<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended July 31, 1999
or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _____ to _____
Commission file number: 0-24346
-------
VIDEO UPDATE, INC.
-----------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 41-1461110
------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3100 World Trade Center
30 East 7/th/ Street
St. Paul, Minnesota 55101
---------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(651) 312-2222
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 __
----
The number of shares of Class A Common Stock, $.01 par value, outstanding
at September 13, 1999 is 29,278,457.
<PAGE>
VIDEO UPDATE, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - April 30, 1999 and July 31, 1999 3
Consolidated Statements of Operations - Three Months ended
July 31, 1998 and July 31, 1999 4
Consolidated Statements of Cash Flows - Three Months ended
July 31, 1998 and July 31, 1999 5
Notes to Consolidated Financial Statements - July 31, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Video Update, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Assets
April 30, July 31,
1999 1999
---------------------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,235 $ 1,211
Accounts receivable 3,826 3,410
Merchandise inventory 6,393 6,578
Video and game rental inventory - net 45,040 44,551
Property and equipment - net 59,395 56,852
Prepaid expenses 6,419 2,126
Goodwill - net 77,715 76,633
Other assets 7,185 7,555
----------- ------------
Total assets $ 207,208 $ 198,916
=========== ============
Liabilities And Stockholders' Equity
Notes payable $ 116,014 $ 141,752
Accounts payable 56,055 24,060
Accrued expenses 23,054 19,325
Accrued rent 7,118 6,896
Accrued compensation 8,062 7,500
----------- ------------
Total liabilities 210,303 199,533
----------- ------------
Commitments and contingencies
Preferred Stock, par value $.01 per share:
Authorized shares -- 5,000,000
Issued shares - none -- --
Class A Common Stock, par value $.01 per share:
Authorized shares -- 60,000,000
Issued and outstanding shares -- 29,278,457 at April 30,
1999 and July 31, 1999 293 293
Additional paid-in capital 116,372 120,776
Retained deficit (118,045) (119,909)
Foreign currency translation (1,715) (1,777)
----------- ------------
Total stockholders' equity (3,095) (617)
----------- ------------
Total liabilities and stockholders' equity $ 207,208 $ 198,916
=========== ============
</TABLE>
See accompanying notes.
Note: The balance sheet at April 30, 1999 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
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<PAGE>
Video Update, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended July 31,
1998 1999
--------------- ---------------
<S> <C> <C>
Revenues:
Rental revenue $ 55,297 $ 53,967
Product sales 6,086 5,900
Service fees 310 197
--------------- ---------------
61,693 60,064
Costs and expenses:
Store operating expenses 54,714 50,884
Selling, general and administrative 5,556 4,460
Cost of product sales 3,548 3,212
Store closing charge -- (1,653)
Amortization of goodwill 951 1,075
--------------- ---------------
64,769 57,978
--------------- ---------------
Operating income (loss) (3,076) 2,086
Interest expense (3,473) (3,997)
Other income 71 47
--------------- ---------------
(3,402) (3,950)
--------------- ---------------
Loss before income taxes (6,478) (1,864)
Income tax expense -- --
--------------- ---------------
Net loss $ (6,478) $ (1,864)
=============== ===============
Net loss per share, basic $ (0.22) $ (0.06)
=============== ===============
Net loss per share, diluted $ (0.22) $ (0.06)
=============== ===============
</TABLE>
See accompanying notes.
4 of 17
<PAGE>
Video Update, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended July 31,
1998 1999
---------------- ----------------
<S> <C> <C>
Operating Activities
Net loss $ (6,478) $ (1,864)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 19,636 16,554
Store closing reserve -- (1,653)
Accrual adjustment -- (2,900)
Loss on disposal of property and equipment 46 --
Changes in operating assets and liabilities:
Accounts receivable (188) 416
Merchandise inventory (3,452) (185)
Income taxes 539 --
Other assets (273) 3,466
Accounts payable 8,801 (8,595)
Accrued rent 643 (222)
Accrued liabilities 42 (2,638)
------------- ----------
Net cash provided by operating activities 18,334 2,379
Investing Activities
Purchase of video and game rental inventory (15,688) (11,536)
Purchase of property and equipment (3,490) (256)
------------- ----------
Net cash used in investing activities (19,178) (11,792)
Financing Activities
Proceeds from notes payable 2,000 22,700
Payments of notes payable (207) (13,249)
------------- ----------
Net cash provided by financing activities 1,793 9,451
------------- ----------
Effect of exchange rate changes on cash (982) (62)
Increase in cash and cash equivalents 949 (24)
Cash and cash equivalents at beginning of the period 1,433 1,235
------------- ----------
Cash and cash equivalents at end of the period $ 2,382 $ 1,211
============= ==========
</TABLE>
See accompanying notes.
5 of 17
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended July 31, 1999 are
not necessarily indicative of the results that may be expected for the nine
months ending January 31, 2000 (in December 1998, the Company's Board of
Directors approved a resolution changing the Company's fiscal year-end from
April 30 to January 31, effective January 31, 2000). Certain prior year items
have been reclassified to conform with the fiscal 2000 presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
April 30, 1999.
2. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excluded any dilutive effect of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and when necessary, restated to
conform to the Statement 128 requirements.
