<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0- 28072
________West Coast Entertainment Corporation_______
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3278751
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D. No.)
</TABLE>
One Summit Square, Suite 200, Rte. 413 & Doublewoods Rd.
Langhorne, Pennsylvania 19047
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215)968-4318
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) had been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at September 8 ,1998
Common Stock, $.01 14,035,329
par value per share
<PAGE> 2
WEST COAST ENTERTAINMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. - Financial Information Page No.
<S> <C>
Item 1. - Financial Statements
Consolidated Balance Sheets -
As of August 2, 1998 and January 31, 1998 3
Consolidated Statements of Operations-
Quarters and Two Quarters Ended
August 2, 1998 and July 31, 1997 4
Consolidated Statements of Cash Flows-
Two Quarters Ended August 2, 1998 and July 31, 1997 5
Consolidated Statement of Stockholders Equity-
As of August 2, 1998 and January 31, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Part II. - Other Information 19
Item 1. - Legal Proceedings
Item 2. - Changes in Securities
Item 3. - Defaults Upon Senior Securities
Item 4. - Submission of Matters to a Vote of the Security Holders
Item 5. - Other Information
Item 6. - Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE> 3
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except for par value)
<TABLE>
<CAPTION>
August 2, January 31,
1998 1998
---------- -----------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,393 $ 2,604
Accounts receivable 2,014 1,629
Merchandise inventory 12,687 8,216
Income taxes receivable -- 441
Deferred tax asset 820 820
Market development funds and co-op receivable 1,659 2,124
Receivable from officers 363 341
Prepaid expenses and other current assets 901 652
--------- ---------
Total current assets 20,837 16,827
Videocassette rental inventory, net 34,633 32,005
Furnishings, equipment and leasehold improvements, net 19,265 18,953
Intangible assets, net of accumulated amortization 114,076 117,047
Other assets 2,476 2,404
--------- ---------
Total assets $ 191,287 $ 187,236
========= =========
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 10,008 $ 8
Accounts payable 15,263 11,719
Accrued expenses and other liabilities 5,166 4,926
Income taxes payable 302 --
--------- ---------
Total current liabilities 30,739 16,653
Long-term debt (net of current portion) 55,002 65,006
Deferred tax liability 1,741 1,741
Other long-term liabilities 102 155
--------- ---------
Total liabilities 87,584 83,555
Stockholders' equity:
Common stock ($0.01 par value; 14,160
shares as of August 2, 1998, of which
14,023 shares were outstanding and
137 shares to be issued; and 13,843
shares outstanding at January 31, 1998,
of which 13,706 shares were
outstanding and 137 shares to be issued) 142 138
Preferred stock ($0.01 par value, 2,000 shares
authorized, no shares issued) -- --
Additional paid in capital 104,085 104,063
Accumulated deficit (282) (520)
Treasury stock (92 shares of common stock at cost) (242) --
--------- ---------
Total stockholders' equity 103,703 103,681
--------- ---------
Total liabilities and stockholders' equity $ 191,287 $ 187,236
========= =========
</TABLE>
See accompanying notes to financial statements
-3-
<PAGE> 4
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter ended Two quarters ended
------------- ------------------
August 2, July 31, August 2, July 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue $ 25,034 $ 24,930 $ 51,193 $ 47,368
Merchandise and other sales 4,734 4,025 9,449 8,149
Franchise fees 948 510 1,631 1,339
-------- -------- -------- --------
Total revenues 30,716 29,465 62,273 56,856
-------- -------- -------- --------
Operating costs and expenses:
Store operating expenses 14,187 14,838 28,110 26,685
Cost of goods sold 3,337 2,725 6,683 5,606
Amortization of videocassette and video game rental
inventory (Note 2) 6,392 6,106 12,664 11,459
Selling, general and administrative 3,752 3,874 7,270 8,063
Amortization of intangible assets 1,611 1,573 3,265 3,000
Debt offering write offs (Note 6) -- 5,125 -- 5,125
-------- -------- -------- --------
Total operating costs and expenses 29,279 34,241 57,992 59,938
-------- -------- -------- --------
Income (loss) from operations 1,437 (4,776) 4,281 (3,082)
-------- -------- -------- --------
Interest expense 1,627 1,188 3,265 1,944
Other expense (income) 70 (29) 144 (64)
-------- -------- -------- --------
Income (loss) before provision for income taxes (260) (5,935) 872 (4,962)
Provision for (benefit of) income taxes 0 (1,853) 634 (1,415)
-------- -------- -------- --------
Net income (loss) ($ 260) ($ 4,082) $ 238 ($ 3,547)
======== ======== ======== ========
Net income (loss) per common share-basic and diluted ($ 0.02) ($ 0.30) $ 0.02 ($ 0.26)
======== ======== ======== ========
Weighted average shares outstanding 14,159 13,826 14,153 13,806
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
-4-
<PAGE> 5
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Two quarters ended
August 2, July 31,
1998 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 238 ($ 3,547)
Adjustments to reconcile net income to cash
flows provided by (used in) operating activities:
Amortization of debt financing costs 222 91
Amortization of videocassette rental inventory 12,664 11,459
Depreciation and amortization of furnishings,
equipment and leasehold improvements 1,588 970
Amortization of intangible assets 3,265 2,999
Changes in assets and liabilities:
Accounts receivable (385) 418
Merchandise inventories (4,471) (2,892)
Prepaid expenses and other assets (395) (2,138)
Accounts payable 3,544 6,456
Accrued expenses and other liabilities 188 687
Income taxes 743 (3,440)
-------- --------
Net cash provided by operating activities 17,201 11,063
