<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28072
West Coast Entertainment Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-3278751
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
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
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) had been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at December 15 ,1999
----- --------------------------------
Common Stock, $.01 14,109,696
par value per share
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<TABLE>
INDEX
<S> <C> <C>
Part I. - Financial Information Page No.
Item 1. - Financial Statements
Consolidated Balance Sheets -
As of October 31, 1999 and January 31, 1999 3
Consolidated Statements of Operations- Quarters Ended
October 31, 1999 and November 1, 1998
Three Quarters Ended October 31, 1999 and November 1, 1998 4
Consolidated Statements of Cash Flows-
Three Quarters Ended October 31, 1999 and November 1, 1998 5
Consolidated Statement of Stockholders Equity-
As of October 31, 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
Item 3. Quantitative and Qualitative Disclosure about Market 15
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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CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JANUARY OCTOBER
31, 31,
1999 1999
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash ................................................................... $ 2,424 $ 1,459
Accounts receivable and other receivables (net of allowance for doubtful
accounts of $ 67 and $ 8 at January 31, 1999 and October 31, 1999,
respectively)........................................................... 1,512 941
Merchandise inventory .................................................. 8,404 9,005
Market development funds and co-op receivable .......................... 1,242 747
Receivables from officers .............................................. 373 383
Prepaid expenses and other current assets .............................. 472 382
--------- ---------
Total current assets .................................................. 14,427 12,917
Videocassette rental inventory, net (Note 2), ........................... 20,375 19,812
Furnishings, equipment and leasehold improvements, net ................... 17,892 16,737
Intangible assets (net of accumulated amortization of $ 16,497 and $21,336
at January 31, 1999 and October 31,1999, respectively) ................ 110,530 105,429
Other assets ............................................................. 2,456 1,307
--------- ---------
Total assets .......................................................... $ 165,680 $ 156,202
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 3) ............................. $ 8,081 $ 69,350
Accounts payable ....................................................... 14,659 15,276
Accrued expenses ....................................................... 7,783 11,577
Income taxes payable ................................................... 655 848
--------- ---------
Total current liabilities ........................................... 31,178 97,051
Long-term debt (Note 3) .................................................. 58,187 --
Other Liabilities ........................................................ 59 29
--------- ---------
Total Liabilities ........................................................ 89,424 97,080
========= =========
Commitments and contingencies ............................................ -- --
Stockholders' equity:
Common stock ($0.01 par value; 14,185 shares as of January 31, 1999 of
which 14,073 shares were outstanding and 20 shares were to be issued
and 14,210 shares as of October 31, 1999 of which 14,098 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 ............................................ 104,093 104,100
Accumulated (deficit) ................................................. (27,737) (44,878)
Treasury stock (92 shares of common stock, at cost) ................... (242) (242)
--------- ---------
Total stockholders' equity .......................................... 76,256 59,122
--------- ---------
Total liabilities and stockholders' equity .......................... $ 165,680 $ 156,202
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE THREE
QUARTER QUARTER QUARTERS QUARTERS
ENDED ENDED ENDED ENDED
NOV 1, OCT 31, NOV 1, OCT 31,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue ........................................... $ 22,711 $ 21,133 $ 73,904 $ 66,531
Merchandise sales ........................................ 4,828 2,835 14,277 9,256
Franchise fees ........................................... 269 95 1,900 704
-------- -------- -------- --------
27,808 24,063 90,081 76,491
-------- -------- -------- --------
Costs and expenses:
Store operating expenses ................................. 14,829 12,139 42,939 37,906
Cost of goods sold ....................................... 4,063 2,411 10,746 6,880
Amortization of video cassette rental inventory.......... 7,077 4,512 19,741 16,227
Revenue sharing expense .................................. -- 3,068 -- 6,991
General and administrative ............................. 4,343 4,082 11,613 12,751
Amortization of intangible ............................... 1,613 1,646 4,878 4,934
Store Closing Charge (Note 4) ............................ 5,557 -- 5,557 --
-------- -------- -------- --------
37,482 27,858 95,474 85,689
Income from Operations..................................... (9,674) (3,795) (5,393) (9,198)
Interest Expense ........................................... 1,587 2,591 4,852 7,853
Other Expense .............................................. 164 (21) 308 10
-------- -------- -------- --------
Income (loss) before raxes.................................. (11,425) (6,365) (10,553) (17,061)
Income taxes ............................................... (634) -- -- 80
-------- -------- -------- --------
Net income ................................................. (10,791) (6,365) (10,553) (17,141)
======== ======== ======== ========
Income (loss) per common share data:
Net income (loss) - basic and diluted .................... $ (0.76) $ (0.45) $ (0.75) $ (1.22)
======== ======== ======== ========
