AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996
REGISTRATION NO. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MOOVIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7841 571012733
State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
201 BROOKFIELD PARKWAY
GREENVILLE, SC 29607
(864) 213-1700
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
(Name, address including zip code, ande (The Commission is
telephone number, including area code, requested to mail copies
of agent for service:) of all orders, notices
and communications to:)
JOHN L. TAYLOR T. CLARK FITZGERALD III, ESQ.
Moovies, Inc. Arnall Golden & Gregory
201 Brookfield Parkway 1201 West Peachtree Street
Greenville, SC 29607 Atlanta, Georgia 30309
Tel: (864) 213-1700 Tel: (404) 873-8622
Fax: (864) 213-1702 Fax: (404) 873-8501
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the Registration
Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.|_|
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
TITLE OF EACH PROPOSED PROPOSED
CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO TO BE OFFERING AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PRICE PER OFFERING FEE**
SHARE* PRICE
- --------------------------------------------------------------------------------
Common stock 1,850,000
$.001 par value shares $5.375 $9,943,750 $3,014.00
- --------------------------------------------------------------------------------
* Estimated solely for the purpose of determining the registration fee pursuant
to Rule 457(c).
** $3,014.00 of the fee previously paid in connection with Registration
Statement No. 333-4270. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT
ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
367223.4
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER ____, 1996
PROSPECTUS
1,850,000 SHARES
MOOVIES, INC.
Common Stock
This Prospectus related to the offer and sale from time to time by Moovies,
Inc., a Delaware corporation ("Moovies" or the "Company"), or its subsidiaries,
of up to 1,850,000 shares of Moovies common stock, $.001 par value, (the "Common
Stock"), in exchange for shares of capital stock of other companies, or in
exchange for assets used in or related to the business of such companies. See
"Securities Covered By This Prospectus." Shares offered hereby may generally be
resold by the persons acquiring them without further registration under the
Securities Act of 1933. For further information on resales, see "Resales" in
this Prospectus. The Company's Common Stock is traded and quoted on the Nasdaq
Stock Market under the symbol "MOOV." On October 7, 1996, the last reported sale
price for the Company's Common Stock on the Nasdaq Stock Market's National
Market System (the "Nasdaq Stock Market") was $5.375 per share. See "Price Range
of Common Stock."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY MOOVIES. NEITHER THE PROSPECTUS NOR THE PROSPECTUS
SUPPLEMENT CONSTITUTES AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY
CHANGE IN THE FACTS SET FORTH OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT OR IN THE AFFAIRS OF MOOVIES SINCE SUCH DATE.
The shares to be offered hereby may be sold (i) in transactions of the
type specified in paragraph (a) of Rule 145 promulgated by the Securities and
Exchange Commission, (ii) in a merger in which the applicable state law would
not require the solicitation as of the votes or consents of all the security
holders of the company being acquired, (iii) in an exchange offer for securities
of the issuer or another security, (iv) in a public reoffering or resale of any
such securities acquired pursuant to this offering; or (iv) in more than one of
the transactions listed above. If used for reoffering or resale, this prospectus
will be amended as required to include information regarding selling
stockholders.
The date of this Prospectus is October ____, 1996.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
367223.4
<PAGE>
TABLE OF CONTENTS
PAGE
Additional Information........................................................2
Prospectus Summary............................................................3
Securities Covered by this Prospectus.........................................6
Plan of Distribution..........................................................6
Resales.......................................................................6
Risk Factors..................................................................7
The Acquisitions.............................................................11
Use of Proceeds..............................................................14
Price Range of Common Stock..................................................14
Dividend Policy..............................................................14
Pro Forma Financial Information..............................................15
Selected Historical and Pro Forma Financial Data.............................25
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................27
Business.....................................................................39
Management...................................................................47
Certain Relationships and Related Transactions...............................58
Principal Stockholders.......................................................59
Description of Capital Stock.................................................61
Shares Eligible for Future Sale..............................................63
Legal Matters................................................................64
Experts......................................................................65
Index to Financial Statements...............................................F-1
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copies at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Common Stock is listed on the
Nasdaq Stock Market and such reports, proxy and information statements and other
information concerning the Company can be inspected and copied at the Nasdaq
Stock Market, 1735 K Street, N.W., Washington, D.C. 20006-1506.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a registration statement on Form S-4
under the Securities Act of 1933, as amended, with respect to the shares of
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the shares of Common
Stock offered hereby, reference is hereby made to such Registration Statement,
exhibits and schedules. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be examined without charge at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York, 10048 and at Northwestern Atrium, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission, Washington, D.C. 20549 upon
payment of the fees prescribed by the Commission.
367223.4
2
<PAGE>
PROSPECTUS SUMMARY
Moovies, Inc. acquired 76 video specialty stores and certain other related
operations concurrently with the consummation of its initial public offering in
August 1995 (the "Initial Acquisitions"). Since the initial public offering,
Moovies, Inc. has acquired an aggregate of 76 additional video specialty stores
in eight acquisitions (the "Recent Acquisitions") (the Initial Acquisitions and
the Recent Acquisitions collectively, the "Acquisitions"). The following summary
is qualified in its entirety by, and should be read in conjunction with, the
more detailed information and consolidated financial statements and the notes
thereto included elsewhere in this Prospectus. Unless the context otherwise
requires all references herein to the "Company" include Moovies, Inc., its
predecessor, Tonight's Feature Limited Partnership II (the "Predecessor"), and
the video specialty stores and related operations acquired in connection with
the Acquisitions.
THE COMPANY
The Company currently owns and operates 203 video specialty stores located
in Georgia, South Carolina, North Carolina, Tennessee, Virginia, Pennsylvania,
New Jersey, New York, Connecticut, Ohio, Iowa, Colorado, Minnesota, Wisconsin,
South Dakota and Nebraska. The Company currently operates 189 of its stores in
the "superstore" format (i.e., a video specialty store with more than 7,500
rental videocassettes). The Company believes that, based upon the number of
stores operated by it as of September 30, 1996, it was the sixth largest
operator of video specialty stores (with 203 specialty stores) and the third
largest operator of video superstores (with 189 superstores) in the United
States.
The key elements of the Company's business and expansion strategy are (i)
to operate video superstores, which the Company believes is the most profitable
format for most locations, (ii) to concentrate store openings and acquisitions
in areas where the Company believes it can achieve economies of scale in
advertising, management and other overhead expenses, (iii) to open and acquire
video specialty stores in desirable locations and (iv) to offer a high level of
customer service at each store, including a commitment to provide more copies of
the newest releases than many of its competitors. The Company anticipates
opening approximately 50 new superstores in 1996 and through September 1996, had
opened 32 new superstores and signed leases for 23 new store sites, including 14
stores that were under construction. The Company estimates that the cash
investment required to open each new Moovies superstore generally ranges from
$250,000 to $300,000.
The Company has designed a visually appealing, customer-friendly and
family-oriented store layout which the Company believes distinguishes Moovies
superstores from those of its competitors. The Company currently operates
substantially all of its stores under the MooviesTM name and logo, except for
stores acquired in the "Premiere Video" acquisition in July 1996, and the
Company expects to convert those stores by the end of the first quarter of 1997.
According to certain publicly available published reports ("Industry
Reports") on the video store industry by independent parties, the domestic video
rental and sales industry has grown from $0.7 billion in revenues in 1982 to
$14.8 billion in 1995 and is projected to reach $19.1 billion in 2000. According
to an Industry Report, the home video market was the largest single source of
revenue to movie distributors in 1994, accounting for approximately 46% of movie
distributors' worldwide revenues. The Company believes that the retail video
industry is highly fragmented and is undergoing consolidation. An Industry
Report indicated that in 1994 there were approximately 27,400 video specialty
stores, including 6,100 video superstores, in the United States. According to an
Industry Report, only nine multiple store businesses operated in excess of 100
stores in 1995. The Company believes that the fragmented nature of the industry
and the emergence of the superstore format present attractive opportunities to
open and acquire video specialty stores.
The Company's principal executive offices are located at 201 Brookfield
Parkway, Greenville, South Carolina 29607, and its telephone number is (864)
213-1700.
RECENT DEVELOPMENTS
Since the Company's initial public offering, the Company has acquired an
aggregate of 76 video specialty stores in eight acquisitions. These acquisitions
included the acquisition of the "Movies to Go" chain of 13 stores in September
1995, the "Pic-A-Flick" chain of 23 stores in December 1995, the "Movie Store"
chain of eight stores in December 1995, the "Showtime" chain of five stores in
March 1996, the "Premiere Video" chain of 23 stores in July 1996 and several
smaller acquisitions.
In March 1996, the Company sold its supermarket video business for
approximately $1.0 million in order to focus its resources on its video
superstores.
367223.4
3
<PAGE>
The Company has had preliminary discussions with numerous video rental
store owners at various times regarding the potential acquisition of their
stores. Management expects that some of these discussions will result in new
acquisitions, although the Company has no agreements or commitments to acquire
stores except as described herein. The Company is engaged in negotiations with
the owners of a total of 23 video retail stores and franchisor's rights in
regard to a total of 45 video retail stores. The Company has not entered into a
definitive agreement in regard to the acquisition of any of such stores or
franchisor's rights, and there can be no assurance that it will do so.
PURPOSE OF OFFERING
The shares to be offered hereby may be sold (i) in transactions of the
type specified in paragraph (a) of Rule 145 promulgated by the Securities and
Exchange Commission, (ii) in a merger in which the applicable state law would
not require the solicitation of the votes or consents of all the security
holders of the company being acquired, (iii) in an exchange offer for securities
of the issuer or another security, (iv) in a public reoffering or resale of any
such securities acquired pursuant to this offering; or (v) in more than one of
the transactions listed above. If used for reoffering or resale, this prospectus
will be amended as required to include information regarding selling
stockholders.
THE OFFERING
Common Stock offered by the Company..................... 1,850,000 shares
Common Stock to be outstanding after offering........... 13,776,620 shares (1)
Use of Common Stock being offered....................... To constitute all or
a portion of purchase
price of future
acquisitions.
See "Use of Proceeds."
Nasdaq Stock Market Symbol.............................. MOOV
---------------
(1) As of September 30, 1996. Assumes issuance of all shares registered.
Excludes 942,100 shares of Common Stock reserved for issuance pursuant
to outstanding options granted under the Company's 1995 Stock Plan and
529,957 shares of Common Stock issuable upon exercise of outstanding
warrants.
367223.4
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
Historical(1) Pro Forma (2)
----------------------------------------------------------- -----------------------
Year Ended Six Months
Years Ended Six Months Ended December Ended June
December 31, June 30, 31, 1995 30, 1996
---------------------------------- ----------------------
1993 1994 1995 1995 1996 (3)
---------- --------- --------- --------- ---------- ----------- ----------
(unaudited)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 3,889 $ 4,392 $ 24,658 $ 2,498 $ 37,601 $ 78,959 $ 43,649
Operating income ................ 278 382 2,983 156 2,731 8,085 4,661
Income before income taxes ...... 235 281 2,811 77 2,016 7,613 3,889
Net income ...................... 235 281 1,765 77 1,214 4,568 2,333
Net income per share ............ -- -- $ 0.52 -- $ 0.14 $ 0.38 $ 0.19
Shares used in computation ...... -- -- 3,395 -- 8,931 12,180 12,196
OPERATING DATA:
Number of stores at end of period 8 9 148 11 164 176 187
Increase (decrease) in same store
revenues (4) ....................... 8.2% 10.5% 1.4% 0.0% (2.4)% -- --
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------
BALANCE SHEET DATA: Actual As Adjusted (5)
-------------------- -------------------
<S> <C> <C>
Cash and cash equivalents............................................ 191 3,249
Videocassette rental inventory, net.................................. 19,144 20,944
Total assets......................................................... 95,049 89,223
Line of credit and other short-term debt............................. 13,745 8,361
Long-term debt, less current portion................................. 3,604 104
Total liabilities.................................................... 36,723 27,839
Stockholders' equity................................................. 58,326 61,384
</TABLE>
(1) The historical financial data reflect data for the Predecessor during 1993
and 1994, and for a portion of 1995. The Predecessor was a limited
partnership and therefore had no income tax liability.
(2) The pro forma statement of operations data for the year ended December 31,
1995 gives effect to the Acquisitions, the Company's initial public
offering and the Company's second offering in July 1996 as if they had
occurred as of the beginning of the year. The pro forma statement of
operations data for the six months ended June 30, 1996 gives effect to the
Company's second offering in July 1996 and the consummation of the Premiere
Video acquisition and the Showtime acquisition as if they had occurred as
of the beginning of the period. See "Use of Proceeds," "The Acquisitions,"
"Plan of Distribution" and "Pro Forma Financial Information." The pro forma
statement of operations data does not give effect to any Future
Acquisitions.
(3) Effective January 1, 1996, the Company adopted an accelerated method of
amortizing its videocassette rental inventory, which has been accounted for
as a change in accounting estimate effected by a change in accounting
principle. The application of the new method of amortizing videocassette
rental inventory, including an $860,000 pre-tax charge ($0.06 per share
after taxes), increased amortization expense for the six months ended June
30, 1996 by approximately $2.4 million and reduced net income by
approximately $1.4 million and earnings per share by $0.16.
(4) The increase (decrease) in same store revenues is computed by comparing on
a quarterly basis revenues from stores open during an entire quarter to
revenues from stores open during the entire corresponding quarter for the
prior year. This calculation includes acquired stores on a pro forma basis,
that were owned and operated at the end of the period.
(5) Adjusted to reflect the sale of 3,220,000 shares in the Company's second
offering and the proceeds therefrom, including the prepayment of certain
outstanding indebtedness and the consummation of the Premiere Video
acquisition.
367223.4
5
<PAGE>
SECURITIES COVERED BY THIS PROSPECTUS
The shares of Common Stock covered by this Prospectus are available for use
in future acquisitions of other businesses or properties, which may be similar
or dissimilar to Moovies' present activities. The consideration offered by
Moovies in such acquisitions, in addition to the shares of Common Stock offered
hereby, may include cash, debt or other securities (which may be convertible
into shares of Common Stock covered by this Prospectus), or assumption by
Moovies of liabilities of the business being acquired, or a combination thereof.
It is contemplated that the terms of acquisitions will be determined by
negotiations between Moovies and the owners of the business or properties to be
acquired, with Moovies taking into account the quality of management, the past
and potential earnings power and growth of the business or properties to be
acquired, and other relevant factors, and it is anticipated that shares of
Common Stock issued in acquisitions will be valued at a price reasonably related
to the market value of the Common Stock either at the time the terms of the
acquisition are tentatively agreed upon or at or about the time or times of
delivery of the shares.
PLAN OF DISTRIBUTION
Shares of Common Stock will be offered in connection with Moovies' or a
subsidiary's acquisition ("Future Acquisition") of other businesses or
properties from time to time as described above. A maximum of 1,850,000 shares
of Common Stock may be sold pursuant to this Prospectus. These shares will
ordinarily represent consideration paid directly upon the acquisition of
businesses or properties, in some cases together with additional consideration
consisting of cash, debt or other securities (which may be convertible into
shares covered by this Prospectus) or assumption by the Company of liabilities
of the businesses being acquired, or a combination thereof. The shares may also
include shares to be delivered upon the exercise or satisfaction of conversion
or purchase rights which are created in connection with acquisitions or which
were previously created or assumed by the companies whose businesses or
properties were acquired.
RESALES
Shares offered hereby may generally be resold by the persons acquiring them
without further registration under the Securities Act of 1933 (the "Act"),
unless such persons are "affiliates" or "underwriters" within the meaning of the
Act.
Any person receiving shares offered hereby who is an "affiliate" of Moovies
may be subject to certain limitations on resale. Such transfer restrictions are
distinct from and in addition to any transfer restrictions which may be
contained in the acquisition agreements for all or some future acquisitions. An
"affiliate" is a person who directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with
the Company. In the absence of a special relationship between Moovies and a
person who receives shares from Moovies in an acquisition transaction (such as
election of such person to Moovies's board of directors or ownership by such
person of a significant percentage of Moovies' outstanding Common Stock), such a
person generally would not be considered an "affiliate" of Moovies within the
meaning of the Act. Therefore, the limitations on resale applicable to
affiliates would not apply to such person.
Any person receiving shares offered hereby who is an "underwriter" of
Moovies may also be subject to certain limitations upon resale. An "underwriter"
includes a person who purchases Moovies shares with a view to the distribution
of such shares. Although an "underwriter" may otherwise be subject to certain
resale limitations, if such person complies with the "safe harbor" provisions of
Rule 145(d), he or she may freely resell shares so long as certain conditions
are met. For example, a person who receives shares of Common Stock from Moovies
in a typical acquisition transaction is deemed to be an "underwriter" as defined
by the Act, but such person is generally free to sell such shares at any time by
complying with Rule 145(d), which requires that the amount of Common Stock which
may be sold by such person in any three-month period may not exceed the greater
of (i) 1% of the Moovies Common Stock outstanding as shown by the most recent
report or statement published by Moovies, or (ii) the average weekly trading
volume in Moovies common shares reported on the Nasdaq Stock Market during the
four calendar weeks preceding the order to sell. Such sales must also be made in
"broker's transactions," which are ordinary sales through a broker acting as
agent without special commission arrangements or selling efforts. Persons
receiving shares in connection with acquisitions may also be subject to
contractual restrictions on resale entered into in connection with such
acquisitions.
In order for affiliates or underwriters not protected by Rule 145(d) to
resell shares offered hereby, Moovies would have to agree 1) to provide an
opinion to the effect that an exemption applies to such resale, 2) to amend the
registration statement of which this prospectus is a part to permit such
resales, or 3) to file a new registration statement which includes the shares
proposed to be resold. Unless a written agreement obligates Moovies to do so,
there is no assurance that Moovies will agree to provide such opinion, amendment
or registration.
367223.4
6
<PAGE>
RISK FACTORS
The discussion in this Prospectus contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as those discussed elsewhere
in this Prospectus. Statements contained in this Prospectus that are not
historical facts are forward looking statements that are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. A number
of important factors could cause the Company's actual results for 1996 and
beyond to differ materially from those expressed in any forward looking
statements made by, or on behalf of, the Company. These factors include, without
limitation, those listed below in "Risk Factors."
ACQUISITION RISKS
General. The Company's growth strategy emphasizes acquisitions. There can
be no assurance that the Company will be able to successfully identify suitable
acquisition candidates, complete acquisitions, integrate acquired operations
into its existing operations or expand into new markets. There can be no
assurance that acquisitions will not have a material adverse effect upon the
Company's operating results, particularly in the first fiscal quarter
immediately following the consummation of such transactions, during which period
the operations of such acquired businesses are typically integrated into the
Company's operations. Once integrated, acquired operations may not achieve
levels of revenues or profitability comparable to those achieved by the
Company's existing operations, or otherwise perform as expected. See "The
Acquisitions," "Pro Forma Financial Information," and "Business -- Business and
Expansion Strategy."
Limited Knowledge and Operating History. Notwithstanding its own due
diligence investigation, management has, and will have, limited knowledge about
the specific operating history, trends and customer buying patterns of video
specialty stores it acquires. Consequently, there can be no assurance that the
Company will make acquisitions at favorable prices, that acquired stores will
perform as well as they had performed historically or that the Company will have
sufficient information to accurately analyze the markets in which it elects to
make acquisitions. Failure to pay reasonable prices for acquisitions or to
acquire profitable video specialty stores could have a material adverse effect
on the Company's financial condition and results of operations.
Competition for Acquisitions. Certain of the Company's larger, better
capitalized competitors may seek to acquire some of the same video specialty
stores that the Company seeks to acquire. Such competition for acquisitions
would be likely to increase acquisition prices and related costs and result in
fewer acquisition opportunities, which could have a material adverse effect on
the Company's growth.
Misrepresentations and Breaches by Sellers. In consummating acquisitions,
the Company relies upon certain representations, warranties and indemnities made
by the sellers, as well as its own due diligence investigation. There can be no
assurance that such representations and warranties will be true and correct or
that the Company's due diligence will uncover all material adverse facts
relating to the operations and financial condition of the stores acquired. Any
material misrepresentations could have a material adverse effect on the
Company's financial condition and results of operations.
Consideration for Acquired Stores Exceeds Asset Value. Valuations of the
video specialty stores acquired in connection with the Acquisitions by the
Company were not established by independent appraisers, but through arm's-length
negotiations between the Company and the respective sellers. The consideration
paid for each of these stores was based primarily on management's estimate of
the value of such stores as going concerns and not on the value of the acquired
assets. No assurance can be given that the future performance of such stores
will justify or be commensurate with the consideration being paid to acquire
them. Similar risks apply to future acquisitions.
NEW STORE OPENINGS
The Company's continued growth will depend in part on its ability to open
and operate new stores on a profitable basis. Although the Company intends to
increase the number of its stores within its current market areas and believes
that adequate sites are currently available in these markets, the rate of new
store openings is subject to various contingencies, some of which are beyond the
Company's control. These contingencies include the Company's ability to secure
suitable store sites on a timely basis and on satisfactory terms, the Company's
ability to hire and train competent store management and personnel, the
availability of adequate capital resources and the successful integration of new
stores into existing operations. There can be no assurance that the Company will
be able to achieve its planned expansion or that its expansion will be
367223.4
7
<PAGE>
profitable. Failure of the Company to achieve its planned expansion on a
profitable basis could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Business and Expansion
Strategy."
FINANCING GROWTH STRATEGY
As of September 30, 1996, the Company had outstanding borrowings of $13.8
million under its $22.5 million bank line of credit. At September 30, 1996 the
Company had $4.6 million available under this line of credit. The Company
currently intends to finance new store openings and future acquisitions with
cash from operations, borrowings under credit facilities and the net proceeds
from the sale of debt or equity securities. If the Company does not have
sufficient cash from operations, credit facilities or the ability to raise cash
through the sale of debt or equity securities, the Company will be unable to
pursue its growth strategy, which would have a material adverse effect on the
Company's ability to increase its revenues and net income and could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business --
Business and Expansion Strategy."
COMPETITION
The video retail industry is highly competitive. According to Industry
Reports, in 1994 there were approximately 27,400 video specialty stores,
including 6,100 video superstores, in the United States. The Company competes
with other video specialty stores, including stores operated by regional and
national chains, as well as other businesses offering videos and video games
such as supermarkets, pharmacies, convenience stores, bookstores, mass
merchants, mail order operations and other retailers. Many of the Company's
stores compete with stores operated by Blockbuster Entertainment Corporation
("Blockbuster"), the dominant video specialty retailer in the United States.
Blockbuster and certain of the Company's other competitors have significantly
greater financial and marketing resources, market share and name recognition
than the Company. In addition, the Company's stores compete with other
leisure-time activities, including movie theaters, network and cable television,
programs made available directly by satellite, live theater, sporting events and
family entertainment centers. The Company's failure to compete effectively would
have a material adverse effect on its financial condition and results of
operations. See "Business -- Competition."
NEW MANAGEMENT TEAM
The Company's management group, including the Chief Executive Officer, the
Chief Financial Officer and the Chief Operating Officer have had only a limited
time to work together. The Chief Executive Officer and the Chief Financial
Officer have only limited experience operating a company in the retail video
industry. As a result, there can be no assurance that the Company's management
group will succeed in managing the operations of the Company or effectively
implement the Company's business and expansion strategy. Failure of the
Company's management group to successfully manage such operations or to
effectively implement the Company's business and expansion strategy could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management."
ABILITY TO MANAGE GROWTH
The Company is currently experiencing a period of rapid growth and
expansion. Such growth and expansion has placed and will continue to place a
significant strain on the Company's services and support operations,
administrative personnel and other resources. The Company's ability to manage
such growth effectively will require the Company to continue to improve its
operational, management and financial systems and controls and to train,
motivate and manage its employees. In addition, the Company may be unable to
retain or hire the necessary personnel or acquire other resources necessary to
service such growth adequately. There can be no assurance that the Company will
be able to effectively manage this rapid growth and expansion.
LOSS OF CUSTOMERS AND CUSTOMER LOYALTY
The success of the video specialty stores the Company acquires depends in
large part on the Company's ability to successfully convert them to the
Moovies(TM) name, logo and format without negatively impacting customer service
in these stores or customers' perceptions of these stores. The Company currently
operates substantially all of its stores under the MooviesTM name and logo,
except for stores acquired in the "Premiere Video" acquisition in July 1996, and
the Company expects to convert those stores by the end of the first quarter of
1997. To the extent that customers have developed loyalty to the current names
and logos of these stores, such transition could result in a loss of customers.
A significant loss of customers would have a material adverse effect on the
Company's financial condition and results of operations.
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TECHNOLOGICAL OBSOLESCENCE
The Company competes with pay-per-view cable television systems
("Pay-Per-View"), in which home subscribers pay a fee to see a movie selected by
the subscriber. Existing Pay-Per-View services offer a limited number of
channels and movies and are generally available only to households with a
converter to unscramble incoming signals. Technologies recently introduced to
the consumer market, however, permit certain cable companies, direct broadcast
satellite companies, telephone companies and other telecommunications companies
to transmit a much greater number of movies to homes in more markets as
frequently as every five minutes ("Near Video-on-Demand"). These technologies,
by providing alternatives to home video rentals and purchases, could have a
material adverse effect on the Company's business. Over the long term, further
improvements in these technologies, or the development of other similar
technologies, could lead to the availability of a broad selection of movies to
consumers on demand ("Video-on-Demand"), which could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Competition." Changes in the manner in which movies are marketed,
primarily related to the timing of releases of movie titles to these
distribution channels, and the prices charged by those channels, could also
substantially decrease the demand for video rentals, resulting in a material
adverse effect on the Company's financial condition and results of operations.
In addition, the advent of digital video discs, which may occur by the end of
1996, could reduce the demand for video rentals, resulting in a material adverse
effect on the Company's financial condition and results of operations. See
"--Pricing of Videos," "Business--Video Retail Industry Overview" and
"Business--Competition."
DEPENDENCE UPON SUPPLIERS
The Company acquires approximately 83% of its supply of videos, in the
aggregate, from two suppliers. While the Company believes that it can readily
purchase sufficient quantities of titles on comparable terms from other
suppliers, there can be no assurance that an alternative supplier or suppliers
would provide service, support or payment terms as favorable as those currently
provided. Failure to obtain comparable service, support or payment terms from an
alternative supplier could have a material adverse effect on the Company's
financial condition and results of operations. See "Business --Suppliers."
PRICING OF VIDEOS
Changes in the movie studios' wholesale pricing structure for videos could
result in a competitive disadvantage for all video specialty stores, including
those of the Company, and could therefore have a material adverse effect on the
Company's financial condition and results of operations. Recently, movie studios
have begun pricing more of their film releases for sale to the consumer rather
than for rental, and to the extent that such sales reduce the volume or prices
of rentals, which generally provide higher margins, the Company's profit margins
would be reduced, which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, the advent of video
compact discs, which may occur by the end of 1996 or early 1997, may result in
an increase in the ratio of sales to rental revenues and a decrease in the
Company's overall profit margins, which could have a material adverse effect on
the Company's financial condition and results of operations.
INABILITY TO OBTAIN AND ADEQUATELY MANAGE LEASED INVENTORY
The Company's ability to compete successfully depends in part on its
ability to lease appropriate quantities of the latest and most popular videos on
a timely basis and at favorable prices. The Company presently intends to spend
approximately 17% of its new release budget to obtain new releases from Rentrak
Corporation ("Rentrak") pursuant to a revenue sharing agreement. The Company
believes Rentrak is currently the sole supplier of leased videos to video
specialty stores. The Company's inability to renew this agreement on comparable
terms could have a material adverse effect on its financial condition and
results of operations. In order for the Company to obtain the most benefit from
the Rentrak revenue sharing arrangement, the Company must correctly identify new
release titles that it should lease from Rentrak and the stores which should
receive them. Because the Company's percentage share of revenue under the
Rentrak agreement is fixed, to the extent that the Company obtains new release
videos from Rentrak for too many or the wrong stores, the Company's profits may
be adversely affected. See "Business--Suppliers."
NO ASSURANCE OF CONTINUED PROFITABILITY; QUARTERLY FLUCTUATIONS; SEASONALITY AND
OTHER FACTORS
Although the Company has been profitable since its initial public offering,
there is no assurance it will continue to be profitable. In addition, many of
the Company's stores have a limited operating history. Future operating results
may be affected by many factors, including variations in the number and timing
of store openings, the quality of new release titles available for rental and
sale, acquisition by the Company of existing video stores, additional and
existing competition,
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marketing programs, weather, special or unusual events and national, regional
and local economic conditions that may affect retailers in general. Any
concentration of new store openings and the related new store pre-opening costs
near the end of a fiscal quarter could have an adverse effect on the financial
results for that quarter and could, in certain circumstances, lead to
fluctuations in quarterly financial results. The video and video game rental
portions of the Company's business are somewhat seasonal, with revenues in
April, May, September and October generally being lower compared to other months
of the year.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated substantially
since its initial public offering in August 1995. See "Price Range of Common
Stock." There is no assurance that the market price of the Common Stock will not
decline. The Common Stock is traded on the Nasdaq Stock Market, which market has
experienced and is likely to experience in the future significant price and
volume fluctuations, which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. The Company
believes factors such as quarterly fluctuations in financial results,
announcements of new technologies in movie distribution or announcements by
competitors may cause the market price of the Common Stock to fluctuate, perhaps
substantially. These fluctuations, as well as general economic conditions, such
as recessions or high interest rates, may adversely affect the market price of
the Common Stock.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of John L.
Taylor, its President, Chairman of the Board and Chief Executive Officer, and
its other executive officers. If any of these individuals become unwilling or
unable to continue their employment or association with the Company, or if the
Company is unable to attract and retain other skilled employees when needed, the
Company's business could be materially, adversely affected. The Company has
obtained key man life insurance covering John L. Taylor in the amount of $1.0
million. See "Management."
CONTROL BY MANAGEMENT
Assuming the sale of all shares registered in this offering, the Company's
executive officers and directors will, in the aggregate, beneficially own 21.0%
of the Company's outstanding Common Stock (including 290,833 shares subject to
currently options and warrants that are currently exercisable or exercisable in
December 1996. These stockholders voting together could delay or prevent a
change in control of the Company or a business combination involving the Company
that is favored by other stockholders. See "--Anti-Takeover Provisions,"
"Management," "Principal Stockholders" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of the Common Stock in the
public market following this offering, or the perception that the sale of a
substantial number of shares might occur, could have a material adverse effect
on the prevailing market price of the Common Stock or the ability of the Company
to raise additional capital through a public offering of its equity securities.
Upon completion of this offering, the Company will have outstanding 13,776,620
shares of Common Stock, of which 6,842,500 shares will be freely tradeable
without restriction or further registration under the Securities Act of 1933
(the "Securities Act"), except for those shares held by "affiliates" (as defined
in the Securities Act) of the Company and "underwriters" who are affiliates of
acquired companies. The 1,850,000 shares issued in this offering and held by
affiliates of acquired companies may be sold subject to the volume requirements
of Rule 145(d). See "Resales." In addition, the Company may register such shares
for resale. None of the remaining 5,084,120 outstanding shares of Common Stock
(the "Restricted Shares") have been registered under the Securities Act, and
such shares may be resold only upon registration under the Securities Act or in
compliance with an exemption from the registration requirements of the
Securities Act. Holders of 461,665 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144 under the Securities Act, subject to the manner
of sale, volume, notice and information requirements of Rule 144, beginning in
December 1996, holders of 349,175 Restricted Shares will be eligible to sell
such shares pursuant to Rule 144 beginning in February 1997, holders of 12,879
Restricted Shares will be eligible to sell such shares pursuant to Rule 144
beginning in June 1997, holders of 3,178,185 Restricted Shares will be eligible
to sell such shares pursuant to Rule 144 beginning in August 1997, holders of
500,531 Restricted Shares will be eligible to sell such shares pursuant to Rule
144 beginning in September 1997, holders of 11,014 Restricted Shares will be
eligible to sell such shares in October 1997, holders of 540,163 Restricted
Shares will be eligible to sell such shares in December 1997, holders of 25,000
Restricted Shares will be eligible to sell such shares in March 1998, holders of
1,377 Restricted Shares will be eligible to sell such shares in April 1998 and
holders of 4,131 Restricted Shares will be eligible to sell such shares in May
1998. The Securities and Exchange
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Commission has sought public comment on the advisability of shortening the
applicable holding periods under Rule 144 by one year. If such a change in Rule
144 were to be effected, the respective dates set forth above would be one year
earlier than as stated above. The Company has granted to certain holders of
Restricted Shares and warrants for shares of Common Stock certain demand and
piggyback registration rights. See "Description of Capital Stock -- Registration
Rights," "Shares Eligible for Future Sale," "Management -- Compensation
Committee Interlocks and Insider Participation" and "Certain Relationships and
Related Transactions."
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to one
million shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring or preventing a change of control of the Company. In
addition, certain provisions in the Company's Certificate of Incorporation and
Bylaws relating to dividing the Board of Directors into three classes,
restrictions on calling special meetings of stockholders, restrictions on
amendments to the Bylaws and prohibitions against action by majority written
consent of the stockholders may discourage or make more difficult any attempt by
a person or group of persons to obtain control of the Company.
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of a
corporation's voting stock. See "Description of Capital Stock--Preferred Stock;
- --Certain Charter and Bylaw Provisions."
In addition, options issued pursuant to the Company's 1995 Stock Plan will
vest immediately upon a Change in Control as defined in the option agreements.
See "Management--Compensation Committee Interlocks and Insider Participation."
THE ACQUISITIONS
THE COMPANY
The Predecessor owned and operated 11 video specialty stores under the
"Moovies" name, logo and format located in South Carolina, North Carolina and
Northern Georgia. Concurrently with the completion of its initial public
offering in August 1995, the Predecessor's corporate general partner was merged
into Moovies, Inc. Moovies, Inc. was incorporated under the laws of the State of
Delaware on November 28, 1994.
INITIAL ACQUISITIONS
Concurrently with its initial public offering in August 1995, the Company
acquired 76 video specialty stores located in Georgia, North Carolina, Virginia,
Pennsylvania, New Jersey, New York, Connecticut and Ohio, for aggregate
consideration of approximately $44.3 million, consisting of approximately $22.4
million in cash, approximately $21.4 million in shares of Common Stock
(approximately 1.8 million shares) and a $500,000 promissory note payable to a
seller. In addition, pursuant to the terms of the Initial Acquisitions, the
Company concurrently repaid approximately $4.2 million of long-term indebtedness
assumed in connection with the Initial Acquisitions and $1.4 million of
long-term indebtedness of the Predecessor. The Initial Acquisitions were
consummated concurrently with the initial public offering in August 1995. The
cash portion of the purchase price of the Initial Acquisitions was financed with
a portion of the net proceeds of the initial public offering.
Set forth below is a brief description of each of the Initial Acquisitions:
First Row. The Company acquired from First Row Video, Inc. and Video Game
Trader, Inc. (collectively, "First Row and Game Trader") 24 video specialty
stores and certain related operations. All of the stores and outlets are located
in Eastern Ohio and Western Pennsylvania.
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Movie Stars. The Company acquired from Movie Stars Entertainment Corp.
("Movie Stars") ten video specialty stores. Nine stores are located in
Poughkeepsie, New York and its surrounding area and the tenth store is located
in Fairfield, Connecticut.
Video Express. The Company acquired from PARR-Four, Inc. ("Video Express")
ten video specialty stores located in the Norfolk, Virginia area.
Video Stars. The Company acquired from BREM, Inc. ("Video Stars") eight
video specialty stores located in the Norfolk, Virginia area.
Video Warehouse I. The Company acquired from Lott's Video Warehouse of
Athens, Inc. and four other related corporations (collectively, "Video Warehouse
I") five video specialty stores located in Northern Georgia.
Video Warehouse II. The Company acquired from Video Warehouse of Augusta
#1, Inc. and six related partnerships and corporations (collectively, "Video
Warehouse II") seven video specialty stores located in Southern Georgia.
King Video. The Company acquired from King Video, Inc. ("King Video") five
video specialty stores located in Blacksburg, Virginia and its surrounding area.
L.A. Video. The Company acquired from L.A. Video, L.A. Video of Upper
Dublin, Inc. and L.A. Video of Aldan, Inc. (collectively, "L.A. Video") five
video specialty stores located in suburban areas of Philadelphia, Pennsylvania.
Planet Video. The Company acquired from Planet Video, Inc., and a related
corporation, XIMPEC, Inc. (collectively, "Planet Video") two video specialty
stores located in Drescher, Pennsylvania and Trenton, New Jersey.
RECENT ACQUISITIONS
Since the Company's initial public offering, the Company has acquired an
aggregate of 76 video specialty stores in eight acquisitions. These acquisitions
included the acquisition of the "Movies to Go" chain of 13 stores in September
1995, the "Pic-A-Flick" chain of 23 stores in December 1995, the "Movie Store"
chain of eight stores in December 1995, the "Showtime Video" chain of five
stores in March 1996, the "Premiere Video" chain of 23 stores in July 1996 and
several smaller acquisitions.
Movies to Go. In September 1995, the Company acquired the "Movies to Go"
chain of 13 stores and certain related operations located in Iowa ("Movies to
Go") through a merger transaction with MoveAmerica, Inc. for aggregate
consideration of 344,421 shares of common stock of the Company, the assumption
of approximately $685,000 in debt, and approximately $1,420,000 in cash. The
Company paid the cash portion of the consideration with proceeds from its
initial public offering.
Pic-A-Flick. In December 1995, the Company acquired the "Pic-A-Flick" chain
of 23 stores located in North and South Carolina ("Pic-A-Flick Group") through a
merger and asset purchase transaction with eight corporations for aggregate
consideration of 336,134 shares of common stock of the Company and notes in the
aggregate principal amount of $5,000,000, due January 5, 1996 (which were
secured by letters of credit from a bank and subsequently repaid using proceeds
from borrowings under the Company's line of credit).
Movie Store. In December 1995, the Company acquired the "Movie Store" chain
of eight stores located in the Atlanta metropolitan area ("Movie Store Group")
through merger and asset purchase transactions with four corporations for
aggregate consideration of 161,449 shares of the Company's Common Stock, the
assumption of approximately $280,000 in debt ($166,000 of which was repaid at
closing), $190,000 in cash, a promissory note in the principal amount of
$435,000 due January 5, 1996 and a promissory note in the principal amount of
$469,000 with five installments of $93,730 each (plus interest at 8% per annum)
due quarterly from April 1, 1996 through April 1, 1997. Under the terms of the
merger agreement, in October 1996, the Company was required to issue 42,580
additional shares to the former stockholder of the merged corporation. The
Company paid the cash portion of the consideration with borrowings under its
line of credit with a bank. The $435,000 note was repaid in January 1996 with
borrowings under the line of credit.
Showtime. In March 1996, the Company acquired the "Showtime Video" chain of
five stores in an asset purchase transaction for aggregate consideration of
approximately $520,000 in cash and a $1.9 million note payable. The Company paid
the cash portion of the consideration and repaid the note in April 1996 with
borrowings under its line of credit. Showtime operates three stores in Fort
Collins, Colorado, one in Boulder, Colorado, and one in Greeley, Colorado.
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Premiere. In July 1996, the Company acquired the "Premiere Video" chain of
23 stores in Minnesota, Iowa, Wisconsin, South Dakota and Nebraska for a
purchase price of approximately $11.5 million, consisting of $8.9 million in
cash at closing and a final payment of $2.6 million payable January 1997 which
is secured by a bank letter of credit.
FUTURE ACQUISITIONS
The Company is engaged in negotiations with the owners of a total of 23
video retail stores and franchisor's rights in regard to a total of 45 video
retail stores. The Company has not entered into a definitive agreement in regard
to the acquisition of any of such stores or franchisor's rights, and there can
be no assurance that it will do so.
The shares of common stock covered by this Prospectus are available for use
in Future Acquisitions. See "Securities Covered by this Prospectus" and "Plan of
Distribution." As of the date hereof, no definitive agreements have been entered
into in connection with such acquisitions, and there can be no assurance that
any Future Acquisitions will be consummated.
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USE OF PROCEEDS
The proceeds of the sale of shares offered hereby, to the extent such
proceeds consist of the assets of acquired businesses, will be added to the
assets of Moovies or a subsidiary. Cash proceeds from shares sold by the
Company, if any, will be added to the general funds of Moovies or a subsidiary
and may be used for general corporate purposes, including capital expenditures
and working capital requirements. The Company will not receive any of the
proceeds from shares registered for resale by selling stockholders. See "Plan of
Distribution" and "Resales."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded and quoted on the Nasdaq Stock Market
under the symbol "MOOV." The following table shows the high and low sales prices
of the Common Stock since the Common Stock began trading publicly on August 4,
1995, as reported through October 7, 1996. The price to the public in the
initial public offering which occurred on August 3, 1995 was $12.00 per share.
High Low
---- ---
YEAR ENDED DECEMBER 31, 1995
Third Quarter (from August 3, 1995)................ $ 22 3/4 $14 3/4
Fourth Calendar Quarter............................ 19 1/2 10
YEAR ENDING DECEMBER 31, 1996
First Calendar Quarter............................. 15 1/4 11 3/4
Second Calendar Quarter ........................... 14 7 1/2
Third Calendar Quarter ............................ 8 11/16 5 1/2
Fourth Calendar Quarter (through October 7, 1996).. 6 5
As of September 25, 1996, there were approximately 286 record holders and
approximately 4,400 beneficial owners of the Company's Common Stock.
Approximately 8,499,355 shares were held by brokers, dealers and their nominees
on behalf of the beneficial owners. The closing price of the Company's Common
Stock as reported on the Nasdaq Stock Market on October 7, 1996 was $5.375.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. However, amounts totalling $22.9 million, reflecting the cash portions of
the purchase prices paid and a note issued in connection with the Initial
Acquisitions, were treated as deemed dividends pursuant to the accounting
treatment accorded to such acquisitions. See Footnote 2 to the Moovies, Inc.
Consolidated Financial Statements. The Company currently intends to retain its
future earnings, if any, to finance the expansion of its business and for
general corporate purposes and currently does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. Any payment of cash
dividends in the future will be at the discretion of the Board of Directors and
will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other factors that the Company's
Board of Directors deems relevant. In addition, the Company's credit facility
with a bank prohibits the payment of any dividends without the prior written
consent of the bank. See "The Acquisitions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996
Concurrently with the completion of the Company's initial public
offering, (i) the Predecessor's corporate general partner was merged into
Moovies, Inc. and (ii) Moovies, Inc. completed the Initial Acquisitions which
resulted in the acquisition of 76 video specialty stores for an aggregate
consideration of approximately $44.3 million, consisting of approximately $22.4
million in cash, approximately $21.4 million in shares of Common Stock
(approximately 1.8 million shares) and a $500,000 promissory note payable to a
seller. See "The Acquisitions" for additional details as to the entities
acquired and the date of acquisition. In addition, approximately $4.2 million of
indebtedness was assumed by the Company in connection with the Initial
Acquisitions and repaid concurrently with the closing of the Company's initial
public offering. Since the owners of the video chains acquired pursuant to the
Initial Acquisitions were considered promoters as defined under Rule 1-02(s) of
Regulation S-X and were stockholders who transferred assets and liabilities to
Moovies, Inc. in exchange for Common Stock contemporaneously with the initial
public offering, Moovies, Inc. recorded the assets and liabilities acquired at
the historical cost basis of the transferors in accordance with the provisions
of Securities and Exchange Commission Staff Accounting Bulletin 48. As a result
of recording the acquired assets and liabilities at their historical cost basis,
no goodwill was recorded by the Company in connection with the Initial
Acquisitions.
In September 1995, the Company acquired MoveAmerica, Inc. for $1.4
million in cash, the issuance of 344,421 shares of Common Stock and the
assumption of approximately $685,000 in debt. In December 1995, the Company
acquired Pic-A-Flick Group for the issuance of a $5 million note payable and the
issuance of 336,134 shares of Common Stock. In December 1995, the Company
acquired Movie Store Group for the issuance of approximately $900,000 in notes
payable, the issuance of 161,449 shares of Common Stock, the assumption of
approximately $270,000 in debt ($166,000 of which was repaid at closing) and
$190,000 in cash. Concurrently with the completion of the Company's second
public offering in July 1996 the Company acquired Premiere Video for $11.5
million, consisting of $8.9 million in cash at closing and a final payment of
$2.6 million payable in January 1997 which was secured by a letter of credit.
See "The Acquisitions" for additional details as to the entities acquired and
the date of acquisition. These acquisitions were accounted for under the
purchase method of accounting and accordingly the assets and liabilities were
recorded at their fair market value. The difference between fair market value
and the purchase price was recorded as goodwill.
