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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NO. 0-28072
WEST COAST ENTERTAINMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3278751
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
ROUTE 413 AND DOUBLE WOODS ROAD, LANGHORNE, PENNSYLVANIA 19047
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 968-4318
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether (1) the Registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [X]
The aggregate market value as of April 22, 1999 of Common Stock held by
non-affiliates of the Registrant was approximately $4,826,111
The number of shares of Common Stock outstanding as of April 22, 1999 was
14,084,704.
WEST COAST ENTERTAINMENT CORPORATION
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1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers 12
PART II
Item 5. Market for the Registrants' Common Stock and Related Stockholder
Matters 13
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47
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PART I
ITEM 1. BUSINESS
GENERAL
West Coast Entertainment Corporation (the "Company") is one of the largest
owners, operators and franchisors of video retail specialty stores in the United
States in terms of system-wide revenues. The Company competes directly against
major regional and national video rental stores in most of its markets and
believes it is the leading video specialty retailer, in terms of number of
stores, in many of the major markets in which Company-owned stores operate. At
January 31, 1999, the Company owned and operated 261 video specialty stores and
franchised 160 video specialty stores located in 22 states, principally in the
Northeast and Midwest.
The Company is a leading video specialty retailer whose stores are designed
and managed to create an atmosphere that enhances the appreciation of movies,
children's video programming and video games. In general, the Company's stores
rent and sell videocassettes, rent video games and sell certain popular
electronic accessories along with 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's stores
vary in layout and inventory according to local market needs. The Company's
stores range in size from 750 square feet to 12,000 square feet and generally
carry a comprehensive selection of 7,000 to 17,000 prerecorded videocassettes.
System-wide, a substantial majority of the Company's stores are currently
operated under the West Coast Video(R) name; the remainder are operated under
names such as Videosmith(R).
As described in more detail below, the Company's long term strategy is to
expand its presence by developing new stores, expanding its franchise system
through acquisitions and area development agreements and by selectively
acquiring independently owned stores as well as stores owned by existing West
Coast Video(R) franchisees, subject to the availability of financing to the
Company.
INDUSTRY OVERVIEW
According to Paul Kagan Associates ("Paul Kagan"), the United States
videocassette rental and sales industry has grown from $9.8 billion in revenue
in 1990 to approximately $16.8 billion in revenue in 1998, and is expected to
reach $20.8 billion in 2002. The video retail industry is highly fragmented, and
in recent years has been characterized by increased consolidation as larger
superstore chains continue to increase market share by opening new stores and
acquiring smaller, local operators. According to the Video Software Dealers
Association ("VSDA"), the video retailing industry association, the number of
video specialty stores operating in 1998 was between 25,000 and 30,000. The
Company believes that additional consolidation will continue as the video retail
industry evolves from smaller, local stores to regional and national superstore
chains. 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 those operators engaged in acquisitions.
Paul Kagan reports that the video retail industry represented the single
largest source of revenue to movie studios and accounted for approximately $6.7
billion, or 48.5%, of the $13.8 billion of estimated domestic studio revenue in
1998. Of the hundreds of movies produced and released by the major studios each
year in the U.S., relatively few are profitable for the movie studios based on
box office revenue alone. According to the Motion Picture Association of America
("MPAA"), between 1990 and 1997 only 7.2% of all movies released generated in
excess of $20 million in U.S. theater revenue for studios; over the same period,
members of the MPAA reported that the average production, advertising and
distribution cost of such movies increased from $38.8 million to $75.7 million
per movie. The Company believes its customers are more likely to rent or
purchase "non-hit" movies on videocassette than on any other medium because
video retail stores provide a compelling opportunity to shop and make an impulse
choice among a very broad selection of new title releases. As a result, video
retail stores, including those operated by the Company, selectively purchase
movies on videocassette regardless of whether the movies were successful at the
box office, thus providing the independent and major movie studios a reliable
source of revenue for almost all of the hundreds of movies produced each year.
Thus, the Company believes movie studios have many
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compelling reasons to protect this unique and significant source of revenue.
The U.S. video retail industry includes both rentals and sales of
prerecorded videocassettes. Movie studios determine the suggested retail prices
to both consumers and video rental stores and, through that pricing, influence
the relative levels of videocassette rental and sales. Videocassettes released
at a relatively high price, typically $60 to $65 wholesale, are generally
purchased by video retail stores and promoted primarily as rental titles and
then later re-released by the studios at a lower price, typically $10 to $20
wholesale, to promote sales directly to consumers ("sell-through"). Select high
grossing box office films, generally with box office revenue in excess of $100
million, are released on videocassette at a relatively low initial price,
typically $12 to $17 wholesale, and are generally purchased by video retailers,
mass merchants, grocery stores and other retailers and promoted both as rental
titles and for sell-through.
During 1998, a number of major studios and large video retailers adopted revenue
sharing as an alternative to historical business models of directly purchasing
rental titles. Under revenue sharing the retailer typically incurs an upfront
fee to acquire videocassettes, with an ongoing requirement to share the revenue
generated on a pre-determined percentage over a specific period of time with the
studios. Given the purported lower cost of product, the retailer has the
additional requirement of acquiring 2 to 4 times the number of copies of a title
than it would have acquired under the traditional purchase model.
Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenue by releasing movies in sequential release date "windows" to various
distribution channels. These distribution channels include, in the customary
order of release date: movie theaters; airlines and hotels; video specialty
stores; pay-per-view satellite and cable television systems ("Pay-Per-View");
premium cable television; basic cable television and, finally, network and
syndicated television. The Company believes that this method of sequential
release has allowed movie studios to increase their total revenue with
relatively little adverse effect on the revenue derived from previously
established distribution channels and it is anticipated that movie studios will
continue the practice of sequential release even as near video on demand
("NVOD") and, eventually, video on demand ("VOD") become more readily available
to the consumer. According to Paul Kagan, most movie studios release hit movie
videocassettes to the home video market from 30 to 80 days (extending up to 120
days for certain titles priced for sale rather than rental) prior to the
Pay-Per-View release date.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, trade names and service marks
including West Coast Video(R), The Movie Buff's Movie Store(R), Game Power
Headquarters(TM), net.spot(TM), The Projector(TM), Spotlight on Video(TM) as
well as Videosmith(R) and other trade names under which certain recently
acquired stores are currently conducting business pending their transition to
the West Coast Video(R) name and signage. The Company has acquired an exclusive
licensing arrangement to reproduce and utilize graphically enhanced versions of
Bernard of Hollywood(TM) photographs of legendary actors and actresses which are
currently utilized inside the Company's stores and may also be utilized for
other promotional purposes and on merchandise produced by the Company to be sold
in its stores.
BUSINESS STRATEGY
The Company's strategy is to strengthen its position as an industry leader
while maximizing revenues and operating cash flow. The key elements of the
Company's operating strategy are:
- Building a Strong Presence in Selected Markets. The Company seeks to
concentrate its stores in chosen markets where it believes that prime
video locations are difficult to obtain and where it ranks among the two
leading video retailers. In each of the New York-New Jersey Metro,
Boston, Philadelphia, Dayton and Louisville metropolitan areas, the
Company believes that it has more outlets than all, or all but one, of
its competitors. This concentration enables the Company to conduct
highly targeted marketing programs to maximize penetration within its
selected markets, to maximize operating efficiencies in inventory
management, training and store supervision and to promote accessibility
to customers.
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- Capitalizing on Economies of Scale. Due to its size, the Company enjoys
key operating efficiencies, including substantial discounts in
purchasing video products and advertising media. The Company has
developed sophisticated in-house capabilities in marketing, purchasing,
management information systems ("M.I.S.")/telecommunications, retailing
and other areas of operations which provide critical management support
services to its stores. The Company employs software systems for the
purposes of monitoring and managing store inventory, sales, purchases
and customer memberships.
- Customizing Purchasing for Local Demographics. The Company's in-house
purchasing department tailors its selection of newly released titles and
video games to the specific demographics of each Company-owned store
and, through its proprietary monthly publication, "The Projector,"
suggests specific purchase quantities on a title-by-title basis for
franchised stores having varying demographic profiles and sales volumes.
- Employing New Store Design. As of January 31, 1999, the Company
completed nearly three years of design and testing of a new store format
that it believes provides video customers with the premier retailing
experience in the industry. Elements of this new design were chosen to
receive the 1997 Mobius Award, an international advertising design
award, in the Company's fourth quarter. New initial test stores opened
utilizing this format have operated at a revenue level substantially in
excess of the Company's current average revenue per store.
- Providing Comprehensive Customer Service. The Company believes that it
builds customer loyalty and promotes additional store visits and product
rentals by offering superior customer service through a highly trained
sales force having comprehensive product knowledge. The Company's
approach is epitomized by its slogan The Movie Buff's Movie Store.(R)The
Company believes its sales force's appreciation and understanding of
movies, children's video programming and interactive electronic
entertainment products can result in a higher level of service than most
of its competitors. An important 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.
The key elements of the Company's growth strategy will be:
- Selectively Developing New Stores. Subject to the availability of
capital, the Company plans to open, expand and relocate video retail
stores in locations where extensive store location studies indicate a
substantial probability of success. Most of these locations will be
within the Company's existing areas of geographic concentration.
- Expanding the Company's Franchise System through Area Development
Agreements and Acquisitions. The Company intends to continue to enter
into area development agreements which contemplate the establishment of
20 or more stores within a given territory by a single developer. See
"-- Franchising." The Company also intends to expand the geographic
scope of its franchise system. The Company believes that it can grow its
franchise system without significant additional capital expenditure and
without significant general and administrative overhead.
The Company is currently seeking alternative financing sources, as well as
pursuing other strategic initiatives and has engaged an investment bank to
explore alternatives including, but not limited to a merger, sale, refinancing,
or partial divestiture.
OPERATIONS
The Company's operating systems have been developed and tested over many
years. Management believes that these systems will allow the Company to manage
operations without incurring substantial incremental general and
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administrative expense. At January 31, 1999, the West Coast corporate staff
included 79 professionals working in the following capacities:
MARKETING/MOVIES & GAMES 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
capacity 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 quarterly marketing campaign several
months in advance of its 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 VSDA in the
past six years, including "Best Overall Campaign," "Best Community Service" and
"Best Special Media/Special Events." These campaigns have increased the
familiarity of existing and potential customers with the Company and are also
intended to increase customer rental and purchase transactions and frequency of
visits.
The Company uses radio and newspaper advertising and direct mail
solicitation to promote its business in the markets in which the Company
competes and uses television advertising in those metropolitan areas where the
Company is a dominant player. The marketing department has a dedicated staff
that publishes and distributes a proprietary, full color monthly consumer
magazine, "Spotlight on Video(TM)," which promotes new releases and special
offers exclusive to the Company.
The costs of the Company's marketing department are funded in part by a
contribution from West Coast's domestic franchisees that is required to be
devoted to advertising and marketing. Such contribution is equal to 1% of the
franchisees' gross revenues. Another 1% contribution is required to be devoted
to 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.
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,
over eight years of industry experience. The rental entertainment purchasers use
computerized purchasing models that analyze data in regard to the sales and
rental performance of individual titles from the Company's stores on-line
through the Company's Point of Sale ("POS") systems. The Company also publishes
a proprietary monthly publication, "The Projector(TM)," for owned and operated
stores and franchised stores that projects suggested purchase quantities on a
title-by-title basis for stores of varying demographic profiles and rental
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 utilizes POS software systems with
continuous inventory and customer database and extensive management reporting
capabilities. Nearly all of its franchisees utilize compatible POS software. In
1999, the Company intends to upgrade its POS system in an effort to make more
detailed data available more quickly on a system-wide basis. In addition, the
Management Information Systems department provides a broad range of services to
management as well as to owned and operated stores and franchised stores. Such
services include: management of various relational databases which aid in movie
and interactive electronic entertainment products purchasing; store site
evaluation and selection and customer profiling and targeting; on-line POS and
other store and corporate software maintenance, service and repair; technical
support for the installation of store computer hardware and software;
maintenance of hardware support agreements; on-line verification of franchisee
revenues for royalty audit purposes; Company and franchisee staff POS system
training; and enhancement and upgrading of POS software.
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RETAIL OPERATIONS. The Company has developed comprehensive retail operations
policy and procedure manuals to achieve standardization among its Company-owned
stores, as well as its franchisees. In addition, the Company's retail operations
group works directly with both corporate and franchisee stores to provide
assistance on a broad range of operational issues including: competitive
strategies; product pricing; revenue enhancement; expense management; risk
management; loss prevention for security and safety systems; new site analysis
and selection; remerchandising and renovation plans and analysis. The retail
operations group provides training and orientation as well as ongoing training
programs to corporate store personnel as well as franchisees. The retail
operations group has also developed a detailed timetable and manual and provides
direct assistance in the opening of Company owned and operated stores as well as
new franchised stores, including obtaining permits/licenses, providing opening
checklists and store configuration options, formulating construction guidelines,
initiating vendor contacts, helping to manage and meet exterior signage
specifications, wage and hiring guidelines, and developing professional service
and vendor contacts.
DEVELOPMENT OF THE COMPANY
West Coast Entertainment Corporation is a Delaware corporation established
by Ralph W. Standley III and T. Kyle Standley in February 1995 (originally under
the name RKT Acquisition Co.) for two purposes: (i) to combine four corporations
(the "Predecessor Corporations") through which the Standley family had
theretofore conducted their video store business and (ii) to acquire
substantially all of the operating assets relating to franchise operations of
West Coast Video Entertainment, Inc., an unrelated third party, and its four
affiliated corporations. In July 1995, each of the 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 Predecessor Corporations became stockholders of the Company.
Simultaneously, the Company, through its wholly-owned subsidiary West Coast
Franchise, a Delaware corporation, acquired substantially all of the
franchise-related operating assets of the West Coast Entertainment Incorporated
Companies, which had previously conducted a video store franchising business
under independent ownership in Philadelphia, Pennsylvania.
The Predecessor Corporations that were merged into the Company had
previously conducted their respective operations under substantially common
ownership. 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. 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. 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.
The Company's growth since fiscal 1997 is described under "-- Acquisitions."
On May 17, 1996, West Coast Entertainment Corporation completed an initial
public offering which consisted of 5,400,000 shares of common stock at $13.00
per share (the "Offering"). The net proceeds of the Offering after deducting
applicable issuance costs and expenses, were $60.8 million. The proceeds were
used to fund certain of the acquisitions discussed below and to repay
approximately $9.6 million in long-term debt.
ACQUISITIONS
YEAR ENDED JANUARY 31, 1998
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.
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YEAR ENDED JANUARY 31, 1999
There were no significant acquisitions by the Company during the year ended
January 31, 1999.
STORE LOCATIONS
The following table lists the number of stores owned and franchised by the
Company in each state or foreign country at January 31, 1999.
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NUMBER OF
OWNED AND NUMBER OF TOTAL
OPERATED STORES FRANCHISED STORES STORES
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STATE OR FOREIGN COUNTRY
Pennsylvania 49 65 114
New Jersey 60 25 85
Massachusetts 35 10 45
New York 33 2 35
Ohio 30 5 35
Kentucky 16 - 16
Louisiana 5 11 16
Indiana 9 1 10
Florida 5 4 9
Maryland - 8 8
Virginia 8 - 8
Illinois - 7 7
Arkansas 5 - 5
Mississippi - 5 5
Canada - 4 4
Oklahoma 3 - 3
Texas 2 1 3
Connecticut - 2 2
Curacao - 2 2
Delaware 1 1 2
Minnesota - 2 2
Peru - 2 2
California - 1 1
New Hampshire - 1 1
Arizona - 1 1
Total.......... 261 160 421
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PRODUCTS AND PRICING
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's stores generally rent new release titles overnight, depending on
the age and popularity of the title, while catalog titles rent for four to six
nights. 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.
The Company also offers videocassettes for sale. Generally, previously
viewed videocassettes are sold beginning 6 to 12 weeks after a new title is
released to video specialty stores depending on the popularity of the product.
Sales of new videocassettes are generally priced at $10.99 to $20.99. In
addition to video rentals and sales, the Company also rents and sells video game
products compatible with various game hardware platforms and personal computers.
Media consultant and economist Wilkofsky Gruen Associates, Inc. ("Gruen
Associates") has estimated that domestic interactive electronic entertainment
software revenue will increase from approximately $5.7 billion in 1995 to
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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 new hardware formats. As a result, the Company
believes that its interactive electronics will experience significant growth in
the next several years.
SUPPLIERS
The Company is contractually obligated to purchase from Ingram Entertainment
("Ingram") the lesser of 30% of its annual requirements of rental videocassettes
and video game products or $25 million through July 12, 2000 and the lesser of
25% of its annual requirements or $25 million through July 12, 2002. Ingram may
terminate this contract at any time for any reason upon 90 days prior written
notice. The Company currently receives marketing funds and an advertising
allowance from Ingram based upon a percentage of the Company's videocassette and
video game purchases. If the relationship with Ingram were terminated, the
Company believes that it could readily obtain its required inventory of
videocassettes and video games from alternative suppliers at prices and on terms
comparable to those with Ingram.
FRANCHISING
The Company's existing franchise agreements call for the Company to receive
approximately 7% of each franchisee's monthly gross revenues, subject to stated
monthly minimum royalties. Of this amount, the Company is required to devote an
amount equal to 2% of such monthly gross revenues to direct and indirect
advertising and marketing programs. The Company also receives a one-time fee
upon execution of the franchise agreement. Franchisees are not required to
purchase their initial inventory or supplies from the Company, although they
sometimes do so. Thereafter, franchisees purchase virtually all of their movie
and interactive game product from unaffiliated suppliers.
Franchisees are entitled to develop West Coast Video(R) stores at approved
locations within a specified geographic area under the terms of a standard
franchise agreement. The exclusivity accorded to a franchisee generally does not
extend beyond a radius of three miles from each franchised location, with
franchisees in urban locations often being limited to a one-half to one mile
radius. Franchises are typically awarded for a term of ten years, subject to the
franchisee's right to renew for additional ten-year periods.
The Company provides training for the franchisee's managers and other store
personnel. Franchisees are required to meet the Company's quality control
standards in regard to store appearance and size of videocassette inventory,
among other things. The Company provides advice about title selection, initial
promotional advertising, posters and brochures.
Each franchise owner has sole responsibility for all operational decisions
and financing commitments relating to the store, including monthly rent,
utilities and payroll. Franchisees are required to indemnify the Company 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. During the year ended
January 31, 1999, the Company has terminated 24 franchise agreements and an
additional 20 franchise agreements have expired.
AREA DEVELOPMENT AGREEMENTS. The Company has developed and executed area
development agreements which allow a franchisee the right to develop a
significant number of stores within a specified time period in specific
geographic locations.
COMPETITION AND TECHNOLOGICAL OBSOLESCENCE
The Company competes with all forms of entertainment and leisure
activities including other local, regional and national video retail stores,
including the Blockbuster Entertainment division of Viacom, Inc.
("Blockbuster"),
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and with other video retailers offering prerecorded videocassettes. Some of the
Company's competitors have significantly greater financial and marketing
resources, market share and name recognition than the Company.
The Company believes the principal competitive factors in the video retail
industry are store location and visibility, title selection, the number of
copies of popular titles available, customer service and convenience of store
access. The Company does not believe that pricing is a competitive factor
amongst video retailers, although it is a significant factor relative to
competition with other forms of entertainment. In addition, as a result of
direct competition with Blockbuster and a trend toward obtaining product via
revenue sharing agreements, rental pricing of videocassettes and greater
availability of new releases may become a more significant competitive factor in
the Company's business, which could have an adverse impact on the results of
operations of the Company. The Company is currently negotiating to obtain
similar copy depth via new revenue sharing agreements and other studio
purchasing programs which it believes will compensate for financial effects of
these programs by its competitors, however, there can be no assurance that such
agreements will be consummated.
The Company competes with several delivery systems including cable,
satellite and pay-per-view cable television systems, to which subscribers pay a
fee to see a movie selected by the subscriber. Current pay-per-view services
offer a limited number of channels and movies and are only available to
households with a direct broadcast satellite (DBS) receiver or a cable converter
to unscramble incoming signals. Digital compression technology and other
developing technologies are enabling cable companies, direct broadcast satellite
companies, telephone companies and other telecommunications companies to
transmit a much greater number of movies to homes at more frequently scheduled
intervals throughout the day on demand. Select cable and other
telecommunications companies have tested "video on demand" service in some
markets. Video on demand service would allow a viewer to pause, rewind and fast
forward movies. Based upon published information, the Company believes these
tests have been unsuccessful. The Company also believes movie studios have a
significant interest in maintaining a viable movie rental business because the
sale of videocassettes to video retail stores represents the studios' largest
source of revenue. As a result, the Company believes movie studios will continue
to make movie titles available to cable television or other distribution
channels only after revenues have been derived from the sale of videocassettes
to video stores.
The Company also believes substantial technological advances will need to
be developed in order to allow pay-per-view television to match the low price,
viewing convenience and selection available through video rental and substantial
capital expenditures will be necessary to implement these systems. In contrast,
according to Adams Media Research, 78.8 million, or 82%, of all U.S. television
households own a VCR. Currently, the Company does not believe that these
competitive technologies represent a near term competitive threat to its
business. However, technological advances or changes in the manner in which
movies are marketed, including the earlier release of movie titles to
pay-per-view, direct broadcast satellite, cable television or other distribution
channels, could make these technologies more attractive and economical, which
could have a material adverse effect on the business of the Company.
Movies recorded on digital videodiscs ("DVD") were introduced in March of
1997, as a new product format with significant potential for the industry.
Because of the ease of use and durability of DVD, it is anticipated that
consumers will be receptive to the introduction of DVD as a new product format
for viewing movies and other products in home entertainment. Currently, the
Company offers DVD for rental and sale in approximately 60 stores in primarily
metropolitan markets. The Company expects to expand its DVD software
availability to other markets once the installed base will support such an
investment. In the near term, however, retail prices on DVD players are expected
to remain high, and the option to allow recordability to DVD, at a
consumer-level price point, is still several years away. In addition, only a
fraction of the titles available on video are available on DVD, and new releases
are typically available on videotape at an earlier date than on DVD. At this
date DVD has not yet attained universal support from movie studios.
EMPLOYEES
At January 31, 1999, the Company had 2,277 employees, including 2,198 in
retail stores and the remainder in corporate administrative and warehousing
operations. Of such employees, 631 were full-time and 1,646 were part-time.