The following table is a reconciliation of the basic and diluted earnings
per share computation:
<TABLE>
<CAPTION>
Three Months Ended July 31,
------------------------------
1998 1999
------------------------------
(In thousands, except per
share amounts)
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share-- net loss $ (6,478) $ (1,864)
============ ===========
Denominator:
Denominator for basic earnings per share-- weighted-average shares
Class A common shares 29,278 29,278
Class B common shares -- --
------------ -----------
Denominator for basic earnings per share 29,278 29,278
Effect of dilutive securities:
Contingent stock acquisition -- --
------------ -----------
Dilutive potential common shares -- --
------------ -----------
Denominator for diluted earnings per share--adjusted weighted-average
shares and assumed conversions 29,278 29,278
============ ===========
Basic net loss per share $ (0.22) $ (0.06)
============ ===========
Diluted net loss per share $ (0.22) $ (0.06)
============ ===========
</TABLE>
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<PAGE>
3. Comprehensive Loss
As of May 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of Statement 130 had no impact on the
Company's net income (loss) or stockholders' equity. Statement 130 requires
unrealized gains or losses on the Company's foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity to be included in other comprehensive income. Prior years' financial
statements have been reclassified to conform to the requirements of Statement
130. During the first quarter of fiscal 1999 and 2000, total comprehensive
loss amounted to $7,460,000 and $1,926,000 respectively.
4. Income Tax Expense
At the end of the July 31, 1999 quarter, the Company estimated that its
effective tax rate for the year ended January 31, 2000 would be 0%. The Company
has therefore used this rate in providing for income taxes in the current
quarter. The Company will evaluate and estimate its effective tax rate at the
end of each interim period during fiscal 2000.
5. Provision for Store Closing and Other Charges
During the first quarter of fiscal 2000, approximately $76,000 was expended
for lease terminations and miscellaneous closing costs related to the 1998
business restructuring plan. Successful negotiations of lease terminations
resulted in an excess reserve of approximately $250,000 that was recorded as an
increase to net income.
During the first quarter of fiscal 2000, approximately $430,000 was expended
for lease terminations and miscellaneous closing costs related to the 1999
business restructuring plan. Successful negotiations of lease terminations
resulted in an excess reserve of approximately $1,400,000 that was recorded as
an increase to net income.
6. Legal Proceedings
In connection with the acquisition of the assets of Videoland, Inc.
("Videoland") in November 1995, the Company issued 239,163 shares of its Class A
Common Stock (the "Videoland Shares") to the sellers of the assets of Videoland
(the "Videoland Sellers"). With respect to the Videoland Shares, the Company
agreed to make a deficiency payment in October 1996 to the Videoland Sellers if
the gross proceeds received by such sellers from the sale of the Videoland
Shares during the six months from March 1996 through September 1996 is not equal
to the number of shares of Videoland Shares sold multiplied by $12.00. The
Videoland Sellers were subject to certain "lockup" or sale restrictions as a
condition to any deficiency payment. The Company initiated an action in federal
district court in Minnesota for a declaratory judgment that the Videoland
Sellers are not entitled to any deficiency payment in light of the failure by
such sellers to comply with the lockup or sale restrictions. In January 1998,
the court entered a judgment, payable in the Company's stock or cash, against
the Company in the amount of $1,220,403 plus interest from October 1996, and
attorney's fees. The Company appealed the judgment to the Eighth Circuit. The
appeal was denied. The Company is exploring further avenues of relief, including
but not limited to the satisfaction of a portion of the judgment by a transfer
of the Company's stock, of which no assurances can be given. The foregoing
description is qualified in its entirety by reference to the full text of the
complaint and papers on file in the action.
In May 1998, Rousnam Video, Inc., a Michigan corporation and Hani (Al)
Monsour (collectively "Monsour") filed a lawsuit in state court (Macomb County,
Michigan) claiming amounts due pursuant to post-closing adjustments contemplated
in connection with an Asset Purchase Agreement among Monsour and Moovies, Inc.
dated as of March 14, 1997, and the alleged default on a Promissory Note among
Monsour and Moovies, Inc. in the amount of $2,000,000 which is currently
reflected in notes payable. The trial court has ruled in favor of the plaintiffs
on a motion for summary judgment, and a judgment for $2,370,195 has been entered
against the Company. The Company believes it has meritorious grounds for its
appeal which is currently pending, although assurances cannot be given as to the
outcome of such action. The foregoing description is qualified in its entirety
by reference to the full text of the complaint and papers on file in the action.
7 of 17
<PAGE>
In May 1998, four stockholders filed suit in the US District Court for the
Central District of California. The plaintiff stockholders allege that Mr.
Potter and the Company made false and misleading statements or omitted material
information about the Company and the video industry during the period April
1995 to September 1996, the date of its subsequent public offering. Plaintiffs
are seeking "at least the sum of $967,967," plus interest, additional damages
and attorneys' fees. The Company and Mr. Potter believe that the claims are
unsubstantiated, without merit and they intend to defend the matter vigorously.
A motion to dismiss the First Amended Complaint was granted, but the court
allowed Plaintiffs to re-file. At present, the Second Amended Complaint has been
filed. The Company is in the process of discovery, which is not scheduled to
close until December 1999. The foregoing description is qualified in its
entirety by reference to the full text of the complaint and papers on file in
the action.
In August 1998, the Company filed suit in federal court in Oregon against
Rentrak Corporation, an Oregon Corporation. The Company alleges that Rentrak has
violated the federal antitrust law, given Rentrak's position in the market and
its exercise of monopoly power. Rentrak has counter-claimed for amounts it
alleges were owed by Moovies, Inc. prior to the acquisition of Moovies, Inc. by
the Company; the Company has denied that any sums are due. Discovery in the
matter is now scheduled to be completed in December 1999. The Company intends to
pursue its claims aggressively, although assurances cannot be given as to the
outcome of this matter. The foregoing description is qualified in its entirety
by reference to the full text of the complaint and papers on file in the action.
