FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 0-26526
MOOVIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-1012733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Brookfield Parkway, Suite 200
Greenville, South Carolina 29607
(Address of principal executive offices)
(Zip code)
(864) 213-1700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and formal fiscal year,
if changed since last report)
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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
The number of shares of common stock, par value $0.001 per share, outstanding at
November 13, 1997 is 12,359,800.
<PAGE>
________________________________________________________________________________
________________________________________________________________________________
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MOOVIES, INC.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Assets 1997 1996
------ ---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 2,295 $ 4,196
Receivables 1,302 927
Merchandise inventory 5,220 8,265
Deferred income tax benefit 7,978 1,517
Other 3,662 2,276
------- -------
Total current assets 20,457 17,181
Videocassette rental inventory, net 26,987 24,885
Furnishings and equipment, net 37,763 30,903
Goodwill 46,644 39,718
Deposits and other assets 3,202 1,099
------- -------
$ 135,053 $113,786
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Line of credit $ 19,000 $ 19,000
Notes payable - 2,600
Current portion of long-term debt 4,500 168
Accounts payable 16,605 18,864
Accrued liabilities 12,526 3,165
------- -------
Total current liabilities 52,631 43,797
Long-term debt, less current portion 26,375 101
Deferred income tax payable 4,599 7,677
------- -------
83,605 51,575
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value; 25,000,000 shares
authorized; issued and outstanding 12,359,800
shares at September 30, 1997 and 11,926,620 shares
at December 31, 1996 12 12
Additional paid-in capital 61,885 58,336
Retained earnings (deficit) (10,449) 3,863
-------- -------
Total stockholders' equity 51,448 62,211
------- -------
$ 135,053 $113,786
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MOOVIES, INC.
Consolidated Statements of Operations
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental revenues $ 23,624 $ 19,126 $ 69,083 $ 1,760
Product sales 3,794 2,968 12,487 7,934
------- ------- -------- ------
27,418 22,094 81,570 9,694
Operating costs and expenses:
Operating expenses 26,363 16,242 67,366 2,580
Cost of product sales 3,375 1,791 9,856 4,958
Selling, general and administrative 2,181 2,409 7,214 7,019
Amortization of Goodwill 622 465 1,762 1,219
Merger related costs 472 - 472 -
Restructuring and other charges 14,060 - 15,560 -
------- ------- -------- ------
47,073 20,907 102,230 5,776
------- ------- -------- ------
Operating income (loss) (19,655) 1,187 (20,660) 3,918
Interest expense, net (1,305) (296) (2,756) (997)
Other, net (26) 3 (55) (11)
-------- ------- --------- ------
Income (loss) before income taxes and loss
on early extinguishment of debt (20,986) 894 (23,471) 2,910
Income tax expense (benefit) (8,394) 353 (9,388) 1,155
-------- ------- --------- ------
Income (loss) before extraordinary item (12,592) 541 (14,083) 1,755
Extraordinary item - loss on early
extinguishment of debt - (64) (229) (64)
------- -------- --------- -------
Net income (loss) $(12,592) $ 477 $ (14,312) $ 1,691
======== ======= ========= =======
Net income (loss) per share:
Income (loss) before extraordinary item $ (1.01) $ 0.05 $ (1.13) $ 0.18
Extraordinary item - (0.01) (0.02) (0.01)
------- ------- --------- -------
Net income (loss) per share: $ (1.01) $ 0.04 $ (1.15) $ 0.17
======= ======= ========= =======
Weighted average shares outstanding 12,517 11,850 12,414 9,904
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MOOVIES, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1997 1996
---- ----
(in thousands)
Operating activities:
<S> <C> <C>
Net income (loss) $ (14,312) $ 1,691
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 22,218 14,827
Restructuring and other charges 14,060 -
Changes in operating assets and liabilities:
Receivables (413) 1,861
Merchandise inventory 2,323 (2,585)
Other current assets (1,604) (1,495)
Deposits and other assets (2,434) (184)
Accounts payable (2,298) 2,036
Accrued liabilities 278 512
Deferred income taxes (9,539) 1,100
---------- --------
Net cash provided by operating activities 8,279 17,763
---------- --------
Investing activities:
Purchases of videocassette rental inventory, net (19,457) (15,351)
Purchases of furnishings and equipment, net (12,850) (15,600)
Proceeds from the sale of the grocery division - 746
Business acquisitions (5,004) (11,323)
---------- ---------
Net cash used in investing activities (37,311) (41,528)
---------- ---------
Financing activities:
Proceeds from line of credit borrowings 20,000 11,296
Proceeds from issuance of long-term debt 30,000 2,000
Principal payments on line of credit borrowings (19,000) -
Principal payments on long-term debt (3,869) (10,370)
Proceeds from issuance of common stock, net - 22,481
----------- ----------
Net cash provided by financing activities 27,131 25,407
----------- ----------
Increase (decrease) in cash and cash equivalents (1,901) 1,642
Cash and cash equivalents at beginning of period 4,196 3,564
----------- ----------
Cash and cash equivalents at end of period $ 2,295 $ 5,206
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,520 $ 726
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MOOVIES, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION
(1) Basis of Presentation
---------------------
Moovies, Inc. (the "Company") currently operates 267 video specialty
superstores located in Georgia, South Carolina, North Carolina,
Tennessee, Virginia, Pennsylvania, New Jersey, New York, Connecticut,
Ohio, Iowa, Colorado, Minnesota, Wisconsin, South Dakota, Nebraska and
Michigan. In addition, the Company is the franchisor for an additional
43 stores located in Florida, Texas, Louisiana and Kentucky. Moovies'
superstores rent and sell a wide range of videos and video games, rent
video players and video game equipment, and sell video accessories
such as blank cassettes, cleaning equipment and a variety of
confectionery items.