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,900) (4,910)
Purchase of videocassette rental inventory (15,292) (14,499)
Purchase of businesses, net of cash acquired -- (18,897)
-------- --------
Net cash used in investing activities (17,192) (38,306)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 29,500
Repayment of long-term debt (4) (4)
Proceeds from issuance of common stock, net 26 80
Purchase of treasury stock (242) --
-------- --------
Net cash provided by (used in) financing activities (220) 29,576
-------- --------
Net increase (decrease) in cash and cash equivalents (211) 2,333
Cash and cash equivalents, beginning of period 2,604 1,311
-------- --------
Cash and cash equivalents, end of period $ 2,393 $ 3,644
======== ========
Supplemental cash flow data:
Interest paid $ 2,892 $ 1,688
======== ========
Income taxes paid $ 185 $ 2,199
======== ========
</TABLE>
See accompanying notes to financial statements
-5-
<PAGE> 6
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
Total
Additional Accumulated Stock-
Common Stock Paid-In Surplus Treasury holders'
----------------------
Shares Amount Capital (Deficit) Stock Equity
---------- -------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
May 14, 1996 0.340-1 reverse stock split (9,243,713) (92) 92 -- -- --
Shares issued-public offering 5,400,000 54 60,778 -- -- 60,832
Shares issued or to be issued-1996 Acquisitions 3,614,174 36 42,258 -- -- 42,294
Net income -- -- -- 3,466 -- 3,466
----------- -------- --------- --------- ------- ---------
Balance at January 31, 1997 13,770,462 138 103,947 3,050 -- 107,135
Shares issued-Employee Stock Purchase Plan 36,567 -- 116 -- -- 116
Shares issued-1996 acquisitions 36,077 -- -- -- -- --
Net (loss) -- -- -- (3,570) -- (3,570)
----------- -------- --------- --------- ------- ---------
Balance at January 31, 1998 13,843,106 138 104,063 (520) -- 103,681
Shares issued-1996 acquisitions 302,065 3 (3) -- -- --
Shares issued-Employee Stock Purchase Plan 14,590 1 25 -- -- 26
Shares received in treasury stock -- -- -- -- (242) (242)
Net income -- -- -- 238 -- 238
----------- -------- --------- --------- ------- ---------
Balance at August 2, 1998 14,159,761 $ 142 $ 104,085 ($ 282) ($ 242) $ 103,703
=========== ======== ========= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial.
-6-
<PAGE> 7
WEST COST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 2, 1998 (unaudited)
1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. For further information, refer to the
consolidated financial statements and footnotes included in West Coast
Entertainment Corporation's (the "Company's") Form 10-K filed with the
SEC on May 1, 1998.
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.
On April 30, 1998, the Company adopted a fiscal year ending on the
first Sunday following January 30, which will result in the Company
having a 52 or periodically, a 53 week fiscal year. Results for this
fiscal year will reflect a 52-week year ending on January 31, 1999.
The Company's quarter and two quarters ended August 2, 1998 includes
revenue and certain operating expenses such as salaries, wages and
other miscellaneous expenses, on a daily basis. All other expenses,
primarily rents, depreciation and amortization, are calculated and
recorded monthly, with twelve months included in each fiscal year.
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 quarter and two quarters ended August 2, 1998 are
not necessarily indicative of the results to be expected for the year
ending January 31, 1999.
Income per common share data has been calculated per Financial
Accounting Standards Board Statement No. 128 "Earnings Per Share"
("SFAS 128"), which requires current and retroactive presentation of
basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
is computed in a similar manner except that the weighted average number
of common shares is increased for dilutive potential common shares.
Potentially dilutive common shares were considered to be anti-dilutive
for the computation of diluted earnings per share for the quarters and
two quarters ended August 2, 1998 and July 31, 1997.
2 Videocassette Rental Inventory
Videocassette rental inventory and related amortization are as follows
(in thousands):
<TABLE>
<CAPTION>
August 2, 1998 January 31, 1998
--------------- ----------------
<S> <C> <C>
Videocassette rental inventory $ 84,549 $ 69,257
Accumulated amortization (49,916) (37,252)
-------- --------
$ 34,633 $ 32,005
======== ========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$6,392,000, $12,664,000, $6,106,000, and $11,459,000 for the quarters
and two quarters ended August 2, 1998 and July 31, 1997, respectively.
7
<PAGE> 8
WEST COST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 2, 1998 (unaudited)
Effective August 1, 1997, the Company adopted an accelerated method of
amortizing its videocassette rental inventory. Under this new method,
videocassette rental inventory base stock (the first three copies of a
title in a particular store) is amortized over its economic life of 36
months, to its estimated salvage value of $6. New release base stock,
less the $6 salvage value, is amortized 50% in the first six months,
then amortized on a straight-line basis to the $6 salvage value over
the remaining 30 months. All copies of new release videocassette rental
inventory in excess of 3 copies per store are amortized on a
straight-line basis during the first nine months to $10, and the
balance is amortized on a straight-line basis over the remaining 27
months to the $6 salvage value.
The new method of amortization was adopted because the Company believes
accelerated expense recognition for new release videocassettes during
the first six months more closely matches the typically higher revenue
generated following a title's release, and believes $6 represents a
reasonable salvage value for all tapes after 36 months.
