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 July 6, 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 August 11, 1997.
The exhibit index to this report appears at page 12 of 15 consecutively numbered
pages.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - July 6, 1997 and January 5, 1997.................1
Consolidated Statements of Operations - Thirteen weeks ended
July 6, 1997 and June 30, 1996; Twenty-six weeks ended
July 6, 1997 and June 30, 1996.................................................2
Consolidated Statements of Cash Flows - Twenty-six weeks ended
July 6, 1997 and June 30, 1996.................................................3
Notes to Consolidated Financial Statements - July 6, 1997......................4
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition..........................................7
Part II. Other Information
Item 1. Legal Proceedings....................................................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
Item 6. Exhibits and Reports on Form 8-K.....................................12
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Balance Sheets
(dollars in thousands)
<CAPTION>
July 6 January 5
1997 1997
-----------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,050 $ 3,982
Merchandise inventory 10,296 10,737
Store supplies and other 4,514 4,109
Deferred income taxes 827 913
-------- --------
Total current assets 16,687 19,741
Videocassette rental inventory, net 93,553 89,929
Property, furnishings and equipment, net 53,008 50,196
Deferred charges, net 9,988 11,151
Excess of cost over net assets acquired, net 85,711 87,822
Deposits and other assets 2,482 2,738
-------- --------
Total assets $261,429 $261,577
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 18,032 $ 24,321
Accrued liabilities 8,747 7,622
Current portion of long-term debt 372 374
-------- --------
Total current liabilities 27,151 32,317
Long-term debt 71,756 67,883
Other accrued liabilities 2,215 2,425
Deferred income taxes 12,790 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 15,818 15,025
-------- --------
Total stockholders' equity 147,517 146,724
-------- --------
Total liabilities and stockholders' equity $261,429 $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 Twenty-six weeks ended
July 6 June 30 July 6 June 30
1997 1996 1997 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 52,045 $ 52,254 $ 107,628 $ 106,630
Product sales 9,283 8,051 19,378 16,175
---------- ---------- ---------- ----------
61,328 60,305 127,006 122,805
Operating costs and expenses:
Store operating expenses 32,860 30,790 66,014 60,169
Amortization of videocassette rental inventory 17,293 20,904 33,576 33,002
Amortization of intangibles 1,762 1,725 3,536 3,351
Cost of sales 5,561 4,995 11,266 9,816
General and administrative 4,085 4,991 8,131 10,092
---------- ---------- ---------- ----------
Operating income (loss) (233) (3,100) 4,483 6,375
Interest expense, net (1,546) (1,325) (3,042) (2,501)
---------- ---------- ---------- ----------
Income (loss) before income taxes (1,779) (4,425) 1,441 3,874
Income taxes (576) (1,367) 648 1,851
---------- ---------- ---------- ----------
Net income (loss) $ (1,203) $ (3,058) $ 793 $ 2,023
========== ========== ========== ==========
Net income (loss) per share $ (.09) $ (.23) $ .06 $ .15
========== ========== ========== ==========
Pro forma net income (loss) per share:
Income (loss) before income taxes $ (4,425) $ 3,874
Pro forma income taxes (1,663) 1,476
---------- ----------
Pro forma net income (loss) $ (2,762) $ 2,398
========== ==========
Pro forma net income (loss) per share $ (.21) $ .18
========== ==========
Weighted average shares outstanding 13,420,163 13,468,700 13,420,475 13,287,784
========== =========== ========== ==========
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Twenty-six weeks ended
July 6 June 30
1997 1996
------------------------------
<S> <C> <C>
Operating activities
Net income $ 793 $ 2,023
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 42,399 40,462
Deferred income taxes 648 1,632
Changes in operating assets and liabilities:
Merchandise inventory 272 436
Other current assets (405) 352
Deposits and other assets 256 398
Accounts payable (6,289) (908)
Accrued liabilities 915 1,081
-------- --------
Net cash provided by operating activities 38,589 45,476
Investing activities
Business acquisitions (262) (7,630)
Purchases of videocassette rental inventory, net (37,031) (37,560)
Purchases of property, furnishings and equipment (8,099) (10,067)
-------- --------
Net cash used in investing activities (45,392) (55,257)
Financing activities
Net proceeds from issuance of common stock -- 524
Net proceeds from issuance of notes payable -- 10,548
Proceeds from issuance of long-term debt 4,000 5,938
Principal payments on long-term debt (129) (6,891)
-------- --------
Net cash provided by financing activities 3,871 10,119
-------- --------
Increase (decrease) in cash and cash equivalents (2,932) 338
Cash and cash equivalents at beginning of period 3,982 6,255
-------- --------
Cash and cash equivalents at end of period $ 1,050 $ 6,593
======== ========
See accompanying notes.
