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