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Previous: QUINTILES TRANSNATIONAL CORP, S-3MEF, 1997-03-06 |
Next: ANCOR COMMUNICATIONS INC /MN/, SC 13G/A, 1997-03-06 |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: March 6, 1997
VIDEO UPDATE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-24346 41-1461110
(Commission File Number) (I.R.S. Employer Identification No.)
3100 World Trade Center, 30 East Seventh Street, St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
(612) 222-0006
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Form 8-K filed on January 10, 1997
as set forth in the pages attached hereto.
(List all such items, financial statements, exhibits or other portions amended)
1. Item 7, page 1 - Amended to include the Financial Statements of
Video View Ltd. and the Registrant's pro forma financial
information.
TABLE OF CONTENTS
FORM 8-K/A
March 6, 1997
Item Page
- ---- ----
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS 1
SIGNATURE 2
EXHIBITS None
-i-
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial statements of businesses acquired.
Attached are the audited financial statements for Video View
Group for the years ended December 31, 1995 and 1996.
b. Pro forma financial information.
Attached is the pro forma financial information for the
Registrant for the year ended April 30, 1996 and for the six
months ended October 31, 1996.
c. Exhibits.
The following exhibits were previously filed with the Form 8-K
filed on January 10, 1997.
Exhibit
No. Title
--- -----
2 Purchase Agreement by and among Video Update
Canada Inc., Video View Ltd. and Gordon and Joanne
Hillman, dated as of January 1, 1997.
3 Restated Certificate of Incorporation.
99 Press Release.
-1-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter
-----------------------------
Daniel A. Potter
Chief Executive Officer
Date: March 6, 1997
-2-
VIDEO VIEW GROUP
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995
AND DECEMBER 31, 1996
and
AUDITORS' REPORT
[LETTERHEAD OF CUTHBERTSON SANDALL, CHARTERED ACCOUNTANTS]
AUDITORS' REPORT
TO THE SHAREHOLDERS
VIDEO VIEW GROUP
We have audited the combined balance sheet of Video View Group as at December
31, 1996 and December 31, 1995 and the combined statements of income and
retained earnings and cash flow for the years then ended. These financial
statements are the responsibility of the Video View Group's management. Our
responsibility is to express an opinion on these 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 an audit to obtain reasonable
assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the combined financial position of the Video View Group as at December
31, 1996 and December 31, 1995 and the results of its operations and the changes
in its financial position for the years then ended in accordance with generally
accepted accounting principles.
February 7, 1997 /s/ Cuthbertson Sandall
Red Deer, Alberta, Canada Chartered Accountants
VIDEO VIEW GROUP
COMBINED BALANCE SHEET
AS AT DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash 404,291 458,395
Accounts receivable 3,216 31,683
Inventory 263,398 329,151
Prepaid expenses 61,574 49,807
Due from affiliated company (Note 2) 249,606 -
--------------- --------------
982,085 869,036
CAPITAL ASSETS (Note 3) 3,930,343 3,947,421
OTHER ASSET
Investment in life insurance 16,856 8,146
--------------- --------------
4,929,284 4,824,603
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 288,733 508,636
Managment bonuses payable 151,500 29,500
Income taxes payable 13,803 20,642
Due to affiliated company (Note 2) - 52,607
Current portion of long-term debt 294,228 312,637
--------------- --------------
748,264 924,022
DUE TO SHAREHOLDERS (Note 4) 13,280 13,280
LONG-TERM DEBT (Note 5) 255,252 906,420
DEFERRED INCOME TAXES 283,675 248,528
--------------- --------------
1,300,471 2,092,250
--------------- --------------
SHAREHOLDERS' EQUITY
Share capital (Note 6) 152 112
Contributed surplus 2,496 2,496
Retained earnings 3,626,165 2,729,745
--------------- --------------
3,628,813 2,732,353
--------------- --------------
4,929,284 4,824,603