On June 20, 1999, Allen Industries, Inc., a North Carolina corporation,
filed a lawsuit against the Company claiming approximately $3 million in unpaid
invoices arising out of the conversion of various Moovies stores. The Company
has asserted that Allen Industries breached its contract and performed defective
work. The Company believes that the claims of Allen Industries are
unsubstantiated and without merit. The Company intends to defend the matter
vigorously. The foregoing description is qualified in its entirety by reference
to the full text of the complaint and papers on file in the action.
On April 12, 1999, Sight & Sound Distributors, Inc., a Delaware
corporation, filed a lawsuit in state court (St. Louis County, Missouri)
alleging that the Company owes approximately $7.7 million for goods and services
purchased from Sight & Sound. The parties have reached settlement in this matter
which the Company expects will resolve this matter without further litigation.
The foregoing description is qualified in its entirety by reference to the full
text of the complaint and papers on file in the action.
In addition to the above, the Company is involved in various legal
proceedings arising during the normal course of conducting business. Management
believes that the resolution of these proceedings will not have any material
adverse impact on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's unaudited
consolidated financial statements and notes thereto appearing elsewhere herein.
Overview
The Company franchised its first store in January 1983 and opened its first
Company-owned store in September 1989. By July 1994, when the Company completed
its initial public offering, the Company had grown to 15 Company-owned stores
and 30 franchised stores. Subsequently, the Company substantially accelerated
its growth and as of July 31, 1999 operated 617 Company-owned stores in 31
states and five provinces in Canada, and has 52 franchised stores predominantly
in the United States. The majority of the Company's stores located in the United
States are superstores. Superstores are video specialty stores that carry more
than 7,500 rental units.
The Company generates revenues primarily from the rental of videocassettes
and video games, from service fees from its franchisees and from the sale of
products. As reflected in the chart below, rental revenues at Video Update
stores have accounted for the substantial majority of the Company's revenues.
The Company expects that this trend will continue.
8 of 17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended July 31,
---------------------------------------
1998 1999
----------------- -----------
(In thousands)
<S> <C> <C>
Rental revenue $ 55,297 $ 53,967
Product sales 6,086 5,900
Service fees 310 197
------------ -----------
$ 61,693 $ 60,064
============ ===========
</TABLE>
Operating Results
The table below sets forth the percentage of revenues represented by certain
items included in the Company's statements of operations for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended July 31,
---------------------------------------
1998 1999
------------------- -------------
<S> <C> <C>
Revenues:
Rental revenue 89.6% 89.9%
Product sales 9.9 9.8
Service fees 0.5 0.3
------------- -------------
Total revenues 100.0 100.0
Costs and expenses:
Store operating expenses 88.7 84.7
Selling, general and administrative 9.0 7.4
Cost of product sales 5.8 5.4
Store closing charge -- (2.8)
Amortization of goodwill 1.5 1.8
------------- -------------
Total cost and expenses 105.0 96.5
------------- -------------
Operating income (loss) (5.0) 3.5
Other income (expense):
Interest expense (5.6) (6.7)
Other income 0.1 0.1
------------- -------------
Total other income (expense) (5.5) (6.6)
------------- -------------
Loss before income taxes (10.5) (3.1)
Income tax expense -- --
------------- -------------
Net loss (10.5)% (3.1)%
============= =============
</TABLE>
Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1999
Rental revenue. Rental revenue was approximately $55,297,000 and
--------------
$53,967,000, or 89.6% and 89.9% of total revenues for the three months ended
July 31, 1998 and 1999, respectively. The decrease in rental revenue of
$1,330,000 was primarily attributed to the closing of under-performing stores
pursuant to the business restructuring plans of fiscal 1998 and 1999. Of the 71
stores closed since July 31, 1998, 35 relate to the fiscal 1999 business
restructuring plan. The reduction of rental revenue that resulted from the
business restructuring plan, adopted in the fourth quarter of fiscal year 1999,
was partially offset by the increase of approximately 1% of same store sales
revenue.
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<PAGE>
Product sales. Product sales were approximately $6,086,000 and $5,900,000,
-------------
or 9.9% and 9.8% of total revenues for the three months ended July 31, 1998 and
1999, respectively. The decrease in product sales of $186,000 was primarily
attributed to the closing of under-performing stores.
Service fees. Service fees were approximately $310,000 and $197,000, or
------------
0.5% and 0.3% of total revenues for the three months ended July 31, 1998 and
1999, respectively. Continuing service fees and royalties from franchisees
accounted for about 84% of total service fees. The decrease of $113,000 in
service fees was primarily a result of the closing of franchised stores since
the first quarter of fiscal 1999.
Store operating expenses. Store operating expenses consist primarily of
------------------------
compensation and related expenses including regional management expenses,
occupancy expenses, and depreciation and amortization expenses. Operating
expenses were approximately $54,714,000 and $50,884,000, or 88.7% and 84.7% of
total revenues for the three months ended July 31, 1998 and 1999, respectively.
The decrease in store operating expenses of $3,830,000 and the decrease in store
operating expenses as a percentage of total revenues was primarily due to the
closing of 71 under-performing stores since July 31, 1998 and other cost cutting
measures such as review of vendor relationship/accounts including adjustments of
amounts previously accrued of approximately $2 million, district manager ratios
and employee-to-store hour ratios.