Staffing requirements for the Company's stores range from 6 to 12 employees,
depending on size and location, and typically include one store manager and one
or two assistant managers. Store managers report directly either to a
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<PAGE> 11
Regional Vice President (of which the Company currently has ten) 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 are represented by a labor union.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS. Certain statements in this Annual
Report on Form 10-K, under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere relate
to future events and expectations and as such constitute "forward-looking
statements." The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and in that
regard is cautioning the readers of this Report that the following important
factors, among others, could affect the Company's actual results of operations
and may cause changes in the Company's strategy with the result that the
Company's operations and results may differ materially from those expressed in
any forward looking statements made by, or on behalf of, the Company. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following considerations, as well as those factors set forth under the caption
"Factors Affecting Future Results" in Item 7 below.
The Company's growth could strain the Company's ability to manage
operations, integrate newly acquired stores into its systems and effectively
pursue its growth strategy. The Company competes with many others, including
Blockbuster, having significantly greater financial and marketing resources,
market share and name recognition than the Company. Further developments in
competing technologies could have a material adverse effect upon the video
retail industry and the Company's financial condition and results of operations.
Industry and Company revenues are somewhat seasonal and may be affected by many
factors, including variations in the acceptance of new release titles available
for rental and sale, the extent of marketing and promotional programs, weather,
special or unusual events and other factors that may affect retailers in
general. There can be no assurance that stores already acquired or acquired in
the future will perform as expected or that the prices paid for such stores will
prove to be advantageous. The Company's growth will be constrained by
limitations under its current capital structure.
ITEM 2. PROPERTIES
In January 1997, the Company moved into its new corporate headquarters,
located at One Summit Square, Suite 200, Route 413 & Double Woods Road,
Langhorne, Pennsylvania, which consists of approximately 17,600 square feet of
office space. This facility is rented under a lease which expires in April 2002.
The Company has one extension option for a five-year period and certain early
termination rights.
The Company currently operates its distribution services in a 32,000
square foot warehouse facility located at 180 Wheeler Court, Suite B, in
Langhorne, Pennsylvania. This facility is rented under a lease that expires
August, 2000 (excluding renewals and extensions). The Company is currently
considering relocating this warehouse to a 12,000 square foot warehouse
currently under lease in Union, New Jersey.
The Company also rents approximately 8,100 square feet of office space in
the aggregate for its regional operations in Union, New Jersey; Marion, Ohio;
and Vestal, New York, under leases which typically run for five or ten years
with options for renewal ranging from one to five years.
The Company leases all of its video specialty stores. The leases for the
Company's stores generally have an initial term of five to ten years or more and
provide one or more options to renew for additional terms of similar lengths.
The leases with respect to the remaining stores generally have an initial term
of five years and provide one or two options to renew for an additional term of
three to five years. Rents for the renewal terms are typically at pre-negotiated
rates. The majority of the leases contain percentage rental provisions which
only apply based upon high thresholds of in-store gross sales revenues. The
Company has not to date paid material amounts of percentage rentals. The Company
is responsible for taxes, insurance and utilities under most leases.
The Company expects that future stores will also occupy leased premises.
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation in the ordinary course 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS
The executive officers and other key executives of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ralph W. Standley, III ............ 60 Chairman of the Board of Directors
T. Kyle Standley .................. 35 President, Chief Executive Officer and Director
Richard G. Kelly .................. 45 Chief Financial Officer
Jerry L. Misterman ................ 53 Chief Accounting Officer and Executive Vice
President, Finance
Donald Weiss ...................... 57 Executive Vice President, Franchising
M. Trent Standley ................. 34 Vice President, Secretary and Director
</TABLE>
Ralph W. Standley III has served as the Chairman of the Board of the Company
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
the Company 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 the Company and its predecessors since its inception in February
1995. Previously, he served as an executive officer of two of the Company'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. Kelly joined the Company as Chief Financial Officer in July 1996. From
January 1994 to June 1996, Mr. Kelly was a shareholder and served as a Director
of Moore, Stephens, Reilly, PC and was a shareholder and Vice President of
Gerald T. Reilly & Co., Certified Public Accountants, Inc. Mr. Kelly served as
Director of Gillis & Kelly, P.C., from 1990 to 1993, at which time the firm
merged with Gerald T. Reilly & Co., Certified Public Accountants, Inc. Mr. Kelly
is a Certified Public Accountant whose responsibilities included direction of
mergers and acquisitions as well as tax and audit related functions.
Mr. Weiss has served as Executive Vice President, Franchising of the Company
since September 1996. From May 1996 to August 1996, Mr. Weiss served as Vice
President-Franchise Development of the Company. From November of 1992 until
April 1996, he served as Vice President-Franchising Development of West Coast
Enterprises, Inc ("WCEI"). From August 1991 to October 1992, Mr. Weiss served as
Vice President-Franchising Development of WCEI, and from March 1989 to July
1991, he served as Executive Director of Franchise Development of WCEI.
Mr. Misterman has served as Executive Vice President-Finance of the Company
since mid-July 1995 and as Chief Financial Officer of WC Franchise since the
acquisition by WC Franchise of certain franchise-related operating assets in
July 1995. Prior to July 1995, Mr. Misterman served as Chief Financial Officer
of each of the
12
<PAGE> 13
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.
M. Trent Standley has served as a Vice President, Secretary and a Director
of the Company since May 1995. He also served as President of one of the
Company'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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER'S MATTERS
The Company's common stock is traded and quoted on the over the counter
Market under the symbol "WCEC". The following table shows the high and low sales
prices of the common stock for the last two fiscal years through January 31,
1999.
<TABLE>
<CAPTION>
COMMON
STOCK PRICE
-----------
HIGH LOW
---- ---
<S> <C> <C>
Quarter ended April 30, 1997 ........... $9.25 $5.50
Quarter ended July 31, 1997 ............ 6.00 3.25
Quarter ended October 31, 1997 ......... 3.75 1.63
Quarter ended January 31, 1998 ......... 2.31 1.00
Quarter ended May 3, 1998 .............. 3.44 1.50
Quarter ended August 2, 1998 ........... 2.62 1.12
Quarter ended November 1, 1998 ......... 1.56 .19
Quarter ended January 31, 1999 ......... 2.00 .27
</TABLE>
As of April 22, 1999, there were 176 holders of record and approximately
1,345 beneficial owners of the Company's common stock. On such date,
approximately 9,275,212 shares were held by brokers, dealers and their nominees
on behalf of the beneficial owners.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its common
stock. For the foreseeable future, the Company expects to retain any earnings to
finance the 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 Company's
current bank 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.
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not make any issuances of unregistered securities during the
year ended January 31, 1999.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical financial data presented under the captions Statement of
Operations Data and Balance Sheet Data as of and for the years ended January 31,
1995, 1996, 1997, 1998, and 1999 was derived from the consolidated financial
statements of the Company. Such financial statements for the year ended January
31, 1999 were audited by BDO Seidman, LLP; financial statements for each of the
four years in the period ended January 31, 1998 were audited by
PricewaterhouseCoopers LLP. The Selected Financial Data set forth below should
be read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this filing.
13
<PAGE> 14
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------
1995 1996 1997 1998 1999
----- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .................................. $ 6,503 $ 14,719 $ 73,293 $ 123,753 $ 120,174
Operating income (loss)(1) ................ 385 1,216 8,053 423 (21,170)
Income (loss) before extraordinary item ... 204 334 3,710 (3,570) (27,217)
Net income (loss) ......................... 204 334 3,466 (3,570) (27,217)
Income (loss) before extraordinary item per
common share - basic and diluted ......... $ 0.12 $ 0.07 $ 0.35 $ (0.26) $ (1.93)
Net income (loss) per common share
basic and diluted ........................ $ 0.12 $ 0.07 $ 0.33 $ (0.26) $ (1.93)
Weighted average number of common shares
outstanding .............................. 1,693 4,756 10,554 13,817 14,072
OPERATING DATA:
Increase (decrease) in same store
revenues (2) ............................. 14.2% 4.8% 5.3% 0.8% (4.0)%
Store Data:
Company-owned stores at end of period .. 28 28 264 286 261
Franchised stores at end of period ..... -- 304 267 217 160
--------- --------- --------- --------- ---------
Total stores at end of period ........ 28 332 531 503 421
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 45 $ 611 $ 1,311 $ 2,604 $ 2,424
Videocassette rental inventory, net ....... 1,464 1,509 24,598 32,005 20,375
Total assets .............................. 3,631 16,515 159,964 187,236 165,680
Long-term debt, less current portion ...... 738 7,101 32,802 65,006 58,187
Total liabilities ......................... 3,266 15,972 52,829 83,555 89,424
Equity .................................... 365 543 107,135 103,681 76,256
</TABLE>
- --------
(1) Operating (loss) for the year ended January 31, 1999 is net of the effects
of the valuation and store closing charges; described in Notes 2 and 17,
respectively, to the consolidated financial statements.
(2) The increase (decrease) in same store revenues compares revenues from stores
owned by the Company at the end of each period that were open throughout
that period and the corresponding period for the prior year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Through January 31, 1998, the Company had experienced rapid growth in
revenue, primarily as a result of acquiring video specialty store chains and had
also experienced increased growth in existing store revenues. After acquiring
the Videosmith(R) chain in 1994, the Company owned and operated 28 stores in
Ohio and Massachusetts. The acquisition of a total of 280 owned and operated
stores during the years ended January 31, 1997 and 1998 significantly increased
the Company's market penetration within New Jersey, New York, Pennsylvania, Ohio
and certain other states and expanded the Company's operations to reach a total
of 22 states.
Revenues. 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 new
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.
The Company believes that convenience, selection, customer service and
weather 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 such competitive factors as are under its
control.
14
<PAGE> 15
The franchise arrangement calls for the Company to receive franchise fee
payments monthly in arrears from its franchised stores. The franchise fee
payment due from most domestic franchisees is equal to 7% of the aggregate
revenues from all of the franchisees' stores for the prior month, of which 2% of
such aggregate revenues is required to be 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.
Expenses. Store operating expenses generally consist of expenses incurred at
the store level, including amortization of videocassette and video game rental
inventory ("rental inventory"), personnel expense, lease expense, utility
expense and depreciation. For purposes of this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," rental inventory
amortization expense has been removed from store operating expenses and
discussed separately. Rental inventory amortization expense is a substantial
component of total expenses. The Company believes that its methods of
amortization result in an appropriate matching of amortization expense with the
revenue received from the associated rental of such inventory.
Cost of goods sold is a smaller component of total expenses consisting
primarily of costs associated with purchasing videocassettes and video games to
be sold directly to customers, supplies to be sold to franchisees, video games
and confectionery items. Selling, general and administrative expenses are
non-store level expenses and include general corporate expenses such as
marketing and advertising, personnel, administration, legal and accounting.
These functions are primarily performed at the Company's headquarters in
Langhorne, Pennsylvania. Interest expense reflects the extent to which the
Company borrows funds and the applicable rate at which such funds are borrowed.
Intangible assets are primarily comprised of franchise rights and goodwill.
Franchise rights are amortized on a straight-line basis over 15 years, the
estimated economic life of such rights. Goodwill is amortized over 20 years on a
straight-line basis.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated statement of
operations data and other data expressed as a percentage of total revenue and
the number of stores open at the end of each period.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Rental revenues ................................... 80.1% 82.4% 82.7%
Merchandise and other sales ....................... 13.4 15.6 15.5
Franchise fees .................................... 6.5 2.0 1.8
----- ----- -----
Total revenues ................................. 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Store operating expenses(1) ....................... 43.5 46.3 47.6
Cost of goods sold ................................ 8.9 11.0 11.9
Amortization of videocassette and video game rental
inventory(2) ................................... 15.4 21.0 20.5
Selling, general and administrative ............... 16.7 12.2 13.0
Amortization of intangible assets ................. 4.6 5.0 5.4
Store closing charges ............................. -- -- 4.7
Valuation charges ................................. -- -- 14.5
Debt offering write-off ........................... -- 4.2 --
----- ----- -----
Total costs and expenses ..................... 89.1 99.7 117.6
----- ----- -----
Income (loss) from operations ..................... 10.9 0.3 (17.6)
Interest expense and other ........................ 1.5 4.0 5.8
----- ----- -----
Income (loss) before provision for income taxes and
extraordinary ....................................... 9.4 (3.7) (23.5)
item
Provision (benefit) for income taxes .............. 4.4 (0.8) (0.8)
----- ----- -----
Income (loss) before extraordinary item ........... 5.0% (2.9)% (22.6)%
===== ===== =====
OTHER DATA:
Purchases of videocassette rental inventory ....... 25.2% 24.6% 25.7%
STORE DATA:
Increase (decrease) in same store revenues(3) ..... 5.3% 0.8% (4.0)%
Company-owned stores at end of period ............. 264 286 261
Franchised stores at end of period ................ 267 217 160
----- ----- -----
Total stores at end of period ..................... 531 503 421
===== ===== =====
</TABLE>
- ----------
(1) Exclusive of amortization of rental inventory.
(2) The Company's amortization policy for rental inventory is described in Note
2 to the Consolidated Financial Statements.
(3) The increase (decrease) in same store revenues compares revenues from stores
owned by the Company at the end of each period that were open throughout
that period and the for the prior year.
YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
Revenues. Revenues decreased $3.5 million, or 2.8%, from $123.7 million for
the year ended January 31, 1998 to $120.2 million for the year ended January 31,
1999. This change reflected a decrease of $2.5 million in rental revenues, a
decrease of $0.7 million in merchandise sales and a decrease of $0.3 million in
franchise fee revenue. The decreases in store rental and merchandise sales
revenues of $3.2 million are attributable to a decrease in average store
revenues from $433,000 during the year ended January 31,1998 to $423,000 during
the year ended January 31, 1999 which accounted for approximately $2.8 million
of the decrease in store revenues. The 38 stores that the Company closed during
the year ended January 31, 1999 did not have a significant impact on store
revenues. On a weighted average store count basis, weighted average stores
decreased from 280 during the year ended January 31,1998 to 279 during the year
ended January 31, 1999. This decrease of 1 weighted average store accounts for
the remaining $0.4 million decrease in store revenues.
Rental revenues decreased $2.5 million, or 2.5%, from $101.9 million for
the year ended January 31, 1998 to $99.4 million for the year ended January 31,
1999. This decrease is primarily attributable to lower average store rental
revenues per store. Average store rental revenues decreased by approximately
$8,000 per store which accounts for $2.2 million of the decrease. The remaining
$0.3 million relates to the weighted average store decrease
16
<PAGE> 17
of 1 store, as discussed above. The rental revenue decrease was caused by both
the impact of revenue sharing being used more extensively by the Company's
competitors which enables them to increase the number of copies of new release
movies carried in their stores and by the unusually dry and mild weather which
occurred during the year in the Company's geographic operating area.
Merchandise and other sales decreased $0.7 million, or 3.6%, from $19.3
million for the year ended January 31, 1998 to $18.6 million for the year ended
January 31, 1999. This decrease is primarily attributable to lower average store
merchandise sales. Average merchandise sales decreased by approximately $2,200
per store which accounts for $0.6 million of the decrease. The remaining $0.1
million relates to the weighted average store decrease of 1 as discussed above.
Merchandise sales decreased as a result of lower store inventory levels during
the Company's fourth quarter of the year ended January 31, 1999. Average store
merchandise sales decreased by $6,600 for the quarter ended January 31, 1999 as
compared to the quarter ended January 31, 1998.
Franchise fee revenues decreased $0.3 million, or 12.0%, from $2.5 million
for the year ended January 31, 1998 to $2.2 million for the year ended January
31, 1999. This decrease is attributable to a decline in the amount 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 from 217 at
January 31, 1998 to 160 at January 31, 1999 and a decrease in the number of
franchise stores.
Store Operating Expenses. Store operating expenses decreased $0.1 million,
or 0.2%, from $57.3 million for the year ended January 31, 1998 to $57.2 million
for the year ended January 31, 1999. This $0.1 million decrease in dollars is
primarily related to weighted average store decrease of 1 store as discussed
above. Average store operating expenses for both years ended January 31, 1998
and 1999 approximated $205,000. As a percentage of total revenues, store
operating expenses increased 1.3 percentage points from 46.3% for the year ended
January 31,1998 to 47.6% for the year ended January 31, 1999 primarily as a
result of lower store revenues as previously discussed.
Cost of Goods Sold. Costs of goods sold increased $0.8 million, or 5.9 %,
from $13.6 million for the year ended January 31, 1998 to $14.4 million for the
year ended January 31, 1999. As a percentage of merchandising sales, cost of
goods sold increased by 4.8 percentage points from 70.5% for the year ended
January 31, 1998 to 75.3 % for the year ended January 31, 1999. These increases
in both dollars and as a percentage of merchandise sales were caused by the
impact of Titanic which represented a significant portion of the year's
merchandise sales and was sold at a lower margin as well as by restocking and
handling fees incurred during the year for merchandise inventory returned to
vendors.
Amortization of Videocassette and Video Game Rental Inventory. Amortization
of rental inventory decreased $1.3 million, or 5.0 %, from $26.0 million for the
year ended January 31, 1998 to $24.7 million for the year ended January 31,
1999, primarily as a result of the change in method of amortization of rental
inventory as of November 1, 1998 as more fully discussed in Notes 2 and 3 of the
consolidated financial statements.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $0.5 million, or 3.3%, from $15.1 million for
the year ended January 31, 1998 to $15.6 million for the year ended January 31,
1999. This increase was caused by increases in professional and consulting fees
of $0.8 million, depreciation of $0.7 million and recording of a $0.6 million
allowance for uncollectable franchise receivables which were mostly offset by
decreases in salaries of $0.5 million, travel of $0.2 million, insurance of $0.3
million, freight and postage of $0.3 million and supplies and computer expense
of $0.3 million. The increase in professional fees were caused by additional
legal expenses related to disputes with franchisees, negotiations with landlord
issues relating to store closures and delisting of the Company's stock by
Nasdaq. Decreases in selling, general and administrative expenses are the result
of cost cutting measures instituted by management. As a percentage of total
revenues, selling, general and administrative expenses increased 0.8 percentage
points from 12.2 % for the year ended January 31, 1998 to 13.0 % for the year
ended January 31, 1999 as a result of the $0.5 million increase of selling,
general and administrative expense as discussed above and the $3.5 million
decrease in total revenues as previously discussed.
Store Closing Charges. During the quarter ended November 1, 1998, the
Company provided for $5.6 million in store closing costs associated with
management's decision to close stores as described in Note 17 to the
consolidated financial statements.
17
<PAGE> 18
Valuation Charges. During the fourth quarter ended January 31, 1999 the
Company recorded a valuation charge of approximately $17.4 million for
write-down of videocassette rental inventory and an impairment of goodwill as
more fully described in Note 2 to the consolidated financial statements.
Amortization of Intangible Assts. Intangible amortization expense increased
$0.3 million, or 4.8 %, from $6.2 million for the year ended January 31, 1998 to
$6.5 million for the year ended January 31, 1999. As a percentage of total
revenues, intangible amortization increased 0.4 percentage points from 5.0 % for
the year ended January 31, 1998 to 5.4% for the year ended January 31, 1999.
These increases are entirely related to goodwill associated with acquisitions in
June 1997 which were only amortized for one-half of the year ended January 31,
1998, but were amortized for a full year during the year ended January 31, 1999.
Interest Expense and Other. Net interest expense and other increased $2.0
million, or 40.0 %, from $5.0 million for the year ended January 31, 1998 to
$7.0 million for the year ended January 31, 1999. Interest expense comprises
almost all this net amount. As a percentage of total revenues, interest expense
increased 1.6 percentage points from 4.0 % for the year ended January 31, 1998
to 5.6 % for the year ended January 31, 1999. The increase is substantially
attributable to additional interest expense incurred in connection with
borrowings related to acquisitions in June 1997 for which interest expense was
incurred for one-half of the year ended January 31, 1998, but for a full year
during the year ended January 31, 1999.
Net Income (Loss). As a result of the foregoing, net income decreased $23.6
million, from a $3.6 million net loss for the year ended January 31, 1998 to a
$27.2 million net loss for the year ended January 31, 1999. Without the store
closing charges of $5.6 million and $17.4 million of valuation charges, the loss
for the year would have been $4.2 million.
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997
Revenues. Revenues increased $50.4 million, or 68.8%, from $73.3 million
for the year ended January 31, 1997 to $123.7 million for the year ended January
31, 1998. This change reflected an increase of $43.2 million in rental revenues,
an increase of $9.5 million in merchandise sales and a decrease of $2.3 million
in franchise fee revenue. The increases in rental and merchandise sales revenues
are partially attributable to the 40 video specialty stores acquired in 1997
which were not included in revenue for the year ended January 31, 1997 but were
included for part of the year ended January 31, 1998 (1 on March 21, 1997, 1 on
April 10, 1997, 37 on June 16, 1997 and 1 on June 24, 1997) and partially
attributable to the timing of acquisitions of stores for the year ended January
31, 1997: 172 stores acquired on May 17, 1996 were included in revenues for only
eight and one-half months in the year ended January 31, 1997, but for the full
year ended January 31, 1998; 5 stores acquired on August 26, 1996 were included
in revenues for only five months in the year ended January 31, 1997 but for all
twelve months in the year ended January 31, 1998; 15 stores acquired between
September 30 and October 1, 1997 were included in revenues for only four months
in the year ended January 31, 1997, but for all 12 months of the year ended
January 31,1998; and 45 stores acquired on November 15, 1996 were included in
revenues for only two and one-half months in the year ended January 31, 1997,
but for the full year ended January 31,1998. Three other store acquisitions
complete the Company's acquisition of 280 stores since the Offering: 1 on
October 25, 1996; 1 on December 1, 1996 and 1 on December 3, 1996. Revenues for
these three stores were included for only three, two, and two months,
respectively, for the year ended January 31, 1997, as compared to all twelve
months of the year ended January 31,1998 The remaining increase is due to the
increase in per store average revenues.
Rental revenues increased $43.2 million, or 73.6%, from $58.7 million for
the year ended January 31, 1997 to $101.9 million for the year ended January 31,
1998. This increase is primarily attributable to the revenues generated by the
40 video specialty stores acquired in the year ended January 31, 1998 and
revenues from stores acquired during and owned for only a portion of the year
ended January 31, 1997 but owned for the full year ended January 31, 1998 as
described above. The remaining increase in rental revenues is due to an increase
in rental revenues for stores owned by the Company for the full twelve months in
both of the years ended January 31, 1998 and 1997.