The unaudited pro forma combined financial statements of the Company
reflect (i) the consummation of the Initial Acquisitions and the Recent
Acquisitions; (ii) the repayment of approximately $10.5 million of indebtedness
assumed in connection with the Acquisitions and $1.4 million of long-term
indebtedness of the Predecessor; (iii) the establishment of a deferred tax asset
arising from cumulative differences between the book and tax basis of assets
acquired; (iv) a provision for income taxes as if the combined operations had
been taxed as a C corporation; (v) the completion of the Company's initial
public offering, second public offering and the application of the net proceeds
therefrom; and (vi) the amortization of the goodwill recorded in the above
transactions (collectively, the "Pro Forma Transactions"). The unaudited pro
forma combined financial statements for the year ended December 31, 1995 give
effect to the Pro Forma Transactions as if each had occurred as of the beginning
of the year. The pro forma combined financial statements for the six months
ended June 30, 1996 give effect to the consummation of the Showtime acquisition
and the Premiere Video acquisition as if each had occurred as of the beginning
of the period. The pro forma combined financial statements of the Company do not
reflect any Future Acquisitions.
Effective January 1, 1996, the Company adopted an accelerated method of
amortizing its videocassette rental inventory which was accounted for as a
change in accounting estimate effected by a change in accounting principle. The
new method of amortization has been applied to videocassette rental inventory
that was held at January 1, 1996. As a result of the adoption of the change the
Company recorded an $860,000 pre-tax charge to operating expenses in the first
quarter of 1996. The Company has used the information obtained at the time of
adoption and throughout 1996 to estimate the additional amortization expense
which would have been recorded had the new method been in effect during 1995.
In the opinion of the Company's management, all adjustments necessary
to present fairly such pro forma combined financial statements have been made
based on the terms and structure of the Pro Forma Transactions.
The pro forma financial statements do not purport to represent what the
Company's results of operations or financial position would actually have been
had the Pro Forma Transactions actually occurred on any of the dates set forth
above or to project the Company's results of operations for any future period.
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The unaudited pro forma financial information should be read in
connection with the accompanying notes and the historical financial statements
and notes thereto of Moovies, Inc., Movie Stars, Parr Four, Inc. d/b/a Video
Express, Video Stars (a division of BREM, Inc.), Video Warehouse I Group, Video
Warehouse II Group, First Row Video, Inc., Video Game Trader, Inc., L.A. Video,
Planet Video, Inc., MoveAmerica, Incorporated d/b/a Movies to Go and Games to
Go, Pic-A-Flick Group, Movie Store Group, and Certain Stores of American
Multi-Entertainment, Inc. d/b/a Premiere Video and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
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<TABLE>
<CAPTION>
PRO FORMA COMBINED BALANCE SHEET
June 30, 1996
(unaudited)
The Premiere Pro Forma The Company
Company Acquisition(1) Adjustments Pro Forma
----------- -------------- ---------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Current assets: $ 191 $ 11 $ 23,442 (2) $ 3,249
Cash and cash equivalents:.................. (8,911) (3)
(11,484) (4)
Receivables................................. 2,239 -- -- 2,239
Subscription receivable..................... 20,384 -- (20,384) (2) --
Merchandise inventory....................... 2,707 57 (57) (3) 2,707
Deferred income tax benefit................. 308 -- -- 308
Prepaid rent................................ 1,071 -- -- 1,071
Other....................................... 1,744 21 (21) (3) 1,744
----------- -------------- ---------------- ------------------
Total current assets.......... 28,644 89 (17,415) 11,318
Videocassette rental inventory, net............. 19,144 1,732 68 (3) 20,944
Furnishings and equipment, net.................. 16,015 2,244 (1,644) (3) 16,615
Goodwill........................................ 30,256 -- 9,100 (3) 39,356
Deposits and other assets....................... 990 254 (254) (3) 990
----------- -------------- ---------------- ------------------
$ 95,049 $ 4,319 $ (10,145) $ 89,223
=========== ============== ================ ==================
Current liabilities:
Line of credit.............................. $ 12,796 $ -- $ (7,984) (4) $ 4,812
Notes payable............................... 500 -- 2,600 (3) 3,100
Current portion of long-term debt........... 449 -- -- 449
Due to AMI corporate........................ -- 2,330 (2,330) (3) --
Accounts payable............................ 9,788 -- -- 9,788
Accrued expenses............................ 3,664 -- -- 3,664
----------- -------------- ---------------- ------------------
Total current liabilities..... 27,197 2,330 (7,714) 21,813
Long-term debt, less current portion............ 3,604 -- (3,500) (4) 104
Deferred income tax payable..................... 5,922 -- -- 5,922
----------- -------------- ---------------- ------------------
36,723 2,330 (11,214) 27,839
Stockholders' equity:
Preferred stock............................. -- -- -- --
Common stock................................ 9 -- 3 (2) 12
Common stock subscribed..................... 3 -- (3) (2) --
Additional paid-in capital.................. 55,503 -- 3,058 (2) 58,561
Retained earnings........................... 2,811 1,989 (1,989) (3) 2,811
----------- -------------- ---------------- ------------------
Total stockholders' equity.... 58,326 1,989 1,069 61,384
----------- -------------- ---------------- ------------------
$ 95,049 $ 4,319 $ (10,145) $ $89,223
=========== ============== ================ ==================
</TABLE>
- ---
(1) See the unaudited financial statements of certain stores of American
Multi-Entertainment, Inc. d/b/a Premiere Video.
(2) Reflects the sale of 3,220,000 shares of Common Stock net of underwriting
discounts and offering expenses of approximately $600,000.
(3) Reflects the consummation of the Premiere Video Acquisition for $11.5
million, consisting of $8.9 million in cash at closing and a final payment
of $2.6 million payable in January 1997 which is secured by a letter of
credit. The acquisition was accounted for under the purchase method of
accounting and accordingly the assets and liabilities were recorded at
their fair market value. The difference between fair market value and the
purchase price was recorded as goodwill.
367223.4
17
<PAGE>
The estimated allocation of purchase price is as follows (in thousands):
HISTORICAL VALUE FAIR PRO FORMA
OF NET ASSETS VALUE NET ASSETS
ACQUIRED ADJUSTMENT ACQUIRED
------------------ ------------- ----------------
Cash .............................. $ 11 $ (11) $ --
Merchandise inventory ............. 57 (57) --
Other ............................. 21 (21) --
Videocassette rental inventory, net 1,732 68 1,800
Furnishings and equipment, net .... 2,244 (1,644) 600
Goodwill .......................... -- 9,100 9,100
Deposits and other assets ......... 254 (254) --
-------- -------- --------
Total assets ................ $ 4,319 $ 7,181 $ 11,500
Notes payable ..................... -- -- --
Due to AMI Corporate .............. 2,330 (2,330) --
-------- -------- --------
Total liabilities ........... $ 2,330 $ (2,330) $ --
-------- -------- --------
Equity ............................ 1,989 (1,989) --
-------- -------- --------
Total ....................... $ -- $ 11,500 $ 11,500
======== ======== ========
--------
(4) The estimated repayment of certain debt with proceeds from the Company's
second public offering is as follows (in thousands):
June 30, 1996
-----------------
Line of credit with a bank ..................... $ 7,984
Subordinated note payable to investment company 3,500
-------
Total debt repaid .............................. $11,484
=======
367223.4
18
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
HISTORICAL
--------------------------------------------
THE INITIAL RECENT PROFORMA THE COMPANY
COMPANY ACQUISITIONS(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA
---------- ------------- --------------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
Revenues:
<S> <C> <C> <C> <C> <C>
Rental revenues...................... $ 20,309 $ 21,288 $ 23,542 $ -- $ 65,139
Product sales........................ 4,349 5,196 4,275 -- 13,820
---------- ------------- --------------- --------------- -------------
24,658 26,484 27,817 -- 78,959
Operating costs and expenses:
(2,436) (3)
Operating expenses................... 15,593 18,178 18,918 1,136 (4) 51,389
Cost of product sales................ 2,979 3,761 3,655 (1,136) (4) 9,259
General and administrative..................2,955.. 3,429 2,658 (805) (5) 8,237
Amortization of goodwill............. 148 -- -- 1,841 (6) 1,989
---------- ------------- --------------- --------------- -------------
21,675 25,368 25,231 (1,400) 70,874
---------- ------------- --------------- --------------- -------------
Operating income....................... 2,983 1,116 2,586 1,400 8,085
Non-operating income (expense):
Interest income (expense), net....... (197) (238) (365) 308 (7) (492)
Other, net........................... 25 26 (130) 99 (8) 20
---------- ------------- --------------- --------------- -------------
Income before income taxes............. 2,811 904 2091 1,807 7,613
Pro forma provision for income taxes... 1,046 350 390 1,259 (9) 3,045
---------- ------------- --------------- --------------- -------------
Pro forma net income................... $ 1,765 $ 554 $ 1,701 $ 548 $ 4,568
========== ============= =============== =============== =============
Pro forma net income per share......... $ 0.38
=============
Shares used in conjunction (10)........ 12,180
=============
</TABLE>
367223.4
19
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
HISTORICAL
-----------------------------
THE RECENT PRO FORMA THE COMPANY
COMPANY ACQUISITIONS(2) ADJUSTMENTS PRO FORMA
----------- --------------- ------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
Revenues:
<S> <C> <C> <C> <C>
Rental revenues........................... $ 32,634 $ 5,247 $ -- $37,881
Product sales............................. 4,967 801 -- 5,768
----------- --------------- ------------------ -------------------
37,601 6,048 -- 43,649
Operating costs and expenses:
Operating expenses (3).................... 26,338 3,809 (1,351)(3) 28,927
131(4)
Cost of product sales..................... 3,168 991 (131) 4,028
General and administrative................ 4,610 341 88 5,039
Amortization of goodwill.................. 754 -- 240 994
----------- --------------- ------------------ -------------------
34,870 5,141 (1,023) 38,988
----------- --------------- ------------------ -------------------
Operating income.............................. 2,731 907 1,023 4,661
Non-operating income (expense):
Interest income (expense), net............ (701) (57) -- (758)
Other, net................................ (14) -- -- (14)
--
----------- --------------- ------------------ -------------------
Pro forma income before income taxes.......... 2.016 850 1,023 3,889
Pro forma provision for income taxes....................802............ -- 754 1,556
----------- --------------- ------------------ -------------------
Pro forma net income.......................... $ 1,214 $ 850 $ 269 $ 2,333
=========== =============== ================== ===================
Pro forma net income per share................ $ 0.19
===================
Shares used in computation.................... 12,196
===================
</TABLE>
367223.4
20
<PAGE>
(1) The table below sets forth certain information with respect to the Initial
Acquisitions for the period from January 1, 1995 through the respective
acquisition dates:
<TABLE>
<CAPTION>
INCOME BEFORE NUMBER OF STORES
REVENUES INCOME TAXES ACQUIRED
---------------- ------------------ ------------------
<S> <C> <C> <C>
First Row and Game Trader.................................. $ 8,301 $ (755) 24
Movie Stars................................................ 2,483 (372) 10
Video Express.............................................. 3,783 151 10
Video Stars................................................ 1,796 151 8
Video Warehouse I.......................................... 2,327 465 5
Video Warehouse II......................................... 3,101 579 7
King Video................................................. 1,609 156 5
L.A. Video................................................. 2,502 476 5
Planet Video............................................... 582 53 2
---------------- ------------------ ------------------
Total............................................. $ 26,484 $ $904 $ 76
================ ================== ==================
</TABLE>
(2) The table below sets forth certain information with respect to the Recent
Acquisitions from the beginning of the periods indicated through the
respective acquisition dates:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------------- ------------------------------
INCOME BEFORE INCOME BEFORE NUMBER OF STORES
REVENUES INCOME TAXES REVENUES INCOME TAXES ACQUIRED
------------- ------------- ------------ --------------- -------------------
<S> <C> <C> <C> <C> <C>
Movies to Go...................... $ 4,963 $ 368 $ -- $ -- 13
Pic-A-Flick Group................. 7,104 316 -- -- 23
Movie Store Group................. 3,613 411 -- -- 8
Showtime.......................... 3,902 156 612 13 5
Premiere Video.................... 7,226 672 5,436 894 23
Other Acquisitions................ 1,009 168 -- -- 4
------------- ------------- ------------ --------------- -------------------
Total......................... $ 27,817$ 2,091 $ 6,048 $ 907 76
============= ============= ============ =============== ===================
</TABLE>
367223.4
21
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(3) Adjustments to operating expenses consist of the following:
To record a decrease in videocassette rental inventory amortization
expense resulting from the allocations of purchase price to
videocassette rental tapes of the acquired entities, based on current
replacement cost for bulk purchases of used tapes. Replacement cost
for bulk purchases of used tapes is significantly less than the cost
of new tape purchases. As a result, future amortization relating to
these tapes, on a per tap basis, will be significantly less than the
amortization relating to new tape purchases. The Company has
determined that there will be no changes to future revenue associated
with base stock inventory acquired and therefore there is no
corresponding pro forma adjustment to revenue necessary. The Company
has determined that its method of amortization, as well as that of
the entities being acquired, results in an appropriate matching of
tape amortization expense with the revenue received from the
<S> <C> <C>
associated rental of such tapes...................................... $(1,700) $(261)
To record the estimated increase in videocassette rental inventory
amortization expense resulting from the Company's adoption of an
accelerated amortization method. The Company adopted the new method
effective January 1, 1996 and has used the information obtained at
the time of adoption and throughout 1996 to estimate the additional
amortization expense which would have
been recorded had the new method been in effect during 1995.......... 945 --
To record the elimination of the $860,000 operating expense
recorded by the Company on January 1, 1996 for the adoption of
the new method of amortization of videocassette rental inventory..... -- (860)
To record a decrease in fixed asset depreciation expense resulting
from the allocation of purchase price to furniture and fixtures of
the acquired entities, based on the fair value of these assets.
Although their market value was lower than their book value, these
assets were not necessarily fully depreciated or lacking utility. The
Company may replace, on an ongoing basis, certain items or equipment
as needed, but there has not been nor is there
intended to be, a one-time extensive replacement of such assets...... (431) (230)
To eliminate reserves which were established to close Video Game
Trader video game stores. In the second quarter of 1995, the Company
and the prior owner of Video Game Trader concluded that trading video
games was not a highly profitable business and decided to
significantly reduce this operation. Prior to the consummation of the
Initial Acquisitions, Video Game Trader recorded a one-time charge of
$1.25 million to reduce the value of its assets, primarily inventory.
This adjustment, taken by Video Game Trader in the second quarter of
1995, was a one-time adjustment in anticipation of the acquisition... (1,250) --
------- ---------
Total......................................................... $(2,436) $(1,351)
======== ========
(4) Adjustment to operating expense and cost of product sales consist of the
following:
</TABLE>
367223.4
22
<PAGE>
<TABLE>
<CAPTION>
To record an increase in amortization expense and a decrease in cost of
product sales related to the adoption of an accelerated method of
amortization videocassette rental inventory. When the Company sells
videocassette rental inventory it records the remaining unamortized
cost of the videocassette as cost of product sales. The Company's
accelerated method of amortization reduces the cost of product sales
as a greater portion of the cost of the videocassette has been
amortized at the time the videocassette is sold. This adjustment has
<S> <C> <C>
no impact on operating income........................................ -- --
----- -----
(5) Adjustments to general and administrative expenses consist of the
following:
To record the increase (decrease) in compensation, including fringe
benefits and bonuses, related to owners/operators of certain entities
acquired. In certain instances, owners/operators of the acquired
companies were paid above-market salary rates prior to their
acquisition by the Company. Several of these individuals joined the
Company in connection with the Acquisitions and entered into new
employment agreements. In some instances, the individuals did not
remain with the Company after the Acquisition and the Company hired
replacement officers to fulfill their management duties. In each
instance, the Company adjusted the pro forma financial statements to
reflect the difference between the employment agreement compensation
of the replacement officers' compensation, as appropriate, and the
above-market salary paid to the former owner/operator. In several
instances, the replacement salaries were actually higher than the
salaries recorded by the acquired company and the pro forma
adjustment increased the Company's salary expense, as appropriate.
The Company has determined that there will be no changes to future
revenue associated with these individuals and therefore there is no
corresponding pro forma adjustment to revenue necessary.............. $(489) $ 88
To record the elimination of legal and accounting expenses recorded
by the Acquisitions which are directly related to the Pro Forma
Transactions, including the initial public offering and this
offering............................................................. (316) --
----- -----
Total......................................................... $ (805) $ 88
======= ========
(6) Adjustments to amortization of goodwill consist of the following:
To record goodwill amortization relating to the excess of the
estimated purchase price, including related acquisition costs, for
all acquisitions accounted for under the purchase method of
accounting, over the estimated fair value of assets acquired
(amortized over 20 years on a straight-line basis)................... $1,841 $ 240
====== =====
(7) Adjustments to interest income (expense), net, consists of the
following:
To eliminate historical interest expense of long-term indebtedness of
the Company which was required to be repaid with the proceeds
of the Initial Public Offering 120 --
To eliminate historical interest expense of long-term indebtedness of
the Initial Acquisitions. This indebtedness could not be assumed
by the Company and no additional indebtedness was incurred by
the Company in connection with its repayment......................... 238 --
</TABLE>
367223.4
23
<PAGE>
<TABLE>
<CAPTION>
To record the interest expense on a $500,000 promissory note issued by
the Company to a seller in connection with the Initial
<S> <C> <C>
Acquisitions......................................................... (50) --
---- --
Total......................................................... $308 $ --
(8) To eliminate the loss incurred by a Recent Acquisition as a result of a
spinoff of a portion of its assets in anticipation of the business
combination with the Company............................................... $ 99 $ --
=== =====
(9) Adjustments to the provisions for income taxes (at an assumed rate of
40%) reflect the following:
Theestimated effect as if the Company (including the Acquisitions,
other than Showtime, some of which were formerly operated as
S Corporations) had been taxed as a C Corporation.................... $ 536 $ 344
The income tax effect on the pro forma adjustments in (4) through
(8) above............................................................ 723 410
--- ---
Total......................................................... $1,259 $ 754
====== ======
(10) Computation of number of shares outstanding as follows:
Existing shareholders................................................... 4,027 4,027
Issuance of Common Stock in the initial public offering........................ 3,623 3,623
Issuance of Common Stock in second public offering...................... 3,220 3,220
Shares issued in acquisition of Movies to Go stores..................... 344 344
Shares issued in acquisition of Pic-A-Flick Group stores................ 336 336
Shares issued in acquisition of Movie Store Group stores................ 162 162
Options and warrants (assumes as outstanding for each of the periods
indicated Common Stock equivalents, using the treasury
stock method for options and warrants)............................... 468 484
----- -----
Total......................................................... 12,180 12,196
</TABLE>
367223.4
24
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial data presented under the captions Statement of
Operations Data and Balance Sheet Data as of and for the years ended December
31, 1992, 1993 and 1994 have been derived from the financial statements of the
Predecessor, which during 1995 was merged into the Company. The selected
historical financial data presented under the captions Statements of Operations
Data and Balance Sheet Data as of and for the year ended December 31, 1995 were
derived from the consolidated financial statements of the Company. Such
financial statements were audited by KPMG Peat Marwick LLP, independent
certified public accountants. The financial statements of the Company as of
December 31, 1994 and 1995 and for each of the years in the three-year period
ended December 31, 1995 and the accountants' report thereon are also included
elsewhere in this Prospectus. The selected financial data presented under the
captions Statement of Operations Data and Balance Sheet Data as of and for the
year ended December 31, 1991 are derived from the unaudited financial statements
of the Predecessor. The selected historical financial data presented under the
captions Statement of Operations Data and Balance Sheet Data as of and for the
six month periods ended June 30, 1995 and 1996 have been derived from the
unaudited financial statements of the Company included elsewhere in this
Prospectus. In the opinion of the Company, such unaudited financial statements
reflect all adjustments, consisting only of normal, recurring adjustments,
necessary for a fair presentation of the results of operations and financial
condition for such period. The pro forma Statement of Operations Data and pro
forma Balance Sheet Data do not purport to represent what the Company's results
of operations and financial position would actually have been had such
transactions actually occurred as of the dates indicated or to project the
Company's results of operations or financial position for any future period. The
Selected Historical and Financial Data and the operating data set forth below
should be read in conjunction with the consolidated financial statements and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Pro Forma Financial Information" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
Historical(1) Pro Forma (2)
---------------------
Year Six Months
Ended Ended
December June 30,
Years Ended December 31, Six Months Ended June 30, 31, 1995 1996
----------------------------------------------------- ----------------------------
1991 1992 1993 1994 1995 1995 1996(3)
-------- -------- --------- -------- --------- ------------- ------------- ---------------------
(in thousands, except per share and operating data)
Statement of Operations
Data:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rental revenues.... $1,728 $2,857 $ 3,579 $4,070 $20,309 $ 2,270 $ 32,634 $ 65,139 $ 37,881
Product sales...... 244 256 310 322 4,349 228 4,967 13,820 5,768
-------- -------- --------- -------- --------- ------------- ------------- --------- ----------
Total......... 1,972 3,113 3,889 4,392 24,658 2,498 37,601 78,959 43,649
Operating costs
and expenses:
Operating expenses. 1,387 2,241 2,798 3,121 15,593 1,773 26,338 51,389 28,927
Cost of product sales 206 127 240 278 2,979 191 3,167 9,259 4,028
General and
administrative 228 313 573 611 2,955 378 4,610 8,237 5,039
Amortization of
goodwill -- -- -- -- 148 -- 755 1,989 994
-------- -------- --------- -------- --------- ------------- ------------- --------- ----------
Operating income...... 151 432 278 382 2,983 156 2,731 8,085 4,661
Non-operating income
(expense):
Interest expense, net (29) (35) (43) (101) (197) (79) (701) (492) (758)
Other, net......... -- -- -- -- 25 -- (14) 20 (14)
-------- -------- --------- -------- --------- ------------- ------------- --------- ----------
Income before
income taxes 122 397 235 281 2,811 77 2,016 7,613 3,889
Provision for
income taxes -- -- -- -- 1,046 -- 802 3,045 1,556
-------- -------- --------- -------- --------- ------------- ------------- --------- ----------
Net income............ $ 122 $ 397 $ 235 $ 281 $ 1,765 $ 77 $ 1,214 $ 4,568 $ 2,333
======== ======== ========= ======== ========= ============= ============= ========= ==========
Net income per share.. $ 0.52 $ 0.14 $ 0.38 $ 0.19
========= ============= ========= ==========
Shares used in
computation 3,395 8,931 12,180 12,196
========= ============= ========= ==========
OPERATING DATA:
Number of stores at
end of period...... 7 8 8 9 148 11 164 176 187
Increase (decrease) in
same store revenues (4) 18.2% (6.5%) 8.2% 10.5% 1.4% 0.0% (2.4%) -- --
</TABLE>
367223.4
25
<PAGE>
<TABLE>
<CAPTION>
Historical Pro Forma(2)
---------------------------------------------------------------------- -----------
December 31, June 30, 1996 June 30, 1996
--------------------------------------------------------
1991 1992 1993 1994 1995
--------- ------- --------- -------- ---------- ----------- -----------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash............................. $ 89 $ 151 $ 242 $ 170 $ 3,564 $ 191 $ 3,249
Videocassette rental inventory, net 942 969 820 931 16,728 19,144 20,944
Total assets..................... 1,520 1,660 1,644 2,098 68,219 95,049 89,223
Line of credit and other
short-term debt 285 187 377 430 8,916 13,745 8,361
Long-term debt, less current portion 187 22 1,078 1,309 2,411 3,605 104
Total liabilities................ 797 536 1,953 2,502 30,756 36,723 27,839
Equity (deficit)................. 723 1,124 (309) (404) 37,463 58,326 61,384
</TABLE>
(1) THE STATEMENT OF OPERATIONS DATA REFLECT THE RESULTS OF OPERATIONS OF
THE PREDECESSOR FOR 1991 THROUGH 1994 AND FOR A PORTION OF 1995. THE
PREDECESSOR WAS A LIMITED PARTNERSHIP AND THEREFORE HAD NO INCOME TAX
LIABILITY.
(2) THE PRO FORMA STATEMENT OF OPERATIONS DATA FOR THE YEAR ENDED DECEMBER
31, 1995 FOR THE COMPANY GIVES EFFECT TO THE INITIAL PUBLIC OFFERING,
THE SECOND PUBLIC OFFERING AND THE PRO FORMA TRANSACTIONS AS IF THEY HAD
OCCURRED AS OF THE BEGINNING OF THE YEAR. THE PRO FORMA STATEMENT OF
OPERATIONS DATA FOR THE SIX MONTHS ENDED JUNE 30, 1996 GIVE EFFECT TO
THE SECOND PUBLIC OFFERING AND THE CONSUMMATION OF THE PREMIERE VIDEO
ACQUISITION AND THE SHOWTIME ACQUISITION AS IF THEY HAD OCCURRED AS OF
THE BEGINNING OF THE PERIOD. THE PRO FORMA STATEMENT OF OPERATIONS DATA
DOES NOT GIVE EFFECT TO ANY FUTURE ACQUISITIONS. THE PRO FORMA BALANCE
SHEET DATA GIVES EFFECT TO THE COMPANY'S SECOND PUBLIC OFFERING IN JULY
1996 AND THE CONSUMMATION OF THE PREMIERE VIDEO ACQUISITION AND THE
SHOWTIME ACQUISITION AS IF THEY HAD BEEN COMPLETED AS OF JUNE 30, 1996.
SEE "USE OF PROCEEDS" AND "PRO FORMA FINANCIAL INFORMATION."
(3) EFFECTIVE JANUARY 1, 1996, THE COMPANY ADOPTED AN ACCELERATED METHOD OF
AMORTIZING ITS VIDEOCASSETTE RENTAL INVENTORY, WHICH HAS BEEN ACCOUNTED
FOR AS A CHANGE IN ACCOUNTING ESTIMATE EFFECTED BY A CHANGE IN
ACCOUNTING PRINCIPLE. THE APPLICATION OF THE NEW METHOD OF AMORTIZING
VIDEOCASSETTE RENTAL INVENTORY, INCLUDING AN $860,000 PRE-TAX CHARGE
($0.06 PER SHARE AFTER TAXES), INCREASED AMORTIZATION EXPENSE FOR THE
SIX MONTHS ENDED JUNE 30, 1996 BY APPROXIMATELY $2.4 MILLION AND REDUCED
NET INCOME BY APPROXIMATELY $1.4 MILLION AND EARNINGS PER SHARE BY
$0.16.
(4) THE INCREASE (DECREASE) IN SAME STORE REVENUES IS COMPUTED BY COMPARING
ON A QUARTERLY BASIS REVENUES FROM STORES OPEN DURING AN ENTIRE QUARTER
TO REVENUES FROM STORES OPEN DURING THE ENTIRE CORRESPONDING QUARTER FOR
THE PRIOR YEAR. THIS CALCULATION INCLUDES ACQUIRED STORES ON A PRO FORMA
BASIS THAT WERE OWNED AND OPERATED AT THE END OF THE PERIOD.
367223.4
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company opened its first video superstore under the Moovies name,
logo and format in June 1992. The Company currently owns and operates 203 video
specialty stores, including approximately 180 stores under the Moovies name and
logo. The Company's revenues consist of rental revenues and product sales
revenues. Rental revenues include revenue from rentals of videos, video games,
video players and video game machines. Product sales revenues are derived from
sales of videos and video games, including excess rental inventory, and
confectionery and other items.
Operating Costs and Expenses are comprised of operating expenses, cost
of product sales, general and administrative expenses and amortization of
goodwill. Operating expenses consists of amortization of videos purchased for
rental, fees and lease expense for leased videos and all store expenses,
including occupancy, payroll, store opening expenses and direct store promotions
expenses.
Effective January 1, 1996, the Company adopted an accelerated method of
amortizing its videocassette rental inventory. See "--Recent Accounting
Developments."
The Company presently spends approximately 17% of its new release budget
to obtain new releases from Rentrak. Under its agreement with Rentrak, pursuant
to which the Company leases videos for rental to its customers, the Company pays
a handling fee of $8 to $10 for each video. During the revenue sharing period,
which is generally one year (but does not exceed two years) the movie studio
that supplies the video to Rentrak owns the video, and the rental revenues are
shared by Rentrak and the Company on a predetermined basis. Generally, the
percentage of rental revenue retained by the Company is fixed for the first
sixty days of the revenue sharing period and is then set at a higher rate for
the remainder of the term. The Company may also sell excess copies of a video
title and share the sale proceeds with Rentrak on a predetermined basis. At the
end of the revenue sharing period for a video title, the Company may purchase
remaining copies of that title generally for less than $5 per copy. The handling
fee per video is amortized on a straight-line basis over the revenue sharing
period, and revenue sharing payments are expenses when incurred.
Cost of product sales is comprised of cost of videos sold rather than
rented to customers and the cost of confectionery and other products sold in the
Company's stores. The cost of a video is measured at its amortized basis when
sold, if previously used as a rental video, or at the Company's cost if
purchased for sell-through, or at a varying basis if a leased product, depending
upon when in the revenue sharing period it is sold.
General and administrative expense is comprised of corporate office
expenses, including office equipment and facilities costs, management salaries
and benefits, professional fees and all other items of corporate expense.
Beginning in January 1996, the Company undertook a program to more
actively manage its product sales by removing less profitable merchandise
categories from its stores. As a result, the revenue comparison for stores open
in the first six months of both 1996 and 1995 was down slightly and same store
revenue comparisons in subsequent periods may also show modest declines in part
due to these intended reductions in product sales. Correspondingly, rental
revenues, from which the Company generally derive a higher profit margin, are
increasing as a percentage of total revenues, leading to improvements in the
Company's store contribution and operating margin.
Since the stockholders and owners of each of the video chains acquired
pursuant to the Initial Acquisitions were considered promoters as defined under
Rule 1-02(s) of Regulation S-X and are stockholders who transferred assets and
liabilities to Moovies, Inc. in exchange for Common Stock contemporaneously with
the initial public offering, Moovies, Inc. recorded the assets and liabilities
acquired in the Initial Acquisitions at the historical cost basis of the
transferors in accordance with the provisions of Securities and Exchange
Commission Staff Accounting Bulletin 48. As a result of recording the acquired
assets at their historical cost basis, no goodwill was recorded by the Company
in connection with the Initial Acquisitions. The assets acquired in the Recent
Acquisitions were recorded under the purchase method of accounting, and the
excess of cost over the estimated fair value of the assets acquired of $40.1
million is being amortized over 20 years on a straight-line basis.
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The following table sets forth for the periods indicated (i) statement
of operations data expressed as a percentage of total revenues and (ii) the
number of stores open at the end of each period.
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------- ------------------------------
Six Months Ended Year Ended Six Months
Years Ended June 30, December 31, Ended
December 31, 1995 June 30, 1996
------------------------------ -----------------
1993 1994 1995 1995 1996
-------- --------- --------- ------- ------- ------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenues:.............. 92.0% 92.7% 82.4% 90.9% 86.8% 82.5% 86.8%
Product sales................. 8.0 7.3 17.6 9.1 13.2 17.5 13.2
-------- --------- --------- ------- ------- ------------- --------------
Total...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating costs and expenses:
Operating expenses............ 71.9 71.1 63.2 71.0 70.0 65.1 66.3
Cost of product sales......... 6.2 6.3 12.1 7.7 8.4 11.8 9.2
General and administrative.... 14.7 13.9 12.0 15.1 12.3 10.4 11.5
Amortization of goodwill...... -- -- 0.6 -- 2.0 2.5 2.3
-------- --------- --------- ------- ------- ------------- --------------
Total...................... 92.8 91.3 87.9 93.8 92.7 89.8 89.3
-------- --------- --------- ------- ------- ------------- --------------
Operating income...................... 7.2 8.7 12.1 6.2 7.3 10.2 10.7
Non-operating income (expense) (1.1) (2.3) (0.7) (3.1) (1.9) (0.6) (1.8)
-------- --------- --------- ------- ------- ------------- --------------
Income before income taxes 6.1% 6.4% 11.4% 3.1% 5.4% 9.6% 8.9%
Number of stores open at end of period 8 9 148 11 164 176 187
</TABLE>
PRO FORMA RESULTS OF OPERATIONS FOR THE COMPANY
Revenues. Pro forma revenues are comprised of rental revenues and
product sales, which were as a percentage of pro forma revenues, 82.5% and
17.5%, respectively, for the year ended December 31, 1995 and 86.8% and 13.2%,
respectively, for the six months ended June 30, 1996. Not all of the video
specialty stores acquired by the Company have historically used leased product.
The Company believes that, because it intends to use leased product in the
acquired stores and to use more of its excess rental tapes as inventory in new
stores instead of offering such tapes for sale, rental revenues as a percentage
of total revenues will be higher for the year ending December 31, 1996 than they
were pro forma for the year ended December 31, 1995. The Company anticipates a
continued decline in same stores revenues for the third quarter of 1996 due to
the impact of the Olympics on its stores in Georgia.
Operating Cost and Expenses. Pro forma operating expenses as a
percentage of revenues were 89.8% for 1995 and 89.3% for the six months ended
June 30, 1996. The Company anticipates a decline in this percentage in 1996 as
store operating efficiencies are improved. The Company anticipates that these
improvements will be partially offset during 1996 by an increase in amortization
of goodwill as additional acquisitions are completed, and by an increase in
videotape purchases based on expected increases in demand that did not
materialize in the third quarter of 1996. The Company anticipates a slight
decrease in general and administrative expenses as a percentage of revenues if
all of its planned new store openings and acquisitions are completed.
Interest Expense, Net. Interest expense for 1996 is expected to increase
compared to pro forma interest expense for 1995 due to borrowings under the
Company's $22.5 million revolving credit facility in order to fund operations,
new store openings and additional acquisitions. This increase is expected to be
partially offset by interest income generated by the investment of proceeds from
the second public offering.
RECENT ACCOUNTING DEVELOPMENTS
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years
beginning after December 31, 1995 and will require the Company to either elect
to recognize in its consolidated financial statements costs related to its
employee stock-based compensation plans, such as stock options and stock
purchase plans, or provide disclosure of such costs in a footnote to the
consolidated financial statements. Costs under SFAS No. 123 will be determined
using fair value as compared with the intrinsic value method of Accounting
Principles Board Opinion No. 25.
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The Company has determined that it will elect the disclosure only
alternative provided by SFAS No. 123 and will make the required pro forma
disclosures in a footnote to the consolidated financial statements. The Company
has not determined the impact of these pro forma adjustments to its net income
or earnings per share.
Effective January 1, 1996, the Company adopted an accelerated method of
amortizing its videocassette rental inventory. Under this new method,
videocassette rental inventory, which includes video games, is stated at cost,
including the related costs to prepare such videocassettes for rent, and is
amortized over its estimated economic life of 36 months, to its estimated
salvage value ($6 per videocassette during 1996). All copies of new release
videocassettes are amortized on an accelerated basis during their first four
months to an average net book value of $15 and then on a straight-line basis to
their estimated salvage value over the next 32 months. All copies of new release
videocassettes that are purchased for $15 or less are amortized on a
straight-line basis to their estimated salvage value of $6 over 36 months. The
number of high and low priced new release titles purchased by the Company in any
given period depends on the price assigned to each release by the movie studios.
Historically, there are fewer low priced new release titles than high priced.
Therefore, the Company has historically spent less on low priced new release
titles. In 1995, the Company spent less than 10% of its new release budget on
low priced titles. After the book value is amortized to its salvage value, it
remains in inventory at that value until disposed of, at which time the salvage
value is recorded as an element of cost of sales.
The method for calculating amortization of videocassette rental
inventory used in 1995 was as follows: videocassettes that were considered base
stock ("catalog titles"), together with related costs to prepare them for rent,
were amortized over 36 months on a straight-line basis. New release
videocassettes were amortized as follows: the tenth and any succeeding copies of
each title per store were amortized over nine months on a straight-line basis;
the fourth through ninth copies of each title per store were amortized 40% in
the first year and 30% in each of the second and third years; and copies one
through three of the titles per store were amortized as base stock. The Company
adopted its previous method of amortization for videocassette rental inventory
concurrently with its initial public offering of common stock in August 1995.
That method was followed by the Company's major competitors and was considered
to be the industry standard. Recently, several competitors have announced
changes in their amortization methods. The Company adopted the new method of
amortization because it believes that accelerating expense recognition for new
release videocassettes during the first four months more closely matches the
typically higher revenues generated following a title's release, and believes
$15 represents a reasonable average carrying value for tapes to be rented or
sold after four months and $6 represents a reasonable salvage value for all
tapes after 36 months. The Company also believes this method is similar to
methods recently adopted by other large video specialty store operators.
Typically the Company attempts to sell half of its new release tapes
between four and six months after the title is released. Half of those remaining
tapes are sold between seven and nine months after the release and the stores
reduce the remaining inventory to approximately three tapes after a year. After
36 months, a store will generally have one copy of that title in its inventory
at a salvage value of $6. At the time of sale, any unamortized cost of the tape
is charged to cost of goods sold.
The new method of amortization was adopted because the Company believes
accelerating expense recognition for new release videocassettes during the first
four months more closely matches the typically higher revenue generated
following a title's release, and believes $15 represents a reasonable average
carrying value for tapes to be rented or sold after four months and $6
represents a reasonable salvage value for all tapes after 36 months. During the
selection process of its new amortization method, the Company evaluated the
revenue stream generated from a typical new release and found this information
to be consistent with the information available in August 1995 when the Company
selected its previous amortization method.
The new method of amortization has been applied to videocassette rental
inventory that was held in inventory at January 1, 1996. The adoption of the new
method of amortization has been accounted for as a change in accounting estimate
effected by a change in accounting principle and, accordingly, the Company
recorded $860,000 as a pre-tax charge to operating expense in the first quarter.
HISTORICAL RESULTS OF OPERATIONS FOR THE COMPANY
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company's results of operations for the six months ended June 30,
1995 reflect only the operations of the Predecessor. The results of operations
for the six months ended June 30, 1996 reflect only the operations of the
Company.
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Revenues. Revenues for the six months ended June 30, 1996 were
$37,601,000 compared to revenues of $2,498,000 for the same period in 1995. The
increased revenues were a result of the additional stores acquired and opened by
the Company concurrently with and subsequent to the initial public offering in
August 1995. Product sales as a percentage of total revenues increased to 13.2%
for the six months ended June 30, 1996 compared to 9.1% for the same period in
1995. This increase is the result of greater emphasis by certain acquired
companies on product sales, including video game sales.
During the quarter same store revenues declined by approximately two
percent. In the quarter, management has concentrated on the profitability of
product sales by making a concerted effort to reduce certain unprofitable
products previously sold in some acquired stores, particularly video games. This
emphasis and a variety of other factors, including softness in video game
rentals, contributed to this decline in same store revenues. The Company
anticipates a continued decline in same store revenues for the third quarter of
1996 due to the impact of the Olympics on its stores in Georgia.
Operating Costs and Expenses. Operating expenses were $26,338,000 for
the six months ended June 30, 1996 compared to $1,773,000 for the comparable
prior year period. Operating expenses as a percentage of total revenues were
70.0% for 1996 compared to 71.0% for 1995. Excluding the $860,000 pre-tax charge
to operating expenses in the first quarter, operating expenses for the six
months ended June 30, 1996 would have been $25,478,000 or 67.8% of total
revenues. This decrease was primarily the result of increased revenues from
product sales in 1996 without a corresponding increase in operating expenses,
partially offset by the impact of the change in the method of amortization of
videocassette rental inventory as described in Note 2 to the consolidated
financial statements included herein. The new method of accounting accelerates
the amortization of videocassette rental inventory. The Company anticipates an
increase in operating expenses for the second half of 1996 due to increased
videotape purchased based on expected increase in demand that did not
materialize in the third quarter and delays in the new store opening schedule.
Cost of product sales increased $2,975,000 to $3,167,000 for the six
months ended June 30, 1996. This increase is directly related to the increase in
product sales. Cost of product sales as a percentage of product sales were 63.8%
for the six months ended June 30, 1996 compared to 84.0% for 1995. This decrease
is the result of closer management of product sales by certain acquired
companies and increasing the mix of higher margin items.
General and administrative expenses increased to $4,610,000 for the six
months ended June 30, 1996 from $378,000 for the comparable prior year period,
reflecting the acquisitions and additional store openings. General and
administrative expenses as a percentage of total revenues were 12.3% for 1996
compared to 15.1% for 1995. The percentage decrease, despite the increase in the
amount of general and administrative expenses, reflects the effect of spreading
these expenses over significantly greater revenues.
Amortization of goodwill was $754,000 for the six months ended June 30,
1996, which reflects a portion of the amortization of approximately $31.0
million of goodwill over a 20 year period. The Company had no amortization of
goodwill in the comparable prior year period.
Interest Expense, net. Interest expense increased to $701,000 for the
six months ended June 30, 1996 from $79,000 for the comparable prior year
period. This increase is related primarily to (i) the issuance in April 1995 of
a $1.5 million note payable, which was incurred to provide financing for the
completion of the Company's initial public offering and (ii) additional
borrowings under the Company's line of credit agreements and subordinated credit
facility.
Income Tax Expense. The Company had no income tax expense for the six
months ended June 30, 1995 because the Predecessor operated as a partnership for
income tax purposes. Income tax expense for the six months ended June 30, 1996
was approximately $802,000, representing an effective income tax rate of 40%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's results of operations for the years ended December 31,
1994 and 1995 reflect only the operations of the Predecessor for the period from
January 1, 1994 to August 8, 1995 and include the results of the various
Acquisitions from and after their respective acquisition dates.
Revenues. Revenues increased $20,266,000, or 461.5%, for 1995 to
$24,658,000 compared to revenues of $4,392,000 for 1994. The increased revenues
were primarily a result of the additional stores acquired and opened by the
Company between August 8 and December 31, 1995. Aggregate same store sales for
the Company, which includes only the Predecessor's nine stores operated during
all of 1994, decreased approximately $276,000, or 6.3%. Same store revenues,
computed by comparing on a quarterly basis revenues from stores open during an
entire quarter to revenues from stores open during the entire corresponding
quarter for the prior year, increased $748,000, or 1.4%. This calculation
367223.4
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<PAGE>
includes acquired stores on a pro forma basis that were owned and operated at
the end of the period. Product sales as a percentage of total revenues increased
to 17.6% for 1995 compared to 7.3% for 1994. This increase is the result of
greater emphasis by certain acquired companies on product sales, including video
game sales. The Company anticipates that this percentage will decrease during
1996. The Company intends to focus its resources on its video specialty
superstores. Accordingly, subsequent to the year ended December 31, 1995, the
Company sold its supermarket video operation in March 1996, for an amount
approximating its book value. The supermarket operation generated approximately
$456,000 in revenues in 1995.
Operating Costs and Expenses. Operating expenses increased $12,472,000
to $15,593,000 for 1995 compared to $3,121,000 for 1994. Operating expenses as a
percentage of total revenues were 63.2% for 1995 compared to 71.1% for 1994. The
difference in these percentages from 1994 to 1995 primarily reflects increased
revenues from product sales in 1995 without a corresponding increase in
operating expenses.
Cost of product sales increased $2,701,000 to $2,979,000 for 1995
compared to $278,000 for 1994. The increase is directly related to the increases
in product sales. Cost of product sales as a percentage of product sales was
68.5% for the year ended December 31, 1995 compared to 86.3% for 1994. This
decrease is the result of the Acquisitions' closer management of product sales
and increasing the mix of higher margin items, including video game sales. The
Company anticipates that the cost of product sales as a percentage of product
sales for 1996 will be comparable to 1995 results, but may vary according to the
mix of products sold.
General and administrative expenses increased $2,344,000 to $2,955,000
for 1995 compared to $611,000 for 1994, reflecting the Acquisitions (except
Showtime and Premiere Video) and additional store openings. General and
administrative expenses as a percentage of total revenues were 12.0% and 13.9%
for 1995 and 1994, respectively. The percentage decrease, despite the increase
in the amount of general and administrative expenses, reflects the effect of
spreading these expenses over significantly greater revenues. The Company
anticipates that 1996 general and administrative expenses will include
incremental costs incurred in connection with the establishment of the corporate
infrastructure to support anticipated future growth.
Interest Expense, Net. Interest expense increased $96,000 to $197,000
for 1995 from $101,000 for 1994. The increase related primarily to the issuance
of a $1.5 million note payable in April 1995, which was incurred to provide
financing for the completion of the Company's initial public offering of Common
Stock, and the issuance of promissory notes in connection with one of the
Initial Acquisitions. These expenses were offset by interest income earned on
the excess cash received at the initial public offering, which was invested in
short-term securities from August 8, 1995 through December 31, 1995. Interest
expense for 1996 is expected to increase due to borrowings under the Company's
$22.5 million revolving credit facility, obtained in March 1996 in order to fund
operations, new store openings and additional acquisitions.
