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United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ending February 6, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________.
Commission File No. 0-28072
WEST COAST ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3278751
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9998 Global Road, 2nd Floor, Philadelphia, Pennsylvania 19047
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (215) 856-2560
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
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Indicate by check mark whether (1) the Registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [X]
The aggregate market value as of June 13, 2000 of Common Stock held by
non-affiliates of the Registrant was approximately $963,428.
The number of shares of Common Stock outstanding as of June 13, 2000 was
14,210,025.
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WEST COAST ENTERTAINMENT CORPORATION
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2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
Item 1. Business ......................................................... 4
Item 2. Properties ....................................................... 17
Item 3. Legal Proceedings ................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders .............. 18
PART II
Item 5. Market for the Registrants' Common Stock and Related Stockholder
Matters .......................................................... 18
Item 6. Selected Consolidated Financial Data ............................. 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....... 35
Item 8. Financial Statements and Supplementary Data ...................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................. 66
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 66
Item 11. Executive Compensation ........................................... 68
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 71
Item 13. Certain Relationships and Related Transactions ................... 74
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 75
</TABLE>
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Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995.
This Annual Report contains forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995, such as statements of the Company's plans, objectives, expectations and
intentions, that involve risks and uncertainties that could cause actual results
to differ materially from those discussed in such forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
West Coast Entertainment Corporation ("West Coast" or the "Company") is one
of the largest owners, operators and franchisors of video retail specialty
stores in the United States in terms of system-wide revenues. The Company
competes directly against major regional and national video rental stores in
most of its markets and believes it is the leading video specialty retailer, in
terms of number of stores, in many of the major markets in which Company-owned
stores operate. At February 6, 2000, the Company owned and operated 238 video
specialty stores and West Coast Franchising Corporation franchised 74 video
specialty stores located in 17 states, principally in the Northeast and Midwest.
The Company is planning to merge with Video City, Inc., ("Video City"), which
owns and operates 74 video stores. See "Recent Developments."
On March 3, 2000, West Coast and Video City entered into a Management
Agreement, pursuant to which Video City manages and operates West Coast's
business until the closing of the proposed merger. See "Recent Developments."
West Coast is a leading video specialty retailer whose stores are designed
and managed to create an atmosphere
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that enhances the appreciation of movies, children's video programming and video
games. In general, the Company's stores rent and sell videocassettes, rent video
games and sell certain popular electronic accessories along with a variety of
confectionery items. Sites for the Company's stores, within each designated
trade area, are selected on the basis of such factors as visibility, ready
accessibility (particularly for evening drivetime parking), signage and
adaptability of existing structures to the Company's requirements, as well as
cost considerations. The Company's stores vary in layout and inventory according
to local market needs. The Company's stores range in size from 750 square feet
to 12,000 square feet and generally carry a comprehensive selection of 7,000 to
15,000 prerecorded videocassettes. System-wide, a substantial majority of the
Company's stores are currently operated under the West Coast Video(R) name; the
remainder are operated under names such as Videosmith(R).
As described in more detail below, the Company's short-term strategy is to
complete the merger with Video City.
RECENT DEVELOPMENTS
Pending Merger - On August 1, 1999, the Company and Video City, Inc.,
entered into an Agreement and Plan of Merger ("Merger Agreement"). Refer to the
Agreement and Plan of Merger previously filed on Form 8-K, dated August 10,
1999. Under the terms of the Merger Agreement, upon consummation of the merger,
each share of West Coast common stock will be converted for no less than 0.25
and no more than .333 share of Video City common stock. In addition, each share
of West Coast common stock will receive .05 share of Video City Series F
convertible redeemable preferred stock. The merger will be accounted for as a
purchase. The consummation of the merger is subject to certain terms and
conditions set forth in the Merger Agreement, including the approval of the
transactions by the shareholders of West Coast and Video City and approval by
creditors and other third parties.
Management Agreement - On March 3, 2000, West Coast and Video City, Inc.
("Video City") entered into a Management Agreement, pursuant to which Video City
will manage and operate West Coast's business until the closing of the proposed
merger between West Coast and Video City. The Management Agreement previously
filed on form 8-K, dated March 28, 2000, provides that West Coast shall pay
management fees for Video City's management services in an amount equal to
between 12% and 14% of gross revenues actually collected from the
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West Coast business less all selling, general and administrative costs and
expenses of West Coast incurred and paid in the ordinary course of business.
Under the Management Agreement, in no event shall the management fee paid to
Video City be less than $400,000 per calendar month. West Coast may terminate
the Management Agreement on or after August 31, 2000. Concurrent with the
execution of the Management Agreement, the directors and executive officers of
West Coast resigned and the Company closed its Newtown, PA executive offices.
Mr. Herbert F. Kozlov is currently the sole director and officer of West Coast.
Video City is currently maintaining and operating West Coast as a separate
business entity as stipulated in the Management Agreement. In addition, Video
City is providing a majority of the purchasing, marketing and retail services
for West Coast.
Divestiture of Stores. In addition, under the Merger Agreement and
Management Agreement with Video City, Video City is currently negotiating to
divest a number of West Coast's video stores, with the anticipated proceeds
being used to pay the cash necessary to complete the restructuring of West
Coast's indebtedness that is a condition to the merger. The Company believes
that the successful implementation of these plans will permit the merger to
proceed and will result in a stronger combined company. There can be no
assurance that these objectives can be successfully completed or that the
resultant company will be profitable.
INDUSTRY OVERVIEW
Video Retail Industry. According to Paul Kagan Associates, the U.S.
videocassette and DVD rental and sales industry grew from $17.1 billion in
revenue in 1998 to a projected $18.5 billion in 1999 and is projected to reach
$22.8 billion in 2005. Paul Kagan Associates estimates that, in 1999, 85.9
million, or 85.9%, of the 100 million total U.S. television households owned a
VCR. The number of VCRs that were sold in the United States in 1999 was
estimated by Paul Kagan Associates to be 20.5 million, which represents the
largest number of VCRs sold in any single year. In addition, the Consumer
Electronics Manufacturers Association estimates that about 4.1 million DVD
players were sold to dealers in the United States during 1999. According to Paul
Kagan Associates, the VCR and DVD markets will continue to grow as the number of
multi-VCR households is expected to increase from 39.7 million in 1999 to 51.4
million by 2005 and the number of DVD households is projected to reach 31.0
million in
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2005.
As part of its Annual Report on the Home Video Market 1998, the Video
Software Dealers Association revealed that each week some 50 million consumers
make a trip to a video store, and almost 60% of the U.S. households owning at
least one VCR rent videos at least a couple of times each month. We believe that
the following factors, among others, make video rental a preferred medium of
entertainment for millions of customers:
- the opportunity to browse among a very broad selection of movies;
- the control over viewing, such as the ability to control start, stop,
pause, fast-forward and rewind; and
- the opportunity to entertain one or more people at home for a reasonable
price.
In addition, a significant competitive advantage that our industry
currently enjoys over most other movie distribution channels except theatrical
release is the early timing of our distribution "window." After the initial
theatrical release, studios make their movies available to video stores for a
specified period of time. This window is exclusive against most other forms of
non-theatrical movie distribution, such as pay-per-view, premium television,
basic cable and network and syndicated television. The current length of the
window for video stores varies, typically ranging from 30 to 90 days for
domestic video stores and from 120 to 180 days for international video stores.
Thereafter, movies are made sequentially available to television distribution
channels.
Movie Studio Dependence on Video Retailing. According to Paul Kagan, total
U.S. movie studio and independent supplier revenue in the United States grew at
a compound annual rate of 6.2% per year from $11.3 billion in 1995 to $15.2
billion in 1999. Paul Kagan Associates also indicate that the video retail
industry is the single largest source of domestic revenue to movie studios and
represented approximately $7.4 billion, or 48.5%, of the $15.2 billion of
estimated domestic studio revenue in 1999. Of the many movies produced and
released by the major studios each year in the United States, relatively few are
profitable for the movie studios based on box office receipts alone. The Company
believes the consumer is more likely to view "non-hit" movies on rented
videocassette
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than in any other medium because retail video stores provide an inviting
opportunity to browse and make an impulse choice among a very broad selection of
new releases. As a result, retail video stores, including those operated by the
Company, purchase movies on videocassette regardless of whether the movies were
successful at the box office, thus providing the major movie studios a reliable
source of revenue for almost all of the hundreds of movies produced each year.
Consequently, the Company believes movie studios are highly motivated to protect
this unique and significant source of revenue.
Rentals versus Sales. Although the video retail industry includes both
rentals and sales, the consumer market for prerecorded videocassettes and DVDs
has been primarily comprised of rentals. By setting the wholesale prices, movie
studios influence the relative levels of videocassette rentals versus sales.
Videocassettes released at a relatively high price, typically $60 to $70, are
purchased by video specialty stores and are promoted primarily as rental titles.
Videocassettes released at a relatively low price, typically $5 to $24
("sell-through titles"), are purchased by video specialty stores and are
generally promoted as both rental and sale titles. In general, movie studios
attempt to maximize total revenue from videocassette releases by combining the
release of most titles at a high price point to encourage purchase for the
rental market, with the release of a relatively few major hits or animated
children's classics at sell-through pricing to encourage purchase directly by
the consumer at retail. Titles released at a high price are re-released at a
lower price six months to one year after the initial release to promote sales
directly to consumers. According to Paul Kagan, video rental revenue has
increased from $7.4 billion in 1997 to $8.1 billion in 1998 and is expected to
increase to $9.7 billion in 2002.
Revenue Sharing. Historically, the major studios or their licensees
released movies to video stores at wholesale prices generally between $60 and
$70 per videocassette for major theatrical releases that were priced for rental
in the United States. The studios still release movies at relatively high
wholesale prices unless the movie is subject to a revenue-sharing agreement or a
quantity discount program or is designated by the studios as a sell-through
movie. The studios attempt to maximize total revenue from newly released video
titles by maintaining the high wholesale price during the first four months to
one year after a movie is released. Thereafter, in order to promote sales to
consumers, the major studios release the movies at a substantially lower price,
generally at retail for about $10 to $20 per videocassette.
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Since the late 1980s, revenue-sharing agreements have been available to
home video chains and independent video dealers through deals brokered by
distributors such as Rentrak Corporation and SuperComm, Inc. More recently, the
major studios have entered into revenue-sharing agreements directly with several
large video chains. For titles purchased under these agreements, video stores
share with the studios an agreed-upon percentage of the video stores' rental
revenue for a limited period of time in exchange for minimal fixed payments for
the videocassettes by the video stores. This percentage generally declines over
a period of weeks following the initial release of the movie. The video stores
also agree to take a minimum number of copies of each movie that is released by
a studio in any U.S. movie theater. The video stores may also agree to take a
minimum number of movies that are not released by a studio in any U.S. movie
theater. The revenue-sharing agreements, subject to limitations and exceptions,
allow the video stores to sell previously viewed videotapes to their customers.
Since 1998 a number of studios and video retailers adopted revenue sharing
as an alternative to the historical rental pricing structure. Studios began
offering retailers more videocassettes for an individual title at substantially
lower initial cost in exchange for a share of the rental revenue that those
copies generate over their initial release window. This has led to higher rental
revenues for the video industry as well as for the studios. In addition, revenue
sharing provides the studios an incentive to market these titles which improve
revenue generated for both the video industry and the studios by increasing
rental transactions.
We believe revenue-sharing agreements have the following significant
benefits to participating video stores:
- they provide these stores with the opportunity to substantially increase
the quantity and selection of newly released video titles that they
stock;
- they increase revenues as a result of the increase in total number of
transactions per store and number of videocassettes rented per
transaction; and
- they align the studios' economic interests more closely with the
interests of the video stores.
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In addition, we believe that revenue-sharing has increased the revenues
received on an annual basis by the studios through increased rental activity on
new releases as well as greater distribution and revenues on non-hit movies
through minimum output provisions. However, depending on the precise contractual
terms that are negotiated, the cost of the revenue sharing arrangement with the
major studios may have an adverse impact on gross income and cash flow.
BUSINESS STRATEGY
Superstore Format. The Company focuses on operating retail video
superstores. The Company believes a superstore is the most commercially viable
format for video stores at most locations. The broader selection of titles and
greater availability of popular new releases of a superstore generate enough
customer traffic to make it economically viable to lease optimal locations that
may demand higher lease rates. Because many store operating expenses, including
labor costs, are substantially fixed regardless of the size of a store,
operating expenses are proportionately lower in the larger superstore format as
compared to a smaller store.
Selection, Availability and Customer Service. The Company's goal is to
offer a more complete selection and greater availability of popular new releases
in an effort to be the customers' preferred store. The Company believes that
certain of the Company's promotional strategies such as the periodic
guaranteeing of the availability of a popular new release at its stores have
been successful in attracting and retaining its customers. The Company permits
its customers in many markets to return a videocassette to any of its other
store locations and hence provides a convenience not normally available at other
video store chains. In addition, the Company's goal is to place great emphasis
on offering its customers excellent service to encourage repeat visits. The
Company uses demographic and historical rental data to determine the selection
and quantity of videos that will best meet the demands of customers in
particular regions or neighborhoods.
Store Location and Marketing. Most of the Company's superstores are located
in high traffic areas providing high visibility and easy access for its
customers. The Company believes excellent customer service, a bright, clean and
friendly shopping environment and convenient store locations are important to
its success. The Company
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advertises through local television, radio, newspaper and direct mail, and
promotes its products through various special programs.
DEVELOPMENT OF THE COMPANY
West Coast Entertainment Corporation is a Delaware corporation established
in February 1995 (originally under the name RKT Acquisition Co). In July 1995,
each of the Predecessor Corporations, Giant Video Corporation ("GVC"), Nostalgia
Ventures, Inc. ("NVI"), G.V. Management Corp. ("GVMC") and Videosmith (DE)
Incorporated ("VDI"), merged with and into the Company ("the Merger"). As a
result of the Merger, the former stockholders of the Predecessor Corporations
became stockholders of the Company. Simultaneously, the Company, through its
wholly-owned subsidiary West Coast Franchising Corporation, a Delaware
corporation, acquired substantially all of the franchise-related operating
assets of the West Coast Entertainment Incorporated Companies, which had
previously conducted a video store franchising business under independent
ownership in Philadelphia, Pennsylvania.