Merchandise and other sales increased $9.5 million, or 96.9 %, from $9.8
million for the year ended January 31, 1997 to $19.3 million for the year ended
January 31, 1998 primarily attributable to the merchandise sales contributed by
the 40 video specialty stores purchased in the year ended January 31, 1998 and
the merchandise sales from stores owned for only a portion of the year ended
January 31, 1997 but for the full year ended January 31, 1998
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<PAGE> 19
as described above. In addition, the Company has expanded its inventory levels
to increase sales of new movies.
Franchise fee revenues decreased $2.3 million, or 47.9%, from $4.8 million
for the year ended January 31, 1997 to $2.5 million for the year ended January
31, 1998. Approximately $0.7 million of this decrease is the net effect of the
acquisition of 39 franchised stores among the total of 280 stores purchased by
the Company since May 17, 1996. The remaining $1.6 million decrease is
attributable to the closing or termination of franchised stores, many of which
did not meet image and appearance criteria, a decline in the number of royalty
payments received from franchisees due to a decline in their business and a
decline in the number of franchisees who make required payments since January
31, 1997.
As a result of the Company's acquisition activities and other
developments described above the mix of revenue sources changed to approximately
82.4% rental, 15.6% merchandising and 2.0% franchising during the year ended
January 31, 1998 from approximately 80.1%, 13.4%, and 6.5%, respectively, during
the year ended January 31, 1997.
Store Operating Expenses. Store operating expenses increased $25.4
million, or 79.6%, from $31.9 million for the year ended January 31, 1997 to
$57.3 million for the year ended January 31, 1998. This $25.4 million increase
in dollars is primarily related to the acquisition of new stores as described
above. As a percentage of total revenues, store operating expenses increased 2.8
percentage points from 43.5% for the year ended January 31, 1997 to 46.3% for
the year ended January 31, 1998. Except as discussed below this increase was
caused by the decrease from the year ended January 31, 1997 to the year ended
January 31, 1998 in the relative significance of the Company's franchise
operations (as measured by the decrease in franchise revenues as a percentage of
total revenues), since the franchise business involves virtually no store
operating expenses. As a percentage of rental revenues and merchandise sales,
store operating costs increased 0.7 percentage points from 46.6% for the year
ended January 31, 1997 to 47.3% for the year ended January 31, 1998. This
increase is primarily due to higher rent costs and payroll costs. Since the
initial acquisition of 172 stores on May 17, 1996, most of the additional 108
stores acquired are located in larger metropolitan areas which generally have
higher occupancy costs. Store salaries increased due to an increase in store man
hours. In September 1997, management implemented steps to begin to reverse this
trend in man hours and during the fourth quarter ended January 31, 1998, store
payroll costs were substantially less than management's goals.
Cost of Goods Sold. Costs of goods sold increased $7.1 million, or
109.2%, from $6.5 million for the year ended January 31, 1997 to $13.6 million
for the year ended January 31, 1998, primarily as a result of an increase in
merchandising sales volume due to the acquisition of the 280 video specialty
stores since May 17, 1996. As a percentage of merchandising sales, cost of goods
sold increased by 4.2 percentage points from 66.3% for the year ended January
31, 1997 to 70.5% for the year ended January 31, 1998. This increase was
primarily due to a change in sales mix caused by the acquisition of the 280
video specialty stores and the sale of more sell-through titles which have a
lower margin.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of rental inventory increased $14.7 million, or 130.1%, from $11.3
million for the year ended January 31, 1997 to $26.0 million for the year ended
January 31, 1998, primarily as a result of the acquisition of the 280 video
specialty stores since May 17, 1996. As a percentage of rental revenues this
amortization increased 6.2 percentage points from 19.3% for the year ended
January 31, 1997 to 25.5% for the year ended January 31, 1998. This is primarily
due to the net effects of purchase accounting for acquired stores and by an
$803,000 charge resulting from the adoption of the new method of amortization of
rental inventory as described in Notes 2 and 3 to the Consolidated Financial
Statements.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $2.9 million, or 23.8%, from $12.2 million for
the year ended January 31, 1997 to $15.1 million for the year ended January 31,
1998. The increase is primarily related to an increase in Corporate personnel
hired in anticipation of the Proposed Private Placement (see " ---- Debt
Offering Write-Off") and related acquisitions. Because of the indefinite delay
in the Company's Proposed Private Placement of debt securities and related
acquisitions, the Company has sharply reduced its general and administrative
costs from the levels reached in contemplation of expansion. The effects of
these changes were partially reflected in the financial results of the fourth
quarter of the year ended January 31, 1998. As a percentage of total revenues,
however, general and administrative expenses decreased 4.5 percentage points
from 16.7% for the year ended January 31, 1997 to 12.2% for the year ended
January 31, 1998
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<PAGE> 20
primarily reflecting the ability of the Company's administrative staff to
operate an increasing number of corporate stores and, to a lesser extent, the
change in the mix of rental revenues, merchandise sales and franchise fees.
Franchising has higher associated general and administrative costs than rental
revenues and merchandise sales.
Amortization of Intangible Assts. Intangible amortization expense
increased $2.8 million, or 82.4%, from $3.4 million for the year ended January
31, 1997 to $6.2 million for the year ended January 31, 1998. As a percentage of
total revenues, intangible amortization increased 0.4 percentage points from
4.6% for the year ended January 31, 1997 to 5.0% for the year ended January 31,
1998. These increases are entirely related to amortization of goodwill
associated with the acquisition of 280 video specialty stores since May 17,
1996.
Debt Offering Write-Off. A debt offering write-off of $5.1 million
was incurred for the year ended January 31, 1998. The entire $5.1 million
represents 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
$3.9 million, or 354.5%, from $1.1 million for the year ended January 31, 1997
to $5.0 million for the year ended January 31, 1998. Interest expense comprises
almost all this net amount. As a percentage of total revenues, interest expense
increased 2.2 percentage points from 1.8% for the year ended January 31, 1997 to
4.0% for the year ended January 31, 1998. The increase is substantially
attributable to additional interest expense incurred in connection with
borrowings related to the acquisitions.
Extraordinary Item. For the year ended January 31, 1998 no
extraordinary items were incurred. For the year ended January 31, 1997 the
Company incurred an extraordinary item of $0.4 million ($0.2 million net of
taxes) in conjunction with the early extinguishment of a portion of the
previously outstanding subordinated debt. The Company was required by terms of
the debt agreement to pay a prepayment penalty of $0.4 million upon completion
of the Offering.
Net Income (Loss). As a result of the foregoing, net income decreased
$7.1 million, from $3.5 million of net income for the year ended January 31,
1997 to a $3.6 million net loss for the year ended January 31, 1998. Carving out
the one-time charge of $5.1 million resulting from the Debt Offering Write-Off
and adjusting for the $0.8 million charge resulting from a change in method of
amortization of the video rental inventory (see Note 2 to the Consolidated
Financial Statements), the loss for the year would have been eliminated.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, the Company has approximately $58.1 million
of its debt maturing February 15, 2000.
Although the Company believes that its projected cash flow will be sufficient to
meet its operating needs until the debt maturity date discussed above, there can
be no assurances beyond that date.
While the Company is continuing to monitor and reduce its operating expenses,
including payroll, it is also considering the sale of certain assets or
operations as well as exploring other alternatives, including, but not limited
to a merger or refinancing.
For the year ended January 31, 1999, the Company had net cash provided by
operating activities of $33.5 million, net cash used in investing activities of
$34.8 million (consisting primarily of cash used to purchase videocassette
rental inventory of $31.0 million and $3.4 million of cash paid for purchases of
property and equipment) and net cash provided by financing activities of $1.1
million (consisting primarily of net borrowings under the Credit Facility, as
described in Note 7 to the Consolidated Financial Statements), resulting in a
net decrease in cash of $0.2 million.
During the current fiscal year, the Company has financed its operations and
capital expenditures primarily through available operating cash flow .
20
<PAGE> 21
On January 12, 1999, the Company signed an amendment to its bank agreement
increasing the availability under the facility from $65,000,000 to $70,000,000,
as well as providing for certain credit enhancements. The amended credit
agreement is a non-revolving facility maturing February 15, 2000. The bank
agreement includes covenants, including, but not limited to, minimum operating
cash flow, minimum net worth, dividend restrictions, and limitations on
indebtedness. The facility is secured by substantially all of the Company's
assets.
In the event the debt is not repaid in full, subject to certain conditions,
prior to September 30, 1999, the banks have the right under a warrant agreement
to purchase 5% of the Company's common stock at 75% of the average market price
15 days prior to July 1, 1999.
On October 7, 1998, the Company received formal notice from NASDAQ that its
stock would no longer be eligible to be traded through the NASDAQ National
Market, due to the Company's inability to meet the NASDAQ requirement to
maintain $4 million of tangible net worth and a $1.00 bid price, or in the
alternative a $5.00 bid price and sales of $50 million. Currently the Company
stock is trading on the OTC Bulletin Board.
During the third quarter of fiscal 1999, the Company implemented a plan to close
certain under-performing stores, for which it recorded a charge of $5.6 million.
In addition, the Company executed an expense reduction program, which when
combined with the aforementioned store closures, is expected to result in a
savings of $4 million annually.
The Year 2000 Issue and Capital Commitments. The year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. As a result, the computerized systems (including both information
and non-information technology systems) and applications used by the Company are
being reviewed, evaluated, and, if and where necessary, modified or replaced to
ensure that all financial, information, and operating systems are Year 2000
compliant.
The Company intends to upgrade its POS systems over the upcoming months in an
effort to make more detailed data available on a system wide basis in a timely
manner at a cost of approximately $0.6 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 has initiated formal communications
with its suppliers to determine the extent to which the Company is vulnerable to
those third parties' failure to remedy their own Year 2000 issues. The Company
will continue to address any further year 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 funds under
the Credit Facility and its' ability to secure additional financing the
Company's capital expenditure plan provides for conversion of the stores
acquired in various prior acquisitions to West Coast Video(R) signage and format
and installing certain West Coast layout and features 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 funds under the Credit Facility.
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.
Recent Accounting Pronouncements
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments"
("SFAS 133") which establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair market value. Under certain circumstances, a portion of the
derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that the
adoption of SFAS 133 will have no impact on its financial position or results of
operations.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities" which
provides guidance on the financial reporting of start-up costs and organization
costs. SOP 98-5 requires that an entity expense costs of start-up activities and
organization costs as incurred. Presently, the Company capitalizes these costs
and amortizes them during the year in which they are incurred. The Company
believes that the adoption of SOP 98-5 will not have a material impact on its
financial position or results of operations.
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 or wage increases.
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 to 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, alternative leisure time activity, and the new
television season.
FACTORS AFFECTING FUTURE RESULTS
The future operating results of the Company remain difficult to predict. The
Company continues to face many risks and uncertainties which could affect its
operating results, including, without limitation, those described below.
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 videocassettes and interactive electronic entertainment
products. Many of the Company's stores compete with stores operated by
Blockbuster, the dominant video specialty retailer in the United States.
Blockbuster and certain of the Company's other 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,
direct broadcast satellite television, live theater, sporting events, family
entertainment centers and Internet-related activities. The Company's failure to
compete effectively would have a material adverse effect on its financial
condition and results of operations.
See "Item 1 -- Competition."
The Company competes with pay-per-view cable television systems
("Pay-Per-View"), to 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
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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 "Item 1 -- 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 "Item 1 -- Video
Industry Overview" and "-- Competition."
Rental and sales volumes for video games 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. Revenues from the
videocassette and video game rental portions of the Company's business are
somewhat seasonal and may be affected by many factors, including variations in
the number and timing of theatrical movie releases and releases to video
specialty stores, the public acceptance of new release titles available for
rental and sale, the extent of marketing and promotional programs sponsored by
distributors of videocassettes and video games and changes in wholesale prices
of videocassettes and Pay-Per-View formatted movies. Demand for the Company's
products may also be affected by weather, special or unusual events and other
factors that may affect retailers in general.
On January 31, 1999, the Company had 104 franchisees operating 160
franchised stores. No assurance can be given that the Company will operate its
franchise operations at profitable levels or continue to market and sell new
franchises. In addition, no assurance can be given that desirable locations and
acceptable leases can be obtained for new franchisees. The Company monitors
franchisees' revenue reporting and 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 inspect the
franchised store and 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 Company has recently experienced a
significant reduction and slowdown in franchise fee receipts.
The Company's recent rapid growth challenges the Company's ability to manage
operations, integrate newly acquired stores into its systems and effectively
pursue its growth strategy. The success of the Company's growth strategy is
dependent upon its ability to achieve cost savings in connection with
acquisitions and otherwise successfully integrate acquired operations into the
Company's management information, telecommunications, management, marketing,
finance and accounting, entertainment purchasing, distribution, retail
operations and merchandising systems. There can be no assurance, however, that
the Company will be able to achieve such savings or successfully integrate
acquired operations into its existing operations. There can be no assurance that
such 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. 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; negotiate acceptable
real estate leases and related agreements for existing stores and for stores to
be acquired or opened and to 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.
In consummating acquisitions, the Company has relied 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.
The Company intends to finance new store openings primarily from borrowings
under the Credit Facility, from the net proceeds from the sale of other debt or
equity securities, and from cash from operations. At present, the
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<PAGE> 24
Credit Facility contains provisions which may place substantial limitations on
the availability of funds which, in turn, may impact future growth. See Note 7
to the Consolidated Financial Statements. There can be no assurance that the
Company will at some future date be able to sell debt or equity securities on
reasonable terms. Continued inability to raise sufficient cash and issue
sufficient stock could inhibit implementation of the Company's long-term growth
strategy.
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. Furthermore, 12 states at present
require a franchisor to comply with registration or filing requirements prior to
offering a franchise in the state and to provide a prospective franchisee with a
current franchise offering circular complying with the state's laws, prior to
the sale of the franchise, and six other states require written notice prior to
the offer of a franchise (collectively, the "Registration States"). The Company
is currently registered in all of the Registration States and is currently
entitled to sell franchises in all other states in compliance with the FTC
Franchise Rule. The Company is in the process of filing all of its renewal
registrations in the Registration States, to reflect its latest franchise
offering. Violations of the FTC Franchise Rule and the franchise offering
requirements of the Registration States could result in civil penalties against
the Company and civil and criminal penalties against the executive officers of
the Company.
The inability by the Company to be able to obtain revenue sharing agreements
from major studios at the same time as Blockbuster, its principal competitor,
has had and may continue to have significant negative impact on rental revenues
and cash flow. In addition, the cost of revenue sharing agreements with major
studios may have an adverse impact on gross income and cash flow.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk relates primarily to potential changes
in interest rates on the Company's long-term debt obligations. The Company has
cash flow exposure on its long-term obligations related to changes in market
interest rates. The Company enters into long-term debt obligations for general
corporate purposes, including the funding of capital expenditures for
acquisitions. The Company has not entered into any material derivative financial
instruments to hedge interest rate risk on these general corporate borrowings.
The Company's management believes that fluctuations in interest rates in the
near term may materially affect the Company's consolidated operating results,
financial position or cash flows as the Company has significant exposure to
interest rate fluctuations.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements of West Coast Entertainment
Corporation, listed in the index appearing under Item 14(a)(1) and (2) are filed
as part of the Annual Report on Form 10-K.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
West Coast Entertainment Corporation
We have audited the accompanying consolidated balance sheet of West Coast
Entertainment Corporation and subsidiaries as of January 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides 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 West Coast
Entertainment Corporation and its subsidiaries as of January 31, 1999 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has approximately $58.1 million
of its Credit Facility maturing February 15, 2000 which raises substantial doubt
about its ability to continue as a going concern beyond that date. Management's
plans, including strategic financial alternatives, in regard to this matter are
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
/s/ BDO Seidman, LLP
Philadelphia, PA
April 23, 1999
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<PAGE> 26
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
present fairly, in all material respects, the financial position of West Coast
Entertainment Corporation and its subsidiaries (the "Company") at January 31,
1998, and the results of their operations and their cash flows for each of the
two years in the period ended January 31, 1998, 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.
As discussed in Note 2 to the consolidated financial statements, effective
August 1, 1997, the Company changed its method of accounting for the
amortization of its videocassette rental inventory.
PRICEWATERHOUSECOOPERS LLP
/s/ PricewaterhouseCoopers LLP
April 2, 1998
Boston, Massachusetts
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WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1998 1999
--------- ---------
<S> <C> <C>
ASSETS (NOTE 7)
Current assets:
Cash ................................................................................ $ 2,604 $ 2,424
Accounts receivable and other receivables (net of allowance for doubtful
accounts of $123 and $ 67 at January 31, 1998 and 1999, respectively) ............. 1,629 1,512
Merchandise inventory ............................................................... 8,216 8,404
Income taxes receivable ............................................................. 441 --
Deferred tax asset (Note 8) ......................................................... 820 --
Market development funds and co-op receivable ....................................... 2,124 1,242
Receivables from officers (Note 9) .................................................. 341 373
Prepaid expenses and other current assets ........................................... 652 472
--------- ---------
Total current assets ............................................................... 16,827 14,427
Videocassette rental inventory, (net of accumulated amortization of $37,252 and
$67,610 at January 31, 1998 and 1999, respectively) (Note 3) ........................ 32,005 20,375
Furnishings, equipment and leasehold improvements, net (Note 4) ....................... 18,953 17,892
Intangible assets (net of accumulated amortization of $10,003 and $ 16,497 at
January 31, 1998 and 1999, respectively) ............................................ 117,047 110,530
Other assets (Note 5) ................................................................. 2,404 2,456
--------- ---------
Total assets ..................................................................... $ 187,236 $ 165,680
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 7) .......................................... $ 8 $ 8,081
Accounts payable .................................................................... 11,719 14,659
Accrued expenses (Note 6) ........................................................... 4,926 7,783
Income taxes payable ................................................................ -- 655
--------- ---------
Total current liabilities ........................................................ 16,653 31,178
Long-term debt (Note 7) ............................................................... 65,006 58,187
Deferred tax liability (Note 8) ....................................................... 1,741 --
Other Liabilities ..................................................................... 155 59
--------- ---------
Total Liabilities ..................................................................... 83,555 89,424
--------- ---------
Commitments and contingencies (Notes 10, 14 and 15) ................................... -- --
Stockholders' equity:
Common stock ($0.01 par value; 13,843 shares as of January 31, 1998, of which
13,706 shares were outstanding and 137 shares were to be issued and 14,185 shares
as of January 31, 1999 of which 14,073 shares were outstanding and 20
shares were to be issued (Note 11) ............................................... 138 142
Preferred stock ($0.01 par value, 2,000 shares authorized, no shares
issued) (Note 13) ................................................................ -- --
Additional paid-in capital ......................................................... 104,063 104,093
Accumulated (deficit) .............................................................. (520) (27,737)
Treasury stock (92 shares of common stock, at cost) ................................ -- (242)
--------- ---------
Total stockholders' equity ....................................................... 103,681 76,256
--------- ---------
Total liabilities and stockholders' equity ....................................... $ 187,236 $ 165,680
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
27
<PAGE> 28
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Rental revenue ..................................... $ 58,728 $ 101,934 $ 99,379
Merchandise sales .................................. 9,795 19,312 18,626
Franchise fees ..................................... 4,770 2,507 2,169
--------- --------- ---------
73,293 123,753 120,174
--------- --------- ---------
Costs and expenses:
Store operating expenses ........................... 31,912 57,346 57,207
Cost of goods sold ................................. 6,527 13,596 14,414
Amortization of videocassette and video game rental
inventory (Note 3 ) ............................. 11,265 25,959 24,636
Selling, general and administrative ................ 12,116 15,065 15,599
Amortization of intangible assets .................. 3,420 6,239 6,493
Store closing charges (Note 17) .................... -- -- 5,557
Valuation charges (Note 2) ......................... -- -- 17,438
Debt offering write-off (Note 16 ) ................. -- 5,125 --
--------- --------- ---------
65,240 123,330 141,344
--------- --------- ---------
Income (loss) from operations ........................ 8,053 423 (21,170)
Interest expense ..................................... 1,294 4,927 6,674
Other expense (income) ............................... (178) 128 345
--------- --------- ---------
Income (loss) before provision (benefit) for income
taxes and extraordinary item ......................... 6,937 (4,632) (28,189)
Provision (benefit) for income taxes ................. 3,227 (1,062) (972)
--------- --------- ---------
Income (loss) before extraordinary item .............. 3,710 (3,570) (27,217)
Extraordinary item (net of income tax benefit of $156) 244 -- --
--------- --------- ---------
Net income (loss) .................................... $ 3,466 $ (3,570) $ (27,217)
========= ========= =========
Income (loss) per common share data:
Income (loss) before extraordinary item - basic and
diluted .......................................... $ .35 $ (.26) $ (1.93)
Extraordinary item (net of tax) - basic and diluted (.02) -- --
--------- --------- ---------
Net income (loss) - basic and diluted .............. $ .33 $ (.26) $ (1.93)
========= ========= =========
Weighted average number of common shares outstanding . 10,554 13,817 14,072
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
28
<PAGE> 29
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ 3,466 $ (3,570) $ (27,217)
Adjustments to reconcile net income (loss) to cash
flows provided by operating activities:
Amortization of debt financing costs .............. 128 224 670
Amortization of videocassette rental inventory .... 11,265 25,959 24,636
Depreciation and amortization of furnishings,
equipment and leasehold improvements ........... 898 2,471 3,300
Amortization of intangible assets ................. 3,420 6,239 6,493
Deferred taxes .................................... 686 456 921
Store closing charges ............................. -- -- 2,321
Valuation charges ................................. -- -- 17,438
Changes in assets and liabilities:
Accounts receivable ............................... (294) 270 812
Merchandise inventory ............................. (2,992) (1,447) (238)
Prepaid expenses and other assets ................. (2,597) (792) (328)
Accounts payable .................................. 5,415 (1,222) 2,690
Accrued expenses and other liabilities ............ (757) 135 2,948
Income taxes payable ............................. 795 (1,996) (934)
--------- --------- ---------
Net cash provided by operating activities ......... 19,433 26,727 33,512
--------- --------- ---------
Cash flows related to investing activities:
Acquisition of businesses, net of cash acquired ...... (80,453) (19,301) (553)
Purchases of property and equipment .................. (3,141) (7,306) (3,359)
Purchases of videocassette rental inventory .......... (18,469) (30,449) (30,906)
--------- --------- ---------
Net cash used in investing activities ........... (102,063) (57,056) (34,818)
--------- --------- ---------
Cash flows related to financing activities:
Proceeds from long-term debt ......................... 33,600 32,200 1,100
Repayments of long-term debt ......................... (10,200) (7) (7)
Proceeds from issuance of common stock ............... 60,832 116 33
Change in other assets related to debt financing costs (902) (687) --
--------- --------- ---------
Net cash provided by financing activities .............. 83,330 31,622 1,126
--------- --------- ---------
Net increase (decrease) in cash ........................ 700 1,293 (180)
Cash, beginning of period .............................. 611 1,311 2,604
--------- --------- ---------
Cash, end of period .................................... $ 1,311 $ 2,604 $ 2,424
========= ========= =========
Supplemental cash flow data:
Interest paid ........................................ $ 1,339 $ 4,619 $ 6,275
========= ========= =========
Income taxes paid .................................... $ 1,746 $ 749 $ 249
========= ========= =========
Non-cash activities:
Treasury stock redeemed in connection with acquisition -- -- $ 242
--------- --------- ---------
Assets acquired by incurring notes payable ........... -- -- $ 162
--------- --------- ---------
Loan origination fees ................................ -- -- $ 250
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
29
<PAGE> 30
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<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, 1996 ................ 14,000,001 $ 140 $ 819 $ (416) $ -- $ 543
May 14, 1996 0.34-1 reverse stock split ... (9,243,713) (92) 92 -- -- 0
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 - Employee Stock Purchase Plan 39,506 1 33 -- -- 34
Shares issued - 1996 acquisitions .......... 302,065 3 (3) -- -- --
Treasury stock, at cost ................... -- -- -- -- (242) (242)
Net (loss) ................................. -- -- -- (27,217) -- (27,217)
---------- ------ --------- --------- ------- ---------
Balance at January 31, 1999 ................ 14,184,677 $ 142 $ 104,093 $ (27,737) $ (242) $ 76,256
========== ====== ========= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE> 31
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND BUSINESS
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared assuming
West Coast Entertainment Corporation and subsidiaries (collectively the
"Company") will continue as a going concern. As discussed in Note 7, the Company
has approximately $58.1 million of its debt maturing February 15, 2000.
