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 July 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 August
13, 1999 was 13,232,415.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - July 4, 1999 and January 3, 1999.................1
Consolidated Statements of Operations - Thirteen and twenty-six weeks
ended July 4, 1999 and July 5, 1998............................................2
Consolidated Statements of Cash Flows - Twenty-six weeks ended July 4, 1999
and July 5, 1998...............................................................3
Notes to Consolidated Financial Statements - July 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 4. Submission of Matters to a Vote of Security Holders.................11
Item 6. Exhibits and Reports on Form 8-K....................................11
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Balance Sheets
(in thousands)
<CAPTION>
July 4, January 3,
1999 1999
------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,937 $ 6,983
Merchandise inventory 11,063 11,824
Prepaid expenses 941 779
Store supplies and other 3,338 3,772
Deferred income taxes 343 312
--------- ---------
Total current assets 19,622 23,670
Rental inventory, net 46,619 44,998
Property, furnishings and equipment, net 40,891 43,920
Goodwill and other intangibles, net 81,617 85,743
Deposits and other assets 2,456 1,799
Deferred income taxes 1,609 2,239
--------- ---------
Total assets $ 192,814 $ 202,369
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 19,282 $ 23,396
Accrued liabilities 8,900 7,426
Current portion of long-term debt 256 442
--------- ---------
Total current liabilities 28,438 31,264
Long-term debt 37,597 46,212
Other accrued liabilities 400 778
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, 13,232,415 and 13,315,915
shares issued and outstanding 13 13
Additional paid-in capital 130,852 131,248
Retained earnings (deficit) (4,486) (7,146)
--------- ---------
Total stockholders' equity 126,379 124,115
--------- ---------
Total liabilities and stockholders' equity $ 192,814 $ 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 Twenty-six weeks ended
July 4, July 5, July 4, July 5,
1999 1998 1999 1998
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 55,971 $ 54,090 $ 115,297 $ 113,023
Product sales 9,539 9,572 19,833 21,130
--------- --------- --------- ---------
65,510 63,662 135,130 134,153
Cost of sales:
Cost of rental revenues 16,904 18,181 33,530 37,843
Cost of product sales 6,067 6,678 12,951 14,197
--------- --------- --------- ---------
Gross profit 42,539 38,803 88,649 82,113
Operating costs and expenses:
Store operating expenses 33,095 32,254 66,073 64,944
Amortization of intangibles 2,320 1,747 4,158 3,494
General and administrative 5,118 4,307 10,035 8,567
--------- --------- --------- ---------
Operating income 2,006 495 8,383 5,108
Interest expense, net (814) (1,391) (1,680) (2,968)
--------- --------- --------- ---------
Income (loss) before income taxes, extraordinary item
and cumulative effect of accounting change 1,192 (896) 6,703 2,140
Income taxes 513 (341) 2,662 813
--------- --------- --------- ---------
Income (loss) before extraordinary item and
cumulative effect of accounting change 679 (555) 4,041 1,327
Extraordinary loss on early extinguishment of debt -- -- (682) --
Cumulative effect of accounting change -- -- (699) --
--------- --------- --------- ---------
Net income (loss) $ 679 $ (555) $ 2,660 $ 1,327
========= ========= ========= =========
Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ .05 $ (.04) $ .30 $ .10
Extraordinary loss on early extinguishment of debt -- -- (.05) --
Cumulative effect of accounting change -- -- (.05) --
--------- --------- --------- ---------
Net income (loss) $ .05 $ (.04) $ .20 $ .10
========= ========= ========= =========
Weighted average shares outstanding:
Basic 13,231 13,421 13,256 13,421
Diluted 13,623 13,421 13,619 13,895
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Twenty-six weeks ended
July 4, July 5,
1999 1998
----------------------
<S> <C> <C>
Operating activities
Net income $ 2,660 $ 1,327
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 36,424 44,189
Deferred income taxes 1,326 813
Changes in operating assets and liabilities:
Merchandise inventory 1,031 3,756
Other current assets 272 (518)
Deposits and other assets (1,030) 17
Accounts payable (4,114) (8,699)
Accrued liabilities 91 (1,463)
-------- --------
Net cash provided by operating activities 38,041 39,422
Investing activities
Business acquisitions (2,485) (2)
Purchases of rental inventory, net (25,843) (30,448)
Purchases of property, furnishings and equipment (3,562) (2,999)
-------- --------
Net cash used in investing activities (31,890) (33,449)
Financing activities
Net proceeds from issuance of common stock 6 8
Purchases of treasury stock (402) --
Payments on notes payable -- (200)
Principal payments on long-term debt (8,801) (9,024)
-------- --------
Net cash used in financing activities (9,197) (9,216)
-------- --------
Decrease in cash and cash equivalents (3,046) (3,243)
Cash and cash equivalents at beginning of period 6,983 4,459
-------- --------
Cash and cash equivalents at end of period $ 3,937 $ 1,216
======== ========
See accompanying notes.