Weighted average number of common shares
outstanding ................................................ 14,160 14,110 14,154 14,097
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE QUARTERS ENDED
NOV. 1, OCT. 31,
1998 1999
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) ................................ $(10,553) $(17,141)
Adjustments to reconcile net income (loss) to cash
flows provided by
operating activities:
Amortization of debt financing costs .......... 282 828
Amortization of videocassette rental inventory 19,741 16,227
Depreciation and amortization of furnishings,
equipment and leasehold improvements .......... 2,361 2,736
Amortization of intangible assets ............. 4,878 5,101
Store Closing Change (Note 4) ................. 5,557 --
Changes in assets and liabilities:
Accounts receivable ........................... 203 1066
Merchandise inventory ......................... (1,359) (601)
Prepaid expenses and other assets ............. (140) 401
Accounts payable .............................. 2,594 617
Accrued expenses and other liabilities ........ 545 3,764
Income taxes payable ......................... 1,006 193
-------- --------
Net cash provided by operating activities ..... 25,115 13,191
-------- --------
Cash flows related to investing activities:
Purchases of property and equipment .............. (2,570) (1,581)
Purchases of videocassette rental inventory ...... (22,864) (15,664)
-------- --------
Net cash used in investing activities ....... (25,434) (17,245)
-------- --------
Cash flows related to financing activities:
Proceeds from debt ............................... 162 3,082
Purchase of treasury stock ....................... (242) --
Repayments of debt ............................... (6) --
Proceeds from issuance of common stock ........... 26 7
-------- --------
Net cash provided by (used in) financing activities (60) 3,089
-------- --------
Net increase (decrease) in cash .................... (379) (965)
Cash, beginning of period .......................... 2,604 2,424
-------- --------
Cash, end of period ................................ $ 2,225 $ 1,459
======== ========
Supplemental cash flow data:
Interest paid .................................... $ 4,376 $ 4,444
======== ========
Income taxes paid ................................ $ 219 $ 31
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCK-
COMMON STOCK PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) STOCK EQUITY
---------- ---------- --------- ----------- ---------- ----------
<S> <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
Shares issued - Employee Stock
Purchase Plan ................... 24,992 -- 7 -- -- 7
Net (loss ....................... -- -- -- (17,141) -- (17,141)
---------- ---------- --------- ----------- ---------- ----------
Balance at January 31, 1999 ..... 14,209,669 $142 $ 104,000 $(44,878) $(242) $ 59,122
========== ========== ========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 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 $69.4 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.
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 first quarter of fiscal
2001.
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 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 three quarters ended October 31, 1999 are not
necessarily indicative of the results to be expected for the year
ending February 6, 2000.
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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
three quarters ended November 1, 1998 and October 31, 1999 reflect a 39
week period.
As of October 31, 1999 the Company owned and operated 237 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 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
three quarters ended October 31, 1999.
2 Videocassette Rental Inventory
Videocassette rental inventory and related amortization are as follows
(in thousands):
<TABLE>
<CAPTION>
January 31, 1999 October 31, 1999
------------------ ------------------
<S> <C> <C>
Videocassette rental inventory $ 87,985 $ 103,649
Accumulated amortization (67,610) (83,837)
-------- ---------
$ 20,375 $ 19,812
======== =========
</TABLE>
Amortization expense related to videocassette rental inventory totaled
approximately $16,227,000 and $19,741,000 for the three quarters ended
October 31, 1999 and November 1, 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
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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 February
15, 2000. At October 31, 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 October 31, 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 October 31, 1999). The interest rate on the Overadvance is
equal to the Prime rate plus 5.5% (13.25% at October 31, 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 December 29, 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 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.
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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 "Liquidity and Capital Resources."
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 stockholders. The Merger Agreement is subject to stockholder
approval of both companies, and is currently anticipated to be
completed some time in the first quarter of fiscal 2001.
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 October 31, 1999 compared to Quarter ended November 1,
1998
Revenues. Revenues decreased $3.7 million, or 13.5%, from $27.8 million
for the quarter ended November 1, 1998 to $24.1 million for the quarter
ended November 1, 1999. This change consisted of a decrease of $1.6
million in rental revenues, a decrease of $2.0 million in merchandise
sales and a decrease of $0.2 million in franchise fee revenue. The
decreases in store rental and merchandise sales revenues of $3.6
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
23 stores from 265 stores owned during the quarter ended November 1,
1998 to 242 stores owned during the quarter ended October 31, 1999 and
accounted for $2.4 million of the total decrease. In addition, a
decrease in average per store revenues accounted for the remaining
decrease of $1.3 million in store revenues.
