<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) December 28, 1998
-----------------
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)
370 Amapola Avenue, Suite 208, Torrance, California 90501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 533-3900
--------------
------------------------
(Former name)
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(Former address)
<PAGE>
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 January 12, 1999, it was impracticable at that time to
provide the required financial statements. Such financial statements are
provided herein by this amendment on pages F-1 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
January 12, 1999, 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-25 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: March 5, 1999 By: /s/ Timothy Denari
--------------------
Timothy Denari
Chief Financial Officer
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Financial Statements of Cianci's Videoland, Inc.
Report of Independent Certified Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Deficit F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Pro Forma Condensed Consolidated Financial Information (unaudited)
Introductory Information F-11
Pro Forma Condensed Consolidated Balance Sheet (unaudited) F-16
Pro Forma Condensed Consolidated Statements of Operations
(unaudited) F-17
Notes to Pro Forma Condensed Consolidated Financial
Statements (unaudited) F-19
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Cianci's Videoland, Inc.
Portland, Oregon
We have audited the accompanying balance sheets of Cianci's Videoland, Inc.
("the Company") as of September 30, 1998 and December 31, 1997, and the related
statements of operations, stockholders' deficit, and cash flows for the nine
months ended September 30, 1998, and the years ended December 31, 1997 and 1996.
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 Cianci's Videoland, Inc. as
of September 30, 1998 and December 31, 1997, and the results of its operations
and its cash flows for the nine months ended September 30, 1998, and for the
years ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 9 to the financial statements, on December 28, 1998,
all of the issued and outstanding shares of common stock of the Company were
acquired by Video City, Inc.
BDO SEIDMAN, LLP
Los Angeles, California
March 5, 1999
F-2
<PAGE>
CIANCI'S VIDEOLAND, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets (Notes 5 and 6)
Current assets
Cash $ - $ 1,214,796
Merchandise inventories 1,592,073 1,512,558
------------- ------------
Total current assets 1,592,073 2,727,354
Advances from shareholder (Note 3) 1,370,673 1,620,673
Videocassette rental inventory, net of accumulated
amortization of $23,494,133 and $17,227,470 1,173,173 1,251,791
Fixed assets, net (Note 4) 3,211,155 3,164,174
Other assets 57,310 57,310
------------- ------------
Total assets $ 7,404,384 $ 8,821,302
============= ============
Liabilities and Stockholders' Deficit
Current liabilities
Bank overdraft $ 211,917 $ -
Revolving line of credit (Note 5) 3,000,000 1,973,720
Accounts payable 5,575,988 4,935,419
Accrued expenses 872,118 1,177,916
Current portion of long-term debt (Note 6) 536,422 428,961
------------- ------------
Total current liabilities 10,196,445 8,516,016
Long-term debt, less current portion (Note 6) 1,729,250 1,788,469
------------- ------------
Total liabilities 11,925,695 10,304,485
------------- ------------
Commitments and Contingencies (Notes 3, 7 and 8)
Stockholders' deficit
Common stock - no par value, authorized 500 shares,
issued and outstanding 10 shares 2,500 2,500
Additional paid-in capital 80,331 80,331
Accumulated deficit (4,604,142) (1,566,014)
------------- ------------
Total stockholders' deficit (4,521,311) (1,483,183)
------------- ------------
Total liabilities and stockholders' deficit $ 7,404,384 $ 8,821,302
============= ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CIANCI'S VIDEOLAND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended Year Ended
September 30, December 31, December 31,
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Revenue
Rental revenues and merchandise sales $ 21,976,028 $ 28,246,665 $ 22,242,340
-------------- ------------- -------------
Operating costs and expenses
Store operating expenses 9,943,030 11,690,786 8,583,912
Amortization of videocassette rental inventory 8,611,835 8,634,231 9,292,881
Cost of merchandise sales 2,696,132 3,114,059 3,072,235
Selling, general and administrative expenses
(Note 3) 3,330,170 3,652,861 3,066,279
-------------- ------------- -------------
Total operating costs and expenses 24,581,167 27,091,937 24,015,307
-------------- ------------- -------------
Income (loss) from operations (2,605,139) 1,154,728 (1,772,967)
Interest expense (345,311) (386,662) (193,433)
Other income 53,835 51,651 147,230
-------------- ------------- -------------
Net income (loss) $ (2,896,615) $ 819,717 $ (1,819,170)
============== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CIANCI'S VIDEOLAND, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------------ --------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 10 $ 2,500 $ 80,331 $ (566,561) $ (483,730)
Net loss (1,819,170) (1,819,170)
------------ --------- ------------- -------------- ----------------
Balance at December 31, 1996 10 2,500 80,331 (2,385,731) (2,302,900)
Net income 819,717 819,717
------------ --------- ------------- -------------- ----------------
Balance at December 31, 1997 10 2,500 80,331 (1,566,014) (1,483,183)
Shareholder Draws (141,513) (141,513)
Net loss (2,896,615) (2,896,615)
------------ --------- ------------- -------------- ----------------
Balance at September 30, 1998 10 $ 2,500 $ 80,331 $ (4,604,142) $ (4,521,311)