Income Tax Expense. The Company had no income tax expense for 1994 or
for 1995 through August because the Predecessor was operated as a limited
partnership. Income tax expense for 1995 was approximately $1,046,000,
representing an effective income tax rate of 37.2%. The Company anticipates its
effective income tax rate will be approximately 40% in 1996.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company's results of operations for the year ended December 31, 1994
reflect the operations of the Predecessor's eight stores plus one new store
opened during the year. The results of operations for the year ended December
31, 1993 reflect the operations of eight stores during the entire year.
Revenues. Revenues increased $503,000, or 12.9%, to $4,392,000 for 1994
from $3,889,000 for 1993. Approximately $96,000 of the increase related to the
opening of the new store during 1994. The remainder of the increase related to
aggregate same store revenues increases of approximately $407,000, or 10.5%, for
1994. The increase in same store revenues in 1994 was attributable to a greater
volume of customer transactions, which the Company believes resulted primarily
from the ongoing implementation of its program of store upgrades which began in
1992. This program generally involved relocation to more prominent positions in
strip centers or to stand-alone locations, improved store design, increased
emphasis on more new release inventory and the change to the Moovies name, logo
and format.
Operating Costs and Expenses. Operating expenses increased $323,000 to
$3,121,000 for 1994 from $2,798,000 for 1993. This increase corresponded to the
increase in revenues in 1994 and was attributable to the new store opened during
1994, the relocation of two stores and the change to the Moovies name, logo and
format. During this period, the
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Company changed the mix of inventory purchases, decreasing the use of leased
product, which contributed to the reduction in operating expenses as a
percentage of revenues from 1993 to 1994.
Cost of product sales increased to $38,000 to $278,000 for 1994 from
$240,000 for 1993, corresponding to the increased revenues from product sales.
Cost of sales as a percentage of product sales was 86.3% for 1994 compared to
77.4% for 1993. The increase was the result of a change in the mix of product
sales.
General and administrative expenses increased to $611,000 for 1994 from
$573,000 for 1993. General and administrative expenses as a percentage of total
revenues decreased to 13.9% for 1994 from 14.7% for 1993. This decrease was the
result of the Company's increasing revenues without a similar level of increase
in administrative cost.
Interest Expense. Interest expense was $101,000 for 1994 compared to
$43,000 for 1993. This increase primarily resulted from a full year of
amortization of the discount on the long-term debt payable to the limited
partners in 1994 compared to only four months of discount amortization in 1993.
HISTORICAL RESULTS OF OPERATIONS FOR SELECTED ACQUISITION COMPANIES
Financial results are discussed below for Movie Store Group, Pic-A-Flick
Group, Movies to Go and Premiere Video. These companies collectively accounted
for 67 of the 76 video specialty stores acquired in connection with the Recent
Acquisitions.
MOVIE STORE GROUP
Movie Store Group ("Movie Store Group"), opened its first video store in
December 1984, and was acquired by the Company in December 1995. At the time of
the acquisition, Movie Store Group operated eight video stores in Georgia.
ELEVEN MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Movie Store Group's results of operations for the eleven months ended
November 30, 1995 reflect the operations of eight stores. Movie Store Group's
results of operations for the year ended December 31, 1994 reflect the
operations of six stores.
Revenues. Revenues increased $411,000, or 12.9%, to $3,613,000 for the
eleven months ended November 30, 1995 from $3,202,000 for the year ended
December 31, 1994. Approximately $535,000 of the increase related to two new
store openings occurring during 1995. This increase was partially offset by a
$124,000, or 3.9%, decline in same store revenues, reflecting the shorter 1995
period.
Operating Costs and Expenses. Operating expenses increased $196,000 to
$2,392,000 for the eleven months ended November 30, 1995 from $2,196,000 for the
year ended December 31, 1994. This increase corresponded to the increase in
revenues in 1995 and was attributable primarily to the opening costs and
operating of two new stores and the relocation of one store, and was offset in
part by reduced same store expenses reflecting the shorter 1995 period.
Cost of product sales decreased $4,000 to $301,000 for the eleven months
ended November 30, 1995 from $305,000 for the year ended December 31, 1994. The
decrease was primarily the result of the shorter 1995 period that did not
include December, which is the highest sales month for product sales.
General and administrative expenses increased $124,000 to $482,000 for
the eleven months ended November 30, 1995 from $358,000 for the year ended
December 31, 1994. General and administrative expenses as a percentage of total
revenues increased to 13.4% for 1995 from 11.2% for 1994. This increase was
primarily the result of rent on a corporate office added to centralize
operations and office supplies expenses to operate the corporate office.
Interest Expense. Interest expense increased $8,000 to $34,000 for the
eleven months ended November 30, 1995 compared to $26,000 for the year ended
December 31, 1994. This increase resulted from borrowings to open the two new
stores.
PIC-A-FLICK GROUP
Pic-A-Flick Video ("Pic-A-Flick Group") opened its first video store in
May 1981. Pic-A-Flick Group was acquired by the Company in December 1995. At the
time of the acquisition, Pic-A-Flick Group operated 23 video stores, 19 located
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in South Carolina and four located in North Carolina. During 1995, Pic-A-Flick
Group opened four new stores and relocated two existing stores. During 1994
Pic-A-Flick Group opened three new stores and relocated one existing store.
ELEVEN MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Pic-A-Flick Group results of operations for the eleven months ended
November 30, 1995 reflect the operations of 23 stores. Pic-A-Flick Group results
of operations for the twelve months ended December 31, 1994 reflect the
operations of 19 stores.
Revenues. Revenues increased $747,000, or 12.1%, to $6,899,000 for the
eleven months ended November 30, 1995 from $6,152,000 for the year ended
December 31, 1994. Approximately $506,000 of the increase is attributable to the
new store openings in 1995 and 1994. The remaining increase is attributable to
aggregate same store revenue increases of approximately $241,000, or 4.5%, for
1995.
Operating Costs and Expenses. Operating expenses increased $929,000 to
$5,227,000 for the eleven months ended November 30, 1995 from $4,298,000 for the
year ended December 31, 1994, notwithstanding the shorter 1995 period. The
increase was a result of Pic-A-Flick Group opening four new stores and
relocating two existing stores in 1995. Operating expenses as a percentage of
total revenues increased to 75.8% for the eleven months ended November 30, 1995
from 69.9% for the year ended December 31, 1994, as a result of the new stores
generating lower revenues than mature stores while incurring full operating
expense amounts.
Cost of product sales increased $75,000 to $544,000 for the eleven
months ended November 30, 1995 from $469,000 for the year ended December 31,
1994, as a result of four new store openings and relocation of two existing
stores. Cost of product sales as a percentage of total revenues slightly
increased to 7.9% for the eleven months ended November 30, 1995 from 7.6% for
the year ended December 31, 1994.
General and administrative expenses decreased $116,000 to $642,000 for
the eleven months ended November 30, 1995 from $758,000 for the year ended
December 31, 1994. General and administrative expenses as a percentage of total
revenues decreased to 9.3% for the eleven months ended November 30, 1995 from
12.3% for the year ended December 31, 1994. The decreases were a result of a
reduction in salary paid to the principal shareholder of Pic-A-Flick Group.
Interest Expense. Interest expense increased slightly to $59,000 for the
eleven months ended November 30, 1995 from $56,000 for the year ended December
31, 1994. Interest expense consists primarily of mortgage interest on a 8,400
square-foot free-standing retail site located in North Carolina. One of the
Pic-A-Flick Group corporations owned the retail site until November 1995. In
November 1995, the land and building were transferred to the principal
shareholder in exchange for a note from such shareholder and his assumption of
the other remaining notes payable secured by the property.
MOVIES TO GO
Movies to Go opened its first video store in November 1984 and its first
game store, dba Games to Go, in May 1993. Movies to Go was acquired by the
Company in September 1995. At the time of the Acquisition, Movies to Go operated
13 video stores and five game stores located in Des Moines, Ankeny, Davenport,
Cedar Rapids and Coralville, Iowa.
NINE MONTHS ENDED AUGUST 31, 1995 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1994
Movies to Go results of operations for the nine months ended August 31,
1994 and the nine months ended August 31, 1995 reflect the operations of 13
video stores and five game stores.
Revenues: Revenues decreased $136,000 to $4,963,000 for the nine months
ended August 31, 1995 compared to $5,099,000 for the nine months ended August
31, 1994. This decrease was due to a $253,000 decline in product sales at the
game stores which was partially offset by an increase of approximately $117,000,
or 2.8%, in aggregate same store revenues at the video stores.
Operating Costs and Expenses: Operating expenses decreased $2,000 to
$3,176,000 for the nine months ended August 31, 1995 compared to $3,178,000 for
the nine months ended August 31, 1994. Operating costs and expenses as a
percentage of total revenues increased to 64.0% for the nine months ended August
31, 1995 compared to 62.3% for the prior period, as a result of the decline in
total revenues.
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Cost of product sales increased $38,000 to $764,000 for the nine months
ended August 31, 1995 from $726,000 for the same period in 1994. Cost of product
sales as a percentage of product sales increased to 69.2% for the nine months
ended August 31, 1995 from 53.2% for the same period in 1994. The decline in
gross margin was the result of lower demand for video games.
General and administrative expenses decreased $215,000 to $538,000 for
the nine months ended August 31, 1995 from $753,000 for the nine months ended
August 31, 1994. The decrease was the result of a reduction in advertising
expense.
Interest Expense: Interest expense increased $15,000 to $67,000 for the
nine months ended August 31, 1995 from $52,000 for the comparable period in 1994
as a result of increased borrowings to fund the two video stores opened in
fiscal 1994.
YEAR ENDED NOVEMBER 30, 1994 COMPARED TO YEAR ENDED NOVEMBER 30, 1993
Movies to Go results of operations for the year ended November 30, 1994
reflect the operations of 13 video stores and five game stores. Movies to Go
results of operations for the year ended November 30, 1993 reflect the
operations of 11 video stores and five game stores.
Revenues. Revenues increased $1,743,000 to $6,536,000 for the year ended
November 30, 1994 from $4,793,000 for the year ended November 30, 1993.
Approximately $555,000 of the increase is attributable to the opening of two new
video stores in 1994 and $839,000 of the increase is attributable to five new
game stores which were open for only part of 1993 but were open for all of 1994.
The remaining increase is attributable to aggregate same store revenue increases
of approximately $349,000, or 7.7% for 1994.
Operating Costs and Expenses. Operating expenses increased $1,257,000 to
$4,302,000 for the year ended November 30, 1994 from $3,045,000 for the year
ended November 30, 1993, as a result of the two new video stores opened in 1994
and the five new games stores opened in 1993. Operating costs and expenses as a
percentage of total revenues increased slightly to 65.8% for 1994 from 63.5% for
1993, as operating expenses at new stores are generally a greater percentage of
revenues until those stores' revenues fully develop.
Cost of product sales increased $412,000 to $926,000 for the year ended
November 30, 1994 from $514,000 for the year ended November 30, 1993, as a
result of the year ended November 30, 1994 being the first full year of
operation for the five new game stores. Cost of product sales as a percentage of
product sales was 55.7% for 1994 and 55.8% for 1993.
General and administrative expenses decreased slightly by $29,000 to
$727,000 for the year ended November 30, 1994 from $756,000 for the year ended
November 30, 1993. No significant changes were made in the general and
administrative operations of the company during 1993 or 1994.
Interest Expense. Interest expense, net, increased by $23,000 to
$106,000 for the year ended November 30, 1994 from $83,000 for the year ended
November 30, 1993, as a result of increased borrowings to fund the two new video
stores and the five new games stores.
PREMIERE VIDEO
Premiere Video opened its first store in July 1985. At the time of the
Acquisition, Premiere Video operated 23 video stores located in Minnesota, South
Dakota, Iowa, Nebraska, and Wisconsin.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Premiere Video's results of operations for the quarter ended June 30,
1996 reflect the operations of 23 stores. Premiere Video's results of operations
for the quarter ended June 30, 1995 reflect the operations of 15 stores.
Revenues. Revenues increased $2,285,00, or 72.5%, to $5,437,000 for June
30, 1996 from $3,152,000 for June 30, 1995. The increase is attributable to the
8 new stores opened after June 30, 1995, and was partially offset by a $14,000
or 0.5%, decrease in revenues for stores that were open during both periods.
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Operating Costs and Expenses. Operating expenses increased $1,572,000 to
$3,362,000 for the six months ended June 30, 1996 from $1,790,000 for the six
months ended June 30, 1995. This increase corresponded to the increase in
revenues for the three months ended June 30, 1996 and was attributable to the
opening costs and operating of ten new stores. Operating costs and expenses, as
a percentage of total revenues, increased to 61.8% for the six months ended June
30, 1996 from 56.8% for the six months ended June 30, 1995.
Cost of product sales increased $413,000 to $908,000 for the six months
ended June 30, 1996 from $495,000 for the six months ended June 30, 1995,
corresponding to the increased revenues from product sales. Cost of sales as a
percentage of total revenues increased to 16.7% for the six months ended June
30, 1996 from 15.7% for the six months ended June 30, 1995.
General and administrative expenses increased $151,000 to $272,000 for
the six months ended June 30, 1996 from $121,000 for the six months ended June
30, 1995. General and administrative expenses as a percentage of total revenues
increased to 5.0% for the six months ended June 30, 1996 from 3.8% for the six
months ended June 30, 1995.
Interest Expense. Interest expense decreased $19,000 to $59,000 for the
six months ended June 30, 1996 compared to $76,000 for the six months ended June
30, 1995. This decrease resulted primarily from a refinancing in the third
quarter of 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Premiere Video's results of operations for the year ended December 31,
1995 reflect the operations of 22 stores. Premiere Video's results of operations
for the year ended December 31, 1994 reflect the operations of 12 stores.
Revenues. Revenues increased $2,057,000 or 39.8% to $7,226,000 for 1995
from $5,169,000 for 1994. Approximately $1,432,000 of the increase related to
new stores opened during 1995. The remaining increase is attributable to a
$625,000, or 12.1%, increase in revenues from stores that were open all of 1995.
Operating Costs and Expenses. Operating expenses increased $1,416,000 to
$4,765,000 for 1995 from $3,349,000 in 1994. This increase corresponded to the
increase in revenues in 1995 and was attributable to the opening costs and
operating of ten new stores. Operating costs and expenses, as a percentage of
total revenues, increased to 65.9% for the year ended December 31, 1995 from
64.8% for the year ended December 31, 1994.
Cost of product sales increased $342,000 to $1,252,000 for 1995 from
$910,000 in 1994, corresponding to the increased revenues from product sales.
Cost of sales as a percentage of total revenues decreased to 17.3% for 1995 from
17.6% for 1994.
General and administrative expenses increased $120,000 to $397,000 for
1995 from $277,000 in 1994. General and administrative expenses as a percentage
of total revenues increased to 5.5% for 1995 from 5.4% for 1994.
Interest Expense. Interest expense increased $21,000 to $140,000 for
1995 from $119,000 for 1994. This increase resulted primarily from increased
borrowings to open the ten new stores.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Premiere Video's results of operations for the year ended December 31,
1994 reflect the operations of 12 stores. Premiere Video's results of operations
for the year ended December 31, 1993 reflect the operations of 9 stores.
Revenues. Revenues increased $1,041,000 or 25.3% to $5,169,000 for 1994
from $4,128,000 for 1993. Approximately $947,000 of the increase related to
three new stores opened during 1994. The remaining increase is attributable to a
$94,000, or 2.3%, increase in revenues for stores that were open all of 1994.
Operating Costs and Expenses. Operating expenses increased $834,000 to
$3,349,000 for 1994 from $2,515,000 in 1993. This increase corresponded to the
increase in revenues in 1994 and was attributable to the opening costs and
operating expenses of three new stores. Operating costs and expenses, as a
percentage of total revenues, increased to 64.8% for the year ended December 31,
1994 from 60.9% for the year ended December 31, 1993.
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Cost of product sales increased $313,000 to $910,000 for 1994 from
$597,000 in 1993, corresponding to the increased revenues from product sales.
Cost of sales as a percentage of total revenues increased to 17.6% for 1994 from
14.5% for 1993.
General and administrative expenses decreased $5,000 to $277,000 for
1994 from $282,000 in 1993. General and administrative expenses as a percentage
of total revenues decreased to 5.4% for 1994 from 6.8% for 1993.
Interest Expense. Interest expense increased $9,000 to $119,000 for 1994
from $110,000 for 1993. This increase resulted primarily from increased
borrowings to open the three new stores.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY
The Company's results of operations are affected by economic trends in
its market areas. To date, the Company has not operated during a period of high
inflation but believes that it would generally be able to pass on increased
costs relating to inflation to its customers.
The video and video game rental portions of the Company's business are
somewhat seasonal, with revenues in April, May, September and October generally
being lower compared to other months of the year due to the weather in the
spring, and the start of school, the football season and the new television
season in the fall. Future operating results may be affected by many factors,
including variations in the number and timing of store openings, the public
acceptance of new release titles available for rental and sale, the timing of
the acquisition of existing video specialty retail stores, the extent of
competition, marketing programs, weather, special or unusual events and other
factors that may affect retailers in general. Any concentration of new store
openings and the related pre-opening costs in any particular fiscal quarter
could have a material adverse effect on the Company's operating results for that
quarter.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's primary long-term capital needs are for opening and
acquiring new stores. The Company expects to fund such needs through cash flows
from operations, borrowing under credit facilities, operating equipment leases
and the net proceeds from the sale of debt and equity securities.
In August 1995 the Company closed its initial public offering and
received net proceeds of approximately $37.0 million. The proceeds were
initially used (i) to pay the $22.4 million cash portion of the Initial
Acquisitions, which were closed concurrently on August 9, 1995, and (ii) to
repay approximately $4.2 million of long-term indebtedness assumed in connection
with the Initial Acquisitions and $1.4 million of long-term indebtedness of the
Predecessor. The remaining amount, $8.9 million, was invested temporarily in
short-term securities and was subsequently used to acquire additional
superstores ($3.4 million), open new superstores ($1.7 million), purchase
computer equipment ($560,000) and for general corporate purposes ($3.2 million).
In December 1995 and January 1996 the Company borrowed a total of $6.5
million under an existing revolving credit facility from a bank. The proceeds
were used to fund a portion of the Recent Acquisitions. In addition, in January
1996 the Company borrowed $2.0 million (the "Subordinated Credit Facility"),
which is subordinated to the Company's revolving credit facility. Borrowings
outstanding under this Subordinated Credit Facility bear interest at an annual
rate equal to 13% and mature in January 2001. In conjunction with this
financing, the Company issued the lender a warrant to purchase 20,000 shares of
Common Stock at an exercise price of $10.80 per share.
In March 1996, the Company signed a revolving credit facility (the
"Facility") for up to $22.5 million to replace its existing credit facilities.
The available amount of the Facility will reduce quarterly beginning on March
31, 1997 with final maturity of June 30, 1998. The interest rate of the Facility
is variable based on LIBOR (i.e., the London Inter-Bank Offer Rate) and the
Company may repay the Facility at any time without penalty. As of September 30,
1996, the Company had outstanding borrowings of $13.8 million and had $3.6
million available under the Facility. The Company has the option to choose the
one-month, the three-month or the six-month LIBOR rate. The rate chosen by the
Company will then remain in effect for the period corresponding to that rate.
The Company used $2.6 million of the line of credit to support a letter of
credit to secure the final payment due in January 1997 in connection with the
Premiere Video Acquisition. See "The Acquisitions."
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In July 1996, the Company completed a public offering of 2.8 million
shares and received net proceeds of approximately $19.7 million. On July 31,
1996 the underwriters exercised their over-allotment option for 420,000
additional shares of common stock and the Company received net proceeds of $3.1
million. The proceeds were initially used (i) to fund the $8.9 million cash
payable at closing of the Premiere Video acquisition, (ii) to repay $3.5 of
long-term indebtedness, (iii) to repay $3.0 million of outstanding borrowings
under the Company's bank line of credit, and (iv) the remaining Proceeds were
temporarily placed in short-term securities and will be used to finance new
store openings and acquisitions of other businesses that are consistent with the
Company's growth strategy.
The Company funds its short-term working capital needs, including the
acquisition of videos and other inventory, primarily through cash from
operations. The Company expects that cash from operations will be sufficient to
fund future video and other inventory purchases and other working capital needs.
Under generally accepted accounting principles, rental inventories are treated
as non-current assets because they are not assets that are reasonably expected
to be completely realized in cash or sold in the normal business cycle. Although
the rental of this inventory generates a substantial portion of the Company's
revenue, the classification of these assets as noncurrent excludes them from the
computation of working capital. The cost of video inventory purchases, however,
is reported as a current liability until paid, and accordingly, is included in
the computation of working capital. Consequently, the Company believes working
capital is not an appropriate measure of its liquidity and it anticipates that
it will operate with a working capital deficit during 1996.
During 1995, net cash provided by operating activities was $9.3 million.
Net cash used in investing activities was $17.6 million, consisting primarily of
$3.5 million used to pay the cash portion of certain of the Recent Acquisitions,
$8.3 million to acquire rental inventory and $5.9 million used to purchase
furniture and fixtures. Net cash provided by financing activities was $11.7
million. Financing sources of cash consisted of $36.9 million from the initial
public offering ("IPO") and $4.1 million from issuance of long-term debt. The
primary financing uses of cash were the payment of $22.4 million in the form of
a deemed dividend in connection with the Initial Acquisitions and $9.2 million
to repay long-term debt. At December 31, 1995, the Company had cash of $3.6
million.
For the six months ended June 30, 1996, net cash provided by operating
activities was $10.1 million. Net cash used in investing activities was $19.5
million, consisting primarily of $2.4 million used to pay the cash portion of
the Showtime acquisition, $10.8 million to acquire rental inventory, and $7.1
million to purchase furniture and fixtures offset by $746,000 received from the
sale of the grocery division. Net cash provided by financing activities was $6.0
million consisting of $10.3 million from increased line of credit borrowing and
$2.0 million from the issuance of long-term debt offset by $6.3 million of
repayments of long-term debt. At June 30, 1996 the Company had cash of $191,000.
The Company's capital expenditures in 1996 will continue to focus on
opening new stores, converting stores to the Moovies name and logo and
implementing a new MIS. The Company intends to open approximately 50 superstores
in 1996 (including 32 superstores already opened through September 30, 1996).
The Company estimates that the total cash required to open a new Moovies
superstore, including store fixtures and equipment, leasehold improvements and
rental and sale inventory, typically ranges from $250,000 to $300,000 per
superstore. In addition, the Company intends to complete the conversion of the
remaining stores acquired in connection with the Premiere acquisition to the
Moovies name and logo at an estimated aggregate cost of approximately $500,000
to $1.0 million. The Company's MIS is currently being used in approximately all
of its video specialty stores except for the 23 stores which were acquired in
connection with the Premiere Video acquisition. In early 1997, the Company
intends to replace the various systems used by the Premiere Video stores with
this system and to improve the computerized information systems at the corporate
offices at an estimated aggregate cost of approximately $1.0 million.
The Company has had preliminary discussions with numerous video rental
store owners at various times regarding the potential acquisition of their
stores. Management expects that some of these discussions will result in new
acquisitions, although the Company has no agreements or commitments to acquire
stores except as described herein. The Company is engaged in negotiations with
the owners of a total of 23 video retail stores and franchisor's rights in
regard to a total of 45 video retail stores. The Company has not entered into a
definitive agreement in regard to the acquisition of any of such stores or
franchisor's rights, and there can be no assurance that it will do so. See "The
Acquisitions."
The Company believes that cash from operations and borrowing
availability under its existing credit facilities will be sufficient to fund its
existing operations, including its planned capital expenditures and new store
openings, through December 31, 1996.
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SELECTED ACQUISITION COMPANIES
Movies to Go funded its operations primarily through cash flow from
operations. New store openings and other purchases of furnishings and equipment
required approximately $1.4 million and $998,000 for the years ended November
30, 1994 and 1993, respectively. Movies To Go borrowed approximately $388,000
and $139,000 for the years ended November 30, 1994 and 1993, respectively, to
finance the new store openings and the purchases of the furnishings and
equipment and the remaining amounts were funded by cash flows from operations.
Movies to Go's cash provided by operations was $1.6 million for the year ended
November 30, 1994 compared to $1.3 million for the same period in 1993.
Pic-A-Flick Group funded its operations primarily through cash flow from
operations. New store openings and other purchases of furnishings and equipment
required approximately $498,000 for the eleven months ended November 30, 1995
and $363,000 for the year ended December 31, 1994. These new store openings and
the purchases of furnishings and equipment were funded entirely by cash flows
from operations. Pic-A-Flick Group's cash provided by operations was $2.3
million for the eleven months ended November 30, 1995 compared to $2.0 million
for the year ended December 31, 1994.
Movie Store Group funded its operations primarily through cash flow from
operations. New store openings and other purchases of furnishings and equipment
required approximately $84,000 for the eleven months ended November 30, 1995 and
$78,000 for the year ended December 31, 1994. The Movie Store Group borrowed
approximately $25,000 from unrelated parties and $150,000 from related parties
during the eleven months ended November 30, 1995 and $128,000 from related
parties during the year ended December 31, 1995 to finance the new store
openings and the purchases of the furnishings and equipment and to fund its
operations. Movie Store Group's cash provided by operations was $1.3 million for
the eleven months ended November 30, 1995 compared to $1.6 million for the year
ended December 31, 1994.
Premiere Video funded its operations primarily through cash flow from
operations. New store openings and other purchases of furnishings and equipment
required approximately $1.5 million and $653,000 for the years ended December
31, 1995 and 1994, respectively. Premiere Video borrowed approximately $1.8
million and $230,000 from related parties during the years ended December 31,
1995 and 1994, respectively, to finance part of the cost of the new store
openings and the purchases of furnishings and equipment. The remaining amounts
were funded by cash flows from operations. New store openings and other
purchases of furnishings and equipment were approximately $401,000 for the six
months ended June 30, 1996. These amounts were funded entirely by cash flows
from operations. Premiere Video's cash provided by operations was $2.9 million
for the year ended December 31, 1995 compared to $2.2 million for the year ended
December 31, 1994. Premiere Video's cash provided by operations was $2.2 million
for the six months ended June 30, 1996.
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BUSINESS
GENERAL
The Company currently operates 203 video specialty superstores located
in Georgia, South Carolina, North Carolina, Tennessee, Virginia, Pennsylvania,
New Jersey, New York, Connecticut, Ohio, Iowa, Colorado, Minnesota, Wisconsin,
South Dakota, and Nebraska. The Company's superstores rent and sell a wide range
of videos and video games, rent video players and video game equipment, and sell
video accessories such as blank cassettes, cleaning equipment and a variety of
confectionery items. Tonight's Feature, the Company's predecessor, opened its
first store in 1989 and in 1992 introduced the Moovies superstore format which
was the prototype for the Company's stores. Substantially all of the Company's
stores are now operating under the Moovies name and logo except for stores
acquired in the "Premiere Video" acquisition in July 1996, and the Company
expects to convert those stores by the end of the first quarter of 1997.
VIDEO RETAIL INDUSTRY
According to estimates published in an Industry Report, the video rental
and sales industry has grown from $0.7 billion in revenues in 1982 to $14.8
billion in 1995 and is projected to reach $19.1 billion in 2000. Annual
revenues, according to Industry Reports, increased each year. The industry is
highly fragmented. An Industry Report estimates that in 1994 there were
approximately 27,400 video specialty stores, including 6,100 superstores, in the
United States. Only nine multiple store businesses operated in excess of 100
stores in 1995. Few single store owners are able to expand to multiple store
operations, in part due to the difficulty of obtaining working capital financing
from banks. Multiple store operations that do exist are generally chains of
fewer than 50 stores. Because of a recent trend toward consolidation in the
video retail industry, the Company believes, and its experience has been, that
many smaller chain operators perceive the need to join larger organizations for
enhanced access to working capital, marketing efficiencies and other economies
of scale to compete successfully in the future. The Company believes it is well
positioned to benefit from this consolidation trend by acquiring successful
smaller chain operations.
Although the domestic video retail industry includes both rentals and
sales, consumers primarily rent rather than buy videos. By setting wholesale
video prices, movie studios influence the relative levels of video rentals
versus sales. Videos released at a relatively high price, typically $60 to $67,
are purchased by video specialty stores and are offered primarily as rental
titles. Videos released at a relatively low price, typically $8 to $17 and known
as "sell-through", are purchased by video specialty stores and are generally
offered as both rental and sales titles. Typically, movie studios attempt to
maximize total revenue from video releases by maintaining prices at a relatively
high level during the first six months to one year after a new release, during
which time sales will be made primarily to video specialty stores for rental,
and then re-releasing the video at a lower price to promote sales.
From time to time, however, movies that are believed to have mass
appeal, such as Forrest Gump and The Lion King, are initially released as
sell-through titles. The Company believes that the studios release videos on a
sell-through basis when they estimate that the lower selling price will generate
six or more times the unit volume of a higher priced rental tape. Mass appeal
sell-through tapes also enable video store operators to purchase large
quantities of popular titles that can draw customers into the stores.
Sell-through titles are dominated by children's or family videos which are
replayed numerous times in the home and are thus more likely to be purchased
than rented. These "sell-through" titles are also placed in the rental pool and
can generate significant cash flow for the stores since the lower cost of the
tapes is recovered in three to six rentals as opposed to 20 to 23 rentals for a
typical rental title. The Company believes that the ability to offer more copies
of a popular title when it is priced for sell-through combined with the higher
profits from rentals that do occur in those titles more than offsets the
potential rental revenues lost when such tapes are purchased by some consumers.
According to an Industry Report, total United States consumer filmed
entertainment spending has increased from approximately $4.7 billion in 1980 to
approximately $39.6 billion in 1994. According to an Industry Report, in 1994
the home video market was the largest single source of revenue to movie
distributors, accounting for approximately 46% of movie distributors' worldwide
revenue. The Company believes that home video revenues are important to the
success of the studios and could not be easily replaced through other
distribution channels. Of the many movies produced by major studios and released
in the United States each year, relatively few are profitable for the studios
based on box office revenue alone. In addition to purchasing box office hits,
video specialty stores typically purchase movies on video that were not
successful at the box office as customers will often rent a video that they
might not view at a theater. The Company believes the consumer is more likely to
view movies that were not box office hits on a rented video than on any other
medium because video specialty stores provide an inviting opportunity to browse
and make an impulse choice among a very broad selection of movie titles at a
relatively low price. Purchases by the video stores provide the major movie
studios with a reliable source of revenue for the majority of their movies.
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Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. These distribution channels currently include, in
release date order, movie theaters, video specialty stores, Pay-Per-View, pay
television, basic cable television, direct broadcast satellite and network and
syndicated television. The Company believes that this method of sequential
release has allowed movie studios to increase their total revenue with
relatively little adverse effect on the revenue derived from previously
established channels and that movie studios will continue the practice of
sequential release as new distribution channels become available. The Company
believes that video stores with their broad purchases will continue to occupy
the first release date window after the box office. Some studios, notably
Disney, have released titles directly to video without exhibiting them at
theaters.
BUSINESS AND EXPANSION STRATEGY
The key elements of the Company's business and expansion strategy are:
Superstores. The Company believes that focusing on the superstore format
will enhance the Company's profitability. Superstores are defined in an Industry
Report as stores carrying 7,500 or more rental videocassettes. The Company
believes that the superstore format is generally the most profitable format. 189
of the Company's stores are superstores. The most significant advantages of the
superstore format include the following:
o A broader selection of titles and greater availability of new
releases, which generate increased customer traffic;
o Sufficient floor space to develop categories and themes and to create
an entertaining environment; and
o Reduced labor costs (the Company's highest operating expense) as a
percentage of revenues.
These characteristics enable superstores to produce revenues and profit
levels sufficient to pay the generally higher lease rates of preferred store
locations.
Customer Service. The Company seeks to provide a high level of customer
service at each of its stores. The Company offers a broad selection of new
releases and catalog product, is committed to offering more copies of the newest
releases than many of its competitors, provides customers with personalized
attention and maintains a fun, family-oriented environment centered around the
"Moovies" theme.
Geographic Concentration. The Company prefers to concentrate its new
store openings and activities in the areas in which other Moovies stores are
located to maximize operating efficiencies. The Company believes that a
geographic concentration allows the Company to more easily monitor store
operations through its area management structure and to achieve operating
efficiencies in inventory management, marketing, distribution, training and
store supervision. The Company will move to new geographic areas when it sees an
opportunity to be a top competitor in a particular market. A key benefit to
operating multiple stores is the Company's ability to receive relatively large
aggregate cooperative advertising credits from its distributors and use them
more efficiently than smaller competitors. The Company receives cooperative
advertising credits for each store it operates, and by operating multiple stores
in a single geographic market, the Company can more effectively use cooperative
advertising credits to maximize the impact of its advertising.
Targeted Acquisitions. The Company believes that acquiring clusters of
superstores in targeted market areas is often the most cost-effective means of
entering a new market, particularly when the stores are in desirable locations.
Other than its preference for concentrating new store openings and acquisitions
in areas where it already has stores, the Company does not focus its acquisition
searches on specific regions of the country, preferring instead to evaluate
opportunities as and where they arise. Because of a recent trend toward
consolidation in the industry, the Company believes smaller chain operators
perceive the need to join larger organizations for enhanced access to working
capital, marketing efficiencies and other economies of scale to compete
successfully in the future. This has created an opportunity for the Company to
grow further through acquisitions, and as a result, the Company believes that it
will continue to be presented with attractive acquisition opportunities
throughout the U.S. See "Risk Factors--Acquisition Risks," "Risk
Factors--Financing Growth Strategy," and "The Acquisitions."
New Store Development. The Company intends to expand its operations
through new store openings. The Company opened 15 new Moovies superstores from
the date of the Company's initial public offering to December 31, 1995. Through
September 30, 1996 the Company has opened 32 additional stores and closed or
sold a total of 5 stores. The Company anticipates opening approximately 18
additional new superstores by the end of 1996, principally in markets with
multiple shopping areas and a sufficient population base to support more than
one video specialty store operator. The Company generally intends to open these
stores in geographic areas where the Company is already operating stores and
attractive acquisition opportunities are not available. The Company currently
estimates that the total cash required to open a new
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Moovies superstore, including store fixtures and equipment, leasehold
improvements and rental and sale inventory, typically ranges from $250,000 to
$300,000 per superstore.
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STORE LOCATIONS
The following table sets forth the locations of the Company's stores as
of September 30, 1996:
CONNECTICUT
Fairfield
COLORADO
Boulder
Brighton
Greeley
Fort Collins (4)
GEORGIA
Athens (2)
Atlanta (10)
Augusta (3)
Dublin
Gainesville
Lawrenceville
Macon (2)
Milledgeville
Savannah (2)
Stockbridge
Toccoa
IOWA
Ames (2)
Ankeny
Carroll
Cedar Rapids
Coralville
Council Bluffs
Des Moines (5)
Iowa City
Sioux City (2)
Urbandale
Waterloo
West Des Moines(3)
MINNESOTA
Bemidji
Brainerd
Sauk Rapids
Savage
St. Cloud
NEBRASKA
Columbus
Kearney
Norfolk
South Sioux City
NEW JERSEY
Cinnaminson
Edgewater
Ewing
Mahwah
Westwindsor
NEW YORK
Fishkill
Larchmont
Middletown
Nanuet
Newburgh (2)
Pleasant Valley
Port Chester
Poughkeepsie
Stony Point
Wappingers Falls
White Plains
NORTH CAROLINA
Asheville (2)
Charlotte (5)
Clyde
Concord
Elizabeth City
Gastonia
Greensboro
Greenville
Jacksonville (2)
Jamestown
Mooresville
Pineville
Raleigh
Wilmington (3)
OHIO
Ashland
Ashtabula
Austintown
Boardman
Calcutta
Conneaut
Cortland
Garrettsville
Newton Falls
Niles
Norwalk
Ravenna
Struthers
Warren (4)
Youngstown (4)
PENNSYLVANIA
Altoona
Drescher
Du Bois
Johnstown
Kittanning
New Castle
Philadelphia (11)
SOUTH CAROLINA
Anderson (2)
Chester
Clemson
Columbia (3)
Easley (2)
Greenville (9)
Greenwood
Greer (2)
Lexington (2)
Newberry
Orangeburg
Pickens
Powdersville
Seneca
Spartanburg
Union
Williamston
SOUTH DAKOTA
Brooking
Sioux Falls (3)
Yankton
TENNESSEE
Kingsport
VIRGINIA
Blacksburg
Chesapeake (4)
Christianburg
Martinsville
Norfolk (2)
Poquoson
Portsmouth
Radford
Roanoke
Salem
Suffolk
Tabb
Virginia Beach (6)
WISCONSIN
Marshfield
Plover
Shawano
Sturgeon Bay
Two Rivers
In addition, as of September 30, 1996 the Company had signed leases for 23 new
store sites, including 14 new stores under construction.
MERCHANDISING
A typical Company superstore carries a broad selection of new release
titles (videos released in the last 12 months) and approximately 8,500 catalog
titles (generally, videos in release for over 12 months). Each store has a few
special interest titles, covering subjects such as sports, exercise and
education, which are selected to appeal to the customer base in the particular
store's market area. Movies are listed and displayed alphabetically within each
category. In 1995, over 82% of the Company's pro forma net revenues and 82% of
its actual net revenues were derived from the rental of videos and video games.
In 1995, over 17% of the Company's pro forma net revenues and 17% of its actual
net revenues were derived from the sale of videos, including previously rented
videos, video games and other products.
The Company generally has a three day, two night rental term for both
new releases and catalog titles. The Company is committed to offering more
copies of popular new releases than its competitors. See "Competition." In the
case of a major box office hit offered for rental, the Company typically orders
20 to 40 copies of that title for each store and may order as many as 200 copies
for a single store. For each superstore, the Company bases the selection and
quantity of videos on demographic data for the region or neighborhood in which
the store is located, as well as the past or projected performance of that
store. Upon conversion to the Moovies format, the Company will not rent or sell
adult movies. The
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Company is in the process of phasing out the limited number of adult videos that
were acquired in connection with the Initial Acquisitions. The Company assesses
late fees for videos returned beyond the initial term.
As of September 30, 1996, substantially all of the Company's stores were
operated under the Moovies name and logo except for stores acquired in the
"Premiere Video" acquisition in July 1996, and the Company expects to convert
those stores by the end of the first quarter of 1997. Moovies stores feature
distinctive signs and colorful awnings on the store's exterior and interior.
"Moo Releases" (new releases) are displayed alphabetically along the perimeter
of each store for easier selection by customers. The Company's new prototype
store will incorporate a children's section complete with a monitor playing
children's videos.
MARKETING AND ADVERTISING
The Company markets its stores and merchandise through radio and direct
mail and to a lesser extent through newspaper advertising, discount coupons,
celebrity appearances and promotional materials. The Company also publishes a
proprietary monthly video guide designed to help customers make video
selections. The cost of these activities is primarily funded through advertising
allowances and market development funds that the Company receives from its video
wholesale suppliers. In addition, the Company benefits from the advertising and
marketing of studios and theaters in connection with their efforts to promote
films and increase box office revenues. The Company's advertising emphasizes the
stores' selection and service and also promotes the Company's family
orientation.
STORES
The Company's management structure is designed to enhance the overall
performance of the Company's video specialty stores by providing more consistent
and supportive supervision of store operations. The Company's operations are
divided into eight geographic areas, each of which has district managers
responsible for store operations within the area. Each of the Company's stores
is managed by a full time store manager, who typically has one assistant
manager.
Management believes that the concentration of the Company's stores in
clusters enhances the Company's control of its store operations and enables the
Company to respond more quickly to changing market conditions. Because the
Company's stores are geographically concentrated, area managers typically visit
stores within their respective areas at least twice a month. These visits are
made to ensure adherence to Company-specified operating standards and to discern
current market information. In addition, area managers meet on a regular basis
with other senior management at the Company's headquarters to discuss their
operations. The Company believes that these meetings facilitate prompt
decision-making and enable the Company to respond rapidly to changing market
conditions and consumer demand.
In choosing new store sites, the Company considers such factors as
visibility, access, traffic volume, consumer demographics and convenience to
residential neighborhoods, regardless of the proximity of competing video
specialty stores. Company superstores are generally located in trade areas with
populations of more than 15,000, such as suburbs of metropolitan markets. The
Company's stores have generally performed well in close proximity to competing
superstores, which the Company believes is due in part to unsatisfied market
demand. The Company's stores generally are located in stand-alone sites or strip
shopping centers for heightened visibility, with a preference for end-cap
locations. The Company's stores range in size from approximately 3,000 to 11,000
square feet, with an average size of approximately 5,700 square feet. Most of
the stores are leased pursuant to leases with terms ranging from one to ten
years and varying renewal options. The Company is responsible for taxes,
insurance and utilities under most of these leases. Generally, the Company's
stores are open seven days a week, from 10:00 a.m. to 11:00 p.m.
In executing its new store development strategy, the Company estimates
that its gross investment in each new Moovies superstore, including store
fixtures and equipment, leasehold improvements and rental and sale inventory,
generally has been and will be approximately $250,000 to $300,000.
As a result of one of its acquisitions, the Company supplied and managed
the video inventory of video departments located in approximately 80
supermarkets in several states. The Company generally received approximately 75%
of the revenues from such operations. In 1995, the revenues received by the
Company from the supermarket operations of the entity acquired were
approximately $456,000. The Company sold this business in March 1996 to enable
the Company to focus its resources on the operation of video specialty stores.
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INVENTORY AND MANAGEMENT INFORMATION SYSTEMS
The Company aggressively manages its store inventory. In each of its
markets, management seeks to maintain the largest selection of new releases and
catalog product that is consistent with long-term store profitability. Buying
decisions are made centrally and are based on the size of the active customer
base, new release dates, box office results, industry newsletters and
management's knowledge of the popularity of certain types of movies in its
markets. The Company believes that centralized buying allows it to obtain better
volume discounts. Rentals are monitored on a daily basis in each store, enabling
the Company to reallocate videos and video games among stores to respond to
customer demand and enhance profitability.
The Company is installing a new management information system ("MIS").
As of September 30, 1996, the new system was installed in all stores except the
23 "Premiere Video" stores. The Company expects the new system to be implemented
in the Premiere Video stores it now operates by the first quarter of 1997. The
new MIS uses a point-of-sale ("POS") computer located at each store that records
all rental and sale information upon customer checkout using scanned bar code
information and updates such information when the videos and video games are
returned. This POS system is tied to a computerized information system at the
corporate offices. The Company believes data generated by the MIS will help
management monitor store operations and inventory more effectively and at lower
cost than the previous systems. The Company also believes its ability to review
rental history by title and location will assist it in making purchasing
decisions with respect to new releases. The MIS can also enable the Company to
perform its periodic physical inventory using bar code recognition, which is
more efficient, more accurate and less costly than a manual count.
While management believes that disruptions caused by the implementation
of the new system in the Company's Premiere Video stores have been and will be
minor, there can be no assurance that such implementation, which will involve,
among other things, the retraining of existing employees, will not cause a
significant disruption in store operations that would materially adversely
affect the Company's financial condition and results of operations.
SUPPLIERS
The video inventory in each of the Company's stores consists of catalog
and new release titles, which it either purchases or rents. The Company
purchases approximately 83% of its new release videos and all of its catalog
videos directly from video wholesalers. The Company purchases from such
wholesalers rather than directly from movie studios because the Company believes
that the cost savings of direct purchases would not offset the expense to the
Company of establishing its own distribution system. Currently, the typical cost
of new release videos purchased by the Company is approximately $60 to $67 for
titles the Company will rent and $8 to $17 for titles acquired for sell-through
as well as for rental. Catalog titles also typically cost from $8 to $17. The
Company has historically used two primary suppliers, Rentrak, and Baker & Taylor
Entertainment, a division of Baker & Taylor ("BTE") to fulfill the majority of
its video needs. BTE and Mr. John Taylor, the Company's Chief Executive Officer,
are not affiliated. The Company may expand its group of primary suppliers with
one or more additional sources. The Company believes that if its relationships
with its primary suppliers are terminated, the Company could obtain videos from
other suppliers at prices and on terms comparable to those available from its
current suppliers.