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 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 twenty-six week
period ended July 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.
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 revenue 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. 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.
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.
4
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
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 (392,000 and none for the thirteen weeks ended July 4, 1999 and July 5,
1998, respectively; 363,000 and 474,000 for the twenty-six weeks ended July 4,
1999 and July 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 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 twenty-six
weeks ended July 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, 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 Twenty-six weeks ended
--------------------------------------------------------
July 4, July 5, Increase July 4, July 5, Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals 85.4% 85.0% 0.4% 85.3% 84.2% 1.1%
Product sales 14.6 15.0 (0.4) 14.7 15.8 (1.1)
----- ----- ----- ----- ----- -----
100.0 100.0 -- 100.0 100.0 --
Cost of sales:
Cost of rental revenues 25.8 28.5 (2.7) 24.8 28.2 (3.4)
Cost of product sales 9.3 10.5 (1.2) 9.6 10.6 (1.0)
----- ----- ----- ----- ----- -----
Gross profit 64.9 61.0 3.9 65.6 61.2 4.4
Operating costs and expenses:
Store operating expenses 50.5 50.7 (0.2) 48.9 48.4 0.5
Amortization of intangibles 3.5 2.7 0.8 3.1 2.6 0.5
General and administrative 7.8 6.8 1.0 7.4 6.4 1.0
----- ----- ----- ----- ----- -----
Operating income 3.1 0.8 2.3 6.2 3.8 2.4
Interest expense, net (1.3) (2.2) 0.9 (1.2) (2.2) 1.0
----- ----- ----- ----- ----- -----
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting change 1.8 (1.4) 3.2 5.0 1.6 3.4
Income taxes 0.8 (0.5) 1.3 2.0 0.6 1.4
----- ----- ----- ----- ----- -----
Income (loss) before extraordinary
item and cumulative effect of
accounting change 1.0 (0.9) 1.9 3.0 1.0 2.0
Extraordinary loss on early
extingushment of debt -- -- -- (0.5) -- (0.5)
Cumulative effect of accounting
change -- -- -- (0.5) -- (0.5)
----- ----- ----- ----- ----- -----
Net income (loss) 1.0% (0.9)% 1.9% 2.0% 1.0% 1.0%
===== ===== ===== ===== ===== =====
Number of stores open at
end of period 903 842 61 903 842 61
===== ===== ===== ===== ===== =====
</TABLE>
6
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the thirteen weeks and twenty-six weeks ended July 4, 1999, total revenues
were $65.5 million and $135.1 million, respectively, increases of 2.9% and 0.7%
over the comparable periods in 1998. Revenues for the second quarter of 1999
were driven by an approximate 3.0% increase in same-store rental revenues, which
follows a 2% increase in rental revenues for the first quarter of 1999. Overall
same-store revenues for the second quarter of 1999 increased 1.4% 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 rental revenues for the second
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 second quarter of 1999 is primarily due to a
decrease in titles released directly to sell-through by movie studios, offset in
part by increases in previously viewed movie sales. In addition to the fewer
titles released directly to sell-through, the year-to-date period product sales
were negatively impacted by a short-term disruption in the supply of
videocassettes held for sale from our primary distributor during the first
quarter.
