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 AprilJuly 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,August
9, 2000 was 11,286,167.11,136,167.
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - AprilJuly 2, 2000 and January 2, 2000................12000.................1
Consolidated Statements of Income - Thirteen and twenty-six weeks
ended AprilJuly 2, 2000 and AprilJuly 4, 1999..............................................................21999............................................2
Consolidated Statements of Cash Flows - ThirteenTwenty-six weeks ended AprilJuly 2, 2000
and AprilJuly 4, 1999..............................................................31999...............................................................3
Notes to Consolidated Financial Statements - AprilJuly 2, 2000.....................42000......................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...........11Risk...........10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders..................10
Item 6. Exhibits and Reports on Form 8-K.....................................118-K.....................................10
Movie Gallery, Inc.
Consolidated Balance Sheets
(in thousands)
AprilJuly 2, January 2,
2000 2000
--------- -------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,1095,700 $ 6,970
Merchandise inventory 13,0199,761 15,148
Prepaid expenses 883952 814
Store supplies and other 3,6013,291 3,395
Deferred income taxes 274218 229
--------- ---------
Total current assets 23,88619,922 26,556
Rental inventory, net 53,90956,270 52,357
Property, furnishings and equipment, net 45,96047,090 44,320
Goodwill and other intangibles, net 82,35780,189 83,539
Deposits and other assets 3,8624,303 2,543
Deferred income taxes -- 212
--------- ---------
Total assets $ 209,974207,774 $ 209,527
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 23,33821,650 $ 26,243
Accrued liabilities 9,54312,429 12,989
Current portion of long-term debt 174117 263
--------- ---------
Total current liabilities 33,05534,196 39,495
Long-term debt 47,76046,200 44,377
Other accrued liabilities 177421 234
Deferred income taxes 1,7681,399 --
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, 11,992,16711,136,167 and 12,549,667
shares issued and outstanding 1211 13
Additional paid-in capital 125,431121,841 127,537
Retained earnings (deficit) 1,7713,706 (2,129)
--------- ---------
Total stockholders' equity 127,214125,558 125,421
--------- ---------
Total liabilities and stockholders' equity $ 209,974207,774 $ 209,527
========= =========
See accompanying notes.
1
Movie Gallery, Inc.
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
Thirteen weeks ended AprilTwenty-six weeks ended
July 2, AprilJuly 4, July 2, July 4,
2000 1999 --------------------2000 1999
---------------------- ----------------------
Revenues:
Rentals $ 69,77766,309 $ 59,32655,971 $ 136,086 $ 115,297
Product sales 11,716 10,294
-------- --------
81,493 69,62011,036 9,539 22,752 19,833
--------- --------- --------- ---------
77,345 65,510 158,838 135,130
Cost of sales:
Cost of rental revenues 20,591 16,62619,467 16,904 40,058 33,530
Cost of product sales 7,190 6,884
-------- --------7,127 6,067 14,317 12,951
--------- --------- --------- ---------
Gross margin 53,712 46,11050,751 42,539 104,463 88,649
Operating costs and expenses:
Store operating expenses 38,113 32,97837,995 33,095 76,108 66,073
Amortization of intangibles 1,805 1,8382,261 2,320 4,066 4,158
General and administrative 6,316 4,917
-------- --------6,258 5,118 12,574 10,035
--------- --------- --------- ---------
Operating income 7,478 6,3774,237 2,006 11,715 8,383
Interest expense, net (868) (866)
-------- --------(957) (814) (1,825) (1,680)
--------- --------- --------- ---------
Income before income taxes, extraordinary item
and cumulative effect of accounting change 6,610 5,5113,280 1,192 9,890 6,703
Income taxes 2,710 2,149
-------- --------1,345 513 4,055 2,662
--------- --------- --------- ---------
Income before extraordinary item and cumulative
effect of accounting change 3,900 3,3621,935 679 5,835 4,041
Extraordinary loss on early extinguishment of
debt, net of tax -- -- -- (682)
Cumulative effect of accounting change, net of tax -- -- -- (699)
-------- ----------------- --------- --------- ---------
Net income $ 3,9001,935 $ 1,981
======== ========679 $ 5,835 $ 2,660
========= ========= ========= =========
Basic and diluted earnings per share:
Income before extraordinary item and cumulative
effect of accounting change $ 0.320.17 $ 0.250.05 $ 0.49 $ 0.30
Extraordinary loss on early extinguishment of
debt, net of tax -- -- -- (0.05)
Cumulative effect of accounting change, net of tax -- -- -- (0.05)
-------- ----------------- --------- --------- ---------
Net income $ 0.320.17 $ 0.15
======== ========0.05 $ 0.49 $ 0.20
========= ========= ========= =========
Weighted average shares outstanding:
Basic 12,275 13,27911,321 13,231 11,798 13,256
Diluted 12,300 13,61411,368 13,623 11,827 13,619
See accompanying notes.
