SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 29, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD OF ___________ TO __________
Commission file number 0-24548
Movie Gallery, Inc.
(Exact name of registrant as specified in its charter)
Delaware 63-1120122
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
739 West Main Street, Dothan, Alabama 36301
(Address of principal executive offices) (Zip Code)
(334) 677-2108
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO _______
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 13,422,534 shares of Common
Stock as of November 8, 1996.
The exhibit index to this report appears at page 12 of 14 consecutively
numbered pages.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 29, 1996 and December 31, 1995....1
Consolidated Statement of Operations - Quarter ended September 29,
1996 and September 30, 1995; Three quarters ended September 29,
1996 and September 30, 1995 ..............................................2
Consolidated Statements of Cash Flows - Three quarters ended
September 29, 1996 and September 30, 1995.................................3
Notes to Consolidated Financial Statements - September 29, 1996...........4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition...................................................8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................12
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Balance Sheets
(Unaudited)
(in thousands)
<CAPTION>
September 29 December 31
1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................... $ 4,013 $ 6,255
Recoverable income tax ............................ 1,447 1,278
Merchandise inventory ............................. 10,995 10,989
Accounts receivable ............................... 1,036 1,933
Prepaid expenses and other ........................ 2,913 2,113
-------- -------
Total current assets 20,404 22,568
Videocassette rental inventory, net ............... 83,245 72,979
Property, furnishings and equipment, net .......... 49,445 41,437
Deferred charges, net ............................. 12,060 12,567
Excess of cost over net assets acquired ........... 88,261 81,963
Deposits and other assets ......................... 2,742 1,965
-------- --------
Total assets ...................................... $256,157 $233,479
======== ========
Liabilities and stockholders' equity
Current liabilities:
Notes payable ..................................... $ -- $ 32,052
Accounts payable .................................. 18,942 15,575
Accrued liabilities ............................... 8,737 13,508
Current portion of long-term financing obligations 4,633 6,390
-------- --------
Total current liabilities ......................... 32,312 67,525
Long-term financing obligations ................... 69,274 19,622
Other accrued liabilities ......................... 2,425 --
Deferred income taxes ............................. 9,117 10,193
Stockholders' equity
Preferred stock, $.10 par value; 2,000,000 shares
authorized, no shares issued and outstanding ... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized, 13,422,534 and 12,877,240 shares
issued and outstanding, respectively ........... 13 13
Additional paid-in capital ........................ 131,686 122,582
Retained earnings ................................. 11,330 13,544
-------- --------
Total stockholders' equity ........................ 143,029 136,139
-------- --------
Total liabilities and stockholders' equity ........ $256,157 $233,479
======== ========
See accompanying notes
</TABLE>
1
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<CAPTION>
Quarter Ended Three Quarters Ended
September 29 September 30 September 29 September 30
1996 1995 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rentals ........................................ $ 54,009 $ 36,463 $ 160,639 $ 87,242
Product sales .................................. 7,719 3,910 23,894 11,895
--------- --------- --------- ----------
$ 61,728 $ 40,373 $ 184,533 $ 99,137
Operating costs and expenses:
Store operating expenses ....................... 31,371 18,798 91,540 44,466
Amortization of videocassette
rental inventory .............................. 14,836 8,081 47,838 19,723
Amortization of intangibles .................... 1,781 1,032 5,132 2,129
Cost of sales .................................. 4,520 2,542 14,336 7,810
General and administrative ..................... 5,429 3,667 15,521 9,277
Restructuring and other charges ................ 9,595 -- 9,595 --
--------- --------- --------- ----------
Operating income (loss) ........................... (5,804) 6,253 571 15,732
Interest expense, net ............................. (1,440) (405) (3,941) (692)
--------- --------- --------- ----------
Income (loss) before income taxes ................. (7,244) 5,848 (3,370) 15,040
Income taxes ...................................... (3,007) 2,318 (1,156) 6,335
--------- --------- --------- ----------
Net income (loss) ................................. $ (4,237) $ 3,530 $ (2,214) $ 8,705
========= ========= ========= ==========
Net income (loss) per share ....................... $ (.32) $ .27 $ (.17) $ .73
========= ========= ========= ==========
Supplemental pro forma net income (loss) per share:
Historical income (loss) before
income taxes .................................... $ (7,244) $ 5,848 $ (3,370) $ 15,040
Pro forma income taxes ............................ (2,757) 2,167 (1,281) 5,537
--------- --------- --------- ----------
Pro forma net income (loss) ....................... (4,487) 3,681 (2,089) 9,503
========= ========= ========= ==========
Supplemental pro forma net
income (loss) per share ......................... $ (.33) $ .28 $ (.16) $ .80
========= ========= ========= ==========
Weighted average shares
outstanding .................................... 13,423 13,013 13,350 11,857
========= ========= ========= ==========
See accompanying notes
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Three Quarters Ended
September 29 September 30
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ....................................... $ (2,214) $ 8,705
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ......................................... 54,235 22,004
Amortization ......................................... 5,132 2,129
Deferred income taxes ................................ (1,375) 5,078
Restructuring charge ................................. 9,595 --
Changes in operating assets and liabilities:
Recoverable income tax ............................... 49 (5)
Merchandise inventory ................................ 143 (933)
Other current assets ................................. 131 (710)
Deposits and other ................................... (733) (1,121)
Accounts payable ..................................... 2,928 1,225
Accrued liabilities .................................. (7,741) 2,697
--------- ---------
Net cash provided by operating activities ............... 60,150 39,069
INVESTING ACTIVITIES
Business acquisitions ................................... (8,537) (68,835)
Purchases of videocassette rental inventory, net ........ (55,690) (33,797)
Purchases of property, furnishings and equipment ........ (14,508) (14,490)
--------- ---------
Net cash used in investing activities ................... (78,735) (117,122)
FINANCING ACTIVITIES
Proceeds from issuance of common stock .................. 524 64,323
Net (payments on) proceeds from notes payable ........... (31,000) 10,500
Proceeds from issuance of long-term financing obligations 72,938 8,341
Principal payments on long-term financing obligations ... (26,119) (4,371)
Cash dividends and other ................................ -- (996)
--------- ---------
Net cash provided by financing activities ............... 16,343 77,797
--------- ---------
Decrease in cash and cash equivalents ................... (2,242) (256)
Cash and cash equivalents at beginning of period ........ 6,255 3,723
--------- ---------
Cash and cash equivalents at end of period .............. $ 4,013 $ 3,467
========= =========
See accompanying notes
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the thirteen week and thirty-nine week
periods ended September 29, 1996, are not necessarily indicative of the results
that may be expected for the fiscal year ended January 5, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Movie Gallery, Inc.'s annual report on Form 10-K for the
year ended December 31, 1995.
The Company's historical financial statements for all periods presented have
been restated to include the results of operations of Home Vision Entertainment,
Inc, and Hollywood Video, Inc. (see note 5).
2. Videocassette Rental Inventory Effective
April 1, 1996, the Company changed its method of amortizing videocassette rental
inventory (which includes video games and audio books). Under the new method,
videocassettes considered to be base stock are amortized over thirty-six months
on a straight-line basis to a $5 salvage value. New release videocassettes are
amortized as follows: (i) the fourth and any succeeding copies of each title per
store are amortized on a straight-line basis over six months to an average net
book value of $5 which is then amortized on a straight-line basis over the next
thirty months or until the videocassette is sold, at which time the unamortized
book value is charged to cost of sales; and (ii) copies one through three of
each title per store are amortized as base stock. Management believes the new
method will result in a better matching of expenses with revenues in the
Company's current operating environment and that it is compatible with changes
made by its primary competitors.
The new method of amortization has been applied to all inventory held at April
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.
The application of the new method of amortizing videocassette rental inventory
increased depreciation expense and cost of sales for the quarter ended June 30,
1996 by approximately $7.7 million and reduced net income by $4.7 million.
Earnings per share for the thirty-nine weeks ended September 29, 1996 was
reduced by $0.36 as a result of this charge.
3. Provision for Business Restructuring
During the third quarter of 1996 the Company began and completed an extensive
analysis of both the store base performance and its organizational structure and
adopted a business restructuring plan to close approximately 50 of its stores
and reduce the corporate organizational staff by approximately 15 percent.