=============== ==============
</TABLE>
VIDEO VIEW GROUP
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES
Rental revenue 6,873,327 5,196,485
Product sales 1,608,585 1,119,067
-------------- --------------
8,481,912 6,315,552
-------------- --------------
COSTS AND EXPENSES
Store operating expenses 4,820,463 3,166,186
General and administrative 1,087,249 941,538
Cost of product sales 1,206,001 838,996
-------------- --------------
7,113,713 4,946,720
-------------- --------------
OPERATING INCOME 1,368,199 1,368,832
-------------- --------------
OTHER INCOME (EXPENSES)
Miscellaneous income 4,495 -
Other income 18,000 18,000
Interest (expense) (105,908) (59,698)
(Loss) on sale of capital assets (165,526) (163,825)
-------------- --------------
(248,939) (205,523)
-------------- --------------
INCOME BEFORE INCOME TAXES 1,119,260 1,163,309
-------------- --------------
Income taxes
Current 187,693 185,844
Deferred 35,147 39,915
-------------- --------------
222,840 225,759
-------------- --------------
NET INCOME FOR THE YEAR 896,420 937,550
Retained earnings at beginning of year 2,729,745 1,792,195
-------------- --------------
RETAINED EARNINGS AT END OF YEAR 3,626,165 2,729,745
============== ==============
</TABLE>
VIDEO VIEW GROUP
COMBINED STATEMENT OF CASH FLOW
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Cash receipts
Sales 8,510,419 7,136,820
Other income 22,495 18,000
Less cash disbursements
General and administrative expenses (5,463,563) (4,684,759)
Income taxes (194,532) (236,340)
---------------- ----------------
2,874,819 2,233,721
---------------- ----------------
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Purchase of capital assets (3,274,416) (2,926,114)
Proceeds on disposal of capital assets 1,325,994 129,434
Purchase of life insurance (8,710) (8,146)
---------------- ----------------
(1,957,132) (2,804,826)
---------------- ----------------
CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES
Repayment of long-term debt (984,511) (235,254)
Proceeds from long-term debt 314,933 823,540
Repayment of shareholders' loan - (2,000)
Advances from (to) affiliated company (302,213) 13,128
---------------- ----------------
(971,791) 599,414
---------------- ----------------
INCREASE (DECREASE) IN CASH FOR THE YEAR (54,104) 28,309
Cash at beginning of year 458,395 430,086
---------------- ----------------
CASH AT END OF YEAR 404,291 458,395
================ ================
</TABLE>
VIDEO VIEW GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Video View Ltd. and the related companies TDG Holdings Ltd., TMH Holdings
Ltd., TGH Holdings Ltd., and TDH Holdings Ltd. (the "Video View Group")
own and operate retail video stores in Alberta, Canada.
Combined financial statements
The accompanying financial statements present the combined financial
position, results of operations and cash flows of the Video View Group.
All intercompany accounts and transactions have been eliminated. These
combined financial statements have been prepared for information purposes
on the subsequent sale of the Video View Group (see Note 8).
Inventory
Inventory is valued at the lower of cost and net realizable value.
Capital assets
Capital assets are recorded at cost less accumulated amortization. The
following rates of amortization, using the declining balance method, are
used to allocate the cost of the assets, less any residual or salvage
value, over their expected useful life:
Buildings 5%
Equipment and fixtures 20%
Video cassette machines 20%
Video cassette rental movies and games (1995; 40%) 50%
Automotive 30%
Computers 30%
Computer software 100%
Leasehold improvements are amortized on a straight-line basis over the
term of the lease plus one renewal period.
Income taxes
The Video View Group provided for taxes under the tax allocation basis,
under which taxes are provided for in the year transactions affect net
income, regardless of when such transactions are recognised for income
tax purposes. Deferred income taxes arise mainly as a result of claiming
amortization for income tax purposes in excess of that recorded in these
financial statements.
