<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 0- 28072
-----
West Coast Entertainment Corporation
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3278751
- --------------------------------- --------------------------
(State or other jurisdiction (I.R.S. Employer I.D. No.)
of incorporation or organization)
One Summit Square, Suite 200, Rte. 413 & Doublewoods Rd.
Langhorne, Pennsylvania 19047
- -----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215)968-4318
-------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) had been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at September 15, 1999
----- ---------------------------------
<S> <C>
Common Stock, $.01 14,084,704
par value per share
</TABLE>
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WEST COAST ENTERTAINMENT CORPORATION
INDEX
<TABLE>
<S> <C> <C>
Part I. - Financial Information Page No.
Item 1. - Financial Statements
Consolidated Balance Sheets -
As of August 1, 1999 and January 31, 1999 3
Consolidated Statements of Operations-
Quarters Ended August 1, 1999
and August 2, 1998
Two Quarters Ended August 1, 1999 and
August 2, 1998 4
Consolidated Statements of Cash Flows-
Two Quarters Ended August 1, 1999 and August 2, 1998 5
Consolidated Statement of Stockholders Equity-
As of August 1, 1999 and January 31, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Part II. - Other Information 15
Item 1. - Legal Proceedings
Item 2. - Changes in Securities
Item 3. - Defaults Upon Senior Securities
Item 4. - Submission of Matters to a Vote of the Security Holders
Item 5. - Other Information
Item 6. - Exhibits and Reports on Form 8-K
</TABLE>
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WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JANUARY AUGUST
31, 1,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................................ $ 2,424 $ 866
Accounts receivable and other receivables (net of allowance for doubtful accounts
of $67 and $8 at January 31, 1999 and August 1,1999, respectively) ............ 1,512 1,325
Merchandise inventory ........................................................... 8,404 8,571
Market development funds and co-op receivable ................................... 1,242 733
Receivables from officers ....................................................... 373 389
Prepaid expenses and other current assets ....................................... 472 552
--------- ---------
Total current assets ........................................................... 14,427 12,436
Videocassette rental inventory, net (Note 2), .................................... 20,375 19,252
Furnishings, equipment and leasehold improvements, net ............................ 17,892 17,090
Intangible assets (net of accumulated amortization of $ 16,497 and $19,694 at
January 31, 1999 and August 1,1999, respectively) ............................... 110,530 107,075
Other assets ...................................................................... 2,456 1,852
--------- ---------
Total assets ................................................................. $ 165,680 $ 157,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 3) ...................................... $ 8,081 $ 69,734
Accounts payable ................................................................ 14,659 11,821
Accrued expenses ................................................................ 7,783 9,852
Income taxes payable ............................................................ 655 802
--------- ---------
Total current liabilities .................................................... 31,178 92,209
Long-term debt (Note 3) ........................................................... 58,187 --
Other Liabilities ................................................................. 59 16
--------- ---------
Total Liabilities ................................................................. 89,424 92,225
--------- ---------
Commitments and contingencies ..................................................... -- --
Stockholders' equity:
Common stock ($0.01 par value; 14,185 shares as of January 31, 1999 and August 1,
1999 of which 14,073 shares were outstanding and 20 shares were to be issued) ..... 142 142
Preferred stock ($0.01 par value, 2,000 shares authorized, no shares
issued) ...................................................................... -- --
Additional paid-in capital ..................................................... 104,093 104,093
Accumulated (deficit) .......................................................... (27,737) (38,513)
Treasury stock (92 shares of common stock, at cost) ............................ (242) (242)
--------- ---------
Total stockholders' equity ................................................... 76,256 66,480
--------- ---------
Total liabilities and stockholders' equity ................................... $ 165,680 $ 157,705
========= =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
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WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWO TWO
QUARTER QUARTER QUARTERS QUARTERS
ENDED ENDED ENDED ENDED
AUGUST 2, AUGUST 1, AUGUST 2, AUGUST 1,
1998 1999 1998 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue ....................................... $ 25,034 $ 21,992 $ 51,193 $ 45,398
