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 October 5, 1997 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: 13,418,885 shares of Common
Stock as of November 10,1997.
_______________________________________________________________________________
The exhibit index to this report appears at page 11 of 11 consecutively numbered
pages.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - October 5, 1997 and January 5, 1997.............1
Consolidated Statements of Operations - Thirteen weeks ended
October 5, 1997 and September 29, 1996; Thirty-nine weeks ended
October 5, 1997 and September 29, 1996........................................2
Consolidated Statements of Cash Flows - Thirty-nine weeks ended
October 5, 1997 and September 29, 1996........................................3
Notes to Consolidated Financial Statements - October 5, 1997..................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>
<TABLE>
Movie Gallery, Inc.
Consolidated Balance Sheets
(dollars in thousands)
<CAPTION>
October 5 January 5
1997 1997
-------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,137 $ 3,982
Merchandise inventory 13,409 10,737
Store supplies and other 4,513 4,109
Deferred income taxes 794 913
-------- --------
Total current assets 19,853 19,741
Videocassette rental inventory, net 94,250 89,929
Property, furnishings and equipment, net 52,727 50,196
Deferred charges, net 9,438 11,151
Excess of cost over net assets acquired, net 84,522 87,822
Deposits and other assets 2,241 2,738
-------- --------
Total assets $263,031 $261,577
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 22,334 $ 24,321
Accrued liabilities 7,538 7,622
Current portion of long-term debt 372 374
-------- --------
Total current liabilities 30,244 32,317
Long-term debt 73,105 67,883
Other accrued liabilities 1,899 2,425
Deferred income taxes 11,935 12,228
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, 13,418,885 and 13,420,791
shares issued and outstanding, respectively 13 13
Additional paid-in capital 131,686 131,686
Retained earnings 14,149 15,025
-------- --------
Total stockholders' equity 145,848 146,724
-------- --------
Total liabilities and stockholders' equity $263,031 $261,577
======== ========
See accompanying notes.
</TABLE>
1
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands, except per share data)
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
October 5 September 29 October 5 September 29
1997 1996 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 53,776 $ 54,009 $ 161,404 $ 160,639
Product sales 8,784 7,719 28,162 23,894
---------- ---------- ---------- ----------
62,560 61,728 189,566 184,533
Operating costs and expenses:
Store operating expenses 33,939 31,371 99,953 91,540
Amortization of videocassette rental inventory 17,593 14,836 51,169 47,838
Amortization of intangibles 1,739 1,781 5,275 5,132
Cost of sales 5,762 4,520 17,028 14,336
General and administrative 4,428 5,429 12,559 15,521
Restructuring and other charges -- 9,595 -- 9,595
---------- ---------- ---------- ----------
Operating income (loss) (901) (5,804) 3,582 571
Interest expense, net (1,590) (1,440) (4,632) (3,941)
---------- ---------- ---------- ----------
Loss before income taxes (2,491) (7,244) (1,050) (3,370)
Income taxes (822) (3,007) (174) (1,156)
---------- ---------- ---------- ----------
Net loss $ (1,669) $ (4,237) $ (876) $ (2,214)
========== ========== ========== ==========
Net loss per share $ (.12) $ (.32) $ (.07) $ (.17)
========== ========== ========== ==========
Pro forma net loss per share:
Loss before income taxes $ (7,244) $ (3,370)
Pro forma income taxes (2,757) (1,281)
---------- ----------
Pro forma net loss $ (4,487) $ (2,089)
========== ==========
Pro forma net loss per share $ (.33) $ (0.16)
========== ==========
Weighted average shares outstanding 13,418,885 13,422,534 13,419,939 13,350,124
========== ========== ========== ==========
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Thirty-nine weeks ended
October 5 September 29
1997 1996
-------------------------
<S> <C> <C>
Operating activities
Net loss $ (876) $ (2,214)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 64,601 59,367
Deferred income taxes (174) (1,375)
Restructuring and other charges -- 9,595
Changes in operating assets and liabilities:
Merchandise inventory (3,091) 471
Other current assets (404) (148)
Deposits and other assets 497 (733)
Accounts payable (1,987) 2,928
Accrued liabilities (610) (7,741)
-------- --------
Net cash provided by operating activities 57,956 60,150
Investing activities
Business acquisitions (262) (8,537)
Purchases of videocassette rental inventory, net (55,071) (55,690)
Purchases of property, furnishings and equipment (10,688) (14,508)
-------- --------
Net cash used in investing activities (66,021) (78,735)
Financing activities
Net proceeds from issuance of common stock -- 524
Net payments on notes payable -- (31,000)
Proceeds from issuance of long-term debt 5,400 72,938
Principal payments on long-term debt (180) (26,119)
-------- --------
Net cash provided by financing activities 5,220 16,343
-------- --------
Decrease in cash and cash equivalents (2,845) (2,242)
Cash and cash equivalents at beginning of period 3,982 6,255
-------- --------
Cash and cash equivalents at end of period $ 1,137 $ 4,013
======== ========
See accompanying notes.
