historically during the same periods. This difference was due primarily
to the expected economies of scale on a pro forma basis compared to the
Company's current operations.
HISTORICAL RESULTS OF OPERATIONS FOR THE COMPANY
The Company's revenues constituted 17.9% and 20.8% of pro forma combined
total revenues for the fiscal year ended January 31, 1996 and for the three
months ended April 30, 1996, respectively.
THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 30,
1995
Revenues. Revenues increased $2.0 million, or 74.1%, from $2.7 million for
the three months ended April 30, 1995 to $4.7 million for the three months ended
April 30, 1996. Of this increase, approximately $1.4 million of franchise fees
and $0.5 million of associated product sales was contributed by the Company's
franchise-related operations following the acquisition on July 12, 1995 of the
operating assets of the WCEI Companies relating to the West Coast Video
franchise system (hereinafter, the "franchise business").
28
<PAGE> 31
Merchandise and other sales increased an additional $0.1 million due to a video
game store acquired from the WCEI Companies and an increase in merchandise and
other sales in existing stores.
Rental revenues increased $0.06 million or 2.6% from $2.35 million for the
three months ended April 30, 1995 to $2.41 million for the three months ended
April 30, 1996 due primarily to the rental revenues of a video game store
acquired from the WCEI Companies and an increase in same store rental revenues.
Merchandise sales and other sales increased $0.6 million or 200% from $0.3
million for the three months ended April 30, 1995 to $0.9 million for the three
months ended April 30, 1996 and franchise fee income increased from zero for
three months ended April 30, 1995 to $1.4 million for the three months ended
April 30, 1996 primarily due to the acquisition of the franchise business on
July 12, 1995.
Store Operating Expenses. Store operating expenses net of amortization of
videocassette rental inventory decreased $0.1 million, or 6.3%, from $1.6
million for the three months ended April 30, 1995 to $1.5 million for the three
months ended April 30, 1996. As a percentage of total revenues, store operating
expenses decreased 27.4 percentage points from 59.3% for the three months ended
April 30, 1995 to 31.9% for the three months ended April 30, 1996. In addition,
as a percentage of rental revenues and merchandise and other sales (excluding
franchise fees), store operating costs decreased 13.8 percentage points, from
59.3% for the three months ended April 30, 1995 to 45.5% for the three months
ended April 30, 1996. These changes are primarily the effect of the acquisition
of the franchise business which contributed $1.9 million of total revenues ($1.4
million of franchise fees and $0.5 million of merchandise and other sales)
during the period, but which involve virtually no store operating expenses.
Cost of Sales. Cost of sales increased $0.6 million, or 600%, from $0.1
million for the three months ended April 30, 1995 to $0.7 million for the three
months ended April 30, 1996, primarily as a result of the acquisition of the
franchise business (which accounted for $0.5 million or 83.3% of the increase)
and increased costs of $0.1 million or 16.7%, resulting from increased sales. As
a percentage of total revenues, cost of sales increased by 11.2 percentage
points, from 3.7% for the three months ended April 30, 1995 to 14.9% for the
three months ended April 30, 1996, due primarily to a change in the mix of total
revenues in favor of merchandise and other sales and the acquisition of the
franchise business. The franchise business had merchandise and other sales that
were 26.3% of its total revenues, which is higher than the comparable percentage
for the Company exclusive of the franchise business (12.5%) for the three months
ended April 30, 1996. As a percentage of merchandise and other sales, cost of
sales increased by 44.5 percentage points, from 33.3% for the three months ended
April 30, 1995 to 77.8% for the three months ended April 30, 1996, primarily
because sales to franchisees are made at substantially lower margins (17.6%)
than sales to customers.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
decreased $0.1 million, or 20.0%, from $0.5 million for the three months ended
April 30, 1995 to $0.4 million for the three months ended April 30, 1996. As a
percentage of rental revenues, this amortization decreased 4.1 percentage
points, from 20.8% for the quarter ended April 30, 1995 to 16.7% for the quarter
ended April 30, 1996. This reflects a change in the mix of movies purchased
during the period, from those requiring a shorter amortization period (in 1995)
to those which necessitate longer amortization (in 1996).
General and Administrative Expense. General and administrative expenses,
which include intangible amortization, increased $1.5 million, or 750%, from
$0.2 million for the three months ended April 30, 1995 to $1.7 million for the
three months ended April 30, 1996. As a percentage of total revenues, general
and administrative expenses increased 28.8 percentage points from 7.4% for the
three months ended April 30, 1995 to 36.2% for the three months ended April 30,
1996. This change resulted from increased head count and non-store operating
costs from the acquisition of the franchise business totaling $1.4 million.
General and administrative expenses of the franchise business equaled 70.0% of
its total revenues because the principal cost of its business is the
administrative cost of providing support services to franchisees.
Non-Operating Expense, Net. Non-operating expense, net increased $0.26
million to $0.3 million for the three months ended April 30, 1996, a 650%
increase from $0.04 million recorded for the three months
29
<PAGE> 32
ended April 30, 1995. Interest expense comprises virtually all of this total. As
a percentage of total revenues, interest expense increased 4.9 percentage points
from 1.5% for the three months ended April 30, 1995 to 6.4% for the three months
ended April 30, 1996. The increase is attributable to additional interest
expense incurred in connection with the acquisition of the franchise business.
Net Income. As a result of the foregoing, net income remained unchanged at
$0.1 million for the quarter ended April 30, 1996.
YEAR ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED JANUARY 31, 1995
Revenues. Revenues increased $8.2 million, or 126.2%, from $6.5 million
for the year ended January 31, 1995 to $14.7 million for the year ended January
31, 1996. Of this increase, approximately $4.2 million was contributed by the 14
Boston-based Videosmith[Registered Trademark] stores, which were acquired by
the Company on August 5, 1994 and were therefore included in the Company's
accounts for all 12 months of the fiscal year ended January 31, 1996 but less
than six months of the fiscal year ended January 31, 1995. An additional $3.2
million of franchise fees and $0.7 million of associated product sales were
contributed by the Company's franchise-related operations following the
acquisition on July 12, 1995 of the franchise business. The video game store
acquired from the WCEI Companies contributed an additional $0.3 million of
merchandise and other sales. Revenues from the Company's other video stores
decreased $0.2 million reflecting the closing of one store, a delay in opening
another store and changes in sources of supply.
Rental revenues increased $3.6 million, or 64.3%, from $5.6 million for the
year ended January 31, 1995 to $9.2 million for the year ended January 31, 1996,
due primarily to having 12 months of revenues, as compared to less than six
months of revenues, from the Videosmith[Registered Trademark] stores and also
to an increase of $0.2 million in revenues from the Company's stores. Increases
occurred primarily in Videosmith[Registered Trademark] stores, principally as a
result of continuing growth in two stores, the elimination of a closely
situated competitor from one market and a change of management personnel early
in 1995 in a third store. During the last six and one half months of the year
ended January 31, 1996, as a result of the acquisition of the franchise
business, franchise fees became, for the first time, a source of revenue for
the Company and generated 21.8% of total revenues for the entire period.
Merchandise and other sales increased $1.4 million, or 156.3%, from $0.9
million for the year ended January 31, 1995 to $2.3 million for the year ended
January 31, 1996. In the six and one half months following the Company's
acquisition of the franchise business, sales of supplies to franchisees
amounted to $0.7 million and retail sales at the video game store acquired from
the WCEI Companies amounted to an additional $0.3 million. Merchandise and
other sales also grew faster than rental revenues during the period because the
Company owned the Videosmith[Registered Trademark] stores for all 12 months of
the year (compared to less than six months of the prior year) and merchandise
and other sales accounted for a larger percentage of total revenues for the
Videosmith[Registered Trademark] stores (14.7%) than for the Company's other
video specialty stores (6.3%) due to Videosmith[Registered Trademark]'s
historical emphasis on merchandise and other sales in comparison with most
other chains in the industry.
Store Operating Expenses. Store operating expenses net of amortization of
videocassette rental inventory increased $2.8 million, or 81.7%, from $3.4
million for the fiscal year ended January 31, 1995 to $6.2 million for the
fiscal year ended January 31, 1996, reflecting 12 months of operations for the
Videosmith[Registered Trademark] stores and the acquisition of the video game
store for six and one half months. As a percentage of total revenues, store
operating expenses decreased 10.4 percentage points from 52.7% for the fiscal
year ended January 31, 1995 to 42.3% for the fiscal year ended January 31,
1996. This decrease was primarily an effect of the acquisition of the franchise
business, which contributed $3.9 million of revenues during the period but
involved no store operating expenses. As a percentage of rental revenues and
merchandise and other sales (excluding franchise fees), store operating costs
increased 1.5 percentage points, from 52.7% for the year ended January 31, 1995
to 54.2% for the year ended January 31, 1996, due primarily to higher occupancy
and payroll costs per store in metropolitan Boston as compared to Ohio.
Cost of Sales. Cost of sales increased $1.0 million, or 262.3%, from $0.4
million for the year ended January 31, 1995 to $1.4 million for the year ended
January 31, 1996, primarily as a result of the acquisition of the franchise
business (which accounted for $0.8 million of the increase) and the expansion of
the Company's
30
<PAGE> 33
product sales resulting from the Videosmith[Registered Trademark] acquisition
(which accounted for $0.1 million of the increase). As a percentage of total
revenues, cost of sales increased by 3.5 percentage points, from 5.9% for the
year ended January 31, 1995 to 9.4% for the year ended January 31, 1996, due
primarily to a change in the mix of total revenues in favor of merchandise and
other sales and the acquisition of the franchise business. The franchise
business had merchandise and other sales that were 24.0% of its total revenues,
which is higher than the comparable percentage for the Company historically. As
a percentage of merchandise and other sales, cost of sales increased by 17.6
percentage points, from 42.6% for the year ended January 31, 1995 to 60.2% for
the year ended January 31, 1996, primarily because sales to franchisees (which
represent 69.0% of the total merchandise and other sales of the franchise
business) are made at substantially lower margins.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of videocassette and video game rental inventory increased $0.6
million, or 37.3%, from $1.4 million for the fiscal year ended January 31, 1995
to $2.0 million for the fiscal year ended January 31, 1996, due to the
expansion of the Company's rental business through the Videosmith[Registered
Trademark] acquisition which occurred on August 5, 1994. As a percentage of
total revenues, amortization of videocassette and video game rental inventory
decreased 8.7 percentage points from 22.1% for the fiscal year ended January
31, 1995 to 13.4% for the fiscal year ended January 31, 1996 primarily as a
result of a change in the mix of total revenues in favor of franchise fees and
merchandise and other sales. As a percentage of rental revenues, amortization
of videocassette and video game rental inventory decreased 4.2 percentage
points from 25.6% for the year ended January 31, 1995 to 21.4% for the year
ended January 31, 1996, due primarily to the difference in the ratio of
videocassette purchases to rental revenues between the Videosmith[Registered
Trademark] stores (a ratio of approximately 18%) and the Company's other stores
(a ratio of approximately 27%), which reflects the greater than
industry-average demand for the rental of film classics and other catalog
titles, as compared to new releases and video games, at Videosmith[Registered
Trademark] stores.
General and Administrative Expenses. General and administrative expenses,
including intangible amortization, increased $3.1 million, or 349.8%, from $0.9
million for the fiscal year ended January 31, 1995 to $4.0 million for the
fiscal year ended January 31, 1996, reflecting increased head count and
non-store operating costs acquired from the WCEI Companies of $2.8 million and
approximately $0.4 million of general and administrative expenses attributable
to including 12 months (rather than less than six months), of
Videosmith[Registered Trademark] operations. As a percentage of total revenues,
general and administrative expenses increased 13.2 percentage points from
13.4% for the fiscal year ended January 31, 1995 to 26.6% for the fiscal year
ended January 31, 1996, primarily as a result of the acquisition of the
franchise business, whose general and administrative expenses equalled 65.8% of
its total revenues because the principal cost of this business is the
administrative cost of providing support services to franchisees.
Non-Operating Expense, Net. Non-operating expense, net, increased $0.5
million, or 442.4%, from $0.1 million for the fiscal year ended January 31, 1995
to $0.6 million for the fiscal year ended January 31, 1996. As a percentage of
total revenues, non-operating expense, net, increased 2.6 percentage points from
1.8% for the fiscal year ended January 31, 1995 to 4.4% for the fiscal year
ended January 31, 1996 due to approximately $0.5 million of additional interest
expense incurred in connection with the Videosmith[Registered Trademark]
acquisition and the acquisition of the franchise business from the WCEI
Companies.
Net Income. As a result of the foregoing, particularly the acquisition of
the franchise business and the inclusion of 12 months of Videosmith[Registered
Trademark] operations, net income increased $0.1 million, from $0.2 million for
the year ended January 31, 1995 to $0.3 million for the year ended January 31,
1996.
YEAR ENDED JANUARY 31, 1995 COMPARED TO YEAR ENDED JANUARY 31, 1994
Revenues. Revenues increased $4.0 million, or 158.1%, from $2.5 million
for the year ended January 31, 1994 to $6.5 million for the year ended January
31, 1995. Of this increase, approximately $3.8 million was a result of the
Company's acquisition of the 14 Videosmith[Registered Trademark] stores on
August 5, 1994. The remaining $0.2 million is attributable to revenue increases
at the Company's Nostalgia Ventures stores.
Rental revenues accounted for 86.2%, and merchandise and other sales
accounted for 13.8%, of total revenues for the year ended January 31, 1995,
compared with 89.2% and 10.8%, respectively, for the year ended January 31,
1994. The Company had no franchise fee revenues during either year. Merchandise
and other sales increased faster than rental revenues because the
Videosmith[Registered Trademark] stores had a higher ratio of
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merchandise and other sales to rental revenues than the Company's other stores
due to Videosmith[Registered Trademark]'s historical emphasis on merchandise
and other sales in comparison with most other chains in the industry.
Store Operating Expenses. Store operating expenses increased $2.1
million, or 163.4%, from $1.3 million in the year ended January 31, 1994 to
$3.4 million in the year ended January 31, 1995, reflecting the inclusion of
the store operating expenses of the 14 Videosmith[Registered Trademark] stores
for six months in the year ended January 31, 1995 (as compared to no portion of
the year ended January 31, 1994). As a percentage of total revenues, store
operating expenses increased 1.0 percentage point from 51.7% in the year ended
January 31, 1994 to 52.7% in the year ended January 31, 1995. This increase was
primarily the result of higher occupancy and payroll costs per store in
metropolitan Boston as compared with Ohio.
Cost of Sales. Cost of sales increased $0.4 million, or 768.2%, from
$0.04 million for the year ended January 31, 1994 to $0.4 million for the year
ended January 31, 1995, reflecting the sales activities of the
Videosmith[Registered Trademark] stores. As a percentage of total revenues, cost
of sales increased by 4.2 percentage points, from 1.7% for the year ended
January 31, 1994 to 5.9% for the year ended January 31, 1995, due primarily to a
change in the mix of total revenues in favor of merchandise and other sales in
accordance with Videosmith[Registered Trademark]'s historical emphasis on such
sales. As a percentage of merchandise and other sales, cost of sales increased
by 26.4 percentage points, from 16.2% for the year ended January 31, 1994 to
42.6% for the year ended January 31, 1995, due primarily to differences in
product mix between the Videosmith[Registered Trademark] stores and the
Company's other stores.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of videocassette and video game rental inventory increased $0.6
million, or 83.2%, from $0.8 million in the year ended January 31, 1994 to $1.4
million in the year ended January 31, 1995, reflecting the rental activities of
the Videosmith[Registered Trademark] stores that were acquired in August 1994.
As a percentage of total revenues, amortization of videocassette and video game
rental inventory decreased 9.0 percentage points from 31.1% in the year ended
January 31, 1994 to 22.1% in the year ended January 31, 1995, and as a
percentage of rental revenues, amortization of videocassette and video game
rental inventory decreased 9.3 percentage points, from 34.9% for the year ended
January 31, 1994 to 25.6% for the year ended January 31, 1995. These decreases
were primarily due to the lower ratio of videocassette purchases to
videocassette rental revenue between the Videosmith[Registered Trademark]
stores during such period (a ratio of approximately 15%) and the Company's
other stores (a ratio of approximately 35%), which reflects the greater than
industry-average demand for the rental of film classics and other catalog
titles, as compared to new releases and video games, at Videosmith[Registered
Trademark] stores.
General and Administrative Expenses. General and administrative
expenses increased $0.5 million, or 101%, from $0.4 million in the year ended
January 31, 1994 to $0.9 million in the year ended January 31, 1995. As
percentage of total revenues, general and administrative expenses decreased 3.8
percentage points from 17.2% of revenues in the year ended January 31, 1994 to
13.4% in the year ended January 31, 1995, primarily as a result of reduced
legal expenses. The Videosmith[Registered Trademark] stores had general and
administrative expenses of 13.8% of revenues in the year ended January 31,
1995.
Non-Operating Expense, Net. Non-operating expense, net, increased
$0.06 million from $0.04 million in the fiscal year ended January 31, 1994 to
$0.1 million in the fiscal year ended January 31, 1995. As a percentage of
total revenues, non-operating expense, net, increased 0.1 percentage points
from 1.7% of revenues during the year ended January 31, 1994 to 1.8% during the
year ended January 31, 1995 as a result of the additional interest expense
incurred in connection with the Videosmith[Registered Trademark] acquisition.
Net Income. As a result of the foregoing, particularly the Videosmith
[Registered Trademark] acquisition, net income increased $0.3 million, or
300.0%, from a loss of $0.1 million in the year ended January 31, 1994 to a
profit of $0.2 million in the year ended January 31, 1995.
HISTORICAL RESULTS OF OPERATIONS FOR PALMER VIDEO
Palmer Video's revenues constituted 27.1% and 26.2% of pro forma combined
total revenues for the fiscal year ended January 31, 1996 and for the three
months ended April 30, 1996, respectively.
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YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Revenues. Revenues increased $1.1 million, or 4.9% from $22.5 million for
the year ended March 31, 1995 to $23.6 million for the year ended March 31,
1996, primarily due to an increase in rental revenues offset by a decrease in
wholesale revenue. Rental revenue increased $1.4 million or 8.6% from $16.3
million for the year ended March 31, 1995 to $17.7 million for the year ended
March 31, 1996. This increase was due to an increase in same store rental
revenues. Merchandise sales decreased $0.4 million or 8.3% from $4.8 million for
the year ended March 31, 1995 to $4.4 million for the year ended March 31, 1996.
This decrease resulted from a decrease in wholesale sales to franchisees of $0.5
million partially offset by an increase in retail sales of $0.1 million. Royalty
and other revenue (which consists primarily of franchise royalties and
advertising revenue) increased $0.1 million or 7.1% from $1.4 million for the
year ended March 31, 1995 to $1.5 million for the year ended March 31, 1996
primarily due to an increase in advertising revenue.
Store Operating Expenses. Store operating expenses increased $0.8 million
or 7.5% from $10.7 million for the year ended March 31, 1995 to $11.5 million
for the year ended March 31, 1996. As a percentage of total revenues, store
operating expenses increased 1.1 percentage points from 47.6% for the year ended
March 31, 1995 to 48.7% for the year ended March 31, 1996. This increase was
primarily due to payroll, advertising, supplies and other costs associated with
opening of new stores which are expensed in the period incurred.
Cost of Sales. Cost of sales increased $0.7 million or 16.7% from $4.2
million for the year ended March 31, 1995 to $4.9 million for the year ended
March 31, 1996. As a percentage of total revenues, cost of sales increased 2.1
percentage points from 18.7% for the year ended March 31, 1995 to 20.8% for the
year ended March 31, 1996. This increase was primarily due to an increase in
revenue-sharing videocassette leasing fees, which are included in cost of sales
rather than in purchases of videocassettes or the amortization of such
purchases.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
decreased $0.5 million, or 12.2% from $4.1 million for the year ended March 31,
1995 to $3.6 million for the year ended March 31, 1996. As a percentage of total
revenues, amortization of videocassette and video game rental inventory
decreased 2.9 percentage points from 18.2% for the year ended March 31, 1995 to
15.3% for the year ended March 31, 1996. This decrease in total amortization
expense was primarily a result of increased revenue-sharing videocassette
leasing fees (which increased cost of sales) and a decrease in videocassettes
purchased.
General and Administrative Expenses. General and administrative expenses
decreased $0.2 million or 6.1% from $3.3 million for the year ended March 31,
1995 to $3.1 million for the year ended March 31, 1996. As a percentage of total
revenues, general and administrative expenses decreased 1.6 percentage points
from 14.7% for the year ended March 31, 1995 to 13.1% for the year ended March
31, 1996. This decrease was primarily due to reducing general and administrative
employees head count while revenues increased.
Non-Operating Income, Net. Non-operating income, net, increased $0.8
million, from a loss of $0.2 million for the year ended March 31, 1995 to $0.6
million for the year ended March 31, 1995. This increase was primarily due to a
settlement of bank debt of $0.8 million.
Net Income. As a result of the foregoing, net income increased $0.8
million, from a loss of $0.3 million for the year ended March 31, 1995 to $0.5
million for the year ended March 31, 1996.
YEAR ENDED MARCH 31, 1995 COMPARED TO YEAR ENDED MARCH 31, 1994
Revenues. Revenues increased $0.3 million, or 1.4%, from $22.2 million for
the year ended March 31, 1994 to $22.5 million for the year ended March 31,
1995. This increase was primarily due to an increase in merchandise sales and
royalty revenue offset by a decrease in rental revenue. Rental revenue decreased
$0.4 million, or 2.4%, from $16.7 million for the year ended March 31, 1994 to
$16.3 million for the year ended March 31, 1995, reflecting a decrease in
revenues per store. Merchandise sales increased $0.5 million, or 11.6%, from
$4.3 million for the year ended March 31, 1994 to $4.8 million for the year
ended March 31, 1995. This increase was primarily due to an increase in retail
sales of $0.3 million and an increase in wholesale
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sales of $0.2 million. Royalty and other revenue increased $0.2 million, or
16.7%, from $1.2 million for the year ended March 31, 1994 to $1.4 million for
the year ended March 31, 1995. This increase consisted primarily of a $0.1
million increase in royalty revenue due to the receipt of past due royalties
from franchisees.
Store Operating Expenses. Store operating expenses increased $0.3 million,
or 2.9%, from $10.4 million for the year ended March 31, 1994 to $10.7 million
for the year ended March 31, 1995. As a percentage of total revenues, store
operating expenses increased 0.8 percentage points from 46.8% for the year ended
March 31, 1994 to 47.6% for the year ended March 31, 1995. This increase was
primarily due to store closings and new store start-up and operating expenses of
new stores.
Cost of Sales. Cost of sales decreased $0.4 million, or 8.7% from $4.6
million for the year ended March 31, 1994 to $4.2 million for the year ended
March 31, 1995. As a percentage of total revenues, cost of sales decreased 2.0
percentage points from 20.7% for the year ended March 31, 1994 to 18.7% for the
year ended March 31, 1995. This decrease was primarily due to a decrease in
revenue-sharing videocassette leasing fees which are included in cost of sales.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
decreased $0.3 million, or 6.8%, from $4.4 million for the year ended March 31,
1994 to $4.1 million for the year ended March 31, 1995. As a percentage of total
revenues, amortization of videocassette and video game rental inventory
decreased 1.6 percentage points from 19.8% for the year ended March 31, 1994 to
18.2% for the year ended March 31, 1995. This decrease in total amortization
expense was primarily the result in a decrease in videocassettes purchased.
General and Administrative Expenses. General and administrative expenses
decreased $0.4 million, or 10.8%, from $3.7 million for the year ended March 31,
1994 to $3.3 million for the year ended March 31, 1995. As a percentage of total
revenues, general and administrative expenses decreased 2.0 percentage points
from 16.7% for the year ended March 31, 1994 to 14.7% for the year ended March
31, 1995. This decrease was primarily due to a reduction in salaries, insurance
premiums and bad debt expenses and generally greater cost efficiencies.
Non-Operating Expense, Net. Non-operating expense, net, remained
relatively constant at $0.2 million for the year ended March 31, 1994 and for
the year ended March 31, 1995.
Net Income. As a result of the foregoing, net loss decreased $0.5 million,
from a loss of $0.8 million for the year ended March 31, 1994 to a loss of $0.3
million for the year ended March 31, 1995.
HISTORICAL RESULTS OF OPERATIONS FOR RED GIRAFFE
The consolidated pro forma revenues of American Video, Inc. and Red Giraffe
Video, Inc. (as used in this section, "Red Giraffe") constituted 11.2% and 11.4%
of pro forma combined total revenues for the year ended January 31, 1996 and for
the three months ended March 31, 1996, respectively.
THREE MONTHS ENDED APRIL 3, 1996 COMPARED TO THREE MONTHS ENDED MARCH 29,
1995.
Revenues. Rental and product sale revenues increased $0.2 million and
$0.005 million, respectively, or 9% and 2%, respectively, from $2.2 million and
$0.215 million, respectively, for the quarter ended March 29, 1995 to $2.4
million and $0.220 million, respectively, for the quarter ended April 3, 1996.
The increase in rental revenue for the quarter ended April 3, 1996 is
attributable to the opening of five new stores, one each in September, November
and December 1995 and January and February 1996. The increase in product sales
resulted from the opening of such five new stores. This increase, however, was
offset in part by a decline in same store sales (stores open the entire period
of both quarters) of 10%, 2% of which is attributable to the inclusion of New
Year's Eve and New Year's Day in the first quarter of 1995 but not 1996, and the
remainder is due to competitive factors and unusually strong revenues during the
quarter ended March 29, 1995.
Store Operating Expenses. Store operating expenses increased $0.3 million,
or 25%, from $1.2 million for the three months ended March 29, 1995 to $1.5
million for the three months ended April 3, 1996. As a percentage of total
revenues, store operating expenses increased 7.7 percentage points from 50% for
the three months ended March 29, 1995 to 57.7% for the three months ended April
3, 1996. These increases were
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primarily attributable to additional labor and occupancy costs associated with
new store development and to increased participation in a revenue-sharing
videocassette leasing program during 1996 when compared to 1995.
Cost of Sales. Cost of sales increased $0.01 million, or 6.3%, from $0.16
million for the three months ended March 29, 1995 to $0.17 million for the three
months ended April 3, 1996. As a percentage of product sales, cost of sales
increased 4.6 percentage points, from 72.7% for the three months ended March 29,
1995 to 77.3% for the three months ended April 3, 1996. This change resulted
principally from price reductions put in place by management to increase sales
volume.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased $0.04 million, or 6.7%, from $0.60 million for the three months ended
March 29, 1995 to $0.64 million for the three months ended April 3, 1996. As a
percentage of total revenues, amortization of videocassette and video game
rental inventory declined 0.4 percentage from 25.0% for the three months ended
March 29, 1995 to 24.6% for the three months ended April 3 ,1996, primarily due
to increased revenues, along with an increased percentage of base stock
amortization created by new store development.
General and Administrative Expenses. General and administrative expenses
increased $0.05 million or 25% from $0.15 million for the three months ended
March 29, 1995 to $0.20 million for the three months ended April 3, 1996. As a
percentage of total revenues, general and administrative expenses increased 1.6
percentage points, from 6.2% for the three months ended March 29, 1995 to 7.8%
for the three months ended April 3, 1996. This was primarily due to
approximately $37,000 of non-recurring legal and accounting costs associated
with the proposed sale of the Company's assets to West Coast and a previously
considered acquisition.
Non-Operating Expenses, Net. Non-operating expense, comprised principally
of interest expense, increased $0.012 million or 30.8%, from $0.039 million for
the three months ended March 29, 1995 to $0.051 million for the three months
ended April 3, 1996. As a percentage of total revenues, non-operating expense
increased 0.4 percentage points, from 1.6% for the three months ended March 29,
1995 to 2.0% for the three months ended April 3, 1996, as a result of increased
borrowings to finance the acquisition of additional inventory and equipment.
Net Income. As a result of the foregoing, net income decreased $0.2
million or 66.7%, from $0.3 million for the three months ended March 29, 1995 to
$0.1 million for the three months ended April 3, 1996.
YEAR ENDED JANUARY 3, 1996 COMPARED TO YEAR ENDED DECEMBER 28, 1994
Revenues. Rental and product sale revenues increased $0.9 million and $0.3
million, respectively, or 11.7% and 55.6%, respectively, from $7.7 million and
$0.6 million, respectively, for the year ended December 28, 1994 to $8.6 million
and $0.9 million, respectively, for the year ended January 3, 1996. The increase
in rental revenues for the year ended January 3, 1996 is attributable to the
opening of five new stores, one each in October 1994 and February, September,
November and December 1995. The increase in product sales resulted from the
opening of such five new stores as well as from the continuing increased
emphasis on such sales by management. The decrease in rental revenues from 93%
of total revenues for the year ended December 28, 1994 to 90% for the year ended
January 3, 1996 resulted from the continuing initiative undertaken by management
to increase product sale revenues which caused product sale revenues to increase
more than rental revenues.
Store Operating Expenses. Store operating expenses increased $0.8 million,
or 18.3%, from $4.5 million for the year ended December 28, 1994 to $5.3 million
for the year ended January 3, 1996, due primarily to an increased participation
in a revenue-sharing videocassette leasing program during 1995. As a percentage
of total revenues, store operating expenses increased 1.4 percentage points from
53.9% for the year ended December 28, 1994 to 55.3% for the year ended January
3, 1996. Excluding the effect of participation in a revenue-sharing
videocassette leasing program, store operating costs would have declined as a
percentage of revenues from 53.6% in the fiscal year ended December 28, 1994 to
52.7% in the fiscal year ended January 3, 1996.
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Cost of Sales. Cost of sales increased $0.1 million, or 61.8%, from $0.3
million for the year ended December 28, 1994 to $0.4 million for the year ended
January 3, 1996. As a percentage of product revenues, cost of sales increased
1.7 percentage points from 43.4% for the year ended December 28, 1994 to 45.1%
for the year ended January 3, 1996. The increase in the percentage resulted
principally from price reductions put in place by management in connection with
the increased emphasis on such sales as previously discussed.
Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased $0.2 million, or 8.3%, from $2.2 million for the year ended December
28, 1994 to $2.4 million for the year ended January 31, 1996, primarily due to
the addition of four new stores in 1995. As a percentage of total revenues,
amortization of videocassette and video game rental inventory declined 1.6
percentage points from 26.6% for the year ended December 28, 1994 to 25.0% for
the year ended January 3, 1996, primarily due to increased revenues, along with
an increased percentage of base stock amortization created by new store
development.
General and Administrative Expenses. General and administrative expenses
increased $0.2 million, or 25.7%, from $0.6 million for the year ended December
28, 1994 to $0.8 million for the year ended January 3, 1996. As a percentage of
total revenues, general and administrative expenses increased 0.7 percentage
points, from 7.9% for the year ended December 28, 1994 to 8.6% for the year
ended January 3, 1996. This was due primarily to approximately $100,000 of
nonrecurring legal and accounting costs associated with the proposed sale of the
Company's assets to West Coast and a previously considered acquisition. If these
nonrecurring costs had not been incurred, general and administrative expenses
would have decreased as a percentage of revenues.
Non-Operating Expense, Net. Non-operating expense, net, remained constant
from the year ended December 28, 1994 to the year ended January 3, 1996.
Net Income. As a result of the foregoing, net income decreased $0.1
million, or 15%, from $0.6 million for the year ended December 28, 1994 to $0.5
million for the year ended January 3, 1996.
YEAR ENDED DECEMBER 28, 1994 COMPARED TO YEAR ENDED DECEMBER 29, 1993
Revenues. Rental and product sale revenues increased $0.7 million and $0.2
million, respectively, or 9.5% and 38.5%, respectively, from $7.0 million and
$0.4 million, respectively, for the year ended December 29, 1993 to $7.7 million
and $0.6 million, respectively, for the year ended December 28, 1994. The
increase in rental revenues was primarily attributable to an increase in the
average number of stores being operated by the Company and a 1.1% increase in
same store volume. The increase in product sales principally related to the
increase in the average number of stores in operation as previously discussed,
coupled with the increased emphasis on such sales by management. The decrease in
rental revenues from 94.0% of total revenues for the year ended December 29,
1993 to 92.6% for the year ended December 28, 1994 resulted from the initiative
implemented by management to increase the level of product sales.
Store Operating Expenses. Store operating expenses increased $0.3 million,
or 6.9%, from $4.2 million for the year ended December 29, 1993 to $4.5 million
for the year ended December 28, 1994. As a percentage of revenues, store
operating expenses decreased 2.2 percentage points from 56.1% for the year ended
December 29, 1993 to 53.9% for the year ended December 28, 1994. This was due
primarily to increased efficiencies from higher store volumes and a decreased
participation in a revenue-sharing videocassette leasing program as compared to
1993.
Cost of Sales. Cost of sales increased slightly in total dollars for the
year ended December 29, 1993 when compared to the year ended December 28, 1994
and increased as a percentage of total revenues from 2.9% for the fiscal year
ended December 29, 1993 to 3.2% for the fiscal year ended December 28, 1994. As
a percentage of total product sale revenues, cost of sales decreased 5.2
percentage points from 48.6% for the year ended December 29, 1993 to 43.4% for
the year ended December 28, 1994. This decrease was primarily the result of a
shift in sales mix, particularly an increased emphasis on previously viewed
movies and concessions from the fiscal year ended December 29, 1993 to the
fiscal year ended December 28, 1994 causing a corresponding shift in costs.
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Amortization of Videocassette and Video Game Rental
Inventory. Amortization of videocassette and video game rental inventory
increased $0.4 million, or 19.2%, from $1.8 million for the year ended December
29, 1993 to $2.2 million for the year ended December 28, 1994. As a percentage
of revenues, amortization of videocassette and video game rental inventory
increased 2.6 percentage points from 24.8% in the year ended December 29, 1993
to 26.6% for the year ended December 28, 1994 primarily as a result of the
significant increase in the level of purchases of videocassette rental
inventory.
General and Administrative Expenses. General and administrative expenses
decreased $0.02 million, or 2.3%, from $0.7 million for the year ended December
29, 1993 to $0.6 million for the year ended December 28, 1994. As a percentage
of total revenues, general and administrative expenses decreased from 8.9% for
the year ended December 29, 1993 to 7.9% for the year ended December 28, 1994.
This occurred primarily as a result of the revenue growth previously discussed
without a corresponding increase in general and administrative expenses.
Non-Operating Expense, Net. Non-operating expense, net, remained
relatively constant during the year ended December 28, 1994 and the year ended
December 29, 1993.
Net Income. As a result of the foregoing, net income increased $0.2
million, or 52.5%, from $0.4 million for the year ended December 29, 1993 to
$0.6 million for the year ended December 28, 1994 primarily due to increased
revenues without a proportionate increase in costs.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
For the fiscal year ended January 31, 1996, the Company had net cash
provided by operating activities of $3.1 million, net cash used in investing
activities of $5.6 million (consisting primarily of cash used to acquire
businesses of $3.5 million and cash used to purchase videocassette rental
inventory of $2.0 million) and net cash provided by financing activities of $3.0
million, resulting in a net increase in cash and cash equivalents of $0.6
million.
For the three months ended April 30, 1996, the Company had net cash
provided by operating activities of $2.4 million, net cash used in investing
activities of $1.9 million (consisting primarily of cash used to purchase
videocassette rental inventory of $0.6 million, and $1.3 million of deferred
acquisition costs associated with the acquisitions of new stores acquired on May
17, 1996) and net cash used in financing activities of $0.9 million (consisting
of $0.4 million of net borrowings offset by $1.3 million of deferred costs
associated with the public offering which occurred on May 14, 1996) resulting in
a net decrease in cash and cash equivalents of $0.4 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 $65.3 million in the Public Offering, refinanced its
outstanding bank debt through the Credit Facility, paid down all of its other
outstanding indebtedness, and consummated the Recent Acquisitions (see "Business
- -- Recent Acquisitions"), which it expects will increase its future net positive
cash flows 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 $60
million Credit Facility from PNC Bank, National Association, ("PNC Bank") (see
"Risk Factors -- Acquisition Risks -- Financing Growth Strategy"). The credit
facility consists of a two-year revolving credit facility followed by a
three-year term loan. Borrowings under the facility are available for working
capital, capital expenditures, refinancing of existing indebtedness and for
certain permitted acquisition financing. The maximum amount available for
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borrowing at any time will equal 2.75 times the Company's operating cash flow
(as defined for the purposes of the Credit Facility) during the previous four
quarters. At the Company's option, interest rates will vary from either PNC
Bank's base rate, as defined, to 1% above such base rate, or from the Eurodollar
rate, as defined, to 2.5% above such Eurodollar rate, in each case depending on
the ratio of the Company's total debt to operating cash flow, as defined.
Borrowings are secured by a first security interest in substantially all of the
Company's assets, including the stock of its subsidiaries. Borrowings are
subject to various conditions including compliance with certain financial tests
and ratios.
Build-out costs for new stores are expected to range from $200,000 to
$250,000 per store. The aggregate costs of converting acquired stores to West
Coast signage and format are expected to be approximately $2.3 million over an
18-month period through November 1997. The aggregate costs of upgrading West
Coast's management information systems and integrating acquired stores onto such
systems are expected to be approximately $0.9 million over such period. Over the
next two years the Company will make additional payments of cash and Common
Stock, currently estimated for the purpose of the Company's pro forma financial
statements at $3.4 million in the aggregate, to the sellers of 19 stores
purchased in connection with the Recent Acquisitions at formulaic purchase
prices based on certain financial measurements for such stores in future
periods. The Company has options to purchase an additional four stores at
similar formulaic prices.
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.
Videocassette and interactive electronic entertainment product rental
inventories are treated as noncurrent assets under generally accepted accounting
principles because they are not assets which are reasonably expected to be
completely realized in cash or sold in the normal business cycle. Although the
rental of this inventory generates the major portion of the Company's revenue,
the classification of these assets as noncurrent results in their exclusion from
working capital. The aggregate amount payable for this inventory, however, is
reported as a current liability until paid and, accordingly, is included in the
computation of working capital. Consequently, the Company believes working
capital is not an appropriate measure of its liquidity. Due to the accounting
treatment of videocassette and interactive electronic entertainment products
rental inventory as a noncurrent asset, the Company expects to operate with a
working capital deficit following this offering.
PALMER VIDEO
Prior to its acquisition by West Coast in May 1996, Palmer Video financed
its operations primarily from internal cash flow and bank debt. The Company
assumed and repaid $0.9 million of outstanding liabilities of Palmer Video upon
consummation of the Recent Acquisition of Palmer Video.
RED GIRAFFE
Prior to its acquisition by West Coast in May 1996, Red Giraffe financed
its operations primarily from cash flows from operations and bank financing. The
Company assumed and repaid $2.7 million of Red Giraffe's outstanding long-term
debt upon consummation of the Recent Acquisition of Red Giraffe.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY
The Company's results of operations are generally affected by economic
trends in its market area but results to date have not been impacted by
inflation. If a period of high inflation is encountered, the Company believes
that it will be able to pass on its higher costs to its customers.
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<PAGE> 41
A concentration of new store openings and the related pre-opening costs in
any particular fiscal quarter could have an adverse impact on the financial
results for that quarter, leading to fluctuating quarterly financial results,
which could adversely impact the Company's Common Stock price.
The videocassette and interactive electronic entertainment products rental
business is somewhat seasonal, with revenues in early Spring generally being
lower due in part to the change in Daylight Savings Time and improved weather,
and revenues in early Fall generally being lower due in part to the start of
school, the football season and the new television season.
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<PAGE> 42
VIDEO INDUSTRY OVERVIEW
According to Kagan Associates, domestic video retail industry revenues
exceeded $14 billion in 1994, with industry revenues projected to grow to
approximately $22 billion by 2005. Of the total domestic revenues in 1994, video
rental revenues were approximately $9.4 billion and video sales revenues were
approximately $4.6 billion.
The industry is characterized by a high degree of fragmentation, with only
nine chains in 1995, including the Company, reported to be operating in excess
of 100 video specialty stores, and the average chain operating fewer than 50
stores. In recent years the video retail industry has begun to consolidate as
regional chains and smaller video specialty store operations are acquired by
operators with greater access to capital. The Company believes that although
video specialty store revenues will continue to grow as consumers rent and
purchase prerecorded videos, a greater rate of growth will occur among video
specialty store operators engaged in a program of acquiring competitors.
According to Kagan Associates, the home video market was the largest single
source of revenue to movie distributors, accounting for approximately 48.6% of
movie distributors' total domestic revenues and approximately 46.1% of movie
distributors' worldwide revenues in 1994. Due to the high production cost of
films today, the Company believes that without home video revenues, most films
would have been unprofitable. Furthermore, in order to quickly recoup the large
theatrical marketing budgets that often exceed a film's production cost, most
films are released simultaneously in a large number of theaters. This broad
exposure usually results in most theaters playing the film only for a few weeks
before replacing it with another release.
Movie studios seek to maximize their revenues by releasing movies in
sequential release date windows to various movie distribution channels. These
distribution channels currently include, in release date order (with approximate
1994 revenues to the motion picture distributors shown in parentheses), movie
theaters ($5.7 billion), video specialty stores ($8.1 billion) and other media
including Pay-Per-View and similar services ($0.2 billion), pay television ($1.7
billion), domestic basic cable television ($0.4 billion) and domestic network
and syndicated television ($0.5 billion).
Sales of prerecorded videos have grown at a cumulative annual growth rate
of 12.9% for the three-year period ending December 31, 1994, but in 1994 still
only represented approximately 33% of video retail industry revenues from all
distribution channels. Movie studios influence the relative levels of video
rentals versus sales by setting wholesale video prices. The movie studios
typically set the initial wholesale price of prerecorded videos at between $50
and $65, which encourages rental rather than sale. In order to maximize revenues
to the studios, after approximately six to twelve months the studios will often
lower the price of these same videos to between $15 and $20, which encourages
their purchase. In addition, a relatively small number of titles that are
believed to have broader consumer appeal, such as Cinderella, The Lion King and
Batman Forever, are wholesaled initially by the studios at between $12 and $17,
which also encourages their purchase rather than rental. While much of this type
of product is heavily promoted as "sell-through" titles by all types of mass
market retailers, the video specialty stores offer this product both for sale
and rental and thus also attract the customer who prefers to rent rather than
buy despite a title's relatively low purchase price.
The Company believes, based on its own practices and information provided
by the sellers in the Recent Acquisitions, that video specialty stores typically
purchase a majority of the films that were released in the box office regardless
of their success in attracting theatre viewers. The Company believes that many
of its customers are predisposed to view a specific film as a result of its
marketing campaign, but due to its short playing time at a local theater, they
will often rent or purchase the prerecorded home video version of that film. In
addition, the Company believes consumers are more apt to view films that were
not box office hits on rented videos than on any other medium because video
specialty stores provide the opportunity to browse and make an impulse choice
among a very broad selection of film titles at a low price. Therefore, video
specialty stores represent a reliable revenue source for a majority of the film
output of the major movie studios.
The Company believes that it will become increasingly likely that certain
major studios will begin to release their films on new digital video discs
("DVD") within the next 12 to 18 months. Video discs and video disc players
function like videocassettes and VCRs but provide a higher quality video image
by using digital technology. To the extent that this format becomes popular with
consumers, the video retail industry could also carry film titles in this format
for both rental and sale, thereby creating an additional revenue base.
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<PAGE> 43
BUSINESS
GENERAL
Immediately following consummation of the Recent Acquisitions, West
Coast owned and operated 200 video specialty stores and franchised 303 video
specialty stores located in 25 states, principally in the Northeast and
Midwest, and two foreign countries. The Company believes that it is among the
largest video specialty retailers in the United States in terms of pro forma
system-wide revenues, number of franchised stores and total franchised store
revenues. The Company competes directly against major regional and national
video rental stores in most of its markets and believes it is a leading video
rental operator, in terms of number of stores, in all of the major markets in
which Company-owned stores operate. In addition, the Company believes it is one
of only two domestic video specialty franchisors that has existing franchised
stores outside North America. Immediately prior to the Recent Acquisitions, the
Company owned and operated 28 stores and was the franchisor of another 296
stores; the Recent Acquisitions involved an additional 172 owned and operated
stores (including 13 stores which were theretofore owned by franchisees of the
Company) plus the rights of one of the acquired companies as franchisor of 20
franchised stores. See "-- Recent Acquisitions and Other Recent Transactions."
System-wide, approximately 60% of the Company's stores are currently operated
under the West Coast Video[Registered Trademark] name and the remainder are
operated under such names as Videosmith[Registered Trademark] and Palmer
Video[Trademark]. The Company intends to extend the West Coast Video[Registered
Trademark] name and logo and its registered trademark The Movie Buff's Movie
Store[Registered Trademark], as soon as practicable, to those stores which
currently operate under other trade names. For the fiscal year ended January
31, 1996, the Company's pro forma revenues were $82.2 million and pro forma net
income was $4.6 million. For the three months ended April 30, 1996, the
Company's pro forma revenues were $22.6 million and pro forma net income was
$1.5 million. See "Selected Historical and Pro Forma Combined Financial Data."
The Company's stores are designed and managed to create an atmosphere
that enhances the appreciation of movies, children's video programming and
interactive electronic entertainment products. To achieve this, the Company has
developed several store format templates in order to appeal to the varying
demographic preferences of its customers. These formats take into account the
population density and demographic profile of each store's targeted geographic
region. Each of the Company's stores rents and sells videocassettes and
interactive electronic game products and also sells certain popular electronic
accessories and a variety of confectionery items. Sites for the Company's
stores within each designated trade area are selected on the basis of such
factors as visibility, ready accessibility (particularly for evening drivetime
parking), signage and adaptability of existing structures to the Company's
requirements, as well as cost considerations.
The Company has grown to its present size primarily through the
acquisitions of the Premiere Video/Nostalgia Ventures and Videosmith[Registered
Trademark] specialty store chains in April 1993 and August 1994, respectively,
through the acquisition of its West Coast Video[Registered Trademark] operating
assets and franchising capability in July 1995 and through the Recent
Acquisitions in May 1996. See "-- Development of the Company," and "-- Recent
Acquisitions and Other Recent Transactions." Although single stores and small
chains, as a whole, currently have the largest share of the video retail
market, the Company believes that large regional and national chains will
substantially increase their market share and account for the majority of
future industry growth due to their greater capital resources, their ability to
achieve economies of scale in areas such as purchasing, advertising and
administration and their announced expansion plans.
The Company believes that there are a significant number of attractive
acquisition targets, including West Coast Video[Registered Trademark]
franchisees, and/or store sites available in its selected markets. The Company
also believes that the net proceeds of the Public Offering have enabled it to
accelerate its planned expansion, enhance its ability to complete acquisitions
and permit it to negotiate favorable terms for store acquisitions and new store
openings. The key factors that the Company considers in determining its rate of
expansion include store location and historical or projected profitability of
stores as well as the availability of adequate financing.
On June 19, 1996, the Company announced that it had reached agreements in
principle with the owners of a total of 72 video retail stores, subject to
completion of due diligence and other closing conditions and
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<PAGE> 44
regulatory approvals. The Company has not entered into definitive agreements in
regard to the acquisition of any of such stores, and there can be no assurance
that it will do so.
RECENT ACQUISITIONS
On May 17, 1996, the Company acquired from seven selling groups and
four West Coast Video[Registered Trademark] franchisees a total of 172 video
specialty stores, plus franchisor's rights in regard to 20 franchised stores.
The Company intends to extend the West Coast Video[Registered
Trademark] name and logo and its registered trademark The Movie Buff's Movie
Store[Registered Trademark], as soon as practicable, to the acquired stores
(other than the 13 West Coast Video[Registered Trademark] franchised stores,
which already operate under the West Coast Video[Registered Trademark] trade
name).
The Company also intends to integrate the acquired stores into the
Company's management information, telecommunications, management, marketing,
finance and accounting, entertainment purchasing, distribution, retail
operations and merchandising systems as soon as is feasible, at an estimated
cost of $0.9 million over an 18 month period following closing of the Recent
Acquisitions. The Company expects the aggregate costs of converting the
acquired stores to West Coast signage and format to be approximately $2.3
million over an 18-month period following consummation of the Recent
Acquisitions.
The terms of the Recent Acquisitions were negotiated at arm's length.
In connection with the Recent Acquisitions, certain of the Sellers and their
affiliates entered into consulting and/or employment agreements with the
Company. These include one person who has become Executive Vice President --
Corporate Retail Operations and Development and a director of the Company and
nine other persons who have become Vice Presidents or Regional Vice Presidents,
but have not become executive officers or directors, at annual salaries ranging
from $82,500 to $210,000.
<TABLE>
Set forth below is a brief description of each of the Recent Acquisitions:
<CAPTION>
NUMBER OF OWNED
NAME OF SELLER(S) AND OPERATED STORES LOCATIONS
----------------- ------------------- ---------
<S> <C> <C>
Palmer Corporation and certain
affiliates ("Palmer Video").......... 43(1) New York and New Jersey
American Video, Inc. and certain
affiliates (collectively, "Red
Giraffe")............................ 31 Indiana, Kentucky and Ohio
4 unaffiliated West Coast Video[Registered
Trademark] franchisees (the "Massachusetts
Franchisees")........................ 13(2)(3) Massachusetts
5 other unaffiliated selling groups.... 85(4) Pennsylvania, Ohio, New Jersey,
Virginia, Arkansas, Oklahoma,
Texas, Louisiana and Florida
---
Total........................ 172
===
<FN>
- ---------------
(1) Includes (a) one store owned by 142nd Retail Associates, a partnership in
which the Company acquired the 51% partnership interest theretofore owned by
a subsidiary of Palmer Corporation while the remaining 49% partnership
interests continue to be owned by their present owners, William J. Krasny
and Cosmo Robles, neither of whom is affiliated with Palmer Corporation or
the Company, and (b) one store owned by 38th Retail Associates Limited
Partnership, in which the Company acquired the 50% general partnership
interest theretofore owned by a subsidiary of Palmer Corporation while the
remaining 50% limited partnership interest continues to be owned by the
estate of Abraham Stelnik, which is not affiliated with Palmer Corporation
or the Company.
(2) Includes four stores owned by HB Associates, Inc., two stores owned by Best
Entertainment, Inc., six stores owned by New Age Entertainment, Inc. and one
store owned by Video Innovators, Inc.
(3) Excludes four Massachusetts Franchisee stores which the company has an
option to purchase on or before August 1996, January 1997, March 1997 and
July 1997, respectively.
</TABLE>
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<PAGE> 45
(4) Consists of 46 stores owned by Vidko, Inc., Kobie-Co Movie Outlet and
Anthony Cocca's Videoland, Inc. (collectively, "Videoland"), 12 stores owned
by Video Giant, Inc. ("Video Giant"), 12 stores owned by A-Z Video Systems,
Inc. ("A-Z Video"), 12 stores owned by Showtime, Inc. ("Showtime Video") and
three stores owned by certain corporations under common control ("Video
Video").
Financial statements for certain of the Sellers are contained in this
Prospectus.
Consideration Paid. In connection with the Recent Acquisitions, the
Company paid aggregate consideration (excluding related costs) of $76.4 million,
consisting of $52.4 million paid in cash and $24.0 million paid in shares of
Common Stock (1,843,720 shares valued for this purpose at the Public Offering
price of $13.00 per share).
<TABLE>
The following table sets forth the consideration paid for the stores
acquired in connection with the Recent Acquisitions and the related indebtedness
for borrowed money of the Sellers that was assumed and repaid by the Company
concurrently with the closing of the Recent Acquisitions:
<CAPTION>
CASH COMMON STOCK
-------------------- -------------------- TYPE OF
AMOUNT %(1) AMOUNT %(1) TOTAL(2) ACQUISITION
----------- ---- ----------- ---- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Palmer Video......................... $10,039,444 50 % $10,039,484 50% $20,078,928(3) Merger
Red Giraffe.......................... 11,486,250(4) 70 4,838,886 30 16,325,136(4)(5) Asset Purchase
4 Massachusetts Franchisees.......... 11,675,000(6) 100 11,675,000(6) Asset Purchase
5 Other Unaffiliated Selling Groups:
A-Z Video(7)....................... 4,300,000 100 4,300,000 Asset Purchase
Showtime Video..................... 3,500,000 100 3,500,000(5) Stock Purchase
Video Giant........................ 1,710,016 19 7,289,984 81 9,000,000(5) Merger
Video Video........................ 2,500,000 100 2,500,000 Asset Purchase
Videoland.......................... 7,200,000 80 1,800,006 20 9,000,006(5) Asset Purchase
----------- ----------- -----------
Total............................ $52,410,710 $23,968,360 $76,379,070
=========== =========== ===========
<FN>
- ---------------
(1) Percentage of total consideration for each of the Recent Acquisitions
represented by the cash component and by the stock component (if any),
respectively.
(2) Subject to subsequent post-closing adjustment based upon the amount by which
each Seller's working capital, as defined, or cash available at closing, or
the amount of sick pay and vacation pay then accrued, exceeded or was less
than a specified amount and the amount of certain prepaid rentals, insurance
premiums and other prepaid expenses. Management believes that these
adjustments will not be material. A portion of the total purchase price was
used to pay certain outstanding accounts payable of certain Sellers.
(3) Excludes approximately $921,000 of liabilities of this Seller paid at
closing by the Company in accordance with the terms of the Merger Agreement.
(4) Includes $2.7 million of indebtedness for borrowed money of the Red Giraffe
group which was assumed and repaid by the Company.