<TABLE>
<CAPTION>
Three Months Ended July 31, Percent of Revenue
----------------------------- ----------------------------
1998 1999 1998 1999
------- --------- --------- --------
<S> <C> <C> <C> <C>
Cost of rental revenue $ 16,483 $ 15,463 26.7% 25.7%
Occupancy expenses 18,209 17,514 29.5 29.2
Compensation and related benefits 15,243 14,933 24.7 24.9
Furniture, fixtures, and equipment expenses 2,901 3,627 4.7 6.0
Other store operating (income) expenses 1,878 (653) 3.1 (1.1)
------------ ------------ -------- -------
Total store operating expenses $ 54,714 $ 50,884 88.7% 84.7%
============ ============ ======== =======
</TABLE>
Cost of rental revenue was approximately $16,483,000 and $15,463,000, or
26.7% and 25.7% of total revenues for the three months ended July 31, 1998 and
1999, respectively. Cost of rental revenue reflects the amortization of
videocassettes and video games, revenue sharing expenses, and fees paid to
videocassette and video game suppliers. The decrease of $1,020,000 was primarily
attributable to the closing of 71 under-performing stores since July 31, 1998.
The decrease in cost of rental revenue as a percentage of revenues was primarily
the result of a change in the method of amortization of rental tapes. Effective
February 1, 1999, the Company changed the amortization policy for videos to more
appropriately reflect the economics of revenue sharing agreements with studios
that result in satisfying consumer demand over a shorter period of time. The
adoption of the new method of amortization was accounted for as a change in
accounting estimate effected by a change in accounting principle in the fourth
quarter of fiscal year 1999. The Company recorded a pre-tax charge of
approximately $50,629,000 in the fourth quarter of fiscal year 1999 which had
the impact of decreasing amortizable inventory in the first quarter of fiscal
year 2000 versus fiscal year 1999.
Occupancy expenses were approximately $18,209,000 and $17,514,000, or 29.5%
and 29.2% of total revenues for the three months ended July 31, 1998 and 1999,
respectively. The decrease of approximately $695,000 was primarily due to the
closing of 71 under-performing stores since July 31, 1998.
Compensation and related expenses were approximately $15,243,000 and
$14,933,000, 24.7% and 24.9% of total revenues for the three months ended July
31, 1998 and 1999, respectively.
Selling, general and administrative. Selling, general and administrative
-----------------------------------
expenses were approximately $5,556,000 and $4,460,000, or 9.0% and 7.4% of total
revenues for the three months ended July 31, 1998 and 1999, respectively. The
decrease of approximately $1,096,000 was primarily due to the closing of 71
under-performing stores since July 31, 1998. The expense as a percentage of
revenue declined as a result of efficiencies realized in the integration into
operations of the acquisitions completed in fiscal year 1998 the vast majority
of which represents adjustments of amounts previously accrued.
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<PAGE>
Cost of product sales. Cost of product sales was approximately $3,548,000
---------------------
and $3,212,000, or 5.8% and 5.4% of total revenues for the three months ended
July 31, 1998 and 1999. The cost of product sales as a percentage of total
product sales revenue was approximately 58.3% and 54.4% for fiscal 1998 and
1999, respectively. The decrease in the cost of product sales as a percentage
of total product sales was primarily due to a difference in product mix. The
Company anticipates that the cost of product sales as a percentage of product
sales will remain consistent with historical results, but will fluctuate
quarterly based upon customer demands.
Store closing charge. During the fourth quarter of fiscal 1999, the
--------------------
Company adopted a business restructuring plan to close approximately 70 under-
performing stores. This resulted in the Company recording a pre-tax charge of
approximately $16,135,000 to cover lease termination charges, closing costs and
asset write-downs for these stores. During the first quarter of fiscal 2000, 35
stores were closed at a significantly lower cost to the Company than originally
planned which resulted in a gain of approximately $1,653,000.
Amortization of goodwill. Amortization of goodwill was approximately
------------------------
$951,000 and $1,075,000, or 1.5% and 1.8% of total revenues for the three months
ended July 31, 1998 and 1999, respectively. The increase as a percentage of
total sales was primarily attributable to an increase in goodwill resulting from
the revaluation of the net book value of prior acquisitions.
Interest expense. Interest expense was approximately $3,473,000 and
----------------
$3,997,000, or 5.6% and 6.7% of total revenues for the three months ended July
31, 1998 and 1999, respectively. The increase of $524,000 was primarily
attributable to interest on increased borrowings, a 0.75% increase of the
overall interest rate, and the issuance of warrants related to the additional
term debt resulting in an increase in interest expense.
Other income. Other income was approximately $71,000 and $47,000, or 0.1%
------------
and 0.1% of total revenues for the three months ended July 31, 1998 and 1999,
respectively.
Income taxes. At the end of the July 31, 1999 quarter, the Company
------------
estimated that its effective tax rate for the year ended January 31, 2000 would
be 0%. The Company has therefore used this rate in providing for income taxes in
the current quarter. The Company will evaluate and estimate its effective tax
rate at the end of each interim period during fiscal 2000.
Liquidity and Capital Resources
The Company has funded its operations through cash from operations, the
proceeds of prior equity and debt offerings, borrowings under bank facilities,
trade credit and equipment leases. The Company's principal capital requirements
are for the purchase of rental inventory, payments related to approximately 71
store closings, payments related to aged accounts payable, payments of interest
and principal related to the Senior Facility (as herein defined) and the Ingram
Note (as herein defined).
At July 31, 1999, the Company had cash and cash equivalents of
approximately $1,211,000. The Company uses an unclassified balance sheet in its
financial statements, and as a result, does not classify its assets or
liabilities as current or non-current. If the Company were to use a classified
balance sheet, a portion of videocassette rental inventories would be classified
as non-current because they are not assets that are reasonably expected to be
completely realized in cash or sold in one year. The acquisition cost of these
inventories, however, would be reflected in current liabilities. The Company
believes that classification of videocassette rental inventories as non-current
assets would be misleading because it would not indicate the level of assets
expected to be converted into cash in the next year as a result of rentals or
sales of these videocassettes.
