-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TgJs5PTiNseBss5fSMQTpNKwKEVMyg5lmvm08Gd6k2qDWZf3f10oHczsbXX+nEBa 9BbpRc3O9TSQzn0I3Cd8JQ== 0000925178-96-000006.txt : 19960917 0000925178-96-000006.hdr.sgml : 19960917 ACCESSION NUMBER: 0000925178-96-000006 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960916 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOVIE GALLERY INC CENTRAL INDEX KEY: 0000925178 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-VIDEO TAPE RENTAL [7841] IRS NUMBER: 631120122 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24548 FILM NUMBER: 96630825 BUSINESS ADDRESS: STREET 1: 739 W MAIN ST CITY: DOTHAN STATE: AL ZIP: 36301 BUSINESS PHONE: 3346772108 MAIL ADDRESS: STREET 1: 739 W MAIN ST CITY: DOTHAN STATE: AL ZIP: 36301 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 1, 1996 Movie Gallery, Inc. (Exact name of registrant as specified in its charter) Delaware (State of other jurisdiction of incorporation) 0-24548 63-1120122 (Commission File Number) (I.R.S. Employer Identification Number) 739 West Main Street 36301 Dothan, Alabama (Zip Code) (Address of principal executive offices) (334) 677-2108 (Registrant's telephone number, including area code) n/a (Former name or former address, if changed since last report) Total Number of Pages: 38 Index to Exhibits appears on Page 3 The Form 8-K dated July 1, 1996 is amended as follows: Item 5. Other Events For the period July 1, 1996 to August 4, 1996 total unaudited revenues and net income for the Company were $25,443,000 and $2,890,000, respectively. Item 7. Financial Statements and Exhibits (a) Financial statements of business acquired Home Vision Entertainment, Inc. for the years ended September 30, 1993,1994, and 1995 and the nine months ended June 30, 1995 and 1996 Balance Sheets Statements of Operations Statements of Changes in Stockholders' Equity Statements of Cash Flows Notes to Financial Statements (b) Pro forma financial information Pro forma financial information includes that of the Company, Home Vision Entertainment, Inc. and Hollywood Video, Inc. (c) Exhibits 1. Home Vision Entertainment, Inc. Financial Statements 2. Pro Forma Financial Information 1 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 hereunto duly authorized. MOVIE GALLERY, INC. Date: September 16, 1996 By: /s/ J. Steven Roy ----------------- J. Steven Roy Senior Vice President and Chief Financial Officer 2 INDEX TO EXHIBITS 1. Home Vision Entertainment, Inc. Financial Statements. . . . . . . . . . . .4 2. Pro Forma Financial Information . . . . . . . . . . . . . . . . . . . . . 31 3 EX-1 2 HOME VISION FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Home Vision Entertainment, Inc.: We have audited the accompanying balance sheets of Home Vision Entertainment, Inc. as of September 30, 1993, 1994, 1995, and the related statements of operations, changes in stockholders' equity, and cash flows for each of the three years ended September 30, 1993, 1994, and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Home Vision Entertainment, Inc. as of September 30, 1993, 1994, and 1995, and the results of its operations and its cash flows for each of the three years ended September 30, 1993, 1994, 1995, in conformity with generally accepted accounting principles. Portland, Maine /s/ Coopers & Lybrand, LLP November 13, 1995, except for Notes 4 and 16, as to which the dates are June 24, 1996 and June 5, 1996, respectively 4 HOME VISION ENTERTAINMENT, INC. BALANCE SHEETS September 30, 1993, 1994, and 1995 June 30, 1996
ASSETS 1993 1994 1995 1996 ------------ ---------- ----------- ----------- (Note 14) (Unaudited) Current assets: Cash $61,645 $502,833 $676,737 $170,509 Accounts receivable 11,922 117,861 236,967 151,805 Inventories 119,064 307,045 1,065,122 679,391 Prepaid expenses 26,885 10,528 48,146 Deferred tax asset (Note 15) 245,000 498,800 ----------- ---------- ----------- ----------- Total current assets 219,516 938,267 2,271,972 1,500,505 ----------- ---------- ----------- ---------- Rental videos and other rental assets, net (Notes 2 and 5) 1,648,381 2,789,707 6,608,592 6,535,528 Property, plant, and equipment, net (Note 3) 991,740 1,141,871 3,202,864 2,956,535 Other assets: Security and other deposits 76,570 80,362 361,978 168,910 Covenants not-to-compete, net (Note 8) 18,000 141,937 327,838 294,121 Other assets 23,126 69,205 117,019 158,625 Deferred stock issuance costs (Note 17) 1,289,822 Goodwill, net (Note 14) 5,956,471 5,808,410 ----------- ---------- ----------- ----------- Total other assets 117,696 291,504 8,053,128 6,430,066 ----------- ---------- ----------- ----------- Total assets $2,977,333 $5,161,349 $20,136,556 $17,422,634 =========== =========== ============ ============
The accompanying notes are an integral part of the financial statements. 5 HOME VISION ENTERTAINMENT, INC. BALANCE SHEETS September 30, 1993, 1994, and 1995 June 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1994 1995 1996 ----------- ---------- ----------- ----------- (Note 14) (Unaudited) Current liabilities: Current portion of long-term debt (Note 4) $327,100 $446,770 $749,446 $1,037,954 Current portion of long term-debt - related parties (Note 4) 61,919 387,947 406,361 Current portion of obligations under capital leases (Note 6) 55,255 52,388 40,223 33,721 Short-term notes payable and line of credit (Note 5) 35,000 258,607 1,052,000 100,000 Accounts payable 747,656 1,552,761 5,144,534 4,835,325 Due to stockholder (Note 11) 450,000 Accrued expenses 114,596 182,132 782,137 1,138,218 Accrued stockholder distributions payable 222,124 Income taxes payable (Note 15) 1,200 ----------- ---------- ----------- ----------- Total current liabilities 1,279,607 3,226,701 8,157,487 7,551,579 ----------- ---------- ----------- ----------- Long-term debt (Note 4) 726,857 1,327,687 5,324,864 6,432,499 Long-term debt - related parties (Note 4) 338,081 1,299,249 1,002,996 Obligations under capital leases (Note 6) 104,624 52,583 33,471 11,548 Deferred income taxes payable (Note 15) 829,800 Commitments (Notes 6 and 18) Stockholder's equity: Preferred stock, .01 par value, 1,000,000 shares authorized, no shares issued or outstanding. Common stock, .01 par value, 35,000,000 shares authorized, 3,644,256, 3,451,000, and 5,916,000 issued at September 30, 1993, 1994, and 1995 respectively (Note 11) 3,400 238,401 4,159,401 4,159,401 Additional paid-in capital 857,000 833,000 Retained earnings (accumulated deficit) 862,845 (22,104) (388,716) (2,568,389) ----------- ---------- ----------- ----------- 866,245 216,297 4,627,685 2,424,012 Less: Stockholder loans receivable (Note 12) (136,000) ----------- ---------- ----------- ----------- Total stockholders' equity 866,245 216,297 4,491,685 2,424,012 ----------- ---------- ----------- ----------- Total liabilities and stockholders' equity $2,977,333 $5,161,349 $20,136,556 $17,422,634 =========== =========== ============ ============
The accompanying notes are an integral part of the financial statements. 6 HOME VISION ENTERTAINMENT, INC. STATEMENTS OF OPERATIONS
Year ended September 30, Nine months ended June 30, -------------------------------------- ----------------------------- 1993 1994 1995 1995 1996 ----------- ---------- ----------- ----------- ------------ (Unaudited) Revenues: Rental revenue $6,142,753 $8,166,862 $14,783,017 $10,157,235 $14,107,041 Product sales revenue 941,783 1,131,578 3,240,971 2,372,522 3,590,164 ----------- ----------- ----------- ----------- ------------ Total revenues 7,084,536 9,298,440 18,023,988 12,529,757 17,697,205 Operating costs and expenses: Cost of product sales 625,027 807,394 2,220,680 1,302,168 2,453,357 Store operating expenses 4,947,849 5,935,930 12,085,641 8,435,801 12,009,398 General and administrative expenses 1,108,860 1,682,202 3,017,509 2,272,795 3,034,200 Contract termination expense with related party (Note 13) 180,238 ----------- ---------- ----------- ----------- ------------ Operating income 402,800 692,676 700,158 518,993 200,250 Interest expense 113,067 147,293 559,770 342,080 730,715 Other expense 2,732,808 ----------- ---------- ----------- ----------- ------------ Income before provision for income taxes 289,733 545,383 140,388 176,913 (3,263,273) Income taxes (Note 15) (507,000) (505,000) 1,083,600 ----------- ---------- ----------- ------------ ------------ Net Income (loss) $289,733 $545,383 ($366,612) ($328,087) ($2,179,673) =========== ========== =========== =========== ============