Although the Company believes that its projected cash flow will be sufficient to
meet its operating needs until the debt maturity date mentioned above, there can
be no assurances beyond that date.
While the Company is continuing to monitor and reduce its operating expenses,
including payroll, it is also considering the sale of certain assets or
operations as well as exploring other alternatives, including, but not limited
to a merger or refinancing.
BUSINESS
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, Giant Video, Inc., G.V.
Management Corporation, Nostalgia Ventures, Inc. and Videosmith, Inc. were
merged into the Company (the "Merger"). These four entities were individually
formed or acquired in the past and were under substantial common ownership and
common day-to-day management prior to the Merger.
On May 17, 1996, the Company completed an initial public offering which
consisted of 5,400,000 shares of common stock at $13.00 per share (the
"Offering"). The net proceeds of the Offering, after deducting applicable
issuance costs and expenses, were $60.8 million. The proceeds were used to fund
certain of the acquisitions discussed in Note 11 and to repay approximately $9.6
million of long-term debt.
As of January 31, 1998, the Company owned and operated 286 video rental
stores and was a franchisor of a chain of 217 video stores. As of January 31,
1999, the Company owned and operated 261 video rental stores and was a
franchisor of a chain of 160 video stores.
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 each of the years ended in the
three year period January 31, 1997 through January 31, 1999 reflect 52 week
years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
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 these estimates.
Consolidation
31
<PAGE> 32
All significant intercompany balances and transactions have been eliminated
in the accompanying consolidated financial statements.
Concentration of Credit Risk
Financial instruments which may subject the Company to concentration of
credit risk at January 31, 1999 and 1998 consist primarily of franchise
receivables. The Company obtains franchise-related revenues from an initial fee
and ongoing fees and royalties based on a percentage of franchisees' gross
revenue, as reported monthly by the franchisees to the Company. No assurance can
be given that the franchisees will continue to operate at levels sufficient to
remit amounts due under these arrangements.
Business Risk
The Company competes with pay-per-view cable and satellite television systems
("Pay-Per-View"), to which cable television subscribers pay a fee to see a movie
or other programs selected by the subscriber. Existing Pay-Per-View services
offer a limited number of channels and programs and are generally available only
to limited households. Recently developed technologies have allowed rapid
transmission of a larger number of movies to a broader base of homes.
Ultimately, further improvements in these technologies or the development of
similar technologies could lead to a broader selection of movies to consumers on
demand, which could have a material adverse effect on the Company's financial
condition and results of operations.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
other receivables, and accounts payable meeting the definition of a financial
instrument approximate fair value at January 31, 1999 and 1998 due to their
short maturity. Fair value of long-term debt is based upon rates available to
the Company for debt with similar terms and maturities.
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
Effective November 2, 1998, the Company adopted a new method of amortizing its
videocassette rental inventory in order to better match an industry change in
the stream of revenues resulting from the new practice of revenue sharing
adopted during 1998 as an alternative to historical business models of directly
purchasing rental titles. Under revenue sharing, the retailer typically incurs
an upfront fee to acquire videocassettes, with an ongoing requirement to share
the revenue generated on a pre-determined percentage over a specific period of
time with the studios. Given the lower cost of product, the retailer has the
additional requirement of acquiring 2 to 4 times the number of copies of a title
than they would have acquired under the prior purchase models. This new practice
is founded upon the slope over time of consumer demand and the related
desirability of titles over time. Under the Company's new method of
amortization, all new release, non-revenue sharing videocassettes, regardless of
the number of copies of a title, will be amortized to a salvage value of $6 over
a period of 6 months. Videocassettes purchased through revenue sharing
agreements will be amortized to the $6 salvage value over the life of the
respective contracts. Studios' share of revenues will be expensed as such
revenues are earned as specified in each agreement.
The new method of amortization has been applied to videocassette rental
inventory that was owned at November 2, 1998. The adoption of the new method of
amortization has been accounted for as a change in accounting estimate and,
accordingly, the Company recorded a $16,738,000 pre-tax valuation charge to
operating expenses in the fourth quarter of fiscal 1999.
Prior to November 2, 1998 videocassette rental inventory, which includes
video games, was stated at cost and amortized as follows: videocassette rental
inventory base stock was amortized over its economic life of 36 months,
32
<PAGE> 33
to its estimated salvage value of $6. New release base stock (the first three
copies of a title in a particular store), less the $6 salvage value, was
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 three copies per store were
amortized to $10 on a straight-line basis during the first nine months, and the
balance was then amortized on a straight-line basis over 27 months to the $6
salvage value. The unamortized cost, if any, of videocassette rental inventory
that was sold was charged to operations at the time of the sale. This method of
amortization was applied to videocassette rental inventory that was held in
inventory at August 1, 1997. The adoption of this method of amortization was
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 third quarter of fiscal 1998.
Videocassette inventory amortization expense resulting from the allocation
of purchase price to videocassette rental tapes of acquired entities was based
on current replacement cost for bulk purchases of used tapes. As discussed
above, base stock was assigned a three-year amortizable life which served 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 bulk purchases of used tapes. Base stock was assigned a
three year amortizable life which served 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, would have been significantly less than the amortization relating to
new tape purchases. The favorable effects resulting from purchase accounting
would have diminished with the passage of time and would not have extended
beyond the three-year period subsequent to acquisition which is the period over
which these tapes would have been amortized.
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 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 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 was
charged to operations at the time of the sale.
Intangible Assets
Intangible assets, net of accumulated amortization, primarily consist of
goodwill ($104,821,000 and $110,843,000 at January 31, 1999 and 1998,
respectively) and franchise rights ($5,457,000 and $5,926,000 at January 31,
1999 and 1998, respectively). Franchise rights are amortized on a straight-line
basis over 15 years, the estimated economic life of such rights. Goodwill
resulting from acquisitions accounted for using the purchase method is amortized
on a straight line basis over 20 years. Total amortization expense related to
intangible assets was $3,420,000, $6,239,000 and $6,493,000 for the years ended
January 31, 1997, 1998 and 1999, respectively. The carrying value of long-lived
assets, including goodwill and franchise rights, is evaluated whenever changes
in circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such review for recoverability, the Company compares
the undiscounted expected future cash flows to the carrying value of long-lived
assets and identifiable intangibles. If the anticipated undiscounted future cash
flows are less than the carrying amount of such assets, the Company recognizes
an impairment loss for the difference between the carrying amount of the assets
and their estimated fair value. The Company has determined at the year ended
January 31, 1999 that there has been an impairment to goodwill associated with
the acquisition of three stores made in November, 1996. Accordingly, the Company
recorded a write-down of $700,000 which is included in the valuation charges in
the consolidated financial statement of operations for fiscal 1999.
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 (3 to 10 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.
Deferred Rent
33
<PAGE> 34
Most of the Company's operating leases have lease terms which contain fixed
increases of the minimum lease rates. The Company recognizes rental expense for
these leases on a straight-line basis and records the difference between the
amount actually paid and the amount expensed as deferred rent.
Income Taxes
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.
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 when collection is reasonably determined.
Advertising Costs
Advertising costs are recorded net of any cooperative and market development
fund reimbursements due from suppliers and are expensed as incurred.
Earnings Per Share
In February 1997, Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share" ("SFAS 128"), which establishes standards for computing and
presenting earning per share. SFAS 128 requires presentation of both 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 potential dilutive
common shares. Potentially dilutive common shares for the 1997 computation of
diluted earnings per share were immaterial. Potentially dilutive common shares
are excluded from the diluted earnings per share calculation at January 31, 1998
and 1999 because the effect would be anti-dilutive.
Accounting for Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" requires the fair
value of stock options and other stock-based compensation issued to employees to
either be recognized as compensation expense in the income statement or be
disclosed as a pro forma effect on net income and earnings per share in the
footnotes to the Company's financial statements. The Company has elected to
adopt the "disclosure basis only" provision s of SFAS 123 for Stock Based
Compensation to employees (Note 12).
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments"
("SFAS 133"), which establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that the
adoption of SFAS 133 will have no impact on its financial position or results of
operations.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities" which
provides guidance on the financial reporting of start-up costs and organization
costs. SOP 98-5 requires that an entity expense such costs as incurred. The
Company believes that
34
<PAGE> 35
the adoption of SOP 98-5 will not have a material impact on its financial
position or results of operations.
3. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related amortization are as follows (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Videocassette rental inventory ........ $ 69,257 $ 87,985
Accumulated amortization .............. (37,252) (67,610)
-------- --------
$ 32,005 $ 20,375
======== ========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
$11,265,000, $25,959,000 and $24,656,000 for the years ended January 31, 1997,
1998 and 1999, respectively. In addition, the Company recorded valuation charges
of $16,738,000 in the fourth quarter of fiscal 1999 (see Note 2).
4. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furnishings, equipment and leasehold improvements comprise the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Furniture and fixtures................ $ 14,790 $ 15,541
Computer equipment and vehicles....... 2,978 3,729
Leasehold improvements................ 5,464 6,094
--------- ---------
23,232 25,364
Accumulated depreciation and
amortization.......................... (4,279) (7,472)
--------- ---------
$ 18,953 $ 17,892
========= =========
</TABLE>
Depreciation and amortization approximated $898,000, $2,471,000 and
$3,300,000 for the years ended January 31, 1997, 1998 and 1999, respectively.
5. NON-CURRENT OTHER ASSETS
Non-current other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Store lease and utility deposits................ 1,117 1,088
Deferred loan origination fees.................. 1,237 1,016
Other........................................... 50 352
------- -------
$ 2,404 $ 2,456
======= =======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Accrued wages and taxes... $ 1,097 $ 987
Sales taxes............... 998 813
Deferred rent............. 949 1,170
Provision for store closing charges -- 2,936
Other................................ 1,882 1,877
------- -------
$ 4,926 $ 7,783
======= =======
</TABLE>
7. LONG-TERM DEBT
35
<PAGE> 36
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Credit Facility......................................... $ 65,000 $ 66,100
Various notes payable due in monthly installments with
interest rates varying from prime plus 2% to prime
plus 4% .............................................. 14 168
-------- --------
65,014 66,268
Less: current portion................................... (8) (8,081)
-------- --------
$ 65,006 $ 58,187
======== ========
</TABLE>
On December 15, 1997, the Company signed an agreement which incorporated the
major points of, but superceded, its previous bank loan agreement (the "New
Facility"). On June 11, 1998 and September 14, 1998, the Company signed
amendments to the New Facility changing the term of the loan as well as certain
maximum debt-to-operating cash flow ratios and minimum operating cash flow
requirements as defined, as well as modifying certain permitted capital and
other expenditures.
On January 12, 1999, the Company signed an amendment to the New Facility (the
"Revised Facility") increasing the Bank's commitment by $5 million (the
"Overadvance") to a total of $70 million as well as providing for certain credit
enhancements. The Revised Facility is a non-revolving loan maturing on February
15, 2000. At January 31, 1999, the Company had approximately $3.9 million
available under the Revised Facility.
The first $65 million of the Revised Facility bears interest at 2% above the
Prime rate (9.75% at January 31, 1999). The interest rate on the first $4
million of the Overadvance is equal to the Prime rate plus 2.5% (10.25% at
January 31, 1999); the interest rate on the remaining $1 million is equal to the
Prime rate plus 3.5%. Should the Company not repay all debt in full on or prior
to June 30, 1999, an additional 3% of interest for the preceding six months on
the $65 million and on any Overadvance borrowed in the last six months will
become due. In addition, Commitment Extension Fees equaling 143 basis points
times the total outstanding debt will be due and payable each month as of July
1, 1999 through February 15, 2000 should the debt remain unpaid as of August 31,
1999, subject to certain conditions.
Any payments of principal of the Revised Facility after the Overadvance
permanently reduces the available amounts under the Facility. Commitment
reductions commence on August 1, 1999 whereby a $3 million reduction occurs,
followed by $2.5 million reductions on November 1, 1999 and on February 1, 2000
with the remaining balance of $58.1 million maturing on February 15, 2000.
The Revised Facility also provided for delivery to the agent on behalf of the
banks of a warrant to purchase, in the event that the all debt is not paid in
full by September 30, 1999, subject to certain conditions, up to 5% of the
Company's capital stock at a price equal to 75% of the average price of the
stock during the 15 days prior to July 1, 1999.
The Revised 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 those of a financial
nature.
Principal due on long-term debt for each of the years following January 31,
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------
<S> <C>
2000.................... 8,081
2001.................... 58,150
2002.................... 37
--------
$ 66,268
========
</TABLE>
36
<PAGE> 37
8. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.... $1,760 $ (817) $ (232)
State...... 781 211 181
------ ------- ------
2,541 (606) (51)
------ -------- -------
Deferred:
Federal.... 584 (44) (1380)
State...... 102 (412) 459
------ -------- ------
686 (456) (921)
------ -------- -------
Tax provision $3,227 $(1,062) $ (972)
====== ======== =======
</TABLE>
The temporary differences which give rise to deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Recognized built-in loss carryforward .......... $ 207 $ 207
Allowance for doubtful accounts ................ 41 27
Expense accruals ............................... 578 1,815
Valuation allowance for rental inventory ....... -- 6,685
Federal and State NOL carryforwards ............ 966 6,739
-------- --------
1,792 15,473
-------- --------
Deferred tax liabilities:
Intangible amortization ........................ (1,872) (2,300)
Videocassette rental inventory amortization .... (45) (3,343)
Furnishings, equipment and leasehold improvement
depreciation ................................... (796) (2,079)
-------- --------
(2,713) (7,722)
-------- --------
Net deferred taxes before valuation allowance .... (921) 7,751
Valuation Allowance .............................. -- (7,751)
-------- --------
$ (921) $ 0
Net deferred tax liability ....................... ======== ========
</TABLE>
Because of the uncertainty that the Company will generate income in the future
sufficient to fully or partially utilize deferred assets, a valuation allowance
in the amount of $7.8 million at January 31, 1999 is provided to reduce such
deferred tax assets to the level of the existing deferred tax liabilities.
The Company has federal net operating loss carryforwards aggregating
approximately $19.4 million and state net operating loss carryforwards
aggregating approximately $24.1 million at January 31, 1999, which expire
through January 31, 2019. At January 31, 1999, the Company has available the
following carryforwards to offset future taxable income:
<TABLE>
<CAPTION>
FEDERAL NET OPERATING STATE NET OPERATING YEAR END
--------------------- ------------------- --------
LOSS CARRYFORWARDS LOSS CARRYFORWARDS EXPIRATION DATES
------------------ ------------------ ----------------
<S> <C> <C>
$ ---- $ 200,000 1/31/02
---- 900,000 1/31/03
---- 2,200,000 1/31/04
---- 1,900,000 1/31/05
19,400,000 18,900,000 1/31/06 - 1/31/19
</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):
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory rate of 34%..................... $2,354 $(1,575) $(9,584)
State tax expense, net of federal benefit............. 583 (133) 422
Change in valuation allowance......................... (76) --- 7,751
Nondeductible intangible amortization................. 359 593 648
Other................................................. 7 53 (209)
------ ------- -------
$3,227 $(1,062) $ (972)
====== ======= =======
</TABLE>
37
<PAGE> 38
9. RELATED PARTY TRANSACTIONS
As of January 31, 1999 and 1998, receivables from certain officers were
$373,000 and $341,000 respectively. Interest has been accrued at a rate of 10%
on such amounts.
10. LEASE COMMITMENTS
The Company leases its facilities under operating leases extending until
2008. Minimum future rental payments under these leases as of January 31, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
------------------------
<S> <C>
2000................... 14,313
2001................... 11,077
2002................... 8,667
2003................... 6,250
2004................... 3,994
Thereafter............. 7,390
--------
Future minimum payments $ 51,691
========
</TABLE>
Rent expense totaled approximately $11,130,000, $19,061,000 and $21,334,000
for the years ended January 31, 1997, 1998 and 1999, respectively. Rent expense
and the above table do not include any amounts in connection with store closings
(see Note 17).
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.
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 acquisition
costs. Of these amounts, approximately $0.4 million represents remaining minimum
contingent consideration (of which approximately $0.1 million and $0.3 million
(20,000 shares) is to be paid in cash and stock, respectively) as of January 31,
1998 and 1997. These common shares to be issued have been considered outstanding
as of January 31, 1999, 1998 and 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 and $4.9 million in shares of common stock (519,000 shares).
Approximately $0.5 million of acquisition costs was also paid. The shares
(465,000) associated with one of these acquisitions were issued in the year
ended January 31, 1999 in three equal installments (six, twelve and eighteen
months from the acquisition date) and the number of shares issued was increased
by the difference between the share price at issuance date and the formulaic
common share price calculated as of the date of acquisition. 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 January 31, 1999,
1998 and 1997 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 and $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 January 31, 1998 and 1997, respectively. These common shares to be issued
38
<PAGE> 39
have been considered outstanding as of January 31, 1999, 1998 and 1997 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.
Year Ended January 31,1999 Acquisitions
During the year ended January 31, 1999 the Company has made certain
acquisitions that were not material.
The allocation of the purchase price associated with the acquisitions made
during the years ended January 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1997 1998
---- ----
<S> <C> <C>
Working Capital.............................. $ (3,326) $ 439
Videocassette rental inventory............... 16,019 2,917
Furnishings, equipment, and leasehold 7,915 2,833
improvements..............................
Intangible assets............................ 105,323 13,146
Other........................................ (756) --
---------- ---------
$ 125,175 $ 19,335
========= =========
</TABLE>
The following unaudited pro forma information presents the results of
operations as though (i) the May 1996 Acquisitions, the Early Fall 1996
Acquisitions, Late Fall 1996 Acquisitions and 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, (iii) the repayment of all previously
existing outstanding debt had occurred as of the beginning of the periods
reported, and (iv) the borrowings under the Credit Facility had occurred as of
the beginning of the periods presented.
The following unaudited pro forma net income (loss) per share for the years
ended January 31, 1997 and 1998 was calculated by dividing the respective
unaudited pro forma net income (loss) by the pro forma weighted average number
of shares of common stock outstanding after giving effect to (i) the 0.340-for-1
reverse stock split approved by the Board of Directors on May 14, 1996, and the
shares issued in conjunction with the Offering, (ii) 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 (v) 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 (loss) per share was 13,999,000 and 13,843,000
for the years ended January 31, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
YEARS ENDED JANUARY 31,
1997 1998
---- ----
(in thousands, except per share data)
<S> <C> <C>
Pro forma revenues ................................... $ 131,378 $ 130,044
Pro forma income (loss) before extraordinary item .... $ 7,933 $ (3,219)
Extraordinary item (net of tax benefit) .............. $ 244 $ --
Pro forma net income (loss) .......................... $ 7,689 $ (3,219)
Pro forma income (loss) per share before extraordinary
item basic and diluted ............................. $ .57 $ (.23)
Extraordinary item - basic and diluted ............... $ (.02) $ --
Pro forma net income (loss) per share - basic and
diluted ........................................... . $ .55 $ (.23)
</TABLE>
39
<PAGE> 40
12. STOCKHOLDERS' EQUITY
Stock Compensation Plan:
Equity Incentive Plan: The Company's Equity Incentive Plan was adopted by
the Board of Directors and approved by the Stockholders in July 1995 and as
amended in April 1997 (the "Equity Plan"). The Equity Plan enables the Company
to grant options to purchase common stock to officers, employees, employee
directors of and consultants to the Company. The Plan authorizes the issuance of
up to 850,000 shares. The options granted are unvested at the date of grant, and
become fully vested pro-rata equally over five years subsequent to the date of
grant. The fixed exercise price associated with the shares subject to option is
the fair value of the Company's stock at the date of grant. The options expire
ten years after the date of grant.
Director Stock Option Plan: The Company's Director Stock Option Plan (the
"Director Option Plan") enables the Company to grant options to purchase common
stock to outside directors of the Company. The Plan authorizes the issuance of
up to 50,000 shares. The options are unvested at the time of grant, and vest
pro-rata equally 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 fixed exercise price associated with the shares subject to options
under this plan is the fair value of the Company's stock at the date of grant.
Commensurate with the Offering, the Company granted an option to purchase 3,000
shares of common stock to three non-employee directors. Each non-employee
director is eligible to receive at the discretion of the Company 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 ended January 31, 1998. As of
January 31, 1999, 6,000 options are outstanding. No options have been exercised
for the years ended January 31, 1998 and 1999.
