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 2, 2000
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 11,
2000 was 11,286,167.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - April 2, 2000 and January 2, 2000................1
Consolidated Statements of Income - Thirteen weeks ended April 2, 2000
and April 4, 1999..............................................................2
Consolidated Statements of Cash Flows - Thirteen weeks ended April 2, 2000
and April 4, 1999..............................................................3
Notes to Consolidated Financial Statements - April 2, 2000.....................4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................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 2, January 2,
2000 2000
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,109 $ 6,970
Merchandise inventory 13,019 15,148
Prepaid expenses 883 814
Store supplies and other 3,601 3,395
Deferred income taxes 274 229
--------- ---------
Total current assets 23,886 26,556
Rental inventory, net 53,909 52,357
Property, furnishings and equipment, net 45,960 44,320
Goodwill and other intangibles, net 82,357 83,539
Deposits and other assets 3,862 2,543
Deferred income taxes -- 212
--------- ---------
Total assets $ 209,974 $ 209,527
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 23,338 $ 26,243
Accrued liabilities 9,543 12,989
Current portion of long-term debt 174 263
--------- ---------
Total current liabilities 33,055 39,495
Long-term debt 47,760 44,377
Other accrued liabilities 177 234
Deferred income taxes 1,768 --
Stockholders' equity:
Preferred stock, $.10 par value; 2,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $.001 par value; 35,000,000
shares authorized, 11,992,167 and 12,549,667
shares issued and outstanding 12 13
Additional paid-in capital 125,431 127,537
Retained earnings (deficit) 1,771 (2,129)
--------- ---------
Total stockholders' equity 127,214 125,421
--------- ---------
Total liabilities and stockholders' equity $ 209,974 $ 209,527
========= =========
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 2, April 4,
2000 1999
--------------------
<S> <C> <C>
Revenues:
Rentals $ 69,777 $ 59,326
Product sales 11,716 10,294
-------- --------
81,493 69,620
Cost of sales:
Cost of rental revenues 20,591 16,626
Cost of product sales 7,190 6,884
-------- --------
Gross margin 53,712 46,110
Operating costs and expenses:
Store operating expenses 38,113 32,978
Amortization of intangibles 1,805 1,838
General and administrative 6,316 4,917
-------- --------
Operating income 7,478 6,377
Interest expense, net (868) (866)
-------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change 6,610 5,511
Income taxes 2,710 2,149
-------- --------
Income before extraordinary item and cumulative effect of
accounting change 3,900 3,362
Extraordinary loss on early extinguishment of debt, net of tax -- (682)
Cumulative effect of accounting change, net of tax -- (699)
-------- --------
Net income $ 3,900 $ 1,981
======== ========
Basic and diluted earnings per share:
Income before extraordinary item and cumulative effect of
accounting change $ 0.32 $ 0.25
Extraordinary loss on early extinguishment of debt, net of tax -- (0.05)
Cumulative effect of accounting change, net of tax -- (0.05)
-------- --------
Net income $ 0.32 $ 0.15
======== ========
Weighted average shares outstanding:
Basic 12,275 13,279
Diluted 12,300 13,614
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Thirteen weeks ended
April 2, April 4,
2000 1999
--------------------
<S> <C> <C>
Operating activities
Net income $ 3,900 $ 1,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt, net of tax -- 682
Cumulative effect of accounting change, net of tax -- 699
Depreciation and amortization 18,443 18,757
Deferred income taxes 1,935 1,813
Changes in operating assets and liabilities:
Merchandise inventory 2,129 1,064
Other current assets (275) 78
Deposits and other assets (1,319) (755)
Accounts payable (2,905) (3,491)
Accrued liabilities (3,503) (1,844)
-------- --------
Net cash provided by operating activities 18,405 18,984
Investing activities
Business acquisitions (628) (65)
Purchases of rental inventory, net (14,642) (13,812)
Purchases of property, furnishings and equipment (5,183) (1,569)
-------- --------
Net cash used in investing activities (20,453) (15,446)
Financing activities
Purchases and retirement of common stock (2,107) (402)
Proceeds from issuance of long-term debt 3,383 --
Principal payments on long-term debt (89) (5,768)
-------- --------
Net cash provided by (used in) financing activities 1,187 (6,170)
-------- --------
Decrease in cash and cash equivalents (861) (2,632)
Cash and cash equivalents at beginning of period 6,970 6,983
-------- --------
Cash and cash equivalents at end of period $ 6,109 $ 4,351
======== ========
See accompanying notes.