The accompanying notes are an integral part of the financial statements. 7 HOME VISION ENTERTAINMENT, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended September 30, 1993, 1994, and 1995, and the nine months ended June 30, 1996 (Note 1)
Retained Common Stock Additional Earnings Stockholder Total ------------------------ Paid-In (Accumulated Loans Stockholders' Shares Amount Capital Deficit) Receivable Equity ---------- ----------- ---------- ----------- ----------- ------------ Balances at September 30, 1992 $3,239,010 $3,200 $630,592 $- $633,792 Issuance of common stock 405,246 200 200 Net Income 289,733 289,733 S corporation distributions (57,480) (57,480) ---------- ----------- ---------- ----------- ----------- ------------ Balances at September 30, 1993 3,644,256 3,400 862,845 866,245 Issuance of common stock (Note 10) 1,061,922 235,001 235,001 Stock repurchase (Note 11) (1,255,178) (930,000) (930,000) Net Income 545,383 545,383 S corporation distributions (500,332) (500,332) ---------- ----------- ---------- ----------- ----------- ------------ Balances at September 30, 1994 3,451,000 238,401 (22,104) 216,297 Stockholder borrowings (Note 12) (136,000) (136,000) Issuance of common stock in connection with the purchase of businesses (Note 14) 2,465,000 3,921,000 3,921,000 Issuance of warrants (Note 7) 857,000 857,000 Net loss (366,612) (366,612) ---------- ----------- ---------- ----------- ----------- ------------ Balances at September 30, 1995 5,916,000 4,159,401 857,000 (388,716) (136,000) 4,491,685 Warrant reclassification (24,000) (24,000) Stockholder borrowings write - off 136,000 136,000 Net loss (2,179,673) (2,179,673) ---------- ----------- ---------- ----------- ----------- ------------ Balances at June 30, 1996 (Unaudited) 5,916,000 $4,159,401 $833,000 ($2,568,389) $- $2,424,012 ========== =========== ========== ============ =========== ============
The accompanying notes are an integral part of the financial statements. 8 HOME VISION ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30, Nine months ended June 30, -------------------------------------- ----------------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- ------------ ------------ (Unaudited) Cash flow from operating activities: Net income (loss) $289,733 $545,383 ($366,612) ($328,087) ($2,179,673) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 1,662,239 2,536,828 4,725,742 2,845,394 4,906,217 Write - off of deferred stock issuance costs 1,289,822 Contract termination expense 180,238 Compensation expense in the form of common stock 75,000 Loss on disposal of fixed assets 2,625 29,835 Changes in certain current assets and liabilities: Accounts receivable - other (5,424) (105,939) (97,037) (67,577) 85,162 Accounts receivable - related parties 18,800 (20,000) Inventories 9,471 (187,981) (375,662) (130,991) 385,731 Prepaid expenses (22,881) 16,357 (34,248) (38,783) 48,146 Security deposits 1,524 (3,792) (241,029) (53,604) 193,068 Accounts payable 168,757 637,021 1,461,352 1,282,700 (309,208) Accrued expenses (13,366) 66,448 518,228 301,419 356,081 Deferred income taxes payable 505,800 379,000 (1,083,600) Taxes payable 1,200 126,000 (1,200) ---------- ----------- ----------- ------------ ------------ Net cash provided by operating activities 2,111,478 3,739,563 6,097,734 4,315,471 3,720,381 ---------- ----------- ----------- ------------ ------------ Cash flow from investing activities: Fixed asset additions (275,775) (378,644) (1,196,342) (763,889) (270,364) Rental video and other rental asset additions (1,837,241) (3,331,403) (5,131,848) (3,416,230) (3,756,297) Purchase of businesses, net of cash acquired * 1,563 (3,093,325) (3,093,325) Proceeds from sale of fixed assets 3,000 93,000 ---------- ----------- ----------- ------------ ------------ Net cash utilized by investing activities (2,110,016) (3,708,484) (9,421,515) (7,273,444) (3,933,661) ---------- ----------- ----------- ------------ ------------ Cash flow from financing activities: Proceeds from issuance of common stock/ warrants 200 79,845 857,000 853,000 Due to stockholder (450,000) (450,000) Proceeds from long-term debt 342,935 774,990 4,221,036 3,725,036 2,252,000 Proceeds from short-term notes payable 10,000 308,064 952,000 Payments on long- term debt (242,505) (418,051) (726,575) (546,714) (855,857) Payments on short- term notes payables (59,457) (257,387) (178,367) (952,000) Payments on related party debt (202,015) (120,805) (277,839) Payments on obligations under capital leases (51,546) (54,908) (52,661) (39,464) (28,425) Change in line of credit 25,000 (25,000) 98,780 Change in stockholder loans receivable (136,000) (136,000) 136,000 S corporation distributions (57,480) (137,972) (222,124) (222,124) Increase in other assets (10,081) (57,402) (47,814) (34,696) (231,905) Deferred stock issuance costs (536,555) (44,888) (334,922) ---------- ----------- ----------- ------------ ------------ Net cash provided by financing activities 16,523 410,109 3,497,685 2,804,978 (292,948) ---------- ----------- ----------- ------------ ------------ Net increase (decrease) in cash 17,985 441,188 173,904 (152,995) (506,228) Cash, beginning of year 43,660 61,645 502,833 502,833 676,737 ---------- ----------- ----------- ------------ ------------ Cash, end of year $61,645 $502,833 $676,737 $349,838 $170,509 ========== =========== =========== ============ ============
The accompanying notes are an integral part of the financial statements. 9 HOME VISION ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS
Year ended September 30, Nine months ended June 30, ------------------------------------------------ ------------------------------- 1993 1994 1995 1995 1996 ----------- ------------- ------------------ ------------------ ----------- (Unaudited) *Purchase of businesses, net of cash acquired: Current assets, other than cash $(407,854) $(430,238) Property and equipment $(19,060) (1,240,807) (1,265,807) Rental assets (61,792) (2,739,704) (2,838,794) Stockholder distributions (140,236) Goodwill (6,114,957) (5,967,801) Other assets (40,587) (40,587) Covenants not-to-compete (224,375) (224,375) Current liabilities 169,172 1,458,931 1,370,249 Other liabilities 20,156 97,000 Deferred income taxes payable 79,000 Long-term debt 213,561 726,817 796,817 Long-term debt - related parties 1,489,211 1,489,211 Common stock issued 3,921,000 3,921,000 ----------- ------------- ------------------ ------------------- -------- 181,801 (3,093,325) (3,093,325) Contract termination expense (180,238) ----------- ------------- ------------------ ------------------- -------- Net cash acquired from (used to acquire) businesses $ - $1,563 $(3,093,325) $(3,093,325) $ - =========== ============= ================== =================== ======== Supplemental disclosures of cash flow information: Cash paid for interest $113,067 $147,293 $476,737 $331,580 $395,108 =========== ============= ================== =================== ========