============ ========= ============= ============== ================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CIANCI'S VIDEOLAND, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended Year Ended
September 30, December 31, December 31,
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (2,896,615) $ 819,717 $ (1,819,170)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 9,393,978 9,494,223 9,934,829
Loss on disposal of fixed assets 10,457 - -
Change in assets and liabilities:
Increase in merchandise inventories (79,515) (298,182) (946,538)
(Increase) Decrease in other assets - (557) 84,181
Increase (Decrease) in accounts payable 640,569 (216,555) 1,841,678
Increase (Decrease) in accrued expenses (305,798) 133,258 51,134
------------- ------------- -------------
Net cash provided by operating activities 6,763,076 9,931,904 9,146,114
------------- ------------- -------------
Cash flows from investing activities
Purchase of videocassette rental inventory, net (8,533,218) (8,795,837) (9,253,146)
Purchase of fixed assets (839,580) (1,039,456) (1,913,266)
------------- ------------- -------------
Net cash used in investing activities (9,372,798) (9,835,293) (11,166,412)
------------- ------------- -------------
Cash flows from financing activities
(Increase) Decrease in advance to shareholder 250,000 (554,438) (528,318)
Increase in bank overdraft 211,917 - -
Repayment of long-term debt (351,758) (1,680,487) (1,406,449)
Proceeds from borrowings of long-term debt 400,000 - 4,900,000
Proceeds from borrowings under line of credit 1,026,280 1,973,720 -
Shareholder draws (141,513) - -
------------- ------------- -------------
Net cash provided by (used in) financing activities 1,394,926 (261,205) 2,965,233
------------- ------------- -------------
Net increase (decrease) in cash (1,214,796) (164,594) 944,935
Cash, at beginning of year 1,214,796 1,379,390 434,455
------------- ------------- -------------
Cash, at end of year $ - $ 1,214,796 $ 1,379,390
============= ============= =============
Supplementary disclosures of cash flow information
Cash paid during the year:
Interest $ (346,999) $ (361,985) $ (175,441)
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CIANCI'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of Business:
Cianci's Videoland, Inc. (the "Company") was incorporated in Oregon on January
24, 1985. The Company owns and operates 76 retail video stores in Oregon,
Washington, Idaho, Iowa, South Dakota and California.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and, as of September 30, 1998, has negative working
capital and a net capital deficiency. Management's plans in response to these
matters primarily consisted of attempting to sell the Company. As discussed in
Note 9 to the financial statements, the Company was acquired on December 28,
1998. The line of credit of $3,000,000 was repaid in conjunction with the
merger. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
2. 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 consists of videotapes purchased for rental,
which are recorded at cost and amortized over their estimated income-producing
life of ninety days. The Company also maintains a base stock of videocassettes,
which is fully amortized. Amortization expense related to videocassette rental
inventory totaled $8,611,835, $8,634,231 and $9,292,881 for the nine months
ended September 30, 1998, and the years ended December 31, 1997 and 1996.
The Company purchases a majority of its videocassettes from one supplier.
Management believes that other supplies could supply videocassettes for similar
terms. However, a change in suppliers could result in a temporary disruption of
the Company's ability to purchase new release videocassettes.
Fixed assets:
Fixed assets are recorded at cost. Depreciation is provided using straight-
line and accelerated methods over the estimated useful lives ranging from five
to seven years.
In the event that facts and circumstances indicate that the cost of an asset
may be impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash flows
associated with the asset would be compared to the carrying amount to determine
if a writedown to market value is required.
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.
F-7
<PAGE>
CIANCI'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
Income Taxes:
The Company has elected S-Corporation status under the Internal Revenue Code
and the tax laws of the states in which they operate. As a result, the Company
is not liable for federal income taxes and a portion of certain state income.
The stockholders reflect their proportionate share of the Company's income in
their individual income tax returns.
Comprehensive Income
The Company adopted SFAS 130 in January 1998. Comprehensive income (loss) is
the change in equity of a business enterprise during a period from transactions
and all other events and circumstances from non-owner sources. Other
comprehensive income (loss) includes foreign currency items and minimum pension
liability adjustments. The Company did not have components of other
comprehensive income (loss) during the nine months ended September 30, 1998 and
the years ended December 31, 1997 and 1996. As a result, comprehensive income
(loss) is the same as the net income (loss) for the nine months ended September
30, 1998 and the years ended December 31, 1997 and 1996.
Use of Estimates in the Preparation of Financial Statements:
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 reporting period.
Actual results could differ from those estimates.
3. Related Party Transactions:
The Company leases its corporate office, warehouse facility and two store
locations from its shareholders. Related party rental expense amounted to
$209,250, $279,000 and $279,000 for the nine months ended September 30, 1998 and
the years ended December 31, 1997 and 1996 (Note 7).
Advances to shareholders were $1,370,673 and $1,620,673 at September 30, 1998
and December 31, 1997.