The Company also rents new release titles under revenue sharing
arrangements. The Company presently spends approximately 17% of its new release
budget to obtain new releases from Rentrak pursuant to a long-term revenue
sharing agreement. Under this agreement, the Company is obligated to obtain a
minimum annual dollar amount of new release titles from Rentrak. The Company may
choose which stores offer a title from Rentrak, but if a store obtains a copy of
a new release title from Rentrak it must obtain all copies of that title from
Rentrak. The Company believes that Rentrak is often a more cost effective source
for larger orders of an individual title and typically chooses to use Rentrak
titles in newly opened stores or stores with significant competition in order to
build customer traffic. Using Rentrak enables the Company to order larger
numbers (often 3 times as many) of copies of a particular title to satisfy
customer demand than would be cost-effective if the copies were purchased for
rental and allows the Company to order a large number of copies for certain
stores to meet most of the heavy initial demand that exists during the first few
weekends after a title's release. When the Company chooses to offer a title
under the Rentrak agreement a minimum number of copies for each store is often
established by Rentrak based on prior experience with similar titles. The
Company believes that these minimum order requirements have not been burdensome
since it typically orders large numbers of copies when it chooses a Rentrak
title. The Company is able to obtain a wide variety of titles under this
agreement since Rentrak has a supplier relationship with four of the six largest
studios.
During the revenue sharing period, which is generally one year (but does
not exceed two years) per title, the movie studio retains ownership of the video
and the Company shares the rental revenue with Rentrak rather than purchasing
the
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video for a fixed cost. In addition, the Company must make an initial payment in
the form of a handling charge of from $8 to $10 per video obtained pursuant to
this agreement. At the end of the revenue sharing period for a title, the
Company has the option to purchase the copies of that title, generally for less
than $5 per copy. Revenue sharing reduces the risk that the Company will be
unable to recover the acquisition cost of a video through rental revenue before
the popularity of the title declines significantly. In order to obtain the full
benefits of the Rentrak revenue sharing arrangement, the Company must correctly
identify the new release titles that it should lease from Rentrak and the stores
which should receive them. Because the Company's percentage share of revenue
under the Rentrak agreement is fixed, to the extent that the Company obtains new
release videos from Rentrak for too many or the wrong stores, the Company's
profits may be adversely affected. See "Risk Factors -- Inability to Obtain and
Adequately Manage Leased Inventory."
The Rentrak agreement has an expiration date in August 2005. However,
the agreement contains a provision which automatically extends the term of the
agreement in the event the Company fails to properly install the point of sale
computer system and the interface with Rentrak's computer system within
specified time periods. Rentrak has asserted that, because of certain alleged
delays by the Company, the agreement has a current term which expires in more
than 130 years. Notwithstanding the alleged extensions, the agreement provides
that the Company has a right to terminate the agreement on one year's notice if
Mr. Ron Berger, age 48, ceases for any reason to be the president and chief
executive officer of Rentrak. Rentrak has also asserted that the Company is
obligated to pay it a penalty arising from late payments and that the Company is
in default under several provisions of the agreement. The Company disputes this
assertion. Rentrak and the Company are currently engaged in negotiations with
regard to amending the terms of the agreement. Although there can be no
assurance that the Company will be able to resolve the dispute with Rentrak on a
basis consistent with the Company's current proposals, management of the Company
believes that the Company's overall relationship with Rentrak is satisfactory
and that resolution of the dispute with Rentrak will not have a material adverse
effect on the Company's financial condition or results of operations.
The Company purchases approximately 60% of its new release titles from
BTE pursuant to a letter agreement that expires April 1, 1997. The Company
believes that BTE is a major supplier in the wholesale video industry. The BTE
agreement provides for purchase of videos at a set discount from manufacturers
suggested retail price, and allows the Company to return overstock items for a
specified percentage credit against future purchases. The Company believes that
it is a major customer of BTE and that the terms of the BTE agreement are
competitive within the video wholesale market.
COMPETITION
The video retail industry is highly competitive. The Company's stores
compete with other video specialty stores, including stores operated by regional
and national chains, such as Blockbuster, and with other businesses offering
videos and video games, such as supermarkets, pharmacies, convenience stores,
bookstores, mass merchants, mail order operations and other retailers. Some of
the Company's competitors, including Blockbuster, have significantly greater
financial and marketing resources, market share and name recognition than the
Company. In addition, the Company's stores compete with other leisure-time
activities, including movie theaters, network, cable and direct broadcast
satellite television, live theater, sporting events and family entertainment
centers. However, many of these have a higher per-person cost than the rental of
a video. See "Risk Factors--Competition."
The Company believes the principal competitive factors among
participants in the video retail industry are store location and visibility,
title selection, the number of copies of each new release available and customer
service. While the Company does not believe that price is a significant
competitive factor among video retailers, the Company believes that price is a
significant factor relative to competition with movie theaters and other forms
of entertainment. The Company's goal is to generally offer a high level of
service and more titles and more copies of new releases than its competitors.
The Company's stores also compete with Pay-Per-View cable television
systems, in which home subscribers pay a fee to see a movie selected by the
subscriber. Existing Pay-Per-View services offer a limited number of channels
and movies and are generally available only to households with a converter to
unscramble incoming signals. Recently developed technologies, however, permit
certain cable companies, direct broadcast satellite companies, telephone
companies and other telecommunications companies to transmit a much greater
number of movies to homes in more markets as frequently as every five minutes,
referred to as "Near Video-on-Demand." These technologies, by providing
alternatives to home video rentals and purchases, could have a material adverse
effect on the Company's business. None of these technologies, however, currently
have penetration in the consumer market as high as the 80% penetration of the
VCR nor currently represent as large a percentage of revenue to the movie
studios as video specialty stores. Over the long term, further improvement in
these technologies could lead to the availability of a broad selection of movies
to consumers on demand, referred to as "Video-on-Demand," at a price which is
competitive with the price of video rentals, which could have a material adverse
effect on the Company's financial condition and results of operations. Although
the Company does not
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believe that these technologies represent a competitive threat to its business
within the next five years, technological advances or changes in the manner in
which movies are marketed, including the earlier release of movie titles to
cable television or other distribution channels, could make these technologies
more attractive and economical, which could have a material adverse effect on
the business of the Company and on the Company's financial condition and results
of operations. See "Risk Factors-- Technological Obsolescence."
EMPLOYEES
As of September 30, 1996, the Company employed approximately 3,000
persons, of whom 670 were employed on a full-time basis. None of the Company's
employees are represented by a labor union, and the Company believes that its
relations with its employees are good.
PROPERTIES
All of the Company's stores are leased pursuant to leases with terms
ranging from one to fifteen years, with varying option renewal periods and which
range from approximately 3,000 to 11,000 square feet. The Company anticipates
that future stores will also be located on leased premises. See "Certain
Relationships and Related Transactions."
The Company occupies a leased corporate headquarters located at 201
Brookfield Parkway, Greenville, South Carolina. This facility consists of an
aggregate of approximately 27,000 square feet of office space.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
MOOVIES(TM). The Company has applied to register CLUB COW A BUBBA(TM), HOLY COW
WHATTA VIDEO STORE!(TM) and certain other logos for video rental services and
promotional products related to its business.
LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that
management believes is likely to have a material adverse effect on the Company's
financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
September 30, 1996 are as follows:
Name Age Position
- ---- --- --------
John L. Taylor ....... 45 President, Chief Executive Officer,
Chairman of the Board
F. Andrew Mitchell ... 43 Chief Financial Officer, Director
Robert J. Klein ...... 48 Chief Operating Officer, Director
Victor B. John, III .. 43 Senior Vice President-Real Estate
Ross Miller .......... 42 Senior Vice President, General Counsel, Secretary
Jeffrey L. Plain ..... 36 Senior Vice President-Purchasing
Rokki Rogan .......... 38 Vice President-Acquisitions, Director
Michael A. Yeargin ... 48 Vice President-Administration, Director
Theodore J. Coburn ... 43 Director
Arthur F. Greeder, III 49 Director
Douglas M. Raines .... 47 Director
Charles D. Way ....... 43 Director
John L. Taylor has served as President, Chief Executive Officer and a
director of the Company since November 1994 and as Chairman of the Board since
November 1995. Mr. Taylor became President and Chief Executive Officer of the
Predecessor in September 1994. From March 1986 through July 1989 Mr. Taylor was
President and Chief Operating Officer, and thereafter through July 1994 was
President and Chief Executive Officer, of Ingram Entertainment, Inc., the
largest video wholesaler in the United States. Mr. Taylor graduated in 1976 from
the University of North Carolina, Charlotte, with a B.S.
in accounting.
F. Andrew Mitchell has served as Chief Financial Officer and as a
Director of the Company since March 1995. From 1987 to March 1995 Mr. Mitchell
was a partner with KPMG Peat Marwick LLP and was managing partner of the
70-person Greenville, South Carolina office for his last three and a half years
with that firm. During his 20-year career with KPMG he had extensive experience
servicing public and privately-held clients in the financial institution,
entertainment and franchise restaurant industries. He graduated in 1975 from the
University of Cincinnati with a B.B.A. in accounting.
Robert J. Klein became Chief Operating Officer of the Company in February
1996 and a director of the Company in May 1996. From June 1995 to February 1996,
he served as Vice President, Chief Operating Officer--Eastern Pennsylvania and
New Jersey Region of the Company. From January 1994 to June 1995, Mr. Klein was
President of Planet Video, which sold its two video specialty stores to the
Company in August 1995. From March 1990 to May 1993, Mr. Klein was a Senior Vice
President of Choices Entertainment Corporation, a video retail company. Mr.
Klein received his B.S. from Temple University in 1970 and a M.A. in
administration in 1975 from Villanova University.
Victor B. John, III became Vice President--Real Estate of the Company in
June 1995 and Senior Vice President in March 1996. From 1982 to June 1995, Mr.
John was a broker with Edens and Avant, Incorporated, a commercial real estate
firm in Columbia, South Carolina.
Ross Miller became Senior Vice President and General Counsel of the
Company in January 1996 and became Secretary of the Company in March 1996. From
1994 to December 1995, Mr. Miller was corporate counsel with the Atlanta,
Georgia law firm of Rogers & Hardin. From 1991 to 1994, Mr. Miller was a partner
in the Chicago law firm of Schwartz, Cooper, Greenberger & Krauss. From 1986 to
1991, Mr. Miller was a partner in the Chicago law firm of Katten Muchin & Zavis.
Mr. Miller received an A.B. degree from the University of North Carolina at
Chapel Hill, a J.D. from the University of
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Michigan Law School and a L.L.M., in International and Comparative Law, from the
University of Brussels. Mr. Miller is a member of the Georgia, Illinois, Texas,
and New York bars.
Jeffrey L. Plain became Vice President--Purchasing in September 1995 and
Senior Vice President in March 1996. From 1989 to 1992, Mr. Plain was an Area
Manager, and thereafter through September 1995, was Director of Purchasing for
the New York Video and New England Video Limited Partnerships, which are
Blockbuster Video franchisees operating stores in New York and Connecticut,
respectively. Mr. Plain received a Bachelor of Science, Health and Physical
Education degree (business concentration) from West Chester University.
Rokki Rogan became Vice President--Acquisitions of the Company in October
1995 and became a director in August 1995. From June 1995 to October 1995, he
was Vice President, Chief Operating Officer--Midwest Region of the Company. From
1983 to June 1995, Mr. Rogan was President of First Row and Game Trader, which
merged their 24 video specialty stores and certain other related operations into
the Company in August 1995.
Michael A. Yeargin co-founded the Company in 1985. From June 1995 to
March 1996, Mr. Yeargin was Executive Vice President--Purchasing, Secretary and
a Director of the Company. In March 1996, Mr. Yeargin resigned as Executive Vice
President and Secretary and became Vice President--Administration of the
Company.
Theodore J. Coburn became a director of the Company in June 1995. Since
1991, Mr. Coburn has been a partner and a director of Brown, Coburn & Co., an
investment banking firm. From 1986 until 1991, he was a Managing Director of
Global Equity Transactions and a member of the Board of Directors of Prudential
Securities. From 1983 to 1986 Mr. Coburn served as Managing Director of Merrill
Lynch Capital Markets. Mr. Coburn received his B.S. from the University of
Virginia in 1975 and an M.B.A. from Columbia University Graduate School of
Business in 1978. Mr. Coburn serves as a director of Nicholas-Applegate Growth
Equity Fund, the Emerging Germany Fund and Measurement Specialties, Inc.
("MSI"), serves as a trustee of Nicholas-Applegate Mutual Funds, and serves on
the compensation committee of MSI.
Arthur F. Greeder, III became a director in August 1995. From October
1995 to August 1996, Mr. Greeder was Vice President--Store
Development--MidAtlantic Region of the Company. From June 1995 to October 1995,
Mr. Greeder was Vice President, Chief Operating Officer -- MidAtlantic Region of
the Company. From 1981 to June 1995, Mr. Greeder was President of Video Express,
which merged its ten stores into the Company in August 1995.
Douglas M. Raines co-founded the Company in 1985 and managed the business
until September 1994. In June 1995, Mr. Raines became Chairman of the Board and
Executive Vice President--Real Estate and Development of the Company responsible
for site selection and construction for new stores. Mr. Raines resigned as
Chairman of the Board in November 1995 and as Executive Vice President in March
1996.
Charles D. Way became a director of the Company in August 1995. Since
June 1988, Mr. Way has been President of Ryan's Family Steakhouses Inc.
("Ryan's"), a chain of restaurants. In October 1989 he was elected Chief
Executive Officer, and in October 1992 he was elected Chairman of the Board of
Ryan's. He graduated in 1975 from Clemson University with a B.S. in Accounting.
Mr. Way serves as a director of World Acceptance Corp. and serves on the
compensation committee of Ryan's.
DIRECTOR COMPENSATION
The Company pays its non-employee directors $5,000 per year plus $1,000
for each board or committee meeting attended in person (plus out-of-pocket
expenses). In addition, on August 3, 1995 the Company granted Mr. Way options to
purchase 5,000 shares of Common Stock exercisable at the initial public offering
price of $12.00 per share, subject to vesting over a 90-day period. These
options are exercisable over a period of ten years. The Company reimburses
employee directors for out-of-pocket expenses but otherwise pays them no
monetary compensation for service as directors.
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BOARD COMMITTEES, STAGGERED BOARD AND EXECUTIVE OFFICERS
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee is currently composed of Mr. Coburn
and Mr. Taylor. The Compensation Committee is responsible for, among other
things, establishing compensation of the Company's executive officers and for
administering the Company's Stock Plan. The Audit Committee is currently
composed of Mr. Coburn and Mr. Way. The Audit Committee is responsible for,
among other things, recommending independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement, monitoring
the Company's accounting policies and control procedures and reviewing and
monitoring the provision of non-audit services by the Company's auditors.
The directors are divided into three classes serving staggered terms that
expire at the 1996, 1997 or 1998 annual meeting of stockholders. The terms of
the directors will expire as follows: Messrs. Taylor, Mitchell and Klein in
1999, Messrs. Greeder, Rogan and Way in 1997, and Messrs. Raines, Yeargin and
Coburn in 1998. Directors for each class will be elected at the annual meeting
of stockholders held in the year in which the term for such class expires and
will serve thereafter for three years or until their earlier resignation or
removal, or until their successors are elected or qualified. Messrs. Taylor,
Mitchell and Klein were elected as directors at the annual meeting of
stockholders held on May 15, 1996.
All executive officers of the Company are elected annually by, and serve
at the discretion of, the Board of Directors.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
EXECUTIVE OFFICERS
The Company's Amended and Restated Certificate of Incorporation
("Certificate of Incorporation") limits the liability of its directors. As
permitted by the General Corporation Law of the State of Delaware (the "Delaware
Code"), directors will not be liable to the Company for monetary damages arising
from a breach of their fiduciary duty as directors in certain circumstances.
Such limitation does not affect liability for (i) any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) unlawful payment of dividends or unlawful stock purchases or
redemptions or (iv) any transaction from which such director derives an improper
personal benefit. Such limitation of liability also does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Certificate of Incorporation and Bylaws provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Delaware Code.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid to the
Chief Executive Officer and the four highest paid executive officers of the
Company who earned more than $100,000 in annual salary and bonus pursuant to
employment agreements with Moovies, Inc. in 1995:
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------------------------------------------------------------
Securities
Other Annual Underlying All Other
Salary Bonus Compensation Options/SARs Compensation
Name and Principal Position Year ($)(1) ($)(2) ($)(3) (#)(4) ($)(5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John L. Taylor
Chairman of the Board of Directors, 1995 200,000 0 0 0 1,110
President and Chief Executive Officer 1994 66,694 (6) 0 0 0 0
F. Andrew Mitchell 1995 190,181 10,000 0 0 1,910
Chief Financial Officer (7) 1994 0 0 (8) 0 0 0
Robert J. Klein (9) 1995 97,014 0 0 40,000 0
Chief Operating Officer 1994 53,000 0 11,500 (10) 0 0
Michael A. Yeargin (11) 1995 98,207 0 0 0 113,853 (12)
Vice President-Administration 1994 65,000 0 0 0 188,148 (12)
Douglas M. Raines (11)(13) 1995 97,380 0 0 0 113,853 (12)
Director 1994 65,000 0 0 0 188,148 (12)
</TABLE>
(1) Indetermining the Named Executives, the salaries and other compensation
paid by certain executives' acquired video chains prior to August 1995
were not considered. The Named Executives were selected based on annual
salary payable pursuant to employment agreements with the Company, as
follows: Mr. Taylor $200,000; Mr. Mitchell, $200,000 (plus an additional
$2,000 per month for his first 12 months with the Company); Mr. Klein,
$150,000; and Messrs. Raines and Yeargin, each $150,000. For Messrs.
Klein, Raines and Yeargin, salaries under these agreements were paid from
August 9, 1995 through December 31, 1995. For Mr. Taylor and Mr. Mitchell,
salaries under these agreements were paid from January 1 and March 1,
respectively, through December 31, 1995. See " -- Employment Agreements;
Covenants Not to Compete."
(2) Includes bonuses earned by the Named Executives for the periods presented
or, for executives hired during the periods, for the period from the date
of hire to the end of the applicable year.
(3) Other than for Mr. Klein in 1994, amounts for perquisites and other
personal benefits extended to the Named Executives are less than 10% of
the total of annual salary and bonus of such Named Executive.
(4) During the periods presented, the only form of long-term compensation
utilized by the Company has been the grant of stock options. The Company
has not awarded restricted stock or stock appreciation rights, nor has it
made any long-term incentive payouts. Accordingly, the columns for
"Restricted Stock Award(s)" and "Long Term Incentive Payouts" have been
omitted.
(5) In 1995, the Company adopted its supplemental life insurance program for
Mr. Taylor and Mr. Mitchell. The Company's contributions to supplemental
life insurance program for 1995 were $1,110 for Mr. Taylor and $1,910 for
Mr. Mitchell.
(6) Includes $46,774 of deferred salary earned by Mr. Taylor in 1994 but paid
in 1995.
(7) Mr. Mitchell joined the Company in March 1995.
(8) Mr. Mitchell's bonus represents a signing bonus paid in March 1995.
(9) For Mr. Klein, includes amounts paid by Planet Video, Inc., a video chain
acquired by the Company in August 1995. The salary amounts paid by Planet
Video, Inc. were $53,000 for 1994 and $41,000 for 1995. The salary amount
paid by the Company in 1995 was $56,014.
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(10) Includes professional fees reimbursed of $5,000, auto allowance of $3,500,
and travel and entertainment allowance of $3,000, all -- paid to Mr. Klein
by Planet Video, Inc.
(11) For Messrs. Yeargin, and Raines, includes salaries paid to the Named
Executive from Tonight's Feature Limited Partnership II (the
"Predecessor") during the periods presented prior to August 8, 1995, the
date the Predecessor was merged with the Company, in the amount of
$40,500, and $40,500, respectively.
(12) Represents capital distributions from the Predecessor.
(13) Mr. Raines served as Chairman prior to November 1995 and Executive Vice
President prior to March 1996.
Grant of Options. During 1995, options were granted to Mr. Klein in
recognition of his performance. No options were granted to any of the other
Named Executives during 1995. No stock appreciation rights (SARs) have been
granted by the Company. The following table sets forth information regarding the
grant of options in 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1995)
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
---------- ---------- Potential Realizable Value At
Options/SARs Employees in Exercise Price Expiration Assumed Annual Rates of
Name Granted (#) Fiscal Year ($/Sh) Date (1) Appreciation for Option Term
---- ----------- ----------- ------ -------- --------------------------------
5%($) 10%($)
----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Klein ................... 40,000 6.0% $10.875 12/11/05 $273,569 $693,278
</TABLE>
(1) Options are subject to earlier termination in the event of death,
disability, retirement, or termination of employment.
Options Exercised. No options were exercised by Named Executives in 1995.
The following table sets forth information regarding the number of options held
by the Named Executives as listed in the Summary Compensation Table, including
the value of unexercised in-the-money options as of December 31, 1995. The
closing price of the Company's Common Stock on December 31, 1995 used to
calculate such values was $13.50 per share.
357291.5
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR (1995)
AND FISCAL YEAR-END OPTION/SAR VALUES (AS OF DECEMBER 31, 1995)
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs at Money Options/SARs at Year
Year End (#) End ($)
------------------------------------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Klein .............. 0 $0 0 40,000 $0 $105,000
</TABLE>
Option Repricing. The Company did not reprice any stock options in 1994
or 1995 and, to date, has not issued any stock appreciation rights Long Term
Incentive Plans. Presently, the Company has no long-term incentive plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since August 1995, compensation decisions for Moovies, Inc. have been
made by the Compensation Committee, comprised of Messrs. Taylor and Coburn.
Prior to August 1995, (i) compensation decisions for Moovies, Inc. were made by
its Board of Directors of which Mr. Taylor is a member, (ii) compensation
decisions for Video Express were made by its Board of Directors of which Mr.
Greeder was a member, (iii) compensation decisions for L.A. Video were made by
Mr. Alan Warshaw as President and owner of L.A. Video, (iv) compensation
decisions for First Row were made by its Board of Directors of which Mr. Rogan
was a member, (v) compensation decisions for Movie Stars were made by its Board
of Directors of which Mr. Alan Daniels was a member, (vi) compensation decisions
for Planet Video were made by its Board of Directors of which Mr. Klein was a
member and (vii) compensation decisions for the Predecessor were made by Messrs.
Raines and Yeargin as general partners.
In connection with the organization of Moovies, Inc., Mr. Taylor, an
executive officer and director of the Company, purchased 461,665 shares of
Common Stock of Moovies, Inc., for nominal consideration. Upon completion of the
initial public offering, Mr. Taylor beneficially owned 6.0% of the outstanding
Common Stock. In addition, in connection with the organization of Moovies, Inc.,
the Company granted Mr. Taylor certain demand and piggyback registration rights
with respect to such Common Stock. See "Description of Capital
Stock--Registration Rights."
In November 1994, the Company granted a warrant to Theodore J. Coburn, a
director of the Company, in connection with his providing assistance to the
Company in completing its business plan and in selecting underwriters for the
initial public offering. Under the warrant, Mr. Coburn may purchase 150,000
shares of Common Stock of the Company at $1.00 per share at any time prior to
June 30, 2000. Shares purchased upon exercise of the warrant will be entitled to
the benefits of a registration rights agreement providing for certain demand and
piggyback registration rights with respect to such Common Stock. See
"Description of Capital Stock--Registration Rights." In addition, Mr. Coburn
received approximately $140,000 during 1995 for consulting services, primarily
in connection with the Company's initial public offering, and continues to
receive $4,500 per month as a retainer as an financial consultant to the
Company.
MERGER OF TONIGHT'S FEATURE, INC. INTO MOOVIES, INC.
In August 1995, Tonight's Feature, Inc. ("TFI") was merged into Moovies,
Inc. under an Agreement and Plan of Merger. TFI beneficially owned 90.1% of the
outstanding partnership interests of the Predecessor prior to the merger.
Messrs. Raines and Yeargin, both executive officers and directors of the
Company, each beneficially owned 50% of the outstanding capital stock of TFI. In
connection with the merger of TFI into Moovies, Inc., (i) all of the partnership
interests of the Predecessor beneficially owned by Messrs. Raines and Yeargin
were converted into 641,149 shares and 641,149 shares, respectively, of Common
Stock of the Company (which represented in each case 8.4% of the Common Stock
outstanding upon completion of the initial public offering) and (ii) Messrs.
Raines and Yeargin were granted certain demand and piggyback registration rights
with respect to such Common Stock. See "Description of Capital
Stock--Registration Rights."
357291.5
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<PAGE>
THE INITIAL ACQUISITIONS
First Row and Game Trader. In August 1995, the Company entered into a
Merger Agreement with First Row and Game Trader, pursuant to which the Company
acquired 24 video specialty stores and certain other related operations. Prior
to these acquisitions, Mr. Rogan, an executive officer and director of the
Company, beneficially owned 70% of the outstanding capital stock of First Row
and Game Trader. In exchange for such interest, Mr. Rogan received aggregate
consideration of $8.4 million, consisting of $3.6 million in cash and $4.8
million in shares of Common Stock (400,000 shares) in the merger. In addition,
the Company repaid approximately $2.1 million of indebtedness of First Row and
Game Trader. In connection with the merger, the Company granted Mr. Rogan
certain demand and piggyback registration rights with respect to his Common
Stock. See "Description of Capital Stock--Registration Rights." Pursuant to the
Agreement and Plan of Merger, Mr. Rogan agreed to indemnify the Company against
certain liabilities arising out of any misrepresentation relating to the
agreement subject to a cap of $4.2 million and not including the first $100,000
of indemnified claims. The merger consideration is subject to adjustment based
on the indemnification agreement. Potential adjustments to the merger
consideration in an aggregate amount of approximately $348,000 are currently
pending, subject to further adjustments. In August 1995, the Company granted Mr.
Rogan options to purchase 50,000 shares of Common Stock immediately exercisable
at the initial public offering price of $12.00 per share.
In January 1995, First Row and Game Trader loaned $260,804 to an
affiliate which is 70% owned by Mr. Rogan pursuant to a demand promissory note
with an annual interest rate of 6%. As of December 31, 1995, $268,804 was
outstanding under this note. The greatest amount outstanding under notes with
similar terms during 1993, 1994, 1995 and the six months ended June 30, 1996 was
$129,013, $260,804, $268,804 and $268,804, respectively.
Video Express. In June 1995, the Company entered into a Merger Agreement
with Video Express pursuant to which the Company acquired ten video specialty
stores. Mr. Greeder, an executive officer and director of the Company, and his
spouse beneficially owned 100% of the outstanding capital stock of Video Express
prior to the merger. Pursuant to the Merger Agreement, in exchange for all such
outstanding capital stock of Video Express, Mr. Greeder and his spouse, Anne
Greeder, received aggregate consideration of approximately $7.1 million,
consisting of approximately $2.7 million in cash and approximately $4.4 million
in shares of Common Stock (362,500 shares). In addition, the Company repaid
approximately $123,000 of indebtedness of Video Express. In connection with the
merger, the Company granted Mr. Greeder and his spouse certain demand and
piggyback registration rights with respect to their Common Stock. See
"Description of Capital Stock -- Registration Rights." Pursuant to the Agreement
and Plan of Merger, Mr. Greeder and his spouse agreed to indemnify the Company
against certain liabilities arising out of any misrepresentation relating to the
agreement or certain liabilities relating to the business or assets of Video
Express. The merger consideration is subject to adjustment based on the
indemnification agreement. Potential adjustments to the merger consideration in
an aggregate amount of approximately $600,000 are currently pending, subject to
further adjustments.
In March 1995, Video Express borrowed $319,314 from Mr. Greeder pursuant
to a demand promissory note with annual interest accruing at a rate equal to the
applicable federal rate published periodically by the United States Treasury
Department. As of December 31, 1995, $319,314 was outstanding under this note.
The greatest amount outstanding under notes with similar terms during 1993,
1994, 1995 and the six months ended June 30, 1996 was $260,680, $260,680,
$326,501 and $326,501, respectively. In August 1995, the Company granted to Mr.
Greeder options to purchase 50,000 shares of Common Stock, exercisable at the
initial public offering price of $12.00 per share, subject to vesting over a
one-year period. See "Description of Capital Stock--Registration Rights."
Movie Stars. In June 1995, the Company entered into an Asset Purchase
Agreement with Movie Stars pursuant to which the Company acquired ten video
specialty stores. Alan Daniels, a former executive officer and director of the
Company, beneficially owned 100% of the outstanding capital stock of Movie
Stars. Pursuant to the Asset Purchase Agreement, in exchange for substantially
all of the assets of Movie Stars, the Company paid Movie Stars aggregate
consideration of approximately $5.3 million, consisting of approximately $1.8
million in cash, a $500,000 promissory note and approximately $3.0 million in
shares of Common Stock (252,083 shares). The promissory note was paid in full at
its maturity in August 1996 with annual interest at a rate equal to the prime
rate as published by NationsBank, N.A., Atlanta, Georgia. In connection with the
acquisition, the Company granted Movie Stars certain demand and piggyback
registration rights with respect to its Common Stock. See "Description of
Capital Stock--Registration Rights." Pursuant to the Asset Purchase
357291.5
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<PAGE>
Agreement, Mr. Daniels agreed to indemnify the Company against liabilities
arising out of any misrepresentation relating to the agreement or certain
liability relating to the business or assets of Movie Stars. In addition, in
connection with the acquisition, the Company repaid approximately $1.1 million
of indebtedness of Movie Stars. Upon the completion of the Company's initial
public offering, the Company granted to Mr. Daniels options to purchase 250,000
shares of Common Stock exercisable at the initial public offering price of
$12.00 per share, of which 100,000 were immediately exercisable and 150,000 were
subject to vesting over a three-year period.
In March 1996, the Company and Mr. Daniels entered into a settlement
agreement whereby (i) the Company received approximately $77,000 from escrow and
Mr. Daniels received approximately $33,000 as a severance payment, (ii) Mr.
Daniels resigned as a director of the Company effective December 1995, and (iii)
Mr. Daniels' options were amended to reduce the total number of option shares to
125,000, all of which vested immediately and expire in March 1999.
In September 1993, Movie Stars borrowed $184,406 from Mr. Daniels. This
advance was payable on demand. Beginning in 1994, Movie Stars paid interest on
Mr. Daniels' personal borrowings from an unaffiliated bank in consideration for
the advances made by Mr. Daniels to Movie Stars. In March 1994, Movie Stars
borrowed $52,786 from Mr. Daniels' spouse. This advance was payable on demand
and bore interest at a rate of 3.84%. The greatest amount outstanding on these
advances during 1993, 1994 and 1995 was approximately $184,406, $235,701 and
$194,000, respectively. The interest paid by Movie Stars on these advances for
1993, 1994 and 1995 was approximately $0, $13,161 and $12,000, respectively. In
1994, Mr. Daniels borrowed $182,915 from an unaffiliated bank, which loan was
secured by certain assets of Movie Stars and by a Movie Stars guaranty. At March
31, 1995, $161,141 was outstanding under such bank loan, all of which was repaid
by Mr. Daniels concurrently with the completion of the Company's offering with a
portion of the net proceeds received by Mr. Daniels under the Asset Purchase
Agreement. In March 1995, Movie Stars borrowed $225,000 from an unaffiliated
bank pursuant to a variable interest demand note, which loan was secured by a
guaranty of Mr. Daniels. In May 1995, Movie Stars borrowed an additional
$255,000 from this bank, which loan was secured by the same guaranty of Mr.
Daniels. These borrowings financed two new stores of Movie Stars. The balance of
this loan was paid in full concurrently with the completion of the Company's
initial public offering.
L.A. Video. In June 1995, Moovies, Inc. entered into an Asset Purchase
Agreement with L.A. Video pursuant to which the Company acquired five video
specialty stores. Alan Warshaw, who was an executive officer of the Company from
August 1995 through September 1995, and his spouse, Linda Warshaw, beneficially
owned 100% of the outstanding equity interests in L.A. Video. Pursuant to the
Asset Purchase Agreement, in exchange for substantially all of the assets of
L.A. Video, the Company paid L.A. Video aggregate consideration of approximately
$5.1 million consisting of approximately $3.3 million in cash and approximately
$1.8 million in shares of Common Stock (149,125 shares). In addition, the
Company repaid approximately $360,000 of indebtedness of L.A. Video. In
connection with the acquisition, the Company granted L.A. Video certain demand
and piggyback registration rights with respect to its Common Stock. See
"Description of Capital Stock --Registration Rights." Pursuant to the Asset
Purchase Agreement, Mr. Warshaw and his spouse agreed to indemnify the Company
against certain liabilities arising out of any misrepresentation relating to the
agreement or certain liabilities relating to the business or assets of L.A.
Video. In August 1995, the Company granted Mr. Warshaw options to purchase
25,000 shares of Common Stock exercisable at the initial public offering price
of $12.00 per share, subject to vesting over a one-year period.
In December 1994, March 1995 and June 1995, L.A. Video borrowed $198,035,
$40,000 and $34,114, respectively, from Mr. Warshaw. These advances are payable
on demand and are non-interest bearing. As of December 31, 1995, these amounts
had been paid in full. The greatest amounts outstanding under these advances
during 1994 and 1995 were $198,035 and $272,149, respectively.
Planet Video. In June 1995, the Company entered into an Asset Purchase
Agreement with Planet Video to acquire two video specialty stores. Mr. Klein, an
executive officer of the Company, beneficially owned 100% of the outstanding
capital stock of Planet Video. Pursuant to the Asset Purchase Agreement, in
exchange for substantially all of the assets of Planet Video, the Company paid
Planet Video aggregate consideration of approximately $653,000 consisting of
approximately $335,000 in cash and approximately $325,000 in shares of Common
Stock (27,083 shares). In addition, the Company repaid approximately $240,000 of
indebtedness of Planet Video. In connection with the acquisition, the Company
granted Planet Video certain demand and piggyback registration rights with
respect to its Common Stock. See "Description of Capital Stock
357291.5
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<PAGE>
- -- Registration Rights." Pursuant to the Asset Purchase Agreement, Mr. Klein
agreed to indemnify the Company against certain liabilities arising out of any
misrepresentation relating to the agreement or certain liabilities relating to
the business or assets of Planet Video.
LEASES
In August 1995, the Company entered into a ten year lease with Mr.
Daniels and his spouse, Kari Daniels, with annual rental payments ranging from
$60,000 in the first year to $78,956 in the tenth year. The Company also entered
into a five year lease with Mr. Greeder with annual rental payments of $87,120.
For 1995 and the six months ended June 30, 1996 the Company made rental payments
of $29,040 and $35,509, respectively, under this lease. The Company continues to
pay rent under these leases at these rental rates. In addition, the Company
entered into a five year lease with Mr. Rogan with annual rental payments of
$29,200. The Company subsequently sold the store subject to this lease and no
longer pays rent thereunder. All of such leases pertain to stores acquired by
the Company in connection with the acquisition of stores beneficially owned by
Messrs. Daniels, Greeder and Rogan.
Prior to August 1995, the Predecessor leased its office from a
partnership owned 100% by Messrs. Raines and Yeargin, and leased one of its
store facilities from a partnership which is 50% owned by Messrs. Raines and
Yeargin. The partnership sold this store property in October 1995 and thereafter
received no further lease payments from the Company. For 1992, 1993 and 1994,
the Predecessor made rental payments under this lease aggregating approximately
$12,691, $12,691 and $45,849, respectively. The Company assumed these leases in
connection with the consummation of the Acquisitions. For the year ended 1995
and the six months ended June 30, 1996, the Company and the Predecessor made
rental payments aggregating approximately $90,000 and $0 under these leases.
Prior to August 1995, First Row and Game Trader leased certain store
facilities and a warehouse from an affiliated company. Mr. Rogan owns 70% of
this affiliated company. For 1993, 1994 and 1995, First Row and Game Trader made
rental payments under this lease aggregating $91,250, $134,610 and $176,812. The
Company assumed these leases in connection with the consummation of the
Acquisitions. For 1995 and six months ended June 30, 1996 the Company made
rental payments under these leases aggregating $105,813 and $194,445,
respectively.
Prior to August 1995, Video Express leased one of its store facilities
from Mr. Greeder. For each of the years ended March 31, 1993, 1994 and 1995,
Video Express made rental payments under this lease aggregating $85,200, and for
the six months ended June 30, 1996, the Company made lease payments aggregating
$43,946.
Prior to August 1995, Movie Stars leased one of its store facilities from
Mr. Daniels and his spouse. For 1993, 1994 and 1995, Movie Stars made rental
payments under this lease aggregating approximately $24,607, $62,155 and
$45,000, respectively. In addition, prior to August 1995, Movie Stars leased one
of its store facilities from Herbert Redl, Mr. Daniels' father-in-law. For 1993,
1994 and 1995, Movie Stars made rental payments under this lease aggregating
approximately $36,182, $37,629 and $28,000, respectively. The Company assumed
these leases in connection with the consummation of the Acquisitions. For the
year ended 1995 and the six months ended June 30, 1996, the Company made rental
payments aggregating approximately $41,000 and $36,159 under these leases.
357291.5
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<PAGE>
MANAGEMENT FEES
Prior to August 1995, the Predecessor paid a management fee to its
general partner, TFI. TFI was wholly owned by Messrs. Raines and Yeargin. For
1993, 1994 and 1995, such management fees aggregated $187,309, $218,356 and $0,
respectively.
Prior to August 1995, First Row and Game Trader received management fees
from certain corporations owned by the stockholders of First Row and Game
Trader. For 1993, 1994, and 1995, such management fees aggregated $38,744,
$50,704 and $0, respectively.
Following the consummation of the Initial Acquisitions, the Company did
not and does not intend to pay any such management fees.
With the exception of the Acquisitions, each of which was negotiated
between unaffiliated parties, management believes that the transactions
described above may not have been on terms as favorable to the Company, the
Predecessor or the relevant video store chains, as applicable, as those that
could have been obtained from unaffiliated parties; however, it is the Company's
policy that all future transactions, if any, with affiliated parties will comply
with the requirements of the Delaware General Corporation Law. As a result, any
such transactions will be approved by the disinterested members of the Company's
Board of Directors (or a committee thereof) or by the stockholders of the
Company.
CERTAIN PRIOR RELATIONSHIPS
Ingram Entertainment, Inc., of which Mr. Taylor was an executive officer
from March 1986 through July 1994, was a wholesale video supplier for the
Predecessor, Video Stars, Movie Stars, King Video, L.A. Video and Video
Warehouse 2 and certain stores owned by one of its owners, Gerald Pryor.
Prior to joining the Company in March 1995, Mr. Mitchell was a partner
with KPMG Peat Marwick LLP ("Peat Marwick"). Mr. Mitchell was involved during
October and November 1994 with the proposal to the Predecessor to engage Peat
Marwick as the Predecessor's independent auditors. Peat Marwick began its audit
of the Predecessor in November 1994. In late November 1994, Mr. Mitchell entered
into negotiations with Moovies, Inc. regarding his possible employment. At that
time, Mr. Mitchell ceased all involvement with respect to the audit of Moovies,
Inc., the Predecessor and each of the video store chains to be acquired pursuant
to the Acquisitions.
Except as set forth above, there were no relationships prior to the
discussions which led to the Acquisitions between the Company, the Predecessor,
and the principals thereof, and the principals of any of the video chains to be
acquired pursuant to the Acquisitions.
EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE
Effective September 1994, the Company entered into a three-year
employment agreement with Mr. Taylor pursuant to which Mr. Taylor serves as
President and Chief Executive Officer at an annual base salary of $200,000 and
is eligible for an annual bonus at the discretion of the Board of Directors. The
Company also maintains for the benefit of Mr. Taylor a $1.0 million life
insurance policy and a $1.0 million life insurance policy for the benefit of the
Company.
Effective March 1995, the Company entered into a two-year employment
agreement with Mr. Mitchell pursuant to which he serves as Chief Financial
Officer at an annual base salary of $200,000 and a guaranteed additional payment
of $2,000 per month through March 1996. The agreement is automatically renewable
by both parties on a year-to-year basis, but it may be terminated at any time by
Mr. Mitchell or the Company upon 90-days prior written notice. Upon the
expiration or termination of the Agreement, except for voluntary termination of
employment by Mr. Mitchell or termination for "just cause" by the Company, Mr.
Mitchell shall be paid severance compensation equal to twelve months base salary
plus an amount equal to the average of any aggregate annual cash bonuses
received by him during the prior two calendar years of employment (collectively
the "Expiration Payment"). "Just Cause" is defined in the Mitchell employment
agreement as one of the following acts by Mr. Mitchell: (a) theft or
embezzlement from the Company; (b) knowingly falsifying substantive
357291.5
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<PAGE>
Company records; (c) fraud committed against the Company; (d) death of Mr.
Mitchell; or (e) any material breach of the Agreement.
The Company may terminate the agreement without cause if it pays Mr.
Mitchell the Expiration Payment plus, if such termination occurs during the
original term of the agreement, an amount equal to the base salary which would
have been paid to Mr. Mitchell had he remained an employee through the end of
such two-year term. The Company also maintains a $1.5 million life insurance
policy for the benefit of Mr. Mitchell.
In August 1995, the Company entered into two-year employment agreements
with Messrs. Raines and Yeargin, as Executive Vice President--Real Estate and
Development and as Executive Vice President--Purchasing, respectively, pursuant
to which each were paid a base salary at the annual rate of $150,000 and were
eligible for an annual bonus granted at the discretion of the Board of
Directors. In 1996, Messrs. Raines and Yeargin each resigned as Executive Vice
President and terminated their employment agreements.
In August 1995, the Company entered into three-year employment agreements
with Messrs. Daniels and Klein, two-year employment agreements with Messrs.
Rogan and Warshaw, and a one-year employment agreement with Mr. Greeder under
which their annual base salaries were $100,000 and they were eligible for
payment of bonuses granted at the discretion of the Board of Directors. In March
1996, the Daniels' employment agreement was terminated by mutual consent of the
parties. See "--The Acquisitions--Movie Stars." In August 1996, the term of Mr.
Greeder's employment agreement expired.
In October 1995, the Company entered into a three-year employment
agreement with Mr. Klein under which his annual base salary was $150,000 and he
was eligible for payment of bonuses at the discretion of the Compensation
Committee. In June 1996, Mr. Klein's employment agreement was amended to
increase his annual base salary to $175,000 and to grant Mr. Klein an additional
100,000 stock options.
Each of the above employment agreements contain covenants not to compete
within a five-mile radius of the Company's store locations in existence upon
completion of the Company's initial public offering for a period of two years
following termination of employment, except that in the case of Messrs.
Mitchell, Rogan, Warshaw, Greeder and Klein such covenants are for a period of
one year following termination of employment. Each of the above employment
agreements contain nondisclosure provisions that generally provide that the
employee will not disclose confidential information or trade secrets of the
Company during the term of the agreement and for one year thereafter.
In May 1996, the Board of Directors of the Company authorized the Company
to enter into severance agreements with each of seven officers, including
Messrs. John, Plain and Miller, that provide for a severance payment of two
times the applicable officer's average annual compensation (including salary and
bonus) for the prior two years in the event that a "Change in Control" occurs
and the officer either resigns or is terminated without cause by the Company
within six months after such Change in Control. In addition, the Board approved
a similar severance agreement for Mr. Klein that provides for a severance
payment equal to (i) $1,000,000 minus (ii) the aggregate difference between the
value of Mr. Klein's outstanding stock options (as measured by the spread
between the market value of the Company's common stock and the exercise price)
and $2,000,000. All such severance agreements will define "Change of Control" as
the occurrence of any of the following events:
(a) any person or entity, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, other than the
Company, a wholly owned subsidiary of the Company, or any employee benefit plan
of the Company or its subsidiaries, becomes the beneficial owner of the
Company's securities having 51 percent or more of the combined voting power of
the then outstanding securities of the Company that may be cast for the election
for directors of the Company; or
(b) as the result of, or in connection with, any cash tender or exchange
offer, merger or other business combination, sale of assets or contested
election, or any combination of the foregoing transactions, less than a majority
of the combined voting power of the then outstanding securities of the Company
or any successor corporation or entity entitled to vote generally in the
election of directors of the Company or such other corporation or entity after
such transaction, are held in
357291.5
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<PAGE>
the aggregate by holders of the Company's securities entitled to vote generally
in the election of directors of the Company immediately prior to such
transaction; or
(c) the approval of the stockholders of the Company of a plan of
liquidation.
In addition, stock option agreements granted to the employees of the
Company, including Messrs. Klein, John, Miller, Plain, Greeder and Rogan,
provide for immediate vesting of the options upon a Change of Control as
described above. See "--1995 Stock Plan."