Supplemental information of noncash financing and investing activities: At June 30, 1996, $24,000 of additional paid-in capital from warrants was reclassified to debt. At September 30, 1995, $753,267 of deferred stock issuance costs remain in accounts payable. During 1994, the Company entered into a covenant not-to-compete agreement by issuing a note payable amounting to $150,000. (Note 8) During 1994, the Company sold 944,588 shares of common stock for a $75,000 cash payment and an $85,000 note receivable from the party. As part of this transaction, an additional $75,000 was assigned to compensation expense for the difference between the stock's fair value and the selling price of the stock (Note 10). At September 30, 1994, the Company had accrued $222,124 for stockholder distributions payable. On September 30, 1994, the Company repurchased 1,255,178 shares of its common stock (Note 11). The noncash impact of this transaction was an increase to long-term debt for $400,000, forgiveness of an $80,000 note receivable, an increase in due to stockholder for $450,000, and a reduction in retained earnings of $930,000. During 1993 and 1995, the Company entered into various capital lease obligations amounting to $30,827 and $21,384, respectively. The accompanying notes are an integral part of the financial statements. 10 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Nature of Business Home Vision Entertainment, Inc. (HVE) is principally involved in the business of renting video tapes, VCRs and video games at various locations throughout Maine and parts of New Hampshire and Massachusetts. The Company Home Vision Entertainment, Inc. (HVE) was formed effective October 1, 1994, and at that time acquired all the assets and assumed all the liabilities of its predecessor, Home Vision Video (HVV), in consideration for the issuance of 3,451,000 shares of common stock of HVE. The exchange between the entities under common control has been accounted for at the historical costs of the assets and liabilities of HVV similar to the pooling of interests method. Prior to HVE acquiring all the assets and assuming all the liabilities of HVV, L.A. Entertainment, Inc. (LAE) merged into Home Vision Video. LAE was formed during 1993 to operate stores under the Home Vision Video name. The merger of these entities under common control was accounted for at historical costs similar to the pooling of interests method. The financial statements prior to October 1, 1994, are those of Home Vision Video and L.A. Entertainment, Inc., which hereafter are referred to collectively as Home Vision Entertainment, Inc. All references to share information have been adjusted to give effect to HVE issuing 3,451,000 shares of common stock for all the assets and the assumption of all the liabilities of HVV and LAE. Interim Financial Statements The financial statements for the nine months ended June 30, 1996, are unaudited but include all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presention of its operating results and cash flows for that period. Cash and Cash Equivalents For the purpose of the statement of cash flows, the Company considers all highly liquid debt investments purchased with original maturities of three months or less to be cash equivalents. 11 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS(CONTINUED) 1. Significant Accounting Policies, Continued: Merchandise Inventories Merchandise inventories, consisting primarily of prerecorded videocassettes, are stated at the lower of cost on the first-in, first-out method or market. Capitalized Software Costs Certain costs of internally developed software to be used in the operation of the Company's video stores are capitalized and amortized over the economic useful life of the software product, which is estimated to be three years. Unamortized capitalized software costs included in other assets were approximately $34,000 and $29,000 at September 30, 1995, and at June 30, 1996, respectively. Rental and Fixed Assets Rental videocassettes and fixed assets are stated at cost. For financial reporting purposes, depreciation and amortization have been computed using straight-line and accelerated methods over the estimated useful lives of the related assets as follows: Years Furniture and fixtures 7 Office equipment 5 Leasehold improvements 5 - 7 Vehicles 5 VCR & other rental equipment 5 - 7 Equipment under capitalized leases 3 - 5 Until October 1, 1995, rental videocassettes which were considered library stock and video games were amortized over 36 months on a straight-line basis. Purchases of a certain number of "hits," namely the top titles released annually, were amortized over twelve months on an accelerated basis. "Hits" consist of those titles for which twelve or more copies were purchased per store. Effective October 1, 1995, the Company adopted a new method of amortization for rental videocassettes. Base stock (copies 1-3) videocassettes are amortized over 36 months on a straight-line basis with a $5 provision for salvage value. Hits (copies 4+) are amortized to $5 on a straight-line basis over 6 months. A one-time cumulative effect adjustment charge of $438,872 was recorded on October 1, 1995. 12 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS(CONTINUED) 1. Significant Accounting Policies, Continued: Equipment under capital leases is amortized over the shorter of the useful life of the equipment or the term of the lease agreement. Maintenance and repairs are charged to expense as incurred; replacements and betterments are capitalized. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is included in the determination of net income. Upon transferring rental videocassettes to merchandise inventories for sale, the cost of the video tape transferred and the related accumulated amortization are removed from the rental asset accounts and the difference between the remaining net book value of the video tape transferred and the lower of cost or market used to value merchandise is charged to depreciation expense. Amortization of Covenants Not-to-Compete Covenants not-to-compete are amortized on a straight-line basis over the terms of the agreements. Amortization of Goodwill The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. Goodwill is amortized on a straight-line basis over 20 years. Goodwill impairment is assessed at each balance sheet date based upon a review of the current and expected future results of the acquired entities. The assessment is premised on future operating earnings and cash flows on an undiscounted basis. Revenue Recognition Revenue is recognized at the time of rental or sale. Store Opening Costs Store opening costs, which consist primarily of payroll, advertising, and supplies, are expensed as incurred. Per Share Data In September, 1995, the Company's Board of Directors approved a stock split of 493-for-1, resulting in the issuance of an additional 5,904,000 shares of common stock to the current stockholders. Share information has been adjusted to give effect to the stock split in the 13 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS(CONTINUED) 1. Significant Accounting Policies, Continued: accompanying financial statements. In addition, the Company authorized 35,000,000 shares of common stock. Prior to this action, there were 12,000 shares of common stock outstanding. Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the period presented. Common stock equivalents include the effect of shares to be issued upon the exercise of common stock options and warrants. Net loss per share for the year ended September 30, 1995 was $(.07). Preferred Stock The Board of Directors has the authority, without further action of the stockholders of the Company, to issue up to an aggregate of 1,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such series. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting and conversion rights that could adversely affect the voting power of holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any shares of Preferred Stock. 