For the three months ended July 31, 1999, net cash provided by operating
activities was approximately $2,379,000. Net cash used in investing activities
was approximately $11,792,000, consisting primarily of approximately $256,000
for the purchase of property and equipment, and approximately $11,536,000 for
the purchase of video and game rental inventory. Net cash generated from
financing activities was approximately $9,451,000.
In March 1998 the Company completed the acquisition of Moovies, Inc. The
Company issued approximately 9.3 million shares of Class A Common Stock in
exchange for Moovies common stock. The
11 of 17
<PAGE>
transaction was treated as a tax-free exchange for federal income tax purposes
and recorded under the purchase method of accounting.
Simultaneous with the closing of the Moovies transaction, the Company
announced that a syndicate led by Banque Paribas had extended it a $120 million
senior credit facility (the "Senior Facility"). This Senior Facility replaced
the Company's previous line of credit. The Senior Facility consisted of the
following: (i) two term loans totaling $95 million; (ii) a $15 million capital
expenditure line; and, (iii) a $10 million revolving line. The Company borrowed
the $95 million of the two term loans in conjunction with the closing of the
merger and the proceeds were used to: (i) refinance approximately $35,000,000 of
outstanding indebtedness including accrued interest under the Company's previous
line of credit; (ii) refinance approximately $50,000,000 of indebtedness of
Moovies under Moovies' previous credit agreement; and (iii) pay transaction fees
and expenses relating to the Merger of approximately $10,000,000, (including
legal fees, accounting fees, and registration fees). The capital expenditure
line was primarily available to fund the conversion of the acquired Moovies
stores and integration costs, the opening of new stores and selected
acquisitions.
During the second quarter of fiscal 1999, the Company and the bank
syndicate amended the terms of the Senior Facility to, among other things: (i)
reduce the Senior Facility from $120 million to $115 million; (ii) revise
certain financial covenants; (iii) modify the terms of the capital expenditure
line to allow usage for working capital needs; (iv) increase the overall
interest rate by 0.5%; (v) add consent fees of $600,000 payable August 12, 1998
and $575,000 payable on August 12, 1999; and (vi) reprice warrants held by the
bank syndicate to a more current market price. During the third quarter of
fiscal 1999, the Company and the bank syndicate amended the terms of the Senior
Facility to, among other things; (i) permit a sale-leaseback transaction; (ii)
defer the January 31, 1999 principal payments to March 12, 1999; and (iii)
increase the overall interest rate by 0.25%. During the fourth quarter of fiscal
1999, the Company and the bank syndicate amended the terms of the Senior
Facility to, among other things; (i) defer the March 12, 1999 principal payments
to May 31, 1999; (ii) revise certain financial covenants; and (iii) add a
consent fee of $57,500 due on April 30, 1999 and May 15, 1999. As of July 31,
1999, the Company had $15 million outstanding under the capital expenditure line
and $5 million outstanding under the revolving line both of which are available
to fund working capital needs. As of April 30, 1999 the Company had no further
borrowing capacity available under its Senior Facility.
Effective May 28, 1999, the Company and the bank syndicate amended the
terms of the Senior Facility to, among other things; (i) increase the overall
Senior Facility with a new tranche of C Term loans in the aggregate amount of
$10.5 million maturing June 2006, and bearing 12% interest; (ii) revise certain
financial covenants; (iii) revise and defer certain principal payments; (iv)
increase the overall interest rate by 0.75%; and (v) reflect the issuance of
7,481,250 warrants at $0.8719 per share expiring June 2006. The Company is using
proceeds of the new C Term loans for, among other things, the purchase of rental
inventory, payments related to expected store closings, trade payables, and debt
service. The Company believes that its relationship with the Senior Facility
lenders is satisfactory and that it would be able to obtain any necessary
waivers, amendments or modifications to the Senior Facility if the Company's
operating performance causes it to fall short of certain financial covenants in
the Senior Facility, although no assurances can be given. If the Company is
unable to maintain such a level of operations, it will be required to reduce its
overall expenditures and expansion plans to comply with the covenants and
requirements of the Senior Facility. Additionally, any failure by the Company to
maintain its level of operations within the covenants and requirements of the
Senior Facility could cause the Company to be in default thereunder, allowing
the lenders to take legal action against the Company, including but not limited
to, the immediate acceleration of payment of borrowed funds, which could
materially and adversely affect the Company's operations. The immediate
acceleration of debt thereunder or the lack of further borrowing capacity, in
whole or in part, would have a material adverse effect on the Company's
operations and financial condition.
Amounts borrowed under the Senior Facility bear interest at variable rates
based on the "base rate" (i.e., the higher of the federal funds rate, plus 1/2
of 1% or the prime commercial lending rate) or the inter-bank Eurodollar rate
(approximately 8.00% and 5.18% per annum, respectively as of July 31, 1999) plus
an applicable margin rate that could range from 0.50% to 5.00%. Amounts
currently outstanding at July 31, 1999 had a weighted average rate of 10.55%.
The Senior Facility includes negative, affirmative and financial covenants
including, but not limited to, minimum free cash flow, consolidated indebtedness
to consolidated free cash flow, maximum leverage, minimum fixed charge coverage,
a prohibition or restriction on capital expenditures, debt and guarantees, liens
and encumbrances on any property, mergers, consolidations, investments,
advances, divestitures, change of business or
12 of 17
<PAGE>
conduct of business, joint ventures, partnerships, the creation of new
subsidiaries, dividends, distributions, repurchases or redemptions of
outstanding stock (including options or warrants), the voluntary prepayment,
repurchase redemption or defeasance of debt, and the acquisition, sale or
transfer, lease or sale-leaseback of assets. The Senior Facility is secured by
substantially all of the Company's assets as well as by pledges of its stock in
its subsidiaries, which subsidiaries also have provided guarantees of the
Company's obligations.