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
April 2, 2000
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 2, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 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 2, 2000.
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. Financing Obligations
On January 7, 1999, the Company entered into a 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.
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
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
3. 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 (25,000 and 335,000 for the thirteen weeks ended April 2, 2000 and April
4, 1999, respectively). No adjustments were made to net income in the
computation of basic or diluted earnings per share.
4. 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 weeks ended
April 4, 1999 was not material.
5
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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
----------------------------------
April 2, April 4, Increase
2000 1999 (Decrease)
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rentals 85.6% 85.2% 0.4%
Product sales 14.4 14.8 (0.4)
-------- -------- --------
100.0 100.0 --
Cost of sales:
Cost of rental revenues 25.2 23.9 1.3
Cost of product sales 8.8 9.9 (1.1)
-------- -------- --------
Gross margin 66.0 66.2 (0.2)
Operating costs and expenses:
Store operating expenses 46.8 47.4 (0.6)
Amortization of intangibles 2.2 2.6 (0.4)
General and administrative 7.8 7.1 0.7
-------- -------- --------
Operating income 9.2 9.1 0.1
Interest expense, net (1.1) (1.2) 0.1
-------- -------- --------
Income before income taxes, extraordinary item
and cumulative effect of accounting change 8.1 7.9 0.2
Income taxes 3.3 3.1 0.2
-------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change 4.8 4.8 --
Extraordinary loss on early extinguishment of
debt, net of tax -- (1.0) 1.0
Cumulative effect of accounting change, net of tax -- (1.0) 1.0
-------- -------- --------
Net income 4.8% 2.8% 2.0%
======== ======== ========
Adjusted EBITDA (in thousands) $ 12,664 $ 11,509 $ 1,155
======== ======== ========
Cash earnings (in thousands) $ 5,705 $ 5,200 $ 505
======== ======== ========
Number of stores open at end of period 960 826 134
======== ======== ========
</TABLE>
6
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Revenue. For the thirteen weeks ended April 2, 2000, total revenues were $81.5
million, a 17.1% increase from $69.6 million in the first quarter of 1999. The
increase was due primarily to an increase in same-store revenues of 3.1%, as
well as a 15.5% increase in the average number of stores open during the first
quarter of 2000 versus 1999. The increase in same-store revenues for the first
quarter of 2000 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 sales of previously viewed movies, which is the direct result of
more product available to consumers due to the copy-depth initiatives and
revenue sharing programs discussed above; (iii) marginally favorable weather
conditions; and (iv) successful, chain-wide internal marketing programs designed
to generate more consumer excitement and traffic in the Company's base of
stores. The revenue increase was partially offset by a decline in new movie
sales as a result of fewer titles being released at sell-through price points.
Cost of Sales. The cost of rental revenues as a percentage of total rental
revenues for the thirteen week period ended April 2, 2000 was 29.5%, an increase
from 28.0% in the prior year quarter. The cost of rental revenues includes both
the amortization of rental inventory and revenue sharing expenses incurred by
the Company. The slight increase is primarily due to continued expansion of the
Company's participation in various revenue sharing and other copy depth programs
and costs associated with the chain-wide roll-out of DVD in the last half of
1999 and early 2000.
