<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) March 25, 1998
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Video City, Inc.
----------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-14023 95-3897052
---------------------------- -------------- -------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
6840 District Boulevard, Bakersfield, California 93313
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (805) 397-7955
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<PAGE>
VIDEO CITY, INC.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
As was indicated in the Current Report on Form 8-K filed by Video City, Inc.
(the "Company") on April 9, 1998, it was impracticable at that time to provide
the required financial statements. Such financial statements are provided herein
by this amendment on pages F-2 through F-10 following the signature page.
(b) PRO FORMA FINANCIAL INFORMATION
As was also indicated in the Current Report on Form 8-K filed by the Company on
April 9, 1998, it was impracticable at that time to provide the required pro
forma financial information. Such pro forma financial information is provided
herein by this amendment on pages F-11 through F-21 following the signature
page.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned hereunto duly authorized.
VIDEO CITY, INC.
Dated: June 5, 1998 By: /s/ Timothy Denari
_________________________
Timothy Denari
Chief Financial Officer
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants F-2
Combined Financial Statements of Adventures in Video, Inc. and
KDDJ Investments, Inc.
Combined Balance Sheet F-3
Combined Statement of Operations F-4
Combined Statement of Stockholders' Equity F-5
Combined Statement of Cash Flows F-6
Notes to Combined Financial Statements F-7
Pro Forma Financial Information (unaudited)
Introductory Information F-11
Pro Forma Condensed Balance Sheet (unaudited) F-15
Pro Forma Condensed Statement of Operations (unaudited) F-17
Notes to Pro Forma Condensed Financial Statements (unaudited) F-18
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Adventures in Video, Inc. and
KDDJ Investments, Inc.
Blaine, Minnesota
We have audited the accompanying combined balance sheet of Adventures in Video,
Inc. ("Adventures") and KDDJ Investments, Inc. ("KDDJ") (collectively the
"Companies") as of December 31, 1997 and the related combined statements of
operations, stockholders' equity and cash flows for the year then ended. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Adventures
in Video, Inc. and KDDJ Investments, Inc. as of December 31, 1997 and the
combined results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
June 3, 1998
F-2
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
ASSETS (NOTE 5)
CURRENT ASSETS
Cash $ 148,181
Merchandise inventories 65,315
Other 5,726
-----------
Total current assets 219,222
VIDEOCASSETTE RENTAL INVENTORY, NET OF ACCUMULATED
AMORTIZATION OF $2,015,439 1,797,907
PROPERTY AND EQUIPMENT, NET (NOTE 4) 209,277
OTHER ASSETS 50,469
-----------
TOTAL ASSETS $ 2,276,875
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 690,106
Accrued expenses and other 80,398
Current portion of long-term debt (Note 5) 166,320
-----------
Total current liabilities 936,824
LONG-TERM DEBT (NOTE 5) 313,338
-----------
TOTAL LIABILITIES 1,250,162
COMMITMENTS (NOTE 6)
STOCKHOLDERS' EQUITY
Common stock-Adventures in Video, Inc., no par value,
authorized 25,000 shares, issued and outstanding 5,000 shares 1,947
Common stock-KDDJ Investments, Inc., no par value, authorized
25,000 shares, issued and outstanding 800 shares 800
Retained earnings 1,023,966
-----------
TOTAL STOCKHOLDERS' EQUITY 1,026,713
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,276,875
===========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
December 31,
1997
-----------
<S> <C>
REVENUE
Rental revenues and merchandise sales $ 4,163,583
-----------
OPERATING COSTS AND EXPENSES
Store operating expenses 2,117,760
Amortization of videocassette rental inventory 1,262,409
Cost of sales 146,432
Cost of leased product 4,334
Selling, general and administrative expenses 553,553
-----------
TOTAL OPERATING COSTS AND EXPENSES 4,084,488
INCOME FROM OPERATIONS 79,095
OTHER (INCOME) EXPENSE
Loss on disposition of assets, net 12,157
Interest expense 45,148
Other (14,644)
-----------
NET INCOME $ 36,434
===========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Adventures KDDJ
in Video, Inc. Investments, Inc. Total
Common Stock Common Stock Retained Stockholders'
Shares Amount Shares Amount Earnings Equity
-------- -------- -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 5,000 $1,947 800 $800 $1,040,732 $1,043,479
Dividends (53,200) (53,200)
Net income 36,434 36,434
------- ------- ------ ------- ----------- -----------
Balance at December 31, 1997 5,000 $1,947 800 $800 $1,023,966 $1,026,713