(5) Excludes payments of cash and/or Common Stock to be made to these Sellers at
specified times following the respective opening dates of certain newly
opened stores included in the Recent Acquisitions (four Red Giraffe stores,
two Showtime Video stores, one Video Giant store and 12 Videoland stores) in
an amount determined on the basis of certain financial measurements for such
stores for specified 12-month or other periods. The amount to be paid for
the Video Giant store has been determined to be $570,620, consisting of
$28,531 paid in cash and $542,089 payable in June 1996 in shares of Common
Stock (41,699 shares valued for this purpose at the initial public offering
price in the Public Offering of $13.00 per share). In preparing the pro
forma financial statements contained in the registration statement for the
Public Offering, the Company estimated the total of all such contingent
payments for the 19 stores at $3.4 million. Upon consummation of the Recent
Acquisition of Showtime Video, the Company advanced $250,000 to such Seller
to defray certain build-out and operating expenses of these stores; such
advances will be applied as an offset against payments, if any, made in
respect of newly opened stores.
</TABLE>
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<PAGE> 46
(6) Excludes $1,295,925 (11.1% of the purchase price payable to the Sellers in
these Recent Acquisitions) paid to the former owner of West Coast and its
affiliates (the "WCEI Companies") and Jules E. Gardner and Kenneth R.
Graffeo, two former executive officers of the WCEI Companies (who are now
executive officers of the Company), pursuant to the terms of the acquisition
by the Company of the franchise-related operating assets of the WCEI
Companies in July 1995.
(7) An executive officer of the Company, Donald R. Thomas, was an executive of,
and had a 2% equity interest in, this seller.
A portion of the net proceeds of the Public Offering, together with $1.7
million of borrowings under the Credit Facility, was used to finance the cash
portion of the purchase price of the Recent Acquisitions ($52.4 million, subject
to adjustment as described in the notes to the above table) and approximately
$3.5 million of acquisition costs and $0.3 million relating to the acceleration
of obligations to the former owners of the WCEI Companies (including the amounts
described in note (6) to the above table).
BUSINESS STRATEGY
The key elements of the Company's business strategy are as follows:
Achieve or Maintain Market Dominance. Immediately following the Recent
Acquisitions, the Company operated or franchised 503 video specialty stores
located principally in the Northeast and Midwest. The Company intends to
initially focus its acquisition, store expansion and franchising efforts
primarily in those areas where its stores are currently located so as to
maximize market share. The Company believes that by achieving or maintaining
market leadership positions or positions of significant concentration within the
regions in which it presently competes, the Company will be able to maximize
operating efficiencies in inventory management, marketing, distribution,
training and store supervision.
Realize Cost Savings By Integrating Stores Using Proven Management
Operating Systems. The Company intends to realize greater cost savings and
efficiencies by integrating the stores acquired, developed or franchised using
proven management systems. The Company has developed advanced software systems
for the purposes of monitoring and managing store inventory, sales, purchases
and customer membership. These proven systems allow the Company to facilitate
the integration of stores the Company acquired in the Recent Acquisitions and
additional stores it acquires, builds or franchises. In addition, such systems
allow the Company to monitor rental trends and manage sales and rental turnover
so as to satisfy customer demand for an extensive selection of new releases as
well as catalog titles while maximizing store profitability. By centralizing all
buying decisions through its software systems, the Company obtains volume
discounts and cooperative advertising credits that would otherwise be
unavailable to its individual stores. To maximize customer satisfaction and
store profitability, rentals are then monitored on a regular basis utilizing the
Company's point-of-sale ("POS") management information system which enables the
Company to reallocate videocassettes and interactive electronic entertainment
products among stores. See "Risk Factors -- Acquisition Risks -- Integration."
Operate Differentiated Store Formats. The Company has developed several
store formats designed to appeal to the varying demographic preferences of its
customers and to meet varying real estate market conditions. These formats vary
in terms of square footage, store design and lay-out. While several of its
competitors have chosen uniform, chain-wide store formats and locations, the
Company believes that having available store formats that take into account
population density and other demographic characteristics is critical in allowing
penetration into market areas that do not conform to uniform, chain-wide
standards. Most of the Company's stores are superstores with over 4,000 square
feet per store, although some are smaller, custom-designed stores, including
some which are formatted as urban boutiques containing a wide variety of catalog
titles. The Company's stores carry between 7,000 and 17,000 videocassettes.
The Company has developed an innovative template and proprietary support
system that operates as a store within a store under the Game Power
Headquarters[Service Mark] trade name. These interactive electronic departments
range from 400 square feet to 1,800 square feet and allow the stores to rent,
sell, buy and trade interactive electronic entertainment software for various
game cartridge platforms and personal computers.
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<PAGE> 47
The departments also have kiosks providing a "Try Before You Buy" entertainment
environment while promoting new game hardware formats and software
introductions.
Provide Superior Customer Service. The Company believes its salesforce's
appreciation and understanding of movies, children's video programming and
interactive electronic entertainment products can result in a higher level of
service than most of its competitors. One criterion used in the Company's
recruitment and selection of employees is their general knowledge in regard to
movies and electronic games. In addition, employees undergo continuous training
to increase their knowledge about the store's video titles and about cinema and
electronic games in general. The Company believes that the implementation of
this strategy in the stores which it acquires can result in higher sales per
customer, higher overall customer satisfaction, higher customer loyalty, lower
employee turnover levels and higher catalog title inventory turnover.
GROWTH STRATEGY
Historically, the Company's growth has resulted from the acquisition of
existing video retail store chains and the opening and franchising of new
stores, as well as increases in existing store sales. The key elements of the
Company's growth strategy are as follows:
Pursue Acquisitions in Highly Fragmented Industry. The Company acquired
two video specialty store chains in 1993 and 1994, the operating assets of the
nation's second-largest franchisor of video specialty stores in 1995 and 172
additional owned and operated stores and franchisor's rights with respect to 20
franchised stores in 1996. It believes that its most significant opportunity for
growth over the next several years will continue to be the acquisition of
existing video retailers. The industry remains highly fragmented with
approximately 28,000 video retailers in the United States, approximately half of
which are operated by operators of one or two stores. Existing video retailers
typically have an established customer base and favorable location. The criteria
for acquisition candidates includes store location and demographics,
profitability, store sales volume, store size and store management personnel. In
addition, the Company seeks acquisition candidates that can realize expense
reductions and more efficient store management through integration into the
Company's information and inventory management systems and marketing and
advertising programs. The Company has already had preliminary discussions with
numerous video retail store owners at various times regarding the potential
acquisition of their stores. Management expects that some of these discussions
will result in new Acquisitions, although the Company has no agreements or
commitments to acquire stores other than as described herein. On June 19, 1996,
the Company announced that it had reached agreements in principle with the
owners of a total of 72 video retail stores, subject to completion of due
diligence and other closing conditions and regulatory approvals. The Company has
not entered into definitive agreements in regard to the acquisition of any of
such stores, and there can be no assurance that it will do so.
Continue to Acquire West Coast Franchisee Stores. The Company intends to
pursue the acquisition of individual or small chains of video specialty stores
within the West Coast Video[Registered Trademark] franchising system. As
franchisor, the Company maintains a right of first refusal to purchase these
stores and intends to selectively acquire these stores in the future at prices
which it considers to be reasonable where it believes that it can increase
store revenues by deploying its own capital, human and other resources and can
achieve a higher return to the Company on store operations by fully integrating
the stores into the Company's operating systems, thereby managing costs and
generating operating profits that exceed the Company's franchise royalty fees
from such stores. West Coast Video[Registered Trademark] franchisee-owned
stores are typically of high quality and conform with the Company's own video
retail strategy. Consistent with this strategy, as part of the Recent
Acquisitions, the Company acquired 13 video retail stores located in
Massachusetts which had theretofore been owned and operated by the four
unaffiliated Massachusetts Franchisees.
Selectively Develop New Stores. The Company plans to open new video retail
stores in locations where acquisition of existing stores is impracticable but
favorable store location studies indicate a substantial probability of success
for a new store. In addition, the Company plans to grow in certain geographic
areas, including internationally, through franchising and believes that its
existing operating systems can be successfully applied to numerous other
franchisees. The Company currently has 10 franchised stores in
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<PAGE> 48
Canada, one in Curacao and two in Peru and has another store under development
out of a planned 20 additional stores in Peru and certain neighboring countries
pursuant to an area development agreement.
See "Risk Factors -- Acquisition Risks."
MANAGEMENT OPERATING SYSTEMS
<TABLE>
The Company's management operating systems have been developed and tested
over years of franchise experience. Management believes that these systems,
whose costs are already being met by franchise royalty payments, will allow the
Company to grow at considerably less incremental general and administrative
expense than would otherwise ordinarily be incurred. The West Coast corporate
staff includes 62 professionals working in the following capacities:
<CAPTION>
NUMBER OF
DEPARTMENT EMPLOYEES
---------- ---------
<S> <C>
Marketing/Movie Management................................................ 17
Purchasing................................................................ 4
M.I.S./Telecommunications................................................. 6
Retail Operations......................................................... 10
Accounting................................................................ 16
Distribution Services..................................................... 4
Executive................................................................. 5
--
Total........................................................... 62
==
</TABLE>
Marketing/Movie Management. The Company currently has in place a
centralized professional marketing department supporting all of the Company's
video specialty stores. The Company's in-house art department provides the
resources of a full service agency and utilizes an integrated computerized
system for in-house scanning, page layout and mechanical production,
illustrations and color printing. Management believes this in-house creative
development has resulted in substantial cost savings and enhanced production
efficiencies for the Company's owned and operated stores and franchised stores.
The Company develops an extensive semi-annual marketing campaign several
months in advance of its six-month implementation period. The store managers'
kits for these campaigns provide national and regional promotions and media
flight schedules in a format that is designed to facilitate local store
customization. The campaigns have earned a wide variety of national awards from
the Video Software Dealers Association in the past five years, including "Best
Overall Campaign," "Best Community Service" and "Best Special Media/Special
Events." These campaigns have increased the familiarity of existing and
potential customers with the Company and are also intended to increase customer
rental and purchase transactions and frequency of visits.
The Company uses radio and newspaper advertising and direct mail
solicitation to promote its business in the markets in which the Company
competes and uses television advertising in those metropolitan areas where the
Company is a dominant player. The marketing department has a dedicated staff
that publishes and distributes a proprietary, full color monthly consumer
magazine, "Spotlight on Video[Trade Mark]," which promotes new releases and
special offers exclusive to the Company.
The costs of the Company's marketing department are funded in part by a
contribution from West Coast's franchisees that is earmarked for advertising and
marketing. Such contribution is equal to 1% of the franchisees' gross revenues.
Another 1% contribution is spent on local advertising. In addition to these
contributions, the Company offsets the costs of its advertising with cooperative
advertising funds and market development funds made available by movie studios
and suppliers to promote certain videocassettes. The Company expects that it
will receive increased amounts of these third-party funds as the Company grows.
Purchasing. The Company believes that the consistent selection of movies
that appeal to the consumer is a significant feature of its operations. The
Company's movie and electronic entertainment purchasers each have, on average,
eight years of industry experience, including Videosmith's purchaser of
"sell-through" video titles who has five years of experience in that capacity.
The rental entertainment purchasers use computerized
46
<PAGE> 49
purchasing models that analyze data in regard to the sales and rental
performance of individual titles from the Company's stores on-line through the
Company's POS systems. The Company also publishes a proprietary monthly
publication, "The Projector[Trademark]," for owned and operated stores and
franchised stores that projects suggested purchase quantities on a
title-by-title basis for stores of varying demographic profiles and rental
volume levels. The Company believes its purchasing department has considerable
specific expertise in evaluating, finding distribution sources for and
purchasing independent, arthouse, foreign and other highly entertaining films
that are frequently not noticed or are ignored by other video specialty chains.
M.I.S./Telecommunications. The Company has developed, at considerable
expense, proprietary POS software with continuous inventory and customer
database and extensive management reporting capabilities. Nearly all of its
franchisees utilize such POS software. In addition, the Management Information
Systems department provides a broad range of services to management as well as
to owned and operated stores and franchised stores. Such services include:
management of various relational databases which aid in movie and interactive
electronic entertainment products purchasing, store site evaluation and
selection and customer profiling and targeting; on-line POS and other store and
corporate software maintenance, service and repair; technical support for the
installation of store computer hardware and software; maintenance of hardware
support agreements; on-line verification of franchisee revenues for royalty
audit purposes; franchisee POS system training; and enhancement and upgrading of
POS software.
Retail Operations. The Company has developed, at considerable time and
expense, comprehensive retail operations policy and procedure manuals to achieve
standardization among its Company-owned stores, as well as its franchisees. In
addition, the Company's retail operations group works directly with both
corporate and franchisee stores to provide assistance on a broad range of
operational issues including competitive strategies, product pricing, revenue
enhancement, expense management, new site analysis and selection and
remerchandising and renovation plans and analysis. The retail operations group
provides training and orientation to new franchisees as well as ongoing training
programs. The retail operations group has also developed a detailed timetable
and manual and provides direct assistance in the opening of new franchised
stores as well as owned and operated stores, including obtaining
permits/licenses, financing equipment, providing opening checklists and store
configuration options, formulating construction guidelines, initiating vendor
contacts, helping to manage and meet exterior signage specifications and wage
and hiring guidelines, and developing professional service and vendor contacts.
STORE LOCATIONS
<TABLE>
The following table lists the number of stores owned and franchised by the
Company in each state or foreign country at July 1, 1996, including the stores
acquired through the Recent Acquisitions. More than 80% of the Company's owned
and operated stores, and more than 80% of its franchised stores, are located in
the Northeast and Midwest.
<CAPTION>
NUMBER OF
OWNED AND NUMBER OF TOTAL
STATE OR FOREIGN COUNTRY OPERATED STORES FRANCHISED STORES STORES
- ------------------------ --------------- ----------------- ------
<S> <C> <C> <C>
Pennsylvania.......................................... 36 109 145
Ohio.................................................. 36 13 49
New Jersey............................................ 34 72 106
Massachusetts......................................... 27 14 41
New York.............................................. 16 5 21
Indiana............................................... 14 1 15
Kentucky.............................................. 14 -- 14
Virginia.............................................. 12 2 14
Arkansas.............................................. 4 -- 4
Oklahoma.............................................. 3 -- 3
Texas................................................. 2 3 5
Louisiana............................................. 2 3 5
Florida............................................... 1 13 14
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
NUMBER OF
OWNED AND NUMBER OF TOTAL
STATE OR FOREIGN COUNTRY OPERATED STORES FRANCHISED STORES STORES
- ------------------------ --------------- ----------------- ------
<S> <C> <C> <C>
Illinois.............................................. -- 15 15
Maryland.............................................. -- 13 13
California............................................ -- 5 5
New Hampshire......................................... -- -- --
Delaware.............................................. -- 4 4
Minnesota............................................. -- 3 3
Arizona............................................... -- 2 2
Oregon................................................ -- 2 2
Connecticut........................................... -- 1 1
Maine................................................. -- 1 1
Michigan.............................................. -- 1 1
Tennessee............................................. -- 1 1
Canada................................................ -- 10 10
Curacao............................................... -- 1 1
Peru.................................................. -- 2 2
--- --- ---
Total....................................... 201 296 497
=== === ===
</TABLE>
PRODUCTS
The Company's primary source of revenue is the rental of videocassettes.
The Company's stores feature between 7,000 and 17,000 videocassettes. At
present, the Company generally rents new release titles for $2.00 to $3.00 for
one day, depending on the age and popularity of the title, while catalog titles
rent for $1.00 to $2.00 for one day. Video games generally rent for $3.00 for
one day. The Company regularly reviews and determines its rental prices for
titles based on the length of time each title has been available on
videocassette and the frequency of rentals for each title. Movie titles are
classified into a variety of thematic categories, including certain categories
which are custom tailored to local tastes and demographic profiles, and are
displayed alphabetically within those categories. The Company attempts to keep
available within each store sufficient numbers of current popular titles, as
well as a significant selection of catalog titles, to satisfy customer demand.
West Coast also offers videocassettes for sale. Generally, previously
viewed videocassettes are sold for $7.99 to $11.99 beginning 12 weeks after a
new title is released to video specialty stores. Sales of new videocassettes
consist primarily of children's and family titles generally priced at $15.99 to
$20.99. Based on anticipated growth in the overall market for videocassette
sales, planned improvements in the Company's videocassette sales merchandising
and the reported revenue mix of other video retailers, the Company expects its
per store sales of new (and, to a lesser extent, used) videocassettes to
increase.
In addition to video rentals and sales, West Coast also rents and sells
interactive electronic entertainment products compatible with various game
hardware platforms and personal computers. Kagan Associates estimates that
domestic interactive electronic entertainment software revenue will increase
from approximately $5.7 billion in 1995 to approximately $8.8 billion in 2002.
The Company expects per store rental revenue of interactive electronic
entertainment products to increase because of an overall rise in the popularity
of CD-ROM and new hardware formats. As a result, the Company believes that its
Game Power Headquarters[Service Mark] format will experience significant growth
in the next several years.
SUPPLIERS
The Company's suppliers of rental videocassette and interactive electronic
entertainment products include Ingram Entertainment, Inc. ("Ingram"), Waxworks,
Inc., Rentrak Corporation, Star Video Entertainment, Inc. and Baker and Taylor
Information and Entertainment Services. Prior to consummation of the Recent
Acquisitions, West Coast purchased approximately 50% of its rental videocassette
products from
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<PAGE> 51
Ingram under a contract that expires in July 2002. Under this contract,
following the Recent Acquisitions the Company must purchase at least 50% of its
annual requirements for such products during each of the first two years of the
contract, the lesser of 30% of its annual requirements or $25 million during the
third through fifth years of the contract and the lesser of 25% of its annual
requirements or $25 million during the last two years of the contract.
The Company currently receives marketing funds and an advertising allowance
from Ingram based upon a percentage of its videocassette and interactive
electronic entertainment products purchases. In addition, the Company currently
has an unsecured open account with outstanding amounts due 60 days from invoice
for all rental, sell-through and game product purchases and 90 days from invoice
for all sell-through product intended for new store openings and Christmas
catalog product. If the relationship with Ingram were terminated, the Company
believes that it could readily obtain its required inventory of videocassette
and interactive electronic entertainment products from alternative suppliers at
prices and on terms comparable to those with Ingram.
FRANCHISING
The Company currently receives franchise fees from West Coast
Video[Registered Trademark] franchisees equal to approximately 7% of each
franchisee's monthly gross revenues, subject to stated monthly minimum
royalties. Of this amount, the Company has devoted an amount equal to 2% of
such monthly gross revenues to direct and indirect advertising and marketing
programs. The Company also receives a one-time fee upon execution of the
franchise agreement. Franchisees are not required to purchase their initial
inventory or supplies from the Company, although they sometimes do so.
Thereafter, franchisees purchase virtually all of their movie and interactive
game product from unaffiliated suppliers.
Franchisees are entitled to develop West Coast Video[Registered Trademark]
stores at approved locations within a specified geographic area under the terms
of a standard franchise agreement. The exclusivity accorded to a franchisee
generally does not extend beyond a radius of three miles from each franchised
location, with franchisees in urban locations often being limited to a one-half
to one mile radius. Franchises are typically awarded for a term of ten years,
subject to the franchisee's right to renew for additional ten-year periods.
The Company provides training for the franchisee's managers and other store
personnel. Franchisees are required to meet the Company's quality control
standards in regard to store appearance and size of videocassette inventory,
among other things. The Company provides advice about title selection, initial
promotional advertising, posters and brochures.
Each franchise owner has sole responsibility for all operational decisions
and financing commitments relating to the store, including monthly rent,
utilities and payroll. Franchisees are required to indemnify West Coast against
claims arising from the franchisee's operations and to provide specified amounts
of insurance coverage. The Company does not currently provide any form of credit
enhancement for any of its franchisees' operations.
The franchise agreement requires the Company's express written agreement to
any transfer of a franchise or any sale of a controlling interest in a
franchisee. The agreement also authorizes the Company at any time to inspect and
monitor the franchisee's operations and audit its books and records. The Company
is entitled to terminate a franchise for a material breach of the terms of the
franchise agreement, subject to compliance with certain state laws regarding
termination for cause, prior notice and similar matters. Since acquiring the
assets of WC Franchise in July 1995, the Company has terminated six franchisees.
Under the terms of an area development agreement with respect to Peru and
certain contiguous South American countries, the area developer will pay the
Company a development fee of up to $175,000 over a five-year period, based on
the achievement of certain specified milestones, as well as license fees equal
to 3% of the revenues of each of its franchised stores.
See "Risk Factors -- Risks Associated with Franchise Operations."
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<PAGE> 52
COMPETITION
The video retail industry is highly competitive. The Company competes with
other video specialty stores, including stores operated by regional and national
chains, such as Blockbuster, and with other businesses, such as supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations and other retailers, that offer videos and interactive electronic
entertainment products. Certain of the Company's competitors, including
Blockbuster, have significantly greater financial and marketing resources,
market share and name recognition than the Company. The Company believes that,
apart from Blockbuster, neither the Company nor any other video specialty store
chain accounts for 2% or more of industry-wide revenues. In addition, the
Company's stores compete with other leisure-time activities, including movie
theaters, network and cable television, live theater, sporting events and family
entertainment centers. However, many of these have a higher per person cost than
the rental of a video.
The Company believes the principal competitive factors among participants
in the video retail industry are store location and visibility, title selection,
the number of copies of each new release available and customer service. While
the Company does not believe that price is a significant competitive factor
among video retailers, it is a significant factor relative to competition with
movie theaters and other forms of entertainment. The Company's goal is to offer
a higher level of service, greater title selection and more copies of new
releases than its competitors to foster more frequent visits and video rentals
by customers.
The Company's stores also compete with Pay-Per-View cable television
systems, in which home subscribers pay a fee to see programming selected by the
subscriber. Existing Pay-Per-View services offer a limited number of channels
and programming and are generally available only to households with a converter
to unscramble incoming signals. While recently developed technologies permit
certain telecommunications companies to transmit a much greater number of movies
to homes in more markets as frequently as every five minutes, the Company
believes that substantial technological developments will be necessary to allow
such alternatives to match the low price, viewing convenience (in terms of
stopping, restarting and rerunning the programs) and selection available through
video rental. Furthermore, the Company believes that movie studios have a
significant interest in maintaining the movie rental business because the sale
of video rental units typically represents the studios' largest source of
revenues. According to Kagan Associates, the home video market was the largest
single source of revenue to movie distributors, accounting for approximately
48.6% of movie distributors' total domestic revenues and approximately 46.1% of
movie distributors' worldwide revenues in 1994. For further information
concerning competition within the industry, see "Video Industry Overview."
EMPLOYEES
At June 1, 1996, the Company had 2,064 employees, including 1,974 in retail
stores and the remainder in corporate administrative and warehousing operations.
Of such employees, 597 were full-time and 1,467 were part-time. Staffing
requirements for West Coast stores range from six to 12 employees, depending on
size, and typically include one store manager and one or two assistant managers.
Store managers report directly either to a Regional Vice President (of which the
Company currently has seven) or, in regions with many stores, to a district
manager who, in turn, reports to a Regional Vice President. The Company believes
that its employee relations are good. None of the Company's employees is
represented by a labor union.
PROPERTIES
The Company's corporate headquarters is located at 9990 Global Road,
Philadelphia, Pennsylvania and consists of approximately 18,200 square feet of
office space. Approximately 11,000 square feet of warehouse space is located in
an adjacent building at 490 Red Lion Road. Currently, annual rentals for these
facilities are $63,098 and $28,176, respectively, plus taxes, insurance and
utilities. These facilities are leased pursuant to an agreement which expires on
December 31, 1996, with an option to renew for an additional three month period.
The Company also rents 1,250 square feet of office space at 685 Delaware
Avenue, Suite 115, Marion, Ohio for its Ohio operations, under a lease for the
period ending December 31, 1996 for an annual rental of $12,000, plus taxes,
insurance and utilities, and 2,400 square feet of office space at 1266
Commonwealth
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<PAGE> 53
Avenue, Boston, Massachusetts for its Massachusetts operations, with a lease for
the period ending August 31, 1997, for an annual rental of $31,500, plus taxes,
insurance and utilities, with two five-year renewal options. Office and
warehouse facilities for Regional Vice Presidents' operations is typically
located in premises leased by a conveniently located store within each region.
The Company believes that such facilities are adequate for current and future
operations.
The Company leases all of its video specialty stores. The leases for the
Company's 14 Videosmith[Registered Trademark] stores generally have an initial
term of five to ten years and seven of such leases provide options to renew for
additional terms. The leases with respect to the remaining stores generally
have an initial term of five years and provide one or two options to renew for
an additional term of three to five years. Rents for the renewal terms are
typically at pre-negotiated rates. The majority of the leases contain
percentage rental provisions which only apply based upon high thresholds of
in-store gross sales revenues. The Company has not to date paid material
amounts of percentage rentals. The Company is responsible for taxes, insurance
and utilities under most leases. The Company expects that future stores will
also occupy leased premises.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, trade names and service marks
including West Coast Video[Registered Trademark], The Movie Buff's Movie
Store[Registered Trademark], Game Power Headquarters[Service Mark], The
Projector[Trademark], Spotlight on Video[Trademark] and Videosmith[Registered
Trademark], as well as Palmer Video, Red Giraffe and other trade names under
which certain recently acquired stores are currently conducting business
pending their transition to the West Coast Video[Registered Trademark] name and
signage. The Company also owns its own IRIS version and source code of the
West Coast Video[Registered Trademark] and Game Power Headquarters[Service Mark]
software. The Company considers its intellectual property rights to be an
important part of its business.
LEGAL PROCEEDINGS
The Company was served with a Demand for Arbitration (the "Demand") by a
Game Power Headquarters[Service Mark] franchisee on January 22, 1996
(Interactive Associates, L.C., Inter Active Electronics Corporation, BSMS
Acquisitions, Inc. and RKT Acquisitions Company, American Arbitration
Association, Case No. 54 114 000 33 96). The Demand alleges that one of the
WCEI Companies, as predecessor franchisor of video game stores, engaged in acts
of fraud and misrepresentation, breach of contract and unfair and deceptive
trade practices, first by misstating its intentions in regard to developing and
supporting a network of stand-alone video game stores, thereby inducing the
franchisee to incur substantial development expenses, and then by failing to
deliver promised support, including design plans and specifications, opening
inventory and computer hardware and software. The Demand seeks compensatory
damages in excess of $355,000. The Company has denied the material allegations
of the Demand and intends to vigorously defend against this action.
On March 20, 1996, a Complaint was filed against the Company in the
Superior Court of the State of California in and for the City and County of
Santa Clara, Anderson & Wells, Sundance Venture Partners, L.P., and Murphy's
Express v. R.K.T. Acquisition Co., West Coast Entertainment Corporation, and
Does 1 through 10 (Case No. CV756743). Plaintiffs claim that the Company failed
to close an $800,000 bridge financing loan from Sundance Venture Partners, L.P.
("Sundance") which plaintiffs allege would have entitled Sundance, as lender, to
warrants for Company common stock worth $420,000 (valued at a share price
equivalent to the price at which the Company subsequently offered its stock in a
public offering) and Anderson & Wells to a $60,000 placement fee. Based on these
assertions, the Complaint alleges breach of contract, breach of the covenant of
good faith and fair dealing and interference with economic relations against the
Company due to its purported failure to close the loan. The Company has denied
the material allegations in the Complaint and plans to defend vigorously against
plaintiffs' claims.
DEVELOPMENT OF THE COMPANY
West Coast Entertainment Corporation is a Delaware corporation established
by Ralph W. Standley III and T. Kyle Standley in February 1995 (originally under
the name RKT Acquisition Co.) for two purposes:
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<PAGE> 54
(i) to combine four corporations (the "Predecessor Corporations") through which
the Standley family had theretofore conducted their video store business and
(ii) to acquire substantially all of the operating assets relating to franchise
operations of West Coast Video Entertainment, Inc., an unrelated third party,
and its four affiliated corporations. In July 1995 each of the four Predecessor
Corporations, Giant Video Corporation ("GVC"), Nostalgia Ventures, Inc. ("NVI"),
G.V. Management Corp. ("GVMC") and Videosmith (DE) Incorporated ("VDI"), merged
with and into the Company (the "Merger"). As a result of the Merger, the former
stockholders of the four Predecessor Corporations became stockholders of the
Company. Simultaneously, the Company, through its wholly-owned subsidiary WC
Franchise, a Delaware corporation, acquired substantially all of the
franchise-related operating assets of the WCEI Companies for $4.0 million in
cash and $4.4 million principal amount of promissory notes and also agreed to
make $500,000 of noncompetition payments and pay certain subsequent fees as
described under "-- Recent Acquisitions."
The Company's growth since 1995 is described under "-- Recent
Acquisitions."
The four Predecessor Corporations that were merged into the Company had
previously conducted their respective operations under substantially common
ownership. See Notes 1 and 11 to the Company's consolidated financial
statements. GVC, an Ohio corporation, was incorporated in 1989 and opened its
first video specialty store in Dayton, Ohio in June 1989. In April 1993 all of
the outstanding stock of NVI, an Ohio corporation with seven stores in the
Greater Dayton area, was acquired by the controlling stockholders of GVC from
unrelated third parties for $100,000 in cash and $108,000 principal amount of
promissory notes accompanied by a $256,000 noncompetition payment. In August
1994 the controlling stockholders of NVI, together with certain other investors,
acquired from an unrelated third party through VS Acquisition Corp., a newly
formed Delaware corporation ("VSAC"), all of the outstanding stock of VDI, the
parent of Videosmith Incorporated, a Massachusetts corporation with 14 stores in
Massachusetts, for $1.9 million in cash. Shortly thereafter, VSAC merged with
and into VDI. In May 1992 the controlling stockholders of GVC formed an Ohio
corporation, GVMC, which provided management services to certain of the other
corporations. In February 1992 over three years prior to the acquisition of its
franchise-related operating assets by the Company, one of the WCEI Companies
filed for protection under Chapter 11 of the Federal Bankruptcy Code due to the
financial condition of its owned and operated video specialty stores, as
distinct from its franchising operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
The executive officers and directors of the Company are as follows:
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ralph W. Standley III..................... 58 Chairman of the Board of Directors
T. Kyle Standley.......................... 33 President, Chief Executive Officer and
Director
Donald R. Thomas.......................... 52 Chief Operating Officer and Director
Kenneth R. Graffeo........................ 38 Executive Vice President-Marketing
Peter Balner.............................. 49 Executive Vice President-Corporate Retail
Operations and Development and Director
Jules E. Gardner.......................... 35 Executive Vice President-Franchise
Operations
Richard G. Kelly.......................... 42 Vice President, Chief Financial Officer
Jerry L. Misterman........................ 50 Vice President, Chief Accounting Officer
M. Trent Standley......................... 31 Vice President, Secretary and Director
James B. Dinneen, Jr.(1).................. 34 Director
C. Stewart Forbes(2)...................... 56 Director
Wesley F. Hoag(1)(2)...................... 39 Director
<FN>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
</TABLE>
Ralph W. Standley III has served as the Chairman of the Board of West Coast
and its principal predecessors for the past five years. He also served as
President of two such predecessors, NVI and VDI, and as Secretary of two other
predecessors, GVI and GVMC, from the date of their inception or acquisition by
West Coast through July 1995. Ralph W. Standley III is the father of T. Kyle
Standley and M. Trent Standley.
T. Kyle Standley has served as the President and Chief Executive Officer
and a Director of West Coast and its predecessors since its inception in
February 1995. Previously, he served as an executive officer of two of West
Coast's predecessors, GVC and GVMC, commencing in 1991. Mr. Standley was
director of research at Colliers International Property Consultants from 1989 to
1991, and prior thereto was a financial analyst at Paine Webber Incorporated.
Mr. Thomas has served as Chief Operating Officer since he joined the
Company in May 1995. Mr. Thomas has also served as Chairman of the Board of
Directors and Executive Consultant since 1985 to A-Z Video, a chain of 12
company-owned and 21 licensed video specialty stores; Chairman of the Board of
Directors, President and Chief Executive Officer of Club Donatello Owners
Association, a hotel-condominium owners association in San Francisco, since
early 1994; and as President of D.R. Thomas Enterprises, Ltd., a management
consulting firm, since 1991. From 1990 through 1992, Mr. Thomas also served as
Senior Vice President of Creative Strategies Research International, Inc., a
high-technology market research and management consulting firm.
Mr. Graffeo has served as Executive Vice President-Marketing since he
joined the Company in July 1995 in connection with the acquisition by WC
Franchise of certain franchise-related operating assets. Prior thereto, Mr.
Graffeo served West Coast Entertainment, Inc. as its Executive Vice President
from December 1993 until July 1995 and as Vice President-Marketing from December
1992 through December 1993. From July 1990 through December 1992, Mr. Graffeo
served as Director of Marketing for West Coast Video Enterprises, Inc. Both West
Coast Entertainment, Inc. and West Coast Video Enterprises, Inc. were WCEI
Companies previously engaged in the franchising and ownership and operation of
video specialty stores. From 1986 to 1990, Mr. Graffeo served as a
Vice-President of Marketing Services for Geographic Marketing Group, a
BBDO/Tracy Locke Company, a domestic marketing group, with direct responsibility
for the marketing campaigns of brands such as Kraft General Foods and
Pepsi-Cola. From 1980 to 1986, Mr. Graffeo was employed by Coca-Cola Co. Inc.,
where he served in various marketing and brand management positions.
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<PAGE> 56
Mr. Balner has served as President and Chief Executive Officer of Palmer
Video, a rental video retailer, since December 1981. Mr. Balner has received
numerous awards, including "Retailer of the Year" in 1989 and 1993 and "Video
Man of the Year" in 1989, and was inducted into the "Video Hall of Fame" in
1992. Mr. Balner has served on the Board of Directors of the Video Software
Dealers Association since 1993.
Mr. Gardner has served as Executive Vice President-Franchise Operations
since he joined the Company in July 1995 in connection with the acquisition by
WC Franchise of certain franchise-related operating assets, and has served as
President of WC Franchise Company since July, 1995. Prior to July 1995, Mr.
Gardner served as Chief Operating Officer for West Coast Entertainment, Inc.
from November 1992. From July 1990 through November 1992, Mr. Gardner was a Vice
President of West Coast Video Enterprises, Inc. with responsibility for
marketing video specialty store franchises. On February 25, 1992, West Coast
Video Enterprises, Inc., of which Mr. Gardner was an executive officer, filed
for protection under Chapter 11 of the Federal Bankruptcy Code. Prior to 1990,
Mr. Gardner also coordinated the national sales and distribution efforts of
Sorbee International, a manufacturer of sugar-free candies.
Mr. Kelly joined the Company in July, 1996. Previously he was a director of
Moore, Stephens, Reilly, P.C. for the past three years. Mr. Kelly was a director
of Gillis & Kelly, P.C. which was merged with Moore, Stephens, Reilly, P.C. Mr.
Kelly is a Certified Public Accountant whose responsibilities included the
direction of the mergers and acquisitions group.
Mr. Misterman has served as Vice President-Finance of the Company since
mid-July 1995 and as Chief Financial Officer of WC Franchise, a wholly owned
subsidiary of the Company, since the acquisition by WC Franchise of certain
franchise-related operating assets in July 1995. Prior to and until July 1995,
Mr. Misterman served as Chief Financial Officer of each of the WCEI Companies,
of Sorbee International, a manufacturer of sugar-free candies, from March 1989,
and of Medical Products Labs, a manufacturer and distributor of fluoride-related
sugar-free dental products, from March 1990. Prior to 1990, Mr. Misterman's
experience included serving as the Chief Financial Officer of the Seven-Up
Bottling Group of Philadelphia Inc., Corporate Controller and Assistant
Treasurer of Aydin Corporation, a manufacturer of electronic communications
systems and equipment, and also as Chief Financial Officer of Providers Benefit
Company, a manager and operator of several primary health care facilities and a
finance company. On February 25, 1992, West Coast Video Enterprises, Inc., of
which Mr. Misterman was an executive officer, filed for protection under Chapter
11 of the Federal Bankruptcy Code.
M. Trent Standley has served as a Vice President, Secretary and a Director
of West Coast since May 1995. He also served as President of one of West Coast's
predecessors, GVI, from 1989 to 1995, as Vice President of two other
predecessors, VDI from 1994 to 1995 and GVMC from 1992 to 1995, and as Secretary
of a fourth predecessor, NVI, from 1993 to 1995.
Mr. Dinneen has served the Company as a Director since August 1995. Since
January 1995, Mr. Dinneen has served as Managing Director of Merion Capital
Management, LLC, an investment management company. From 1991 to 1994, Mr.
Dinneen served as Assistant to the President of WSR Corporation, an auto parts
retailer, with responsibility for general management and strategic planning
functions. Prior to 1991, Mr. Dinneen served as a financial analyst for Merrill
Lynch Capital Partners, Inc.
Mr. Forbes has served as President of Colliers International Property
Consultants since 1979.
Mr. Hoag has served as General Counsel and Chief Operating Officer of R.
Meeder & Associates, Inc., a registered investment adviser ("Meeder"), since
July 1993, and since April 1994 has served as Vice President of The Flex-Funds
and The Flex-Partners, investment companies sponsored by Meeder. From 1984 to
1993, Mr. Hoag was an attorney at the law firm of Porter, Wright, Morris &
Arthur.
Executive officers of the Company are generally elected by the Board of
Directors on an annual basis and serve at the discretion of the Board of
Directors. Directors serve for one-year terms, until the next Annual Meeting of
Stockholders and until their respective successors are duly elected and
qualified.
Mr. Dinneen has been elected as a director of the Company pursuant to an
agreement with the former stockholders (other than members of the Standley
Family) of VDI and NVI (the "Non-Standley Investors") in connection with the
merger of each of VDI and NVI with and into the Company in July 1995. The
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<PAGE> 57
agreement will terminate when the Non-Standley Investors own less than 475,469
shares, which equals one half of the shares of Common Stock acquired by them in
the merger.
DIRECTOR COMPENSATION
Non-employee directors of the Company receive an annual stipend of $10,000
and all directors are reimbursed for their out-of-pocket expenses incurred in
connection with their attendance at Board and committee meetings.
Under the Company's 1995 Director Stock Option Plan (the "Director Option
Plan"), upon the consummation of the Public Offering, each of Messrs. Dinneen,
Forbes and Hoag, the Company's non-employee directors, was granted an option to
purchase 3,000 shares of Common Stock at an exercise price per share equal to
the public offering price. In addition, each non-employee director initially
elected to the Board of Directors in the future will be granted an option, upon
his or her initial election as a director, to purchase 3,000 shares of Common
Stock. Each non-employee director will also receive a subsequent grant of an
option for 1,000 shares on the date of each Annual Meeting of Stockholders at
which such director is reelected as a director of the Company, beginning with
the Annual Meeting for the year ending January 31, 1997. All options granted
under the Director Option Plan have or will have an exercise price equal to the
fair market value of the Common Stock on the date of grant, will vest over a
three-year period, provided the optionholder continues to serve as a director of
the Company, and will expire ten years from the date of grant (subject to
earlier termination in the event the optionee ceases to serve as a director of
the Company). The total number of shares of Common Stock that may be issued
under the Director Option Plan is 50,000 shares.
EXECUTIVE COMPENSATION
Summary Compensation
<TABLE>
The following table sets forth certain information concerning the annual
and long-term remuneration paid to or accrued for the Chief Executive Officer
and each of the other four most highly compensated executive officers of the
Company whose salaries and bonuses exceeded $100,000 for services rendered
during the year ended January 31, 1996 (the "Named Executives") together with
similar information in regard to such remuneration paid to or accrued for the
Named Executives for services rendered during the year ended January 31, 1995.
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION(1)
FISCAL YEAR ENDED --------------------
NAME AND PRINCIPAL POSITION JANUARY 31, SALARY BONUS
- --------------------------- ----------------- -------- -------
<S> <C> <C> <C>
Ralph W. Standley III 1996 $117,923
Chairman of the Board......................... 1995 $ 52,000 $34,000
T. Kyle Standley 1996 $ 43,795
President and Chief Executive Officer......... 1995 $ 26,000 $30,000
Kenneth R. Graffeo(2)
Executive Vice President...................... 1996 $200,000
Jules E. Gardner(2)
Executive Vice President...................... 1996 $200,000
Jerry L. Misterman(2)
Vice President-Finance........................ 1996 $118,750
<FN>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total of annual salary and bonuses for the executive officer for the fiscal
year.
(2) This executive officer joined the Company in July 1995.
</TABLE>
The Company expects to pay higher amounts of executive compensation to
Ralph W. Standley III and T. Kyle Standley in the year ending January 31, 1997
and subsequent years as its operations expand. Estimates
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<PAGE> 58
of such amounts have been reflected in the pro forma combined financial data set
forth elsewhere in this Prospectus.
Option Grants and Year-End Option Values
To date, the Company has not granted any employee stock options. Future
grants will be made at the discretion of the Compensation Committee.
Employment Agreements
In connection with the purchase by WC Franchise of substantially all the
operating assets pertaining to franchising operations of the WCEI Companies, WC
Franchise entered into employment agreements with each of Messrs. Gardner,
Graffeo and Misterman. Each of these agreements has a two-year term which
expires in July 1997. Under such agreements, these employees serve WC Franchise
as its President, Executive Vice President-Marketing and Vice President-Finance,
respectively. Messrs. Gardner, Graffeo and Misterman are also executive officers
of the Company.
These agreements provide for annual salaries of $200,000 to each of Messrs.
Gardner and Graffeo, and $118,750 to Mr. Misterman. All reasonable travel,
entertainment and other expenses incurred in connection with the performance of
their employment duties are reimbursable by the Company.
Under each agreement, the employee's employment may be terminated by the
Company in the event that the employee fails to perform his respective duties
for a certain period of time, for cause, upon the death or disability of the
employee or at the election of the employee upon two months' written notice
provided to the Company. In the event that the Company moves the employee's
primary place of employment to a location beyond a 40 mile radius of its present
Philadelphia site and the employee elects to terminate his employment for such
reason, then the Company is obligated to pay each such terminating employee the
balance of any salary and benefits which he would have been entitled to receive
had he remained employed for the remainder of the term of the respective
agreement.
The Company has entered into a one-year employment agreement with Mr.
Balner which became effective upon consummation of the Acquisition of Palmer
Video, pursuant to which Mr. Balner serves as Executive Vice President-Corporate
Retail Operations and Development at an annual salary of $210,000. Except that
Mr. Balner's agreement does not provide for termination benefits if his primary
place of employment is moved, such agreement is substantially similar in all
other material respects to those of Messrs. Gardner, Graffeo and Misterman.
The agreements generally prohibit each employee from competing with the
Company during his term of employment by the Company and for two years
thereafter, and contain customary confidentiality and invention assignment
provisions in favor of the Company. The agreements require the Company to
indemnify each employee to the fullest extent permitted under the Delaware
General Corporation Law for liabilities incurred by each employee in the
performance of his duties.
EMPLOYEE STOCK PLANS
1995 Equity Incentive Plan. The Company's 1995 Equity Incentive Plan (the
"Equity Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company in July 1995. The Equity Plan enables the Company to
grant options to purchase Common Stock, to make awards of restricted Common
Stock, and to issue certain other equity-related securities of the Company to
employees of and consultants to the Company. The total number of shares of
Common Stock which may be issued under the Equity Plan is 350,000 shares. Stock
options entitle the optionee to purchase Common Stock from the Company for a
specified exercise price as determined by the Board of Directors, during a
period specified in the applicable option agreement. Restricted stock awards
entitle the recipient to purchase Common Stock from the Company under terms
which provide for vesting over a period of time and a right of repurchase in
favor of the Company with respect to the unvested portion of the Common Stock
subject to the award upon the termination of the recipient's employment or other
relationship with the Company. The maximum number
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<PAGE> 59
of shares with respect to which options or awards may be granted to any employee
under the Equity Plan may not exceed 90,000 shares of Common Stock during any
calendar year.
Under the Equity Plan, the Company may grant options that are intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") ("incentive stock
options"), or options not intended to qualify as incentive stock options
("nonstatutory options"). Incentive stock options may only be granted to
employees of the Company. Stock options granted under the Equity Plan will be
nontransferable, and it is expected that they will generally become exercisable
over a four-year period and expire ten years after the date of grant (subject to
earlier termination in the event of the termination of the optionee's employment
with the Company).
The Equity Plan is administered by the Compensation Committee of the Board
of Directors, which selects the persons to whom stock options and restricted
stock awards are granted and determines the number of shares of Common Stock
covered by the option or award, its exercise price or purchase price, its
vesting schedule and (in the case of stock options) its expiration date. To
date, no stock options, restricted stock or other equity incentives have been
granted under the Equity Plan.
1995 Employee Stock Purchase Plan. The Company's 1995 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and
approved by the stockholders of the Company in November 1995. The Purchase Plan
authorizes the issuance of up to a total of 125,000 shares of Common Stock to
participating employees through a series of semiannual offerings. Offering
periods will commence on each July 1, beginning July 1, 1996, and January 1 and
terminate on the following June and December 31, respectively. The maximum
number of shares available in each offering is 25,000 shares. The Purchase Plan
will terminate when the maximum number of shares issuable under the Purchase
Plan has been purchased by participating employees. Any employee, including an
employee who is a director, of the Company or a participating subsidiary is
eligible to participate in an offering if, on the first day of the applicable
offering, he or she is regularly employed by the Company or the subsidiary for
more than 20 hours a week and has been so employed for more than five months in
a calendar year. The price at which employees may purchase Common Stock in an
offering is 85% of the closing price of the Common Stock on the Nasdaq National
Market on the day the offering commences or on the day the offering terminates,
whichever is lower. An employee may elect to have up to 10% of his or her
qualifying compensation withheld for the purpose of purchasing stock under the
Purchase Plan. On the date an offering commences, each participating employee is
deemed to have been granted an option to purchase up to the number of whole
shares determined by dividing 12% of such employee's compensation for the
immediately prior six-month period by 85% of the fair market value of the Common
Stock on the date the offering commences. Unless the participant elects to
withdraw from the offering, each participant who continues to be employed by the
Company on the date such offering terminates is deemed to have exercised the
option and purchased on such date such number of shares (subject to the maximum
number covered by his or her option) as may be purchased with the amount of his
or her payroll deductions at the offering price. If the total number of shares
of Common Stock that would otherwise be purchased in the offering with the
accumulated payroll deductions exceeds the number of shares available during the
offering, the available shares will be allocated on a pro rata basis to
participating employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Immediately following the completion of the Public Offering, the Company
established a Compensation Committee consisting of Messrs. Forbes and Hoag. The
Board of Directors did not previously have a Compensation Committee; instead,
the functions of the Compensation Committee were performed by the Board of
Directors as a whole. For information concerning certain transactions and
relationships among the Company and the members of the Board of Directors, see
"Certain Transactions."
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<PAGE> 60
CERTAIN TRANSACTIONS
In July 1994, in connection with its formation, VSAC, one of the Company's
predecessors, issued 13 shares of its Common Stock to each of Ralph W. Standley
III, T. Kyle Standley and M. Trent Standley for cash payments of $2,000 each. In
August 1994, in connection with the acquisition by VSAC of all of the capital
stock of VDI, VSAC issued (i) an additional 414 shares of its Common Stock to
Ralph W. Standley III and an additional 402 shares of its Common Stock to each
of T. Kyle Standley and M. Trent Standley for an aggregate cash payment of
$194,000 each and (ii) 279 shares of its Series A Convertible Preferred Stock to
James B. Dinneen, Jr. for a cash payment of $100,000. In September 1994, VSAC
was merged with and into VDI and VDI issued shares of its Common Stock and
Series A Convertible Preferred Stock to the stockholders of VSAC in
consideration for the cancellation of their capital stock of VSAC.
In February 1995, in connection with its formation and initial
capitalization, the Company issued a total of 1,028,460 shares of Common Stock
to Ralph W. Standley III (342,840 of which shares Mr. Standley subsequently
transferred to the Ralph W. Standley III Irrevocable Trust), 1,028,460 shares of
Common Stock to T. Kyle Standley and 228,547 shares of Common Stock to M. Trent
Standley for cash payments of $4,500, $4,500 and $1,000, respectively.
In July 1995, in connection with the merger of NVI, GVC, GVMC and VDI into
the Company, the Company issued a total of 611,379 shares of Common Stock to
Ralph W. Standley III, 64,304 shares of Common Stock to Ralph W. Standley III's
wife, 407,465 shares of Common Stock to T. Kyle Standley, 436,411 shares of
Common Stock to M. Trent Standley and 172,956 shares of Common Stock to Mr.
Dinneen, reflecting the value of each such person's stockholdings in such four
entities, in consideration for cancellation of their capital stock in such four
entities.
The Company has entered into employment agreements with Messrs. Graffeo,
Gardner, Misterman and Balner. See "Management -- Employment Agreements."
Two corporations, 51% of whose outstanding stock was owned by Mr. Gardner
and 40% by Mr. Graffeo, operated two West Coast Video[Registered Trademark]
stores from July 1991 through October 1993 and October 1995, respectively,
under royalty-free license agreements from the WCEI Companies (prior to July
1995) and WC Franchise (thereafter). Had standard royalties and advertising
fees not been waived, such stores would have paid the franchisors approximately
$59,800 during fiscal 1992, approximately $64,480 during fiscal 1993,
approximately $34,800 during fiscal 1994 and $33,280 during fiscal 1995. The
two stores were sold to unrelated third parties which had already become West
Coast Video[Registered Trademark] franchisees.
For a description of the agreement with the Non-Standley Investors,
pursuant to which Mr. Dinneen has been elected a director of the Company, see
"Management -- Executive Officers and Directors." For a description of a
registration rights agreement to which Mr. Dinneen is a party, see "Description
of Capital Stock -- Registration Rights."
In May 1996, the Company granted certain stock options to Messrs. Dinneen,
Forbes and Hoag under the Director Option Plan. See "Management -- Director
Compensation."
The Company paid an aggregate purchase price of $9,156,781, consisting of
$4,578,391 in cash and 352,184 shares of Common Stock, to Peter Balner in
connection with the Recent Acquisition by the Company of all outstanding stock
of Palmer Video owned by him, together with an additional $2,289,196, consisting
of $436,686 in cash and 142,501 shares of Common Stock, payable to two family
trusts of which Mr. Balner is trustee.
The Company paid an aggregate purchase price of $4,300,000 in cash to A-Z
Video in connection with the Recent Acquisition of 12 video specialty stores.
Mr. Thomas, the Chief Operating Officer of the Company, was Chairman of the
Board of A-Z Video and owned 2% of its outstanding capital stock.
In May 1996, the Company repaid approximately $3.1 million of indebtedness
to a financial institution, all of which had been guaranteed by Ralph W.
Standley III, T. Kyle Standley and M. Trent Standley.
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In May 1996, the Company repaid $216,781 of principal of and accrued
interest on a convertible note to Mr. Gardner. Mr. Graffeo elected to convert an
additional $216,781 of principal and accrued interest into 20,844 shares of
Common Stock. Each of Messrs. Graffeo and Gardner had a 10% interest in such
note, which was issued to West Coast Video Enterprises, Inc. in July 1995 as
part of the purchase price for the franchise-related assets of that corporation
which were acquired by the Company's wholly owned subsidiary, WC Franchise.
In July 1995, the Company also agreed to pay to each of Messrs. Graffeo and
Gardner 1.11% (and the WCEI Companies 8.88%) of the total purchase price paid
by the Company to the seller in connection with the acquisition of the stock or
assets of any company which was a West Coast Video[Registered Trademark]
franchisee as of July 12, 1995. Under this agreement, the Recent Acquisition of
stores from the Massachusetts Franchisees resulted in a payment of
approximately $130,000 to each such individual.
The Company has adopted a policy requiring all future transactions between
the Company and its officers, directors and affiliates to be on terms no less
favorable to the Company than could be obtained from unrelated third parties and
to be approved by a majority of the disinterested members of the Company's Board
of Directors.
PRICE RANGE OF COMMON STOCK; DIVIDENDS
<TABLE>
The Company's Common Stock has traded on Nasdaq's National Market System
under the symbol "WCEC" since May 14, 1996. The Company believes that
approximately three dealers are engaged in making a market in the Company's
Common Stock. The following table sets forth, for the fiscal period indicated,
the high and low sales prices for the Company's Common Stock as reported by
Nasdaq.
<CAPTION>
SALE PRICES
--------------
FISCAL YEAR ENDING JANUARY 31, 1997 HIGH LOW
----------------------------------- ------ -----
<S> <C> <C>
Second Quarter
(from May 14, 1996 through June 30, 1996)........................... 13 1/2 9 1/4
</TABLE>
There were approximately 95 record owners of the Company's Common Stock as
of July 1, 1996.
For the foreseeable future, the Company expects to retain its earnings to
finance the expansion and development of its business. The payment of dividends
is within the discretion of the Company's Board of Directors and will depend on
the earnings, capital requirements, restrictions in future credit agreements and
the operating and financial condition of the Company, among other factors. The
Credit Facility contains a covenant prohibiting the payment of dividends without
the lender's consent. There can be no assurance that the Company will ever pay
dividends in the future.