Merchandise sales .................................... 4,734 2,863 9,449 6,422
Franchise fees ....................................... 948 300 1,631 608
---------- ---------- ---------- ----------
30,716 25,155 62,273 52,428
---------- ---------- ---------- ----------
Costs and expenses:
Store operating expenses ............................. 14,187 13,090 28,110 25,767
Cost of goods sold ................................... 3,337 1,986 6,683 4,470
Amortization of videocassette and video game rental
inventory (Note 2 ) ............................... 6,392 5,222 12,664 11,716
Revenue sharing expense .............................. -- 2,656 -- 3,922
Selling, general and administrative .................. 3,752 4,912 7,270 8,669
Amortization of intangible assets .................... 1,611 1,646 3,265 3,287
---------- ---------- ---------- ----------
29,279 29,512 57,992 57,831
Income (loss) from operations .......................... 1,437 (4,357) 4,281 (5,403)
Interest expense ....................................... 1,627 3,250 3,265 5,262
Other expense (income) ................................. 70 42 144 31
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes ........ (260) (7,649) 872 (10,696)
Provision for income taxes ............................ 0 40 634 80
---------- ---------- ---------- ----------
Net income (loss) ...................................... $ (260) $ (7,689) $ 238 $ (10,776)
========== ========== ========== ==========
Income (loss) per common share data:
Net income (loss) - basic and diluted ................ $ (0.02) $ (0.55) $ 0.02 $ (0.77)
========== ========== ========== ==========
Weighted average number of common shares outstanding ... 14,159 14,085 14,153 14,085
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
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WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
AUGUST 2, AUGUST 1,
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................. $ 238 $ (10,776)
Adjustments to reconcile net income (loss) to cash flows provided by
operating activities:
Amortization of debt financing costs ............................ 222 605
Amortization of videocassette rental inventory .................. 12,664 11,716
Depreciation and amortization of furnishings, equipment
and leasehold improvements .................................... 1,588 1,931
Amortization of intangible assets ............................... 3,265 3,287
Changes in assets and liabilities:
Accounts receivable ............................................. (385) 186
Merchandise inventory ........................................... (4,471) (167)
Prepaid expenses and other assets ............................... (395) 581
Accounts payable ................................................ 3,544 (2,838)
Accrued expenses and other liabilities .......................... 188 2,027
Income taxes payable ........................................... 743 147
-------- --------
Net cash provided by operating activities ....................... 17,201 6,699
-------- --------
Cash flows related to investing activities:
Purchases of property and equipment ................................ (1,900) (1,129)
Purchases of videocassette rental inventory ........................ (15,292) (10,594)
-------- --------
Net cash used in investing activities ......................... (17,192) (11,723)
-------- --------
Cash flows related to financing activities:
Proceeds from long-term debt ....................................... -- 3,506
Purchase of treasury stock ......................................... (242) --
Repayments of long-term debt ....................................... (4) (40)
Proceeds from issuance of common stock ............................. 26 --
-------- --------
Net cash provided by (used in) financing activities .................. (220) 3,466
-------- --------
Net increase (decrease) in cash ...................................... (211) (1,558)
Cash, beginning of period ............................................ 2,604 2,424
-------- --------
Cash, end of period .................................................. $ 2,393 $ 866
======== ========
Supplemental cash flow data:
Interest paid ...................................................... $ 2,892 $ 3,415
======== ========
Income taxes paid .................................................. $ 185 $ 13
======== ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
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WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCK-
------------------------ PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) STOCK EQUITY
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
Net (loss) .................................... -- -- -- (10,776) -- (10,776)
---------- ---------- ---------- ---------- ---------- ----------
Balance at August 1, 1999 .................... 14,184,677 $ 142 $ 104,093 $ (38,513) $ (242) $ 65,480
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
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WEST COAST ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 1999 (unaudited)
1 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 3, the Company has approximately $69.7
million of its debt maturing by February 15, 2000.
