UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From___________ 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 ____
The number of shares outstanding of the registrant's common stock as of November
11, 1999 was 12,883,265.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - October 3, 1999 and January 3, 1999......... ....1
Consolidated Statements of Operations - Thirteen and thirty-nine weeks
ended October 3, 1999 and October 4, 1998......................................2
Consolidated Statements of Cash Flows - Thirty-nine weeks ended
October 3, 1999 and October 4, 1998............................................3
Notes to Consolidated Financial Statements - October 3, 1999.................. 4
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition............................................................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.....................................12
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Balance Sheets
(in thousands)
<CAPTION>
October 3, January 3,
1999 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,813 $ 6,983
Merchandise inventory 12,338 11,824
Prepaid expenses 943 779
Store supplies and other 3,726 3,772
Deferred income taxes 88 312
--------- ---------
Total current assets 21,908 23,670
Rental inventory, net 48,084 44,998
Property, furnishings and equipment, net 41,137 43,920
Goodwill and other intangibles, net 80,428 85,743
Deposits and other assets 2,504 1,799
Deferred income taxes 1,888 2,239
--------- ---------
Total assets $ 195,949 $ 202,369
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 22,695 $ 23,396
Accrued liabilities 7,668 7,426
Current portion of long-term debt 260 442
--------- ---------
Total current liabilities 30,623 31,264
Long-term debt 39,479 46,212
Other accrued liabilities 583 778
Stockholders' equity:
Preferred stock, $.10 par value; 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value; 35,000,000
shares authorized, 12,941,915 and 13,315,915
shares issued and outstanding 13 13
Additional paid-in capital 129,191 131,248
Retained earnings (deficit) (3,940) (7,146)
--------- ---------
Total stockholders' equity 125,264 124,115
--------- ---------
Total liabilities and stockholders' equity $ 195,949 $ 202,369
========= =========
See accompanying notes.
</TABLE>
1
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
---------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 59,056 $ 53,104 $ 174,353 $ 166,127
Product sales 8,686 11,293 28,519 32,423
--------- --------- --------- ---------
67,742 64,397 202,872 198,550
Cost of sales:
Cost of rental revenues 18,423 60,089 51,953 97,932
Cost of product sales 5,410 7,790 18,361 21,987
--------- --------- --------- ---------
Gross margin 43,909 (3,482) 132,558 78,631
Operating costs and expenses:
Store operating expenses 34,997 33,167 101,070 98,111
Amortization of intangibles 1,793 1,741 5,951 5,235
General and administrative 5,477 4,579 15,512 13,146
--------- --------- --------- ---------
Operating income (loss) 1,642 (42,969) 10,025 (37,861)
Interest expense, net (744) (1,211) (2,424) (4,179)
--------- --------- --------- ---------
Income (loss) before income taxes, extraordinary item
and cumulative effect of accounting change 898 (44,180) 7,601 (42,040)
Income taxes 352 (16,134) 3,014 (15,321)
--------- --------- --------- ---------
Income (loss) before extraordinary item and
cumulative effect of accounting change 546 (28,046) 4,587 (26,719)
Extraordinary loss on early extinguishment of debt -- -- (682) --
Cumulative effect of accounting change -- -- (699) --
--------- --------- --------- ---------
Net income (loss) $ 546 $ (28,046) $ 3,206 $ (26,719)
========= ========= ========= =========
Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ .04 $ (2.09) $ .34 $ (1.99)
Extraordinary loss on early extinguishment of debt -- -- (.05) --
Cumulative effect of accounting change -- -- (.05) --
--------- --------- --------- ---------
Net income (loss) $ .04 $ (2.09) $ .24 $ (1.99)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 13,127 13,424 13,213 13,421
Diluted 13,515 13,424 13,582 13,421
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Thirty-nine weeks ended
October 3, October 4,
1999 1998
-----------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 3,206 $ (26,719)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt 682 --
Cumulative effect of accounting change 699 --
Depreciation and amortization 53,247 107,207
Deferred income taxes 1,302 (15,321)
Changes in operating assets and liabilities:
Merchandise inventory (244) 2,502
Other current assets (118) (803)
Deposits and other assets (1,072) (13)
Accounts payable (701) (2,623)
Accrued liabilities (1,062) (1,630)
--------- ---------
Net cash provided by operating activities 55,939 62,600
Investing activities
Business acquisitions (3,505) --
Purchases of rental inventory, net (38,577) (44,702)
Purchases of property, furnishings and equipment (7,055) (4,162)
--------- ---------
Net cash used in investing activities (49,137) (48,864)
Financing activities
Net proceeds from issuance of common stock 43 26
Purchases of treasury stock (2,100) (495)
Payments on notes payable -- (200)
Principal payments on long-term debt (6,915) (16,325)
--------- ---------
Net cash used in financing activities (8,972) (16,994)
--------- ---------
Decrease in cash and cash equivalents (2,170) (3,258)
Cash and cash equivalents at beginning of period 6,983 4,459
--------- ---------
Cash and cash equivalents at end of period $ 4,813 $ 1,201
========= =========
See accompanying notes.