4. Fixed assets:
Fixed assets are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Furniture, fixtures and store equipment $ 3,687,401 $ 3,078,458
Leasehold improvements 2,958,935 2,728,298
------------- -------------
6,646,336 5,806,756
Accumulated depreciation (3,435,181) (2,642,582)
------------- -------------
Fixed assets, net $ 3,211,155 $ 3,164,174
============= =============
</TABLE>
F-8
<PAGE>
CIANCI'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
5. Line of Credit:
At September 30, 1998, the Company had a line of credit agreement, as amended,
with a bank (the "Credit Agreement"). Pursuant to terms of the Credit Agreement,
advances bear interest at the bank's prime rate plus 1/2 percent (8.25% at
September 30, 1998) and are secured by substantially all assets of the Company.
The Credit Agreement was to be repaid in equal monthly installments of principal
and interest over a twenty-four month period ending September 30, 2000. The
Credit Agreement contained various financial and operating covenants with which
the Company was not in compliance at September 30, 1998; accordingly, the entire
balance outstanding under the Credit Agreement has been classified as current at
September 30, 1998. In connection with the sale of the Company on December 28,
1998 (See Note 9), all amounts outstanding under the Credit Agreement were
repaid and the Credit Agreement was terminated.
6. Long-Term Debt
Long-term debt is collateralized by substantially all corporate assets (unless
noted otherwise) and consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Note payable, distributor, payable in monthly installments of
$34,403, including interest imputed at 9%, due 2003 $ 1,613,197 $ 1,806,608
Note payable distributor, payable in monthly installments of
$5,952, including interest imputed at 9%, due 2003 274,596 312,558
Note payable in monthly installments of $12,907, including
interest at 10% due 2000. 341,349 -
Other 36,530 98,264
----------------------------
2,265,672 2,217,430
----------------------------
Less current portion 536,422 428,961
----------------------------
Long-term $ 1,729,250 $ 1,788,469
============================
</TABLE>
Principal payments due on long-term debt in the three months ending and the
years ending after December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
1998 (three months) $ 173,721
1999 661,081
2000 648,317
2001 522,980
2002 484,260
2003 112,499
----------
2,602,858
Less imputed interest (337,186)
----------
$2,265,672
==========
</TABLE>
F-9
<PAGE>
CIANCI'S VIDEOLAND, INC.
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies:
The Company is obligated under operating leases of real property expiring at
various dates through December 2008. Certain leases have options to renew for
three or five year terms. Future minimum rentals are approximately as follows:
<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
1999 $ 4,849,856
2000 4,213,002
2001 3,618,565
2002 3,202,307
2003 2,727,133
Thereafter 8,071,657
-------------
$ 26,682,520
=============
</TABLE>
Rental expense for leases was approximately $4,453,153, $5,028,126 and
$3,600,781 for the nine months ended September 30, 1998, and the years ended
December 31, 1997 and 1996.
8. Year 2000 (Unaudited)
Like other companies, Videoland could be adversely affected if the computer
systems we, our suppliers or customers use do not properly process and calculate
date-related information and data from the period surrounding and including
January 1, 2000. This is commonly known as the "Year 2000" issue. Additionally,
this issue could impact non-computer systems and devices such as production
equipment, elevators, etc. At this time, because of the complexities involved in
the issue, management cannot provide assurances that the Year 2000 issue will
not have an impact on the company's operations.
9. Subsequent Event
On December 28, 1998, all of the outstanding shares of the Company's common
stock was acquired by Video City, Inc. ("Video City"), pursuant to an Agreement
of Merger and Plan of Reorganization ("the Merger Agreement"). The acquisition
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 Agreement, Video City paid off
existing indebtedness of $3,000,000 owed by the Company to Union Bank (See Note
5).
F-10
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CURRENT ACQUISITION
- -------------------
On December 28, 1998, Video City, Inc. ("Video City" or the "Company") acquired
Cianci's Videoland, Inc. ("Videoland") from Victor J. Cianci and Evvy R. Cianci.
This acquisition increased Video City's chain of retail video stores to 128.
The acquisition 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 transaction:
(a) Cianci's Videoland, Inc. ("Videoland")
Videoland owned and operated 76 stores under the name "Videoland" in
Oregon, Washington, Iowa, Idaho, South Dakota and California. Videoland was
owned by Victor J. and Evvy Cianci. The consideration consisted of 76,000 shares
of Video City Series B voting Convertible Redeemable Preferred Stock with a
stated value of $100 per share and $1,900,000 in cash reduced by (a) the total
amount of indebtedness and liabilities of Videoland in excess of $11,500,000 at
the time of closing and (b) $10.00 multiplied by the number of video cassettes
in Videoland's inventory at March 31, 1998 that exceeds the number of
videocassettes at the time of closing, if any.
(b) BankBoston Credit Facility
On December 28, 1998, Video City and its subsidiaries entered into a Loan
and Security agreement with BankBoston providing for a $30 million revolving
credit facility secured by all of the assets of Video City and its subsidiaries.
This agreement replaced Video City's previous $7.5 million loan facility with
FINOVA Capital Corporation. The new loan agreement provides for a maturity date
of December 29, 2001 and a per annum interest rate equal to either (a) the base
rate announced from time to time by BankBoston, N.A. plus 0.5 percent or (b)
LIBOR plus 3.0 percent, at Video City's election. In addition, Video City is
obligated to pay various fees in connection with the credit facility. As of
December 30, 1998, Video City borrowed $13,400,000 the net proceeds of which (a)
$6,400,000 was used to pay off all amounts due to FINOVA Capital Corporation,
(b) $1,900,000 was used as the cash component of the purchase price of
Videoland, (c) $3,700,000 was used to pay off certain indebtedness and trade
payables of Videoland, and (d) $800,000 was used to pay off certain amounts owed
by Video City.