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. The gross margin on product sales increased to 38.6% in
the first quarter of 2000 from 33.1% in the first quarter of 1999. The increase
in profitability of product sales is primarily the result of an increase in
previously viewed movie sales and a decrease in new movie sales throughout 1999
and continuing in 2000, driven by the Company's increased focus on the sale of
previously viewed movies. Previously viewed movies carry gross margins that are
substantially higher than the average gross margins for new movie sales and
increasing participation in copy depth programs provides significant resources
to support a larger previously viewed movie inventory.
Gross Margins. The significant improvement in profit margins on product sales
was partially offset by the slight increase in the cost margin on rental
revenues resulting in a total gross margin increase to 34.0% for the first
quarter of 2000 from 33.8% in the first quarter of 1999.
Operating Costs and Expenses. Store operating expenses, which include
store-level expenses such as lease payments and in-store payroll, decreased to
46.8% of total revenue for the first quarter of 2000 from 47.4% in the first
quarter of 1999. The decrease in store operating expenses is primarily due to
the same-store revenue increase of 3.1% during the first quarter of 2000 and
overall cost containment at the store level.
Amortization of intangibles as a percentage of total revenue for the thirteen
weeks ended April 2, 2000 was 2.2%, a decrease from 2.6% for the comparable
period in the prior year. This decrease is primarily due to the 17.1% increase
in revenue.
General and administrative expenses as a percentage of revenue increased to 7.8%
in the first quarter of 2000 from 7.1% for the first quarter of 1999. The
increase is primarily due to increased staffing and travel costs associated with
the Company's increased new store development which began in the latter half of
1999, as well as incremental expenses from the operation of the Company's
e-commerce effort which was launched in September 1999.
7
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Extraordinary Loss. 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."
Cumulative Effect Accounting Change. 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 4 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, as well as common stock repurchases within the past year. The Company
has funded inventory purchases, remodeling and relocation programs, new store
opening costs, acquisitions and stock repurchases primarily from cash flow from
operations, the proceeds of two public equity offerings, loans under revolving
credit facilities and seller financing.
During the thirteen weeks ended April 2, 2000 the Company generated
approximately $12.7 million in Adjusted EBITDA, a 10.0% increase over $11.5
million for the comparable period in 1999. The increase was primarily driven by
the 17.1% increase in total revenue. Adjusted EBITDA is defined as 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 per diluted share for the first quarter of 2000 increased 21.1% to
$0.46 from $0.38 in the first quarter of 1999. Contributing to this increase was
a 9.7% decline in weighted average shares outstanding as a result of share
repurchases. Cash earnings is defined as net income before extraordinary items,
cumulative effect accounting changes and amortization of intangibles. Cash
earnings 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 $18.4 million for the thirteen
weeks ended April 2, 2000 as compared to $19.0 million for the thirteen weeks
ended April 4, 1999. The decrease in net cash provided by operating activities
was primarily the result of a continued reduction in rental product costs that
are capitalized and amortized versus an increase in variable rental product
costs which are expensed as incurred. The remaining decrease is due to increases
in various other assets and offsetting decreases of inventory, accounts payable
and accrued liabilities. Net cash provided by operating activities continues to
be sufficient to cover capital resource and debt service needs.
8
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Net cash used in investing activities was $20.5 million for the first quarter of
2000 as compared to $15.4 million for the comparable period of 1999. This
increase in funds used for investing activities is primarily the result of
increases in capital expenditures related to rental inventory and property,
furnishings and equipment purchased to support the Company's increased new store
development plan.
Net cash provided by financing activities was $1.2 million for the first quarter
of 2000 as compared to net cash used in financing activities of $6.2 million for
the comparable period of 1999. The changes from the first quarter of 1999 are
due primarily to significant reductions in long-term debt repayments during the
first quarter of 2000 to fund increased capital needs for stock repurchases and
new store development.
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 opened 24 internally-developed stores
during the first quarter of 2000 and remains on target to open approximately 100
new stores during the year. The Company will entertain potential acquisition
transactions; however, the number of acquired stores in 2000 is expected to be
less than the number of internally developed stores. 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.