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
October 5, 1997
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, the financial statements 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 thirty-nine week
period ended October 5, 1997 are not necessarily indicative of the results that
may be expected for the fiscal year ended January 4, 1998. 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
fiscal year ended January 5, 1997.
The Company's historical financial statements for all periods presented have
been restated to include the results of operations of Home Vision Entertainment,
Inc. ("Home Vision") and Hollywood Video, Inc. ("Hollywood Video"), acquisitions
consummated on July 1, 1996 and accounted for as poolings-of-interests.
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 results 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 was applied to all inventory held at April 1,
1996. The adoption of the new method of amortization was 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.
4
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
3. Provision for Business Restructuring
During the third quarter of 1996 the Company completed an extensive analysis of
both its store base performance and organizational structure and adopted a
business restructuring plan to close approximately 50 of its stores. This
analysis resulted in the Company recording a $9.6 million pretax restructuring
charge in the third quarter of 1996. The components of the restructuring charge
included 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. The store closures
are expected to be completed by the end of fiscal year 1997. Approximately $1.7
million of restructuring costs were paid and charged against the liability as of
October 5, 1997. The stores identified for closure had revenues and operating
losses of approximately: $301,000 and $50,000, respectively, for the thirteen
weeks ended October 5, 1997; $1,290,000 and $304,000, respectively, for the
thirty-nine weeks ended October 5, 1997; $1,543,000 and $224,000, respectively,
for the thirteen weeks ended September 29, 1996; and $4,995,000 and $1,113,000,
respectively, for the thirty-nine weeks ended September 29, 1996. Results for
1996 include all stores identified for closure under the restructuring plan
while results for 1997 include only those stores under the plan which had not
been closed as of the beginning of the period.
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, originally provided
borrowings for up to $125 million and replaced the Company's previously existing
line of credit agreement. During 1997, the Company voluntarily reduced the
commitment to $90 million.
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 October 5, 1997, $72.4 million was
outstanding under the Facility. Currently, the Company is in default of its most
restrictive covenant. However, the Company anticipates gaining approval for an
amendment to the Facility that will enable the Company to further draw down
funds under the Facility.
The Company has entered into an interest rate swap agreement with a commercial
bank which effectively fixes the Company's interest rate exposure on $37 million
of the amount outstanding under the Facility at 6.22% plus the applicable
interest rate credit spread. The interest rate swap agreement terminates at the
time the Facility matures.
5. 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 1996 acquisition of
Hollywood Video had been consummated prior to January 1, 1996. 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.
5
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
6. Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No.128, "Earnings per Share", which revises the disclosure requirements and
increases the comparability of EPS data on an international basis by simplifying
the existing computational guidelines in APB Opinion No. 15. The pronouncement,
effective for the final quarter of the fiscal year ending January 4, 1998, will
require the Company to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact of adopting the pronouncement has not been
determined, however, the Company believes it will not have a material impact on
its primary or fully diluted earnings per share.
7. Contingencies
The Company is currently engaged in litigation proceedings with certain former
shareholders of Home Vision in connection with the merger of the Company and
Home Vision in July 1996. These shareholders seek damages in excess of $7.5
million plus costs. The Company believes that the claims set forth in the
complaint are without merit and intends to vigorously defend such claims.