2. Rental Videos and Other Rental Assets: Rental videos and other rental assets consisted of the following at September 30, 1993, 1994, 1995, and at June 30, 1996: 1993 1994 1995 1996 ---- ---- ---- ---- Rental videos $4,227,869 $5,433,331 $9,727,253 $13,091,722 Rental video games 521,585 987,625 1,485,822 1,825,662 VCR's/ other assets 53,089 121,377 452,049 504,037 ----------- ----------- ----------- ----------- 4,802,543 6,542,333 11,665,124 15,421,421 Less accum. amort. (3,154,162) (3,752,626) (5,056,532) (8,885,893) ----------- ----------- ----------- ----------- $1,648,381 $2,789,707 $6,608,592 $ 6,535,528 =========== =========== =========== =========== Amortization expense for rental videos and other rental assets was approximately $1,438,000, $2,254,000, and $4,053,000 for the years ended September 30, 1993, 1994, and 1995, respectively, and $3,880,000 for the nine months ended June 30, 1996. 14 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS(CONTINUED) 3. Property, Plant, and Equipment: Property, plant, and equipment consisted of the following at September 30, 1993, 1994, 1995, and at June 30, 1996: 1993 1994 1995 1996 ---- ---- ---- ---- Furniture & Fixtures $ 896,773 $1,124,985 $2,238,290 $2,705,097 Office Equipment 149,926 203,007 552,357 473,675 Leasehold Improvements 320,412 371,240 1,187,418 1,331,080 Vehicles 33,166 83,585 320,237 58,814 Equipment under lease 223,008 223,008 244,392 244,392 ---------- ----------- ----------- ----------- 1,623,285 2,005,825 4,542,694 4,813,058 Less accum. depreciation (631,545) (863,954) (1,339,830) (1,856,523) ---------- ----------- ----------- ----------- $ 991,740 $1,141,871 $3,202,864 $2,956,535 ========== =========== =========== =========== Depreciation and amortization expense for property, plant, and equipment was approximately $206,000, $247,000, and $473,000 for the years ended September 30, 1993, 1994, and 1995, respectively, and $517,000 for the nine months ended June 30, 1996. During 1995 the Company purchased approximately $113,000 of computer equipment from a company owned by a related party. 4. Long-Term Debt, Including Related Parties: Long-term debt consisted of the following at September 30, 1993, 1994, 1995, and June 30, 1996:
1993 1994 1995 1996 ---- ---- ---- ---- from the New York Prime plus 2% to 3% (10.75% - 11.75% at September 30, 1995), with principal and interest due in monthly installments ranging from $2,680 - $3,999 through various dates through the year 2000. The notes are collateralized by substantially all assets of the Company. $ $ 544,723 $ 698,708 $ 601,429 8% stockholder note, with principal and interest due in monthly installments of $8,111 through October 1, 1999. 400,000 338,081 283,982 7% note payable to related party, with principal and interest payable in monthly installments of $20,000 through December 2000. 1,051,875 924,150
15 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS(CONTINUED) 4. Long-Term Debt, Including Related Parties, Continued:
1993 1994 1995 1996 ---- ---- ---- ---- 8% stockholder note, with principal and interest due in monthly installments of $11,307 through July, 1997. 230,655 150,654 Various notes payable bearing interest at 9% with principal and interest due in monthly installments ranging from $1,113 to $1,908 through August, 1998. 123,659 93,919 9% related party note, with principal and interest due in monthly installments of $2,226 through August, 1998. 66,585 50,572 Various notes bearing interest at 9.5%, with principal and interest due in monthly installments ranging from $3,125 to $4,467. 227,937 195,692 8% note, with principal and interest payable in monthly installments of $4,701 through September, 1997. 107,935 71,126 11% subordinated note, with principal and interest due on December 31, 1996, collateralized by substantially all assets of the Company. The note is with the Company's primary supplier of video rental tapes. (Note 7) 2,976,000 3,000,000 Variable rate note guaranteed by the stockholders of the Company with interest equal to the New York prime rate plus 2% (9.25% at Septem- ber 30, 1995); principal and interest payable in monthly install- ments of $25,349 through November 1999. The note is collateralized by substantially all assets of the Company. 1,014,811 854,430 Variable rate (10.75% at September 30, 1995) note, with principal and interest payable in monthly installments of $18,249 through February, 1999; collateralized by substantially all assets of the Company. 813,620 668,010 543,730 13.63% covenant not-to-compete obligation, with principal and interest payable in monthly installments of $1,287 through February, 2002. 71,492 65,826 60,744 Various notes due in monthly installments with interest rates ranging from 6.9% to 15%. 155,625 158,958 191,424 40,728 10% note guaranteed by the stockholders of the Company and col- lateralized by assignment of leases and all assets, with principal and interest due in monthly installments of $9,680 through 1996. 278,336 185,664
16 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS(CONTINUED) 4. Long-Term Debt, Including Related Parties, Continued:
1993 1994 1995 1996 ---- ---- ---- ---- Variable rate (8.5% at September 30, 1993) U.S. Small Business Administration note, guaranteed by the stockholders of the Company, collateralized by assignment of leases and all assets except vehicles; payable over 5 years in monthly installments of $12,917, plus accrued interest. Note repaid in 1994. 619,996 12.5% note guaranteed by the stockholders of the Company with principal and interest payable in monthly installments of $115,808 through April, 1997. 1,094,403 Variable rate note guaranteed by the stockholders of the Company with interest equal to the New York prime rate plus 3%(10.25% at January 31, 1996); principal and interest payable in monthly installments of $20,580 through January, 2001. The note is collateralized by substantially all assets of the Company. 914,251 ---------- ----------- ----------- ----------- 1,053,957 2,174,457 7,761,506 8,879,810 Less current portion (327,100) (508,689) (1,137,393) (1,444,315) ---------- ----------- ----------- ----------- Long-term debt, excluding current portion $ 726,857 $1,665,768 $6,624,113 $7,435,495 ========== =========== =========== ===========
The loan agreements contain certain restrictive covenants including the maintenance of certain minimum current assets to current liability ratios, attaining certain net profits, maintaining cash reserves equal to 5% of total assets beginning September 30, 1995, maintaining a deposit relationship with the Company's primary lender, and attaining minimum debt to tangible net worth ratios. As of September 30, 1995, the Company was not in compliance with certain restrictive covenants and received a waiver from the note holder in a letter dated October 27, 1995 under which the note holder agreed to waive the covenant default through and including October 1, 1996. The $2,976,000 note contains various covenants, including the maintenance of minimum cash flow and current ratios, and stipulations that the Company shall not declare or pay a dividend of any kind nor allow senior indebtedness to exceed $12,500,000 prior to the proposed initial public offering or $25,000,000 after the proposed initial public offering. As of September 30, 1995, the Company was not in compliance with certain restrictive covenants and received a waiver from the note holder in a letter dated June 24, 1996, under which the note holder agreed to waive the covenant default through and including October 1, 1996. 17 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS(CONTINUED) 4. Long-Term Debt, Including Related Parties, Continued: The aggregate principal maturities of the long-term debt at September 30, 1995, for the next five years and thereafter are as follows: 1996 $1,137,393 1997 4,177,168 1998 1,077,392 1999 889,669 2000 378,057 Thereafter 101,827 ------------ $7,761,506 ============ 5. Short-Term Notes Payable and Line of Credit: Short-term notes payable consisted of the following at September 30, 1993, 1994, 1995, and June 30, 1996.