During the first quarter of 2000, the Company completed its previously announced
$5 million stock repurchase plan and announced another $5 million stock
repurchase plan. Through May 11, 2000, the Company has repurchased 1,063,500
shares under the new repurchase plan which, combined with the previous
repurchase plan, represents approximately 16% of the Company's outstanding
shares since September 1998. It is anticipated the majority of the $5 million
under the new repurchase plan will be utilized during the first half of fiscal
year 2000.
At April 2, 2000, the Company had a working capital deficit of $9.2 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 year
2000, including its anticipated new store openings, a modest potential
acquisition program and stock repurchases. However, to fund a major acquisition
program, or to provide funds in the event that the Company's need for funds is
9
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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.
Forward Looking Statements
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, but are not
limited to, 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, the
Company's ability to repurchase common stock under its share repurchase
authorization 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 2, 2000.
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 2, 2000 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
10.1 Amended and Restated Supply Agreement dated February 28,
2000 between M. G. A., Inc. and Ingram Entertainment, Inc.
(portions were omitted pursuant to a request for
confidential treatment)
10.2 First Amendment to Employment Contract between M.G.A.,
Inc. and J. T. Malugen dated April 3, 2000.
10.3 First Amendment to Employment Contract between M.G.A.,
Inc. and H. Harrison Parrish dated April 3, 2000.
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: May 17, 2000 /s/ J. Steven Roy
--------------------------------------
J. Steven Roy, Executive Vice President
and Chief Financial Officer
11
Exhibit 10.1
[*] Confidential portions of this Agreement have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
February 28, 2000
Mr. Bo Loyd
Sr. Vice President of Merchandising
M.G.A., Inc.
739 West Main
Dothan, AL 36301
Re: Amended and Restated Supply Agreement between Ingram Entertainment
Inc. and Home-Vision Entertainment Inc. dated September 21, 1995 (the
"Home-Vision Agreement")
Dear Mr. Loyd:
This will embody in writing the agreement (the "Supply Agreement") between
M.G.A., Inc. ("M.G.A.") and Ingram Entertainment Inc. ("Ingram") to the terms
and conditions of the 1999 Business Proposal (the "Proposal") attached to this
letter as follows:
1. The Home-Vision Agreement has, by operation of law or by agreement, or
both, been assumed by or otherwise become the valid, legal, and
binding obligation of M.G.A.
2. The terms and conditions set out in the Proposal are binding upon both
M.G.A., for itself and as successor to Home-Vision Entertainment Inc.
("Home Vision"), and Ingram, subject to the provisions set out in this
letter. In the event of any inconsistency between this letter and the
Proposal, the terms of this letter will control. The term "Supply
Agreement" refers to the Proposal as modified by this letter.
3. This Supply Agreement supercedes the Home-Vision Agreement and governs
all purchases by M.G.A. from Ingram. It incorporates all
understandings of the parties with respect to its subject matter and
may only be amended in writing signed by both parties.
4. The term of this Supply Agreement will run from the date of this
letter through February 7, 2002, but may be terminated by Ingram after
giving 30 days advance written notice to M.G.A. upon the occurrence of
an Extraordinary Transaction (other than an Extraordinary Transaction
to which exceptions (x) or (y) of Item 6 below apply). M.G.A. shall
have the right to terminate this Agreement after giving Ingram 30 days
advance written notice. If M.G.A. terminates this Agreement as
provided herein, it shall be obligated to pay to Ingram the prorated
fees as described in Section 6.