PREVIOUS ACQUISITIONS
- ---------------------
On September 30, 1998, the Company acquired an aggregate of nine retail video
stores through the acquisition of all of the outstanding shares of capital stock
of Video Tyme Inc. ("Video Tyme") and substantially all of the assets of Far
West Entertainment, Inc. ("Far West Entertainment") and Game City, Inc. ("Game
City"). The acquisitions increased the number of retail video stores owned and
operated by the Company to 53. The purchase price consisted of a combination of
cash, the Company's common stock and/or promissory notes and assumption of
indebtedness.
The following sets forth a description of the transactions:
(a) Video Tyme, Inc. ("Video Tyme")
Video Tyme was previously owned by Andrew T. Baruffi and members of his
immediate family through The Baruffi Family Trust and The Baruffi Family
Partnership (collectively, the "Selling Shareholders"). Video Tyme owned and
operated six retail video stores in Las Vegas, Nevada, of which five were
acquired.
F-11
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The purchase price of Video Tyme consisted of 1,050,000 shares of the Company's
common stock and cash in the amount of $1,000,000 (subject to post-closing
adjustments, if any). The Company also entered into a management agreement with
the Selling Shareholders to manage an additional store in Las Vegas currently
owned by the Selling Shareholders. Pursuant to the management agreement, the
Company has the option to acquire such store from the Selling Shareholders at a
cash purchase price of (a) $400,000 if such option to purchase is exercised on
or before March 31, 1999 or (b) $440,000 if such option to purchase is exercised
between April 1, 1999 and September 30, 1999.
(b) Far West Entertainment, Inc. ("Far West")
Far West was owned by Bradley K. Maples. Far West owned and operated two
retail video stores located in Clovis, California and Pocatello, Idaho. The
purchase price of the assets of Far West consisted of 32,000 shares of the
Company's common stock, cash in the amount of $20,000, the assumption of certain
indebtedness to third parties and to the Company in the total amount of $495,000
and a promissory note in the principal amount of $100,000. For more than 21
months prior to this acquisition, the store located in Clovis, California was
managed by the Company pursuant to a management agreement, and operated under
the name "Video City."
(c) Game City, Inc. ("Game City")
Game City was owned and operated by Young C. and Kay L. Lee. Game City owned
and operated a retail video store in Bakersfield, California. The purchase price
of the assets consisted of cash in the amount of $7,500, the assumption of
certain indebtedness to third parties and to the Company in the total amount of
$117,500, and a promissory note in the principal amount of $150,000. For more
than 26 months prior to this acquisition, this acquired store was managed by the
Company pursuant to a management agreement, and operated under the name "Video
City." Young C. and Kay L. Lee are the parents of Robert Y. Lee, the Company's
Chief Executive Officer and Chairman of the Board. The Company believes that
this acquisition represents an arm's length transaction on terms and valuation
comparable to other completed and pending acquisitions by the Company for the
year ending January 31, 1999.
On March 25, 1998, Video City 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 transaction:
(a) Adventures in Video, Inc. ("Adventures") and KDDJ Investments, Inc.
These two companies were owned by David A. Ballstadt and members of his
immediate family. These were the only two acquisitions that were related to one
another. Adventures owned and operated thirteen stores in Minnesota in the
greater Minneapolis metropolitan area. The purchase price for Adventures was
866,000 shares of Video City common stock. KDDJ owned and operated three stores
in San Francisco, California. The purchase
F-12
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
price for KDDJ was 216,500 shares of Video City common stock. 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 are 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 new seat. 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 owned and operated 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 150,000
shares of Video City common stock. Pursuant to the Merger Agreement, Video City
also 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 owned and operated 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 owned and operated 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
F-13
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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) FINOVA Credit Facility
The Company, on March 25, 1998, 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 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 facility to pay off a term loan owing to Ingram
Entertainment Corporation.
This credit facility was paid off on December 28, 1998 at the time of the
Videoland purchase, with proceeds from a new $30 million revolving credit
facility with BankBoston.
(g) Restructured Agreement With Rentrak
Concurrently with the March 25, 1998 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. 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 City
common stock in payment of $940,324 of indebtedness owed to Rentrak by Sulpizio
One, 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.
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited pro forma condensed consolidated financial
statements illustrate the effect of the acquisitions, the sale of the film
library, the restructured agreement with Rentrak and the BankBoston credit
facility ("Pro Forma") on the Company's financial position and results of
operations.
F-14
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited pro forma condensed consolidated balance sheet as of October 31,
1998 is based on the historical balance sheet of Video City, Inc. as of that
date, and the historical balance sheet of Videoland, Inc. as of September 30,
1998. The unaudited pro forma condensed consolidated balance sheet assumes the
Videoland acquisition and the BankBoston credit facility took place on October
31, 1998.