Rental revenue costs as a percentage of rental revenues for the thirteen week
and twenty-six week periods ended July 4, 1999 were 30.2% and 29.1%,
respectively, a decrease from 33.6% and 33.5% for the comparable fiscal 1998
periods. These costs include 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.
Effective July 6, 1998, the Company changed its amortization policy for rental
inventory. 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."
Product sales costs as a percentage of product sales for the thirteen week and
twenty-six week periods ended July 4, 1999 were 63.6% and 65.3%, respectively,
compared to 69.8% and 67.2% for the comparable periods in 1998. The increased
gross margin from product sales is primarily due to 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 twenty-six week periods
ended July 4, 1999 increased to 64.9% and 65.6%, respectively, from 61.0% and
61.2% for the comparable periods in 1998.
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 50.5% and 48.9% for the
thirteen weeks and twenty-six weeks ended July 4, 1999, respectively, as
compared to 50.7% and 48.4% in 1998. The increase in store operating expenses
was primarily the result of the acquisition of 88 stores from Blowout
Entertainment, Inc. ("Blowout") in May of 1999. The overall strong increase in
revenues for the second quarter of 1999 resulted in a decrease in store
operating expenses as a percentage of total revenue, while the year-to-date
period percentage of store operating expenses to total revenue increased
slightly.
Amortization of intangibles as a percentage of total revenue for the thirteen
weeks and twenty-six weeks ended July 4, 1999 was 3.5% and 3.1%, respectively,
increases from 2.7% and 2.6% for the comparable periods in 1998. The increased
amortization of intangibles is 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 7.8%
and 7.4%, respectively, for the second quarter and year-to-date periods of 1999
from 6.8% and 6.4% for the comparable periods in 1998. The increase is primarily
the result of increased staffing 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 1.3% and 1.2%,
respectively, for the second quarter and year-to-date period of fiscal 1999 from
2.2% 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 its debt
obligations discussed below in "Liquidity and Capital Resources."
Effective January 4, 1999, the Company adopted the provisions of the American
Institute of Certified 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.
During the twenty-six weeks ended July 4, 1999 and July 5, 1998, the Company
generated approximately $19.4 million in Adjusted EBITDA. "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 $38.0 million for the twenty-six
weeks ended July 4, 1999 as compared to $39.4 million for the twenty-six weeks
ended July 5, 1998. 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 $31.9 million for the year-to-date
period of fiscal 1999 as compared to $33.4 million for the comparable period of
1998. This decrease in funds used for investing activities is the result of a
decrease in the expenditures of capital for rental inventory, offset in part by
increased capital expenditures related to property, furnishings and equipment in
1999 versus 1998 and the capital required to consummate the acquisition of
Blowout in May 1999.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Net cash used in financing activities was $9.2 million for the year-to-date
periods of 1999 and 1998. Long-term debt paydowns were approximately the same
during the first half of 1999 and 1998.
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 has announced a planned increase in its
unit growth in 1999, which 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 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 July 4, 1999, the Company had a working capital deficit of $8.8 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 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.
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
Other Matters
In March 1999, the Company entered into a definitive agreement to purchase the
assets and assume the leases of 88 stores operated by Blowout for an aggregate
purchase price of approximately $2.4 million. Blowout operates video stores
within large retailers such as Wal-Mart. The acquisition closed in May 1999.
The Company plans to launch an e-commerce sales and information site at
www.moviegallery.com by the middle of September. This site will primarily sell
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 the remaining portion of 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.
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 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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on June 8, 1999. 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:
Name For Withheld
---- --- --------
Joe Thomas Malugen 11,627,170 28,018
H. Harrison Parrish 11,627,670 27,518
William B. Snow 11,627,670 27,518
Sanford C. Sigoloff 11,627,670 27,518
Philip B. Smith 11,627,670 27,518
Joseph F. Troy 11,627,670 27,518
2. A proposal to amend the Company's Certificate of Incorporation to
decrease the authorized shares of common stock from 60,000,000 to
35,000,000 was approved by a vote of 11,637,828 for versus 7,520
against. There were 9,840 abstentions and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3.1.1 Certificate of Amendment of Certificate of Incorporation dated
June 6, 1996
3.1.2 Certificate of Amendment of Certificate of Incorporation dated
July 1, 1999
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: August 17, 1999 /s/ J. Steven Roy
---------------------------------------
J. Steven Roy, Executive Vice President
and Chief Financial Officer
11
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF
MOVIE GALLERY, INC.
