<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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: 12,379,308 shares of Common
Stock as of May 8, 1996
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The exhibit index to this report appears at page 11 of 13 consecutively
numbered pages.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1996 and December
31, 1995.................................................... 1
Consolidated Statements of Income - Three months
ended March 31, 1996 and 1995............................... 2
Consolidated Statements of Cash Flows - Three months ended
March 31, 1996 and 1995..................................... 3
Notes to Consolidated Financial Statements - March 31, 1996............. 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...............................11
<PAGE>
Movie Gallery, Inc.
Consolidated Balance Sheets
(dollars in thousands)
March 31 December 31
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,091 $ 5,689
Recoverable income tax 924 1,278
Merchandise inventory 7,469 9,511
Accounts receivable 2,171 1,701
Prepaid expenses and other 1,636 1,958
-------- --------
Total current assets 13,291 20,137
Videocasette rental inventory, net 72,691 63,893
Property, furnishing and equipment, net 37,803 33,974
Deferred charges, net 11,669 12,039
Excess of cost over net assets acquired 82,517 76,077
Deposits and other assets 2,176 1,761
-------- --------
Total assets $220,147 $207,881
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 38,800 $ 31,000
Accounts payable 10,674 15,575
Accrued liabilities 3,591 3,520
Current portion of long-term debt 5,449 4,988
-------- --------
Total current liabilities 58,514 55,083
Long-term debt 1,407 5,793
Deferred income taxes 13,309 10,634
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, 12,341,704 and
12,108,863 shares issued and outstanding
respectively 12 12
Additional paid-in capital 122,908 117,463
Retained earnings 23,997 18,896
-------- --------
Total stockholders' equity 146,917 136,371
-------- --------
Total liabilities and stockholders' equity $220,147 $207,881
======== ========
See accompanying notes
- ----------------------
1
<PAGE>
Movie Gallery, Inc.
Consolidated Statements of Income
(Unaudited)
(dollars in thousands, except per share data)
Three Months Ended
March 31
1996 1995
----------- ----------
Revenues:
Rentals $ 46,906 $ 19,446
Product sales 6,806 2,674
----------- ----------
53,712 22,120
Operating costs and expenses:
Store operating expenses 24,836 9,414
Amortization of videocassette rental inventory 10,388 3,843
Amortization of intangibles 1,522 453
Costs of sales 3,960 1,858
General and administrative 3,971 1,832
----------- ----------
Operating income 9,035 4,720
Interest expense, net (808) (139)
----------- ----------
Income before income taxes 8,227 4,581
Income taxes 3,126 1,718
----------- ----------
Net income $ 5,101 $ 2,863
=========== ==========
Net income per share $ .41 $ .30
=========== ==========
Shares used in computing net income per share 12,336,484 9,475,159
=========== ==========
See accompanying notes
- ----------------------
2
<PAGE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
Three Months Ended
March 31
1996 1995
-------- --------
OPERATING ACTIVITIES
Net income $ 5,101 $ 2,863
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 11,887 4,346
Amortization 1,522 453
Deferred income taxes 2,675 525
Changes in operating assets and liabilities:
Recoverable income tax 355 1,223
Merchandise inventory 2,101 (389)
Other current assets (148) (155)
Deposits (416) (386)
Accounts payable (4,902) 688
Accrued liabilities 71 (396)
-------- --------
Net cash provided by operating activities 18,246 8,772
INVESTING ACTIVITIES
Business acquisitions (5,050) (6,415)
Purchase of videocassette rental inventory, net (17,045) (8,563)
Purchase of property, furnishings and equipment (4,648) (2,964)
-------- --------
Net cash used in investing activities (26,743) (17,942)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 24 213
Proceeds from issuance of note payable 7,800 8,700
Principal payments on long-term debt (3,925) (375)
-------- --------
Net cash provided by financing activities 3,899 8,538
-------- --------
(Decrease) increase in cash and cash equivalents (4,598) (632)
Cash and cash equivalents at beginning of period 5,689 3,220
-------- --------
Cash and cash equivalents at end of period $ 1,091 $ 2,588
======== ========
See accompanying notes
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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 three-month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. 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.
2. VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related accumulated amortization are as
follows:
March 31 December 31
1996 1995
-------- -----------
(in thousands)
Videocassette rental inventory $112,400 $ 93,231
Accumulated amortization (39,709) (29,338)
-------- --------
$ 72,691 $ 63,893
======== ========
3. PROPERTY, FURNISHINGS AND EQUIPMENT
Property, furnishings and equipment are stated at cost and include costs
incurred in the development and construction of new stores. Depreciation is
provided over the estimated lives of the related assets on a straight-line
basis. Property, furnishings and equipment consists of the following:
4
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Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited) (continued)
3. PROPERTY, FURNISHINGS AND EQUIPMENT (CONTINUED)
March 31 December 31
1996 1995
-------- -----------
(in thousands)
Land and buildings $ 1,879 $ 1,879
Furniture and fixtures 18,269 16,352
Equipment 13,327 12,159
Leasehold improvements 10,036 8,280
-------- --------
43,511 38,670
Accumulated depreciation (5,708) (4,696)
-------- --------
$ 37,803 $ 33,974
======== ========
4. STOCKHOLDERS' EQUITY
In July 1994, the Board of Directors adopted and the stockholders of the Company
approved, the 1994 Stock Option Plan (the "Plan"). The Plan, as amended,
provides for the award of incentive stock options, stock appreciation rights,
bonus rights and other incentive grants to employees, independent contractors
and consultants. The Company has reserved 1,250,000 shares for issuance under
the Plan. At March 31, 1996, options representing the right to purchase
1,205,950 shares had been issued at prices ranging from $14.00 to $42.63 per
share, 1,400 of which were exercised during the three months ended March 31,
1996. Of the 1,075,550 options outstanding, options to purchase 431,850 shares
were exercisable, and the remaining options become exercisable over one to five
years.
5. ACQUISITIONS
During the three months ended March 31, 1996, the Company acquired the assets
and assumed certain liabilities, (principally store leases) of 31 video
specialty stores from 11 unrelated sellers for approximately $10.2 million,
including 228,080 shares of common stock. The purchase method of accounting was
used to record the acquisitions. The excess of the cost over the estimated fair
value of the assets acquired of $6.4 million will be amortized over 20 years on
a straight-line basis. The results of operations of the acquired stores have
been included in the operations of the Company since their respective dates of
acquisition.
5
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Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited) (continued)
5. ACQUISITIONS (CONTINUED)
The following unaudited pro forma information presents the results of operations
as though the aforementioned acquisitions and other acquisitions 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.
Pro forma
Three Months Ended
March 31
1996 1995
------------------------------------
(in thousands, except per share data)
Revenues $55,364 $50,417
Net income 5,304 5,241
Net income per share $ .43 $ .42
6
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of income
data expressed as a percentage of total revenue, the percentage increase or
decrease from the comparable period and number of stores open at the end of each
period.
Three months ended
March 31
----------------------------------------
Increase
1996 1995 (Decrease)
---------- ---------- ----------
Revenues:
Rentals 87.3% 87.9% (0.6)%
Product sales 12.7 12.1 0.6
-------- -------- --------
100.0 100.0 -
Operating costs and expenses:
Operating expenses 46.2 42.6 3.6
Amortization of rental inventory 19.4 17.4 2.0
Amortization of intangibles 2.8 2.0 0.8
Cost of sales 7.4 8.4 (1.0)
General and administrative 7.4 8.3 (0.9)
-------- -------- --------
Total 83.2 78.7 4.5
-------- -------- --------
Operating income 16.8 21.3 (4.5)
-------- -------- --------
Interest expense, net (1.5) (0.6) (0.9)
-------- -------- --------
Income before income taxes 15.3 20.7 (5.4)
Income taxes 5.8 7.8 (2.0)
-------- -------- --------
Net income 9.5 12.9 (3.4)
======== ======== ========
Number of stores open at end
of period 707 335 372
======== ======== ========
7
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the three months ended March 31, 1996, revenues were approximately $53.7
million, an increase of 143% over the same period in 1995. The increase was a
result of an increase in the number of stores operated by the Company and an
increase in same store sales of 2% at stores operated by the Company for at
least 13 months. Product sales increased as a percentage of revenue from 12.1%
for the three months ended March 31, 1995 to 12.7% for the three months ended
March 31, 1996 as a result of (i) an emphasis on the sale of previously viewed
rental inventory; and (ii) an increase in the variety of movie memorabilia and
confectionery items sold in the stores.
Store operating expenses, which reflect direct store expenses such as lease
payments and in-store payroll increased as a percentage of revenues from 42.6%
for the three months ended March 31, 1995 to 46.2% for the three months ended
March 31, 1996. The increase in store operating expenses is due primarily to an
increase in rent and other expenses in connection with the integration of
developed and acquired stores into the Company's store base.
Amortization of videocassette rental inventory increased as a percentage of
revenue to 19.4% for the three months ended March 31, 1996 from 17.4% for the
three months ended March 31, 1995 due to an increase in purchasing levels during
1995. The purchase of videocassette rental inventory represents the Company's
single largest operating expenditure and the amortization of that inventory over
its estimated useful life results in a substantial charge against income. The
method of amortization has evolved over time in the video specialty store
industry as the business has changed. The Company adopted its current method in
April 1993 in preparation for its initial public offering which occurred in
August 1994. The method adopted was similar to the amortization method employed
by the established industry leader, Blockbuster Entertainment, and others in the
industry.