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 6, 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 twenty-six week
period ended July 6, 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 and earnings per share
by $4.7 million and $0.36, respectively.
4
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
July 6, 1997
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 $1.4
million of restructuring costs were paid and charged against the liability as of
July 6, 1997. The stores identified for closure had revenues and operating
losses of approximately $361,000 and $57,000, respectively, for the thirteen
weeks ended July 6, 1997; $989,000 and $232,000, respectively, for the
twenty-six weeks ended July 6, 1997; $1,634,000 and $642,000, respectively, for
the thirteen weeks ended June 30, 1996; and $3,453,000 and $888,000,
respectively, for the twenty-six weeks ended June 30, 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 July 6, 1997, $71.0 million was
outstanding and approximately $5.6 million was available for borrowing under the
Facility.
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)
July 6, 1997
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 Twenty-six weeks ended
---------------------------------------------------------------------------
July 6 June 30 Increase July 6 June 30 Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals 84.9% 86.6% (1.7)% 84.7% 86.8% (2.1)%
Product Sales 15.1 13.4 1.7 15.3 13.2 2.1
------ ------ ------ ------ ------ ------
100.0 100.0 - 100.0 100.0 -
Operating costs and expenses:
Store operating expenses 53.6 51.0 2.6 52.0 49.0 3.0
Amortization of rental inventory 28.2 34.7 (6.5) 26.4 26.9 (0.5)
Amortization of intangibles 2.9 2.8 0.1 2.8 2.7 0.1
Cost of sales 9.0 8.3 0.7 8.9 8.0 0.9
General and administrative 6.7 8.3 (1.6) 6.4 8.2 (1.8)
------ ------ ------ ------ ------ ------
Total 100.4 105.1 (4.7) 96.5 94.8 1.7
------ ------ ------ ------ ------ ------
Operating income (loss) (0.4) (5.1) 4.7 3.5 5.2 (1.7)
Interest expense, net (2.5) (2.2) (0.3) (2.4) (2.0) (0.4)
------ ------ ------ ------ ------ ------
(2.9) (7.3) 4.4 1.1 3.2 (2.1)
Income Taxes (0.9) (2.7) (1.8) 0.5 1.2 (0.7)
------ ------ ------ ------ ------ ------
Net income (loss) (2.0)% (4.6)% 2.6% 0.6% 2.0% (1.4)%
====== ====== ====== ====== ====== ======
Number of Stores open at end of period 862 859 3 862 859 3
====== ====== ====== ====== ====== ======
</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 twenty-six weeks ended July 6,
1997, revenues were $61.3 million and $127.0 million, respectively, increases of
1.7% and 3.4% over the same periods in 1996. The increases were primarily a
result of an increase in the number of stores operated by the Company as well as
the net positive effect of new store additions offset by the Company's store
closings that resulted from a third quarter 1996 corporate restructuring. The
increases were partially offset by a decrease in same store revenues of 2.1% for
the second quarter and 3.9% year-to-date at stores operated by the Company for
at least 13 months. The same store revenue decrease for the second quarter is
primarily the result of: (i) a significant level of competitive openings over
the past year in the Company's more urban locations; (ii) the Company's decision
to implement aggressive promotional responses in certain competitive markets to
preserve and build market share; and (iii) a continuation of overall industry
softness that began in the first quarter, which resulted from a lack of strong
new release titles during that period.
Product sales as a percentage of total revenue for the thirteen weeks and
twenty-six weeks ended July 6, 1997 were 15.1% and 15.3%, respectively,
increases from 13.4% and 13.2% for the comparable periods in 1996. This change
is primarily the result of a general increased effort by the Company to sell
previously viewed videocassettes as well as general softness in the rental
market due to the factors discussed above.