Management concluded that certain stores were under performing and that it was
not prudent to continue to operate these locations. The expected closings are
not concentrated in a particular geographic area. The principal factors
considered in identifying stores for closure included: (i) whether a store
generated sufficient cash flow at the store level to provide an acceptable
return on current investment; (ii) whether the latest sales trends indicated a
likely improvement in the historical store results; (iii) whether the current or
future competitive climate would make sales improvements less likely; and (iv)
whether a store's performance warrants lease renewal where the lease was
scheduled to expire within the next year.
4
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(Continued)
This restructuring plan has resulted in the Company recording a $9.6 million
pretax restructuring charge in the third quarter of 1996. The components of the
restructuring charge include approximately $5.4 million in reserves for future
cash outlays for lease terminations, miscellaneous closing costs and legal and
accounting costs, as well as approximately $4.2 million in asset write downs
(see below). In some situations, the timing of store closures will depend on the
Company's ability to negotiate reasonable lease termination agreements. The
lease commitments associated with the closing stores will be retired entirely or
materially diminished by one of three methods: (i) through the normal expiration
of the lease within the next year; (ii) through the subletting of the property
to another entity; or (iii) through a negotiated lease buyout with the
individual landlord. The store closures are expected to be completed by the end
of fiscal year 1997. The stores identified for closure had revenues and store
operating expenses of approximately $6.2 million and $5.3 million, respectively,
for the first three quarters of fiscal year 1996.
During the first quarter of 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," issued in March 1995. In
conjunction with the business restructuring, an estimated $4.2 million
impairment loss was incurred for those stores identified to close where
projected operating performance indicated an impairment. This impairment loss
related primarily to the write-off of leasehold improvements, fixtures and
intangibles and a valuation allowance for videocassette rental inventory
associated with the stores to be closed.
Included within the "Restructuring and other charges" line item in the
consolidated statement of operations is $325,000 of estimated employee
termination benefits related to the elimination of approximately 50 positions
within the corporate organizational staff of the Company. The positions
terminated encompassed all aspects of the corporate staff of the Company.
4. Financing Obligations
On July 10, 1996, the Company entered into a Credit Agreement with First Union
National Bank of North Carolina with respect to a reducing revolving credit
facility (the "Facility"). The Facility is unsecured, provides borrowings for up
to $125 million and replaced the Company's previously existing line of credit
agreement.
The available amount of the Facility will reduce quarterly beginning on March
31, 1998 with a final maturity of June 30, 2000. The interest rate of the
Facility is LIBOR-based and the Company may repay the Facility at any time
without penalty. The more restrictive covenants of the Facility restrict
borrowings based upon cash flow levels. At November 8, 1996, $67 million was
outstanding and approximately $5.5 million of the $125 million commitment was
available for borrowing under the Facility.
5. Acquisitions
On July 1, 1996, the Company acquired Home Vision Entertainment, Inc. ("Home
Vision") in a merger transaction accounted for as a pooling-of-interests,
pursuant to which the Company issued approximately 731,000 shares of its common
stock to Home Vision shareholders and assumed approximately $12.5 million in
liabilities. At the time of the merger, Home Vision operated 55 video specialty
stores in Maine, New Hampshire and Massachusetts.
5
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(Continued)
On July 1, 1996, the Company acquired Hollywood Video, Inc. ("Hollywood Video")
in a merger transaction accounted for as a pooling-of-interests, pursuant to
which the Company issued approximately 38,000 shares of its common stock to
Hollywood Video shareholders and assumed approximately $11.5 million in
liabilities. At the time of the merger, Hollywood Video operated 43 video
specialty stores in Iowa, Wisconsin and Illinois.
The Company's historical financial statements for all periods presented have
been restated to include the results of operations of Home Vision and Hollywood
Video. The effects of conforming the accounting policies of the Company, Home
Vision and Hollywood Video were not material.