The interim financial information included herein is unaudited.
Certain information and footnote disclosures normally included in the
financial statements have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission
("SEC"), although the Company believes that the disclosures made are
adequate to make the information presented not misleading. This
financial information should be read in conjunction with the
consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K which was previously filed with
the SEC. Other than as indicated herein, there have been no
significant changes from the financial data published in that report.
In the opinion of management, such unaudited information reflects all
adjustments, consisting only of normal recurring accruals and other
adjustments as disclosed herein, necessary for a fair presentation of
the unaudited information. The results of operations for interim
periods are not necessarily indicative of the results expected for the
full year.
(2) Senior Credit Facility
----------------------
In March 1997, the Company signed a new senior credit facility (the
"Senior Facility") for up to $75.0 million. The Senior Facility
consists of (i) a five year $30.0 million long-term note with
quarterly repayments beginning on September 30, 1997; (ii) a $41.0
million capital facilities line and (iii) a $4.0 million revolver. The
Company may borrow amounts under the capital facilities line until
March 31, 1999 at which time it will begin repaying any amount
outstanding quarterly over the next three years. The interest rate of
the Senior Facility is variable based on LIBOR and the Company may
repay the Senior Facility at any time without penalty. At September
30, 1997, the Company had outstanding borrowings of $49.0 million
under the Senior Facility which consisted of a $29.0 million long-term
note, $16.0 million under the capital facilities line and $4.0 million
under the revolver. The Company determined it would not be in
compliance with certain covenants of its Senior Facility and
accordingly requested and received a waiver for certain covenants for
the period ended September 30, 1997; the Company was in compliance
with the remaining covenants.
In connection with the Senior Facility, the syndication agent received
a warrant to purchase up to 500,000 shares of common stock of the
Company at an exercise price of $6.35 which was the average stock
price over the 30 days prior to signing the commitment. The warrant
was valued at $1,250,000 and is included in additional
paid-in-capital, with the resulting original issue discount (OID) on
the loan being amortized using a method which approximates the
interest method over the term of the note.
(3) Extraordinary item
------------------
In connection with the repayment and replacement of its previous
senior credit facility and the repayment of its subordinated note
payable, the Company wrote off the remaining unamortized capitalized
costs
5
<PAGE>
associated with these credit facilities. Accordingly, the Company
recorded extraordinary items of approximately $229,000 and $64,000,
net of income taxes, in the first quarter of 1997 and the third
quarter of 1996, respectively.
(4) Movie Warehouse Acquisition
---------------------------
Concurrently with the closing of the Senior Facility, the Company
acquired certain assets and business of Movie Warehouse, Inc. and
affiliates ("Movie Warehouse") in an asset purchase transaction. The
Company acquired 21 video specialty stores and the franchisor's
interest with respect to an additional 43 video specialty stores which
will continue to operate under the Movie Warehouse name. The aggregate
consideration for the acquisition was approximately $9.6 million,
consisting of $5.0 million in cash, $2.0 million in promissory notes
due in March 1999 and $2.6 million in common stock (427,672 shares).
(5) Video Update Acquisition
------------------------
In July 1997, the Company announced that it had entered into an
agreement with Video Update, Inc. ("Video Update") pursuant to which
Video Update would acquire Moovies in a stock-for-stock merger
transaction. Terms of the agreement called for each stockholder of
Moovies to receive 1.1 shares of Video Update Class A Common Stock for
each share of Moovies Common Stock. In October 1997, the Merger
Agreement was amended and now provides that each stockholder of
Moovies will receive .75 shares of Video Update Class A Common Stock
for each share of Moovies' Common Stock. The transaction is subject to
stockholder approval of both companies and certain other terms and
conditions, and is anticipated to be completed in early 1998. During
the quarter ended September 30, 1997, the Company incurred $472,000 of
merger related costs.
(6) Restructuring and Other Charges
-------------------------------
In May 1997, the Company announced it would reduce the number of new
stores to be developed in 1997 and as a result of the reduced growth
plans it would make immediate reductions in general and administrative
expenses. The cost of implementing these reductions resulted in a
one-time charge of $1.5 million or $0.07 per share, which was recorded
in the second quarter.
During the third quarter of 1997, the Company began and completed an
extensive analysis of its store base performance and adopted a
business restructuring plan to close approximately 20 of its stores
and eliminate future store growth for at least the next twelve months.
Management concluded that certain stores were under performing, that
it was not prudent to continue to operate these locations and that
cash from operations and the lack of borrowing capacity would not
allow for continued cash outlay for opening additional stores.
This restructuring plan has resulted in the Company recording an
additional $14.1 million pretax charge for restructuring and other
charges in the third quarter of 1997. The components of the charge
include approximately (i) $4.8 million in reserves for future cash
outlays for lease terminations, miscellaneous closing costs and legal
and accounting costs, (ii) $2.8 million in asset write downs
associated with the store closings, (iii) $2.9 million in write down
of rental inventory previously expected to be transferred to and used
in new stores that will now be liquidated, (iv) $2.1 million in write
off of store design prototypes and capitalized costs associated with
the development of new sites which will not be developed, (v) $1.1
million in reserves for future cash outlays under existing contracts
for purchases of fixtures and equipment that were intended to be
placed in new stores and (vi) $400,000 for the closure of the
Company's product management center for new store inventory.