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<PAGE> 62
PLAN OF DISTRIBUTION
Shares of common stock will be offered in connection with West Coast's (or
a subsidiary's) acquisition of businesses, properties or equity and/or debt
securities in business combination transactions from time to time. A maximum of
5,000,000 shares of common stock may be issued and sold pursuant to this
prospectus. These shares will ordinarily represent consideration paid directly
upon the acquisition of businesses, properties or securities, in some cases
together with additional consideration consisting of cash, debt or other
securities (which may be convertible into shares covered by this Prospectus) or
assumption by the Company of liabilities of the businesses being acquired, or a
combination thereof. The shares may also include shares to be delivered upon the
exercise or satisfaction of conversion or purchase rights which are created in
connection with acquisitions or which were previously created or assumed by the
companies whose businesses or properties are acquired by West Coast (or a
subsidiary).
RESALES
Shares offered hereby may generally be resold by the persons acquiring them
without further registration under the Securities Act of 1933 (the "Act"),
unless such persons are "affiliates" or "underwriters" within the meaning of the
Act. Such transfer restrictions are distinct from and in addition to any
transfer restrictions which may be contained in the acquisition agreements for
all or some future acquisitions. The Company intends to seek the agreement of
recipients of shares of Common Stock in Acquisitions to restrictions on their
transfer of such shares for periods ranging from six to 18 months or to
structure such transactions to provide for issuance of shares on a deferred
basis over periods of six to 18 months.
Any person receiving shares offered hereby who is an "affiliate" of West
Coast may be subject to certain limitations on resale. An "affiliate"' is a
person who directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with the Company. In the absence
of a special relationship between West Coast and a person who receives shares
from West Coast in an acquisition transaction (such as election of such person
to West Coast's board of directors or ownership by such person of a significant
percentage of West Coast's outstanding common stock), such a person generally
would not be considered an "affiliate" of West Coast within the meaning of the
Act. Therefore, the limitations on resale applicable to affiliates would not
apply to such person.
Any person receiving shares offered hereby who is an "underwriter" of West
Coast may also be subject to certain limitations upon resale. An "underwriter"
includes a person who purchases West Coast shares with a view to the
distribution of such shares, or an affiliate of a company or business acquired
by West Coast. Although an "underwriter" may otherwise be subject to certain
resale limitations, if such person complies with the "safe harbor" provisions of
Rule 145(d), he or she may freely resell shares so long as certain conditions
are met. For example, a person who receives common shares from West Coast in a
typical acquisition transaction is deemed to be an "underwriter" as defined by
the Act, but such person is generally free under the Securities Act to sell such
shares at any time by complying with Rule 145(d), which requires that the amount
of common shares which may be sold by such person in any three-month period may
not exceed the greater of (i) 1% of the West Coast common shares outstanding as
shown by the most recent report or statement published by West Coast, or (ii)
the average weekly trading volume in West Coast common shares reported on Nasdaq
during the four calendar weeks preceding the order to sell. Such sales must also
be made in "brokers' transactions," which are ordinary sales through a broker
acting as agent without special commission arrangements or selling efforts.
Persons receiving shares in connection with acquisitions may also be subject to
contractual restrictions on resale entered into in connection with such
acquisitions.
In order for affiliates or underwriters not protected by Rule 145(d) to
resell shares offered hereby, West Coast would have to agree (i) to provide an
opinion to the effect that an exemption applies to such resale, (ii) to amend
the registration statement of which this prospectus is a part to permit such
resales, or (iii) to file a new registration statement which includes the shares
proposed to be resold. Unless a written agreement obligates West Coast to do so,
it does not expect that it will agree to provide such opinion, amendment or
registration.
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<PAGE> 63
USE OF PROCEEDS
The proceeds of the sale of shares offered hereby, to the extent such
proceeds consist of the assets of acquired businesses, will be added to the
assets of West Coast. Cash proceeds, if any, will be added to the general funds
of West Coast and may be used for general corporate purposes, including capital
expenditures and working capital requirements.
PRINCIPAL STOCKHOLDERS
<TABLE>
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 1, 1996 by (i) each person
who is known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director and nominee, (iii) each Named
Executive and (iv) all directors and executive officers as a group.
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
NAME AND ADDRESS OF ------------------------
BENEFICIAL OWNER NUMBER PERCENT(2)
- ------------------- --------- ----------
<S> <C> <C>
5% STOCKHOLDERS:
Ralph W. Standley III(3)(4)(5).................................... 1,361,323 11.3%
Ralph W. Standley III Irrevocable Trust(3)(5)..................... 342,820 2.9
T. Kyle Standley(3)(5)............................................ 1,435,935 11.9
M. Trent Standley(3).............................................. 664,958 5.5
OTHER EXECUTIVE OFFICERS:
Peter Balner(6)................................................... 352,184 2.9
Palmer Corporation
1767 Morris Avenue
Union, NJ 07083-3598
Jules E. Gardner(3)............................................... -- --
Kenneth R. Graffeo(3)............................................. 20,844 *
Donald R. Thomas(3)............................................... -- --
OTHER DIRECTORS:
James B. Dinneen, Jr.(7).......................................... 172,956 1.4
Merion Capital Management
767 Third Avenue, 27th Floor
New York, NY 10017
C. Stewart Forbes................................................. -- --
Colliers International
84 State Street, 5th Floor
Boston, MA 02109
Wesley F. Hoag.................................................... -- --
R. Meeder & Associates
P.O. Box 7177
Dublin, OH 43017
All directors and executive officers as a group
(11 persons)(4)(5)(6)............................................. 4,351,020 36.2
<FN>
- ---------------
* Less than 1%
(1) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise indicated. In accordance with the
rules of the Securities and Exchange Commission, each stockholder is deemed
to beneficially own any shares subject to stock options or warrants which
are
</TABLE>
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<PAGE> 64
currently exercisable or which become exercisable, or convertible securities
which are currently exercisable or which become exercisable, within 60 days
after July 1, 1996, and any reference in these footnotes to shares subject
to stock options held by the person or entity in question refers to stock
options which are currently exercisable or which become exercisable within
60 days after July 1, 1996. The inclusion herein of shares listed as
beneficially owned does not constitute an admission of beneficial ownership.
The number and percentage of outstanding shares owned after this offering
assumes none of the listed stockholders will purchase additional shares in
this offering.
(2) Number of shares deemed outstanding includes shares outstanding as of July
1, 1996 and any shares subject to stock options held by the person or entity
in question that are currently exercisable or exercisable within 60 days
following July 1, 1996.
(3) These holders have an address c/o the Company, 9990 Global Road,
Philadelphia, Pennsylvania 19115.
(4) Includes 64,304 shares owned by this stockholder's wife; this stockholder
disclaims beneficial ownership of all such 64,304 shares.
(5) Voting and dispositive power over 342,820 shares owned by this trust is
shared by T. Kyle Standley and John H. Chory, Esq., as co-trustees. The
beneficiaries of the trust are Ralph W. Standley III's issue, who include T.
Kyle Standley and M. Trent Standley. The number of shares in the column next
to Ralph W. Standley III's name excludes these shares.
(6) Excludes 142,501 shares of Common Stock to be acquired by two family trusts,
over which Mr. Balner has no voting or dispositive power, in connection with
the Acquisition of Palmer Video by the Company.
(7) All of these shares are held by a charitable remainder trust, over which Mr.
Dinneen shares voting power, and is the sole income beneficiary.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock and 2,000,000 shares of Preferred Stock. As of July 1, 1996,
there were outstanding (i) 12,020,844 shares of Common Stock held by
approximately 95 stockholders of record, (ii) the Warrant, which provides for
the purchase of 192,308 shares of Common Stock and (iii) options issued pursuant
to the Director Option Plan to purchase a total of 9,000 shares of Common Stock.
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Certificate of Incorporation, as amended (the "Certificate of
Incorporation") and Restated By-laws (the "By-Laws") is believed to be complete
in all material respects. For further details, see the Company's Certificate of
Incorporation and By-laws included as exhibits to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the outstanding shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to preferential dividend rights, if
any, of any outstanding series of Preferred Stock. Upon the liquidation,
dissolution or winding-up of the Company, holders of Common Stock are entitled
to receive ratably the net assets of the Company available for distribution
after the payment of all debts and other liabilities of the Company. Holders of
Common Stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of Common Stock are, and the shares offered hereby will
be, when issued and paid for, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of holders of shares of any series of
Preferred Stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 2,000,000 shares of Preferred Stock, in one or more
series. Each such series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights.
The stockholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject to
the rights of holders of any Preferred Stock issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
Preferred Stock.
WARRANT
In July 1995, the Company issued the Warrant to Resource Holdings, Inc., a
subsidiary of Ingram. The Warrant entitles its holder to purchase a number of
shares equal to $1,750,000 divided by 70% of the initial public offering price
per share in the Public Offering (192,308 shares). The exercise price of the
Warrant is 70% of such initial public offering price. The exercise price may be
paid (i) in cash or by certified check,
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<PAGE> 66
(ii) upon the surrender of the documents evidencing certain indebtedness owed by
the Company to Resource Holdings Inc. or (iii) by a combination of methods (i)
and (ii). The Warrant expires on July 12, 2000. See Note 7 to the Company's
consolidated financial statements. The Company has granted certain registration
rights relating to the shares of Common Stock issuable upon exercise of the
Warrant. See "-- Registration Rights."
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to approve the sale or exchange of all or substantially all of a
corporation's assets or the merger or consolidation of a corporation with or
into any other corporation, or to amend a corporation's certificate of
incorporation or by-laws, unless a corporation's certificate of incorporation or
by-laws, as the case may be, requires a greater percentage. The Company's
Certificate of Incorporation and By-laws require the affirmative vote of the
holders of at least two-thirds of the shares of capital stock of the Company
issued and outstanding and entitled to vote to approve the sale or exchange of
all or substantially all of the Company's assets or the merger or consolidation
of the Company with or into any other corporation (except for mergers or
consolidations which do not result in a substantial change in ownership of the
Company's outstanding capital stock). The Company's Certificate of Incorporation
and By-laws also require the affirmative vote of the holders of at least 75% of
the shares of capital stock of the Company issued and outstanding and entitled
to vote to amend or repeal such provision and certain of the provisions
described in the next two paragraphs.
The Company's By-laws also provide that any action required or permitted to
be taken by the stockholders of the Company may be taken without a meeting only
by the unanimous written consent of stockholders, and that special meetings of
stockholders may be called only by the Board of Directors or the President of
the Company. In addition, stockholders wishing to nominate a candidate for
election as a director or bring other business before a meeting of stockholders
must comply with certain advance notice and informational requirements in the
Company's By-laws. The foregoing provisions could have the effect of delaying
until the next stockholders' meeting stockholder actions which are favored by
the holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take unilateral action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent unless it had acquired 100% of the Company's outstanding
voting stock.
The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability to the
Company or its stockholders for monetary damages for a breach of fiduciary duty,
except in circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Company's Certificate of
Incorporation also contains provisions obligating the Company to indemnify its
directors and officers to the fullest extent permitted by the General
Corporation Law of Delaware. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.
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<PAGE> 67
REGISTRATION RIGHTS
Certain securityholders of the Company (collectively the "Rightsholders"),
who together own or have the right to acquire a total of 2,987,273 shares of
Common Stock (the "Registrable Shares") are parties to agreements with the
Company under which they have certain rights with respect to the registration of
the Registrable Shares under the Securities Act for resale to the public. These
agreements provide that in the event the Company proposes to register any of its
Common Stock under the Securities Act for its own account or otherwise, the
Rightsholders are entitled to include their Registrable Shares in such
registration, subject to certain conditions and limitations, which include the
right of the managing underwriter of any such offering to exclude some or all of
the Registrable Shares from such registration. In addition, certain of the
Rightsholders have demand registration rights under which, beginning in May
1997, they may require the Company to register all or part of their Registrable
Shares for resale to the public under the Securities Act, subject to certain
conditions and limitations. The Company is required to bear the expenses of
certain registrations (except underwriting discounts and commissions).
The Company is prohibited, pursuant to this agreement, from subsequently
granting registration rights to a third party which are more favorable to such
party than those rights enjoyed by the Rightsholders, unless approved by
Rightsholders who own more than 50% of the Registrable Shares.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
65
<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
At July 1, 1996, the Company had outstanding 12,213,152 shares of Common
Stock (assuming exercise of the Warrant). Of these shares, the 5,400,000 shares
sold in the Public Offering are freely tradeable without restriction under the
Securities Act except that shares owned by "affiliates" of the Company are
subject to certain restrictions. None of the remaining 6,813,152 outstanding
shares of Common Stock (collectively, the "Restricted Shares"), including
Restricted Shares to be issued in connection with the exercise of the Warrant,
have been registered under the Securities Act, and they may be resold publicly
only upon registration under the Securities Act or in compliance with an
exemption from the registration requirements of the Securities Act.
SALES OF RESTRICTED SECURITIES
At present, Rule 144 provides generally that if two years have elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company. If three years
have elapsed since the later of the date of acquisition of restricted shares of
Common Stock from the Company or from any affiliate of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale, such person would
be entitled to sell such shares without regard to the limitations described
above. Holders of 2,285,466 Restricted Shares will be eligible to sell such
shares pursuant to Rule 144 under the Securities Act, subject to the manner of
sale, volume, notice and information requirements of Rule 144, beginning in
February 1997, holders of 2,470,826 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144 beginning in July 1997 and holders of 2,056,860
Restricted Shares will be eligible to sell such shares pursuant to Rule 144
beginning in May 1998. The Commission has recently sought public comment on the
advisability of shortening the applicable holding periods under Rule 144 by one
year. If such a change in Rule 144 were to be effected, the respective dates
referred to above would be February 1996 and July 1996 (subject to the lock-up
agreements referred to below) and May 1997.
LOCK-UP AGREEMENTS
Pursuant to the terms of lock-up agreements with the Underwriters, the
Company, executive officers, directors and certain stockholders of the Company,
who hold in the aggregate approximately 4,618,000 shares of Common Stock have
agreed not to offer, sell, offer to sell, contract to sell, assign, pledge,
grant any option to purchase or otherwise dispose of or transfer any Common
Stock of the Company, or any other security of the Company, convertible into, or
exchangeable or exercisable for, Common Stock until November 1996 (the "Lock-up
Period"), without the prior written consent of Jefferies & Company, Inc.
("Jefferies"), except that (a) the Company may issue (i) Common Stock or options
to purchase Common Stock under the 1995 Equity Incentive Plan, the 1995 Director
Option Plan or the 1995 Employee Stock Purchase Plan, (ii) Common Stock upon the
exercise of presently outstanding warrants and (iii) Common Stock in connection
with the Company's express strategy of growth through acquisitions provided that
such Common Stock is restricted and is not tradeable prior to the expiration of
the Lock-up Period and (b) the executive officers, directors and certain
stockholders of the Company may make bona fide gifts to donees who agree to be
bound by the foregoing restrictions. See "Underwriting."
REGISTRATION RIGHTS
The Company intends to file registration statements under the Securities
Act later in 1996 registering the shares of Common Stock reserved for issuance
under the Company's 1995 Equity Incentive Plan, 1995 Director Stock Option Plan
and 1995 Employee Stock Purchase Plan. See "Management -- Director Compensation"
and "-- Employee Stock Plans." The Company has granted demand and piggyback
66
<PAGE> 69
registration rights to certain holders of certain Restricted Shares and to the
holder of the Warrant in connection with certain offerings of securities made by
the Company or its affiliates. See "Description of Capital Stock -- Registration
Rights." Shares registered under registration statements will be available for
sale in the open market, unless such shares are subject to vesting restrictions
imposed by the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Hale and Dorr, Boston, Massachusetts. John H. Chory, a partner of
Hale and Dorr, shares voting and dispositive power, as a co-trustee of the Ralph
W. Standley III Irrevocable Trust, with respect to 342,820 shares of Common
Stock owned by such trust.
EXPERTS
The financial statements of each of West Coast Entertainment Corporation;
New Age Entertainment, Inc. (one of the Massachusetts Franchisees); HB
Associates, Inc. (one of the Massachusetts Franchisees); Video Innovators, Inc.
(one of the Massachusetts Franchisees); Best Entertainment, Inc. (one of the
Massachusetts Franchisees); Showtime, Inc.; Video Giant, Inc.; Anthony Cocca's
Videoland, Inc.; Vidko, Inc.; Kobie-Co Movie Outlet; and Videosmith Incorporated
have been included herein and in the Registration Statement in reliance on the
reports of Price Waterhouse LLP, independent accountants, as of the dates and
for the periods indicated in their reports appearing elsewhere herein, except as
they relate to the unaudited twelve month period ended December 31, 1995 of
Vidko, Inc., and on the authority of said firm as experts in auditing and
accounting.
The financial statements of each of Lancaster Group, Inc. (a member of the
Red Giraffe group), Palmer Corporation and subsidiaries and Videosmith
Incorporated have been included herein and in the Registration Statement in
reliance on the reports of KPMG Peat Marwick LLP, independent certified public
accountants, as of the dates and for the periods indicated in their reports
appearing elsewhere herein, and on the authority of said firm as experts in
auditing and accounting.
The combined financial statements of American Video, Inc. (a member of the
Red Giraffe group) and Red Giraffe Video, Inc. have been included herein and in
the Registration Statement in reliance on the report of Carpenter & Mountjoy,
PSC, independent certified public accountants, as of the dates and for the
periods indicated in their report appearing elsewhere herein, and on the
authority of said firm as experts in auditing and accounting.
The combined financial statements of West Coast Entertainment, Inc., and
affiliates have been included herein and in the Registration Statement in
reliance on the report of Miller, Glusman, Footer & Magarick, P.C., independent
certified public accountants, as of the dates and for the periods indicated in
their report appearing elsewhere herein, and on the authority of said firm as
experts in auditing and accounting.
67
<PAGE> 70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
This Index relates to the financial statements set forth in this Prospectus
of West Coast Entertainment Corporation (the "Company"), its previously acquired
businesses ("Prior Acquisitions") and certain companies whose stock or assets
were acquired by the Company or which were merged into West Coast on May 17,
1996, concurrently with the consummation of the Public Offering, which companies
are identified under the caption "Recent Transactions" (the " Recent
Acquisitions").
<CAPTION>
PAGE
----
<S> <C>
THE REGISTRANT
West Coast Entertainment Corporation
Report of Independent Accountants.............................................. F-4
Consolidated Balance Sheet..................................................... F-5
Consolidated Statement of Operations........................................... F-6
Consolidated Statement of Cash Flows........................................... F-7
Consolidated Statement of Stockholders' Equity/(Deficit)....................... F-8
Notes to the Consolidated Financial Statements................................. F-9
Interim Financial Statements................................................... F-22
PRIOR ACQUISITIONS
Videosmith Incorporated
Report of Independent Accountants.............................................. F-27
Balance Sheet.................................................................. F-28
Statement of Operations........................................................ F-29
Statement of Stockholder's Equity.............................................. F-30
Statements of Cash Flows....................................................... F-31
Notes to Financial Statements.................................................. F-32
Videosmith Incorporated
Independent Auditors' Report................................................... F-36
Balance Sheets................................................................. F-37
Statements of Operations and Retained Earnings................................. F-38
Statements of Cash Flows....................................................... F-39
Notes to Financial Statements.................................................. F-40
West Coast Entertainment, Inc. and Affiliates
Report of Independent Certified Public Accountants............................. F-44
Combined Balance Sheets........................................................ F-45
Combined Statements of Operations.............................................. F-46
Combined Statements of Changes in Stockholders' Deficiency..................... F-47
Combined Statements of Cash Flows.............................................. F-48
Notes to Combined Financial Statements......................................... F-49
RECENT ACQUISITIONS (EXCLUDING A-Z VIDEO AND VIDEO VIDEO)
PALMER VIDEO
Palmer Corporation and Subsidiaries
Independent Auditors' Report................................................. F-53
Consolidated Balance Sheets.................................................. F-54
Consolidated Statements of Operations........................................ F-55
Consolidated Statements of Cash Flows........................................ F-56
Consolidated Statements of Stockholders' Equity.............................. F-57
Notes to Consolidated Financial Statements................................... F-58
RED GIRAFFE
American Video, Inc. and Red Giraffe Video, Inc.
Independent Auditor's Report................................................. F-66
Combined Balance Sheets...................................................... F-67
</TABLE>
F-1
<PAGE> 71
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Combined Statements of Income................................................ F-68
Combined Statements of Stockholders' Equity.................................. F-69
Combined Statements of Cash Flows............................................ F-70
Notes to Combined Financial Statements....................................... F-71
Interim Financial Statements................................................. F-75
Lancaster Group, Inc.
Independent Auditors' Report................................................. F-79
Balance Sheets............................................................... F-80
Statements of Operations..................................................... F-81
Statements of Stockholders' Equity (Deficit)................................. F-82
Statements of Cash Flows..................................................... F-83
Notes to Financial Statements................................................ F-84
Interim Financial Statements................................................. F-87
4 MASSACHUSETTS FRANCHISEES
New Age Entertainment, Inc.
Report of Independent Accountants............................................ F-91
Balance Sheet................................................................ F-92
Statement of Operations...................................................... F-93
Statements of Cash Flows..................................................... F-94
Statement of Stockholders' Equity............................................ F-95
Notes to Financial Statements................................................ F-96
Interim Financial Statements................................................. F-100
HB Associates, Inc.
Report of Independent Accountants............................................ F-104
Balance Sheet................................................................ F-105
Statement of Operations...................................................... F-106
Statement of Cash Flows...................................................... F-107
Statement of Stockholders' Equity............................................ F-108
Notes to Financial Statements................................................ F-109
Interim Financial Statements................................................. F-113
Best Entertainment, Inc.
Report of Independent Accountants............................................ F-117
Balance Sheet................................................................ F-118
Statement of Operations...................................................... F-119
Statement of Cash Flows...................................................... F-120
Statement of Stockholders' Equity............................................ F-121
Notes to Financial Statements................................................ F-122
Interim Financial Statements................................................. F-126
Video Innovators, Inc.
Report of Independent Accountants............................................ F-130
Balance Sheet................................................................ F-131
Statement of Operations...................................................... F-132
Statement of Cash Flows...................................................... F-133
Statement of Stockholders' Equity............................................ F-134
Notes to the Financial Statements............................................ F-135
Interim Financial Statements................................................. F-139
</TABLE>
F-2
<PAGE> 72
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
OTHER UNAFFILIATED SELLING GROUPS:
SHOWTIME VIDEO
Showtime, Inc.
Report of Independent Accountants............................................ F-143
Balance Sheet................................................................ F-144
Statement of Operations...................................................... F-145
Statement of Cash Flows...................................................... F-146
Statement of Stockholder's Equity............................................ F-147
Notes to Financial Statements................................................ F-148
Interim Financial Statements................................................. F-151
VIDEO GIANT
Video Giant, Inc.
Report of Independent Accountants............................................ F-155
Balance Sheet................................................................ F-156
Statement of Operations...................................................... F-157
Statement of Cash Flows...................................................... F-158
Statement of Stockholders' Equity............................................ F-159
Notes to Financial Statements................................................ F-160
Interim Financial Statements................................................. F-163
VIDEOLAND
Anthony Cocca's Videoland, Inc.
Report of Independent Accountants............................................ F-167
Balance Sheet................................................................ F-168
Statement of Operations...................................................... F-169
Statement of Cash Flows...................................................... F-170
Statement of Stockholders' Equity............................................ F-171
Notes to Financial Statements................................................ F-172
Interim Financial Statements................................................. F-176
Vidko, Inc.
Report of Independent Accountants............................................ F-180
Balance Sheet................................................................ F-181
Statement of Operations...................................................... F-182
Statement of Cash Flows...................................................... F-183
Statement of Stockholders' Equity............................................ F-184
Notes to Financial Statements................................................ F-185
Interim Financial Statements................................................. F-188
Kobie-Co Movie Outlet
Report of Independent Accountants............................................ F-192
Balance Sheet................................................................ F-193
Statement of Operations...................................................... F-194
Statement of Cash Flows...................................................... F-195
Statement of Owner's Equity.................................................. F-196
Notes to Financial Statements................................................ F-197
Interim Financial Statements................................................. F-201
</TABLE>
F-3
<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
West Coast Entertainment Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
(deficit) present fairly, in all material respects, the financial position of
West Coast Entertainment Corporation, formerly the combined companies of Giant
Video Corporation, Nostalgia Ventures, Inc., Videosmith, Inc., and G.V.
Management Corporation, at January 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
March 12, 1996
Boston, Massachusetts
F-4
<PAGE> 74
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUE)
<CAPTION>
JANUARY 31,
--------------------
1995 1996
------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 45 $ 611
Accounts receivable................................................... -- 1,085
Merchandise inventories............................................... 288 504
Prepaid expenses and other current assets............................. 162 151
Receivable from stockholder........................................... 30 --
------ -------
Total current assets.......................................... 525 2,351
Videocassette rental inventory, net..................................... 1,464 1,509
Furnishings, equipment and leasehold improvements, net.................. 1,299 1,235
Other assets............................................................ 269 4,258
Intangible assets (net of accumulated amortization of $254,000 at
January 31, 1996)..................................................... -- 6,967
Deferred tax asset...................................................... 74 195
------ -------
$3,631 $16,515
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................... $ 859 $ 2,091
Accounts payable...................................................... 735 1,327
Accrued expenses...................................................... 495 4,686
Income taxes.......................................................... 397 760
Advances from stockholders............................................ 42 7
------ -------
Total current liabilities..................................... 2,528 8,871
Long-term debt.......................................................... 738 7,101
------ -------
Total liabilities............................................. 3,266 15,972
Commitments (Note 14)
Stockholders' equity:
Common stock, $0.01 par value, 25,000 shares authorized, 7,273, and
14,000 shares issued and outstanding at January 31, 1995 and 1996,
respectively....................................................... 73 140
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares
issued............................................................. -- --
Additional paid-in capital............................................ 819 819
Accumulated deficit................................................... (527) (416)
------ -------
Total stockholders' equity.................................... 365 543
------ -------
$3,631 $16,515
====== =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-5
<PAGE> 75
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Revenues:
Rental revenue................................................ $2,248 $5,606 $ 9,209
Merchandise sales............................................. 272 897 2,299
Franchise fees................................................ -- -- 3,211
------ ------ -------
2,520 6,503 14,719
------ ------ -------
Costs and expenses:
Store operating expenses...................................... 2,086 4,866 8,206
Cost of goods sold............................................ 44 382 1,384
General and administrative.................................... 434 870 3,913
------ ------ -------
2,564 6,118 13,503
------ ------ -------
Income (loss) from operations................................... (44) 385 1,216
------ ------ -------
Interest expense................................................ 42 118 640
------ ------ -------
Income (loss) before provision for income taxes................. (86) 267 576
Provision (benefit) for income taxes............................ (14) 63 242
------ ------ -------
Net income (loss)............................................. $ (72) $ 204 $ 334
====== ====== =======
Unaudited pro forma data:
Income (loss) before income taxes............................. $ (86) $ 267 $ 576
Income tax provision (benefit)................................ (29) 63 275
------ ------ -------
Net income (loss)............................................. $ (57) $ 204 $ 301
====== ====== =======
Net income (loss) per share................................... $ (.07) $ .12 $ .06
====== ====== =======
Weighted average number of common shares...................... 843 1,693 4,756
====== ====== =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-6
<PAGE> 76
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ (72) $ 204 $ 334
Adjustments to reconcile net income (loss) to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory............ 784 1,436 1,972
Depreciation and amortization of furnishings, equipment
and leasehold improvements.............................. 86 192 359
Amortization of intangible assets......................... 254
Changes in assets and liabilities:
Accounts receivable..................................... -- -- (262)
Merchandise inventories................................. 2 4 64
Prepaid expenses and other assets....................... (77) (66) (3,522)
Accounts payable........................................ 75 27 115
Accrued expenses........................................ 140 (190) 3,575
Current taxes........................................... 36 135 363
Deferred taxes.......................................... 43 (117) (121)
------ ------- -------
Net cash provided by operating activities................. 1,017 1,625 3,131
------ ------- -------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired.............. 3 (1,734) (3,453)
Purchases of property and equipment.......................... (6) (47) (95)
Purchases of videocassette rental inventory.................. (685) (1,430) (2,002)
------ ------- -------
Net cash used in investing activities..................... (688) (3,211) (5,550)
------ ------- -------
Cash flows from financing activities:
Proceeds from long-term debt................................. 189 1,410 5,565
Repayment of long-term debt.................................. (479) (474) (2,352)
Proceeds (repayments) from advances from stockholders........ -- 34 (5)
Shareholder contribution (distributions)..................... (50) 649 (223)
------ ------- -------
Net cash used in financing activities..................... (340) 1,619 2,985
------ ------- -------
Net increase (decrease) in cash and cash equivalents........... (11) 33 566
------ ------- -------
Cash and cash equivalents, beginning of period................. 23 12 45
------ ------- -------
Cash and cash equivalents, end of period....................... $ 12 $ 45 $ 611
====== ======= =======
Supplemental cash flow data:
Interest paid................................................ $ 42 $ 118 $ 332
====== ======= =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-7
<PAGE> 77
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1993................ 1,419,571 $ 15 $ (3) $(558) $(546)
Shares issued -- Nostalgia Ventures,
Inc. .................................... 1,272,725 12 88 -- 100
Net loss................................... -- -- -- (72) (72)
S Corporation distribution................. -- -- -- (50) (50)
----------- ---- ---- ----- -----
Balance at January 31, 1994................ 2,692,296 27 85 (680) (568)
Shares issued -- Videosmith, Inc........... 4,580,505 46 734 -- 780
Net income................................. -- -- -- 204 204
S Corporation distribution................. -- -- -- (51) (51)
----------- ---- ---- ----- -----
Balance at January 31, 1995................ 7,272,801 73 819 (527) 365
Shares issued -- West Coast Entertainment
Corporation.............................. 6,727,200 67 -- -- 67
Net income................................. -- -- -- 334 334
S Corporation distribution................. -- -- -- (223) (223)
----------- ---- ---- ----- -----
Balance at January 31, 1996................ 14,000,001 $140 $819 $(416) $ 543
=========== ==== ==== ===== =====
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-8
<PAGE> 78
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND BUSINESS
West Coast Entertainment Corporation (the "Company") was incorporated in
the State of Delaware in February 1995 for the purpose of conducting business as
an owner and operator as well as a franchisor of videocassette rental stores.
Upon incorporation, 10,000 shares were issued to the Company's then existing
shareholders. On July 12, 1995, in connection with an anticipated initial public
offering (the "Offering"), Giant Video, Inc., G.V. Management Corporation,
Nostalgia Ventures, Inc. and Videosmith, Inc. were merged into the Company.
These four entities were individually formed or acquired over the past several
years and were under substantial common ownership and common day-to-day
management prior to the merger. In accordance with the plan of merger, the
Company declared a 672.72-for-1 stock split with respect to its 10,000 shares
issued and outstanding and issued and exchanged 7,272,801 shares of its common
stock for all of the outstanding common stock of the above four entities. In
addition, the stockholders of the above four entities own all of the Company's
shares of common stock outstanding (14,000,001) prior to the Offering. The
financial statements of the above four entities have been combined and included
in the accompanying consolidated financial statements from the date of the
respective entity's acquisition or inception, at its historical cost, determined
as of such date. The par value and number of shares outstanding have been
retroactively adjusted to appropriately reflect the merger transaction as well
as the fact that the entities were acquired or formed at various times during
the past several years.
<TABLE>
The consolidated financial statements of the Company include the accounts
and transactions of the following companies:
<CAPTION>
<S> <C>
Giant Video, Inc. For the years ended January 31, 1994, 1995 and 1996.
G.V. Management Corporation For the years ended January 31, 1994, 1995, 1996.
Nostalgia Ventures, Inc. For the period from April 3, 1993 (the date the company was
acquired by the above noted stockholders) to January 31, 1994,
for the years ended January 31, 1995 and 1996.
Videosmith, Inc. For the period from August 5, 1994 (the date the company was
acquired by the above noted stockholders) to January 31, 1995
and for the year ended January 31, 1996.
West Coast Franchising For the period from July 12, 1995 (the date of inception) to
Company January 31, 1996 (see Note 11).
</TABLE>
As of January 31, 1996, the Company owns and operates 28 video rental
stores and is a franchisor of a chain of 304 video stores.
Unaudited pro forma data included in the consolidated statement of
operations reflect certain adjustments to give effect to the income tax
implications of the merger transaction. Unaudited pro forma data, as adjusted,
reflect certain supplemental adjustments to the consolidated statement of
operations to give effect to the income tax implications of the merger
transaction and application of the estimated proceeds of the Offering (see Note
16).
As certain of the combined entities were Subchapter S Corporations and were
not subject to federal and state income taxes, historical per share data is not
considered meaningful and, accordingly, has not been presented.
F-9
<PAGE> 79
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Consolidation
All significant intercompany balances and transactions have been eliminated
in the accompanying consolidated financial statements.
Classification
Certain prior year balances have been reclassified to conform with current
year classifications.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game. Franchise fees, related to the sale of franchises, are recognized
when the stores are opened for business. Post-sale franchise fees are recognized
based on stated percentages of franchisee revenue as defined in the franchise
agreements.
Franchising Costs
Direct costs relating to franchise sales for which revenue has not been
recognized is deferred until the related revenue is recognized.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of the sale. The Company believes that its method of amortization
results in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
F-10
<PAGE> 80
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as
incurred.
Intangible Assets
Intangible assets are primarily comprised of franchise rights and a
covenant not-to-compete. Franchise rights are amortized on a straight-line basis
over 15 years, the estimated remaining economic life of such rights. The
covenant not-to-compete is amortized on a straight-line basis over the term of
the agreement.
Income Taxes
Income taxes for financial reporting purposes are recorded in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). SFAS 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of the Company's assets and liabilities. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance.
Prior to the effective date of the merger transaction discussed in Note 1,
Nostalgia Ventures, Inc. and Videosmith, Inc. were subject to tax as C
corporations, while Giant Video, Inc., and G.V. Management Corporation had
elected to be treated as S corporations for federal and state income tax
purposes. Under the provisions of Subchapter S, a pro rata portion of each
entity's taxable income is allocated to each individual shareholder.
Accordingly, no provision for income taxes relating to Giant Video, Inc., and
G.V. Management Corporation is included in the accompanying consolidated
statement of operations for any period prior to the effective date of the
merger.
Concurrent with the merger transaction, the assets received from the merged
S corporations became subject to C corporation tax. As such, the income tax
expense included in the accompanying consolidated statement of operations
subsequent to the effective date of the merger includes normal corporate level
federal and state income taxes. The deferred tax attributes arising from the
conversion to C Corporation status totalled $72,000, resulting in the
recognition of a deferred tax asset.
3. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows (in
thousands):
<CAPTION>
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Videocassette rental inventory................................... $ 2,494 $ 3,299
Accumulated amortization......................................... (1,030) (1,790)
------- -------
$ 1,464 $ 1,509
======= =======
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$784,000, $1,436,000 and $1,972,000 for the years ended January 31, 1994, 1995
and 1996, respectively.
F-11
<PAGE> 81
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
Furnishings, equipment and leasehold improvements comprise the following
(in thousands):
<CAPTION>
JANUARY 31,
-----------------
1995 1996
------ ------
<S> <C> <C>
Furniture and fixtures............................................. $ 561 $ 634
Equipment and vehicles............................................. 73 220
Leasehold improvements............................................. 1,216 1,291
------ ------
1,850 2,145
Accumulated depreciation and amortization.......................... (551) (910)
------ ------
$1,299 $1,235
====== ======
</TABLE>
Depreciation and amortization totaled $86,000, $192,000 and $359,000 for
the years ended January 31, 1994, 1995 and 1996, respectively.
5. NON-CURRENT OTHER ASSETS
<TABLE>
Non-Current other assets is comprised of the following (in thousands):
<CAPTION>
JANUARY 31,
---------------
1995 1996
---- ------
<S> <C> <C>
Deferred expenses relating to the initial public offering and
pending acquisitions.............................................. $146 $4,109
Other............................................................... 123 149
---- ------
$269 $4,258
==== ======
</TABLE>
6. ACCRUED EXPENSES
<TABLE>
Accrued expenses is comprised of the following (in thousands):
<CAPTION>
JANUARY 31,
---------------
1995 1996
---- ------
<S> <C> <C>
Accrued wages and taxes............................................. $212 $ 259
Property taxes payable.............................................. 33 --
Sales taxes......................................................... 58 102
Accrued rent........................................................ 77 126
Accrued professional fees........................................... -- 3,006
Accrued advertising expenses........................................ -- 267
Accrued interest expenses........................................... 10 318
Accrued finder's fee................................................ -- 200
Other............................................................... 105 408
---- ------
$495 $4,686
==== ======
</TABLE>
F-12
<PAGE> 82
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
<TABLE>
Long-term debt is comprised of the following (in thousands):
<CAPTION>
JANUARY 31,
------------------
1995 1996
------ -------
<S> <C> <C>
Revolving credit facility................................................ $ -- $ 1,166
Senior bank term loan.................................................... -- 2,250
11% subordinated secured note payable.................................... -- 1,400
10% second subordinated secured convertible note payable................. -- 2,000
10% second subordinated secured note payable............................. -- 2,000
Unsecured non-interest bearing $500 obligation due to the former owner of
West Coast Video, less unamortized discount of $118 based on an imputed
interest rate of 10%. Monthly installments of $8.3 are required
beginning in July 1995 and continuing through June 2000. (See Note
11).................................................................... -- 340
Bank term loan, interest at prime plus 1.75% (10.25% at January 31,
1995), secured by the assets and common stock of Videosmith, Inc., and
limited guarantees of $750 by the stockholders of Videosmith, Inc.
Payable in monthly installments of $20.8 plus interest beginning on
September 5, 1994 and continuing through July 5, 1998.................. 938 --
Note payable to the Company's principal supplier of video rental tapes,
secured by the inventory sold to the Company by the supplier, with
interest at prime plus 4% (12.5% at January 31, 1995), payable in
monthly installments of principal plus interest of $10.4 through
October 1996........................................................... 208 --
10% note payable to the landlord of Giant Video Inc.'s six stores,
secured by all of the assets and stock of Giant Video, Inc. Interest
and principal is payable in various monthly installments through July
1995................................................................... 170 --
10% note payable to former shareholder of Nostalgia Ventures, Inc.,
secured by the assets and common stock of Nostalgia Ventures, Inc.,
with principal and interest due in monthly installments of $8.9 through
March 1996............................................................. 110 --
Various notes payable due in monthly installments with interest rates
varying from prime plus 2% to 4%....................................... 171 36
------ -------
1,597 9,192
Less: current portion.................................................... (859) (2,091)
------ -------
$ 738 $ 7,101
====== =======
</TABLE>
Effective July 12, 1995, and in connection with the merger transaction
discussed in Note 1, the Company refinanced borrowings that were in existence at
that time. In addition, on that date, the Company issued certain notes payable
in connection with an acquisition (see Note 11). A summary of the various credit
facilities follows.
SENIOR DEBT
On July 12, 1995, the Company entered into a $3,000,000 senior bank term
loan (the "Term Loan") and a $1,250,000 bank revolving credit facility (the
"Facility"), both of which bear interest at prime + 1/2% (8 3/4% at January 31,
1996) through July 11, 1996 and at prime thereafter. Under the terms of this
arrangement, quarterly principal payments of $375,000 are required on the Term
Loan beginning October 1, 1995 and ending July 11, 1997. Borrowings under the
Facility are limited to the borrowing base of 75% of eligible outstanding
franchisee fee receivables plus $500,000 (the "Overadvance") through April 29,
1996. The
F-13
<PAGE> 83
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Overadvance decreases to $333,333 for the period April 30, 1996 through May 30,
1996 and to $166,667 for the period May 31, 1996 through June 29, 1996 and is $0
thereafter. The Facility expires on July 11, 1997 and provides for a commitment
fee payable quarterly, computed as 1/2% of the average unused Facility during
the preceding quarter.
The senior borrowings are secured by a first security interest in the
assets and common stock of the Company and contain certain restrictive
covenants, including the maintenance of 1) minimum tangible net worth, 2)
maximum ratio of debt to tangible net worth and 3) a minimum fixed charge
coverage ratio. In addition, dividend declarations are restricted under the
terms of the agreement.
SUBORDINATED DEBT
On July 12, 1995, the Company entered into a $1,400,000, 11% subordinated
secured note payable with a primary supplier of video tape rentals. In
accordance with the terms of the note, all interest accruing through July 12,
1997 shall be compounded annually and added to the outstanding principal balance
of the note. Commencing on October 12, 1997, and continuing until all principal
and accrued interest are paid in full, interest payments shall be made
quarterly. Principal payments of $110,000, $180,000 and $190,000 are payable on
October 12, 1997, January 12, 1998 and April 12, 1998, respectively. All
remaining unpaid principal and accrued interest is due and payable in full on
July 12, 1998. The note also provides for a subordinated security interest in
the common stock and assets of the Company and contains restrictive covenants
similar to those included in the Senior Debt as described above.
<TABLE>
In conjunction with this note the Company issued a detachable warrant
entitling the holder to purchase shares of the Company's common stock. The
warrant is exercisable beginning on the earlier of the Offering date or July 12,
1997 and expires on July 12, 2000. The number of shares that can be acquired is
equal to the quotient obtained by dividing $1.75 million by the exercise price
per share. The exercise price per share is dependent on the timing of the
Offering as outlined below:
<CAPTION>
OFFERING DATE EXERCISE PRICE/SHARE($)
------------- -----------------------
<S> <C>
On or before January 12, 1996......... 80% of IPO price
January 13, 1996-July 12, 1996........ 70% of IPO price
July 13, 1996-July 12, 1997........... 60% of IPO price
</TABLE>
In the event that the Offering does not occur on or before July 13, 1997,
the number of shares that can be acquired is equal to 6.25% of the common stock
outstanding on the exercise date. The exercise price of the warrant after July
12, 1997 is equal to $1,400,000 and the company has the right, upon such
exercise, to redeem the interest for $300,000. Upon the occurrence of a Private
Sale Event, as defined in the warrant, the holder of the warrant is entitled to
acquire 875,000 shares of the Company's common stock at an exercise price of
$1.60 per share. The warrants may be exercised for cash, presentation of the
related note payable, or a combination of the two. The Company has determined
that the value of the warrant is insignificant at the date of issuance.
On March 5, 1996, the Company entered into an $800,000, 12% subordinated
secured note payable with the same primary supplier of video tape rentals
referred to above. In accordance with the terms of the note, all interest which
accrues through February 1, 1999 shall be compounded annually and added to the
outstanding principal balance of the note on February 1 of each year. Equal
quarterly principal and accrued interest payments commence on April 1, 1999
continuing through January 1, 2000. In the event that the Company prepays the
note in whole or in part prior to August 1, 1997, a prepayment penalty of
$400,000 will be due to the lender. Prepayment is mandatory upon the occurrence
of an initial public stock offering or a change of control event, as defined in
the note. The note also provides for a subordinated security interest in the
common
F-14
<PAGE> 84
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock and assets of the Company and contains restrictive covenants similar to
those included in the Senior Debt as described above.
Also, on July 12, 1995, and in connection with the acquisition of West
Coast Entertainment Inc., West Coast Video Enterprises, Inc., West Coast
Services, Inc., Game Power Headquarters, Inc., and Premier Advertising, Inc.
(the "Acquired Businesses"), the Company issued a $2,000,000 10% second
subordinated secured convertible note payable (the "convertible note"), a
$2,000,000 10% second subordinated secured note payable (the "subordinated
note") and a $500,000 unsecured non-interest bearing note to the former
shareholder of the Acquired Businesses.
In accordance with the terms of the convertible note, repayment of
principal and interest is dependent upon the Company's ability to successfully
undertake the Offering on or before January 31, 1997 (the "conversion date"). If
the Offering occurs on or before the conversion date, all principal together
with unpaid interest accrued thereon shall be paid in full out of the proceeds
of the IPO. However, the holder of the convertible note may elect to convert
some or all of the outstanding principal, together with interest accrued
thereon, into the number of shares of the Company's common stock as determined
by dividing the appropriate amount of principal and interest so converted by 80%
of the Offering price per share.
If the Company's Offering does not occur by the conversion date, the entire
outstanding principal balance shall be converted into shares of the Company's
stock using an agreed upon formula, not to exceed 49% of the total outstanding
share value at the conversion date. Interest payments are not required until
January 31, 1997 at which point the holder of the convertible note can elect to
convert such amounts into shares of the Company's stock in conjunction with the
conversion of the principal discussed above or to receive a lump sum payment. In
the event that the Company does not have adequate available cash at that time or
such payment would be precluded by the Senior Debt or the Subordination
Agreements, such payment shall be made on July 31, 1997 along with any
additional interest accruing through that date.
The Company may, at its option, prepay all or any portion of the
outstanding principal and/or interest without penalty and without discount, with
the exception of the last $50,000 of principal which can be prepaid only with
the consent of the holder.
In accordance with the terms of the subordinated note, principal payments
are required to be made in 16 monthly installments of $125,000 beginning on July
31, 1997 or, at the Company's election on September 30, 1997. Interest will
accrue on the subordinated note at 10% per annum, compounded annually, however,
no interest payments accruing on the original borrowing are required until
January 31, 1997, at which point all interest shall be paid in one lump sum
subject to the Company having adequate cash balances available and the terms of
the Senior Debt and the Subordination Agreements. In the event that the interest
payment is not made on January 31, 1997, such payment shall be made 50% on July
31, 1997 and 50% on August 31, 1997 along with the additional interest accruing
through those dates. Monthly interest payments on the remaining unpaid principal
will begin on either February 28, 1997 or September 30, 1997.
The Company may prepay all or any portion of the principal and/or interest
at any time without penalty and without discount.
The convertible note and the subordinated note provide the holder with a
second subordinated security position with respect to the assets and common
stock of the Company. In addition, the notes contain certain restrictive
covenants similar to those described in the Senior Debt.
In the event that the Company is unable to complete the offering, it is
management's intention to reduce its present cost structure and restructure its
obligations.
F-15
<PAGE> 85
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
Principal due on long-term debt for each of the years following January 31,
1996 is as follows:
<CAPTION>
<S> <C>
1997............................................................. $2,091,000
1998............................................................. 4,668,000
1999............................................................. 2,311,000
2000............................................................. 91,000
2001............................................................. 31,000
----------
$9,192,000
==========
</TABLE>
In March 1996, the Company received a commitment for a $60 million credit
facility from PNC Bank, National Association, contingent upon completion of the
Offering.
8. INCOME TAXES
<TABLE>
The components of the provision for income taxes are as follows (in
thousands):
<CAPTION>
YEAR ENDED
JANUARY 31,
---------------
1995 1996
----- -----
<S> <C> <C>
Current:
Federal................................................... $ 139 $ 176
State..................................................... 41 187
----- -----
180 363
----- -----
Deferred:
Federal................................................... (100) (112)
State..................................................... (17) (9)
----- -----
(117) (121)
----- -----
Tax provision............................................... $ 63 $ 242
===== =====
</TABLE>
F-16
<PAGE> 86
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. The temporary differences which give rise
to deferred tax assets and liabilities are as follows (in thousands):
<CAPTION>
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax asset:
Intangible amortization........................................ $ 10 $ --
Videocassette rental inventory amortization.................... 668 --
Furnishings, equipment and leasehold improvement
depreciation................................................ 588 596
Recognized built-in loss carryforward.......................... 126 812
Write-off of fixed assets...................................... 94 --
Expense accruals............................................... -- 165
State NOL carryforward......................................... -- 66
Acquisition costs.............................................. -- 21
Other.......................................................... 25 19
------- -------
1,511 1,679
Deferred tax asset valuation allowance........................... (1,437) (1,484)
------- -------
$ 74 $ 195
======= =======
</TABLE>
As a result of a change in ownership of Videosmith, Inc. at August 4, 1994,
there is an annual limitation on the use of net unrealized built-in losses. Such
limitation applies only to those built-in losses recognized for income tax
purposes in the five-year period beginning with the date of the ownership
change. The use of such losses is limited to approximately $45,000 per year for
the carryforward period, generally 15 years subsequent to the year recognized,
and are subject to certain consolidated tax return limitations, including
Videosmith's separate company taxable income. A majority of the temporary
differences noted above at January 31, 1996 are comprised of net unrealized
built-in losses that have not been recognized for income tax reporting purposes.
Management anticipates that approximately 68% of such unrealized built-in losses
will be recognized on a tax return basis within the five year period.
Management believes that it is more likely than not that it will generate
taxable income sufficient to realize a portion of the tax benefit associated
with the future deductible temporary differences identified above. This belief
is based upon a review of all available evidence, including historical operating
results and projections of future taxable income, recognizing the limitations
discussed above.
F-17
<PAGE> 87
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows (in thousands):
<CAPTION>
YEAR ENDED
JANUARY 31,
--------------
1995 1996
----- ----
<S> <C> <C>
Income at statutory rate of 34%...................................... $ 93 $196
State tax expense, net of federal benefit.......................... 25 58
Amount not subject to federal income tax due to S Corporation
status.......................................................... 28 (33)
Change in valuation allowance...................................... (102) 47
Nondeductible intangible amortization.............................. 11 11
Deferred tax asset due to conversion to C Corporation status....... -- (72)
Reserve for contingency............................................ -- 22
Other.............................................................. 8 13
----- ----
$ 63 $242
===== ====
</TABLE>
9. RELATED PARTY TRANSACTIONS
The principal stockholders have from time to time loaned the Company funds
for working capital purposes. No interest is charged on these loans.
10. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities under operating leases extending until
2002. Minimum future rental payments under these leases as of January 31, 1996
are as follows (in thousands):
<CAPTION>
YEAR ENDING OPERATING LEASES
----------- ----------------
<S> <C>
1997........................................................ $1,652
1998........................................................ 1,411
1999........................................................ 864
2000........................................................ 492
2001........................................................ 185
Thereafter.................................................. 237
------
Future minimum payments....................................... $4,841
======
</TABLE>
Rent expense totalled approximately $427,000, $939,000 and $1,947,000 for
the years ended January 31, 1994, 1995 and 1996, respectively.
11. ACQUISITIONS
All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
NOSTALIGIA VENTURES
On April 2, 1993, the stockholders discussed in Note 1 acquired 100% of the
outstanding stock of Nostalgia Ventures, Inc. and entered into a three year
non-competition agreement with the former owner of
F-18
<PAGE> 88
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nostalgia Ventures, Inc. The purchase price was $464,000, consisting of cash of
$100,000, short-term debt of $108,000 and a note payable of $256,000.
VIDEOSMITH, INC.
On August 4, 1994, V.S. Acquisition Corporation acquired 100% of the
outstanding stock of Xtra-vision Corporation and its wholly owned subsidiary,
Videosmith, Inc. The purchase price of $2,042,000 was paid in cash. V.S.
Acquisition Corporation, Xtra-vision Corporation and Videosmith Inc., merged on
September 20, 1994 to form Videosmith Inc.
WEST COAST FRANCHISING COMPANY
On July 12, 1995, West Coast Franchising Company, a wholly-owned subsidiary
of the Company, acquired the business, assets and certain liabilities of West
Coast Entertainment, Inc., West Coast Video Enterprises, Inc., West Coast
Services, Inc., Game Power Headquarters, Inc., and Premier Advertising, Inc.
(the "Acquired Businesses"). West Coast Franchising Company operates as a
franchisor of 307 chain stores under the trade name of West Coast Video involved
in the sale and rental of videocassettes, recorders, related equipment and
supplies.
The cost of the Acquired Businesses was approximately $8.6 million,
comprising cash of $4 million, a $2 million second subordinated secured
convertible note payable, a $2 million second subordinated secured note payable
(see Note 7) and acquisition costs of $200,000. Additionally, the Company
entered into a five year, non-interest bearing arrangement Agreement with the
former owner of the Acquired Businesses. Under the Agreement the Company is
required to make equal monthly payments over five years totalling $500,000 to
the former owner (see Note 7). In addition, in connection with the acquisition,
the Company entered into an arrangement to pay the former owner and certain key
executives of the Acquired Businesses a fee in the event that the Company
purchases the assets or stock of any Franchisee of the Acquired Businesses. The
remaining obligation under the Agreement is required to be reduced by 80% of any
fee paid under the arrangement within the five year period.
<TABLE>
The allocation of the purchase price associated with the above acquisitions
is summarized as follows (in thousands):
<CAPTION>
NOSTALGIA VIDEOSMITH ACQUIRED
VENTURES INC. BUSINESSES
--------- ---------- ----------
<S> <C> <C> <C>
Working capital..................................... $124 $ (334) $1,075
Videocassette rental inventory...................... 199 1,082 --
Furnishings, equipment and leasehold improvements... 101 1,285 200
Intangible assets................................... 130 -- 7,221
Other............................................... (90) 9 86
---- ------ ------
$464 $2,042 $8,582
==== ====== ======
</TABLE>
SUMMARY
<TABLE>
The following unaudited pro forma information presents the results of
operations as though acquisition of Videosmith Inc. and the Acquired Businesses
had occurred as of February 1, 1994 (in thousands):
<CAPTION>
YEAR ENDED
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Revenues......................................................... $20,746 $18,482
Net income (loss)................................................ (76) 414
</TABLE>
F-19
<PAGE> 89
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EQUITY INCENTIVE PLANS
Effective July 5, 1995, the Company adopted and the stockholders approved
the 1995 Equity Incentive Plan. Under the terms of this plan, the Board of
Directors is authorized to grant options at an exercise price that is not less
than the fair market value of a share of the Company's common stock at the date
of grant. The exercise and expiration dates for options granted under this plan
shall be set forth in the agreement evidencing such option with the exception of
the expiration date for Incentive Stock Options, which shall be no later than 10
years after the date on which the option is granted. In addition, the Board of
Directors can grant restricted stock awards which shall consist of the sale and
issuance by the Company, and the purchase by the recipient, of shares of the
Company's common stock. The price at which shares of the Company's common stock
are sold to recipients of such awards is at the discretion of the Board of
Directors. The Company has reserved 350,000 shares of common stock for issuance
under the plan. As of January 31, 1996, no awards have been granted under this
plan.
