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 April 4, 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 May 12,
1999 was 13,431,115.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - April 4, 1999 and January 3, 1999................1
Consolidated Statements of Income - Thirteen weeks ended April 4, 1999
and April 5, 1998..............................................................2
Consolidated Statements of Cash Flows - Thirteen weeks ended April 4, 1999
and April 5, 1998..............................................................3
Notes to Consolidated Financial Statements - April 4, 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...........11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.....................................11
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Balance Sheets
(in thousands)
<CAPTION>
April 4, January 3,
1999 1999
------------------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,351 $ 6,983
Merchandise inventory 10,760 11,824
Prepaid expenses 910 779
Store supplies and other 3,563 3,772
Deferred income taxes 308 312
--------- ---------
Total current assets 19,892 23,670
Rental inventory, net 45,090 44,998
Property, furnishings and equipment, net 41,261 43,920
Goodwill and other intangibles, net 83,932 85,743
Deposits and other assets 2,181 1,799
Deferred income taxes 1,157 2,239
--------- ---------
Total assets $ 193,513 $ 202,369
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 19,905 $ 23,396
Accrued liabilities 6,456 7,426
Current portion of long-term debt 252 442
--------- ---------
Total current liabilities 26,613 31,264
Long-term debt 40,634 46,212
Other accrued liabilities 572 778
Stockholders' equity:
Preferred stock, $.10 par value; 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value; 60,000,000
shares authorized, 13,431,115 shares issued
and outstanding 13 13
Additional paid-in capital 131,743 131,743
Retained earnings (deficit) (5,165) (7,146)
Treasury stock (200,200 and 115,200 shares) (897) (495)
--------- ---------
Total stockholders' equity 125,694 124,115
--------- ---------
Total liabilities and stockholders' equity $ 193,513 $ 202,369
========= =========
See accompanying notes.
</TABLE>
1
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
<CAPTION>
Thirteen weeks ended
April 4, April 5,
1999 1998
---------------------
<S> <C> <C>
Revenues:
Rentals $ 59,326 $ 58,933
Product sales 10,294 11,558
-------- --------
69,620 70,491
Operating costs and expenses:
Store operating expenses 35,853 35,050
Amortization of rental inventory 13,751 17,302
Amortization of intangibles 1,838 1,747
Cost of product sales 6,884 7,519
General and administrative 4,917 4,260
-------- --------
Operating income 6,377 4,613
Interest expense, net (866) (1,577)
-------- --------
Income before income taxes, extraordinary loss
and cumulative effect of accounting change 5,511 3,036
Income taxes 2,149 1,154
-------- --------
Income before extraordinary loss and cumulative
effect of accounting change 3,362 1,882
Extraordinary loss on early extinguishment of debt (682) --
Cumulative effect of accounting change (699) --
-------- --------
Net income $ 1,981 $ 1,882
======== ========
Basic and diluted earnings per share:
Income before extraordinary loss and cumulative
effect of accounting change $ 0.25 $ 0.14
Extraordinary loss on early extinguishment of debt (0.05) --
Cumulative effect of accounting change (0.05) --
-------- --------
Net income $ 0.15 $ 0.14
======== ========
Weighted average shares outstanding:
Basic 13,279 13,419
Diluted 13,614 13,818
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Thirteen weeks ended
April 4, April 5,
1999 1998
---------------------
<S> <C> <C>
Operating activities
Net income $ 1,981 $ 1,882
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of debt 682 --
Cumulative effect of accounting change 699 --
Depreciation and amortization 18,757 22,248
Deferred income taxes 1,813 1,154
Changes in operating assets and liabilities:
Merchandise inventory 1,064 714
Other current assets 78 (348)
Deposits and other assets (755) (41)
Accounts payable (3,491) (3,871)
Accrued liabilities (1,844) (321)
-------- --------
Net cash provided by operating activities 18,984 21,417
Investing activities
Business acquisitions (65) --
Purchases of rental inventory, net (13,812) (15,397)
Purchases of property, furnishings and equipment (1,569) (1,551)
-------- --------
Net cash used in investing activities (15,446) (16,948)
Financing activities
Net proceeds from issuance of common stock -- 7
Purchases of treasury stock (402) --
Payments on notes payable -- (200)
Principal payments on long-term debt (5,768) (4,764)
-------- --------
Net cash used in financing activities (6,170) (4,957)
-------- --------
Decrease in cash and cash equivalents (2,632) (488)
Cash and cash equivalents at beginning of period 6,983 4,459
-------- --------
Cash and cash equivalents at end of period $ 4,351 $ 3,971
======== ========
See accompanying notes.
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
April 4, 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 thirteen week period
ended April 4, 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.
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 Company will continue to expense
revenue sharing payments as revenues are earned pursuant to contractual
arrangements.
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. Prior to July 6, 1998, rental inventory was recorded at cost and
amortized over its economic useful life. 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.