The new method of amortization has been applied to videocassette rental
inventory that was held in inventory at August 1, 1997. The adoption of
the new method of amortization has been accounted for as a change in
accounting estimate effected by a change in accounting principle and,
accordingly, the Company recorded an $803,000 pre-tax charge to
operating expense in the quarter ended October 31, 1997 and the year
ended January 31, 1998.
Prior to August 1, 1997, videocassette rental inventory, which includes
video games, was stated at cost and was amortized over its estimated
economic life with no provision for salvage value. Videocassettes that
were considered base stock (the first three copies of a title in a
particular store) were amortized over 36 months on a straight-line
basis. New release videocassettes were amortized as follows: the first
through third copies of each title per store were amortized as base
stock and the fourth and succeeding copies of each title per store were
amortized over nine months on a straight-line basis. The unamortized
cost, if any, of videocassette rental inventory that was sold is
charged to operations at the time of sale.
Videocassette rental inventory amortization expense resulting from the
allocation of purchase price to videocassette rental tapes of the
acquired entities is based on current replacement cost for bulk
purchases of used tapes as well as the assignment of a three year
amortizable life which serves to extend the remaining economic useful
lives of videocassette rental tapes acquired. Replacement cost for bulk
purchases of used tapes is significantly less than the cost of new tape
purchases. As a result, future amortization relating to these tapes, on
a per tape basis, will be significantly less than the amortization
relating to new tape purchases. In addition, to the extent the acquired
tapes have book values lower than newly purchased tapes, sales of the
acquired tapes should result in higher operating income than sales of
new tape purchases. The favorable effects resulting from purchase
accounting will diminish with the passage of time and will not extend
beyond the three year period subsequent to acquisition which is the
period over which these tapes will be amortized.
3 Acquisitions
May 1996 Acquisitions
On May 17, 1996, the Company acquired 172 video specialty stores (the "May
1996 Acquisitions"), including 13 stores owned by franchisees of the
Company. Taking into account certain adjustments and calculation of certain
contingent payments, the aggregate consideration of $83.9 million was paid
consisting of the following: $53.0 million in cash, approximately $26.2
million in shares of common stock (2.1 million shares), and approximately
$4.7 million of
8
<PAGE> 9
WEST COST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 2, 1998 (unaudited)
acquisition costs. Of these amounts, approximately $0.4 million
represents remaining minimum contingent consideration (of which
approximately $0.1 million and $0.3 million (19,734 shares) is to be
paid in cash and stock, respectively). These common shares to be issued
have been considered outstanding as of August 2, 1998 and July 31, 1997
as their issuance is dependent only on the passage of time.
Early Fall 1996 Acquisitions
Between August 26 and October 25, 1996, the Company acquired the assets
of 21 video specialty stores (the "Early Fall 1996 Acquisitions").
Aggregate consideration of $13.6 million was paid, consisting of the
following: $8.2 million in cash, $4.9 million in shares of common stock
(519,000 shares), and approximately $0.5 million of acquisition costs.
The shares (465,000) associated with one of these acquisitions were
issued in three equal installments (six, twelve and eighteen months
from the acquisition date) and the number of shares issuable was
increased in certain cases by the difference between the share price at
issuance date and a formulaic common share price calculated as of the
date of acquisition. A total of 340,000 shares were issued due to this
difference. Additionally, 92,000 shares associated with another Early
Fall 1996 Acquisition are to be issued. In both instances these common
shares and other common shares to be issued in installments have been
considered outstanding as of the beginning of the periods presented as
their issuance is dependent only on the passage of time.
Late Fall 1996 Acquisitions
Between November 15 and December 3, 1996, the Company acquired the
assets of 47 video specialty stores (the "Late Fall 1996
Acquisitions"), including 19 stores owned by franchisees of the Company
for aggregate consideration of $27.7 million consisting of the
following: $14.4 million in cash, $11.0 million in shares of common
stock (1.0 million shares) and approximately $2.3 million of
acquisition costs. Additionally, 243,000 and 25,000 shares were to be
issued as of July 31, 1997 and August 2, 1998 respectively. These
common shares to be issued have been considered outstanding as of the
beginning of the periods presented as their issuance is dependent only
on the passage of time.
June, 1997 Acquisitions
On June 16, 1997, and June 24, 1997 the Company acquired a total of 38
video specialty stores (the "June 1997 Acquisitions"), including 5
stores owned by a franchisee of the Company for aggregate consideration
of $17.9 million consisting of $17.2 million in cash and approximately
$0.7 million of acquisition costs.
The excess of the cost over the fair value of the assets acquired is
being amortized over 20 years on a straight-line basis. The results of
operations of the acquired stores have been included in operations of
the Company since the date of acquisition. The purchase method of
accounting was used to account for the acquisitions.
The following unaudited pro forma information presents the results of
operations as though (i) the June 1997 Acquisitions had occurred as of
the beginning of the periods presented, (ii) each entity included in
the consolidated statement of operations had been included in the
Company's consolidated income tax returns and subject to corporate
income taxation as a C corporation during all periods presented, and
(iii) the borrowings under the Credit Facility (see Note 4) had
occurred as of the beginning of the periods presented.