VIDEO VIEW GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
2. DUE FROM (TO) AFFILIATED COMPANY
The amount due from (to) Hillman Holdings Ltd., an affiliated company
controlled by common shareholders, is non-interest bearing and has no
fixed terms of repayment but is payable upon demand. Therefore, the
amount has been classified as a current asset or liability.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
<S> <C> <C> <C>
Equipment and fixtures 859,314 262,499 596,815
Video cassette machines 237,030 131,682 105,348
Video cassette rental movies and games 7,142,873 4,435,328 2,707,545
Automotive 85,169 36,305 48,864
Computer hardware 299,087 134,644 164,443
Computer software 25,460 18,706 6,754
Leasehold improvements 435,072 134,498 300,574
--------------- --------------- ---------------
9,084,005 5,153,662 3,930,343
=============== =============== ===============
</TABLE>
Included in capital assets are capital leases with a net book value of
$359,056. The amount charged to amortization expense is $81,026.
Included in store operating expenses is $1,799,974 in amortization
expenses on capital assets.
VIDEO VIEW GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
3. CAPITAL ASSETS (cont'd)
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
<S> <C> <C> <C>
Land 199,400 - 199,400
Buildings 874,113 35,835 838,278
Equipment and fixtures 503,944 160,907 343,137
Video cassette machines 178,018 112,722 65,296
Video cassette rental movies and games 5,355,376 3,232,726 2,122,650
Automotive 85,170 15,364 69,806
Computer hardware 230,625 80,179 150,446
Computer software 11,952 7,106 4,846
Leasehold improvements 313,461 159,899 153,562
--------------- --------------- ---------------
7,752,059 3,804,738 3,947,421
=============== =============== ===============
</TABLE>
Included in capital assets are capital leases with a net book value of
$275,150. The amount charged to amortization expense on these assets is
$60,689.
Included in store operating expenses is $1,051,152 in amortization
expenses on capital assets.
4. DUE TO SHAREHOLDERS
The amount due to shareholders is non-interest bearing, unsecured and is
due on demand. However, the shareholders have indicated that they will
not request repayment of this amount within the next fiscal year.
Consequently, this amount has been classified as a non-current liability
in the accompanying financial statements.
VIDEO VIEW GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Bank term loan, due in monthly instalments of $3,500 including principal and
interest at bank prime plus 1%, collateral lodged as security in support of
this debt includes a fixed and floating debenture on assets and personal
security in support of this debt includes a fixed and floating debenture on
assets and personal guarantees of certain shareholders 136,345 -
Bank term loan, due in monthly instalments of $3,114 including principal and
interest at bank prime rate plus 1%, collateral lodged as security in
support of this debt includes a fixed and floating debenture on assets on
assets and personal guarantees of certain shareholders 118,007 150,174
Bank term loan, due in monthly instalments of $3,500 including principal and
interest at bank prime rate plus 1%, collateral lodged as security in
support of this debt includes a fixed and floating debenture on assets and
personal assets on assets and personal guarantees of certain shareholders 36,610 77,902
Bank term loan, due in monthly instalments of $2,225 including principal and
interest at bank prime rate plus 1%, collateral lodged as security in
support of this debt includes a fixed and floating debenture on assets and
on assets and personal guarantees of certain shareholders 48,559 73,062
Capital leases, due in monthly instalments of $20,697 in aggregate including
interest at 18%, collateral lodged as security includes specific capital
equipment with a net book value of $359,056 (1995; $275,150) 209,959 198,706
Bank term loans - 719,213
--------- ---------
549,480 1,219,057
Less principal portion due within one year 294,228 312,637
--------- ---------
255,252 906,420
========= =========
</TABLE>
VIDEO VIEW GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
5. LONG-TERM DEBT (cont'd)
Estimated principal payments over the next four years are as follows:
1997 294,228
1998 144,583
1999 79,136
2000 31,533
--------------
549,480
==============
6. SHARE CAPITAL
Authorized: Unlimited number of Class A voting common shares
Unlimited number of Class B voting common shares
Unlimited number of Class C non-voting common shares
Unlimited number of Class D non-voting preferred shares
Unlimited number of Class E voting preferred shares
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Issued: 191 Class A common shares (1995; 500 Class A) 109 140
11,610 Class D preferred shares, redeemable and retractable at
$100.00 per share with an adjusted cost base for tax purposes of
$43.06 per share 9 9
3,870 Class D preferred shares, redeemable and retractable at
$100.00 per share with an adjusted cost base for tax purposes of
$100.00 per share 3 3
19,563 Class E preferred shares, redeemable and retractable at
$100.00 per share with an adjusted cost base for tax purposes of
$100.00 per share 31 -
-------- ---------
152 152
======== =========
</TABLE>
VIDEO VIEW GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
7. RELATED PARTY TRANSACTIONS
During the year the company received $18,000 (1995; $18,000) in
management fees from Hillman Holdings Ltd., a company related as a result
of common shareholdings.