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
October 3, 1999
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 3, 1999 are not necessarily indicative of the results that
may be expected for the fiscal year ending January 2, 2000. 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 3, 1999.
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation. These reclassifications had no
impact on stockholders' equity or net income. Amortization of rental inventory
and revenue sharing expenses have been combined and are presented as cost of
rental revenues on the statement of operations.
2. Rental Inventory
Effective July 6, 1998, the Company changed its method of amortizing
videocassette and video game rental inventory. This new method accelerates the
rate of amortization and has been adopted as a result of an industry trend
towards significant increases in copy-depth availability from movie studios,
which have resulted in earlier satisfaction of consumer demand, thereby,
accelerating the rate of revenue recognition. Under the new method, the cost of
base stock videocassettes, consisting of two copies per title for each store, is
amortized on an accelerated basis to a net book value of $8 over six months and
to a $4 salvage value over the next thirty months. The cost of non-base stock
videocassettes, consisting of the third and succeeding copies of each title per
store, is amortized on an accelerated basis over six months to a net book value
of $4 which is then amortized on a straight-line basis over the next 30 months
or until the videocassette is sold, at which time the unamortized book value is
charged to cost of sales. Video games are amortized on a straight-line basis to
a $10 salvage value over eighteen months.
The new method of amortization has been applied to all rental inventory held at
July 6, 1998. The adoption of the new method of amortization has been accounted
for as a change in accounting estimate effected by a change in accounting
principle. The application of the new method of amortizing videocassette and
video game rental inventory decreased rental inventory and increased
depreciation expense for the quarter ended October 4, 1998 by approximately
$43.6 million and increased the net loss and the loss per diluted share by $27.7
million and $2.06, respectively.
Prior to July 6, 1998, videocassettes and video games considered to be base
stock were amortized over thirty-six months on a straight-line basis to a $5
salvage value. New release videocassettes and video games were amortized as
follows: (i) the fourth and any succeeding copies of each title per store were
amortized on a straight-line basis over six months to an average net book value
of $5 which was then amortized on a straight-line basis over the next thirty
months or until the videocassette or video game was sold, at which time the
unamortized book value was charged to cost of sales and (ii) copies one through
three of each title per store were amortized as base stock.
4
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited) (continued)
3. Financing Obligations
On January 7, 1999, the Company entered into a new Credit Agreement with First
Union National Bank of North Carolina ("First Union") with respect to a
revolving credit facility (the "Facility"). The Facility provides for borrowings
of up to $65 million, is unsecured and will mature in its entirety on January 7,
2002. The Company may increase the amount of the Facility to $85 million if
existing banks increase their commitments or if any new banks enter the Credit
Agreement. The interest rate of the Facility is based on LIBOR plus an
applicable margin percentage, which depends on the Company's cash flow
generation and borrowings outstanding. 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.
Concurrent with the Facility, the Company amended its then existing interest
rate swap to coincide with the maturity of the Facility. The amended interest
rate swap agreement effectively fixes the Company's interest rate exposure on
$37 million of the amount outstanding under the Facility at 5.8% plus an
applicable margin percentage. The interest rate swap reduces the risk of
increases in interest rates during the life of the Facility. The Company
accounts for its interest rate swap as a hedge of its debt obligation. The
Company pays a fixed rate of interest and receives payment based on a variable
rate of interest. The difference in amounts paid and received under the contract
is accrued and recognized as an adjustment to interest expense on the debt.