The expected store closings are not concentrated in a particular
geographic area. The principal factors considered in identifying
stores for closure included: (i) whether a store generated sufficient
cash flow at the store level to provide an acceptable return on
current
6
<PAGE>
investment; (ii) whether the latest sales trends indicated a likely
improvement in the historical store results; (iii) whether the current
or future competitive climate would make sales improvements less
likely; and (iv) whether a store's performance warrants lease renewal
where the lease was scheduled to expire within the next year. In some
situations, the timing of store closures will depend on the Company's
ability to negotiate reasonable lease termination agreements. The
lease commitments associated with the closing stores will be retired
entirely or materially diminished by one of three methods: (i) through
the normal expiration of the lease within the next year; (ii) through
the subletting of the property to another entity; or (iii) through a
negotiated lease buyout with the individual landlord. The store
closures are expected to be completed by the end of the second quarter
of 1998. The stores identified for closure had revenues and store
operating expenses (including amortization of videocassettes and cost
of goods sold) of approximately $3.0 million and $4.2 million,
respectively, for the nine months ended September 30, 1997.
During the first quarter of 1996, the Company adopted Financial
Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," issued in March 1995. In conjunction with the business
restructuring, an estimated $2.8 million impairment loss was incurred
for those stores identified to close where projected operating
performance indicated an impairment. This impairment loss related
primarily to the write-off of leasehold improvements, fixtures and
intangibles and a valuation allowance for videocassette rental
inventory associated with the stores to be closed.
Since its inception, the Company has experienced rapid growth through
new store openings and acquisitions. To meet this growth expectation,
the Company had built a strong store development department, opened a
new store product management center, developed store design
prototypes, accumulated videocassette tapes to be used in opening new
stores, started the development of a software system capable of
tracking each tape and entered into selected contracts with suppliers
for the purchase of store fixtures. As a result of the elimination of
future growth, these designs, systems, centers and contracts are no
longer necessary.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
The Company's results of operations for the three and nine months ended
September 30, 1997 and 1996, reflect the operations of the Company and include
the results of various acquisitions from and after their acquisition date.
Revenues. Revenues for the three and nine months ended September 30, 1997 were
$27,418,000 and $81,570,000, respectively, compared to revenues of $22,094,000
and $59,694,000 for the same periods in 1996. The increased revenues were a
result of the additional 51 stores opened and 23 stores acquired by the Company
subsequent to September 30, 1996. Product sales as a percentage of total
revenues were 12.8% and 14.7% for the three and nine months ended September 30,
1997, respectively, compared to 13.4% and 13.3% for the same periods in 1996.
During the third quarter of 1997, same store revenues declined by approximately
12%. Management believes this decline was principally due to (i) a lack of
consumer acceptance of a weaker selection of new release product during 1997,
(ii) an increased number of competitive openings in several of the Company's
major markets, and (iii) overall industry softness that began in the first
quarter of 1997. The Company anticipates that same store revenues will continue
to decline in the quarter ended December 31, 1997 due to the same factors
discussed above.
Operating Costs and Expenses. Operating expenses were $26,363,000 and
$67,366,000 for the three and nine months ended September 30, 1997 compared to
$16,242,000 and $42,580,000 for comparable prior year periods. Operating
expenses as a percentage of total revenues were 96.2% and 82.6% for 1997
compared to 73.5% and 71.3% for 1996. The increases primarily reflect the effect
of substantially fixed operating expenses on a per store basis compared to
revenue levels that were significantly less than the previous year on a per
store basis and higher levels of expenses for new stores as new store revenues
have not ramped up to expected levels. In addition, the Company incurred
additional operating expenses related to (i) increased advertising costs,
including a direct mail advertising campaign to inactive customers and (ii)
increased tape amortization and use of leased product. Management believes that
operating expenses as a percentage of revenue will improve in the fourth
quarter, but that it will still be higher than the previous year.
Cost of product sales increased by $1,584,000 to $3,375,000 and by $4,898,000 to
$9,856,000 for the three and nine months ended September 30, 1997. These
increases are directly related to the increase in product sales. Cost of product
sales as a percentage of product sales were 88.9% and 78.9% for the three and
nine months ended September 30, 1997 compared to 60.3% and 62.5% for 1996. The
percentage increases are due to the lower margins accepted by the Company on
selected sell-through promotions conducted during the respective periods and the
increased sales of previously viewed tapes at substantially reduced margins,
which tapes have historically been used to build the rental inventory of new
stores. Management believes that the Company will continue to experience margin
pressures in the fourth quarter; however, it does expect to see improvement from
the third quarter of 1997 results.
General and administrative expenses were $2,181,000 and $7,214,000 for the three
and nine months ended September 30, 1997, respectively, compared to $2,409,000
and $7,019,000 for the comparable prior year periods. General and administrative
expenses were 8.0% and 8.8% of total revenues for the three and nine months
ended September 30, 1997, respectively, as compared to 10.9% and 11.8%,
respectively, for the same nine months period in 1996. These reduced percentages
reflect the additional leverage achieved by the Company in 1997 as well as the
results of the restructuring of the Company's operations, which started in May
1997. Management believes that general and administrative expenses as a
percentage of revenue will continue to decline in the fourth quarter.