During the year the Video View Group sold at fair market value land and
buildings to Hillman Holdings Ltd. for $1,232,895. The Video View Group
then paid rent and common area costs of $76,885 as per lease agreements
on these properties.
8. SUBSEQUENT EVENTS
On January 1, 1997 the Video View Group entered into a sale agreement to
sell to Video Update Inc. all assets directly related to the video sale
and rental business. These assets included petty cash, customer accounts
receivable, inventory, prepaid expenses, capital assets and goodwill.
The Video View Group, in conjunction with the sale agreement, entered
into a management agreement with Video Update Inc. for them to manage the
business of the Video View Group until approval for the sale agreement
was obtained from Investment Canada. This approval was obtained January
30, 1997 and the sale agreement was closed February 4, 1997.
As part of the sale agreement the Video View Group agreed to buy out all
capital lease contracts for capital assets sold and pay out all long-term
bank debt. Also, all operating leases were assigned to Video Update Inc.
With the completion of the sale February 4, 1997, the Video View Group
ceased active operations in the video sale and rental business.
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
YEAR ENDED APRIL 30, 1996 AND
SIX MONTHS ENDED OCTOBER 31, 1996
INTRODUCTION
In January 1997, the Company acquired the assets of Video Warehouse, Inc., a ten
store video retail chain of Longview, Washington, and Video View, Ltd., a
twenty-three store video retail store chain in Canada for approximately
$7,643,000 in cash and the issuance of 75,000 shares of Class A Common Stock.
The purchase method of accounting has been used to account for the acquisition.
The unaudited pro forma financial statements reflect the following: (i) the
combination of the financial statements of the acquisitions; (ii) an adjustment
to allocate the purchase price based upon the estimated fair value of the assets
acquired and the obligations assumed; (iii) a provision for income taxes as if
the combined operations had been taxed as a C corporation for all the periods
presented (statement of income only).
The unaudited combined pro forma balance sheet shows the effect of Video
Warehouse, Inc. and Video View, Ltd. acquisitions as of October 31, 1996 and
were prepared as if the transaction had occurred as of such period end.
The unaudited pro forma combined statements of income for the year ended April
30, 1996 and the six months ended October 31, 1996 give effect to (i) the
acquisition of Video Warehouse, (ii) the acquisition of Video View, Ltd., and
(iii) video stores acquired from unrelated sellers during the year ended April
30, 1996 (see Registrant's Registration No. 333-7929 on Form S-3 dated September
27, 1996), treated as purchases for accounting purposes and were prepared as if
the transactions had occurred as of the beginning of the respective periods.
The historical statements of income for acquisitions are presented for the year
ended April 30, 1996 and the six months ended October 31, 1996.
In the opinion of the Company's management, all adjustments necessary to present
fairly such pro forma financial statements have been made based on the terms and
structure of the transaction. The Company anticipates, however, that changes in
the composition of the assets acquired as of October 31, 1996 will not be
materially different as of the date of the transaction. Therefore, the Company
believes any related change in adjustments will not be material to the pro forma
financial statements.
The unaudited pro forma financial statements are not necessarily indicative of
the actual results had the acquisitions occurred at the beginning of the fiscal
year ended April 30, 1996 and at the beginning of the six months ended October
31, 1996.