9
<PAGE> 10
WEST COST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 2, 1998 (unaudited)
The following unaudited pro forma net income per share for the quarters
and two quarters ended August 2, 1998 and July 31, 1997 was calculated
by dividing the respective unaudited pro forma net income by the pro
forma weighted average number of shares of common stock outstanding
after giving effect to (i) the 0.340-for-1 reverse stock split approved
by the Board of Directors on May 14, 1996, and the shares issued in
conjunction with the Initial Public Offering on May 17, 1996 ("the
Offering"), (ii) issuance of shares in connection with the May 1996,
Early Fall 1996 and Late Fall 1996 Acquisitions, (iii) repayment of
outstanding debt at the date of the Offering, and (iv) the impact of a
detachable warrant with a primary supplier of videocassettes and a
portion of a convertible note which was converted into shares of the
Company's common stock as if the transactions 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 was
14,159,761 for the quarters and two quarters ended August 2, 1998 and
14,125,839 for the quarter ended July 31,1997.
<TABLE>
<CAPTION>
Unaudited
Pro Forma
----------------------------------------------------
(in thousands, except per share data)
Quarter Ended Two Quarters Ended
------------- ------------------
August 2, 1998 July 31, 1997 August 2, 1998 July 31, 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Pro forma revenues $ 30,716 $ 31,562 $ 62,273 $ 63,147
Pro forma net income (loss) (260) (3,971) 238 (3,196)
Pro forma net income (loss)
per share-basic and diluted $ (0.02) $ (0.28) $ 0.02 $ (0.23)
</TABLE>
4 Long Term Debt
On May 17, 1996 the Company obtained a $60,000,000 Credit Facility
("the Credit Facility") from a bank which consists of a 17 month
revolving credit facility followed by a three year term loan. In
association with the borrowing the Company paid a fee of $700,000 on
May 17, 1996 which has been recorded in other long term assets and will
be amortized over the term of the Credit Facility. Borrowings under the
Credit Facility are available for working capital, capital
expenditures, refinancing of existing indebtedness, and for certain
permitted acquisition financing.
On October 31, 1996 the Company received a commitment from the Bank to
increase the Credit Facility to $65,000,000 effective August 5, 1996.
As of August 2, 1998, the Company had $65,000,000 outstanding under the
Credit Facility.
On December 15, 1997 the Company signed an amendment increasing the
Credit Facility to $70,000,000 with current commitments from the
participating banks for $65,000,000 (the "Amended Facility"). The
Amended Facility has a three year term ending December 14, 2000 with
two one-year options to extend the term to December 14, 2002. If the
Company attains certain total debt to operating cash flow ratios, as
defined, the commitment reduces quarterly commencing June 15, 1999 and
continues through the end of the term. If such total debt to operating
cash flow ratios are not attained, the quarterly commitment reductions
start on December 15, 1998 whereby a $3 million reduction occurs for
the year ended January 31, 1999. Any amounts in excess of the
commitment, as it may be reduced from time to time, must be repaid. On
September 14, 1998, the Company signed an amendment to the Amended
Facility
10
<PAGE> 11
WEST COST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 2, 1998 (unaudited)
changing certain maximum debt to operating cash flow ratios and minimum
operating cash flow requirements as defined, as well as modifying
certain permitted capital expenditures.
Borrowings under the Amended Facility are limited to a multiple of
operating cash flow, as defined, over the previous four quarters. As a
result of the above mentioned amendment, at August 2, 1998, this
multiple was modified from 3.50 to 3.75 times operating cash flow, and
reduces over the next two fiscal quarters to a low of 3.25 times
operating cash flow on January 31, 1999 and thereafter. Interest rates
vary from either the Bank's base rate, as defined, to 1.5% above such
base rate, or from the Eurodollar rate, as defined, to 5.0% above such
Eurodollar rate. On January 14, 1998, the Company entered into an
interest rate swap agreement with the bank for $30,000,000 of the
Amended Facility. As of January 31, 1998, the bank estimates that it
would have received $74,000 to terminate the interest rate swap
agreements. The interest rate swap agreement is for a three year period
ending on January 16, 2001 and fixes the Eurodollar rate to 5.62%. The
Company's weighted average borrowing rate under the Amended Facility
was 9.06% for the quarter ended August 2, 1998. Additionally, the
Amended Facility provides for a commitment fee payable quarterly,
computed at up to 0.5% of the unused portion of the available Amended
Facility during the previous quarter.
The Amended Facility is secured by a first security interest in
substantially all of the Company's assets, including the stock of its
subsidiaries, and provides for certain restrictive covenants, including
among others compliance with certain financial tests and ratios and
dividend restrictions.
5 Treasury Stock
In the quarter ended May 3, 1998, treasury stock valued at $242,000
(92,000 shares) was received in satisfaction of amounts owed to the
Company.
6 Debt Offering Write-Off
On July 1, 1997 the Company's private placement of debt securities (the
"Proposed Private Placement") and related acquisitions were
indefinitely delayed due to market conditions. The Company has
written-off $5.1 million in costs during the quarter ended July 31,
1997 that were incurred in connection with the Proposed Private
Placement and related acquisitions.
11
<PAGE> 12
WEST COST ENTERTAINMENT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended August 2, 1998 compared to Quarter ended July 31, 1997
Revenues
Revenues increased $1.2 million, or 4.1%, from $29.5 million for the
quarter ended July 31, 1997 to $30.7 million for the quarter ended
August 2, 1998. This change reflected an increase of $0.8 million in
merchandise sales and an increase of $0.4 million in franchise fee
revenue. Rental revenues remained unchanged at $25.0 million for the
quarters ended July 31, 1997 and August 2, 1998.