Although the Company believes that its projected cash flow as well
as additional borrowings under the Revised Facility 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 has also entered into an agreement
and plan of merger with Video City Inc. See "---Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
On August 2, 1999 the Company announced that it has signed a
definitive Merger Agreement with Video City Inc. (OTC-BB: VDCT). The
terms of the transaction call for each West Coast Entertainment
shareholder to receive .33 shares of Video City common stock
(subject to adjustments under certain conditions) and .05 shares of
Video City series F preferred stock ($25 stated value) for each
share of West Coast Entertainment stock held by stockholders. The
Merger Agreement is subject to stockholder approval of both
companies, and is currently anticipated to be completed some time in
the fourth quarter of fiscal 2000.
The obligations of the Company and Video City to consummate the
merger are subject to the satisfaction of certain conditions,
including, but not limited to, obtaining requisite approvals of the
stockholders for the Company and Video City, obtaining consents
under their respective bank credit agreements (for the Company, a
consent under and/or a modification of the Credit Facility),
obtaining adequate financing, obtaining requisite regulatory
approvals (under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, the "HSR Act" and the effectiveness under the
securities laws of a registration statement which has not yet been
filed), and the continuing accuracy, in all material respects, as of
the effective time of the merger of the representations and
warranties made by the Company and Video City in the Merger
Agreement. There can be no assurances that the transaction will
close.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission
("SEC"). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the
consolidated financial statements and footnotes included in West
Coast Entertainment Corporation's (the "Company's") Form 10-K filed
with the SEC on May 16, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from these estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been
included. Such adjustments consisted only of normal recurring items.
The results of operations for the two quarters ended August 1, 1999
are not necessarily indicative of the results to be expected for the
year ending February 6, 2000.
Business
On April 30, 1998 the Company adopted a fiscal year ending on the
first Sunday following January 30, which will result in the Company
having a 52 or periodically, a 53 week fiscal year. Results for this
fiscal year will reflect a 53 week year ending on February 6, 2000.
Results for the two quarters ended August 2, 1998 and August 1, 1999
reflect a 26 week period.
As of August 1, 1999 the Company owned and operated 251 video stores
and was a franchisor of approximately 125 video stores.
Earnings Per Share
Income per common share data has been calculated per Financial
Accounting Standards Board Statement No. 128 "Earnings Per Share"
("SFAS 128"), which requires current and retroactive presentation of
basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per
share is computed in a similar manner except that the weighted
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WEST COAST ENTERTAINMENT CORPORATION
average number of common shares is increased for dilutive potential
common shares. Potentially dilutive common shares were considered to
be anti-dilutive for the computation of diluted earnings per share
for the quarter and two quarters ended August 1, 1999.
2 Videocassette Rental Inventory
Videocassette rental inventory and related amortization are as
follows (in thousands):
<TABLE>
<CAPTION>
January 31, 1999 August 1, 1999
---------------- --------------
<S> <C> <C>
Videocassette rental inventory $ 87,985 $ 98,579
Accumulated amortization (67,610) (79,327)
-------- --------
$ 20,375 $ 19,252
======== ========
</TABLE>
Amortization expense related to videocassette rental inventory
totaled approximately $5,222,000 and $6,392,000 for the quarters
ended August 1, 1999 and August 2, 1998, respectively.
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.
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, 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.
3 Long Term Debt
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
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WEST COAST ENTERTAINMENT CORPORATION
February 15, 2000. At August 1, 1999, the Company had no available funds under
the Revised Facility.
On October 22, 1999 the Company entered into a fourth amendment to the Revised
Facility increasing the Overadvance to $9,500,000 and eliminating the commitment
reductions originally scheduled for August 1, 1999, November 1, 1999 and
February 1, 2000. The full amount of both the Credit Facility and the
Overadvance are due February 14, 2000.
The first $65 million of the Revised Facility bears interest at 5% above the
Prime rate (12.75% at August 1, 1999). The interest rate on the Overadvance is
equal to the Prime rate plus 5.5% (13.25% at August 1, 1999. 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.
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. As of October 22, 1999, this
warrant has not been exercised.
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.