5. M.G.A. agrees to purchase from Ingram [*] of each of the following as
supplied to M.G.A. through wholesale distribution: pre-recorded video
rental product ("Distribution Video Product") and interactive media
game software rental product ("Distribution Game Product"). M.G.A.
also agrees to use Ingram to [*] of each of the following purchased
directly from the studio and/or the manufacturer: pre-recorded video
rental product ("Direct Video Product") and interactive media game
software rental product ("Direct Game Product"). The above
requirements for Distribution Video Product and Distribution Game
Product are subject to the following exceptions:
<PAGE>
Mr. Bo Loyd
Page 2
February 28, 2000
(a) [*]
(b) [*]
(c) [*]
(d) [*]
6. The occurrence of any one of the following events shall be deemed an
"Extraordinary Transaction" for purposes of this Item 6:
(a) consummation of a sale or other disposition of [*] by M.G.A.
other than in the ordinary course of business, [*] within [*]
of such transaction (an "Asset Sale");
(b) consummation of a merger or consolidation of, into, or
involving M.G.A., in which M.G.A. is not the surviving
corporation; or
(c) a breach by M.G.A. of any of the requirements of Item 5 above
which is not cured, within 30 days of written notice from
Ingram to M.G.A., by payment to Ingram of the following
amounts, as applicable:
(i) with respect to Distribution Video Product, an amount
equal to [*] of Distribution Video Product from Ingram
during such calendar year;
(ii) with respect to Distribution Game Product, an amount
equal to [*] of Distribution Game Product from Ingram
during such calendar year;
(iii)with respect to Direct Video Product, an amount equal
to [*] of Direct Video Product M.G.A. purchased
directly from the manufacturer during such calendar
year, as such [*] is reasonably demonstrated by Ingram;
and
(iv) with respect to Direct Game Product, an amount equal to
[*] of Direct Game Product M.G.A. purchased directly
from the manufacturer during such calendar year, as
such [*] is reasonably demonstrated by Ingram.
In the case of (i) through (iv) above, the intent of the
parties is to put Ingram into the same economic position in
which it would have been had M.G.A. fulfilled its [*] set
out above.
(d) A material breach of any other provision of this Agreement
which is not cured within 30 days of written notice from
Ingram to M.G.A., or the filing of any bankruptcy petition or
other seeking of relief from creditors by or with respect to
M.G.A., voluntary or involuntary, which is not dismissed
within 60 days of filing.
<PAGE>
Mr. Bo Loyd
Page 3
February 28, 2000
Upon the termination of this Agreement by Ingram due to the
consummation or occurrence of an Extraordinary Transaction or upon the
termination of this Agreement by M.G.A. prior to [*], M.G.A. shall
immediately pay Ingram in cash the following amounts (the "Termination
Payment"):
Extraordinary Transaction Date Termination Payment Due
------------------------------ -----------------------
On or before [*] [*]
On or before [*] [*]
On or before [*] [*]
On or before [*] [*]
After [*] [*]
The parties have agreed to the above payments in lieu of a formula
designed to calculate the discounted present value of anticipated
annual future payments under this Supply Agreement, due to the
uncertainty inherent in any such formula calculation.
The following shall apply notwithstanding the above:
(x) in the event of an Asset Sale of less than [*] of M.G.A., the
payment set out above shall be prorated based upon the required
payments made to Ingram under this Supply Agreement by M.G.A., with
respect to the locations so sold, during the 12 months preceding the
Extraordinary Transaction, prorated for any partial year of the
unexpired term of this Supply Agreement; and
(y) in the event of an Extraordinary Transaction in which this Supply
Agreement is assigned to and assumed by a third party of credit
quality at least equal to that of M.G.A. on terms and conditions
reasonably acceptable to Ingram, M.G.A. will not be required to make
any Termination Payment unless and until subsequent annual payments by
the assignee to Ingram under this Supply Agreement in each 12 month
period after the Extraordinary Transaction ("Subsequent Annual
Payments") fail to equal or exceed required payments made or required
to be made to Ingram under this Supply Agreement during the 12 months
preceding the Extraordinary Transaction ("Prior Annual Payments"). If
in any such 12 month period Subsequent Annual Payments are less than
the Prior Annual Payments (a "Shortage Period"), M.G.A. shall pay to
Ingram a pro rata portion of the Termination Payment determined by
multiplying the Termination Payment due as if the Extraordinary
Transaction had occurred at the beginning of the Shortage Period by a
fraction, the numerator of which is the amount of Subsequent Annual
Payments and the denominator of which is the amount of Prior Annual
Payments.