6
<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>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------------------- ---------------------------------------
October 5 September 29 Increase October 5 September 29 Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals 86.0% 87.5% (1.5)% 85.1% 87.1% (2.0)%
Product sales 14.0 12.5 1.5 14.9 12.9 2.0
----- ----- ----- ----- ----- ----
100.0 100.0 -- 100.0 100.0 --
Operating costs and expenses:
Store operating expenses 54.2 50.9 3.3 52.7 49.6 3.1
Amortization of rental inventory 28.1 24.0 4.1 27.0 25.9 1.1
Amortization of intangibles 2.8 2.9 (0.1) 2.8 2.8 --
Cost of sales 9.2 7.3 1.9 9.0 7.8 1.2
General and administrative 7.1 8.8 (1.7) 6.6 8.4 (1.8)
Restructuring and other charges -- 15.5 (15.5) -- 5.2 (5.2)
----- ----- ----- ----- ----- ----
Total 101.4 109.4 (8.0) 98.1 99.7 (1.6)
----- ----- ----- ----- ----- ----
Operating income (loss) (1.4) (9.4) 8.0 1.9 0.3 1.6
Interest expense, net (2.6) (2.3) (0.3) (2.5) (2.1) (0.4)
----- ----- ----- ----- ----- ----
Loss before income taxes (4.0) (11.7) 7.7 (0.6) (1.8) 1.2
Income taxes (1.3) (4.9) 3.6 (0.1) (0.6) 0.5
----- ----- ----- ----- ----- ----
Net loss (2.7)% (6.8)% 4.1% (0.5)% (1.2)% 0.7%
===== ===== ===== ===== ===== =====
Number of stores open at end of period 856 870 (14) 856 870 (14)
===== ===== ===== ===== ===== =====
</TABLE>
The results of operations for all periods presented include the combined results
of the Company, Home Vision and 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
October 5, 1997, revenues were $62.6 million and $189.6 million, respectively,
increases of 1.3% and 2.7% over the same periods in 1996. The increases were
primarily a result of the net positive effect of new store additions offset, in
part, by the Company's normal store closings and the store closings that
resulted from a third quarter 1996 corporate restructuring. The third quarter
increase was partially aided by an increase in same-store sales of 1.8%, while
the year-to-date increase in revenues was partially offset by a decrease in
same-store sales of 1.8% for the year-to-date period. The same-store sales
increase for the third quarter was primarily the result of: (i) the comparative
sales increase related to the 1996 Summer Olympics, one of the most heavily
watched events in television history; and (ii) an increase in the game rental
business due to the advent and consumer acceptance of the Nintendo 64 and Sony
Playstation game platforms.
Product sales as a percentage of total revenue for the thirteen weeks and
thirty-nine weeks ended October 5, 1997 were 14.0% and 14.9%, respectively,
increases from 12.5% and 12.9% for the comparable periods in 1996. This change
was primarily the result of a general increased effort by the Company to sell
previously viewed videocassettes, as well as the Company's implementation of new
sell-through products within its store base.
7
<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 54.2%
for the thirteen weeks ended October 5, 1997 from 50.9% for the comparable
fiscal period in 1996. For the thirty-nine weeks ended October 5, 1997, store
operating expenses as a percentage of revenue were 52.7%, an increase from 49.6%
for the comparable period in 1996. The increase in store operating expenses as a
percentage of revenues was primarily due to strategic responses in the Company's
most competitive markets. This increase was also due, in part, to the national
minimum wage increases that were implemented on September 1, 1996 and September
1, 1997. In addition, store operating expenses were also negatively impacted by
increases in rent and other expenses in connection with the normal renewal of
leases in existing stores.