Common shares subject to options under these plans were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1998 1999
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE Options EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at February 1 ....... 82,137 $ 11.06 14,137 $ 10.54
Granted ......................... -- -- 226,250 $ .25
Exercised ....................... -- -- -- --
Terminated/Canceled ............. 68,000 $ 12.85 2,588 $ 8.75
------ -------
Options outstanding at January 31 14,137 $ 10.54 237,799 $ .77
------ -------
Options exercisable at January 31 4,034 $ 10.86 6,774 $ 11.26
------ -------
</TABLE>
As discussed in Note 2, the Company adopted the disclosure requirements of
SFAS No. 123. The pro forma information below is presented as if the Company had
adopted the recognition provisions of SFAS 123.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Weighted average fair value of options granted -- calculated using
the Black-Scholes option-pricing model..................... $ 4.63 $ 4.63 $ .50
Range of exercise price per share............................ $ 8.75-$13.00 $ 8.75-$13.00 $ .25-$13.00
Actual:
Net income (loss) (in thousands)........................... $ 3,466 $ (3,570) $ (27,217)
Earnings (loss) per share, basic and diluted............... $ .33 $ (.26) $ (1.93)
Pro Forma:
Net income (loss) (in thousands)........................... $ 3,431 $ (3,601) $ (27,217)
Earnings (loss) per share, basic and diluted............... $ .33 $ (.26) $ (1.93)
Assumptions:
Weighted average dividend yield............................ -- -- --
Weighted average volatility................................ 35% 35% 75%
Weighted average risk free interest rate................... 6.58% 6.58% 5.50%
Weighted average expected life (years)..................... 5 5 5
</TABLE>
Employee Stock Purchase Plan: The Company's Employee Stock Purchase Plan
(the "Purchase Plan") authorizes the issuance of up to a total of 125,000 shares
of common stock to participating employees through a series of semiannual
offerings. Offering periods will commence on each November 1, beginning November
1, 1996, and May 1 and terminate on the following April 30 and October 31,
respectively. The maximum number of shares
40
<PAGE> 41
available in each offering is 25,000 shares. Eligible employees may direct
1%-10% of their total compensation in a Plan period to the Plan, at a price
equal to 85% of the lower of the closing price of the common stock on the first
business day of the plan or the last business day of the plan. During the fiscal
years ended January 31, 1998 and 1999, the Company had issued approximately
37,000 and 40,000 shares, respectively, related to the Plan.
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.
14. COMMITMENTS
Purchase Commitments
On July 12, 1995, with an Amendment on August 20, 1997, 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>
August 20, 1998-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 in the ordinary course of business.
The Company believes that the outcome of such litigation will not materially
affect the Company's financial position or results of operations.
16. DEBT OFFERING WRITE-OFF
On July 1, 1997 the Company's planned private placement of debt securities
(the "Proposed Private Placement") and related acquisitions were indefinitely
delayed due to market conditions. The Company wrote off $5.1 million in costs
during the year ended January 31, 1998 that were incurred in connection with the
Proposed Private Placement and related acquisitions.
17. STORE CLOSING CHARGES
During the quarter ended November 1, 1998, the Company began and completed
an extensive analysis of its base store performance and made a decision to close
33 of its stores. This analysis resulted in the Company recording charges of
approximately $5,557,000. The components of the charges included approximately
$3,100,000 for lease terminations and miscellaneous closing costs, as well as
approximately $2,457,000 in property asset write downs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and certain information with respect to
each director, nominee for election as a director, and executive officer of the
Company.
Ralph W. Standley III, age 60, has served as the Chairman of the Board
of Directors of the Company and its principal predecessors since 1992. He also
served as President of two such predecessors, Nostalgia Ventures, Inc. ("NVI")
and Videosmith (DE) Incorporated ("VDI"), and as Secretary of two other
predecessors, Giant Video Corporation ("GVC") and G.V. Management Corp.
("GVMC"), from the date of their inception or acquisition by the Company through
July 1995. Ralph W. Standley III is the father of T. Kyle Standley and M. Trent
Standley.
T. Kyle Standley, age 35, has served as the President and Chief
Executive Officer and a Director of the Company and its predecessors since its
inception in February 1995. Previously, he served as an executive officer of two
of the Company'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.
M. Trent Standley, age 34, has served as a Vice President, Secretary
and a Director of the Company since May 1995. He also served as President of one
of the Company'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.
C. Stewart Forbes, age 58, a Director of the Company since May 1996,
has served as President of Colliers International Property Consultants since
1979.
Wesley F. Hoag, age 42, a Director of the Company since May 1996, has
served as General Counsel and Chief Operating Officer of the 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 managed and sponsored by Meeder. From 1984
to 1993, Mr. Hoag was an attorney at the law firm of Porter, Wright, Morris &
Arthur.
Richard G. Kelly, age 45, joined the Company as Chief Financial Officer
in July 1996. From January 1994 to June 1996, Mr. Kelly was a shareholder and
served as a Director of Moore, Stephens, Reilly, PC and was a shareholder and
Vice President of Gerald T. Reilly & Co., Certified Public Accountants, Inc. Mr.
Kelly served as Director of Gillis & Kelly, P.C., from 1990 to 1993, at which
time the firm merged with Gerald T. Reilly & Co., Certified Public Accountants,
Inc. Mr. Kelly is a Certified Public Accountant whose responsibilities included
direction of mergers and acquisitions as well as tax and audit related
functions.
Donald Weiss, age 57, has served as Executive Vice President,
Franchising of the Company since September 1996. From May 1996 to August 1996,
Mr. Weiss served as Vice President -- Franchise Development of the Company. From
November of 1992 until April 1996, he served as Vice President -- Franchising
Development of WCEI. From August 1991 to October 1992, Mr. Weiss served as Vice
President -- Franchising Development of West Coast Enterprises, Inc., and from
March 1989 to July 1991, he served as Executive Director of Franchise
Development of West Coast Enterprises, Inc.
Jerry L. Misterman, age 52, has served as Executive Vice President --
Finance of the Company since mid-July 1995 and as Chief Financial Officer of WC
Franchise since the acquisition by WC Franchise of certain franchise-related
operating assets in July 1995. Prior to 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.
42
<PAGE> 43
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and regulations of the Securities and Exchange Commission
("SEC") thereunder require the Company's executive officers and directors, and
persons who own more than ten percent of the Company's outstanding Common Stock,
to file reports of initial ownership and changes in ownership with the SEC and
the National Association of Securities Dealers, Inc. Such officers, directors
and ten-percent stockholders are also required by SEC rules to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it, or written representations
from certain reporting persons that no other reports were required for such
persons, the Company believes that, during or with respect to the fiscal year
ended January 31, 1999, all of its executive officers, directors and ten-percent
stockholders complied with their Section 16(a) filing obligations.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the compensation of the Company's Chief Executive Officer and each of
the other four most highly compensated executive officers whose salaries and
bonuses exceeded $100,000 for services rendered during the fiscal year ended
January 31, 1999 (the "Named Executive Officers"), together with similar
information with respect to the Named Executive Officers for each of the fiscal
years ended January 31, 1997 and 1998.
<TABLE>
<CAPTION>
Annual Compensation
------------------- Long-Term
Compensation
Awards(2)
----------------
Name and Fiscal Salary Bonus Other Annual Number of shares All
Principal Position Year Compensation (1) Underlying Stock Other Compensation
- ------------------ ---- ---------------- ---------------- ------------------
Options
<S> <C> <C> <C> <C> <C> <C>
T. Kyle Standley 1999 $330,049 $75,000
President and Chief 1998 $230,000 __ __ __
Executive Officer 1997 $126,507 __ __ __ __
Richard G. Kelly 1999 $254,231
Chief Financial 1998 $200,000 __ __ __ __
Officer 1997 $126,923 __ __ __ __
Ralph W. Standley III 1999 $213,639
Chairman of the 1998 $150,000 __ __ __ __
Board of Directors 1997 $107,308 __ __ __ __
Jerry L. Misterman 1999 $164,942
Chief Accounting 1998 $150,000 __ __ __ __
Officer 1997 $151,154 __ __ __ __
Donald Weiss 1998 $150,000
Executive Vice 1997 $150,000 __ __ __ __
President 1996 $129,944 __ __ __ __
</TABLE>
- --
(1) Other compensation in the form of perquisites and other personal
benefits has been omitted for certain of the Named Executive Officers,
in accordance with the rules of the Securities and Exchange Commission,
as the aggregate amount of such perquisites and other personal benefits
for such officers constituted less than the lesser of $50,000 or 10% of
the total annual salary and bonus for each executive officer in each
fiscal year covered.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts to
these individuals during any fiscal year covered.
43
<PAGE> 44
Option Grants. In October 1998, both Jerry L. Misterman and Donald Weiss were
granted incentive stock options under the Company's equity incentive plan of
8,000 and 6,000 options respectively, at an exercise price of $0.25. The options
granted are unvested at the date of grant and become fully vested pro-rata
equally over five years subsequent to the date of grant.
Option Exercises and Holdings. None of the Executive Officers exercised any
options to purchase Common Stock of the Company. At January 31, 1999, both Jerry
L. Misterman and Donald Weiss have outstanding holdings of 8,000 and 6,000
options respectively.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual stipend of $10,000 and all
directors are reimbursed for expenses incurred in connection with attendance at
Board of Directors and committee meetings.
Under the Company's 1995 Director Stock Option Plan, as amended to date
(as amended, the "Director Option Plan"), each non-employee director is eligible
to receive options for such number of shares of Common Stock and at such times
as the Board of Directors may determine, which options have an exercise price
equal to the fair market value of the Common Stock on the date of grant. All
options granted under the Director Option Plan vest over a three-year period,
provided the optionholder continues to serve as a director of the Company, and
expire ten years from the date of grant. The Director Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Company in July
1995, and was amended by the Board of Directors in October 1996. The total
number of shares of Common Stock that may be issued under the Director Option
Plan is 50,000. Messrs. Forbes and Hoag have each been granted an option under
the Director Option Plan to purchase 3,000 shares of Common Stock at an exercise
price of $13.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during the fiscal year ended
January 31, 1999, were Wesley F. Hoag and C. Stewart Forbes.
None of the Company's executive officers serves as a member of the
compensation committee (or other board committee performing equivalent functions
or, in the absence of such a committee, the entire board of directors) of
another entity, one of whose executive officers serves on the Compensation
Committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee reviews the compensation levels of the
Company's executive officers, makes recommendations to the Board of Directors
regarding compensation, and has authority to grant options under the Company's
1995 Equity Incentive Plan.
The Company's compensation program seeks to achieve the following
objectives:
- To attract and retain key executives who are important to the
long-term growth and success of the Company.
- To give appropriate incentives based on both individual
performance and the performance of the Company as a whole.
- To promote identity of interest between the Company's
stockholders and its senior management.
- To reward officers for their contributions to growing the
number of video stores (through
44
<PAGE> 45
acquisitions and new store construction) and increasing the
average annual revenue per store.
The Company's executive compensation program consists primarily of base
salaries, supplemented by equity incentives and bonuses under appropriate
circumstances. Base salaries are determined in a manner intended to be
comparable to the salaries that are paid to persons performing similar functions
for companies of comparable size in comparable industries, although a number of
subjective factors also influence salary decisions, including the Company's
judgment with respect to a given individual's particular skills, experience and
knowledge of the Company's industry. In addition, the compensation of executives
who joined the Company upon the Company's acquisition of their former employers
reflects the level at which they were compensated by such former employers. The
Company typically reviews executive base salaries on an annual basis. Equity
incentives represent the principal performance-based component of the Company's
compensation program. The Company granted options to both Jerry L. Misterman and
Donald Weiss of 8,000 and 6,000 options respectively. The Company only paid a
bonus to its Chief Executive Officer, T. Kyle Standley, of $75,000 relating to
the fiscal year ended January 31, 1999.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. In March 1998, the Company
increased Mr. Standley's annual base salary to $330,000 plus a bonus of $75,000.
The Compensation Committee believed that this level of compensation is
appropriate given the rapid growth of the Company and Mr. Standley's
contributions to that growth, as well as the current size of the Company. The
Compensation Committee believes that Mr. Standley's level of compensation is
near the middle of the range of compensation to chief executives for companies
of similar size within the industry.
Compensation Committee
Wesley F. Hoag
C. Stewart Forbes
The following table compares the cumulative total stockholder return on the
common stock of the Company between May 14, 1996 (the date the Company's common
stock commenced public trading) and January 31, 1999 with the cumulative total
return of (i) the Nasdaq Market Index (US) and (ii) an index compiled for the
Company ("Peer Group") over the same period. The Peer Group is comprised of
Hollywood Video, Inc. Movie Gallery, Inc., and Video Update, Inc., other
comparable publicly-traded companies whose primary line of business is the
retail rental and sale of movies on videocassette. This table assumes the
investment of $100.00 on May 14, 1996 in the Company's common stock, the Nasdaq
Market Index and the Peer Group and assumes that dividends, if any, are
invested.
45
<PAGE> 46
<TABLE>
<CAPTION>
05/14/96 01/31/97 01/30/98 1/31/99
-------- -------- -------- -------
<S> <C> <C> <C> <C>
West Coast $100 $ 64 $ 14 $ 9
Entertainment
Corporation
Nasdaq Market Index (US) $100 $112 $132 $207
Peer Group $100 $ 91 43 $125
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's Common Stock as of January 31, 1999 (i) by each person who is known by
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) by each director and nominee for election as a director, (iii) by
each of the executive officers, and (iv) by all directors and executive officers
as a group:
<TABLE>
<CAPTION>
Shares Beneficially
Beneficial Owner Owned(1)(2)
---------------- -----------
Number Percent
------ -------
<S> <C> <C>
5% STOCKHOLDERS:
Ralph W. Standley III(3)(4)(5) 1,345,765 9.6
Ralph W. Standley III Irrevocable Trust(3)(5) 342,819 2.4
T. Kyle Standley(3)(5)(6) 1,431,388 10.2
Marsh & McLennan Companies, Inc.(7) 975,890 6.9
OTHER EXECUTIVE OFFICERS:
Richard G. Kelly(3)
Jerry L. Misterman(3)
Donald Weiss(3) 43,000 *
OTHER DIRECTORS:
M. Trent Standley(3)(5)(6) 647,576 4.6
C. Stewart Forbes 14,000 *
c/o Colliers International
84 State Street, 5th Floor
Boston, MA 02109
Wesley F. Hoag 2,000 *
c/o R. Meeder & Associates
6000 Memorial Drive
Columbus, OH 43215
All directors and executive officers as a group
(8 persons)(4)(5)(6)(7) 3,826,548 27.2
</TABLE>
- --------------
* Less than 1%.
(1) Each stockholder possesses sole voting and investment power with
respect to the shares listed, except as otherwise indicated. In
accordance with the rules of the Securities and Exchange Commission,
each stockholder is deemed to beneficially own any shares subject to
stock options or warrants which are currently exercisable or which
become exercisable, or convertible securities which are currently
exercisable or which become exercisable, within 60 days after February
28, 1999, 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 February 28, 1999. The inclusion herein of shares
listed as beneficially owned does not constitute an admission of
beneficial ownership.
(2) Number of shares deemed outstanding includes shares outstanding as of
February 28, 1999, 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 February 28, 1999.
(3) These persons have an address c/o the Company, One Summit Square, Suite
200, Route 413 and Double Woods Road, Langhorne, Pennsylvania 19047.
(4) Includes 1,281,461 shares held by a revocable trust over which this
stockholder has sole voting and dispositive power; also includes 64,304
shares owned by this stockholder's wife as to which this stockholder
disclaims beneficial ownership.
(5) Voting and dispositive power over 342,819 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 children, who
include T. Kyle Standley and M. Trent Standley. The numbers of shares
in the column next to the names of Ralph W. Standley III, T. Kyle
Standley and M. Trent Standley exclude these shares.
(6) All shares owned by this individual are pledged to a bank as loan
collateral.
(7) Includes [985,900] shares beneficially owned by Putnam Investments,
Inc., which is a wholly-owned subsidiary of Marsh & McLennan Companies,
Inc. The shares beneficially held by Putnam Investments, Inc. include
shares held by two registered investment advisers which Putnam
Investments, Inc. wholly owns, Putnam Investment Management, Inc. and
The Putnam Advisory Company, Inc.
46
<PAGE> 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The company has granted certain stock options to Messrs. Forbes and
Hoag under the Director Option Plan. See Item 11 -- "Executive Compensation --
Compensation of Director".
Ralph W. Standley III, the Chairman of the Board of Directors of the
Company, is indebted to the Company under a promissory note between the Company
and Mr. Standley, pursuant to which the Company loaned Mr. Standley $126,103,
at an interest rate of 10% per annum. The promissory note is payable on demand.
As of January 31, 1999, the aggregate amount (including interest) of the loan
outstanding was $148,344.
T. Kyle Standley, the President and Chief Executive Officer of the
Company, is indebted to the Company under a promissory note between the Company
and Mr. Standley, pursuant to which the Company loaned Mr. Standley $169,499,
at an interest rate of 10% per annum. The promissory note is payable on demand.
As of January 31, 1999, the aggregate amount (including interest) of the loan
outstanding was $199,394.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Reports of Independent Accountants
Consolidated Balance Sheet at January 31, 1999 and 1998
Consolidated Statement of Operations for the fiscal years ended
January 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the fiscal years ended
January 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the fiscal years
ended January 31, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(b) Exhibits:
47
<PAGE> 48
<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
+10.1 -- Assets 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")
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------------------
<S> <C>
+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
+10.29 -- 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
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------------------
<S> <C>
+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 -- Third Amendment to Credit Agreement as of December 15, 1998
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------------------
<C> <C> <S>
+21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of PricewaterhouseCoopers LLP
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.
(c) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, dated November 15, 1996,
as amended by a Current Report on Form 8-K/A, pursuant to which it reported its
acquisition of the assets of several unaffiliated entities engaged in the retail
video rental and sale business under Item 2 of Form 8-K. No financial statements
were required to be filed in connection with such Current Report.
The Registrant filed a Current Report on Form 8-K reporting on Item 8 Change in
fiscal year on May 15, 1998.
The Registrant filed a Current Report on Form 8-K reporting on Item 4 Changes
Registrant's certifying Accountant on November 20, 1998, reporting the
termination of PricewaterhouseCoopers LLP.
The Registrant filed a Current Report on Form 8-K reporting on Item 4 Changes
Registrant's certifying Accountant on January 31, 1999, reporting the selection
and appointment of BDO Seidman, LLP.
The Registrant filed a Current Report on Form 8-K reporting on Item 5 the third
amendment to Credit Agreement on January 27, 1999, reporting amendments
effective January 12, 1999 to the existing Credit Agreement.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 27, 1999
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ T. KYLE STANDLEY
-----------------------------------------
T. Kyle Standley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ T. KYLE STANDLEY (Principal executive officer May 27, 1999
- ------------------------ and a Director)
T. Kyle Standley
/s/ RICHARD G. KELLY (Principal financial officer) May 27, 1999
- ------------------------
Richard G. Kelly
/s/ JERRY L. MISLERMAN (Principal accounting officer) May 27, 1999
- ------------------------
Jerry L. Mislerman
/s/ RALPH W. STANDLEY III (Director) May 27, 1999
- -------------------------
Ralph W. Standley III
/s/ M. TRENT STANDLEY (Director) May 27, 1999
- ------------------------
M. Trent Standley
/s/ C. STEWART FORBES (Director) May 27, 1999
- ------------------------
C. Stewart Forbes
/s/ WESLEY F. HOAG (Director) May 27, 1999
- ------------------------
Wesley F. Hoag
52
<PAGE> 1
EXHIBIT 1
THIRD AMENDMENT TO CREDIT AGREEMENT
THIRD AMENDMENT, dated as of December 15, 1998, among WEST COAST
ENTERTAINMENT CORPORATION (the "Company"), certain direct and indirect
subsidiaries thereof which are signatory hereto (together with the Company,
individually, a "Borrower"; collectively, the "Borrowers"), the several banks
and other financial institutions parties to the Existing Credit Agreement (as
hereinafter defined) (individually, a "Bank"; collectively, the "Banks") and PNC
BANK, NATIONAL ASSOCIATION, as agent (in such capacity, the "Agent").
WITNESSETH:
WHEREAS, the Borrowers, the Banks and the Agent are parties to a Credit
Agreement, dated as of December 15, 1997 (as heretofore amended, supplemented or
otherwise modified, the "Existing Credit Agreement");
WHEREAS, Borrowers have informed the Banks that certain Defaults and Events
of Default exist and are continuing under the Existing Credit Agreement which
Defaults and Events of Default are set forth below;
WHEREAS, the Borrowers have requested the Banks to (i) make available to
the Borrowers additional loans and credit commitments to enable the Borrowers to
pay certain expenses and for general working capital which loans and
commitments, when added to the Loans to the Company currently outstanding under
the Existing Credit Agreement, would exceed the Total Commitments under the
Agreement, (ii) waive the existing Defaults and Events of Default, and (iii)
make certain other amendments to the Existing Credit Agreement; and
WHEREAS, the Banks have agreed to certain of the Borrowers' requests
pursuant to the terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
SECTION I
ACKNOWLEDGMENTS
1.1 Terms Defined in the Existing Credit Agreement. Unless otherwise
amended or defined herein, the capitalized terms used in this Third Amendment
shall have the same definitions as are contained in the Existing Credit
Agreement.
1.2 Acknowledgment of Events of Default; Enforceability of Credit
Agreement; Waiver of Defenses. The Borrowers acknowledge that: (i) certain
Defaults and Events of Default have occurred and/or currently exist under the
Existing Credit Agreement, which Defaults or
<PAGE> 2
Events of Default are described on Schedule I attached hereto (the "Existing
Defaults"), (ii) as a result of the Existing Defaults and but for the waiver of
the Existing Defaults as set forth in this Third Amendment, the Agent, on
behalf of the Banks, without the need for further notice or declaration to the
Borrowers or any other entity, would be entitled to exercise its rights and
remedies under the Existing Credit Agreement and the other Loan Documents;
(iii) the Existing Credit Agreement and the other Loan Documents are
enforceable against the Borrowers in every respect, and all of the terms and
conditions thereof, as amended by this Third Amendment, are binding upon the
Borrowers; (iv) the Loans and other indebtedness owing to the Banks under the
Existing Credit Agreement and the other Loan Documents are absolutely and
unconditionally owing without defense, offset or counterclaim, and (v) no
defenses, set-offs or counterclaims exist with respect to the enforcement by
the Agent or the Banks of their respective rights under the Existing Credit
Agreement and the Loan Documents.
1.3 Acknowledgment of Indebtedness. The Borrowers acknowledge that as of
the date hereof, the Borrowers are indebted to the Banks in the principal
amount of $65,000,000, together with unpaid, accrued interest through the date
of this Third Amendment and together with the Agent's and the Banks' costs of
collection of the aforesaid amount which costs of collection include, without
limitation, the Agent's and the Banks' attorneys' and consultant fees incurred
in connection with the preparation, negotiation, execution and recordation of
this Third Amendment and the various other documents executed in connection
with this Third Amendment and the verification of information provided to the
Banks by the Borrowers prior to the execution of this Third Amendment.