Prior to the merger, Home Vision reported on a fiscal year ending on September
30 and Hollywood Video reported on a calendar year basis. The Home Vision
statement of operations for the year ended September 30, 1995 is combined with
the statement of operations for the Company and Hollywood Video for the year
ended December 31, 1995. The combined balance sheet includes the December 31,
1995 balance sheet for the Company, Home Vision and Hollywood Video. In order to
conform with the Company's fiscal year end, Home Vision's net loss of $2,082,000
for the quarter ended December 31, 1995 is reflected in the Company's retained
earnings balance at December 31, 1995.
Separate results of operations of the merged entities for the periods prior to
the merger date are as follows (dollars in thousands) (unaudited):
<TABLE>
Six Months Three Months Nine Months
Ended Ended Ended
June 30 September 30 September 30
1996 1995 1995
-------------------------------------
<CAPTION>
<S> <C> <C> <C>
Revenues
Movie Gallery ...... $ 106,307 $ 34,595 $ 80,927
Home Vision ........ 11,191 3,732 12,530
Hollywood Video .... 5,307 2,046 5,680
--------- --------- ---------
Combined .............. $ 122,805 $ 40,373 $ 99,137
========= ========= =========
Net income (loss)
Movie Gallery ...... $ 3,106 $ 4,289 $ 10,122
Home Vision ........ (97) (345) (328)
Hollywood Video .... (986) (414) (1,089)
--------- --------- ---------
Combined .............. $ 2,023 $ 3,530 $ 8,705
========= ========= =========
Other changes in
stockholders' equity
Movie Gallery ...... $ 9,256 $ 2,079 $ 64,170
Home Vision ........ (24) 3,049 4,638
Hollywood Video .... -- -- --
--------- --------- ---------
Combined .............. $ 9,232 $ 5,128 $ 68,808
========= ========= =========
</TABLE>
Costs of approximately $757,000 incurred by the Company in connection with
the Home Vision and Hollywood Video mergers have been included in general and
administrative expenses in the consolidated statement of operations for the
thirteen weeks ended September 29, 1996.
6
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(Continued)
The following unaudited pro forma information presents the results of operations
as though other acquisitions accounted for as purchases, which have occurred
since January 1, 1995, had occurred as of the beginning of the year in which the
acquisition occurred and the beginning of the immediately preceding year.
<TABLE>
Quarter Ended Three Quarters Ended
September 29 September 30 September 29 September 30
1966 1995 1996 1995
--------------------------------------------------------
(in thousands, except per share data)
<CAPTION>
<S> <C> <C> <C> <C>
Revenues .................. $ 61,728 $ 58,144 $ 191,361 $ 176,492
Net income (loss) ......... (4,487) 5,135 (1,174) 16,227
Net income (loss) per share $ (.33) $ .38 $ (.09) $ 1.21
</TABLE>
6. Supplemental Pro Forma Earnings Per Share
Pro forma income taxes reflect income tax expense which would have been
recognized by the Company as a C Corporation if the acquisitions of Home Vision
and Hollywood Video had been consummated prior to January 1, 1995. Home Vision's
historical operating results for the 1995 fiscal year include a $400,000 charge
to recognize deferred taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," upon Home Vision's conversion
from an S Corporation to a C Corporation for federal and state income tax
purposes. Hollywood Video's historical operating results do not include any
provision for income taxes as Hollywood Video was taxed as an S Corporation for
all periods prior to the merger. Historical operating results for the thirteen
weeks ended September 29, 1996 include a $250,000 income tax benefit for the
conversion of Hollywood Video from an S Corporation to a C Corporation.
7
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
The following table sets forth, for the periods indicated, statement of
operations data expressed as a percentage of total revenue, the percentage
increase or decrease from the comparable period and the number of stores open at
the end of each period.