There are no termination penalties associated with the interest rate swap
agreement; however, if the swap agreement was terminated at the Company's
option, the Company would either pay or receive the present value of the
remaining hedge payments at the then prevailing interest rates for the time to
maturity of the swap agreement. The interest rate swap agreement terminates at
the time the Facility matures.
As a result of the Facility and the amended interest rate swap agreement, the
Company recognized an extraordinary loss on the early extinguishment of debt of
$682,000 (net of taxes of $359,000), or $0.05 per share, during the first
quarter of 1999. The extraordinary loss was comprised primarily of unamortized
debt issue costs associated with the Company's previous credit facility and the
negative value of the previous interest rate swap at January 7, 1999.
4. Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
shares of common stock outstanding during the periods presented. Diluted
earnings per share is computed based on the weighted average number of shares of
common stock outstanding during the periods presented, increased solely by the
effects of shares to be issued from the exercise of dilutive common stock
options (388,000 and none for the thirteen weeks ended October 3, 1999 and
October 4, 1998, respectively; 369,000 and none for the thirty-nine weeks ended
October 3, 1999 and October 4, 1998, respectively). No adjustments were made to
net income in the computation of basic or diluted earnings per share.
5. Cumulative Effect of a Change in Accounting Principle
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting the Costs of Start-Up
Activities," which requires that certain costs related to start-up activities be
expensed as incurred. Prior to January 4, 1999, the Company capitalized certain
costs incurred in connection with site selection for new video specialty store
locations. The Company adopted the provisions of the SOP in its financial
statements for the first quarter of 1999. The effect of the adoption of SOP 98-5
was to record a charge for the cumulative effect of an accounting change of
$699,000 (net of taxes of $368,000), or $0.05 per share, to expense the
unamortized costs that had been capitalized prior to January 4, 1999. The impact
of adoption on income from continuing operations for the thirteen and
thirty-nine weeks ended October 3, 1999 was not material.
5
<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, statements 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 3, October 4, Increase October 3, October 4, Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals 87.2% 82.5% 4.7% 85.9% 83.7% 2.2%
Product sales 12.8 17.5 (4.7) 14.1 16.3 (2.2)
-------- -------- ------ --------- --------- ------
100.0 100.0 -- 100.0 100.0 --
Cost of sales:
Cost of rental revenues:
Recurring 27.2 25.6 1.6 25.6 27.3 (1.7)
Policy change -- 67.7 (67.7) -- 22.0 (22.0)
Cost of product sales 8.0 12.1 (4.1) 9.1 11.1 (2.0)
-------- -------- ------ --------- --------- ------
Gross margin 64.8 (5.4) 70.2 65.3 39.6 25.7
Operating costs and expenses:
Store operating expenses 51.7 51.5 0.2 49.9 49.5 0.4
Amortization of intangibles 2.6 2.7 (0.1) 2.9 2.6 0.3
General and administrative 8.1 7.1 1.0 7.6 6.6 1.0
-------- -------- ------ --------- --------- ------
Operating income (loss) 2.4 (66.7) 69.1 4.9 (19.1) 24.0
Interest expense, net (1.1) (1.9) 0.8 (1.2) (2.1) 0.9
-------- -------- ------ --------- --------- ------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting change 1.3 (68.6) 69.9 3.7 (21.2) 24.9
Income taxes 0.5 (25.0) 25.5 1.5 (7.7) 9.2
-------- -------- ------ --------- --------- ------
Income (loss) before extraordinary
item and cumulative effect of
accounting change 0.8 (43.6) 44.4 2.2 (13.5) 15.7
Extraordinary loss on early
extinguishment of debt -- -- -- (0.3) -- (0.3)
Cumulative effect of accounting
change -- -- -- (0.3) -- (0.3)
-------- -------- ------ --------- --------- ------
Net income (loss) 0.8% (43.6)% 44.4% 1.6% (13.5)% 15.1%
======== ======== ====== ========= ========= ======
Adjusted EBITDA (in thousands) $ 6,487 $ 5,979 $ 508 $ 25,911 $ 25,376 $ 535
======== ======== ====== ========= ========= ======
Number of stores open at
end of period 906 834 72 906 834 72
======== ======== ====== ========= ========= ======
</TABLE>
6
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the thirteen weeks and thirty-nine weeks ended October 3, 1999, total
revenues were $67.7 million and $202.9 million, respectively, increases of 5.2%
and 2.2% over the comparable periods in 1998. Revenues for the third quarter of
1999 were driven by an approximate 7% increase in same-store revenues. Overall
same-store revenues for the third quarter of 1999 increased approximately 1% due
to the rental revenue growth, offset partially by a decrease in product sales
revenue. For the fiscal year-to-date period, same-store revenues increased by
approximately 1%. The increase in same-store revenues for the third quarter and
year-to-date period of 1999 was the result of (i) an increase in the number of
copies of new release videocassettes available to customers as a result of the
Company's continuing focus on the use of copy-depth initiatives, including
revenue sharing programs and other depth of copy programs available from movie
studios; (ii) an increase in the game rental business due to both increasing
consumer acceptance of the Nintendo 64 and Sony Playstation game platforms and
an increase in the number of game titles available for these platforms; and
(iii) chain-wide internal marketing programs designed to generate more consumer
excitement and traffic in the Company's base of stores. The decrease in product
sales for the third quarter of 1999 as compared to the third quarter of 1998 was
primarily due to the release of "Titanic" in the third quarter of 1998, which
generated significant sales, and a decrease in titles released directly to
sell-through by movie studios in 1999, offset in part by increases in previously
viewed movie sales in 1999.