Rental revenues decreased $1.6 million, or 6.9%, from $22.7 million
for the quarter ended November 1, 1998 to $21.1 million for the quarter
ended October 31, 1999. This decrease is primarily attributable to the
closing of underperforming stores during the fourth quarter of the last
fiscal year and, the resulting
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decrease in weighted average number of stores owned as discussed above.
This decrease in stores owned accounted for $2.0 million of the
decrease offset by an increase of $0.4 million relating to an increase
in average store rental revenues.
Merchandise and other sales decreased $2.0 million, or 41.3%,
from $4.8 million for the quarter ended November 1, 1998 to $2.8
million for the quarter ended October 31, 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 $0.4 million. The remaining
$1.6 million decrease is due to lower merchandise and other sales as a
result of lower store inventory levels, and the impact of Titanic which
was priced as a sell through title and released September 1, 1998.
Franchise fee revenues decreased $0.2 million, or 64.7%, from
$0.3 million for the quarter ended November 1, 1998 to $0.1 million for
the quarter ended October 31, 1999. This decrease is attributable to a
decline in the number of operating franchisees.
Store Operating Expenses. Store operating expenses decreased
$2.7 million, or 18.1%, from $14.8 million for the quarter ended
November 1, 1998 to $12.1 million for the quarter ended October 31,
1999. A decrease of approximately $1.3 million caused by the closing of
underperforming stores during the fourth quarter of the last fiscal
year as described above. The remaining decrease of $1.4 million was
primarily caused by lower occupancy costs and advertising expense.
Cost of Goods Sold. Costs of goods sold decreased $1.6
million, or 39.6 %, from $4.0 million for the quarter ended November 1,
1998 to $2.4 million for the quarter ended October 31, 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
$1.2 million decrease is related to lower merchandise and other sales.
As a percentage of merchandise sales, cost of goods increased 1.0
percentage points from 84% for the quarter ended November 1, 1998 to
85% for the quarter ended October 31, 1999.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of rental inventory decreased $2.6 million, or 36.3 %,
from $7.1 million for the quarter ended November 1, 1998 to $4.5
million for the quarter ended October 31, 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 $3.1
million for the quarter ended October 31, 1999 as compared to no
revenue sharing expense for the quarter ended November 1, 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 decreased $0.2 million or 6%, from $4.3
million for the quarter ended November 1, 1998 to $4.1 million for the
quarter ended October 31, 1999. This decrease was primarily caused by a
decrease in salaries and related employee costs of approximately $0.6
million along with a decrease in bad debt expense of approximately $0.6
million offset by an increase in professional fees of approximately
$0.9 million.
Amortization of Intangible Assets. Intangible amortization
expense remained unchanged at $1.6 million for the quarters ended
November 1, 1998 and October 31, 1999. As a percentage of total
revenues, intangible amortization increased 1.0 percentage points from
5.8% for the quarter ended November 1, 1998 to 6.8% for the quarter
ended October 31, 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 $0.8 million, or 46.7%, from $1.8 million for the quarter
ended November 1, 1998 to $2.6 million for the quarter ended October
31, 1999. Interest expense comprises almost all this net amount. This
increase was caused by higher
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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
decreased $4.4 million, from a $10.8 million net loss for the quarter
ended November 1, 1998 to a $6.4 million net loss for the quarter ended
October 31, 1999.
Three quarters ended October 31, 1999 compared to Three quarters ended
November 1, 1998
Revenues. Revenues decreased $13.6 million, or 15.1%, from
$90.1 million for the three quarters ended November 1, 1998 to $76.5
million for the three quarters ended October 31, 1999. This change
reflected a decrease of $7.4 million in rental revenues, a decrease of
$5.0 million in merchandise sales and a decrease of $1.2 million in
franchise fee revenue. Approximately $9.2 million of the $12.4 million
decrease in store rental and merchandise sales revenues was
attributable to a lower weighted average number of stores owned (after
closing underperforming stores primarily in the fourth quarter of last
year ending January 31, 1999) which decreased by 29 stores from 279
stores owned during the three quarters ended November 1, 1998 to 250
stores owned during the three quarters ended October 31, 1999. A
decrease in average per store revenues for the reasons discussed below
accounted for a decrease of $3.2 million in store revenues.