<TABLE>
Quarter Ended Three Quarters Ended
September 29 September 30 September 29 September 30
-------------------------------------------------------------------------
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
-------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals ........................... 87.5% 90.3% (2.8)% 87.1% 88.0% (0.9)%
Product sales ..................... 12.5 9.7 2.8 12.9 12.0 0.9
------ ------ ------ ------ ------ ------
100.0 100.0 -- 100.0 100.0 --
Operating costs and expenses:
Store operating expenses .......... 50.9 46.5 4.4 49.6 44.8 4.8
Amortization of rental inventory .. 24.0 20.0 4.0 25.9 19.9 6.0
Amortization of intangibles ....... 2.9 2.6 0.3 2.8 2.1 0.7
Cost of sales ..................... 7.3 6.3 1.0 7.8 7.9 (0.1)
General and administrative ........ 8.8 9.1 (0.3) 8.4 9.4 (1.0)
Restructuring and other charges.... 15.5 -- 15.5 5.2 -- 5.2
------ ------ ------ ------ ------ ------
Total ................................ 109.4 84.5 24.9 99.7 84.1 15.6
------ ------ ------ ------ ------ ------
Operating income (loss) .............. (9.4) 15.5 (24.9) 0.3 15.9 (15.6)
Interest expense, net ................ (2.3) (1.0) (1.3) (2.1) (0.7) (1.4)
------ ------ ------ ------ ------ ------
Income (loss) before income taxes .... (11.7) 14.5 (26.2) (1.8) 15.2 (17.0)
Income taxes ......................... (4.9) 5.8 (10.7) (0.6) 6.4 (7.0)
------ ------ ------ ------ ------ ------
Net income (loss) .................... (6.8)% 8.7% (15.5)% (1.2)% 8.8% (10.0)%
====== ====== ====== ====== ====== ======
Number of stores open at end of period 870 629 241 870 629 241
====== ======= ====== ====== ====== ======
</TABLE>
The results of operations for all periods presented include the combined results
of the Company, Home Vision Entertainment, Inc. ("Home Vision") and Hollywood
Video, Inc. ("Hollywood Video"). The acquisitions of Home Vision and Hollywood
Video were both consummated on July 1, 1996 and accounted for as
poolings-of-interests. For the thirteen weeks and thirty-nine weeks ended
September 29, 1996, revenues were $61.7 million and $184.5 million, increases of
52.9% and 86.1%, respectively, over the same periods in 1995. The increases were
a result of an increase in the number of stores operated by the Company. Same
store sales decreased 2.4% for the third quarter and were down 1.2% for the
thirty-nine weeks ended September 29, 1996, at stores operated by the Company
for at least 13 months. The same store sales decrease for the third quarter is
primarily the result of the Summer Olympics, one of the most heavily watched
events in television history, which took place during what is traditionally one
of the busiest periods of the year for the Company. Same store sales were also
negatively impacted by a reduction of approximately 15% in the Company's budget
for new release videocassette rental inventory over prior year levels. Although
efficiencies were achieved from the implementation of a new buying program in
January 1996, certain stores' revenue production did not meet management's
expectations.
Product sales as a percentage of total revenue for the thirteen weeks ended
September 29, 1996 was 12.5%, an increase from 9.7% for the comparable period in
1996. This increase is primarily the result of an increased effort by the
Company to sell previously viewed videocassettes. For the thirty-nine week
period ended September 29, 1996 product sales as a percentage of revenue was
12.9%, a slight increase from 12.0% for the comparable 1995 period.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Store operating expenses, which reflect direct store expenses such as lease
payments and in-store payroll increased as a percentage of revenues to 50.9% for
the thirteen weeks ended September 29, 1996 from 46.5% for the comparable fiscal
period in 1995. The increase in store operating expenses as a percentage of
revenues is primarily due to (i) the shortfall in revenue as a result of the
above-mentioned items; (ii) an increase in rent and other expenses in connection
with the integration of developed and acquired stores into the Company's store
base; and (iii) marketing expenditures equal to approximately 1% of revenue
during the quarter which were not incurred in the prior year.
For the third quarter of 1996, amortization of videocassette rental inventory
increased as a percentage of revenue to 24.0% from 20.0% for the same period in
1995. During the second quarter of 1996, the Company adopted a new policy for
amortizing videocassette rental inventory which has the effect of accelerating
the Company's rate of amortization of its inventory.
Amortization of intangibles increased as a percentage of revenue to 2.9% for the
quarter ended September 29, 1996 from 2.6% for the quarter ended September 30,
1995 due to the effect of acquisitions which occurred subsequent to the second
quarter of 1995 and which were accounted for under the purchase method of
accounting.