1993 1994 1995 1996 ---- ---- ---- ---- 11.75% note due January 1996, collateralized by rental and fixed assets. The note is guaranteed by stockholders of the Company. $ $ $ 952,000 $ Non-interest bearing note; collateralized by rental assets, payable in monthly installments of $26,692 through July 1995. 257,387 9% note, collateralized by rental assets. 10,000 Variable rate (9.75% at September 30, 1995) bank line of credit; collateralized by rental assets. 25,000 Variable rate (9.75% at September 30, 1995) $100,000 bank line of credit; collateralized by rental assets. 1,220 100,000 100,000 --------- ---------- ---------- ---------- $ 35,000 $ 258,607 $1,052,000 $ 100,000 ========= ========== ========== ==========
6. Commitments: Leases The Company leases certain of its retail and office space and equipment under non-cancelable operating leases, certain of which contain renewal options and escalation clauses. 18 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Commitments, Continued: Leases, Continued Future minimum lease payments required under these leases as of September 30, 1995 are as follows: Operating Capital Leases Leases ---------- ------- 1996 $2,292,000 $51,325 1997 1,938,000 16,425 1998 1,347,000 5,491 1999 873,000 5,491 2000 621,000 4,852 Thereafter 1,736,000 ---------- ------- Total minimum lease payments $8,807,000 83,584 ========== Less amount representing interest (9,890) ------- Present value of future minimum lease payments $73,694 ======= The net book value of equipment under capitalized leases at September 30, 1993, 1994, and 1995, was approximately $123,000, $168,000, and $100,000, respectively, and was approximately $45,000 at June 30, 1996. Aggregate rental expense was approximately $1,025,000, $1,200,000, and $2,150,000 for the years ended September 30, 1993, 1994, and 1995, respectively, and was approximately $2,500,000 at June 30, 1996. The Company rents its office space from a partnership whose partners are also stockholders of the Company. Amounts paid to the related partnership were approximately $58,000, $55,000, and $56,000 for the years ended September 30, 1993, 1994, and 1995, respectively, and was approximately $42,000 for the nine months ended June 30, 1996. Employment Contracts The Company has entered into employment contracts with certain key employees that provide for minimum annual compensation over periods ranging from two to five years. At September 30, 1995, the aggregate commitment was approximately $3,380,000. Rentrak Agreement Home Vision Entertainment, Inc. has entered into a six year agreement with Rentrak which requires the Company to rent a minimum quantity of video tapes on a monthly basis. In consideration for the Company's agreeing to certain rental conditions, Rentrak will pay 19 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENT (CONTINUED) 6. Commitments, Continued: Rentrak, Continued approximately $290,000 to the Company which will be amortized to income over the life of the agreement. At September 30, 1995, the Company has received $262,000 from Rentrak of which approximately $228,000 has been deferred for future income recognition. Litigation Certain claims arising in the normal course of business are pending; however, in the opinion of management, the outcome of these matters will not have a material adverse effect on the Company. 7. Warrants: On June 27, 1995, the Company issued warrants to Rentrak for $833,000. The warrants entitle Rentrak to purchase one percent (1%) of the Company's common stock immediately prior to the proposed initial public offering at an exercise price of $100. These warrants may be exercised beginning June 27, 1995 through June 27, 2000. In fiscal 1995, in conjunction with a $3 million financing arrangement, the Company issued detachable warrants entitling the holder to purchase shares of the Company's common stock subsequent to its IPO. The warrants are exercisable beginning on the date the IPO is completed and expire on June 30, 2000. The number of shares purchasable is equal to the quotient obtained by dividing $3,495,000 by an amount equal to 85% of the common stock's IPO price. These warrants are exercisable at a price equal to 85% of the IPO price and may be exercised for cash, presentation of the related note payable, or a combination of the two. Based upon the imputed value of the Company's stock at the time the detachable warrants were issued, $24,000 has been allocated to the value of the detachable warrants at September 30, 1995 with a corresponding reduction from the $3 million face value of the note. On June 30, 1996, the $24,000 allocated to these warrants was reclassified to the note. 8. Covenants Not-To-Compete: As part of a stock redemption agreement with a former shareholder in fiscal year 1988, the Company executed a non-competition agreement in exchange for a noninterest bearing obligation for $100,000, payable in monthly installments of $1,000 over 100 months. In fiscal 1994, the Company executed a non-competition agreement with a former shareholder in exchange for a $150,000 obligation. The obligation required a $75,000 payment during 20 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. Covenants Not-To-Compete, Continued: fiscal 1994 with the remaining $75,000 to be paid in monthly install- ments of $1,287 over 96 months and bears interest at a rate of 13.63%. In conjunction with the Total Video Acquisition (Note 14) on June 30, 1995, the Company executed a non-competition agreement with Total Video's stockholder in exchange for a cash payment of $100,000. The covenant will be amortized over four years, the life of the agreement. In conjunction with one of the "Other" Acquisitions (Note 14), the Company executed a non-competition agreement with one of the stockholders in exchange for a $124,375 obligation. The obligation is to be paid in monthly installments of $3,125 over 48 months, and bears interest at a rate of 9.5%. 9. Stock Options: In September of 1995, the Board of Directors approved a stock option plan available to substantially all full time employees and a stock option plan available to all outside directors of the Company. The Company has reserved 1,000,000 shares of common stock for these plans. Upon the completion of a proposed IPO, the Company will grant options to certain employees entitling the employees to purchase a total of 211,400 shares of the Company's common stock at the IPO price per share. Of these, options to purchase 87,900 shares will be exercisable immediately and the remainder will be exercisable over periods ranging from one to four years. The Director's stock option plan provides for the two outside Directors to receive 5,000 options each upon completion of the IPO, exercisable at the IPO price per share. The various above mentioned stock option plans have not been implemented since the Company has not completed the proposed IPO. Prior to adopting its formal stock option plan, the Company granted an option to purchase $200,000 of common stock to the stockholder of Total Video (Note 14), which is exercisable at a price equal to the IPO price per share. In addition, as further discussed in Note 16, the Company has agreed to grant a total of 319,500 options in conjunction with the acquisitions expected to occur upon completion of the IPO. These options are exercisable at the IPO price per share. 21 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. Compensation Expense in the Form of Common Stock: On December 7, 1993, Home Vision Entertainment, Inc. sold 944,588 shares of common stock for a $75,000 cash payment and an $85,000 note receivable from a related party. The value of the 944,588 shares of common stock was determined to be $235,000 which resulted in the Company's recognizing $75,000 of expense for the difference between the fair value of the stock and the consideration originally received from the stockholder. 11. Stock Repurchase: On September 30, 1994, Home Vision Entertainment, Inc. reacquired 1,255,178 shares of its no par common stock from its stockholders for an estimated fair value of $930,000, which included Home Vision Entertainment, Inc. forgiving $80,000 outstanding on a note receivable (Note 10), paying $450,000 in cash subsequent to year end (classified as due to stockholder at September 30, 1994), and issuing a five year, 8%, related party note payable for $400,000. 12. Stockholder Loans Receivable: Stockholder loans receivable represent amounts advanced to stockholders bearing interest at 8.5%. The notes are uncollateralized and have been included with stockholders' equity. These notes were written off by the Company in fiscal 1996. 