3. Financing Obligations
On July 10, 1996, the Company entered into a Credit Agreement with First Union
National Bank of North Carolina ("First Union") with respect to a reducing
revolving credit facility (the "Original Facility"). The Original Facility was
unsecured and involved a $90 million commitment that reduced quarterly beginning
March 31, 1998. $46 million was outstanding at January 3, 1999. The Original
Facility was replaced on January 7, 1999 with a new Credit Agreement with First
Union (the "New Facility"). The New Facility is an unsecured revolving credit
facility that will mature in its entirety on January 7, 2002. The New Facility
provides for borrowings of up to $65 million, and the Company may increase the
amount of the New Facility to $85 million if existing banks increase their
commitments or if any new banks enter the Credit Agreement. The interest rate of
the New 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 New Facility at any time without penalty. The more
restrictive covenants of the New Facility restrict borrowings based upon cash
flow levels.
4
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
Concurrent with the New Facility, the Company amended its existing interest rate
swap to coincide with the maturity of the New Facility. The amended interest
rate swap agreement effectively fixes the Company's interest rate exposure on
$37 million of the amount outstanding under the New 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 New 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 New Facility matures.
As a result of the New 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 Original Facility and the negative value of
the original 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 (335,000 and 399,000 for the thirteen weeks ended April 4, 1999 and
April 5, 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 quarter ended April 4, 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 quarter ended
April 4, 1999 was not material.
5
<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
April 4, April 5, Increase
1999 1998 (Decrease)
---------------------------------------
<S> <C> <C> <C>
Revenues:
Rentals 85.2% 83.6% 1.6
Product sales 14.8 16.4 (1.6)
------- ------- ------
100.0 100.0 --
Operating costs and expenses:
Store operating expenses 51.5 49.8 1.7
Amortization of rental inventory 19.8 24.5 (4.7)
Amortization of intangibles 2.6 2.5 0.1
Cost of product sales 9.9 10.7 (0.8)
General and administrative 7.1 6.0 1.1
------- ------- ------
Total 90.9 93.5 (2.6)
------- ------- ------
Operating income 9.1 6.5 2.6
Interest expense, net (1.2) (2.2) 1.0
------- ------- ------
Income before income taxes, extraordinary loss
and cumulative effect of accounting change 7.9 4.3 3.6
Income taxes 3.1 1.6 1.5
------- ------- ------
Income before extraordinary loss and cumulative
effect of accounting change 4.8 2.7 2.1
Extraordinary loss on early extinguishment of debt (1.0) -- (1.0)
Cumulative effect of accounting change (1.0) -- (1.0)
------- ------- ------
Net income 2.8% 2.7% 0.1%
======= ======= ======
Adjusted EBITDA (in thousands) $11,509 $11,747 $ (238)
======= ======= ======
Number of stores open at end of period 826 849 (23)
======= ======= ======
</TABLE>
For the thirteen weeks ended April 4, 1999, revenues were $69.6 million, a 1.2%
decrease from $70.5 million in the comparable period of the prior year. The
Company had 2.7% fewer stores in the operating base at the end of the first
quarter versus the prior year. Revenues for the first quarter of 1999 were
driven by a 2% increase in same-store revenues from rentals while overall
same-store revenues increased only slightly due to decreases in product sales
revenue. The increase in same-store rental revenues for the first quarter 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 revenue was
primarily the result of a short-term disruption in the supply of videocassettes
held for sale from our primary distributor.
6
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Product sales as a percentage of total revenue for the thirteen weeks ended
April 4, 1999 was 14.8%, compared to 16.4% for the comparable period in 1998.
This decrease reflects the net impact of the increased rental revenue and the
short-term disruption in the supply of videocassettes held for sale discussed
above.
Store operating expenses, which reflect direct store expenses such as lease
payments and in-store payroll, increased as a percentage of revenues to 51.5%
for the thirteen weeks ended April 4, 1999 from 49.8% for the thirteen weeks
ended April 5, 1998. This increase in store operating expenses as a percentage
of revenues was primarily due to a continuing increase in revenue sharing
expenses as a result of the Company's focus on the purchase of rental product
using various copy-depth initiatives.
Effective July 6, 1998, the Company changed its amortization policy for rental
inventory, which was accounted for as a change in accounting estimate effected
by a change in accounting principle and resulted in a non-recurring, non-cash,
pre-tax charge of $43.6 million in the quarter ended October 4, 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."
Amortization of rental inventory for the thirteen weeks ended April 4, 1999 was
19.8%, down from 24.5% for the comparable period in 1998. Amortization of rental
inventory for all periods ending prior to July 6, 1998, was calculated under the
previous policy described in Note 2 of the "Notes to Consolidated Financial
Statements." A reduction in capital expended for rental inventory purchases from
1998 to 1999, as well as continued increases in the use of revenue sharing, are
the main reasons that the amortization of rental inventory as a percentage of
revenue in 1999 has declined from 1998 levels.
Cost of product sales includes the costs of new videocassettes, confectionery
items and other goods, as well as the unamortized value of previously viewed
rental inventory sold in the Company's stores. Cost of product sales decreased
with the decreased revenue from product sales and increased slightly as a
percentage of revenues from product sales from 65.1% for the first quarter of
1998 to 66.9% for the first quarter of 1999. The decrease in product sales gross
margins resulted primarily from efforts by the Company to promote increased
product sales through discounted pricing and special sales promotions.