Movie Gallery, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
1. That at a meeting of the board of directors of the Corporation,
resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of the Corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
Resolved, that the Certificate of Incorporation of the Corporation be
amended by changing the first paragraph of Article Fourth so that, as
amended, Article Fourth shall be and read as follows:
"1. The Corporation is authorized to issue two classes of stock, to be
designated "Common Stock" and "Preferred Stock," respectively. The total
number of shares which the Corporation is authorized to issue is sixty-two
million (62,000,000) shares. The number of shares of Common Stock
authorized to be issued is sixty million (60,000,000), with a par value of
$0.001 per share. The number of shares of Preferred Stock authorized to be
issued is two million (2,000,000), with a par value of $0.10 per share."
2. That thereafter, pursuant to resolution of its board of directors, an
annual meeting of the stockholders of the Corporation was duly called and held,
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware at which meeting the necessary number of shares as required by
statute were voted in favor of the amendment.
3. That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
4. That the capital of the Corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by H. Harrison Parrish, its President and S. Page Todd,
its secretary this 6th day of June, 1996.
/s/ H. Harrison Parrish
-------------------------------
H. Harrison Parrish, President
/s/ S. Page Todd
-------------------------------
S. Page Todd, Secretary
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF
MOVIE GALLERY, INC.
Movie Gallery, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
1. That at a meeting of the board of directors of the Corporation,
resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of the Corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
Resolved, that the first paragraph of Article Fourth of the Company's
Certificate of incorporation be amended to read in its entirety as follows:
"1. The Corporation is authorized to issue two classes of stock, to be
designated "Common Stock" and "Preferred Stock," respectively. The total
number of shares which the Corporation is authorized to issue is
thirty-seven million (37,000,000) shares. The number of shares of Common
Stock authorized to be issued is thirty-five million (35,000,000), with a
par value of $0.001 per share. The number of shares of Preferred Stock
authorized to be issued is two million (2,000,000), with a par value of
$0.10 per share."
2. That thereafter, pursuant to resolution of its board of directors, an
annual meeting of the stockholders of the Corporation was duly called and held,
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware at which meeting the necessary number of shares as required by
statute were voted in favor of the amendment.
3. That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
4. That the capital of the Corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by H. Harrison Parrish, its President and S. Page Todd,
its Secretary this 1st day of July, 1999.
/s/ Harrison Parrish, President
-------------------------------
Harrison Parrish, President
/s/ S. Page Todd, Secretary
-------------------------------
S. Page Todd, Secretary
<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-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> JUL-04-1999
<CASH> 3,937
<SECURITIES> 0
<RECEIVABLES> 291
<ALLOWANCES> 0
<INVENTORY> 11,063
<CURRENT-ASSETS> 19,622
<PP&E> 271,537<F1>
<DEPRECIATION> 184,027<F2>
<TOTAL-ASSETS> 192,814
<CURRENT-LIABILITIES> 28,438
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 126,366
<TOTAL-LIABILITY-AND-EQUITY> 192,814
<SALES> 19,833
<TOTAL-REVENUES> 135,130
<CGS> 12,951
<TOTAL-COSTS> 126,747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,680
<INCOME-PRETAX> 6,703
<INCOME-TAX> 2,662
<INCOME-CONTINUING> 4,041
<DISCONTINUED> 0
<EXTRAORDINARY> (682)
<CHANGES> (699)
<NET-INCOME> 2,660
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
<FN>
<F1> Includes $188,529 of rental inventory.
<F2> Includes $141,910 of accumulated amortization on rental inventory.
</FN>
</TABLE>