Merchandise sales increased $0.8 million, or 20.0%, from $4.0 million
for the quarter ended July 31, 1997 to $4.8 million for the quarter
ended August 2, 1998. Merchandise sales increased by $0.6 million as a
result of placing a greater emphasis on such revenues by expanding
inventory levels of new movies for sale. In addition, $0.2 million of
merchandise sales were added through the acquisition of a total of 38
video specialty stores, consisting of 37 stores acquired on June 16,
1997 and 1 store on June 24, 1997. These stores were owned for only
approximately one-half of the quarter ended July 31, 1997 as compared
to a full quarter in 1998.
Franchise fee revenues increased $0.4 million, or 80.0%, from $0.5
million for the quarter ended July 31, 1997 to $0.9 million for the
quarter ended August 2, 1998. This increase is primarily related to the
settlement of a lawsuit which recovered old franchise fee revenues
previously not recognized.
Rental revenues remained unchanged at $25.0 million for the quarters
ended July 31, 1997 and August 2, 1998. An additional $1.5 million of
rental revenues added through the acquisition of the 38 video specialty
stores in mid quarter of 1997 as described above as compared to owning
the 38 stores for a full quarter in 1998 was offset by a decrease in
rental revenues by the Company's stores owned prior to the 38 store
acquisition. The rental revenue decrease was primarily caused by
unusually dry weather.
As a result of the Company's acquisition activities and other
developments described above the mix of revenue sources changed to
approximately 81.4% rental, 15.6% merchandising, and 2.9% franchising
during the quarter ended August 2, 1998 from approximately 84.7%,
13.6%, and 1.7%, respectively, during the quarter ended July 31, 1997.
Store Operating Expenses
Store operating expenses decreased $0.6 million, or 4.1 %, from $14.8
million for the quarter ended July 31, 1997 to $14.2 million for the
quarter ended August 2, 1998. Actual store operating expenses decreased
by $1.5 million after factoring in the additional $0.9 million of store
operating expenses the 38 acquired stores as described above
contributed for a full quarter this year as compared to the
approximately one-half quarter that they were owned the comparable
quarter last year. In addition, as a percentage of total revenues,
store operating expenses decreased 3.9 percentage points from 50.2% for
the quarter ended July 31, 1997 to 46.3% for the quarter ended August
2, 1998. These decreases in both dollars and as a percentage of
revenues are primarily due to the continued efforts of management to
control and reduce store operating costs which were implemented in
July, 1997.
Cost of Goods Sold
Cost of goods sold increased $0.6 million, or 22.2%, from $2.7 million
for the quarter ended July 31, 1997 to $3.3 million for the quarter
ended August 2, 1998, primarily as a result of an increase in
merchandise sales volume due to the acquisition of the 38 video
specialty stores and increased emphasis on merchandise sales by
expanding inventories as described above. As a percentage of
merchandise and
12
<PAGE> 13
WEST COST ENTERTAINMENT CORPORATION
Results of Operations (continued)
other sales, cost of goods sold decreased by 0.8 percentage points from
67.5% for the quarter ended July 31, 1997 to 66.7% for the quarter
ended August 2, 1998. This decrease was primarily due to a change in
sales mix.
Amortization of Videocassette and Video Game Rental Inventory
Amortization of rental inventory increased $0.3 million, or 4.9%, from
$6.1 million for the quarter ended July 31, 1997 to $6.4 million for
the quarter ended August 2, 1998 primarily as a result of the
acquisition of the 38 video specialty stores as described above. As a
percentage of rental revenues this amortization increased 1.2
percentage points from 24.4 % for the quarter ended July 31, 1997 to
25.6% for the quarter ended August 2, 1998. This is primarily due to
the net effects of purchase accounting for acquired stores and the
adoption of the new method of amortization of rental inventory as
described in Note 2.
General and Administrative Expense
General and administrative expenses decreased $0.1 million, or 2.6%,
from $3.9 million for the quarter ended July 31, 1997 to $3.8 million
for the quarter ended August 2, 1998. As a percentage of total
revenues, general and administrative expenses decreased 0.8 percentage
points from 13.2% for the quarter ended July 31,1997 to 12.4% for the
quarter ended August 2, 1998. These decreases, both in dollars and in
percentage of revenues, are primarily due to the Company's efforts to
reduce overhead costs particularly corporate payroll.
Amortization of Intangible Assets
Intangible amortization expense remained unchanged at $1.6 million for
the quarters ended July 31, 1997 and August 2, 1998. As a percentage of
total revenues, intangible amortization decreased 0.2 percentage points
from 5.4% for the quarter ended July 31, 1997 to 5.2% for the quarter
ended August 2, 1998. This percentage decrease is a function of the
$1.2 increase in total revenues.
Debt Offering Write-Offs
During the quarter ended July 31, 1997 the Company wrote-off $5.1
million in Debt Offering expense associated with the Proposed Private
Placement and related acquisitions due to the Company's decision to
indefinitely delay such offering.
Interest Expense and Other
Net interest expense and other increased $0.5 million, or 41.7%, from
$1.2 million for the quarter ended July 31, 1997 to $1.7 million for
the quarter ended August 2, 1998. Interest expense comprises almost all
of this net amount. As a percentage of total revenues, interest expense
increased 1.1 percentage points from 4.1% for the quarter ended July
31, 1997 to 5.2% for the quarter ended August 2, 1998. The increase is
substantially attributable to additional interest expense incurred in
connection with borrowings related to acquisitions.
Net Income
As a result of the foregoing, net income increased $3.8 million, or
92.7%, from a $4.1 million net loss for the quarter ended July 31, 1997
to a $0.3 million net loss for the quarter ended August 2, 1998.