Interest Expense, net. Interest expense increased to $1,305,000 and $2,756,000
for the three and nine months ended September 30, 1997 from $296,000 and
$997,000 for the comparable prior year periods.
The increases are related primarily to the increased borrowings under the
Company's Senior Facility which were used to fund acquisitions, additional new
store development and operations.
Income Tax Expense. Income tax benefit for the three and nine months ended
September 30, 1997 was $8,394,000 and $9,388,000, respectively, compared to
income tax expense for the three and nine months ended September 30, 1996 of
$353,000 and $1,155,000, respectively, representing an effective income tax rate
of 40% for each period presented.
8
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Historically, the Company's primary long-term capital needs have been for
opening and acquiring new stores. The Company has funded such needs through cash
flows from operations, borrowing under credit facilities, operating equipment
leases and the net proceeds from the sale of debt and equity securities.
In March 1997, the Company signed a new senior credit facility (the "Senior
Facility") for up to $75.0 million. The Senior Facility consists of (i) a five
year $30.0 million long-term note with quarterly repayments beginning on
September 30, 1997; (ii) a $41.0 million capital facilities line and (iii) a
$4.0 million Revolver and replaced the Company's then existing credit facility.
The Company may borrow amounts under the capital facilities line until March 31,
1999 at which time it will begin repaying any amount outstanding quarterly over
the next three years. The interest rate of the Senior Facility is variable based
on LIBOR and the Company may repay the Senior Facility at any time without
penalty. At September 30, 1997, the Company had outstanding borrowings of $49.0
million under the Senior Facility which consisted of the $29.0 million long-term
note, $16.0 million under the capital facilities line and $4.0 million under a
revolving line of credit. The Company determined it would not be in compliance
with certain covenants of its Senior Facility and accordingly requested and
received a waiver for certain covenants for the period ended September 30, 1997;
the Company was in compliance with the remaining covenants. There can be no
assurance that future waivers will be received if needed.
Concurrently with the closing of the Senior Facility, the Company acquired
certain assets and business of Movie Warehouse, Inc. and affiliates ("Movie
Warehouse") in an asset purchase transaction, including 21 video specialty
stores and the franchisor's interest with respect to an additional 43 specialty
stores which will continue to operate under the Movie Warehouse name. The
aggregate consideration for the acquisition was approximately $9.6 million,
consisting of $5.0 million in cash, $2.0 million in promissory notes due in
March 1999, and $2.55 million in common stock (427,672 shares).
The Company funds its short-term working capital needs, including the
acquisition of videos and other inventory, primarily through cash from
operations. For the quarter ended September 30, 1997, cash from operations did
not meet the Company's expectations and, as a result, the amounts due to
selected vendors are now past due. The Company is working with these vendors to
develop repayment plans. The Company has maintained a satisfactory relationship
with its current vendors, including its two primary product vendors. The loss of
these two product vendors could have a material adverse effect on the Company.
Assuming the Company is able to reach satisfactory arrangements with the
selected vendors, the Company expects that cash from operations will be
sufficient to fund future video and other inventory purchases and other working
capital needs, although unanticipated expenses or revenue shortfalls likely will
cause the Company to require additional financing to fund operations. There can
be no assurance that any such sources of funds will be available or, if
available, that they will be on terms and conditions satisfactory or favorable
to the Company.
Under generally accepted accounting principles, rental inventories are treated
as non-current assets because they are not assets that are reasonably expected
to be completely realized in cash or sold in the normal business cycle. Although
the rental of this inventory generates a substantial portion of the Company's
revenue, the classification of these assets as noncurrent excludes them from the
computation of working capital. The cost of video inventory purchases, however,
is reported as a current liability until paid, and accordingly, is included in
the computation of working capital. Consequently, the Company believes working
capital is not an appropriate measure of its liquidity and it anticipates that
it will operate with a working capital deficit during 1997.
The Company's capital expenditures during the remainder of 1997 will be limited
by cash from operations and lack of additional borrowing capacity under its
Senior Facility. In May 1997, the Company reassessed its new store development
program and reduced the number of new stores expected to be opened during 1997.
The Company opened four new stores during the third quarter of 1997 and 33
during the first nine
9
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months of 1997. No additional new stores are presently being contemplated due to
cash flow constraints and the current merger plans. The Company is in the
process of closing approximately 20 stores. Management does not believe that
these store closings will have a material adverse effect on the Company's cash
flow (See also footnote 6).
In July 1997, the Company announced it had entered into an agreement ("Merger
Agreement") with Video Update Inc. ("Video Update") pursuant to which Video
Update would acquire Moovies in a stock-for-stock merger transaction (the
"Merger"). (See also footnote 5). The obligations of Video Update and the
Company to consummate the Merger are subject to the satisfaction of certain
conditions, including, but not limited to, obtaining requisite approvals of the
stockholders of Video Update and the Company, obtaining consents under the
respective bank credit agreements of Video Update and the Company (which in
respect to the Company's Senior Facility agreement requires payoff of all
amounts outstanding at the time the Merger is consummated (the "Effective
Time")), obtaining adequate financing, obtaining requisite regulatory approvals
(including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act")), the continuing accuracy, in all material respects, as
of the Effective Time of the representations and warranties made by Video Update
and the Company in the Merger Agreement, and the receipt of a legal opinion with
respect to certain tax matters. Each party has the right to waive certain of the
closing conditions referred to above. There can be no assurance that these
conditions will be met and that the Merger will be consummated.