The unaudited pro forma condensed consolidated 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 statement of
operations of Video Tyme, Inc., Far West Entertainment, Inc., Game City, Inc.,
Leptis Magna, Inc., Old Republic Entertainment, Inc., Sulpizio One, Inc. and the
historical combined statements of operations of Adventures in Video, Inc. and
KDDJ Investments, Inc., and Videoland, Inc. for the year ended December 31,
1997. The unaudited pro forma condensed consolidated statement of operations
assumes the acquisitions, sale of the film library, the restructured agreement
with Rentrak and the BankBoston credit facility took place on February 1, 1997.
The unaudited pro forma condensed consolidated statement of operations for the
nine months ended October 31, 1998 is based on historical statements of
operations of Video City, Inc. for the nine months then ended, the historical
statements of operations of Video Tyme, Inc. for the year ended December 31,
1997, and the historical statement of operations of Far West Entertainment,
Inc., Game City, Inc., and Videoland, Inc. for the nine months ended September
30, 1998. The unaudited pro forma condensed consolidated statements of
operations assumes the acquisitions, sale of the film library, the restructured
agreement with Rentrak and the BankBoston credit facility took place on February
1, 1998.
The unaudited 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
unaudited pro forma condensed consolidated financial statements are based on
management's estimates of the allocation of the purchase price, the actual
allocation may differ. The unaudited pro forma condensed consolidated statements
of operations may not be indicative of the actual results which would have been
obtained if the transactions had occurred on February 1, 1997 or February 1,
1998.
The accompanying unaudited pro forma condensed consolidated financial
statements should be read in conjunction with the historical financial
statements of Video City, Inc., Videoland, Inc. and the historical combined
financial statements of Adventures in Video, Inc. and KDDJ Investments, Inc.
F-15
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Pro-forma
Video Adjustments
City Videoland (Note A) Pro-forma
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash $ 42,348 $ - $ - $ 42,348
Accounts receivable, net 1,121,891 - 1,121,891
Notes receivable 86,703 86,703
Merchandise inventories 1,079,332 1,592,073 2,671,405
Other 239,520 - (16,690)(1) 222,830
--------------------------------------------------------------------------------
Total current assets 2,569,794 1,592,073 (16,690) 4,145,177
Advances from shareholder - 1,370,673 1,370,673
Videocassette rental
inventory, net 8,541,436 1,173,173 10,744,616 (1) 20,459,225
Fixed assets, net 1,717,934 3,211,155 4,929,089
Goodwill 1,958,050 - 8,077,920 (1) 10,035,970
Deferred tax asset 2,421,457 - (2,421,457)(1)
Other assets 1,440,262 57,310 600,000 (4) 2,097,572
--------------------------------------------------------------------------------
Total assets $ 18,648,933 $ 7,404,384 16,984,389 $ 43,037,706
================================================================================
Liabilities
Current liabilities
Bank Overdraft $ - $ 211,917 $ - $ 211,917
Line of credit - 3,000,000 (3,000,000)(3) 13,400,000
13,400,000 (4)
Accounts payable 5,488,660 5,575,988 (1,500,000)(3) 9,564,648
Accrued expenses 672,400 872,118 1,544,518
Current portion of
long-term debt 1,765,060 536,422 (847,000)(2) 1,454,482
--------------------------------------------------------------------------------
Total current liabilities 7,926,120 10,196,445 8,053,000 26,175,565
Long-term debt 7,475,037 1,729,250 (5,553,000)(2) 3,651,287
Deferred tax liability 1,876,389 (1) 1,876,389
Other liabilities 428,805 - 428,805
--------------------------------------------------------------------------------
Total liabilities 15,829,962 11,925,695 4,376,389 32,132,046
--------------------------------------------------------------------------------
Preferred stock- Series A 700,000 700,000
Total stockholders'
equity (deficit) 2,118,971 (4,521,311) 12,608,000 (1) 10,205,660
--------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 18,648,933 $ 7,404,384 16,984,389 $ 43,037,706
================================================================================
</TABLE>
See notes to pro forma condensed consolidated financial statements (unaudited).
