UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 1, 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.)
900 West Main Street, Dothan, Alabama 36301
(Address of principal executive offices) (Zip Code)
(334) 677-2108
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES X NO ____
The number of shares outstanding of the registrant's common stock as of November
9, 2000 was 11,136,167.
<PAGE>
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - October 1, 2000 and January 2, 2000..............1
Consolidated Statements of Income - Thirteen and thirty-nine weeks
ended October 1, 2000 and October 3, 1999......................................2
Consolidated Statements of Cash Flows - Thirty-nine weeks ended
October 1, 2000 and October 3, 1999............................................3
Notes to Consolidated Financial Statements - October 1, 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>
October 1, January 2,
2000 2000
---------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,640 $ 6,970
Merchandise inventory 8,659 15,148
Prepaid expenses 1,065 814
Store supplies and other 3,380 3,395
Deferred income taxes 120 229
--------- ---------
Total current assets 17,864 26,556
Rental inventory, net 57,496 52,357
Property, furnishings and equipment, net 51,004 44,320
Goodwill and other intangibles, net 78,793 83,539
Deposits and other assets 2,468 2,543
Deferred income taxes -- 212
--------- ---------
Total assets $ 207,625 $ 209,527
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 18,933 $ 26,243
Accrued liabilities 10,336 12,989
Current portion of long-term debt 59 263
--------- ---------
Total current liabilities 29,328 39,495
Long-term debt 50,250 44,377
Other accrued liabilities 237 234
Deferred income taxes 1,691 --
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, 11,136,167 and 12,549,667
shares issued and outstanding 11 13
Additional paid-in capital 121,841 127,537
Retained earnings (deficit) 4,267 (2,129)
--------- ---------
Total stockholders' equity 126,119 125,421
--------- ---------
Total liabilities and stockholders' equity $ 207,625 $ 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 Thirty-nine weeks ended
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 64,527 $ 59,056 $200,613 $174,353
Product sales 10,823 8,686 33,575 28,519
-------- -------- -------- --------
75,350 67,742 234,188 202,872
Cost of sales:
Cost of rental revenues 20,065 18,423 60,123 51,953
Cost of product sales 6,879 5,410 21,196 18,361
-------- -------- -------- --------
Gross margin 48,406 43,909 152,869 132,558
Operating costs and expenses:
Store operating expenses 38,375 34,997 114,483 101,070
Amortization of intangibles 1,674 1,793 5,740 5,951
General and administrative 6,464 5,477 19,038 15,512
-------- -------- -------- --------
Operating income 1,893 1,642 13,608 10,025
Interest expense, net (942) (744) (2,767) (2,424)
-------- -------- -------- --------
Income before income taxes, extraordinary item
and cumulative effect of accounting change 951 898 10,841 7,601
Income taxes 390 352 4,445 3,014
-------- -------- -------- --------
Income before extraordinary item and
cumulative effect of accounting change 561 546 6,396 4,587
Extraordinary loss on early extinguishment of
debt, net of tax -- -- -- (682)
Cumulative effect of accounting change, net of tax -- -- -- (699)
-------- -------- -------- --------
Net income $ 561 $ 546 $ 6,396 $ 3,206
======== ======== ======== ========
Basic and diluted earnings per share:
Income before extraordinary item and
cumulative effect of accounting change $ .05 $ .04 $ .55 $ .34
Extraordinary loss on early extinguishment of
debt, net of tax -- -- -- (.05)
Cumulative effect of accounting change, net of tax -- -- -- (.05)
-------- -------- -------- --------
Net income $ .05 $ .04 $ .55 $ .24
======== ======== ======== ========
Weighted average shares outstanding:
Basic 11,136 13,127 11,578 13,213
Diluted 11,186 13,515 11,608 13,582
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Thirty-nine weeks ended
October 1, October 3,
2000 1999
------------------------
<S> <C> <C>
Operating activities
Net income $ 6,396 $ 3,206
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 56,014 53,247
Deferred income taxes 2,012 1,302
Changes in operating assets and liabilities:
Merchandise inventory 6,489 (244)
Other current assets (236) (118)
Deposits and other assets 75 (1,072)
Accounts payable (7,310) (701)
Accrued liabilities (2,650) (1,062)
-------- --------
Net cash provided by operating activities 60,790 55,939
Investing activities
Business acquisitions (1,257) (3,505)
Purchases of rental inventory, net (44,149) (38,577)
Purchases of property, furnishings and equipment (17,685) (7,055)
-------- --------
Net cash used in investing activities (63,091) (49,137)
Financing activities
Net proceeds from issuance of common stock -- 43
Purchases and retirement of common stock (5,698) (2,100)
Proceeds from issuance of long-term debt 5,873 --
Principal payments on long-term debt (204) (6,915)
-------- --------
Net cash used in financing activities (29) (8,972)
-------- --------
Decrease in cash and cash equivalents (2,330) (2,170)
Cash and cash equivalents at beginning of period 6,970 6,983
-------- --------
Cash and cash equivalents at end of period $ 4,640 $ 4,813
======== ========
See accompanying notes.