Cost of sales increased with the increased revenue from product sales and
decreased as a percentage of revenues from product sales from 65.7% for the nine
months ended September 30, 1995 to 60.0% for the thirty-nine weeks ended
September 29, 1996. The increase in product sales gross margins resulted
primarily from (i) an increase in the sale of previously viewed rental
inventory, the unamortized value of which is expensed to cost of sales and
generally generates higher margins than other product categories, and, (ii)
higher margins on sell-through products.
General and administrative expenses as a percentage of revenue decreased to 8.8%
for the thirteen weeks ended September 29, 1996 versus 9.1% for the comparable
period in 1995. Excluding $757,000 in merger related expenses associated with
the acquisitions of Home Vision and Hollywood, general and administrative
expenses were 7.6% of revenues for the third quarter of 1996. The decrease is
primarily due to operating efficiencies attained through a larger revenue base.
Net interest expense as a percentage of revenues increased to 2.3% for the third
quarter of 1996 from 1.0% for the three months ended September 30, 1995. For the
thirty-nine week period ended September 29, 1996, net interest expense as a
percentage of revenues increased to 2.1% from 0.7% for the nine months ended
September 30, 1995. The increase for these periods is due to the increased use
of debt financing to fund the Company's growth in 1996 versus 1995, a year in
which the Company completed a secondary offering of its common stock.
During the third quarter of 1996, the Company began and completed an extensive
analysis of both the store base performance and its organizational structure and
adopted a business restructuring plan to close approximately 50 of its stores
and reduce the corporate organizational staff by approximately 15%. Management
concluded that certain stores were under performing and that it was not prudent
to continue to operate these locations. The expected closings are not
concentrated in a particular geographic area.
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
This restructuring plan has resulted in the Company recording a $9.6 million
pretax restructuring charge in the third quarter of 1996. The components of the
restructuring charge include approximately $5.4 million in reserves for future
cash outlays for lease terminations, miscellaneous closing costs and legal and
accounting costs, as well as approximately $4.2 million in asset write downs. In
some situations, the timing of store closures will depend on the Company's
ability to negotiate reasonable lease termination agreements. These stores had
year-to-date revenues and store operating expenses of approximately $6.2 million
and $5.3 million, respectively, for the first three quarters of fiscal year
1996. If these stores had been closed on January 1, 1996, store operating
expenses as a percentage of total revenue would have decreased from 49.6% to
48.4% for the thirty-nine week period ended September 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary capital needs have been for opening and
acquiring new stores and for the purchase of videocassette inventory. Other
capital needs include the remodeling of existing stores, relocation of existing
stores, and the continued upgrading and installation of the Company's
point-of-sale and management information systems. Typically, the Company has
funded its inventory purchases, its remodeling and relocation program, and a
majority of its new store opening costs from cash flow from operations. The
Company has funded the balance of its capital needs, primarily for the
acquisition of additional video stores, from the proceeds of two public
offerings, loans under revolving credit facilities and seller financing.
Net cash provided by operating activities was $60.2 million for the thirty-nine
weeks ended September 29, 1996 as compared to $39.1 million for the comparable
period of 1995. The increase was primarily due to higher net income before
depreciation, amortization, deferred taxes and the restructuring charge
discussed above.
Net cash used in investing activities was $78.7 million for the thirty-nine
weeks ended September 29, 1996 as compared to $117.1 million for the nine months
ended September 30, 1995, primarily as a result of a decrease in the total cash
expended for stores acquired during the first nine months of 1996 versus 1995,
offset by a net increase in the purchase of videocassette rental inventory
resulting from the Company's growth.
Net cash provided by financing activities decreased from $77.8 million in the
first nine months of 1995 to $16.3 million in the comparable period in 1996.
This decrease was primarily the result of a secondary common stock offering in
1995, offset partially by a net increase in debt balances of $15.8 million in
1996.