The Predecessor Corporations that were merged into the Company had
previously conducted their respective operations under substantially common
ownership. GVC, an Ohio corporation, was incorporated in 1989 and opened its
first video specialty store in Dayton, Ohio in June 1989. In April 1993, all of
the outstanding stock of NVI, an Ohio corporation with seven stores in the
Greater Dayton area, was acquired by the controlling stockholders of GVC from
unrelated third parties. In August 1994, the controlling stockholders of NVI,
together with certain other investors, acquired from an unrelated third party
through VS Acquisition Corp., a newly formed Delaware corporation ("VSAC"), all
of the outstanding stock of VDI, the parent of Videosmith Incorporated, a
Massachusetts corporation with 14 stores in Massachusetts. Shortly thereafter,
VSAC merged with and into VDI. In May 1992, the controlling stockholders of GVC
formed an Ohio corporation, GVMC, which provided management services to certain
of the other corporations.
On May 17, 1996, West Coast Entertainment Corporation completed an initial
public offering, which consisted of 5,400,000 shares of common stock at $13.00
per share (the "Offering"). The net proceeds of the Offering after deducting
applicable issuance costs and expenses, were $60.8 million. The proceeds were
used to fund the
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acquisition of 242 video specialty stores during fiscal 1997 and 38 stores
during fiscal 1998, and to repay approximately $9.6 million in long-term debt.
There were no significant acquisitions by the Company during the years ended
January 31, 1999 and February 6, 2000.
STORE LOCATIONS
The following table lists the number of stores owned and franchised by the
Company in each state at February 6, 2000.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
OWNED AND FRANCHISED TOTAL
STATE OPERATED STORES STORES STORES
------------------ ------------------ ---------------- --------
<S> <C> <C> <C>
Pennsylvania 42 38 80
New Jersey 58 9 67
Massachusetts 32 10 42
New York 30 -- 30
Ohio 25 2 27
Kentucky 15 -- 15
Louisiana 4 -- 4
Indiana 7 1 8
Florida 5 3 8
Maryland 1 6 7
Virginia 8 -- 8
Illinois -- 3 3
Arkansas 5 -- 5
Oklahoma 3 -- 3
Texas 2 -- 2
Connecticut -- 2 2
Delaware 1 -- 1
------------------ ---------------- --------
Total 238 74 312
================== ================ ========
</TABLE>
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PRODUCTS AND PRICING
The Company's primary source of revenue is the rental of videocassettes. The
Company's stores feature between 7,000 and 15,000 videocassettes. At present,
the Company's stores generally rent new release titles overnight, depending on
the age and popularity of the title, while catalog titles rent for four to six
nights. The Company regularly reviews and determines its rental prices for
titles based on the length of time each title has been available on
videocassette and the frequency of rentals for each title. Movie titles are
classified into a variety of thematic categories, including certain categories
which are custom tailored to local tastes and demographic profiles, and are
displayed alphabetically within those categories. The Company attempts to keep
available within each store sufficient numbers of current popular titles, as
well as a significant selection of catalog titles, to satisfy customer demand.
The Company also offers videocassettes for sale. Generally, previously
viewed videocassettes are sold beginning 6 to 12 weeks after a new title is
released to video specialty stores depending on the popularity of the product.
Sales of new videocassettes are generally priced at $8.99 to $19.99. In addition
to video rentals and sales, the Company also rents and sells video game products
compatible with various game hardware platforms and personal computers.
SUPPLIERS
The Company is contractually obligated to purchase from Ingram Entertainment
("Ingram") the lesser of 30% of its annual requirements of rental videocassettes
and video game products or $25 million through July 12, 2000 and the lesser of
25% of its annual requirements or $25 million through July 12, 2002. Ingram may
terminate this contract at any time for any reason upon 90 days prior written
notice. The Company currently receives marketing funds and an advertising
allowance from Ingram based upon a percentage of the Company's videocassette and
video game purchases. The Company is in the process of renegotiating terms with
Ingram, which the Company believes
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will result in a favorable outcome.
REVENUE SHARING
In the first quarter of fiscal 2000, the Company entered into revenue
sharing arrangements with some major studios. Studios supply quantities of
specified videocassettes, and the video stores share with the studios an agreed
upon percentage of the video stores' rental revenue from these products for a
limited period of time, usually up to 26 weeks following the initial release of
the movie. Revenue sharing, in many cases, also allows the video stores to sell
the previously viewed tapes to their customers.
Revenue sharing with the major studios provide a major competitive
advantage for the Company and have the following significant benefits;
- They provide the opportunity to substantially increase the quantity and
selection of newly released video titles in stock and decrease the
in-store copy depth problems that have plagued the industry for years;
- They increase revenues as a result of the increase in total number of
transactions per store and number of videocassettes rented per
transaction;
- They allow for significantly increased availability of new release
movies; and
- They align the studios' economic interest more closely with the interest
of the video stores.
Revenue sharing allows West Coast to purchase rental product at a lower
product cost than the traditional buying arrangements, and reduces the shelf
life of each rental product. As the new business model results in a greater
proportion of rental revenue over a shorter period of time, West Coast has
changed its method of amortizing the rental library in order to more closely
match expenses in proportion with the anticipated revenues to be
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generated therefrom.
FRANCHISING
As of February 6, 2000, the Company has 74 franchised video specialty
stores. Under the existing franchise agreements, the Company received
approximately 7% of each franchisee's monthly gross revenues, subject to stated
monthly minimum royalties. Of this amount, the Company is required to devote an
amount equal to 2% of such monthly gross revenue to direct and indirect
advertising and marketing programs.
Following the pending merger with Video City, the existing franchised
stores will have the opportunity to be re-licensed under a new proprietary
licensing program.
COMPETITION
The video retail industry is highly competitive. The Company competes with
other local, regional and national chains, such as Blockbuster, Inc. and
Hollywood Entertainment Corporation ("Hollywood Entertainment"), and with
supermarkets, mass merchants, mail order companies and other retailers. Some of
the Company's competitors have significantly greater financial and marketing
resources and name recognition, although the Company is generally one of the
largest video retailers in most of its geographic markets.
The Company believes the principal competitive factors in the video retail
industry are store location and visibility, title selection, the number of
copies of popular titles available, customer service, and, to a lesser extent,
pricing. Most of the Company's stores compete directly with stores operated by
Blockbuster and/or Hollywood Entertainment. As a result of direct competition
with Blockbuster, Hollywood Entertainment and others, rental pricing of
videocassettes and greater availability of new releases may become a more
significant competitive factor in the Company's business, which could have an
adverse impact on the results of operations of the Company.
The Company also competes with cable television, satellite and
pay-per-view, in which subscribers pay a fee to see a movie selected by the
subscriber. Existing pay-per-view services offer a limited number of channels
and
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movies and are only available to households with a direct broadcast satellite or
a cable converter to unscramble incoming signals. Recent technological
developments could permit cable companies, direct broadcast satellite companies,
telephone companies, and other telecommunications companies to transmit a much
greater number of movies to homes at more frequently scheduled intervals
throughout the day. Ultimately, these technologies could lead to the
availability of movies to consumers on demand. Certain cable and other
telecommunications companies have tested "video on demand" service in some
markets. Video on demand service would allow a viewer to pause, rewind and fast
forward movies. Based upon publicly available information, the Company believes
these tests have been unsuccessful. The Company also believes movie studios have
a strong interest in maintaining a viable movie rental business because the sale
of videocassettes to video retail stores represents the studio's largest source
of revenue. As a result, the Company believes movie studios will continue to
make movie titles available to cable television and other distribution channels
only after the revenue has been derived from the sale of videocassettes to video
stores. Substantial technological developments will be necessary in order for
pay-per-view to match the low price, viewing convenience and selection available
through video rental.
SEASONALITY
The video retail industry generally experiences relative revenue declines
in April and May, due in part to the change to Daylight Savings Time and
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs. The Company believes these
seasonality trends will continue.
INTELLECTUAL PROPERTY
West Coast owns a number of trademarks, trade names and service marks. These
include West Coast Video(R), The Movie Buff's Movie Store(R), Game Power
Headquarters(TM), net.spot(TM), The Projector(TM), Spotlight on Video(TM). They
also include Videosmith(R) and other trade names which some acquired stores are
currently using to conduct business pending transition to the West Coast
Video(R) name and signage. West Coast has acquired an exclusive licensing
arrangement to reproduce and use graphically enhanced versions of Bernard of
Hollywood photographs of legendary actors and actresses. These enhanced
photographs are currently displayed inside West Coast's stores and may also be
used for other promotional purposes and on merchandise produced by the Company
to be sold in its
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stores.
EMPLOYEES
At February 6, 2000, the Company had 2,277 employees, including 2,198 in
retail stores and the remainder in corporate administrative and warehousing
operations. Of such employees, 631 were full-time and 1,646 were part-time.
Staffing requirements for the Company's stores range from 6 to 12 employees,
depending on size and location, and typically include one store manager and one
or two assistant managers. Store managers report directly to a district manager
who, in turn, reports to a Regional Manager. The Company believes that its
employee relations are good. None of the Company's employees are represented by
a labor union.
ITEM 2. PROPERTIES
In March 2000, the Company combined its corporate headquarters with Video
City at 9998 Global Road, 2nd Floor, Philadelphia, PA. The facility has
approximately 6,500 square feet of office space and 10,000 square feet of
warehouse space. Video City rents the facility, under a lease, which expires in
April 2002.
The Company leases all of its video specialty stores. The leases for the
Company's stores generally have an initial term of five to ten years or more and
provide one or more options to renew for additional terms of similar lengths.
Rents for the renewal terms are typically at pre-negotiated rates. Some of the
leases contain percentage rental provisions, which only apply based upon high
thresholds of in-store gross sales revenues. The Company has not to date paid
material amounts of percentage rentals. The Company is responsible for taxes,
insurance and utilities under most leases. The Company expects that future
stores will also occupy leased premises.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation in the ordinary course of its
business. The Company believes that the outcome of such litigation will not
materially affect the Company's financial position or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER'S MATTERS
The Company's common stock is traded and quoted on the over the counter
market under the symbol "WCEC". The following table shows the high and low sales
prices of the common stock for the last two fiscal years through February 6,
2000.
<TABLE>
<CAPTION>
COMMON
STOCK PRICE
-------------------
HIGH LOW
--------- -------
<S> <C> <C>
Quarter ended May 3, 1998....... 3.44 1.50
Quarter ended August 2, 1998.... 2.62 1.12
Quarter ended November 1, 1998.. 1.56 .19
Quarter ended January 31, 1999.. 2.00 .27
Quarter ended May 2, 1999....... 1.59 .25
Quarter ended August 1, 1999.... .94 .25
Quarter ended October 31, 1999.. .63 .21
Quarter ended February 6, 2000.. .72 .11
</TABLE>
As of April 22, 2000, there were 171 holders of record and approximately
2,142 beneficial owners of the Company's common stock. On such date, brokers,
dealers and their nominees on behalf of the beneficial owners held approximately
9,866,788 shares.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its common
stock. For the foreseeable future,
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<PAGE> 19
the Company expects to retain any earnings to finance its business. The payment
of dividends is within the discretion of the Company's Board of Directors and
will depend on the earnings, capital requirements, restrictions in future credit
agreements and the operating and financial condition of the Company, among other
factors. The Company's current bank credit facility contains a covenant
prohibiting the payment of dividends without the lender's consent. There can be
no assurance that the Company will ever pay dividends in the future.
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not make any issuances of unregistered securities during the
fourth quarter ended February 6, 2000.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical financial data presented under the captions
Statement of Operations Data and Balance Sheet Data as of and for the years
ended February 6, 2000, January 31, 1999, 1998, 1997, and 1996 was derived from
the consolidated financial statements of the Company. Such financial statements
for the years ended February 6, 2000 and January 31, 1999 were audited by BDO
Seidman, LLP; financial statements for each of the three years in the period
ended January 31, 1998 were audited by PricewaterhouseCoopers LLP. The Selected
Financial Data set forth below should be read in conjunction with the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
filing.
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 6, JANUARY 31,
2000 1999 1998 1997 1996
----------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues ................................ $ 104,424 $ 120,174 $ 123,753 $ 73,293 $ 14,719
Operating income (loss) ................. (64,023) (21,170) 423 8,053 1,216
Income (loss) before extraordinary item . (81,863) (27,217) (3,570) 3,710 334
Net income (loss) ....................... (81,863) (27,217) (3,570) 3,466 334
Income (loss) before extraordinary item
per
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C> <C>
common share - basic and diluted ....... $ (5.80) $ (1.93) $ (0.26) $ 0.35 $ 0.07
Net income (loss) per common share ...... --
basic and diluted ...................... $ (5.80) $ (1.93) $ (0.26) $ 0.33 $ 0.07
Weighted average number of common shares
Outstanding ............................ 14,107 14,072 13,817 10,554 4,756
OPERATING DATA:
Increase (decrease) in same store
revenues (1) ........................... (7.8)% (4.0)% 0.8% 5.3% 4.8%
Store Data:
Company-owned stores at end of period 238 261 286 264 28
Franchised stores at end of period ... 74 160 217 267 304
--------- --------- --------- --------- ---------
Total stores at end of period ...... 312 421 503 531 332
BALANCE SHEET DATA:
Cash and cash equivalents ............... $ 888 $ 2,424 $ 2,604 $ 1,311 $ 611
Rental library, net ..................... 21,132 20,375 32,005 24,598 1,509
Total assets ............................ 100,381 165,680 187,236 159,964 16,515
Long-term debt, less current portion .... -- 58,187 65,006 32,802 7,101
Total liabilities ....................... 105,983 89,424 83,555 52,829 15,972
Equity (deficit) ........................ (5,602) 76,256 103,681 107,135 543
</TABLE>
--------
(1) The increase (decrease) in same store revenues compares revenues from stores
owned by the Company at the end of each period that were open throughout
that period and the corresponding period for the prior year. For the year
ended February 6, 2000, which is a 53-week year, same store sales were
adjusted to be comparable to a 52-week year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During the fiscal years ended February 6, 2000 and January 31, 1999 West
Coast acquired no stores, closed 23 and 36 owned and operated stores, reduced
its franchised stores by 86 and 57, respectively and experienced a decrease in
same store revenues of 7.8% in fiscal 2000 and 4.08% in fiscal 1999. This
contraction has continued during the current fiscal year.
Revenues. Historically, the Company's revenues have been derived primarily
from the rental of videocassettes
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<PAGE> 21
and video games together with sales of previously viewed videocassettes ("rental
revenues"), while lesser amounts have been derived from payments from
franchisees ("franchise fees") and sales of new videocassettes, miscellaneous
merchandise and other sales ("merchandise and other sales"). Acquisitions or
dispositions of franchised stores and company-owned stores with differing levels
of merchandise and other sales compared with rental revenues have had, and may
in the future have, an effect on the Company's mix of revenue components.
The Company believes that convenience, selection, customer service and
weather are the most significant factors in determining rental volumes.