The unaudited pro forma financial statements should be read in connection with
the audited historical financial statements and notes thereto of Video Update,
Inc. and Video View, Ltd. for the year ended April 30, 1996 and December 31,
1996, respectively.
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)(A)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
----------------------------------
Video Update, Combined
Inc. Acquisitions
---------------- ---------------
October 31, October 31, Pro Forma
ASSETS 1996 1996 Adjustments Pro Forma
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash $ 13,790 $ 701 $ (8,329) (b) $ 6,162
Accounts receivable - net 1,534 32 (29) (b) 1,537
Notes receivable 1,265 - - 1,265
Inventory 3,599 367 (149) (b) 3,817
Videocassette rental inventory - net 33,974 2,723 (247) (c) 36,450
Property and equipment - net 23,706 1,395 (384) (c) 24,717
Prepaid expenses 1,153 64 (33) (b) 1,184
Excess of estimated costs of acquisition over the
estimated fair values of assets to be acquired 25,402 - 4,505 (c) 29,907
Other assets 932 171 (148) (b) 955
---------------- --------------- --------------- ---------------
Total Assets $ 105,355 $ 5,453 $ (4,814) $ 105,994
================ =============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ 660 $ 925 $ (925) (b) $ 660
Accounts payable 11,335 545 (545) (b) 11,335
Deferred income taxes 972 170 (170) (c) 972
Accrued expenses 1,460 34 312 (c) 1,806
Accrued compensation 1,250 - - 1,250
Income taxes payable 425 127 (127) (b) 425
Accrued rent expense 271 - - 271
Other liabilities 1,152 148 (148) (b) 1,152
Stockholders' Equity
Preferred Stock - - - -
Common Stock 200 2 (1) (c)(d) 201
Additional paid-in capital 85,991 2 290 (c)(d) 86,283
Retained earnings (deficit) 3,219 3,500 (3,500) (b)(c) 3,219
Foreign currency translation 100 - - 100
---------------- --------------- --------------- ---------------
Total stockholders' equity 89,510 3,504 (3,211) 89,703
Notes receivable from officers for
the exercise of options (1,680) (1,680)
---------------- --------------- --------------- ---------------
Total Liabilities and Stockholders' Equity $ 105,355 $ 5,453 $ (4,814) $ 105,994
================ =============== =============== ===============
The accompanying notes are an integral part of the pro forma combined balance sheet (unaudited).
</TABLE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
(a) See the introductory paragraphs under "Pro Forma Combined Financial
Statements."
(b) To adjust for assets not acquired and liabilities not assumed of the
seller.
(c) To allocate the estimated purchase price based on the estimated fair
value of the assets acquired accrue acquisition costs and the elimination
of the sellers stockholders equity.
(d) The adjustment to common stock and additional paid-in capital for 25,000
and 50,000 Class A Common Stock issued in connection with the acquisition
of Video Warehouse, Inc. and Video View Ltd., respectively.
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED) (A)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
----------------------------------
Video Update, Combined
Inc. Acquisitions
(b)
Fiscal Year Ended
----------------------------------
April 30, April 30, Pro Forma
1996 1996 Adjustments Pro Forma
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue $ 46,592 $ 17,426 $ (283) (c) $ 63,735
Service fees 491 - - 491
Product sales 3,421 3,123 (276) (d) 6,268
--------------- ---------------- ---------------- ---------------
50,504 20,549 (559) 70,494
Costs and expenses:
Store operating expenses 39,685 13,095 122 (e) 52,902
Selling, general and administrative 5,362 2,409 (1,894) (f) 5,877
Cost of Sales 1,880 2,024 (115) (g) 3,789
Amortization of intangible 1,072 22 555 (h) 1,649
--------------- ---------------- ---------------- ---------------
47,999 17,550 (1,332) 64,217
--------------- ---------------- ---------------- ---------------
Operating income 2,505 2,999 773 6,277
Interest (expense) (232) (183) 139 (i) (276)
Other income 548 (38) 100 (j) 610
--------------- ---------------- ---------------- ---------------
316 (221) 239 334
--------------- ---------------- ---------------- ---------------
Income before income taxes 2,821 2,778 1,012 6,611
Income tax expense 1,193 319 1,249 (k) 2,761
--------------- ---------------- ---------------- ---------------
Net income $ 1,628 $ 2,459 $ (237) $ 3,850
=============== ================ ================ ===============
Net income per share
Primary $ 0.15 $ 0.28
=============== ===============
Fully diluted $ 0.14 $ 0.27
=============== ===============
Weighted average number of common and
equivalent shares outstanding
Primary 10,663 3,128 (l) 13,791
=============== ================ ===============
Fully diluted 11,229 3,128 14,357
=============== ================ ===============
The accompanying notes are an integral part of the pro forma combined statement of income (unaudited).