======= ======= ====== ======= =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 31,
1997
------------
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,434
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,335,324
Loss on disposal of assets 12,157
Changes in assets and liabilities:
Decrease in merchandise inventories 21,830
Decrease in other assets 32,614
Decrease in accounts payable (97,246)
Decrease in accrued expenses (68,140)
-----------
Net cash provided by operating activities 1,272,973
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of videocassette rental inventory, net (1,384,270)
Purchases of fixed assets (73,108)
-----------
Net cash used in investing activities (1,457,323)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (177,218)
Proceeds from borrowings under long-term debt 318,723
Dividends (53,200)
-----------
Net cash provided by financing activities 88,305
NET DECREASE IN CASH (96,095)
Cash at beginning of year 244,276
-----------
Cash at end of year $ 148,181
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SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR:
Interest $ 45,192
Income taxes $ 2,800
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of Adventures in Video,
Inc. and KDDJ Investments, Inc. (collectively, the "Companies"). The Companies
were under common ownership and management during the year ended December 31,
1997. All material accounts and transactions between the Companies have been
eliminated.
2. DESCRIPTION OF BUSINESS
Adventures in Video, Inc. ("Adventures") was incorporated in Minnesota on August
3, 1982. KDDJ Investments, Inc. ("KDDJ") was incorporated in Minnesota on
December 14, 1987. The Companies are primarily in the business of renting
prerecorded videocassette movies and video games. As of December 31, 1997,
Adventures owned and operated fifteen stores primarily located throughout
metropolitan Minneapolis and St. Paul, Minnesota. KDDJ owned and operated three
stores located in San Francisco, California.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MERCHANDISE INVENTORIES
Merchandise inventories consist primarily of videocassettes and games for
resale, and related items that are stated at the lower of cost (determined on a
first-in, first-out basis) or market value.
VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory, which includes video games, is stated at cost,
and is amortized over the estimated economic life. Videocassettes that are
considered base stock are amortized over 36 months on a straight-line basis.
New release videocassettes are amortized as follows: the tenth and any
succeeding copies of each title per store are amortized over nine months on a
straight-line basis, and copies one through nine of each title per store are
amortized as base stock.
Amortization expense related to videocassette rental inventory totaled
approximately $1,262,409. As videocassettes are sold or retired, the applicable
cost and accumulated amortization are eliminated from the accounts, and any gain
or loss is recorded.
F-7
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VIDEOCASSETTE RENTAL INVENTORY (CONTINUED)
The Companies may obtain new release and various other titles from Rentrak
Corporation ("Rentrak") pursuant to a revenue sharing agreement. Under this
agreement, Rentrak provides videocassettes released by certain movie studios.
The Companies pay an upfront handling fee of approximately $8.00 for each
videocassette. During the revenue sharing period, which does not exceed two
years, the studio retains ownership of the videocassette and the Companies share
the rental revenue with the studio rather than initially purchasing the
videocassette for a fixed cost. Revenue sharing reduces the risk that the
Companies will be unable to recover the acquisition cost of a videocassette
through rental revenue before the popularity of the title declines
significantly. The Companies have an option to purchase the videocassette
(based on fair value) at specified intervals and at the end of the revenue
sharing period. The Companies expense revenue sharing costs as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided using straight-line and accelerated methods based on
estimated useful lives ranging from five to ten years.
REVENUE RECOGNITION
Revenue is recognized at the time of rental or sale.
STORE OPENING COSTS
Store opening costs, which consist primarily of payroll, advertising, occupancy,
and supplies, are expensed as incurred.
INCOME TAXES
The Companies have elected S-Corporation status under the Internal Revenue Code
and the tax laws of the states in which they operate. As a result, the
Companies are not liable for federal income taxes and a portion of certain state
income taxes. The stockholders reflect their proportionate share of the
Companies' income in their individual income tax returns.