1995 STOCK PLAN
In June 1995, the Board of Directors adopted, and the stockholders
approved, the Moovies, Inc. 1995 Stock Plan (the "Plan"). The Plan provides for
the award of incentive stock options to officers and employees and the award of
non-qualified stock options and other incentive grants to directors, officers,
and employees. The Company reserved 560,000 shares of Common Stock for issuance
under the Plan. In February 1996, the Board of Directors of the Company approved
an amendment to the Plan to increase the shares reserved to 1,200,000 shares,
subject to stockholder approval. In April 1996, the Board of Directors and the
Stockholders of the Company approved a further amendment to the Plan to increase
the shares reserved to 1,500,000 shares. The Board of Directors has granted an
aggregate of 942,100 shares (net of forfeitures) under the Plan.
The Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). The current Committee members are Messrs. Taylor
and Coburn. Subject to the terms of the Plan, the Committee has the authority to
determine the employees to whom options or rights may be granted, the exercise
price and number of shares subject to each option or right and the time or times
when each option shall become exercisable, to interpret the Plan and prescribe
and rescind rules and regulations consistent with the Plan and to determine
certain other provisions with respect to each option or right.
The purchase price of Common Stock upon exercise of incentive stock
options must not be less than the fair market value of the Common Stock at the
date of the grant or, in the case of incentive stock options issued to holders
of more than 10% of the outstanding voting securities of the Company, 110% of
fair market value on the date of grant. The maximum term of incentive stock
options is ten years, or five years in the case of 10% stockholders. The
aggregate fair market value on the date of the grant of the stock for which
incentive stock options are exercisable for the first time by an employee during
any calendar year may not exceed $100,000. Options are exercisable over a period
of time in accordance with the terms of option agreements entered into at the
time of grant. Options granted under the Plan are generally nontransferable by
the optionee and, unless otherwise determined by the Committee, must be
exercised by the optionee during the period of the optionee's employment or
service with the Company or within a specified period following termination of
employment or service. The option agreements generally provide for immediate
vesting in the event of a "Change in Control," as described at "--Employment
Agreements; Covenants Not to Compete," provided that the optionee is employed by
the Company on the date of such Change in Control.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Moovies, Inc. was incorporated in the State of Delaware in November 1994.
In connection with the organization of Moovies, Inc., Messrs. Mitchell and
Taylor, both executive officers and directors of the Company, purchased 224,711
shares and 461,665 shares of Common Stock of Moovies, Inc., respectively, for
$225 and $462, respectively. Upon completion of this offering, Messrs. Mitchell
and Taylor will beneficially own 1.6% and 3.3%, respectively, of the outstanding
Common Stock. In addition, in connection with the organization of Moovies, Inc.,
the Company granted Messrs. Mitchell and Taylor certain demand and piggyback
registration rights with respect to such Common Stock. See "Description of
Capital Stock--Registration Rights."
Mortco, Inc. ("Mortco") beneficially owned 9.9% of the outstanding
partnership interests of the Predecessor. Mortco acquired its interest in the
Predecessor in 1993 for aggregate consideration of $250,000. In connection with
the merger of
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the Predecessor into Moovies, Inc., (i) all of the partnership interests
beneficially owned by Mortco were converted into 140,897 shares of Common Stock
of the Company (which represents approximately 1.0% of the Common Stock
outstanding upon completion of this offering) and (ii) Mortco was granted
certain demand and piggyback registration rights with respect to such Common
Stock. See "Description of Capital Stock--Registration Rights."
Mortco is a wholly owned subsidiary of Rentrak which leases videos to the
Company. For 1993, 1994, 1995 and the six months ended June 30, 1996, the
Predecessor or the Company, as applicable, paid Rentrak lease and revenue
sharing payments aggregating approximately $496,902, $667,811, $1.3 million and
$1.6 million, respectively. In addition, First Row and Game Trader, Planet
Video, Video Express and Video Stars also leased videos from Rentrak. Pursuant
to a revolving credit agreement, in November 1994 Mortco provided the
Predecessor a revolving line of credit initially having aggregate borrowing
availability of $250,000, which was subsequently increased to $750,000 in March
1995. Borrowing under this facility bears interest at a rate equal to the
greater of 7% or the prime rate as published by the Wall Street Journal plus
2.0%. During the year ended December 31, 1995, the aggregate amounts owed to
Mortco during such period ranged from $150,000 to $750,000 and the aggregate
interest paid by the Predecessor or the Company, as applicable, to Mortco during
such period was $70,000. The note was paid in full in December 1995. In April
1995 in consideration of Mortco subordinating its revolving line of credit to
other financing obtained by the Predecessor from a third party, Moovies, Inc.
issued to Mortco a warrant to purchase 40,877 shares of Common Stock of the
Company at an exercise price equal to the initial public offering price of
$12.00 per share. The registration rights granted to Mortco also apply to the
Common Stock subject to this warrant.
See "Management--Compensation Committee Interlocks and Insider
Participation" for a description of certain other transactions among the Company
and certain of its affiliates.
With the exception of transactions between the Company or the
Predecessor, and Mortco and its affiliates, management believes that the
transactions described above may not have been on terms as favorable to the
Company or the Predecessor, as applicable, as those that could have been
obtained from unaffiliated parties; however, it is the Company's policy that all
future transactions, if any, with affiliated parties will comply with the
requirements of the Delaware General Corporation Law. As a result, any such
transactions will be required to be approved by the disinterested members of the
Company's Board of Directors (or a committee thereof) or by the stockholders of
the Company.
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PRINCIPAL STOCKHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 30, 1996 by (i) each person who is
known to the Company to be the beneficial owner of more than 5% of the Common
Stock, (ii) each director, (iii) each executive officer of the Company, and (iv)
all executive officers and directors of the Company as a group, both before and
after giving effect to this offering (assuming all shares offered hereby are
sold). Except as set forth below, the stockholders listed below have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Common Stock Percentage of Percentage of
Beneficially Class Prior to Class After
Name(1) Owned Offering Offering
-------------------------------------------------------------
Directors and Executive Officers:
<S> <C> <C> <C>
John L. Taylor................................................... 453,740 (2) 3.8% 3.3%
F. Andrew Mitchell............................................... 221,711 (3) 1.9 1.6
Robert J. Klein.................................................. 40,416 (4) * *
Victor B. John, III.............................................. 6,767 (5) * *
Ross Miller...................................................... 13,000 (6) * *
Jeffrey L. Plain................................................. 3,333 (7) * *
Arthur F. Greeder, III........................................... 397,800 (8) 3.3 2.9
Rokki Rogan...................................................... 378,400 (9) 3.2 2.7
Michael A. Yeargin............................................... 637,649 5.3 4.6
Theodore J. Coburn............................................... 150,000 (10) 1.2 1.1
Douglas M. Raines................................................ 629,149 5.3 4.6
Charles D. Way................................................... 29,000 (11) * *
All executive officers and directors as a group (12 persons)... 2,960,965 (12) 24.2% 21.0%
</TABLE>
* Less than 1.0%.
(1) The address of the persons listed above is c/o Moovies, Inc., 201
Brookfield Parkway, Greenville, South Carolina 29607.
(2) Includes 7,400 shares held of record by Mr. Taylor as custodian for minor
children.
(3) Includes 2,000 shares held of record by Mr. Mitchell's spouse as custodian
for minor children.
(4) Includes 27,083 shares held of record by XIMPEC, Inc., a corporation of
which Mr. Klein is a director and stockholder. Includes 13,333 shares of
Common Stock which are issuable upon the exercise of currently exercisable
options.
(5) Includes 6,667 shares of Common Stock which are issuable upon the exercise
of currently exercisable options.
(6) Includes 12,500 shares of Common Stock which are issuable upon the exercise
of currently exercisable options.
(7) Consists of 3,333 shares of Common Stock which are issuable upon the
exercise of currently exercisable options.
(8) Includes 165,150 shares held jointly with Mr. Greeder's spouse and 1,400
shares held by a dependent child. Also includes 50,000 shares of Common
Stock which are issuable upon the exercise of currently exercisable
options.
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(9) Includes 50,000 shares of Common Stock which are issuable upon the exercise
of currently exercisable options.
(10) Consists of 150,000 shares which may be purchased upon exercise of a
warrant that is currently exercisable.
(11) Includes 5,000 shares which are issuable upon the exercise of currently
exercisable options.
(12) Includes 290,833 shares which may be purchased upon exercise of a
warrant and options that are currently exercisable.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of Moovies, Inc. consists of 25,000,000
shares of Common Stock, $.001 par value per share, and 1,000,000 shares of
preferred stock, $.001 par value per share (the "Preferred Stock"). As of
October 3, 1996, Moovies, Inc. had outstanding 11,926,620 shares of Common Stock
and no shares of Preferred Stock. Upon completion of this offering, assuming the
issuance of all of the shares offered hereby, the Company will have outstanding
13,776,620 shares of Common Stock and no shares of Preferred Stock.
COMMON STOCK
Except as otherwise required by law or as provided by the Board of
Directors with respect to any class or series of Preferred Stock, the entire
voting power and all voting rights shall be vested exclusively in the Common
Stock. Each holder of shares of Common Stock shall be entitled to one vote for
each share outstanding in his or her name on the books of the Company.
Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders of
Common Stock are entitled to such dividends as may be declared by the Board of
Directors out of funds legally available therefor. The Company has no current
plans to pay cash dividends on its Common Stock.
In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, after the distribution or payment to
the holders of shares of any series of Preferred Stock as provided by the Board
of Directors with respect to any such series of Preferred Stock, the remaining
assets of the Company available for distribution to stockholders shall be
distributed among and paid to the holders of Common Stock ratably in proportion
to the number of shares of Common Stock held by them respectively.
On June 13, 1995 the Company effected a 76.7449-for-one Common Stock
split payable as a stock dividend to common stockholders of record on June 13,
1995.
On August 3, 1995 the Company effected a .0733-for-one Common Stock split
payable as a stock dividend to common stockholders of record on August 2, 1995.
PREFERRED STOCK
The Board of Directors is authorized to issue shares of Preferred Stock
at any time and from time to time, in one or more series, and to fix or alter
the designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions of such shares of
Preferred Stock, including without limitation of the generality of the
foregoing, dividend rights, dividend rates, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), redemption
price or prices and liquidation preferences of any wholly unissued series of
preferred shares and the number of shares constituting any of such series and
the designation thereof, or any of them; and to increase or decrease the number
of shares of a series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. Furthermore, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may have
the effect of delaying or preventing a change in control
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of the Company, discourage bids for the Common Stock or may otherwise adversely
affect the market price of the Common Stock. The Company has no present plans to
issue any shares of Preferred Stock.
CERTAIN CHARTER AND BYLAW PROVISIONS
Stockholders' rights and related matters are governed by the Delaware
General Corporation Law, the Company's Certificate of Incorporation and its
Bylaws. Certain provisions of the Certificate of Incorporation and Bylaws of the
Company, which are summarized below, tend to limit stockholders' ability to
influence matters pertaining to corporate governance.
Classified Board of Directors. The Company's Board of Directors is
divided into three classes of directors serving staggered terms of three years
each. See "Management--Executive Officers and Directors." As a result, it will
be more difficult to change the composition of the Company's Board of Directors,
which may discourage or make more difficult any attempt by a person or group of
persons to obtain control of the Company.
Special Meeting Call Restrictions. Under the Company's Bylaws, special
meetings of the stockholders may only be called by the Chairman of the Board, a
majority of the Board of Directors or upon the written demand of the holders of
a majority of the outstanding shares of Common Stock entitled to vote at any
such meeting. This provision makes it more difficult for stockholders to require
the Company to call a special meeting of stockholders to consider any proposed
corporate action, including any sale of the Company, which may be favored by the
stockholders.
Restrictions on Amendments to Bylaws. Under the Company's Certificate of
Incorporation, the Company's Bylaws may not be amended by the stockholders and
any contrary provision may not be adopted without the affirmative vote of at
least two-thirds of the shares entitled to vote generally in the election of
directors. This supermajority restriction makes it more difficult for the
stockholders of the Company to amend the Bylaws and thus enhances the power of
the Company's Board of Directors vis-a-vis stockholders with regard to matters
of corporate governance that are governed by the Bylaws.
Limited Action by Written Consent of Stockholders. In general,
stockholder action may only be taken at a special or annual stockholder meeting
called for such purpose or with the unanimous written consent of the
stockholders. These requirements may delay stockholder action on matters
requiring stockholder approval.
WARRANTS
In November 1994, the Company granted to a director a warrant to purchase
150,000 shares of Common Stock of the Company at $1.00 per share. In March 1995,
the Company granted 19 former limited partners of the Predecessor warrants to
purchase an aggregate of 74,352 shares of Common Stock of the Company for $.01
per share. In April 1995, the Company's Predecessor granted to Mortco, Inc., in
connection with the Company's note payable to Mortco, a warrant to acquire
40,877 shares of Common Stock at an exercise price equal to the initial public
offering price per share (i.e. $12.00 per share). In April 1995, the Company
granted to Sirrom Capital Corporation a warrant to acquire 156,110 shares of
Common Stock at $.01 per share in connection with a loan from Sirrom to the
Predecessor. In July 1995, the Company agreed to issue to the managing
underwriters in the initial public offering ("IPO Representatives"), warrants to
purchase 236,250 shares of Common Stock at a purchase price per share equal to
120% of the initial public offering price per share (i.e. $14.40 per share). In
December 1995, the Company issued a warrant for 25,000 shares of Common Stock at
a purchase price of $14.875 per share in connection with the Pic-A-Flick
acquisition. In January 1996, in connection with the Subordinated Credit
Facility, the Company granted to Sirrom Capital Corporation a warrant to
purchase 20,000 shares of Common Stock at an exercise price of $10.80 per share.
See Footnote 7 to Consolidated Financial Statements, "Underwriting."
REGISTRATION RIGHTS
The Company has granted piggyback and/or demand registration rights to
certain holders of Common Stock (or warrants for shares of Common Stock)
including Messrs. Taylor, Raines, Mitchell, Daniels, Yeargin, Greeder, Rogan,
Warshaw, Klein and Coburn and certain of their spouses. All of such holders
beneficially own an aggregate of approximately
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4.9 million shares of Common Stock. The registration rights are for purposes of
resale of shares owned by the holders. In the event the Company proposes to
register shares of Common Stock under the Securities Act for its own account or
for the account of others, holders of piggyback registration rights will have
the right to require the Company to include their shares in the registration,
subject to the right of any managing underwriter of the offering to exclude some
or all the shares for marketing reasons. Holders of demand registration rights
as a group will have the right to require the Company on one occasion only to
register shares held by them under the Securities Act at any time between August
9, 1995 and August 9, 2000, provided, however, that such offering must be
underwritten on a firm commitment basis and the proposed net offering price of
shares to be registered must be at least $2,000,000. The Company is not
obligated to effect a demand registration within six months after the effective
date of a previous Company registration. The registration expenses of such
shares, other than underwriting discounts and filing fees, shall be borne by the
Company except to the extent otherwise prohibited by law. See "Certain
Transactions." The Company also granted demand and piggyback registration rights
to Mortco, Inc. as the beneficial owner of 178,589 shares of Common Stock.
Mortco has two demand registration rights exercisable any time beginning one
year after August 3, 1995 and unlimited piggyback registration rights
exercisable beginning one year after August 3, 1995. In addition, the Company
issued to the IPO Representatives warrants to purchase shares of Common Stock in
August 1995. See " -- Warrants" and "Underwriting." The shares of Common Stock
underlying the warrants are accorded one demand registration right exercisable
at any time between one and five years after the warrants are issued and
unlimited piggyback registration rights exercisable at any time between one and
seven years after the warrants are issued.
DELAWARE BUSINESS COMBINATION STATUTE
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"), an anti-takeover law. Section 203
provides, with certain exceptions, that a publicly held Delaware corporation may
not engage in a "business combination" with a person, or an affiliate or
associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless: (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the Board of Directors
of the corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquired 85% or more of the outstanding voting stock of
the corporation in the same transaction that made such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. For purposes of Section 203, a "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder and an "interested stockholder"
is defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation who was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank of North Carolina.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the sale of all shares offered hereby, and assuming no other sales,
the Company will have outstanding 13,776,620 shares of Common Stock. Of these
shares, the 3,622,500 shares sold in the Company's initial public offering and
the 3,220,000 shares sold in the Company's second public offering, are freely
tradeable without restriction or further registration under the Securities Act
except for those shares held by "affiliates" (as defined in the Securities Act)
of the Company. Pursuant to Rule 145, a recipient of any of the 1,850,000 shares
offered hereby may sell within any three-month period, a number of shares that
does not exceed the greater of 1% of the then outstanding shares of Common Stock
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the order to sell. See "Resales." None of the remaining
5,084,120 outstanding shares of Common Stock (collectively, the "Restricted
Shares")
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have been registered under the Securities Act, and they may be resold publicly
only upon registration under the Securities Act or in compliance with an
exemption from the registration requirements of the Securities Act. The Company
has granted demand and piggyback registration rights to holders of Restricted
Shares and warrants to purchase shares of Common Stock.
See "Description of Capital Stock -- Registration Rights."
Rule 144 provides generally that if two years have elapsed since the
later of the date of the acquisition of restricted shares of Common Stock from
the Company or any affiliate of the Company, the acquiror or subsequent holder
thereof may sell, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares that does not exceed the greater of
1% of the then outstanding shares of Common Stock or the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. If three years have elapsed since the later of the date of acquisition
of restricted shares of Common Stock from the Company or from any affiliate of
the Company and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares under Rule 144(k)
without regard to the limitations described above. Holders of 461,665 Restricted
Shares will be eligible to sell such shares pursuant to Rule 144 under the
Securities Act, subject to the manner of sale, volume, notice and information
requirements of Rule 144, beginning in December 1996, holders of 349,175
Restricted Shares will be eligible to sell such shares pursuant to Rule 144
beginning in February 1997, holders of 12,879 Restricted Shares will be eligible
to sell such shares pursuant to Rule 144 beginning in June 1997, holders of
3,178,185 Restricted Shares will be eligible to sell such shares pursuant to
Rule 144 beginning in August 1997, holders of 500,531 Restricted Shares will be
eligible to sell such shares pursuant to Rule 144 beginning in September 1997,
holders of 11,014 Restricted Shares will be eligible to sell such shares in
October 1997, holders of 540,163 Restricted Shares will be eligible to sell such
shares in December 1997, holders of 25,000 Restricted Shares will be eligible to
sell such shares in March 1998, holders of 1,377 Restricted Shares will be
eligible to sell such shares in April 1998 and holders of 4,131 Restricted
Shares will be eligible to sell such shares in May 1998.
The underwriters in the June 1996 public offering obtained lock-up
agreements whereby the Company, executive officers, directors and certain
stockholders of the Company agreed not (directly or indirectly) to offer, sell,
offer to sell, contract to sell, assign, pledge, grant any option to purchase or
otherwise dispose of or transfer (or announce any offer, sale, offer of sale,
contract for sale, assignment, pledge, grant of an option to purchase or other
disposition or transfer of) any Common Stock of the Company, or any other
security of the Company, convertible into, or exchangeable or exercisable for,
Common Stock for a period of 90 days after the effective date of the
registration statement (the "Lock-up Period") without the prior written consent
of the Underwriters, except that (a) the Company (i) may issue Common Stock or
options to purchase Common Stock under the Stock Plan, (ii) may issue Common
Stock upon the exercise of presently outstanding warrants and (iii) may issue
Common Stock in connection with the Company's express strategy of growth through
acquisitions provided that such Common Stock is restricted and is not tradeable
prior to the expiration of the Lock-up Period and (b) the executive officers,
directors and certain stockholders of the Company may make bona fide gifts to
donees who agree to be bound by the foregoing restrictions. The Lock-Up Period
expired on September 26, 1996.
The Company filed registration statements under the Securities Act
registering the 1,500,000 shares of Common Stock reserved for issuance under the
Stock Plan in December 1995. See "Management -- 1995 Stock Plan." Accordingly,
shares registered under such registration statements will be available for sale
in the open market, unless such shares are subject to vesting restrictions
imposed by the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Arnall Golden & Gregory, Atlanta, Georgia.
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EXPERTS
The financial statements of Moovies, Inc. as of December 31, 1994 and
1995 and for each of the years in the three year period ended December 31, 1995,
have been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The financial statements of the Pic-A-Flick Group and the Movie Store
Group have been included herein and in the Registration Statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, as of the dates and for the periods indicated in their reports
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The financial statements of MoveAmerica, Incorporated d/b/a Movies To Go
and Games To Go have been included herein and in the Registration Statement in
reliance upon the reports of McGladrey & Pullen, LLP, independent certified
public accountants, as of the dates and for the periods indicated in their
reports appearing elsewhere herein, and upon the authority of said firm as
experts in auditing and accounting.
The financial statements of (i) Movie Stars (a division of Movie Stars
Entertainment Corp.); (ii) PARR-Four, Inc. (d/b/a Video Express); (iii) Video
Stars (a division of BREM, Inc.); (iv) Video Warehouse I Group; (v) Video
Warehouse II Group; (vi) Planet Video; (vii) First Row Video, Inc.; (viii) Video
Game Trader, Inc.; and (ix) L.A. Video have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, as of the dates and for the periods
indicated in their reports appearing elsewhere herein, and upon the authority of
said firm as experts in auditing and accounting. The report of KPMG Peat Marwick
LLP covering the December 31, 1993 and 1994 financial statements of First Row
Video, Inc. refers to a change in the method of computing amortization of
videocassette rental inventory.
The financial statements of Certain Stores of American
Multi-Entertainment, Inc. d/b/a Premiere Video have been included herein and in
the Registration Statement in reliance upon the reports of McMahon, Hartmann,
Amundson & Co. LLP, independent certified public accountants, as of the dates
and for the periods indicated in their reports appearing elsewhere herein, and
upon the authority of said firm as experts in auditing and accounting.
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MOOVIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Moovies, Inc. ............................................................
Independent Auditors' Report ....................................... F-3
Consolidated Balance Sheets ........................................ F-4
Consolidated Statements of Operations .............................. F-5
Consolidated Statements of Stockholders'
Equity and Partners' Equity (Deficit) .............................. F-6
Consolidated Statements of Cash Flows .............................. F-7
Notes to Consolidated Financial Statements ......................... F-8
Movie Stars (a division of Movie Stars Entertainment Corp.)
Independent Auditors' Report ................................... F-19
Statements of Operating Revenues and Expenses .................. F-20
Statements of Cash Flows ....................................... F-21
Notes to Financial Statements .................................. F-22
Parr-Four, Inc. (d/b/a Video Express)
Independent Auditors' Report ................................... F-25
Statements of Operations ....................................... F-26
Statements of Cash Flows ....................................... F-27
Notes to Financial Statements .................................. F-28
Video Stars (a division of BREM, Inc.)
Independent Auditors' Report ................................... F-32
Statement of Operating Revenues and Expenses ................... F-33
Statement of Cash Flows ........................................ F-34
Notes to Financial Statements .................................. F-35
Video Warehouse I Group
Independent Auditors' Report ................................... F-38
Combined Statements of Operating Revenues and Expenses ......... F-39
Combined Statements of Cash Flows .............................. F-40
Notes to Combined Financial Statements ......................... F-41
Video Warehouse II Group
Independent Auditors' Report ................................... F-43
Combined Statements of Operating Revenues and Expenses ......... F-44
Combined Statements of Cash Flows .............................. F-45
Notes to Combined Financial Statements ......................... F-46
Planet Video
Independent Auditors' Report ................................... F-48
Combined Statements of Operating Revenues and Expenses ......... F-49
Combined Statements of Cash Flows .............................. F-50
Notes to Combined Financial Statements ......................... F-51
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Page
First Row Video, Inc. ...................................................
Independent Auditors' Report ...................................... F-53
Statements of Income .............................................. F-54
Statements of Cash Flows .......................................... F-55
Notes to Financial Statements ..................................... F-56
Video Game Trader, Inc. .................................................
Independent Auditors' Report ...................................... F-61
Statements of Operations .......................................... F-62
Statements of Cash Flows .......................................... F-63
Notes to Financial Statements ..................................... F-64
L.A. Video
Independent Auditors' Report ...................................... F-67
Combined Statements of Operating Revenues and Expenses ............ F-68
Combined Statements of Cash Flows ................................. F-69
Notes to Combined Financial Statements ............................ F-70
MoveAmerica, Incorporated d/b/a Movies To Go and Games To Go
Independent Auditors' Report ...................................... F-72
Statements of Income .............................................. F-73
Statements of Cash Flows .......................................... F-74
Notes to Financial Statements ..................................... F-75
Movie Store Group
Independent Auditors' Report ...................................... F-77
Combined Statements of Operating Revenues and Expenses ............ F-78
Combined Statements of Cash Flows ................................. F-79
Notes to Combined Financial Statements ............................ F-80
Pic-A-Flick Group
Independent Auditors' Report ...................................... F-83
Combined Statements of Operating Revenues and Expenses ............ F-84
Combined Statements of Cash Flows ................................. F-85
Notes to Combined Financial Statements ............................ F-86
Certain Stores of American Multi-Entertainment, Inc. d/b/a Premiere Video
Independent Auditors' Report ...................................... F-90
Combined Statements of Net Assets ................................. F-91
Combined Statements of Operations ................................. F-92
Statement of Changes in Stores' Capital ........................... F-93
Combined Statements of Cash Flows ................................. F-94
Notes to Combined Financial Statements ............................ F-95
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Independent Auditors' Report
The Board of Directors and Shareholders
Moovies, Inc.:
We have audited the accompanying consolidated balance sheets of Moovies, Inc. as
of December 31, 1994 and 1995, and the related consolidated statements of
operations, stockholders' equity and partners' equity (deficit), and cash flows
for each of the years in the three year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Moovies, Inc. as of December 31, 1994 and 1995, and the consolidated results of
its operations and its cash flows for each of the years in the three year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
March 1, 1996
<PAGE>
MOOVIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Six months ended
December 31, June 30,
Assets 1994 1995 1996
------ ---- ---- ----
(unaudited)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 169,591 $ 3,563,788 $ 191,095
Receivables 6,544 2,780,214 22,622,690
Merchandise inventory 9,985 2,617,496 2,706,695
Deferred income tax benefit - 984,136 308,224
Prepaid rent - 739,804 1,071,138
Other 116,810 1,243,708 1,744,634
------------- ---------------- --------------
Total current assets 302,930 11,929,146 28,644,476
Videocassette rental inventory, net 931,212 16,728,416 19,144,366
Furnishings and equipment, net 566,743 9,858,952 16,014,766
Goodwill - 29,080,621 30,255,843
Deposits and other assets 297,502 622,361 989,702
$ 2,098,387 $ 68,219,496 $ 95,049,153
============= ================ ==============
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ - $ 2,500,000 $ 12,795,934
Notes payable - 5,935,215 500,000
Current portion of long-term debt 430,726 481,064 448,771
Accounts payable 672,993 10,567,375 9,788,466
Accrued liabilities 89,573 3,065,603 3,663,864
------------- ---------------- --------------
Total current liabilities 1,193,292 22,549,257 27,197,035
Long-term debt, less current portion 1,309,002 2,410,987 3,604,601
Deferred income tax payable - 5,796,051 5,921,634
------------- ---------------- --------------
2,502,294 30,756,295 36,723,270
Commitments
Stockholders' equity (partners' deficit):
Preferred stock, $.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding - - -
Common stock, $.001 par value; 25,000,000 shares
authorized; issued and outstanding, 8,664,040
at June 30, 1996, 8,658,532 shares at
December 31, 1995 and none at December 31, 1994 - 8,659 8,664
Common stock subscribed - - 2,800
Additional paid-in capital - 35,857,767 55,503,225
Retained earnings - 1,596,775 2,811,194
Partners' deficit (403,907) - -
------------- ---------------- -------------
Total stockholders' equity (partners' deficit) (403,907) 37,463,201 58,325,883
------------- ---------------- --------------
$ 2,098,387 $ 68,219,496 $ 95,049,153
============= ================ ==============
See accompanying notes to Consolidated Financial Statement.
</TABLE>
<PAGE>
MOOVIES, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
------------------------------------------------- -----------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
Revenues:
<S> <C> <C> <C> <C> <C>
Rental revenues $ 3,578,535 $ 4,069,509 $ 20,309,185 $ 2,269,903 $ 32,633,378
Product sales 310,458 322,099 4,349,124 228,107 4,967,294
-------------- ------------- ------------- ------------- -------------
3,888,993 4,391,608 24,658,309 2,498,010 37,600,672
Operating costs and expenses:
Operating expenses 2,798,239 3,120,557 15,592,814 1,772,851 26,337,499
Cost of product sales 239,426 278,448 2,978,728 191,508 3,167,492
Selling, general and
administrative 573,006 610,471 2,955,493 377,882 4,610,282
Amortization of
goodwill - - 148,112 - 754,405
-------------- ------------- ------------- ------------- -------------
3,610,671 4,009,476 21,675,147 2,342,241 34,869,678
-------------- ------------- ------------- ------------- -------------
Operating income 278,322 382,132 2,983,162 155,769 2,730,994
Interest expense (43,134) (101,030) (197,236) (79,049) (700,518)
Other, net - - 25,014 - (14,522)
-------------- ------------- ------------- ------------- -------------
Income before income taxes 235,188 281,102 2,810,940 76,720 2,015,954
Income tax expense - - 1,045,822 - 801,535
-------------- ------------- ------------- ------------- -------------
Net income $ 235,188 $ 281,102 $ 1,765,118 $ 76,720 $ 1,214,419
============== ============= ============= ============= =============
Net income per share $ N/A $ N/A $ .52 $ N/A $ .14
============== ============= ============= ============= =============
Weighted average shares
outstanding N/A N/A 3,395,000 N/A 8,931,000
============== ============= ============= ============= =============
See accompanying notes to Consolidated Financial Statement.
</TABLE>
<PAGE>
MOOVIES, INC.
Consolidated Statements of Stockholders' Equity and Partners' Equity (Deficit)
<TABLE>
<CAPTION>
Additional Partners' Total
Common Paid-In Retained Equity Stockholders'
Stock Capital Earnings (Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ - $ - $ - $ 1,124,295 $ 1,124,295
Net income - - - 235,188 235,188
Limited partner buy-out - - - (1,691,107) (1,691,107)
Partner contributions - - - 22,910 22,910
--------- --------------- ------------ ------------- --------------
Balance at December 31, 1993 - - - (308,714) (308,714)
Net income - - - 281,102 281,102
Partner withdrawals - - - (376,295) (376,295)
--------- --------------- ------------ ------------- --------------
Balance at December 31, 1994 - - - (403,907) (403,907)
Partner withdrawals - - - (227,707) (227,707)
Partnership net income,
through August 8, 1995 - - - 168,343 168,343
Net proceeds from issuance and
sale of 3,622,500 shares of
common stock in connection with
the initial public offering, net
of issuance costs of $3,463,770 3,623 36,959,707 - - 36,963,330
Issuance of common stock
to companies acquired
concurrently with the
initial public offering
of common stock 4,027 9,654,626 - - 9,658,653
Payment of deemed dividend - (22,949,114) - - (22,949,114)
Elimination of partner's deficit - (463,271) - 463,271 -
Issuance of 842,004 shares of
common stock in connection
with acquisitions of video
rental chains 842 12,654,315 - - 12,655,157
Exercise of warrants for
167,124 shares 167 1,504 - - 1,671
Net income - - 1,596,775 - 1,596,775
--------- --------------- ------------ ------------- --------------
Balance at December 31, 1995 8,659 35,857,767 1,596,775 - 37,463,201
Subscription of common stock 2,800 19,645,458 - - 19,648,258
Exercise of warrants for 5,000 share 5 - - - 5
Net income - - 1,214,419 - 1,214,419
--------- --------------- ------------ ------------- --------------
Balance at June 30, 1996 (unaudited) $ 11,464 $ 55,503,225 $ 2,811,194 $ - $ 58,325,878
========= =============== ============ ============= ==============
See accompanying notes to Consolidated Financial Statements. </TABLE>
MOOVIES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1993 1994 1995 1995 1996
(unaudited)
Operating activities:
<S> <C> <C> <C> <C>
Net income $ 235,188 $ 281,102 $ 1,765,118 $ 76,720$ 1,214,419
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 865,330 906,949 4,643,167 454,126 9,937,748
Amortization of discount on
long-term debt 20,849 65,355 - 34,325 -
Loss on disposal of furnishings
and equipment 4,066 8,837 - - -
Changes in operating assets and liabilities:
Receivables (10,603) 9,852 (2,543,634) (39,781) 795,899
Merchandise inventory (1,054) (2,747) (847,187) (20,615) (89,199)
Other current assets - - (679,401) - (1,343,002)
Deposits and other assets, net (31,921) (56,674) 34,103 (266,342) (367,341)
Accounts payable 176,890 233,698 4,720,501 716,457 (778,909)
Accrued liabilities (5,934) 31,473 1,166,108 (63,043) (26,739)
Deferred income taxes - - 1,045,822 - 801,495
----------- ----------- ------------ ---------- -----------
Net cash provided by operating
activities 1,252,811 1,477,845 9,304,597 891,847 10,144,371
----------- ----------- ------------ ---------- -----------
Investing activities:
Purchases of videocassette rental inventory, net (622,828) (890,931) (8,282,582) (949,448) (10,765,488)
Purchases of furnishings and equipment (95,540) (217,431) (5,884,931) (220,473) (7,085,103)
Proceeds from the sale of the grocery division - - - - 745,625
Business acquisitions - - (3,477,311) - (2,434,187)
----------- ----------- ------------ ---------- -----------
Net cash used in investing activities (718,368) (1,108,362) (17,644,824) (1,169,921) (19,539,135)
----------- ----------- ------------ ---------- -----------
Financing activities:
Proceeds from line of credit borrowings - - 2,500,000 - 10,295,934
Proceeds from issuance of long-term debt 550,000 581,646 4,116,151 2,100,000 2,000,000
Principal payments on long-term debt (206,257) (362,620) (9,222,697) (622,117) (6,273,895)
Capitalized initial public offering costs - (285,024) - (1,071,722) -
Proceeds from issuance of common stock, net - - 36,963,330 - -
Cash paid, in the form of a deemed dividend, for
the purchase of video chains - - (22,396,324) - -
Proceeds from the exercise of warrants - - 1,671 - 50
Payment to limited partners (810,000) - - - -
Capital/partner contributions (withdrawals), net 22,910 (376,295) (227,707) (106,580) -
----------- ------------ ------------ ---------- ----------
Net cash (used in) provided by
financing activities (443,347) (442,293) 11,734,424 299,581 6,022,089
----------- ----------- ------------ ---------- -----------
Increase (decrease) in cash and cash equivalents 91,096 (72,810) 3,394,197 21,507 (3,372,693)
Cash and cash equivalents at beginning of year 151,305 242,401 169,591 169,591 3,563,788
----------- ----------- ------------ ---------- -----------
Cash and cash equivalents at end of year $ 242,401 $ 169,591 $ 3,563,788 $ 191,908$ 191,095
=========== =========== ============ ========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 22,286 $ 35,674 $ 161,718 $ 76,196$ 176,483
=========== =========== ============ ========== ==========
Issuance of limited partnership promissory notes $ 881,107 $ - $ - $ - $ -
=========== =========== ============= ========== =========
See accompanying notes to Consolidated Financial Statement.
</TABLE>
<PAGE>
MOOVIES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Description of Business
Moovies, Inc. (the "Company") was incorporated in November 1994 for the
purpose of entering into agreements to acquire video specialty stores,
consummating an initial public offering of stock and operating video
specialty stores. Concurrently with the completion of an initial public
offering of stock in August 1995, the Company acquired ten other video
specialty chains, including Tonight's Feature Limited Partnership II, the
Company's predecessor (the "Predecessor" or "Tonight's Feature"). As of
December 31, 1995, the Company operated 148 video specialty stores
located in South Carolina, North Carolina, Georgia, Iowa, Virginia, Ohio,
New Jersey, New York, Connecticut and Pennsylvania. Prior to August 1995,
Moovies, Inc. had no operations.
Basis of Presentation
The accompanying consolidated financial statements reflect the 1993, 1994
and 1995 results of operations of Tonight's Feature, the Company's
predecessor, and from August 1995, the operations of the combined
acquisitions (see note 2). In August 1995, Tonight's Feature was merged
into the Company. Throughout these consolidated financial statements,
references to the Company refer to Tonight's Feature for periods prior to
August 1995.
The consolidated balance sheet as of June 30, 1996 and the consolidated
statements of operations, stockholder's equity and partners' equity
(deficit) and cash flows for the six months ended June 30, 1995 and 1996
have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial
position, results of operations and cash flows as of June 30, 1996 and
for the three months ended June 30, 1995 and June 30, 1996, have been
included.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries from and after the date of acquisition
of each such subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Merchandise Inventory
Merchandise inventory, consisting primarily of prerecorded
videocassettes, children's' books and confectionery items, is stated at
the lower of cost or market. Cost is determined using the first-in,
first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the tenth and any succeeding
copies of each title per store are amortized over nine months on a
straight-line basis; the fourth through ninth copies of each title per
store are amortized 40% in the first year and 30% in each of the second
and third years; and copies one through three of the titles per store are
amortized as base stock.
<PAGE>
(1) Summary of Significant Accounting Policies (Continued)
Videocassette Rental Inventory (Continued)
Certain videocassettes in the rental inventory are leased under a revenue
sharing agreement with a vendor, as broker for various studios. During
the revenue sharing period, which does not exceed two years, the studios
retain ownership of the videocassette, and the Company shares the rental
revenue with the vendor rather than purchasing the videocassette for a
fixed cost (typically $60 to $67). Under this agreement, the percentage
of rental revenue retained by the Company generally increases during the
first 90 days of the revenue sharing period, reaching a fixed percentage
at 90 days. The associated handling fee per leased videocassette is
amortized on a straight-line basis over the term of the lease. Revenue
sharing allows the Company to order a substantially larger number of
copies to fill most of the temporarily heavy demand that exists during
the first few weekends of a title's release. Revenue sharing reduces the
risk that the Company will be unable to recover the acquisition cost of a
videocassette through rental revenue before the popularity of the title
declines significantly. At the end of the revenue sharing period for a
title, the Company may purchase the remaining copies of that title for
generally less than $5 per copy. The purchased copies are then amortized
as base stock (see Note 10).
Videocassette rental inventory and related amortization are as follows:
December 31, June 30,
1994 1995 1996
(unaudited)
Videocassette rental inventory . $ 3,039,992 $ 38,903,293 $ 35,452,007
Accumulated amortization ....... (2,108,780) (22,174,877) (16,307,641)
------------ ------------ ------------
$ 931,212 $ 16,728,416 $ 19,144,366
============ ============ ============
Amortization expense related to videocassette rental inventory amounted
to $772,119, $779,285, and $3,988,296 for the years ended December 31,
1993, 1994 and 1995, respectively, and $383,376 and $7,307,449 for the
six months ended June 30, 1995 and 1996 (unaudited), respectively. As
videocassette rental inventory is sold or retired, the applicable cost
and accumulated amortization are eliminated from the accounts and any
related gain or loss is recognized.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (5 to 7 years)
for furnishings and equipment and the lesser of the useful lives or lease
term (primarily 5 to 10 years) for leased items using the straight-line
method.
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
Goodwill
Goodwill consists of the excess of acquisition costs over the fair market
value of assets acquired. Goodwill is amortized over 20 years and is
shown net of $148,112 of accumulated amortization at December 31, 1995
and $902,517 at June 30, 1996 (unaudited). If facts and circumstances
suggest that the excess of cost over net assets acquired will not be
recoverable, as determined based on the undiscounted cash flows of the
entity acquired over the remaining amortization period, the Company's
carrying value of the excess cost over net assets acquired will be
reduced by the estimated shortfalls of cash flows. In connection with the
acquisitions, the Company may obtain certain noncompete agreements. These
agreements have minimal value and as such, none of the excess acquisition
cost has been allocated to specific noncompete agreements.
<PAGE>
(1) Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
At December 31, 1994 and 1995 and at June 30, 1996 (unaudited), the
carrying value of financial instruments such as cash and cash equivalents
and accounts payable and notes payable approximated their fair values,
based upon the short-term maturities of these instruments. The fair value
of the Company's long-term debt is estimated using discounted cash flow
analysis, based upon the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The carrying value of such
instruments approximated their fair value at December 31, 1994 and 1995
and at June 30, 1996 (unaudited).
Income Taxes
The Predecessor operated as a partnership for income tax purposes through
August 1995. Accordingly, income taxes were paid by the Predecessor's
general partners and the Predecessor had no income tax liability.
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding.
Weighted average common and common equivalent shares include common
shares, stock options using the treasury stock method and the assumed
exercise of the outstanding warrants to purchase common stock.
(2) Initial Stock Offering and Acquisitions
Public Offering
In August 1995, the Company completed its initial public offering of
3,622,500 shares of common stock for $12.00 per share (the "offering").
The net proceeds of the offering, after deducting applicable issuance
costs and expenses, were approximately $37.0 million. The proceeds were
used to pay the cash portion of the acquisitions of $22.4 million, which
together with the issuance of a $500,000 note payable were considered to
be deemed dividends, and to repay approximately $4.2 million of long-term
indebtedness of the acquisitions and $1.4 million of long-term
indebtedness of Tonight's Feature. The remaining proceeds were used to
acquire additional video rental chains and to open new stores, acquire
new sites, renovate older locations, purchase computer equipment and for
general corporate purposes.
Acquisitions
Concurrently with the completion of the offering, the Company purchased
substantially all of the assets, assumed certain liabilities and acquired
the businesses of 76 video specialty stores. As defined under Rule
1-02(s) of Regulation S-X, the shareholders and owners of these video
stores were considered promoters who transferred assets and liabilities
to the Company in exchange for common stock. As a result, the Company
recorded the assets and liabilities acquired at their historical cost
bases and no goodwill was recorded in the transaction.
<PAGE>
(2) Initial Stock Offering and Acquisitions (Continued)
Acquisitions, Continued
Subsequent to the initial public offering, the Company acquired 48 video
specialty stores from six unrelated sellers for approximately $22.1
million, including the issuance of approximately $5.9 million in notes
payable and the issuance of approximately 842,000 shares of common stock.
The assigned value of the shares of common stock issued was an aggregate
of approximately $13.0 million, based upon the closing price of the
common stock on the date of acquisition. These acquisitions were recorded
under the purchase method of accounting. The excess of cost over the
estimated fair value of the assets acquired of approximately $29.2
million is being amortized over 20 years on a straight-line basis.
The following unaudited pro forma information presents the results of
operations of the Company as though the aforementioned acquisitions had
occurred as of the beginning of the year in which the acquisition
occurred and the immediately preceding year.
December 31,
1994 1995
Pro forma revenue .......................... $59,709,000 $67,831,000
Pro forma net income ....................... $ 3,296,000 $ 4,339,000
Pro forma net income per share ............. $ .37 $ .48
Pro forma weighted average shares .......... 8,860,000 8,960,000
(3) Furnishings and Equipment
Furnishings and equipment consisted of the following at December 31:
December 31, June 30,
1994 1995 1996
(unaudited)
Building ....................... $ -- $ 147,126 $ 147,126
Furniture and fixtures ......... 772,387 5,381,083 7,221,884
Other equipment ................ 29,000 4,824,807 5,595,008
Leasehold improvements ......... -- 2,666,848 4,506,809
Vehicles ....................... 120,246 216,130 216,967
Construction in progress ....... -- 2,190,098 4,739,209
------------ ------------ ------------
921,633 15,426,092 22,427,003
Accumulated depreciation and
amortization .............. (354,890) (5,567,140) (6,412,237)
------------ ------------ ------------
$ 566,743 $ 9,858,952 $ 16,014,766
============ ============ ============
Depreciation and amortization expense on furnishings and equipment was
$93,211, $127,664, and $506,759 for the years ended December 31, 1993,
1994 and 1995, respectively, and $70,750 and $1,012,398 for the six
months ended June 30, 1995 and 1996 (unaudited), respectively.
In December 1995, the Company entered into an ongoing operating lease
agreement whereby the Company may lease its computers and phone
equipment. As of December 31, 1995, the Company had a receivable from the
leasing company for $1,445,029 which was included in receivables. This
receivable was $515,907 at June 30, 1996 (unaudited). This receivable
represents cash due for equipment sold to the leasing company which will
be leased back to the Company.