General and administrative expenses as a percentage of revenue increased to 7.1%
for the first quarter of 1999 from 6.0% for the comparable period in 1998 as the
Company increased its human resources in preparation for a more aggressive new
store development effort in 1999.
As a result of the above factors, primarily the reduction in amortization of
rental inventory, operating income increased by 38.2% to $6.4 million in the
first quarter of 1999 from $4.6 million in the first quarter of 1998.
Net interest expense as a percentage of revenues decreased to 1.2% for the first
quarter of 1999 from 2.2% for the first quarter of 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 its debt
obligations discussed below in "Liquidity and Capital Resources."
7
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Effective January 4, 1999, the Company adopted the provisions of the AICPA
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.
During the first quarter of 1999, the Company generated $11.5 million in
Adjusted EBITDA versus $11.7 million for 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.
Net cash provided by operating activities was $19.0 million for the first
quarter of 1999 as compared to $21.4 million for the first quarter of 1998. The
decrease in net cash provided by operating activities was primarily due to
decreases in depreciation and amortization and accrued liabilities, as well as
an increase in deposits and other assets, partially offset by higher operating
income in the first quarter of 1999 versus the first quarter of 1998.
Net cash used in investing activities was $15.4 million for the first quarter of
1999 as compared to $16.9 million for the first quarter of 1998. This decrease
in funds used for investing activities is the result of a decrease in the
expenditures of capital for rental inventory during the first quarter of 1999
versus the first quarter of 1998.
Net cash used in financing activities was $6.2 million for the quarter ended
April 4, 1999 as compared to $5.0 million for the comparable period in 1998.
This increase represents an increase in principal payments on long-term debt
versus the prior year.
During 1996, the Company entered into an unsecured reducing revolving credit
facility (the "Original Facility") which involved a $90 million commitment that
reduced quarterly beginning March 31, 1998. $46 million was outstanding at
January 3, 1999. The Original Facility was replaced on January 7, 1999 with a
new Credit Agreement with First Union National Bank of North Carolina (the "New
Facility"). The New Facility provides for borrowings of up to $65 million, is an
unsecured revolving credit facility and matures on January 7, 2002. The Company
may increase the amount of the New Facility to $85 million if existing banks
increase their commitments or if any new banks enter the Credit Agreement. The
interest rate of the New 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 New Facility at any time without penalty.
The more restrictive covenants of the New Facility restrict borrowings based
upon cash flow levels.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
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 has announced a planned increase in its
unit growth in 1999, which is planned to be accomplished via opening up to 100
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 New Facility, financing provided by 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 April 4, 1999, the Company had a working capital deficit of $6.7 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 New Facility, cash on hand and trade credit will provide the necessary
capital to fund its current plan of operations for Fiscal 1999, including its
anticipated new store openings. However, to fund a resumption of an aggressive
acquisition program, 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 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
In March 1999, the Company entered into a definitive agreement to purchase the
assets and assume the leases of approximately 90 stores operated by Blowout
Entertainment, Inc. ("Blowout") for an aggregate purchase price of approximately
$2.4 million, subject to adjustment under certain circumstances. Blowout
operates video stores within large retailers such as Wal-Mart. While the
consummation of the acquisition is subject to a number of closing conditions,
the Company anticipates consummation of the transaction to occur in May 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 begun to actively replace or modify 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's payroll software is not currently year 2000 compliant. However,
the Company is in the process of replacing its payroll system with a year 2000
compliant package that will provide management with better functionality and
reporting. While the current payroll software is the Company's largest year 2000
issue to resolve, the Company believes that its planned software and hardware
modifications, as well as its replacement efforts will result in no significant
operational problems. However, if such modifications and conversions are not
made, or are not completed timely, the year 2000 issue could have a material
adverse impact on the operations of the Company.
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
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.
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.
10
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risks
There have been no 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)
/s/ J. Steven Roy
--------------------------------------
J. Steven Roy, Executive Vice President
and Chief Financial Officer
Date: May 14, 1999
11
<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> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> APR-04-1999
<CASH> 4,351
<SECURITIES> 0
<RECEIVABLES> 375
<ALLOWANCES> 0
<INVENTORY> 10,760
<CURRENT-ASSETS> 19,892
<PP&E> 266,219
<DEPRECIATION> 179,868
<TOTAL-ASSETS> 193,513
<CURRENT-LIABILITIES> 26,613
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 125,681
<TOTAL-LIABILITY-AND-EQUITY> 125,694
<SALES> 10,294
<TOTAL-REVENUES> 69,620
<CGS> 6,884
<TOTAL-COSTS> 63,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 866
<INCOME-PRETAX> 5,511
<INCOME-TAX> 2,149
<INCOME-CONTINUING> 3,362
<DISCONTINUED> 0
<EXTRAORDINARY> (682)
<CHANGES> (699)
<NET-INCOME> 1,981
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<FN>
<F1> Includes $185,595 of rental inventory.
<F2> Includes $140,505 of accumulated amortization on rental inventory.
</FN>
</TABLE>