7. M.G.A. shall maintain true and complete records in connection with its
calendar year purchases from all sources of Distribution Video Product
and Distribution Game Product, all direct purchases of Direct Video
Product and Direct Game Product in each calendar year from all
<PAGE>
Mr. Bo Loyd
Page 4
February 28, 2000
sources, and all transactions related thereto, and shall retain all
such records for at least 24 months after the end of each applicable
calendar year. Ingram may from time to time and at any time, during
the term of this Supply Agreement and during the 24 month period
following the termination of this Supply Agreement, audit any and all
such records with its own or third party auditors so as to determine
compliance by M.G.A. with this Supply Agreement. In addition to any
Termination Payment, M.G.A. shall promptly reimburse Ingram for the
reasonable costs of any such audit in the event it reveals an
Extraordinary Transaction has occurred or said audit reveals a
variance or discrepancy of M.G.A.'s purchase requirements as set forth
in Section 5 of greater than 5%. If said audit does reveal a
discrepancy of greater than 5% then M.G.A. will have 30 days to
rectify the same.
8. M.G.A. may not assign this Supply Agreement without the express
written consent of Ingram.
Ingram Entertainment Inc. M.G.A., Inc.
By: /s/ John Reding By: /s/ Bo Loyd
------------------------------ ----------------------------
Print Name: John Reding Print Name: Bo Loyd
Title: Vice President of Sales Title: Senior Vice President-Purchasing
<PAGE>
1999 Business Proposal
M.G.A.
I. Pricing and Special Terms
Traditional Rental and Sell-Through Pricing:
M.G.A., Inc. ("M.G.A." or "you") will receive Ingram Entertainment
Inc.'s [*] plus the [*] set out below, pricing on pre-recorded video
products:
New release and catalog rental product : [*]
(Product with [*] and higher which
is inclusive of [*].)
New release feature sell-through product : [*]
purchased for rental use. (Product with
[*] and lower with National Goals
of [*]) ***
New release feature sell-through product : [*] *
purchased for sale to the consumer.
(Product with [*] and lower with
National Goals of [*]) ***
* M.G.A. will qualify for a [*]
Catalog Sell-Through Product : [*]**
** M.G.A. will qualify for a [*]
Special Sell-Through Provision:
*** Existing Inventory: M.G.A. will process overstock returns on
feature and catalog sell-through titles to its current supplier of
these products. Future returns of product to Ingram Entertainment of
products not purchased through Ingram Entertainment will be credited
at Ingram Entertainment's gross replacements cost for that product.
Sell-Through Special Orders Process:
Ingram Entertainment will provide a designated 800 number established
for M.G.A.. Stores calling in special orders on this number would be
routed to the Ingram National Sales Center and will be handled by a
group of individuals familiar with your account. Special orders can be
shipped to the store for the customer to collect on their next visit
or can be shipped directly to the consumer's home for an additional
handling charge of [*]
We would suggest sourcing special orders from our Memphis facility and
having all special order back-orders shipped from this facility as
well. We can process special orders on a fill or kill basis or hold
back-orders for any number of days between 1 and 120.
DVD Pricing:
DVD Product New Release and Catalog [*]
<PAGE>
Interactive Media Game Software Pricing / Co-op:
Rental Product ([*] and higher) [*]
Sell-Through ([*] and lower) [*]
Rental Advertising Game Software [*]
Sell-through Advertising Game Product [*]
Advertising dollars earned on Sell-Through interactive media/game
software purchases must be spent on Sell-Through games.