</TABLE>
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED) (A)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
----------------------------------
Video Update, Combined
Inc. Acquisitions
(b)
Six Months Ended
----------------------------------
October 31, October 31, Pro Forma
1996 1996 Adjustments Pro Forma
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue $ 35,628 $ 3,575 $ - (c) $ 39,203
Service fees 284 - - 284
Product sales 2,775 730 (41) (d) 3,464
--------------- ---------------- ---------------- ---------------
38,687 4,305 (41) 42,951
Costs and expenses:
Store operating expenses 30,426 2,956 (91) (e) 33,291
Selling, general and administrative 4,022 499 (484) (f) 4,037
Cost of Sales 1,636 488 23 (g) 2,147
Amortization of intangible 743 - 144 (h) 887
--------------- ---------------- ---------------- ---------------
36,827 3,943 (408) 40,362
--------------- ---------------- ---------------- ---------------
Operating income 1,860 362 367 2,589
Interest (expense) (318) (71) 71 (i) (318)
Other income 269 (10) 10 (j) 269
--------------- ---------------- ---------------- ---------------
(49) (81) 81 (49)
--------------- ---------------- ---------------- ---------------
Income from continuing operations
before income taxes 1,811 281 448 2,540
Income tax expense 778 69 251 (k) 1,098
--------------- ---------------- ---------------- ---------------
Net income from continuing operations $ 1,033 $ 212 $ 197 $ 1,442
=============== ================ ================ ===============
Net income per share
Primary $ 0.08 $ 0.09
=============== ===============
Fully diluted $ 0.08 $ 0.09
=============== ===============
Weighted average number of common and
equivalent shares outstanding
Primary 13,461 1,835 (l) 15,296
=============== ================ ===============
Fully diluted 13,461 1,835 (l) 15,296
=============== ================ ===============
The accompanying notes are an integral part of the pro forma combined statement of income (unaudited).
</TABLE>
NOTES TO PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
(a) See the introductory paragraphs under "Pro Forma Combined Financial
Statements."
(b) The combined acquisitions include the operations of (i) Video Warehouse,
Inc. (representing 10 stores) which which closed in January 1997 and
Video View Ltd. of Canada (representing 23 stores) which closed in
January 1997 and (ii) 136 video stores acquired from unrelated sellers
during the year ended April 30, 1996 (See Registrant's Registration on
Form S-3 dated September 27, 1996); treated as purchases for accounting
purposes and assuming all such transactions had been consummated on May
1, 1995.