4 Subsequent Event
The Company was a defendant in a lawsuit with Brookfield Communication, Inc. A
verdict was returned against West Coast Entertainment Corporation subsequent to
August 1, 1999 in the amount of $1,700,000 of which all but $750,000 is believed
to be covered by its general liability insurance. The Company plans to pursue
all remedies available under law to overturn and reverse the decision.
9
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WEST COAST ENTERTAINMENT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS. Certain statements in this
Report on Form 10-Q, under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations," 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.
On August 2, 1999 the Company announced that it has signed a definitive
Merger Agreement with Video City Inc. (OTC-BB: VDCT). The terms of the
transaction call for each West Coast Entertainment shareholder to
receive .33 shares of Video City common stock (subject to adjustments
under certain conditions) and .05 shares of a series F preferred stock
($25 stated value) for each share of West Coast Entertainment stock held
by such stockholders. The Merger Agreement is subject to stockholder
approval of both companies, and is currently anticipated to be completed
some time in the fourth quarter of fiscal 2000.
The obligations of the Company and Video City to consummate the merger
are subject to the satisfaction of certain conditions, including, but
not limited to, obtaining requisite approvals of the stockholders for
the Company and Video City, obtaining consents under their respective
bank credit agreements (for the Company, a consent under and/or a
modification of the Revised Facility), obtaining adequate financing,
obtaining requisite regulatory approvals (under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, the "HSR Act" and the
effectiveness under the securities laws of a registration statement
which has not yet been filed), and the continuing accuracy, in all
material respects, as of the effective time of the merger of the
representations and warranties made by the Company and Video City in the
Merger Agreement. There can be no assurances that the transaction will
close.
RESULTS OF OPERATIONS
Quarter ended August 1, 1999 compared to Quarter ended August 2, 1998
Revenues. Revenues decreased $5.5 million, or 17.9%, from $30.7 million
for the quarter ended August 2, 1998 to $25.1 million for the quarter
ended August 1, 1999. This change consisted of a decrease of $3.0
million in rental revenues, a decrease of $1.9 million in merchandise
sales and a decrease of $0.6 million in franchise fee revenue. The
decreases in store rental and merchandise sales revenues of $4.9 million
are attributable to a lower weighted average number of stores owned
(after closing underperforming stores primarily in the fourth quarter of
the fiscal year ending January 31, 1999) which decreased by 30 stores
from 282 stores owned during the quarter ended August 2, 1998 to 252
stores owned during the quarter ended August 1, 1999 and accounted for
$3.2 million of the total decrease. In addition, a decrease in average
per store revenues accounted for the remaining decrease of $1.7 million
in store revenues.
Rental revenues decreased $3.0 million, or 12.0%, from $25.0
million for the quarter ended August 2, 1998 to $22.0 million for the
quarter ended August 1, 1999. This decrease is primarily attributable to
the closing of underperforming stores during the fourth quarter of the
last fiscal year and, the resulting decrease in weighted average number
of stores owned as discussed above. This decrease in stores owned
accounted for $2.6 million of the decrease. The remaining $0.4 million
decrease is related to a decrease in average store rental revenues.
Merchandise and other sales decreased $1.9 million, or 39.6%, from
$4.8 million for the quarter ended August 2, 1998 to $2.9 million for
the quarter ended August 1, 1999. This decrease is attributable to the
closing of underperforming stores during the fourth quarter of the last
fiscal year as described above which caused merchandise and other sales
to decrease by $0.5 million. The remaining $1.4 million decrease is due
to lower merchandise and other sales as a result of lower store
inventory levels, as compared to inventory levels during the quarter
ended August 2, 1998.
Franchise fee revenues decreased $0.6 million, or 66.7%, from $0.9
million for the quarter ended August 2, 1998 to $0.3 million for the
quarter ended August 1, 1999. This decrease is attributable to a decline
in the number of franchises and the decrease in the sale or settlement
of franchise agreements received for the quarter ended August 2, 1998.