During the second quarter of fiscal year 1996, the Company changed its method of
amortizing videocassette rental inventory (which includes video games and audio
books). The new amortization policy has the effect of accelerating the Company's
rate of amortization of its inventory. The application of the new amortization
policy, accounted for as a change in accounting estimate effected by a change in
accounting principle, resulted in a one-time increase in amortization of
videocassette rental inventory by $7.7 million during the second quarter of
1996. Videocassette amortization expense as a percentage of revenue under the
new method was 24.0% for the thirteen weeks ended September 29, 1996 and was
approximately 21.8% for the thirty-nine weeks ended September 29, 1996, net of
the approximately $7.7 million charge discussed above. For the third quarter and
the year-to-date 1997 periods, amortization of videocassette rental inventory
increased as a percentage of revenue to 28.1% and 27.0%, respectively. The
increase in amortization of videocassette rental inventory as a percentage of
revenue was primarily the result of (i) a decision by the Company during the
fourth quarter of 1996 to increase its level of expenditures on rental inventory
in response to industry-wide competitive issues, (ii) an increase in the depth
of hit new release titles purchased during the year, which results in more tapes
being amortized at the Company's most aggressive rate, and (iii) a marked
increase in the quantity of new game release purchases, which is due to the
buildup of inventory related to the consumer acceptance of new game platforms
(i.e. Nintendo 64).
Cost of sales increased with the increased revenue from product sales and
increased as a percentage of revenues from product sales from 58.6% for the
thirteen weeks ended September 29, 1996 to 65.6% for the thirteen weeks ended
October 5, 1997. For the thirty-nine weeks ended October 5, 1997, cost of sales
as a percentage of revenue from product sales was 60.5%, an increase from 60.0%
for the comparable period in 1996. The decrease in product sales gross margins
during the third quarter resulted primarily from an increase in new tape sales
which carry lower margins than other sell-through component items.
General and administrative expenses as a percentage of revenue decreased to 7.1%
for the thirteen weeks ended October 5, 1997 versus 8.8% for the comparable
period in 1996. For the thirty-nine weeks ended October 5, 1997, general and
administrative expenses as a percentage of revenue were 6.6%, a decrease from
8.4% for the comparable period in 1996. The decrease was primarily due to a
reduction in overhead that was effected over the past year in conjunction with
the Company's third quarter 1996 restructuring.
Net interest expense as a percentage of revenue increased to 2.6% for the third
quarter of 1997 from 2.3% for the thirteen weeks ended September 29, 1996. For
the fiscal year-to-date period ended October 5, 1997, net interest expense as a
percentage of revenue increased to 2.5% from 2.1% for the comparable period in
1996. The increase for these periods was due to the increased amount of debt
financing over the past year.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
The Company's income tax provision as a percentage of net income for the
thirty-nine weeks ended October 5, 1997 was 16.6%. The difference between the
Company's effective rate and the blended federal and state statutory rate of
38.0% is due to the non-deductibility of certain goodwill associated with past
tax-free acquisitions made by the Company.
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, the relocation of
existing stores and the continued upgrading and installation of the Company's
POS system and management information systems. The Company has funded inventory
purchases, remodeling and relocation programs, new store opening costs and
acquisitions primarily from cash flow from operations, the proceeds of two
public equity offerings, loans under revolving credit facilities and seller
financing.
During the thirty-nine weeks ended October 5, 1997, the Company generated
approximately $13.1 million in Adjusted EBITDA versus approximately $14.6
million for the comparable period in 1996, a decrease of approximately 10.3%.
"Adjusted EBITDA" is earnings before interest, taxes, depreciation and
amortization, excluding non-recurring charges and less the Company's purchase of
videocassette rental inventory. Included in the Company's videocassette rental
inventory purchases for the thirty-nine weeks ended October 5, 1997 is
approximately $1.1 million associated with inventory purchases specifically for
new store openings. Adjusted EBITDA does not take into account capital
expenditures, other than purchases of videocassette rental inventory, and does
not represent cash generated from operating activities in accordance with
generally accepted accounting principles ("GAAP"), is not to be considered as an
alternative to net income or any other GAAP measurements as a measure of
operating performance and is not indicative of cash available to fund cash
needs. The Company's definition of Adjusted EBITDA may not be identical to
similarly titled measures of other companies. The Company believes that in
addition to cash flows and net income, Adjusted EBITDA is a useful financial
performance measurement for assessing the operating performance of the Company
because, together with net income and cash flows, Adjusted EBITDA is widely used
in the videocassette specialty retailing industry to provide investors with an
additional basis to evaluate the ability of the Company to incur and service its
debt and to fund growth.