F-8
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 649,974
Leasehold improvements 158,243
---------
$ 808,217
Accumulated depreciation (598,940)
---------
$ 209,277
</TABLE>
5. Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<S> <C>
Note payable to bank, due in monthly
installments of $16,859, with interest of prime
plus 1% (9.5% at December 31, 1997), maturing
August 2000. Secured by virtually all assets
of Adventures in Video, Inc. and guaranteed by
the majority stockholder. $ 471,651
Other 8,007
---------
Total Debt 479,658
Less current portion (166,320)
---------
Total long-term debt $ 313,338
</TABLE>
Total maturities of remaining long-term debt subsequent to December 31, 1997 are
as follows:
<TABLE>
<S> <C>
1998 $ 166,320
1999 182,818
2000 130,520
---------
Total $ 479,658
</TABLE>
F-9
<PAGE>
ADVENTURES IN VIDEO, INC.
AND KDDJ INVESTMENTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
6. COMMITMENTS
The Companies lease their facilities under noncancelable operating leases
expiring at various dates through 2007. Rent expense under operating leases was
approximately $716,881 for the year ended December 31, 1997.
The future minimum lease payments under noncancelable operating leases with
initial lease terms in excess of one year as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998 $807,751
1999 692,857
2000 506,024
2001 404,430
2002 300,076
Thereafter 914,923
</TABLE>
7. SUBSEQUENT EVENT
All of the outstanding shares of both Companies' common stock were acquired
by Video City, Inc. ("Video City"), on March 25, 1998 pursuant to two Agreements
of Merger and Plan of Reorganization (the " Merger Agreements"). Each of the
acquisitions was structured as a reverse triangular merger, with a newly formed
subsidiary of Video City merging into the acquired corporation. Video City owns
and operates video specialty stores. Pursuant to the Merger Agreements, Video
City paid off existing indebtedness of approximately $449,000 owed by Adventures
to Marquette Bank, N.A. As part of the restructuring, Rentrak accepted Video
City common stock in settlement of $389,900 owed by Adventures to Rentrak.
Video City also entered into a two-year employment agreement with the prior
major shareholder of the Companies at a salary of $100,000 per year plus a
possible bonus of up to $100,000 per year based on increases if any, in certain
dealer allowances, and certain additional benefits.
F-10
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
On March 25, 1998, Video City, Inc. ("Video City" or the "Company") acquired
five corporations owning and operating an aggregate of 29 retail video stores.
These acquisitions increased Video City's chain of retail video stores from 18
to 47 stores. Each of the acquisitions was structured as a reverse triangular
merger, with a newly formed subsidiary of Video City merging into the acquired
corporation. The following sets forth a description of the transactions:
(a) Adventures in Video, Inc. ("Adventures") and KDDJ Investments, Inc.
("KDDJ")
These two companies were owned by David A. Ballstadt and members of his
immediate family. These are the only two acquisitions that were related to one
another. Adventures owns and operates thirteen stores in Minnesota in the
greater Minneapolis metropolitan area. The purchase price for Adventures was
440,000 shares of Video City common stock, plus an additional 426,000 shares
that will become issuable if either (a) the gross revenues of such stores during
the three months of April through June 1998 exceed their gross revenues during
the corresponding three months of 1997, or (b) if Video City fails to make
certain specified upgrades of the stores. KDDJ owns and operates three stores
in San Francisco, California. The purchase price for KDDJ was 110,000 shares of
Video City common stock plus an additional 106,500 shares that will become
issuable if those three stores meet targets substantially the same as the
contingent share targets described above for Adventures. The two Merger
Agreements provide for an adjustment in the number of Video City shares if and
to the extent that the aggregate liabilities of the two companies as of the
closing is greater or less than $1,200,000. Pursuant to the merger agreement,
Video City paid off existing indebtedness of approximately $449,000 that
Adventures in Video owed to Marquette Bank, N.A. Concurrently with these two
acquisitions, the Board of Directors of Video City was expanded from eight to
nine members and David A. Ballstadt was elected to fill this vacancy. As part
of the restructuring (see note g), Rentrak accepted 194,950 shares of Video City
common stock in settlement of $389,900 owed by Adventures to Rentrak. Video
City also entered into a two-year employment agreement with Mr. Ballstadt at a
salary of $100,000 per year plus a possible bonus of up to $100,000 per year
based on increases, if any, in certain dealer allowances, and certain additional
benefits.