Significant increases in rental revenues largely depend upon the appeal of new
releases coming from motion picture producers and video game developers.
Management plans and executes various buying, marketing and operating strategies
so as to take maximum advantage of such competitive factors as are under its
control.
The franchise arrangement calls for the Company to receive franchise fee
payments monthly in arrears from its franchised stores. The franchise fee
payment due from most domestic franchisees is equal to 7% of the aggregate
revenues from all of the franchisees' stores for the prior month, of which 2% of
such aggregate revenues is required to be devoted to paying marketing and
advertising costs.
Merchandise and other sales are derived primarily from new videocassettes
sold directly to customers, sales of supplies to franchisees, video game sales
and the sale of confectionery and other movie-related merchandise.
Expenses. Store operating expenses generally consist of expenses incurred at
the store level, including personnel expense, lease expense, utility expense,
advertising and depreciation. Rental library amortization expense is a
substantial component of total expenses and the Company believes that its
methods of amortization result in an appropriate matching of amortization
expense with the revenue received from the associated rental of such inventory.
Revenue sharing expense is the studios' share of revenues earned for product
purchased under revenue sharing agreements.
Cost of goods sold is a smaller component of total expenses consisting
primarily of costs associated with
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<PAGE> 22
purchasing videocassettes and video games to be sold directly to customers,
supplies to be sold to franchisees, video games and confectionery items.
Selling, general and administrative expenses are non-store level expenses and
include general corporate expenses such as marketing and advertising, personnel,
administration, legal and accounting. These functions have been primarily
performed at the Company's headquarters in Philadelphia, Pennsylvania. Interest
expense reflects the extent to which the Company borrows funds and the
applicable rate at which such funds are borrowed. Intangible assets are
primarily comprised of franchise rights and goodwill.
During the current fiscal year, the Company will pay management fees to
Video City under the Management Agreement, instead of incurring its own expenses
for executive management incurring and reduced expenses for purchasing,
marketing and retail services.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated statement of
operations data and other data expressed as a percentage of total revenue and
the number of stores open at the end of each period.
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 6, JANUARY 31,
2000 1999 1998
----------- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Rental revenues .................................... 87.1% 82.7% 82.4%
Merchandise and other sales ........................ 12.2 15.5 15.6
Franchise fees ..................................... 0.7 1.8 2.0
----- ----- -----
Total revenues .................................. 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Store operating expenses ........................... 48.9 47.6 46.3
Cost of goods sold ................................. 9.4 11.9 11.0
Amortization of rental library(1) .................. 21.7 34.4 21.0
Revenue Sharing Expense ............................ 8.4 -- --
Selling, general and administrative ................ 15.7 13.0 12.2
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
Amortization of intangible assets .................. 55.1 6.0 5.0
Store closing charges .............................. 2.0 4.7 --
Debt offering write-off ............................ -- -- 4.2
----- ----- -----
Total costs and expenses ...................... 161.2 117.6 99.7
----- ----- -----
Income (loss) from operations ...................... (61.2) (17.6) 0.3
Interest expense and other ......................... 16.8 5.8 4.0
----- ----- -----
Loss before provision (benefit) for income taxes
and extraordinary Item .......................... (78.0) (23.5) (3.7)
Provision (benefit) for income taxes ............... 0.4 (0.8) (0.8)
----- ----- -----
Loss before extraordinary item ..................... (78.4)% (22.6)% (2.9)%
===== ===== =====
OTHER DATA:
Purchases of videocassette rental inventory ........ 22.4% 25.7% 24.6%
STORE DATA:
Increase (decrease) in same store revenues(2) ...... (7.8)% 4.0)% 0.8%
Company-owned stores at end of period .............. 238 261 286
Franchised stores at end of period ................. 74 160 217
----- ----- -----
Total stores at end of period ...................... 312 421 503
===== ===== =====
</TABLE>
(1) The Company's amortization policy for rental library is described in Note 2
to the Consolidated Financial Statements.
(2) The increase (decrease) in same store revenues compares revenues from stores
owned by the Company at the end of each period that were open throughout
that period and the corresponding period for the prior year. For the year
ended February 6, 2000, which is a 53-week year, same store revenue sales
were adjusted to be comparable to a 52-week year.
YEAR ENDED FEBRUARY 6, 2000 COMPARED TO YEAR ENDED JANUARY 31, 1999
Revenues. Revenues decreased $15.8 million, or 13.1%, from $120.2 million for
the year ended January 31, 1999 to $104.4 million for the year ended February 6,
2000. This change consisted of a decrease of $8.4 million in rental revenues, a
decrease of $6.0 million in merchandise sales and a decrease of $1.4 million in
franchise fee revenue. The decrease in store rental and merchandise sales
revenues of $14.4 million are attributable to a lower weighted average number of
stores owned (after closing underperforming stores) which decreased by 32 stores
from 279
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<PAGE> 24
stores owned during the year ended January 31, 1999 to 247 stores owned during
the year ended February 6, 2000 and accounted for $13.5 million of the total
decrease. In addition, a decrease in average per store revenues accounted for
the remaining decrease of $0.9 million.
Rental revenues decreased $8.4 million, or 8.5%, from $99.4 million for the
year ended January 31, 1999 to $90.9 million for the year ended February 6,
2000. This decrease is primarily attributable to the closing of underperforming
stores and the resulting decrease in weighted average number of stores owned as
discussed above. This decrease in stores owned accounted for a decrease of $11.4
million which was partially offset by an increase of $3.0 million relating to an
increase in average store rental revenues due to the extra week in fiscal 2000,
and the fact that the stores disposed of were relatively low volume stores.
Merchandise and other sales decreased $5.9 million, or 31.7%, from $18.6
million for the year ended January 31, 1999 to $12.7 million for the year ended
February 6, 2000. This decrease is attributable to the closing of
underperforming stores as described above, which caused merchandise and other
sales to decrease by $2.1 million. The remaining decrease of $3.8 million was
caused by a decrease in average store sales as a result of lower store inventory
levels which were necessitated by working capital restrictions and sell-through
competition from mass merchants.
Franchise fee revenues decreased $1.4 million, or 65.0%, from $2.2 million
for the year ended January 31, 1999 to $0.8 million for the year ended February
6, 2000. This decrease is attributable to a decline in the amount of royalty
payments received from franchisees due to a decline in the number of franchisees
who make required payments and a decrease in the number of franchise stores from
160 at January 31, 1999 to 74 at February 6, 2000.
Store Operating Expenses. Store operating expenses decreased $6.1 million,
or 10.7%, from $57.2 million for the year ended January 31, 1999 to $51.1
million for the year ended February 6, 2000. $6.5 million of the decrease is
attributable to a reduction in weighted average number of stores. As a
percentage of total revenues, store operating expenses increased 1.3 percentage
points from 47.6% for the year ended January 31, 1999 to 48.9% for the year
ended February 6, 2000 primarily as a result of lower store revenues and higher
occupancy and depreciation
24
<PAGE> 25
expense.
Cost of Goods Sold. Costs of goods sold decreased $4.6 million, or 31.9 %, from
$14.4 million for the year ended January 31, 1999 to $9.8 million for the year
ended February 6, 2000. Of this decrease, $1.7 million is caused by lower
weighted average stores. The remaining decrease of $2.9 million is a result of
lower merchandise sales. As a percentage of merchandise sales, cost of goods
remained the same at 77.4%
Amortization of Rental Library. Amortization of rental library decreased
$18.7 million, or 45.2%, from $41.4 million for the year ended January 31, 1999
to 22.6 million for the year ended February 6, 2000. The decrease was caused by
the Company purchasing less videocassette inventory due to entering into revenue
sharing agreements with studios and the change in amortization methods as
described below.
During the fourth quarter of fiscal 2000, the Company adopted an
accelerated method of amortizing its rental library, which more closely matches
expenses in proportion with anticipated revenues under the revenue sharing
model. The Company recorded an adjustment of $2,100,000 to amortization expense.
During the fourth quarter of fiscal 1999, the Company adopted a method of
amortizing its rental library to better match an industry change in the stream
of revenues resulting from the then new practice of revenue sharing adopted
during 1998. The Company recorded an adjustment of $16,738,000 to amortization
expense.
Revenue Sharing Expense. Revenue sharing expense was $8.8 million for the
year ended February 6, 2000 as compared to no revenue sharing expense for the
year ended January 31, 1999, as a result of new revenue sharing agreements with
studios.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $0.8 million, or 5.1%, from $15.6 million for
the year ended January 31, 1999 to $16.4 million for the year ended February 6,
2000. This increase was caused by increases in professional and consulting fees
of $2.2 million and depreciation of $0.3 million, which were mostly offset by a
decrease in salaries and related employee costs of approximately $1.0 million
along with a decrease in bad debt expense of approximately $0.6 million. The
increase
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<PAGE> 26
in professional fees was caused by legal settlements, negotiations relating to
the merger, and the forbearance and credit agreements. As a percentage of total
revenues, selling, general and administrative expenses increased 2.7 percentage
points from 13.0% for the year ended January 31, 1999 to 15.6% for the year
ended February 6, 2000 as a result of the $0.7 million increase in selling,
general and administrative expense as discussed above and the $15.8 million
decrease in total revenues as previously discussed.
Store Closing and Restructuring Charges. For the year ended February 6,
2000, the Company recorded a restructuring charge of $1.5 million relating to
the closing of its Newtown, PA corporate offices. In addition, the Company
increased its store closing reserve by $0.6 million. During the quarter ended
November 1, 1998, the Company provided for $5.6 million in store closing costs
associated with management's decision to close stores as described in Note 16 to
the consolidated financial statements.
Amortization of Intangible Assets. Intangible amortization expense
increased $50.4 million, or 700%, from $7.2 million for the year ended January
31, 1999 to $57.6 million for the year ended February 6, 2000. As a percentage
of total revenues, intangible amortization increased 49.1 percentage points from
6.0% for the year ended January 31, 1999 to 55.1% for the year ended February 6,
2000. This increase is primarily a result of the Company recording a write off
of goodwill of $46.0 million relating to closed stores and under-performing
chains. In addition, the Company wrote off approximately $5.0 million of
franchise rights as a result of the Company's re-licensing of its franchised
stores.
Interest Expense and Other. Net interest expense and other increased $10.6
million, or 150%, from $6.7 million for the year ended January 31, 1999 to $17.3
million for the year ended February 6, 2000. Interest expense comprises almost
all this net amount. As a percentage of total revenues, interest expense
increased 11 percentage points from 5.6% for the year ended January 31, 1999 to
16.6% for the year ended February 6, 2000. The increase is attributable to an
increase in borrowing and commitment extension fees relating to the credit
agreement as more fully described in Note 6 to the consolidated financial
statements.
Income Taxes. Income tax expense was $322,000 for fiscal 2000 compared to a
benefit of $972,000 for fiscal
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<PAGE> 27
1999. Because of the uncertainty that the Company will generate income in the
future sufficient to fully or partially utilize deferred assets, a full
valuation allowance in the amount of $40.3 million at February 6, 2000 has been
provided.
Net Loss. As a result of the foregoing, net loss increased $54.6 million,
from a $27.2 million net loss for the year ended January 31, 1999 to a $81.8
million net loss for the year ended February 6, 2000.
YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
Revenues. Revenues decreased $3.5 million, or 2.8%, from $123.7 million for
the year ended January 31, 1998 to $120.2 million for the year ended January 31,
1999. This change reflected a decrease of $2.5 million in rental revenues, a
decrease of $0.7 million in merchandise sales and a decrease of $0.3 million in
franchise fee revenue. The decreases in store rental and merchandise sales
revenues of $3.2 million are attributable to a decrease in average store
revenues from $433,000 during the year ended January 31,1998 to $423,000 during
the year ended January 31, 1999 which accounted for approximately $2.8 million
of the decrease in store revenues. The 38 stores that the Company closed during
the year ended January 31, 1999 did not have a significant impact on store
revenues. On a weighted average store count basis, weighted average stores
decreased from 280 during the year ended January 31, 1998 to 279 during the year
ended January 31, 1999. This decrease of 1 weighted average store accounts for
the remaining $0.4 million decrease in store revenues.
Rental revenues decreased $2.5 million, or 2.5%, from $101.9 million for the
year ended January 31, 1998 to $99.4 million for the year ended January 31,
1999. This decrease is primarily attributable to lower average store rental
revenues per store. Average store rental revenues decreased by approximately
$8,000 per store which accounts for $2.2 million of the decrease. The remaining
$0.3 million relates to the weighted average store decrease of 1 store, as
discussed above. The rental revenue decrease was caused by both the impact of
revenue sharing being used more extensively by the Company's competitors which
enables them to increase the number of copies of new release movies carried in
their stores and by unusually dry and mild weather which occurred during the
year in the Company's geographic operating area.
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<PAGE> 28
Merchandise and other sales decreased $0.7 million, or 3.6%, from $19.3
million for the year ended January 31, 1998 to $18.6 million for the year ended
January 31, 1999. This decrease is primarily attributable to lower average store
merchandise sales. Average merchandise sales decreased by approximately $2,200
per store, which accounts for $0.6 million of the decrease. The remaining $0.1
million relates to the weighted average store decrease of 1 as discussed above.
Merchandise sales decreased as a result of lower store inventory levels during
the Company's fourth quarter of the year ended January 31, 1999. Average store
merchandise sales decreased by $6,600 for the quarter ended January 31, 1999 as
compared to the quarter ended January 31, 1998.
Franchise fee revenues decreased $0.3 million, or 12.0%, from $2.5 million
for the year ended January 31, 1998 to $2.2 million for the year ended January
31, 1999. This decrease is attributable to a decline in the amount of royalty
payments received from franchisees due to a decline in their business and a
decline in the number of franchisees who make required payments and a decrease
in the number of franchise stores from 217 at January 31, 1998 to 160 at January
31, 1999.
Store Operating Expenses. Store operating expenses decreased $0.1 million,
or 0.2%, from $57.3 million for the year ended January 31, 1998 to $57.2 million
for the year ended January 31, 1999. This $0.1 million decrease in dollars is
primarily related to the weighted average store decrease of 1 store as discussed
above. Average store operating expenses for both years ended January 31, 1998
and 1999 approximated $205,000. As a percentage of total revenues, store
operating expenses increased 1.3 percentage points from 46.3% for the year ended
January 31, 1998 to 47.6% for the year ended January 31, 1999 primarily as a
result of lower store revenues as previously discussed.