Also in May 1999, the Company issued Ingram Entertainment Inc., a supplier
of rental inventory ("Ingram"), a $14,000,000 subordinated promissory note in
respect to outstanding trade payable amounts from the Company. The note (the
"Ingram Note") bears interest at a rate of 12% per annum with principal and
interest payable monthly over three years. Simultaneous with the issuance of the
Ingram Note, the Company issued Ingram warrants to purchase 1,000,000 shares of
Class A Common Stock, at the then market price of $0.81 per share, which
warrants expire May 2004.
In September 1999, the Company settled its litigation with Sight & Sound
Distributors, Inc. ("Sight & Sound") (see Part II, Item 1 - Legal Proceedings).
In connection with the settlement, the Company has agreed to pay Sight & Sound
an aggregate principal amount of $6,500,000, with payments aggregating
approximately $160,000 monthly over a period of approximately three years.
Interest on the unpaid balance will accrue at a per annum rate of 8%.
During fiscal year 2000, the Company is proceeding with actions intended to
enhance prospects for revenue growth and profitability including the closing of
approximately 70 identified under-performing locations. The Company continues to
evaluate opportunities to reduce costs and improve revenues. The Company has
maintained a longstanding and satisfactory relationship with its primary product
vendors and has negotiated extended payment terms with several of these vendors.
The loss of its primary product vendors could have a material adverse effect on
the Company. The Company will continue to focus on reducing the aged accounts
payable with payments, the extension of terms, and negotiated settlements. If
the Company is unable to reduce the aged accounts payable to the satisfaction of
the trade creditors, it could have a material adverse effect on the Company.
Assuming the Company is able to maintain a satisfactory relationship with its
selected vendors, its bank lenders, and its trade creditors, the Company expects
that cash from operations, trade credits, equipment leases, available revenue
sharing arrangements, and available borrowings under the Senior Facility will be
sufficient to fund future inventory purchases and other working capital needs
for the next twelve months, although no assurances can be given that the Company
will not require additional sources of financing as a result of disappointing
operating results, or unanticipated cash needs or opportunities. Moreover, no
assurances can be given that such additional funds will be available on
satisfactory terms, if at all. If the Company is unable to obtain such
additional financing, the Company may be required to reduce its overall
expenditures and the Company's ability to maintain or expand its current level
of operations could be materially and adversely affected.
Each of Messrs. Potter and Bedard have issued notes to the Company (the
"Recourse Notes") in connection with stock option exercises, for approximately
$2,080,147 and $1,155,637, respectively, including accrued interest through
April 30, 1998. In fiscal 1999, the Recourse Notes accrued additional interest
of $147,097 and $81,721 for a total Recourse Note balance of $2,227,244 and
$1,237,358 for Messrs. Potter and Bedard, respectively. The Recourse Notes were
issued by the executives upon their exercise in August 1995 of 420,000 options
granted to them under the Company's Stock Option Plans in May 1995 at an
exercise price of $4.3125, the fair market value of the stock on the date the
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to satisfy
then anticipated tax liabilities. The Recourse Notes, which provide for full
recourse against the respective officer's personal assets and Company
stockholdings, are evidenced by promissory notes bearing accrued interest at a
rate of 8% per annum with payment of principal and interest due on October 4,
1999. In the event that the obligors sell shares of the Company's stock, the net
proceeds thereof will be applied to payment, in part or in full, of the Recourse
Notes.
In connection with the restated employment agreements for Mr. Potter and
Mr. Bedard, the Board has approved an accrual of bonuses that will be directed
primarily to satisfying obligations arising from the Recourse Notes. For fiscal
year 1998, bonus payments aggregating $816,580 were awarded as reimbursement of
previous payments of principal and interest on the Recourse Notes and
accompanying tax liability to the recipients. In addition, the Board has
approved the subsequent payment of additional aggregate bonuses of approximately
$6,345,000 to be used primarily to satisfy the Recourse Notes, as well as the
anticipated income tax liabilities to the executives subject to any required
approvals. In fiscal 1999, the Company accrued an additional bonus of $458,000
to be used to satisfy the fiscal 1999 accrued interest related to the Recourse
Notes as well as the anticipated income
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<PAGE>
tax liabilities to the executives subject to any required approvals. If such
bonuses are not effected, the Recourse Notes will remain outstanding.
The Company generally does not offer lines of credit or guarantees for the
obligations of its franchisees, although on occasion, the Company has made
short-term loans to current franchisees. The Company intends to evaluate the
possibility of providing loans or limited guarantees for certain franchisee
obligations, which in the aggregate are not expected to be material to the
Company's financial condition.
Substantially all Company-owned stores are in leased premises, except for
three stores that are located on premises owned by the Company. The Company
expects that most future stores will occupy leased premises.
In November 1998, the Company entered into a sale-leaseback arrangement
with respect to certain of its furniture, fixtures, equipment and signage used
in selected retail locations. Under the arrangement the Company obtained
approximately $5 million.
This Quarterly Report on Form 10-Q contains a number of forward looking
statements that involve risks and uncertainties. Any statements contained herein
(including without limitation statements to the effect that the Company or its
management "believes," "expects," "anticipates," "plans" and similar
expressions) that are not statements of historical fact should be considered
forward looking statements. Such statements are subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. There are a
number of important factors that could cause the Company's results to differ
materially from those indicated by such forward looking statements including,
but not limited to, changes in business strategy or development plans, store
openings and closings, availability of products, availability of financing,
competition, management, ability to manage growth, loss of customers, weather
(particularly on weekends and holidays), consumer acceptance of new release
videocassette titles, and a variety of other factors, including risks and
uncertainties included in the Company's Annual Report on Form 10-K for the year
ended April 30, 1999. These factors include, without limitation, the following:
Inflation
To date, inflation has not had a material effect on the Company's business.