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1995. The Purchase Plan authorizes
the issuance of up to a total 125,000 shares of Common Stock to participating
employees through a series of semiannual offerings. Offering periods will
commence on each July 1, beginning July 1, 1996, and January 1 and terminate on
the following June 30 and December 31, respectively. The maximum number of
shares available in each offering is 25,000 shares. The price at which employees
may purchase Common Stock in an offering is 85% of the closing price of the
Common Stock on the day the offering commences or on the day the offering
terminates, whichever is lower.
The Company's 1995 Director Stock Option Plan (the "Director Option Plan")
was adopted by the Board of Directors in November 1995. Under the Director
Option Plan, upon the effectiveness of the Offering, the Company's non-employee
directors will be granted an option to purchase 9,000 shares of Common Stock at
an exercise price per share equal to the public offering price. In addition,
each non-employee director initially elected to the Board of Directors in the
future will be granted an option, upon his or her initial election as a
director, to purchase 9,000 shares of Common Stock. Each non-employee director
will also receive a subsequent grant of an option for 3,000 shares on the date
of each Annual Meeting of Stockholders at which such director is reelected as a
director of the Company, beginning with the Annual Meeting for the year ending
January 31, 1997. All options granted under the Director Option Plan have or
will have an exercise price equal to the fair market value of the Common Stock
on the date of grant, will vest over a three-year period, provided the
optionholder continues to serve as a director of the Company, and will expire
ten years from the date of grant. The total number of shares of Common Stock
that may be issued under the Director Option Plan is 50,000 shares.
13. PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 2,000,000 shares of Preferred Stock, in one or more series. Each
such series of Preferred Stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges as shall be determined by the Board of Directors, which may include,
among others, dividend rights, voting rights, redemption and sinking fund
provisions, liquidation preferences, conversion rights and preemptive rights.
The rights of the holders of Common Stock will be subject to the rights of
holders of any Preferred Stock issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of the outstanding voting stock of the Company. The Company has not issued any
shares of Preferred Stock as of January 31, 1996.
F-20
<PAGE> 90
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS
On July 12, 1995, the Company entered into a contract with a supplier of
video rental products that requires the Company to purchase, at a discount, its
requirements for such products over the ensuing seven year period as follows:
<TABLE>
<S> <C>
July 12, 1995-July 12, 1997...... 50% of annual requirements
July 13, 1997-July 12, 2000...... lesser of 30% of annual requirements or $25
million
July 13, 2000-July 12, 2002...... lesser of 25% of annual requirements or $25
million
</TABLE>
15. LITIGATION
The Company is involved in litigation that is incidental to the operation
of its business. The Company believes that the outcome of such litigation will
not materially affect the Company's financial position or results of operations.
16. UNAUDITED PRO FORMA INFORMATION
Unaudited pro forma information reflects an adjustment to the consolidated
statement of operations for each of the years in the three year period ended
January 31, 1996. Such adjustment gives effect to the merger transaction
discussed in Note 1, as if it had occurred as of February 1, 1992. Accordingly,
the pro forma income tax provision (benefit) and proforma net income have been
calculated as if each entity included in the consolidated statement of
operations had been included in the Company's consolidated income tax returns
and subject to corporate income taxation as a C Corporation during all periods
presented.
Unaudited pro forma net income (loss) per share has been calculated for the
respective periods by dividing the respective unaudited pro forma net income
amounts by the weighted average number of shares of common stock outstanding
effected for the 0.340 reverse stock split discussed in Note 17.
17. SUBSEQUENT EVENT (UNAUDITED)
On May 14, 1996 the Board of Directors approved a 0.340-to-1 reverse stock
split of the Company's Common Stock. The consolidated financial statements have
not been retroactively adjusted to reflect the split. On a post-split basis the
number of shares of common stock outstanding as of January 31, 1996 and 1995 is
4,756,292 and 2,470,827, respectively. See Note 16 regarding the effect of the
split on unaudited pro forma net income (loss) per share.
F-21
<PAGE> 91
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUE)
UNAUDITED
<CAPTION>
APRIL 30, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 207
Accounts receivable........................................................... 1,064
Merchandise inventory......................................................... 538
Prepaid expenses and other current assets..................................... 40
-------
Total current assets.................................................. 1,849
Videocassette rental inventory, net........................................... 1,693
Furnishings, equipment and leasehold improvements, net........................ 1,164
Other assets.................................................................. 6,871
Intangible assets, net........................................................ 6,834
Deferred tax asset............................................................ 195
-------
$18,606
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt............................................. $ 2,091
Accounts payable.............................................................. 1,597
Accrued expenses and other liabilities........................................ 5,971
Income taxes.................................................................. 798
Advances from stockholders.................................................... --
-------
Total current liabilities............................................. 10,457
Long-term debt.................................................................. 7,505
-------
Total liabilities..................................................... 17,962
-------
Stockholders' equity
Common stock, $0.01 par value, 4,756 shares outstanding at April 30, 1996 and
January 31, 1996........................................................... 48
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares issued... --
Additional paid-in capital.................................................... 911
Accumulated deficit........................................................... (315)
-------
Total stockholders' equity............................................ 644
-------
$18,606
=======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-22
<PAGE> 92
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<CAPTION>
THREE MONTHS
ENDED
APRIL 30,
-----------------
1995 1996
------ ------
<S> <C> <C>
Revenues
Rental revenue........................................................... $2,351 $2,414
Merchandise sales........................................................ 324 931
Franchise fees........................................................... -- 1,377
------ ------
2,675 4,722
------ ------
Operating costs and expenses
Store operating expenses................................................. 1,564 1,473
Cost of goods sold....................................................... 132 693
General and administrative............................................... 241 1,586
Amortization of videocassettes and video game rental inventory........... 516 386
Intangible amortization.................................................. -- 133
------ ------
2,453 4,271
------ ------
Income from operations..................................................... 222 451
------ ------
Interest expense........................................................... 37 285
Other, net................................................................. -- (9)
------ ------
Income before provision for income taxes................................... 185 175
Provision for income taxes................................................. 50 74
------ ------
Net income............................................................... $ 135 $ 101
====== ======
Historical pro forma net income per share................................ $ 0.03 $ 0.02
====== ======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-23
<PAGE> 93
WEST COAST ENTERTAINMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<CAPTION>
THREE MONTHS
ENDED
APRIL 30,
-----------------
1995 1996
----- -------
<S> <C> <C>
Cash flows from operating activities
Net income.............................................................. $ 135 $ 101
Adjustments to reconcile net income to cash flows provided by (used in)
operating activities:
Amortization of videocassette rental inventory....................... 516 386
Depreciation and amortization of furnishings, equipment and leasehold
improvements........................................................ 96 104
Amortization of intangible assets.................................... -- 133
Changes in assets and liabilities
Accounts receivable................................................ -- 21
Merchandise inventory.............................................. (22) (34)
Prepaid expenses and other assets.................................. (142) 111
Accounts payable................................................... 44 270
Accrued expenses and other liabilities............................. 63 1,278
Current taxes...................................................... 50 38
----- -------
Net cash provided by operating activities....................... 740 2,408
----- -------
Cash flows from investing activities
Purchases of furnishings, equipment and leasehold improvements.......... (47) (33)
Purchases of videocassette rental inventory............................. (537) (570)
Changes in other assets related to acquisitions......................... -- (1,318)
----- -------
Net cash used in investing activities........................... (584) (1,921)
----- -------
Cash flows from financing activities
Proceeds from long-term debt............................................ 100 800
Repayment of long-term debt............................................. (65) (396)
Shareholder distributions............................................... (19) --
Changes in other assets related to financing............................ -- (1,295)
----- -------
Net cash provided by (used in) financing activities............. 16 (891)
----- -------
Net increase (decrease) in cash and cash equivalents...................... 172 (404)
----- -------
Cash and cash equivalents, beginning of period............................ 27 611
----- -------
Cash and cash equivalents, end of period.................................. $ 199 $ 207
===== =======
Supplemental cash flow data
Interest paid........................................................... $ 37 $ 285
===== =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-24
<PAGE> 94
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company's audited consolidated financial statements included elsewhere
herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended April 30, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
Unaudited historical pro forma net income per share has been calculated for
each of the three month periods ended April 30, 1995 and 1996 by dividing the
respective unaudited historical pro forma net income amounts by the weighted
average number of shares of common stock outstanding (4,756,000 at April 30,
1995 and 1996). Unaudited historical pro forma net income per share reflects an
adjustment to the consolidated statement of operations to give effect to the
merger transaction and as discussed below the 0.340 reverse stock split as if
pro forma income tax provision and historical pro forma net income have been
calculated as if each entity included in the consolidated statement of
operations had been included in the Company's consolidated income tax returns
and subject to corporate income taxation as a C corporation during each period
presented.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND ACQUISITIONS
On May 14, 1996, the Company completed its initial public offering of
5,400,000 shares of common stock. Concurrently with the closing of the offering,
which occurred on May 17, 1996, the Company acquired 171 video specialty stores,
including 13 stores owned by franchisees of the Company together with
franchisor's rights in regard to 20 additional stores franchised by one of the
companies acquired. The aggregate consideration paid, excluding certain fees and
contingent considerations relating to newly opened stores, was $76.4 million,
consisting of $52.4 million paid in cash and $24.0 million payable in shares of
Common stock.
3. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows (in
thousands):
<CAPTION>
APRIL 30, 1996
--------------
<S> <C>
Videocassette rental inventory.................................. $ 3,868
Accumulated amortization........................................ (2,175)
--------
$ 1,693
========
</TABLE>
4. PRO FORMA INFORMATION
The following unaudited pro forma information presents the results of
operations as though the aforementioned acquisitions had occurred as of the
beginning of the periods presented. The pro forma income
F-25
<PAGE> 95
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax provision and pro forma net income have been calculated as if each entity
included in the consolidated statement of operations had been included in the
Company's consolidated income tax returns and subject to corporate income
taxation as a C corporation during both periods presented. Additionally, with
respect to the three month periods ended April 30, 1995, the unaudited pro forma
information includes the revenue and net income of a business acquired on July
12, 1995 as if that acquisition had occurred coincidentally with the period
beginning February 1, 1995.
Pro forma net income per share has been calculated by dividing the
respective pro forma net income by the pro forma weighted average number of
common shares outstanding during the period after giving effect to (i) the 0.340
reverse stock split approved by the Board of Directors on May 14, 1996, (ii) the
shares issued or to be issued as contingent consideration in conjunction with
the aforementioned acquisitions, (iii) repayment of all outstanding debt, (iv)
borrowings under a new credit facility, (v) the impact of a detachable warrant
with a primary supplier of rental videocassettes and (vi) a portion of a
convertible note which was converted into shares of the Company's common stock
as if the initial public offering 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>
THREE MONTHS
ENDED APRIL 30,
---------------------------
1995 1996
------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Pro forma revenues....................................... $21,587 $23,306
Pro forma net income..................................... 1,254 1,487
Pro forma net income per share........................... 0.10 0.12
</TABLE>
F-26
<PAGE> 96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Videosmith Incorporated
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholder's equity present fairly, in all
material respects, the financial position of Videosmith Incorporated at August
4, 1994, and the results of its operations and its cash flows for the period
from January 30, 1994 through August 4, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The financial statements of the Company for the years ended January 29,
1994 and January 31, 1993 were audited by the other independent accountants
whose report dated March 11, 1994 expressed an unqualified opinion on those
statements.
PRICE WATERHOUSE LLP
Boston, Massachusetts
November 10, 1995
F-27
<PAGE> 97
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
<TABLE>
BALANCE SHEET
<CAPTION>
AUGUST 4,
1994
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 308,149
Merchandise inventories........................................................ 229,660
Prepaid expenses and other current assets...................................... 191,884
----------
Total current assets................................................... 729,693
Videocassette rental inventory, net............................................ 848,271
Furnishings and equipment, net................................................. 1,752,819
Other non-current assets....................................................... 54,383
----------
Total non-current assets............................................... 2,655,473
----------
Total assets........................................................... $3,385,166
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long term debt.............................................. $ 17,315
Accounts payable............................................................... 476,706
Accrued expenses............................................................... 286,086
Income taxes payable........................................................... 226,837
----------
Total current liabilities.............................................. 1,006,944
Long-term debt................................................................... 45,163
----------
Total liabilities...................................................... 1,052,107
Stockholder's equity
Common stock, $1 par value, 300,000 shares authorized, 9,075 shares issued and
outstanding................................................................. 9,075
Additional paid-in capital..................................................... 1,590,903
Retained earnings.............................................................. 733,081
----------
Total stockholder's equity............................................. 2,333,059
----------
$3,385,166
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-28
<PAGE> 98
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
JANUARY 30, 1994
TO AUGUST 4, 1994
-----------------
<S> <C>
Revenues..................................................................... $3,826,215
----------
Costs and expenses:
Operating expenses......................................................... 3,221,313
General and administrative................................................. 521,282
----------
3,742,595
----------
Income from operations.................................................. 83,620
----------
Interest expense............................................................. 3,000
----------
Income before provision for income taxes................................ 80,620
Provision for income taxes................................................... 226,837
----------
Net loss................................................................ $ (146,217)
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-29
<PAGE> 99
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
<TABLE>
STATEMENT OF STOCKHOLDER'S EQUITY
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 30, 1994.................. $9,075 $2,220,925 $ 879,298 $3,109,298
Forgiveness of receivable from parent........ -- (630,022) -- (630,022)
Net income................................... -- -- (146,217) (146,217)
------ ---------- --------- ----------
Balance at August 4, 1994.................... $9,075 $1,590,903 $ 733,081 $2,333,059
====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-30
<PAGE> 100
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
JANUARY 30, 1994
TO AUGUST 4, 1994
-----------------
<S> <C>
Cash flows from operating activities
Net loss................................................................... $ (146,217)
Adjustments to reconcile net income to net cash flows provided by (used in)
operating activities:
Amortization of videocassette rental inventory.......................... 592,408
Depreciation and amortization of furnishings and equipment.............. 196,528
Change in operating assets and liabilities:
Merchandise inventories............................................... (59,744)
Prepaid expenses and other assets..................................... (34,717)
Income taxes payable.................................................. 99,425
Accounts payable...................................................... 239,070
Accrued expenses and other liabilities................................ 159,236
----------
Net cash provided by operating activities.......................... 1,045,989
----------
Cash flows from investing activities
Purchases of furnishings and equipment..................................... (8,594)
Purchases of videocassette rental inventory................................ (617,513)
----------
Net cash used in investing activities.............................. (626,107)
----------
Cash flows from financing activities
Increase in amount receivable from parent.................................. (151,318)
Repayments of long-term debt............................................... (12,558)
----------
Net cash used in financing activities.............................. (163,876)
----------
Net increase in cash and cash equivalents.................................... 256,006
Cash and cash equivalents, at beginning of period............................ 52,143
----------
Cash and cash equivalents, at end of period.................................. $ 308,149
==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest..................................... $ 50,561
==========
Cash paid during the period for income taxes................................. $ 125,000
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-31
<PAGE> 101
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The financial statements present the results of Videosmith Incorporated
(the "Company"), a wholly-owned subsidiary of Xtra-vision Corporation (the
"Parent"), itself a wholly-owned subsidiary of Xtra-vision plc, a publicly held
Irish company. The Company operates 14 video rental stores in Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game. Late charges are recognized when payment is received.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
All rental tapes are carried at their residual value of $6 per tape. All
tapes purchased are written down to their residual value in the month of
purchase. The Company believes that its method of amortization results in an
appropriate matching of tape amortization expense with the revenue received from
the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 10 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms of
leased items (primarily 3 to 4 years) and leasehold improvements (10 years),
using the straight-line method. Repair and maintenance costs are expensed as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
The Company is included in its parent's consolidated federal and state
income tax returns and its taxes are calculated as if it was filing a separate
return.
F-32
<PAGE> 102
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
Prepaid expenses and other current assets at August 4, 1994 consist of the
following:
<S> <C>
Prepaid rent...................................................... $ 97,024
Other............................................................. 94,860
--------
$191,884
========
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
Property and furnishings at August 4, 1994, consist of the following:
<CAPTION>
ESTIMATED
USEFUL
LIFE
---------
<S> <C> <C>
Computers............................................. 5 years $ 460,356
Furniture and fixtures................................ 7 years 854,765
Leasehold improvements................................ 10 years 2,796,999
----------
4,112,120
Less accumulated depreciation......................... 2,359,301
----------
$1,752,819
==========
</TABLE>
Depreciation charged to income during the period from January 30, through
August 4, 1994, amounted to $196,528.
5. ACCRUED EXPENSES
<TABLE>
Accrued expenses at August 4, 1994 consist of the following:
<S> <C>
Coupon accrual.................................................... $ 26,510
Sales taxes payable............................................... 49,640
Accrued payroll................................................... 37,689
Accrued accounting expense........................................ 20,109
Accrued rent...................................................... 18,384
Other............................................................. 133,754
--------
$286,086
========
</TABLE>
6. NOTE PAYABLE
<TABLE>
Note payable at August 4, 1994, comprises the following:
<S> <C>
Unsecured note payable to Trustee of Security Realty Trust with
interest at prime plus 2% payable through October 1998......... $62,478
Less amount payable within one year.............................. 17,315
-------
$45,163
=======
</TABLE>
7. RELATED PARTY TRANSACTIONS
A receivable from the parent totalling $630,022 was forgiven by the Company
during the period ending August 4, 1994.
F-33
<PAGE> 103
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASE COMMITMENTS
<TABLE>
The Company's stores, office space, and certain equipment used in the
business are leased. The Company operates seven of its stores on the basis of a
minimum rent and a percentage of net sales when sales exceed a certain base
amount. At August 4, 1994, future minimum lease payments required under
operating leases in excess of one year were as follows:
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1996........................................................... $1,307,463
1997........................................................... 1,291,349
1998........................................................... 1,153,235
1999........................................................... 581,433
2000........................................................... 256,575
Thereafter..................................................... 265,232
----------
Future minimum payments........................................ $4,855,287
==========
</TABLE>
Rent expense totalled approximately $544,952 for the period from January
30, 1994 through August 4, 1994.
9. INCOME TAXES
At August 4, 1994, the deferred tax asset amounts to approximately $1.3
million. The Company has not recorded this asset because in management's view,
the current conditions in the industry and the past financial performance of the
Company do not make it more likely than not that the asset would be recovered
against future taxable book income. Accordingly, a valuation reserve of the
entire amount of the asset has been established to reduce it to zero. In view of
the change in ownership of the Company's immediate parent company, there is a
limitation which applies to built-in losses recognized in the five year period
beginning with the ownership change.
<TABLE>
The components of income tax expense for the period from January 30, 1994
through August 4, 1994 are:
<S> <C>
Income tax expense
Current:
Federal.................................................... $174,501
State...................................................... 52,336
--------
$226,837
========
</TABLE>
Deferred income taxes as of August 4, 1994, reflect the impact of
"temporary differences" between amounts of assets, and liabilities for financial
reporting purposes and such amount as measured by tax laws.
F-34
<PAGE> 104
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The timing differences which give rise to the deferred tax assets and
liabilities, are as follows at August 4, 1994:
<S> <C>
Deferred tax asset:
Videocassettes rental amortization.......................... $ 866,021
Furnishings and equipment depreciation...................... 364,734
Write-off of fixed assets................................... 94,221
Other....................................................... 19,130
-----------
1,344,106
Deferred tax asset valuation allowance........................ (1,344,106)
-----------
$ --
===========
</TABLE>
<TABLE>
A reconciliation of the tax expense for financial statement purposes and
the expected statutory federal rate of 35% is as follows:
<S> <C>
Federal statutory income tax at 35%............................. $ 28,217
State income taxes, net of federal benefit...................... 5,135
Timing differences for which no deferred tax asset is
established................................................... 192,601
Other........................................................... 884
--------
$226,837
========
</TABLE>
10. SUBSEQUENT EVENT
Effective August 5, 1995, Xtra-vision plc entered into an agreement to sell
100% of the outstanding stock of the Company's Parent to V.S. Acquisition
Corporation.
F-35
<PAGE> 105
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Videosmith Incorporated:
We have audited the accompanying balance sheets of Videosmith Incorporated
(a wholly-owned subsidiary of Xtra-vision Corporation) as of January 29, 1994
and January 31, 1993, and the related statements of operations and retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Videosmith Incorporated as
of January 29, 1994 and January 31, 1993, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 11, 1994
F-36
<PAGE> 106
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
<TABLE>
BALANCE SHEETS
JANUARY 29, 1994 AND JANUARY 31, 1993
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 52,143 $ 44,530
Accounts receivable............................................... 51,750 56,283
Merchandise inventories........................................... 169,916 365,602
Prepaid expenses and other assets................................. 159,800 303,100
---------- ----------
Total current assets...................................... 433,609 769,515
---------- ----------
Noncurrent assets:
Rental films and equipment, net of accumulated depreciation of
$4,552,243 in 1994 and $4,812,969 in 1993 (note 2)............. 823,166 1,230,591
Property and equipment, net (note 3).............................. 1,940,753 2,639,093
---------- ----------
Total noncurrent assets................................... 2,763,919 3,869,684
---------- ----------
Total assets.............................................. $3,197,528 $4,639,199
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of note payable (note 4)....................... $ 17,315 $ 10,504
Current maturities of obligations under capital leases (note 6)... 6,335 37,978
Trade accounts payable............................................ 237,636 430,305
Other liabilities and accrued expenses............................ 126,850 153,520
Income taxes payable (note 8)..................................... 127,412 160,461
Payable to parent (note 5)........................................ -- 290,772
Restructuring reserve (note 7).................................... -- 717,596
---------- ----------
Total current liabilities................................. 515,548 1,801,136
---------- ----------
Long-term liabilities:
Note payable, net of current maturities (note 4).................. 47,448 61,662
Obligations under capital leases, net of current maturities (note
6)............................................................. 3,938 10,851
---------- ----------
Total long-term liabilities............................... 51,386 72,513
---------- ----------
Total liabilities......................................... 566,934 1,873,649
---------- ----------
Commitments (note 6)
Stockholder's equity (note 9):
Common stock, $1 par value, 300,000 shares authorized, 9,075
shares issued and outstanding.................................. 9,075 9,075
Additional paid-in capital........................................ 2,220,925 2,220,925
Retained earnings................................................. 879,298 535,550
---------- ----------
3,109,298 2,765,550
Less receivable from parent (note 5).............................. 478,704 --
---------- ----------
Net stockholder's equity.................................. 2,630,594 2,765,550
---------- ----------
Total liabilities and stockholder's equity................ $3,197,528 $4,639,199
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 107
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
<TABLE>
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED JANUARY 29, 1994 AND JANUARY 31, 1993
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Revenue:
Sales of merchandise............................................. $1,182,791 $ 1,254,708
Film and equipment rentals....................................... 7,140,420 7,603,024
---------- -----------
8,323,211 8,857,732
---------- -----------
Cost of sales:
Cost of merchandise.............................................. 836,916 767,801
Film and equipment rentals (note 2).............................. 1,168,406 1,015,551
Operating expenses............................................... 4,698,055 5,065,974
---------- -----------
6,703,377 6,849,326
---------- -----------
Operating profit......................................... 1,619,834 2,008,406
---------- -----------
Other expenses:
Restructuring costs (note 7)..................................... -- 717,596
General and administrative....................................... 1,171,958 1,383,935
Interest......................................................... 9,844 36,302
Miscellaneous.................................................... 34,956 30,561
Provision to reduce the carrying value of rental tapes (note
2)............................................................ -- 1,430,404
---------- -----------
1,216,758 3,598,798
---------- -----------
Income (loss) before income taxes........................ 403,076 (1,590,392)
Income taxes (note 8).............................................. 59,328 240,908
---------- -----------
Net income (loss)........................................ 343,748 (1,831,300)
Retained earnings at beginning of year............................. 535,550 2,366,850
---------- -----------
Retained earnings at end of year................................... $ 879,298 $ 535,550
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 108
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
<TABLE>
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 29, 1994 AND JANUARY 31, 1993
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ 343,748 $(1,831,300)
Adjustments to reconcile net income (loss) to cash flows
provided by (used in) operating activities:
Rental tape depreciation..................................... 1,168,406 1,015,551
Provision to reduce the carrying value of rental tapes....... -- 1,430,404
Depreciation and amortization on property and equipment...... 419,588 515,813
Provision for restructuring costs............................ -- 717,596
Write-off of leasehold improvements on store closure......... 552 22,653
Decrease in accounts receivable................................. 4,533 19,972
Decrease in merchandise inventories............................. 195,686 43,701
Decrease in prepaid expenses and other assets................... 143,300 51,897
(Decrease) increase in income taxes payable..................... (33,049) 140,208
(Decrease) increase in trade accounts payable................... (192,669) 132,767
(Decrease) in accrued expenses and other liabilities............ (26,670) (653)
----------- -----------
Net cash provided by operating activities............... 2,023,425 2,258,609
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............................. (84,910) (383,504)
Purchases of rental films and equipment......................... (1,115,467) (1,402,012)
----------- -----------
Net cash used in investing activities................... (1,200,377) (1,785,516)
----------- -----------
Cash flows from financing activities:
(Decrease) in amount payable to parent.......................... (290,772) (462,096)
Repayments of notes payable..................................... (7,403) (7,403)
(Increase) in amount receivable from parent..................... (478,704) --
Payments of obligations under capital leases.................... (38,556) (57,878)
----------- -----------
Net cash used in financing activities................... (815,435) (527,377)
----------- -----------
Net increase (decrease) in cash................................... 7,613 (54,284)
Cash at beginning of year......................................... 44,530 98,814
----------- -----------
Cash at end of year............................................... $ 52,143 $ 44,530
=========== ===========
Cash paid during the year for:
Interest........................................................ $ 18,208 $ 36,302
=========== ===========
Income taxes.................................................... $ 95,162 $ 100,700
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 109
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1994 AND JANUARY 31, 1993
1. BASIS OF PRESENTATION
The financial statements present the results of Videosmith Incorporated
("the Company"), a wholly owned subsidiary of Xtra-vision Corporation (the
"Parent"), itself a wholly-owned subsidiary of Xtra-vision plc, a publicly held
Irish company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities
The Company operates video stores which rent and sell video films,
equipment and related accessories.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method. Maintenance and repairs are charged to expense as
incurred. Leasehold improvements are amortized using the straight-line method
over the term of the lease.
Rental Films and Equipment
Until January 31, 1993, rental films and equipment were recorded at cost
and amortized to a residual value over their estimated useful life which
approximated thirty months. Because of changes in the industry, the effective
useful life of a rental tape has, in management's view, decreased significantly
as industry and consumer pressures for "quick release, hit-driven" movies have
increased. Taking this into account, management revised the estimated carrying
value of its inventory at January 29, 1993, resulting in a charge against income
of $1,430,404. At January 29, 1994, all rental tapes are carried at their
residual value. All tapes purchased are written down to their residual value in
the month of purchase. The Company believes that its method of amortization
results in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Inventories
Merchandise inventories are generally stated on the conventional retail
method which approximates lower of cost or market. Inventories consist of video
tapes, film and equipment available for sale.
Income Taxes
The Company files its federal tax return on a consolidated basis along with
its parent. Income taxes are provided based on the taxable income of each
Company to the extent there is any net tax charge attributable to the
consolidated U.S. companies. State income taxes are also filed on a consolidated
basis.
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, was issued by the Financial Accounting Standards Board in February 1992.
Statement 109 requires a change from the deferred method under APB Opinion 11 to
the asset and liability method of accounting for income taxes. Under the asset
and liability method of Statement 109, deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities, are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred taxes of a change in tax rate is
recognized in income in the period that includes the enactment date.
The Company adopted Statement 109 on February 1, 1993, on a prospective
basis. The impact of the adoption of FAS 109 was not material.
F-40
<PAGE> 110
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain amounts in the 1993 financial statements have been reclassified to
conform with the 1994 presentation.
3. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment at January 29, 1994 and January 31, 1993 consist of
the following:
<CAPTION>
ESTIMATED
1994 1993 USEFUL LIFE
---------- ---------- ---------
<S> <C> <C> <C>
Computers........................................ $ 454,683 $ 467,399 5 years
Furniture and fixtures........................... 849,688 1,152,868 7 years
Leasehold improvements........................... 2,735,798 3,235,704 10 years
---------- ----------
4,040,349 4,855,971
Less accumulated depreciation and amortization... 2,099,596 2,216,878
---------- ----------
$1,940,753 $2,639,093
========== ==========
</TABLE>
Depreciation and amortization charged to income during the years ended
January 29, 1994 and January 31, 1993 amounted to $419,588 and $515,813,
respectively.
4. NOTE PAYABLE
<TABLE>
Note payable at January 29, 1994 and January 31, 1993 consist of the
following:
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Note payable to trustee of Security Realty Trust with interest at
prime plus 2% payable through October 1998..................... $64,763 $72,166
Less amount payable within one year.............................. 17,315 10,504
------- -------
$47,448 $61,662
======= =======
</TABLE>
5. RELATED PARTY TRANSACTIONS
Amounts due to or from the parent corporation are interest free and are
payable on demand. The payable balance was $290,772 at the end of fiscal year
1993. The Company has paid expenses on behalf of and remitted amounts received
on the sale of stores to the parent corporation during fiscal 1994. At January
29, 1994, the receivable from parent amounted to $478,704. This receivable from
parent is classified as a reduction of stockholder's equity due to the
uncertainty related to the stockholder's ability to pay off the outstanding
balance.
F-41
<PAGE> 111
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASE COMMITMENTS
<TABLE>
The Company's stores, office space, and certain equipment used in the
business are leased. The Company operates seven of its stores on the basis of a
minimum rent and a percentage of net sales when sales exceed a certain base
amount. At January 29, 1994, future minimum lease payments required under
capital leases and noncancelable operating leases in excess of one year were as
follows:
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
---------- ------- ----------
<S> <C> <C>
1995........................................................ $ 9,683 $ 976,873
1996........................................................ 3,343 991,760
1997........................................................ 384 916,990
1998 and thereafter......................................... -- 2,048,345
------- ----------
Future minimum payments....................................... 13,410 $4,933,968
==========
Less amount representing interest............................. 3,137
-------
Present value of future minimum lease payments................ 10,273
Less current maturities....................................... 6,335
-------
Obligations under capital leases, net of current maturities... $ 3,938
=======
</TABLE>
Rent expense totalled approximately $1,239,000 and $1,484,000 for the years
ended January 29, 1994 and January 31, 1993, respectively.
7. RESTRUCTURING COSTS
In fiscal 1993, the Company provided approximately $428,000 for
restructuring costs it intended to incur during 1994 in consolidating its store
operations. The Company had also provided for anticipated losses of
approximately $290,000 it expected to incur on disposal of four of its stores in
1994. During fiscal 1994 these reserves were fully utilized.
8. INCOME TAXES
The Company files its federal tax return on a consolidated basis with its
parent. As mentioned in note 1, on February 1, 1993, the Company implemented
Financial Accounting Standards Board Statement 109, Accounting for Income Taxes.
At the date of implementation, the Company could have recorded a deferred tax
asset of approximately $1,050,000 if management had felt that the future income
of the Company would support the recovery of such an asset. The asset occurs
principally because the Company has shorter lives for leasehold improvements and
tape inventory for book purposes than for tax purposes. The asset is indicative
of the future benefits available for deduction for tax purposes in later years
of amounts which have already been expensed for book purposes.
At January 29, 1994, the asset would amount to approximately $1,100,000.
The Company has not recorded this asset because in management's view, the
current conditions in the industry and the past financial performance of the
Company do not make it more likely than not that the asset would be recovered
against future taxable book income. Accordingly, a valuation reserve of the
entire amount of the asset has been established to reduce it to zero.
F-42
<PAGE> 112
VIDEOSMITH INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF XTRA-VISION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The components of income tax expense are:
<CAPTION>
1994 1993
------- --------
<S> <C> <C>
Income tax expense:
Current:
Federal.................................................... $11,045 $217,550
State...................................................... 48,283 23,358
------- --------
$59,328 $240,908
======= ========
</TABLE>
<TABLE>
A reconciliation of the tax expense for financial statement purposes and
the expected statutory federal rate of 34% is as follows:
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Federal statutory income tax (benefit) at 34%................ $137,192 $(540,733)
State income taxes, net of federal benefit................... 20,046 15,650
Permanent adjustments........................................ -- 2,035
Intercompany fees............................................ (51,000) --
Timing differences and book adjustments for which no deferred
tax asset is established................................... (46,910) 763,956
-------- ---------
$ 59,328 $ 240,908
======== =========
</TABLE>
9. SUBSEQUENT EVENT
The ultimate parent company has entered into a letter of intent with
unrelated parties to sell the entire outstanding issued common stock of the
Company and of its parent, Xtra-vision Corp. It is contemplated that the
transaction will be finalized in April, 1994.
F-43
<PAGE> 113
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
West Coast Entertainment, Inc. and Affiliates
We have audited the accompanying combined balance sheets of West Coast
Entertainment, Inc.; West Coast Video Enterprises, Inc. and its wholly owned
subsidiary, National Video, Inc.; West Coast Services, Inc.; Interactive
Electronics Corporation d/b/a Game Power Headquarters; Game Power Headquarters,
Inc.; and Premier Advertising, Inc. (collectively known as "the Companies") as
of December 31, 1993 and 1994 and July 12, 1995, and the related combined
statements of operations, changes in stockholders' deficiency and cash flows for
the years and period then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies as of December 31, 1993 and 1994 and July 12, 1995, and the combined
results of their operations and their cash flows for the years and period then
ended, in conformity with generally accepted accounting principles.
MILLER, GLUSMAN, FOOTER & MAGARICK, P.C.
Certified Public Accountants
January 26, 1996
Philadelphia, Pennsylvania
F-44
<PAGE> 114
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
<TABLE>
COMBINED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994 AND JULY 12, 1995
<CAPTION>
DECEMBER 31,
--------------------------- JULY 12,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash (Note 1)..................................... $ 545,391 $ 414,464 $ 511,489
Accounts receivable, net of allowance for doubtful
accounts approximating $10,000 in 1993 and
$91,000 in 1994 and 1995....................... 928,850 1,119,929 869,679
Inventories (Note 1).............................. 391,493 524,718 341,300
Prepaid expenses and other current assets......... 22,752 11,977 39,847
----------- ----------- -----------
Total current assets...................... 1,888,486 2,071,088 1,762,315
Due from affiliates (Note 6)........................ 42,928 42,928 42,928
Property and equipment, net (Notes 1 and 2)......... 313,802 273,895 254,408
Other assets........................................ 201,273 172,145 57,173
----------- ----------- -----------
$ 2,446,489 $ 2,560,056 $ 2,116,824
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt (Note 4)........ $ 511,827 $ 594,043 $ 475,997
Notes payable, stockholders (Note 3).............. 158,172 309,729 237,939
Accounts payable and accrued expenses............. 1,027,638 1,111,504 826,688
Other............................................. 45,000 80,000 25,000
----------- ----------- -----------
Total current liabilities................. 1,742,637 2,095,276 1,565,624
----------- ----------- -----------
Long-term debt, net of current portion (Note 4)..... 3,643,736 3,110,387 2,881,147
----------- ----------- -----------
Commitments (Note 7)
Stockholders' deficiency:
Common stock (Note 5)............................. 787,000 787,000 787,000
Additional paid-in capital........................ 2,564,000 2,714,000 2,714,000
Accumulated deficit............................... (6,290,884) (6,146,607) (5,830,947)
----------- ----------- -----------
Total stockholders' deficiency............ (2,939,884) (2,645,607) (2,329,947)
----------- ----------- -----------
$ 2,446,489 $ 2,560,056 $ 2,116,824
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE> 115
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
<TABLE>
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
-------------------------- JULY 12,
1993 1994 1995
---------- ----------- ------------
<S> <C> <C> <C>
Revenues (Note 1):
Franchise and royalty fees......................... $7,079,779 $ 6,848,813 $3,660,385
Product sales...................................... 1,729,547 3,568,140 782,614
---------- ----------- ----------
8,809,326 10,416,953 4,442,999
---------- ----------- ----------
Costs and expenses
(Notes 6 and 7):
Cost of product sales........................... 1,516,247 3,177,829 703,815
Operating expenses.............................. 6,455,991 6,795,569 3,208,829
---------- ----------- ----------
7,972,238 9,973,398 3,912,644
---------- ----------- ----------
Income from operations.......................... 837,088 443,555 530,355
Interest expense, net................................ (264,714) (362,917) (215,043)
Other income (expense)............................... (32,717) 63,639 348
---------- ----------- ----------
Net income........................................... $ 539,657 $ 144,277 $ 315,660
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE> 116
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
<TABLE>
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
<CAPTION>
COMMON STOCK
(SEE NOTE 5)
---------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993..... 1,006,000 $486,000 $2,465,000 $(6,755,541) $(3,804,541)
Issuance of common stock..... 2,000 301,000 99,000 -- 400,000
Distributions................ -- -- -- (75,000) (75,000)
Net income................... -- -- -- 539,657 539,657
--------- -------- ---------- ----------- -----------
Balance, December 31, 1993... 1,008,000 787,000 2,564,000 (6,290,884) (2,939,884)
Contribution of capital...... -- -- 150,000 -- 150,000
Net income................... -- -- -- 144,277 144,277
--------- -------- ---------- ----------- -----------
Balance, December 31, 1994... 1,008,000 787,000 2,714,000 (6,146,607) (2,645,607)
Net income................... -- -- -- 315,660 315,660
--------- -------- ---------- ----------- -----------
Balance, July 12, 1995....... 1,008,000 $787,000 $2,714,000 $(5,830,947) $(2,329,947)
========= ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE> 117
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
<TABLE>
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
----------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 539,657 $ 144,277 $ 315,660
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for bad debts........................ -- 36,366 --
Gain on sale of assets......................... (42,032) -- --
Depreciation and amortization.................. 95,693 147,792 40,677
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable....................... (359,906) (227,446) 250,250
Inventories............................... (327,742) (133,224) 183,418
Prepaid expenses and other current
assets.................................. (2,497) 10,775 (27,870)
Other assets.............................. (179,335) 29,128 114,972
Increase (decrease) in liabilities:
Accounts payable and accrued expenses..... 113,086 83,866 (284,816)
Other current liabilities................. 45,000 35,000 (55,000)
----------- --------- -----------
Total adjustments.............................. (657,733) (17,743) 221,631
----------- --------- -----------
Net cash provided by (used in) operating
activities................................... (118,076) 126,534 537,291
----------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment............... (209,340) (107,885) (21,190)
Net advances to affiliates........................ (10,167) -- --
----------- --------- -----------
Net cash used in investing activities.......... (219,507) (107,885) (21,190)
----------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock................... 400,000 -- --
Proceeds from additional paid-in capital.......... -- 150,000 --
Net repayments of long-term debt.................. (2,089,437) (451,133) (2,319,076)
Proceeds from notes payable, stockholders......... 158,172 151,557 1,900,000
Distributions to stockholders..................... (75,000) -- --
----------- --------- -----------
Net cash used in financing activities.......... (1,606,265) (149,576) (419,076)
----------- --------- -----------
Net increase (decrease) in cash..................... (1,943,848) (130,927) 97,025
Cash, beginning of period........................... 2,489,239 545,391 414,464
----------- --------- -----------
Cash, end of period................................. $ 545,391 $ 414,464 $ 511,489
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE> 118
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD ENDED JULY 12, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the accounts of West Coast
Entertainment, Inc. ("Entertainment"); West Coast Video Enterprises, Inc.
("Enterprises") and its wholly owned subsidiary, National Video, Inc.
("National"); West Coast Services, Inc. ("Services"); Interactive Electronics
Corporation d/b/a Game Power Headquarters ("Interactive"); Game Power
Headquarters, Inc. ("Game Power"); and Premier Advertising, Inc. (hereafter
collectively known as "the Companies"). Significant intercompany accounts and
transactions have been eliminated in the combined financial statements.
The results for the 1995 period reflect a material decline in product sales
as a result of de-emphasis and/or elimination of certain product lines and a
significant decline in franchise and royalty fees as a result of an overall
decline in the number of new franchises sold. To offset these revenue declines,
the Companies instituted a significant cost-reduction program resulting in an
overall increase in net income for the period ended July 12, 1995.
The Companies (1) sell and service video franchises, which operate outlets
for the rental and sale of video cassettes, electronic games and related
accessories, (2) distribute operational and ancillary sale items to franchise
stores, and (3) sell merchandise to video and game stores.
Pursuant to an asset purchase agreement ("the Purchase Agreement") which
became effective July 12, 1995, the Companies agreed to sell substantially all
of their assets and certain liabilities to BSMS Acquisition Co., Inc. ("the
Buyer").
During 1994, Interactive effected a statutory merger with Game Power under
the tax-free reorganization regulations of the Internal Revenue Code. Under the
terms of the merger agreement, the surviving company, Game Power, acquired 100%
of the stock of Interactive.
During 1992, Enterprises filed for bankruptcy protection under Chapter 11
of the U.S. Bankruptcy Code, and later submitted a Plan of Reorganization that
became effective January 1993. As disclosed in Note 4, certain liabilities
incurred in connection with the Plan of Reorganization were not assumed by the
Buyer under the terms of the Purchase Agreement.
Cash
The Companies maintain their cash accounts at several financial
institutions in Philadelphia, PA. Balances at these institutions are insured by
the Federal Deposit Insurance Corporation up to $100,000. Uninsured balances
approximated $285,000 as of July 12, 1995.
Inventories
Merchandise, consisting primarily of video cassettes and games, and
computer inventories are stated at the lower of cost, using the first-in,
first-out method, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the terms of the leases
or service lives of the improvements.
F-49
<PAGE> 119
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Franchise fees, related to the sale of franchises, are recognized when the
stores are opened for business. Royalty and advertising income are recognized
based on 5% and 2%, respectively, of franchisee revenue as defined in the
franchise agreement. Sales to video and game stores are recognized when goods
are shipped.
Income Taxes
The Companies, except for National and Game Power, have elected
S-corporation status for federal and state income tax purposes. Consequently,
taxable income flows through and is taxed to the stockholders on their
individual income tax returns. Accordingly, no provision for federal and state
income taxes has been made in the accompanying combined financial statements.
National and Game Power have available unused federal net operating loss
carryforwards, expiring through 2009, aggregating approximately $165,000 and
$281,000 as of December 31, 1993 and 1994, respectively, and $281,000 as of July
12, 1995. A valuation allowance has been provided for the full amount of the
resulting deferred tax asset.
Reclassification
Certain items in the 1993 and 1994 combined financial statements have been
reclassified to conform to the 1995 presentation.
2. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consisted of the following:
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Equipment..................................... $1,065,566 $1,082,503 $1,096,172
Furniture and fixtures........................ 125,111 147,797 147,797
Computer equipment............................ 58,590 81,961 81,961
Leasehold improvements........................ 61,375 106,266 113,787
---------- ---------- ----------
1,310,642 1,418,527 1,439,717
Accumulated depreciation and amortization..... 996,840 1,144,632 1,185,309
---------- ---------- ----------
$ 313,802 $ 273,895 $ 254,408
========== ========== ==========
</TABLE>
Depreciation and amortization expense were approximately $96,000 and
$148,000 for the years 1993 and 1994, respectively; and approximately $41,000
for the 1995 period.
3. NOTES PAYABLE, STOCKHOLDERS
A demand note payable in the approximate amount of $158,000, $210,000 and
$183,000 at December 31, 1993 and 1994 and July 12, 1995, respectively, to one
stockholder bears interest at the prime rate (8.75% at July 12, 1995). The
remaining note payable to another stockholder is non-interest bearing and
payable in monthly installments through November 1995. The notes payable to the
stockholders were not assumed by the Buyer as part of the Purchase Agreement.
F-50
<PAGE> 120
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
<TABLE>
Long-term debt consisted of:
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Note payable, bank(a)......................... $3,163,264 $3,071,964 $1,116,525
Note payable, stockholder(b).................. -- -- 1,894,647
Due to affiliate(c)........................... 399,250 180,250 81,780
Creditor settlements(d)....................... 593,049 452,216 264,192
---------- ---------- ----------
4,155,563 3,704,430 3,357,144
Less current portion.......................... 511,827 594,043 475,997
---------- ---------- ----------
$3,643,736 $3,110,387 $2,881,147
========== ========== ==========
- ---------------
<FN>
(a) Repayment terms under a February 1995 refinancing agreement, called for (1)
an immediate payment of $1.9 million, and (2) monthly principal payments of
$10,000 plus interest at prime plus 2% (10.75% at July 12, 1995). The
remaining balance was paid in full from the proceeds of the Purchase
Agreement.
(b) Note payable, stockholder, with monthly principal payments of $20,200,
including interest at 11.925%. The remaining balance was not assumed by the
Buyer as part of the Purchase Agreement.
(c) Represents amounts due to an affiliated entity (not included in the combined
Companies) that assumed $600,000 of the amount due to the bank under the
Plan of Reorganization (see Note 1). Payment terms called for monthly
principal payments of $18,250 plus interest at prime plus 1%. This liability
was not assumed by the Buyer as part of the Purchase Agreement.
(d) Consists of amounts payable to various franchisees, limited partners of
affiliated partnerships and unsecured creditors under the terms of the Plan
of Reorganization (see Note 1). This liability was not assumed by the Buyer
as part of the Purchase Agreement.
</TABLE>
5. COMMON STOCK
<TABLE>
Common stock consisted of the following:
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------------- JULY 12,
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Entertainment
No par value
Authorized -- 1,000,000 shares
Issued and outstanding -- 5,000 shares........... $475,000 $475,000 $475,000
Enterprises
Class A
Authorized -- 8,000,000 shares
Issued and outstanding -- none................... -- -- --
Class B
$.01 par value
Authorized -- 2,000,000 shares
Issued and outstanding -- 1,000,000 shares....... 10,000 10,000 10,000
Services(a)
$1 par value
Authorized, issued and outstanding -- 1,000
shares........................................... 1,000 1,000 1,000
</TABLE>
F-51
<PAGE> 121
WEST COAST ENTERTAINMENT, INC. AND AFFILIATES
<TABLE>
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<CAPTION>
YEARS ENDED PERIOD ENDED
DECEMBER 31, JULY 12,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interactive/Game Power (a)
No par value
Authorized, issued and outstanding -- 1,000
shares........................................... $ 300,000 $ 300,000 $ 300,000
Premier
$1 par value
Authorized, issued and outstanding -- 1,000
shares........................................... 1,000 1,000 1,000
---------- ---------- ----------
787,000 787,000 787,000
Combined additional paid-in capital................... 2,564,000 2,714,000 2,714,000
---------- ---------- ----------
Combined capitalization............................... $3,351,000 $3,501,000 $3,501,000
========== ========== ==========
- ---------------
<FN>
(a) Issued during 1993.
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Companies make and receive non-interest bearing temporary cash advances
to and from affiliated companies not included in the Purchase Agreement and the
accompanying combined financial statements.
The Companies lease certain facilities and equipment under operating leases
with related parties (not included in the Purchase Agreement and the
accompanying combined financial statements) which were terminated on July 12,
1995. Rent expense under these leases aggregated approximately $111,000 and
$150,000 for the years 1993 and 1994, respectively; and approximately $37,000
for the 1995 period.
7. LEASE COMMITMENTS
The Companies leased their facilities and certain equipment under operating
leases. Except for the Game Power lease, which was assumed by the Buyer, all
other leases were terminated on July 12, 1995.
Rent expense (including amounts to related parties) approximated $171,000
and $242,000 for the years 1993 and 1994, respectively; and approximately
$63,000 for the 1995 period.
F-52
<PAGE> 122
INDEPENDENT AUDITORS' REPORT
The Stockholders
Palmer Corporation:
We have audited the accompanying consolidated balance sheets of Palmer
Corporation and subsidiaries as of March 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Palmer
Corporation and subsidiaries at March 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 2 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for videocassette rental inventory.
Princeton, New Jersey
June 27, 1996
F-53
<PAGE> 123
PALMER CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (note 2)....................................... $ 259,849 $ 466,558
Marketable equity securities............................................. -- 5,870
Accounts receivables, less allowance for doubtful accounts of $68,000 in
1996
and 1995.............................................................. 263,481 379,313
Merchandise inventories (note 3)......................................... 2,085,240 1,864,104
Prepaid expenses......................................................... 24,202 203,245
Notes receivable -- current portion, less allowance for doubtful accounts
of none in 1996, $51,400 in 1995 (note 4)............................. 158,417 145,756
---------- ----------
Total current assets............................................. 2,791,189 3,064,846
Videocassette rental inventory, net........................................ 3,235,629 3,568,049
Property and equipment, net (note 5)....................................... 1,421,350 1,728,156
Intangible assets, net of amortization of $202,872 and $168,233,
respectively (note 2).................................................... 232,119 266,758
Other assets............................................................... 18,500 --
Notes receivable -- less current portion (note 4).......................... 159,022 136,806
Due from affiliated companies.............................................. 138,032 36,189
Cash surrender value of officers' life insurance, net...................... 72,168 98,865
Security deposits.......................................................... 303,839 301,481
---------- ----------
$8,371,848 $9,201,150
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable -- bank (note 7)............................................ $ -- $ 600,000
Accounts payable......................................................... 2,535,034 2,747,170
Accrued expenses......................................................... 821,291 1,187,655
Current installments of long-term debt (note 8).......................... 45,554 320,770
Advances from stockholders (note 9)...................................... 249,250 310,000
Income taxes payable..................................................... 356,081 53,988
Sales tax payable........................................................ 126,506 112,744
---------- ----------
Total current liabilities........................................ 4,133,716 5,332,327
Long-term debt, less current portion (note 8).............................. 148,406 192,143
Deferred rent.............................................................. 995,718 1,036,399
---------- ----------
5,277,840 6,560,869
---------- ----------
Minority interest.......................................................... 60,918 30,137
---------- ----------
Commitments and contingencies (note 12)
Stockholders' equity (note 11):
Convertible preferred stock, par value $1 per share; authorized 400,000
shares; issued and outstanding 400,000 shares (note 11)............... 400,000 400,000
Common stock, no par value; authorized 100,000,000 shares; issued and
outstanding 197,450 shares, respectively.............................. 2,087,842 2,087,842
Retained earnings........................................................ 693,401 245,455
---------- ----------
3,181,243 2,733,297
Less treasury stock (14.835 of pre-replacement shares and 250 of
post-replacement shares in 1996 and 14.835 of pre-replacement shares
in 1995, at cost)..................................................... 148,153 123,153
---------- ----------
Total stockholders' equity....................................... 3,033,090 2,610,144
---------- ----------
$8,371,848 $9,201,150
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<PAGE> 124
PALMER CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Movie rentals..................................... $17,733,546 $16,343,066 $16,682,587
Merchandise sales................................. 4,373,215 4,797,189 4,297,596
Royalties and other revenue....................... 1,461,095 1,356,283 1,247,277
----------- ----------- -----------
23,567,856 22,496,538 22,227,460
----------- ----------- -----------
Operating costs and expenses:
Store operating expenses.......................... 11,500,400 10,659,393 10,351,566
Amortization of videocassette rental inventory.... 3,639,008 4,147,925 4,412,558
Cost of sales -- movie rentals (note 9)........... 1,471,234 503,247 --
Cost of sales -- merchandise sales................ 3,359,207 3,681,728 4,601,999
General and administrative expenses............... 3,054,095 3,289,407 3,705,045
----------- ----------- -----------
23,023,944 22,281,700 23,071,168
----------- ----------- -----------
Operating income (loss)................... 543,912 214,838 (843,708)
----------- ----------- -----------
Minority interest in net income of subsidiary....... (72,777) (64,611) (48,566)
----------- ----------- -----------
Other income (expense):
Interest income................................... 11,307 26,849 7,886
Interest expense.................................. (50,940) (160,544) (283,648)
Settlement of litigation (note 7)................. 771,000 -- --
Other............................................. (146,178) (87,652) 53,937
----------- ----------- -----------
585,189 (221,347) (221,825)
----------- ----------- -----------
Income (loss) before income taxes......... 1,056,324 (71,120) (1,114,099)
Income tax expense (benefit) (note 10).............. 542,228 217,613 (287,392)
----------- ----------- -----------
Net income (loss)......................... $ 514,096 $ (288,733) $ (826,707)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE> 125
PALMER CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 514,096 $ (288,733) $ (826,707)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................... 531,340 615,055 639,166
Amortization of videocassette rental inventory.............. 3,639,008 4,147,925 4,412,558
Increase in allowance for doubtful accounts................. -- 8,440 (78,136)
Bad debt expense related to notes receivable................ -- 48,732 51,400
Loss on disposal of fixed assets............................ -- 105,187 13,664
Minority interest........................................... 30,781 (440) (74,707)
Settlement of litigation.................................... (771,000) -- --
Changes in assets and liabilities:
Marketable securities..................................... 5,870 -- (5,870)
Accounts receivable....................................... 115,832 (2,528) 329,732
Merchandise inventories................................... (221,136) (746,580) 93,942
Prepaid expenses.......................................... 179,043 (136,578) 96,668
Notes receivable.......................................... (34,877) (17,601) 57,309
Prepaid and refundable income taxes....................... -- 316,591 (308,679)
Other assets.............................................. (18,500) 5,850 1,800
Due from affiliated companies............................. (101,843) (36,189) --
Cash surrender value of officers' life insurance.......... 26,697 43,262 18,226
Security deposits......................................... (2,358) 25,222 35,260
Accounts payable.......................................... (212,136) 64,628 216,804
Accrued expenses.......................................... (195,364) (95,683) 615,650
Income taxes payable...................................... 302,093 53,988 (123,649)
Sales tax payable......................................... 13,762 (16,100) 37,483
Deferred rent............................................. (40,681) 61,995 70,918
----------- ----------- -----------
Net cash provided by operating activities................. 3,760,627 4,156,443 5,272,832
Cash flows from investing activities:
Purchases of videocassette rental inventory, net.............. (3,306,588) (4,054,606) (4,562,453)
Purchase of equipment......................................... (189,895) (431,449) (417,213)
Purchase of intangible assets................................. -- (59,020) --
----------- ----------- -----------
Net cash used in investing activities.................. (3,496,483) (4,545,075) (4,979,666)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of notes payable.................................... (318,953) (737,922) (379,209)
Proceeds from note payable.................................... -- 7,530 --
Proceeds from issuance of common stock........................ -- 1,745,000 --
Purchase of treasury stock.................................... (25,000) -- --
Repayment of advances from stockholders....................... (60,750) (213,288) (5,162)
Partnership capital drawings, net of contributions............ (66,150) (15,000) (171,933)
----------- ----------- -----------
Net cash provided by (used in) financing activities.... (470,853) 786,320 (556,304)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............ (206,709) 397,688 (263,138)
Cash and cash equivalents, beginning of year.................... 466,558 68,870 332,008
----------- ----------- -----------
Cash and cash equivalents, end of year.......................... $ 259,849 $ 466,558 $ 68,870
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 59,990 $ 138,738 $ 263,645
Income taxes.............................................. 170,015 167,540 7,800
=========== =========== ===========
</TABLE>
Noncash transaction:
During 1996, the Company was released from $600,000 of bank debt and $171,000 of
related accrued interest.