Store Operating Expenses. Store operating expenses decreased $1.1
million, or 7.7%, from $14.2 million for the quarter ended August 2,
1998 to $13.1 million for the quarter ended August 1, 1999. A
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WEST COAST ENTERTAINMENT CORPORATION
decrease of approximately $1.5 million caused by the closing of
underperforming stores during the fourth quarter of the last fiscal year
as described above. The remaining increase of $0.4 million was primarily
caused by higher occupancy costs and increased depreciation expense.
Cost of Goods Sold. Costs of goods sold decreased $1.3 million, or
39.4 %, from $3.3 million for the quarter ended August 2, 1998 to $2.0
million for the quarter ended August 1, 1999. Of this decrease, $0.4
million is related to lower merchandise and other sales caused by the
closing of underperforming stores during the fourth quarter of the last
fiscal year as previously discussed. The remaining $0.9 million decrease
is related to lower merchandise and other sales caused by a decrease in
inventory levels of new movies for sale. As a percentage of merchandise
sales, cost of goods increased 2.3 percentage points from 66.7% for the
quarter ended August 2, 1998 to 69.0% for the quarter ended August 1,
1999.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of rental inventory decreased $1.2 million, or 18.8 %, from
$6.4 million for the quarter ended August 2, 1998 to $5.2 million for
the quarter ended August 1, 1999, primarily as a result of the Company
entering into revenue sharing agreements with studios. Without the
effects of revenue sharing, amortization expense would have increased
due to the reduction of estimated life of tapes established through the
change in amortization method as discussed in Note 2 of the consolidated
financial statements.
Revenue Sharing Expense. Revenue sharing expense was $2.7 million
for the quarter ended August 1, 1999, as compared to no revenue sharing
expense for the quarter ended August 2, 1998. The Company entered into
revenue sharing agreements with studios as more fully discussed in Note
2 of the consolidated financial statements.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $1.1 million, or 28.9%, from $3.8
million for the quarter ended August 2, 1998 to $4.9 million for the
quarter ended August 1, 1999. This increase was primarily caused by a
legal judgement against the Company in which all but $750,000 is
believed to be covered by the Company's general liability insurance. In
addition, the Company experienced increased professional fees related to
higher legal expenses due to costs incurred related to the merger and in
fees related to negotiation of the merger agreement and amendments to
the Revised Facility. As a percentage of total revenues, selling,
general and administrative expenses increased 7.1 percentage points from
12.4 % for the quarter ended August 2, 1998 to 19.5% for the quarter
ended August 1, 1999 as a result of the legal judgment and lower
revenues primarily related to store closures as previously discussed.
Amortization of Intangible Assets. Intangible amortization expense
remained unchanged at $1.6 million for the quarters ended August 2, 1998
and the quarter ended August 1, 1999. As a percentage of total revenues,
intangible amortization increased 1.2 percentage points from 5.2% for
the quarter ended August 2, 1998 to 6.4% for the quarter ended August 1,
1999. This percentage increase is primarily to the decline in revenues
for reasons discussed above.
Interest Expense and Other. Net interest expense and other
increased $1.5 million, or 88.2%, from $1.7 million for the quarter
ended August 2, 1998 to $3.2 million for the quarter ended August 1,
1999. Interest expense comprises almost all this net amount. This
increase was caused by higher interest rates as a result of the amended
credit agreement of January 12, 1999 as more fully described in Note 3
to the consolidated financial statements and by higher levels of
borrowings under the revised agreement.
Net Income (Loss). As a result of the foregoing, net loss increased
$7.4 million, from a $0.3 million net loss for the quarter ended August
2, 1998 to a $7.7 million net loss for the quarter ended August 1, 1999.