Cost of Goods Sold. Costs of goods sold increased $0.8 million, or 5.9%,
from $13.6 million for the year ended January 31, 1998 to $14.4 million for the
year ended January 31, 1999. As a percentage of merchandising sales, cost of
goods sold increased by 4.8 percentage points from 70.5% for the year ended
January 31, 1998 to 77.4% for the year ended January 31, 1999. These increases
in both dollars and as a percentage of merchandise sales were caused by the
impact of Titanic which represented a significant portion of the year's
merchandise sales and was sold at a
28
<PAGE> 29
lower margin as well as by restocking and handling fees incurred during the year
for merchandise inventory returned to vendors.
Amortization of Rental Library. Amortization of rental library increased
$15.4 million, or 59.4%, from $26.0 million for the year ended January 31, 1998
to $41.4 million for the year ended January 31, 1999, primarily as a result of
the change in method of amortization of rental inventory.
During the fourth quarter of fiscal 1999, the Company adopted a method of
amortizing its rental library to better match an industry change in the stream
of revenues resulting from the then new practice of revenue sharing adopted
during 1998. The Company recorded an adjustment of $16,738,000 to amortization
expense. On August 1, 1997, the Company had adopted a new method of amortization
resulting in a charge against amortization expense of $803,000.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $0.5 million, or 3.3%, from $15.1 million for
the year ended January 31, 1998 to $15.6 million for the year ended January 31,
1999. This increase was caused by increases in professional and consulting fees
of $0.8 million, depreciation of $0.7 million and recording of a $0.6 million
allowance for uncollectible franchise receivables which were mostly offset by
decreases in salaries of $0.5 million, travel of $0.2 million, insurance of $0.3
million, freight and postage of $0.3 million and supplies and computer expense
of $0.3 million. The increase in professional fees was caused by additional
legal expenses related to disputes with franchisees, negotiations with landlord
issues relating to store closures and delisting of the Company's stock by
NASDAQ. Decreases in selling, general and administrative expenses are the result
of cost cutting measures instituted by management. As a percentage of total
revenues, selling, general and administrative expenses increased 0.8 percentage
points from 12.2 % for the year ended January 31, 1998 to 13.0 % for the year
ended January 31, 1999 as a result of the $0.5 million increase of selling,
general and administrative expense as discussed above and the $3.5 million
decrease in total revenues as previously discussed.
Store Closing Charges. During the quarter ended November 1, 1998, the
Company provided for $5.6 million in store closing costs associated with
management's decision to close stores as described in Note 16 to the
consolidated
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<PAGE> 30
financial statements.
Amortization of Intangible Assets. Intangible amortization expense
increased $1.0 million, or 15.3%, from $6.2 million for the year ended January
31, 1998 to $7.2 million for the year ended January 31, 1999. As a percentage of
total revenues, intangible amortization increased 1.0 percentage points from
5.0% for the year ended January 31, 1998 to 6.0% for the year ended January 31,
1999. These increases are related to goodwill associated with acquisitions in
June 1997 which were only amortized for one-half of the year ended January 31,
1998, but were amortized for a full year during the year ended January 31, 1999
and a write off of goodwill of approximately 0.7 million in the fourth quarter
of fiscal 1999.
Interest Expense and Other. Net interest expense and other increased $2.0
million, or 40.0%, from $5.0 million for the year ended January 31, 1998 to $7.0
million for the year ended January 31, 1999. Interest expense comprises almost
all this net amount. As a percentage of total revenues, interest expense
increased 1.6 percentage points from 4.0% for the year ended January 31, 1998 to
5.6% for the year ended January 31, 1999. The increase is substantially
attributable to additional interest expense incurred in connection with
borrowings related to acquisitions in June 1997 for which interest expense was
incurred for one-half of the year ended January 31, 1998, but for a full year
during the year ended January 31, 1999.
Income Taxes. Income tax benefit was $972,000 for fiscal 1999 compared to
$1,062,000 for fiscal 1998. Because of the uncertainty that the Company will
generate income in the future sufficient to fully or partially utilize deferred
assets, a full valuation allowance in the amount of $7.8 million at January 31,
1999 has been provided.
Net Loss. As a result of the foregoing, net loss increased $23.6 million,
from a $3.6 million net loss for the year ended January 31, 1998 to a $27.2
million net loss for the year ended January 31, 1999. Without the store closing
charges of $5.6 million, $0.7 million of goodwill write-off and $16.7 million
amortization adjustment, the loss for the year would have been $4.2 million.
LIQUIDITY AND CAPITAL RESOURCES
30
<PAGE> 31
The Company funds its short-term working capital needs, including the
purchase of videocassettes and other inventory, primarily through cash from
operations. The Company expects that cash from operations and extended vendor
terms will be sufficient to fund future videocassette and other inventory
purchases for its existing stores. There can be no assurance, however, that cash
from operations and extended vendor terms will be sufficient to fund future
videocassette and inventory purchases.
The rental library is accounted for as a non-current asset under generally
accepted accounting principles because it is not an asset that is reasonably
expected to be completely realized in cash or sold in the normal business cycle.
Although the rental of this inventory generates a substantial portion of the
Company's revenue, the classification of this asset as non-current excludes it
from the computation of working capital. The acquisition cost, however, is
reported as a current liability until paid and, accordingly, included in the
computation of working capital. Consequently, the Company believes working
capital is not as significant a measure of financial condition for companies in
the video retail industry as it is for companies in other industries.
The Company has suffered recurring operating losses and has a working
capital deficit and a stockholders' deficit at February 6, 2000. The Company is
also in default under its debt agreements. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The report of our
Independent Certified Public Accountants contains an explanatory paragraph
regarding the uncertainty of the Company's ability to continue as a going
concern.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 6 to
the consolidated financial statements, approximately $81.6 million of the
Company's debt matured on February 15, 2000 and has been extended to August 31,
2000.
A majority of the company's existing lenders the ("Bank Group") have agreed
in principle to a complete restructuring of debt that will include repayment of
$20 million in cash, issuance of $25 million of senior notes and issuance of $40
million worth of shares of Video City Preferred Stock. The restructuring is
contingent upon the
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<PAGE> 32
Company providing the Bank Group with the cash portion before the forbearance
agreement expires on August 31, 2000, and completing the pending merger with
Video City.
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. Under the Merger Agreement with Video City, Video City
is currently negotiating to divest a number of West Coast's video stores, with
the anticipated proceeds being used to pay the cash portion necessary to
complete the restructuring of West Coast's indebtedness and the merger. The
Company believes that the successful implementation of these plans will permit
the merger to proceed and will result in a stronger combined company. There can
be no assurance that these objectives can be successfully completed or that the
resultant company will be profitable.
For the year ended February 6, 2000, the Company had net cash provided by
operating activities of $10.2 million, net cash used in investing activities of
$27.0 million (consisting primarily of cash used to purchase videocassette
rental inventory of $23.4 million and $3.6 million of cash paid for purchases of
property and equipment) and net cash provided by financing activities of $15.3
million (consisting primarily of net borrowings under its credit facility, as
described in Note 6 to the Consolidated Financial Statements), resulting in a
net decrease in cash of $1.5 million.
For the year ended January 31, 1999, the Company had net cash provided by
operating activities of $33.5 million, net cash used in investing activities of
$34.8 million (consisting primarily of cash used to purchase videocassette
rental inventory of $30.9 million and $3.4 million of cash paid for purchases of
property and equipment) and net cash provided by financing activities of $1.1
million resulting in a net decrease in cash of $0.2 million.
During the current fiscal year, the Company has financed its operations and
capital expenditures primarily through available operating cash flow, as well as
additional borrowings under its credit facility.
On January 12, 1999, the Company signed an amendment to its bank agreement
increasing the availability
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<PAGE> 33
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 fourth amendment to its
credit facility which increased its overadvance from $5,000,000 to $9,500,000
and eliminated its scheduled commitment reductions due from August 1, 1999
through February 1, 2000.
On February 13, 2000 the Company signed a forbearance and fifth amendment
to its credit facility whereby the Bank Group extended the effective date of
maturity to August 31, 2000.
Due to non-payment of debt under the terms of the credit facility, 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 May 15, 2000 this warrant has not been
exercised.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY
The Company anticipates that its business will be affected by general
economic and other consumer trends. To date, the Company has not operated during
a period of high inflation. However, the Company believes that it would
generally be able to pass on increased costs relating to inflation to its
customers. Future operating results may be affected by various factors,
including variations in the number and timing of new store openings, the
performance of new or acquired stores, the expenses associated with any
acquisition of stores, the quality and number of new release titles available
for rental and sale, the expense associated with the acquisition of new release
titles, additional and existing competition, marketing programs, weather,
special or unusual events and other factors that may affect retailers in
general. Any concentration of acquisitions or new store openings and the related
costs and other expenses associated with the acquisition of stores or opening of
new stores near the end of a fiscal quarter could have an adverse effect on the
financial results for that quarter and could, in certain circumstances, lead to
fluctuations in quarterly financial results.
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<PAGE> 34
The video retail industry generally experiences relative revenue declines
in April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs. The Company believes these
seasonality trends will continue.
YEAR 2000 READINESS DISCLOSURE
Before the rollover of the year from 1999 to 2000, many installed computer
systems and software products were coded to accept only two digit date entries
and were unable to accept four digit date entries to distinguish 21st century
dates from the 20th century dates. As a result, computers systems and software
used by many companies prior to the rollover date required upgrading or
replacement to comply with such "Year 2000" requirements. The failure of the
Company, its vendors, suppliers or other critical third parties with whom the
Company conducts business to achieve Year 2000 compliance on a timely basis
could materially adversely affect the Company's business, operating results, and
financial condition.
As of May 10, 2000, the Company has not experienced and does not anticipate
any material adverse effects on its production equipment, systems or operations
as a result of Year 2000 issues. Business is continuing as usual, and internal
equipment and systems will continue to be monitored for any likely disruptions.
Further, as of May 10, 2000, the Company has not experienced any operational
difficulties as a result of Year 2000 issues with its vendors, suppliers or
other critical third parties with whom the Company conducts business. However,
Year 2000 compliance has many elements and potential consequences, some of which
may not be foreseeable or may be realized in future periods. Consequently, there
can be no assurance that unforeseen circumstances may not arise, or that the
Company will not in the future identify equipment or systems which are not Year
2000 compliant.
Although the transition to the Year 2000 did not have any significant
impact on the Company or its equipment, systems and operations, the Company will
continue to monitor the impact of the Year 2000 on its equipment and systems and
those of its vendors, suppliers and other critical third parties. The
contingency plans that were developed for use in the event of Year 2000-related
failures will be maintained and generalized for ongoing business
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<PAGE> 35
use.
In the aggregate, the Company has spent approximately $1.0 million to
address Year 2000 issues and does not anticipate spending any additional
material amounts relating to Year 2000 issues.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk relates primarily to potential changes
in interest rates on the Company's debt obligations. The Company has cash flow
exposure on its obligations related to changes in market interest rates. The
Company enters into debt obligations for general corporate purposes, including
the funding of capital expenditures for acquisitions. The Company has not
entered into any material derivative financial instruments to hedge interest
rate risk on these general corporate borrowings.
The Company's management believes that fluctuations in interest rates in the
near term may materially affect the Company's consolidated operating results,
financial position or cash flows as the Company has significant exposure to
interest rate fluctuations.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements of West Coast Entertainment
Corporation, listed in the index appearing under Item 14(a)(1) and (2) are filed
as part of the Annual Report on Form 10-K.
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<PAGE> 36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
West Coast Entertainment Corporation
We have audited the accompanying consolidated balance sheets of West Coast
Entertainment Corporation and subsidiaries as of February 6, 2000 and January
31, 1999 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the years ended February 6, 2000 and
January 31, 1999. These consolidated statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based upon our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of West Coast
Entertainment Corporation and subsidiaries as of February 6, 2000 and January
31, 1999 and the results of their operations and cash flows for each of the
years ended February 6, 2000 and January 31, 1999 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring operating
losses, has a working capital deficit and a stockholders' deficit at February 6,
2000. The Company is also in default under its credit facility. These conditions
raise substantial doubt about its ability to continue as a going
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<PAGE> 37
concern beyond that date. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Los Angeles, CA
May 12, 2000
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<PAGE> 38
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
FEBRUARY 6, JANUARY 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash .......................................................................... $ 888 $ 2,424
Accounts receivable and other receivables (net of allowance for doubtful
accounts of $8 and $ 67 at February 6, 2000 and January 31, 1999, respectively) 377 1,512
Merchandise inventory ......................................................... 6,887 8,404
Market development funds and co-op receivable ................................. 678 1,242
Receivables from officers (Note 8) ............................................ -- 373
Prepaid expenses and other current assets ..................................... 281 472
--------- ---------
Total current assets ......................................................... 9,111 14,427
Rental library, (net of accumulated amortization of $90,148 and $67,610 at
February 6, 2000 and January 31, 1999, respectively) (Note 2) ................ 21,132 20,375
Furnishings, equipment and leasehold improvements, net (Note 3) ................. 16,506 17,892
Intangible assets (net of accumulated amortization of $20,888 and $ 16,497 at
February 6, 2000 and January 31, 1999, respectively) ........................ 52,532 110,530
Other assets (Note 4) ........................................................... 1,100 2,456
--------- ---------
Total assets ............................................................... $ 100,381 $ 165,680
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt (Note 6) .................................... $ 81,571 $ 8,081
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C> <C>
Accounts payable .............................................................. 12,370 14,659
Accrued expenses (Note 5) ..................................................... 11,808 7,783
Income taxes payable .......................................................... 192 655
--------- ---------
Total current liabilities .................................................. 105,941 31,178
Long-term debt (Note 6) ......................................................... -- 58,187
Other Liabilities ............................................................... 42 59
--------- ---------
Total Liabilities ............................................................... 105,983 89,424
--------- ---------
Stockholders' equity (deficit):
Common stock ($0.01 par value; 14,190 shares as of February 6, 2000 of
which 14,098 shares were issued and outstanding and 14,185 shares as of
January 31, 1999, of which 14,073 shares were outstanding and 20 shares
were to be issued. (Note 11) ............................................... 142 142
Preferred stock ($0.01 par value, 2,000 shares authorized, no shares
issued) (Note 12) .......................................................... -- --
Additional paid-in capital ................................................... 104,098 104,093
Accumulated deficit .......................................................... (109,600) (27,737)
Treasury stock (92 shares of common stock, at cost) .......................... (242) (242)
--------- ---------
Total stockholders' equity (deficit) ....................................... (5,602) 76,256
--------- ---------
Total liabilities and stockholders' equity (deficit) ....................... $ 100,381 $ 165,680
========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
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<PAGE> 40
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 6, JANUARY 31,
2000 1999 1998
------------ ---------- -------------
<S> <C> <C> <C>
Revenues:
Rental revenue .......................................... $ 90,948 $ 99,379 $ 101,934
Merchandise sales ....................................... 12,716 18,626 19,312
Franchise fees .......................................... 760 2,169 2,507
--------- --------- ---------
104,424 120,174 123,753
--------- --------- ---------
Costs and expenses:
Store operating expenses ................................ 51,057 57,207 57,346
Cost of goods sold ...................................... 9,838 14,414 13,596
Amortization of rental library (Notes 2) ................ 22,643 41,374 25,959
Revenue sharing expense ................................. 8,821 -- --
Selling, general and administrative ..................... 16,421 15,599 15,065
Amortization and write down of intangible assets (Note 2) 57,556 7,193 6,239
Store closing and restructuring charges (Note 16) ....... 2,111 5,557 --
Debt offering write-off (Note 15) ....................... -- -- 5,125
--------- --------- ---------
168,447 141,344 123,330
--------- --------- ---------
Income (loss) from operations ............................. (64,023) (21,170) 423
Interest expense .......................................... 17,318 6,674 4,927
Other expense ............................................. 200 345 128
--------- --------- ---------
Loss before provision (benefit) for income taxes .......... (81,541) (28,189) (4,632)
Provision (benefit) for income taxes (Note 7) ............. 322 (972) (1,062)
--------- --------- ---------
Net loss .................................................. $ (81,863) $ (27,217) $ (3,570)
========= ========= =========
Loss per common share data:
Net loss per common share - basic and diluted .......... $ (5.80) $ (1.93) $ (.26)
========= ========= =========
Weighted average number of common shares outstanding ...... 14,107 14,072 13,817
========= ========= =========
</TABLE>
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<PAGE> 41
The accompanying notes are an integral part of
the consolidated financial statements.