1.4 Acknowledgment of Liens and Priority/Grant of Security Interest. The
Borrowers acknowledge that the Agent holds, for the benefit of the Banks,
perfected security interests in and liens upon the Collateral pursuant to the
Security Documents, which security interests and liens are of the first
priority and which security interests and liens secure the Borrowers'
obligations to the Banks under the Loan Documents, as amended hereby. The
Borrowers further acknowledge the prior execution and delivery to the Agent for
the benefit of the Banks of the Security Documents and that, notwithstanding
the execution and delivery of this Third Amendment, the Security Documents
remain in full force and effect and the rights and remedies of the Agent and
the Banks thereunder, the obligations of the Borrowers thereunder, and the
liens and security interests created and provided for thereunder remain in full
force and effect and shall not be affected, impaired or discharged hereby.
Except as specifically set forth in this Third Amendment, nothing contained
herein shall in any manner affect or impair the priority of the liens and
security interests created and provided for by the Security Documents as to the
indebtedness which would be secured thereby prior to giving effect to this
Third Amendment. Without limiting the foregoing, the Borrowers, the Agent and
each of the Banks acknowledge and agree that all of the indebtedness,
obligations and liabilities to the Agent and the Banks pursuant to the Existing
Credit Agreement as amended hereby, including, without limitation, the
indebtedness and obligations of the Borrowers to the Overadvance Banks
(hereinafter defined) with respect to the Overadvance Loans (hereinafter
defined) and the fees and costs associated therewith, shall constitute
indebtedness secured by each of the Security Documents and shall be secured by,
and entitled to all of the benefits of, the liens and security interests
created and
- 2 -
<PAGE> 3
provided for under each of the Security Documents. In furtherance of the
foregoing, the Borrowers hereby grant to the Agent for the benefit of the Banks
and the Borrowers hereby acknowledge the previous grant to the Agent for the
benefit of the Banks and agree that the Agent for the benefit of the Banks shall
continue to hold a continuing security interest in all of the Borrowers'
property, both real and personal, presently existing or hereinafter created,
tangible and intangible, including without limitation, all of the Borrowers'
accounts, accounts receivable, inventory, equipment, furniture, general
intangibles, contracts, contract rights, leases, chattel paper and all
accessions and additions thereto, together with all products, rents, offspring,
profits and proceeds of each of the foregoing, and all proceeds from the
collection of any of the foregoing (which proceeds are further acknowledged to
include all rents, rental payments, charges, fees and/or all other consideration
whenever and in whatever form received by Borrowers or any of them for the lease
or rental of rental video cassettes, rental digital video discs and rental game
inventory in the ordinary course of Borrowers' business) and in all other
property described or referred to in the granting clauses of the Security
Documents as same have been or may hereafter or herewith be amended, each and
all of which granting clauses are hereby incorporated by reference herein in
their entirety. The foregoing grant shall be in addition to and supplemental of
and not in substitution for the grant by the Borrowers under the Security
Documents, and except as specifically set forth in this Third Amendment, shall
not affect or impair the lien or priority of the Security Documents in the
Collateral subject thereto or the indebtedness secured thereby.
SECTION II
WAIVER OF EXISTING DEFAULTS
2.1 Waiver of Existing Defaults. On and as of the Third Amendment
Effective Date (hereinafter defined), the Agent and the Banks waive the
Existing Defaults.
2.2 Limitations. Except as specifically set forth in Section 2.1 above,
nothing contained in this Third Amendment nor any communication between the
Agent and/or the Banks and any Borrower or any officer, agent, employee, or
representative of any Borrower shall be deemed to constitute a waiver of (i) any
Defaults or Events of Default existing under the Existing Credit Agreement other
than the Existing Defaults; (ii) the ongoing obligation of the Borrowers to
comply with the Existing Credit Agreement, as amended hereby; or (iii) any
rights or remedies which the Agent and/or the Banks have against the Borrowers
under the Agreement, the Loan Documents and/or applicable law, other than rights
and remedies which directly result from the occurrence and existence of the
Existing Defaults. The Agent and the Banks hereby reserve and preserve all of
their rights and remedies against the Borrowers under the Agreement, the Loan
Documents and under applicable law, other than the right to declare an Event or
Default or exercise remedies based upon the occurrence and existence of the
Existing Defaults, including, without limitation, the right to declare a Default
or Event of Default and exercise remedies should an Event of Default presently
exist which has not been disclosed to the Agent and the Banks by the Borrowers
and which is not part of the defined "Existing Defaults" or should an Event of
Default occur after the date of this Third Amendment.
- 3 -
<PAGE> 4
SECTION III
AMENDMENTS TO SECTION 1. OF EXISTING CREDIT
AGREEMENT/DEFINITIONS
3.1 Amendments to Defined Terms. (a) The definitions of the following terms
contained in Section 1.1 of the Existing Credit Agreement shall be amended and
restated as follows as of the date of this Third Amendment:
"Applicable Margin": shall mean (i) 2.0% with respect to Base Rate
Tranche A Loans and Base Rate Tranche B Loans, (ii) 2.5% with respect to
Tranche A Overadvance Loans, and (iii) 3.5% with respect to Tranche B
Overadvance Loans.
"Base Rate": shall mean for any day, a rate per annum equal to the
Prime Rate in effect on such day. Any change in the Base Rate due to a
change in the Prime Rate shall be effective on the effective date of such
change in the Prime Rate.
"Commitments": shall mean collectively the Tranche A Commitments, the
Tranche B Commitments and the Overadvance Commitments.
"Letters of Credit": shall have the meaning set forth in Section
2.20(f) of the Agreement.
"L/C Participant": shall mean, in respect of each Letter of Credit,
each Overadvance Bank (other than the Issuing Bank in respect of such
Letter of Credit) in its capacity as the holder of a participating interest
in such Letter of Credit.
"Loans": shall mean collectively the Tranche A Loans, Tranche B Loans
and the Overadvance Loans.
"Notes": shall mean collectively the Tranche A Notes, the Tranche B
Notes and the Overadvance Notes.
"Termination Date": shall mean the earlier of (a) February 14, 2000,
or (b) the date the Commitments are terminated as provided herein.
(b) The definition of the term "Permitted Liens" is amended as follows: in
subsection (h) of that definition the dollar amount "$2,000,000" is deleted and
the dollar amount of "$3,500,000" is inserted in its place.
3.2 Additions to Defined Terms. Subsection 1.1 of the Existing Credit
Agreement shall be supplemented and amended by inserting the following defined
terms and definitions therein in their correct alphabetical order:
-4-
<PAGE> 5
"Available Overadvance Commitments": shall mean, at any particular time, an
amount equal to the excess, if any, of the (a) Overadvance Commitments at such
time over (b) the sum of the aggregate unpaid principal amount of the
Overadvance Loans outstanding at such time which shall include, without
limitation, amounts available to be drawn but not yet drawn under Letters of
Credit.
"Bank Debt": shall mean the unpaid principal amount of and interest on the
Notes and all other obligations and liabilities of the Borrowers to the Agent or
any Bank, whether direct or indirect, absolute or contingent, due or to become
due, or now existing or hereafter incurred, which may arise under, out of, or in
connection with, the Agreement, the Notes, the Letters of Credit, the other Loan
Documents and any other document made, delivered or given in connection
therewith or herewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses or otherwise.
"Budget": shall mean the budget and Cash Flow forecast for the Budgeted
Period prepared and proposed by the Borrowers and updated and provided to the
Banks biweekly during the period commencing on the Third Amendment Effective
Date through the Termination Date and approved as to form and content by the
Required Overadvance Banks, in their reasonable discretion, for so long as the
Overadvance Commitments exist or any Overadvance Loans are outstanding and
thereafter by the Required Banks, in their reasonable discretion.
"Budgeted Expenses": shall refer to line items contained on the Budget
indicating categories of expenditures anticipated to be made by the Borrowers
during the Budgeted Period.
"Budgeted Period": shall mean the period of time covered by a Budget. Each
Budgeted Period shall be thirteen weeks. The initial Budgeted Period shall
commence on December 14, 1998 and shall end March 15, 1999.
"Existing Commitment Percentage": shall mean, as to any Bank, at any time,
the percentage which such Bank's Tranche A Commitment and Tranche B Commitment
then constitutes of the total Tranche A Commitments and Tranche B Commitments of
all Banks at such time (or at any time after the Tranche A Commitments and the
Tranche B Commitments shall have expired or terminated, the percentage which the
amount of such Bank's Existing Exposure constitutes of the Existing Exposure of
all Banks at such time).
"Existing Exposure": shall mean as to any Bank, at any time, an amount
equal to the sum of the aggregate principal amount of Tranche A Loans and
Tranche B Loans made by such Bank then outstanding.
"Overadvance Banks": shall mean those Banks making Overadvance Loans in
accordance with their Overadvance Commitments hereunder.
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"Overadvance Commitments": shall mean, as to any Bank, the Tranche A
Overadvance Commitment and the Tranche B Overadvance Commitment of such Bank as
set forth on Schedule II attached to the Third Amendment.
"Overadvance Commitment Percentage" as to any Overadvance Bank at any time,
the percentage which such Overadvance Bank's Overadvance Commitment then
constitutes of the Total Overadvance Commitments at such time (or, at any time
after the Total Overadvance Commitments shall have expired or terminated, the
percentage which the amount of such Overadvance Bank's Overadvance Exposure
constitutes of the total Overadvance Exposure of all of the Overadvance Banks at
such time).
"Overadvance Commitment Period": shall mean the period from and including
the Third Amendment Effective Date to, but not including, the Termination Date.
"Overadvance Exposure": as to any Overadvance Bank, at any time, the
sum of such Bank's Tranche A Overadvance Exposure and Tranche B Overadvance
Exposure.
"Overadvance Loans": shall mean collectively the Tranche A Overadvance
Loans and Tranche B Overadvance Loans.
"Overadvance Notes": shall mean collectively the Tranche A Overadvance
Notes and Tranche B Overadvance Notes.
"Required Overadvance Banks": at any time, Overadvance Banks the
Overadvance Commitment Percentages of which at such time aggregate at least
66-2/3%.
"Third Amendment": shall mean the Third Amendment to the Agreement dated as
of December 15, 1998 among the Borrowers, the Banks and the Agent.
"Third Amendment Effective Date": shall mean the date on which all the
conditions set forth in Section XI of the Third Amendment have been duly
satisfied in the sole and absolute discretion of the Agent and the Banks as
evidenced by their execution of the Third Amendment.
"Total Overadvance Commitments": shall mean $5,000,000 which is the
aggregate amount of the Overadvance Banks' Overadvance Commitments.
"Tranche A Overadvance Commitment": shall mean, as to any Overadvance Bank,
the obligation of such Bank to make Tranche A Overadvance Loans and to acquire
participating interests in Letters of Credit hereunder in an aggregate amount at
any one time outstanding not to exceed the amount set forth opposite such Bank's
name on Schedule II hereto under the Caption "Tranche A Overadvance
Commitments," as such amount may be changed from time to time in accordance with
the provisions of the Agreement and/or any applicable Assignment and Acceptance.
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"Tranche B Overadvance Commitment": shall mean, as to any Overadvance Bank,
the obligation of such Bank to make Tranche B Overadvance Loans in an aggregate
amount at any one time outstanding not to exceed the amount set forth opposite
such Bank's name on Schedule II hereto under the Caption "Tranche B Overadvance
Commitment," as such amount may be changed from time to time in accordance with
the provisions of the Agreement and/or any applicable Assignment and Acceptance.
"Tranche A Overadvance Loan": shall have the meaning ascribed thereto in
Section 2.20(a) of the Agreement.
"Tranche B Overadvance Loan": shall have the meaning ascribed thereto in
Section 2.20(b) of the Agreement.
"Tranche A Overadvance Exposure": shall mean, as to any Overadvance Bank at
any time, an amount equal to the sum of (a) the aggregate principal amounts of
Tranche A Overadvance Loans made by such bank then outstanding and (b) such
Overadvance Bank's share of the L/C Obligations then outstanding.
"Tranche A Overadvance Notes": shall have the meaning ascribed thereto in
Section 2.20(d) of the Agreement.
"Tranche B Overadvance Exposure": shall mean as to any Overadvance Bank at
any time the aggregate principal amounts of Tranche B Overadvance Loans made by
such Bank then outstanding.
"Tranche B Overadvance Notes": shall have the meaning ascribed thereto in
Section 2.20(e) of the Agreement.
SECTION IV
AMENDMENTS TO SECTION 2. OF EXISTING CREDIT AGREEMENTS/LOANS AND
TERMS OF COMMITMENTS
4.1 Amendments to Section 2.1 of the Existing Credit Agreement. Subsections
2.1(a) and (b) of the Existing Credit Agreement are hereby amended to provide
that, from and after the Third Amendment Effective Date, the Tranche A Loans and
the Tranche B Loans will no longer revolve and all principal repayments of the
Tranche A loans and/or the Tranche B Loans made by the Borrowers following the
Third Amendment Effective Date shall permanently reduce the principal balance
outstanding thereunder and shall not be available for reborrowing. Except as set
forth in Section 2.16(d), no payments made by the Borrowers to the Banks shall
be applied by the Banks to reduce the principal amounts outstanding under the
Tranche A Loans or Tranche B Loans until and unless the Overadvance Loans have
been paid in full and there is no further Overadvance Commitment. Subsection
2.1(c) and (d) are hereby deleted from the Agreement.
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4.2 Amendments to Section 2.2 of the Existing Credit Agreement. Section
2.2(a) of the Existing Credit Agreement shall be amended by inserting in the
parenthesis immediately before the term "Tranche A Note" where it first appears
the following words: "as it may be amended, modified or supplemented from time
to time". Section 2.2(b) of the Existing Credit Agreement shall be amended by
inserting in the parenthesis immediately before the term "Tranche B Note" where
it first appears the following words: "as it may be amended, modified or
supplemented from time to time".
4.3 Amendments to Section 2.3 of the Existing Credit Agreement/Procedure
for Loans. Section 2.3 of the Existing Credit Agreement and all references
thereto are hereby deleted as there is no further ability by the Borrowers to
borrow under the Tranche A Commitments or the Tranche B Commitments.
4.4 Amendments to Section 2.4 of the Existing Credit Agreement/L/C
Commitment. As of the Third Amendment Effective Date, Section 2.4 of the
Existing Credit Agreement is deleted in that as of the Third Amendment Effective
Date, the L/C Commitment under the Tranche A Commitment has expired and is no
longer available.
4.5 Amendment to Section 2.12 of the Existing Credit Agreement/Fees.
Section 2.12 of the Existing Credit Agreement is deleted in its entirety.
4.6 Amendment to Section 2.13 of the Existing Credit Agreement/Interest
Rates and Payment Dates.
(a) Section 2.13(a) of the Existing Loan Agreement is amended and restated
as follows:
Until the Third Amendment Effective Date and subject to the provisions of
subsection 2.14 hereof, each Base Rate Tranche A Loan shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be) at a rate per annum equal to the Base Rate plus
the Applicable Margin applicable to Base Rate Tranche A Loans. Until the Third
Amendment Effective Date and subject to the provisions of subsection 2.14, each
Base Rate Tranche B Loan shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 365 or 366 days, as the case may
be) at a rate per annum equal to the Base Rate plus the Applicable Margin
applicable to Base Rate Tranche B Loans. Upon and following the Third Amendment
Effective Date, each Base Rate Tranche A Loan and each Base Rate Tranche B Loan
shall accrue interest (computed on the basis of the actual number of days
elapsed over a year of 365 or 366 days, as the case may be) at a rate equal to
the Default Rate (the "Interest Accrual Rate"). Notwithstanding the foregoing,
upon and following the Third Amendment Effective Date until the earlier of (i)
June 30, 1999 or (ii) payment of the Bank Debt in full, the Borrowers shall pay
interest to the Agent, for the ratable benefit of the Banks, in arrears in
accordance with the Tranche A Loans and Tranche B Loans then outstanding and,
with respect to each Base Rate Tranche A Loan and each Base Rate Tranche B Loan,
at the Base Rate plus the Applicable Margin applicable to such Loans
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<PAGE> 9
(the "Interest Pay Rate"). Subject to the provisions of subsection (c) of
this Section 2.13, the amount equal to the difference between the interest
that accrued at the Interest Accrual Rate and the Interest Pay Rate (the
"Interest Differential") between the Third Amendment Effective Date and the
earlier of (i) June 30, 1999 or (ii) payment of the Bank Debt in full,
shall be due and payable by the Borrowers to the Agent for the ratable
benefit of the Banks of the earlier to occur of (i) July 1, 1999 or (ii)
the date on which the Bank Debt is fully paid.
(b) Subsection 2.13(b) of the Existing Credit Agreement is amended by
adding to it the following language:
"Notwithstanding the foregoing, upon and following the Third Amendment
Effective Date, as to all Eurodollar Loans which are outstanding on the
Third Amendment Effective Date, such Loans shall continue to bear interest
at the rate in effect on the day immediately preceding the Third Amendment
Effective Date and the Borrowers shall continue to pay such interest on the
Interest Payment Date applicable to such Loans, provided, however, that
(i) as and when the Interest Periods of any Eurodollar Loans outstanding on
the Third Amendment Effective Date expire, such Eurodollar Loans shall
cease to be Eurodollar Loans and shall be immediately converted to Base
Rate Loans which shall accrue interest at the rate set forth in subsection
(a) above, and the Borrowers shall have no further right under the
Agreement to convert Base Rate Loans to Eurodollar Loans or to continue
Eurodollar Loans when they expire.
(c) Subsection (c) of Section 2.13(c) is amended by adding the following
language to the end of that section:
"Notwithstanding the foregoing, upon and following the Third Amendment
Effective Date through the earliest of (i) an Event of Default, (ii) June
30, 1999 or (iii) the date on which the Bank Debt is repaid in full and no
further Commitments exist, the Borrowers shall pay on the Interest Payment
Date (x) with respect to each Base Rate Tranche A Loan and each Base Rate
Tranche B Loan, interest at the Interest Pay Rate and (y) with respect to
any Eurodollar Loan that still exists as of that date, interest at the rate
applicable to such Eurodollar Loan on the day immediately preceding the
Third Amendment Effective Date. If there exist any Bank Debt outstanding
after June 30, 1999, then the Borrowers shall be obligated to pay to the
Banks on July 1, 1999 the Interest Differential that has accrued through
June 30, 1999. If all Bank Debt has been repaid on or prior to June 30,
1999, then the Borrowers shall be relieved of the obligation to pay the
Interest Differential. If there is Bank Debt outstanding after June 30,
1999, interest on the Tranche A Loans and Tranche B Loans shall accrue and
be payable at the Interest Accrual Rate on each Interest Payment Date."
4.7 Amendment to Section 2.14 of the Existing Credit Agreement/Default
Interest. Subsections 2.14(a) and 2.14(b) of the Existing Credit Agreement are
hereby amended to provide a single default rate of interest applicable to all
Loans following the occurrence of any Default
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<PAGE> 10
or Event of Default under the Loan Documents, as amended by the Third
Amendment. Such default rate of interest (the "Default Rate") shall be an
annual rate of interest and (i) with respect to Base Rate Loans and Overadvance
Loans, shall equal the Base Rate plus the Applicable Margin plus 3% and (ii)
with respect to Eurodollar Loans, shall equal the Eurodollar Rate plus the
Applicable Margin in effect on the day immediately preceding the Third
Amendment Effective Date plus 3%. Except as expressly provided in Section 2.13
of the Agreement, as amended hereby, interest accruing at the Default Rate
shall be due and payable on demand.
4.8 Amendments to Section 2.16/Termination, Reduction, Extension and
Increase of Commitments. Section 2.16 is amended as follows:
(a) Subsection 2.16(b) is amended to provide that the Commitments may
be permanently reduced by the Borrowers at any time in any increments. Except
as set forth in subsection (d) of this Section, all payments received from the
Borrowers on and following the Third Amendment Effective Date shall first be
used to pay interest and fees then due and owing to the Agent or the Banks, as
the case may be, and thereafter to repay the Overadvance Loans and thereafter,
to permanently repay the Tranche B Loans then outstanding and thereafter to
permanently repay the Tranche A Loans then outstanding. All payments against
Tranche B Loans or Tranche A Loans shall be applied by the Agent to first repay
Base Rate Loans, with the excess, if any, applied to repay any remaining
Eurodollar Loans in the order of next maturing Interest Periods. Each reduction
in the Commitments hereunder shall be made ratably among the Banks in
accordance with amounts outstanding under their respective Tranche A Loans,
Tranche B Loans and Overadvance Loans, as appropriate.
(b) Subsection 2.16(d) of the Existing Credit Agreement is hereby
amended and restated in its entirety as follows:
"The Tranche B Commitments, or if no Tranche B Commitments then exist,
the Tranche A Commitments shall be automatically and permanently reduced by
the amounts and on the dates set forth below:
Commitment Reduction Date Amount of Reduction
------------------------- -------------------
August 1, 1999 $3,000,000
November 1, 1999 $2,500,000
February 1, 2000 $2,500,000
February 15, 2000 Remaining Amount"
(c) Subsection 2.16(e) is hereby deleted from the Existing Credit
Agreement in its entirety. In addition, the Tranche A Commitments and Tranche B
Commitments are no longer subject to extension or increase and Subsections
2.16(f) and 2.16(g) are hereby deleted from the Existing Credit Agreement in
their entirety and are of no further force and effect.
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4.9 Amendment to Section 2.17 of the Existing Credit Agreement/Optional
Prepayments of Loans. Section 2.17 of the Existing Credit Agreement is deleted
in its entirety.
4.10 Amendment to Section 2.18 of the Existing Credit Agreement/Mandatory
Prepayments.
Section 2.18 of the Existing Credit Agreement is amended and restated in
its entirety as follows:
"Promptly upon receipt by the Company or any of its Subsidiaries of any Net
Proceeds from an Asset Sale, the Borrowers shall pay to the Agent 100% of
such Net Proceeds which Net Proceeds shall be applied to the outstandings
under the Loans in the following order: first to interest (other than the
Interest Differential) and fees then due and owing under the Agreement,
second to amounts outstanding under the Overadvance Loans, third to the
Interest Differential, if any is then payable, fourth to amounts
outstanding under the Tranche B Loans and fifth to amounts outstanding
under the Tranche A Loans."
4.11 Renumbering of Sections 2.19 Through 2.25 of the Existing Credit
Agreement.