Effective July 6, 1998, the Company changed its amortization policy for rental
inventory. The change resulted in a nonrecurring, non-cash, pre-tax charge of
approximately $43.6 million in the third quarter of 1998. The major impetus for
the change in amortization policy is the changing purchasing economics within
the industry, which have resulted in a significant increase in new release
videos available for rental. While revenue sharing agreements and other
copy-depth initiatives have increased customer satisfaction and driven increased
rental revenue, the overall demand for each new release is satisfied sooner. In
order to match more accurately the valuation of tape inventory with accelerated
consumer demand, the Company has changed its amortization policy for rental
inventory as described in Note 2 of the "Notes to Consolidated Financial
Statements."
The cost of rental revenues as a percentage of rental revenues for the
thirty-nine week period ended October 3, 1999 was 29.8%, a decrease from 32.7%
in the prior year, excluding the nonrecurring charge related to the change in
amortization policy. The third quarter 1999 rental cost percentage of 31.2%
represents essentially no change from the prior year's third quarter. The cost
of rental revenues includes both the amortization of rental inventory and
revenue sharing expenses incurred by the Company. The decreases are primarily
due to the Company's change in amortization policy during the third quarter of
1998, the Company's reduced per unit costs of acquiring rental product through
the various copy-depth programs available from the movie studios, as well as the
more efficient allocation of product to our store base.
Product sales costs as a percentage of product sales for the thirteen week and
thirty-nine week periods ended October 3, 1999 were 62.3% and 64.4%,
respectively, compared to 69.0% and 67.8% for the comparable periods in 1998.
The increased gross margin from product sales is primarily due to the low profit
margins associated with the sale of "Titanic" in the third quarter of 1998, an
increase in previously viewed movie sales and a decrease in new movie sales
during 1999. Previously viewed movies carry gross margins that are substantially
higher than the average gross margins for new movie sales.
As a result of the improved margins on both rental revenues and product sales,
total gross profit margins for the thirteen week and thirty-nine week periods
ended October 3, 1999 increased to 64.8% and 65.3%, respectively, from 62.3% and
61.6% for the comparable periods in 1998, excluding the impact of the change in
amortization policy for videocassette inventory mentioned above.
7
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Store operating expenses as a percentage of revenues was 51.7% and 49.9% for the
thirteen weeks and thirty-nine weeks ended October 3, 1999, respectively, as
compared to 51.5% and 49.5% in 1998. The slight increase in operating expenses
in the third quarter of 1999 versus 1998 relates mostly to the fact that the
stores acquired from Blowout Entertainment, Inc. ("Blowout") operate with a
higher percentage of salaries and wages as a percentage of total revenues than
the Company's other stores. The Blowout stores generate less average revenue
than the Company's overall average revenue level. Also, for the year-to-date
period, the Company incurred some incremental training and other operational
expenses during the integration of the Blowout acquisition.