Rental revenues decreased $7.4 million, or 10.0%, from $73.9
million for the three quarters ended November 1, 1998 to $66.5 million
for the three quarters ended October 31, 1999. Approximately $7.7
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. This was
offset by a $0.3 million increase relating to an increase in average
store rental revenues.
Merchandise and other sales decreased $5.0 million, or 35.2%,
from $14.3 million for the three quarters ended November 1, 1998 to
$9.3 million for the three quarters ended October 31, 1999.
Approximately $1.5 million of this decrease was attributable to the
closing of underperforming stores during the fourth quarter of last
year. The remaining $3.5 million decrease was due to lower merchandise
and other sales as a result of lower store inventory levels.
Franchise fee revenues decreased $1.2 million, or 63.0%, from
$1.9 million for the three quarters ended November 1, 1998 to $0.7
million for the three quarters ended October 31, 1999. This decrease is
attributable to a decline in the number of franchisees and a decrease
through the sale or settlement of franchise agreements received for the
three quarters ended November 1, 1998.
Store Operating Expenses. Store operating expenses decreased
$5.0 million, or 11.7%, from $42.9 million for the three quarters ended
November 1, 1998 to $37.9 million for the three quarters ended October
31, 1999. A decrease of approximately $4.5 million was caused by the
closing of underperforming stores during the fourth quarter of last
year. The remaining decrease of $0.5 million was primarily caused by
lower occupancy costs and advertising expense.
Cost of Goods Sold. Costs of goods sold decreased $3.9
million, or 36.4%, from $10.7 million for the three quarters ended
November 1, 1998 to $6.9 million for the three quarters ended October
31, 1999. Approximately $1.1 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 $2.8 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 74.5% for both the three quarters
ended October 31, 1999 and the three quarters ended November 1, 1998.
Amortization of Videocassette and Video Game Rental Inventory.
Amortization of rental inventory decreased $3.5 million, or 17.8%, from
$19.7 million for the three quarters ended November 1, 1998 to $16.2
million for the three quarters ended October 31, 1999, primarily as a
result of the Company entering
12
<PAGE> 13
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 to the consolidated
financial statements.
Revenue Sharing Expense. Revenue sharing expense was $7.0
million for the three quarters ended October 31, 1999 as compared to no
revenue sharing expense for the three quarters ended November 1, 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 $1.1 million, or 9.8%, from $11.6
million for the three quarters ended November 1, 1998 to $12.7 million
for the three quarters ended October 31, 1999. This increase was caused
by increases in insurance, consulting and professional fees expenses
offset by a decrease of salaries and bad debt expense. The increase in
insurance expense was due to recording a retroactive premium for the
first quarter of the year ended November 1, 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 3.8 percentage points from 12.9%
for the three quarters ended November 1, 1998 to 16.7% for the three
quarters ended October 31, 1999 as a result of the legal judgement and
lower revenues resulting primarily from store closures as previously
discussed.
Amortization of Intangible Assets. Intangible amortization
expense increased $0.1 million, or 1.1%, from $4.9 million for the
three quarters ended November 1, 1998 to $4.9 million for the three
quarters ended October 31, 1999. As a percentage of total revenues,
intangible amortization increased 1.0 percentage point from 5.4 % for
the three quarters ended November 1, 1998 to 6.4% for the three
quarters ended October 31, 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 $2.7 million, or 52.4%, from $5.2 million for the three
quarters ended November 1, 1998 to $7.9 million for the three quarters
ended October 31, 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 consolidated financial statements and higher
levels of borrowings under the amended agreement.
Net Income (Loss). As a result of the foregoing, net loss
increased $6.6 million, from $10.6 million of net loss for the three
quarters ended November 1, 1998 to a $17.1 million net loss for the
three quarters ended October 31, 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 $69.4 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 three quarters ended October 31, 1999, the Company had net cash
provided by operating activities of $13.2 million, net cash used in
investing activities of $17.2 million (consisting primarily of cash
used to purchase videocassette rental inventory of $15.6 million and
$1.6 million of cash paid for purchases of property and equipment) and
net cash provided by financing activities of $3.1 million (consisting
primarily of net borrowings under the Revised Facility, as described in
Note 3 to the
13
<PAGE> 14
Consolidated Financial Statements), resulting in a net decrease in cash
of $1.0 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
December 31, 1999 this warrant has not been exercised.
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 upgraded its POS systems in November 1999 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
14
<PAGE> 15
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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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.
15
<PAGE> 16
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)
16
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