During 1995, the Company wrote-off notes receivable of $100,132 that were fully
reserved.
See accompanying notes to consolidated financial statements.
F-56
<PAGE> 126
PALMER CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
----------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993
(unaudited)..................... $400,000 $ 342,842 $1,547,828 $(123,153) $2,167,517
Partnership drawings............ -- -- (171,933) -- (171,933)
Net loss........................ -- -- (826,707) -- (826,707)
-------- ---------- ---------- --------- ----------
Balance, March 31, 1994........... 400,000 342,842 549,188 (123,153) 1,168,877
Issuance of common stock
(note 11).................... -- 1,745,000 -- -- 1,745,000
Partnerships drawings, net of
capital contributions........ -- -- (15,000) -- (15,000)
Net loss........................ -- -- (288,733) -- (288,733)
-------- ---------- ---------- --------- ----------
Balance, March 31, 1995........... 400,000 2,087,842 245,455 (123,153) 2,610,144
Partnerships drawings net of
capital contributions........ -- -- (66,150) -- (66,150)
Purchase of treasury stock...... -- -- -- (25,000) (25,000)
Net income...................... -- -- 514,096 -- 514,096
-------- ---------- ---------- --------- ----------
Balance, March 31, 1996........... $400,000 2,087,842 693,401 148,153 3,033,090
======== ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE> 127
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
(1) ORGANIZATION
The consolidated financial statements include the accounts of the Company,
Palmer Corporation, its wholly-owned subsidiaries, Palmer Video Corporation,
Casablanca Distributing Corporation, Palmer Investment Corporation, its 51%
owned subsidiary 142nd Retail Associates ("142nd"), 135th Retail Associates
("135th") which was 85% owned by Palmer Video Corporation through March 1, 1995,
at which time the entire interest was purchased by Palmer Investment
Corporation, and its 50% owned subsidiary 38th Retail Associates ("38th")
(together "The Company"). All significant intercompany transactions and balances
have been eliminated in consolidation.
Palmer Video Corporation ("Video") owns and operates all 100% owned company
stores. At March 31, 1996 and 1995, Video owned 41 and 39 such stores,
respectively. During March 31, 1996 and 1995, 3 and 2 new stores were opened,
none and 2 stores were purchased and 1 and 3 stores were closed, respectively.
In addition, Video also functions as the franchisor company. At March 31, 1996
and 1995, there were 22 and 23 franchised stores in operation, including certain
stores in which the Company owns a majority interest.
Casablanca Distributing Corporation ("Casa") is a wholesaler of video
cassettes and accessories supplying company-owned, franchisees and independent
stores.
Palmer Investment Corporation ("Investment") is the holding company for all
partial equity interests in company-owned stores. At March 31, 1996 and 1995,
Investment holds a 51% interest in 142nd and a 50% interest in 38th.
142nd and 38th were organized as partnerships to own and operate two
majority owned stores.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash equivalents:
Cash equivalents consist of highly liquid investments, such as money market
accounts and a certificate of deposit with an original maturity of three months
or less.
Merchandise inventory:
Merchandise inventory consisting primarily of prerecorded videocassettes
and accessories, are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method and with market defined as the lower of
replacement cost or realizable value.
Videocassette rental inventory:
Videocassette rental inventory, which includes video games, is recorded at
cost, and amortized over their estimated economic life with no provision for
salvage value. For the period from April 1, 1993 through March 31, 1994
videocassettes were amortized over 36 months on an accelerated basis. Effective
April 1, 1994, the Company changed its method of amortization. Videocassettes
which are considered base stock are amortized over 36 months on a straight-line
basis. Purchases of new release videocassettes are amortized whereby the tenth
and any succeeding copies of each title are amortized over nine months on an
accelerated basis; the fourth through ninth copies of each title per store are
amortized over 36 months on an accelerated basis; and copies one through three
of each title are amortized as base stock. Management is of the opinion that the
new method of amortization is a more appropriate matching of the cost per tape
with its related revenue. The effect of the change in method of amortization
caused a decrease in amortization expense in 1995 of $80,305.
F-58
<PAGE> 128
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense related to videocassette rental inventory totaled
$3,639,008, $4,147,925 and $4,412,558 for the years ended March 31, 1996, 1995
and 1994, respectively. As videocassettes are sold or retired, the applicable
cost and accumulated amortization are eliminated from the accounts, and any gain
or loss is recorded.
Property and equipment:
<TABLE>
Property and equipment are recorded at cost and depreciated primarily using
the straight-line method of depreciation over estimated useful lives as follows:
<S> <C>
Furniture and fixtures................... 5 to 7 years
Equipment................................ 3 to 5 years
Leasehold improvements and signs......... Shorter of estimated useful life or lease
term
</TABLE>
Revenue recognition:
Movie rental and merchandise revenue is recognized at the time of rental or
sale. Royalty fees, earned based upon the franchisee's sales, are recorded as
revenue in the period when they are received.
Store opening costs:
Store opening costs, which consist primarily of payroll, advertising and
supplies, are expensed as incurred.
Intangible assets:
Intangible assets consist of the cost of acquired businesses in excess of
the market value of the net tangible assets acquired. The cost in excess of the
market value of the net tangible assets is amortized on a straight-line basis
over 15 years.
Income taxes:
The Company files a consolidated Federal income tax return with its
wholly-owned subsidiaries. Income taxes are not payable or provided for by the
Partnerships. Partners are taxed individually on their share of the partnership
earnings or losses.
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," (Statement 109) deferred income taxes are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Pension plan:
The Company has a 401(k) retirement plan covering all eligible employees.
Employer contributions, if any, are determined by an annual resolution of the
Board of Directors and cannot exceed the maximum amount allowable as a tax
deduction under the Internal Revenue Code and regulations. In addition, each
qualified participant may make voluntary contributions to the plan on a pre-tax
basis by salary reductions which cannot exceed 15% of eligible compensation. In
1996 and 1995, the Company did not contribute to the plan.
F-59
<PAGE> 129
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments:
Statement of Financial Accounting Standards SFAS No 107, "Disclosure about
Fair Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company believes that there is no
material difference between the fair value and the reported amounts of financial
instruments in the consolidated balance sheets.
(3) MERCHANDISE INVENTORIES
<TABLE>
Merchandise inventories for the years ended March 31, 1996 and 1995 are
summarized as follows:
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Video cassettes for resale.................................. $1,835,264 $1,442,947
Video accessories/supplies.................................. 221,609 377,524
Blank video tapes........................................... 28,367 43,633
---------- ----------
$2,085,240 $1,864,104
========== ==========
</TABLE>
(4) NOTES RECEIVABLE
<TABLE>
Notes receivable as of March 31, 1996 and 1995 are summarized as follows:
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Various installment notes -- receivable in monthly
installments aggregating $1,505 and $1,128 in 1996 and
1995, including interest at 10% per annum for periods
expiring through May 1999................................. $ 31,996 $156,439
Various installment notes -- receivable in consecutive
monthly installments aggregating $6,754 and $5,934 in 1996
and 1995, respectively, including interest at 9% per annum
through March 1999........................................ 208,657 46,895
Various installment notes -- receivable in consecutive
monthly installments aggregating $1,725 in 1996 and $595
in 1995, including interest at 8% per annum through March
2001...................................................... 76,786 79,228
-------- --------
317,439 282,562
Less current portion...................................... 158,417 145,756
-------- --------
$159,022 $136,806
======== ========
</TABLE>
F-60
<PAGE> 130
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment as of March 31, 1996 and 1995 are comprised of the
following:
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $2,952,299 $2,799,241
Machinery and equipment..................................... 1,812,672 1,775,835
Leasehold improvements...................................... 543,849 543,849
---------- ----------
5,308,820 5,118,925
Accumulated depreciation and amortization................... 3,887,470 3,390,769
---------- ----------
$1,421,350 $1,728,156
========== ==========
</TABLE>
Depreciation and amortization expense related to property and equipment
amounted to $495,898 and $591,391 for the years ended March 31, 1996 and 1995,
respectively.
(6) ACQUISITIONS
On March 1, 1995, Video purchased assets with a book value of $178,231,
assumed liabilities with a book value of $204,188 for $35,000 which was paid in
cash at the closing. The transaction resulted in an increase to Video's goodwill
of $60,069. These assets and liabilities were previously owned by 135th Retail
Associates, which was previously a franchise store.
On March 31, 1995, Video acquired the assets (primarily video rental
cassettes) of Legends Inc. for $82,000. In addition, Video assumed the existing
occupancy lease.
(7) NOTE PAYABLE -- BANK
The advances from the bank aggregating $600,000 at March 31, 1995 were in
the form of demand notes payable with interest ranging from 1% to 1 1/2% above
the bank's base rate, as defined. The notes are unsecured.
Demand was made on the note payable -- bank and accrued interest and was
referred to legal counsel. The Company alleges that the bank breached a
commitment to advance additional funds under a line of credit and has filed a
lender liability action.
In June 1995, the Company and the bank agreed to settle the aforementioned
dispute. The settlement terms release the Company from all obligations and cause
no funds to be exchanged between the parties.
F-61
<PAGE> 131
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LONG-TERM DEBT
<TABLE>
Long-term debt as of March 31, 1996 and 1995 consists of the following
components:
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Promissory note -- payable in consecutive monthly principal
installments of $33,333 through November 1995, plus interest
at 2% above the bank's prevailing base rate (as defined) (9%
at March 31, 1995)........................................... $ -- $267,589
Installment loans -- payable in monthly installments of $2,262
and $3,051 in 1996 and 1995, including interest at various
rates, collateralized by various company assets, for periods
through November 1997........................................ 16,694 41,407
Installment agreement payable in monthly installments of $3,500
in 1996 and 1995, including interest at 8%................... 177,266 203,917
-------- --------
193,960 512,913
Less current maturities........................................ 45,554 320,770
-------- --------
$148,406 $192,143
======== ========
</TABLE>
<TABLE>
Aggregate maturities of long-term debt are as follows:
<CAPTION>
YEARS ENDING
MARCH 31
------------
<S> <C>
1997.................................................... $ 45,554
1998.................................................... 31,259
1999.................................................... 33,852
2000.................................................... 36,661
2001.................................................... 39,704
Thereafter.............................................. 6,930
--------
$193,960
========
</TABLE>
(9) ADVANCES FROM STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
At March 31, 1996 and 1995, the Company has been advanced $249,250 and
$310,000, respectively, from its stockholders, which is payable on demand plus
interest at 10%.
On December 16, 1994, Video entered into an agreement to lease video rental
cassettes from a vendor whose parent became a stockholder in December 1994. The
agreement is effective for the period January 1, 1995 to December 31, 2004. The
agreement stipulates that the Company is required to lease a minimum number of
video rental cassettes from the vendor for the purposes of subsequent rental or
sale. Based on rental and sales volume, the Company is required to remit to the
vendor a stipulated percentage of the volume. Based on the agreement, the
Company paid $1,471,234 and $503,247 to the vendor in 1996 and 1995,
respectively.
Based on the terms of the agreement, the Company, at its own option, is
able to terminate the agreement if certain revenue percentage increases are not
achieved in the first twelve month period of the agreement. If the Company
elects to terminate the agreement, the parent of the vendor can require the
Company to reacquire the parent's common shares acquired in December, 1994 at
the same price that the shares were originally issued (see note 11).
The Company also has a consulting agreement with a stockholder. The
agreement calls for annual payments of $42,000 through May 2001. Such amounts
have been present valued at a discount rate of 8% and are included in the
long-term debt in the accompanying balance sheet.
F-62
<PAGE> 132
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME TAXES
<TABLE>
As discussed in note 2, the Company adopted Statement 109 effective April
1, 1992. The components of the provision for income tax expense (benefit) as of
March 31, 1996, 1995 and 1994 are as follows:
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal......................................... $400,015 $205,000 $(291,491)
State........................................... 142,213 12,613 4,099
-------- -------- ---------
Total current provision (benefit)....... $542,228 $217,613 $(287,392)
======== ======== =========
</TABLE>
<TABLE>
A reconciliation of the Federal income tax rate to the Company's effective
income tax rate is as follows:
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Income tax expense benefit at statutory rate...... $359,190 $(24,181) $(378,794)
Amortization of goodwill.......................... 11,777 8,046 15,187
Officer's life insurance.......................... 31,280 37,400 23,525
Meals and entertainment........................... 13,600 5,780 5,768
Increase (decrease) in valuation allowance for
Federal deferred tax assets..................... 140,767 229,208 (12,708)
State and local taxes, net of federal benefit..... 93,861 -- --
Other............................................. (108,247) (38,640) 59,630
-------- -------- ---------
$542,228 $217,613 $(287,392)
======== ======== =========
</TABLE>
<TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1996 and 1995 are presented below:
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accruals for officers' salaries............................. $ 176,193 $ 156,623
Deferred rent............................................... 397,690 413,938
Net operating loss carryforwards............................ -- 13,665
Allowance for doubtful accounts............................. 27,159 27,159
Other....................................................... 16,681 17,448
--------- ---------
Total gross deferred tax assets.......................... 617,723 628,833
Less valuation allowance.................................... (404,332) (252,637)
--------- ---------
Net deferred tax assets.................................. 213,391 376,196
--------- ---------
Deferred tax liabilities:
Videocassette rental inventory, principally due to
differences in amortization.............................. 96,828 220,891
Accumulated depreciation.................................... 88,329 118,284
Other....................................................... 28,234 37,021
--------- ---------
Total gross deferred tax liability....................... 213,391 376,196
--------- ---------
Net deferred taxes....................................... $ -- $ --
========= =========
</TABLE>
F-63
<PAGE> 133
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Convertible Preferred Stock:
In 1988 the Company authorized and issued 400,000 shares of Series A
Convertible Preferred Stock (Preferred Stock). The total proceeds received by
the Company were $400,000. The Preferred Stock does not pay dividends and the
shareholders are not entitled to any voting privileges. The preferred
shareholders have liquidation preferences senior to the common stockholders and
are entitled to $1 per preferred share upon the occurrence of certain defined
events, including, among other things, a voluntary or involuntary dissolution of
the Company through a merger or consolidation with another party. The Preferred
Stock shareholders also have the option to convert their shares into common
stock upon the occurrence of one of the following events: (i) an initial public
offering of the Company's common stock; (ii) the proposed sale of 30%, or more,
of the Company's common stock or assets; or (iii) that date which is two years
from the sale of the Preferred Stock. The Preferred Stock converts into that
number of common stock shares, ranging from 2% to 4% of the common stock
outstanding immediately prior to the conversion, based upon certain defined
criteria. The Company maintains a reserve of such number of common stock shares
necessary to convert the Preferred Stock at all times. As of March 31, 1995 no
conversion options have been exercised.
Common Stock:
In December 1994 the Company issued replacement shares of common stock to
the then current shareholders. The effect of this action caused the 156.868 then
outstanding common stock shares to be replaced with 180,000 shares. All holders
maintained their proportional ownership share.
On December 16, 1994 the Company executed a Stock Purchase Agreement (the
Agreement) with a private investor (the Investor) whereby the Company sold
10,000 shares of its common stock, representing approximately 5% of the then
outstanding shares of common stock, for total proceeds of $1,000,000. The
Agreement includes an anti-dilution provision that mandates if the Preferred
Stock is converted into common stock the Company will issue that number of
shares of common stock to the Investor that would maintain its proportionate
equity ownership that existed immediately prior to the conversion, at no
additional cost to the Investor. The Company and the Investor also entered into
a registration and piggyback registration agreement related to these shares. In
addition, the Company executed a Right of First Refusal and Co-sale Agreement
(the Co-sale Agreement) that is in effect from the aforementioned date until the
date that the common stock of the Company is registered under the Securities and
Exchange Act of 1934 (the Option Period). The Co-sale Agreement states that if
the Company sells additional shares of its common stock, the Investor shall have
an option to purchase that number of common stock shares sold during the Option
Period that would allow the Investor to maintain its proportionate
equity ownership that existed immediately prior to the common stock sale, at a
per share price equal to those sold. Furthermore, if certain common stock
shareholders propose to transfer their common stock (Proposed Common Shares) to
parties other than the Company or the Investor, the Investor shall have the
option to participate in the proposed transfer on the same terms and conditions
as the certain common stock shareholders and include in the transfer that number
of shares by which the Co-sale agreement allows the Proposed Common Shares to be
reduced.
In December 1994, the Company sold an additional 7,450 shares of its common
stock, representing approximately 4% of the then outstanding shares of common
stock, to individual investors at a price of $100 per share aggregating $745,000
in proceeds to the Company.
(12) COMMITMENTS AND CONTINGENCIES
The Company leases their facilities and certain equipment under operating
leases expiring on various dates through 2005. Several of the leases are subject
to scheduled rental increases based on a defined formula
F-64
<PAGE> 134
PALMER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the effect of which has been reflected in the accompanying consolidated
financial statements. Rental expense for the years ended March 31, 1996 and 1995
aggregated $4,267,443 and $4,373,818, respectively.
<TABLE>
Future minimum rental commitments under noncancelable operating leases
(with terms of one year or more) consisted of the following at March 31, 1996:
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1997.................................................. $ 4,262,214
1998.................................................. 4,020,314
1999.................................................. 3,201,377
2000.................................................. 2,247,188
2001.................................................. 1,275,674
Thereafter............................................ 1,977,648
-----------
$16,984,415
===========
</TABLE>
In addition, the leases provide for escalation clauses for increases in
real estate taxes and building maintenance.
At March 31, 1995, the Company was contingently liable under outstanding
letters of credit in the amount of $15,587, which were being held as additional
security deposits for various store locations. There were no such contingent
liabilities at March 31, 1996.
(13) SUBSEQUENT EVENT
On May 17, 1996 the Company merged with RKT Subsidiary Corp., a
wholly-owned subsidiary of West Coast Video.
F-65
<PAGE> 135
INDEPENDENT AUDITOR'S REPORT
Board of Directors
American Video, Inc. and Red Giraffe Video, Inc.
Louisville, Kentucky
We have audited the accompanying combined balance sheets of American Video,
Inc. and Red Giraffe Video, Inc. as of January 3, 1996, December 28, 1994, and
December 29, 1993, and the related combined statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of American
Video, Inc. and Red Giraffe Video, Inc. as of January 3, 1996, December 28,
1994, and December 29, 1993, and the results of their combined operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
CARPENTER & MOUNTJOY, PSC
Louisville, Kentucky
March 4, 1996
F-66
<PAGE> 136
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
<TABLE>
COMBINED BALANCE SHEETS
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
---------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash -- Note J...................................... $ 427,548 $ 56,104 $ 203,676
Accounts receivable -- Note A....................... 58,189 15,662 8,626
Merchandise and supplies inventories -- Notes A and
D................................................ 271,201 273,259 217,568
Preopening costs, net -- Note A..................... 44,664 18,846 9,220
Prepaid expenses.................................... 109,586 38,223 19,712
---------- ---------- ----------
Total current assets........................ 911,188 402,094 458,802
Videocassette Rental Inventory, net--
Notes A, D and K.................................... 2,426,242 2,326,304 2,418,550
Furnishings and Equipment, net--
Notes A, B, and D................................... 1,097,457 969,804 1,076,526
Other Assets -- Note C................................ 113,088 112,071 131,907
---------- ---------- ----------
Total....................................... $4,547,975 $3,810,273 $4,085,785
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt -- Note D......... $ 878,064 $ 588,000 $ 588,000
Note payable-stockholders -- Note H................. 113,000 272,961 272,961
Checks written in excess of bank balance............ -- 55,349 --
Accounts payable.................................... 723,416 813,104 457,671
Accrued expenses.................................... 303,397 143,219 205,542
---------- ---------- ----------
Total current liabilities................... 2,017,877 1,872,633 1,524,174
Long-Term Debt--Note D................................ 1,601,144 980,265 1,568,327
Commitments and Contingencies--Notes E and I.......... -- -- --
Stockholders' Equity
Common stock, no par value, 350,000 shares
authorized, 8,398 shares issued and outstanding
4,000 nonvoting shares authorized, 1 share issued
and outstanding.................................. 1,383,459 1,383,459 1,383,459
Common stock, no par value, 350,000 shares
authorized, 8,398 shares issued and
outstanding...................................... 192,000 192,000 192,000
Retained deficit -- Note K.......................... (646,505) (618,084) (582,175)
---------- ---------- ----------
Total stockholders' equity.................. 928,954 957,375 993,284
---------- ---------- ----------
Total....................................... $4,547,975 $3,810,273 $4,085,785
========== ========== ==========
</TABLE>
See notes to combined financial statements
F-67
<PAGE> 137
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
<TABLE>
COMBINED STATEMENTS OF INCOME
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Revenues
Video rental......................................... $8,557,200 $7,658,130 $6,993,357
Product sales........................................ 957,639 615,469 444,434
Royalty fees......................................... 28,689 -- --
---------- ---------- ----------
Total revenue................................ 9,543,528 8,273,599 7,437,791
Cost and Expenses
Store operating expenses............................. 5,279,564 4,462,133 4,174,195
Tape amortization -- Notes A and K................... 2,383,667 2,200,000 1,846,039
Cost of product sales................................ 432,361 267,154 216,201
General and administrative........................... 816,950 649,763 665,072
---------- ---------- ----------
Total cost and expenses...................... 8,912,542 7,579,050 6,901,507
---------- ---------- ----------
Income from operations....................... 630,986 694,549 536,284
Interest Expense....................................... (153,757) (144,396) (164,183)
Other, net............................................. 4,350 17,251 --
---------- ---------- ----------
Income before provision for income taxes..... 481,579 567,404 372,101
Provision for Income Taxes -- Note G................... -- -- --
---------- ---------- ----------
Net Income................................... $ 481,579 $ 567,404 $ 372,101
========== ========== ==========
</TABLE>
See notes to combined financial statements
F-68
<PAGE> 138
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
<TABLE>
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
COMMON RETAINED STOCKHOLDERS'
STOCK DEFICIT EQUITY
---------- ----------- -------------
<S> <C> <C> <C>
Balance at December 30, 1992......................... $1,631,459 $(1,034,199) $ 597,260
Prior period adjustment -- Note K.................. -- 79,923 79,923
Treasury stock purchase............................ (56,000) -- (56,000)
Net income......................................... -- 372,101 372,101
---------- ----------- ---------
Balance at December 29, 1993......................... 1,575,459 (582,175) 993,284
Distributions paid................................. -- (603,313) (603,313)
Net income......................................... -- 567,404 567,404
---------- ----------- ---------
Balance at December 28, 1994......................... 1,575,459 (618,084) 957,375
Distributions paid................................. -- (510,000) (510,000)
Net income......................................... -- 481,579 481,579
---------- ----------- ---------
Balance at January 3, 1996........................... $1,575,459 $ (646,505) $ 928,954
========== =========== =========
</TABLE>
See notes to combined financial statements
F-69
<PAGE> 139
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
<TABLE>
COMBINED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income........................................ $ 481,579 $ 567,404 $ 372,101
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of videocassette rental
inventory.................................... 2,383,667 2,200,000 1,846,039
Depreciation and amortization.................. 402,519 501,566 514,222
Loss on write off of assets.................... -- -- 33,261
Change in assets and liabilities
Accounts receivable.......................... (42,527) (7,036) (4,655)
Merchandise and supplies inventories......... 2,058 (55,688) (57,926)
Prepaid expenses and other assets............ (168,758) (28,303) 22,955
Bank overdraft............................... (55,349) 55,349 --
Accounts payable............................. (89,688) 355,432 (156,075)
Accrued expenses............................. 160,178 (62,323) (150,279)
----------- ----------- -----------
Net cash provided by operating
activities.............................. 3,073,679 3,526,401 2,419,643
Cash Flows From Investing Activities
Purchase of property and equipment................ (459,613) (374,843) (165,779)
Purchase of videocassette rental inventory........ (2,483,605) (2,107,755) (1,668,824)
----------- ----------- -----------
Net cash used by investing activities..... (2,943,218) (2,482,598) (1,834,603)
Cash Flows From Financing Activities
Borrowings from bank.............................. 1,450,000 -- --
Repayment of long-term debt....................... (539,056) (588,062) (588,061)
Stockholder loans................................. 113,000 -- 113,000
Repayment of stockholder loans.................... (272,961) -- --
Distributions paid................................ (510,000) (603,313) --
Treasury stock purchase........................... -- -- (56,000)
----------- ----------- -----------
Net cash provided (used) by financing
activities.............................. 240,983 (1,191,375) (531,061)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents....................................... 371,444 (147,572) 53,979
Cash and Cash Equivalents, Beginning of the Year.... 56,104 203,676 149,697
----------- ----------- -----------
Cash and Cash Equivalents, End of the Year.......... $ 427,548 $ 56,104 $ 203,676
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest.......... $ 149,947 $ 148,024 $ 231,587
=========== =========== ===========
Supplemental Disclosure of Noncash Investing and
financing activities:
Stockholder notes payable contributed to
capital........................................ $ -- $ -- $ 374,400
=========== =========== ===========
</TABLE>
See notes to combined financial statements
F-70
<PAGE> 140
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JANUARY 3, 1996, DECEMBER 28, 1994 AND DECEMBER 29, 1993
NOTE A -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Red Giraffe Video, Inc. an Indiana corporation,
operates as a franchisor of video tape rental and sale superstores. Red Giraffe
Video, Inc. had 28 franchised stores as of January 3, 1996. American Video, Inc.
d/b/a Red Giraffe, a Kentucky corporation, operates as franchisee of Red Giraffe
Video, Inc. American Video, Inc. had 25 stores in operation at January 3, 1996.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Revenue Recognition: Revenue is recognized at the time of rental or sales
of a videocassettes or video games.
Intercompany Accounts and Transactions: All intercompany accounts and
transactions have been eliminated in combination.
Fiscal Year: American Video, Inc. has a fiscal year which ends on the
Wednesday closest to December 31. Red Giraffe Video, Inc. has a fiscal year
which ends on December 31. Red Giraffe Video, Inc. had no financial activity on
December 31 to the Wednesday closest to December 31, therefore, all results
reflect the year-end date of American Video, Inc.
Accounts Receivable: American Video, Inc. and Red Giraffe Video, Inc.
consider accounts receivable to be fully collectible and as such, no allowance
for doubtful accounts has been recorded. Any accounts determined to be
uncollectible will be charged to operations when that determination is made.
Merchandise and Supply Inventories: Merchandise and supply inventories
consist primarily of pre-recorded and blank videocassette tapes held for sale
and are stated at the lower of cost (first-in, first-out method) or market.
Preopening Costs: Preopening costs consist of costs incurred in opening a
store, and are amortized over twelve months from the store opening.
Video Rental Tapes: Videocassette rental inventory, which includes video
games, is stated at cost and is amortized over its estimated economic life with
no provision for salvage value. Videocassettes that are considered base stock
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies of each
title maintained in each store are amortized as base stock and the fourth and
succeeding copies of each title maintained in each store are amortized over nine
months on a straight-line basis (see Note K). The Company believes that its
method of amortization results in an appropriate matching of tape amortization
expense with the revenue received from the associated rental of such tapes.
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Videocassette rental inventory.............. $ 7,496,600 $ 6,134,935 $ 5,327,648
Accumulated amortization.................... (5,070,358) (3,808,631) (2,909,098)
----------- ----------- -----------
$ 2,426,242 $ 2,326,304 $ 2,418,550
=========== =========== ===========
</TABLE>
Equipment and Improvements: Equipment and improvements are recorded at
cost. Depreciation of equipment is provided using the straight-line depreciation
method over five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the useful lives of the related assets
or lease term, including the option period, if management intends to renew the
lease.
F-71
<PAGE> 141
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- EQUIPMENT AND IMPROVEMENTS
<TABLE>
Equipment and improvements consist of the following:
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Office and store equipment.................. $ 3,142,993 $ 2,755,209 $ 2,418,402
Leasehold improvements...................... 781,662 722,840 716,625
Rental equipment............................ 70,963 57,997 56,443
----------- ----------- -----------
Total............................. 3,995,618 3,536,046 3,191,470
Less accumulated depreciation and
amortization.............................. (2,898,161) (2,566,242) (2,114,944)
----------- ----------- -----------
Net equipment and improvements.............. $ 1,097,457 $ 969,804 $ 1,076,526
=========== =========== ===========
</TABLE>
NOTE C -- OTHER ASSETS
<TABLE>
Other assets consist of the following:
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29,
1996 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
Security deposits............................... $ 62,000 $ 51,277 $ 37,915
Loan fees....................................... 17,852 9,577 22,339
Franchisee organizational materials............. 33,236 51,217 71,653
-------- -------- --------
Total................................. $113,088 $112,071 $131,907
======== ======== ========
</TABLE>
Loan fees are amortized over the life of the loan. Franchisee
organizational materials are amortized over five years.
NOTE D -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is payable to a bank in monthly installments on principal
plus interest through October 30, 2000. Interest is computed at the prime rate
plus 1/2% (effective rate of 9.0% at January 3, 1996). The borrowings are
secured by all video rental tapes, equipment and improvements, merchandise
inventories and the personal guarantees of certain stockholders.
<TABLE>
Aggregate annual principal maturities of long-term debt are as follows:
<CAPTION>
YEAR ENDED
----------
<S> <C>
January 1, 1997........................................................ $ 878,064
December 31, 1997...................................................... 731,144
December 30, 1998...................................................... 290,000
December 29, 1999...................................................... 290,000
January 3, 2001........................................................ 290,000
----------
Total........................................................ $2,479,208
==========
</TABLE>
F-72
<PAGE> 142
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- COMMITMENTS
<TABLE>
The Company occupies stores, warehouse and office facilities under
noncancelable operating leases which expire at various dates through 2000. Many
of the operating lease agreements have options for renewal for terms that range
up to fifteen years. Future annual minimum payments under leases with terms in
excess of one year are:
<CAPTION>
YEAR ENDED
----------
<S> <C>
January 1, 1997........................................ $1,252,730
December 31, 1997...................................... 1,060,213
December 30, 1998...................................... 800,052
December 29, 1999...................................... 579,885
January 3, 2001........................................ 316,885
----------
Total........................................ $4,009,765
==========
</TABLE>
Rent expense under these leases amounted to $1,385,461, $1,190,783 and
$997,495, for the years ending January 3, 1996, December 28, 1994, and December
29, 1993, respectively.
These minimum payments do not include amounts payable for related common
areas, real estate taxes, repairs and maintenance, utilities and other such
charges. Three of the leases provide for additional contingent rentals based
upon sales in excess of a predetermined amount. No such percentage rentals were
paid or accruable for the year ended January 3, 1996.
Substantially all of the leases are renewable at increased rates based upon
the Consumer Price Index. Certain of the leases are guaranteed by certain
stockholders.
NOTE F -- RELATED PARTY TRANSACTIONS
American Video, Inc. and Red Giraffe Video, Inc. are related companies
through common ownership of both companies. Furthermore, American Video, Inc. is
a franchisee of Red Giraffe Video, Inc. Royalties paid by American Video, Inc.
amounted to $285,451, $247,384 and $227,665 for the years ended January 3, 1996,
December 28, 1994 and December 29, 1993, respectively. All of these balances
were eliminated in these combined financial statements.
NOTE G -- INCOME TAXES
The Companies have elected S corporation status under the Internal Revenue
Code of 1986 and as such, no provision has been made for income taxes. Taxes on
the net income of each Company is the responsibility of the stockholders.
Although, local income taxes are payable by the Company, no accrual has been
made as this amount is considered immaterial at January 3, 1996.
NOTE H -- NOTES PAYABLE TO STOCKHOLDERS
At January 3, 1996, American Video, Inc. had notes payable to two
stockholders totaling $113,000. The notes are payable on demand with interest
accruing at 9.5%. At December 29, 1993 and December 28, 1994, American Video,
Inc. had notes payable to two stockholders totaling $272,961. The notes were
payable on demand and had a stated interest at 10% and 8%, respectively.
NOTE I -- SUBSEQUENT EVENT
The stockholders of American Video, Inc. and Red Giraffe Video, Inc. have
entered into an agreement to sell substantially all of the assets and
liabilities of the Companies to an unrelated third party subject to terms
F-73
<PAGE> 143
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and obligations to perform acts within a specified period of time. Pursuant to
the completion of the sale, the Companies will pay a portion of the proceeds to
certain members of its management. No provision has been made in these financial
statements as a result of the sale or any payments which may be made to
management.
NOTE J -- CONCENTRATION OF CREDIT RISK
The Companies maintain cash at several financial institutions. Balances at
the institutions are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. At January 3, 1996, the Companies uninsured cash balance was
approximately $250,000.
NOTE K -- CHANGE IN ACCOUNTING FOR VIDEOCASSETTE RENTAL INVENTORY
Related to the initial public offering of West Coast Entertainment
Corporation, the Company has changed its method of videocassette tape
amortization to more closely resemble the methods used by other video store
chains.
<TABLE>
The effect on net income for each of the years presented is as follows:
<CAPTION>
INCREASE
YEAR ENDED (DECREASE)
---------- ----------
<S> <C>
January 3, 1996...................................... $(450,330)
December 28, 1994.................................... $(553,186)
December 29, 1993.................................... $(516,062)
</TABLE>
The cumulative effect on years prior to 1993 was an increase in retained
earnings of $79,923.
F-74
<PAGE> 144
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
<TABLE>
COMBINED BALANCE SHEET (UNAUDITED)
APRIL 3, 1996
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash........................................................................... $ 129,566
Accounts receivable............................................................ 52,903
Merchandise and supplies inventories........................................... 270,929
Preopening costs, net.......................................................... 60,780
Prepaid expenses............................................................... 99,438
----------
Total current assets................................................... 613,616
Videocassette Rental Inventory, net--Note B.................................... 2,579,088
Furnishings and Equipment, net................................................. 1,240,907
Other assets................................................................... 123,395
----------
Total.................................................................. $4,557,006
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.............................................. $ 922,664
Note payable-stockholders...................................................... 140,500
Accounts payable............................................................... 682,810
Accrued expenses............................................................... 223,084
----------
Total current liabilities.............................................. 1,969,058
Long-Term Debt................................................................... 1,629,529
----------
Total liabilities...................................................... 3,598,587
Stockholders' Equity
American Video, Inc.--Common stock, no par value, 350,000 shares authorized,
8,398 shares issued and outstanding; 4,000 nonvoting shares authorized, 1
share issued and outstanding................................................ 1,383,459
Red Giraffe Video, Inc.--Common stock, no par value, 350,000 shares authorized,
8,398 shares issued and outstanding......................................... 192,000
Retained deficit............................................................... (617,040)
----------
Total stockholders' equity............................................. 958,419
----------
Total.................................................................. $4,557,006
==========
</TABLE>
See accountant's review report and notes to the financial statements.
F-75
<PAGE> 145
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
<TABLE>
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
FOR THE THREE MONTHS
ENDED
---------------------
APRIL 3 MARCH 29
1996 1995
--------- ---------
<S> <C> <C>
REVENUES
Video rental.......................................... $2,351,653 $2,196,661
Product sales......................................... 220,698 215,385
Royalty fees.......................................... 8,434 --
---------- ----------
TOTAL REVENUE...................................... 2,580,785 2,412,046
COST AND EXPENSES
Store operating expenses.............................. 1,458,531 1,159,874
Tape amortization..................................... 637,964 595,917
Cost of product sales................................. 170,882 157,428
General and administrative............................ 199,053 153,321
---------- ----------
TOTAL COST AND EXPENSES............................ 2,466,430 2,066,540
---------- ----------
INCOME FROM OPERATIONS............................. 114,355 345,506
INTEREST EXPENSE........................................ (51,959) (36,386)
OTHER, NET.............................................. 1,050 (2,637)
---------- ----------
NET INCOME......................................... 63,446 306,483
========== ==========
</TABLE>
See accountant's review report and notes to the financial statements.
F-76
<PAGE> 146
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
<TABLE>
COMBINED STATEMENTS OF CASH FLOWS
UNAUDITED
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------
APRIL 3 MARCH 29
1996 1995
----------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss).............................................. $ 63,446 $ 306,483
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of videocassette rental inventory.............. 637,964 595,917
Depreciation and amortization............................... 93,811 100,482
Changes in assets and liabilities
Accounts receivable....................................... 21,786 (66,747)
Merchandise and supplies inventories...................... 272 17,633
Prepaid expenses and other assets......................... (32,167) (46,735)
Cash overdraft............................................ -- (55,349)
Accounts payable.......................................... (40,606) (136,265)
Accrued expenses.......................................... (80,313) 26,646
----------- ---------
Net cash provided by operating activities.............. 664,193 742,065
Cash Flows From Investing Activities
Purchase of furnishings and equipment.......................... (221,309) (126,633)
Purchases of videocassette rental inventory.................... (790,870) (468,489)
----------- ---------
Net cash used by investing activities.................. (1,012,179) (595,122)
----------- ---------
Cash Flows From Financing Activities
Borrowings from bank........................................... 377,500 --
Repayment of long-term debt.................................... (304,515) (147,015)
Stockholder loans.............................................. 27,500 --
Distributions Paid............................................. (33,981) --
Related company loans.......................................... (16,500) --
----------- ---------
Net cash provided (used) by financing activities....... 50,004 (147,015)
Net Decrease in Cash and Cash Equivalents........................ $ (297,982) $ (72)
Cash, Beginning of Period........................................ 427,548 56,104
----------- ---------
Cash, End of Period.............................................. $ 129,566 $ 56,032
=========== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest....................... $ 51,959 $ 56,032
=========== =========
</TABLE>
See accountant's review report and notes to the financial statements.
F-77
<PAGE> 147
AMERICAN VIDEO, INC. AND RED GIRAFFE VIDEO, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 3, 1996 AND MARCH 29, 1995
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been presented in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Companies' audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operation
for the three month periods ended April 3, 1996 and March 29, 1995, are not
necessarily indicative of the results to be expected for the full year.
<TABLE>
NOTE B -- VIDEOCASSETTE RENTAL INVENTORY
<CAPTION>
APRIL 3,
1996
-----------
<S> <C>
Videocassette rental inventory................................. $ 8,287,470
Accumulated amortization....................................... (5,708,382)
-----------
$ 2,579,088
===========
</TABLE>
NOTE C -- SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-78
<PAGE> 148
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lancaster Group, Inc.:
We have audited the accompanying balance sheets of Lancaster Group, Inc. as
of December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lancaster Group, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in note 2 to the financial statements, in 1994 the Company
changed its method of accounting for videocassettes and games.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 23, 1996
F-79
<PAGE> 149
LANCASTER GROUP, INC.
<TABLE>
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<CAPTION>
1995 1994
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash............................................................... $ 81,894 $ 66,896
Merchandise inventories............................................ 10,833 25,632
Other.............................................................. 164 29,999
--------- ---------
Total current assets....................................... 92,891 122,527
Videocassette and game rental inventory, net of amortization (note
2)................................................................. 142,603 182,455
Property and equipment, net (note 3)................................. 354,295 461,064
--------- ---------
$ 589,789 $ 766,046
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt (note 4).................... $ 134,867 $ 127,607
Accounts payable................................................... 58,542 102,690
Accrued expenses................................................... 48,971 12,127
Liquidating dividends payable...................................... 1,200 --
--------- ---------
Total current liabilities.................................. 243,580 242,424
Long-term debt less current installments (note 4).................... 358,232 493,099
--------- ---------
Total liabilities.......................................... 601,812 735,523
Stockholders' equity (deficit):
Common stock, no par value; 3,000 shares authorized; 2,000 shares
issued and outstanding.......................................... 435,635 435,635
Capital repayment.................................................. (48,869) --
Accumulated deficit................................................ (398,789) (405,112)
--------- ---------
Net stockholders' equity (deficit)......................... (12,023) 30,523
--------- ---------
$ 589,789 $ 766,046
========= =========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE> 150
LANCASTER GROUP, INC.
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Rentals revenues..................................... $1,238,809 $1,193,540 $ 523,197
Merchandise sales.................................... 189,018 130,309 65,449
---------- ---------- ---------
1,427,827 1,323,849 588,646
---------- ---------- ---------
Operating costs and expenses:
Store operating expenses............................. 782,957 721,029 419,493
Amortization of videocassette and game rental
inventory......................................... 289,978 298,849 119,046
Cost of sales........................................ 178,529 101,055 69,988
General and administrative expenses.................. 137,734 52,136 62,771
---------- ---------- ---------
1,389,198 1,173,069 671,298
---------- ---------- ---------
Operating income (loss).............................. 38,629 150,780 (82,652)
Other expenses:
Interest............................................. 32,306 25,200 18,827
---------- ---------- ---------
Net income (loss)...................................... $ 6,323 $ 125,580 $(101,479)
========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 151
LANCASTER GROUP, INC.
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
TOTAL
COMMON CAPITAL ACCUMULATED STOCKHOLDERS'
STOCK REPAYMENT DEFICIT EQUITY (DEFICIT)
-------- --------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 (unaudited)... $ 13,101 $ -- $(429,213) $(416,112)
Conversion of debt to equity............. 422,534 -- -- 422,534
Net loss................................. -- -- (101,479) (101,479)
-------- -------- --------- ---------
Balance at December 31, 1993............... 435,635 -- (530,692) (95,057)
Net income............................... -- -- 125,580 125,580
-------- -------- --------- ---------
Balance at December 31, 1994............... 435,635 -- (405,112) 30,523
Net income............................... -- -- 6,323 6,323
Liquidating dividends.................... -- (48,869) -- (48,869)
-------- -------- --------- ---------
Balance at December 31, 1995............... $435,635 $(48,869) $(398,789) $ (12,023)
======== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE> 152
LANCASTER GROUP, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 6,323 $125,580 $(101,479)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 423,763 412,308 151,790
Loss on sale of equipment........................... 2,073 -- --
Transfer of equipment to officer in lieu of
salary............................................ 14,000 -- --
Change in assets and liabilities:
(Increase) decrease in merchandise inventories.... 14,799 (11,321) (11,218)
(Increase) decrease in other assets............... 29,835 1,376 (30,675)
Increase (decrease) in accounts payable........... (44,148) (1,615) 98,507
Increase in accrued expenses...................... 36,844 3,387 2,241
--------- -------- ---------
Total adjustments.............................. 477,166 404,135 210,645
--------- -------- ---------
Net cash provided by operating activities...... 483,489 529,715 109,166
--------- -------- ---------
Cash flows from investing activities:
Purchases of videocassette rental inventory, net....... (250,126) (405,833) (180,306)
Purchases of equipment................................. (43,089) (240,537) (127,859)
--------- -------- ---------
Net cash used in investing activities.......... (293,215) (646,370) (308,165)
--------- -------- ---------
Cash flows from financing activities:
Repayment of notes payable............................. (127,607) (72,000) --
Liquidating dividends paid............................. (47,669) -- --
Proceeds from note payable............................. -- 224,286 215,233
--------- -------- ---------
Net cash provided by (used in) financing
activities................................... (175,276) 152,286 215,233
--------- -------- ---------
Net increase in cash........................... 14,998 35,631 16,234
Cash at beginning of year................................ 66,896 31,265 15,031
--------- -------- ---------
Cash at end of year...................................... $ 81,894 $ 66,896 $ 31,265
========= ======== =========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest............................................ $ 32,355 $ 22,325 $ --
========= ======== =========
Noncash conversion of debt and accrued interest to
equity................................................. $ -- $ -- $ 422,534
========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE> 153
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. THE COMPANY
Lancaster Group, Inc., a Kentucky corporation, owns and operates video
specialty stores located in Southern Indiana and Louisville, Kentucky. As of
December 31, 1995 and 1994, the Company operated three stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merchandise Inventory
Merchandise inventory consisting primarily of prerecorded videocassettes,
video games, and candy, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Videocassette and Game Rental Inventory
Videocassette and game rental Inventory, which includes video games, is
recorded at cost, and amortized over their estimated economic life with no
provision for salvage value. For the period from January 1, 1993 through
December 31, 1993 videocassettes and games were amortized over 36 months on an
accelerated basis. Effective January 1, 1994, the Company changed its method of
amortization. Videocassettes which are considered base stock are amortized over
36 months on a straight-line basis. Purchases of new release videocassettes and
video games are amortized whereby the tenth and any succeeding copies of each
title per store are amortized over nine months on an accelerated basis; the
fourth through ninth copies of each title per store are amortized over 36 months
on an accelerated basis; and copies one through three of each title per store
are amortized as base stock. The adoption of this change in the method of
amortization decreased net income for the years ended December 31, 1995 and 1994
by approximately $4,200 and $13,500, respectively. The Company believes that its
method of amortization results in an appropriate matching of tape amortization
expense with the revenue received from the associated rental of such tapes.
Amortization expense related to videocassette rental inventory totaled
$289,978, $298,849 and $119,046 and for the years ended December 31, 1995, 1994
and 1993, respectively.
Property and Equipment
<TABLE>
Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives as follows:
<S> <C>
Furniture and fixtures................... 5 years
Equipment................................ 5 years
Leasehold improvements and signs......... Shorter of estimated useful life or lease
term
</TABLE>
Revenue Recognition
Revenue is recognized at the time of rental or sale.
Income Taxes
The Company's shareholders have elected "S" Corporation status for income
tax purposes. An "S" Corporation is generally not taxed at the federal or state
level on the Company's taxable income. The distributive share of taxable income,
certain gains, losses and other items are passed through to each shareholder.
Accordingly, there is no provision for federal and state income taxes. The
Company does provide for various local municipality income taxes, which are
classified as general and administrative expenses in the accompanying statements
of operations.
F-84
<PAGE> 154
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
3. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment are comprised of the following:
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 483,826 $ 501,692
Equipment.................................................... 8,315 7,796
Leasehold improvements and signs............................. 169,594 137,820
--------- ---------
661,735 647,308
Accumulated depreciation..................................... (307,440) (186,244)
--------- ---------
$ 354,295 $ 461,064
========= =========
</TABLE>
4. LONG-TERM DEBT
<TABLE>
Long-term debt as of December 31, 1995 is summarized as follows:
<CAPTION>
1995 1993
-------- --------
<S> <C> <C>
Notes payable to former shareholders due 11-1-99, bearing
interest at 4.98% -- 6.87%. Secured by substantially all
assets of the Company........................................ $493,099 $620,706
Less current installments.................................... 134,867 127,607
-------- --------
Long-term debt less current installments............. $358,232 $493,099
======== ========
</TABLE>
<TABLE>
Total maturities of long-term debt for the five years subsequent to
December 31, 1995 are as follows:
<S> <C>
1996.............................................. $134,867
1997.............................................. 142,550
1998.............................................. 150,683
1999.............................................. 64,999
--------
$493,099
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
leases expiring on various dates through 1999. Rental expense for the years
ended December 31, 1995, 1994, and 1993, aggregated $165,568, $149,300, and
$112,246, respectively.
F-85
<PAGE> 155
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
Future minimum rental commitments under noncancelable operating leases
(with terms of one year or more) consisted of the following at December 31,
1995:
<S> <C>
1996.............................................. $165,927
1997.............................................. 103,509
1998.............................................. 57,175
1999.............................................. 12,000
</TABLE>
6. RELATED PARTY
The Company rents office space and certain office equipment from an officer
and shareholder of the Company. Rent expense paid to this person was $3,600,
$3,600 and $3,400 for the years ended December 31, 1995, 1994 and 1993,
respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995, the carrying amounts of cash, accounts payable and
accrued expenses approximate fair value because of the short-term maturity of
these instruments.
It is not practical to estimate the fair value of the notes payable to
former shareholders as these related party transactions were not made at market
rates.
8. SALE AGREEMENT
On January 10, 1996, the Company's shareholders agreed to sell the Company
to West Coast Entertainment Corporation.
F-86
<PAGE> 156
LANCASTER GROUP, INC.
<TABLE>
BALANCE SHEET
UNAUDITED
<CAPTION>
MARCH 31, 1996
---------------
ASSETS
<S> <C>
Current assets:
Cash................................................................... $ 57,333
Merchandise inventories................................................ 16,516
Other.................................................................. 1,960
---------
Total current assets................................................ 75,809
Videocassette and game rental inventory, net of amortization............. 148,822
Property and equipment, net.............................................. 326,325
---------
$ 550,956
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt................................. $ 136,747
Accounts payable....................................................... 55,134
Accrued expenses....................................................... 51,619
---------
Total current liabilities........................................... 243,500
Long-term debt less current installments................................. 323,332
---------
Total liabilities................................................... 566,832
Stockholders' equity (deficit)
Common stock, no par value: 3,000 shares authorized; 2,000 shares
issued and outstanding.............................................. 435,635
Capital repayment........................................................ (53,869)
Accumulated deficit...................................................... (397,642)
---------
Net Stockholders' equity (deficit).................................. (15,876)
---------
$ 550,956
=========
</TABLE>
See accompanying notes to financial statements
F-87
<PAGE> 157
LANCASTER GROUP, INC.
<TABLE>
STATEMENT OF OPERATIONS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues:
Rental revenue..................................................... $339,838 $309,875
Merchandise sales.................................................. 53,625 46,943
-------- --------
393,463 356,818
-------- --------
Operating costs and expenses:
Store operating expenses........................................... 196,007 205,853
Amortization of videocassette and game rental inventory............ 80,221 66,130
Cost of sales...................................................... 40,811 37,409
General and administrative expenses................................ 49,036 39,308
-------- --------
366,075 348,700
-------- --------
Operating income................................................... 27,388 8,118
Other expenses:
Interest........................................................... (7,142) (6,971)
-------- --------
Net income........................................................... $ 20,246 $ 1,147
======== ========
</TABLE>
See accompanying notes to financial statements
F-88
<PAGE> 158
LANCASTER GROUP. INC.
<TABLE>
STATEMENTS OF CASH FLOWS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 20,246 $ 1,147
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................. 109,153 95,747
Change in assets and liabilities:
(Increase) decrease in merchandise inventories.............. 6,717 (5,683)
(Increase) in other assets.................................. (10,834) (2,997)
(Decrease) in accounts payable.............................. (90,097) (3,408)
Increase in accrued expenses................................ 54,369 2,648
-------- --------
Total adjustments........................................ 69,308 86,307
-------- --------
Net cash provided by operating activities................ 89,554 87,454
-------- --------
Cash flows provided from investing activities:
Purchases of videocassette rental inventory, net.............. (28,789) (72,349)
Purchases of equipment........................................ (26,317) (1,647)
-------- --------
Net cash used in investing activities.................... (55,106) (73,996)
-------- --------
Cash flows provided from financing activities:
Repayment of notes payable.................................... (33,019) (33,019)
Liquidating dividends paid.................................... -- (5,000)
-------- --------
Net cash used in investing activities.................... (33,019) (38,019)
-------- --------
Net increase (decrease) in cash.......................... 1,429 (24,561)
Cash at beginning of period........................................ 66,896 81,894
-------- --------
Cash at end of period.............................................. $ 68,325 $ 57,333
======== ========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest........................ $ 7,142 $ 6,971
======== ========
</TABLE>
See accompanying notes to financial statements
F-89
<PAGE> 159
LANCASTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................ $ 794,779
Accumulated amortization...................................... (645,957)
---------
$ 148,882
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996 the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-90
<PAGE> 160
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of New Age Entertainment, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of New Age Entertainment, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 2, 1996
F-91
<PAGE> 161
NEW AGE ENTERTAINMENT, INC.