13. Contract Termination: On September 30, 1994, Home Vision Entertainment, Inc. purchased the rights to certain advertising space from Priority One, a company engaged in the selling of advertising space on Home Vision Entertainment, Inc. video cartridge boxes. Home Vision Entertainment, Inc. was required to pay $167,000 and assume approximately $21,000 of debt to terminate its contract with Priority One and obtain the advertising rights. Priority One was 75% owned by a stockholder of Home Vision Entertainment, Inc. 22 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. Acquisitions: Verbal Volumes Acquisition: On September 30, 1994, the Company acquired all of the assets and assumed certain liabilities of Verbal Volumes (VV), a company engaged in the rental of audio tapes, owned substantially by the stockholders of the Company. The Company purchased VV for $1 and assumed approximately $192,000 of VV's debt, and forgave a $20,0000 account receivable due from VV. The exchange between the entities under common control was accounted for at historical costs similar to the pooling of interests method. The historical cost at the date of the acquisition of the assets and liabilities was as follows: Current assets $ 1,000 Audio book rental inventory 62,000 Equipment 11,000 Current liabilities (2,000) Long-term liabilities (192,000) --------- $(120,000) ========= The difference between the historical costs of the assets acquired and the liabilities assumed was treated as stockholder distributions. The results of operations of VV have been included in the results of operations of the Company since the date of the acquisition. 23 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. Acquisitions, Continued: Sounds Easy Video Acquisition: On October 1, 1994, the Company acquired all of the assets and assumed all of the liabilities of Guerrette Home Entertainment in connection with fourteen video stores operated by Guerrette Home Entertainment in Maine under the trade name Sounds Easy Video (SEV). The assets acquired consisted principally of videocassettes and other inventory held for sale or rent and furniture and fixtures of the video stores. The cost of the SEV acquisition, net of various liabilities assumed, of $1,725,000 was provided for through the issuance of 1,479,000 shares of the Company's common stock. Prior to this acquisition, SEV redeemed 49% of its outstanding partnership interest for $1,319,000 in demand notes payable. The purchase method of accounting was used to record the acquisition. The estimated fair market value at the date of the acquisition of the assets and liabilities of the acquired stores was as follows: Current assets $ 208,000 Videocassette rental inventory 1,245,000 Equipment and leasehold improvements 504,000 Other assets 8,000 Current liabilities (1,095,000) Long-term liabilities (1,199,000) ------------ $ (329,000) ============ As a result, the Company recorded approximately $2.1 million in goodwill, which is being amortized over 20 years on a straight-line basis. The results of operations of SEV have been included in the results of operations of the Company since the date of the acquisition. Total Video Acquisition On June 30, 1995, the Company acquired, for $1.85 million in cash, from Total Video (TV) substantially all of the operating assets of TV used in connection with five video stores operated by TV in New Hampshire and paid $100,000 in cash for a covenant not-to-compete. As part of its purchase of TV, the Company granted stock options entitling the stockholder of TV to purchase $200,000 worth of the Company's common stock at a price equal to the initial public offering price of the common stock (Note 9). The assets acquired consisted principally of videocassettes and other inventory held for sale or rent and furniture and fixtures of the video stores. 24 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. Acquisitions, Continued: Total Video Acquisition, Continued: The total cost of the TV acquisition of $1.95 million was provided through borrowings of long-term debt by the Company. The purchase method of accounting was used to record the acquisition. The estimated fair market value at the date of the acquisition of the assets of the acquired stores was as follows: Current assets $ 73,000 Videocassette rental inventory 488,000 Equipment and leasehold improvements 162,000 Other assets 21,000 --------- $ 744,000 ========= As a result, the Company recorded approximately $1.1 million in goodwill, which is being amortized over 20 years on a straight-line basis, and a $100,000 covenant not-to-compete, which will be amortized over four years, the life of the agreement. Front Row Video Acquisition On June 30, 1995, the Company acquired all of the assets and assumed all of the liabilities of nine Front Row Video (FRV) video stores in Maine. As part of this purchase, the Company paid $250,000 in cash, issued a $250,000, 8% note payable due in 24 monthly installments commencing August 1, 1995, and issued 658,155 shares of its common stock, which were assigned a value of $2,196,000. 327,845 shares of the common stock issued as part of the acquisition of FRV were issued to a stockholder of the Company who owned 49% of FRV. In order to capitalize the Company with 5,916,000 shares of outstanding common stock upon completion of the FRV acquisition, all of the remaining stockholders of the Company received 362,355 additional shares of common stock, proportionate to their shareholdings after giving effect to the acquisitions. The assets acquired consisted principally of videocassettes and other inventory held for sale or rent and furniture and fixtures of the video stores. The purchase method of accounting was used to record the acquisition. The estimated fair market value at the date of the acquisition of the assets and liabilities of the acquired stores was as follows: 25 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. Acquisitions, Continued: Front Row Video Acquisition, Continued: Current assets $ 144,000 Videocassette rental inventory 722,000 Equipment and leasehold improvements 472,000 Other assets 21,000 Deferred income taxes (79,000) Current liabilities (503,000) Long-term liabilities (500,000) ----------- $ 277,000 =========== As a result, the Company has recorded approximately $2.4 million in goodwill, which is being amortized over 20 years on a straight-line basis. Other Acquisitions On June 30, 1995, the Company acquired two video store chains consisting of three video stores in Massachusetts and one video store in Maine (the "Other Acquisitions"). The assets acquired consisted principally of videocassettes and other inventory held for sale or rent and furniture and fixtures of the video stores. The total cost of the other acquisitions of $1.02 million was funded through the issuance of approximately $439,000 of notes payable, $424,000 in cash, and assuming certain liabilities. Three of the Company's stockholders had an ownership interest in one of the "Other Acquisitions". The stockholders were paid approximately $65,000 in the aggregate as part of the acquisition. The purchase method of accounting was used to record the acquisition. The estimated fair value at the date of the acquisition of the assets and liabilities of the acquired stores was as follows: Current assets $ 51,000 Videocassette rental inventory 283,000 Equipment and leasehold improvements 52,000 Other assets 5,000 Current liabilities (107,000) Long-term liabilities (70,000) ---------- $ 214,000 ========== 26 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. Acquisitions, Continued: Other Acquisitions, Continued: As a result, the Company has recorded approximately $520,000 in goodwill, which is being amortized over 20 years on a straight-line basis, and a $124,375 covenant not-to-compete, which will be amortized over four years, the life of the agreement. Summary The following table represents the unaudited proforma results of operations of the Company for the years ended September 30, 1994 and 1995, as if the Sounds Easy Acquisition, Total Video Acquisition, Front Row Video Acquisition, and the "Other Acquisitions" had occurred at the beginning of the respective periods. These proforma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of the respective periods or of results which may occur in the future. 1994 1995 ------------ ------------- (Unaudited) Total revenue $ 21,359,000 $ 23,339,000 Net income (loss) $ 1,174,000 $ (558,000) 15. Income Taxes: Prior to October 1, 1994, the Company was taxed for federal and state income tax purposes as an S corporation under Subchapter S of the Internal Revenue Code of 1986, and was taxed as an S corporation for state income tax purposes under comparable state tax laws. As a result, the Company's earnings were taxed directly to the Company's shareholders for federal and certain state income tax purposes, at their individual federal and state income tax rates, rather than to the Company. Subsequent to September 30, 1994, the Company has been subject to federal and state income taxes on its earnings. Under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109) issued by the Financial Accounting Standards Board, the Company was required to provide for deferred taxes, arising from the cumulative temporary differences between financial reporting and tax reporting, by recognizing a provision for income taxes for such deferred taxes in its statement of operations in the period in which the termination of the Company's S corporation status occurred. Such charge to earnings during the year ended September 30, 1995 was $400,000. 