<PAGE>
(4) Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
(unaudited)
<S> <C> <C> <C>
Note payable to former limited partners .................................. $ 967,311 $ -- $ --
Notes payable to bank due in monthly installments of varying amounts
through March 1997, with interest at prime plus 1.5%, secured
by certain fixed assets .............................................. 552,315 -- --
Notes payable to bank, due in monthly installments of varying amounts
through November 1999, with interest at 7% to 9%,
secured by certain fixed assets ...................................... 70,102 -- --
Revolving credit agreement with a related party vendor, due in March 1998,
with interest payable monthly at prime plus 2%, secured
by certain fixed assets .............................................. 150,000 -- --
Notepayable to bank, due in monthly installments of varying amounts
through November 2000, with interest at prime plus 1.5%,
secured by all assets of selected stores ............................. -- 629,045 --
Notepayable to bank, due in monthly installments of varying amounts
through November 2000, with interest at 9.75%, secured
by certain fixed assets .............................................. -- 116,151 112,258
Notepayable to investment company, due in monthly installments through
April 2000, with interest at 11%, secured by certain
fixed assets ......................................................... -- 112,011
-----------
Unsecured note payable to seller, due in five equal principal payments
with the final payment due in April 1997, with
interest at 8% ....................................................... -- 468,650 374,920
Notepayable to bank, due in monthly installments of varying amounts
through June 1996, with interest at 8.5%, secured by all assets
of selected stores ................................................... -- 66,194
66,194
Subordinated note payable to investment company, due in April 2000, with
interest at 13.5%, secured by second lien on assets of
selected stores ...................................................... -- 1,500,000
3,500,000
1,739,728 2,892,051 4,053,372
Less current portion ..................................................... (430,726) (481,064) (448,771)
----------- ----------- -----------
$ 1,309,002 $ 2,410,987 $ 3,604,601
=========== =========== ===========
</TABLE>
<PAGE>
(4) Long-term Debt (Continued)
The Company is required to comply with certain covenants which limit the
incurrence of additional debt, restrict the payment of dividends and
restrict the disposition of certain assets. At year end, the Company was
in compliance with such covenants.
Scheduled maturities of long-term debt at December 31, 1995 are as
follows:
1996 $ 481,064
1997 300,945
1998 127,620
1999 142,950
2000 1,839,472
----------
$2,892,051
At December 31, 1995, the Company had a commitment from a lender for a
$2.0 million term loan which will be subordinated to the Company's
revolving credit facility. In January 1996, the Company exercised its
commitment and received $2.0 million under the facility. Borrowings
outstanding under this loan bear interest at an annual rate of 13% and
mature in January 2001. In connection with the borrowing, the Company
issued the lender a warrant to purchase 20,000 shares of common stock at
an exercise price of $10.80 per share.
(5) Line of Credit
The Company has a $6.5 million revolving credit facility with a bank. At
December 31, 1995, the Company had outstanding borrowings under the line
of $2.5 million. The borrowings bear interest at the bank's prime rate
plus 1.25%, with interest payable monthly. The facility terminates in
July 1996. Borrowings are secured by substantially all of the Company's
assets. The Company is required to comply with certain covenants which
limit the incurrence of additional debt, restrict the payment of
dividends and restrict the disposition of certain assets. At December 31,
1995, the Company was in compliance with such covenants. (see note 10)
(6) Notes Payable
Concurrently with the completion of its initial public offering and the
acquisition of 76 video specialty stores, the Company issued a $500,000
unsecured promissory note payable to a seller. The note bears interest at
a rate of 10% and matures in August 1996.
In connection with the acquisition of the Pic-A-Flick Group in December
1995 the Company issued a $5.0 million note payable to the former owners.
The note bears interest at a rate of 5.5%. The note and the related
interest were repaid by the Company in January 1996.
In connection with the acquisition of the Movie Store Group in December
1995 the Company issued a $435,215 note payable to the former owners. The
note bears interest at a rate of 5.5%. The note and the related interest
were repaid by the Company in January 1996.
<PAGE>
(7) Stockholder's Equity
Preferred Stock
The Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock in one or more series, and to fix or alter the
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions of such
stock, including the dividend rights, dividend rates, conversion rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices and liquidation preferences of
the shares constituting any series, without any further vote or action by
the stockholders' of the Company. No shares of preferred stock have been
issued.
Stock Options
In June 1995, the Board of Directors adopted, and the stockholders'
approved, the 1995 Stock Option Plan (the "Plan"). The Plan provides for
the award of incentive stock options to officers and employees and the
award of non-qualified stock options and other incentive grants to
directors, officers and employees. The Company has reserved 1,200,000
shares for issuance under the Plan, subject to stockholder approval. On
May 15, 1996, the stockholders approved an increase in the number of
shares issuable under the Plan to 1,500,000 (unaudited).
At December 31, 1995, option grants were as follows:
Shares Option Price
Outstanding ............................. 700,450 $10.88 to $12.00
Exercisable ............................. 155,000 $10.88 to $12.00
Granted ................................. 700,450 $10.88 to $12.00
Exercised ............................... -- --
Canceled ................................ -- --
----------------
Available for future grants ............. 499,550
At December 31, 1995, options outstanding become exercisable as follows:
1996 275,567
1997 150,566
1998 119,317
-------
545,450
All options were granted at an exercise price equal to the closing price
as of the date of grant and therefore were not compensatory.
<PAGE>
(7) Stockholder's Equity, Continued
Warrants
In November 1994, the Company granted to a director a warrant to purchase
150,000 shares of Common Stock of the Company at $1.00 per share. In
March 1995, the Company granted 19 former limited partners of the
Predecessor warrants to purchase an aggregate of 74,352 shares of Common
Stock of the Company for $.01 per share. In April 1995, the Company's
predecessor granted to Mortco, Inc., in connection with the Company's
note payable to Mortco, a warrant to acquire 40,877 shares of Common
Stock at an exercise price equal to the initial public offering price per
share (i.e. $12.00 per share). In April 1995, the Company granted to
Sirrom Capital Corporation a warrant to acquire 156,110 shares of Common
Stock at $.01 per share in connection with a loan from Sirrom to the
Predecessor. In July 1995, the Company agreed to issue to the
Underwriters warrants to purchase 236,250 shares of Common Stock at a
purchase price per share equal to 120% of the initial public offering
price per share (i.e. $14.40 per share). In December 1995, the Company
issued a warrant for 25,000 shares of Common Stock at a Purchase Price of
$14.875 per share in connection with the Pic-A-Flick acquisition. In
January 1996, in connection with issuance of a subordinated note payable,
the Company granted to Sirrom Capital Corporation a warrant (the "Sirrom
Warrant") to purchase 20,000 shares of Common Stock at an exercise price
of $10.80 per share. The warrants will be exercisable during the four
year period commencing one year after the date the warrants are issued.
Except for the Sirrom Warrant, all warrants were granted at an exercise
price equal to the closing price on the date of grant and therefore were
not compensatory. The Sirrom Warrant was granted at a price of $1.20
below the closing price and was accounted for in accordance with SFAS No.
123.
During 1995, warrants for 167,124 shares at $.01 per share were
exercised. The Company received proceeds of $1,671.
(8) Commitments
The Company leases all of its retail facilities under noncancelable
operating leases which contain renewal options and escalation clauses.
Future minimum lease payments required under these leases as of December
31, 1995 are as follows:
1996 $ 9,889,649
1997 8,749,859
1998 7,810,513
1999 7,025,556
2000 5,498,321
-----------
$38,973,898
Rental and related expenses amounted to $368,236, $421,836, and
$2,900,697 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $251,926 and $5,329,587 for the six months ended June
30, 1996 (unaudited), respectively.
The Company has a revenue sharing agreement through 2005 whereby it is
obligated to obtain a minimum annual dollar amount of new releases from a
vendor. During the revenue sharing period, which is generally one year
(but does not exceed two years) per title, the movie studio retains
ownership of the video and the Company shares the rental revenue with the
vendor.
<PAGE>
(9) Income Taxes
Income tax expense is as follows:
Current Deferred Total
Year ended December 31, 1995:
Federal .............................. $ -- $ 822,580 $ 822,580
State ................................ -- 223,242 223,242
-------- ---------- ----------
Total ....................... $ -- $1,045,822 $1,045,822
======== ========== ==========
Six months ended June 30, 1996 (unaudited):
Federal .............................. $ -- $ 710,260 $ 710,260
State ................................ -- 91,275 91,275
-------- ---------- ----------
Total ....................... $ -- $ 801,535 $ 801,535
======== ========== ==========
Income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% as a result of the following :
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1993 1994 1995 1996
(unaudited)
<S> <C> <C> <C> <C>
Computed " expected" tax expense $ 80,009 $ 95,575 $ 955,719 $ 648,425
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net
of Federal income tax benefits - - 147,340 60,241
Goodwill amortization - - - 55,869
Income from partnership, taxable
to partners (80,009) (95,575) (57,237) -
--------- ----------- ----------- ----------
Actual tax expense $ - $ - $ 1,045,822 $ 801,535
========= ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred income tax
assets and liabilities is as follows:
December 31, June 30,
1995 1996
(unaudited)
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 789,196 $ 705,222
Accrued expenses and allowances deductible
for books, but not for tax 992,848 741,662
----------- -------------
$ 1,782,044 $ 1,446,884
----------- -------------
Deferred tax liabilities:
Furnishings and equipment, principally due to
differences in depreciation $ 3,403,544 $ 3,821,590
Intangibles, principally due to differences in basis
including amortization 2,744,969 2,837,650
Other 445,446 401,054
----------- -------------
6,593,959 7,060,294
----------- -------------
Net deferred tax liabilities $ 4,811,915 $ 5,613,410
=========== =============
</TABLE>
<PAGE>
(9) Income Taxes (Continued)
Management believes that a valuation allowance is not considered
necessary based upon projections of future taxable income and the
reversal of taxable temporary differences over the periods during which
the deferred tax assets are deductible.
At December 31, 1995, the Company has a net operating loss carryforward
for Federal income tax purposes of approximately $1,950,000. At June 30,
1996, the Company estimates a net operating loss carryforward for Federal
income tax purposes of approximately $1,700,000 (unaudited) which is
available to offset future taxable income, if any, through 2010.
(10) Subsequent Events (unaudited)
Effective January 1, 1996, the Company adopted an accelerated method of
amortizing its videocassette rental inventory. Under this new method,
videocassette rental inventory, which includes video games, is stated at
cost, including the related costs to prepare such videocassettes for
rent, and is amortized over its estimated economic life of 36 months, to
its estimated salvage value ($6 per videocassette during 1996). All
copies of new release videocassettes are amortized on an accelerated
basis during their first four months to an average net book value of $15
and then on a straight-line basis to their estimated salvage value of $6
over the next 32 months. All copies of new release videocassettes that
are purchased for less than $15 are amortized on a straight-line basis to
the estimated salvage value of $6 over 36 months. The number of high and
low priced new release title purchased by the Company in any given period
depends on the price assigned to each release by the movie studios.
Historically, there are fewer low priced new release titles than high
priced. Therefore, the Company has historically spent less on low priced
new release titles. In 1995, the Company spent less than 10% of its new
release budget on low priced titles. After the book value is amortized to
its salvage value, it remains in inventory at that value until disposed
of, at which time the salvage value is recorded as an element of cost of
sales.
Typically the Company attempts to sell half of its new release tapes
between four and six months after the title is released. Half of those
remaining tapes are sold between seven and nine months after the release
and the stores reduce the remaining inventory to approximately three
tapes after a year. After 36 months, a store will generally have one copy
of that title in its inventory at a salvage value of $6. At the time of
sale, any unamortized cost of the tape is charged to cost of goods sold.
The new method of amortization was adopted because the Company believes
accelerating expense recognition for new release videocassettes during
the first four months more closely matches the typically higher revenue
generated following a title's release, and believes $15 represents a
reasonable average carrying value for tapes to be rented or sold after
four months and $6 represents a reasonable salvage value for all tapes
after 36 months. During the selection process of its new amortization
method, the Company evaluated the revenue stream generated from a typical
new release and found this information to be consistent with the
information available in August 1995 when the Company selected its
previous amortization method.
The new method of amortization has been applied to videocassette rental
inventory that was held in inventory at January 1, 1996. The adoption of
the new method of amortization has been accounted for as a change in
accounting estimate effected by a change in accounting principle and,
accordingly, the Company recorded $860,000 as a pre-tax charge to
operating expense in the first quarter. The charge in the current period
related to amortization expense that would have been recorded for tapes
had the Company adopted the new amortization method prior to January 1,
1996. The application of the new method of amortizing videocassette
rental inventory, including the $860,000 or $0.06 per share charge
described above, increased amortization expense for the six months ended
March 31, 1996 by approximately $2.4 million and reduced net income by
approximately $1.4 million and earnings per share by $0.16.
In March 1996, the Company acquired five video specialty stores in
Colorado for approximately $2.4 million.
In March 1996, the Company signed a revolving credit facility (the
"Facility") for up to $22.5 million to replace its existing revolving
credit facility. The available amount of the Facility will reduce
quarterly beginning on March 31, 1997 with a final maturity of June 30,
1998. The interest rate of the facility is variable based on LIBOR and
the Company may repay the Facility at any time without penalty.
Borrowings are secured by substantially all of the Company's assets. The
more restrictive covenants under the facility require the Company to
maintain certain debt to equity ratios and require the Company to
maintain certain cash flow levels. Borrowings under this line of credit
amounted to $12,795,934 at June 30, 1996 (unaudited).
On June 28, 1996 the Company completed a public offering of 2,800,000
shares of common stock. On July 3, 1996 the Company closed this offering
of 2,800,000 and on July 30, 1996 the Company closed on 420,000
additional shares issued in accordance with the over-allotment option
granted to the underwriters. The net proceeds to the Company from the
sale of common stock and the over-allotment, after deducting offering
expenses, were approximately $19.7 million ad $3.1 million, respectively.
The Company used a portion of the proceeds to fund the Premiere Video
acquisition described below.
On July 3, 1996, the Company acquired certain assets and business of
American Multi-Entertainment, Inc. d/b/a Premiere Video ("Premiere
Video") in an asset purchase transaction for aggregate consideration of
approximately $11.5 million, consisting of $8.9 million in cash at
closing and a final payment of $2.6 million payable in January 1997 which
has been secured by a bank letter of credit. Premiere Video owned and
operated 23 stores in Minnesota, Iowa, Wisconsin, South Dakota and
Nebraska.
<PAGE>
MOVIE STARS
(a division of Movie Star Entertainment Corp.)
Independent Auditors' Report
The Board of Directors and Shareholder
Movie Stars Entertainment Corp.:
We have audited the accompanying statements of operating revenues and expenses
and cash flows of Movie Stars (a division of Movie Stars Entertainment Corp.)
for the years ended December 31, 1993 and 1994. 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 operating revenues and expenses and cash flows of
Movie Stars (a division of Movie Stars Entertainment Corp.) for the years ended
December 31, 1993 and 1994 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
May 19, 1995
<PAGE>
MOVIE STARS (a division of
Movie Star Entertainment Corp.)
Statements of Operating Revenues and Expenses
Six months
ended
Years ended December 31, June 30,
1993 1994 1995
(unaudited)
Revenues:
Rental revenues .............. $ 2,373,943 $ 2,805,350 $ 1,577,050
Product sales ................ 693,780 693,321 369,613
----------- ----------- -----------
3,067,723 3,498,671 1,946,663
----------- ----------- -----------
Operating costs and expenses:
Operating expenses ........... 2,168,119 2,134,053 1,442,758
Cost of product sales ........ 515,910 639,234 340,044
General and administrative ... 274,240 508,326 244,729
Interest, net ................ 12,315 15,410 18,456
Other (income) expense ....... (19,727) (9,153) (1,997)
----------- ----------- -----------
2,950,857 3,287,870 2,043,990
----------- ----------- -----------
Operating revenues in excess
of operating expenses ........ $ 116,866 $ 210,801 $ (97,327)
=========== =========== ===========
See accompanying notes to financial statements.
<PAGE>
MOVIE STARS (a division of
Movie Star Entertainment Corp.)
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months
ended
Years ended December 31, June 30,
1993 1994 1995
(unaudited)
Operating activities:
Operating revenues in excess of
<S> <C> <C> <C>
operating expenses $ 116,866 $ 210,801 $ (97,327)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 908,250 827,250 564,621
Changes in operating assets
and liabilities:
Merchandise inventory (115,573) (25,514) 44,532
Other current assets (767) (10,539) (18,380)
Deposits and other assets (11,334) (40,720) (81,850)
Accounts payable 144,525 81,516 257,996
Accrued liabilities 25,295 14,159 (8,382)
----------- ----------- -----------
Net cash provided by
operating activities 1,067,262 1,056,953 661,210
----------- --------- -----------
Investing activities:
Purchases of videocassette rental
inventory, net (805,128) (878,023) (800,476)
Purchases of furnishings and equipment (54,961) (168,774) (537,667)
----------- ----------- -----------
Net cash used in
investing activities (860,089) (1,046,797) (1,338,143)
----------- ----------- -----------
Financing activities:
Increase in advances from shareholder 115,009 60,265 149,480
Capital withdrawals (134,353) (60,954) -
Proceeds from issuance of long-term debt - - 475,000
Principal payments on long-term debt (10,971) (24,021) (6,980)
----------- ----------- -----------
Net cash (used in) provided
by financing activities (30,315) (24,710) 617,500
----------- ----------- -----------
Increase (decrease) in cash 176,858 (14,554) (59,433)
Cash at beginning of period 22,334 199,192 184,638
----------- ----------- -----------
Cash at end of period $ 199,192 $ 184,638 $ 125,205
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 13,518 $ 15,488 $ 17,811
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MOVIE STARS (a division of
Movie Star Entertainment Corp.)
Notes to Financial Statements
(1) Accounting Policies
Basis of Presentation
The accompanying financial statements of Movie Stars (a division of Movie
Star Entertainment Corp.) include substantially all operating revenues
and expenses and cash flows of Movie Stars. As of December 31, 1994,
Movie Stars owned and operated ten video specialty stores in New York.
The statements of revenues and expenses and cash flows for the six months
ended June 30, 1995 have been prepared by the Company without audit. In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the assets
and liabilities, operating revenues and expenses and cash flows for the
six months ended June 30, 1995 have been included.
Merchandise Inventory
Merchandise inventory, consisting of videocassettes, children's books and
confectionery items, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Videocassette rental inventory and related amortization are as follows:
Amortization expense related to videocassette rental inventory totaled
$874,728 and $782,009 for the years ended December 31, 1993 and 1994,
respectively, and $520,476 for the six months ended June 30, 1995
(unaudited). As videocassette rental inventory is sold or retired, the
applicable cost and accumulated amortization are eliminated from the
accounts and any related gain or loss is recognized.
Income Taxes
Movie Stars operates as a subchapter S corporation for income tax
purposes. Accordingly, income taxes are paid by the Corporation's
shareholder and Movie Stars has no income tax liability.
(Continued)
<PAGE>
MOVIE STARS (a division of
Movie Star Entertainment Corp.)
Notes to Financial Statements
(1) Accounting Policies, Continued
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to 10 years) for leased items using the
straight-line method.
Depreciation and amortization expense on furniture and equipment was
$33,522 and $45,241 for the years ended December 31, 1993 and 1994,
respectively and $44,145 for the six months ended June 30, 1995
(unaudited). Maintenance and repair expenditures are expensed as incurred
and amounted to $20,324 and $26,405 for the years ended December 31, 1993
and 1994, respectively, and $31,887 for the six months ended June 30,
1995 (unaudited).
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Commitments
The Company leases all of its retail facilities under noncancelable
operating leases. Future minimum lease payments required under these
leases as of December 31, 1994 are as follows:
1995 $ 360,517
1996 317,025
1997 279,589
1998 242,532
1999 229,439
Thereafter 322,767
----------
$1,751,869
Rental and related expenses totaled $279,151 and $323,014 for the years
ended December 31, 1993 and 1994, respectively, and $282,654 for the six
months ended June 30, 1995 (unaudited).
(3) Subsequent Event (unaudited)
Under an asset purchase agreement, substantially all of the assets,
certain liabilities (principally store leases) and the business of Movie
Stars were sold to Moovies, Inc. concurrently with the closing of the
initial public offering of common stock by Moovies, Inc.
<PAGE>
F-25
Independent Auditors' Report
The Board of Directors and Shareholders
Parr-Four, Inc.:
We have audited the accompanying statements of operations and cash flows of
Parr-Four, Inc. (d/b/a Video Express) for the years ended March 31, 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 results of operations and cash flows of Parr Four,
Inc. (d/b/a Video Express) for the years ended March 31, 1994 and 1995 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
May 12, 1995
<PAGE>
PARR FOUR, INC.
(d/b/a Video Express)
Statements of Operations
Three months
ended
Years ended March 31, June 30,
1994 1995 1995
(unaudited)
Revenues:
Rental revenues .............. $ 3,771,153 $ 4,657,855 $ 1,197,686
Product sales ................ 580,379 879,361 281,733
----------- ----------- -----------
4,351,532 5,537,216 1,479,419
----------- ----------- -----------
Operating costs and expenses:
Operating expenses ........... 2,577,255 3,097,962 838,270
Cost of product sales ........ 505,682 790,535 196,195
General and administrative ... 1,005,974 1,411,296 198,486
----------- ----------- -----------
4,088,911 5,299,793 1,232,951
----------- ----------- -----------
Operating income .................. 262,621 237,423 246,468
Other income (expense):
Interest expense ............. (9,706) (18,191) (4,701)
Other income, net ............ 19,391 35,979 3,962
----------- ----------- -----------
Income before income taxes ........ 272,306 255,211 245,729
Income taxes ...................... 102,000 115,000 98,290
----------- ----------- -----------
Net income ........................ $ 170,306 $ 140,211 $ 147,439
=========== =========== ===========
See accompanying notes to financial statements.
<PAGE>
PARR FOUR, INC.
(d/b/a Video Express)
Statements of Cash Flows
<TABLE>
<CAPTION>
Three months
ended
Years ended March 31, June 30,
1994 1995 1995
(unaudited)
Operating activities:
<S> <C> <C> <C>
Net income $ 170,306 $ 140,211 $ 147,439
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 733,763 1,098,527 323,658
Changes in operating assets and liabilities:
Accounts receivable (2,165) 2,612 -
Merchandise inventory (35,874) (98,204) 33,306
Deferred income tax expense
(benefit), net (12,271) 138,575 98,290
Income taxes receivable, net 114,271 (156,086) -
Deposits and other assets (8,553) (53,070) (19,801)
Accounts payable 45,742 119,838 (86,731)
Accrued officers' bonus 307,125 (169,998) -
Accrued liabilities 40,678 24,685 (25,236)
------------ ------------- --------------
Net cash provided by
operating activities 1,353,022 1,047,090 470,925
------------ ------------- --------------
Investing activities:
Purchases of videocassette rental inventory, net (907,818) (1,228,500) (347,740)
Purchases of furnishings and equipment (297,025) (221,425) (49,013)
------------ ------------- --------------
Net cash used in
investing activities (1,204,843) (1,449,925) (396,753)
------------ ------------- --------------
Financing activities:
Increase (decrease) in advances from shareholder (250,816) 309,450 (56,000)
Proceeds from issuance of long-term debt 214,000 173,685 -
Principal payments on long-term debt (100,649) (164,790) (38,043)
------------ ------------- --------------
Net cash provided by (used in)
financing activities (137,465) 318,345 (94,043)
------------ ------------- --------------
Increase (decrease) in cash 10,714 (84,490) (19,871)
Cash at beginning of year 104,828 115,542 31,052
------------ ------------- --------------
Cash at end of year $ 115,542 $ 31,052 $ 11,181
============ ============= ==============
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 9,706 $ 18,191 $ 2,180
============ ============= ==============
Cash paid during the year for income taxes $ 10,240 $ 122,226 $ -
============ ============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PARR FOUR, INC.
(d/b/a Video Express)
Notes to Financial Statements
(1) Accounting Policies
Basis of Presentation
As of March 31, 1995, Parr Four, Inc. owned and operated ten video
specialty stores in the Norfolk, Virginia area.
The statements of revenues and expenses and cash flows for the three
months ended June 30, 1995 have been prepared by the Company without
audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
assets and liabilities, operating revenues and expenses and cash flows
for the three months ended June 30, 1995 have been included.
Merchandise Inventory
Merchandise inventory, consisting of videocassettes, children's books and
confectionery items, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Certain videocassettes in the rental inventory are leased under a revenue
sharing agreement with a vendor, as broker for various studios. During
the revenue sharing period, which is generally one year (but does not
exceed two years), the studios retain ownership of the videocassette and
Parr Four, Inc. shares the rental revenue with a vendor rather than
purchasing the videocassette for a fixed cost (typically $60 to $67).
Under this agreement, the percentage of rental revenue retained by Parr
Four, Inc. generally is fixed for the first sixty days of the revenue
sharing period and is then set at a higher rate for the remainder of the
term. The associated handling fee per leased videocassette is amortized
on a straight-line basis over the term of the lease. Revenue sharing
allows Parr Four, Inc. to order a larger number of copies to meet most of
the temporarily heavy demand that exists during the first few weekends of
a title's release. Revenue sharing reduces the risk that Parr Four, Inc.
will be unable to recover the acquisition cost of a videocassette through
rental revenue before the popularity of the title declines significantly.
At the end of the revenue sharing period for a title, Parr Four, Inc. may
purchase the remaining copies of that title for generally less than $5
per copy. The purchased copies are then amortized as base stock.
Amortization expense related to videocassette rental inventory totaled
$640,716 and $969,721 for the years ended March 31, 1994 and 1995,
respectively, and $303,408 for the three months ended June 30, 1995
(unaudited). As videocassette rental inventory is sold or retired, the
applicable cost and accumulated amortization are eliminated from the
accounts and any related gain or loss is recognized.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to 10 years) for leased items using the
straight-line method.
(Continued)
<PAGE>
(1) Accounting Policies, Continued
Depreciation and amortization expense on furnishings and equipment was
$93,047 and $128,806 for the years ended March 31, 1994 and 1995,
respectively, and $20,250 for the three months ended June 30, 1995
(unaudited). Maintenance and repair expenditures are expensed as incurred
and amounted to $76,911 and $92,766 for the years ended March 31, 1994
and 1995, respectively, and $6,760 for the three months ended June 30,
1995 (unaudited).
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(2) Commitments
Retail facilities are leased under noncancelable operating leases. Future
minimum lease payments required under these leases as of March 31, 1995
are as follows:
1995 $ 654,595
1996 591,857
1997 490,214
1998 300,812
1999 200,840
Thereafter 70,500
-------------
$2,308,818
Rental and related expenses amounted to $527,975 and $600,612 for the
years ended March 31, 1994 and 1995, respectively, and $159,997 for the
three months ended June 30, 1995 (unaudited).
(Continued)
<PAGE>
(3) Income Taxes
Income tax expense (benefit) is as follows:
Current Deferred Total
Year ended March 31, 1994:
Federal ........................... $ 95,843 $ (10,604) $ 85,239
State ............................. 18,428 (1,667) 16,761
--------- --------- --------
Total ......................... $ 114,271 $ (12,271) $102,000
========= ========= ========
Year ended March 31, 1995:
Federal ........................... $ (15,575) $ 116,767 $101,192
State ............................. (8,000) 21,808 13,808
--------- --------- --------
Total ......................... $ (23,575) $ 138,575 $115,000
========= ========= ========
Three months ended June 30, 1995
(unaudited):
Federal ........................... $ 138,392 $ (55,638) $ 82,754
State ............................. 25,981 (10,445) 15,536
--------- --------- --------
Total ......................... $ 164,373 $ (66,083) $ 98,290
========= ========= ========
Income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% as a result of the following:
Three months
ended
Years ended March 31, June 30,
1994 1995 1995
(unaudited)
Computed "expected" tax expense .............. $ 92,584 $ 86,765 $83,548
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
Federal income tax benefits ......... 11,062 9,113 10,253
Increase (decrease) for surtax
exemption ........................... (1,764) 18,111 --
Other, net .............................. 118 1,011 4,489
--------- -------- -------
Actual tax expense ........................... $ 102,000 $115,000 $98,290
========= ======== =======
(Continued)
<PAGE>
(4) Related Party Transactions
Parr-Four, Inc. leases one of its retail locations from its sole
stockholder. Rental expense relating to the lease amounted to $85,200
annually for each of the years ended March 31, 1994 and 1995 and was
$21,300 for the three months ended June 30, 1995 (unaudited).
(5) Subsequent Event (unaudited)
Under a merger agreement, all of the assets, liabilities and the business
of Parr-Four, Inc. were sold to Moovies, Inc. concurrently with the
closing of the initial public offering of common stock by Moovies, Inc.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
BREM, Inc.:
We have audited the accompanying statements of operating revenues and expenses
and cash flows of Video Stars (a division of BREM, Inc.) for the nine months
ended March 31, 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the operating revenues and expenses and cash flows of
Video Stars (a division of BREM, Inc.) for the nine months ended March 31, 1995
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
May 5, 1995
<PAGE>
VIDEO STARS (a division of
BREM, Inc.)
Statement of Operating Revenues and Expenses
Nine months Three months
ended ended
March 31, June 30,
1995 1995
Revenues:
Rental revenues ................................. $1,796,272 $ 557,294
Product sales ................................... 415,066 148,570
---------- ----------
2,211,338 705,864
---------- ----------
Operating costs and expenses:
Operating expenses .............................. 1,596,643 560,481
Cost of product sales ........................... 282,658 35,124
General and administrative ...................... 150,769 74,346
Interest, net ................................... 3,966 759
---------- ----------
2,034,036 670,710
---------- ----------
Operating revenues in excess of operating expenses ... $ 177,302 $ 35,154
========== ==========
See accompanying notes to financial statements.
<PAGE>
VIDEO STARS (a division of
BREM, Inc.)
Statement of Cash Flows
<TABLE>
<CAPTION>
Nine months Three months
ended ended
March 31, June 30,
1995 1995
Operating activities:
<S> <C> <C>
Operating revenues in excess of operating expenses $ 177,302 $ 35,154
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 471,360 174,461
Changes in operating assets and liabilities:
Merchandise inventory (2,244) -
Deposits and other assets (42,693) (4,547)
Accounts payable 40,330 4,225
Accrued liabilities (8,722) 22,293
---------- -----------
Net cash provided by operating activities 635,333 231,586
---------- -----------
Investing activities:
Purchases of videocassette rental inventory, net (497,842) (215,221)
Purchases of furnishings and equipment (29,899) (120)
---------- -----------
Net cash used in investing activities (527,741) (215,341)
---------- -----------
Financing activities:
Proceeds from issuance of long-term debt 7,673 -
Principal payments on long-term debt (11,018) (1,678)
Principal payments on capital lease (17,509) (17,118)
Capital withdrawals (62,450) -
---------- ----------
Net cash used in financing activities (83,304) (18,796)
---------- -----------
Increase (decrease) in cash 24,288 (2,551)
Cash at beginning of period 118,475 142,763
---------- -----------
Cash at end of period $ 142,763 140,212
========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 5,974 1,138
========== ===========
Non-cash financing activity related to capital lease $ 23,850 $ -
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VIDEO STARS (a division of
BREM, Inc.)
Notes to Financial Statements
(1) Accounting Policies
Basis of Presentation
The accompanying financial statements of Video Stars (a division of BREM,
Inc., "BREM") include substantially all operating revenues and expenses
and cash flows of Video Stars. As of March 31, 1995, Video Stars owned
and operated eight video specialty stores in the Norfolk, Virginia area.
Video Stars' fiscal year end is June 30; the financial statements
presented reflect operations for the nine months ended March 31, 1995 and
the three months ended June 30, 1995.
The statements of revenues and expenses and cash flows for the three
months ended June 30, 1995 have been prepared by the Company without
audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
assets and liabilities, operating revenues and expenses and cash flows
for the three months ended June 30, 1995 have been included.
Merchandise Inventory
Merchandise inventory, consisting of videocassettes, children's books and
confectionery items, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Certain videocassettes in the rental inventory are leased under a revenue
sharing agreement with a vendor, as broker for various studios. During
the revenue sharing period, which generally is one year (but does not
exceed two years), the studios retain ownership of the videocassette and
Video Stars shares the rental revenue with a vendor rather than
purchasing the videocassette for a fixed cost (typically $60 to $67).
Under this agreement, the percentage of rental revenue retained by Video
Stars generally is fixed for the first sixty days of the revenue sharing
period and is then set at a higher rate for the remainder of the term.
The associated handling fee per leased videocassette is amortized on a
straight-line basis over the term of the lease. Revenue sharing allows
Video Stars to order a larger number of copies to meet most of the
temporarily heavy demand that exists during the first few weekends of a
title's release. Revenue sharing reduces the risk that Video Stars will
be unable to recover the acquisition cost of a videocassette through
rental revenue before the popularity of the title declines significantly.
At the end of the revenue sharing period for a title, Video Stars may
purchase the copies of that title for generally less than $5 per copy.
The purchased copies are then amortized as base stock.
(Continued)
<PAGE>
(1) Accounting Policies, Continued
Amortization expense related to videocassette rental inventory totaled
$440,754 and $167,091, for the nine months ended March 31, 1995 and the
three months ended June 30, 1995 (unaudited), respectively. As
videocassette rental inventory is sold or retired, the applicable cost
and accumulated amortization are eliminated from the accounts and any
related gain or loss is recognized.
Income Taxes
Video Stars operates as a subchapter S corporation for income tax
purposes. Accordingly, income taxes are paid by the Corporation's
shareholder and Video Stars has no income tax liability.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to 10 years) for leased items using the
straight-line method.
Depreciation and amortization expense on furniture and equipment was
$30,606 and $7,370 for the nine months ended March 31, 1995 and the three
months ended June 30, 1995 (unaudited), respectively. Maintenance and
repair expenditures are expensed as incurred and amounted to $20,425 and
$7,207 for the nine months ended March 31, 1995 and the three months
ended June 30, 1995 (unaudited), respectively.
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Capital Lease Obligation
Video Stars has capital lease obligations with monthly principal and
interest payments of approximately $2,200. All lease arrangements expire
during fiscal 1996.
(3) Commitments
The Company leases all of its retail facilities under noncancelable
operating leases. Future minimum lease payments required under these
leases as of March 31, 1995 are as follows:
1996 $ 179,654
1997 160,366
1998 122,432
1999 73,593
2000 71,477
Thereafter 215,820
-----------
$ 823,342
Rental and related expenses amounted to $174,660 and $64,821 for the nine
months ended March 31, 1995 and the three months ended June 30, 1995
(unaudited), respectively.
(Continued)
<PAGE>
VIDEO STARS (a division of
BREM, Inc.)
Notes to Financial Statements
(4) Subsequent Event (unaudited)
Under a merger agreement, substantially all of the assets, liabilities
and the business of Video Stars were sold to Moovies, Inc. concurrently
with the closing of the initial public offering of common stock by
Moovies, Inc.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Video Warehouse I Group:
We have audited the accompanying combined statements of operating revenues and
expenses and cash flows of Video Warehouse I Group for the years ended December
31, 1993 and 1994. These financial statements are the responsibility of the
Group'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 combined financial statements referred to above present
fairly, in all material respects, the operating revenues and expenses and cash
flows of Video Warehouse I Group for the years ended December 31, 1993 and 1994
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
May 17, 1995
<PAGE>
VIDEO WAREHOUSE I GROUP
Combined Statements of Operating Revenues and Expenses
Six months
Years ended December 31, ended June 30,
1993 1994 1995
(unaudited)
Revenues ............................. $2,800,471 $3,348,190 $1,917,651
Operating costs and expenses:
Operating expenses .............. 1,568,015 2,035,877 1,056,553
Cost of product sales ........... 592,572 705,117 400,611
General and administrative ...... 382,583 386,182 158,078
Interest, net ................... 1,004 -- --
---------- ---------- ----------
2,544,174 3,127,176 1,615,242
---------- ---------- ----------
Operating revenues in excess
of operating expenses ........... $ 256,297 $ 221,014 $ 302,409
========== ========== ==========
See accompanying notes to combined financial statements.
<PAGE>
VIDEO WAREHOUSE I GROUP
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Six months
Years ended December 31, ended June 30,
1993 1994 1995
(unaudited)
Operating activities:
Operating revenues in excess
<S> <C> <C> <C>
of operating expenses $ 256,297 $ 221,014 $ 302,409
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization 728,913 1,013,167 505,731
Changes in operating
assets and liabilities:
Accounts payable 72,797 (84,657) 74,954
Accrued liabilities 50,853 82,160 (25,098)
-------------- ------------- --------------
Net cash provided by
operating activities 1,108,860 1,231,684 857,996
-------------- ------------- --------------
Investing activities:
Purchases of videocassette rental
inventory, net (793,687) (1,093,482) (526,785)
Purchases of furnishings and
equipment (8,858) (50,464) (5,500)
-------------- ------------- --------------
Net cash used in
investing activities (802,545) (1,143,946) (532,285)
-------------- ------------- --------------
Financing activities:
Capital withdrawals (152,370) (340,157) (339,100)
-
Principal payments on long-term debt (5,008) - -
-------------- ------------- -------------
Net cash used in
financing activities (157,378) (340,157) (339,100)
-------------- ------------- --------------
Increase (decrease) in cash 148,937 (252,419) (13,389)
Cash at beginning of period 150,425 299,362 46,943
-------------- ------------- --------------
Cash at end of period ` $ 299,362 $ 46,943 $ 33,554
============== ============= ==============
Supplemental disclosures of cash flow
information
Cash paid during the period for interest $ 1,072 $ - $ -
============== ============= =============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
VIDEO WAREHOUSE I GROUP
Notes to Combined Financial Statements
VIDEO WAREHOUSE I GROUP
Notes to Combined Financial Statements
(1) Accounting Policies
Basis of Presentation
The accompanying combined financial statements of Video Warehouse I Group
include substantially all operating revenues and expenses and cash flows
of the following subchapter S corporations, all commonly controlled by
two shareholders; Lott's Video Warehouse of Athens, Inc., No. 1, Lott's
Video Warehouse of Athens, Inc., No. 2, Lott's Video Warehouse of Dublin,
Inc., Lott's Video Warehouse of Gainesville, Inc. and Lott's Video
Warehouse of Milledgeville, Inc. As of December 31, 1994 Video Warehouse
I Group owned and operated five video specialty stores in Georgia.
The combined statements of operating revenues and expenses and cash flows
for the six months ended June 30, 1995 have been prepared by the Group
without audit. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation
of the operating revenues and expenses and cash flows for the six months
ended June 30, 1995 have been included.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Amortization expense related to videocassette rental inventory amounted
to $713,758 and $996,696 for the years ended December 31, 1993 and 1994,
respectively, and $496,181 for the six months ended June 30, 1995
(unaudited). As videocassette rental inventory is sold or retired, the
applicable cost and accumulated amortization are eliminated from the
accounts and any related gain or loss is recognized.
Income Taxes
Each of the corporations of Video Warehouse I Group operates as a
subchapter S corporation for income tax purposes. Accordingly, income
taxes are paid by the shareholders and Video Warehouse I Group has no
income tax liability.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to 10 years) for leased items using the
straight-line method.
(continued)
<PAGE>
(1) Accounting Policies, Continued
Depreciation and amortization expense on furnishings and equipment was
$15,155 and $16,471 for the years ended December 31, 1993 and 1994,
respectively and $9,550 for the six months ended June 30, 1995
(unaudited). Maintenance and repair expenditures are expensed as incurred
and amounted to $16,698 and $17,739 for the years ended December 31, 1993
and 1994, respectively, and $17,788 for the six months ended June 30,
1995 (unaudited).
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Commitments
Video Warehouse I Group leases all of its retail facilities under
noncancelable operating leases. Future minimum payments under these
leases as of December 31, 1994 are as follows:
1995 $ 133,296
1996 80,990
1997 3,117
---------
$ 217,403
Rent and related expenses totaled approximately $143,793 and 177,493, for
the years ended December 31, 1993 and 1994, respectively, and $104,118
for the six months ended June 30, 1995 (unaudited).
(3) Related Party Transactions
Video Warehouse I Group pays a fee to BEL management for management
advisory services. Expense for these services amounted to $317,686 and
$338,078 for the years ended December 31, 1993 and 1994, respectively,
and $196,200 for the six months ended June 30, 1995 (unaudited).
(4) Subsequent Events (unaudited)
Under an asset purchase agreement, substantially all of the assets,
certain liabilities (principally store leases) and the business of Video
Warehouse I Group were sold to Moovies, Inc. concurrently with the
closing of the initial public offering of common stock by Moovies, Inc.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Video Warehouse II Group:
We have audited the accompanying combined statements of operating revenues and
expenses and cash flows of Video Warehouse II Group for the years ended December
31, 1993 and 1994. These financial statements are the responsibility of the
Group'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 combined financial statements referred to above present
fairly, in all material respects, the operating revenues and expenses and cash
flows of Video Warehouse II Group for the years ended December 31, 1993 and 1994
in conformity with generally accepted accounting principles.
Greenville, South Carolina
May 19, 1995
<PAGE>
VIDEO WAREHOUSE II GROUP
Combined Statements of Operating Revenues and Expenses
Years ended Six months
December 31, ended June 30,
1993 1994 1995
---- ---- ----
(unaudited)
Revenues ............................. $3,369,577 $4,551,324 $2,487,462
Operating costs and expenses:
Operating expenses .............. 2,002,364 2,461,318 1,299,122
Cost of product sales ........... 500,972 942,704 417,195
General and administrative ...... 454,942 477,370 278,647
Interest, net ................... 12,883 24,355 13,034
---------- ---------- ----------
2,971,161 3,905,747 2,007,998
---------- ---------- ----------
Operating revenues in excess
of operating expenses ........... $ 398,416 $ 645,577 $ 479,464
========== ========== ==========
See accompanying notes to combined financial statements.
<PAGE>
VIDEO WAREHOUSE II GROUP
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Six months
ended
Years ended December 31, June 30,
1993 1994 1995
---- ---- ----
(unaudited)
Operating activities:
Operating revenues in excess
<S> <C> <C> <C>
of operating expense $ 398,416 $ 645,577 $ 479,464
Adjustments to reconcile to net cash provided
by operating activities:
(Gain) loss on disposal of
furnishings and equipment 41,246 (14,170) -
Depreciation and amortization 841,005 1,168,695 661,714
Changes in operating assets
and liabilities:
Other receivables 36,775 22,912 2,316
Merchandise inventory - (16,705) 12,229
Deposits and other assets - (5,000) (13,594)
Accounts payable (148,925) 38,151 319,723
Accrued liabilities (12,803) (3,974) 12,001
-------------- ------------- --------------
Net cash provided by
operating activities 1,155,714 1,835,486 1,473,853
-------------- ------------- --------------
Investing activities:
Purchases of videocassette rental inventory, net (1,140,764) (1,136,052) (591,289)
Purchases of furnishings and equipment (93,861) (107,809) (36,444)
-------------- ------------- --------------
Net cash used in
investing activities (1,234,625) (1,243,861) (627,733)
-------------- ------------- --------------
Financing activities:
Proceeds from issuance of long-term debt 129,360 58,640 200,000
Principal payments on long-term debt (41,578) (19,195) -
Capital withdrawals, net (8,344) (631,170) (1,032,245)
-------------- ------------- --------------
Net cash (used in)
provided by
financing activities 79,438 (591,725) (832,245)
-------------- ------------- --------------
Increase (decrease) in cash 527 (100) 13,875
Cash at beginning of period 5,423 5,950 5,850
-------------- ------------- --------------
Cash at end of period $ 5,950 $ 5,850 $ 19,725
============== ============= ==============
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 4,430 $ 31,943 $ 16,944
============== ============= ==============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
VIDEO WAREHOUSE II GROUP
Notes to Combined Financial Statements
VIDEO WAREHOUSE II GROUP
Notes to Combined Financial Statements
(1) Accounting Policies
Basis of Presentation
The accompanying combined financial statements include substantially all
operating revenues and expenses and cash flows of the following commonly
controlled subchapter S corporations and partnerships: Video Warehouse of
Augusta #1, Inc., Video Warehouse of Augusta #2, Inc., Video Warehouse of
Macon #3, Inc., Video Warehouse of Savannah #1, Inc.; Video Warehouse of
Augusta #3, Video Warehouse of Macon #1 and Video Warehouse of Savannah
#2. As of December 31, 1994, Video Warehouse II Group owned and operated
seven video specialty stores in Georgia.
The combined statements of operating revenues and expenses and cash flows
for the six months ended June 30, 1995 have been prepared by the Group
without audit. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation
of operating revenues and expenses and cash flows for the six months
ended June 30, 1995 have been included.
Merchandise Inventory
Merchandise inventory, consisting of videocassettes, children's books and
confectionery items, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Amortization expense related to videocassette rental inventory totaled
$801,150 and $1,118,393 for the years ended December 31, 1993 and 1994,
respectively, and $636,564 for the six months ended June 30, 1995
(unaudited). As videocassette rental inventory is sold or retired, the
applicable cost and accumulated amortization are eliminated from the
accounts and any related gain or loss is recognized.