(a) Sections 2.19, 2.20, 2.21, 2.22, 2.23, 2.24 and 2.25 of the Existing
Credit Agreement are amended by renumbering such sections which sections shall
now have the numbers set forth below:
<TABLE>
<CAPTION>
Section Number-Existing Credit Agreement Section Number-Agreement
<S> <C>
2.19 2.22
2.20 2.23
2.21 2.24
2.22 2.25
2.23 2.26
2.24 2.27
2.25 2.28
</TABLE>
Any references in the Existing Credit Agreement to the section numbers set forth
in the left hand column above shall, after the Third Amendment Effective Date,
be deemed to refer to the applicable section number set forth in the right hand
column above.
(b) Sections 2.26, 2.27 and 2.28 of the Existing Credit Agreement are
hereby deleted therefrom.
4.12 New Section 2.19. The following new Section 2.19 shall be inserted in
the Agreement:
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<PAGE> 12
2.19 Amendment Fee. An Amendment Fee of $300,000 shall be paid by the
Borrowers to the Agent for the ratable benefit of the Banks and in
accordance with each Bank's Commitment Percentage as follows: (i) $50,000
on the Third Amendment Effective Date; and (ii) $250,000 on the earlier to
occur of the Termination Date or the date on which the Bank Debt is paid in
full. The foregoing $250,000 fee is earned on the Third Amendment Effective
Date.
4.13 New Section 2.20 of the Credit Agreement. The following new Section
2.20 shall be inserted in the Agreement:
2.20 Overadvance Commitments.
(a) Tranche A Overadvance Loans. Subject to the terms and conditions
hereof, each Overadvance Bank severally agrees to make revolving credit
loans (the "Tranche A Overadvance Loans") to the Borrowers on a joint and
several basis from time to time during the Overadvance Commitment Period
which Tranche A Overadvance Loans may be borrowed, repaid and reborrowed in
accordance with the terms of this Agreement. The Tranche A Overadvance
Loans shall not, at any time, exceed $4,000,000 in the aggregate and each
Overadvance Bank's obligation to make Tranche A Overadvance Loans shall be
limited by the amount of such Bank's Tranche A Overadvance Commitment,
provided, however, that no Tranche A Overadvance Loan shall be made if,
after giving effect to the making of such Loan, the aggregate amount of the
Tranche A Overadvance Exposure of all Overadvance Banks would exceed the
aggregate amount of the Tranche A Overadvance Commitments of all the
Overadvance Banks. The Tranche A Overadvance Loans are being made to enable
the Borrowers to make payments as set forth in the Budget. The Borrowers
shall not utilize the Tranche A Overadvance Loans to make any expenditure
which is not a Budgeted Expense as set forth in the Budget, or which is not
set forth on a revised and updated Budget that has been preapproved by the
Required Overadvance Banks in their reasonable discretion. The Tranche A
Overadvance Commitments may be terminated or reduced by the Borrowers from
time to time, without penalty or premium.
(b) Tranche B Overadvance Loans. Subject to the terms and conditions
hereof, each Overadvance Bank severally agrees to make revolving credit
loans (the "Tranche B Overadvance Loans") to the Borrowers on a joint and
several basis from time to time during the Overadvance Commitment Period
which Tranche B Overadvance Loans may be repaid and reborrowed in
accordance with the terms of this Agreement. The Tranche B Overadvance
Loans shall not, at any time, exceed $1 million in the aggregate and each
Overadvance Bank's obligation to make Tranche B Overadvance Loans shall be
limited by the amount of such Bank's Tranche B Overadvance Commitment,
provided, however, that no Tranche B Overadvance Loan shall be made if,
after giving effect to the making of such Loan, the aggregate outstanding
amount of the Tranche B Overadvance Loans of all the Overadvance Banks
would exceed the aggregate amount of the Tranche B Overadvance Commitments
of all the Overadvance Banks, and provided, further, that
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<PAGE> 13
notwithstanding anything to the contrary contained herein, the Borrowers may not
borrow Tranche B Overadvance Loans unless at such time there remains no further
availability under the Tranche A Overadvance Commitments. Further, the Tranche B
Overadvance Loans are being made to enable the Borrowers to make payments as set
forth in the Budget. The Borrowers shall not utilize the proceeds from Tranche B
Overadvance Loans to make any expenditure which is not set forth in the Budget,
or which is not set forth on an updated and revised Budget that has been
approved by the Required Overadvance Banks in their reasonable discretion. The
Tranche B Overadvance Commitments may be terminated or reduced by the Borrowers
from time to time, without penalty or premium.
(c) Interest. Subject to the provisions of subsection 2.14 hereof, each
Tranche A Overadvance Loan shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 365 or 366 days, as the case may
be) at a rate per annum equal to the Base Rate plus the Applicable Margin
applicable to Tranche A Overadvance Loans. Subject to the provisions of
subsection 2.14 hereof, each Tranche B Overadvance Loan shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be) at a rate per annum equal to the Base Rate plus
the Applicable Margin applicable to Tranche B Overadvance Loans. Interest on all
Overadvance Loans shall be due and payable monthly by the Borrowers to the Banks
on the last day of each month and shall be automatically withdrawn by the Agent
from the Borrowers' account with the Agent and thereafter distributed by Agent
to Overadvance Banks in accordance with their respective Overadvance Commitment
Percentages.
(d) Tranche A Overadvance Notes. The Tranche A Overadvance Loans made by
each Overadvance Bank shall be evidenced by a promissory note of the Borrowers,
substantially in the same form as Exhibit "A-1" attached hereto, with
appropriate insertions as to payee, date and principal amount (each a "Tranche A
Overadvance Note"), payable to the order of such Overadvance Bank in the
principal amount equal to the amount of the Tranche A Overadvance Commitment of
such Bank. Each Overadvance Bank is hereby authorized to record the date and
amount of each Tranche A Overadvance Loan made by such Bank and the date and
amount of each payment of principal thereof on a schedule annexed to and
constituting part of its Tranche A Overadvance Note, and any such recordation
shall constitute prima facie evidence of the accuracy of the information so
recorded, provided that the failure of any Overadvance Bank to make such
recordation (or any error in such recordation) shall not affect the obligations
of the Borrowers hereunder or under such Tranche A Overadvance Note. Each
Tranche A Overadvance Note shall (i) be dated the date of the Third Amendment
Effective Date, (ii) be stated to mature on the Termination Date, (iii) provide
for the payment of interest in accordance with this Agreement and (iv) provide
such other terms as deemed necessary by the Overadvance Banks.
(e) Tranche B Overadvance Notes. The Tranche B Overadvance Loans made by
each Overadvance Bank shall be evidenced by a promissory note of the Borrowers,
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substantially in the same form as Exhibit "A-2" attached hereto, with
appropriate insertions as to payee, date and principal amount (a "Tranche B
Overadvance Note"), payable to the order of such Bank in the principal amount
equal to the amount of the Tranche B Overadvance Commitment of such Bank. Each
Overadvance Bank is hereby authorized to record the date and amount of each
Tranche B Overadvance Loan made by such Bank and the date and amount of each
payment or prepayment of principal thereof on a schedule annexed to and
constituting part of its Tranche B Overadvance Note, and any such recordation
shall constitute prima facie evidence of the accuracy of the information so
recorded, provided that the failure of any Overadvance Bank to make such
recordation (or any error in such recordation) shall not affect the obligations
of the Borrowers hereunder or under such Tranche B Overadvance Note. Each
Tranche B Overadvance Note shall (i) be dated the date of the Third Amendment
Effective Date, (ii) be stated to mature on the Termination Date, (iii) provide
for the payment of interest in accordance with this Agreement and (iv) contain
such other provisions deemed necessary by the Overadvance Banks.
(f) Issuance of Letters of Credit under Tranche A Overadvance Commitments.
Subject to the terms and limitations of this Agreement, an Issuing Bank, in
reliance upon the agreements of the Overadvance Banks set forth in subsection
2.7(a) of this Agreement, shall issue letters of credit ("Letters of Credit")
for the account of Borrowers in such form as may be approved from time to time
by such Issuing Bank, provided, that the amounts available to be drawn under
Letters of Credit shall reduce the availability under the Tranche A Overadvance
Commitments on a dollar for dollar basis and further provided that the face
amount of all Letters of Credit shall not exceed, in the aggregate, $1,500,000
and no Letter of Credit shall be issued if, after giving effect thereto, the
amount of Tranche A Overadvance Exposure would exceed the aggregate amount of
Tranche A Overadvance Commitments in effect at such time. Any such Letter of
Credit issued by an Issuing Bank shall (i) be denominated in Dollars and shall
be a standby letter of credit, (ii) expire no later than three days prior to the
Termination Date, (iii) be subject to the Uniform Customs and Practices Act, and
to the extent not inconsistent therewith, the laws of the Commonwealth of
Pennsylvania. An Issuing Bank shall not at any time be obligated to issue any
Letter of Credit hereunder if such issuance would conflict with, or cause such
Issuing Bank or any L/C Participant to exceed any limits imposed by any
applicable Requirement of Law.
(g) Fees in respect of Letters of Credit. The Borrowers shall pay to the
Agent, for the account of the Overadvance Banks (including the Issuing Banks)
pro rata according to their respective Overadvance Commitment Percentages, a
letter of credit commission with respect to each Letter of Credit, at the rate
of 2% per annum on the daily average undrawn face amount of such Letter of
Credit (computed on the basis of the actual number of days such Letter of Credit
is outstanding in a year of 360 days). Such commissions shall be payable in
arrears on the last Business Day of each March, June, September and December to
occur after the date of issuance of each Letter of Credit, and on the
Termination Date or such earlier date as the Overadvance Commitment is
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<PAGE> 15
terminated, and shall be nonrefundable. The Borrowers shall also pay to each
Issuing Bank, in respect of each Letter of Credit issued by such Issuing Bank, a
fronting fee for the period from and including the date of issuance of such
Letter of Credit to and including the date of termination of such Letter of
Credit computed at the rate of 1/8% per annum on the daily average undrawn face
amount of such Letter of Credit (computed on the basis of the actual number of
days such Letter of Credit is outstanding in a year of 360 days). The fees
described in the preceding sentence shall be due and payable quarterly in
arrears on the last Business Day of each March, June, September and December of
each year and on the Termination Date or such earlier date as the Overadvance
Commitment is terminated, and shall be nonrefundable. In addition to the
foregoing fees and expenses, the Borrowers shall pay the Issuing Bank for such
normal and customary costs and expenses as are incurred or charged by such
Issuing Bank in issuing, effecting payment under, amending or otherwise
administering any Letter of Credit.
(h) Other Provisions Pertaining to Letters of Credit Issued Under Tranche
A Overadvance Commitment. Section 2.5 of this Agreement shall pertain to all
Letters of Credit issued under the Tranche A Overadvance Commitment, except that
the reference therein to Section 2.4(a) is amended and restated to refer to
Section 2.20(f) and (g). Section 2.6 of the Agreement shall be deleted. Section
2.7 of this Agreement shall pertain to all Letters of Credit issued under the
Tranche A Overadvance Commitment, except that the term "Commitment Percentage"
shall be deleted where it appears and shall be replaced by the term "Overadvance
Commitment Percentage". Sections 2.8, 2.9, 2.10 and 2.11 of this Agreement shall
pertain to all Letters of Credit issued under the Tranche A Overadvance
Commitment except that the reference in Section 2.9 to Section 2.6 shall be
deleted.
(i) Overadvance Commitment Fee. An Overadvance Commitment Fee of $50,000
shall be paid by the Borrowers to the Overadvance Banks in accordance with their
Overadvance Commitment Percentages on the Third Amendment Effective Date.
(j) Making of Overadvance Loans/Compliance with Budget. The initial amount
advanced under the Tranche A Overadvance Commitment by the Overadvance Banks
shall be the lesser of (i) $2,500,000 million or (ii) the cash needs of the
Borrowers during the initial four week period covered by and as shown on the
Borrowers' initial Budget. Each Overadvance Loan shall be made by the Agent to
the Borrowers for the ratable benefit of each Overadvance Bank (an "Agent Loan")
and each Overadvance Bank agrees to reimburse the Agent a dollar amount equal to
its Overadvance Commitment Percentage with respect to any Agent Loan in
accordance with subsection 2.20(l) hereof. With respect to all Overadvance Loans
following the initial Overadvance Loan, the Borrowers shall make a written
borrowing request therefore (a "Borrowing Request") by giving the Agent (with a
copy to each Overadvance Bank) irrevocable notice (which notice must be received
by the Agent prior to 10:00 a.m., Philadelphia time, one Business Day prior to
the requested Borrowing Date) specifying in the Borrowing Request: (a) the
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<PAGE> 16
amount requested to be borrowed, (ii) the requested Borrowing Date, (c) whether
the borrowing is a Tranche A Overadvance Loan or a Tranche B Overadvance Loan or
a combination thereof, and the amount allocated to each. The Borrowing Request
shall also contain a certification by the Borrowers' chief financial officer
that the Borrowers are in compliance with all of the terms and conditions of
this Agreement and that the amount requested in the Borrowing Request will be
spent on Budgeted Expenses in accordance with the Budget then in effect.
Overadvance Loans shall be made, and the proceeds of the Overadvance Loans shall
be used by the Borrowers, solely to pay Budgeted Expenses in accordance with the
Budget. So long as there exists Available Overadvance Commitments and the
Borrowers are otherwise in compliance with the terms of the Agreement and are in
compliance with the revenue side of their Cash Flow projections, the Borrowers
may deviate with respect to any single Budgeted Expense by an amount up to 10%
of the amount shown on the Budget for that Budgeted Expense, and may deviate as
to all Budgeted Expenses, in the aggregate, in an amount up to 10% of such total
Budgeted Expenses. Notwithstanding the foregoing, the Borrowers may deviate with
respect to inventory purchase amounts by an amount up to 25% of the amount shown
on the Budget for those types of Budgeted Expenses as a result of the effect of
revenue sharing arrangements to which the Borrowers become a party after the
date of the Budget.
(k) Repayment of Overadvance Loans/Borrowers' Cash Management. Each day the
Borrowers shall deposit all cash and other amounts received in the operation of
their businesses in their operating accounts. To the extent practicable, the
Borrowers shall maintain their operating accounts at branches of either the
Agent or one of the other Banks. A complete list of the Borrowers' operating
accounts is set forth on Schedule "III" attached hereto and made a part hereof.
Any change in the Borrowers' operating accounts shall occur only after notice by
the Borrowers to the Banks. Except for minimal amounts not to exceed $1000 per
operating account, commencing on the Third Amendment Effective Date and at all
times thereafter, the Borrowers shall transfer or cause the transfer each
Business Day, of all cash and receipts received by any Borrower on the preceding
Business Day into account no. 8611138793 located at the Agent (the
"Concentration Account"). The Agent may, and the Borrowers hereby authorize the
Agent to "sweep" the aforesaid Concentration Account each Business Day and to
apply the "swept" funds to reduce the Overadvance Loans then outstanding. In the
event that any fees or interest is due by the Borrowers to the Banks, the Agent
and the Banks shall apply such funds first to the payment of such fees and
interest and thereafter to the principal balance of the Overadvance Loans. In
the event that the Concentration Account contains funds at a time when there are
no Overadvance Loans outstanding and no other fees or interest is due and owing
to the Banks hereunder, the Agent shall transfer the funds in the Concentration
Account to the Borrowers' operating account at the Agent and the Borrowers may
use such funds to pay their ordinary business expenses as set forth on the
Budget.
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(l) Settlement. Each Agent Loan made hereunder shall be deemed an
Overadvance Loan. The Agent shall not make any Agent Loan if the Agent
shall have actual knowledge of the existence and continuation of an Event
of Default. The Agent shall be deemed to have actual knowledge of an Event
of Default only if it has received written notice from a Borrower or a Bank
regarding the existence and continuation of an Event of Default. The Agent
and each Overadvance Bank agrees (which agreement shall not be for the
benefit of or enforceable by the Borrowers) to the following procedure
regarding a settlement of the Agent Loans. The Agent shall notify the
Overadvance Banks of each Agent Loan following the making of such Agent
Loan. The Agent shall maintain a daily accounting of the Available
Overadvance Commitments and the Overadvance Loans funded by each
Overadvance Bank. On each Friday, or if any such Friday is not a Business
Day, on the immediately succeeding Business Day (hereinafter a "Reporting
Day"), during the Overadvance Commitment Period, the Agent shall report to
each of the Overadvance Banks as to the amount of Agent Loans made during
the week ending on such Reporting Day and the amount of the Borrowers'
funds swept from the Concentration Account and applied to the Overadvance
Loans during the week ending on such Reporting Day and the amount, if any,
of the Agent Loans which remain unfunded or underfunded by the Overadvance
Banks (the "Underfunded Amount"). With respect to any Underfunded Amount
existing on a Reporting Day, each Overadvance Bank agrees to immediately
transfer to the Agent an amount equal to such Bank's Overadvance Commitment
Percentage multiplied by such Underfunded Amount. In the event that there
exists no Underfunded Amount because collected funds of the Borrowers for
the week at issue were sufficient to pay down such Underfunded Amount and
were also sufficient to reduce the funded portion of the Overadvance Loans
(hereinafter, an "Overfunded Portion of the Overadvance Loans"), the Agent
shall make payment to each of the Overadvance Banks of an amount equal to
such Overadvance Bank's Overadvance Commitment Percentage multiplied by the
Overfunded Portion of the Overadvance Loans. If and to the extent the Agent
or any Overadvance Bank shall not have made payment as provided for in this
Section, both the Agent and such Bank agree to repay the other forthwith on
demand the amount to be paid together with interest thereon for each day
past due at the Federal Funds Effective Rate, provided, that if such Bank
shall not repay such amount within three Business Days from the due date,
the interest rate on such overdue amount shall, at the expiration of such
three Business Day period, be the rate per annum applicable to all Base
Rate Tranche A Loans.
4.14 New Section 2.21 of the Credit Agreement. The following new Section
2.21 shall be inserted in the Agreement:
2.21 Priority of Overadvance Loans.
(a) Payment Priority. The Borrowers, the Agent and the Banks
all agree that obligations of the Borrowers with respect to the Tranche A
Loans and the Tranche B Loans (hereinafter in this Section 2.21, the
"Existing Loans") shall be subordinate and subject in right of payment to
the prior payment in full of all obligations of the Borrowers
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<PAGE> 18
to the Overadvance Banks under the Overadvance Loans made pursuant to this
Agreement, including, without limitation, all obligations of the Borrowers under
the Overadvance Loans in respect of interest accruing before or after the
commencement of any bankruptcy, insolvency, or similar proceedings with respect
to any of the Borrowers, Each Bank, including those Banks that are not
Overadvance Banks (hereinafter in this Section 2.21, an "NonOveradvance Bank")
hereby expressly agrees that, except as and to the extent hereinafter provided,
such Bank will not ask, demand, sue for, take or receive from the Borrowers or
from any guarantor or surety of the Existing Loans or any portion thereof, by
set-off or, or from the Collateral, or in any other manner, payment of, (and the
Borrowers hereby agree that, except as, and to the extent hereinafter provided,
they will not pay) the whole or any part of the Existing Loans, or any security
therefor, unless or until all of the Overadvance Loans shall have been fully
paid.
(b) Mandatory Commitment Reductions, Interest Payments and Fees Permitted
on Existing Loans. Anything in Subsection 2.21(a) to the contrary
notwithstanding, the Borrowers may make (i) scheduled payments of interest and
fees on the Existing Loans as provided in Sections 2.13 and 2.19, (ii) payments
resulting from the application of tax refunds received by the Agent pursuant to
that certain Assignment of Tax Refunds dated as of the Third Amendment Effective
Date and (iii) scheduled principal reductions of the Tranche A Commitments
and/or the Tranche B Commitments as set forth in Section 2.16(d), provided that,
with respect to the payments described in clauses (i) and (iii) above, at the
time of such payment and after giving effect to such payment no Default or Event
of Default shall exist under the Agreement and the other Loan Documents.
(c) Distributions. In furtherance of, and to make effective, the
subordination provided for herein, each NonOveradvance Bank further agrees that
in the event of any distribution, division, or application, partial or complete,
voluntary or involuntary, by operation of law or otherwise, of all or any part
of the Collateral or the proceeds thereof, to creditors of any Borrower by
reason of the liquidation, dissolution or other winding up, partial or complete,
of such Borrower or its business, or any sale, receivership, insolvency or
bankruptcy proceedings, or assignment for the benefit of creditors, or any
proceeding by or against any Borrower for any relief under any bankruptcy or
insolvency law or laws related to the relief of debtors, the adjustment of
indebtedness, arrangements, reorganizations, compositions, or extensions, then
and in any such event: (i) any payment or distribution of any kind or character,
whether in cash, securities or any other property which but this Section 2.21
would be payable or deliverable upon or with respect to any or all of the
Existing Loans, shall instead be paid or delivered directly to the Agent for
application to the Overadvance Loans, whether then due or not due, until the
Overadvance Loans shall have first been fully paid and satisfied; and (ii) each
NonOveradvance Bank hereby irrevocably authorizes and empowers the Agent to
demand, sue for, collect and receive every such payment or distribution and give
acquittance therefor, and to file and/or vote claims and take other proceedings,
in the name of the Agent or in the name of such NonOveradvance Bank, or
otherwise, as the
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Agent may reasonably deem necessary or advisable for the enforcement of these
subordination provisions. The NonOveradvance Banks agree duly and promptly to
take such action as may be reasonably requested by the Agent to assist in the
collection of the Overadvance Loans for the account of the Overadvance Banks and
hereby irrevocably authorize the Agent as attorney-in-fact for the
NonOveradvance Banks to file appropriate proofs of claim in respect to the
Existing Loans, and to execute such other powers of attorney, assignments of
claim or other instruments as may be appropriate to enable the Agent to enforce
any and all claims upon or with respect to the Existing Loans, and to collect
and receive any and all payments and distributions which may be payable or
deliverable at any time upon or with respect to the Existing Loans. Should any
payment not permitted under Section 2.21(b) hereof or distribution of Collateral
or proceeds of any Collateral be received by any NonOveradvance Bank upon or in
respect of the Existing Loans prior to the payment in full of the Overadvance
Loans, such NonOveradvance Bank will forthwith deliver the same to the Agent in
precisely the form received (except for the endorsement or assignment of the
NonOveradvance Bank where necessary) for application on the Overadvance Loans,
whether then due or not due, and, until so delivered, the same shall be held in
trust by any such NonOveradvance Bank as property of the Overadvance Banks. In
the event of the failure of any NonOveradvance Bank to make any such endorsement
or assignment, the Agent, or any of its officers or employees, are hereby
irrevocably appointed as attorney-in-fact for such NonOveradvance Bank and are
authorized to make such endorsement or assignment on behalf of the
NonOveradvance Bank. Notwithstanding the foregoing, upon the institution of
proceedings by the Agent to collect the Overadvance Loans, the Agent and/or the
NonOveradvance Banks may institute proceedings or take such other action as they
deem necessary to collect the Existing Loans, provided that all funds resulting
therefrom are applied to reduce and satisfy the Overadvance Loans prior to being
applied to reduce the Existing Loans.