13
<PAGE> 14
WEST COST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
Two Quarters ended August 2, 1998 compared to Two Quarters ended July
31, 1997
Revenues
Revenues increased $5.4 million or 9.5% from $56.9 million for the two
quarters ended July 31, 1997 to $62.3 million for the two quarters
ended August 2, 1998. This change reflected an increase of $3.8 million
in rental revenues, an increase of $1.3 million in merchandise sales
and an increase of $0.3 million in franchise fee revenue.
Rental revenues increased $3.8 million or 8.0% from $47.4 million for
the two quarters ended July 31, 1997 to $51.2 million for the two
quarters ended August 2, 1998. An additional $5.2 million of rental
revenues added by the acquisition of the 38 video specialty stores in
mid June, 1997 which only represented approximately 25% of the two
quarters in 1997 in which the 38 stores generated $1.9 million of
rental revenues as compared to $7.1 million of rental revenues for a
full two quarters in 1998 was offset by a decrease in rental revenues
of the Company's stores owned prior to the 38 store acquisition. This
decrease in rental revenues was primarily caused by unusually dry
weather.
Merchandise sales increased $1.3 million or 15.9% from $8.2 million for
the two quarters ended July 31, 1997 to $9.5 million for the two
quarters ended August 2, 1998. Merchandise sales increased by $0.6
million as a result of placing greater emphasis on such revenues by
expanding inventory levels of new movies for sale. In addition, $0.7
million of merchandise sales were added through the acquisition of the
38 video specialty stores as described above.
Franchise fee revenue increased $0.3 million, or 23.1% from $1.3
million for the two quarters ended July 31, 1997 to $1.6 million for
the two quarters ended August 2, 1998. This increase is primarily
related to the settlement of a lawsuit which recovered old franchise
fee revenues previously not recorded for $0.4 million which was
partially offset by a $0.1 million decrease in the quarter ended May 3,
1998. The $0.1 million decrease in the prior quarter is attributable to
a decline in the number of royalty payments received from franchisees
due to both a decline in their business and a decline in the number of
franchisees who make required payments.
As a result of the Company's acquisition activities and other
developments described above, the mix of revenue sources changed to
approximately 82.2% rental, 15.2% merchandising and 2.6% franchising
during the two quarters period ended August 2, 1998 from approximately
83.3%, 14.4%, and 2.3%, respectively, during the two quarters ended
July 31, 1997.
Store Operating Expenses
Store operating expenses increased $1.4 million, or 5.2%, from $26.7
million for the two quarters ended July 31, 1997 to $28.1 million for
the two quarters ended August 2, 1998. After factoring in the impact of
the 38 video specialty stores acquired in mid June, 1997 as described
above, store operating expenses actually decreased by $1.3 million.
Store operating expenses for the full two quarters this year for these
38 stores amounted to $3.7 million as compared to $1.0 million incurred
for one-half of the quarter that the stores were owned in 1997. As a
percentage of total revenues, store operating expenses decreased 1.8
percentage points from 46.9% for the two quarters ended July 31, 1997
to 45.1% for the two quarters ended August 2, 1998. These decreases in
both dollars as adjusted above and as a percentage of revenues are
primarily due to the continued efforts of management to control and
reduce store operating expenses.
Cost of Sales
Cost of goods sold increased $1.1 million, or 19.6%, from $5.6 million
for the two quarters ended July 31, 1997 to $6.7 million for the two
quarters ended August 2, 1998, primarily as a result of an increase in
merchandise sales volume due to the acquisition of the 38 video
specialty stores and increased emphasis
14
<PAGE> 15
WEST COST ENTERTAINMENT CORPORATION
RESULTS OF OPERATIONS (continued)
on merchandise sales by expanding inventories as described above.
As a percentage of merchandise sales, cost of goods sold decreased by
0.9 percentage points from 68.3% for the two quarters ended July 31,
1997 to 67.4% for the two quarters ended August 2, 1998. This decrease
was primarily due to a change in sales mix.
Amortization of Videocassette and Video Game Rental Inventory
Amortization of rental inventory increased $1.3 million, or 11.4%, from
$11.4 million for the two quarters ended July 31, 1997 to $12.7 million
for the two quarters ended August 2, 1998, as a result of the
acquisition of the 38 video specialty stores as described above. As a
percentage of rental revenues this amortization increased 0.7
percentage points from 24.1% for the two quarters ended July 31, 1997
to 24.8% for the two quarters ended August 2, 1998. This increase is
due to the net effects of purchase accounting for acquired stores and
the adoption of the new method of amortization of rental inventory as
described in Note 2.
General and Administrative Expense
General and administrative expenses decreased $0.8 million, or 9.9%,
from $8.1 million for the two quarters ended July 31, 1997 to $7.3
million for the two quarters ended August 2, 1998. As a percentage of
total revenues, general and administrative expenses decreased 2.5
percentage points from 14.2% for the two quarters ended July 31, 1997
to 11.7% for the two quarters ended August 2, 1998. These decreases,
both in dollars and in percentage of revenues, are primarily due to the
Company's efforts to reduce overhead costs particularly corporate
payroll.
Amortization of Intangible Assets
Intangible amortization expense increased $0.2 million, or 6.7%, from
$3.0 million for the two quarters ended July 31, 1997 to $3.2 million
for the two quarters ended August 2, 1998. This increase is entirely
related to amortization of goodwill associated with the acquisition of
the 38 video specialty stores as described above. As a percentage of
total revenues, intangible amortization decreased 0.2 percentage points
from 5.3% for the two quarters ended July 31, 1997 to 5.1% for the two
quarters ended August 2, 1998. This percentage decrease is a function
of the $5.4 million increase in total revenues.