F-16
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
Video Adventures Old Video
City /KDDJ Leptis Republic Sulpizio Tyme
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Rental revenues and
product sales $ 10,007,358 $ 4,163,583 $ 1,572,200 $ 2,009,006 $ 1,871,669 $ 4,935,259
Management fee income 205,000
-----------------------------------------------------------------------------------------------
Total revenue 10,212,358 4,163,583 1,572,200 2,009,006 1,871,669 4,935,259
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 3,064,422
Cost of leased product 419,361 4,334 - - 66,603 -
General and
administrative 2,035,428 553,553 103,651 22,271 344,439 1,982,457
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 5,046,879
Income (loss) from
operations (2,422,956) 79,095 185,079 198,499 87,997 (111,620)
Gain (loss) on
disposition of assets, - (12,157) - (157,500)
net
Interest expense 552,359 45,148 12,054 69,177 97,414 256
Other (income) - (14,644) (2,498) (17,755)
-----------------------------------------------------------------------------------------------
Income (loss) before taxes $ (2,975,315) $ 36,434 $ 173,025 $ (28,178) $ (6,919) $ (94,121)
Income tax (expense) benefit - - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2,975,315) $ 36,434 $ 173,025 $ (28,178) $ (6,919) $ (94,121)
===============================================================================================
Basic earnings per
share $ (0.30)
Diluted earnings
per share $ (0.30)
Weighted average number
of common shares out-
standing (Note B):
Basic 9,770,594
Diluted 9,770,594
<CAPTION>
Pro-forma
Far West Game Adjustments
Entertainment City Videoland (Note B) Pro-forma
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
Rental revenues and
product sales $ 316,753 $ 347,572 $ 28,246,665 $ $ 53,470,065
Management fee income (205,000)(5) -
----------------------------------------------------------------------------------------------
Total revenue 316,753 347,572 28,246,665 (205,000) 53,470,065
Operating costs and
expenses
Store operating
expenses 241,208 169,825 11,690,786 21,461,511
Amortization of
videocassette rental
inventory 81,387 73,750 8,634,231 (4,762,000)(2) 8,553,906
Cost of product sales 21,950 22,290 3,114,059 7,458,124
Cost of leased product 2,706 14,487 507,491
General and
administrative - 38,677 3,652,861 509,197 (1) 8,766,114
(613,820)(6)
137,400 (7)
Non-recurring write
down of film library (3,029,829)(4) -
----------------------------------------------------------------------------------------------
Total operating costs
and expenses 347,251 319,029 27,091,937 (7,759,052) 46,747,146
Income (loss) from
operations (30,498) 28,543 1,154,728 7,554,052 6,722,919
Gain (loss) on
disposition of assets, (8,134) (177,791)
net
Interest expense 8,515 12,396 386,662 731,274 (3) 1,915,255
Other (income) (51,651) (86,548)
----------------------------------------------------------------------------------------------
Income (loss) before taxes (39,013) 8,013 $ 819,717 6,822,778 $ 4,716,421
Income tax (expense) benefit - - - (1,886,568)(8) (1,886,568)
----------------------------------------------------------------------------------------------
Net income (loss) $ (39,013) $ 8,013 $ 819,717 4,936,210 $ 2,829,853
==============================================================================================
Basic earnings per
share $ 0.17
Diluted earnings
per share $ 0.16
Weighted average number
of common shares out-
standing (Note B):
Basic 3,429,612 (9) 13,200,206
Diluted 3,816,996 (9) 13,587,590
</TABLE>
See notes to pro forma condensed consolidated financial statements (unaudited).
F-17
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
Pro-forma
Video Video Far West Game Adjustments
City Tyme Entertainment City Videoland (Note C) Pro-forma
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Rental revenues and
product sales $ 14,174,164 $ 4,935,259 $ 192,224 $ 246,824 $ 21,976,028 $ 368,928 (7) $ 41,893,427
Management fee income 116,133 (116,133)(4) -
------------------------------------------------------------------------------------------------------
Total revenue 14,290,297 4,935,259 192,224 246,824 21,976,028 252,795 41,893,427
Operating costs and
expenses
Store operating
expenses 7,517,466 - 168,965 133,816 9,943,030 17,763,277
Amortization of
videocassette rental
inventory 1,805,657 48,965 56,753 8,611,835 (3,572,000)(2) 6,951,210
Cost of product sales 2,174,651 3,064,422 13,063 23,322 2,696,132 (584,611)(7) 7,386,979
Cost of leased 1,292,854 - 30,243 40,645 1,363,742
product
General and
administrative 2,563,873 1,982,457 19,564 34,552 3,330,170 340,220 (1) 7,569,810
(460,365)(5)
84,300 (6)
(324,961)(7)
Non-recurring write
down of film library -
------------------------------------------------------------------------------------------------------
Total operating costs
and expenses 15,354,501 5,046,879 280,800 289,088 24,581,167 (4,517,417) 41,035,018
------------------------------------------------------------------------------------------------------
Income (loss) from
operations (1,064,204) (111,620) (88,576) (42,264) (2,605,139) 4,770,212 858,409
Gain (loss) on
disposition of assets, -
net
Interest expense 647,053 256 29,745 1,053 345,311 (45,126)(3) 951,591
(26,701)(7)
Other (income) (15,097) (17,755) (53,835) (7,296)(7) (93,983)
------------------------------------------------------------------------------------------------------
Income (loss) before taxes $ (1,696,160) $ (94,121) $ (118,321) $ (43,317) $ (2,896,615) $ 4,849,335 801
Income tax (expense) benefit
2,477,132 - - - - 2,477,452(8) (320)
------------------------------------------------------------------------------------------------------
Net income (loss) $ 780,972 $ (94,121) $ (118,321) $ (43,317) $ (2,896,615) $ 2,371,883 $ 481
------------------------------------------------------------------------------------------------------
Basic earnings (loss) per
share $ 0.07 $ (0.04)
Diluted earnings (loss)
per share $ 0.07 $ (0.04)
Weighted average number
of common shares out-
standing (Note C):
Basic 11,419,984 1,410,936 (9) 12,830,920
Diluted 11,913,471 917,449 (9) 12,830,920
</TABLE>
F-18
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. Pro Forma Adjustments - Pro Forma Condensed Consolidated Balance Sheet
The adjustments to the pro forma condensed consolidated balance sheet are
as follows:
(1) To reflect the acquisition of Videoland 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 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Components of purchase price:
Cash from BankBoston credit
facility $ 1,900,000
Video City Series B preferred stock 7,600,000
Acquisition costs 503,379
-------------
Total purchase price $ 10,003,379
=============
Allocation of purchase price:
Videocassette rental inventory $ 10,744,616
Deferred tax liability 4,297,846
Stockholders equity (deficit) (4,521,311)
Goodwill 8,077,920
-------------
$ 10,003,379
=============
</TABLE>
Of the $503,379 in acquisition costs, $16,690 had been incurred by Video City
prior to October 31, 1998. Video City's existing net deferred tax asset of
$2,421,457 is reclassified and shown net of the deferred tax liability from the
Videoland acquisition resulting in a net deferred tax liability of $1,876,389.