Net cash provided by operating activities was $58.0 million for the thirty-nine
weeks ended October 5, 1997 as compared to $60.2 million for the comparable
period of 1996. The decrease was primarily due to a decrease in operating
income, exclusive of the effects of the 1996 restructuring, an increase in
merchandise inventory and a corresponding decrease in accounts payable,
partially offset by increased depreciation and amortization expense.
Net cash used in investing activities was $66.0 million for the thirty-nine
weeks ended October 5, 1997 as compared to $78.7 million for the comparable
period in 1996, primarily as a result of a decrease in the total cash expended
both for stores acquired and for property, furnishings and equipment.
Net cash provided by financing activities decreased from $16.3 million in the
thirty-nine weeks ended September 29, 1996 to $5.2 million in the comparable
period in 1997. This decrease was primarily the result of a diminished level of
acquisition activity discussed above.
During Fiscal 1996, the Company replaced its existing $60 million revolving
credit facility with a $125 million reducing revolving credit facility (the
"Facility"). The Facility has a maturity date of June 30, 2000. The interest
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
rate of the Facility is LIBOR-based and the Company may repay the Facility at
any time without penalty. The Facility has covenants that restrict borrowing
based upon cash flow levels. During 1997, the Company voluntarily reduced the
commitment to $90 million. At October 5, 1997, $72.4 million was outstanding
under the Facility. Currently, the Company is in default of its most restrictive
covenant. However, the Company anticipates gaining approval for an amendment to
the Facility that will enable the Company to further draw down funds under the
Facility.
At October 5, 1997, the Company had a working capital deficit of $10.4 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.
The Company believes its projected cash flow from operations, borrowing capacity
with the Facility, cash on hand and trade credit will provide the necessary
capital to fund its current plan of operations for Fiscal 1997 and Fiscal 1998,
including its anticipated new store openings. However, to fund a resumption of
the Company's acquisition program (which was suspended in the latter half of
1996), to provide funds in the event that the Company's need for funds is
greater than expected or if the Company increases its growth plan, the Company
will need to seek additional or alternative sources of financing. This financing
may not be available on terms satisfactory to the Company. Failure to obtain
financing to fund the Company's expansion plans or for other purposes could have
a material adverse effect on the Company.
OTHER MATTERS
The Company has performed an analysis of its operating systems to determine
systems' compatibility with the upcoming year 2000. Substantially all of the
Company's operating systems are year 2000 compliant, and the Company does not
believe that there will be any material exposure related to year 2000
compatibility.
This report contains certain forward-looking statements regarding the Company.
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and in that regard is
cautioning the readers of this report that a number of important risk factors
could affect the Company's actual results of operations and may cause changes in
the Company's strategy with the result that the Company's operations and results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risk factors include competitive
factors and weather conditions within the Company's geographic markets, adequate
product availability from Hollywood, the Company's ability to amend its bank
facility to provide for increased borrowing capacity and the risk factors that
are discussed from time-to-time in the Company's SEC reports, including, but not
limited to, the report on Form 10-K for the fiscal year ended January 5, 1997.
10
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10 Agreement dated August 15, 1997 between Major Video
Concepts, Inc. and Movie Gallery, Inc. (portions have been
omitted pursuant to a request for confidential treatment)
11 Computation of Earnings Per Share
27 Financial Data Schedule
b) Reports on Form 8-K
None.
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 19, 1997 /s/ J. Steven Roy
------------------------------------
J. Steven Roy, Senior Vice President
and Chief Financial Officer
11
EXHIBIT 10
MOVIE GALLERY, INC.
AGREEMENT
MAJOR VIDEO CONCEPTS, INC.
INDIANAPOLIS, IN
AUGUST 15, 1997
** - EXECUTIVE VICE PRESIDENT
** - BRANCH MANAGER
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
1
<PAGE>
Major Video Concepts, Inc. (MVC) hereby agrees to fulfill all of Movie Gallery's
needs of product and services referred to below during the term of this
agreement.