Debt Offering Write-Offs
During the two quarters ended July 31, 1997 the Company wrote-off $5.1
million in Debt Offering expense associated with the Proposed Private
Placement and related acquisitions due to the Company's decision to
indefinitely delay such offering.
Interest Expense and Other
Net interest expense and other increased 1.5 million or 78.9% from $1.9
million for the two quarters ended July 31, 1997 to $3.4 million for
the two quarters ended August 2, 1998. Interest expense comprises
almost all this net amount. As a percentage of total revenues, interest
expense increased 2.0 percentage points from 3.3% for the two quarters
ended July 31, 1997 to 5.3% for the two quarters ended August 2, 1998.
This increase is substantially attributable to additional interest
expense incurred in connection with borrowings related to acquisitions.
Net Income
As a result of the foregoing, net income increased $3.8 million, or
108.6% from a $3.5 million net loss for the two quarters ended July 31,
1997 to $0.3 million of net income for the two quarters ended August 2,
1998.
15
<PAGE> 16
WEST COST ENTERTAINMENT CORPORATION
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual
results of operations to differ materially from any forward-looking
statements made in this Quarterly Report on Form 10-Q or any
forward-looking statements made elsewhere by management of the Company
from time to time.
The Company's rapid growth, particularly its acquisition of 280 video
specialty stores since May of 1996 and franchising additional stores,
could strain the Company's ability to manage operations, integrate
newly acquired stores into its systems, and effectively pursue its
growth strategy. The Company competes with many others, including the
Blockbuster Entertainment division of Viacom, Inc., which has
significantly greater financial and marketing resources, market share,
and name recognition than the Company. Further developments in
competing technologies could have a material adverse effect upon the
video retail industry and the Company. Industry and Company revenues
are somewhat seasonal and may be affected by many factors, including
variation in the acceptance of new release titles available for rental
and sale, the extent of competition, marketing programs, weather, the
timing of any holiday weekends, special or unusual events, and other
factors that may affect retailers in general. There can be no assurance
that stores already acquired or acquired in future will perform as
expected or that the prices paid for such stores will prove to be
advantageous. The costs of integrating newly acquired stores into the
Company's systems may vary significantly from the amounts assumed for
purposes of the Company's pro forma financial statements. The Company's
common stock has traded publicly only since May 14, 1996 and no
prediction can be made as to future price levels for such stock.
PRO FORMA RESULTS OF OPERATIONS (Note 3)
Quarter ended August 2, 1998 compared to Quarter ended July 31, 1997
Revenues
Pro forma revenues decreased by $0.9 million, or 2.9% from $31.6
million for the quarter ended July 31, 1997 to $30.7 for million for
the quarter ended August 2, 1998. The mix of revenues, however, changed
in the quarter ended August 2, 1998 compared to the quarter ended July
31, 1997. Rental revenue decreased as a result of unusually dry
weather, but was partially offset by an increase in merchandise sales
due to increased inventory levels and an increase in franchise fee
revenues as a result of the settlement of a lawsuit.
Net Income
Pro forma net income increased by $3.7 million, from a net loss of $4.0
million for the quarter ended July 31, 1997 to a net loss of $0.3
million for the quarter ended August 2, 1998. This increase is
primarily due to the write-off of $5.1 million in debt offering costs
as described in Note 6 offset by the decrease in revenues as described
above.
Two Quarters ended August 2, 1998 compared to Two Quarters ended July
31, 1997
Revenues
Pro forma revenues decreased by $0.8 million, or 1.3%, from $63.1
million for the two quarters ended July 31, 1997 to $62.3 for the two
quarters ended August 2, 1998. This is due to a decrease in rental
revenues due to unusually dry weather in the second quarter partially
offset by an increase in merchandise sales due to an increase in
inventory levels and in franchise fee revenues as a result of the
settlement of a lawsuit.
16
<PAGE> 17
WEST COST ENTERTAINMENT CORPORATION
NET INCOME
Pro forma net income increased by $3.4 million, from a $3.2 million net
loss for the two quarters ended July 31, 1997 to $0.2 million net
income for the two quarters ended August 2, 1998. This increase was
primarily due to the $5.1 million write off of costs relating to the
debt offering taken during quarter ended July 31, 1997 offset by the
decrease in revenues of $0.8 million mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
For the two quarters ended August 2, 1998, the Company had net cash
provided by operating activities of $17.2 million, net cash used in
investing activities of $17.2 million (consisting of cash used to
purchase videocassette rental inventory of $15.3 million and to
purchase property and equipment of $1.9 million) and net cash used in
financing activities of $0.2 million, resulting in a $0.2 million
decrease in cash and cash equivalents.
During the current fiscal year, the Company has financed its operations
and capital expenditures primarily through available operating cash
flow .
The amount of borrowings available under the Company's Credit Facility
may decrease during the next twelve months ended August 1, 1999 if the
Company does not attain certain debt-to-operating cash flow ratios (as
defined); see Note 4. The Company presently believes that $10,000,000
may have to be repaid during the next twelve months.
Immediately following the Company's decision to indefinitely delay its
proposed private placement of debt securities in July of 1997, the
Company instituted cost-cutting measures, which included downsizing its
general and administrative costs from the levels reached in
contemplation of the proposed acquisitions and said debt securities.