On July 10, 1996, the Company replaced its existing $60 million revolving credit
facility with a new, $125 million reducing revolving credit facility (the
"Facility"). The Facility has a maturity date of June 30, 2000. The interest
rate of the Facility is LIBOR-based and the Company may repay the Facility at
any time without penalty. The more restrictive covenants of the Facility
restrict borrowings based upon cash flow levels. At November 8, 1996, $67
million was outstanding under the Facility with additional availability of
approximately $5.5 million.
10
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
The Company plans to focus on internal store growth, customer service and sales
through mid-1997 at which time it will determine whether to recommence an
aggressive acquisition strategy, and it anticipates that funds generated from
operations and available under its credit facility will be sufficient to meet
operational requirements during 1997. However, if the Company determines to
recommence an aggressive acquisitions strategy, additional capital may be
required. To the extent available, future acquisitions would be completed using
funds available under its credit facility, financing provided by sellers,
alternative financing arrangements such as capital raised in public or private
debt or equity offerings and the use of the Company's common stock. The Company
currently has registered and available for issuance over $100 million of its
common stock which could be used in future acquisitions. Since the fourth
quarter of 1995, the Company has issued an aggregate of 1,278,571 shares of its
common stock in connection with the acquisition of 154 additional stores, which
includes the acquisitions of Home Vision and Hollywood Video.
At September 29, 1996, the Company had a working capital deficit of $11.9
million, due to the accounting treatment of its inventory. Videocassette and
video game rental inventory are treated as non-current assets under generally
accepted accounting principles because they are not assets which are reasonably
expected to be completely realized in cash or sold in the normal business cycle.
Although the rental of this inventory generates the major portion of the
Company's revenue, the classification of these assets as noncurrent results in
their exclusion from working capital. The aggregate amount payable for this
inventory, however, is reported as a current liability until paid and,
accordingly, is included in working capital. Consequently, the Company believes
that working capital is not an appropriate measure of its liquidity and it
anticipates that it will continue to operate with a working capital deficit.
11
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits -
11 Computation of Earnings Per Share
27 Financial Data Schedule
b) Reports on Form 8-K
A Form 8-K reporting on Items 2, 5, and 8 was filed on July 15,
1996.
A Form 8-K/A reporting on Items 5 and 7 was filed on
September 16, 1996.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Movie Gallery, Inc.
(Registrant)
Date: November 13, 1996 /S/ J. Steven Roy
___________________________________
J. Steven Roy, Senior Vice President
and Chief Financial Officer
12
<PAGE>
<TABLE>
Movie Gallery, Inc.
Computation of Earnings Per Share
Quarter Ended Three Quarters Ended
September 29 September 30 September 29 September 30
1996 1995 1996 1995
---------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
Net income (loss) .................. $ (4,237,000) $ 3,530,000 $ (2,214,000) $ 8,705,000
============ =========== =========== ===========
Shares:
Weighted average common shares
outstanding ..................... 13,422,534 12,536,130 13,180,362 11,491,117
Net effect of dilutive stock options -- 477,140 169,762 365,801
------------ ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding ... 13,422,534 13,013,270 13,350,124 11,856,918
============ =========== =========== ===========
Income (loss) per common and
common equivalent share ......... $ (.32) $ .27 $ (0.17) $ .73
============ =========== =========== ===========
</TABLE>
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 4,013
<SECURITIES> 0
<RECEIVABLES> 1,036
<ALLOWANCES> 0
<INVENTORY> 10,995
<CURRENT-ASSETS> 20,404
<PP&E> 226,626<F1>
<DEPRECIATION> 93,936<F2>
<TOTAL-ASSETS> 256,157
<CURRENT-LIABILITIES> 32,312
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 143,016
<TOTAL-LIABILITY-AND-EQUITY> 256,157
<SALES> 23,894
<TOTAL-REVENUES> 184,533
<CGS> 14,336
<TOTAL-COSTS> 183,962
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,941
<INCOME-PRETAX> (3,370)
<INCOME-TAX> (1,156)
<INCOME-CONTINUING> (2,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,214)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES $163,105 OF VIDEOCASSETTE RENTAL INVENTORY.
<F2>INCLUDES $79,860 OF ACCUMULATED AMORTIZATION ON VIDEOCASSETTE RENTAL
INVENTORY.
</FN>
</TABLE>