Direct Deal - Distribution Fee:
Ingram Entertainment will provide [*] Freight will be [*] M.G.A. will
be responsible for [*] Provided M.G.A. [*] there will be no fee for
processing returns. If Ingram Entertainment processes returns [*]
Distribution Fee Payment Terms will be [*]
Products purchased under this option do not qualify for [*]
II. General Terms
Prepacks:
M.G.A. will receive pricing and premium benefits offered by
manufacturers on units purchased in prepack form. Product will be
broken-down and delivered to individual locations when a prepack
consists of multiple units of one title. If the prepack offered
contains multiple titles, M.G.A.'s orders must be in the same multiple
as the titles offered in a prepack.
Premiums:
M.G.A. will be eligible to receive premium items offered directly from
the manufacturer and delivered to one location at Ingram
Entertainment's cost.
Payment Terms and Credit Limit:
Payment terms will be [*] on all purchases, including distribution fee
charges. Late fees will be assessed to invoices exceeding the agreed
upon terms.
Credit limit will be established following Ingram Entertainment's
analysis of updated financials from time-to-time in accordance with
Ingram Entertainment policies.
Floor Planning:
M.G.A. is eligible to participate in the Video Financial Service Inc.
("VFS") "Floor Plan" program which offers 150 day terms on select
secondary titles and from time to time other product lines. There is
no additional charge for the extended terms; however, a separate VFS
credit application is required for participation. VFS will communicate
these titles to M.G.A. on a regular basis.
Freight:
Product will be shipped to M.G.A. retail locations prepaid freight on
shipments of [*] In the event new release product arrives late to
Ingram Entertainment warehouse facilities, Ingram Entertainment will
use commercially reasonable efforts to ship the product in a manner
that will have the product arrive by street date; provided that Ingram
Entertainment can recover the additional freight charges from the
supplier of the product.
2
<PAGE>
Returns:
Overstock - [*] M.G.A. agrees to cooperate with Ingram Entertainment
to [*] Defectives - [*] Return authorizations must be requested within
[*] and product must be returned to our facility within [*] of being
authorized for return.
Business Interruption:
None
Account Representation:
Dedicated sales representation for Pre-recorded Videocassette, DVD and
Games.
Pre-Recorded Video Software Advertising:
M.G.A. will earn co-op advertising dollars at a rate of [*] M.G.A.
will earn [*] Ingram Entertainment will assist M.G.A. in the
acquisition of Market Development Funds from each supplier, to the
extent available. Not available on direct purchases.
M.G.A. has the option of having its advertising handled by Ingram
Entertainment's Ad Placement Department. Ingram Entertainment's Ad
Placement staff will handle placement with media sources, payment and
studio chargebacks. Not available on direct purchases.
P.O.P:
P.O.P materials will be provided at no charge, however, M.G.A. will be
responsible for freight charges related to the delivery of the P.O.P.
materials.
Annual Meeting:
Ingram will assist in accumulation of funding and processing of
authorizations and assistance can be provided on coordinating the
M.G.A. event if Ingram Entertainment has been named the primary
supplier of pre-recorded video products.
3
Exhibit 10.2
FIRST AMENDMENT TO EMPLOYMENT CONTRACT
THIS FIRST AMENDMENT TO EMPLOYMENT CONTRACT is made and entered into
this 3rd day of April, 2000, by and between M.G.A., INC., a Delaware corporation
(the "Company"), and J. T. MALUGEN (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into that certain Employment
Contract, dated June 9, 1994 (the "Agreement"), providing for the employment of
Employee as Chief Executive Officer of the Company; and
WHEREAS, the Board of Directors of the Company has approved an amendment
to the Agreement to increase the base annual salary payable to Employee under
the Agreement;
NOW, THEREFORE, for good and valuable consideration, the parties hereby
agree to amend the Agreement as follows:
1. Paragraph 4.1 of ARTICLE IV of the Agreement is hereby removed and
deleted in its entirety, and a new Paragraph 4.1 of ARTICLE IV is hereby added
in its place and stead as follows:
"4.1 For the services to be rendered by Employee in his capacity
hereunder, or any other duty assigned to him by the Board of Directors
of the Company, the Company agrees to pay Employee a base annual salary
of Four Hundred Thousand and No/100 Dollars ($400,000.00) per year,
subject to such increases as the Board of Directors (or the Compensation
Committee of the Board of Directors) in its sole discretion deems
appropriate in accordance with the Company's customary procedures
regarding the salaries of its executive officers. Said base annual
salary shall be payable in successive biweekly payments due on the
normal payroll payment days of each month in equal amounts."