During late 1994 and in March 1996, Blockbuster and another large public video
specialty store chain announced that they had revised their methods to
accelerate the rate of amortization. Due to these changes and the evolving
nature of the video specialty retail industry, the Company began a comprehensive
analysis of its amortization policy during the first quarter. This analysis is
continuing and the Company anticipates adopting a change in its amortization
method during the second quarter consistent with the Company's operations and
industry trends. The Company believes that the change will be to a method which
is similar to that used by other industry leaders. While the extent of this
change has not been determined, the change will accelerate the rate of
amortization of its videocassette inventory thereby increasing operating
expenses and reducing net income. A change would have no impact on the
Company's cash flow from operations.
Cost of sales increased with the increased revenue from product sales and
decreased as a percentage of revenues from product sales from 69.5% for the
three months ended March 31, 1995 to 58.2% for the three months ended March 31,
1996. The increase in product sales gross margins resulted primarily from 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 from an increase in margins on sell-
through products.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
General and administrative expenses decreased for the three months ended March
31, 1996 versus comparable periods in 1995 primarily as a result of operating
efficiencies attained through a larger revenue base.
Amortization of intangibles increased as a percentage of revenue to 2.8% for the
three months ended March 31, 1996 from 2.0% for the three months ended March 31,
1995 due to cumulative effect of the substantial number of acquisitions which
occurred subsequent to the Company's initial public offering in August 1994 and
which were accounted for under the purchase method of accounting.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs are for acquiring and opening new stores and
for the purchase of videocassette inventory. Other capital needs include the
remodeling 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 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 the Company's credit facility and seller financing.
Net cash provided by operating activities was $18.2 million during the first
quarter of 1996 (the "96 Quarter") as compared to $8.8 million during the first
quarter of 1995 (the "95 Quarter"). The increase was primarily due to higher
net income before depreciation, amortization and deferred taxes, a decrease in
merchandise inventory, offset by a reduction in payables.
Net cash used in investing activities was $26.7 million during the 96 Quarter as
compared to $17.9 million during the 95 Quarter, primarily as a result of a net
increase in the purchase of videocassette rental inventory resulting from the
Company's growth.
Net cash provided by financing activities decreased from $8.5 million in the 95
Quarter to $3.9 million in the 96 Quarter. This decrease was primarily the
result of a $3.9 million reduction in long-term debt during the 96 Quarter.
The Company currently has a $60 million credit facility with its bank, of which
approximately $20 million was available at May 8, 1996.
It is anticipated that future acquisitions will 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 in future acquisitions over
$100 million of its Common Stock. Since the last quarter of 1995, the Company
has issued an aggregate of 544,500 shares of its Common stock in connection with
the acquisition of 92 additional stores.
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
At March 31, 1996, the Company had a working capital deficit of $45.2 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.
10
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
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 dated February 28, 1996, in connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, was
filed outlining cautionary statements identifying important factors that
could cause the Company's actual results to differ materially from those
projected in forward looking statements of the Company made by, or on
behalf of the Company.
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: May 14, 1996 /s/ J. Steven Roy
--------------------------------------
J. Steven Roy, Senior Vice President
and Chief Financial Officer
11
<PAGE>
Exhibit 11
Movie Gallery, Inc.
Computation of Earnings Per Share
Three Months Ended
March 31
1996 1995
----------- ----------
Net income $ 5,100,800 $2,862,959
=========== ==========
Shares:
Weighted average common shares
outstanding 12,138,659 9,203,450
Net effect of dilutive stock options 197,825 271,709
----------- ----------
Weighted average common and common
equivalent shares outstanding 12,336,484 9,475,159
=========== ==========
Earnings per common and
common equivalent share $ .41 $ .30
=========== ==========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FROM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,091
<SECURITIES> 0
<RECEIVABLES> 2,171
<ALLOWANCES> 0
<INVENTORY> 7,469
<CURRENT-ASSETS> 13,291
<PP&E> 155,911<F1>
<DEPRECIATION> 45,417<F2>
<TOTAL-ASSETS> 220,147
<CURRENT-LIABILITIES> 58,514
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 146,905
<TOTAL-LIABILITY-AND-EQUITY> 220,147
<SALES> 6,806
<TOTAL-REVENUES> 53,712
<CGS> 3,960
<TOTAL-COSTS> 44,677
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 808
<INCOME-PRETAX> 8,227
<INCOME-TAX> 3,126
<INCOME-CONTINUING> 5,101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,101
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0
<FN>
<F1> Includes $112,400 of videocassette rental inventory.
<F2> Includes $39,709 of accumulated amortization on videocassette rental
inventory.
</FN>
</TABLE>