(b) Leptis Magna, Inc. ("Leptis")
This company owns and operates five stores under the name "Video Unlimited" in
Colorado. This company was owned by G. Wayne Bailey and Orawan Bailey. The
purchase price in the merger consisted of $75,000 in cash, a one-year promissory
note for $75,000 payable in twelve equal monthly installments, and an amount of
Video City common stock to be determined within 90 days after the closing; of
this amount of common stock, Video City advanced 150,000 shares at the closing,
with the actual number of shares to be determined. Pursuant to the Merger
Agreement, Video City also
F-11
<PAGE>
paid off existing indebtedness including $131,000 owed to Norwest Bank Colorado,
N.A. and $372,000 of indebtedness owed to Ingram Entertainment Corporation.
(c) Old Republic Entertainment, Inc. ("Old Republic")
This company owns and operates four stores in and around Ventura, California,
under the name "Video Tyme." The company is wholly owned by C. Anthony
Anderson. The purchase price consisted of 350,000 shares of Video City common
stock, $150,000 in cash, and the assumption of certain debt. Pursuant to the
Merger Agreement, Video City paid off approximately $741,000 of existing
indebtedness owed to three creditors of the acquired company.
(d) Sulpizio One, Inc. ("Sulpizio")
This company owns and operates four stores in Lancaster, Santa Barbara, and Los
Banos, California. The purchase price consisted of 100,000 shares of Video City
common stock plus the assumption of all liabilities including the amounts owing
to Rentrak Corporation which are described under "Restructured Agreement With
Rentrak" below. For more than three years prior to this acquisition, these
stores were managed by Video City under a management agreement and operated
under the name "Video City."
(e) Sale of Film Library
Concurrently, Video City sold the rights to its library of 47 feature films and
other properties and related accounts receivable to an entity owned and
controlled by Stephen Lehman, a member of Video City's board of directors, for
$1,350,000 in cash. The library was the principal asset of Prism Entertainment
Corporation ("Prism"), the former name of the Company prior to the merger in
January 1997 of Lee Video City, Inc., the retail video company, into Prism. The
Company's historical financial statements do not include any revenues related to
the film library since the Company had not further exploited the film library
since it was acquired from Prism.
The Company used the proceeds of the sale of the film library and approximately
$24,000 of additional funds to pay off all amounts owing to Imperial Bank, which
was the principal creditor of Prism Entertainment Corporation prior to the
January 1997 merger.
(f) New Credit Facility
Concurrently, the Company and its five newly acquired subsidiaries entered into
a $7,500,000 Loan and Security Agreement with FINOVA Capital Corporation,
secured by all of the assets of the Company and its subsidiaries. Of these
funds, $5,700,000 has been or may be used to pay the cash portion of the
acquisition purchase prices, to repay other existing indebtedness of Video City,
to repay certain existing indebtedness of the acquired companies, and to provide
inventory financing and working capital for the expanded retail operation of the
combined companies. Video City used $1,500,000 of the FINOVA credit
F-12
<PAGE>
facility to pay off a term loan owing to Ingram Entertainment Corporation. The
remaining $1,800,000 of the credit facility may be used only to finance future
acquisitions, if any.