F-19
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. Pro Forma Adjustments - Pro Forma Condensed Consolidated Balance Sheet
(Continued)
(2) To reflect the repayment of FINOVA debt from the proceeds of the BankBoston
credit agreement as follows:
<TABLE>
<CAPTION>
<S> <C>
Current portion $ 847,000
Long term 5,553,000
------------
$ 6,400,000
============
</TABLE>
(3) To reflect the repayment of certain trade payables and debt from the
BankBoston credit facility as follows:
<TABLE>
<CAPTION>
Video City Videoland Total
--------------------------------------------------
<S> <C> <C> <C>
Accounts payable $ 800,000 $ 700,000 $ 1,500,000
Revolving line of
credit - 3,000,000 3,000,000
--------------------------------------------------
Total $ 800,000 $ 3,700,000 $ 4,500,000
============= ============ ============
</TABLE>
(4) To reflect the credit facility with BankBoston as follows:
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
BankBoston loan fees $ 600,000
Videoland acquisition (Note 1) 1,900,000
FINOVA repayment (Note 1) 6,400,000
Trade payables and debt (Note 1) 4,500,000
--------------
Total (all current) $ 13,400,000
==============
</TABLE>
F-20
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
B. Pro Forma Adjustments - Pro Forma Condensed Consolidated Statement of
Operations for the year ended January 31, 1998
The adjustments to the pro forma condensed consolidated statement of
operations are as follows:
(1) Adjustments for amortization of excess cost over fair value of net assets
acquired amortized over 20 years
Cost in excess of fair value of net assets acquired:
<TABLE>
<CAPTION>
Amount
------------
<S> <C>
Adventures/KDDJ $ 66,747
Leptis 141,029
Old Republic 693,152
Sulpizio 257,196
Video Tyme 767,428
Far West Entertainment 180,467
Game City -
Videoland 8,077,920
============
Total $ 10,183,939
============
Number of years 20
============
Annual amortization expense $ 509,197
============
</TABLE>
Total goodwill includes $147,969 of post-closing adjustments made by Video City,
Inc. subsequent to October 31, 1998.
(2) Adjustment to reflect amortization of videocassette rental inventory based
on the postacquisition valuation utilizing Video City amortization
methodology.
(3) Adjustment to interest expenses as follows:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
Elimination of interest on Adventures indebtedness to Marquette
Bank at 9.5% $ (45,148)
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 on indebtedness to Imperial Bank at 11.5% (254,000)
Elimination of interest on Videoland indebtedness to Union Bank at
6.2% (186,000)
Interest on BankBoston credit facility at LIBOR (5.06% at December
31, 1998) plus 3% 1,080,040
Amortization of BankBoston loan costs 200,000
------------
Total $ 731,274
============
</TABLE>
(4) To eliminate the non-recurring write down of the film library.
F-21
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) To eliminate management fees paid to Video City by Sulpizio, Game City and
Far West.
(6) To eliminate Videoland corporate expenses:
The following personnel compensation expense are not incurred subsequent to
the acquisition as a result of duplicate corporate expenditures:
<TABLE>
<CAPTION>
Amount
--------------
<S> <C>
Shareholder's compensation
Victor J. Cianci $ 200,000
Ewy R. Cianci 200,000
Corporate accounting personnel 108,880
Inventory purchasing and marketing
personnel 104,940
--------------
Total $ 613,820
</TABLE>
The above adjustment does not include the effect of ten employees who
separated from Videoland because the positions were replaced at Video
A corporate offices.
(7) Adjustment for additional Video City and Adventures/KDDJ corporate
expenses.
The following additional corporate expenses are being incurred subsequent
to the acquisitions:
<TABLE>
<CAPTION>
Amount
--------------
<S> <C>
Adventures/KDDJ incremental salary
for Mr. Ballstadt $ 25,000
Video City Corporate office lease 62,400
Additional training and travel 50,000
--------------
Total $ 137,400
</TABLE>
(8) Adjustment for pro forma income tax expense at 40%.