</TABLE>
3
<PAGE>
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
October 1, 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 thirty-nine week
period ended October 1, 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.
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 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 (50,000 and 388,000 for the thirteen weeks ended October 1, 2000 and
October 3, 1999, respectively; 30,000 and 369,000 for the thirty-nine weeks
ended October 1, 2000 and October 3, 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 and
thirty-nine weeks ended October 3, 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 Thirty-nine weeks ended
--------------------------------- -------------------------------------
October 1, October 3, Increase October 1, October 3, Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals 85.6% 87.2% (1.6)% 85.7% 85.9% (0.2)%
Product sales 14.4 12.8 1.6 14.3 14.1 0.2
-------- -------- -------- --------- --------- ---------
100.0 100.0 -- 100.0 100.0 --
Cost of sales:
Cost of rental revenues 26.7 27.2 (0.5) 25.7 25.6 0.1
Cost of product sales 9.1 8.0 1.1 9.0 9.1 (0.1)
-------- -------- -------- --------- --------- ---------
Gross margin 64.2 64.8 (0.6) 65.3 65.3 --
Operating costs and expenses:
Store operating expenses 50.9 51.7 (0.8) 48.9 49.9 (1.0)
Amortization of intangibles 2.2 2.6 (0.4) 2.5 2.9 (0.4)
General and administrative 8.6 8.1 0.5 8.1 7.6 0.5
-------- -------- -------- --------- --------- ---------
Operating income 2.5 2.4 0.1 5.8 4.9 0.9
Interest expense, net (1.3) (1.1) (0.2) (1.2) (1.2) --
-------- -------- -------- --------- --------- ---------
Income before income taxes, extraordinary
item and cumulative effect of accounting
change 1.2 1.3 (0.1) 4.6 3.7 0.9
Income taxes 0.5 0.5 -- 1.9 1.5 0.4
-------- -------- -------- --------- --------- ---------
Income before extraordinary item and
cumulative effect of accounting change 0.7 0.8 (0.1) 2.7 2.2 0.5
Extraordinary loss on early extinguishment
of debt, net of tax -- -- -- -- (0.3) 0.3
Cumulative effect of accounting change,
net of tax -- -- -- -- (0.3) 0.3
-------- -------- -------- --------- --------- ---------
Net income 0.7% 0.8% (0.1)% 2.7% 1.6% 1.1%
======== ======== ======== ========= ========= =========
Adjusted EBITDA (in thousands) $ 7,620 $ 6,487 $ 1,133 $ 29,717 $ 25,911 $ 3,806
======== ======== ======== ========= ========= =========
Cash earnings (in thousands) $ 2,235 $ 2,339 $ (104) $ 12,136 $ 10,538 $ 1,598
======== ======== ======== ========= ========= =========
Number of stores open at end of period 976 906 70 976 906 70
======== ======== ======== ========= ========= =========
</TABLE>
6
<PAGE>
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Revenue. For the thirteen weeks and thirty-nine weeks ended October 1, 2000,
total revenues were $75.4 million and $234.2 million, respectively, increases of
11.2% and 15.4% over the comparable periods in 1999. The revenue increases were
driven by an 11.0% increase in the average number of stores open for the year as
well as a 3.6% increase in same-store revenues for the year-to-date period.
Same-store revenues for the third quarter were essentially flat due to a poor
new release schedule and competition with the Summer Olympics. The increase in
year-to-date same-store revenues was the result of several positive factors in
the first and second quarters, including (i) increased product availability for
the customer; (ii) a favorable new release schedule in the second quarter of
2000 versus the second quarter of 1999; (iii) successful, chain-wide internal
marketing programs designed to generate more consumer excitement and traffic in
the Company's base of stores; (iv) an increase in the sales of previously viewed
movies and previously played games; and (v) increases in other ancillary sales.
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 and a
deemphasis on the sale of older sell-through titles in certain stores.