41
<PAGE> 42
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
FEBRUARY 6, JANUARY 31,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $(81,863) $(27,217) $ (3,570)
Adjustments to reconcile net loss to cash flows
provided by operating activities:
Amortization of debt financing costs .................. 966 670 224
Amortization of videocassette rental library .......... 22,643 41,374 25,959
Depreciation and amortization of furnishings,
equipment and leasehold improvements ................ 3,763 3,300 2,471
Amortization of intangible assets ..................... 57,556 7,193 6,239
Deferred taxes ........................................ -- 921 456
Store closing and restructuring charges ............... 1,219 2,321 --
Changes in assets and liabilities:
Accounts receivable ............................... 1,699 812 270
Merchandise inventory ............................. 1,517 (238) (1,447)
Prepaid expenses and other assets ................. 1,398 (328) (792)
Accounts payable ................................... (2,291) 2,690 (1,222)
Accrued expenses and other liabilities ............. 4,008 2,948 135
Income taxes payable ............................... (463) (934) (1,996)
-------- -------- --------
Net cash provided by operating activities ............. 10,152 33,512 26,727
-------- -------- --------
Cash flows related to investing activities:
Acquisition of businesses, net of cash acquired .......... -- (553) (19,301)
Purchases of property and equipment ...................... (3,596) (3,359) (7,306)
Purchases of videocassette rental inventory .............. (23,400) (30,906) (30,449)
-------- -------- --------
Net cash used in investing activities ................. (26,996) (34,818) (57,056)
-------- -------- --------
</TABLE>
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<PAGE> 43
<TABLE>
<S> <C> <C> <C>
Cash flows related to financing activities:
Proceeds from long-term debt, net ........................ 15,303 1,100 32,200
Repayments of long-term debt ............................. -- (7) (7)
Proceeds from issuance of common stock ................... 5 33 116
Commitment extension fees ................................ -- -- (687)
-------- -------- --------
Net cash provided by financing activities .................. 15,308 1,126 31,622
-------- -------- --------
Net increase (decrease) in cash ............................ (1,536) (180) 1,293
Cash, beginning of year .................................... 2,424 2,604 1,311
-------- -------- --------
Cash, end of year .......................................... $ 888 $ 2,424 $ 2,604
======== ======== ========
Supplemental cash flow data:
Interest paid ............................................ $ 6,609 $ 6,275 $ 4,619
======== ======== ========
Income taxes paid ........................................ $ 214 $ 249 $ 749
======== ======== ========
Non-cash investing and financing activities:
Treasury stock redeemed in connection with acquisition ... -- $ 242 --
-------- -------- --------
Assets acquired by incurring notes payable ............... -- $ 162 --
-------- -------- --------
Loan origination fees .................................... -- $ 250 --
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE> 44
WEST COAST ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
STOCK-
COMMON STOCK ADDITIONAL ACCUMULATED HOLDERS'
---------------------- PAID-IN SURPLUS TREASURY EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) STOCK (DEFICIT)
---------- ------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January, 31 1997 ..................... 13,770,462 138 $ 103,947 $ 3,050 $ -- $107,135
Shares issued - Employee Stock Purchase Plan .... 36,567 -- 116 -- -- 116
Shares issued - 1996 acquisitions ............... 36,077 -- -- -- -- --
Net loss ........................................ -- -- -- (3,570) -- (3,570)
---------- ---- ----------- ----------- ----------- --------
Balance at January 31, 1998 ..................... 13,843,106 138 104,063 (520) -- 103,681
Shares issued - Employee Stock Purchase Plan .... 39,506 1 33 -- -- 34
Shares issued - 1996 acquisitions ............... 302,065 3 (3) -- -- --
Treasury stock, at cost ........................ -- -- -- -- (242) (242)
Net loss ........................................ -- -- -- (27,217) -- (27,217)
---------- ---- ----------- ----------- ----------- --------
Balance at January 31, 1999 ..................... 14,184,677 142 104,093 (27,737) (242) 76,256
Shares issued - Employer Stock Purchase Plan .... 24,992 -- 5 -- -- 5
Contingent shares expired - 1996 acquisitions ... (19,734) -- -- -- -- --
Net loss ........................................ -- -- -- (81,863) -- (81,863)
---------- ---- ----------- ----------- ----------- --------
Balance at February 6, 2000 ..................... 14,189,935 142 $ 104,098 $ (109,600) $ (242) $ (5,602)
========== ==== =========== =========== =========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
44
<PAGE> 45
WEST COAST ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS
The Company was incorporated in the State of Delaware in February 1995 for
the purpose of conducting business as an owner and operator as well as a
franchisor of videocassette rental stores. Upon incorporation, 10,000 shares
were issued to the Company's then existing shareholders. On July 12, 1995, in
connection with an anticipated initial public offering, Giant Video, Inc., G.V.
Management Corporation, Nostalgia Ventures, Inc. and Videosmith, Inc. were
merged into the Company (the "Merger"). These four entities were individually
formed or acquired in the past and were under substantial common ownership and
common day-to-day management prior to the Merger.
On May 17, 1996, the Company completed an initial public offering which
consisted of 5,400,000 shares of common stock at $13.00 per share (the
"Offering"). The net proceeds of the Offering, after deducting applicable
issuance costs and expenses, were $60.8 million. The proceeds were used to fund
certain of the acquisitions discussed in Note 11 and to repay approximately $9.6
million of long-term debt.
As of January 31, 1999, the Company owned and operated 261 video rental
stores and was a franchisor of a chain of 160 video stores. As of February 6,
2000, the Company owned and operated 238 video rental stores and was a
franchisor of a chain of 74 video stores.
On April 30, 1998 the Company adopted a fiscal year ending on the first
Sunday following January 30, which will result in the Company having a 52, or
periodically, a 53 week fiscal year. Results for each of the years ended in
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<PAGE> 46
the two-year period January 31, 1999 and 1998 reflect 52-week years; results for
the year ended February 6, 2000 reflect a 53-week year.
BASIS OF PRESENTATION
The Company's previous independent auditors would not consent to the use of
their opinion dated April 2, 1999 on the consolidated statements of operations,
cash flows and stockholders' equity for the year ended January 31, 1998.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern which contemplates
the realization of assets and the satisfaction of liabilities in the ordinary
course of business. The carrying amounts of assets and liabilities presented in
the financial statements do not purport to represent realizable or settlement
values. However, the Company has suffered recurring operating losses and has a
working capital deficit and stockholders' deficit at February 6, 2000. The
Company is also in default under its credit facility. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments related to
the recoverability and classification of recorded asset amounts or the amount
and classification of liabilities or any other adjustments that might be
necessary should the Company be unable to continue as a going concern.
Management's plan is to complete the proposed merger with Video City, Inc. (Note
17). However, there is no assurance that the merger will ultimately be
consummated.
The Company has entered into a management agreement (Note 18) with Video
City, Inc., until the closing of the proposed merger between the Company and
Video City (Note 17), whereby Video City provides management services for a
management fee.
Concurrent with the execution of the management agreement, and in
anticipation of the proposed merger, the Company combined its operations and
substantially reduced corporate expenses of both Video City and West Coast
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<PAGE> 47
Entertainment, thus utilizing the benefits of economies of scale.
The Company is negotiating the sale of a significant number of its stores
and is entertaining several offers. The stores for sale were strategically
selected, to concentrate the Company's operations in efficient geographic areas.
The proceeds from the divestitures will be used to pay the cash portion
necessary to complete the restructuring of its indebtedness and complete the
merger.
The Company believes that the combined company after the merger will have
the potential for greater financial strength, operational efficiencies, earning
power and growth potential than either Video City or West Coast would have on
its own. There can be no assurance, however, that these objectives can be
successfully completed or that the resultant company will be profitable and have
sufficient operating cash flows.
The Company's previous independent auditors would not consent to the use of
their opinion dated April 2, 1999 on the consolidated statements of operations,
cash flows and stockholders' equity for the year ended January 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Consolidation
All significant intercompany balances and transactions have been eliminated
in the accompanying consolidated
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<PAGE> 48
financial statements.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, other receivables, and
accounts payable meeting the definition of a financial instrument approximate
fair value at February 6, 2000 and January 31, 1999 due to their short maturity.
Fair value of long-term debt is based upon rates available to the Company for
debt with similar terms and maturities.
Merchandise Inventory
Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Rental Library
During the fourth quarter of fiscal 2000, the Company adopted an
accelerated method of amortizing its rental library, which more closely matches
expenses in proportion with anticipated revenues under the revenue sharing
business model.
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.
Pursuant to the new amortization method, the Company records base stock
(generally 3 copies per title for each store) at cost and amortizes a portion of
these costs on an accelerated basis over three months, generally to $8 per
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<PAGE> 49
unit, with the remaining base stock cost amortized on a straight line basis over
33 months to an estimated $3 salvage value. The cost of non-base stock
(generally greater than 3 copies per title for each store) is amortized on an
accelerated basis over three months to an estimated $3 salvage value. Video
games are amortized on an accelerated basis over a 12-month period to an
estimated $10 salvage value. Revenue-sharing payments are expensed when revenues
are earned pursuant to the applicable contractual arrangements.
The adoption of the new method of amortization was accounted for as a
change in accounting estimate effected by a change in accounting principle and,
accordingly, the Company recorded a pre-tax adjustment of approximately $2.1
million to amortization expense in the fourth quarter of the fiscal year ended
February 6, 2000. The charge represents an adjustment to the carrying value of
the videocassette rental inventory due to the new method of amortization.
Rental amortization expense approximated $22,643,000 (including a $2.1
million adjustment recorded in the fourth quarter of fiscal 2000), $41,374,000
(including a $16.7 million adjustment recorded in the fourth quarter of fiscal
1999) and $25,959,000 (including a $0.8 million adjustment recorded in the third
quarter of fiscal 1998) for the years ended February 6, 2000 and January 31,
1999 and 1998, respectively.
During the fourth quarter of fiscal 1999, the Company adopted a method of
amortizing its rental library in order to better match an industry change in the
stream of revenues resulting from the then new practice of revenue sharing
adopted during 1998 as an alternative to historical business models of directly
purchasing rental titles. Under this method of amortization, all new release,
non-revenue-sharing videocassettes, regardless of the number of copies of a
title, were amortized to a salvage value of $6 over a period of 6 months.
Videocassettes purchased through revenue sharing agreements were amortized to
the $6 salvage value over the life of the respective contracts. Studios' share
of revenues were expensed as such revenues were earned, as specified in each
agreement. This method of amortization was applied to the rental library that
was owned at November 2, 1998. The adoption of this method of amortization was
accounted for as a change in accounting estimate effected by a change in
accounting principle. The Company recorded a $16,738,000 pre-tax adjustment to
amortization expenses in the fourth quarter of fiscal 1999.
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<PAGE> 50
Prior to November 2, 1998 the rental library, which included videocassettes
and video games, was stated at cost and amortized as follows: 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 new release copies 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 rental items sold was charged to
operations at the time of the sale. This method of amortization was applied to
the rental library that was held at August 1, 1997. The adoption of this method
of amortization was accounted for as a change in accounting estimate effected by
a change in accounting principle and, accordingly, the Company recorded an
$803,000 pre-tax charge to operating expense in the third quarter of fiscal
1998.
Prior to August 1, 1997, the rental library, which includes videocassettes
and video games, was stated at cost and was amortized over its estimated
economic life with no provision for salvage value. Videocassettes that were
considered base stock were amortized over 36 months on a straight-line basis.
New release videocassettes were amortized as follows: the first through third
copies of each title per store were amortized as base stock and succeeding
copies of each title per store were amortized over nine months on a straight
line basis. The unamortized cost, if any, of rental inventory that was sold was
charged to operations at the time of the sale.
Intangible Assets
Intangible assets, net of accumulated amortization, primarily consist of
goodwill ($52,532,000 and $110,843,000 at February 6, 2000 and January 31, 1999,
respectively) and franchise rights ($0 and $5,457,000 at February 6, 2000 and
January 31,1999, respectively). Franchise rights are amortized on a
straight-line basis over 15 years, the estimated economic life of such rights.
Goodwill resulting from acquisitions accounted for using the purchase method is
amortized on a straight line basis over 20 years. Total amortization expense
related to intangible assets was $57,556,000, $7,193,000 and $6,239,000 for the
years ended February 6, 2000, January 31, 1999 and 1998, respectively.
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During the fourth quarter of fiscal 2000, the Company wrote off $45,999,000
of goodwill related to closed stores and under performing chains. During the
fourth quarter of fiscal 1999, the Company wrote off $700,000 of goodwill. As a
result of the Company's re-licensing of its franchised stores, the Company wrote
off the remaining franchise rights of $4,988,000 during the fourth quarter of
fiscal 2000. These adjustments are included in amortization expense.
Furnishings, Equipment and Leasehold Improvements
Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (3 to 10 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as
incurred.