Note regarding Private Securities Litigation Reform Act: Statements made by the
Company which are not historical facts are forward looking statements that
involve risks and uncertainties. Actual results could differ materially from
those expressed or implied in forward looking statements. All such forward
looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Important factors that could cause
financial performance to differ materially from past results and from those
expressed or implied in this document include, without limitation, the risks of
acquisition of businesses (including limited knowledge of the businesses
acquired and misrepresentations by sellers), changes in business strategy or
development plans, new store openings, availability of financing, competition,
management, ability to manage growth, loss of customers, the availability of
products, the difficulty of managing leased inventory, the effects of store
closings and restructuring on the Company's operations, lack of customer
acceptance of new video releases, and a variety of other factors. The
obligations of Video Update and the Company to consummate the Merger are subject
to the satisfaction of certain conditions, including, but not limited to,
obtaining requisite approvals of the stockholders of Video Update and the
Company, obtaining consents under the respective bank credit agreement of Video
Update and the Company (which in respect to the Company Senior Credit Facility
agreement requires payoff at of all an outstanding thereon at the time the
Merger is consummated (the "Effective Time")), obtaining adequate financing,
obtaining requisite regulatory approvals (including under the HSR Act), the
continuing accuracy, in all material respects, as of the Effective Time of the
representations and warranties made by Video Update and the Company in the
Merger Agreement, and the receipt of a certain legal opinion with respect to tax
matters. There can be no assurance that these conditions will be met and that
the Merger will be consummated. For further information on these and other
risks, see the "Risk Factors" section of Item 1 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, as well as the Company's
other filings with the Securities and Exchange Commission.
10
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
11
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PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
(a) None
(b) None
(c) Recent Sales of Unregistered Securities
The following information relates to securities of Moovies, Inc.
issued or sold during the quarter ended September 30, 1997 which were
not registered under the Securities Act in 1933, as amended (the
"Securities Act"):
From July 1997 through September 1997, an aggregate of 422_
shares of Common Stock were purchased on the Nasdaq Stock Market
and credited to participant's accounts pursuant to the Moovies,
Inc. 401(k) Plan. The Company believes that these issuances were
exempt from registration under the Securities Act by virtue of
Section 4(2) as transactions not involving a public offering.
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) See the Index to Exhibits.
(b) Current Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K with the Commission
on July 10, 1997 with respect to the Company's Merger Agreement with
Video Update
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this quarterly report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized on November 14, 1997.
MOOVIES, INC.
By:/s/ John L. Taylor
--------------------------------------------
John L. Taylor
President and Chief Executive Officer
(principal executive officer)
By:/s/ F. Andrew Mitchell
--------------------------------------------
F. Andrew Mitchell
Chief Financial Officer and Director
(principal financial officer)
13
<PAGE>
EXHIBIT INDEX
(a) The following exhibits, which are furnished with this Form 10-Q, are filed
as part of this Form 10-Q:
Exhibit No. Exhibit Description
- ----------- -------------------
2.1 -- Agreement and Plan of Merger by and among Video Update,
Inc., VUI Merger Corp. and Moovies, Inc., dated July 9, 1997
(incorporated by reference to Exhibit 2 in the Registrant's
Current Report on Form 8-K dated July 9, 1997)
2.2 -- Amendment dated as of October 27, 1997 to Agreement and Plan
of Merger by and among Video Update, Inc., VUI Merger Corp.
and Moovies, Inc., dated as of July 9, 1997. (Incorporated
by reference to Exhibit 2 in the Registrant's Current Report
on Form 8-K filed on November 10, 1997).
3.1* -- Restated Certificate of Incorporation of Moovies, Inc.
3.2 -- Restated Bylaws of Moovies, Inc. (Incorporated by reference
to Exhibit 3.2 in the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
3.3** -- Certificate of Designation, Preferences and Rights of
Participating Preferred Stock.
10.2*** -- Agreement dated July 9, 1997 by and among Rentrak
Corporation, Video Update, Inc. and Moovies, Inc.
10.3**** -- Voting Agreement dated July 9, 1997 by and among Video
Update, Inc., VUI Merger Corp., Inc., Moovies, Inc., and
certain persons listed therein as Amended and Restated as of
October 27, 1997.
11.1**** -- Statement Re Computation of Per Share Earnings
27.1**** -- Financial Data Schedule
* Incorporated by reference to the same Exhibit number in the
Registrant's Registration Statement on Form S-1 (No. 33-93562).
** Incorporated by reference to the same Exhibit number in the
Registrant's quarterly Report on Form 10-Q for the Quarter ended March
31, 1997.
*** Incorporated by reference to the same Exhibit number in the
Registrant's quarterly Report on Form 10-Q for the Quarter ended June
30, 1997.
**** Filed herewith.
AMENDED AND RESTATED VOTING AGREEMENT
AMENDED AND RESTATED VOTING AGREEMENT, dated as of October 27, 1997
(the "Agreement"), among Video Update, Inc. a Delaware corporation ("BUYER"),
VUI Merger Corp., a Delaware corporation ("SUB"), Moovies, Inc., a Delaware
corporation ("COMPANY") and the persons listed on attached Schedule 1 annexed
hereto, each with an address as set forth on Schedule 1 (such individuals being
hereinafter referred to individually as "Stockholder" and collectively as
"Stockholders").