<TABLE>
BALANCE SHEET
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,231 $ 79,831
Merchandise inventory..................................... 57,796 78,185
Prepaid expenses and other assets......................... 6,435 4,397
---------- ----------
94,462 162,413
Videocassette rental inventory, net......................... 599,695 822,508
Furnishings and equipment, net.............................. 207,210 564,346
Other assets................................................ 105,971 100,399
---------- ----------
$1,007,338 $1,649,666
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 95,872 $ 114,653
Current portion of obligations under capital leases....... 12,500 28,994
Trade accounts payable.................................... 206,357 490,520
Accruals and other liabilities............................ 179,323 248,408
Advances from stockholders................................ 42,390 38,572
---------- ----------
Total current liabilities......................... 536,442 921,147
---------- ----------
Long-term debt.............................................. 84,120 370,415
Obligations under capital leases............................ 25,000 38,615
---------- ----------
645,562 1,330,177
---------- ----------
Commitments (Note 10)
Stockholders' equity:
Common stock, no par value, 15,000 shares authorized, 600
shares issued and outstanding at December 31, 1993 and
1994, 1,000 shares issued and outstanding at December
31, 1995............................................... -- --
Additional paid-in capital................................ 600 40,600
Loan to stockholder....................................... -- (39,407)
Retained earnings......................................... 361,176 318,296
---------- ----------
Total stockholders' equity........................ 361,776 319,489
---------- ----------
$1,007,338 $1,649,666
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-92
<PAGE> 162
NEW AGE ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental revenue............................... $2,533,663 $3,018,277 $3,592,222
Merchandise sales............................ 322,134 384,899 404,909
---------- ---------- ----------
2,855,797 3,403,176 3,997,131
---------- ---------- ----------
Cost and expenses:
Operating expenses........................... 2,501,635 2,978,185 3,539,512
Cost of sales................................ 90,036 95,994 154,959
General and administrative................... 129,019 209,254 290,300
---------- ---------- ----------
2,720,690 3,283,433 3,984,771
---------- ---------- ----------
Income from operations............... 135,107 119,743 12,360
Interest expense............................... 22,980 20,008 55,240
Other, net..................................... 356 2,331 --
---------- ---------- ----------
Net income/(loss).................... $ 111,771 $ 97,404 $ (42,880)
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-93
<PAGE> 163
NEW AGE ENTERTAINMENT, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 111,771 $ 97,404 $ (42,880)
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental
inventory.................................... 891,813 1,198,881 1,430,131
Amortization of franchise fees................. 4,667 4,667 4,667
Depreciation and amortization of furnishings
and equipment................................ 34,562 50,468 98,664
Loss on disposal of fixed assets............... -- 2,250 --
Changes in assets and liabilities:
Merchandise inventories...................... -- -- (20,389)
Prepaid expenses and other assets............ 54,186 (31,543) 2,943
Accounts payable............................. 71,711 49,685 284,163
Accruals and other liabilities............... 17,531 48,562 69,085
----------- ----------- -----------
Net cash provided by operating
activities.............................. 1,186,241 1,420,374 1,826,384
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............... (91,725) (8,800) (406,319)
Purchases of videocassette rental inventory....... (1,017,122) (1,296,378) (1,652,944)
----------- ----------- -----------
Net cash used in investing activities..... (1,108,847) (1,305,178) (2,059,263)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt...................... 33,698 158,309 391,689
Loans from stockholders........................... 10,000 -- 34,500
Repayment of long-term debt....................... (90,739) (126,914) (86,613)
Repayment of stockholder loans.................... (19,573) (69,840) (38,318)
Principal repayments on capital lease
obligations.................................... -- (12,500) (19,372)
Repayment of principal on note receivable......... -- -- 593
Distributions..................................... -- (57,987) --
----------- ----------- -----------
Net cash (used in) provided by financing
activities.............................. (66,614) (108,932) 282,479
----------- ----------- -----------
Net increase in cash and cash equivalents........... 10,780 6,264 49,600
----------- ----------- -----------
Cash and cash equivalents, beginning of period...... 13,187 23,967 30,231
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 23,967 $ 30,231 $ 79,831
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......... $ 19,830 $ 23,158 $ 55,240
=========== =========== ===========
Supplemental disclosure of noncash investing and
financing activities:
Fixed assets purchased under capital leases....... $ 50,000 $ -- $ 49,481
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-94
<PAGE> 164
NEW AGE ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... -- $ 600 $209,988 $210,588
Net income.................................... -- -- 111,771 111,771
------ ------- -------- --------
Balance at December 31, 1993.................. -- 600 321,759 322,359
Distributions................................. -- -- (57,987) (57,987)
Net income.................................... -- -- 97,404 97,404
------ ------- -------- --------
Balance at December 31, 1994.................. -- 600 361,176 361,776
Issuance of shares............................ -- 40,000 -- 40,000
Net loss...................................... -- -- (42,880) (42,880)
------ ------- -------- --------
Balance at December 31, 1995.................. -- $40,600 $318,296 $358,896
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-95
<PAGE> 165
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
New Age Entertainment, Inc. (the "Company") owns and operates eight
videocassette rental stores, located in Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 4 to 10 years) of leased items using the straight-line method. Repair
and maintenance costs are expensed as incurred.
Income Taxes
The Company has elected to be treated as a Subchapter S corporation for
income tax purposes. Accordingly, the income of the Company is taxed at the
shareholder level and no provision for income taxes has been made in the
accompanying financial statements.
F-96
<PAGE> 166
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Videocassette rental inventory.............................. $1,195,153 $1,663,708
Accumulated amortization.................................... (595,458) (841,200)
---------- ----------
$ 599,695 $ 822,508
========== ==========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$891,813, $1,198,881, and $1,430,131 for the years ended December 31, 1993,
1994, and 1995, respectively.
4. FURNISHINGS AND EQUIPMENT
<TABLE>
Furnishings and equipment consist of the following:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 161,896 $ 289,381
Equipment and vehicles....................................... 101,326 111,180
Leasehold improvements....................................... 45,433 363,894
--------- ---------
308,655 764,455
Accumulated depreciation and amortization.................... (101,445) (200,109)
--------- ---------
$ 207,210 $ 564,346
========= =========
</TABLE>
Depreciation and amortization expense was $34,562, $50,468, and $98,664 for
the years ended December 31, 1993, 1994, and 1995, respectively.
The Company has $37,500 and $67,609 as of December 31, 1994 and 1995,
respectively, of furnishing and equipment under capital leases. Accumulated
amortization on these assets was $12,500 and $31,872 at December 31, 1994 and
1995, respectively. Amortization on the leased assets included in the
depreciation charge was $12,500 and $19,372 in the years ended December 31, 1994
and 1995, respectively.
5. OTHER LONG TERM ASSETS
<TABLE>
Other long term assets consist of the following:
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Lease deposits................................................. $ 66,957 $ 68,384
Franchise fees, net............................................ 30,930 26,264
Prepaid software lease deposit, net............................ 8,000 5,667
Other.......................................................... 84 84
-------- --------
$105,971 $100,399
======== ========
</TABLE>
Franchise fees are amortized over the life of the franchise. Amortization
expense was $4,667 in each of the years ended December 31, 1993, 1994, and 1995.
Prepaid software deposit is amortized over the life of the lease.
Amortization expense was $333 for the year ended December 31, 1993 and $2,000
for the years ended December 31, 1994 and 1995, respectively.
F-97
<PAGE> 167
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUALS AND OTHER LIABILITIES
<TABLE>
Accruals and other liabilities consist of the following:
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Accrued rent.................................... $ 73,273 $ 99,323
Accrued bonus................................... -- 22,658
Accrued payroll................................. 35,478 19,625
Sales tax payable............................... 7,394 13,946
Accrued consultancy fees........................ 25,000 --
Other........................................... 38,178 92,856
-------- --------
$179,323 $248,408
======== ========
</TABLE>
7. ADVANCES FROM STOCKHOLDER
Advances from stockholders are unsecured and have no fixed repayment date
other than those advances governed by agreements. All stockholder notes are due
to be paid in full by the end of 1997. The advances bear interest at rates of
interest ranging from 8.5% to 11.0%.
8. LOAN TO STOCKHOLDER
The loan to stockholder represents a loan for the purchase of shares in the
company. The loan bears interest at 10% and is repayable quarterly with the last
installment due in October 2005.
9. DEBT
<TABLE>
Debt consists of the following:
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
-------- ---------
<S> <C> <C>
Note Payable................................... $158,311 $ 467,590
Auto loan...................................... 21,681 17,478
-------- ---------
179,992 485,068
Less: Current portion.......................... (95,872) (114,653)
-------- ---------
$ 84,120 $ 370,415
======== =========
</TABLE>
<TABLE>
Principal due on long-term debt for each of the years following December
31, 1995 is as follows:
<S> <C>
1996............................................... $114,653
1997............................................... 122,825
1998............................................... 110,000
1999............................................... 110,000
2000............................................... 27,590
Thereafter......................................... --
--------
$485,068
========
</TABLE>
In November 1994, the Company signed a $158,311 note to finance the opening
of a new store. In February 1995, the Company renegotiated the outstanding note
payable and borrowed an additional $391,689.
F-98
<PAGE> 168
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The note is secured by the company's current assets, and is repayable in equal
monthly installment until March 30, 2000. Interest is calculated on the loan at
2% over the prime rate of interest.
In April 1993, the Company purchased a vehicle under a $27,798 loan
agreement with a bank. The loan is secured by the vehicle purchased and is
repayable in 48 equal monthly installments. Interest on the loan is calculated
at 10.25%.
10. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities under operating leases extending until
2001. In addition, the Company leases computer and office equipment under
capital lease arrangements. Minimum future rental payments under these leases as
of December 31, 1995 are as follows:
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
----------- -------- ----------
<S> <C> <C>
1996........................................... $ 36,159 $ 490,915
1997........................................... 36,159 462,168
1998........................................... 12,236 396,048
1999........................................... -- 304,980
2000........................................... -- 143,360
Thereafter..................................... -- 432,360
-------- ----------
Future minimum payments.......................... 84,554 $2,229,831
==========
Less amount representing interest................ (16,945)
--------
Present value of future minimum lease payments,
including current portion of $28,994............ $ 67,609
========
</TABLE>
Rent expense totalled approximately $397,644, $458,182, and $531,370 for
the years ended December 31, 1993, 1994, and 1995, respectively.
11. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-99
<PAGE> 169
NEW AGE ENTERTAINMENT, INC.
<TABLE>
BALANCE SHEET
UNAUDITED
<CAPTION>
MARCH 31, 1996
--------------
ASSETS
<S> <C>
Current assets
Cash and cash equivalents.................................................... $ 51,989
Merchandise inventory........................................................ 77,175
Prepaid expenses and other assets............................................ 2,878
----------
Total current assets................................................. 132,042
Videocassette rental inventory, net.......................................... 768,137
Furnishings and equipment, net............................................... 552,449
Other assets................................................................. 97,051
----------
$1,549,679
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt............................................ $ 115,901
Current portion of obligations under capital leases.......................... 28,994
Trade accounts payable....................................................... 403,157
Accruals and other liabilities............................................... 251,688
Advances from stockholders................................................... 21,163
----------
Total current liabilities............................................ 820,903
Long-term debt................................................................. 342,138
Obligations under capital leases............................................... 30,324
----------
Total liabilities.................................................... 1,193,365
----------
Stockholders' equity:
Common stock, no par value, 15,000 shares authorized, 1,000 shares issued and
outstanding............................................................... --
Additional paid-in capital................................................... 40,600
Loan to stockholder.......................................................... (38,799)
Retained earnings............................................................ 354,513
----------
Total stockholders' equity........................................... 356,314
----------
$1,549,679
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-100
<PAGE> 170
NEW AGE ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF OPERATIONS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
-------- ----------
<S> <C> <C>
Revenues
Rental revenue..................................................... $812,035 $1,122,887
Merchandise sales.................................................. 127,227 110,069
-------- ----------
939,262 1,232,956
-------- ----------
Costs and expenses
Store operating expenses........................................... 856,196 1,056,835
Cost of goods sold................................................. 49,988 43,151
General and administrative......................................... 79,779 77,443
-------- ----------
985,963 1,177,429
-------- ----------
Income (loss) from operations.............................. (46,701) 55,527
Interest expense..................................................... 5,878 19,310
-------- ----------
Net income (loss).......................................... $(52,579) $ 36,217
======== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-101
<PAGE> 171
NEW AGE ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF CASH FLOWS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ (52,579) $ 36,217
Adjustments to reconcile net income (loss) to cash flows provided
by (used in) operating activities
Amortization of videocassette rental inventory.................. 311,089 508,371
Amortization of franchise fees.................................. 1,166 1,166
Depreciation and amortization of furnishings and equipment...... 24,307 25,399
Changes in assets and liabilities
Merchandise inventory......................................... 545 1,010
Prepaid expenses and other assets............................. 1,347 3,701
Accounts payable.............................................. 35,186 (87,363)
Accruals and other liabilities................................ 23,313 3,280
--------- ---------
Net cash provided by operating activities.................. 344,374 491,781
--------- ---------
Cash flows from investing activities
Purchases of furnishings and equipment............................. (247,289) (13,502)
Purchases of videocassette rental inventory........................ (382,027) (454,000)
--------- ---------
Net cash used in investing activities...................... (629,316) (467,502)
--------- ---------
Cash flows from financing activities
Proceeds from long-term debt....................................... 391,689 --
Repayment of long-term debt........................................ (1,010) (27,030)
Repayment of stockholder loans..................................... (5,171) (17,409)
Principal repayments on capital lease obligations.................. (3,126) (8,290)
Repayment of principal on note receivable.......................... -- 608
--------- ---------
Net cash provided by (used in) financing activities........ 382,382 (52,121)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 97,440 (27,842)
--------- ---------
Cash and cash equivalents, beginning of period....................... 30,231 79,831
--------- ---------
Cash and cash equivalents, end of period............................. $ 127,671 $ 51,989
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 5,878 $ 19,310
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-102
<PAGE> 172
NEW AGE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
Videocassette rental inventory...................... $1,704,208
Accumulated amortization............................ (936,071)
----------
$ 768,137
==========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-103
<PAGE> 173
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of HB Associates, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of HB Associates, Inc. at December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 19, 1996
F-104
<PAGE> 174
HB ASSOCIATES, INC.
<TABLE>
BALANCE SHEET
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 81,462 $143,958
Merchandise inventory................................................ 43,600 55,880
Prepaid expenses and other current assets............................ 8,379 6,737
-------- --------
Total current assets......................................... 133,441 206,575
Videocassette rental inventory, net.................................... 344,685 390,916
Furnishings, equipment and leasehold improvements, net................. 293,258 267,672
Other assets........................................................... 65,898 56,487
-------- --------
$837,282 $921,650
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................... $ 31,066 $ 36,480
Current portion of obligations under capital leases.................. 32,117 23,626
Accounts payable..................................................... 158,821 370,348
Accrued expenses..................................................... 62,984 67,703
Advances from stockholders........................................... 70,400 70,400
-------- --------
Total current liabilities.................................... 355,388 568,557
Long-term debt....................................................... 48,674 16,520
Obligations under capital leases..................................... 47,938 24,317
-------- --------
Total liabilities............................................ 452,000 609,394
Commitments (Note 10)
Stockholders' equity:
Common stock, no par value, 1,000 shares authorized, 300 shares
issued and outstanding............................................ -- --
Additional paid-in capital........................................... 80,850 80,850
Retained earnings.................................................... 304,432 231,406
-------- --------
Total stockholders' equity................................... 385,282 312,256
-------- --------
$837,282 $921,650
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-105
<PAGE> 175
HB ASSOCIATES, INC.
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rental revenue....................................... $1,817,359 $2,238,839 $2,381,050
Merchandise sales.................................... 219,811 294,071 374,157
---------- ---------- ----------
2,037,170 2,532,910 2,755,207
---------- ---------- ----------
Costs and expenses:
Operating expenses................................... 1,655,385 1,964,453 2,291,237
Cost of sales........................................ 199,830 250,048 316,126
General and administrative........................... 94,427 104,859 119,169
---------- ---------- ----------
1,949,642 2,319,360 2,726,532
---------- ---------- ----------
Income from operations....................... 87,528 213,550 28,675
Interest expense....................................... 18,783 32,827 33,901
---------- ---------- ----------
Net income (loss)............................ $ 68,745 $ 180,723 $ (5,226)
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-106
<PAGE> 176
HB ASSOCIATES, INC.
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (deficit).................................. $ 68,745 $ 180,723 $ (5,226)
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory..... 430,059 594,348 817,621
Depreciation of furnishings, equipment and
leasehold improvements........................... 36,569 57,438 58,015
Amortization of franchise fees..................... 3,251 19,561 7,857
Loss on disposal of fixed assets................... -- 20,620 --
Changes in assets and liabilities:
Merchandise inventory............................ (10,645) (12,997) (12,280)
Prepaid expenses and other assets................ 16,604 6,607 3,196
Accounts payable................................. 70,089 (38,311) 211,527
Accrued expenses................................. 39,235 13,552 4,719
--------- --------- ----------
Net cash provided by operating activities..... 653,907 841,541 1,085,429
Cash flows from investing activities:
Purchases of videocassette rental inventory........... (468,053) (654,060) (863,852)
Purchases of furnishings, equipment and leasehold
improvements....................................... (21,087) (48,879) (32,429)
--------- --------- ----------
Net cash used in investing activities......... (489,140) (702,939) (896,281)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from stockholder loans....................... 39,000 34,000 --
Repayment of long-term debt........................... (30,212) (35,093) (26,740)
Repayment of stockholder loans........................ (10,000) (6,000) --
Principal repayments on capital lease obligations..... (11,998) (27,554) (32,112)
Distributions to shareholders......................... (137,900) (36,150) (67,800)
--------- --------- ----------
Net cash used in financing activities......... (151,110) (70,797) (126,652)
--------- --------- ----------
Net increase in cash and cash equivalents............... 13,657 67,805 62,496
--------- --------- ----------
Cash and cash equivalents, beginning of period.......... -- 13,657 81,462
--------- --------- ----------
Cash and cash equivalents, end of period................ $ 13,657 $ 81,462 $ 143,958
========= ========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 17,621 $ 28,919 $ 33,901
========= ========= ==========
Supplemental disclosure of noncash investing and
financing activities:
Purchase of fixed assets under capital lease
obligations........................................ $ 73,314 $ 12,000 $ --
========= ========= ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-107
<PAGE> 177
HB ASSOCIATES INC.
<TABLE>
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993................... -- $80,850 $ 229,014 $ 309,864
Net income................................... -- -- 68,745 68,745
S Corporation distribution................... -- -- (137,900) (137,900)
------ ------- --------- ---------
Balance at December 31, 1993................. -- 80,850 159,859 240,709
Net income................................... -- -- 180,723 180,723
S Corporation distribution................... -- -- (36,150) (36,150)
------ ------- --------- ---------
Balance at December 31, 1994................. -- 80,850 304,432 385,282
Net loss..................................... -- -- (5,226) (5,226)
S Corporate distribution..................... -- -- (67,800) (67,800)
------ ------- --------- ---------
Balance at December 31, 1995................. -- $80,850 $ 231,406 $ 312,256
====== ======= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-108
<PAGE> 178
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
HB Associates, Inc. (the "Company") owns and operates 5 videocassette
rental stores, located in Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation is provided over the estimated useful lives (5 to 7 years) of
furnishings and equipment and, for leasehold improvements, over the lesser of
the estimated useful lives or lease terms (primarily 4 to 10 years) using the
straight-line method. Repair and maintenance costs are expensed as incurred.
Other Assets
Included in other assets are franchise fees which are stated at cost less
the related accumulated amortization. Franchise fees are amortized on a straight
line basis over the life of the franchise agreement (7 to 10 years).
F-109
<PAGE> 179
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be treated as an S corporation for income tax
purposes. Accordingly, the income of the Company is taxed at the shareholder
level and, accordingly, no provision for income taxes has been made in the
accompanying financial statements.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
Prepaid expenses and other current assets comprise the following:
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------ ------
<S> <C> <C>
Prepaid insurance................................................. $6,364 $6,362
Other............................................................. 2,015 375
------ ------
$8,379 $6,737
====== ======
</TABLE>
4. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory.............................. $ 734,730 $ 984,739
Accumulated amortization.................................... (390,045) (593,823)
--------- ---------
$ 344,685 $ 390,916
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$430,059, $594,348, and $817,621 for the years ended December 31, 1993, 1994 and
1995, respectively.
5. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
Furnishings, equipment and leasehold improvements comprise the following:
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures...................................... $ 57,489 $ 57,489
Equipment and vehicles...................................... 225,223 251,529
Leasehold improvements...................................... 148,167 154,290
--------- ---------
430,879 463,308
Accumulated depreciation.................................... (137,621) (195,636)
--------- ---------
$ 293,258 $ 267,672
========= =========
</TABLE>
At December 31, 1994 and 1995, the Company had $120,926 and $85,514,
respectively, of fixed assets held under capital leases. Accumulated
depreciation on these assets was $29,327 and $21,660 at December 31, 1994 and
1995, respectively.
Depreciation expense totaled $36,569, $57,438 and $58,015 for the years
ended December 31, 1993, 1994 and 1995, respectively.
F-110
<PAGE> 180
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
<TABLE>
Other assets comprise of the following:
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- -------
<S> <C> <C>
Franchise fees.................................................. $40,666 $32,809
Lease deposits.................................................. 22,196 18,907
Other........................................................... 3,036 4,771
------- -------
$65,898 $56,487
======= =======
</TABLE>
Accumulated amortization on franchise fees was $29,334 and $37,191 at
December 31, 1994 and 1995, respectively. Amortization expense was $3,251,
$19,561 and $7,857 for the years ended December 31, 1993, 1994 and 1995,
respectively.
7. ACCRUED EXPENSES
<TABLE>
Accrued expenses comprise the following:
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Accrued salaries................................. $ 8,978 $17,964
Other............................................ 54,006 49,739
------- -------
$62,984 $67,703
======= =======
</TABLE>
8. ADVANCES FROM STOCKHOLDERS
Advances from stockholders are unsecured and have no fixed repayment dates.
Interest on shareholder loans is calculated at 6.7%.
9. LONG-TERM DEBT
Long-term debt comprises a note payable which is repayable in equal monthly
installments of principal and interest with payments applied first to accrued
interest. Any amounts not paid in accordance with the above repayment schedule
are due in full in May 1997. Interest on the note is prime plus two and three-
quarters of a percent (11.25% at December 31, 1995). The note is secured by a
first security interest in substantially all of the Company's fixed assets.
<TABLE>
The schedule repayments of long-term debt using the interest rate in effect
(10.75%) at December 31, 1995, is as follows:
<S> <C>
1996....................................... $36,480
1997....................................... 16,520
-------
$53,000
=======
</TABLE>
F-111
<PAGE> 181
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities and certain equipment under operating
leases extending until 2001. In addition, the Company leases computer and office
equipment under capital lease arrangements. Minimum future rental payments under
these leases as of December 31, 1995 is as follows:
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
----------- -------- ----------
<S> <C> <C>
1996....................................................... $ 30,344 $ 368,153
1997....................................................... 19,960 346,802
1998....................................................... 5,791 252,100
1999....................................................... 2,104 226,100
2000....................................................... -- 163,498
Thereafter................................................. -- 36,875
-------- ----------
Future minimum payments...................................... 58,199 $1,393,528
==========
Less amount representing interest............................ (10,260)
--------
Present value of future minimum lease payments, including
current portion of $23,626................................. $ 47,939
========
</TABLE>
Rent expense totalled approximately $242,892, $340,974 and $356,119 for the
years ended December 31, 1993, 1994, and 1995, respectively.
11. PENSION AND PROFIT SHARING PLANS
In 1993, the Company adopted a non-contributory, defined contribution
retirement plan for eligible employees. Contributions to the plan are based on a
fixed percentage of employees' annual compensation. Expense related to this plan
totalled $15,000, $15,000 and $25,000 for the years ended December 31, 1993,
1994 and 1995, respectively. Benefits under this plan vest in annual increments
of 20%.
In 1993, the Company initiated a profit sharing plan for eligible
employees. Contributions to the plan are determined solely at management's
discretion, and were $15,000, $6,000 and $5,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
12. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-112
<PAGE> 182
HB ASSOCIATES, INC.
<TABLE>
BALANCE SHEET
UNAUDITED
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $118,988
Merchandise inventory........................................................ 56,211
Prepaid expenses and other current assets.................................... 8,182
--------
Total current assets................................................. 183,381
Videocassette rental inventory, net.......................................... 393,117
Furnishings, equipment and leasehold improvements, net....................... 252,672
Other assets................................................................. 54,671
--------
$883,841
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt............................................ $ 36,374
Current portion of obligations under capital leases.......................... 23,626
Accounts payable............................................................. 234,465
Accrued expenses............................................................. 82,466
Advances from stockholders................................................... 70,400
--------
Total current liabilities............................................ 447,331
Long-term debt............................................................... 8,444
Obligations under capital leases............................................. 14,401
--------
Total liabilities.................................................... 470,176
--------
Stockholders' equity
Common stock, no par value, 1,000 shares authorized, 300 shares issued and
outstanding............................................................... --
Additional paid-in capital................................................... 80,850
Retained earnings............................................................ 332,815
--------
Total stockholders' equity........................................... 413,665
--------
$883,841
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-113
<PAGE> 183
HB ASSOCIATES, INC.
<TABLE>
STATEMENT OF OPERATIONS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $651,109 $713,204
Merchandise sales.................................................... 109,547 106,968
-------- --------
760,656 820,172
-------- --------
Costs and expenses
Store operating expenses............................................. 540,053 561,296
Cost of sales........................................................ 94,814 97,089
General and administrative........................................... 32,403 44,334
-------- --------
667,270 702,719
-------- --------
Income from operations....................................... 93,386 117,453
Interest expense....................................................... 5,540 2,544
-------- --------
Net income................................................... $ 87,846 $114,909
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-114
<PAGE> 184
HB ASSOCIATES, INC.
<TABLE>
STATEMENT OF CASH FLOWS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 87,846 $ 114,909
Adjustments to reconcile net income to cash flows provided by
(used in) operating activities
Amortization of videocassette rental inventory.................. 200,895 163,155
Depreciation of furnishings, equipment and leasehold
improvements................................................... 15,025 15,000
Amortization of franchise fees.................................. 1,965 1,965
Changes in assets and liabilities
Merchandise inventory......................................... (19,361) (331)
Prepaid expenses and other assets............................. (3,493) (1,594)
Accounts payable.............................................. 70,706 (135,883)
Accrued expenses.............................................. 4,249 14,763
--------- ---------
Net cash provided by operating activities.................. 357,832 171,984
--------- ---------
Cash flows from investing activities
Purchases of videocassette rental inventory........................ (215,963) (165,356)
--------- ---------
Net cash used in investing activities...................... (215,963) (165,356)
--------- ---------
Cash flows from financing activities
Repayment of long-term debt........................................ (4,246) (8,182)
Principal repayments on capital lease obligations.................. (9,039) (9,916)
Distributions to stockholders...................................... (13,050) (13,500)
--------- ---------
Net cash used in financing activities...................... (26,335) (31,598)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 115,534 (24,970)
--------- ---------
Cash and cash equivalents, beginning of period....................... 81,462 143,958
--------- ---------
Cash and cash equivalents, end of period............................. $ 196,996 $ 118,988
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 5,540 $ 2,544
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-115
<PAGE> 185
HB ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
<TABLE>
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $1,046,342
Accumulated amortization....................................... (653,225)
----------
$ 393,117
==========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-116
<PAGE> 186
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Best Entertainment, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Best Entertainment Inc. at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 29, 1996
F-117
<PAGE> 187
BEST ENTERTAINMENT, INC.
<TABLE>
BALANCE SHEET
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 23,675 $ 55,083
Merchandise inventory................................................ 57,350 28,237
-------- --------
Total current assets......................................... 81,025 83,320
Videocassette rental inventory, net.................................. 375,571 384,945
Furnishings, equipment and leasehold improvements, net............... 47,175 32,649
Other assets......................................................... 62,667 23,054
-------- --------
$566,438 $523,968
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.................................... $ 25,304 $ --
Current portion of obligations under capital leases.................. 5,434 --
Accounts payable..................................................... 54,290 111,655
Accrued expenses..................................................... 21,012 24,698
Payroll and sales tax payable........................................ 8,526 5,154
-------- --------
Total current liabilities.................................... 114,566 141,507
Long-term debt......................................................... 18,239 --
Commitments (Note 8)
Stockholders' Equity
Common stock, no par value, 15,000 shares authorized, 100 shares
issued and outstanding............................................ -- --
Additional paid-in capital........................................... 63,000 63,000
Retained earnings.................................................... 370,633 319,461
-------- --------
Total stockholders' equity................................... 433,633 382,461
-------- --------
$566,438 $523,968
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-118
<PAGE> 188
BEST ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rental............................................... $1,173,865 $1,310,309 $1,327,301
Merchandise.......................................... 160,073 184,965 225,098
---------- ---------- ----------
1,333,938 1,495,274 1,552,399
---------- ---------- ----------
Cost and expenses:
Store operating expenses............................. 993,058 1,071,024 1,018,714
Cost of goods sold................................... 105,648 101,731 171,074
General and administrative........................... 101,649 107,898 91,396
---------- ---------- ----------
1,200,355 1,280,653 1,281,184
---------- ---------- ----------
Income from operations....................... 133,583 214,621 271,215
---------- ---------- ----------
Interest expense....................................... 10,367 6,216 1,305
---------- ---------- ----------
Net income................................... $ 123,216 $ 208,405 $ 269,910
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-119
<PAGE> 189
BEST ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 123,216 $ 208,405 $ 269,910
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory..... 300,690 402,333 453,400
Depreciation of furnishings, equipment and
leasehold improvements........................... 28,644 26,073 24,723
Amortization of franchise fees..................... 7,000 7,000 7,000
Changes in assets and liabilities:
Merchandise inventory............................ 191 (634) 29,113
Other assets..................................... 1,188 (1,170) --
Accounts payable................................. 19,924 7,295 57,365
Accrued expenses................................. 17,537 (19,286) 3,686
Payroll and sales tax payables................... (4,141) 265 (3,372)
--------- --------- ---------
Net cash provided by operating activities..... 494,249 630,281 841,825
--------- --------- ---------
Cash flows from investing activities:
Purchases of furnishings, equipment and leasehold
improvements....................................... (5,820) (6,566) (5,819)
Purchases of videocassette rental inventory........... (377,176) (439,755) (466,939)
--------- --------- ---------
Net cash used in investing activities......... (382,996) (446,321) (472,758)
--------- --------- ---------
Cash flows from financing activities:
Proceeds (repayments) from advances from
stockholders....................................... 12,019 (12,019) --
Repayment of long-term debt........................... (50,003) (64,557) (29,199)
Principal repayments on capital lease obligations..... (8,937) (9,997) (5,434)
Shareholder distributions............................. (37,725) (128,050) (303,026)
--------- --------- ---------
Net cash used in financing activities......... (84,646) (214,623) (337,659)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 26,607 (30,663) 31,408
--------- --------- ---------
Cash and cash equivalents, beginning of period.......... 27,731 54,338 23,675
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 54,338 $ 23,675 $ 55,083
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 10,367 $ 6,644 $ 1,305
========= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-120
<PAGE> 190
BEST ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993............. -- $63,000 $ 204,787 $ 267,787
S Corporation distribution............. (37,725) (37,725)
Net income............................. 123,216 123,216
---- ------- --------- ---------
Balance at December 31, 1993........... -- 63,000 290,278 353,278
S Corporation distribution............. (128,050) (128,050)
Net income............................. 208,405 208,405
---- ------- --------- ---------
Balance at December 31, 1994........... -- 63,000 370,633 433,633
S Corporation distribution............. (321,082) (321,082)
Net income............................. 269,910 269,910
---- ------- --------- ---------
Balance at December 31, 1995........... -- $63,000 $ 319,461 $ 382,461
==== ======= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-121
<PAGE> 191
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Best Entertainment Inc. (the "Company") owns and operates 2 videocassette
rental stores under franchise agreements with West Coast Video Corporation. The
stores are located in Somerville and Revere, Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation is provided over the estimated useful lives (5 to 7 years) of
furnishings and equipment and, for leasehold improvements, over the lesser of
the estimated useful lives or lease terms (primarily 5-10 years), using the
straight-line method. Repair and maintenance costs are expensed as incurred.
Other Assets
Included in other assets are franchise fees, which are stated at cost less
the related accumulated amortization. Franchise fees are amortized using the
straight line method over the life of the franchise agreements (7-10 years).
F-122
<PAGE> 192
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Income Taxes
The Company has elected to be treated as an S corporation for income tax
purposes. Accordingly, the income of the Company is taxed at the shareholder
level and, accordingly, no provision for income taxes has been made in the
accompanying financial statements.
3. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory............................... $ 833,265 $ 898,075
Accumulated amortization..................................... (457,694) (513,130)
--------- ---------
$ 375,571 $ 384,945
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$300,690, $402,333 and $453,400 for the years ended December 31, 1993, 1994, and
1995, respectively.
4. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
Furnishings, equipment and leasehold improvements comprise the following:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 51,260 $ 51,713
Equipment and vehicles....................................... 103,411 108,777
Leasehold improvements....................................... 22,893 22,893
--------- ---------
177,564 183,383
Accumulated depreciation..................................... (130,389) (150,734)
--------- ---------
$ 47,175 $ 32,649
========= =========
</TABLE>
Depreciation expense totaled $28,644, $26,073, and $24,723 for the years
ended December 31, 1993, December 31, 1994 and December 31, 1995, respectively.
5. OTHER ASSETS
<TABLE>
Other assets comprise the following:
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Franchise fees................................................. $ 70,000 $ 65,000
Less: accumulated amortization................................. (35,000) (42,000)
-------- --------
35,000 23,000
Key-person life insurance policy -- cash surrender value....... 27,400 --
Other assets................................................... 267 54
-------- --------
$ 62,667 $ 23,054
======== ========
</TABLE>
On December 28, 1995, title to the life insurance policy was transferred to
the stockholders of the Company for no consideration.
F-123
<PAGE> 193
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. LONG-TERM DEBT
<TABLE>
Long-term debt comprises the following:
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- ----
<S> <C> <C>
Note payable -- Allied Lending Corporation........................ $ 26,804 $ --
Note payable -- Metropolitan Bank and Trust Company............... 2,395 --
Phoenix Home Life Mutual Insurance Company........................ 9,344 --
Loan from West Coast Corporation.................................. 5,000 --
-------- ----
Total debt.............................................. 43,543 --
Less: current portion............................................. (25,304) --
-------- ----
Total long term debt.................................... $ 18,239 $ --
======== ====
</TABLE>
Borrowings from the Allied Lending Corporation comprised a note payable
which was secured by the tangible assets of the Revere store and was due in
monthly installments through May 2, 1997. The Company accelerated payments due
on the note resulting in full settlement of the obligation during the year ended
December 31, 1995. Interest was paid at a variable rate based on one of several
prime rates (10.50% at December 31, 1994.)
Borrowings from the Metropolitan Bank and Trust Company were secured by the
tangible assets of the Somerville store and were due in monthly installments
through April 5, 1995. Interest was paid at a variable rate based on 2% plus the
bank's prime rate.
Borrowings with Phoenix Mutual Life Insurance Corporation comprised a loan
against a life insurance policy on one of the stockholders. Interest was accrued
at a fixed rate of 8%. On December 28, 1995, title to the life insurance policy
was transferred to the stockholders of the Company, together with all
obligations under this loan agreement.
The loan from West Coast Corporation for $5,000 related to unpaid franchise
fees outstanding since April 1991. The loan was interest free and was forgiven
by West Coast Corporation during the year ended December 31, 1995. As a result,
the loan and the franchise fee asset were both reduced by this amount at
December 31, 1995.
7. RELATED PARTY TRANSACTIONS
The Company leases retail space for one of its stores from a realty trust
in which the principal trustees are relatives of the Company's shareholders.
Rent expense related to this lease totaled $74,208, $84,715, and $78,698 for the
years ended December 31, 1993, 1994 and 1995, respectively.
F-124
<PAGE> 194
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
8. LEASE COMMITMENTS
<TABLE>
The Company leases its retail space under operating leases extending until
the year 2000. Both store leases contain renewal options ranging up to 15 years
and generally require the Company to pay utilities, insurance, taxes and common
area maintenance costs. Minimum future rental payments under these leases as of
December 31, 1995 are as follows:
<CAPTION>
OPERATING
LEASES
--------
<S> <C>
1996.................................................... $106,086
1997.................................................... 110,653
1998.................................................... 115,420
1999.................................................... 94,997
2000.................................................... 86,218
</TABLE>
Rent expense totalled $107,449, $121,159, and $117,662 for the years ended
December 31, 1993, 1994, and 1995, respectively.
9. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-125
<PAGE> 195
BEST ENTERTAINMENT, INC.
<TABLE>
BALANCE SHEET
UNAUDITED
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $133,046
Merchandise inventory........................................................ 29,737
--------
Total current assets................................................. 162,783
Videocassette rental inventory, net.......................................... 373,059
Furnishings, equipment and leasehold improvements, net....................... 29,431
Other assets................................................................. 23,915
--------
$589,188
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 97,653
Accrued expenses............................................................. 27,021
--------
Total current liabilities............................................ 124,674
--------
Stockholders' equity
Common stock, no par value, 15,000 shares authorized,
100 shares issued and outstanding......................................... --
Additional paid-in capital................................................... 63,000
Retained earnings............................................................ 401,514
--------
Total stockholders' equity........................................... 464,514
--------
$589,188
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-126
<PAGE> 196
BEST ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF OPERATIONS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $354,461 $381,598
Merchandise sales.................................................... 58,971 65,461
-------- --------
413,432 447,059
-------- --------
Costs and expenses
Store operating expenses............................................. 275,218 267,430
Cost of goods sold................................................... 47,105 39,416
General and administrative........................................... 20,850 24,494
-------- --------
343,173 331,340
-------- --------
Income from operations....................................... 70,259 115,719
-------- --------
Interest expense....................................................... 1,359 --
-------- --------
Net income................................................... $ 68,900 $115,719
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-127
<PAGE> 197
BEST ENTERTAINMENT, INC.
<TABLE>
STATEMENT OF CASH FLOWS
UNAUDITED
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 68,900 $ 115,719
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of videocassette rental inventory.................. 155,680 162,448
Depreciation of furnishings, equipment and leasehold
improvements................................................... 2,909 3,218
Amortization of franchise fees.................................. 1,750 1,750
Changes in assets and liabilities
Merchandise inventory......................................... 5,000 (1,500)
Other assets.................................................. 54 (2,611)
Accounts payable.............................................. (2,898) (14,002)
Accrued expenses.............................................. (5,025) (2,831)
--------- ---------
Net cash provided by operating activities.................. 226,370 262,191
--------- ---------
Cash flows from investing activities
Purchase of furnishings, equipment and leasehold improvements...... (10,207) --
Purchases of videocassette rental inventory........................ (101,761) (150,562)
--------- ---------
Net cash used in investing activities...................... (111,968) (150,562)
--------- ---------
Cash flows from financing activities
Proceeds from short-term borrowings................................ 9,344 --
Repayment of long-term debt........................................ (16,193) --
Principal repayments on capital lease obligations.................. (5,434) --
Shareholder distributions.......................................... (67,596) (33,666)
--------- ---------
Net cash used in financing activities...................... (79,879) (33,666)
--------- ---------
Net increase in cash and cash equivalents............................ 34,523 77,963
--------- ---------
Cash and cash equivalents, beginning of period....................... 23,675 55,083
--------- ---------
Cash and cash equivalents, end of period............................. $ 58,198 $ 133,046
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 1,359 $ --
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-128
<PAGE> 198
BEST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
Videocassette rental inventory.......................... $ 906,875
Accumulated amortization................................ (533,816)
---------
$ 373,059
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-129
<PAGE> 199
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Video Innovators, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Video Innovators, Inc. at December
31, 1995 and 1994 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 20, 1996
F-130
<PAGE> 200
VIDEO INNOVATORS, INC.
<TABLE>
BALANCE SHEET
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 49,147 $ 59,903
Accounts receivable.................................................. 1,733 3,124
Merchandise inventories.............................................. 28,837 31,847
Other current assets................................................. 50,000 --
Due from stockholders................................................ 10,412 46,486
-------- --------
Total current assets......................................... 140,129 141,360
-------- --------
Videocassette rental inventory, net.................................... 89,603 139,771
Furnishings and equipment, net......................................... 100,754 199,155
Deferred tax asset..................................................... 18,940 48,816
Other assets........................................................... 27,475 39,443
-------- --------
$376,901 $568,545
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 25,224 $101,809
Accrued expenses and other liabilities............................... 50,311 83,904
Accrued rent......................................................... -- 24,287
Current portion of obligations under capital leases.................. -- 1,975
Dividends payable.................................................... -- 30,770
Income tax payable................................................... 86,620 164,767
Deferred tax liabilities............................................. 9,499 --
Due to stockholders.................................................. 20,719 8,244
-------- --------
Total current liabilities.................................... 192,373 415,756
-------- --------
Accrued rent........................................................... 79,250 75,771
Obligations under capital leases....................................... -- 7,677
Commitments (Note 6)
Stockholders' equity:
Common stock, $.01 par value, 2,400 shares authorized, 2,400 shares
issued and outstanding............................................ 24 24
Additional paid-in capital........................................... 19,976 19,976
Retained earnings.................................................... 85,278 49,341
-------- --------
Total stockholders' equity................................... 105,278 69,341
-------- --------
$376,901 $568,545
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-131
<PAGE> 201
VIDEO INNOVATORS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rental revenue........................................... $601,436 $744,138 $774,229
Merchandise sales........................................ 46,424 66,388 72,932
-------- -------- --------
647,860 810,526 847,161
-------- -------- --------
Costs and expenses:
Operating expenses....................................... 348,995 433,852 429,596
Cost of sales............................................ 36,342 51,971 57,122
General and administrative............................... 205,980 258,333 291,409
-------- -------- --------
591,317 744,156 778,127
-------- -------- --------
Income from operations........................... 56,543 66,370 69,034
Other (income) expense, net................................ 5,155 (16,466) 859
-------- -------- --------
Income before provision for income tax........... 51,388 82,836 68,175
Provision for income taxes................................. 24,073 30,665 38,772
-------- -------- --------
Net income....................................... $ 27,315 $ 52,171 $ 29,403
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-132
<PAGE> 202
VIDEO INNOVATORS, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 27,315 $ 52,171 $ 29,403
Adjustments to reconcile net income to cash flows
provided by operating activities:
Amortization of organizational costs............... 5,320 5,320 5,320
Amortization of videocassette rental inventory..... 190,314 242,457 240,978
Depreciation and amortization of furnishings and
equipment........................................ 16,210 24,599 27,045
Deferred tax provision (benefit)................... (10,461) (6,860) (39,375)
Changes in assets and liabilities:
Accounts receivable.............................. (1,184) (549) (1,391)
Merchandise inventories.......................... (4,132) (10,459) (3,010)
Other current assets............................. 1,756 (50,000) 50,000
Other assets..................................... (4,138) (6,000) (17,288)
Accounts payable................................. 7,375 (3,904) 76,585
Accrued expenses................................. (30,534) 14,361 33,593
Income tax payable............................... 34,534 37,525 78,147
Accrued rent..................................... 30,630 24,310 20,808
--------- --------- ---------
Net cash provided by operating activities..... 263,005 322,971 500,815
--------- --------- ---------
Cash flows from investing activities:
Loan to stockholders.................................. -- (10,412) (36,074)
Purchases of property and equipment................... (11,364) (13,311) (114,446)
Purchases of videocassette rental inventory........... (205,733) (241,653) (291,146)
--------- --------- ---------
Net cash used in investing activities......... (217,097) (265,376) (441,666)
--------- --------- ---------
Cash flows from financing activities:
Repayment of capital lease obligation................. -- -- (1,348)
Repayment of stockholder debt......................... (13,299) (35,982) (12,475)
Dividends paid........................................ -- (43,272) (34,570)
--------- --------- ---------
Net cash used in financing activities......... (13,299) (79,254) (48,393)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 32,609 (21,659) 10,756
--------- --------- ---------
Cash and cash equivalents, beginning of period.......... 38,197 70,806 49,147
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 70,806 $ 49,147 $ 59,903
========= ========= =========
Cash paid for interest.................................. -- -- $ 859
Non-cash transactions:
Dividend payable...................................... -- -- $ 30,770
Obligation under capital lease........................ -- -- $ 11,000
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-133
<PAGE> 203
VIDEO INNOVATORS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993...................... $24 $19,976 $ 49,064 $ 69,064
Net income...................................... 27,315 27,315
--- ------- -------- ---------
Balance at December 31, 1993.................... 24 19,976 76,379 96,379
Net income...................................... 52,171 52,171
Dividends....................................... (43,272) (43,272)
--- ------- -------- ---------
Balance at December 31, 1994.................... 24 19,976 85,278 105,278
Net income...................................... 29,403 29,403
Dividends....................................... (65,340) (65,340)
--- ------- -------- ---------
Balance at December 31, 1995.................... $24 $19,976 $ 49,341 $ 69,341
=== ======= ======== =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-134
<PAGE> 204
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Video Innovators, Inc. (the "Company") owns and operates one videocassette
rental store, located in Brookline, MA. During 1995 the Company was preparing
for the opening of its second store in January 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and any succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory............................... $ 305,121 $ 461,137
Accumulated amortization..................................... (215,518) (321,366)
--------- ---------
$ 89,603 $ 139,771
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$190,314, $242,457 and $240,978 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-135
<PAGE> 205
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided over the estimated useful lives (five
to seven years) of furnishings and equipment and over the lesser of the
estimated useful lives or lease terms (five to ten years) of leased items and
leasehold improvements using the straight-line method. Repair and maintenance
costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
Organizational Costs
Included in other assets at December 31, 1994 and 1995 are $9,751 and
$4,431 of organizational costs, net of accumulated amortization of $16,847 and
$22,167, respectively. This asset is being amortized on a straight-line basis
over 5 years. Amortization of $5,320 was charged to expense in each of the years
ended December 31, 1993, 1994, and 1995, respectively.
3. FURNISHINGS AND EQUIPMENT
<TABLE>
Furnishings and equipment consist of the following:
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Furniture and fixtures......................................... $ 57,832 $ 91,817
Equipment and vehicles......................................... 20,607 39,189
Leasehold improvements......................................... 71,906 144,785
-------- --------
150,345 275,791
Accumulated depreciation and amortization...................... (49,591) (76,636)
-------- --------
$100,754 $199,155
======== ========
</TABLE>
Depreciation and amortization expenses were $16,210, $24,599, and $27,045
for the years ended December 31, 1993, 1994, 1995, respectively.
4. SHORT-TERM BORROWINGS
The Company has available unsecured lines of credit from a domestic bank
approximating $25,000 at December 31, 1994 and December 31, 1995.
F-136
<PAGE> 206
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
<TABLE>
The components of the provision for income taxes are as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Current
Federal........................................... $ 24,769 $26,639 $ 56,551
State............................................. 9,765 10,886 21,596
34,534 37,525 78,147
-------- ------- --------
Deferred
Federal........................................... (8,182) (5,365) (31,537)
State............................................. (2,279) (1,495) (7,838)
-------- ------- --------
(10,461) (6,860) (39,375)
-------- ------- --------
$ 24,073 $30,665 $ 38,772
======== ======= ========
</TABLE>
<TABLE>
The components of the net deferred tax asset (liability) are as follows:
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Videocassette rental library................................... $ -- $ 9,529
Rent........................................................... 18,940 34,469
Depreciation................................................... -- 2,797
Other temporary differences.................................... -- 2,021
------- -------
$18,940 $48,816
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Videocassette rental library................................... $9,499 $ --
------ -------
9,499 --
------ -------
Net deferred tax asset......................................... $9,441 $48,816
====== =======
</TABLE>
F-137
<PAGE> 207
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows:
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Income tax at statutory rate.......................... $17,472 $28,165 $23,180
State tax expense, net of federal income tax
benefit............................................. 5,778 7,644 6,838
Provision for contingencies........................... 5,077 6,567 13,951
Benefit of graduated rates............................ (6,616) (7,779) (5,607)
Other items........................................... 2,362 (3,932) 410
------- ------- -------
$24,073 $30,665 $38,772
======= ======= =======
</TABLE>
6. RELATED PARTY TRANSACTIONS
Under the terms of an Investors Agreement with the stockholders, each
stockholder of the Company agreed to make interest-free loans to the Company.
The notes payable to stockholders are due on demand and totaled $20,719 and
$8,244 at December 31, 1994 and 1995, respectively.
The Company leases a store facility from a stockholder in connection with
the operations of the West Coast Video business located in Brookline, MA. Rent
expense charged to operations for these facilities totaled $100,150 for each of
the three years in the period ended for December 31, 1995.
The amounts due from stockholders are payable on demand and bear no
interest.
7. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities and certain equipment under operating
leases extending until October 31, 2005. In addition, the Company leases
computer equipment under capital lease arrangements. Minimum future rental
payments under these leases as of December 31, 1995 are as follows:
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
------------ ------- ----------
<S> <C> <C>
1996.......................................................... $ 2,940 $ 197,725
1997.......................................................... 2,940 204,525
1998.......................................................... 2,940 176,250
1999.......................................................... 2,940 97,875
Thereafter.................................................... 737 644,343
------- ----------
Future minimum payments....................................... 12,497 $1,320,718
==========
Less amounts representing interest............................ 2,845
-------
Present value of future minimum lease payments, including
current portion of $1,975................................... $ 9,652
=======
</TABLE>
Rent expense totalled approximately $100,150, $100,150, and $116,705 for
the years ended December 31, 1993, 1994, and 1995, respectively.
8. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-138
<PAGE> 208
VIDEO INNOVATORS, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents....................................................... $ 19,824
Accounts receivable............................................................. 3,836
Merchandise inventory........................................................... 31,947
Due from stockholders........................................................... 46,486
--------
Total current assets.................................................... 102,093
Videocassette rental inventory, net............................................. 172,531
Furnishings and equipment, net.................................................. 227,691
Deferred tax asset.............................................................. 48,816
Other assets.................................................................... 42,690
--------
$593,821
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................................ $182,163
Accrued expenses and other liabilities.......................................... 27,250
Accrued rent.................................................................... 111,228
Current portion of obligations under capital leases............................. 2,031
Dividends payable............................................................... 30,770
Income tax payable.............................................................. 161,118
Due to stockholders............................................................. 8,244
--------
Total current liabilities............................................... 522,804
Obligations under capital leases.................................................. 7,149
--------
Total liabilities....................................................... 529,953
--------
Stockholders' equity
Common stock, $10 par value, 2,400 shares authorized,
issued and outstanding....................................................... 24
Additional paid-in capital...................................................... 19,976
Retained earnings............................................................... 43,868
--------
Total stockholders' equity.............................................. 63,868
--------
$593,821
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-139
<PAGE> 209
VIDEO INNOVATORS, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $188,556 $269,369
Merchandise sales.................................................... 26,289 41,738
-------- --------
214,845 311,107
-------- --------
Costs and expenses
Store operating expenses............................................. 94,291 168,519
Cost of sales........................................................ 20,506 32,556
General and administrative........................................... 68,099 118,915
-------- --------
182,896 319,990
-------- --------
Income (loss) from operations................................ 31,949 (8,883)
Interest expense....................................................... 225 239
-------- --------
Income (loss) before provision (benefit) for income tax...... 31,724 (9,122)
Provision (benefit) for income taxes................................... 18,083 (3,649)
-------- --------
Net income (loss)............................................ $ 13,641 $ (5,473)
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-140
<PAGE> 210
VIDEO INNOVATORS, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
-------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................... $ 13,641 $ (5,473)
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of organizational costs............................. 1,330 1,330
Amortization of videocassette rental inventory................... 41,535 94,089
Depreciation and amortization of furnishings and equipment....... 6,400 14,815
Changes in assets and liabilities
Merchandise inventory.......................................... (987) (100)
Accounts receivable............................................ 255 (712)
Other assets................................................... (855) (4,577)
Accounts payable............................................... 12,721 80,354
Accrued expenses and other liabilities......................... (11,460) (56,654)
Income tax payable............................................. 18,083 (3,649)
Accrued rent................................................... 1,762 11,170
-------- ---------
Net cash provided by operating activities................... 82,425 130,593
-------- ---------
Cash flows from investing activities
Loan to stockholders................................................ (10,491) --
Purchases of furnishings and equipment.............................. -- (43,351)
Purchases of videocassette rental inventory......................... (51,423) (126,849)
-------- ---------
Net cash used in investing activities....................... (61,914) (170,200)
-------- ---------
Cash flows from financing activities
Repayment of capital lease obligations.............................. -- (472)
-------- ---------
Net cash used in financing activities....................... -- (472)
-------- ---------
Net increase (decrease) in cash and cash equivalents.................. 20,511 (40,079)
-------- ---------
Cash and cash equivalents, beginning of period........................ 49,147 59,903
-------- ---------
Cash and cash equivalents, end of period.............................. $ 69,658 $ 19,824
======== =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest............................ $ 225 $ 239
======== =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-141
<PAGE> 211
VIDEO INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $ 507,897
Accumulated amortization....................................... (335,366)
---------
$ 172,531
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-142
<PAGE> 212
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Showtime, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholder's equity present fairly, in all
material respects, the financial position of Showtime, Inc. at December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 22, 1996
F-143
<PAGE> 213
SHOWTIME, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 145,019 $ 164,377
Merchandise inventories........................................... 299,600 221,374
Prepaid expenses and other assets................................. 1,201 1,732
---------- ----------
Total current assets...................................... 445,820 387,483
Videocassette rental inventory, net................................. 818,989 766,200
Furnishings and equipment, net...................................... 105,174 233,185
Other assets........................................................ 35,636 59,801
Deferred income taxes............................................... 57,372 20,161
---------- ----------
$1,462,991 $1,466,830
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current obligation under capital leases........................... $ -- $ 11,340
Accounts payable.................................................. 235,993 303,684
Accrued expenses and other liabilities............................ 71,918 78,400
Income tax payable................................................ 60,665 820
Amounts due to shareholder........................................ 346,357 379,466
---------- ----------
Total current liabilities................................. 714,933 773,710
---------- ----------
Obligations under capital leases.................................. -- 7,639
---------- ----------
Total liabilities......................................... 714,933 781,349
Commitments (Note 7)
Stockholder's equity:
Class A, common stock, $.10 par value, 10,000 shares authorized,
4,000 shares issued and outstanding............................ 400 400
Class B, common stock, $.10 par value, 2,000 shares authorized,
1,000 shares issued............................................ 100 100
Additional paid-in capital........................................ 566,624 566,624
Retained earnings................................................. 242,934 180,357
---------- ----------
810,058 747,481
Less: Treasury stock at cost -- 1,000 Class B common
shares.................................................. 62,000 62,000
---------- ----------
Total stockholder's equity................................ 748,058 685,481
---------- ----------
$1,462,991 $1,466,830
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-144
<PAGE> 214
SHOWTIME, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $2,942,287 $3,330,078 $3,474,569
Merchandise.......................................... 711,820 602,001 436,032
---------- ---------- ----------
3,654,107 3,932,079 3,910,601
---------- ---------- ----------
Cost and expenses:
Store operating expenses............................. 2,576,184 3,006,288 3,040,000
Cost of goods sold................................... 569,456 589,637 348,826
General and administrative........................... 212,783 380,752 578,190
---------- ---------- ----------
3,358,423 3,976,677 3,967,016
---------- ---------- ----------
Income (loss) from operations..................... 295,684 (44,598) (56,415)
---------- ---------- ----------
Interest expense....................................... 25,802 23,924 21,871
---------- ---------- ----------
Income (loss) before provision for income taxes... 269,882 (68,522) (78,286)
Provision/(benefit) for income taxes................... 95,428 (35,952) (15,709)
---------- ---------- ----------
Net income (loss)................................. $ 174,454 $ (32,570) $ (62,577)
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-145
<PAGE> 215
SHOWTIME, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 174,454 $ (32,570) $ (62,577)
Adjustments to reconcile net income (loss) to cash
flows provided by operating activities:
Deferred income taxes........................... 25,778 (48,437) 37,211
Amortization of videocassette rental
inventory..................................... 812,976 1,063,070 1,098,413
Depreciation and amortization of furnishings and
equipment..................................... 62,554 64,931 90,517
Loss on disposal of furnishings and equipment... 450 7,600 --
Changes in assets and liabilities:
Prepaid expenses and other assets............. 20,470 (617) (1,154)
Merchandise inventories....................... 19,010 49,802 78,226
Other assets.................................. (7,740) 1,517 (24,165)
Accounts payable.............................. 38,527 (36,393) 67,691
Income tax payable............................ 49,216 11,449 (59,845)
Accrued expenses and other liabilities........ (16,272) 1,930 6,482
---------- ----------- -----------
Net cash provided by operating
activities............................... 1,179,423 1,082,282 1,230,799
---------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................ (60,407) (46,156) (196,650)
Purchases of videocassette rental inventory........ (868,219) (1,070,039) (1,045,624)
---------- ----------- -----------
Net cash (used in) investing activities.... (928,626) (1,116,195) (1,242,274)
---------- ----------- -----------
Cash flows from financing activities:
Loan from shareholder.............................. -- 5,533 33,109
Repayment of long-term debt........................ (119,001) (5,000) (2,276)
---------- ----------- -----------
Net cash provided by (used in) financing
activities............................... (119,001) 533 30,833
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 131,796 (33,380) 19,358
---------- ----------- -----------
Cash and cash equivalents, beginning of period....... 46,603 178,399 145,019
---------- ----------- -----------
Cash and cash equivalents, end of period............. $ 178,399 $ 145,019 $ 164,377
========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........... $ 25,802 $ 20,210 $ 21,925
========== =========== ===========
Cash paid during the period for income taxes....... $ 27,836 $ 1,036 $ 6,928
========== =========== ===========
Supplemental disclosure of noncash financing
activities:
</TABLE>
During 1995, capital lease obligations of $21,878 were incurred in
connection with lease agreements for office equipment.
The accompanying notes are an integral
part of the financial statements.
F-146
<PAGE> 216
SHOWTIME, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDER'S
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993........ $500 $566,624 $101,050 $(62,000) $606,174
Net income........................ 174,454 174,454
---- ------- -------- -------- --------
Balance at December 31, 1993...... 500 566,624 275,504 (62,000) 780,628
Net loss.......................... (32,570) (32,570)
---- ------- -------- -------- --------
Balance at December 31, 1994...... 500 566,624 242,934 (62,000) 748,058
Net loss.......................... (62,577) (62,577)
---- ------- -------- -------- --------
Balance at December 31, 1995...... $500 $566,624 $180,357 $(62,000) $685,481
==== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-147
<PAGE> 217
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Showtime, Inc. (the "Company"), owns and operates 12 videocassette rental
stores, located primarily in Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 5 to 7 years) of leased items using the straight-line method. Repair
and maintenance costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and
F-148
<PAGE> 218
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tax credit carryforwards. Deferred tax expense represents the change in the
deferred tax asset or liability balances.
<TABLE>
3. VIDEOCASSETTE RENTAL INVENTORY AND RELATED AMORTIZATION ARE AS FOLLOWS:
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Videocassette rental inventory............................ $ 4,800,115 $ 5,285,391
Accumulated amortization.................................. (3,981,126) (4,519,191)
----------- -----------
$ 818,989 $ 766,200
=========== ===========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$812,976, $1,063,070, and $1,098,413 for the years ended December 31, 1993,
1994, and 1995, respectively.
4. FURNISHINGS AND EQUIPMENT
<TABLE>
Furnishings and equipment consist of the following:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 502,023 $ 502,674
Equipment and vehicles....................................... 135,660 330,101
Leasehold improvements....................................... 21,559 44,995
--------- ---------
659,242 877,770
Accumulated depreciation and amortization.................... (554,068) (644,585)
--------- ---------
$ 105,174 $ 233,185
========= =========
</TABLE>
Depreciation and amortization expense were $62,554, $64,931, and $90,517
for the years ended December 31, 1993, 1994, and 1995, respectively.
5. INCOME TAXES
<TABLE>
The components of the provision for income taxes are as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Current
Federal........................................... $57,498 $ 8,928 $(42,133)
State............................................. 12,152 3,557 (10,787)
------- -------- --------
69,650 12,485 (52,920)
------- -------- --------
Deferred
Federal........................................... 23,064 (43,338) 31,088
State............................................. 2,714 (5,099) 6,123
------- -------- --------
25,778 (48,437) 37,211
------- -------- --------
$95,428 $(35,952) $(15,709)
======= ======== ========
</TABLE>
F-149
<PAGE> 219
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The components of the net deferred tax asset are as follows:
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax asset:
Amortization on rental inventory................................. $57,372 $20,161
======= =======
</TABLE>
<TABLE>
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Income tax at statutory rate -- 34%................. $91,760 $(23,297) $(26,617)
State tax expense, net of federal income tax
benefit........................................... 10,734 (2,753) (3,731)
Impact of graduated rates........................... (7,066) (9,902) 14,639
------- -------- --------
$95,428 $(35,952) $(15,709)
======= ======== ========
</TABLE>
6. AMOUNTS DUE TO SHAREHOLDER
Amounts due to shareholder represent demand loans made by the sole
shareholder to the Company. The loan bears interest at 7%, which is payable on
August 31 each year.
7. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities and certain equipment under operating
leases extending until 2003. Minimum future rental payments under these leases
as of December 31, 1995 are as follows:
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1996............................................ $ 422,520
1997............................................ 362,800
1998............................................ 233,040
1999............................................ 227,520
2000............................................ 227,520
Thereafter...................................... 536,554
----------
Future minimum payments.............................. $2,009,954
==========
</TABLE>
During the year ended December 31, 1995, the Company incurred capital lease
obligations of $21,878 in connection with a lease agreement for office
equipment.
Rent expense totalled approximately $607,119, $687,442, and $705,295 for
the years ended December 31, 1993, 1994, and 1995, respectively.
8. SUBSEQUENT EVENTS
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment. The sale is contingent upon the completion of the initial public
offering of West Coast Entertainment's common stock.
F-150
<PAGE> 220
SHOWTIME, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash......................................................................... $ 205,592
Merchandise inventory........................................................ 151,631
Prepaid expenses and other current assets.................................... 3,464
Current income taxes receivable.............................................. 4,375
----------
Total current assets................................................. 365,062
Videocassette rental inventory, net.......................................... 632,237
Furnishings and equipment, net............................................... 210,556
Other assets................................................................. 59,801
Deferred income taxes........................................................ 20,161
----------
$1,287,817
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current obligation under capital leases...................................... $ 11,340
Accounts payable............................................................. 226,835
Accrued expenses and other liabilities....................................... 48,939
Amounts due to shareholder................................................... 316,945
----------
Total current liabilities............................................ 604,059
Obligations under capital leases............................................... 6,070
----------
Total liabilities.................................................... 610,129
----------
Stockholder's equity
Class A, common stock, $.10 par value, 10,000 shares authorized,
4,000 shares issued and outstanding....................................... 400
Class B, common stock, $.10 par value, 2,000 shares authorized,
1,000 shares issued....................................................... 100
Additional paid-in capital................................................... 566,624
Retained earnings............................................................ 172,564
----------
739,688
Less: Treasury stock at cost -- 1,000 Class B common shares............... 62,000
----------
Total stockholder's equity........................................... 677,688
----------
$1,287,817
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-151
<PAGE> 221
SHOWTIME, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues
Rental revenue.................................................... $ 834,716 $ 976,259
Merchandise sales................................................. 168,427 138,406
---------- ----------
1,003,143 1,114,665
---------- ----------
Costs and expenses
Store operating expenses.......................................... 741,950 956,756
Cost of goods sold................................................ 113,327 110,039
General and administrative........................................ 30,619 54,020
---------- ----------
885,896 1,120,815
---------- ----------
Income (loss) from operations............................. 117,247 (6,150)
---------- ----------
Interest expense.................................................... 4,901 6,838
---------- ----------
Income (loss) before provision (benefit) for income
taxes................................................... 112,346 (12,988)
Provision (benefit) for income taxes................................ 22,544 (5,195)
---------- ----------
Net income (loss)......................................... $ 89,802 $ (7,793)
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-152
<PAGE> 222
SHOWTIME, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ 89,802 $ (7,793)
Adjustments to reconcile net income (loss) to cash flows provided
by (used in) operating activities
Amortization of videocassette rental inventory................ 274,703 402,886
Depreciation and amortization of furnishings and equipment.... 22,629 22,629
Changes in assets and liabilities
Prepaid expenses and other assets.......................... 317 (1,732)
Merchandise inventory...................................... 89,513 69,743
Accounts payable........................................... (34,392) (76,849)
Current taxes.............................................. (38,121) (5,195)
Accrued expenses and other liabilities..................... 51,974 (29,461)
--------- ---------
Net cash provided by operating activities.................. 456,425 374,228
--------- ---------
Cash flows from investing activities
Purchases of videocassette rental inventory........................ (246,000) (268,923)
--------- ---------
Net cash used in investing activities......................... (246,000) (268,923)
--------- ---------
Cash flows from financing activities
Repayment of loan from shareholder................................. (229,458) (62,521)
Principal repayments on capital lease obligations.................. -- (1,569)
--------- ---------
Net cash used in financing activities......................... (229,458) (64,090)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. (19,033) 41,215
--------- ---------
Cash and cash equivalents, beginning of period....................... 145,019 164,377
--------- ---------
Cash and cash equivalents, end of period............................. $ 125,986 $ 205,592
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 4,901 $ 6,838
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-153
<PAGE> 223
SHOWTIME, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory....................................... $ 5,282,452
Accumulated amortization............................................. (4,650,215)
-----------
$ 632,237
===========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold its business to West Coast Entertainment
Corporation.
F-154
<PAGE> 224
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Video Giant, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Video Giant, Inc. at December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 19, 1996
F-155
<PAGE> 225
VIDEO GIANT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 571,783 $ 695,994
Merchandise inventories........................................... 72,094 13,536
Prepaid expenses and other current assets......................... 59,330 20,958
---------- ----------
Total current assets...................................... 703,207 730,488
Videocassette rental inventory, net................................. 1,309,239 1,210,228
Furnishings, equipment and leasehold improvements, net.............. 365,482 395,533
Other assets........................................................ 29,507 29,367
---------- ----------
$2,407,435 $2,365,616
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 101,777 $ 140,920
Accrued expenses.................................................. 134,173 42,428
Current income taxes payable...................................... 211,135 132,033
---------- ----------
Total current liabilities................................. 447,085 315,381
Deferred tax liability............................................ 505,573 486,011
---------- ----------
Total liabilities......................................... 952,658 801,392
Commitments (Note 7)
Stockholders' equity:
Common stock, $0.01 par value, 500,000 shares authorized, 125,000
shares issued and outstanding.................................. 1,250 1,250
Additional paid-in capital........................................ 48,750 48,750
Retained earnings................................................. 1,404,777 1,514,224
---------- ----------
Total stockholders' equity................................ 1,454,777 1,564,224
---------- ----------
$2,407,435 $2,365,616
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-156
<PAGE> 226
VIDEO GIANT, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $3,033,117 $4,516,812 $4,906,137
Merchandise.......................................... 160,983 162,852 304,842
---------- ---------- ----------
3,194,100 4,679,664 5,210,979
---------- ---------- ----------
Costs and expenses:
Store operating expenses............................. 2,264,304 3,029,200 4,432,799
Cost of goods sold................................... 110,982 143,863 248,873
General and administrative........................... 293,663 320,336 340,617
---------- ---------- ----------
2,668,949 3,493,399 5,022,289
---------- ---------- ----------
Income from operations............................ 525,151 1,186,265 188,690
---------- ---------- ----------
Interest expense....................................... 47,423 25,228 2,907
---------- ---------- ----------
Income before provision for income taxes.......... 477,728 1,161,037 185,783
Provision for income taxes............................. 192,851 467,230 76,336
---------- ---------- ----------
Net income........................................ $ 284,877 $ 693,807 $ 109,447
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-157
<PAGE> 227
VIDEO GIANT, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 284,877 $ 693,807 $ 109,447
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Amortization of videocassette rental inventory.... 562,174 866,762 1,588,788
Depreciation and amortization of furnishings,
equipment and leasehold improvements............ 87,676 123,543 155,901
Changes in assets and liabilities:
Merchandise inventories......................... (19,302) (792) 58,558
Prepaid expenses and other assets............... (28,973) 38,503 38,512
Accounts payable................................ 99,343 (14,187) 39,143
Accrued expenses................................ (2,143) 111,166 (91,745)
Current taxes................................... 98,468 112,667 (79,102)
Deferred taxes.................................. 94,383 354,563 (19,562)
---------- ----------- -----------
Net cash provided by operating activities.... 1,176,503 2,286,032 1,799,940
---------- ----------- -----------
Cash flows from investing activities:
Purchases of furnishings, equipment and leasehold
improvements...................................... (107,998) (216,999) (185,952)
Purchases of videocassette rental inventory.......... (638,950) (1,673,174) (1,489,777)
---------- ----------- -----------
Net cash used in investing activities........ (746,948) (1,890,173) (1,675,729)
---------- ----------- -----------
Cash flows from financing activities:
Repayment of stockholder loans.................... (338,640) (322,667) --
---------- ----------- -----------
Net increase in cash and cash equivalents.............. 90,915 73,192 124,211
---------- ----------- -- --------
Cash and cash equivalents, beginning of period......... 407,676 498,591 571,783
---------- ----------- -----------
Cash and cash equivalents, end of period............... $ 498,591 $ 571,783 $ 695,994
========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............. $ 47,423 $ 25,228 $ 2,907
========== =========== ===========
Cash paid during the period for income taxes......... $ -- $ -- $ 175,000
========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-158
<PAGE> 228
VIDEO GIANT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... $1,250 $48,750 $ 426,093 $ 476,093
Net income.................................... -- -- 284,877 284,877
------ ------- ---------- ----------
Balance at December 31, 1993.................. 1,250 48,750 710,970 760,970
Net income.................................... -- -- 693,807 693,807
------ ------- ---------- ----------
Balance at December 31, 1994.................. 1,250 48,750 1,404,777 1,454,777
Net income.................................... -- -- 109,447 109,447
------ ------- ---------- ----------
Balance at December 31, 1995.................. $1,250 $48,750 $1,514,224 $1,564,224
====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-159
<PAGE> 229
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Video Giant, Inc. (the "Company") owns and operates twelve videocassette
rental stores, located primarily in the southern regions of the USA.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost determined by the first-in, first-out method, and is amortized over its
estimated economic life with no provision for salvage value. Videocassettes that
are considered base stock are amortized over 36 months on a straight-line basis.
New release videocassettes are amortized as follows: the first through third
copies of each title per store are amortized as base stock and the fourth and
succeeding copies of each title per store are amortized over nine months on a
straight-line basis. The unamortized cost, if any, of videocassette rental
inventory that is sold is charged to operations at the time of sale. The Company
believes that its method of amortization results in an appropriate matching of
tape amortization expense with the revenue received from the associated rental
of such tapes.
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (5 to 7 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
F-160
<PAGE> 230
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
differences between the carrying amounts and the tax bases of other assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
3. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Videocassette rental inventory............................ $ 2,562,293 $ 3,127,557
Accumulated amortization.................................. (1,253,054) (1,917,329)
----------- -----------
$ 1,309,239 $ 1,210,228
=========== ===========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$562,174, $866,762, and $1,588,788 for the years ended December 31, 1993, 1994,
and 1995, respectively.
4. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
Furnishings, equipment and leasehold improvements comprise the following:
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 379,156 $ 455,721
Equipment and vehicles...................................... 422,069 531,256
Leasehold improvements...................................... 42,109 42,309
--------- ----------
843,334 1,029,286
Accumulated depreciation.................................... (477,852) (633,753)
--------- ----------
$ 365,482 $ 395,533
========= ==========
</TABLE>
Depreciation expense totaled $87,676, $123,543, and $155,901 for the years
ended December 31, 1993, 1994, and 1995, respectively.
5. INCOME TAXES
<TABLE>
The components of the provision for income taxes are as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 78,872 $ 90,246 $ 76,814
State............................................ 19,596 22,421 19,084
-------- -------- --------
98,468 112,667 95,898
-------- -------- --------
Deferred:
Federal.......................................... 82,175 308,700 (17,031)
State............................................ 12,208 45,863 (2,531)
-------- -------- --------
94,383 354,563 (19,562)
-------- -------- --------
$192,851 $467,230 $ 76,336
======== ======== ========
</TABLE>
F-161
<PAGE> 231
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
Deferred income taxes as of December 31, 1994 and 1995 reflect the impact
of "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. The
temporary differences which give rise to the deferred tax assets and liabilities
are as follows:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax asset:
Bonus accrual.............................................. $ 40,200 $ --
--------- ---------
40,200 --
--------- ---------
Deferred tax liabilities:
Videocassette rental amortization.......................... (525,816) (486,011)
Other...................................................... (19,957) --
--------- ---------
(545,773) (486,011)
--------- ---------
$(505,573) $(486,011)
========= =========
</TABLE>
<TABLE>
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Income tax at statutory rate of 35%................. $167,205 $406,363 $65,024
State tax expense, net of federal income tax
benefit........................................ 20,673 44,385 10,759
Other............................................... 4,973 16,482 553
-------- -------- -------
$192,851 $467,230 $76,336
======== ======== =======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The principal stockholder has from time to time loaned the Company funds
for working capital purposes and to fund new store opening costs. Interest on
these short term loans was charged at a rate of 10%.
7. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities and equipment under operating leases
extending until 2001. Minimum future rental payments under these leases as of
December 31, 1995 are as follows:
<CAPTION>
OPERATING
YEAR ENDING LEASES
----------- ---------
<S> <C>
1996..................................... $406,420
1997..................................... 321,810
1998..................................... 239,495
1999..................................... 206,850
2000..................................... 170,280
Thereafter............................... 23,100
</TABLE>
Rent expense totalled $423,392, $460,346, and $506,510 for the years ended
December 31, 1993, 1994, and 1995, respectively.
8. SUBSEQUENT EVENT
In 1996, the Company has negotiated the sale of its business to West Coast
Entertainment. The sale is contingent upon the completion of the initial public
offering of West Coast Entertainment's common stock.
F-162
<PAGE> 232
VIDEO GIANT, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 694,657
Merchandise inventory........................................................ 12,460
Prepaid expenses and other current assets.................................... 23,228
Current income taxes receivable.............................................. 22,230
----------
Total current assets................................................. 752,575
Videocassette rental inventory, net.......................................... 1,030,696
Furnishings, equipment and leasehold improvements, net....................... 334,600
Other assets................................................................. 29,367
----------
$2,147,238
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 177,669
Accrued expenses............................................................. 150,729
----------
Total current liabilities............................................ 328,398
Deferred tax liability......................................................... 486,011
----------
Total liabilities.................................................... 814,409
----------
Stockholders' equity
Common stock, $0.01 par value, 500,000 shares authorized, 125,000 shares
issued and outstanding.................................................... 1,250
Additional paid-in capital................................................... 48,750
Retained earnings............................................................ 1,282,829
----------
Total stockholders' equity........................................... 1,332,829
----------
$2,147,238
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-163
<PAGE> 233
VIDEO GIANT, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues
Rental revenue.................................................... $1,244,485 $1,323,211
Merchandise sales................................................. 136,473 141,258
---------- ----------
1,380,958 1,464,469
---------- ----------
Costs and expenses
Store operating expenses.......................................... 1,188,105 1,690,248
Cost of goods sold................................................ 64,944 60,526
General and administrative........................................ 93,660 99,353
---------- ----------
1,346,709 1,850,127
---------- ----------
Income (loss) from operations.................................. 34,249 (385,658)
---------- ----------
Interest expense.................................................... 2,907 --
---------- ----------
Income (loss) before provision (benefit) for income taxes...... 31,342 (385,658)
Provision (benefit) for income taxes................................ 12,806 (154,263)
---------- ----------
Net income (loss).............................................. $ 18,536 $ (231,395)
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-164
<PAGE> 234
VIDEO GIANT, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ 18,536 $(231,395)
Adjustments to reconcile net income (loss) to cash flows provided
by (used in) operating activities
Amortization of videocassette rental inventory..................... 521,639 536,458
Depreciation and amortization of furnishings, equipment and
leasehold improvements......................................... 58,491 70,933
Changes in assets and liabilities
Merchandise inventory......................................... 19,780 1,076
Prepaid expenses and other assets............................. 18,703 (2,270)
Accounts payable.............................................. 36,585 36,749
Accrued expenses.............................................. (80,175) 108,301
Current taxes................................................. 12,806 (154,263)
--------- ---------
Net cash provided by operating activities.................. 606,365 365,589
--------- ---------
Cash flows from investing activities
Purchases of furnishings, equipment and leasehold improvements..... (130,859) (10,000)
Purchases of videocassette rental inventory........................ (351,922) (356,926)
--------- ---------
Net cash used in investing activities...................... (482,781) (366,926)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 123,584 (1,337)
--------- ---------
Cash and cash equivalents, beginning of period....................... 571,783 695,994
--------- ---------
Cash and cash equivalents, end of period............................. $ 695,367 $ 694,657
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 2,907 $ --
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-165
<PAGE> 235
VIDEO GIANT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $ 3,123,156
Accumulated amortization....................................... (2,092,460)
------------
$ 1,030,696
============
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold its business to West Coast Entertainment
Corporation.
F-166
<PAGE> 236
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Anthony Cocca's Videoland, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholder's equity present fairly, in all
material respects, the financial position of Anthony Cocca's Videoland, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 16, 1996
F-167
<PAGE> 237
ANTHONY COCCA'S VIDEOLAND, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 90,428 $ 161,211
Accounts receivable............................................... 24,364 51,607
Merchandise inventories........................................... 125,952 174,304
---------- ----------
Total current assets...................................... 240,744 387,122
Videocassette rental inventory, net................................. 981,732 1,414,650
Furnishings and equipment, net...................................... 370,927 473,473
Other assets........................................................ 22,367 24,117
---------- ----------
$1,615,770 $2,299,362
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt................................................... $ 60,958 $ 51,958
Lines of credit................................................... 8,690 3,862
Current portion of long-term debt................................. 111,837 82,261
Accounts payable.................................................. 600,470 903,655
Accrued expenses and other liabilities............................ 153,578 164,748
Amounts due to shareholder........................................ 71,326 99,927
---------- ----------
Total current liabilities................................. 1,006,859 1,306,411
---------- ----------
Long-term debt...................................................... 144,882 62,418
---------- ----------
Commitments (Note 8)
Stockholder's equity:
Common stock, $10 par value, 100 shares authorized,
100 shares issued and outstanding.............................. 1,000 1,000
Additional paid-in capital........................................ 217,697 217,697
Retained earnings (deficit)....................................... 245,332 711,836
---------- ----------
Total stockholder's equity................................ 464,029 930,533
---------- ----------
$1,615,770 $2,299,362
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-168
<PAGE> 238
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $2,125,496 $3,026,048 $3,999,302
Merchandise.......................................... 166,148 313,835 483,598
---------- ---------- ----------
2,291,644 3,339,883 4,482,900
---------- ---------- ----------
Costs and expenses:
Operating expenses................................... 2,099,106 2,311,335 3,231,676
Cost of goods sold................................... 117,747 222,190 295,555
General and administrative........................... 389,623 354,997 420,858
---------- ---------- ----------
2,606,476 2,888,522 3,948,089
---------- ---------- ----------
(Loss)/income from operations................ (314,832) 451,361 534,811
---------- ---------- ----------
Interest expense....................................... 24,201 33,280 20,827
---------- ---------- ----------
Net income (loss)............................ $ (339,033) $ 418,081 $ 513,984
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-169
<PAGE> 239
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)/income................................. $ (339,033) $ 418,081 $ 513,984
Adjustments to reconcile net income to cash flows
provided by operating activities:
Amortization of videocassette rental
inventory.................................... 957,617 1,339,747 1,811,846
Depreciation and amortization of furnishings
and equipment................................ 55,773 75,445 97,178
Changes in assets and liabilities:
Accounts receivable.......................... (7,327) (4,346) (27,243)
Merchandise inventories...................... (52,418) (43,685) (48,352)
Other assets................................. 10,108 (22,367) (1,750)
Accounts payable............................. 414,422 (17,623) 303,185
Accrued expenses............................. 94,448 2,849 11,170
----------- ----------- -----------
Net cash provided by operating
activities.............................. 1,133,590 1,748,101 2,660,018
----------- ----------- -----------
Cash flows from investing activities:
Purchases of videocassette rental inventory....... (1,101,677) (1,583,881) (2,244,764)
Purchases of property and equipment............... (181,888) (111,601) (199,724)
----------- ----------- -----------
Net cash used in investing activities..... (1,283,565) (1,695,482) (2,444,488)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt....................... (39,856) (96,703) (112,040)
Borrowings under lines of credit.................. 191,269 69,284 --
Repayment of lines of credit...................... (3,251) (6,556) (4,828)
Repayment of short-term debt...................... -- -- (9,000)
Amounts due to shareholder........................ -- -- 28,601
Distributions..................................... -- -- (47,480)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 148,162 (33,975) (144,747)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (1,813) 18,644 70,783
----------- ----------- -----------
Cash and cash equivalents, beginning of period...... 73,597 71,784 90,428
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 71,784 $ 90,428 $ 161,211
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......... $ 24,201 $ 33,280 $ 20,827
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-170
<PAGE> 240
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... $1,000 $217,697 $ 166,284 $ 384,981
Net loss...................................... -- -- (339,033) (339,033)
------ -------- --------- ---------
Balance at December 31, 1993.................. 1,000 217,697 (172,749) 45,948
Net income.................................... -- -- 418,081 418,081
------ -------- --------- ---------
Balance at December 31, 1994.................. 1,000 217,697 245,332 464,029
Net income.................................... -- -- 513,984 513,984
Distributions................................. -- -- (47,480) (47,480)
------ -------- --------- ---------
Balance at December 31, 1995.................. $1,000 $217,697 $ 711,836 $ 930,533
====== ======== ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-171
<PAGE> 241
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Anthony Cocca's Videoland, Inc. (the "Company") owns and operates 22
videocassette rental stores as of December 1995, located primarily in Ohio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) of furnishings and
equipment and over the lessor of the estimated useful lives or lease terms of
leased items using the straight-line method. Repair and maintenance costs are
expensed as incurred.
Income Taxes
The Company has elected to be treated as a Subchapter S corporation for
income tax purposes. Accordingly, the income of the Company is taxed at the
shareholder level and no provision for income taxes has been made in the
accompanying financial statements.
F-172
<PAGE> 242
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Videocassette rental inventory............................ $ 4,461,618 $ 6,106,097
Accumulated amortization.................................. (3,479,886) (4,691,447)
----------- -----------
$ 981,732 $ 1,414,650
=========== ===========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$957,617, $1,339,747, and $1,811,846 for the years ended December 31, 1993,
1994, and 1995, respectively.
4. FURNISHINGS AND EQUIPMENT
<TABLE>
Furnishings and equipment consist of the following:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 470,300 $ 624,024
Equipment and vehicles....................................... 104,830 150,830
--------- ---------
575,130 774,854
Accumulated depreciation and amortization.................... (204,203) (301,381)
--------- ---------
$ 370,927 $ 473,473
========= =========
</TABLE>
Depreciation and amortization expense were $55,773, $75,445, and $97,178
for the years ended December 31, 1993, 1994 and 1995, respectively.
5. BORROWINGS
<TABLE>
Borrowings consists of the following:
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
SHORT-TERM DEBT
In 1993 the Company had a commitment from a bank for a $100,000 line of
credit bearing interest at prime plus 1.5% (10% at December 31,
1995). The line of credit was available through May 30, 1994 at which
time any amounts borrowed became payable upon demand. The line of
credit is secured by inventory, equipment, accounts receivable, and a
second mortgage on personal property of the stockholder. The Company
is making monthly principal payments of $1,000 plus interest. ....... $ 60,958 $51,958
======== =======
LINES OF CREDIT
The Company has a line of credit agreement with a bank that allows for
borrowings up to $20,000. Borrowings under the agreement bear
interest at the 91 day T-bill rate plus 4.5% (9.41% at December 31,
1995) and are secured by an equity mortgage. ........................ $ 8,690 $ 3,862
======== =======
LONG-TERM DEBT
On May 30, 1994, the borrowings of $197,760 under a $200,000 line of
credit agreement with a bank became a note payable due in monthly
principal installments of $5,556 plus interest at prime plus 1.5%
(10% at December 31, 1995), due in June, 1997, secured by inventory,
equipment, accounts receivable, and a second mortgage on personal
property of the stockholder. ........................................ $164,425 $97,549
</TABLE>
F-173
<PAGE> 243
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
-------- --------
<S> <C> <C>
Mortgage payable to a bank due in equal monthly installments of $574
including interest at 13.7%, due in October 2003, secured by the
building used as the Company's warehouse. ........................... 37,007 34,437
Note payable to a bank in monthly principal installments of $1,283,
plus interest at prime plus 3% (11.5% at December 31, 1995), due in
March 1996, secured by a mortgage on personal property of the
stockholder. ........................................................ 17,846 2,450
Note payable to a bank in monthly installments of $1,182 including
interest at 10.5%, due in September 1996, secured by a mortgage on
the Company's corporate headquarters. ............................... 22,616 10,243
Note payable to a bank, in monthly installments of $1,507 including
interest at prime plus 1% (9.5% at December 31, 1994), due in
November 1995, secured by certain fixed assets, accounts receivables
and certain personal assets of the stockholder. ..................... 8,775 --
Note payable to a bank in monthly installments of $775 including
interest at 11.75%, due in February 1995, secured by a personal asset
of the
stockholder. ........................................................ 1,497 --
Note payable to a bank in monthly installments of $650 including
interest at the banks base rate plus 1% (9% at December 31, 1994),
due in June 1995, secured by computer equipment. .................... 3,311 --
Note payable to a bank in monthly installments of $316 including
interest at 8.25%, due in April 1995, secured by a vehicle. ......... 1,242 --
-------- --------
Total long-term debt......................................... 256,719 144,679
Less: Current portion of long-term debt...................... 111,837 82,261
-------- --------
$144,882 $ 62,418
======== ========
</TABLE>
<TABLE>
Principal due on long-term debt for each of the years following December
31, 1995 is as follows:
<S> <C>
1996............................................................... $82,261
1997............................................................... 34,139
1998............................................................... 3,677
1999............................................................... 4,144
2000............................................................... 4,671
Thereafter......................................................... 15,787
</TABLE>
6. RELATED PARTY TRANSACTIONS
Leases
The Company leased its administrative headquarters and warehouse facility
from the sole stockholder of the Company. Rent expense for these locations was
approximately $21,000, $25,800 and $30,600 for the years ended December 31,
1993, 1994, and 1995, respectively.
The Company leased a store location from the sole stockholder of the
Company for two months ended February 28, 1993. Rent expense for this location
was approximately $800. Since March 1993, the Company has leased this store
location from a partnership, 50% of which is owned by the sole stockholder of
the Company. Rent expense for this location was approximately $21,500, $25,800
and $25,800 for the ten months ended December 31, 1993, and for the years ended
December 31, 1994 and 1995, respectively.
The Company leases two store locations from the sole stockholder of the
Company. Rent expense for these locations was approximately $32,436, $53,886 and
$55,836 for the years ended December 31, 1993, 1994, and 1995, respectively.
F-174
<PAGE> 244
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases one store location from a partnership, 50% of which is
owned by the sole stockholder of the Company. Rent expense for this location was
approximately $4,000 and $6,000 for the nine months ended December 31, 1994 and
the year ended December 31, 1995, respectively.
7. DUE TO STOCKHOLDER
In 1992, the sole stockholder loaned the Company approximately $71,000 for
operating purposes. The balance increased by $28,601 in 1995 due to an
additional loan to the Company from the sole stockholder in connection with the
purchase of four new stores. The loan is non-interest bearing.
8. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities under operating leases extending until
2001. Minimum future rental payments under these leases as of December 31, 1995
is as follows:
<CAPTION>
OPERATING
YEAR ENDING LEASES
----------- ----------
<S> <C>
1996........................................................... $ 668,131
1997........................................................... 640,086
1998........................................................... 560,445
1999........................................................... 484,925
2000........................................................... 221,536
Thereafter..................................................... 10,659
----------
Future minimum payments........................................ $2,585,782
==========
</TABLE>
Rent expense totalled approximately $274,408, $391,846 and $606,246 for the
years ended December 31, 1993, 1994, and 1995, respectively.
9. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-175
<PAGE> 245
ANTHONY COCCA'S VIDEOLAND, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 108,808
Accounts receivable.......................................................... 58,655
Merchandise inventory........................................................ 147,465
----------
Total current assets................................................. 314,928
Videocassette rental inventory, net.......................................... 1,374,785
Furnishings and equipment, net............................................... 467,921
Other assets................................................................. 24,117
----------
$2,181,751
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt.............................................................. $ 48,958
Current portion of long-term debt............................................ 78,953
Accounts payable............................................................. 683,739
Accrued expenses and other liabilities....................................... 78,206
Amounts due to shareholder................................................... 94,033
----------
Total current liabilities............................................ 983,889
Long-term debt................................................................. 31,576
----------
Total liabilities.................................................... 1,015,465
----------
Stockholders' equity
Common stock, $10 par value, 100 shares authorized,
100 shares issued and outstanding......................................... 1,000
Additional paid-in capital................................................... 217,697
Retained earnings............................................................ 947,589
----------
Total stockholders' equity........................................... 1,166,286
----------
$2,181,751
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-176
<PAGE> 246
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues
Rental revenue.................................................... $1,001,551 $1,429,894
Merchandise sales................................................. 59,010 58,592
---------- ----------
1,060,561 1,488,486
---------- ----------
Costs and expenses
Store operating expenses.......................................... 818,820 1,206,372
Cost of goods sold................................................ 23,604 23,437
General and administrative........................................ 11,801 18,277
---------- ----------
854,225 1,248,086
---------- ----------
Income from operations.................................... 206,336 240,400
---------- ----------
Interest expense.................................................... 8,054 4,647
---------- ----------
Net income................................................ $ 198,282 $ 235,753
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-177
<PAGE> 247
ANTHONY COCCA'S VIDEOLAND, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 198,282 $ 235,753
Adjustments to reconcile net income to cash flows provided by
(used in) operating activities
Amortization of videocassette rental inventory.................. 374,361 449,034
Depreciation and amortization of furnishings and equipment...... 14,232 18,537
Changes in assets and liabilities
Accounts receivable........................................... (28,516) (7,048)
Merchandise inventory......................................... 63,567 26,839
Other assets.................................................. 22,367 --
Accounts payable.............................................. (62,319) (219,916)
Accrued expenses and other liabilities........................ (109,080) (86,542)
--------- ---------
Net cash provided by operating activities.................. 472,894 416,657
--------- ---------
Cash flows from investing activities
Purchases of videocassette rental inventory........................ (420,411) (409,169)
Purchases of furnishings and equipment............................. (13,548) (12,985)
--------- ---------
Net cash used in investing activities...................... (433,959) (422,154)
--------- ---------
Cash flows from financing activities
Repayment of long-term debt........................................ (24,583) (34,150)
Repayment of short-term debt....................................... (9,690) (6,862)
Amounts due to shareholder......................................... -- (5,894)
--------- ---------
Net cash used in financing activities...................... (34,273) (46,906)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 4,662 (52,403)
--------- ---------
Cash and cash equivalents, beginning of period....................... 90,428 161,211
--------- ---------
Cash and cash equivalents, end of period............................. $ 95,090 $ 108,808
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................... $ 8,054 $ 4,647
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-178
<PAGE> 248
ANTHONY COCCA'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31,
1996
-----------
<S> <C>
Videocassette rental inventory.................................. $ 6,311,225
Accumulated amortization........................................ (4,936,440)
-----------
$ 1,374,785
===========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-179
<PAGE> 249
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Vidko, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Vidko, Inc. at December 31, 1994
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 8, 1995
F-180
<PAGE> 250
VIDKO, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 69,351 $ 75,452
Merchandise inventories.............................................. 10,619 12,189
Due from affiliates.................................................. 3,676 25,000
-------- --------
Total current assets.............................................. 83,646 112,641
Videocassette rental inventory, net.................................... 78,871 136,936
Furnishings and equipment, net......................................... 29,184 21,522
Other assets........................................................... 3,900 3,900
-------- --------
$195,601 $274,999
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 24,195 $ 24,740
Accrued expenses and other liabilities............................... 16,515 35,607
Distributions payable................................................ -- 60,000
Due to affiliates...................................................... -- 547
-------- --------
Total current liabilities......................................... 40,710 120,894
-------- --------
Commitments (Note 5)................................................... -- --
Stockholders' equity:
Common stock, no par value, 750 shares authorized,
100 shares issued and outstanding................................. -- --
Additional paid-in capital........................................... 45,849 45,849
Retained earnings.................................................... 109,042 108,256
-------- --------
Total stockholders' equity........................................ 154,891 154,105
-------- --------
$195,601 $274,999
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-181
<PAGE> 251
VIDKO, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental.................................................. $179,656 $390,517 $521,930
Merchandise............................................. 3,476 5,903 27,461
-------- -------- --------
183,132 396,420 549,391
-------- -------- --------
Costs and expenses:
Store operating expenses................................ 99,161 197,096 243,323
Cost of goods sold...................................... 2,746 4,663 21,694
General and administrative.............................. 58,508 121,440 149,028
-------- -------- --------
160,415 323,199 414,045
-------- -------- --------
Net income........................................... $ 22,717 $ 73,221 $135,346
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-182
<PAGE> 252
VIDKO, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 22,717 $ 73,221 $ 135,346
Amortization of videocassette rental inventory......... 38,376 84,060 115,398
Depreciation and amortization of furnishings and
equipment........................................... 6,429 10,310 11,797
Changes in assets and liabilities:
Merchandise inventories............................. (10,852) 2,012 (1,570)
Accounts payable.................................... 16,367 3,785 545
Accrued expenses.................................... 6,454 2,854 19,092
Other assets........................................ -- (1,100) --
-------- --------- ---------
79,491 175,142 280,608
-------- --------- ---------
Cash flows from investing activities:
Amounts due from affiliates, net....................... 2,000 2,324 (21,324)
Purchases of property and equipment.................... (15,101) (10,432) (4,135)
Purchases of videocassette rental inventory............ (56,340) (124,638) (173,463)
-------- --------- ---------
Net cash used in investing activities.......... (69,441) (132,746) (198,922)
Cash flows from financing activities:
Proceeds from affiliate borrowings, net................ (5,055) (2,948) 547
Stockholder distribution............................... -- -- (76,132)
Stockholder contributions.............................. -- 5,830 --
Proceeds from issuance of common stock................. -- -- --
-------- --------- ---------
Net cash used in financing activities.......... (5,055) 2,882 (75,585)
-------- --------- ---------
Net increase in cash and cash equivalents................ 4,995 45,278 6,101
-------- --------- ---------
Cash and cash equivalents, beginning of period........... 19,078 24,073 69,351
-------- --------- ---------
Cash and cash equivalents, end of period................. $ 24,073 $ 69,351 $ 75,452
======== ========= =========
Supplemental disclosure of noncash investing and
financing activities:
Fair value of fixed assets contributed from
stockholders........................................ $ 18,610 -- --
Fair value of inventory contributed from
stockholders........................................ $ 12,409 -- --
Shareholder's distributions declared but not paid...... -- -- $ 60,000
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-183
<PAGE> 253
VIDKO, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
---------- --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1993............................. $40,019 $ 13,104 $ 53,123
Net income............................................. -- 22,717 22,717
------- --------- ---------
Balance at December 31, 1993........................... 40,019 35,821 75,840
Contributions from stockholders........................ 5,830 -- 5,830
Net income............................................. -- 73,221 73,221
------- --------- ---------
Balance at December 31, 1994........................... 45,849 109,042 154,891
Distributions (unaudited).............................. -- (136,132) (136,132)
Net income (unaudited)................................. -- 135,346 135,346
------- --------- ---------
Balance at December 31, 1995 (unaudited)............... $45,849 $ 108,256 $ 154,105
======= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-184
<PAGE> 254
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO DECEMBER 31, 1995)
1. DESCRIPTION OF BUSINESS
Vidko, Inc. (the "Company") owns and operates three videocassette rental
stores, located primarily in Central Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory that is sold is charged to operations at
the time of sale. The Company believes that its method of amortization results
in an appropriate matching of tape amortization expense with the revenue
received from the associated rental of such tapes.
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
-------- ---------
(UNAUDITED)
<S> <C> <C>
Videocassette rental inventory................................ $141,820 $ 253,666
Accumulated amortization...................................... (62,949) (116,730)
-------- ---------
$ 78,871 $ 136,936
======== =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$38,376, $84,060 and $115,398 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-185
<PAGE> 255
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 years) of furnishings and
equipment and over the lesser of the estimated useful lives or lease terms
(primarily 3 years) of leased items using the straight-line method. Repair and
maintenance costs are expensed as incurred.
Income Taxes
The Company has elected to be treated as a Subchapter S corporation for
income tax purposes. Accordingly, the income of the Company is taxed at the
shareholder level and, accordingly, no provision for income taxes has been made
in the accompanying financial statements.
Unaudited Interim Financial Information
The balance sheet as of December 31, 1995, and the statements of
operations, of stockholders' equity and of cash flows for the year ended
December 31, 1995 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of these financial statements have been
included. Such adjustments consisted only of normal recurring items.
3. FURNISHINGS AND EQUIPMENT
<TABLE>
Furnishings and equipment consist of the following:
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures......................................... $ 5,134 $ 8,934
Equipment and vehicles......................................... 31,714 32,049
Leasehold improvements......................................... 12,485 12,485
-------- --------
49,333 53,468
Accumulated depreciation and amortization...................... (20,149) (31,946)
-------- --------
$ 29,184 $ 21,522
======== ========
</TABLE>
Depreciation and amortization expense were $6,429, $10,310 and $11,797 for
the years ended December 31, 1993, 1994 and 1995, respectively.
4. RELATED PARTY TRANSACTIONS
The Company has entered into several agreements and transactions with
affiliate parties which may have resulted in different financial results had
they been with unrelated parties. It is the opinion of management that any
economic differences resulting from these transactions would be immaterial.
5. LEASE COMMITMENTS
The Company leases its facilities under operating leases, including one
contingent rental lease, extending through January 31, 1997. Future minimum
payments for 1996 total $15,325.
Rent expense totalled approximately $32,600, $53,609, and $79,240 for the
years ended December 31, 1993, 1994 and 1995, respectively.
F-186
<PAGE> 256
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENT
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-187
<PAGE> 257
VIDKO, INC.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31,
1996
-------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 73,898
Merchandise inventory........................................................ 11,984
Due from affiliates.......................................................... 25,000
--------
Total current assets................................................. 110,882
Videocassette rental inventory, net.......................................... 139,934
Furnishings and equipment, net............................................... 20,677
Other assets................................................................. 3,900
--------
$275,393
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 40,783
Accrued expenses and other liabilities....................................... 25,016
Distributions payable........................................................ 10,000
--------
Total current liabilities............................................ 75,799
--------
Stockholders' equity
Common stock, no par value, 750 shares authorized,
100 shares issued and outstanding......................................... --
Additional paid-in capital................................................... 45,849
Retained earnings............................................................ 153,745
--------
Total stockholders' equity........................................... 199,594
--------
$275,393
========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-188
<PAGE> 258
VIDKO, INC.
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $130,254 $152,881
Merchandise sales.................................................... 6,855 8,046
-------- --------
137,109 160,927
-------- --------
Costs and expenses
Store operating expenses............................................. 64,771 83,087
Cost of goods sold................................................... 5,415 6,561
General and administrative........................................... 24,690 25,790
-------- --------
94,876 115,438
-------- --------
Net income................................................... $ 42,233 $ 45,489
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-189
<PAGE> 259
VIDKO, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income........................................................... $ 42,233 $ 45,489
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of videocassette rental inventory.................... 34,547 56,853
Depreciation and amortization of furnishings and equipment........ 992 845
Changes in assets and liabilities
Merchandise inventory........................................... (1,531) 205
Accounts payable................................................ 5,684 16,043
Accrued expenses and other liabilities.......................... (3,183) (10,591)
-------- --------
Net cash provided by operating activities.................... 78,742 108,844
-------- --------
Cash flows from investing activities
Amounts due from affiliates, net..................................... (21,324) --
Purchases of videocassette rental inventory.......................... (41,639) (59,851)
-------- --------
Net cash used in investing activities........................ (62,963) (59,851)
-------- --------
Cash flows from financing activities
Amounts paid to affiliates........................................... -- (547)
Stockholder distribution............................................. -- (50,000)
-------- --------
Net cash used in financing activities........................ -- (50,547)
-------- --------
Net increase (decrease) in cash and cash equivalents................... 15,779 (1,554)
-------- --------
Cash and cash equivalents, beginning of period......................... 69,351 75,452
-------- --------
Cash and cash equivalents, end of period............................... $ 85,130 $ 73,898
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-190
<PAGE> 260
VIDKO, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Videocassette rental inventory................................. $ 270,026
Accumulated amortization....................................... (130,092)
---------
$ 139,934
=========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-191
<PAGE> 261
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kobie-Co Movie Outlet
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of owner's equity present fairly, in all
material respects, the financial position of Kobie-Co Movie Outlet, at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1996
F-192
<PAGE> 262
KOBIE-CO MOVIE OUTLET
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $114,847 $ 210,120
Accounts receivable................................................ 1,766 1,856
Merchandise inventories............................................ 54,303 82,654
Prepaid expenses and other current assets.......................... 2,417 6,934
Due from affiliates................................................ 63,172 12,231
-------- ----------
236,505 313,795
Videocassette rental inventory, net.................................. 267,503 482,921
Furnishings and equipment, net....................................... 82,378 184,871
Other assets......................................................... -- 75,022
-------- ----------
$586,386 $1,056,609
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $116,399 $ 156,680
Accrued expenses and other current liabilities..................... 62,202 81,905
Due to affiliates.................................................. 5,264 25,000
Short-term borrowings.............................................. 75,000 5,000
Current portion of obligations under capital leases................ 2,607 --
Current portion of long-term debt.................................. -- 109,909
-------- ----------
Total current liabilities.................................. 261,472 378,494
-------- ----------
Long-term debt....................................................... -- 142,150
Commitments (Note 7)
Partnership capital:
Owner's equity..................................................... 103,936 122,267
Retained earnings.................................................. 220,978 413,698
-------- ----------
Total partnership capital.................................. 324,914 535,965
-------- ----------
$586,386 $1,056,609
======== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-193
<PAGE> 263
KOBIE-CO MOVIE OUTLET
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $1,159,633 $1,354,010 $2,637,361
Merchandise.......................................... 136,963 142,797 305,932
---------- ---------- ----------
1,296,596 1,496,807 2,943,293
---------- ---------- ----------
Costs and expenses:
Operating expenses................................... 526,628 490,183 1,294,226
Cost of goods sold................................... 107,545 121,699 221,314
General and administrative........................... 501,595 473,572 928,632
---------- ---------- ----------
1,135,768 1,085,454 2,444,172
---------- ---------- ----------
Income from operations............................ 160,828 411,353 499,121
---------- ---------- ----------
Interest income........................................ (780) (695) (1,867)
Interest expense....................................... 4,855 8,044 22,449
Other expense (income), net............................ (1,480) 4,224 (2,533)
---------- ---------- ----------
Net income........................................ $ 158,233 $ 399,780 $ 481,072
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-194
<PAGE> 264
KOBIE-CO MOVIE OUTLET
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 158,233 $ 399,780 $ 481,072
Amortization of videocassette rental inventory........ 340,024 312,654 849,705
Depreciation and amortization of furnishings and
equipment.......................................... 24,297 33,746 55,460
Amortization of covenant not to compete............... -- -- 2,000
Loss on asset disposal................................ -- 114 --
Changes in assets and liabilities:
Account receivable................................. 504 405 (90)
Merchandise inventories............................ (20,493) (13,703) (28,351)
Prepaid expenses and other current assets.......... 134 3,273 (4,517)
Other assets....................................... -- -- 24,655
Accounts payable................................... 81,843 25,366 40,281
Accrued expenses................................... (12,128) (18,355) 19,460
--------- --------- ---------
Net cash provided by operating activities..... 572,414 743,280 1,439,675
--------- --------- ---------
Cash flows from investing activities:
Due from affiliates, net.............................. (11,862) (33,859) 23,441
Purchases of property and equipment................... (53,705) (26,758) (71,703)
Purchases of videocassette rental inventory........... (350,343) (410,684) (879,301)
Acquisition of stores................................. -- -- (25,000)
--------- --------- ---------
Net cash used in investing activities......... (415,910) (471,301) (952,563)
--------- --------- ---------
Cash flows from financing activities:
Due to affiliates, net................................ (337) (2,399) 19,736
Net borrowings under line-of credit agreement......... 1,170 19,500 (42,500)
Distributions......................................... (142,315) (248,758) (288,352)
Principal repayments on capital lease obligations..... (15,205) (6,844) (6,107)
Proceeds from long-term debt.......................... 12,852 -- 17,500
Repayment of long-term debt........................... (17,696) (13,814) (92,116)
--------- --------- ---------
Net cash used in financing activities......... (161,531) (252,315) (391,839)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (5,027) 19,664 95,273
--------- --------- ---------
Cash and cash equivalents, beginning of period.......... 100,210 95,183 114,847
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 95,183 $ 114,847 $ 210,120
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 4,855 $ 8,044 $ 22,449
Supplemental disclosure of noncash investing and
financing activities:
Net assets contributed by owner....................... $ -- $ -- $ 18,331
Net assets and liabilities assumed in store
acquisition........................................ $ -- $ -- $ 43,331
Net assets and liabilities offset with affiliate...... $ -- $ -- $ 27,500
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-195
<PAGE> 265
KOBIE-CO MOVIE OUTLET
STATEMENT OF OWNER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
OWNER'S RETAINED STOCKHOLDERS'
EQUITY EARNINGS EQUITY
-------- --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1993............................. $ 97,273 $ 54,041 $ 151,314
Contributions.......................................... 6,663 -- 6,663
Net income............................................. -- 158,233 158,233
Distributions.......................................... -- (142,318) (142,318)
-------- --------- ---------
Balance at December 31, 1993........................... 103,936 69,956 173,892
Net income............................................. -- 399,780 399,780
Distributions.......................................... -- (248,758) (248,758)
-------- --------- ---------
Balance at December 31, 1994........................... 103,936 220,978 324,914
Contributions.......................................... 18,331 -- 18,331
Net income............................................. -- 481,072 481,072
Distributions.......................................... -- (288,352) (288,352)
-------- --------- ---------
Balance at December 31, 1995........................... $122,267 $ 413,698 $ 535,965
======== ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-196
<PAGE> 266
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Kobie-Co Movie Outlet (the "Company") owns and operates ten videocassette
rental stores, located primarily in Northeast Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost and is amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. New release Videocassettes are amortized as
follows: the first through third copies of each title per store are amortized as
base stock and the fourth and succeeding copies of each title per store are
amortized over nine months on a straight-line basis. The unamortized cost, if
any, of videocassette rental inventory is charged to operations at the time of
sale. The Company believes that its method of amortization results in an
appropriate matching of tape amortization expense with the revenue received from
the associated rental of such tape.