Income Taxes
All of the entities of Video Warehouse II Group operate as subchapter S
corporations or partnerships for income tax purposes. Accordingly, income
taxes are paid by the shareholders or partners and Video Warehouse II
Group has no income tax liability.
<PAGE>
(1) Accounting Policies, Continued
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to 10 years) for leased items using the
straight-line method.
Depreciation and amortization expense on furnishings and equipment was
$39,855 and $50,302 for the years ended December 31, 1993 and 1994,
respectively, and $25,150 for the six months ended June 30, 1995
(unaudited). Maintenance and repair expenditures are expensed as incurred
and amounted to $12,352 and $12,276 for the years ended December 31, 1993
and 1994, respectively, and $7,023 for the six months ended June 30, 1995
(unaudited).
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Commitments
Video Warehouse II Group leases one of its seven retail facilities under
noncancelable operating leases from non-related parties. Future minimum
payments under noncancelable operating leases as of December 31, 1994 are
as follows:
1995 $ 25,200
=========
Rental and related expenses amounted to $43,200 for both the years ended
December 31, 1993 and 1994, and $21,600 for the six months ended June 30,
1995 (unaudited). (See note 3).
(3) Related Party Transactions
Six of the seven stores which comprise Video Warehouse II Group are owned
by the majority shareholders of Video Warehouse II Group. The Group pays
monthly rent to the owners of these stores and there are no long-term
lease agreements. The amount of rent paid on these stores was $207,644
and $177,711 for the years ended December 31, 1993 and 1994,
respectively, and $165,155 for the six months ended June 30, 1995
(unaudited).
(4) Subsequent Event (unaudited)
Under three asset purchase agreements and four merger agreements,
substantially all of the assets, certain liabilities (principally store
leases) and the business of Video Warehouse II Group were sold to
Moovies, Inc. concurrently with the closing of the initial public
offering of common stock by Moovies, Inc.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
XIMPEC, Inc. and Planet Video, Inc.:
We have audited the accompanying combined statements of operating revenues and
expenses and cash flows of Planet Video (combined statements of XIMPEC, Inc. and
Planet Video, Inc.) for the year ended December 31, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the operating revenues and expenses and cash
flows of Planet Video (combined statements of XIMPEC, Inc. and Planet Video,
Inc.) for the year ended December 31, 1994 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
May 24, 1995
<PAGE>
PLANET VIDEO
Combined Statements of Operating Revenues and Expenses
Year ended Six months
December 31, ended June 30,
1994 1995
---- ----
(unaudited)
Revenues:
Rental revenues ........................ $ 586,648 $ 394,441
Product sales .......................... 121,313 81,189
--------- ---------
707,961 475,630
--------- ---------
Operating costs and expenses:
Operating expenses ..................... 492,035 361,023
Cost of product sales .................. 71,121 31,641
General and administrative ............. 101,903 74,194
Interest, net .......................... 17,224 14,014
--------- ---------
682,283 480,872
--------- ---------
Operating revenues in excess of
operating expenses ..................... $ 25,678 $ (5,242)
========= =========
See accompanying notes to combined financial statements.
<PAGE>
PLANET VIDEO
Combined Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended Six months
December 31, ended June,
1994 1995
---- ----
(unaudited)
Operating activities:
Operating revenues in excess of
<S> <C> <C>
operating expenses ................................ $ 25,678 $ (5,242)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization .................. 106,504 80,016
Changes in operating assets and liabilities:
Merchandise inventory ...................... (24,437) 7,883
Deposits and other assets .................. (57,267) (7,499)
Accounts payable ........................... 134,253 (26,164)
Accrued liabilities ........................ 19,248 (3,225)
--------- ---------
Net cash provided by operating activities 203,979 45,769
--------- ---------
Investing activities:
Purchases of videocassette rental
inventory, net .................................... (240,565) (63,989)
Purchases of furnishings and equipment ............... (165,116) (6,531)
--------- ---------
Net cash used in investing activities ... (405,681) (70,520)
--------- ---------
Financing activities:
Proceeds from issuance of long-term debt ............. 265,000 --
Principal payments on long-term debt ................. -- (18,760)
Net cash provided by (used in)
financing activities ................. 265,000 (18,760)
--------- ---------
Increase (decrease) in cash ............................... 63,298 (43,511)
Cash at beginning of period ............................... -- 63,298
Cash at end of period ..................................... $ 63,298 $ 19,787
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for interest ............. $ 17,224 $ 14,014
========= =========
Capital contribution of videocassette
rental inventory .................................. $ 24,743 $ 16,536
========= =========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
PLANET VIDEO
Notes to Combined Financial Statements
(1) Accounting Policies
Basis of Presentation The accompanying combined financial statements of
Planet Video (a combined entity consisting of XIMPEC, Inc. and Planet
Video, Inc.) include substantially all operating revenues and expenses
and cash flows of Planet Video. As of December 31, 1994, Planet Video
owned and operated two video specialty stores in New Jersey and
Pennsylvania.
The combined statements of operating revenues and expenses and cash flows
for the six month period ended June 30, 1995 have been prepared by the
Company without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the operating revenues and expenses and cash flows for
the six months ended June 30, 1995 have been included.
Merchandise Inventory
Merchandise inventory, consisting of videocassettes, children's books and
confectionery items, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third of the
titles per store are amortized as base stock; the fourth through ninth
copies of each title per store are amortized 40% in the first year and
30% in each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Certain videocassettes in the rental inventory are leased under a revenue
sharing agreement with a vendor, as broker for various studios. During
the revenue sharing period, which generally is one year (but does not
exceed two years), the studios retain ownership of the videocassette and
Planet Video shares the rental revenue with a vendor rather than
purchasing the videocassette for a fixed cost (typically $60 to $67).
Under this agreement, the percentage of rental revenue retained by Planet
Video generally is fixed for the first sixty days of the revenue sharing
period and is then set at a higher rate for the remainder of the term.
The associated handling fee per leased videocassette is amortized on a
straight-line basis over the term of the lease. Revenue sharing allows
Planet Video to order a larger number of copies to meet most of the
temporarily heavy demand that exists during the first few weekends of a
title's release. Revenue sharing reduces the risk that Planet Video will
be unable to recover the acquisition cost of a videocassette through
rental revenue before the popularity of the title declines significantly.
At the end of the revenue sharing period for a title, Planet Video may
purchase the copies of that title for generally less than $5 per copy.
The purchased copies are then amortized as base stock.
Amortization expense related to videocassette rental inventory totaled
$89,653 for the year ended December 31, 1994 and $59,057 for the six
months ended June 30, 1995 (unaudited). As videocassette rental inventory
is sold or retired, the applicable cost and accumulated amortization are
eliminated from the accounts and any related gain or loss is recognized.
(Continued)
<PAGE>
PLANET VIDEO
Notes to Combined Financial Statements
(1) Accounting Policies, Continued
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to 10 years) for leased items using the
straight-line method.
Depreciation and amortization expense on furniture and equipment was
$16,851 for the year ended December 31, 1994 and $20,959 for the six
months ended June 30, 1995 (unaudited). Maintenance and repair
expenditures are expensed as incurred and amounted to $4,679 for the year
ended December 31, 1994 and $3,120 for the six months ended June 30, 1995
(unaudited).
Income Taxes
Each of the corporations of Planet Video operates as subchapter S
corporations for income tax purposes. Accordingly, income taxes are paid
by the Shareholders and Planet Video has no income tax liability.
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Commitments
The Company leases all of its retail facilities under noncancelable
operating leases. Future minimum lease payments required under these
leases as of December 31, 1994 are as follows:
1995 $136,879
1996 139,266
1997 141,723
1998 144,255
1999 26,079
--------
$588,202
Rental and related expenses amounted to $120,675 for the year ended
December 31, 1994 and $85,862 for the six months ended June 30, 1995
(unaudited).
(3) Subsequent Event (unaudited)
Under an asset purchase agreement, substantially all of the assets,
certain liabilities (principally store leases) and the business of Planet
Video were sold to Moovies, Inc. concurrently with the closing of the
initial public offering of common stock by Moovies, Inc.
<PAGE>
//
Independent Auditors' Report
The Board of Directors
First Row Video, Inc.:
We have audited the accompanying statements of income and cash flows of First
Row Video, Inc. for the years ended December 31, 1993 and 1994. 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 results of operations and cash flows of First Row
Video, Inc. for the years ended December 31, 1993 and 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of computing the amortization of its videocassette rental inventory
effective January 1, 1994.
KPMG Peat Marwick LLP
Cleveland, Ohio
April 12, 1995
<PAGE>
See accompanying notes to financial statements.
F-55
FIRST ROW VIDEO, INC.
Statements of Income
<TABLE>
<CAPTION>
Six months
ended
Years Ended December 31, June 30,
1993 1994 1995
(unaudited)
Revenues
<S> <C> <C> <C>
Rental revenues ................... $ 7,567,608 $ 9,680,173 $ 4,703,206
Product sales ..................... 1,125,132 1,418,894 1,337,450
------------ ------------ ------------
8,692,740 11,099,067 6,040,656
------------ ------------ ------------
Operating costs and expenses
Operating expenses ................ 6,909,559 8,722,370 4,172,938
Cost of product sales ............. 233,838 471,871 658,126
General and administrative expenses 993,551 1,100,297 672,925
------------ ------------ ------------
8,136,948 10,294,538 5,503,989
------------ ------------ ------------
Operating income ....................... 555,792 804,529 536,667
Other income (expenses)
Interest expense, net ............. (63,331) (72,623) (61,507)
Other ............................. (157,374) 56,938 22,426
------------ ------------ ------------
Income before income taxes 335,087 788,844 497,586
Income taxes ........................... 135,362 311,170 194,058
------------ ------------ ------------
Net income ............... $ 199,725 $ 477,674 $ 303,528
============ ============ ============
</TABLE>
<PAGE>
FIRST ROW VIDEO, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months
ended
Years Ended December 31, June 30,
1993 1994 1995
(unaudited)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 199,725 $ 477,674 $ 303,528
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,188,770 3,737,668 1,819,947
(Gain) loss on disposal of equipment 67,712 (30,082) -
Income taxes, net 135,362 279,795 194,058
Change in assets and liabilities:
Accounts receivable 67,050 (14,456) (102,828)
Merchandise inventories (23,300) (573,136) (229,214)
Related party receivable and other assets (117,947) (295,108) (220,848)
Accounts payable, accrued expenses,
and other liabilities 389,742 436,884 (186,794)
-------------- -------------- --------------
Net cash provided by
operating activities 3,907,114 4,019,239 1,577,849
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of videocassette rental inventory, net (3,520,985) (3,546,404) (1,896,653)
Purchases of furnishing and equipment (645,299) (1,050,559) (180,976)
Proceeds from sale of fixed assets - 143,877 -
-------------- --------------- -------------
Net cash used in investing activities (4,166,284) (4,453,086) (2,077,629)
-------------- -------------- --------------
Cash flows from financing activities:
Increase (decrease) in notes payable, net 2,011 (7,307) (64,367)
Increase (decrease) in long-term debt 180,687 393,099 525,667
-------------- -------------- --------------
Net cash provided by
financing activities 182,698 385,792 461,300
-------------- -------------- --------------
Net decrease in cash (76,472) (48,055) (38,480)
Cash and cash equivalents at beginning of year 247,562 171,090 123,035
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 171,090 $ 123,035 $ 84,555
============== ============== ==============
Supplementary disclosure of cash flow information
Cash paid during the year for
Interest $ 63,998 $ 92,716 $ 79,959
============== ============== ==============
</TABLE>
<PAGE>
FIRST ROW VIDEO, INC.
Notes to Financial Statements
(1) The Company
First Row Video, Inc. (the Company), an Ohio corporation, owns and
operates video specialty stores located in Ohio and Pennsylvania. As of
December 31, 1994, the Company operated 24 stores.
The statements of income and cash flows for the six months ended June 30,
1995 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of income and cash flows
for the six months ended June 30, 1995 have been included.
(2) Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with
maturities of three months or less.
Merchandise Inventories
Merchandise inventories, consisting primarily of prerecorded
videocassettes and video games available for resale, are stated at the
lower of cost or market. Cost is determined by the first-in, first-out
method.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is recorded
at cost and amortized over their estimated economic life with no
provision for salvage value. Prior to 1994, videocassettes were amortized
over 36 months on an accelerated basis. Effective January 1, 1994, the
Company changed its method of amortization. Videocassettes which are
considered base stock are amortized over 36 months on a straight-line
basis. Purchases of new release videocassettes and video games are
amortized whereby the first through third of each title per store are
amortized as base stock; the fourth through ninth copies of each title
per store are amortized over 36 months on an accelerated basis; and the
tenth and any succeeding copies of each title per store are amortized
over nine months on a straight-line basis. The adoption of this change in
method of amortization increased net income for the year ended December
31, 1994 by approximately $61,000.
Amortization expense related to videocassette rental inventory totaled
$2,809,819 and $3,315,028 for the years ended December 31, 1993 and 1994,
respectively, and $1,582,000 for the six months ended June 30, 1995
(unaudited). As videocassettes are sold or retired, the applicable cost
and accumulated amortization are eliminated from the accounts, and any
gain or loss is recorded.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
Furnishings and Equipment
Furnishings and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives as follows:
Furniture and fixtures 7 years
Equipment and vehicles 5 years
Leasehold improvements Shorter of estimated useful life
or lease term
Depreciation and amortization expense on furnishings and equipment was
$378,951 and $422,640 for the years ended December 31, 1993 and 1994,
respectively, and $237,947 for the six months ended June 30, 1995
(unaudited).
Revenue Recognition
Revenue is recognized at the time of rental or sale of the videocassette.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Under the asset and liability method of Statement 109, deferred income
taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes
the enactment date.
The Company adopted Statement 109 effective January 1, 1993. The adoption
of Statement 109 had no material effect on the amount of income tax
expense reported in the year ended December 31, 1993. Prior to January 1,
1992, the Company followed Statement of Financial Accounting Standards
No. 96 to account for income taxes.
<PAGE>
(3) Income Taxes
The components of the provision for income tax expense are as follows:
Six months
Years ended ended
December 31, June 30,
1993 1994 1995
---- ---- ----
(unaudited)
Current:
Federal ................ $ -- $ 25,000 $ 64,234
State .................. -- 6,375 8,000
-------- -------- --------
Total current ............... -- 31,375 72,234
-------- -------- --------
Deferred:
Federal ................ 115,058 237,826 108,332
State .................. 20,304 41,969 13,492
-------- -------- --------
Total deferred .............. 135,362 279,795 121,824
-------- -------- --------
Total provision ............. $135,362 $311,170 $194,058
======== ======== ========
A reconciliation of the income tax at the federal statutory rate to the
Company's income tax expense is as follows:
Six months
Years ended ended
December 31, June 30,
1993 1994 1995
---- ---- ----
(unaudited)
Income tax at statutory rate ........... $ 113,930 $ 268,207 $ 169,180
State tax expense, net of federal
income tax benefit ................ 20,304 48,344 14,185
Other .................................. 1,128 (5,381) 10,693
--------- --------- ---------
$ 135,362 $ 311,170 $ 194,058
========= ========= =========
<PAGE>
(4) Lease Commitments
The Company occupies store facilities and a warehouse and uses equipment
under operating leases extending to 2004. Rent expense charged to
operations totaled $661,000 and $832,000 for the years ended December 31,
1993 and 1994, respectively, and $508,320 for the six months ended June
30, 1995 (unaudited). Most leases contain options for renewal periods. In
most cases, management expects that in the normal course of business, all
leases will be renewed or replaced with other leases. The following is a
schedule of future minimum lease payments under leases that have initial
or remaining noncancelable terms in excess of one year as of December 31,
1994:
1995 $ 781,154
1996 760,286
1997 747,121
1998 744,551
1999 724,160
Thereafter 3,941,229
-------------
$ 7,698,501
(5) Controlling Interest and Related Party Transactions
All of the outstanding common stock is owned by two individuals.
The Company leases various store facilities and a warehouse from an
affiliated company through common ownership. Rent expense charged to
operations for these facilities totaled $75,500 and $113,610 for the
years ended December 31, 1993 and 1994, respectively, and $71,165 for the
six months ended June 30, 1995 (unaudited). Management fee income of
$38,744 and $50,704 for the years ended December 31, 1993 and 1994,
respectively, and $30,203 for the six months ended June 30, 1995
(unaudited) was charged by the Company to other entities owned by the
stockholders.
(6) Retirement Plan
During 1993, the Company adopted a 401(k) defined contribution retirement
plan which covers substantially all employees. The Company matches 50
percent of employees' voluntary contributions up to 6 percent of gross
pay. Participants may make voluntary contributions to the plan up to 15
percent of gross wages. Total expense under the plan was $3,934 and
$21,952 for the years ended December 31, 1993 and 1994, respectively, and
$23,934 for the six months ended June 30, 1995 (unaudited).
<PAGE>
(7) Other Income
During 1994, the Company sold assets related to its "store within a
store" operations. These assets included equipment and videocassette
rental inventory. The total proceeds on the sale of these assets was
$262,252, resulting in a gain of $53,352 which is included in other
income on the statement of income and retained earnings.
(8) Subsequent Event (unaudited)
Under a merger agreement dated June 14, 1995, all of the assets,
liabilities and the business of First Row Video, Inc. were sold to
Moovies, Inc. concurrently with the closing of the initial public
offering of common stock by Moovies, Inc.
<PAGE>
Independent Auditors' Report
The Board of Directors
Video Game Trader, Inc.:
We have audited the accompanying statements of operations and cash flows of
Video Game Trader, Inc. for the years ended December 31, 1993 and 1994. 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 results of operations and cash flows of Video Game
Trader, Inc. for the years ended December 31, 1993 and 1994 ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Cleveland, Ohio
April 12, 1995
<PAGE>
See accompanying notes to financial statements.
VIDEO GAME TRADER, INC.
Statements of Operations
Six months
Years ended ended
December 31, June 30,
1993 1994 1995
---- ---- ----
(unaudited)
Revenues
Merchandise sales .............. $ 1,285,286 $ 2,618,785 $ 928,363
Operating costs and expenses
Operating expenses ............. 485,000 983,534 371,871
Cost of sales .................. 824,957 1,614,061 528,048
General and administrative ..... 9,408 21,168 17,455
----------- ----------- ---------
1,319,365 2,618,763 917,374
----------- ----------- ---------
Operating income (loss) ............. (34,079) 22 10,989
Other income (expenses):
Interest expense, net .......... (12,995) (41,048) (22,200)
----------- ----------- ---------
Net Loss ................... $ (47,074) $ (41,026) $ (11,211)
=========== =========== =========
<PAGE>
VIDEO GAME TRADER, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months
Years ended ended
December 31, June 30,
1993 1994 1995
---- ---- ----
(unaudited)
Cash flows from operating activities
<S> <C> <C> <C>
Net loss $ (47,074) $ (41,026) $ (11,211)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 42,243 98,239 64,824
Change in assets and liabilities
Accounts receivable (355) (947) (3,336)
Merchandise inventories (415,395) (93,024) (1,271)
Prepaid expenses (2,859) - -
Other assets (19,580) (1,497) (8,074)
Accounts payable and accrued expenses 378,743 52,692 (236,346)
------------- ------------- -------------
Net cash provided by (used in)
operating activities (64,277) 14,437 (195,414)
------------- -------- -------------
Cash flows from investing activities
Purchases of video game rental inventory, net - (116,558) (37,039)
Purchases of equipment, net (261,698) (130,246) (6,042)
------------- ------------- -------------
Net cash used in investing activities (261,698) (246,804) (43,081)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from notes payable 57,994 114,839 212,908
Proceeds from repayment of long-term debt, net 335,557 161,613 (85,362)
------------- ------------- -------------
Net cash provided by financing activities 393,551 276,452 127,546
------- ------------- -------------
Net increase (decrease) in cash 67,576 44,085 (110,949)
Cash and cash equivalents at beginning of year 10,871 78,447 122,532
------------- ------------- -------------
Cash and cash equivalents at end of year $ 78,447 $ 122,532 $ 11,583
============= ============= =============
Supplementary disclosure of cash flow information
Cash paid during the year for
Interest $ 12,995 $ 34,365 $ 18,870
============= ============= =============
</TABLE>
<PAGE>
VIDEO GAME TRADER, INC.
Notes to Financial Statements, Continued
(1) The Company
Video Game Trader, Inc. (Company), an Ohio corporation incorporated March
4, 1992, owns and operates video game specialty stores located primarily
in Ohio and Pennsylvania. As of December 31, 1994, the Company operated
eight stores.
The statements of income and cash flows for the six months ended June 30,
1995 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of income and cash flows
for the six months ended June 30, 1995 have been included.
(2) Summary of Significant Accounting Policies
Merchandise Inventories
Merchandise inventories, consisting primarily of video games, is stated
at the lower of cost of market. Cost is determined by the first-in,
first-out method.
Video Game Rental Inventory
Video game rental inventory is recorded at cost, and amortized over their
estimated economic life with no provision for salvage value. Video games
which are considered base stock are amortized over 36 months on a
straight-line basis. Purchases of video games are amortized whereby the
first through third copies of each game per store are amortized as base
stock; the fourth through ninth copies of each game per store are
amortized over 36 months on an accelerated basis; the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Amortization expense related to video game rental inventory totaled
$21,421 for the year ended December 31, 1994 and $20,999 for the six
months ended June 30, 1995 (unaudited).
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives as follows:
Furniture and fixtures 7 years
Equipment and vehicles 5 years
Leasehold improvements and signs Shorter of estimated useful
life or lease term
Depreciation and amortization expense on furnishings and equipment was
$42,243 and $76,818 for the years ended December 31, 1993 and 1994,
respectively, and $43,825 for the six months ended June 30, 1995
(unaudited).
Revenue Recognition
Revenue is recognized at the time of rental or sale.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Under the asset and liability method of Statement 109, deferred income
taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes
the enactment date.
(3) Income Taxes
At December 31, 1994, the Company had an unused net operating loss
carryforward of approximately $76,000 for federal income tax purposes,
expiring in 2009, available for offset against future taxable income.
Temporary differences relate to net operating loss carryforwards.
(4) Lease Commitments
The Company leases its facilities under operating leases extending to
2004. Following is a summary of future minimum rental payments under
these leases as of December 31 1994:
1995 $ 164,513
1996 165,788
1997 150,666
1998 152,166
1999 87,713
Thereafter 72,408
------
$ 793,254
Rent expense was $57,562, and $152,346 for the years ended December 31,
1993 and 1994, respectively, and $80,432 for the six months ended June
30, 1995 (unaudited).
<PAGE>
(5) Controlling Interest and Related Party Transactions
All of the outstanding common stock is owned by two individuals.
The Company pays management fees to a company owned by the stockholders;
such management fees charged to operations totaled $9,408 and $21,168
during 1993, and 1994, respectively, and $11,648 for the six months ended
June 30, 1995 (unaudited). The Company also leases one of its store
facilities from its stockholders; rent expense charged to operations for
this facility totaled $15,750 and $21,000 during 1993 and 1994,
respectively, and $10,500 for the six months ended June 30, 1995
(unaudited).
(6) Pension Plan
During 1993, the Company adopted a 401(k) defined contribution retirement
plan which covers substantially all employees. The Company matches 50
percent of employees' voluntary contributions up to 6 percent of gross
wages. Participants may make voluntary contributions to the plan up to 15
percent of gross wages. Total expense under the plan was $43 and $1,192
for 1993 and 1994, respectively, and $890 for the six months period June
30, 1995 (unaudited).
(7) Subsequent Event (unaudited)
Under a merger agreement dated June 14, 1995, all of the assets,
liabilities and the business of Video Game Trader, Inc. were sold to
Moovies, Inc. concurrently with the closing of the initial public
offering of common stock by Moovies, Inc.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
L.A. Video:
We have audited the accompanying combined statements of operating revenues and
expenses and cash flows of L.A. Video for the years ended December 31, 1993 and
1994. These financial statements are the responsibility of L.A. Video'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 combined financial statements referred to above present
fairly, in all material respects, the operating revenues and expenses and cash
flows of L.A. Video for the years ended December 31, 1993 and 1994 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
June 30, 1995
<PAGE>
L.A. VIDEO
Combined Statements of Operating Revenues and Expenses
Years ended Six months
December 31, ended June 30,
1993 1994 1995
---- ---- ----
(unaudited)
Revenues:
Rental revenues ................. $2,399,088 $2,578,482 $1,714,077
Product sales ................... 353,082 485,269 288,775
---------- ---------- ----------
2,752,170 3,063,751 2,002,852
---------- ---------- ----------
Operating costs and expenses:
Operating expenses .............. 1,656,928 1,919,817 1,312,579
Cost of product sales ........... 286,858 384,675 220,297
General and administrative ...... 164,779 182,621 104,219
Interest, net ................... 27,049 28,457 19,564
---------- ---------- ----------
2,135,614 2,515,570 1,656,659
---------- ---------- ----------
Operating revenues in excess
of operating expenses ........... $ 616,556 $ 548,181 $ 346,193
========== ========== ==========
See accompanying notes to combined financial statements.
<PAGE>
L.A. VIDEO
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Six months
Years ended December 31, ended June 30,
1993 1994 1995
(unaudited)
Operating activities:
Operating revenues in excess of
<S> <C> <C> <C>
operating expenses $ 616,556 $ 548,181 $ 346,193
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 872,568 813,699 567,684
Changes in operating assets and liabilities:
Merchandise inventory (2,000) (11,000) (1,236)
Prepaid rent - (8,533) (17,296)
Accounts payable (35,296) 154,653 107,379
Accrued liabilities (1,381) 21,530 10,525
------------ ------------- -------------
Net cash provided by
operating activities 1,450,447 1,518,530 1,013,249
------------ ------------- -------------
Investing activities:
Purchases of videocassette rental
inventory, net (838,441) (986,612) (519,912)
Purchases of furnishings and equipment (27,894) (353,085) (55,975)
------------ ------------- -------------
Net cash used in
investing activities (866,335) (1,339,697) (575,887)
------------ ------------- -------------
Financing activities:
Increase in advances from shareholder - 198,035 82,965
Capital withdrawals (572,956) (715,501) (295,910)
Proceeds from issuance of long-term debt 218,654 343,688 -
Principal payments on long-term debt (227,652) (77,943) (77,836)
------------ ------------- -------------
Net cash used in financing activities (581,954) (251,721) (290,781)
------------ ------------- -------------
Increase (decrease) in cash 2,158 (72,888) 146,581
Cash at beginning of period 100,092 102,250 29,362
------------ ------------- -------------
Cash at end of period $ 102,250 $ 29,362 $ 175,943
============ ============= =============
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 28,396 $ 30,130 $ 20,542
============= ============= =============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
L.A. VIDEO
Notes to Combined Financial Statements
(1) Accounting Policies
Basis of Presentation
The accompanying combined financial statements of L.A. Video include
substantially all operating revenues and expenses and cash flows of the
following sole proprietorships or subchapter S corporations, all commonly
controlled by one or two shareholders; L.A. Video of Upper Darby; L.A.
Video of Upper Dublin, Inc.; and, L.A. Video of Aldan, Inc. As of
December 31, 1994, L.A. Video owned and operated five video specialty
stores in the Philadelphia area.
The combined statements of operating revenues and expenses and cash flows
for the six months ended June 30, 1995 have been prepared by the Company
without audit. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation
of the operating revenues and expenses and cash flows for the six months
ended June 30, 1995 have been included.
Merchandise Inventory
Merchandise inventory, consisting of prerecorded videocassettes, children
books and confectionery items, is stated at the lower of cost or market.
Cost is determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: and first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Amortization expense related to videocassette rental inventory totaled
$734,734 and $728,867 for the years ended December 31, 1993 and 1994,
respectively, and $510,784 for the six months ended June 30, 1995
(unaudited). As videocassette rental inventory is sold or retired, the
applicable cost and accumulated amortization are eliminated from the
accounts and any related gain or loss is recognized.
(Continued)
<PAGE>
(1) Accounting Policies, Continued
Income Taxes
Each of the entities comprising L.A. Video operate as subchapter S
corporations or sole proprietorship for income tax purposes. Income taxes
are paid by of the shareholders or owner. L.A. Video has no income tax
liability.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to seven years) for leasehold improvements
using the straight-line method.
Depreciation and amortization expense on furniture and equipment was
$65,828 and $84,832 for the years ended December 31, 1993 and 1994,
respectively, and $56,900 for the six months ended June 30, 1995
(unaudited). Maintenance and repair expenditures are expensed as incurred
and amounted to $12,086 and $19,213 for the years ended December 31, 1993
and 1994, respectively, and $9,606 for the six months ended June 30, 1995
(unaudited).
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Commitments
L.A. Video leases all of its retail facilities under noncancelable
operating leases. Future minimum lease payments required under these
leases as of December 31, 1994 are as follows:
1995 $ 388,119
1996 305,118
1997 242,567
1998 207,727
1999 204,589
Thereafter 555,464
-------------
$ 1,903,584
Rental and related expenses totaled $247,886 and $281,657 for the years
ended December 31, 1993 and 1994, respectively, and $231,782 for the six
months ended June 30, 1995 (unaudited).
<PAGE>
(3) Subsequent Events (unaudited)
Under an asset purchase agreement, substantially all of the assets,
certain liabilities (principally store leases) and the business of L.A.
Video were sold to Moovies, Inc. concurrently with the closing of the
initial public offering of common stock by Moovies, Inc.
<PAGE>
Independent Auditors' Report
To the Board of Directors
MoveAmerica, Incorporated
We have audited the accompanying balance sheets of MoveAmerica, Incorporated as
of November 30, 1994 and 1993, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. 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 MoveAmerica, Incorporated as of
November 30, 1994 and 1993, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
McGladrey & Pollen LLP
Des Moines, Iowa
December 21, 1994
<PAGE>
MOVEAMERICA, INCORPORATED
d/b/a/ MOVIES TO GO AND
GAMES TO GO
Statements of Income
<TABLE>
<CAPTION>
Nine months ended
Years ended November 30, August 31,
-------------------------- ------------
1994 1993 1995 1994
---- ---- ---- ----
(unaudited)
Operating revenues:
Movies To Go
<S> <C> <C> <C> <C>
Rental revenues .............................. $ 4,863,033 $ 3,852,314 $ 3,652,954 3,520,412
Product sales ................................. 523,934 622,053 409,806 418,980
----------- ----------- ----------- -----------
5,386,967 4,474,367 4,062,760 3,939,392
Games To Go product sales ..................... 1,138,143 298,617 694,094 946,730
Other .................................. 11,311 19,747 206,585 212,521
----------- ----------- ----------- -----------
6,536,421 4,792,731 4,963,439 5,098,643
----------- ----------- ----------- -----------
Operating costs and expenses:
Cost of product sales - Movies To Go .......... 381,461 380,341 362,192 291,943
Cost of product sales - Games To Go ........... 544,934 133,414 401,638 434,255
Compensation and related payroll costs ........ 1,647,040 1,207,517 1,087,629 1,278,973
Depreciation .................................. 1,297,129 869,511 1,008,702 970,960
Repairs and maintenance ....................... 116,804 87,528 223,774 190,418
Occupancy ..................................... 1,241,509 880,818 855,532 737,245
Advertising ................................... 355,788 359,798 137,045 368,881
Selling, general and administrative ........... 371,574 396,611 401,064 383,908
----------- ----------- ----------- -----------
5,956,239 4,315,538 4,477,576 4,656,583
----------- ----------- ----------- -----------
Operating income ....................... 580,182 477,193 485,863 442,060
----------- ----------- ----------- -----------
Financial income (expense):
Interest income ............................... 361 887 414 259
Interest expense .............................. (106,418) (84,098) (67,817) (52,535)
Other ......................................... -- -- (50,089) (67,569)
----------- ----------- ----------- -----------
(106,057) (83,211) (50,089) (119,845)
----------- ----------- ----------- -----------
Income before income taxes ............. 474,125 393,982 368,371 322,215
----------- ----------- ----------- -----------
Federal and state income taxes:
Current ....................................... 101,891 65,982 90,540 63,000
Deferred ...................................... 83,000 86,000 -- --
----------- ----------- ----------- -----------
184,891 151,982 90,540 63,000
----------- ----------- ----------- -----------
Net income ............................. $ 289,234 242,000 277,831 259,215
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
MOVEAMERICA, INCORPORATED
d/b/a/ MOVIES TO GO AND
GAMES TO GO
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
Years ended November 30, August 31,
------------------------ ----------
1994 1993 1995 1994
---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income $ 289,234 242,000 277,831 259,215
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,297,129 869,511 968,336 933,549
Loss on disposal of equipment -- 4,142 -- --
(Gain) on capital lease termination (44,136) -- -- --
Deferred taxes 83,000 86,000 83,000 --
Change in assets and liabilities:
(Increase) decrease in income tax refund
claim receivable 7,571 (7,571) 68 6,847
(Increase) in merchandise inventories (27,152) (116,163) 27,211 549
Decrease in prepaid expenses 9,191 2,335 5,407 8,560
Increase (decrease) in accounts payable (89,588) 219,099 (182,740) (128,678)
Increase (decrease) in accrued expenses (28,954) 51,585 16,509 (57,659)
Increase (decrease) in income taxes
payable 74,109 (46,161) (40,140) 52,389
----------- ---------- ---------- ----------
Net cash provided by
operating activities 1,570,404 1,314,777 1,155,482 1,074,772
----------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,400,249) (997,622) (578,669) (1,560,776)
----------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term borrowings 387,847 138,990 -- 480,463
Proceeds from sale of common stock 6,400 5,874 3,750 1,000
Principal payments on long-term borrowings,
including capital lease obligations (382,209) (382,305) (588,250) --
Payment on property and equipment
purchased on account (268,306) (61,918) -- --
Purchase of common stock for
retirement (2,000) -- -- --
----------- ---------- ---------- ----------
Net cash (used in)
financing activities (258,268) (299,359) (584,500) 481,463
----------- ---------- ---------- ----------
Net increase (decrease) in cash (88,113) 17,796 (7,687) (4,541)
Cash
Beginning 349,405 331,609 344,864 349,405
----------- ---------- ---------- ----------
Ending $ 261,292 349,405 337,177 344,864
=========== ========== ========== ==========
Supplemental disclosures of cash flow
information: Cash payments
for:
Interest $ 106,418 84,098 67,817 52,535
=========== ========== ========== ==========
Income taxes $ 20,211 119,714 90,540 63,000
=========== ========== ========== ==========
Supplemental schedule of noncash investing
and financing activities:
Property and equipment purchased
on account $ 249,635 268,306 124,874 363,284
=========== ========== ========== ==========
Property and equipment acquired
through notes payable $ 307,161 129,149 -- 307,161
=========== ========== ========== ==========
Capital lease termination $ 212,886 -- -- --
=========== ========== ========== ==========
See notes to financial statements.
</TABLE>
<PAGE>
MOVEAMERICA, INCORPORATED
d/b/a MOVIES TO GO AND
GAMES TO GO
Notes to Financial Statements
November 30, 1994 and 1993
(1) Nature of Business and Significant Accounting Policies
Nature of Business:
The Company is principally engaged in the business of renting and
selling prerecorded video movies, video games and video equipment
with operations located in Des Moines, Ames, Ankeny, Davenport, Cedar
Rapids and Coralville, Iowa. The Company has 13 Movies To Go stores
and 5 Games To Go stores.
The combined statements of income and cash flows for the nine months
ended August 31, 1994 and 1995 have been prepared by the Company
without audit. In the opinion of management, all adjustments
consisting only of normal recurring adjustments, necessary for the
fair presentation of income and cash flows for the nine months ended
August 31, 1994 and 1995 have been included.
Significant Accounting Policies
Merchandise Inventories:
Merchandise inventories, which consist primarily of prerecorded video
cassettes and video games held for sale, are stated at the lower of
cost (specific identification method) or market.
Depreciation::
The leasehold interest in building and the leasehold improvements are
depreciated over the related lease terms. Depreciation of movie
cassettes held for rental and rental equipment is computed over a one
to three-year estimated useful life by the straight-lie method.
Depreciation of office furniture and equipment is computed primarily
by declining-balance methods over their estimated useful lives. It is
the Company's policy to include amortization expense on assets
acquired under capital lease with depreciation expense on owned
assets.
Income Taxes:
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities
and their tax bases.
Videocassette Revenue:
Revenue is recognized at the time of rental or sale of the
videocassette.
<PAGE>
Notes to Financial Statements
(2) Rent expense
The Company leases sixteen of its buildings and its office space under
noncancellable agreements which expire between December 1994 and April
2004 and require minimum annual rentals. These leases may be renewed for
periods ranging from one to five years and require payment of property
taxes, insurance and maintenance. Seven of the building leases are leased
from parties related to the Company. The Company has subleased one of its
buildings to another company under a noncancelable agreement which begins
December 1, 1994 and expires August 31, 1996 and requires annual rentals
of $78,000.
The minimum rental commitment at November 30, 1994 is due as
follows:
Related
Total Parties
Year ending November 30:
1995 $ 930,109 436,275
1996 861,383 369,298
1997 629,024 333,298
1998 607,278 333,298
1999 429,816 178,929
Thereafter 666,616 --
---------- ----------
$4,124,226 1,651,098
========== ==========
The preceding minimum rental commitment amounts have not been reduced by
the sublease rentals mentioned above totaling $136,500 which are to be
received in the future.
Rent expense for the years ended November 30, 1994 and 1993 was $851,552
and $644,112, respectively, including rent expense to related parties of
$362,265 and $273,970, respectively. Rent expense for the nine months
ended August 31, 1995 and 1994 (unaudited) was $749,961 and $744,866,
respectively, including rent expense to related parties $358,195 and
$259,726, respectively.
(3) Commitment
The Company has pledged $10,000 to the Iowa Film Awards to be paid next
year.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Movie Store Group:
We have audited the accompanying combined statements of operating revenues and
expenses and cash flows of Movie Store Group for the eleven months ended
November 30, 1995. These financial statements are the responsibility of the
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 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the operating revenues and expenses and cash
flows of Movie Store Group for the eleven months ended November 30, 1995 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
February 2, 1996
<PAGE>
MOVIE STORE GROUP
Combined Statement of Operating Revenues and Expenses
Eleven months Six months
ended ended
November 30, June 30,
1995 1995
(unaudited)
Revenues ..................................... $3,612,619 $1,855,625
Operating costs and expenses:
Operating expenses ...................... 2,391,752 1,316,480
Cost of product sales ................... 300,653 19,125
General and administrative .............. 482,276 277,594
---------- ----------
3,174,681 1,613,199
---------- ----------
Operating income ............................. 437,938 242,426
Interest expense, net ........................ 34,267 14,218
Other income, net ............................ 6,446 3,706
---------- ----------
Income before income taxes ................... 410,117 231,914
Income tax expense ........................... 53,875 30,464
---------- ----------
Net income ................................... $ 356,242 $ 201,450
========== ==========
See accompanying notes to combined financial statements.
<PAGE>
MOVIE STORE GROUP
Combined Statement of Cash Flows
<TABLE>
<CAPTION>
Eleven months Six months
ended ended
November 30, June 30,
1995 1995
(unaudited)
Operating activities:
<S> <C> <C>
Net income $ 356,242 $ 201,450
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization 873,824 633,892
Changes in operating assets
and liabilities:
Other receivables 1,000 (6,449)
Merchandise inventory (5,706) 23,224
Deposits and other assets 557 658
Accounts payable 95,894 26,134
Accrued liabilities 16,778 (20,548)
Income taxes payable (409) 21,007
Deferred income tax, net (21,520) 9,457
------------- -------------
Net cash provided by operating activities 1,316,660 888,825
------------- -------------
Investing activities:
Purchases of videocassette rental inventory, net (1,010,657) (731,106)
Purchases of furnishings and equipment (83,567) (105,585)
------------- -------------
Net cash used in investing activities (1,094,224) (836,691)
---------- -------------
Financing activities:
Proceeds from issuance of long-term debt 25,000 75,000
Principal payments on long-term debt (665) (2,710)
Proceeds from issuance of notes payable to related parties 150,000 -
Principal payments on notes payable to related parties (91,335) (4,000)
Capital withdrawals (265,400) (131,985)
------------- -------------
Net cash used in financing activities (182,400) (63,695)
------------- -------------
Increase (decrease) in cash 40,036 (11,561)
Cash at beginning of period 66,584 66,584
------------- -------------
Cash at end of period $ 106,620 $ 55,023
============= =============
Supplemental disclosures of cash flow information: Cash paid for:
Interest $ 36,515 $ 15,213
Income taxes $ 76,054 $ -
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
MOVIE STORE GROUP
Notes to Combined Financial Statement
(1) Accounting Policies
Basis of Presentation
The accompanying combined financial statements of Movie Store Group
include substantially all operating revenues and expenses and cash flows
of the following commonly controlled subchapter S and subchapter C
corporations: The Movie Store, Inc., The Movie Store VI, Inc., Parkaire
Media Associates, Ltd., and The Movie Store VII, Inc. As of November 30,
1995, Movie Store Group owned and operated eight video specialty stores
in Georgia.
The combined statements of operating revenues and expenses and cash flows
for the six months ended June 30, 1995 have been prepared by the Group
without audit. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation
of operating revenues and expenses and cash flows for the six months
ended June 30, 1995 have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Merchandise Inventory
Merchandise inventory, consisting of videocassettes, children's books and
confectionery items, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in the each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Amortization expense related to videocassette rental inventory totaled
$823,371 for the eleven months ended November 30, 1995 and $618,409 for
the six months ended June 30, 1995 (unaudited). As videocassette rental
inventory is sold or retired, the applicable cost and accumulated
amortization are eliminated from the accounts and any related gain or
loss is recognized.
Income Taxes
Each of the entities of Movie Store Group operate as subchapter S
corporations or subchapter C corporations for income tax purposes. Income
taxes are paid by the shareholders in the case of the S corporations.
<PAGE>
(1) Accounting Policies, Continued
The C corporations account for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates in effect
for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to 10 years) for leasehold improvements
using the straight-line method.
Depreciation and amortization on furnishings and equipment was $50,453
for the eleven months ended November 30, 1995 and $15,483 for the six
months ended June 30, 1995 (unaudited). Maintenance and repair
expenditures are expensed as incurred and amounted to $48,593 for the
eleven months ended November 30, 1995 and $6,816 for the six months ended
June 30, 1995 (unaudited).
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Commitments
Movie Store Group leases eight of its retail facilities and one corporate
office under noncancelable operating leases from non-related parties.
Future minimum payments under these leases as of November 30, 1995 are as
follows:
1996 $ 720,781
1997 671,496
1998 634,222
1999 456,496
Thereafter 995,747
----------
$3,478,742
Rental and related expenses amounted to $588,643 for the eleven months
ended November 30, 1995 and $278,938 for the six months ended June 30,
1995 (unaudited).
<PAGE>
(3) Income Taxes
Income tax expense (benefit) is as follows:
Current Deferred Total
Eleven months ended November 30, 1995:
Federal ................................. $ 60,750 $(17,340) $ 43,410
State ................................... 14,645 (4,180) 10,465
-------- -------- --------
Total ............................... $ 75,395 $(21,520) $ 53,875
======== ======== ========
Six months ended June 30, 1995 (unaudited):
Federal ................................. $ 17,089 $ 7,693 $ 24,782
State ................................... 3,918 1,764 5,682
-------- -------- --------
Total ............................... $ 21,007 $ 9,457 $ 30,464
======== ======== ========
Income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% as a result of the following:
Eleven months Six months
ended ended
November 30, June 30,
1995 1995
(unaudited)
Computed "expected" tax expense ...................... $ 139,440 78,851
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of Federal
income tax benefits ......................... 6,907 8,609
Income from Subchapter S corporations,
taxable to shareholders ..................... (92,472) (56,996)
--------- ---------
Actual tax expense ................................... $ 53,875 30,464
========= =========
(4) Related Party Transactions
One of the eight stores which comprise Movie Store Group is owned by Rio
Media Associates, Inc., which is owned by a shareholder. Movie Store pays
monthly rent to the company. The amount of rent paid on this store for
the eleven months ended November 30, 1995 was $42,020 and $4,408 for the
six months ended June 30, 1995(unaudited).