The Company anticipates that its business will be affected by general economic
trends. Although the Company has not operated during a period of high inflation,
it believes that it would generally be able to pass increased costs resulting
from inflation on to customers.
Seasonality and Quarterly Fluctuations
The video rental industry generally experiences 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 school openings and the
introduction of new network and cable television programs.
The Company's video rental business may be affected by other factors,
including acquisitions by the Company of existing video stores, additional and
existing competition, marketing programs, weather, special or unusual events,
variations in the number of superstore openings, and other factors that may
affect retailers in general.
The Company depends significantly on availability and consumer acceptance
of new release videocassette titles available for rental. To the extent that
available new release titles fail to stimulate consumer interest and retail
traffic, operating results could be materially adversely affected.
Year 2000 Compliance
The year 2000 ("Y2K") issue is the result of computer programs that were
written using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. To the extent that
the Company's (and its vendors' and suppliers') software applications contain
source code that is unable to interpret appropriately the upcoming calendar year
2000 and beyond, some level of modification or replacement of such applications
will be necessary to avoid system failures and the temporary inability to
process transactions or engage in other normal business activities.
14 of 17
<PAGE>
The Company's information services group has been coordinating the
Company's internal Y2K compliance efforts and has identified all computer-based
systems and applications (including embedded systems) the Company uses in its
operations that might not be Y2K compliant. The Company is determining what
modifications or replacements will be necessary to achieve compliance;
implementing any necessary modifications and replacements; conducting tests
necessary to verify that the modified systems are operational; and transitioning
the compliant systems into the regular operations of the Company. The Company
estimates that these actions with respect to systems that it believes would have
a material effect on the business are approximately 95% complete. The Company
estimates that all critical systems and applications will be Y2K ready by the
end of September 1999.
The Company is also examining its relationship with certain key outside
vendors, suppliers, and others with whom the Company has significant business
relationships to determine, to the extent practical, the degree of such outside
parties' Y2K compliance. The Company has been contacting such outside parties
and attempting to seek assurances that such parties will be Y2K compliant. The
Company does not believe that its relationship with any single third party is
material to the Company's operations and, therefore, does not believe that the
failure of any single third party to be Y2K compliant would have a material
adverse effect on the Company. The Company believes that if it, or any third
party with whom the Company has a significant business relationship, has a Y2K
related systems failure, the most significant impact would likely be the
inability, with respect to a store or group of stores, to conduct operations due
to a power failure, to deliver inventory in a timely fashion, to receive certain
products from vendors or to process electronically customer sales at the store
level. The Company does not anticipate that any such impact would be material to
the Company's liquidity or results of operations.
The Company is establishing and implementing a contingency plan to provide
for viable alternatives to ensure that the Company's core business operations
are able to continue in the event of a Y2K related systems failure. The Company
expects to have a comprehensive contingency plan established by October 1999. If
the Company's systems are not sufficiently Y2K ready by the end of calendar year
1999 or if the Company does not have an appropriate contingency plan in place at
that time, the Company's business, financial condition and results of operations
may be materially and adversely affected. Such adverse effects may include, but
may not be limited to, the ability to manage store operations, collect revenues
from customers, supply stores with inventory, make payments to vendors and
suppliers, remit wages to employees, and conduct other essential business-
related activities.
Through July 31, 1999, the Company has expended approximately $1,787,600 to
address Y2K compliance issues. The Company estimates that it will incur an
additional $150,000 for a total of approximately $1,937,600 to address Y2K
issues, which includes the estimated costs of all modifications, testing and
consultant fees. Y2K costs will be funded through cash from operations and
available borrowings under the Senior Facility.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk associated with its debt
instruments. The market risk inherent in the Company's debt instruments
represents the increased interest costs arising from adverse changes in interest
rates (primarily LIBOR and prime bank rates). The Company is party to financial
instruments with off-balance-sheet risk which are entered into in the normal
course of business to meet its financing needs and to manage its exposure to
fluctuations in market rates. These financial instruments include swap
agreements and interest rate caps. The instruments involve, to a varying degree,
elements of credit and market risk in addition to amounts recognized in the
financial statements. The Company does not hold or issue financial instruments
for trading purposes. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended April 30, 1999.
The Company operates internationally in Canada, and thus is subject to
potentially adverse movements in foreign exchange currency rate changes. The
Company does not enter into foreign exchange forward contracts to reduce its
exposure to foreign currency rate changes on inter-company foreign currency
denominated balance sheet positions. Historically, the effect of movements in
the exchange rates have been immaterial to the consolidated operating results of
the Company.
15 of 17
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
In connection with the acquisition of the assets of Videoland, Inc.
("Videoland") in November 1995, the Company issued 239,163 shares of its Class A
Common Stock (the "Videoland Shares") to the sellers of the assets of Videoland
(the "Videoland Sellers"). With respect to the Videoland Shares, the Company
agreed to make a deficiency payment in October 1996 to the Videoland Sellers if
the gross proceeds received by such sellers from the sale of the Videoland
Shares during the six months from March 1996 through September 1996 is not equal
to the number of shares of Videoland Shares sold multiplied by $12.00. The
Videoland Sellers were subject to certain "lockup" or sale restrictions as a
condition to any deficiency payment. The Company initiated an action in federal
district court in Minnesota for a declaratory judgment that the Videoland
Sellers are not entitled to any deficiency payment in light of the failure by
such sellers to comply with the lockup or sale restrictions. In January 1998,
the court entered a judgment, payable in the Company's stock or cash, against
the Company in the amount of $1,220,403 plus interest from October 1996, and
attorney's fees. The Company appealed the judgment to the Eighth Circuit. The
appeal was denied. The Company is exploring further avenues of relief, including
but not limited to the satisfaction of a portion of the judgment by a transfer
of the Company's stock, of which no assurances can be given. The foregoing
description is qualified in its entirety by reference to the full text of the
complaint and papers on file in the action (Case No. 3-96 735).