WHEREAS, BUYER, SUB, and COMPANY have entered into an Agreement and
Plan of Merger, dated as of July 9, 1997 and an Amendment to the Agreement and
Plan of Merger dated as of the date hereof (the "Amendment"), both of which are
collectively referred to as the "Merger Agreement";
WHEREAS, BUYER, SUB, COMPANY and Stockholders have entered into a
Voting Agreement dated as of July 9, 1997 (the "July 9, 1997 Voting Agreement");
WHEREAS, BUYER, SUB, COMPANY and Stockholders, in connection with the
Amendment, wish to amend and replace the July 9, 1997 Voting Agreement with this
Amended and Restated Voting Agreement dated as of October 27, 1997;
WHEREAS, initially capitalized terms not otherwise defined herein shall
have their respective meanings as set forth in the Merger Agreement, a copy of
which has been provided to each of the Stockholders;
WHEREAS, each of the Stockholders is familiar with the terms and
conditions of the Merger Agreement and the transactions referred to therein and
contemplated thereby ("Transactions");
WHEREAS, as of the date hereof, the Stockholders beneficially (as
defined in Rule 13-d promulgated under the Exchange Act) own that number of
BUYER or COMPANY Shares set forth opposite each Stockholder's respective name on
Schedule 1; and
WHEREAS, as a condition to the willingness of BUYER, SUB and COMPANY to
enter into the Merger Agreement, and to induce BUYER, SUB and COMPANY to enter
into the Merger Agreement, BUYER SUB, and COMPANY have required that each of the
Stockholders agree and the Stockholders have agreed to vote, or cause to be
voted, all their BUYER and COMPANY Shares, as the case may be, in favor of the
Merger and the Transactions, upon the terms and subject to the conditions of
this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE 1.
AGREEMENT TO VOTE
SECTION 1.01. VOTING AGREEMENT. BUYER, SUB, COMPANY and Stockholders
hereby agree that (a) the July 9, 1997 Voting Agreement shall cease to be of any
further force or effect and (b) this Amended and Restated Voting Agreement shall
amend and replace the July 9, 1997 Voting Agreement. Until the Termination Date
(as hereinafter defined), each of the Stockholders agree with each other
Stockholder and with BUYER, SUB and COMPANY that he shall vote, or cause to be
voted, all of his BUYER and COMPANY Shares, as the case may be, and any other
BUYER, and COMPANY Shares, as the case may be, that may hereafter be acquired by
such Stockholder ("Additional Shares") in favor of the Merger and the
Transactions, as the case may be, and to the extent applicable and not
prohibited by contract, in favor of the Requisite BUYER Stockholder Proposal (as
defined in the Merger Agreement).
SECTION 1.02. NO TRANSFER. Until the Termination Date, no Stockholder
shall, except as permitted under any existing security agreement or encumbrance
relating to such Stockholder, transfer any interest in any of his or her BUYER
or COMPANY Shares, create, suffer or permit to be created any security interest,
lien, claim, pledge, option, right of first refusal, agreement, charges or other
encumbrances of any nature whatsoever on or with respect to his BUYER or COMPANY
Shares or any BUYER or COMPANY Additional Shares, other than those arising under
the Securities Act and any applicable state securities or "Blue Sky" laws.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each of the Stockholders hereby represents and warrants to the other
Stockholders and to each of BUYER, SUB and COMPANY as follows:
SECTION 2.01. AUTHORITY RELATIVE TO THIS AGREEMENT. He has all
necessary power and authority to execute and deliver this Agreement to perform
his or her obligations hereunder and to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by such
Stockholder, constitutes a legal, valid and binding obligation of Stockholder,
enforceable against him in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
SECTION 2.02. NO CONFLICT. The execution and delivery of this Agreement
by the Stockholder does not, and the performance of this Agreement by the
Stockholder will not (i) require any consent, approval, authorization or permit
of, or filing with or notification to any governmental or regulatory authority,
domestic or foreign, (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to the Stockholder or by which any property
or asset of the Stockholder is bound or affected, or (iii) result in any breach
of or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or other encumbrance of any nature whatsoever on any property or asset of the
Stockholder or pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit franchise or other instrument or obligation to
which such Stockholder is a party or by which the Stockholder, BUYER or COMPANY
or any property or asset of the Stockholder or BUYER or COMPANY is bound or
affected.
SECTION 2.03. TITLE TO THE SHARES. As of the date hereof, the
Stockholder has sole voting authority with respect to the BUYER or COMPANY
Shares set forth opposite his name which are all the shares of BUYER or COMPANY
Common Stock owned, either of record or beneficially, by such Stockholder. The
Stockholder may vote such BUYER or COMPANY Shares free and clear of all options,
rights of first refusal, limitations on the Stockholder's voting rights, (other
than those arising under the Securities Act, and any applicable state securities
or "blue sky" laws), and, the Stockholder has not appointed or granted any proxy
which is still effective, with respect to the BUYER or COMPANY Shares and, until
the Effective Time (as defined in the Merger Agreement) shall take all actions
necessary to retain ownership of the BUYER or COMPANY Shares and to preserve his
rights to comply with Section 1.01.