4.15 Amendments to former Section 2.24(a) of the Existing Credit
Agreement/Pro Rata Treatment of Loans and Payments. Subsection 2.26(a) of the
Agreement (Subsection 2.24(a) of the Existing Credit Agreement) is hereby
amended and restated in its entirety as follows:
"Except as required under subsection 2.22, each borrowing by the Borrowers
hereunder, each payment or prepayment of principal of the Loans, each
payment of interest on the Loans, and each reduction of the Commitments,
shall be made pro rata among the Banks in accordance with their respective
Existing Commitment Percentages and Overadvance Commitment Percentages as
appropriate."
SECTION V
AMENDMENTS TO SECTION 5. OF THE EXISTING CREDIT
AGREEMENT/AFFIRMATIVE COVENANTS
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5.1 Amendment to Section 5.2(c) of the Existing Credit Agreement. Section
5.2(c) of the Existing Credit Agreement is amended and restated as follows:
(c) Within 25 days after the end of each month, a certificate of a
Responsible Officer of the Company setting forth the Consolidated Net Worth
of the Company and, within 25 days after the last day of each fiscal
quarter, a certificate of a Responsible Officer of the Company setting
forth the OCF of the Company as of the last day of such quarter and
measured in accordance with Section 6.1(b) hereof; each such certificate
shall be accompanied by a summary or other appropriate backup materials
demonstrating the computations or methods used in preparing the
certificates.
5.2 Amendment to Section 5.15 of the Existing Credit Agreement. Section
5.15 of the Existing Credit Agreement is amended and restated as follows:
Good Standing. Within thirty (30) days of the Third Amendment
Effective Date cause West Coast Entertainment Corporation to become in good
standing in the State of Delaware. Within ninety (90) days of the Third
Amendment Effective Date cause Palmer Video Corporation to become in good
standing in the State of New Jersey and to be qualified to transact
business as a foreign corporation in the State of New York.
5.3 New Section 5.16 of the Agreement. The following new Section 5.16
shall be inserted in the Agreement:
5.16 Updated Budgets. Furnish to the Agent and the Banks:
(a) Commencing on January 15, 1999 and on every other successive
Friday thereafter (or if such Friday is not a Business Day, then on
the next succeeding Business Day), an updated Budget and Cash Flow
which projects the revenues and Budgeted Expenses of the Borrowers for
the next Budgeted Period and which is in a form substantially similar
to the form attached to the Third Amendment as Exhibit "B". Each
Budget following the initial Budget shall not, without the prior
consent of the Required Overadvance Banks, restate and amend the
Budgeted Expenses for the weeks covered in prior Budgets, except to
the extent necessary to incorporate actual variances in cash received.
Notwithstanding the foregoing, the Banks acknowledge that changes will
be made to the initial Budget and Cash Flow as a direct result of the
Borrowers entering into revenue sharing agreements with certain of
their vendors after the date of the initial Budget. All such changes
must be in form and content acceptable to the Required Overadvance
Banks, or if there are no Overadvance Loans outstanding and the
Overadvance Commitments have expired, by the Required Banks;
(b) on Wednesday of each week until the Bank Debt is fully paid,
a written report in a form acceptable to the Agent and the Banks
relating to the week ending on the immediately preceding Friday, which
report shall (i) set forth the manner in which Overadvance Loans and
any other funds in the Borrowers' possession have been
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applied, and (ii) compares the projected Cash Flow and Budgeted Expenses of
the Borrowers on the Budget for such week with the actual Cash Flow and
actual expenditures of the Borrowers during such week, together with a
reasonable explanation of the variances, if any, between the Borrowers'
actual and projected performance. Each report shall be certified by the
chief financial officer of the Company; and
(c) on April 1, 1999, a Cash Flow projection, in form and content
acceptable to the Required Overadvance Banks, covering the time period
from July 1, 1999 through the Termination Date.
5.4 New Section 5.17 of the Agreement. The following new Section 5.17 shall
be inserted in the Agreement;
5.17 Deposit Accounts. Maintain at all times, to the extent
practicable, operating and other bank accounts with branches of either the
Agent or the Banks; deposit, to the extent practicable, all cash and
checks in operating accounts with the Agent or the Banks as and when such
cash and checks are received by the Borrowers; and assist the Agent in
making all arrangements and obtaining all agreements or other documents
necessary to (i) cause funds of the Borrowers held at banks other than the
Banks to be held in blocked accounts to the extent requested by the Agent
and (ii) accomplish the transfer, on a daily basis, of funds held in all
of Borrowers' operating accounts to the Borrowers' Concentration Account
at the Agent.
5.5 New Section 5.18 of the Agreement. The following new Section 5.18 shall
be inserted in the Agreement:
5.18 Landlord Waivers. Notwithstanding anything to the contrary
contained in Section 6.16 hereof, upon the reasonable request of the Agent
from time to time, use their best efforts to obtain landlord waivers, in
form and substance satisfactory to the Agent, from the owners of any real
property leased by the Borrowers or any Subsidiary where any of the
Borrowers' Inventory (as defined in the Security Agreement) is located.
5.6 New Section 5.19 of the Agreement. The following new Section 5.19 shall
be inserted in the Agreement:
5.19 Sale/Refinance of the Company. Use their best efforts to achieve
the goals set forth on the statement attached hereto as Schedule "IV",
by the dates set forth therein, including, without limitation those goals
regarding either (i) the refinance of the Bank Debt or (ii) the sale of
the Borrowers' businesses or assets for a sale price sufficient to repay
the Bank Debt in full and, in connection with such sale or refinance
efforts, report to, meet with and otherwise keep the Banks informed as to
the Borrowers' progress and the progress of the Borrowers' investment
banker/financial advisor in that regard; and advise the Agent and the
Banks of all offers, written or oral, for the Borrowers'
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<PAGE> 22
businesses or stock and of all commitments regarding a refinancing of the
Bank Debt promptly following the Borrowers' receipt of any such offers
and/or commitments.
5.7 New Section 5.20 of the Agreement. The following new Section 5.20
shall be inserted in the Agreement:
5.20 Turnaround Initiatives. Use their best efforts to implement the
turnaround initiatives described on the Schedule attached hereto as
Schedule "V".
5.8 New Section 5.21 of the Agreement. The following new Section 5.21
shall be inserted in the Agreement:
5.21 Additional Reporting; Monthly Meetings. In addition to the
reporting requirements described herein, (i) provide to the Agent and the
Banks (A) the reports and Budget as required in Section 5.16 above, and (B)
any other information or report relating to the Borrowers financial
condition or performance that the Agent or any Bank may reasonably request,
(ii) meet with representatives of the Agent and the Banks at least one day
each month, at a time and place deemed convenient for the Banks, to review
the Borrowers' financial condition and performance, the most recent
financial data, and the Borrower's efforts regarding the refinance of the
Bank Debt or sale of the Borrowers' businesses or assets, and (iii) fully
and completely cooperate with Banks' consultant, Deloitte & Touche
Consulting Group LLC ("Deloitte Consulting"), regarding Deloitte
Consulting's monitoring of Borrowers' financial condition and performance.
5.9 New Section 5.22 of the Agreement. The following new Section 5.22
shall be inserted in the Agreement:
5.22 Tax Refunds. On the Third Amendment Effective Date or
thereafter, at the Agent's request, execute and complete all forms deemed
necessary or desirable by the Agent in order that any and all tax refunds
payable to the Borrower on account of the Borrower's federal income taxes
will be paid directly to the Agent by the Internal Revenue Service.
5.10 New Section 5.23 of the Agreement. The following new Section 5.23
shall be inserted in the Agreement:
5.23 Warrants and Commitment Extension Fees.
(a) On the Third Amendment Effective Date, the Company shall deliver
to the Agent for the benefit of the Banks, a warrant to purchase up to 5%
of the Company's capital stock at a price equal to 75% of the average bid
price for such stock during the period of 15 trading days prior to the date
such warrants are first exercisable as set forth below. The warrant shall
be substantially in the same form as the warrant attached hereto as Exhibit
"C" and shall be held by the Agent for the benefit of the Banks, in
accordance
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with each Bank's share of the Loans. In the event that the Borrowers do not
pay the Bank Debt in full on or prior to June 30, 1999, then the warrants
may be exercised by the Banks at any time after June 30, 1999, provided,
however, that if, before June 30, 1999, the Borrowers have obtained either
a bona fide letter of intent regarding the sale of the businesses, assets
or stock of the Borrowers or a firm commitment to refinance the Bank Debt
with respect to a sale or refinance which will occur on or before September
30, 1999, then the date after which the warrant may be exercised shall be
extended to September 30, 1999. If under the circumstances set forth in the
immediately preceding sentence the Borrowers pay the Bank Debt in full on
or before September 30, 1999, then the warrant shall become null and void.
(b) In the event that the Borrowers do not pay the Bank Debt in full
on or prior to June 30, 1999, then commencing on July 1, 1999 and on the
first day of each subsequent month until the Bank Debt is paid in full, the
Borrowers shall pay to the Banks, in accordance with each Bank's Commitment
Percentage, a monthly Commitment Extension Fee in an amount equal to the
Total Commitments as of the Third Amendment Effective Date multiplied by
one hundred and forty-three (143) basis points, provided, however, that
if, before June 30, 1999, the Borrowers have obtained either a bona fide
letter of intent regarding the sale of the businesses, assets or stock of
the Borrowers or a firm commitment to refinance the Bank Debt with respect
to a sale or refinance which will occur on or before August 31, 1999, then
the Commitment Extension Fees that would otherwise have accrued and been
payable on July 1, 1999 and August 1, 1999 shall be deferred to and be
payable on September 1, 1999 together with the Commitment Extension Fee
that would otherwise be payable on that day. If under the circumstances
set forth in the immediately preceding sentence the Borrowers pay the Bank
Debt in full on or prior to August 31, 1999, then no Commitment Extension
Fees shall be due and payable by the Borrowers. In the event that the
Borrowers do not pay the Bank Debt in full on or prior to August 31, 1999,
any Commitment Extension Fee incurred and deferred as a result of this
provision shall be deemed earned on the day it first accrues and shall
become part of the Bank Debt on that day.
SECTION VI
AMENDMENTS TO SECTION 6. OF THE EXISTING CREDIT
AGREEMENT/NEGATIVE COVENANTS
6.1 Amendment to Section 6.1 of the Existing Credit Agreement. Section 6.1
of the Existing Credit Agreement is amended and restated as follows:
6.1 Financial Condition Covenants.
(a) Maintenance of Net Worth. Permit Consolidated Net Worth on
any day to be less than $83,000,000; provided however that Borrowers may
take a one-time adjustment with regard to their rental videocassette
inventory so long as such
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<PAGE> 24
adjustment is effected during the fiscal quarter ending January 31, 1999
and further provided that Borrower's Consolidated Net Worth on the day such
adjustment is taken is at minimum $70,000,000.
(b) Minimum OCF. Permit OCF to be less than $9,000,000 for any period
of four consecutive quarters, provided that, for purposes of this Section
6.1(b), when calculating OCF there shall be excluded (without duplication
of any other applicable exclusion) from Consolidated Net Income any
subtraction for operating losses during such period, if any, attributable
to the discontinuance of operations at the locations set forth on the
schedule attached hereto as Schedule VI.
6.2 Amendment to Section 6.3(c)(ii) of the Existing Credit Agreement.
Section 6.3(c)(ii) of the Existing Credit Agreement is amended and restated as
follows:
(c) Indebtedness (i) listed on Schedule 6.3, and renewals, extensions
and modifications thereof which do not increase the principal amount
thereof or otherwise significantly change the terms thereof unless
otherwise specified in schedule 6.3 and (ii) Indebtedness under Capital
Leases or secured by Purchase Money Security Interests in an aggregate
amount for both clauses (i) and (ii) above not exceeding in the aggregate
$3,500,000.
6.3 Payment of Expenses Which are not Budgeted Expenses/Deviation from
Budget. The following new Section 6.17 is inserted into the Agreement:
6.17 Payments that are not Budgeted Expenses. Make any payment that
is not a Budgeted Expense or deviate from the Budget, provided that:
Borrowers may increase an expenditure with respect to a Budgeted Expense
for any period so long as the increase is not in an amount greater than 10%
of the amount set forth for such Budgeted Expense on the Budget for such
period, and Borrowers may increase the amount of all Budgeted Expenses from
the amount shown on the Budget for any period so long as such increase is
not greater than 10% of the total amount shown for all such Budgeted
Expenses on the Budget for such period and further provided that with
respect to Budgeted Expenses which are inventory purchases, the Borrowers
may deviate from the amount shown on the Budget with respect to such
Budgeted Expenses by an amount up to 25% of the amount shown, if such
deviation is the result of revenue sharing arrangements to which the
Borrowers become a party after the date of the Budget.
SECTION VII
AMENDMENTS TO SECTION 7. OF THE EXISTING CREDIT
AGREEMENT/EVENTS OF DEFAULT
7.1 New Subsection 7.1(n) of the Existing Credit Agreement. The following
new Subsection 7.1(n) shall be inserted in the Agreement:
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(n) At any time, any Borrower is in default of a real property lease
which lease is material to such Borrower's business and which could result
in a material adverse change in the Borrower's business and the landlord of
the property covered by such lease has initiated action which could result
in the removal of such Borrower from the premises or has accelerated the
rent under the lease.
SECTION VIII
AMENDMENTS TO SECTION 9. OF THE EXISTING CREDIT
MISCELLANEOUS
8.1 Amendment to Subsection 9.1 of the Existing Credit Agreement.
Subsection 9.1 of the Existing Credit Agreement is amended by adding to it the
following language:
"Notwithstanding the foregoing, with respect to the terms of this
Agreement and the other Loan Documents relating to Overadvance Loans
and the Overadvance Notes, (i) written waivers, amendments,
supplements, modifications related to the Budget may be accomplished
with the consent of only the Required Overadvance Banks, and (ii)
written waivers, amendments, supplements, modifications related to all
other terms of the Overadvance Loans the may be accomplished with the
consent of only all Overadvance Banks."
8.2 Amendment to Subsection 9.2 of the Existing Credit Agreement.
Subsection 9.2 of the Existing Credit Agreement is amended by restating the
addresses of the Agent as follows:
The Agent: PNC Capital Recovery Corp.
249 Fifth Avenue
Pittsburgh, PA 15222-2707
Attention: Thomas J. McCool, Senior Vice President
Telecopy: 412-762-4157
PNC Bank, N.A.
Special Assets Division
1600 Market Street, 11th Floor
Philadelphia, PA 19103
Attention: William R. Breisch, Vice President
Telecopy: (215) 585-8391
With a Copy to: Duane, Morris & Heckscher
One Liberty Place
Philadelphia, PA 19103-7396
Attention: Claudia Z. Springer, Esquire
Telecopy: (215) 979-1020
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8.3 Amendment to Subsection 9.6 of the Existing Credit Agreement. (a)
Subsection 9.6(b) of the Existing Credit Agreement is amended to provide that
the Borrowers' consent shall not be required before any Bank may sell or assign
all or any part of its interests, rights and obligations under the Agreement,
the Notes and in the Loan Documents. Subsection 9.6(b) is further amended by
adding to it the following language:
"Notwithstanding the foregoing, a Bank may not sell or assign to any other
bank or financial institution or to any other third party any part of its
Commitments or its interest in the Loans unless it simultaneously sells or
assigns to the same third party a proportionate amount of its Tranche A
Commitment and the Tranche A Loans, Tranche B Commitment and Tranche B
Loans, and, if applicable, Overadvance Commitment and Overadvance Loans."
(b) Subsection 9.6(j) is hereby deleted in its entirety.
SECTION IX
RELEASE AND INDEMNITY
Recognizing and in consideration of the Banks' and the Agent's agreement to
the amendments set forth in this Third Amendment, each Borrower hereby waives
and releases the Banks and the Agent and their officers, attorneys, agents, and
employees from any liability, suit, damage, claim, loss or expense of any kind
or nature whatsoever and howsoever arising that such Borrower ever had or now
has against any of them arising out of or relating to any Bank's or the Agent's
acts or omissions with respect to this Third Amendment, the Agreement, the other
Loan Documents or any other matters described or referred to herein or therein.
Each Borrower further hereby agrees to indemnify and hold the Agent and the
Banks and their officers, attorneys, agents, and employees harmless from any
loss, damage, judgment, liability or expense (including counsel fees) suffered
by or rendered against the Banks or the Agent or any of them on account of
anything arising out of this Third Amendment, the Agreement, the other Loan
Documents or any other document delivered pursuant thereto up to and including
the date hereof; provided that, no Borrower shall have any obligation hereunder
to the Agent or any Bank with respect to indemnified liabilities arising from
the gross negligence or willful misconduct of the Agent or such Bank.
SECTION X
REPRESENTATIONS AND WARRANTIES
Each of the Borrowers hereby represents and warrants to the Agent and the
Banks that:
10.1 No Default. The Existing Defaults were the only Defaults or Events of
Default existing under the Existing Credit Agreement. After giving effect to
this Third Amendment, there exits no Default or Event of Default under the
Agreement;
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10.2 Representations and Warranties. The representations and warranties
made in the Agreement are true and correct in all material respects on and as of
the date hereof as if made on and as of the date hereof; and
10.3 Amendment Authorized and Enforceable. The execution and delivery by
each of the Borrowers of this Third Amendment and all other documents and
instruments related hereto or required herein has been duly authorized by all
requisite action on behalf of the Borrowers, and this Third Amendment and such
all other such documents and instruments constitute the legal, valid and binding
obligation of each Borrower, enforceable against each of them in accordance with
their terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).
SECTION XI
CONDITIONS PRECEDENT
The following conditions shall have occurred or shall exist in order for
this Third Amendment to be deemed in effect and binding upon the parties hereto:
11.1 Execution. All of the parties hereto, where required, shall have
executed originals or counterparts of this Third Amendment and all other
documentation required herein and shall have delivered same to the Agent;
11.2 Documents. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transaction
contemplated by this Third Amendment shall be satisfactory in form and substance
to the Agent, and the Agent shall have received such other documents (which
shall include, without limitation, resolutions of each Borrower's Board of
Directors authorizing each such Borrower to execute, deliver and perform under
the Agreement as amended by this Third Amendment and any other document or
instrument to be executed and delivered by such corporation, an incumbency
certificate executed by the officers of each Borrower, certificates of no change
or certified copies, as appropriate, of each Borrower's articles of
incorporation and by-laws, and, except for the Company and Palmer Video
Corporation, current good standing certificates for each Borrower certified by
the Office of the Secretary of State of the state of the Borrower's
incorporation) in respect of any aspect or consequences of the transactions
contemplated hereby or by the Loan Documents as it shall reasonably request;
11.3 Representations and Warranties True and Correct. Each of the
representations and warranties made in the Agreement shall, after giving effect
to this Third Amendment, be true and correct in all material respects;
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<PAGE> 28
11.4 No Events of Default. No Default or Event of Default shall, after
giving effect to this Third Amendment, have occurred or be continuing;
11.5 Fees and Expenses. The Borrowers shall have paid all of the Agent's
reasonable out-of-pocket fees and expenses incurred in connection with the
preparation, negotiation and execution of this Third Amendment, including,
without limitation, the reasonable fees and expenses Duane, Morris & Heckscher
LLP and Deloitte Consulting. Borrowers shall also have paid for the ratable
benefit of the Banks and the Amendment Fee and Overadvance Commitment Fee
provided for in Sections 2.19 and 2.20(i) of the Agreement;
11.6 Opinion of Counsel. The Agent and the Banks shall have received an
opinion of counsel for the Borrowers in form and substance acceptable to the
Agent and the Banks; and
11.7 Budget and Reports. The Borrowers shall have delivered to the Agent
and the Banks the initial Budget and Cash Flow in form and substance acceptable
to the Banks and all other reports, financial statements and projections for
the Borrowers that are reasonably required by the Agent and the Banks.
11.8 List of Store Locations. The Borrowers shall have delivered to the
Agent and the Banks a complete and updated list of all store locations
currently operated or leased by the Borrowers.
SECTION XII
MISCELLANEOUS
12.1 Limited Effect. Except as expressly amended and waived by this Third
Amendment, the Agreement shall continue to be, and shall remain, unaltered and
in full force and effect in accordance with its terms. To the extent that any
existing provision of the Agreement is inconsistent with the specific
provisions of this Third Amendment, the provisions of this Third Amendment
shall control. Notwithstanding the foregoing, reference to this Third
Amendment need not be made in the Agreement, or in any other instrument or
document executed in connection therewith or herewith, or in any certificate,
letter or communication issued or made pursuant to or with respect to the
Agreement, any reference in any of such items to the Agreement being sufficient
to refer to the Agreement as amended hereby.
12.2 Additional Action. The Borrowers the Agent agree to take such further
action to execute and deliver to each other such additional agreements,
instruments and documents as may reasonably be required to carry out the
purposes of this Third Amendment.
12.3 Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
-28-
<PAGE> 29
12.4 Successor and Assigns. The terms and provisions of this Amendment
shall be binding upon and shall inure to the benefit of the Borrowers, the
Agent and the Banks and their respective successors and assigns.
12.5 Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
shall constitute one and the same instrument.
12.6 Headings. The headings of any paragraph of this Amendment are for
convenience only and shall not be used to interpret any provision hereof.
12.7 Modifications. No modification hereof or any agreement referred to
herein shall be binding or enforceable unless in writing and signed on behalf of
the party against whom enforcement is sought.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-29-
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ T. Kyle Standley
------------------------------------
Name: T. Kyle Standley
Title: President
VIDEOSMITH, INCORPORATED
By: /s/ Ralph W. Standley
------------------------------------
Name: Ralph W. Standley
Title: President
WEST COAST FRANCHISING COMPANY
By: /s/ T. Kyle Standley
------------------------------------
Name: T. Kyle Standley
Title: President
PALMER WEST COAST CORPORATION
By: /s/ T. Kyle Standley
------------------------------------
Name: T. Kyle Standley
Title: President
PALMER VIDEO CORPORATION
By: /s/ T. Kyle Standley
------------------------------------
Name: T. Kyle Standley
Title: President
-30-
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
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0
0
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