Cost of Sales. Rental revenue costs as a percentage of rental revenues for the
thirteen week period ended October 1, 2000 was 31.1%, consistent with 31.2% for
the comparable 1999 period, and was 30.0% for the thirty-nine weeks ended
October 1, 2000, only a slight increase from 29.8% in the prior year. The cost
of rental revenues includes both the amortization of rental inventory and
revenue sharing expenses incurred by the Company.
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 for the thirteen weeks
ended October 1, 2000 was 36.4%, a slight decrease from 37.7% in the comparable
period of 1999. For the year-to-date period ended October 1, 2000, the product
sales margin increased to 36.9% from 35.6% in 1999. The overall increase in
profitability of product sales for the year is primarily the result of an
increase in previously viewed movie sales and a decrease in new movie sales as
discussed above. Previously viewed movies carry gross margins that are
substantially higher than the average gross margins for new movie sales and the
Company's participation in various copy depth programs provides significant
resources to achieve larger levels of previously viewed movie inventory.
Operating Costs and Expenses. Store operating expenses include store-level
expenses such as lease payments and in-store payroll. Store operating expenses
as a percentage of revenues were 50.9% and 48.9% for the thirteen weeks and
thirty-nine weeks ended October 1, 2000, respectively, as compared to 51.7% and
49.9% in 1999. The decrease in store operating expenses as a percentage of
revenue is primarily due to the same-store revenue increases for the
year-to-date period as well as the centralization of certain functions at the
general and administrative level which have resulted in store level expense
savings.
Amortization of intangibles as a percentage of total revenue for the thirteen
weeks and thirty-nine weeks ended October 1, 2000 was 2.2% and 2.5%,
respectively, slight decreases from 2.6% and 2.9% for the comparable periods in
1999. This decrease is primarily due to the increase in revenue.
General and administrative expenses as a percentage of revenue increased to 8.6%
and 8.1%, respectively, for the third quarter and year-to-date periods of 2000
from 8.1% and 7.6% for the comparable periods in 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.
As a result of the above factors, operating income increased by 15.3% for the
third quarter and 35.7% year-to-date in fiscal 2000 to $1.9 million and $13.6
million, respectively.
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 fully in Note 2 of the "Notes to
Consolidated Financial Statements."
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 thirty-nine weeks ended October 1, 2000 the Company generated
approximately $29.7 million in Adjusted EBITDA, a 14.7% increase over $25.9
million for the comparable period in 1999. The increase was primarily driven by
the operating earnings generated by a 15.4% 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 thirty-nine weeks ended October 1, 2000
increased 34.6% to $1.05 from $0.78 in the comparable period of 1999.
Contributing to this increase was a 14.5% 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 $60.8 million for the thirty-nine
weeks ended October 1, 2000 as compared to $55.9 million for the thirty-nine
weeks ended October 3, 1999. The increase in net cash provided by operating
activities was primarily the result of increased net income and depreciation, as
well as decreased levels of merchandise inventory due to fewer titles being
released at sell-through price points and a deemphasis on the sale of new movies
in certain stores. The increase was partially offset by reductions in 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 $63.1 million for the thirty-nine
weeks ended October 1, 2000 as compared to $49.1 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 used in financing activities was $29,000 for the thirty-nine weeks
ended October 1, 2000 as compared to $9.0 million for the comparable period of
1999. This decrease in funds used for financing activities is due to a net
increase in long-term debt during 2000 to fund new store growth and stock
repurchases, versus a decrease in long-term debt for the comparable period of
1999.
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 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 74 internally-developed stores
during the first three quarters 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 a second $5 million stock
repurchase plan which was completed in May 2000. During fiscal 2000, the Company
has repurchased 1.4 million shares for $5.7 million, which has been funded
through cash flow from operations and borrowings under the Facility.
At October 1, 2000, the Company had a working capital deficit of $11.5 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 and a modest potential
acquisition program. However, to fund a major 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 Financial Condition
and Results of Operations (continued)
Other Matters
Supply Contract. During the third quarter of 2000, the Company made a $2.5
million payment to a vendor pursuant to preliminary negotiations regarding an
agreement that, if executed, would modify the terms of an existing supply
contract with the vendor. The Company and the vendor have failed to reach a
final agreement on the terms of modification to the existing supply contract and
the Company has requested a refund of the $2.5 million payment. The vendor has
refused the Company's request for repayment, however, the Company believes it is
entitled to a refund and has the right to offset future amounts due under the
existing supply contract with funds currently held by the vendor.
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 continue to expand,
including its 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 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
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.
--------------------------------------
Date: November 15, 2000 /s/ J. Steven Roy
--------------------------------------
J. Steven Roy, Executive Vice President
and Chief Financial Officer
11