In May 1998, Rousnam Video, Inc., a Michigan corporation and Hani (Al)
Monsour (collectively "Monsour") filed a lawsuit in state court (Macomb County,
Michigan) claiming amounts due pursuant to post-closing adjustments contemplated
in connection with an Asset Purchase Agreement among Monsour and Moovies, Inc.
dated as of March 14, 1997, and the alleged default on a Promissory Note among
Monsour and Moovies, Inc. in the amount of $2,000,000 which is currently
reflected in notes payable. The trial court has ruled in favor of the plaintiffs
on a motion for summary judgment, and a judgment for $2,370,195 has been entered
against the Company. The Company believes it has meritorious grounds for its
appeal which is currently pending, although assurances cannot be given as to the
outcome of such action. The foregoing description is qualified in its entirety
by reference to the full text of the complaint and papers on file in the action
(Case No. 98-1998-CK).
In May 1998, four stockholders filed suit in the US District Court for the
Central District of California. The plaintiff stockholders allege that Mr.
Potter and the Company made false and misleading statements or omitted material
information about the Company and the video industry during the period April
1995 to September 1996, the date of its subsequent public offering. Plaintiffs
are seeking "at least the sum of $967,967," plus interest, additional damages
and attorneys' fees. The Company and Mr. Potter believe that the claims are
unsubstantiated, without merit and they intend to defend the matter vigorously.
A motion to dismiss the First Amended Complaint was granted, but the court
allowed Plaintiffs to re-file. At present, the Second Amended Complaint has been
filed. The Company is in the process of discovery, which is not scheduled to
close until December 1999. The foregoing description is qualified in its
entirety by reference to the full text of the complaint and papers on file in
the action (Case No. SACV 98-415 GLT-ANx).
In August 1998, the Company filed suit in federal court in Oregon against
Rentrak Corporation, an Oregon Corporation. The Company alleges that Rentrak has
violated the federal antitrust law, given Rentrak's position in the market and
its exercise of monopoly power. Rentrak has counter-claimed for amounts it
alleges were owed by Moovies, Inc. prior to the acquisition of Moovies, Inc. by
the Company; the Company has denied that any sums are due. Discovery in the
matter is now scheduled to be completed in December 1999. The Company intends to
pursue its claims aggressively, although assurances cannot be given as to the
outcome of this matter. The foregoing description is qualified in its entirety
by reference to the full text of the complaint and papers on file in the action
(Case No. CV 98-1013-HA).
On June 20, 1999, Allen Industries, Inc., a North Carolina corporation,
filed a lawsuit against the Company claiming approximately $3 million in unpaid
invoices arising out of the conversion of various Moovies stores. The Company
has asserted that Allen Industries breached its contract and performed defective
work. The Company believes that the claims of Allen Industries are
unsubstantiated and without merit. The Company intends to defend the matter
vigorously. The foregoing description is qualified in its entirety by reference
to the full text of the complaint and papers on file in the action (Case No.
1:99CV640).
16 of 17
<PAGE>
On April 12, 1999, Sight & Sound Distributors, Inc., a Delaware
corporation, filed a lawsuit in state court (St. Louis County, Missouri)
alleging that the Company owes approximately $7.7 million for goods and services
purchased from Sight & Sound. The parties have reached settlement in this matter
which the Company expects will resolve this matter without further litigation.
The foregoing description is qualified in its entirety by reference to the full
text of the complaint and papers on file in the action (Case No. 99CC-001222).
In addition to the above, the Company is involved in various legal
proceedings arising during the normal course of conducting business. Management
believes that the resolution of these proceedings will not have any material
adverse impact on the Company's financial statements.
Item 6. Exhibits and Reports on Form 8-k
A. Exhibits. The following exhibits are filed herewith:
---------
Exhibit No. Title
----------- -----
27 Financial Data Schedule
B. Reports on Form 8-K. Listed below are all Current Reports or
--------------------
amendments on Form 8-K that were filed during the fiscal quarter
covered by this report, listing the items reported, any financial
statements filed, and the dates of such reports.
Current Report on Form 8-K filed July 1, 1999, reporting
amendments to the Company's existing credit facility.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIDEO UPDATE, INC.
Date: September 15, 1999: By: /s/ Daniel A. Potter
--------------------------------------
Daniel A. Potter,
Chief Executive Officer and
Chairman of the Board of Directors
Date: September 15, 1999: By: /s/ Daniel C. Howard
---------------------------------------
Daniel C. Howard,
Treasurer
17 of 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JULY 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,211
<SECURITIES> 0
<RECEIVABLES> 3,410
<ALLOWANCES> 0
<INVENTORY> 51,129
<CURRENT-ASSETS> 0
<PP&E> 80,863
<DEPRECIATION> 24,011
<TOTAL-ASSETS> 198,916
<CURRENT-LIABILITIES> 50,935
<BONDS> 472
0
0
<COMMON> 293
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<TOTAL-LIABILITY-AND-EQUITY> 198,916
<SALES> 5,900
<TOTAL-REVENUES> 60,064
<CGS> 3,212
<TOTAL-COSTS> 57,978
<OTHER-EXPENSES> (47)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,997
<INCOME-PRETAX> (1,864)
<INCOME-TAX> 0
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