Amortization of intangibles as a percentage of total revenue for the thirteen
weeks and thirty-nine weeks ended October 3, 1999 was 2.6% and 2.9%,
respectively. For the third quarter of 1999, this percentage was slightly less
than the prior year quarter of 2.7%. However, for the year-to-date period of
1999, intangibles amortization as a percentage of total revenue increased to
2.9% of revenue from 2.6% for the comparable period in 1998. The increased
year-to-date amortization of intangibles was primarily the result of the write
off of certain intangible assets as a part of the Company's ongoing review of
its intangible assets for impairment, as prescribed by Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
General and administrative expenses as a percentage of revenue increased to 8.1%
and 7.6%, respectively, for the third quarter and year-to-date periods of 1999
from 7.1% and 6.6% for the comparable periods in 1998. The increase was
primarily the result of increased staffing and travel costs associated with the
Company's ramp up in new store development, as well as expense increases
resulting from the acquisition of stores from Blowout in May of 1999.
Net interest expense as a percentage of revenues decreased to 1.1% and 1.2%,
respectively, for the third quarter and year-to-date period of fiscal 1999 from
1.9% and 2.1% for the comparable periods in 1998. These decreases were due
primarily to reductions in total debt outstanding from 1998 to 1999.
During the first quarter of 1999, the Company incurred an extraordinary loss on
the early extinguishment of debt of $682,000 (net of taxes of $359,000), or
$0.05 per share. The extraordinary loss was comprised primarily of the write off
of both the unamortized debt issue costs and the negative value of an interest
rate swap agreement in association with the restructuring of the Company's debt
obligations discussed below in "Liquidity and Capital Resources."
Effective January 4, 1999, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position ("SOP") 98-5,
"Reporting the Costs of Start-up Activities." As a result, the Company recorded
a charge for the cumulative effect of an accounting change of $699,000 (net of
taxes of $368,000), or $0.05 per share, to expense the unamortized portion of
certain start-up costs that had been capitalized prior to January 4, 1999,
discussed fully in Note 5 of the "Notes to Consolidated Financial Statements."
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 refurbishment, remodeling and relocation of existing
stores. 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.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
During the thirty-nine weeks ended October 3, 1999 the Company generated
approximately $25.9 million in Adjusted EBITDA, a 2.1% increase over the
comparable period in 1998. "Adjusted EBITDA" is earnings before interest, taxes,
depreciation and amortization, less the Company's purchase of rental inventory
which excludes rental inventory purchases specifically for new store openings.
Adjusted EBITDA should be considered in addition to, but not as a substitute for
or superior to, operating income, net income, cash flow and other measures of
financial performance prepared in accordance with generally accepted accounting
principles.
Cash earnings for the third quarter and year-to-date period in 1999 totaled $2.3
million, or $0.17 per diluted share, and $10.5 million, or $0.78 per diluted
share, respectively. This was a 70% increase for both time periods over 1998
cash earnings performance. Cash earnings is defined as net income before
amortization of intangibles.
Net cash provided by operating activities was $55.9 million for the thirty-nine
weeks ended October 3, 1999 as compared to $62.6 million for the thirty-nine
weeks ended October 4, 1998. The decrease in net cash provided by operating
activities was primarily the result of a change in mix of rental product costs
that are capitalized and amortized versus directly expensed as variable rental
product costs. In 1999, the Company has expensed more rental product costs as
variable rental product cost than in 1998, which has resulted in less overall
depreciation and amortization within the operating activities section of the
cash flow statement. A corresponding decrease in net rental inventory purchases
in the investing activities section of the cash flow statement offsets in large
part the difference in total depreciation and amortization. The other primary
reason for the decrease in net cash provided by operating activities is the net
increase in merchandise inventory in 1999 of $0.2 million versus a net decrease
in merchandise inventory in 1998 of $2.5 million. Net cash provided by operating
activities continues to be sufficient to cover capital resource and debt service
needs.
Net cash used in investing activities was $49.1 million for the year-to-date
period of fiscal 1999 as compared to $48.9 million for the comparable period of
1998. The overall slight increase in funds used for investing activities is the
result of the Company's acquisition activity during the year, as well as
increases in capital expenditures related to property, furnishings and equipment
in 1999 versus 1998, offset in large part by an overall decrease in net rental
inventory purchases in 1999 versus 1998, as mentioned above.
Net cash used in financing activities was $9.0 million for the year-to-date
period of 1999 as compared to $17.0 million for the comparable period of 1998.
The decrease in net cash used in financing activities relates primarily to less
paydowns of long-term debt in 1999 versus 1998, offset in part by an increase in
the amount of cash used by the Company to repurchase its common stock on the
open market.