Impairment of long lived assets
The carrying value of long-lived assets, including goodwill and franchise
rights, is evaluated whenever changes in circumstances indicate the carrying
amount of such assets may not be recoverable. In performing such review for
recoverability, the Company compares the undiscounted expected future cash flows
to the carrying value of long-lived assets and identifiable intangibles. If the
anticipated undiscounted future cash flows are less than the carrying amount of
such assets, the Company recognizes an impairment loss for the difference
between the carrying amount of the assets and their estimated fair value.
Deferred Rent
Most of the Company's operating leases have lease terms which contain fixed
increases of the minimum lease rates. The Company recognizes rental expense for
these leases on a straight-line basis and records the difference between the
amount actually paid and the amount expensed as deferred rent.
51
<PAGE> 52
Income Taxes
Tax assets and liabilities result from the expected future tax consequences
of temporary differences between the carrying amounts and the tax basis of the
Company's assets and liabilities. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance.
Revenue Recognition
Revenue is recognized at the time of rental or sale of a videocassette or
video game. Franchise fees, related to the sale of franchises are recognized
when the stores are opened for business. Post-sale franchise fees are recognized
based on stated percentages of franchisee revenue as defined in the franchise
agreements when collection is reasonably determined.
Advertising Costs
Advertising costs are recorded net of any cooperative and market development
fund reimbursements due from suppliers and are expensed as incurred.
Earnings (Loss) Per Share
Earning (loss) per share is presented according to Statement of Financial
Accounting Standards No. 128. SFAS 128 requires presentation of both basic and
diluted earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed in a similar manner except that
the weighted average number of common shares is increased for potential dilutive
common shares. Potentially dilutive common shares are excluded from the diluted
earnings per share calculation at January 31, 1998, 1999, and February 6, 2000
because the effect would be anti-dilutive.
52
<PAGE> 53
Accounting for Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" requires the fair
value of stock options and other stock-based compensation issued to employees to
either be recognized as compensation expense in the income statement or be
disclosed as a pro forma effect on net income and earnings per share in the
footnotes to the Company's financial statements. The Company has elected to
adopt the "disclosure basis only" provisions of SFAS 123 for Stock Based
Compensation to employees (Note 11).
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 2000 presentation.
3. FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furnishings, equipment and leasehold improvements comprise the following (in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 6, JANUARY 31,
2000 1999
-------- --------
<S> <C> <C>
Furniture and fixtures ............ $ 16,892 $ 15,541
Computer equipment and vehicles ... 4,090 3,729
Leasehold improvements ............ 6,185 6,094
-------- --------
27,167 25,364
Accumulated depreciation and
amortization ...................... (10,661) (7,472)
-------- --------
$ 16,506 $ 17,892
======== ========
</TABLE>
Depreciation and amortization approximated $3,763,000, $3,300,000 and
$2,471,000 for the years ended February 6, 2000, January 31, 1999, and 1998,
respectively.
53
<PAGE> 54
4. NON-CURRENT OTHER ASSETS
Non-current other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 6, JANUARY 31,
2000 1999
------ ------
<S> <C> <C>
Store lease and utility deposits ... $ 976 $1,088
Deferred loan origination fees ..... -- 1,016
Other .............................. 124 352
------ ------
$1,100 $2,456
====== ======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 6, JANUARY 31,
2000 1999
------- -------
<S> <C> <C>
Accrued wages and taxes ........... $ 1,109 $ 987
Sales taxes ....................... 912 813
Deferred rent ..................... 1,195 1,170
Provision for store closing and
restructure charges ............... 3,336 2,936
Interest .......................... 3,352 538
Other ............................. 1,904 1,339
------- -------
$11,808 $ 7,783
======= =======
</TABLE>
6. LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
54
<PAGE> 55
<TABLE>
<CAPTION>
FEBRUARY 6, JANUARY 31,
2000 1999
-------- --------
<S> <C> <C>
Credit Facility ................................................... $ 81,571 $ 66,100
Various notes payable due in monthly installments with interest
rates varying from prime plus 2% to prime plus 4% ............... -- 168
-------- --------
81,571 66,268
Less: current portion ............................................. (81,571) (8,081)
-------- --------
$ -- $ 58,187
======== ========
</TABLE>
On January 12, 1999, the Company signed an amendment to its bank agreement
increasing the availability under its existing facility from $65 million to $70
million as well as providing for certain credit enhancements. The amended credit
agreement is a non-revolving facility, which matured 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 in which the Company was not in compliance. The facility is secured
by substantially all of the Company's assets.
The first $65 million of the revised credit facility bears interest at 2%
above the prime rate (10.75% at February 6, 2000). The interest rate on the
first $4 million of the $5 million overadvance is equal to the prime rate plus
2.5% (11.25% at February 6, 2000); the interest rate on the remaining $1 million
is equal to the prime rate plus 3.5%. The agreement provided for repayment of
all debt in full on or prior to June 30, 1999. As a result of non-payment, an
additional 3% of interest for the preceding six months on the $65 million and on
overadvances borrowed in the last six months became due. In addition, commitment
extension fees equaling 143 basis points times the total outstanding debt became
due and payable each month as of July 1, 1999 through February 15, 2000.
On October 22, 1999 the Company entered into the fourth 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 under the terms of the credit agreement.
On February 13, 2000 the Company signed a forbearance and fifth amendment
to its credit agreement whereby the banks extended the effective date of
maturity to the earlier of the completion of the Pending Merger (Note 17) or
55
<PAGE> 56
August 31, 2000.
A majority of the company's existing lenders ("The Bank Group") have agreed
in concept to a complete restructuring of debt that will include repayment of
$20 million in cash, issuance of $25 million of senior notes and issuance of $40
million worth of shares of Video City preferred stock. The restructuring is
contingent upon the Company providing The Bank Group with the cash portion
before the end of the forbearance agreement (August 31, 2000), and the
completion of the Pending Merger with Video City.
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 due to default on payments due September 30, 1999 under the terms of the
credit agreement. As of May 12, 2000 this warrant has not been exercised.
7. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 6, JANUARY 31,
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal ................. $ -- $ (232) $ (817)
State ................... 322 181 211
------- ------- -------
-- (51) (606)
------- ------- -------
Deferred:
Federal ................. -- (1,380) (44)
State ................... -- 459 (412)
------- ------- -------
-- (921) (456)
------- ------- -------
Tax provision (benefit) ... $ 322 $ (972) $(1,062)
======= ======= =======
</TABLE>
The temporary differences which give rise to deferred tax assets and
liabilities are as follows (in thousands):
56
<PAGE> 57
<TABLE>
<CAPTION>
FEBRUARY 6, JANUARY 31,
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Recognized built-in loss carryforward ........................... $ 207 $ 207
Allowance for doubtful accounts ................................. 3 27
Expense accruals ................................................ 1,762 1,815
Valuation allowance for rental inventory ........................ 7,213 6,685
Federal and State NOL carryforwards ............................. 39,917 6,739
-------- --------
49,102 15,473
-------- --------
Deferred tax liabilities:
Intangible amortization ......................................... (2,476) (2,300)
Videocassette rental inventory amortization ..................... (3,599) (3,343)
Furnishings, equipment and leasehold improvement depreciation ... (2,686) (2,079)
-------- --------
(8,761) (7,722)
-------- --------
Net deferred taxes before valuation allowance ..................... 40,341 7,751
Valuation Allowance ............................................... (40,341) (7,751)
-------- --------
Net deferred taxes ................................................ $ 0 $ 0
======== ========
</TABLE>
Because of the uncertainty that the Company will generate income in the
future sufficient to fully or partially utilize deferred assets, a full
valuation allowance in the amount of $40.3 million at February 6, 2000 and $7.8
million at January 31, 1999 has been provided to reduce such deferred tax assets
to the level of the existing deferred tax liabilities.
The Company has federal net operating loss carryforwards aggregating
approximately $102.5 million and state net operating loss carryforwards
aggregating approximately $107.2 million at February 6, 2000, which expire
through February 6, 2020. At February 6, 2000, the Company has available the
following carryforwards to offset future taxable income:
57
<PAGE> 58
<TABLE>
<CAPTION>
FEDERAL NET OPERATING STATE NET OPERATING YEAR END
LOSS CARRYFORWARDS LOSS CARRYFORWARDS EXPIRATION DATES
------------------ ------------------ ----------------
<S> <C> <C>
$ -- $ 200,000 1/31/02
-- 900,000 1/31/03
-- 2,200,000 1/31/04
-- 1,900,000 1/31/05
19,400,000 18,900,000 1/31/06 - 1/31/19
83,100,000 83,100,000 1/31/07 - 2/06/20
</TABLE>
A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 6, JANUARY 31, JANUARY 31,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Income tax at statutory rate of 34% ........... $(27,833) $ (9,584) $ (1,575)
State tax expense, net of federal benefit ... (4,822) 422 (133)
Change in valuation allowance ............... 32,500 7,751 --
Nondeductible intangible amortization ....... 477 648 593
Other ....................................... -- (209) 53
-------- -------- --------
$ 322 $ (972) $ (1,062)
======== ======== ========
</TABLE>
8. RELATED PARTY TRANSACTIONS
As of February 6, 2000 and January 31, 1999, receivables from certain
officers were $0 and $373,000 respectively. Interest has been accrued at a rate
of 10% on such amounts. During the fourth quarter of fiscal 2000, the Company
determined that certain unsecured loans to officers aggregating $383,000 were
uncollectible and were consequently written off.
9. LEASE COMMITMENTS
58
<PAGE> 59
The Company leases its facilities under operating leases extending until
2008. Minimum future rental payments under these leases as of February 6, 2000
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
------------------------
<S> <C>
2001 ...................... 11,558
2002 ...................... 9,335
2003 ...................... 6,916
2004 ...................... 4,506
2005 ...................... 3,489
Thereafter ................ 3,687
-------
Future minimum payments ... $39,491
=======
</TABLE>
Rent expense totaled approximately $17,448,753, $21,334,000 and $19,061,000
for the years ended February 6, 2000, January 31, 1999, and 1998, respectively.
Rent expense and the above table do not include any amounts in connection with
store closings (see Note 16).
10. ACQUISITIONS
All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
June, 1997 Acquisitions. On June 16, 1997, and June 24, 1997 the Company
acquired a total of 38 video specialty stores (the "June, 1997 Acquisitions"),
including 5 stores owned by a franchisee of the Company for aggregate
consideration of $17.9 million consisting of $17.2 million in cash and
approximately $0.7 million of acquisition costs.
The following unaudited pro forma information presents the results of
operations as though June 1997 Acquisitions had occurred as of the beginning of
the period presented, (i) each entity included in the consolidated statement of
operations had been included in the Company's consolidated income tax returns
and subject to corporate income taxation as a C corporation during all periods
presented, (ii) the repayment of all previously existing outstanding debt had
occurred as of the beginning of the periods reported, and (iii) the borrowings
under the
59
<PAGE> 60
Credit Facility had occurred as of the beginning of the periods presented.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
YEAR ENDED JANUARY 31, 1998
-------------------------------------
(in thousands, except per share data)
<S> <C>
Pro forma revenues .................................................. $ 130,044
Pro forma income (loss) before extraordinary item ................... $ (3,219)
Extraordinary item (net of tax benefit) ............................. $ --
Pro forma net income (loss) ......................................... $ (3,219)
Pro forma income (loss) per share before extraordinary item basic $ (.23)
and diluted ......................................................
Extraordinary item - basic and diluted .............................. $ --
Pro forma net income (loss) per share - basic and diluted ........... $ (.23)
</TABLE>
11. STOCKHOLDERS' EQUITY
Stock Compensation Plan:
Equity Incentive Plan: The Company's Equity Incentive Plan was adopted by
the Board of Directors and approved by the Stockholders in July 1995 and as
amended in April 1997 (the "Equity Plan"). The Equity Plan enables the Company
to grant options to purchase common stock to officers, employees, employee
directors of and consultants to the Company. The Plan authorizes the issuance of
up to 850,000 shares. The options granted are unvested at the date of grant, and
become fully vested over five years subsequent to the date of grant. The fixed
exercise price associated with the shares subject to option is the fair value of
the Company's stock at the date of grant. The options expire ten years after the
date of grant.
Director Stock Option Plan: The Company's Director Stock Option Plan (the
"Director Option Plan") enables the Company to grant options to purchase common
stock to outside directors of the Company. The Plan authorizes the issuance of
up to 50,000 shares. The options are unvested at the time of grant, and vest
pro-rata equally over a three-year period, provided the optionholder continues
to serve as a director of the Company, and will expire ten
60
<PAGE> 61
years from the date of grant. The fixed exercise price associated with the
shares subject to options under this plan is the fair value of the Company's
stock at the date of grant. Commensurate with the Offering, the Company granted
an option to purchase 3,000 shares of common stock to three non-employee
directors. Each non-employee director is eligible to receive at the discretion
of the Company a subsequent grant of an option for 1,000 shares on the date of
each Annual Meeting of Stockholders, at which such director is reelected as a
director of the Company, beginning with the Annual Meeting for the year ended
January 31, 1998. As of February 6, 2000 and January 31, 1999; 0 and 6,000
options were outstanding. No options have been exercised for the years ended
February 6, 2000 and January 31, 1999, and 1998.
Common shares subject to options under these plans were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 6, 2000 JANUARY 31, 1999
------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at February 1 ... 237,799 $ .77 14,137 $10.54
Granted ..................... 12,500 $ .25 226,250 $ .25
Exercised ................... -- -- -- --
Terminated/Canceled ......... (167,131) $ .92 (2,588) $ 8.75
-------- -------
Options outstanding ......... 83,168 $ .39 237,799 $ .77
-------- -------
Options exercisable ......... 28,764 $ .56 6,774 $11.26
-------- -------
</TABLE>
Information relating to stock options at February 6, 2000 summarized by
exercise price is presented in the following table:
61
<PAGE> 62
<TABLE>
<CAPTION>
FEBRUARY 6, 2000
OUTSTANDING EXERCISABLE
------------------------------ -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE PER SHARE SHARES LIFE PRICE SHARES PRICE
------------------------ ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$0.25 ... 81,750 8.8 $0.25 27,700 $0.25
$8.75 ... 1,418 6.6 $8.75 1,064 $8.75
------ ----- ----- ------ -----
83,168 8.76 $0.39 28,764 $0.56
====== ===== ===== ====== =====
</TABLE>
As discussed in Note 2, the Company adopted the disclosure requirements of
SFAS No. 123. The pro forma information below is presented as if the Company had
adopted the recognition provisions of SFAS 123.