(9) Pro forma adjustments to the weighted average number of common shares
outstanding are as follows:
Shares issued pursuant to the following merger agreements:
<TABLE>
<CAPTION>
Shares
------------
<S> <C>
Adventures 866,000
KDDJ 216,500
Leptis 150,000
Old Republic 350,000
Sulpizio 100,000
Video Tyme 1,050,000
Far West Entertainment 32,000
Game City -
----------
Total merger shares 2,764,500
Shares issued for restructured agreement with Rentrak 665,112
----------
Total additional shares - basic 3,429,612
Effect of dilutive options and warrants 387,384
----------
Total additional shares - dilutive 3,816,996
==========
</TABLE>
Pro forma basic and dilutive earnings per share include the pro forma effect of
$608,000 preferred stock dividends. Dilutive earnings per share does not include
the effect of the preferred stock conversion because it is anti-dilutive.
F-22
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
C. Pro Forma Adjustments - Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended October 31, 1998
The adjustments to the pro forma condensed consolidated statement of
operations are as follows:
(1) Adjustments for amortization of excess cost over fair value of net assets
acquired amortized over 20 years
Amortization expense for period from February 1, 1998 to the date of each
acquisition:
<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
Adventures/KDDJ $ 556
Leptis 1,176
Old Republic 5,776
Sulpizio 2,143
Video Tyme 22,383
Far West Entertainment 5,264
Game City -
Videoland 302,922
=============
Total $ 340,220
=============
</TABLE>
(2) Adjustment to reflect amortization of videocassette rental inventory based
on the post acquisition valuation utilizing Video City amortization
methodology.
(3) Adjustment to interest expenses as follows:
<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
Interest on note payable in conjunction with Leptis acquisition at
9.5% for the period February 1, 1998 to March 25, 1998 $ 1,188
Elimination of interest on indebtedness to Imperial Bank at 11.5%
for the period February 1, 1998 to March 25, 1998 (42,333)
Elimination of interest on Videoland indebtedness to Union Bank at
6.2% (139,500)
Elimination of interest in credit facility with FINOVA Capital for
the period March 25, 1998 to October 31, 1998 (720,000)
Elimination of FINOVA amortization of loan costs on credit facility
for the period March 25, 1998 to October 31, 1998 (104,511)
Interest on BankBoston credit facility at 8.06% 810,030
Amortization of BankBoston loan costs 150,000
-------------
Total $ (45,126)
=============
</TABLE>
(4) To eliminate management fees paid to Video City by Sulpizio for the period
February 1, 1998 to March 25, 1998 and Game City and Far West
Entertainment for the period February 1, 1998 to September 30, 1998.
F-23
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) To eliminate Videoland corporate expenses.
The following personnel compensation expense are not incurred subsequent to
the acquisition as a result of duplicate corporate expenditures:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
Shareholder's compensation
Victor J. Cianci $ 150,000
Evvy R. Cianci 150,000
Corporate accounting personnel 81,660
Inventory purchasing and marketing
personnel 78,705
----------
Total $ 460,365
</TABLE> ==========
The above adjustment does not include the effect of ten employees who
separated from Videoland because the positions were replaced at Video City's
corporate offices.
(6) Adjustment for additional Video City corporate expenses.
The following additional corporate expenses are being incurred subsequent
to the acquisitions:
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
Corporate office lease $ 46,800
Additional training and travel 37,500
---------
Total $ 84,300
</TABLE> =========
(7) Adjustment to reflect Adventures/KDDJ, Leptis, Old Republic and Sulpizio
for the period February 1, 1998 to March 25, 1998 and to remove three
months of operations for Video Tyme:
<TABLE>
<CAPTION>
Adventures/ Old
KDDJ Leptis Republic Sulpizio VideoTyme Total
--------------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental revenues and
product sales $ 693,931 $ 262,033 $ 334,834 $ 311,945 $(1,233,815) $ 368,928
Cost of product sales 127,026 1,360 23,601 29,509 (766,106) (584,611)
General and
administrative 92,259 17,275 3,712 57,407 (495,614) (324,961)
Interest expense 7,525 2,009 11,530 16,236 (64,001) (26,701)
Other (income) (2,441) - - (416) (4,439) (7,296)
</TABLE>
(8) Adjustment for pro forma income tax expense at 40%.
F-24
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(9) Pro forma adjustments to the weighted average number of common shares
outstanding for the nine months ended October 31, 1998 are as follows:
Weighted average shares for mergers
<TABLE>
<CAPTION>
Shares
-------------
<S> <C>
Adventures (February 1, 1998-March 25, 1998) 168,125
KDDJ (February 1, 1998-March 25, 1998) 42,031
Leptis (February 1, 1998-March 25, 1998) 29,121
Old Republic (February 1, 1998-March 25, 1998) 67,949
Sulpizio (February 1, 1998-March 25, 1998) 19,414
Video Tyme (February 1, 1998-September 30, 1998) 926,923
Far West Entertainment (February 1, 1998-September
30, 1998) 28,249
-------------
Total merger shares 1,281,812
Shares issued for restructured agreement with Rentrak 129,124
-------------
Total additional shares - basic 1,410,936
Options and warrants (493,487)
-------------
Total additional shares - dilutive 917,449
=============
</TABLE>
Pro forma basic and dilutive earnings per share include the pro forma effect
of $456,000 preferred stock dividends. Dilutive earnings per share does not
include the effect of the preferred stock conversion because it is
anti-dilutive.
F-25