The credit facility consists of (i) a revolving loan equal to the lesser of
$500,000 or 65% of the value of eligible inventory held for sale; (ii) a five
year loan in the initial principal amount of $3,465,000, providing for monthly
payments of interest only until maturity, provided that an annual appraisal of
eligible rental video tape and game inventory shall be made and principal must
be paid if and to the extent it exceeds 50% of the orderly liquidation value of
such inventory; (iii) a five-year loan in the initial principal amount of
$1,735,000, providing for 60 equal monthly installments of principal, together
with interest, provided that an annual appraisal of eligible rental video tape
and game inventory shall be made and principal must be paid if and to the extent
it exceeds 25% of the orderly liquidation value of such inventory; and (iv) one
or more loans to be made in the future in amounts not to exceed 75% of the value
of eligible rental video tape and game inventory acquired by the Company in
future retail store acquisitions and approved by FINOVA in its discretion,
provided that the aggregate principal amount of such loans shall not exceed the
lesser of (a) $7,000,000 less the aggregate outstanding principal balance of the
loans referred to in clauses (ii) and (iii) of this paragraph, or (b) 75% of
such rental video tape and game inventory as appraised annually, such loans to
provide for equal monthly payments of principal based on a 15-year amortization
of the original principal amount, plus interest, with the entire principal
balance due in March 2001. The interest rate on all of these loans shall be at
a per annum rate of 2.75% in excess of the prime rate of Citibank, N.A., from
time to time. In addition, the Company is obligated to pay various closing,
monthly and annual fees. As part of the new credit facility, Video City issued
to FINOVA a warrant which gives FINOVA the right either (i) to require Video
City to repurchase the warrant for $600,000 at any time commencing March 25,
2001 and expiring March 25, 2005, or (ii) to purchase 520,720 shares of Video
City Common Stock at a price of $.01 per share but only if, prior to March 25,
2005, Robert Y. Lee's ownership of the Company's outstanding Common Stock
decreases to 10% or less, or the Company makes a public offering of shares of
its Common Stock, or the Company terminates the Loan and Security Agreement with
FINOVA, or the Company recapitalizes, refinances, reorganizes, or sells
substantially all of its assets.
(g) Restructured Agreement With Rentrak.
Concurrently with the acquisitions, the Company also entered into a restructured
debt agreement with Rentrak Corporation, a major lessor of videocassettes under
a revenue sharing arrangement. Prior to the acquisitions, Video City and
Sulpizio One, Inc. (one of the acquired companies) were parties to such
arrangements with Rentrak. With the expanded group of stores, management
expects to increase its leasing of video cassettes from Rentrak. As part of the
restructuring, Rentrak agreed to accept 194,950 shares of Video City common
stock in settlement of a lawsuit relating to amounts due to Rentrak which was
previously filed against Adventures in Video, Inc. (one of the acquired
companies), and 470,162 shares of Video common stock in payment of $940,324 of
indebtedness owed to Rentrak by Sulpizio One,
F-13
<PAGE>
Inc. (The $2.00 per share valuation of the Video City common stock was a figure
negotiated by Video City and Rentrak, and does not reflect the market price of
the Video City stock. Video City makes no representation as to what the market
price of its stock is or will be.) As part of the restructured debt agreement,
Rentrak also agreed to a deferral of certain amounts owed to it by Sulpizio One,
Inc. and Video City, and obtained a security interest in the assets of Video
City to secure such amounts. Rentrak also released Robert Y. Lee, Video City's
chief executive officer, from personal guaranties of Video City's indebtedness
that Mr. Lee had previously given.
The accompanying condensed financial statements illustrate the effect of the
acquisitions, the sale of the film library, the new credit facility, and the
restructured agreement with Rentrak ("Pro Forma") on the Company's financial
position and results of operations.
The pro forma condensed balance sheet as of January 31, 1998 is based on the
historical balance sheets of Video City, Inc. as of that date, the combined
historical balance sheet of Adventures in Video, Inc. and KDDJ Investments, Inc.
as of December 31, 1997, and the historical balance sheets of Leptis Magna,
Inc., Old Republic Entertainment, Inc., and Sulpizio One, Inc., as of December
31, 1997. The pro forma condensed balance sheet assumes the acquisitions, sale
of the film library, the new credit facility, and the restructured agreement
with Rentrak took place on January 31, 1998.
The pro forma condensed statement of operations for the year ended January 31,
1998 is based on the historical statements of operations of Video City, Inc.
for the year then ended, the historical combined statements of operations of
Adventures in Video, Inc. and KDDJ Investments, Inc. for the year ended December
31, 1997, and the historical statements of operations of Leptis Magna, Inc., Old
Republic Entertainment, Inc. and Sulpizio One, Inc. for the year ended December
31, 1997. The pro forma condensed statement of operations assumes the
acquisitions, sale of the film library, the new credit facility, and the
restructured agreement with Rentrak took place on February 1, 1997.