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 53.6%
for the thirteen weeks ended July 6, 1997 from 51.0% for the comparable fiscal
period in 1996. For the twenty-six weeks ended July 6, 1997, store operating
expenses as a percentage of revenue was 52.0%, an increase from 49.0% for the
comparable period in 1996. The increase in store operating expenses as a
percentage of revenues is primarily due to the shortfall in revenue resulting
from negative same-store revenues. Store operating expenses were also negatively
impacted by increases in both fixed asset depreciation and rent and other
expenses in connection with the normal renewal of leases in existing stores as
well as the integration of developed stores into the Company's store base.
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. Net of the approximately $7.7 million charge discussed above,
videocassette amortization expense as a percentage of revenue under the new
method was approximately 22.0% for the thirteen weeks ended June 30, 1996 and
20.6% for the twenty-six weeks ended June 30, 1996. For the second quarter and
the year-to-date 1997 periods, amortization of videocassette rental inventory
increased as a percentage of revenue to 28.2% and 26.4%, respectively. The
increase in amortization of videocassette rental inventory as a percentage of
revenue is primarily the result of (i) higher overall videocassette rental
inventory purchasing levels, which are based on revenue projections that were in
excess of actual results achieved and (ii) an effort on the Company's part to
buy top new release titles in more volume in order to satisfy customer demand.
Such increased new release title purchases had the effect of increasing
videocassette amortization expense due to the policy's accelerated amortization
of copies four and above of any title within a given store.
Cost of sales increased with the increased revenue from product sales and
decreased as a percentage of revenues from product sales from 62.0% for the
thirteen weeks ended June 30, 1996 to 59.9% for the thirteen weeks ended July 6,
1997. For the twenty-six weeks ended July 6, 1997, cost of sales as a percentage
of revenue from product sales was 58.1%, a decrease from 60.7% for the
comparable period in 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 introduced within the last year.
General and administrative expenses as a percentage of revenue decreased to 6.7%
for the thirteen weeks ended July 6, 1997 versus 8.3% for the comparable period
in 1996. For the twenty-six weeks ended July 6, 1997, general and administrative
expenses as a percentage of revenue was 6.4%, a decrease from 8.2% for the
comparable period in 1996. The decrease is primarily due to the efficiencies
gained from the leveraging of overhead associated with acquisition activity in
1996, in particular the acquisitions of Home Vision and Hollywood Video, and a
reduction in corporate overhead over the past year.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Net interest expense as a percentage of revenue increased to 2.5% for the second
quarter of 1997 from 2.2% for the thirteen weeks ended June 30, 1996. For the
fiscal year-to-date period ended July 6, 1997, net interest expense as a
percentage of revenue increased to 2.4% from 2.0% for the comparable period in
1996. The increase for these periods is due to the increased amount of debt
financing that has been used to fund the Company's growth during the first half
of 1996.
The Company's income tax provision as a percentage of net income for the
twenty-six weeks ended July 6, 1997 was 45.0%. 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 twenty-six weeks ended July 6, 1997, the Company generated
approximately $9.9 million in Adjusted EBITDA versus approximately $9.3 million
for the comparable period in 1996, an increase of approximately 6.5%. "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 twenty-six weeks ended July 6, 1997 is approximately $775,000
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 $38.6 million for the twenty-six
weeks ended July 6, 1997 as compared to $45.5 million for the comparable period
of 1996. The decrease was primarily due to lower net income and a substantial
decrease in accounts payable partially offset by increased depreciation and
amortization expense.
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Net cash used in investing activities was $45.4 million for the twenty-six weeks
ended July 6, 1997 as compared to $55.3 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 $10.1 million in the
first and second quarters of 1996 to $3.9 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
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 July 6, 1997, $71.0 million was outstanding under
the Facility with additional availability of approximately $5.6 million.
The Company grows its store base through internally developed and acquired
stores and requires capital in excess of internally generated cash flow to
achieve its desired growth. To the extent available, future acquisitions may be
completed using funds available under the Facility, financing provided by
sellers, or alternative financing arrangements such as funds raised in public or
private debt or equity offerings. However, there can be no assurance that
financing will be available to the Company on terms which will be acceptable, if
at all.