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ------------
<S> <C> <C> <C>
Weighted average fair value of options granted -- calculated using the
Black-Scholes option-pricing model ..................................... $ .23 $ .50 $ 4.63
Range of exercise price per share ........................................ $.25-$13.00 $.25-$13.00 $8.75-$13.00
Actual:
Net income (loss) (in thousands) ....................................... $ (81,863) $ (27,217) $ (3,570)
Earnings (loss) per share, basic and diluted ........................... $ (5.80) $ (1.93) $ (.26)
Pro Forma:
Net income (loss) (in thousands) ....................................... $ (81,874) $ (27,217) $ (3,601)
Earnings (loss) per share, basic and diluted ........................... $ (5.80) $ (1.93) $ (.26)
Assumptions:
Weighted average dividend yield ........................................ -- -- --
Weighted average volatility ............................................ 70% 75% 35%
Weighted average risk free interest rate ............................... 5.14% 5.50% 6.58%
Weighted average expected life (years) ................................. 5 5 5
</TABLE>
Employee Stock Purchase Plan: The Company's Employee Stock Purchase Plan
(the "Purchase Plan") authorizes the issuance of up to a total of 125,000 shares
of common stock to participating employees through a series of semiannual
offerings. Offering periods will commence on each November 1, beginning November
1, 1996, and May 1 and terminate on the following April 30 and October 31,
respectively. The maximum number of shares available in each offering is 25,000
shares. Eligible employees may direct 1%-10% of their total compensation in a
Plan period to the Plan, at a price equal to 85% of the lower of the closing
price of the common stock on the first
62
<PAGE> 63
business day of the plan or the last business day of the plan. During the fiscal
years ended February 6, 2000, January 31, 1999 and 1998, the Company had issued
approximately 25,000, 40,000 and 37,000 shares, respectively, related to the
Plan.
12. PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 2,000,000 shares of preferred stock, in one or more series. Each
such series of preferred stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges as shall be determined by the Board of Directors, which may include,
among others, dividend rights, voting rights, redemption and sinking fund
provisions, liquidation preferences, conversion rights and preemptive rights.
The rights of the holders of common stock will be subject to the rights of
holders of any preferred stock issued in the future. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of the outstanding voting stock of the Company. The Company has not issued any
shares of preferred stock.
13. COMMITMENTS
Purchase Commitments: On July 12, 1995, with an Amendment on August 20, 1997,
the Company entered into a contract with a supplier of video rental products
that requires the Company to purchase, at a discount, its requirements for such
products over the ensuing seven year period as follows:
<TABLE>
<S> <C>
August 20, 1998-July 12, 2000....... Lesser of 30% of annual requirements or $25 million
July 13, 2000-July 12, 2002......... lesser of 25% of annual requirements or $25 million
</TABLE>
14. LITIGATION
The Company is involved in litigation in the ordinary course of business.
The Company believes that the
63
<PAGE> 64
outcome of such litigation will not materially affect the Company's financial
position or results of operations.
15. DEBT OFFERING WRITE-OFF
On July 1, 1997 the Company's planned private placement of debt securities
(the "Proposed Private Placement") and related acquisitions were indefinitely
delayed due to market conditions. The Company wrote off $5.1 million in costs
during the year ended January 31, 1998 that were incurred in connection with the
Proposed Private Placement and related acquisitions.
16. STORE CLOSING AND RESTRUCTURING CHARGES
During the fourth quarter of fiscal 2000, the Company recorded charges for
the planned closing of its main office and increased its store closing reserve
for additional store closings. The total costs relating to the Newtown, PA
office closure was $1,541,000 and an additional reserve of $570,000 was recorded
for the closure of 14 stores subsequent to year-end.
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.
17. PENDING MERGER
On August 1, 1999, the Company and Video City, Inc., entered into an
Agreement and Plan of Merger ("Pending Merger"). Under the terms of the Merger
Agreement, upon consummation of the merger, each share of West Coast common
stock will be converted for not less than 0.25 and no more than 0.333 shares of
Video City common stock. In addition, each share of West Coast common stock will
receive .05 shares of Video City Series F convertible redeemable preferred
stock. The merger will be accounted for as a purchase. There is no assurance
that
64
<PAGE> 65
the merger will ultimately be consummated.
18. SUBSEQUENT EVENTS
Management Agreement: On March 3, 2000, the Company and Video City, Inc.
("Video City") entered into a Management Agreement, pursuant to which Video City
will manage and operate West Coast's business until the closing of the proposed
merger between Video City and West Coast. The Management Agreement provides that
West Coast shall pay management fees for Video City's management services an
amount equal to certain percentages of gross revenues actually collected from
the West Coast business less all selling, general and administrative costs and
expenses of West Coast incurred and paid in the ordinary course of business (in
no event should the management fee paid by West Coast to Video City be less than
$400,000 per calendar month). West Coast may terminate the Management Agreement
on or after August 31, 2000. Concurrent with the execution of the Management
Agreement, the directors and executive officers of West Coast resigned and Video
City moved its principle executive offices from Torrance, California to
Philadelphia, Pennsylvania. Video City entered into consulting, non-compete and
international service agreements with former members of West Coast's
management that provide for total payments of $5,900,000. The payments are to
be made over approximately seven years in amounts not to exceed $800,000 per
year, subject to acceleration if West Coast's bank debt is repaid. The first
$2,000,000 of aggregate payments is secured by 1,357,282 shares of Video City
common stock, owned by Video City's Chief Executive Officer.
Forbearance Agreement: On February 13, 2000 the Company signed a
forbearance and fifth amendment to its credit agreement whereby the banks
extended the effective date of maturity to the earlier of the completion of the
Pending Merger (Note 17) or August 31, 2000.
A majority of the company's existing lenders ("The Bank Group") have agreed
in concept to a complete restructuring of debt that will include repayment of
$20 million in cash, issuance of $25 million in senior notes and issuance of $40
million worth of shares of Video City preferred stock. The restructuring is
contingent upon the Company providing The Bank Group with the cash portion
before the end of the forbearance agreement (August 31, 2000), and the
completion of the Pending Merger with Video City.
Divestitures of Stores: Under the Pending Merger and Management Agreement
with Video City, Video City is
65
<PAGE> 66
currently negotiating the sale of a significant number of the Company's stores
and is entertaining several offers. The stores for sale were strategically
selected, to concentrate the Company's operation in efficient geographic areas.
The proceeds from the divestitures will be used to pay the cash portion
necessary to complete the restructuring of its indebtedness and complete the
merger.
The Company believes that the combined company after the merger will have
the potential for greater financial strength, operational efficiencies, earning
power and growth potential than either Video City or West Coast would have on
its own. There can be no assurance, however, that these objectives can be
successfully completed or that the resultant company will be profitable and have
sufficient operating cash flows.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and certain information with respect to
each director and executive officer of the Company at February 6, 2000.
Concurrent with the execution of the Management Agreement, the following
directors and executive officers of the Company resigned.
Ralph W. Standley III, age 60, served as the Chairman of the Board of
Directors of the Company and its principal predecessors from 1992 to March 3,
2000. He also served as President of two such predecessors, Nostalgia Ventures,
Inc. ("NVI") and Videosmith (DE) Incorporated ("VDI"), and as Secretary of two
other predecessors, Giant Video Corporation ("GVC") and G.V. Management Corp.
("GVMC"), from the date of their inception or acquisition by the Company through
July 1995. Ralph W. Standley III is the father of T. Kyle Standley and M. Trent
Standley.
66
<PAGE> 67
T. Kyle Standley, age 35, served as the President and Chief Executive
Officer and a Director of the Company and its predecessors from its inception in
February 1995 to March 3, 2000. Previously, he served as an executive officer of
two of the Company's predecessors, GVC and GVMC, commencing in 1991. Mr.
Standley was director of research at Colliers International Property Consultants
from 1989 to 1991, and prior thereto was a financial analyst at Paine Webber
Incorporated.
M. Trent Standley, age 34, served as a Vice President, Secretary and a
Director of the Company from May 1995 to March 3, 2000. He also served as
President of one of the Company's predecessors, GVI, from 1989 to 1995, as Vice
President of two other predecessors, VDI from 1994 to 1995, and GVMC from 1992
to 1995, and as Secretary of a fourth predecessor, NVI, from 1993 to 1995.
Richard G. Kelly, age 45, joined the Company as Chief Financial Officer
in July 1996 and served until March 3, 2000. From January 1994 to June 1996, Mr.
Kelly was a shareholder and served as a Director of Moore, Stephens, Reilly, PC
and was a shareholder and Vice President of Gerald T. Reilly & Co., Certified
Public Accountants, Inc. Mr. Kelly served as Director of Gillis & Kelly, P.C.,
from 1990 to 1993, at which time the firm merged with Gerald T. Reilly & Co.,
Certified Public Accountants, Inc. Mr. Kelly is a Certified Public Accountant
whose responsibilities included direction of mergers and acquisitions as well as
tax and audit related functions.
CURRENT SOLE DIRECTOR AND EXECUTIVE OFFICER OF WEST COAST
Herbert F. Kozlov, age 47 was appointed as a director and officer of
the company in May 2000, replacing James King who was elected sole director and
officer in March 2000 and who resigned as a director of the company in May 2000.
Mr. Kozlov is currently a partner at Parker Duryee Rosoff & Haft, a New York law
firm. Mr. Kozlov is currently serving as the Chairman of the Corporate
Department of the firm. As of May 2000, Mr. Kozlov is currently the sole
director and officer of West Coast Entertainment Corporation. Mr. Kozlov is also
a director of H.M.G. Worldwide Corporation, Alpha Hospitality Corp. and
Worldwide Entertainment and Sports Corporation.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
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<PAGE> 68
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and regulations of the Securities and Exchange Commission
("SEC") thereunder require the Company's executive officers and directors, and
persons who own more than ten percent of the Company's outstanding Common Stock,
to file reports of initial ownership and changes in ownership with the SEC and
the National Association of Securities Dealers, Inc. Such officers, directors
and ten-percent stockholders are also required by SEC rules to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it, or written representations
from certain reporting persons that no other reports were required for such
persons, the Company believes that, during or with respect to the fiscal year
ended February 6, 2000, all of its executive officers, directors and ten-percent
stockholders complied with their Section 16(a) filing obligations.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the compensation of the Company's Chief Executive Officer and each of
the other four most highly compensated executive officers whose salaries and
bonuses exceeded $100,000 for services rendered during the fiscal year ended
February 6, 2000 (the "Named Executive Officers"), together with similar
information with respect to the Named Executive Officers for each of the fiscal
years ended January 31, 1998 and 1999.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------
Awards(2)
---------
Name and Fiscal Other Annual Number of shares All Other
Principal Position Year Salary Bonus Compensation (1) Underlying Stock Options Compensation
------------------ ---- ------ ----- ---------------- ------------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
T. Kyle Standley (3) 2000 $330,000
President and Chief 1999 $330,000 75,000
Executive Officer 1998 $230,000 -- -- -- --
</TABLE>
68
<PAGE> 69
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Richard G. Kelly (3) 2000 $250,000
Chief Financial 1999 $254,231
Officer 1998 $200,000 -- -- -- --
Ralph W. Standley III (3) 2000 $200,000
Chairman of the 1999 $213,639
Board of Directors 1998 $150,000 -- -- -- --
Donald Weiss 2000 $150,000
Executive Vice 1999 $150,000
President 1998 $150,000 -- -- -- --
</TABLE>
--
(1) Other compensation in the form of perquisites and other personal
benefits has been omitted for certain of the Named Executive Officers,
in accordance with the rules of the Securities and Exchange Commission,
as the aggregate amount of such perquisites and other personal benefits
for such officers constituted less than the lesser of $50,000 or 10% of
the total annual salary and bonus for each executive officer in each
fiscal year covered.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts to
these individuals during any fiscal year covered.
(3) Upon resigning as officers and directors of West Coast, T. Kyle
Standley, Ralph W. Standley, III and Richard G. Kelly entered into
amended consulting, non-competition and international service
agreements with Video City. The amended agreements provide for total
payments of $2,925,000 to T. Kyle Standley, $1,225,000 to Ralph W.
Standley, III, $500.000 to Richard G. Kelly and $1,250.000 to a company
owned by Messrs. Standley and Standley. These amounts are payable by
Video City whether or not Video City acquires West Coast. The payments
are to be made over approximately seven years in amounts not to exceed
$800.000 per year, subject to acceleration if West Coast's bank debt is
repaid.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual stipend of $10,000 and all
directors are reimbursed for expenses incurred in connection with attendance at
Board of Directors and committee meetings.
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<PAGE> 70
Under the Company's 1995 Director Stock Option Plan, as amended to date
(as amended, the "Director Option Plan"), each non-employee director is eligible
to receive options for such number of shares of Common Stock and at such times
as the Board of Directors may determine, which options have an exercise price
equal to the fair market value of the Common Stock on the date of grant. All
options granted under the Director Option Plan vest over a three-year period,
provided the optionholder continues to serve as a director of the Company, and
expire ten years from the date of grant. The Director Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Company in July
1995, and was amended by the Board of Directors in October 1996. The total
number of shares of Common Stock that may be issued under the Director Option
Plan is 50,000. Two former directors Messrs. C. Stewart Forbes and Wesley F.
Hoag, have each been granted an option under the Director Option Plan to
purchase 3,000 shares of Common Stock at an exercise price of $13.00 per share.
70
<PAGE> 71
Stock Option Grants. There were no options or shares granted to executive
officers named in the summary compensation table during fiscal year 2000.
Option Exercises and Year-End Option Table. The named executive officers
exercised no stock options during fiscal 2000. They held the following stock
options as of February 6, 2000.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
EXERCISE AT FISCAL YEAR-END AT FISCAL YEAR-END
NAME (#) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE) (1)
----------------------- ----------- --------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Donald Weiss -- 2,400 3,600 264 396
</TABLE>
-----------
(1) Based on the closing trading price of West Coast's common stock on February
6, 2000 ($0.36 per share) less the option price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during the fiscal year ended
February 6, 2000, were Wesley F. Hoag and C. Stewart Forbes.
None of the Company's executive officers serves or has served as a member of
the compensation committee (or other board committee performing equivalent
functions or, in the absence of such a committee, the entire board of directors)
of another entity, one of whose executive officers serves on the Compensation
Committee of West Coast.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of February 6, 2000 (i) by each person who is known by the
Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) by each director and nominee for election as a director, (iii) by
each of the executive officers, and (iv) by all directors and executive officers
as a group:
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<PAGE> 72
<TABLE>
<CAPTION>
Shares Beneficially
Beneficial Owner Owned(1)(2)
---------------- -----------
Number Percent
------ -------
<S> <C> <C>
5% STOCKHOLDERS:
Ralph W. Standley III(3)(4)(5) 1,345,765 9.6
Ralph W. Standley III Irrevocable Trust(3)(5) 342,819 2.4
T. Kyle Standley(3)(5)(6) 1,431,388 10.2
Marsh & McLennan Companies, Inc.(7) 975,890 6.9
OTHER EXECUTIVE OFFICERS:
Richard G. Kelly(3)
Donald Weiss(3) 43,000
OTHER DIRECTORS:
M. Trent Standley(3)(5)(6) 647,576 4.6
C. Stewart Forbes 14,000 *
c/o Colliers International
84 State Street, 5th Floor
Boston, MA 02109
Wesley F. Hoag 2,000 *
c/o R. Meeder & Associates
6000 Memorial Drive
Columbus, OH 43215
All directors and executive officers as a group
(8 persons)(4)(5)(6) 3,826,548 27.2
</TABLE>
--------------
* Less than 1%.