SECTION 2.04. NO OTHER REPRESENTATIONS OR WARRANTIES. Notwithstanding
the representations and warranties contained in this Section 2, the Stockholders
make none of the representations or warranties contained in the Merger Agreement
with respect to BUYER or COMPANY or with respect to any obligations, property or
assets of BUYER or COMPANY.
<PAGE>
ARTICLE 3.
MISCELLANEOUS
SECTION 3.01. FURTHER ASSURANCE. The parties will execute and deliver
all such further documents and instruments and take all such further action as
may be necessary in order to carry out the intentions of this Agreement.
SECTION 3.02. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 3.03. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings, both written and oral,
between or among them with respect to the subject matter hereof.
SECTION 3.04. ASSIGNMENT; PARTIES IN INTEREST. This Agreement shall be
binding upon, inure solely to the benefit of, and be enforceable by, the parties
hereto and their successors and permitted assigns. Nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 3.05. AMENDMENT; WAIVER. This Agreement may not be amended and
no term or condition hereof may be waived except by an instrument in writing
executed by the parties hereto.
SECTION 3.06. SEVERABILITY. If a court of competent jurisdiction shall
finally determine that any provision of this Agreement is invalid, illegal or
unenforceable, then all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect and such court shall modify such
invalid, illegal or unenforceable provision to the minimum extent necessary to
make same valid, legal an enforceable.
SECTION 3.07. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be delivered in person,
by telecopy, expedited delivery service (such as Federal Express) or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
If to BUYER or SUB
Video Update, Inc.
3300 World Trade Center
30 E. Seventh Street
St. Paul, MN 55101
Attention: Chief Executive Officer
with a copy to:
Lawrence H. Gennari, Esq.
Gadsby & Hannah LLP
225 Franklin Street
Boston, MA 02110
<PAGE>
if to any one or more of the Stockholders:
To the address set forth next to such stockholders name.
if to COMPANY:
Moovies, Inc.
201 Brookfield Parkway, Suite 200
Greenville, SC 29607
Attention: President and
Chief Executive Officer
with a copy to:
Jonathan Golden, Esq.
Eva Cederholm, Esq.
Arnall Golden & Gregory LLP
2800 One Atlantic Center
1201 W. Peachtree Street
Atlanta, GA 30309
Such notice shall be effective on the day following receipt of delivery
in person, by verified telecopy or by expedited delivery service and shall be
effective four days after mailing in accordance the foregoing. The person to
whom notice is to be given, and any address, may be changed from time to time in
the manner set forth above (provided that notice of any change of address shall
be effective only upon receipt thereof).
SECTION 3.08. JURY TRIAL WAIVER. All parties hereto hereby waive trial
by jury in any action, counterclaim or proceeding of any kind arising under or
out of or in connection with this Agreement, the negotiations leading thereto,
the inducements to the parties to enter into this Agreement and to the
transactions it contemplates.
SECTION 3.09. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with the laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
SECTION 3.10. HEADINGS. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 3.11. TERMINATION. This Agreement shall terminate on the first
to occur of (a) the termination of the Merger Agreement in accordance with
Section 7 thereof; (b) the closing of the Merger Agreement and the consummation
of the Transactions; or (c) one year from the date hereof (the "Termination
Date"). In the event of the termination of this Agreement, this Agreement shall
forthwith become void and there shall be no liability on the part of BUYER, SUB
or COMPANY or each of the Stockholders under this Agreement, except with regard
to any breach of this Agreement prior to such termination.
<PAGE>
SECTION 3.12. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of BUYER, SUB or COMPANY has caused this
Agreement to be executed by its officer thereunto duly authorized and each of
the Stockholders has duly executed this Agreement as of the date first written
above.
VIDEO UPDATE, INC.
By: Daniel A. Potter
_______________________
Name: Daniel A. Potter
Title: Chief Executive Officer
VUI MERGER CORP.
By: Daniel A. Potter
_______________________
Name: Daniel A. Potter
Title: President
MOOVIES, INC.
By: John Taylor
_______________________
Name: John Taylor
Title: President and Chief
Executive Officer
<PAGE>
STOCKHOLDERS:
/s/Daniel A. Potter /s/John L. Taylor
__________________________ _______________________
Daniel A. Potter John L. Taylor
/s/Daniel C. Howard /s/Arthur F. Greeder, III, individually
__________________________ ________________________________________
Daniel C. Howard Arthur F. Greeder, III, individually
/s/ Richard Bedard /s/Arthur F. Greeder, III
__________________________ _________________________________________
Richard Bedard Arthur F. Greeder, III, as joint tenant
with the right of survivorship with
Ann E. Greeder
/s/Bruce Carlson /s/Ann E. Greeder
__________________________ _________________________________________
Bruce Carlson Ann E. Greeder, as joint tenant with
the right of survivorship with Arthur
F. Greeder, III
/s/Michael Schifsky /s/F. Andrew Mitchell
_________________________ _________________________________________
Michael Schifsky F. Andrew Mitchell
/s/Robert E. Yager /s/Michael A. Yeargin
_________________________ _________________________________________
Robert E. Yager Michael A. Yeargin
/s/Jana Vaughn /s/Theodore J. Coburn
_________________________ __________________________________________
Jana Vaughn Theodore J. Coburn
/s/Paul Kelnberger /s/Douglas M. Raines
_________________________ __________________________________________
Paul Kelnberger Douglas M. Raines
/s/Bernard Patriacca /s/Charles D. Way
_________________________ _________________________________________
Bernard Patriacca Charles D. Way
/s/John M. Bedard
_________________________
John M. Bedard
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
Stockholder/Address Number of Shares
<S> <C>
1. Daniel A. Potter 270,000 shares of Video Update
4569 McDonald Drive Overlook Inc. Class A Common Stock, $.01
Stillwater, MN 55082 par value per share ("VUI Class A
Shares")
1,086,759 shares of Video Update Inc.