The effects of these cost cutting measures are reflected in the
financial results of the quarter ended August 2, 1998 and will continue
to be realized during the balance of this fiscal year. While there can
be no assurance, the Company expects these modifications to be
sufficient to allow the Company to attain its debt to operating cash
flow ratios and to support its current operations and growth plans over
the next year.
In the future, the Company may seek debt refinancing, additional debt
financing or equity capital through additional private or public
offerings of securities. The availability of debt refinancing,
additional debt financing or equity capital will depend on prevailing
market conditions, the market price of the Company's common stock and
other factors over which the Company has no control, as well as the
Company's financial condition and results of operations.
The Board of Directors has adopted a resolution of the possible
delisting by NASDAQ by declaring the advisability of, and submitting to
the stockholders for approval during the annual meeting on July 1,
1998, a proposal to amend the Company's Certificate of Incorporation to
effect a reverse split of the Company's common stock, pursuant to which
each four shares of common stock will be automatically converted into
one share without any action on the part of the stockholder (the
"Reverse Split"). Management has met with NASDAQ with respect to the
Company's submitted request to maintain its national market listing.
Upon receipt of the response from NASDAQ, management will only proceed
with the reverse split if deemed necessary. For more information on the
Reverse Split see the Company's proxy statement dated June 1, 1998.
Capital Commitments. The remaining aggregate costs of upgrading West
Coast's management information systems and integrating stores acquired
in prior acquisitions onto such systems are expected to be
approximately $1.8 million over the next 12-15 months.
The Company has conducted a review of its computer systems to identify
the systems that are affected by the year 2000. The year 2000 problem
is the result of computer programs being written using two digits
rather than four to define the applicable year. The Company intends to
upgrade its POS systems over the next 12-15 months in an effort to make
more detailed data available on a system wide basis in a timely manner
at a cost of approximately $1.8 million. Such costs will be capitalized
and amortized over the useful life of the new software. The Company
believes that with modifications to existing software and conversions
to the new POS system, the year 2000 issue will not pose significant
operational problems for the Company's computer systems. The Company
will continue to address any further year
17
<PAGE> 18
WEST COST ENTERTAINMENT CORPORATION
2000 issues and believes that any costs relating to such issues will
not be material to the Company's financial condition or results of
operations.
Subject to the availability of sufficient funds under the Credit
Facility, the Company's capital expenditure plan provides for
continuing to convert the stores acquired in various prior acquisitions
to West Coast Video(R) signage and format and installing certain West
Coast layout and features at a rate of up to 50 stores per year at an
estimated cost of $32,000 per store; the Company also has plans to
relocate and open up to 50 stores. Build-out costs for relocated
stores are expected to range from $30,000 to $225,000 per store. The
Company's expansion plans are subject to the availability of
sufficient funds under the Credit Agreement and its' ability to
secure additional financing.
Under certain cross-purchase and area development agreements, the
Company will be entitled to acquire (and, subject to certain
conditions, will be required to acquire, if the owners elect to put)
all of the assets of up to 51 stores operated or to be operated by such
owners at specified times between 1998 and 2002. In conjunction with
such agreements, the Company is subject to puts during the next 12
months; however it is not certain that any of the puts will be
consummated. The purchase prices will be equal to specified multiples
of the stores' net operating cash flow; the purchase prices of 24 such
stores will be payable in shares of common stock and the other purchase
prices will be payable in cash or in shares of common stock, at the
Company's election.
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.
18
<PAGE> 19
WEST COST ENTERTAINMENT CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of the Security Holders
At the Company's Annual Meeting of Stockholders held on July 1, 1998,
(a) the vote with respect to the election of five directors was as
follows: C. Stewart Forbes, 11,287,078 shares FOR and 400,171 shares
WITHHELD; Wesley F. Hoag, 11,287,634 shares FOR and 399,615 shares
WITHHELD; Ralph W. Standley III, 11,228,684 shares FOR and 458,565
shares WITHHELD; T. Kyle Standley, 11,218,484 shares FOR and 468,765
shares WITHHELD; M. Trent Standley, 11,227,128 shares FOR and 460,121
shares WITHHELD, (b) the vote with respect to the approval of an
amendment to the Company's Certificate of Incorporation to effect a
four into one reverse split of the Company's common stock $0.01 par
value per share, as described in the Company's Proxy Statement was
9,907,052 shares FOR, 1,742,317 shares AGAINST and 6,000 shares
ABSTAINING, and (c) the vote with respect to ratification of
PricewaterhouseCoopers LLP as the Company's independent auditors for
the current fiscal year was 11,645,462 shares FOR, 35,611 shares
AGAINST and 6,176 shares ABSTAINING. All of the directors elected at
the Annual Meeting were incumbent directors of the Company.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 - Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K reporting on item 8 change in fiscal year filed on
May 15, 1998.
19
<PAGE> 20
WEST COST ENTERTAINMENT CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WEST COAST ENTERTAINMENT
CORPORATION
Date: September 16, 1998 By: /s/ T. Kyle Standley
---------------------------
T. Kyle Standley, President and
Chief Executive Officer
(Principal Executive Officer)
Date: September 16, 1998 By: /s/ Richard G. Kelly
---------------------------
Richard G. Kelly, Chief Financial
Officer
(Principal Financial Officer)
Date: September 16, 1998 By: /s/ Jerry L. Misterman
---------------------------
Jerry L. Misterman, Chief
Accounting Officer
(Principal Accounting Officer)
20
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