Two quarters ended August 1, 1999 compared to Two quarters ended August
2, 1998
Revenues. Revenues decreased $9.9 million, or 15.9%, from $62.3
million for the two quarters ended August 2, 1998 to $52.4 million for
the two quarters ended August 1, 1999. This change reflected a decrease
of $5.8 million in rental revenues, a decrease of $3.1 million in
merchandise sales and a decrease of $1.0 million in franchise fee
revenue. Approximately $6.4 million of the $8.9 million decrease in
store rental and merchandise sales revenues was attributable to a lower
weighted average number of stores owned (after
11
<PAGE> 12
WEST COAST ENTERTAINMENT CORPORATION
closing underperforming stores primarily in the fourth quarter of last
year ending January 31, 1999) which decreased by 30 stores from 284
stores owned during the two quarters ended August 2, 1998 to 254 stores
owned during the two quarters ended August 1, 1999 and accounted for
$6.4 million of the total decrease. A decrease in average per store
revenues, for the reasons discussed below, accounted for a decrease of
$2.5 million in store revenues.
Rental revenues decreased $5.8 million, or 11.3%, from $51.2
million for the two quarters ended August 2, 1998 to $45.4 million for
the two quarters ended August 1, 1999. Approximately $5.4 million of
this decrease was primarily attributable to the closing of
underperforming stores during the fourth quarter of last year and, the
resulting decrease in weighted average number of stores owned. The
remaining $0.4 million decrease is related to a decrease in average
store rental revenues.
Merchandise and other sales decreased $3.1 million, or 32.6%, from
$9.5 million for the two quarters ended August 2, 1998 to $6.4 million
for the two quarters ended August 1, 1999. Approximately $1.1 million of
this decrease was attributable to the closing of underperforming stores
during the fourth quarter of last year. The remaining $2.1 million
decrease was due to lower merchandise and other sales as a result of
lower store inventory levels, which were necessitated by working capital
restrictions.
Franchise fee revenues decreased $1.0 million, or 62.5%, from $1.6
million for the two quarters ended August 2, 1998 to $0.6 million for
the two quarters ended August 1, 1999. This decrease is attributable to
a decline in the number of franchises and a decrease through the sale or
settlement of franchise agreements.
Store Operating Expenses. Store operating expenses decreased $2.3
million, or 8.2%, from $28.1 million for the two quarters ended August
2, 1998 to $25.8 million for the two quarters ended August 1, 1999. A
decrease of approximately $3.0 million was caused by the closing of
underperforming stores during the fourth quarter of last year. This
decrease was offset by an increase of $0.7 million which was primarily
caused by higher occupancy costs and depreciation expense.
Cost of Goods Sold. Costs of goods sold decreased $2.2 million, or
32.8%, from $6.7 million for the two quarters ended August 2, 1998 to
$4.5 million for the two quarters ended August 1, 1999. Approximately
$0.7 million of this decrease is related to lower merchandise and other
sales caused by the closing of underperforming stores during the fourth
quarter of last year. The remaining $1.5 million decrease was related to
lower merchandise and other sales caused by a decrease in inventory
levels of new movies for sale. As a percentage of merchandising sales,
cost of goods sold remained unchanged at approximately 70% for both the
two quarters ended August 1, 1999 and the two quarters ended August 2,
1998.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of rental inventory decreased $1.0 million, or 7.9%, from
$12.7 million for the two quarters ended August 2, 1998 to $11.7
million for the two quarters ended August 1, 1999, primarily as a
result of the Company entering into revenue sharing agreements with
studios as discussed in Note 2 to the consolidated financial
statements.
Revenue Sharing Expense. Revenue sharing expense was $3.9 million
for the two quarters ended August 1, 1999, as compared to no revenue
sharing expense for the two quarters ended August 2, 1998. The Company
entered into revenue sharing agreements with studios as more fully
discussed in Note 2 to the consolidated financial statements.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $1.3 million, or 17.8%, from $7.3
million for the two quarters ended August 2, 1998 to $8.6 million for
the two quarters ended August 1, 1999. This increase was caused by
increases in insurance, consulting and professional fees expenses. The
increase in insurance expense was due to recording a retroactive premium
for the first quarter of the year ended August 2, 1998. The increase in
professional fees is primarily caused by a legal judgement against the
Company in which all but $750,000 is believed to be covered by the
Company's general liability insurance. In addition, the Company
experienced increased professional fees related to higher legal expenses
due to costs incurred related to the merger and in fees related to
negotiation of the merger agreement and amendments to the Revised
Facility. As a percentage of total revenues, selling, general and
administrative expenses increased 4.7 percentage points from 11.7% for
the two quarters ended August 2, 1998 to 16.4% for the two quarters
ended August 1, 1999 as a result of the legal judgment and lower
revenues resulting primarily from store closures as previously
discussed.