Class B Common Stock , $.01
par value per share ("VUI Class
B Shares")
2. John M. Bedard 150,000 VUI Class A Shares
4535 Olson Lake Trail 878,117 VUI Class B Shares
Lake Elmo, MN 55042
3. Daniel C. Howard
440 E. Montana Avenue 35,124 VUI Class B Shares
St. Paul, MN 55101
4. Christopher J. Gondeck 4,000 VUI Class A Shares
18905 9th Avenue North
Plymouth, MN
5. Richard Bedard 0 VUI Class A Shares
250 E. 6th Street, Apartment 224
St. Paul, MN 55101
6. Bruce Carslon 0 VUI Class A Shares
6476 175th Street W.
Farmington, MN 55024
7. Michael Schifsky 0 VUI Class A Shares
2707 Galatier Street
Roseville, MN 55113
8. Robert E. Yager 78,750 VUI Class A Shares
21382 Heath Avenue Crt. N.
Forest Lake, MN 55025
9. Jana Webster Vaughn 0 VUI Class A Shares
722 W. Mulberry Street
Stillwater, MN 55082
10. Paul M. Kelnberger 1,500 VUI Class A Shares
8208 Galway Road
Woodbury, MN 55125
11. Bernard Patriacca 0 VUI Class A Shares
78 Acorn Street
Millis, MA 02054
12. John L. Taylor 456,740 shares of Moovies
1401 Winding Way Common Stock, $.001 par
Taylors, SC 29687 value per share ("Moovies Shares")
87,000 Moovies Shares subject to margin call
13. F. Andrew Mitchell 221,711 Moovies Shares
101 Chelsea Lane
Greer, SC 29650
14. Douglas M. Raines 629,149 Moovies Shares
1006 Hyman Avenue 121,000 Moovies Shares subject to
Aspen, CO 81611 margin call
15. Michael A. Yeargin 637,649 Moovies Shares
1077 Altamont Road 28,000 Moovies Shares subject to
Greenville, SC 26909 margin call
16. Arthur F. Greeder, III 181,250 Moovies Shares
6806 A Oceanfront
Virginia Beach, VA 23451
17. Arthur F. Greeder, III and Ann E. Greeder, 165,150 Moovies Shares
joint tenants with the right of survivorship
6806 A Oceanfront
Virginia Beach, VA 23451
18. Charles D. Way 14,000 Moovies Shares
c/o Ryan's Family Steakhouses, Inc.
405 Lancaster Avenue
Greer, SC 29650
19. Theodore J. Coburn 0 Moovies Shares
20 Davids Lane
Chatham, MA 02633
</TABLE>
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------- ------------
1994 1995 1996 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income per share calculations:
Income (Loss) before extraordinary item $281 $ 1,765 $ 2,331 $ (12,592) $ (14,083)
Extraordinary item -- -- 64 -- 229
---- -------- -------- -------- --------
Net income $281 $ 1,765 $ 2,267 $(12,592) $ (14,312)
==== ======== ======== ======== ===========
Weighted average number
of common and common
equivalent shares are as follows:
Weighted average common
shares outstanding 3,184 10,273 12,360 12,243
Shares issued from assumed
exercise of options and
warrants (1) 211 182 157 171
---- -------- -------- -------- ---------
Weighted average number
of shares outstanding N/A 3,395 10,455 12,517 12,414
==== ======== ======== ======== ==========
Income per common and common equivalent shares:
Income before extraordinary item $ 0.52 $ 0.23 $ (1.01) (1.15)
Extraordinary item -- 0.01 -- 0.02
---- -------- -------- -------- ---------
Net income N/A $ 0.52 $ 0.22 $ (1.01) (1.17)
==== ======== ======== ======== =========
</TABLE>
- - ------------------------------------------
(1) Shares issued from assumed exercise of options and warrants include the
number of incremental shares which would result from applying the "treasury
stock method" for options and warrants, APB 15, paragraph 38 and Staff
Accouting Bulletin No. 83.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 2,295
<SECURITIES> 0
<RECEIVABLES> 1,302
<ALLOWANCES> 0
<INVENTORY> 7,978
<CURRENT-ASSETS> 20,457
<PP&E> 48,008
<DEPRECIATION> (10,245)
<TOTAL-ASSETS> 135,053
<CURRENT-LIABILITIES> 52,631
<BONDS> 26,375
0
0
<COMMON> 12
<OTHER-SE> 51,436
<TOTAL-LIABILITY-AND-EQUITY> 135,053
<SALES> 12,487
<TOTAL-REVENUES> 81,570
<CGS> 9,856
<TOTAL-COSTS> 102,230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,756
<INCOME-PRETAX> (23,471)
<INCOME-TAX> (9,388)
<INCOME-CONTINUING> (14,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 229
<CHANGES> 0
<NET-INCOME> (14,312)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