<TABLE>
<CAPTION>
1996 Six Months
Fiscal Year Ended
Pro Forma Pro Forma
--------------- --------------
<S> <C> <C>
(c) Adjustment to rental revenue is for the following:
To record a decrease in rental revenue for the planned store closings of Wilderness $ (225) $ -
To record a decrease in revenue related to the sale of videos to brokers
after its initial rental period. (58) -
=============== ==============
$ (283) $ -
=============== ==============
(d) Adjustment to product sales is for the following:
To record decrease in product revenue for the Wilderness store closings $ (32) $ -
To eliminate Music sales (115) (41)
To record decrease in sales of new release to customers (50) -
To decrease product sales related to the sale of videos to brokers after the initial
rental period. (79) -
=============== ==============
$ (276) $ (41)
=============== ==============
(e) Adjustments to store operating expenses consist of the following:
To record decrease in depreciation expense related to the allocation of
the purchase price of the assets to the fair market values of leasehold
improvements, furniture and computer equipment acquired $ 4 $ -
To record decrease in amortization expense related to the allocation of
the purchase price to the fair market value of videocassette rental inventory (313) -
acquired
To record increase in amortization expense for the write up of rental inventory
to fair market value 91 -
To record decrease in operating expenses for the Wilderness store closings (254) -
To record decrease in advertising expense due to incremental savings from Acquired
stores located in the Company's existing market, and co-op funding (194) (62)
To reclassify cost of sales recorded as store operating expenses (see Note (g) (150) (62)
below)
To adjust amortization expense to comply with the Company's amortization policy 490 (135)
To account for expenses related to regional management 130 -
To record rent expense related to locations owned by seller but not
purchased by Video Update Video Update entered into lease agreements for
the locations with sellers 97 34
To reclassify selling, general, and administrative expenses recorded as store
operating expenses (see note (f) below). 221
134
=============== ==============
$ 122 $ (91)
=============== ==============
(f) Adjustments to selling, general and administrative expenses:
To reduce corporate overhead as a result of consolidating operations $ (1,673) $ (350)
To reclassify selling, general, and administrative expenses recorded as store
operating expenses (see note (e) above). (221) (134)
=============== ==============
$ (1,894) $ (484)
=============== ==============
NOTES TO PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
1996 Six Months
Fiscal Year Ended
Pro Forma Pro Forma
-------------- --------------
(g) Adjustments to cost of sales consist of the following:
To record decrease in cost of product sales for Wilderness store closings $ (25) $ -
To eliminate Cost of sales related to music sales (103) (39)
To reclassify cost of sales recorded as store operating expenses (see note (e) above) 150 62
To eliminate cost of sales related to reducing sales of new releases to brokers
and customers. (137) -
============== ==============
$ (115) $ 23
============== ==============
(h) Adjustments to amortization of intangible assets:
To record amortization related to a two year and four year non-compete $ 5 $ -
To record goodwill amortization resulting from the allocation of the
purchase price and the related acquisition costs based on the estimated fair
values of assets acquired (i.e., goodwill) over 20 years on a straight line basis. 550 144
============== ==============
$ 555 $ 144
============== ==============
(i) Adjustments to interest expense consist of the following:
To record additional interest expense related to $2,200,000 acquisition debt for
Video Powerstores $ 1 $ -
To record interest expense on 60 day note at 8% related to Video Powerstores (4) -
To record change in interest expense on acquisition debt at 9.5% related to
Wilderness 25 -
To eliminate interest expense for decrease in debt 117 71
============== ==============
$ 139 $ 71
============== ==============
(j) Adjustments to other income (expense) consist of the following:
To eliminate other income (expense) that Video Update will not realized. $ 100 $ 10
-------------- --------------
$ 100 $ 10
============== ==============
(k) Adjustments to provision for income taxes consist of the following:
To record estimated provisions for income taxes related to operations as
if the Company had been taxes as a C Corporation $ 833 $ 57
To record the income tax effect of the pro forma adjustments
in (b) through (h) above . 416 194
============== ==============
$ 1,249 $ 251
============== ==============
(l) Adjustments to the weighted average number of common and equivalent
shares outstanding consist of the following:
To record the shares offered in connection with the Acquisitions 437 75
To show the number of shares of Class A Common Stock issued upon exercise
of the Class A Warrants called for redemption in September 1995, related
to the cash portion of the Acquisition. 532 -
To show the number of shares of Class A Common Stock from issued in the
Stock Offering in September 1996, related to the cash portion of the Acquisition. 2,159 1,760
============== ==============
3,128 1,835
============== ==============
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