The pro forma condensed consolidated financial statements may not be indicative
of the actual results of the acquisitions and there can be no assurance that the
foregoing results will be obtained. In particular, the pro forma condensed
financial statements are based on management's current estimate of the
allocation of the purchase price, the actual allocation of which may differ.
The accompanying pro forma condensed financial statements should be read in
conjunction with the historical financial statements of Video City, Inc., the
historical combined financial statements of Adventures in Video, Inc. and KDDJ
Investment, Inc.
F-14
<PAGE>
<TABLE>
<CAPTION>
Video City, Inc.
Pro Forma Condensed Balance Sheet (Unaudited)
31-Jan-98
Pro-forma
Video Adventures Old Adjustments
City /KDDJ Leptis Republic Sulpizio (Note A) Pro-forma
---------- ----------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash 28,127 148,181 43,395 42,906 150,464 (24,000)(4) 389,073
Accounts receivable, net 758,101 225,546 47,914 (566,545)(3) 465,016
Notes receivable 355,430 1,500 356,930
Merchandise inventories 339,759 65,315 142,455 547,529
Other 411,536 5,726 18,680 (257,286)(1) 178,656
---------- ----------- -------- -------- ---------- ----------
Total current assets 1,892,953 219,222 268,941 90,820 313,099 1,937,204
Videocassette rental inventory, net 2,795,258 1,797,907 146,718 366,693 478,052 (189,997)(1) 5,394,631
Property and equipment 859,708 209,277 168,527 145,143 107,992 (28,937)(1) 1,461,710
Film library 818,171 (818,171)(3) -
Other assets 233,226 50,469 16,181 28,303 63,193 792,916 (1) 1,706,843
522,555 (8)
Total Assets 6,599,316 2,276,875 600,367 630,959 962,336 10,500,388
========== =========== ======== ========= ========== ==========
</TABLE>
See notes to pro forma condensed financial statements (unaudited)
F-15
<PAGE>
Video City, Inc.
Pro Forma Condensed Balance Sheet (Unaudited)
31-Jan-98
<TABLE>
<CAPTION>
Pro-forma
Video Adventures Old Adjustments
City /KDDJ Leptis Republic Sulpizio (Note A)
----------- ------------- ---------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable 2,166,027 690,106 453,569 56,154 303,089
Accrued expenses 702,293 80,398 11,128 13,512 338,320 (296,408) (1)
(34,716) (3)
(372,000) (6)
Current portion of long-term debt 1,674,457 166,320 69,542 79,551 (339,206) (2)
(924,000) (4)
---------- --------- -------- -------- ---------
Total current liabilities 4,542,777 936,824 534,239 149,217 641,409
Long-term debt 2,043,431 313,338 65,128 603,328 1,034,340 (1,330,224) (1)
75,000 (1)
(981,794) (2)
(450,000) (4)
(1,500,000) (5)
3,418,000 (7)
Other liabilities 711,931
Total Liabilities 7,298,139 1,250,162 599,367 752,545 1,675,749
Total Stockholders' Equity (Deficit) (698,823) 1,026,713 1,000 (121,586) (713,413) 1,643,328 (1)
522,555 (8)
Total Liabilities and Stockholders' Equity
(Deficit) 6,599,316 2,276,875 600,367 630,959 962,336
========= ========= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Pro-forma
-------------
<S> <C>
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable 3,668,945
Accrued expenses 442,527
Current portion of long-term debt 726,664
----------
Total current liabilities 4,838,136
Long-term debt 3,290,547
Other liabilities 711,931
Total Liabilities 8,840,614
Total Stockholders' Equity (Deficit) 1,659,774
Total Liabilities and Stockholders' Equity
(Deficit) 10,500,388
==========
</TABLE>
See notes to pro forma condensed financial statements (unaudited)
F-16
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
JANUARY 31, 1998
<TABLE>
<CAPTION>
Video Adventures Old
City /KDDJ Leptis Republic Sulpizio
--------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue
Rental revenues and product sales 10,007,538 4,163,583 1,572,200 2,009,006 1,871,669
Management fee income 205,000
---------- ---------- --------- --------- ---------