Movie Gallery agrees to make MVC the primary distributor of video rental and
sell-thru product during the term of this agreement.
Pricing:
- - ** for new release rental cassettes and video games. Movie Gallery cost
is calculated by **.
- - New feature sell-thru titles (limited to first time releases that have
theatrical box office) **. New feature sell-thru titles can be stock balanced
at ** of MVC's and Movie
Gallery's agreed upon quantity ordered for unopened and factory sealed
product.
- - ** on Touch-Tell orders and year-round rack/new tape inventory. Movie Gallery
cost is calculated by **.
Pre-pack Pricing:
If a price break is available on a per-pack versus single units, **.
**
Inventory:
Catalog product is purchased weekly by MVC's product managers. Inventory levels
will be customized to fit Movie Gallery's needs.
Premiums:
Promotions offered by the studios or MVC will be honored and administered by
MVC. Customized premiums can be produced as part of Movie Gallery's advertising
program.
Terms:
- - ** days on PVT rack program and "Plan O Gram" catalog (initial order). - **
days on everything else from invoice date (see Attachment I).
- - **
- - Payable **
Freight:
MVC will prepay UPS, GPS, or RPS ground shipping charges on **. Prepaid freight
includes shipments from any of MVC's shipping locations.
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
2
<PAGE>
Shipping arrangements can be made so that your new release product will arrive
at your stores **.
Rental Ready Processing:
Should you desire, MVC is prepared to ship your product ready for rental
according to your specifications. **
Returns:
Catalog titles ($29.99 retail or less) can be stock balanced at ** of MVC's and
Movie Gallery's agreed upon quantity ordered for unopened and factory sealed
product. Stock balancing should be exercised within ** days of purchase. Event
titles should be returned within ** days of purchase.
Manufacturer's defective product will be replaced one for one within the time
constraints imposed upon MVC by the studios. MVC will honor No-Fault Return
Policies as offered by the studios. Return authorization numbers will be
assigned immediately upon notification of a defective tape and replacement
product will be shipped. **
Employees:
In house sales rep $**/year
Advertising Assistant $**/year
Movie Gallery Special Account Rep $**/year
Interviewing and job description will be agreed upon by both parties.**
Co-op Advertising:
**co-op on "co-opable" new release, catalog or event title product. MDF will be
secured by Movie Gallery. **
Advertising claims will be **.
P.O.P. Materials:
P.O.P. material will be shipped monthly **.
Annual Meeting:
MVC will contribute $** during the length of this contract for **.
New Release Orders:
A disk with Movie Gallery's new release orders would need to be given to ** so
that we could upload the pre-orders. We would also like to have a disk to input
your store ship-to locations. An Excel/Lotus spreadsheet or ASCII file will work
for these files. The files could also be transmitted via modem, eliminating the
mailing of a disk.
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
3
<PAGE>
Additional Features from MVC's Spotlight Program:
"Diamonds In The Rough"
A bi-monthly program of 8 - 10 secondary titles that are selected by the
MVC sales force according to quality, genre, star-power, and rentability.
Purchase a minimum number of six titles and receive one scratch off card
per unit purchased. Currently, the winning cards reveal a 20" TV/VCR combo,
RCA stereo VCR, Sharp facsimile machine, or Sony Playstation that will be
sent to you within 15 days.
Touch-Tell
We would set up one master account for billing purposes. Each store would
have its own open to buy and catalog account numbers under the master
account. A credit line of $**/month will be established for each Movie
Gallery's open to buy account.
MVC and Movie Gallery are currently set up to service ** stores. ** stores
will be active by September 1. All stores will be sent MVC current catalog.
Buy Back Program:
MVC and Movie Gallery will discuss opportunities for both companies.
World Wide Web Site (Optional):
MVC will create and maintain a web site for each of your stores - all
updated weekly - for a $10 set-up fee and $10 a month. Your page will
feature your store logo, store information, location, rental rates and your
e-mail address (optional). Your web page will also provide new release
information, titles coming soon, top 40 videos, special orders, listing of
DVD titles for sale, and a special kids page. You will also receive a
counter card telling your customers to visit you on your web site.