On January 7, 1999, the Company entered into a new Credit Agreement with First
Union National Bank of North Carolina with respect to a revolving credit
facility (the "Facility"). The Facility provides for borrowings of up to $65
million, is unsecured and will mature in its entirety on January 7, 2002. The
Company may increase the amount of the Facility to $85 million if existing banks
increase their commitments or if any new banks enter the Credit Agreement. The
interest rate of the Facility is based on LIBOR plus an applicable margin
percentage, which depends on the Company's cash flow generation and borrowings
outstanding. 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.
The Company grows its store base through internally developed and acquired
stores and may require capital in excess of internally generated cash flow to
achieve its desired growth. The Company plans to grow its store base by over 100
units per year, beginning in the year 2000. This unit growth is planned to be
accomplished both through opening internally developed stores and making
selective, accretive and strategically consistent acquisitions, if available to
the Company on reasonable terms. To the extent available, future acquisitions
may be completed using funds available under the Facility, financing provided by
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
sellers, alternative financing arrangements such as funds raised in public or
private debt or equity offerings or shares of the Company's stock issued to
sellers. However, there can be no assurance that financing will be available to
the Company on terms which will be acceptable, if at all.
At October 3, 1999, the Company had a working capital deficit of $8.7 million,
due to the accounting treatment of its rental inventory. Rental inventory is
treated as a noncurrent asset under generally accepted accounting principles
because it is a depreciable asset and is not an asset which is 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 this asset as noncurrent results in its
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 the remainder of fiscal 1999
and the fiscal year 2000, including its anticipated new store openings. However,
if the Company increases its growth plan, or to provide funds in the event that
the Company's need for funds is greater than expected, or if certain of the
financing sources identified above are not available to the extent anticipated,
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 launched an e-commerce sales and information site at
www.moviegallery.com during September of this year. The site primarily sells new
videocassette and DVD movies, previously viewed movies and games to its customer
base. The Company anticipates early stage losses related to this venture.
However, the Company does not currently believe that these losses will exceed
$800,000 during 1999.
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, including its point-of-sale
system. While the Company has actively replaced or modified certain software and
hardware so that they will properly function on January 1, 2000 and thereafter,
the costs associated with these modifications or replacements have not been
material to the Company nor does the Company believe these costs will be
material in the future.
The Company is currently not aware of any major vendor that is not actively
managing the process of being year 2000 compliant by December 31, 1999. Thus,
the Company does not believe that there are any vendors with a year 2000 issue
that would materially impact the results of operations or the liquidity of the
Company. However, the Company has no means of ensuring that vendors will be
adequately prepared for the year 2000.
The Company is developing contingency plans in the event it experiences system
failure related to the year 2000. The Company plans to evaluate the status of
year 2000 compliance throughout 1999 to determine whether such contingency plans
are adequate, although at this time the Company knows of no reason its
modifications and replacements of operating systems will not be effective and
completed in a timely manner.
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 movie studios, the Company's ability to successfully
execute its new store opening program 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 3, 1999.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risks
There have been no material changes in the Company's inherent market risks
since the disclosures made as of January 3, 1999 in the Company's annual report
on Form 10-K.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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 16, 1999 /s/ J. Steven Roy
---------------------------------------
J. Steven Roy, Executive Vice President
and Chief Financial Officer
12
<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-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 4,813
<SECURITIES> 0
<RECEIVABLES> 267
<ALLOWANCES> 0
<INVENTORY> 12,338
<CURRENT-ASSETS> 21,908
<PP&E> 277,180<F1>
<DEPRECIATION> 187,959<F2>
<TOTAL-ASSETS> 195,949
<CURRENT-LIABILITIES> 30,623
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 125,251
<TOTAL-LIABILITY-AND-EQUITY> 195,949
<SALES> 28,519
<TOTAL-REVENUES> 202,872
<CGS> 18,361
<TOTAL-COSTS> 192,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,424
<INCOME-PRETAX> 7,601
<INCOME-TAX> 3,014
<INCOME-CONTINUING> 4,587
<DISCONTINUED> 0
<EXTRAORDINARY> (682)
<CHANGES> (699)
<NET-INCOME> 3,206
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
<FN>
<F1> Includes $191,260 of rental inventory.
<F2> Includes $143,176 of accumulated amortization on rental inventory.
</FN>
</TABLE>