27 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 15. Income Taxes, Continued: The provision for income taxes consists of the following for fiscal 1995 and for fiscal 1996 through June 30, 1996: 1995 1996 Current tax expense ----------- ------------ State $ 1,200 $ - ----------- ------------ 1,200 - Deferred tax expense Federal 834,300 (839,800) State 189,500 (243,800) ----------- ------------ 1,023,800 (1,083,600) ----------- ------------ Benefit of net operating loss (518,000) - ----------- ------------ $ 507,000 $(1,083,600) ========== ============ A reconciliation of the differences between income tax expense at statutory rates and the effective rate is as follows: 1995 1996 ---- ---- Tax expense on income at statutory rates $ 49,000 $ (1,141,600) Conversion to C corporation 400,000 Goodwill amortization 36,000 60,000 Shareholder note write-off 54,000 State income taxes, net of federal benefit 9,000 (163,000) Other 13,000 107,000 --------- -------------- Total tax expense $ 507,000 $ (1,083,600) ========= ============== Deferred taxes result principally from temporary differences in the amounts recorded for depreciation and amortization, and certain accrued liabilities for financial statement and tax reporting purposes. In addition, there is a net operating loss carryforward in the amount of $5,564,000 available to the year ending September 30, 2010. The components of deferred taxes are as follows: Depreciation and amortization $1,338,800 $1,888,000 Net operating loss carryforward (518,000) (2,225,600) Deferred revenue (132,000) (106,400) Contract termination expense (72,000) Accrued expenses (32,000) (54,800) ---------- ---------- Total deferred income taxes payable (deferred tax asset) $ 584,800 $ (498,800) ========== ========== 28 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 16. Events Subsequent to Year-End: Pending Acquisitions Concurrently with the closing of the proposed IPO, the Company anticipated acquiring seventy two additional video stores and their related operations for aggregate consideration of approximately $50.5 million consisting of approximately $41.4 million in cash, the issuance of approximately $5.7 million in shares of common stock, $0.4 million in scheduled payments under covenants not-to-compete and $3.0 million in assumed liabilities. The Company agreed to grant options entitling various stockholders and key employees of the aforementioned acquirees to purchase 319,500 shares of the Company's common stock at an exercise price equal to the public offering price per share in the proposed initial public offering. The purchase and sale agreement with one of the acquirees expired December 1, 1995, while the remaining three purchase and sale agreements expired January 31, 1996. Agreement of Merger On June 5, 1996, the Company's shareholders entered into an Agreement of Merger (the Agreement) with Movie Gallery, Inc. and Movie Gallery of Maine, Inc. Pursuant to the terms of the Agreement, Movie Gallery, Inc. will acquire all of the stock of the Company by means of a reverse merger of Movie Gallery of Maine, Inc. into the Company on the terms and subject to the conditions set for in the Agreement. 17. Deferred Stock Issuance Costs: Deferred stock issuance costs represents amount incurred to conduct audits of the companies acquired or to be acquired by the Company, and various legal and accounting costs directly related to the proposed IPO. The deferred stock issuance costs were written off by the Company in December, 1995. 18. Workers' Compensation: During fiscal year 1994, the Company became a participant in a group workers' compensation self-insured trust fund. Workers' compensation expense is based on premiums paid plus the Company's pro rata share of any excess of liabilities over plan assets. The Company is jointly and severally liable in connection with the group workers' compensation self-insured trust fund for: 1. Any lawful obligation of the trust fund which it might become legally obligated to pay in respect to any fund year or part thereof that the Company participated in the Fund. 29 HOME VISION ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 18. Workers' Compensation, Continued: 2. All necessary assessments and charges, as determined by the fund trustee, to be paid into the Fund at required intervals. No liability has been recorded for any assessments, nor does the Company's management believe that such potential assessment, if ultimately made, would have a material impact on the financial statements. 19. Reclassifications: Certain reclassifications have been made to the 1993 and 1994 financial statements to conform to the 1995 presentation. 30 EX-2 3 PRO FORMA FINANCIAL INFORMATION Movie Gallery, Inc. Pro Forma Financial Information Pro Forma Combined Condensed Financial Statements Years ended December 31, 1993, 1994, and 1995 and six months ended June 30, 1996 On July 1, 1996, Movie Gallery, Inc. (the Company) acquired Home Vision Entertainment, Inc. (Home Vision) and Hollywood Video, Inc. (Hollywood Video) in separate transactions both accounted for as a pooling of interests. The Company issued approximately 731,000 shares of its common stock to Home Vision shareholders upon consummation of the merger. In addition, the Company has issued warrants for approximately 100,000 shares of the Company's stock to a Home Vision vendor pursuant to the terms of a securities purchase agreement between the vendor and Home Vision. The Company issued approximately 38,000 shares of its common stock to Hollywood Video shareholders upon consummation of the merger. The actual shares issued in both transactions are subject to adjustment based on the amount of assumed liabilities and available cash at closing. Home Vision operates 55 video specialty stores in Maine, New Hampshire and Massachusetts. Hollywood Video operates 43 video specialty stores in Iowa, Wisconsin and Illinois. The unaudited pro forma combined condensed balance sheet as of June 30, 1996 reflects the acquisitions of Home Vision and Hollywood Video as if those transactions had been consummated on June 30, 1996. The unaudited pro forma combined condensed statements of income for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 reflect the acquisitions of Home Vision and Hollywood Video as if those transactions had been consummated on January 1, 1993. In the opinion of the Company's management, all adjustments necessary to present fairly such pro forma financial statements have been made. These unaudited pro forma financial statements are not necessarily indicative of the actual results of operations had both acquisitions occurred as of January 1, 1993 nor do they purport to indicate the results of future operations of the Company. These unaudited pro forma financial statements should be read in connection with the accompanying notes, the accompanying historical financial statements and notes thereto of Home Vision Entertainment, Inc. and the historical financial statements and notes thereto of Movie Gallery, Inc., included in its Form 10-K for the year ended December 31, 1995 and its Form 10-Q for the six months ended June 30, 1996 both filed with the Securities and Exchange Commission. 31 Pro Forma Combined Condensed Balance Sheet (Unaudited) As of June 30, 1996 (in thousands)