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Videocassette rental inventory............................... $ 546,723 $ 985,031
Accumulated amortization..................................... (279,220) (502,110)
--------- ---------
$ 267,503 $ 482,921
========= =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$340,024, $312,654 and $849,705 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-197
<PAGE> 267
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (five to seven years) of
furnishings and equipment and over the lesser of the estimated useful lives or
lease terms (primarily three years) of leased items using the straight-line
method. Repair and maintenance costs are expensed as incurred.
Upon sale or retirement, the costs and related accumulated depreciation or
amortization are eliminated from the respective accounts and any resulting gain
or loss is included in income.
Income Taxes
The Company has elected to be treated as a general partnership for income
tax purposes for the three years ended December 31, 1995. Accordingly, the
income of the Company is taxed at the partnership level for those years, and no
provision for income tax has been made in the accompanying financial statements.
3. FURNISHINGS AND EQUIPMENT
<TABLE>
Furnishings and equipment consist of the following:
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures....................................... $ 87,909 $ 91,968
Equipment and vehicles....................................... 51,668 165,998
Leasehold improvements....................................... 63,866 103,430
--------- ---------
203,443 361,396
Accumulated depreciation and amortization.................... (121,065) (176,525)
--------- ---------
$ 82,378 $ 184,871
========= =========
</TABLE>
Depreciation and amortization expense were $24,297, $33,746 and $55,460 for
the years ended December 31, 1993, 1994 and 1995, respectively.
4. SHORT-TERM BORROWINGS
The Company has available additional unsecured lines of credit from various
domestic banks approximating $25,000 and $45,000 for the years ended December
31, 1994 and December 31, 1995, respectively. The short-term borrowings
outstanding at the end of December 31, 1994 and 1995 represent bank borrowings
under these lines of credit. The Company's working capital needs were fulfilled
by borrowing under these lines of credit, which were on terms and at interest
rates generally extended to companies of comparable credit worthiness.
F-198
<PAGE> 268
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Long-term debt consists of the following:
10.00% note payable to bank, payable in monthly
installments of $242 commencing September of 1995................. $-- $ 6,531
10.00% note payable to bank, payable in monthly installments of
$381.62 commencing November of 1995............................... -- 9,417
10% note payable to former owners of Mortgage I in monthly
installments of $7,260.12 commencing February of 1995............. -- 163,232
10% note payable to former owners of Montage II in monthly
installments of $564.68 commencing February of 1995............... -- 12,696
Consulting fee payable to former owners of Montage I and Montage II
in monthly installments of $2,610.26 commencing February of
1995.............................................................. -- 60,183
--- --------
-- 252,059
Less: current portion................................................ -- 109,909
--- --------
$-- $142,150
=== ========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company leases various store facilities from an affiliate company
through common ownership. Rent expense charged to operations for these
facilities totaled $24,100, $58,200 and $78,600 for December 31, 1993, 1994 and
1995, respectively.
In 1994, an owner of the company assumed both the ownership of a vehicle
previously owned by the Company and its related debt. The net book value and
outstanding debt, at the date of transfer, of this assumed asset were $15,394
and $15,280, respectively.
Amounts due to affiliates and amounts due from affiliates are due on
demand, bearing no interest.
The Company has entered into several other agreements and transactions with
affiliate parties which may have resulted in different financial results. It is
the opinion of management that any economic differences resulting from these
transactions would be immaterial.
On January 1, 1995, one of the two partners of the Company purchased the
remaining partnership interest in the Company from the other partner.
Effective January 1, 1995, the Company acquired substantially all of the
net assets of Montage I, a company 50% owned by a previous partner in the
Company. Refer to Note 7 for further information regarding this transaction.
The owner of the Company had a 50% ownership in Montage II, a company
consisting of two stores. Effective January 1, 1995, the owner of the Company
purchased the remaining ownership interest in Montage II. The owner contributed
the net assets of Montage II in exchange for $25,000 in cash.
7. ACQUISITION
On January 1, 1995, the Company acquired substantially all of the net
assets and entered into a five-year non-competition agreement with the owner of
Montage I, a company consisting of four stores, in exchange for a note payable
to the previous owners in the amount of $225,000. The acquisition was accounted
for as a
F-199
<PAGE> 269
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purchase, and Montage I was merged into the Company. Operations of Montage I
have been included in the accompanying financial statements from the date of
acquisition.
<TABLE>
The allocation of the purchase price associated with the above acquisition
is summarized as follows:
<CAPTION>
MONTAGE I
---------
<S> <C>
Videocassette rental inventory.................................... $125,000
Furnishings, equipment and leasehold improvements................. 75,000
Intangibles....................................................... 25,000
--------
$225,000
========
</TABLE>
8. LEASE COMMITMENTS
<TABLE>
The Company leases its facilities under operating leases extending until
December 31, 1999. Minimum future rental payments under these leases as of
December 31, 1995 is as follows:
<S> <C>
1996.............................................................. $271,493
1997.............................................................. 217,029
1998.............................................................. 109,400
1999.............................................................. 78,600
Thereafter........................................................ --
--------
Future minimum payments........................................... $676,522
========
</TABLE>
Rent expense totalled approximately $132,868, $152,199 and $334,570 for the
years ended December 31, 1993, 1994 and 1995, respectively.
9. DISTRIBUTIONS
The Company is a partnership. Current year distributions were made to one
of the two partners. If the Company is sold, the proceeds of such sale are to be
distributed equally between the two partners.
10. SUBSEQUENT EVENTS
During 1996, the Company entered into an asset purchase agreement wherein
substantially all of the Company's assets and certain of its liabilities will be
acquired by West Coast Entertainment. The sale is conditioned upon the initial
public offering of West Coast Entertainment's common stock.
F-200
<PAGE> 270
KOBIE-CO MOVIE OUTLET
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................................. $ 237,189
Merchandise inventory..................................................... 62,422
Prepaid expenses and other current assets................................. 3,301
Due from affiliates....................................................... 3,162
----------
Total current assets.............................................. 306,074
Videocassette rental inventory, net....................................... 515,152
Furnishings and equipment, net............................................ 185,517
Other assets.............................................................. 68,300
----------
$1,075,043
==========
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities
Accounts payable.......................................................... $ 187,113
Accrued expenses and other current liabilities............................ 31,240
Due to affiliates......................................................... 25,000
Current portion of long-term debt......................................... 53,684
----------
Total current liabilities......................................... 297,037
Long-term debt.............................................................. 163,955
----------
Total liabilities................................................. 460,992
----------
Partnership Capital:
Owners' equity............................................................ 122,267
Retained earnings......................................................... 491,784
----------
Total partnership capital......................................... 614,051
----------
$1,075,043
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-201
<PAGE> 271
KOBIE-CO MOVIE OUTLET
STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues
Rental revenue....................................................... $686,855 $752,565
Merchandise sales.................................................... 66,360 83,926
-------- --------
753,215 836,491
-------- --------
Costs and expenses
Store operating expenses............................................. 373,607 378,764
Cost of goods sold................................................... 48,443 59,998
General and administrative........................................... 201,841 239,580
-------- --------
623,891 678,342
-------- --------
Income from operations....................................... 129,324 158,149
-------- --------
Interest income........................................................ (205) (439)
Interest expense....................................................... 9,202 7,252
-------- --------
Net income........................................................ $120,327 $151,336
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-202
<PAGE> 272
KOBIE-CO MOVIE OUTLET
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income.......................................................... $ 120,327 $ 151,336
Adjustments to reconcile net income to cash flows provided by (used
in) operating activities
Amortization of videocassette rental inventory................... 236,202 217,440
Depreciation and amortization of furnishings and equipment....... 13,790 7,703
Amortization of covenant not to compete.......................... 500 500
Changes in assets and liabilities
Merchandise inventory.......................................... (6,331) 20,232
Prepaid expenses and other current assets...................... (19,212) 5,489
Other assets................................................... 23,914 6,222
Accounts payable............................................... 24,062 30,433
Accrued expenses and other current liabilities................. (27,966) (50,665)
--------- ---------
Net cash provided by operating activities................... 365,286 388,690
--------- ---------
Cash flows from investing activities
Due from affiliates, net............................................ 25,924 9,069
Purchases of property and equipment................................. (64,855) (8,349)
Purchases of videocassette rental inventory......................... (196,887) (249,671)
Acquisition of stores............................................... (25,000) --
--------- ---------
Net cash used in investing activities....................... (260,818) (248,951)
--------- ---------
Cash flows from financing activities
Due to affiliates, net.............................................. (5,264) --
Distributions....................................................... (16,000) (73,250)
Principal repayments on capital lease obligations................... (6,107) --
Proceeds from long-term debt........................................ 17,500 --
Repayment of long-term debt......................................... (17,662) (39,420)
--------- ---------
Net cash used in financing activities....................... (27,533) (112,670)
--------- ---------
Net increase in cash and cash equivalents............................. 76,935 27,069
--------- ---------
Cash and cash equivalents, beginning of period........................ 114,847 210,120
--------- ---------
Cash and cash equivalents, end of period.............................. $ 191,782 $ 237,189
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest............................ $ 9,202 $ 7,252
Supplemental disclosure of noncash investing and financing activities
Net assets contributed by owner..................................... $ 18,331 $ --
Net assets and liabilities assumed in store acquisition............. $ 43,331 $ --
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-203
<PAGE> 273
KOBIE-CO MOVIE OUTLET
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
Company's audited financial statements included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of operations
for the three month periods ended March 31, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
Videocassette rental inventory and related amortization are as follows:
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
Videocassette rental inventory................................... $1,063,842
Accumulated amortization......................................... (548,690)
----------
$ 515,152
==========
</TABLE>
3. SUBSEQUENT EVENT
On May 17, 1996, the Company sold substantially all of its assets and
certain of its liabilities to West Coast Entertainment Corporation.
F-204
<PAGE> 274
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the NASD filing
fee.
<S> <C>
SEC Registration Fee............................................. $18,104
Nasdaq Listing Fee............................................... 17,500
Blue Sky Fees and Expenses....................................... *
Accounting Fees and Expenses..................................... *
Legal Fees and Expenses.......................................... *
Printing, Engraving and Mailing Expenses......................... *
Miscellaneous.................................................... *
-------
Total.................................................. $ *
=======
<FN>
- ---------------
* To be completed by amendment.
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Article NINTH of the Registrant's Certificate of Incorporation, as amended
(the "Certificate of Incorporation") provides that a director or officer of the
Registrant (a) shall be indemnified by the Registrant against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
reasonably incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of the Registrant) brought against him
by virtue of his position as a director or officer of the Registrant if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful and
(b) shall be indemnified by the Registrant against expenses (including
attorneys' fees) and amounts paid in settlement reasonably incurred in
connection with any action by or in the right of the Registrant by virtue of his
position as a director or officer of the Registrant if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Registrant, except that no indemnification shall be made with
respect to any such matter as to which such director or officer shall have been
adjudged to be liable to the Registrant, unless and only to the extent that a
court determines that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper. Notwithstanding the
foregoing, to the extent that a director or officer has been successful, on the
merits or otherwise, he shall be indemnified against all expenses (including
attorneys' fees) reasonably incurred by him in connection therewith. Expenses
incurred in defending a civil or criminal action, suit or proceeding shall be
advanced by the Registrant to a director or officer, at his request, upon
receipt of an undertaking by the director or officer to repay such amount if it
is ultimately determined that he is not entitled to indemnification.
Indemnification is required to be made unless the Registrant determines (in
the manner provided in the Certificate of Incorporation) that the applicable
standard of conduct required for indemnification has not been
II-1
<PAGE> 275
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition a court to make an independent determination as to whether
such person is entitled to indemnification. As a condition precedent to the
right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article NINTH of the Registrant's Certificate of Incorporation further
provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers, the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Under the Underwriting Agreement filed as Exhibit 1.1 hereto, the
Underwriters are obligated, under certain circumstances, to indemnify directors
and officers of the Company against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act").
The Company intends to purchase a general liability insurance policy which
covers certain liabilities of directors and officers of the Company arising out
of claims based on acts or omissions in their capacity as directors or officers.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that, except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Registrant shall be personally liable to
the Registrant or its stockholders for monetary damages for any breach of
fiduciary duty as a director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The securities issued or sold by the Company since June 1, 1993 which were
not registered under the Securities Act are listed below:
(i) In July 1994, in connection with its formation, VS Acquisition
Corporation, a predecessor of the Company ("VSAC"), issued a total of 39
shares of its Common Stock to its three founders, Ralph W. Standley III, T.
Kyle Standley and M. Trent Standley. In August 1994, in connection with the
acquisition by VSAC of all of the capital stock of Videosmith (DE)
Incorporated, VSAC issued a total of 1,218 shares of its Common Stock to
such three founders and a total of 3,511 shares of its Series A Preferred
Stock to seven other investors known to the founders.
(ii) In September 1994, VSAC was merged with and into Videosmith (DE)
Incorporated ("Videosmith (DE)") and Videosmith (DE) issued shares of its
Common Stock and Series A Convertible Preferred Stock, respectively, to the
ten shareholders of VSAC mentioned in paragraph (i) above in consideration
for cancellation of their capital stock in VSAC.
(iii) In February 1995, May 1995 and July 1995, in connection with its
formation and initial capitalization, the Company issued a total of
2,348,747 shares of its Common Stock to its four founders, Ralph W.
Standley III, T. Kyle Standley, M. Trent Standley and the Ralph W. Standley
III Irrevocable Trust.
(iv) In July 1995, each of Nostalgia Ventures, Inc., G.V. Management
Corp., Giant Video Corporation and Videosmith (DE) was merged into the
Company, and the Company issued a total of 2,539,239 shares of Common Stock
to the 12 shareholders of such predecessor entities (the ten shareholders
mentioned in paragraph (ii) above plus the Ralph W. Standley III
Irrevocable Trust and Ralph W. Standley III's wife, Marcia L. Standley) in
consideration for cancellation of their capital stock in such entities.
(v) In July 1995, in connection with the issuance by the Company of a
promissory note in an aggregate principal amount of $1,400,000 to Resource
Holdings, Inc. ("Resource"), the Company granted to Resource a warrant to
purchase a number of shares of the Company's Common Stock equal to
$1,750,000 divided by 70% of the initial public offering price per share in
this offering at a price equal to 70% of the initial public offering price
per share in the offering.
II-2
<PAGE> 276
(vi) In July 1995, the Company issued a $2,000,000 convertible
subordinated secured promissory note to West Coast Video Enterprises, Inc.
in connection with the purchase by West Coast Franchising Company, the
Company's wholly owned subsidiary, of substantially all the
franchise-related operating assets of West Coast Entertainment, Inc., an
unrelated third party, and its four affiliated corporations. Two executive
officers of the Company have ownership interests in such promissory note.
<TABLE>
(vii) In January 1996 and prior to the filing of a registration
statement with the Securities and Exchange Commission with respect to the
Public Offering, the Company entered into two Asset Purchase Agreements and
two Merger Agreements under which a total of 131 owned and operated video
specialty stores, plus the franchisor's rights to an additional 20
franchised stores, were acquired by the Company. As partial consideration,
the Company issued a total of 1,843,720 shares of Common Stock. Under these
agreements, the sellers were obligated to sell their video specialty stores
subject only to satisfaction of specified conditions (including without
limitation the completion of the offering of the shares registered in the
Public Offering) which were not within their control. The table below sets
forth the date of the agreement, the Acquisition, the number of purchasers
and the number of shares of Common Stock purchased:
<CAPTION>
SHARES OF
COMMON STOCK
DATE OF AGREEMENT DATE OF ISSUANCE ACQUISITION PURCHASERS PURCHASED(1)
- ----------------- ---------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
January 11, 1996 May 17, 1996 Palmer Video 5 772,268(2)
January 11, 1996 May 17, 1996 Red Giraffe 8 372,222(3)
January 11, 1996 May 17, 1996 Video Giant 2 560,768(4)
January 11, 1996 May 17, 1996 Videoland 1 138,462
--
Total 16 1,843,720(5)
<FN>
- ---------------
<S> <C> <C>
(1) Valued for this purpose at the initial public offering price of $13.00 per
share in the Public Offering.
(2) Allocated among the stockholders as follows:
Peter Balner................................................................... 352,184
Peter Margaritondo............................................................. 247,343
The James Eugene Balner 7-28-93 Trust, Lewis H. Grindlinger, Trustee........... 71,251
The Alexis Leigh Balner 7-28-93 Trust, Lewis H. Grindlinger, Trustee........... 71,251
Catherine Simms................................................................ 30,239
-------
772,268
(3) Allocated among the stockholders as follows:
Michael L. Cappy............................................................... 170,466
Nolen Allen.................................................................... 78,074
C. Melinda Stogel.............................................................. 18,480
P. Gail Allen.................................................................. 18,480
A. Jan Pfeifer................................................................. 18,480
Tyler A. Allen................................................................. 18,480
Alisa K. Nash.................................................................. 18,480
Patrick R. Lancaster III....................................................... 31,282
-------
372,222
(4) Allocated among the stockholders as follows:
Jack and Wanda Poe Family Trust................................................ 396,737
Patricia and Kenneth Stone, JTWROS............................................. 99,184
State Street Bank and Trust Company, as escrow agent
(escrowed shares to be delivered to the stockholders named above
after expiration of indemnification period).................................. 64,847
-------
560,768
(5) Excludes additional shares to be determined, in accordance with formulas
contained in the respective Asset Purchase Agreements and Merger Agreements,
on the basis of certain financial measurements for certain newly opened stores
over specified 12-month periods. The number of shares issuable in connection
with the one such store that has been determined is a total of 41,700 shares
at the initial offering price of
</TABLE>
II-3
<PAGE> 277
$13.00 per share (33,360 shares issuable to the Jack and Wanda Poe Family
Trust and 8,340 shares issuable to Patricia and Kenneth Stone, JTWROS).
The shares of capital stock issued in the above transactions were offered
and sold in reliance upon the exemption from registration under Section 4(2) and
Rule 152 under the Securities Act, relative to sales by an issuer not involving
any public offering, and, in the case of the transaction described in paragraph
(vii) above, Rule 506 under the Securities Act. Among other things, each of the
transactions described above (a) involved no general advertising or general
solicitation, within the meaning of Rule 502(c) under the Securities Act, and no
use of finders, brokers, underwriters or other intermediaries; (b) involved a
small number of purchasers, all of whom either were accredited investors within
the meaning of Rule 501(a) under the Securities Act or met the criteria
regarding knowledge and experience in financial and business matters set forth
in Rule 506 under the Securities Act and could adequately fend for themselves in
connection with the transaction; (c) imposed on the securities being sold
transfer restrictions of the type set forth in Rule 502(d) under the Securities
Act, so that the purchasers were required to acquire the shares for investment
purposes only and not with a view to, or for sale in connection with, a
distribution thereof; (d) afforded to each purchaser, through his, her or its
relationship with the Company, adequate access to information about the Company
(including, in the case of the transaction described in paragraph (vii) above,
written disclosures of the type described in Rule 502(b)(2)(i)(C) under the
Securities Act); and (e) in the case of the transaction described in paragraph
(vii) above, required the purchasers to become obligated, upon entering into an
Asset Purchase Agreement or Merger Agreement prior to the filing of the
Registration Statement for the Public Offering, to purchase their shares at the
closing of the Acquisitions subject only to satisfaction of specified conditions
which will not be within the control of such purchasers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
(a) Exhibits
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+3.1 -- Certificate of Incorporation
+3.2 -- First Amendment of Certificate of Incorporation
+3.3 -- Second Amendment of Certificate of Incorporation
+3.4 -- Certificate of Correction Filed to Correct a Certain Error in the Second
Certificate of Amendment of Certificate of Incorporation
+3.5 -- Form of Third Certificate of Amendment of Certificate of Incorporation
+3.6 -- Restated By-laws
+3.7 -- Amendment to the Restated By-Laws
+4.1 -- Specimen certificate for shares of Common Stock
*5.1 -- Opinion of Hale and Dorr
+10.1 -- Asset Purchase Agreement by and among the Registrant, A-Z Video Systems, Inc.,
Donald R. Thomas, Art H. Thomas, Harry M. Smith and Dwight M. Thomas, dated as of
January 11, 1996
+10.2 -- Asset Purchase Agreement by and among the Registrant, American Video, Inc., Red
Giraffe Video, Inc., The Lancaster Group, Inc., Nolan Allen, Michael Cappy and
P.R. Lancaster, dated as of January 11, 1996, the first amendment thereto dated
March 25, 1996 and waiver dated March 12, 1996
+10.3 -- Asset Purchase Agreement by and among the Registrant, Anthony Cocca's Videoland,
Inc. and Anthony Cocca, dated as of January 11, 1996
+10.4 -- Asset Purchase Agreement by and among the Registrant, Vidko, Inc., Kobie-Co Movie
Outlet and Anthony Cocca, dated as of January 11, 1996
+10.5 -- Asset Purchase Agreement by and between the Registrant and Best Entertainment,
Inc., dated as of January 11, 1996
+10.6 -- Asset Purchase Agreement by and between the Registrant and HB Associates, Inc.,
dated as of January 11, 1996
+10.7 -- Asset Purchase Agreement by and between the Registrant and New Age Entertainment,
Inc., dated as of January 11, 1996
</TABLE>
II-4
<PAGE> 278
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+10.8 -- Merger Agreement by and among the Registrant, RKT Subsidiary Corp., Palmer
Corporation and the Stockholders named therein, dated as of January 11, 1996, as
amended (the "Palmer Merger Agreement")
+10.9 -- Stock Purchase Agreement by and among the Registrant, Showtime, Inc. and Clemens
J. Wadle, dated as of January 11, 1996
+10.10 -- Merger Agreement by and among the Registrant, RKT Merger Co., Video Giant Inc. and
the Stockholders named therein, dated as of January 11, 1996
+10.11 -- Asset Purchase Agreement by and between the Registrant and Video Innovators, Inc.,
dated as of January 11, 1996
+10.12 -- Asset Purchase Agreement by and among the Registrant, Video Video of Westfield,
Inc., Video Video of Parsippany, Inc., Video Video of Chatham, Inc. and Harold
Rosenbaum, dated as of January 11, 1996, and the first amendment thereto dated
February 19, 1996
+10.13 -- Asset Purchase Agreement by and among the Registrant, Video Video of Livingston,
Inc., Harold Rosenbaum and Alan Kass, dated as of January 11, 1996, and the first
amendment thereto dated February 19, 1996
+10.14 -- Form of Standard Franchise Agreement, pursuant to which existing franchisees of
the Registrant (excluding those to be acquired upon closing of the transactions
contemplated by the Palmer Merger Agreement) currently operate
+10.15 -- Form of Standard Franchise Agreement to be executed between the Registrant and
future franchisees
+10.16 -- Form of Standard Franchise Agreement pursuant to which existing franchisees of
Palmer Corporation currently operate
+10.17 -- Lease between the Registrant and Elliot Stone for office space located at 9990
Global Road, Philadelphia, Pennsylvania, dated as of July 12, 1995, as amended
+10.18 -- Lease between the Registrant and Elliot Stone for warehouse space located at 490
Red Lion Road, Philadelphia, Pennsylvania dated as of July 12, 1995, as amended
+10.19 -- 1995 Equity Incentive Plan, and amendment thereto
+10.20 -- 1995 Director Stock Option Plan
+10.21 -- 1995 Employee Stock Purchase Plan
+10.22 -- Employment Agreement between the Registrant and Jules E. Gardner, dated May 26,
1995
+10.23 -- Employment Agreement between the Registrant and Kenneth R. Graffeo, dated May 26,
1995
+10.24 -- Employment Agreement between the Registrant and Jerry L. Misterman, dated May 26,
1995
+10.25 -- Form of Employment Agreement between the Registrant and Peter Balner
+10.26 -- Customer Group Purchasing Contract between the Registrant together with its
subsidiaries, and Ingram Entertainment, Inc. dated as of July 12, 1995, and the
first amendment thereto dated as of March 1, 1996
+10.27 -- Subordinated Secured Promissory Note made by the Registrant and its subsidiaries
in favor of Resource Holdings, Inc., dated July 12, 1995
+10.28 -- Warrant to Purchase Shares of Common Stock issued July 12, 1995 by the Registrant
to Resource Holdings Inc.
+10.29 -- Stockholders Voting Agreement among Resource Holdings Inc., T. Kyle Standley,
Ralph W. Standley, III and M. Trent Standley dated July 12, 1995
+10.30 -- Shareholders Agreement among T. Kyle Standley, Ralph W. Standley, III, M. Trent
Standley, the Ralph W. Standley III Irrevocable Trust dated May 18, 1995 and
certain "Investors" in the Company named therein, dated July 12, 1995
+10.31 -- Convertible Promissory Note made by the Registrant and its subsidiaries in favor
of West Coast Video Enterprises, Inc. dated July 12, 1995 (the "Convertible Note")
+10.32 -- Non-Convertible Promissory Note made by the Registrant and its subsidiaries in
favor of West Coast Video Enterprises, Inc. dated July 12, 1995
+10.33 -- Letter Agreement dated July 12, 1995 between the Registrant and West Coast Video
Enterprises, Inc. regarding payment of the Convertible Note
+10.34 -- Letter Agreement regarding the payment of a fee to West Coast Video Enterprises,
Inc., West Coast Entertainment, Inc., West Coast Services, Inc., Game Power
Headquarters, Inc., Premier Advertising, Inc., Jules Gardner and Kenneth Graffeo
upon the purchase by West Coast Franchising Company of Existing Franchises dated
July 12, 1995
</TABLE>
II-5
<PAGE> 279
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+10.35 -- Non-Competition Agreement between the Registrant and Elliot Stone dated July 12,
1995
+10.36 -- Revolving Credit and Term Loan Agreement by and between the Registrant and its
subsidiaries and PNC Bank, National Association dated as of July 12, 1995
+10.37 -- Revolving Credit Note made by the Registrant and its subsidiaries in favor of PNC
Bank, National Association, dated as of July 12, 1995
+10.38 -- Term Note made by the Registrant and its subsidiaries in favor of PNC Bank,
National Association dated as of July 12, 1995
+10.39 -- Security Agreement between the Registrant and its subsidiaries and PNC Bank,
National Association dated as of July 12, 1995
+10.40 -- Pledge and Security Agreement between the Registrant and PNC Bank, National
Association dated as of July 12, 1995
+10.41 -- Pledge and Security Agreement between Ralph W. Standley III, T. Kyle Standley and
M. Trent Standley and PNC Bank, National Association dated as of July 12, 1995
+10.42 -- Guaranty and Surety Agreement by T. Kyle Standley, M. Trent Standley and Ralph W.
Standley, III in favor of PNC Bank, National Association dated July 12, 1995
+10.43 -- Subordination Agreement among West Coast Entertainment, Inc., West Coast Video
Enterprises, Inc., West Coast Services, Inc. and Interactive Electronics
Corporation, PNC Bank, National Association, the Registrant and its subsidiaries
and Resource Holdings Inc. dated July 12, 1995, and the first amendment thereto
dated as of March 6, 1996
+10.44 -- Subordinated Pledge and Security Agreement between the Registrant and West Coast
Video Enterprises, Inc., for itself and as agent for the Creditors named therein,
dated July 12, 1995, and the first amendment thereto dated as of March 6, 1996
+10.45 -- Subordinated Pledge and Security Agreement among Ralph W. Standley III, T. Kyle
Standley, M. Trent Standley and the Ralph W. Standley Irrevocable Trust and West
Coast Video Enterprises, Inc., for itself and as agent for the Creditors named
therein, dated July 12, 1995, and the first amendment thereto dated March 6, 1996
+10.46 -- Subordinated Security Agreement between the Company and its subsidiaries and West
Coast Video Enterprises, Inc., for itself and as agent for the Creditors named
therein, dated July 12, 1995, and the first amendment thereto dated as of March 6,
1996
+10.47 -- Intercreditor Agreement among Resource Holdings Inc., West Coast Entertainment,
Inc., West Coast Video Enterprises, Inc., West Coast Services, Inc., Game Power
Headquarters, Inc. and Premier Advertising Co., Inc. and the Registrant and its
subsidiaries dated July 12, 1995, and the first amendment thereto dated as of
March 6, 1996
+10.48 -- Stockholders Agreement between the Registrant (as assumed by virtue of the merger
of VS Acquisition Corp. into the Registrant), Ralph W. Standley III, T. Kyle
Standley and M. Trent Standley and certain shareholders of the Registrant listed
on Schedule I thereto dated August 5, 1994
+10.49 -- Registration Rights Agreement between the Registrant and Resource Holdings Inc.
dated July 12, 1995
+10.50 -- Form of Employment Agreement for Regional Vice Presidents
+10.51 -- Agreement and Plan of Merger, dated as of July 12, 1995 among Nostalgia Ventures,
Inc., G.V. Management Corp., Giant Video Corporation, Videosmith (DE) Incorporated
and the Registrant
+10.52 -- Certificate of Merger of Nostalgia Ventures, Inc., G.V. Management Corp., Giant
Video Corporation and Videosmith (DE) Incorporated into the Registrant, as filed
with the Secretary of State of Delaware on July 13, 1995
+10.53 -- Certificate of Merger of Nostalgia Ventures, Inc., G.V. Management Corp., Giant
Video Corporation and Videosmith (DE) Incorporated into the Registrant, as filed
with the Secretary of State of Ohio on July 13, 1995
+10.54 -- Asset Purchase Agreement by and among BSMS Acquisition Co., Inc. (the "Buyer"),
the Buyer's Affiliates listed on Exhibit A thereto and the Sellers listed on
Exhibit B thereto, dated May 26, 1995
+10.55 -- Letter Agreement between the Buyer and National Video, Inc. regarding the purchase
by the Buyer of certain assets of National Video, Inc., dated July 12, 1995
+10.56 -- Form on Registration Rights Agreement to be executed by and between the Registrant
and the Purchasers named therein
</TABLE>
II-6
<PAGE> 280
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+10.57 -- Subordinated Secured Note due January 1, 2000 made by the Registrant and its
subsidiaries to the order of Ingram Entertainment Inc. ("Ingram"), dated as of
March 6, 1996
+10.58 -- Securities Purchase Agreement, dated as of July 12, 1995, by and among Resource
Holdings Inc. and the Registrant and its subsidiaries, and the first amendment
thereto dated as of March 6, 1996
+10.59 -- Subordinated Trademark Security Agreement, dated July 12, 1995, between West Coast
Franchising Company, West Coast Video Enterprises, Inc., for itself and as agent
for the Creditors named therein, and the first amendment thereto dated March 6,
1996
+10.60 -- Subordinated Trademark Security Agreement, dated July 12, 1995, between Videosmith
Incorporated and West Coast Video Enterprises, Inc., for itself and as agent for
the Creditors named therein, and the first amendment thereto dated March 6, 1996
+10.61 -- Commitment Letter and Term Sheet of PNC Securities Corp. regarding underwriting
that certain Credit Facility of the Registrant described therein, dated February
27, 1996
+10.62 -- Development Agreement by and between Jorge Del Pino Woll and the Registrant, as
assignee of West Coast Entertainment, Inc., dated February 17, 1995
+10.63 -- Example of typical lease for stores to be acquired by the Registrant upon
consummation of the Acquisition of stores from Palmer Video
+10.64 -- Example of typical lease for stores to be acquired by the Registrant upon
consummation of the Acquisition of stores from Red Giraffe
++10.65 -- Credit Agreement by and among the Registrant and its subsidiaries (the
"Borrowers") and PNC Bank, National Association, as agent for itself and for
certain other participants to be subsequently ascertained (the "Lenders") dated
May 17, 1996
++10.66 -- Revolving Credit Note dated May 17, 1996 issued by the Borrowers to the Lenders
++10.67 -- Term Note dated May 17, 1996 issued by the Borrowers to the Lenders
++10.68 -- Pledge Agreement dated May 17, 1996 between the Borrowers and the Lenders
++10.69 -- Security Agreement dated May 17, 1996 between the Borrowers and the Lenders
*11.1 -- Statement regarding computation of earnings per share
+21.1 -- Subsidiaries of the Registrant
*23.1 -- Consent of Hale and Dorr (contained in Exhibit 5.1)
23.2 -- Consent of Price Waterhouse LLP
23.3 -- Consent of Carpenter & Mountjoy, PSC
23.4 -- Consent of Miller, Glusman, Footer & Magarick, P.C.
23.5 -- [Omitted]
23.6 -- Consent of KPMG Peat Marwick LLP related to Lancaster Group, Inc.
23.7 -- Consent of KPMG Peat Marwick LLP related to Palmer Corporation
23.8 -- Consent of KPMG Peat Marwick LLP related to Videosmith Incorporated
+24.1 -- Power of Attorney
99.1 -- Consent of Paul Kagan Associates, Inc.
<FN>
- ---------------
* To be filed by amendment.
+ Incorporated by reference to the correspondingly numbered exhibit contained
in the Company's registration statement on Form S-1 (file no. 333-00272).
++ Incorporated by reference to Exhibits 17 through 21 to the Registrant's
Current Report on Form 8-K dated May 17, 1996.
</TABLE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation and Restated By-Laws, as amended (the "By-Laws") of the Registrant
and the laws of the State of Delaware, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant
II-7
<PAGE> 281
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-8
<PAGE> 282
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Massachusetts on this 24th day of July, 1996.
WEST COAST ENTERTAINMENT
CORPORATION
By: /s/ T. KYLE STANDLEY
----------------------------------
T. Kyle Standley
President and Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of West Coast Entertainment
Corporation, hereby severally constitute and appoint Ralph W. Standley III, T.
Kyle Standley, Edward Young and each of them singly, our true and lawful
attorneys with full power to them, and each of them singly, to sign for us and
in our names in the capacities indicated below, the Registration Statement on
Form S-1 filed herewith and any and all pre-effective and post-effective
amendments to said Registration Statement (including any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b)), and
generally to do all such things in our names and on our behalf in our capacities
as officers and directors to enable West Coast Entertainment Corporation to
comply with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or any of
them, to said Registration Statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ RALPH W. STANDLEY III Chairman and Director July 24, 1996
- -------------------------------------
Ralph W. Standley III
/s/ T. KYLE STANDLEY President, Chief Executive July 24, 1996
- ------------------------------------- Officer and Director
T. Kyle Standley (Principal Executive Officer)
/s/ M. TRENT STANDLEY Vice President, Secretary and July 24, 1996
- ------------------------------------- Director
M. Trent Standley
/s/ RICHARD G. KELLY Chief Financial Officer July 24, 1996
- ------------------------------------- (Principal Financial and
Richard G. Kelly Accounting Officer)
/s/ JERRY MISTERMAN Chief Accounting Officer July 24, 1996
- ------------------------------------- (Principal Accounting Officer)
Jerry Misterman
</TABLE>
II-9
<PAGE> 283
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- -------- -------------
<S> <C> <C>
Director July , 1996
- -------------------------------------
James B. Dinneen, Jr.
/s/ PETER BALNER Director July 24, 1996
- -------------------------------------
Peter Balner
Director July , 1996
- -------------------------------------
C. Stewart Forbes
/s/ WESLEY F. HOAG Director July 24, 1996
- -------------------------------------
Wesley F. Hoag
/s/ DONALD R. THOMAS Director July 24, 1996
- -------------------------------------
Donald R. Thomas
</TABLE>
II-10
<PAGE> 284
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+3.1 -- Certificate of Incorporation
+3.2 -- First Amendment of Certificate of Incorporation
+3.3 -- Second Amendment of Certificate of Incorporation
+3.4 -- Certificate of Correction Filed to Correct a Certain Error in the Second
Certificate of Amendment of Certificate of Incorporation
+3.5 -- Form of Third Certificate of Amendment of Certificate of Incorporation
+3.6 -- Restated By-laws
+3.7 -- Amendment to the Restated By-Laws
+4.1 -- Specimen certificate for shares of Common Stock
*5.1 -- Opinion of Hale and Dorr
+10.1 -- Asset Purchase Agreement by and among the Registrant, A-Z Video Systems, Inc.,
Donald R. Thomas, Art H. Thomas, Harry M. Smith and Dwight M. Thomas, dated as of
January 11, 1996
+10.2 -- Asset Purchase Agreement by and among the Registrant, American Video, Inc., Red
Giraffe Video, Inc., The Lancaster Group, Inc., Nolan Allen, Michael Cappy and
P.R. Lancaster, dated as of January 11, 1996, the first amendment thereto dated
March 25, 1996 and waiver dated March 12, 1996
+10.3 -- Asset Purchase Agreement by and among the Registrant, Anthony Cocca's Videoland,
Inc. and Anthony Cocca, dated as of January 11, 1996
+10.4 -- Asset Purchase Agreement by and among the Registrant, Vidko, Inc., Kobie-Co Movie
Outlet and Anthony Cocca, dated as of January 11, 1996
+10.5 -- Asset Purchase Agreement by and between the Registrant and Best Entertainment,
Inc., dated as of January 11, 1996
+10.6 -- Asset Purchase Agreement by and between the Registrant and HB Associates, Inc.,
dated as of January 11, 1996
+10.7 -- Asset Purchase Agreement by and between the Registrant and New Age Entertainment,
Inc., dated as of January 11, 1996
+10.8 -- Merger Agreement by and among the Registrant, RKT Subsidiary Corp., Palmer
Corporation and the Stockholders named therein, dated as of January 11, 1996, as
amended (the "Palmer Merger Agreement")
+10.9 -- Stock Purchase Agreement by and among the Registrant, Showtime, Inc. and Clemens
J. Wadle, dated as of January 11, 1996
+10.10 -- Merger Agreement by and among the Registrant, RKT Merger Co., Video Giant Inc. and
the Stockholders named therein, dated as of January 11, 1996
+10.11 -- Asset Purchase Agreement by and between the Registrant and Video Innovators, Inc.,
dated as of January 11, 1996
+10.12 -- Asset Purchase Agreement by and among the Registrant, Video Video of Westfield,
Inc., Video Video of Parsippany, Inc., Video Video of Chatham, Inc. and Harold
Rosenbaum, dated as of January 11, 1996, and the first amendment thereto dated
February 19, 1996
+10.13 -- Asset Purchase Agreement by and among the Registrant, Video Video of Livingston,
Inc., Harold Rosenbaum and Alan Kass, dated as of January 11, 1996, and the first
amendment thereto dated February 19, 1996
+10.14 -- Form of Standard Franchise Agreement, pursuant to which existing franchisees of
the Registrant (excluding those to be acquired upon closing of the transactions
contemplated by the Palmer Merger Agreement) currently operate
+10.15 -- Form of Standard Franchise Agreement to be executed between the Registrant and
future franchisees
+10.16 -- Form of Standard Franchise Agreement pursuant to which existing franchisees of
Palmer Corporation currently operate
</TABLE>
<PAGE> 285
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+10.17 -- Lease between the Registrant and Elliot Stone for office space located at 9990
Global Road, Philadelphia, Pennsylvania, dated as of July 12, 1995, as amended
+10.18 -- Lease between the Registrant and Elliot Stone for warehouse space located at 490
Red Lion Road, Philadelphia, Pennsylvania dated as of July 12, 1995, as amended
+10.19 -- 1995 Equity Incentive Plan, and amendment thereto
+10.20 -- 1995 Director Stock Option Plan
+10.21 -- 1995 Employee Stock Purchase Plan
+10.22 -- Employment Agreement between the Registrant and Jules E. Gardner, dated May 26,
1995
+10.23 -- Employment Agreement between the Registrant and Kenneth R. Graffeo, dated May 26,
1995
+10.24 -- Employment Agreement between the Registrant and Jerry L. Misterman, dated May 26,
1995
+10.25 -- Form of Employment Agreement between the Registrant and Peter Balner
+10.26 -- Customer Group Purchasing Contract between the Registrant together with its
subsidiaries, and Ingram Entertainment, Inc. dated as of July 12, 1995, and the
first amendment thereto dated as of March 1, 1996
+10.27 -- Subordinated Secured Promissory Note made by the Registrant and its subsidiaries
in favor of Resource Holdings, Inc., dated July 12, 1995
+10.28 -- Warrant to Purchase Shares of Common Stock issued July 12, 1995 by the Registrant
to Resource Holdings Inc.
+10.29 -- Stockholders Voting Agreement among Resource Holdings Inc., T. Kyle Standley,
Ralph W. Standley, III and M. Trent Standley dated July 12, 1995
+10.30 -- Shareholders Agreement among T. Kyle Standley, Ralph W. Standley, III, M. Trent
Standley, the Ralph W. Standley III Irrevocable Trust dated May 18, 1995 and
certain "Investors" in the Company named therein, dated July 12, 1995
+10.31 -- Convertible Promissory Note made by the Registrant and its subsidiaries in favor
of West Coast Video Enterprises, Inc. dated July 12, 1995 (the "Convertible Note")
+10.32 -- Non-Convertible Promissory Note made by the Registrant and its subsidiaries in
favor of West Coast Video Enterprises, Inc. dated July 12, 1995
+10.33 -- Letter Agreement dated July 12, 1995 between the Registrant and West Coast Video
Enterprises, Inc. regarding payment of the Convertible Note
+10.34 -- Letter Agreement regarding the payment of a fee to West Coast Video Enterprises,
Inc., West Coast Entertainment, Inc., West Coast Services, Inc., Game Power
Headquarters, Inc., Premier Advertising, Inc., Jules Gardner and Kenneth Graffeo
upon the purchase by West Coast Franchising Company of Existing Franchises dated
July 12, 1995
+10.35 -- Non-Competition Agreement between the Registrant and Elliot Stone dated July 12,
1995
+10.36 -- Revolving Credit and Term Loan Agreement by and between the Registrant and its
subsidiaries and PNC Bank, National Association dated as of July 12, 1995
+10.37 -- Revolving Credit Note made by the Registrant and its subsidiaries in favor of PNC
Bank, National Association, dated as of July 12, 1995
+10.38 -- Term Note made by the Registrant and its subsidiaries in favor of PNC Bank,
National Association dated as of July 12, 1995
+10.39 -- Security Agreement between the Registrant and its subsidiaries and PNC Bank,
National Association dated as of July 12, 1995
+10.40 -- Pledge and Security Agreement between the Registrant and PNC Bank, National
Association dated as of July 12, 1995
+10.41 -- Pledge and Security Agreement between Ralph W. Standley III, T. Kyle Standley and
M. Trent Standley and PNC Bank, National Association dated as of July 12, 1995
+10.42 -- Guaranty and Surety Agreement by T. Kyle Standley, M. Trent Standley and Ralph W.
Standley, III in favor of PNC Bank, National Association dated July 12, 1995
</TABLE>
<PAGE> 286
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+10.43 -- Subordination Agreement among West Coast Entertainment, Inc., West Coast Video
Enterprises, Inc., West Coast Services, Inc. and Interactive Electronics
Corporation, PNC Bank, National Association, the Registrant and its subsidiaries
and Resource Holdings Inc. dated July 12, 1995, and the first amendment thereto
dated as of March 6, 1996
+10.44 -- Subordinated Pledge and Security Agreement between the Registrant and West Coast
Video Enterprises, Inc., for itself and as agent for the Creditors named therein,
dated July 12, 1995, and the first amendment thereto dated as of March 6, 1996
+10.45 -- Subordinated Pledge and Security Agreement among Ralph W. Standley III, T. Kyle
Standley, M. Trent Standley and the Ralph W. Standley Irrevocable Trust and West
Coast Video Enterprises, Inc., for itself and as agent for the Creditors named
therein, dated July 12, 1995, and the first amendment thereto dated March 6, 1996
+10.46 -- Subordinated Security Agreement between the Company and its subsidiaries and West
Coast Video Enterprises, Inc., for itself and as agent for the Creditors named
therein, dated July 12, 1995, and the first amendment thereto dated as of March 6,
1996
+10.47 -- Intercreditor Agreement among Resource Holdings Inc., West Coast Entertainment,
Inc., West Coast Video Enterprises, Inc., West Coast Services, Inc., Game Power
Headquarters, Inc. and Premier Advertising Co., Inc. and the Registrant and its
subsidiaries dated July 12, 1995, and the first amendment thereto dated as of
March 6, 1996
+10.48 -- Stockholders Agreement between the Registrant (as assumed by virtue of the merger
of VS Acquisition Corp. into the Registrant), Ralph W. Standley III, T. Kyle
Standley and M. Trent Standley and certain shareholders of the Registrant listed
on Schedule I thereto dated August 5, 1994
+10.49 -- Registration Rights Agreement between the Registrant and Resource Holdings Inc.
dated July 12, 1995
+10.50 -- Form of Employment Agreement for Regional Vice Presidents
+10.51 -- Agreement and Plan of Merger, dated as of July 12, 1995 among Nostalgia Ventures,
Inc., G.V. Management Corp., Giant Video Corporation, Videosmith (DE) Incorporated
and the Registrant
+10.52 -- Certificate of Merger of Nostalgia Ventures, Inc., G.V. Management Corp., Giant
Video Corporation and Videosmith (DE) Incorporated into the Registrant, as filed
with the Secretary of State of Delaware on July 13, 1995
+10.53 -- Certificate of Merger of Nostalgia Ventures, Inc., G.V. Management Corp., Giant
Video Corporation and Videosmith (DE) Incorporated into the Registrant, as filed
with the Secretary of State of Ohio on July 13, 1995
+10.54 -- Asset Purchase Agreement by and among BSMS Acquisition Co., Inc. (the "Buyer"),
the Buyer's Affiliates listed on Exhibit A thereto and the Sellers listed on
Exhibit B thereto, dated May 26, 1995
+10.55 -- Letter Agreement between the Buyer and National Video, Inc. regarding the purchase
by the Buyer of certain assets of National Video, Inc., dated July 12, 1995
+10.56 -- Form on Registration Rights Agreement to be executed by and between the Registrant
and the Purchasers named therein
+10.57 -- Subordinated Secured Note due January 1, 2000 made by the Registrant and its
subsidiaries to the order of Ingram Entertainment Inc. ("Ingram"), dated as of
March 6, 1996
+10.58 -- Securities Purchase Agreement, dated as of July 12, 1995, by and among Resource
Holdings Inc. and the Registrant and its subsidiaries, and the first amendment
thereto dated as of March 6, 1996
+10.59 -- Subordinated Trademark Security Agreement, dated July 12, 1995, between West Coast
Franchising Company, West Coast Video Enterprises, Inc., for itself and as agent
for the Creditors named therein, and the first amendment thereto dated March 6,
1996
+10.60 -- Subordinated Trademark Security Agreement, dated July 12, 1995, between Videosmith
Incorporated and West Coast Video Enterprises, Inc., for itself and as agent for
the Creditors named therein, and the first amendment thereto dated March 6, 1996
+10.61 -- Commitment Letter and Term Sheet of PNC Securities Corp. regarding underwriting
that certain Credit Facility of the Registrant described therein, dated February
27, 1996
</TABLE>
<PAGE> 287
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
+10.62 -- Development Agreement by and between Jorge Del Pino Woll and the Registrant, as
assignee of West Coast Entertainment, Inc., dated February 17, 1995
+10.63 -- Example of typical lease for stores to be acquired by the Registrant upon
consummation of the Acquisition of stores from Palmer Video
+10.64 -- Example of typical lease for stores to be acquired by the Registrant upon
consummation of the Acquisition of stores from Red Giraffe
++10.65 -- Credit Agreement by and among the Registrant and its subsidiaries (the
"Borrowers") and PNC Bank, National Association, as agent for itself and for
certain other participants to be subsequently ascertained (the "Lenders") dated
May 17, 1996
++10.66 -- Revolving Credit Note dated May 17, 1996 issued by the Borrowers to the Lenders
++10.67 -- Term Note dated May 17, 1996 issued by the Borrowers to the Lenders
++10.68 -- Pledge Agreement dated May 17, 1996 between the Borrowers and the Lenders
++10.69 -- Security Agreement dated May 17, 1996 between the Borrowers and the Lenders
*11.1 -- Statement regarding computation of earnings per share
+21.1 -- Subsidiaries of the Registrant
*23.1 -- Consent of Hale and Dorr (contained in Exhibit 5.1)
23.2 -- Consent of Price Waterhouse LLP
23.3 -- Consent of Carpenter & Mountjoy, PSC
23.4 -- Consent of Miller, Glusman, Footer & Magarick, P.C.
23.5 -- [Omitted]
23.6 -- Consent of KPMG Peat Marwick LLP related to Lancaster Group, Inc.
23.7 -- Consent of KPMG Peat Marwick LLP related to Palmer Corporation
23.8 -- Consent of KPMG Peat Marwick LLP related to Videosmith Incorporated
+24.1 -- Power of Attorney
99.1 -- Consent of Paul Kagan Associates, Inc.
<FN>
- ---------------
* To be filed by amendment.
+ Incorporated by reference to the correspondingly numbered exhibit contained
in the Company's registration statement on Form S-1 (file no. 333-00272).
++ Incorporated by reference to Exhibits 17 through 21 to the Registrant's
Current Report on Form 8-K dated May 17, 1996.
</TABLE>
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
the Registration Statement on Form S-1 of our reports dated March 12, 1996,
November 10, 1995, February 2, 1996, January 19, 1996, January 29, 1996,
February 20, 1996, February 22, 1996, January 19, 1996, February 16, 1996,
December 8, 1995 and February 7, 1996, relating to the financial statements of
West Coast Entertainment Corporation, Videosmith Incorporated, New Age
Entertainment, Inc., HB Associates, Inc., Best Entertainment Inc., Video
Innovators, Inc., Showtime Video, Inc., Video Giant Inc., Anthony Cocca's
Videoland, Inc., Vidko Inc. and Kobie Co. Movie Outlet, respectively, all of
which appear in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data".
/s/ Price Waterhouse LLP
- ----------------------------
PRICE WATERHOUSE LLP
Boston, Massachusetts
July 19, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 4, 1996 relating
to the financial statements of American Video, Inc. and Red Giraffe Video, Inc.
which appear in such Prospectus.
/s/ Carpenter & Mountjoy, PSC
-------------------------------
Carpenter & Mountjoy, PSC
Louisville, Kentucky
July 19, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 26, 1996 relating
to the combined financial statements of West Coast Entertainment, Inc. and
Affiliates appear in such Prospectus. We also consent to the references to us
under the heading "Experts" in such Prospectus.
/s/ Miller, Glusman, Footer & Magarick, P.C.
----------------------------------------------
Miller, Glusman, Footer & Magarick, P.C.
July 19, 1996
Philadelphia, Pennsylvania
<PAGE> 1
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Stockholders
Lancaster Group, Inc.:
We consent to the inclusion of our report dated February 23, 1996, with
respect to the balance sheets of Lancaster Group, Inc. as of December 31, 1995
and 1994, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1995, which report appears in the Form S-1 of West Coast
Entertainment Corporation and to the reference to our firm under the heading
"Experts" in the prospectus.
Our report refers to a change in the method of accounting for rental video
cassettes and rental games.
/s/ KPMG Peat Marwick LLP
Louisville, Kentucky
July 23, 1996
<PAGE> 1
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Stockholders
Palmer Corporation and Subsidiaries:
We consent to the inclusion of our report dated June 27, 1996 with respect to
the consolidated balance sheets of Palmer Corporation and subsidiaries as of
March 31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three year
period ended March 31, 1996, which report appears in the Form S-1 of West Coast
Entertainment Corporation and to the reference to our firm under the heading
"Experts" in the prospectus.
Our report refers to a change in method of accounting for videocassette rental
inventory.
KPMG Peat Marwick LLP
Princeton, New Jersey
July 23, 1996
<PAGE> 1
EXHIBIT 23.8
------------
INDEPENDENT AUDITORS' REPORT
-----------------------------
The Stockholders
Videosmith Incorporated:
We consent to the inclusion of our report dated March 11, 1994, with respect to
the balance sheets of Videosmith Incorporated as of January 29, 1994 and
January 31, 1993, and the related statements of operations and retained
earnings and cash flows for the years then ended, which report appears in the
Form S-1 of West Coast Entertainment Corporation and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Boston, Massachusetts
July 22, 1996
<PAGE> 1
EXHIBIT 99.1
------------
[LOGO] July 23, 1996
PAUL KAGAN ASSOCIATES, INC.
126 CLOCK TOWER PLACE
CARMEL, CALIFORNIA 93923-8734
(408) 624-1536
VIA FACSIMILE
(215) 677-5804
Mr. Steven Apple
West Coast Entertainment Corporation
9990 Global Road
Philadelphia, PA 19115
RE: Your letter of July 16, 1996
Dear Mr. Apple:
This letter constitutes Paul Kagan Associates, Inc. permission to use
materials appearing in KAGAN'S MEDIA TRENDS '95 in support of a shelf
registration filing being considered by the West Coast Entertainment
Corporation. It is understood the KAGAN MEDIA TRENDS references will appear in
the Registration Statement for the SEC, and any amendments thereto, as depicted
on pages 4, 39 and 49 of the proposed offering materials forwarded for our
review by reference.
It is understood this is a one-time approval, and this material may not be used
or disseminated for any other purpose without our prior consent. Thank you
for seeking prior approval to use our information.
Sincerely,
/s/ Dwight W. Beach
Managing Editor