2. This amendment shall be effective as of April 3, 2000.
3. In all other respects, the Agreement is hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Employment Contract on the day and year first above written.
ATTEST: M.G.A., INC.
/s/ Leah C. Brook By: /s/ S. Page Todd
- ------------------------ -----------------------
Assistant Secretary Senior Vice President
/s/ Martha M. Compton /s/ J. T. Malugen
- ------------------------ ---------------------
Witness J. T. Malugen
Exhibit 10.3
FIRST AMENDMENT TO EMPLOYMENT CONTRACT
THIS FIRST AMENDMENT TO EMPLOYMENT CONTRACT is made and entered into
this 3rd day of April, 2000, by and between M.G.A., INC., a Delaware corporation
(the "Company"), and H. HARRISON PARRISH (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into that certain Employment
Contract, dated June 9, 1994 (the "Agreement"), providing for the employment of
Employee as President of the Company; and
WHEREAS, the Board of Directors of the Company has approved an amendment
to the Agreement to increase the base annual salary payable to Employee under
the Agreement;
NOW, THEREFORE, for good and valuable consideration, the parties hereby
agree to amend the Agreement as follows:
1. Paragraph 4.1 of ARTICLE IV of the Agreement is hereby removed and
deleted in its entirety, and a new Paragraph 4.1 of ARTICLE IV is hereby added
in its place and stead as follows:
"4.1 For the services to be rendered by Employee in his capacity
hereunder, or any other duty assigned to him by the Board of Directors
of the Company, the Company agrees to pay Employee a base annual salary
of Four Hundred Thousand and No/100 Dollars ($400,000.00) per year,
subject to such increases as the Board of Directors (or the Compensation
Committee of the Board of Directors) in its sole discretion deems
appropriate in accordance with the Company's customary procedures
regarding the salaries of its executive officers. Said base annual
salary shall be payable in successive biweekly payments due on the
normal payroll payment days of each month in equal amounts."
2. This amendment shall be effective as of April 3, 2000.
3. In all other respects, the Agreement is hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Employment Contract on the day and year first above written.
ATTEST: M.G.A., INC.
/s/ Leah C. Brook By: /s/ S. Page Todd
- ------------------------- ----------------------
Assistant Secretary Senior Vice President
/s/ Martha M. Compton /s/ H. Harrison Parrish
- ------------------------ ------------------------
Witness H. Harrison Parrish
<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> DEC-31-2000
<PERIOD-START> JAN-03-2000
<PERIOD-END> APR-02-2000
<CASH> 6,109
<SECURITIES> 0
<RECEIVABLES> 223
<ALLOWANCES> 0
<INVENTORY> 13,019
<CURRENT-ASSETS> 23,886
<PP&E> 181,475<F1>
<DEPRECIATION> 81,606<F2>
<TOTAL-ASSETS> 209,974
<CURRENT-LIABILITIES> 33,055
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 127,202
<TOTAL-LIABILITY-AND-EQUITY> 209,974
<SALES> 11,716
<TOTAL-REVENUES> 81,493
<CGS> 7,190
<TOTAL-COSTS> 74,015
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 868
<INCOME-PRETAX> 6,610
<INCOME-TAX> 2,710
<INCOME-CONTINUING> 3,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,900
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.32
<FN>
<F1>Includes $85,271 of rental inventory.
<F2>Includes $31,362 of accumulated amortization on rental inventory.
</FN>
</TABLE>