At July 6, 1997, the Company had a working capital deficit of $10.5 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, including its
anticipated new store openings. However, to fund a resumption of the Company's
acquisition program (which was temporarily suspended in the latter half of
1996), to provide funds in the event that the Company's need for funds is
greater than expected, if certain of the financing sources identified above are
not available to the extent anticipated 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.
10
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
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, 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.
11
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In June 1997, certain former shareholders of Home Vision Entertainment, Inc.
(the "Home Vision Shareholders") filed a complaint against the Company in the
U. S. District Court for the District of Maine. According to the complaint, the
Home Vision Shareholders have asserted a claim for breach of contract 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.
In June 1997, the Company filed a complaint against certain former shareholders
of Home Vision in the Circuit Court of Houston County, Alabama. The complaint
alleges breach of contract and fraud in connection with the aforesaid merger.
Movie Gallery seeks compensatory and punitive damages.
Investors are cautioned that due to the inherent uncertainties involved in
litigation, the foregoing forward-looking statements concerning Movie Gallery's
belief with respect to the merits of the Home Vision shareholders' complaint and
its intentions with respect thereto could differ materially from actual results.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
June 13, 1997. The following actions were taken at the Annual Meeting, for which
proxies were solicited pursuant to Regulation 14 under the Securities Exchange
Act of 1934, as amended:
1. The six nominees proposed by the Board of Directors were elected as directors
by the following votes:
<TABLE>
<CAPTION>
Name For Withheld
- --------------------- ---------- --------
<S> <C> <C>
Joe Thomas Malugen 11,913,004 133,332
H. Harrison Parrish 11,913,704 132,632
William B. Snow 11,913,839 132,497
Sanford C. Sigoloff 11,913,504 132,832
Phillip B. Smith 11,914,139 132,197
Joseph F. Troy 11,914,139 132,197
</TABLE>
2. A proposal to amend the Company's 1994 Stock Plan, as amended, to increase
the number of shares available for grant from 1,750,000 to 2,250,000 was
approved by a vote of 9,416,077 for versus 2,594,573 against. There were 7,475
abstentions and 28,211 broker non-votes.
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
None.
12
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Movie Gallery, Inc.
(Registrant)
Date: August 20, 1997 /s/ J. Steven Roy
------------------------------------
J. Steven Roy, Senior Vice President
and Chief Financial Officer
13
<TABLE>
Exhibit 11
Movie Gallery, Inc.
Computation of Earnings Per Share
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
July 6 June 30 July 6 June 30
1997 1996 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $(1,203,000) $(3,058,000) $ 793,000 $ 2,023,000
=========== =========== =========== ===========
Shares:
Weighted average common shares
outstanding 13,420,163 13,205,856 13,420,475 13,057,270
Net effect of dilutive stock options - 262,844 - 230,514
------------ ----------- ----------- ----------
Weighted average common and common
equivalent shares outstanding 13,420,163 13,468,700 13,420,475 13,287,784
=========== =========== =========== ==========
Net income (loss) per common and
common equivalent share $ (.09) $ (.23) $ .06 $ .15
=========== =========== ========== ==========
</TABLE>
14
<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> 6-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JAN-06-1997
<PERIOD-END> JUL-06-1997
<CASH> 1,050
<SECURITIES> 0
<RECEIVABLES> 1,002
<ALLOWANCES> 0
<INVENTORY> 10,296
<CURRENT-ASSETS> 16,687
<PP&E> 258,019<F1>
<DEPRECIATION> 111,458<F2>
<TOTAL-ASSETS> 261,429
<CURRENT-LIABILITIES> 27,151
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 147,504
<TOTAL-LIABILITY-AND-EQUITY> 261,429
<SALES> 19,378
<TOTAL-REVENUES> 127,006
<CGS> 11,266
<TOTAL-COSTS> 122,523
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,042
<INCOME-PRETAX> 1,441
<INCOME-TAX> 648
<INCOME-CONTINUING> 793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 793
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES $183,416 OF VIDEOCASSETTE RENTAL INVENTORY.
<F2> INCLUDES $89,863 OF ACCUMULATED AMORTIZATION ON VIDEOCASSETTE RENTAL
INVENTORY.
</FN>
</TABLE>