Total revenue 10,212,538 4,163,583 1,572,200 2,009,006 1,871,669
Operating Costs and Expenses
Store operating expenses 4,460,200 2,117,760 832,305 1,069,203 880,224
Amortization of videocassette rental inventory 1,928,343 1,262,409 443,003 577,429 315,354
Cost of product sales 762,153 146,432 8,162 141,604 177,052
Cost of leased product 419,361 4,334 66,603
General and administrative 2,035,428 553,553 103,651 22,271 344,439
Non-recurring write down of film library 3,029,829
---------- ---------- --------- --------- ---------
Total operating costs and expenses 12,635,314 4,084,488 1,387,121 1,810,507 1,783,672
Income (Loss) from Operations (2,422,776) 79,095 185,079 198,499 87,997
Other (Income) Expense
Gain (Loss) on disposition of assets, net - (12,157) (157,500)
Interest expense 552,359 45,148 12,054 69,177 97,414
Other - (14,644) (2,498)
Net Income (Loss) (2,975,135) 36,434 173,025 (28,178) (6,919)
========== ========= ========= ========= =========
Basic Earnings (Loss) per Share $ (0.30)
Diluted Earnings (Loss) per Share $ (0.30)
Weighted Average Number of Common
Share Outstanding (Note C):
Basic 9,770,594
Diluted 9,770,594
</TABLE>
<TABLE>
<CAPTION>
Pro-forma
Adjustments
(Notes B) Pro-forma
---------------- --------------
<S> <C> <C>
Revenue
Rental revenues and product sales 19,623,996
Management fee income (160,000)(5) 45,000
-----------
Total revenue 19,668,996
Operating Costs and Expenses
Store operating expenses 25,000 (1) 9,224,692
(160,000)(5)
Amortization of videocassette rental inventory 4,526,538
Cost of product sales 1,235,403
Cost of leased product 490,298
General and administrative 39,646 (2) 3,098,988
Non-recurring write down of film library (3,029,829)(4) -
-----------
Total operating costs and expenses 18,575,919
Income (Loss) from Operations 1,093,077
Other (Income) Expense
Gain (Loss) on disposition of assets, net (169,657)
Interest expense 126,271 (3) 902,423
Other (17,142)
Net Income (Loss) 38,139
===========
Basic Earnings (Loss) per Share $ -
Diluted Earnings (Loss) per Share $ -
Weighted Average Number of Common
Share Outstanding (Note C):
Basic 2,347,612 C 12,118,206
Diluted 3,248,277 C 13,018,871
</TABLE>
See notes to pro forma condensed financial statements (unaudited)
F-17
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A. PRO FORMA ADJUSTMENTS - BALANCE SHEET
The adjustments to the pro forma condensed balance sheet are as follows:
(1) To reflect the acquisition of Adventures, KDDJ, Leptis, Old Republic, and
Sulpizio and the allocation of the purchase price on the basis of the fair
values of the assets acquired and liabilities assumed. The components of the
purchase price and its allocation to the assets and liabilities of each company
are as follows:
<TABLE>
<CAPTION>
Adventures Old
/KDDJ Leptis Republic Sulpizio Total
------------ ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Components of purchase price:
Cash from new credit facility $ 75,000 $ 150,000 $ 225,000
Video City common stock 894,215 105,000 245,000 399,113 1,643,328
Notes payable 75,000 75,000
Acquisition costs 244,867 28,753 67,090 109,290 450,000
---------- -------- --------- -------- ----------
Total purchase price 1,139,082 283,753 462,090 508,403 2,393,328
Allocation of purchase price:
Stockholders' equity (deficit) 1,026,713 1,000 (121,586) (713,413) 192,714
Videocassette rental inventory (248,594) 29,928 43,585 (14,916) (189,997)
Property and equipment (28,937) - - - (28,937)
Accrued expenses 296,408 296,408
Long-term debt 389,900 940,324 1,330,224
---------- -------- --------- ----------- ----------
Costs in excess of net assets
acquired $ - $252,825 $ 540,091 $ - $ 792,916
========== ======== ========= =========== ==========
</TABLE>
Of the $450,000 in acquisition costs, $257,286 had been incurred by Video
City prior to January 31, 1998.