(1) Each stockholder possesses sole voting and investment power with
respect to the shares listed, except as otherwise indicated. In
accordance with the rules of the Securities and Exchange Commission,
each
72
<PAGE> 73
stockholder is deemed to beneficially own any shares subject to stock
options or warrants which are currently exercisable or which become
exercisable, or convertible securities which are currently exercisable
or which become exercisable, within 60 days after February 28, 1999,
and any reference in these footnotes to shares subject to stock options
held by the person or entity in question refers to stock options which
are currently exercisable or which become exercisable within 60 days
after February 28, 1999. The inclusion herein of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership.
(2) Number of shares deemed outstanding includes shares outstanding as of
May 15, 2000, and any shares subject to stock options held by the
person or entity in question that are currently exercisable or
exercisable within 60 days following February 28, 1999.
(3) These persons have an address c/o the Company, 9998 Global Road 2nd
Floor Philadelphia, Pennsylvania 19115
(4) Includes 1,281,461 shares held by a revocable trust over which this
stockholder has sole voting and dispositive power; also includes 64,304
shares owned by this stockholder's wife as to which this stockholder
disclaims beneficial ownership.
(5) Voting and dispositive power over 342,819 shares owned by this trust is
held by T. Kyle Standley as trustee. The beneficiaries of the trust are
Ralph W. Standley III's children, who include T. Kyle Standley and M.
Trent Standley. The numbers of shares in the column next to the names
of Ralph W. Standley III, T. Kyle Standley and M. Trent Standley
exclude these shares.
(6) All shares owned by this individual are pledged to a bank as loan
collateral.
(7) Includes 985,900 shares beneficially owned by Putnam Investments, Inc.,
which is a wholly-owned subsidiary of Marsh & McLennan Companies, Inc.
The shares beneficially held by Putnam Investments, Inc. include shares
held by two registered investment advisers which Putnam Investments,
Inc. wholly
73
<PAGE> 74
owns, Putnam Investment Management, Inc. and The Putnam Advisory
Company, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has granted certain stock options to Messrs. Forbes and
Hoag under the Director Option Plan. See Item 11 -- "Executive Compensation --
Compensation of Director".
Ralph W. Standley III, the Chairman of the Board of Directors of the
Company, is indebted to the Company under a promissory note between the Company
and Mr. Standley, pursuant to which the Company loaned Mr. Standley $126.103, at
an interest rate of 10% per annum. The promissory note is payable on demand. As
of February 6, 2000, the aggregate amount (including interest) of the loan
outstanding was $148,344.
T. Kyle Standley, The President and Chief Executive Officer of the
Company, is indebted to the Company under a promissory note between the Company
and Mr. Standley, pursuant to which the Company loaned Mr. Standley $169,499, at
an interest rate of 10% per annum. The promissory note is payable on demand. As
of February 6, 2000, the aggregate amount (including interest) of the loan
outstanding was $199,394.
During the fourth quarter of fiscal 2000, the Company determined that
the above loans to officers were uncollectible and were consequently written
off. Video City has indicated that it does not intend to seek repayment of the
loans following acquisition of the Company.
The Company has adopted a policy requiring all future transactions
between the Company and its officers, directors and affiliates to be on terms no
less favorable to the Company than could be obtained from unrelated third
parties and to be approved by a majority of the disinterested members of the
Company's Board of Directors.
PART IV
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<PAGE> 75
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at February 6, 2000 and January 31, 1999
Consolidated Statements of Operations for the fiscal years ended February 6,
2000, January 31, 1999 and 1998
Consolidated Statements of Cash Flows for the fiscal years ended February 6,
2000, January 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal
years ended February 6, 2000, January 31, 1999 and 1998
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
+3.1 -- Certificate of Incorporation
+3.2 -- First Amendment of Certificate of Incorporation
+3.3 -- Second Amendment of Certificate of Incorporation
</TABLE>
75
<PAGE> 76
<TABLE>
<S> <C>
+3.4 -- Certificate of Correction Filed to Correct a Certain
Error in the Second Certificate of Amendment of
Certificate of Incorporation
+3.5 -- Form of Third Certificate of Amendment of
Certificate of Incorporation
+3.6 -- Restated By-Laws
+3.7 -- Amendment to the Restated By-Laws
+++++ ++3.8 -- Agreement and Plan of Merger, dated as of August 1,
1999, by and among Video City, Inc., Keystone Merger
Corp. and the Registrant
+++++ +3.9 -- First amendment to Merger Agreement between
Registrant and Video City, Inc.
+4.1 -- Specimen certificate for shares of common stock
+10.1 -- Assets Purchase Agreement by and among the
Registrant, A-Z Video Systems, Inc., Donald R.
Thomas, Art H. Thomas, Harry M. Smith and Dwight M.
Thomas, dated as of January 11, 1996
+10.2 -- Asset Purchase Agreement by and among the
Registrant, American Video, Inc., Red Giraffe Video,
Inc., the Lancaster Group, Inc., Nolan Allen,
Michael Cappy and P.R. Lancaster, dated as of
January 11, 1996, the first amendment thereto dated
March 25, 1996 and waiver dated March 12, 1996
+10.3 -- Asset Purchase Agreement by and among the
Registrant, Anthony Cocca's Videoland, Inc. and
Anthony Cocca, dated as of January 11, 1996
+10.4 -- Asset Purchase Agreement by and among the
Registrant, Vidko, Inc., Kobie-Co Movie Outlet and
Anthony Cocca, dated as of January 11, 1996
+10.5 -- Asset Purchase Agreement by and between the
Registrant and Best Entertainment, Inc., dated as of
January
</TABLE>
76
<PAGE> 77
<TABLE>
<S> <C>
11, 1996
+10.6 -- Asset Purchase Agreement by and between the
Registrant and HB Associates, Inc., dated as of
January 11, 1996
+10.7 -- Asset Purchase Agreement by and between the
Registrant and New Age Entertainment, Inc., dated as
of January 11, 1996
+10.8 -- Merger Agreement by and among the Registrant, RKT
Subsidiary Corp., Palmer Corporation and the
Stockholders named therein, dated as of January 11,
1996, as amended (the "Palmer Merger Agreement")
+10.9 -- Stock Purchase Agreement by and among the
Registrant, Showtime, Inc. and Clemens J. Wadle,
dated as of January 11, 1996
+10.10 -- Merger Agreement by and among the Registrant, RKT
Merger Co., Video Giant Inc. and the Stockholders
named therein, dated as of January 11, 1996
+10.11 -- Asset Purchase Agreement by and between the
Registrant and Video Innovators, Inc., dated as of
January 11, 1996
+10.12 -- Asset Purchase Agreement by and among the
Registrant, Video Video of Westfield, Inc., Video
Video of Parsippany, Inc., Video Video of Chatham,
Inc. and Harold Rosenbaum, dated as of January 11,
1996, and the first amendment thereto dated February
19, 1996
+10.13 -- Asset Purchase Agreement by and among the
Registrant, Video Video of Livingston, Inc., Harold
Rosenbaum and Alan Kass, dated as of January 11,
1996, and the first amendment thereto dated February
19, 1996
+10.14 -- Form of Standard Franchise Agreement, pursuant to
which existing franchisees of the Registrant
(excluding those to be acquired upon closing of the
transactions contemplated by the Palmer Merger
Agreement)
</TABLE>
77
<PAGE> 78
<TABLE>
<S> <C>
currently operate
+10.15 -- Form of Standard Franchise Agreement to be executed
between the Registrant and future franchisees
+10.16 -- Form of Standard Franchise Agreement pursuant to
which existing franchisees of Palmer Corporation
currently operate
+10.17 -- Lease between the Registrant and Elliot Stone for
office space located at 9990 Global Road,
Philadelphia, Pennsylvania, dated as of July 12,
1995, as amended
+10.18 -- Lease between the Registrant and Elliot Stone for
warehouse space located at 490 Red Lion Road,
Philadelphia, Pennsylvania dated as of July 12,
1995, as amended
*+10.19 -- 1995 Equity Incentive Plan, and amendment thereto
*+10.20 -- 1995 Director Stock Option Plan
*+10.21 -- 1995 Employee Stock Purchase Plan
*+10.22 -- Employment Agreement between the Registrant and
Jules E. Gardner, dated May 26, 1995
*+10.23 -- Employment Agreement between the Registrant and
Kenneth R. Graffeo, dated May 26, 1995
*+10.24 -- Employment Agreement between the Registrant and
Jerry L. Misterman, dated May 26, 1995
*+10.25 -- Form of Employment Agreement between the Registrant
and Peter Balner
+10.29 -- Stockholders Voting Agreement among Resource
Holdings Inc., T. Kyle Standley, Ralph W. Standley,
III and M. Trent Standley dated July 12, 1995
+10.30 -- Shareholders Agreement among T. Kyle Standley, Ralph
W. Standley, III, M. Trent Standley, the Ralph W.
</TABLE>
78
<PAGE> 79
<TABLE>
<S> <C>
Standley III Irrevocable Trust dated May 18, 1995
and certain "Investors" in the Company named
therein, dated July 12, 1995
+10.31 -- Convertible Promissory Note made by the Registrant
and its subsidiaries in favor of West Coast Video
Enterprises, Inc. dated July 12, 1995 (the
"Convertible Note")
+10.32 -- Non-Convertible Promissory Note made by the
Registrant and its subsidiaries in favor of West
Coast Video Enterprises, Inc. dated July 12, 1995
+10.33 -- Letter Agreement dated July 12, 1995 between the
Registrant and West Coast Video Enterprises, Inc.
regarding payment of the Convertible Note
+10.34 -- Letter Agreement regarding the payment of a fee to
West Coast Video Enterprises, Inc., West Coast
Entertainment, Inc., West Coast Services, Inc., Game
Power Headquarters, Inc., Premier Advertising, Inc.,
Jules Gardner and Kenneth Graffeo upon the purchase
by West Coast Franchising Company of Existing
Franchises dated July 12, 1995
+10.35 -- Non-Competition Agreement between the Registrant and
Elliot Stone dated July 12, 1995
+10.36 -- Revolving Credit and Term Loan Agreement by and
between the Registrant and its subsidiaries and PNC
Bank, National Association dated as of July 12, 1995
+10.37 -- Revolving Credit Note made by the Registrant and its
subsidiaries in favor of PNC Bank, National
Association, dated as of July 12, 1995
+10.38 -- Revolving Credit Note made by the Registrant and its
subsidiaries in favor of PNC Bank, National
Association, dated as of December 15, 1998
+++++ +10.39 -- Forbearance and Fifth Amendment to Credit Agreement
between the Registrant and PNC Bank, NA (as agent)
and other financial institutions effective March 3,
2000.
</TABLE>
79
<PAGE> 80
<TABLE>
<S> <C>
+++++ +10.40 -- Management Agreement between the Registrant and
Video City, Inc. effective March 3, 2000.
+++++ +10.41 -- Amended and Restated Term Sheet between the
Registrant and Video City, Inc. effective March 3,
2000.
+++++ +10.42 -- Third Agreement to Credit Agreement as of December
15, 1998.
+21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of BDO Seidman, LLP
27 -- Financial Data Schedule
</TABLE>
----------
+ Incorporated by reference to the correspondingly numbered exhibit
contained in the Registrant's Registration Statement on Form S-1 (File
No. 333-00272).
++ Incorporated by reference to Exhibits 17 through 21 to the Registrant's
Current Report on Form 8-K dated May 17, 1996.
+++ Incorporated by reference to Exhibits 1 through 8 to the Registrant's
Current Report on Form 8-K dated October 15, 1996.
++++ Incorporated by reference to the correspondingly numbered exhibits
contained in the Registrant's Current Report on Form 8- K, dated
December 2, 1996.
+++++ Incorporated by reference to the correspondingly numbered exhibits
contained in the Registrant's Current Report on Form 10-K, dated May 5,
1999.
+++++ + Incorporated by reference to the correspondingly numbered exhibits
contained in the Registrant's Current Report on Form 8-K, dated March
28, 2000.
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<PAGE> 81
+++++ ++ Incorporated by reference to the correspondingly numbered exhibits
contained in the Registrant's Current Report on Form 8-K, dated August
10, 1999.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
(c) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, dated November 15, 1996, as
amended by a Current Report on Form 8-K/A, pursuant to which it reported its
acquisition of the assets of several unaffiliated entities engaged in the retail
video rental and sale business under Item 2 of Form 8-K. No financial statements
were required to be filed in connection with such Current Report.
The Registrant filed a Current Report on Form 8-K reporting on Item 8 Change in
fiscal year on May 15, 1998
The Registrant filed a Current Report on Form 8-K reporting on Item 4 Changes in
Registrant's certifying Accountant on November 20, 1998, reporting the
termination of PricewaterhouseCoopers LLP.
The Registrant filed a Current Report on Form 8-K reporting on Item 4 Changes in
Registrant's certifying Accountant on January 31, 1999, reporting the selection
and appointment of BDO Seidman, LLP.
The Registrant filed a Current Report on Form 8-K reporting on Item 5 the third
amendment to Credit Agreement on January 27, 1999, reporting amendments
effective January 12, 1999 to the existing Credit Agreement.
The Registrant filed a Current Report on Form 8-K reporting on Item 5 on August
10, 1999, the Agreement and Plan of Merger with Video City, Inc.
81
<PAGE> 82
The Registrant filed a Current Report on Form 8-K reporting on Item 5 the fifth
amendment to Credit Agreement on March 3, 2000, reporting on a first amendment
to Merger Agreement, a Management Agreement, and an Amended and Restated Term
Sheet with Video City, Inc.
82
<PAGE> 83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: June 21, 2000
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ Joseph M. Ciano
-----------------------
JOSEPH M. CIANO
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Herbert F. Kozlov (Principal executive officer and sole Director) June 21, 2000
---------------------
HERBERT F. KOZLOV
/s/ Joseph M. Ciano (Principal financial and accounting officer) June 21, 2000
---------------------
JOSEPH M. CIANO
</TABLE>
83