Home Vision Movie Entertainment, Hollywood Pro Forma Gallery, Inc. Inc. Video, Inc. Adjustments Pro Forma ------------- ------------- ----------- ----------- --------- Assets Current assets: Cash and cash equivalents $ 6,405 $ 171 $ 17 $ - $ 6,593 Recoverable income tax 1,340 - - - 1,340 Merchandise inventory 9,171 679 265 - 10,115 Accounts receivable 1,634 152 - - 1,786 Prepaid expenses and other 2,586 499 49 - 3,134 ------------- ------------- ----------- ----------- --------- Total current assets 21,136 1,501 331 - 22,968 Videocassette rental inventory, net 71,285 6,536 3,571 - 81,392 Property, furnishing and equipment, net 41,598 2,956 4,318 - 48,872 Deferred charges, net 11,691 294 - - 11,985 Excess of cost over net assets acquired 84,592 5,808 - - 90,400 Deposits and other assets 1,358 328 37 - 1,723 ------------- ------------- ----------- ----------- --------- Total assets $ 231,660 $ 17,423 $ 8,257 $ - $257,340 ============= ============= =========== =========== ========= Liabilities and stockholders' equity Current liabilities: Note payable $ 42,500 $ 100 $ - $ - $ 42,600 Accounts payable 16,554 4,836 2,473 - 23,863 Accrued liabilities 4,526 1,138 459 - 6,123 Current portion of long-term debt 5,316 1,478 228 - 7,022 ------------- ------------- ----------- ----------- --------- Total current liabilities 68,896 7,552 3,160 - 79,608 Long-term debt 1,408 7,447 8,861 - 17,716 Deferred income taxes 12,623 - - (250)(c) 12,373 Stockholders' equity Preferred stock - - - - - Common stock 13 4,159 - (4,159)(a) 13 Additional paid-in capital 126,718 833 104 1,591 (a) 125,378 (3,868)(b) Retained earnings 22,002 (2,568) (3,868) 2,568 (a) 22,252 3,868 (b) 250 (c) ------------- ------------- ----------- ----------- --------- Total stockholders' equity 148,733 2,424 (3,764) 250 147,643 ------------- ------------- ----------- ----------- --------- Total liabilities and stockholders' equity $ 231,660 $ 17,423 $ 8,257 $ - $257,340 ============= ============= =========== =========== =========
32 Movie Gallery, Inc. Notes to Pro Forma Combined Condensed Balance Sheet (Unaudited) June 30, 1996 (a) To reflect the issuance of approximately 731,000 shares of the Company's common stock to effect the acquisition of Home Vision as a pooling of interests. (b) To reflect the issuance of approximately 38,000 shares of the Company's common stock to effect the acquisition of Hollywood Video as a pooling of interests. (c) To adjust deferred tax liabilities as if Hollywood Video had been a C corporation. 33 Pro Forma Combined Condensed Statement of Income (Unaudited) (in thousands, except per share data) Year ended December 31, 1993
Home Vision Hollywood Movie Gallery, Entertainment, Video, Inc. (a)(b) Inc. (c)(d) Inc. (c) Pro Forma ------------- ------------- ----------- --------- Revenues: Rentals $ 15,769 $ 6,143 $ 2,902 $ 24,814 Product sales 754 942 304 2,000 ------------- ------------- ----------- --------- 16,523 7,085 3,206 26,814 Operating costs and expenses: Store operating expenses 8,351 3,510 1,945 13,806 Amortization of videocassette rental inventory 3,269 1,438 837 5,544 Amortization of intangibles 162 18 - 180 Cost of sales 629 625 291 1,545 General and administrative 1,568 1,091 250 2,909 ------------- ------------- ----------- --------- Operating income (loss) 2,544 403 (117) 2,830 Interest expense, net (211) (113) (186) (510) ------------- ------------- ----------- --------- Income (loss) before income taxes 2,333 290 (303) 2,320 Income tax expense (benefit) 868 116 (115) 869 ------------- ------------- ----------- --------- Net income (loss) $ 1,465 $ 174 $ (188) 1,451 ============= ============= =========== ========= Net income per share $ 0.25 $ 0.22 ============= ========= Shares used in computing net income per share (f) 5,947 731 38 6,716 ============= ============= =========== =========
34 Pro Forma Combined Condensed Statements of Income (Unaudited) (in thousands, except per share data) Year ended December 31, 1994
Home Vision Hollywood Movie Gallery, Entertainment, Video, Inc. (b) Inc. (c)(d) Inc. (c) Pro Forma ------------- ------------- ----------- --------- Revenues: Rentals $ 34,839 $ 8,167 $ 4,776 47,782 Product sales 3,804 1,131 506 5,441 ------------- ------------- ----------- --------- 38,643 9,298 5,282 53,223 Operating costs and expenses: Store operating expenses 17,146 3,681 3,292 24,119 Amortization of videocassette rental inventory 6,702 2,255 1,306 10,263 Amortization of intangibles 570 26 - 596 Cost of sales 2,742 807 469 4,018 General and administrative 3,343 1,836 419 5,598 ------------- ------------- ----------- --------- Operating income (loss) 8,140 693 (204) 8,629 Interest expense, net (54) (148) (285) (487) ------------- ------------- ----------- --------- Income (loss) before income taxes 8,086 545 (489) 8,142 Income tax expense (benefit) 2,951 218 (186) 2,983 ------------- ------------- ----------- --------- Net income (loss) $ 5,135 $ 327 $ (303) $ 5,159 ============= ============= =========== ========= Net income per share $ 0.70 $ 0.63 ============= ========= Shares used in computing net income per share (f) 7,383 731 38 8,152 ============= ============= =========== =========
35 Pro Forma Combined Condensed Statement of Income (Unaudited) (in thousands, except per share data) Year ended December 31, 1995
Home Vision Hollywood Movie Entertainment, Video, Gallery, Inc. Inc. (d)(e) Inc. (c) Pro Forma ------------- ------------- ----------- --------- Revenues: Rentals $ 108,215 $ 14,783 $ 7,355 $130,353 Product sales 14,928 3,241 679 18,848 ------------- ------------- ----------- --------- 123,143 18,024 8,034 149,201 Operating costs and expenses: Store operating expenses 54,238 8,032 5,488 67,758 Amortization of videocassette rental inventory 22,487 4,053 2,562 29,102 Amortization of intangibles 3,158 222 - 3,380 Cost of sales 9,801 2,221 578 12,600 General and administrative 10,173 2,796 557 13,526 ------------- ------------- ----------- --------- Operating income (loss) 23,286 700 (1,151) 22,835 Interest expense, net (414) (560) (554) (1,528) ------------- ------------- ----------- --------- Income (loss) before income taxes 22,872 140 (1,705) 21,307 Income tax expense (benefit) 8,386 107 (648) 7,845 ------------- ------------- ----------- --------- Net income (loss) $ 14,486 $ 33 $ (1,057) $ 13,462 ============= ============= =========== ========= Net income per share $ 1.27 $ 1.11 ============= ========= Shares used in computing net income per share (f) 11,385 731 38 12,154 ============= ============= =========== =========
36 Pro Forma Combined Condensed Statements of Income (Unaudited) (in thousands, except per share data) Six months ended June 30, 1996
Home Vision Hollywood Movie Entertainment, Video, Gallery, Inc. Inc. (d) Inc. (c) Pro Forma ------------- ------------- ----------- --------- Revenues: Rentals $ 92,339 $ 9,328 $ 4,963 $106,630 Product sales 13,968 1,863 344 16,175 ------------- ------------- ----------- --------- 106,307 11,191 5,307 122,805 Operating costs and expenses: Store operating expenses 50,566 6,011 3,592 60,169 Amortization of videocassette rental inventory 29,788 1,494 1,720 33,002 Amortization of intangibles 3,147 205 - 3,352 Cost of sales 8,379 1,153 284 9,816 General and administrative 7,765 1,993 334 10,092 ------------- ------------- ----------- --------- Operating income (loss) 6,662 335 (623) 6,374 Interest expense, net (1,647) (491) (363) (2,501) ------------- ------------- ----------- --------- Income (loss) before income taxes 5,015 (156) (986) 3,873 Income tax expense (benefit) 1,909 (58) (375) 1,476 ------------- ------------- ----------- --------- Net income (loss) $ 3,106 $ (98) $ (611) 2,397 ============= ============= =========== ========= Net income per share $ 0.25 $ 0.18 ============= ========= Shares used in computing net income per share (f) 12,519 731 38 13,288 ============= ============= =========== =========
37 Movie Gallery, Inc. Notes to Pro Forma Combined Condensed Statements of Income (Unaudited) Years ended December 31, 1993, 1994, and 1995 and six months ended June 30, 1996 (a) The Company's historical statement of income for the year ended December 31, 1993 consists of the combined statements for the three months ended March 31, 1993 (unaudited) and the nine months ended December 31, 1993 (audited). (b) Includes pro forma adjustments for the change in compensation levels arising from the employment agreements with stockholders which became effective as of the completion of the Company's initial public offering on August 2, 1994. Also includes pro forma adjustments to reflect income taxes which would have been recorded if the Company had been a C corporation. (c) Includes pro forma adjustments to reflect income taxes as if the Company had been a C corporation. (d) Home Vision's fiscal year end is September 30. Home Vision's statements of operations for the years ended September 30, 1993, 1994 and 1995 are combined with statements of income for the Company and Hollywood Video for the years ended December 31, 1993, 1994 and 1995, respectively. In order to conform with the Company's fiscal year end, Home Vision's net loss of $2,082,000 for the quarter ended December 31, 1995 is reflected in the retained earnings balance of Home Vision at June 30, 1996. (e) Excludes a $400,000 charge to earnings which resulted from the conversion of Home Vision from an S corporation to a C corporation and reflects the tax provision arising from the cumulative temporary differences between financial reporting and tax reporting. (f) Pro forma earnings per share are based on the weighted average number of shares outstanding for the period adjusted for the applicable exchange ratio. 38 -----END PRIVACY-ENHANCED MESSAGE-----