(2) To reflect the repayment of debt from the proceeds from the new credit
agreement as follows:
<TABLE>
<CAPTION>
Total Long-term Current
----------- --------- ---------
<S> <C> <C> <C>
Adventures/KDDJ $ 449,000 $ 313,338 $ 135,662
Leptis 131,000 65,128 65,872
Old Republic 741,000 603,328 137,672
----------- --------- ---------
Total $ 1,321,000 $ 981,794 $ 339,206
</TABLE>
F-18
<PAGE>
(3) To reflect the sale of the film library and other properties, related
accounts receivable net of related accrued royalties payable as follows:
<TABLE>
<S> <C>
Accounts receivable $ 566,545
Accrued royalties (34,716)
Film library 818,171
-----------
Net book value $ 1,350,000
Proceeds (1,350,000)
-----------
Gain (Loss) realized $ -0-
</TABLE>
(4) To reflect the use of proceeds from the sale of the film library to pay off
amounts owing to Imperial Bank as follows:
<TABLE>
<S> <C>
Proceeds from sale of film library $ 1,350,000
Amounts owed to Imperial Bank:
Current (924,000)
Long-term (450,000)
-----------
Additional funds required $ 24,000
</TABLE>
(5) To reflect the $1,500,000 repayment of the term loan owed by Video City to
Ingram Entertainment Corporation from the proceeds of the new credit facility.
(6) To reflect the repayment of $372,000 indebtedness owed by Leptis to Ingram
Entertainment Corporation from the proceeds of the new credit facility.
(7) To reflect the new credit facility with FINOVA Capital Corporation as
follows:
<TABLE>
<S> <C>
Acquisitions $1,546,000
Ingram Entertainment Corporation - Video City 1,500,000
Ingram Entertainment Corporation - Leptis 372,000
----------
Total $3,418,000
</TABLE>
(8) To reflect the loan costs on the new credit facility as follows:
<TABLE>
<S> <C>
Warrant issued to FINOVA Capital $ 428,805
Loan origination fees 93,750
----------
$ 522,555
</TABLE>
F-19
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
B. PRO FORMA ADJUSTMENTS - STATEMENT OF OPERATIONS
The adjustments to the pro forma condensed statement of operations are as
follows:
(1) To reflect the effect of the new employment agreement related to the
Adventures/KDDJ acquisitions.
(2) Adjustments of general and administrative expenses as follows:
<TABLE>
<CAPTION>
<S> <C>
Amortization of excess cost over fair value
of net assets acquired over 20 years $ 39,646
(3) Adjustment to interest expenses as follows:
Elimination of interest on Adventures indebtedness
to Marquette Bank at 9.5% $ (45,147)
Interest on note payable in conjunction with Leptis
acquisition at 9.5% 7,125
Elimination of interest on Leptis indebtedness to
Norwest Bank at 8.75% (11,463)
Elimination of interest on indebtedness to creditors
of Old Republic at 8% (59,280)
Elimination of interest in indebtedness to Imperial
Bank at 11.5% (254,000)
Interest on new credit facility with FINOVA Capital
Corporation at 11.25% 384,525
Amortization of loan costs on new credit facility
over 5 years 104,511
---------
Total $ 126,271
</TABLE>
(4) To eliminate the non-recurring write down of the film library.
(5) To eliminate management fees paid by Sulpizio to Video City.
F-20
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
C. PRO FORMA ADJUSTMENTS - WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Pro forma adjustments to the weighted average number of common shares
outstanding are as follows:
Shares issued pursuant to the following merger agreements:
<TABLE>
<S> <C>
Adventures 866,000
KDDJ 216,500
Leptis 150,000
Old Republic 350,000
Sulpizio 100,000
---------
Total merger shares 1,682,500
Shares issued for restructured agreement with Rentrak 665,112
---------
Total additional shares - basic 2,347,612
FINOVA Warrant 513,281
Effect of dilutive options and warrants 387,384
---------
Total additional shares - dilutive 3,248,277
</TABLE>
F-21