(5) Subsequent Event
Under merger and purchase agreements dated December 21, 1995, all of the
assets, liabilities and the business of Movie Store Group were sold to
Moovies, Inc.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Pic-A-Flick Group:
We have audited the accompanying combined statements of operating revenues and
expenses and cash flows of Pic-A-Flick Group for the year ended December 31,
1994 and the eleven months ended November 30, 1995. These financial statements
are the responsibility of the Group'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 combined financial statements referred to above present
fairly, in all material respects, the operating revenues and expenses and cash
flows of Pic-A-Flick Group for the year ended December 31, 1994 and the eleven
months ended November 30, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
January 26, 1996
<PAGE>
PIC-A-FLICK GROUP
Combined Statements of Operating Revenues and Expenses
Eleven months Six months
Year Ended ended ended
December 31, November 30, June 30,
1994 1995 1995
---- ---- ----
(unaudited)
Revenues ........................... $ 6,152,378 $ 6,898,792 $ 3,893,484
Operating costs and expenses:
Operating expenses ............ 4,297,992 5,226,974 1,455,300
Cost of product sales ......... 468,974 543,547 1,481,408
General and administrative .... 758,289 642,329 707,151
----------- ----------- -----------
5,525,255 6,412,850 3,643,859
----------- ----------- -----------
Operating income ................... 627,123 485,942 249,625
Interest expense, net .............. 55,524 59,380 28,006
Other (income) expense, net ........ (23,487) 86,294 (14,655)
----------- ----------- -----------
32,037 145,674 13,351
Income before income taxes ......... 595,086 340,268 236,274
Income tax expense ................. 150,041 121,258 88,866
----------- ----------- -----------
Net income ......................... $ 445,045 $ 219,010 $ 147,408
=========== =========== ===========
See accompanying notes to combined financial statements.
<PAGE>
PIC-A-FLICK GROUP
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Eleven months Six months
Year Ended ended ended
December 31, November 30, June 30,
1994 1995 1995
---- ---- ----
(unaudited)
Operating activities:
<S> <C> <C> <C>
Net income $ 445,045 $ 219,010 $ 147,408
Adjustments to reconcile to net cash provided
by operating activities:
Loss on disposal of furnishings
and equipment 7,675 110,596 -
Depreciation and amortization 1,391,212 1,714,073 746,222
Changes in operating assets and liabilities:
Other receivables (652) (1,246) 2,019
Merchandise inventory (55,000) (28,330) (1,749)
Deposits and other assets (3,569) (2,432) (53,834)
Accounts payable 94,037 219,251 (7,859)
Accrued liabilities 38,961 (32,605) (2,233)
Deferred income tax, net 150,041 121,258 88,866
----------- ------------ --------------
Net cash provided by operating activities 2,067,750 2,319,575 918,840
----------- ------------ --------------
Investing activities:
Purchases of videocassette rental inventory, net (1,570,045) (1,819,703) (751,668)
Purchases of furnishings and equipment (363,220) (498,023) (232,563)
Proceeds from the sale of furnishing and equipment 31,116 22,111 -
----------- ------------ -------------
Net cash used in investing activities (1,902,149) (2,295,615) (984,231)
----------- ------------ --------------
Financing activities:
Principal payments on long-term debt (85,491) (82,520) (669)
Capital withdrawals (14,050) (7,500) -
----------- ------------- -------------
Net cash used in financing activities (99,541) (90,020) (669)
----------- ------------ --------------
Increase (decrease) in cash 66,060 (66,060) (66,060)
Cash at beginning of period - 66,060 66,060
----------- ------------ --------------
Cash at end of period $ 66,060 $ - $ -
=========== ============ =============
Supplemental disclosures of cash flow information: Cash paid for:
Interest $ 58,745 $ 72,490 $ 25,460
=========== ============ ==============
</TABLE>
Supplemental disclosure regarding land and buildings:
In 1994, the Group acquired land and a building with a note to the sellers
for $396,000 and a note to the principle shareholder for $433,225. In 1995,
the land and building were transferred to the principle shareholder in
exchange for the note to the principle shareholder and the principle
shareholder assumed the remaining balance of the note to the sellers. A
loss of $90,220 was recorded on this transaction.
See accompanying notes to combined financials
<PAGE>
PIC-A-FLICK GROUP
Notes to Combined Financial Statements
(1) Accounting Policies
Basis of Presentation
The accompanying combined financial statements of Pic-A-Flick Group
include substantially all operating revenues and expenses and cash flows
of the following commonly controlled subchapter S and subchapter C
corporations: Pic-A-Flick of Seneca, Inc.; Video Warehouse of Greenville,
Inc.; Pic-A-Flick of Greenville, Inc.; Pic-A-Flick Video International,
Inc.; Pic-A-Flick of Berea, Inc.; PAF-NC, Inc.; Take One Video of
Simpsonville, SC, Inc.; and Pic-A-Flick of Chester, Inc. As of November
30, 1995, Pic-A-Flick Group owned and operated twenty-three video
specialty stores in North and South Carolina.
The combined statements of operating revenues and expenses and cash flows
for the six months ended June 30, 1995 have been prepared by the Group
without audit. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation
of operating revenues and expenses and cash flows for the six months
ended June 30, 1995 have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Merchandise Inventory
Merchandise inventory, consisting of videocassettes, children's books and
confectionery items, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is stated at
cost, and is amortized over its estimated economic life with no provision
for salvage value. Videocassettes that are considered base stock
("catalog titles"), together with related costs to prepare them for rent,
are amortized over 36 months on a straight-line basis. New release
videocassettes are amortized as follows: the first through third copies
of the titles per store are amortized as base stock; the fourth through
ninth copies of each title per store are amortized 40% in the first year
and 30% in the each of the second and third years; and the tenth and any
succeeding copies of each title per store are amortized over nine months
on a straight-line basis.
Amortization expense related to videocassette rental inventory totaled
$1,179,317 and $1,473,800 for the year ended December 31, 1994 and the
eleven months ended November 30, 1995, respectively, and $651,356 for the
six months ended June 30, 1995 (unaudited). As videocassette rental
inventory is sold or retired, the applicable cost and accumulated
amortization are eliminated from the accounts and any related gain or
loss is recognized.
<PAGE>
(1) Accounting Policies, Continued
Income Taxes
Each of the entities of Pic-A-Flick Group operate as subchapter S
corporations or subchapter C corporations for income tax purposes. Income
taxes are paid by the shareholders in the case of the S corporations.
The C corporations account for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates in effect
for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and
amortization are provided over the estimated useful lives (five to seven
years) for furnishings and equipment and the lesser of the useful lives
or lease term (primarily five to ten years) for leasehold improvements
using the straight-line method.
Depreciation and amortization expense on furnishings and equipment was
$211,895 and $240,273 for the year ended December 31, 1994 and the eleven
months ended November 30, 1995, respectively, and $94,866 for the six
months ended June 30, 1995 (unaudited). Maintenance and repair
expenditures are expensed as incurred and amounted to $101,818 and
$87,176 for the year ended December 31, 1994 and the eleven months ended
November 30, 1995, respectively, and $30,269 for the six months ended
June 30, 1995 (unaudited).
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
(2) Commitments
Pic-A-Flick Group leases 16 of its 23 retail facilities under
noncancelable operating leases from non-related parties. Future minimum
payments under these leases as of November 30, 1995 are as follows:
1996 $ 983,772
1997 908,850
1998 769,473
1999 627,789
2000 531,987
Thereafter 970,096
----------
$4,791,967
<PAGE>
(2) Commitments, Continued
Rental and related expenses amounted to $854,893 and $929,453 for the
year ended December 31, 1994 and the eleven months ended November 30,
1995, respectively, and $541,337 for the six months ended June 30, 1995
(unaudited).
(3) Income Taxes
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Current Deferred Total
Year ended December 31, 1994:
<S> <C> <C> <C>
Federal $ - $ 120,896 $ 120,896
State - 29,145 29,145
----------- ----------- ------------
Total $ - $ 150,041 $ 150,041
=========== =========== ============
Eleven months ended November 30, 1995:
Federal $ - $ 97,703 $ 97,703
State - 23,555 23,555
----------- ----------- ------------
Total $ - $ 121,258 $ 121,258
=========== =========== ============
Six months ended June 30, 1995 (unaudited):
Federal $ - $ 71,586 $ 71,586
State - 17,280 17,280
----------- ----------- ------------
Total $ - $ 88,866 $ 88,866
=========== =========== ============
Income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% as a result of the following :
Eleven Six months
Year ended, months ended ended
December 31, November 30, June 30,
1994 1995 1995
Computed "expected" tax expense $ 202,329 $ 115,691 $ 84,872
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of Federal
income tax benefits 19,236 15,546 11,405
Income from subchapter S corporations,
taxable to shareholders (71,524) (9,979) (7,411)
----------- ----------- -----------
Actual tax expense $ 150,041 $ 121,258 $ 88,866
=========== =========== ===========
</TABLE>
<PAGE>
(4) Related Party Transactions
Seven of the 23 stores which comprise Pic-A-Flick Group are owned by the
principle shareholder. Pic-A-Flick pays monthly rent to the principle
shareholder and there are no long-term lease agreements for the periods
presented. The amount of rent paid on these stores was $361,683 and
$352,833 for the year ended December 31, 1994 and the eleven months ended
November 30, 1995, respectively, and $186,648 for the six months ended
June 30, 1995 (unaudited).
(5) Subsequent Event
Under merger and purchase agreements dated December 11, 1995, all of the
assets, liabilities and the business of Pic-A-Flick Group were sold to
Moovies, Inc.
<PAGE>
See accompanying notes to combined financial statements.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Multi-Entertainment, Inc.,
d/b/a: Premiere Video
St. Cloud, Minnesota
Members of the Board:
We have audited the accompanying combined statements of net assets of certain
stores of American Multi-Entertainment, Inc., d/b/a Premiere Video as of
December 31, 1994 and those respective stores as of December 31, 1995, and the
related combined statements of operations, stores' capital, and cash flows, for
the years in the three year period ended December 31, 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 certain stores of American
Multi-Entertainment, Inc., d/b/a Premiere Video as of December 31, 1994, and
those respective stores as of December 31, 1995, and the results of their
operations and cash flows for the years in the three year period ended December
31, 1995, in conformity with generally accepted accounting principles.
MCMAHON, HARTMANN, AMUNDSON & CO., LLP
St. Cloud, Minnesota
May 7, 1996
<PAGE>
Certain Stores of American Multi-Entertainment, Inc.
d/b/a Premiere Video
Combined Statements of Net Assets
December 31, June 30,
1994 1995 1996
(unaudited)
ASSETS
Current assets:
Cash ............................... $ 6,000 $ 11,000 $ 11,500
Merchandise inventory .............. 35,756 48,036 56,650
Prepaid expenses ................... 10,800 19,800 20,700
---------- ---------- ----------
Total current assets ........... 52,556 78,836 88,850
Rental tape and game inventory .......... 1,043,339 1,938,527 1,732,338
Furnishings and equipment, net .......... 1,198,558 2,162,243 2,244,226
Deposits and other assets ............... 292,095 280,574 253,712
---------- ---------- ----------
$2,586,548 $4,460,180 $4,319,126
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to AMI corporate .................... $1,400,836 $3,237,684 $2,329,774
Stores' capital ......................... 1,185,712 1,222,496 1,989,352
---------- ---------- ----------
$2,586,548 $4,460,180 $4,319,126
========== ========== ==========
<PAGE>
Certain Stores of American Multi-Entertainment, Inc.
d/b/a Premiere Video
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
Revenues:
<S> <C> <C> <C> <C> <C>
Rental revenues .......... $3,747,219 $4,606,308 $6,428,863 $2,799,860 $4,739,925
Product sales ............ 381,163 562,933 797,482 352,178 696,922
---------- ---------- ---------- ---------- ----------
4,128,382 5,169,241 7,226,345 3,152,038 5,436,847
Operating costs and expenses:
Operating expenses ....... 2,514,952 3,348,625 4,765,157 1,789,748 3,362,190
Cost of product sales .... 596,778 910,478 1,251,830 494,573 907,732
General and administrative 281,755 276,772 397,063 121,076 271,906
---------- ---------- ---------- ---------- ----------
3,393,485 4,535,875 6,414,050 1,178,880 4,541,828
Operating income ............ 734,897 633,366 812,295 746,641 895,019
Interest expense ............ 110,184 119,132 139,994 75,930 56,845
---------- ---------- ---------- ---------- ----------
Net income .................. $ 624,713 $ 514,234 $ 672,301 $ 670,711 $ 838,174
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Certain Stores of American Multi-Entertainment, Inc.
d/b/a Premiere Video
Statement of Changes in Stores' Capital
Years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
June 30,
1993 1994 1995 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Stores' capital at beginning of period $ 606,941 $ 1,013,878 $ 1,185,712 $ 1,222,496
Distributions (301,546) (342,000) (635,517) (71,318)
Net income 624,713 514,234 672,301 838,174
Capital contributions 83,770 - - -
------------ ------------ ------------ -----------
Stores' capital at end of period $ 1,013,878 $ 1,185,712 $ 1,222,496 $ 1,989,352
============ ============ ============ ============
</TABLE>
<PAGE>
Certain Stores of American Multi-Entertainment, Inc.
d/b/a Premiere Video
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1993 1994 1995 1995 1996
(unaudited)
Operating Activities:
<S> <C> <C> <C> <C>
Net income $ 624,713 $ 514,234 $ 672,301 $ 670,711$ 838,174
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Depreciation 230,703 278,504 548,849 153,742 318,864
Amortization 916,787 1,382,729 1,695,211 569,598 1,081,590
Merchandise Inventory 11,920 39,916 (12,280) (17,006) (8,614)
Prepaid Expenses (3,895) (2,700) (9,000) (3,600) (900)
----------- ----------- ------------ ---------- -----------
Net Cash Provided by
Operating Activities 1,780,228 2,212,683 2,895,081 1,373,445 2,229,114
Investing Activities:
Purchase of Furnishings and Equipment 283 (653,004) (1,512,534) (473,433) (400,847)
Purchase of Rental Tape and Game Inventory,
Net (969,857) (1,353,744) (2,499,056) (830,728) (825,448)
(Increase) Decrease in Deposits and
Other Assets 10,583 (92,417) (79,822) 45,254 26,862
----------- ----------- ------------ ---------- -----------
Net Cash Used by Investing Activities (958,991) (2,099,165) (4,091,412) (1,258,907) (1,199,433)
Financing activities:
Due to AMI Corporate (603,461) 230,382 1,836,848 556,516 (907,910)
Issuance of Common Stock 83,770 - - - -
Distributions Paid to Stockholders (301,546) (342,400) (635,517) (669,054) (121,271)
----------- ----------- ------------ ---------- ------------
Net Cash (Used by) Provided by
Financing Activities (821,237) (112,018) 1,201,331 (112,538) (1,029,181)
----------- ----------- ------------ ---------- -----------
Increase in Cash - 1,500 5,000 2,000 500
Cash - Beginning of Period 4,500 4,500 6,000 6,000 11,000
----------- ----------- ------------ ---------- -----------
Cash - End of Period $ 4,500 $ 6,000 $ 11,000 $ 8,000$ 11,500
=========== =========== ============ ========== ===========
</TABLE>
<PAGE>
MOOVIES, INC.
Notes to Consolidated Financial Statements
F-98
(1) NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Description of Business
The financial statements of certain stores of American
Multi-Entertainment, Inc., d/b/a Premiere Video include substantially all assets
and liabilities, operating revenues and expenses and cash flows of certain
stores of American Multi-Entertainment, Inc., d/b/a Premiere Video. Excluded
from the financial statements are certain assets of American
Multi-Entertainment, Inc. which are not included in the purchase agreement. The
excess of assets over liabilities is presented herein as stores' capital.
Certain stores of American Multi-Entertainment, Inc., d/b/a Premiere Video are
engaged in the video and game rental business in Iowa, Minnesota, Nebraska,
South Dakota and Wisconsin.
The combined statement of net assets as of June 30, 1996 and the combined
statements of operations, stores' capital and cash flows for the six months
ended June 30, 1995 and 1996 have been prepared by the Company without audit. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the net assets, results of
operations and cash flows as of June 30, 1996 and for the six months ended June
30, 1995 and 1996, have been included.
Basis of Presentation
The accompanying combined statements of net assets, statements of
operations, and statements of stores' capital have been prepared from the books
and records of American Multi-Entertainment, Inc. Allocations and assumptions
have been made in accordance with the purchase agreement with Moovies, Inc. (See
note 6)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Merchandise Inventory
Merchandise inventory, consisting primarily of confectionery items, is
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method of accounting.
Rental Tape and Game Inventory
Rental tapes and games are recorded at the lower of cost or market.
Market is determined by reducing the original cost by 1/24 per month for new
store openings and 1/12 per month for subsequent purchases, which has been
determined to be the estimated useful life of the rental tapes and games.
Rental tape and game inventory and related amortization are as follows:
December 31, June 30,
1994 1995 1996
(unaudited)
Rental tape and game inventory ....... $2,113,530 $3,389,292 $4,214,740
Accumulated amortization ............. 1,070,191 1,450,765 2,482,402
---------- ---------- ----------
$1,043,339 $1,938,527 $1,732,338
========== ========== ==========
Amortization expense related to rental tape and game inventory amounted
to $842,719, $1,297,661 and $1,603,868 for the years ended December 31,
1993, 1994 and 1995, respectively, and $526,099 and $1,031,637 for the
six months ended June 30, 1995 and 1996 (unaudited), respectively.
<PAGE>
(1) NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
Furnishings and Equipment
Leasehold improvements, equipment, and vehicles are carried at cost.
Major additions and betterments are charged to the property accounts while
replacements, maintenance, and repairs which do not improve or extend the life
of the respective assets are expensed currently.
Depreciation of physical properties for financial reporting purposes is
computed using the straight-line and declining balance methods based on the
estimated useful lives of the properties as follows:
Leasehold Improvements 5-10 years
Equipment 5-7 years
Vehicles 5 years
Income Taxes
Effective February 1, 1993, the Company elected to be treated as a small
business corporation for income tax purposes as provided in Section 1362(a) of
the Internal Revenue Code. As such, income taxes have not been provided because
the Company's income or loss and credits are passed through to the stockholders
and combined with their other personal income and deductions to determine
taxable income on their individual tax returns.
Advertising
The Company expenses advertising costs as incurred.
Due to AMI Corporate
American Multi-Entertainment, Inc. is responsible for paying all
operating costs and expenses and indebtedness of Premiere Video. Due to
AMI Corporate represents the amount owed to American Multi-Entertainment,
Inc. as of the end of the periods presented.
Fair Value of Financial Instruments
The following method and assumption were used to estimate the fair value
of the class of the financial instrument:
Cash: The carrying amount approximates fair value because of the short
maturity of those investments.
(2) FURNISHINGS AND EQUIPMENT
Furnishings and equipment consisted of the following:
December 31, June 30,
1994 1995 1996
(unaudited)
Equipment and fixtures ......... $ 1,303,287 $ 2,409,471 $
Leasehold improvements ......... 438,062 829,586
----------- -----------
1,741,349 3,239,057 3,639,904
Accumulated depreciation ....... (542,791) (1,076,814) (1,395,678)
----------- ----------- -----------
$ 1,198,558 $ 2,162,243 $ 2,244,226
=========== =========== ===========
Depreciation expense on furnishings and equipment was $230,703,
$278,504 and $548,849 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $153,742 and $318,864 for the six months ended June 30, 1995
and 1996 (unaudited), respectively.
<PAGE>
(3) DEPOSITS AND OTHER ASSETS
Deposits and Other Assets consisted of the following:
December 31, June 30,
1994 1995 1996
(unaudited)
Lease and utility deposits ........... $ 5,575 $ 25,088 $ 48,179
Covenants not to compete ............. 286,520 255,486 205,533
-------- -------- --------
$292,095 $280,574 $253,712
======== ======== ========
Covenants not to compete are recorded at cost and are being amortized
over the life of the agreements. Amortization expense on covenants not to
compete were $74,068, $85,068 and $91,343 for the years ended December 1993,
1994 and 1995, respectively, and $43,499, and $49,953 for the six months ended
June 30, 1995 and 1996 (unaudited), respectively.
(4) COMMITMENTS AND CONTINGENCIES
The Company is a party to several operating leases for various
facilities. The majority of the leases provide that the Company pay, in addition
to the minimum rent, all real estate taxes and insurance. Rent expense totaled
$391,175, $456,837 and $679,340 for the years ended December 31, 1993, 1994 and
1995, respectively, and $289,106 and $480,076 for the six months ended June 30,
1995 and 1996 (unaudited), respectively. The following is a schedule of future
minimum rent payments required under noncancellable operating leases:
1996 $ 835,583
1997 730,737
1998 641,268
1999 533,479
2000 292,536
Thereafter 241,207
----------
$3,274,810
(5) RELATED PARTY TRANSACTIONS
The Company pays an annual management fee to Cinema Entertainment Corp.,
a company related through common ownership and control. Charges to income
totaled $14,063, $13,637 and $30,609 for the year ended December 31, 1993, 1994
and 1995, respectively, and $13,215 and $5,000 for the six months ended June 30,
1995 and 1996 (unaudited), respectively.
(6) SUBSEQUENT EVENT (UNAUDITED)
Under an asset purchase agreement, substantially all of the assets,
certain liabilities (principally store leases) and the business of Premiere
Video are to be sold to Moovies, Inc. no later than the date of the proposed
public offering of common stock by Moovies, Inc.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and the Bylaws of the Company provide
for the indemnification of directors and officers to the fullest extent
permitted by the General Corporation Law of the State of Delaware (the "Delaware
Code").
Section 145 of the Delaware Code authorizes indemnification when a person
is made a party to any proceeding by reason of the fact that such person is or
was a director, officer, employee or agent of the corporation or was serving as
a director, officer, employee or agent of another enterprise, at the request of
the corporation, and if such person acted in good faith and in a manner
reasonably believed by him or her to be in or not opposed to the best interests
of the corporation. With respect to any criminal proceeding, such person must
have had no reasonable cause to believe that his or her conduct was unlawful. If
it is determined that the conduct of such person meets these standards, he or
she may be indemnified for expenses incurred and amounts paid in such proceeding
if actually and reasonably incurred by him or her in connection therewith. If
such a proceeding is brought by or on behalf of the corporation (i.e., a
derivative suit), such person may be indemnified against expenses actually and
reasonably incurred if he or she acted in good faith and in a manner reasonably
believed by him or her to be in, or not opposed to, the best interests of the
corporation. There can be no indemnification with respect to any matter as to
which such person is adjudged to be liable to the corporation; however, a court
may, even in such case, allow such indemnification to such person for such
expenses as the court deems proper. Where such person is successful in any such
proceeding, he or she is entitled to be indemnified against expenses actually
and reasonably incurred by him or her. In all other cases, indemnification is
made by the corporation upon determination by it that indemnification of such
person is proper because such person has met the applicable standard of conduct.
Article Six of the Company's Certificate of Incorporation provides that
the Company's directors will not be personally liable to the Company or its
stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors except for liability (a) for any breach of their duty of
loyalty to the Company or its stockholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, under Section 174 of the Delaware Code, which makes directors liable for
unlawful dividends or unlawful stock repurchases or redemptions or (d) for
transactions from which directors derive an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C> <C>
2.1* -- Agreement and Plan of Merger dated June 15, 1995 among Moovies, Inc., Tonight's Feature,
Inc., Douglas Raines, Michael Yeargin and Mortco, Inc.
2.2* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated July 13, 1995 among Moovies, Inc., First
Row Video, Inc., Video Game Trader, Inc. Rokki Rogan and Robert Ulam.
2.3* -- Asset Purchase Agreement dated June 15, 1995 as amended by First Amendment to Asset
Purchase Agreement and Waiver dated June 30, 1995 among Moovies, Inc. and Movie Stars
Entertainment Corp. and Alan Daniels.
2.4* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated July 8, 1995 among Moovies, Inc.,
PARR-Four, Inc. d/b/a Video Express, Arthur F. Greeder, III and Ann E. Greeder.
</TABLE>
357291.5
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C> <C>
2.5* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated July 8, 1995 among Moovies, Inc., BREM,
Inc. d/b/a Video Stars and Robert L. Brown, Jr.
2.6* -- Asset Purchase Agreement dated June 14, 1995 as amended by First Amendment to Asset
Purchase Agreement and Waiver dated July 13, 1995 among Moovies, Inc., Lott's Video
Warehouse of Athens, Lott's Video Warehouse of Athens, Inc., No. 2, Lott's Video
Warehouse of Dublin, Inc., Lott's Video Warehouse of Gainesville, Inc., Lott's Video
Warehouse of Milledgeville, Inc., Bryant Lott and Jerry W. Lott.
2.7* -- Asset Purchase Agreement dated June 14, 1995 as amended by First Amendment to Asset
Purchase Agreement and Waiver dated July 13, 1995 among Moovies, Inc., Video Warehouse
of Augusta #3, Gerald Pryor and Michael Harden.
2.8* -- Asset Purchase Agreement dated June 14, 1995 as amended by First Amendment to Asset
Purchase Agreement and Waiver dated July 13, 1995 among Moovies, Inc., Video Warehouse
of Macon #1, Gerald Pryor and Kevin Griffin.
2.9* -- Asset Purchase Agreement dated June 14, 1995 as amended by First Amendment to Asset
Purchase Agreement and Waiver dated July 13, 1995 among Moovies, Inc., Video Warehouse
of Savannah #2, Gerald Pryor and Kevin Griffin.
2.10* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated July 13, 1995 among Moovies, Inc., Video
Warehouse of Savannah #1, Inc., Gerald Pryor and Kevin Griffin.
2.11* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated July 13, 1995 among Moovies, Inc., Video
Warehouse of Augusta #2, Inc. and Gerald Pryor.
2.12* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated July 13, 1995 among Moovies, Inc., Video
Warehouse of Macon #3, Inc., Gerald Pryor, Michael Harden and Eddie Williams.
2.13* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated July 13, 1995 among Moovies, Inc., Video
Warehouse of Augusta #1, Inc. and Gerald Pryor.
2.14* -- Asset Purchase Agreement dated June 14, 1995 as amended by First Amendment to Asset
Purchase Agreement and Waiver dated July 13, 1995 among Moovies, Inc., L.A. Video, L.A.
Video of Upper Dublin, Inc., L.A. Video of Aldan, Inc., Alan Warshaw and Linda Warshaw.
2.15* -- Agreement and Plan of Merger dated June 14, 1995 as amended by First Amendment to
Agreement and Plan of Merger and Waiver dated June 30, 1995 among Moovies, Inc., King
Video, Inc. and Thomas C. King.
2.16* -- Asset Purchase Agreement dated June 14, 1995 as amended by First Amendment to Asset
Purchase Agreement and Waiver dated July 13, 1995 among Moovies, Inc., Planet Video,
Inc., XIMPEC, Inc. and Robert Klein.
2.17* -- Asset Purchase Agreement dated August 25, 1995 among Moovies, Inc., Moviemax Video
Superstores, Inc., David Thomas Roberts, Deborah C. Roberts, Freeman C. Todd and
Carolyn C. Todd.
2.18 -- Agreement and Plan of Merger dated September 15, 1995 among Moovies, Inc., Moovies of
Iowa, Inc., MoveAmerica, Incorporated d/b/a Movies to Go, Richard C. Eychaner, Andy
Burton, Sheila Burton, Keith West, Howard Eychaner, Mark Peters, Dave Ryan, Brian
Gosnell, Kurt Vanderhoef, Kirk Reinert, and Robert Keenan (Incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated September 18, 1995).
2.19** -- Asset Purchase Agreement dated October 11, 1995 among Moovies, Inc., First Row Video #6
of Belmont Avenue, Inc. d/b/a First Row Video, Mark A. Mallen, and Stephanie R. Mallen.
2.20** -- Asset Purchase Agreement dated November 20, 1995 among
Moovies, Inc., Smash Video, Inc., Bobby Harrelson, Rex
Stephens, and Robert Exum.
</TABLE>
357291.5
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C> <C>
2.21 -- Agreement and Plan of Merger dated December 11, 1995 among Moovies, Inc., Moovies of
the Carolinas, Inc., Pic-A-Flick of Berea, Inc., PAF-NC, Inc., Pic-A-Flick of Seneca, Inc.,
Video Warehouse of Greenville, Inc., Pic-A-Flick Video International, Inc., Joseph G.
Mahaffey, Sr., Joseph G. Mahaffey, Jr., and Susan J. Mahaffey (Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 11, 1995).
2.22 -- Asset Purchase Agreement dated December 11, 1995 among Moovies, Inc., Moovies of the
Carolinas, Inc., Pic-A-Flick of Chester, Inc., Take One Video of Simpsonville, S.C., Inc.,
Joseph G. Mahaffey, Sr. and Alinda W. Mahaffey (Incorporated by reference to Exhibit 2.3 to
the Company's Current Report on Form 8-K dated December 11, 1995).
2.23 -- Stock Purchase Agreement dated December 11, 1995 among Moovies, Inc., Moovies of the
Carolinas, Inc., Pic-A-Flick of Greenville, Inc., and Joseph G. Mahaffey, Sr. (Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 11,
1995).
2.24 -- Agreement and Plan of Merger dated December 21, 1995 among Moovies, Inc., Moovies of
Georgia, Inc., The Movie Store, Inc., The Movie Store VI, Inc., and Paul D. Love
(Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated
December 21, 1995).
2.25 -- Asset Purchase Agreement dated December 21, 1995 among Moovies, Inc., Moovies of
Georgia, Inc., and Movie Store VII, Inc. (Incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K dated December 21, 1995).
2.26 -- Asset Purchase Agreement dated December 21, 1995 among Moovies, Inc., Moovies of
Georgia, Inc., and Parkaire Media Associates, Ltd. (Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K dated December 1, 1995).
2.27*** -- Asset Purchase Agreement dated March 19, 1996, among Moovies, Inc., Showtime U.S.A.,
Ltd., Jerry Hilburn, Lois Hilburn, Justin Hilburn, Phil Blanton, Paige Wood, and Neil
Granath.
2.28*** -- Asset Purchase Agreement dated April 30, 1996 among Moovies, Inc., American
Mult-Entertainment, Inc. d/b/a Premiere Video, Dave Ross, Tony Tillemans, Matthew Otto,
Nicole Ross, Anthony Ross, and Catherine Ross as Custodian for Mark Ross.
3.1* -- Restated Certificate of Incorporation of Moovies, Inc.
3.2 -- Restated Bylaws of Moovies, Inc. (Incorporated by reference to Exhibit 3.2 in the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
4.1* -- Specimen Common Stock Certificate.
5.1**** -- Opinion of Arnall Golden & Gregory.
10.1* -- Form of Registration Rights Agreement.
10.1.1*** -- Registration Rights Agreement dated August 9, 1995 between Moovies, Inc. and Mortco, Inc.
10.1.2*** -- Amendment and Joinder Agreement for Registration Rights Agreement dated September 18,
1995 among Moovies, Inc., Richard C. Eychaner, Andy Burton, Sheila Burton, Keith West,
Howard Eychaner, Mark Peters, Dave Ryan, Brian Gosnett, Kurt Vanderhoef, Kirk Reinert
and Robert Keenan.
10.1.3*** -- Piggyback Registration Rights Agreement dated December 11, 1995 among Moovies, Inc.,
Joseph G. Mahaffey, Sr., Joseph G. Mahaffey, Jr. and Susan J. Mahaffey.
10.1.4*** -- Piggyback Registration Rights Agreement dated December 21, 1995 between Moovies, Inc.
and Paul D. Love.
10.2* -- Rentrak National Account Agreement dated March 8, 1995, as amended by First Addendum
dated March 8, 1995 and Amendment to First Addendum dated as of June 16, 1995.
10.2.1** -- Letter Agreement dated January 17, 1996, between Moovies, Inc. and Baker & Taylor
Entertainment, a division of Baker & Taylor.
10.2.2*** -- Second Addendum to Rentrak National Account Agreement, dated May 18, 1995.
10.3* -- 1995 Stock Plan and forms of Stock Option Agreements.
10.3.1*** -- First Amendment to 1995 Stock Plan.
</TABLE>
357291.5
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C> <C>
10.3.2*** -- Form of Non-Qualified Stock Option Agreement
10.4* -- Employment Agreement effective September 1994 between Tonight's Feature, Inc. and John
L. Taylor.
10.5* -- Employment Agreement effective March 1995 between Tonight's Feature Limited Partnership
II and F. Andrew Mitchell.
10.6* -- Form of Employment Agreement between Moovies, Inc. and Douglas Raines.
10.7* -- Form of Employment Agreement between Moovies, Inc. and Michael Yeargin.
10.8* -- Form of Employment Agreement between Moovies, Inc. and Alan Daniels.
10.9* -- Form of Employment Agreement between Moovies, Inc. and Robert Klein.
10.9.1*** -- Employment Agreement dated October 1, 1995 between Moovies, Inc. and Robert Klein.
10.9.2**** -- Amendment to Employment Agreement effective June 30, 1996, between Moovies, Inc. and
Robert Klein.
10.10* -- Form of Employment Agreement between Moovies, Inc. and Rokki Rogan.
10.11* -- Form of Employment Agreement between Moovies, Inc. and Arthur F. Greeder, III.
10.12* -- Form of Employment Agreement between Moovies, Inc. and Alan Warshaw.
10.13* -- Loan Agreement, in the principal amount of $550,000 dated August 31, 1993 between
Tonight's Feature Limited Partnership II and BB&T.
10.14* -- Promissory Note in the principal amount of $550,000 dated August 31, 1993, between
Tonight's Feature Limited Partnership II and BB&T.
10.15* -- Promissory Note in the principal amount of $150,000 dated August 25, 1994, between
Tonight's Feature Limited Partnership II and BB&T.
10.16* -- Promissory Note in the principal amount of $125,000 dated December 15, 1994, between
Tonight's Feature Limited Partnership II and BB&T.
10.17* -- Secured Revolving Note in the principal amount of $250,000 dated November 24, 1993
between Tonight's Feature Limited Partnership II and Rentrak.
10.18* -- Security Agreement dated November 24, 1993 between Tonight's Feature Limited Partnership
II and Mortco, Inc.
10.19* -- Revolving Credit Agreement dated March 8, 1995 between Tonight's Feature Limited
Partnership II, Tonight's Feature, Inc. and Mortco, Inc., as amended by First Amendment
dated June 13, 1995.
10.20* -- Secured Revolving Note in the principal amount of $750,000 dated March 8, 1995 between
Tonight's Feature and Mortco, Inc.
10.21* -- Security Agreement dated March 8, 1995 between Tonight's Feature and Mortco, Inc.
10.22* -- Promissory Notes dated August 31, 1993 between Tonight's Feature and former limited
partners.
10.23* -- Warrant Agreement dated April 19, 1995 with Sirrom Capital Corporation, as amended June
14, 1995.
10.23.1*** -- Warrant Agreement dated January 5, 1996 with Sirrom Capital Corporation.
10.24* -- Warrant Agreement dated April 19, 1995 with Mortco, Inc., as amended June 13, 1995.
10.25* -- Stock Purchase Warrant dated November 30, 1994 with Theodore J. Coburn.
10.26* -- Form of Warrant for former limited partners.
10.27* -- Loan Agreement dated April 19, 1995 by and between Tonight's Feature Limited Partnership
II and Sirrom Capital Corporation.
10.27.1*** -- First Amendment to Loan Agreement and Loan Documents dated January 5, 1996 between
Moovies, Inc. and Sirrom Capital Corporation.
10.27.2*** -- Secured Promissory Note in the original principal amount of $2,000,000 between Moovies,
Inc. and Sirrom Capital Corporation.
10.28** -- Promissory Note from Moovies of the Carolinas, Inc. in favor of Take One Video of
Simpsonville, S.C., Inc. in the amount of $1,625,000, with related Letter of Credit to secure
payment thereof from Carolina First Bank.
</TABLE>
357291.5
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C> <C>
10.29** -- Promissory Note from Moovies of the Carolinas, Inc. in favor of Pic-A-Flick of Chester, Inc.
in the amount of $375,000, with related Letter of Credit to secure payment thereof from
Carolina First Bank.
10.30** -- Promissory Note from Moovies of the Carolinas, Inc. in favor of Joseph G. Mahaffey, Sr., in
the principal amount of $3,000,000, with related Letter of Credit to secure payment thereof
from Carolina First Bank.
10.31** -- Promissory Note dated December 21, 1995 from Moovies, Inc. in favor of Movie Store VII,
Inc. in the original principal amount of $435,215 .
10.32** -- Promissory Note dated December 21, 1995 from Moovies, Inc., in favor of Parkaire Media
Associates, Ltd. in the original principal amount of $468,650.
10.33** -- Stock Purchase Warrant from Moovies, Inc. to Joseph G. Mahaffey, Sr.
10.34*** -- Credit Agreement dated March 29, 1996, between Moovies, Inc. and First Union National
Bank as agent.
10.35*** -- Sublease Agreement dated December 1, 1995 between Dow Brands, L.P. and Moovies, Inc.
10.36*** -- Form of Severance Agreement with Executive Officers.
10.37*** -- Form of Severance Agreement with Robert Klein.
11**** -- Statement re computation of per share earnings.
21.1*** -- Subsidiaries of the Company.
23.1**** -- Consent of KPMG Peat Marwick LLP.
23.2**** -- Consent of McGladrey & Pullen, LLP.
23.3**** -- Consent of Arnall Golden & Gregory (contained in Exhibit 5.1).
23.4**** -- Consent of McMahon, Hartmann, Amundson & Co., LLP
24.1**** -- Power of Attorney (contained on Signature page of the Registration Statement).
</TABLE>
* Incorporated by reference to the same Exhibit number in the
Registrant's Registration Statement on Form S-1 (No. 33-93562).
** Incorporated by reference to the same Exhibit number in the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
*** Incorporated by reference to the same Exhibit number in the
Registrant's Registration Statement on Form S-1. (No. 333-4270)
**** Filed herewith.
***** To be filed by amendment.
357291.5
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the 'Calculation of Registration Fee'
table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by Moovies pursuant to Section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant to
the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933,
357291.5
II-6
<PAGE>
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions,or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling persons in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
357291.5
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenville,
State of South Carolina on October 10, 1996.
MOOVIES, INC.
By: /s/ F. ANDREW MITCHELL
-------------------------
F. Andrew Mitchell
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints John L. Taylor, Andrew Mitchell and Ross Miller,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, any related
registration statement filed pursuant to Rule 462 promulgated pursuant to the
Securities Act of 1933, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might of could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on October 10, 1996.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ JOHN L TAYLOR Chairman, President and Chief October 10, 1996
- --------------------------------------
John L Taylor Executive Officer (Principal Executive
Officer) and Director
/s/ F. ANDREW MITCHELL Chief Financial Officer and Director October 10, 1996
- --------------------------------------
F. Andrew Mitchell (Principal Financial and
Accounting Officer)
/s/ DOUGLAS RAINES Director October 10, 1996
- --------------------------------------
Douglas Raines
/s/ MICHAEL YEARGIN Director October 10, 1996
- --------------------------------------
Michael Yeargin
/s/ THEODORE J. COBURN Director October 10, 1996
- --------------------------------------
Theodore J. Coburn
357291.5
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<PAGE>
/s/ ARTHUR F. GREEDER III Director October 10, 1996
- -------------------------------------
Arthur F. Greeder III
/s/ ROKKI ROGAN Director October 10, 1996
- -------------------------------------
Rokki Rogan
/s/ CHARLES D. WAY Director October 10, 1996
- -------------------------------------
Charles D. Way
/s/ ROBERT J. KLEIN Director October 10, 1996
- ------------------------------------
Robert J. Klein
</TABLE>
357291.5
II-9
EXHIBIT 5.1
October 10, 1996
Moovies, Inc.
201 Brookfield Parkway
Greenville, SC 29607
Ladies and Gentlemen:
We have acted as counsel to Moovies, Inc. ("Moovies") in connection
with the filing of a Registration Statement on Form S-4 (the "Registration
Statement") to register under the Securities Act of 1933, as amended, 1,850,000
shares of its Common Stock (the "Shares") for offering from time to time in
connection with the acquisition of businesses and properties by Moovies and its
subsidiaries. The Shares may be presently authorized but unissued shares or
shares held as treasury shares at the time of their delivery. In this connection
we have made such investigation and reviewed such documents as we deem necessary
in the circumstances to render the following opinion.
Based upon such investigation and review, it is our opinion that the
Shares have been duly authorized for issue, and when (i) authorized for issuance
by the Board of Directors of Moovies in transactions of the type and for the
consideration described in the Registration Statement and (ii) issued or
delivered upon receipt of such consideration, such Shares will be legally
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this opinion and to our firm in
the prospectus included therein. This consent is not to be construed as an
admission that we are a party whose consent is required to be filed with the
Registration Statement under the provisions of the Securities Act of 1933 as
amended.
Very truly yours,
ARNALL GOLDEN & GREGORY
ARNALL GOLDEN & GREGORY
365518.1
<PAGE>
EXHIBIT 10.9.2
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") made this
______ day of June, 1996, effective as of the 4th day of March, 1996, by and
among Moovies, Inc., a Delaware corporation (the "Company") and Robert Klein, a
resident of South Carolina (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee have entered into an Employment
Agreement dated as of October 1, 1995 (the "Employment Agreement");
WHEREAS, the Board of Directors has promoted Employee to Chief
Operating Officer and the Compensation Committee of the Board of Directors of
the Company has authorized certain changes in the Employment Agreement;
WHEREAS, the Company desires to enter into this Amendment to secure
Employee's continued employment with the Company and to memorialize the changes
to the Employment Agreement authorized by the Compensation Committee of the
Board of Directors;
WHEREAS, the Employee desires to accept such continued employment upon
the terms and subject to the conditions contained herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and the Employee hereby agree as follows, effective as of
March 4, 1996:
1. The first sentence of Section 1 of the Employment Agreement is
deleted in its entirety and the following two sentences are inserted in lieu
thereof:
"Employee shall serve as Chief Operating Officer on the terms
and conditions hereinafter set forth. Employee shall be
responsible, subject to the supervision, direction and control
of the President and Board of Directors of the Company, for
all facets of the day-to-day operations of the Company to
assure that the various divisions and departments of the
Company operate efficiently, productively and in full
cooperation with one another."
2. Section 3(a) of the Employment Agreement is deleted in its entirety
and the following inserted in lieu thereof:
"(a) Base Salary. One Hundred Seventy-Five Thousand
Dollars ($175,000) annually ("Base Salary") (prorated for any
partial calendar year during the term hereof) shall be payable in
accordance with the Company's customary payroll procedures but
not less often than in monthly installments."
335454.1
<PAGE>
3. Section 17 of the Employment Agreement is amended by adding the
following sentence immediately after the first sentence thereof:
"Effective as of March 4, 1996, subject to approval by the
stockholders of the Company of the increase in the number of
shares of Common Stock subject to the Moovies, Inc. 1995 Stock
Plan, Company grants Employee a non-qualified stock option to
purchase an additional 100,000 shares of the Company's Common
Stock under the Moovies, Inc. 1995 Stock Plan in accordance
with the terms of a non-qualified stock option agreement
between Company and Employee, which shall contain certain
vesting provisions and other terms and conditions."
4. Other than as expressly provided herein, the Employment Agreement
remains in full force and effect.
5. The Employment Agreement as modified by this Amendment may not be
further changed or modified except in writing and signed by Company and
Employee.
6. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
7. Capitalized terms not otherwise defined herein shall have the
meaning assigned to them in the Employment Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment, as of the
day and year first above written.
COMPANY:
MOOVIES, INC.
By:__________________________________
John L. Taylor, CEO and President
EMPLOYEE:
_____________________________________
Robert Klein
335454.1
-2-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Moovies, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Historical and Pro Forma Financial Data" and
"Experts" in the prospectus.
Our report on First Row Video, Inc. refers to a change in the method of
computing the amortization of videocassette rental inventory effective January
1, 1994.
KPMG PEAT MARWICK LLP
Cleveland, Ohio
October 8, 1996
369081.1
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Moovies, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Historical and Pro Forma Financial Data" and
"Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
October 8, 1996
369081.1
<PAGE>
EXHIBIT 23.2
We hereby consent to the use in the Registration Statement of Moovies, Inc.
on Form S-4, dated October 10, 1996, of our report dated December 21, 1994
relating to the statements of income and cash flows of Move America,
Incorporated, and to the reference to our Firm under the caption "Experts" in
the Prospectus.
McGLADREY & PULLEN, LLP
Des Moines, Iowa
October 10, 1996
369081.1
EXHIBIT 23.4
McMahon, Hartmann, Amundson & Co., LLP
October 10, 1996
Moovies, Inc.
201 Brookfield Parkway
Greenville, South Carolina
Members of the Board:
We hereby consent to the use in this Registration Statement of our report, dated
May 7, 1996, relating to the financial statements of American
Multi-Entertainment, Inc. d/b/a Premiere Video, and to the reference to our Firm
under the caption "Experts" in the Prospectus.
MCMAHON HARTMANN AMUNDSON & CO., LLP
369837.1
<PAGE>