Internet Broadcast or Majorfax:
Receive daily information on PPV windows, weekend box office hits, TV
movies, video games, etc.
Weekly Magazine:
MVC produces one of the best and most respected weekly magazines in the
industry.
Spotlight on Video Hits Consumer Flyers:
MVC provides month in-store flyers cross-promoting current video new
releases with similar catalog favorites to produce incremental rentals and
increase consumer satisfaction.
Length of Program:
We request that Movie Gallery commit to MVC beginning ** and ending **.
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
4
<PAGE>
Account Representation:
MVC offers the following personnel to assist your needs: - ** (President),
Indianapolis, IN - ** (Executive Vice President, Sales), Indianapolis, IN - **
(Senior Vice President, Marketing), Indianapolis, IN - ** (Senior Vice
President, Operations and Purchasing), Indianapolis, IN - ** (Vice President,
Controller), Indianapolis, IN - ** (National Credit Manager), Indianapolis, IN -
** (Branch Manager), Birmingham, AL - ** (Advertising Coordinator), Birmingham,
AL - ** (Account Executive), Birmingham, AL
Business Interruption Clause:
If MVC fails to delivery new release rental and special event titles by street
date,**. If our shipping company, studios, or inclement weather causes late
arrival of new release rental and special event titles, **.
The above paragraph is not enforceable during the current UPS strike. MVC will
attempt to do everything within reason (postal service, truck line, will call)
to get Movie Gallery their product by street date. Once the UPS strike ends,
this paragraph becomes void.
Breach of Agreement:
If either party breaches or fails to adhere to the terms of this agreement, the
party who has breached or failed to adhere to the said terms will be notified in
writing via certified mail by the other party as to the nature of the said
offense.
The party who has breached the terms of this agreement shall have ** days from
the date of notification to correct said offense. If the said breach has not
been corrected within the ** days, the opposing party shall have the right to
terminate this agreement.
Agreed and accepted this 19th day of August, 1997 by:
MOVIE GALLERY, INC. and MAJOR VIDEO CONCEPTS, INC.
MGA, INC.
/s/ J. T. Malugen /s/ Douglas B. Meadows
- ----------------------------- ------------------------------
J. T. Malugen, Chairman and Douglas B. Meadows - President
Chief Executive Officer
/s/ J. S. Roy /s/ Eric H. Smith
- ----------------------------- ------------------------------
J. S. Roy, Sr. Vice President Eric H. Smith -
and Chief Financial Officer Executive Vice President
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
5
<PAGE>
EXAMPLES OF PRICING
Schedule A: Rental Product**
Retail Price Dealer Price MGA Price
Father's Day NSRP $79.50 $**
McHale's Navy NSRP $79.50 $**
Saint, The NSRP $79.25 $**
Silent Trigger NSRP $79.50 $**
Commandments NSRP $79.50 $**
English Patient NSRP $81.75 $**
Selena NSRP $79.50 $**
B.A.P.S. NSRP $79.00 $**
Volcano NSRP $79.25 $**
Anaconda NSRP $81.75 $**
That Old Feeling NSRP $79.50 $**
Grosse Point Blank NSRP $79.50 $**
Night Falls on Manhattan NSRP $76.50 $**
Sixth Man NSRP $79.50 $**
Addicted to Love NSRP $79.50 $**
Austin Powers NSRP $80.50 $**
Fifth Element NSRP $81.75 $**
Schedule B: Sell-Thru Event Title Pricing
Sleeping Beauty $26.99 $20.25 $**
Casper: A Spirited Being $19.98 $15.25 $**
Warriors of Virtue $19.98 $15.25 $**
Liar, Liar $22.98 $17.25 $**
Babes in Toyland $19.98 $15.25 $**
Hercules and Xena $19.98 $15.25 $**
Jungle Book $26.99 $20.25 $**
Jingle All the Way $19.98 $15.25 $**
Schedule C: Buy Back Pricing Examples
MGAPrice Buy Back MGA Net Price
Father's Day $** $** $**
McHale's Navy $** $** $**
Saint, The $** $** $**
Silent Trigger $** $** $**
Commandments $** $** $**
English Patient $** $** $**
Selena $** $** $**
B.A.P.S. $** $** $**
Volcano $** $** $**
Anaconda $** $** $**
That Old Feeling $** $** $**
Grosse Point Blank $** $** $**
Night Falls on Manhattan $** $** $**
Sixth Man $** $** $**
Addicted to Love $** $** $**
Austin Powers $** $** $**
Fifth Element $** $** $**
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
6
<PAGE>
ATTACHMENT 1
PAYMENT INV. START INV.END HIGH DAYS LOW DAYS AVERAGE DAYS
**
Average Days **
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
7
<PAGE>
(MVC Letterhead)
August 20, 1997
Mr. Joe Malugen
Movie Gallery Inc. Via Fax
Dear Joe:
This letter shall constitute an addendum to the agreement between Major Video
Concepts, Inc. (MVC) and Movie Gallery, Inc. dated August 19, 1997 to add the
following items:
1) All returns on product sold to Movie Gallery **. All other returns would
be**. In those situations where product is re-priced by the vendor, MVC will **.