12
<PAGE> 13
WEST COAST ENTERTAINMENT CORPORATION
Amortization of Intangible Assets. Intangible amortization expense
increased $0.1 million, or 3.1%, from $3.2 million for the two quarters
ended August 2, 1998 to $3.3 million for the two quarters ended August
1, 1999.. As a percentage of total revenues, intangible amortization
increased 1.2 percentage points from 5.1 % for the two quarters ended
August 2, 1998 to 6.3% for the two quarters ended August 1, 1999. This
percentage increase was primarily attributable to the decline in
revenues for reasons discussed above.
Interest Expense and Other. Net interest expense and other
increased $1.9 million, or 61.2%, from $3.4 million for the two quarters
ended August 2, 1998 to $5.3 million for the two quarters ended August
1, 1999. Interest expense comprises almost all this net amount. This
increase was caused by higher interest rates as a result of amending the
credit agreement on January 12, 1999 as more fully described in Note 3
to the financial statements and by higher levels of borrowings under the
amended agreement.
Net Income (Loss). As a result of the foregoing, net income
decreased $11.1 million, from $0.3 million of net income for the two
quarters ended August 2, 1998 to a $10.8 million net loss for the two
quarters ended August 1, 1999.
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 3 to the consolidated financial statements, the Company has
approximately $69.7 million of its debt maturing by February 15, 2000.
Although the Company believes that its projected cash flow and
additional borrowings under the Revised Facility will be sufficient to
meet its operating needs until the debt maturity date discussed above,
there can be no assurances beyond that date.
For the two quarters ended August 1, 1999, the Company had net cash
provided by operating activities of $6.7 million, net cash used in
investing activities of $11.7 million (consisting primarily of cash used
to purchase videocassette rental inventory of $10.6 million and $1.1
million of cash paid for purchases of property and equipment) and net
cash provided by financing activities of $3.5 million (consisting
primarily of net borrowings under the Revised Facility, as described in
Note 3 to the Consolidated Financial Statements), resulting in a net
decrease in cash of $1.6 million.
During the current fiscal year, the Company has financed its operations
and capital expenditures primarily through available operating cash
flow, as well as additional borrowings under the Revised Facility.
On January 12, 1999, the Company signed an amendment to its bank
agreement increasing the availability under the facility from $65
million to $70 million, 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.
On October 22, 1999 the Company entered into the forth amendment to the
Revised Facility which increased the Overadvance from $5,000,000 to
$9,500,000 and eliminated its scheduled commitment reductions due from
August 1, 1999 through February 1, 2000.
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. As of
October 22, 1999, this warrant has not been exercised.
13
<PAGE> 14
WEST COAST ENTERTAINMENT CORPORATION
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
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 $1.0 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.
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.
Item 3: 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.
14
<PAGE> 15
WEST COAST ENTERTAINMENT CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company was a defendant in a lawsuit with Brookfield
Communication, Inc. A verdict was returned against West
Coast Entertainment Corporation subsequent to August 1,
1999 in the amount of $1,700,000 of which all but
$750,000 is believed to be covered by its general
liability insurance. The Company plans to pursue all
remedies available under law to overturn and reverse the
decision.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of the Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K
reporting an Item 5 merger agreement between the
Registrant and Video City Inc. on August 10, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WEST COAST ENTERTAINMENT
CORPORATION
Date: October 27, 1999 By: /s/ T. Kyle Standley
-----------------------------------------
T. Kyle Standley, President and
Chief Executive Officer
(Principal Executive Officer)
Date: October 27, 1999 By: /s/ Richard G. Kelly
-----------------------------------------
Richard G. Kelly, Chief Financial Officer
(Principal Financial Officer)
15
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