If Movie Gallery does not return all affected product, **
2) Both parties agree to maintain strictest confidentiality of this agreement.
Only those within each organization that are involved in the execution of this
agreement or those with a need to know shall be advised of the terms of this
agreement.
3) Movie Gallery agrees to mail to **, CFO for MVC, their quarterly financial
statements within 45 days of the end of their fiscal quarters. Movie Gallery
will send their year-end financial statements to John White within 90 days of
the end of their fiscal calendar year.
4) MVC is establishing a credit line of $** for Movie Gallery which will allow
them to purchase product at their current purchasing levels. Any request for a
higher credit line during this agreement will be reviewed by MVC.
**
In all other respects the agreement is hereby reaffirmed according to its terms.
/s/ Douglas B. Meadows /s/ J. T. Malugen
- ------------------------------ --------------------
Douglas B. Meadows, President Joe Malugen
Movie Gallery Inc.
/s/ Eric H. Smith
- ------------------------------
Eric H. Smith,
Executive Vice President
**Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
8
<TABLE>
Exhibit 11
Movie Gallery, Inc.
Computation of Earnings Per Share
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
October 5 September 29 October 5 September 29
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (1,669,000) $ (4,237,000) $ (876,000) $ (2,214,000)
============ ============ ============ ============
Shares:
Weighted average common shares
outstanding 13,418,885 13,422,534 13,419,939 13,180,362
Net effect of dilutive stock options -- -- -- 169,762
------------ ------------ ------------ ------------
Weighted average common and common
equivalent shares outstanding 13,418,885 13,422,534 13,419,939 13,350,124
============ ============ ============ ============
Net loss per common and
common equivalent share $ (.12) $ (.32) $ (.07) $ (.17)
============ ============ ============ ============
</TABLE>
<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>
<CIK> 0000925178
<NAME> MOVIE GALLERY, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JAN-06-1997
<PERIOD-END> OCT-05-1997
<CASH> 1,137
<SECURITIES> 0
<RECEIVABLES> 1,067
<ALLOWANCES> 0
<INVENTORY> 13,409
<CURRENT-ASSETS> 19,853
<PP&E> 275,611<F1>
<DEPRECIATION> 128,634<F2>
<TOTAL-ASSETS> 263,031
<CURRENT-LIABILITIES> 30,244
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 145,835
<TOTAL-LIABILITY-AND-EQUITY> 263,031
<SALES> 28,162
<TOTAL-REVENUES> 189,566
<CGS> 17,028
<TOTAL-COSTS> 185,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,632
<INCOME-PRETAX> (1,050)
<INCOME-TAX> (174)
<INCOME-CONTINUING> (876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (876)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES $198,656 OF VIDEOCASSETTE RENTAL INVENTORY.
<F2> INCLUDES $104,406 OF ACCUMULATED AMORTIZATION ON VIDEOCASSETTE RENTAL
INVENTORY.
</FN>
</TABLE>