2
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
ThirteenTwenty-six weeks ended
AprilJuly 2, AprilJuly 4,
2000 1999
------------------------------------------
Operating activities
Operating activities
Net income $ 3,9005,835 $ 1,9812,660
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 18,75737,477 36,424
Deferred income taxes 1,935 1,8131,622 1,326
Changes in operating assets and liabilities:
Merchandise inventory 2,129 1,0645,387 1,031
Other current assets (275) 78(34) 272
Deposits and other assets (1,319) (755)(1,760) (1,030)
Accounts payable (2,905) (3,491)(4,593) (4,114)
Accrued liabilities (3,503) (1,844)(373) 91
-------- --------
Net cash provided by operating activities 18,405 18,98443,561 38,041
Investing activities
Business acquisitions (628) (65)(721) (2,485)
Purchases of rental inventory, net (14,642) (13,812)(29,991) (25,843)
Purchases of property, furnishings and equipment (5,183) (1,569)(10,098) (3,562)
-------- --------
Net cash used in investing activities (20,453) (15,446)(40,810) (31,890)
Financing activities
Net proceeds from issuance of common stock -- 6
Purchases and retirement of common stock (2,107)(5,698) (402)
Proceeds from issuance of long-term debt 3,3831,823 --
Principal payments on long-term debt (89) (5,768)(146) (8,801)
-------- --------
Net cash provided by (used in)used in financing activities 1,187 (6,170)(4,021) (9,197)
-------- --------
Decrease in cash and cash equivalents (861) (2,632)(1,270) (3,046)
Cash and cash equivalents at beginning of period 6,970 6,983
-------- --------
Cash and cash equivalents at end of period $ 6,1095,700 $ 4,3513,937
======== ========
See accompanying notes.
3
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
AprilJuly 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 thirteentwenty-six week
period ended AprilJuly 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
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(47,000 and 335,000392,000 for the thirteen weeks ended AprilJuly 2, 2000 and AprilJuly
4, 1999, respectively; 29,000 and 363,000 for the twenty-six weeks ended July 2,
2000 and July 4, 1999, respectively). No adjustments were made to net income in
the computation of basic or diluted earnings per share.
4
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
4. Cumulative Effect of a Change in Accounting Principle
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("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
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
andAnd 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.
Thirteen weeks ended Twenty-six weeks ended
---------------------------------- April-------------------------------------
July 2, AprilJuly 4, Increase July 2, July 4, Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
-------- -------- -------- --------- --------- --------
Revenues:
Rentals 85.6% 85.2%85.7% 85.4% 0.3% 85.7% 85.3% 0.4%
Product sales 14.4 14.814.3 14.6 (0.3) 14.3 14.7 (0.4)
-------- -------- -------- --------- --------- --------
100.0 100.0 -- 100.0 100.0 --
Cost of sales:
Cost of rental revenues 25.2 23.9 1.325.8 (0.6) 25.2 24.8 0.4
Cost of product sales 8.8 9.9 (1.1)9.2 9.3 (0.1) 9.0 9.6 (0.6)
-------- -------- -------- --------- --------- --------
Gross margin 66.0 66.2 (0.2)65.6 64.9 0.7 65.8 65.6 0.2
Operating costs and expenses:
Store operating expenses 46.8 47.4 (0.6)49.2 50.5 (1.3) 47.9 48.9 (1.0)
Amortization of intangibles 2.22.9 3.5 (0.6) 2.6 (0.4)3.1 (0.5)
General and administrative 8.1 7.8 7.1 0.70.3 7.9 7.4 0.5
-------- -------- -------- --------- --------- --------
Operating income 9.2 9.1 0.15.4 3.1 2.3 7.4 6.2 1.2
Interest expense, net (1.1) (1.2) (1.3) 0.1 (1.2) (1.2) --
-------- --------- --------- -------- -------- --------
Income before income taxes, extraordinary item
and cumulative effect of accounting change 8.1 7.9 0.24.2 1.8 2.4 6.2 5.0 1.2
Income taxes 3.3 3.1 0.21.7 0.8 0.9 2.5 2.0 0.5
` -------- -------- --------- --------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change 4.8 4.8 --2.5 1.0 1.5 3.7 3.0 0.7
Extraordinary loss on early extinguishment of
debt, net of tax -- (1.0) 1.0-- -- -- (0.5) 0.5
Cumulative effect of accounting change, net of tax -- (1.0) 1.0-- -- -- (0.5) 0.5
-------- -------- -------- --------- --------- --------
Net income 4.8% 2.8%2.5% 1.0% 1.5% 3.7% 2.0% 1.7%
======== ======== ======== ========= ========= ========
Adjusted EBITDA (in thousands) $ 12,6649,433 $ 11,5097,915 $ 1,1551,518 $ 22,097 $ 19,424 $ 2,673
======== ======== ======== ========= ========= ========
Cash earnings (in thousands) $ 5,7054,196 $ 5,2002,999 $ 5051,197 $ 9,901 $ 8,199 $ 1,702
======== ======== ======== ========= ========= ========
Number of stores open at end of period 960 826 134959 903 56 959 903 56
======== ======== ======== ========= ========= ========
6
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Revenue. For the thirteen weeks and twenty-six weeks ended AprilJuly 2, 2000, total
revenues were $81.5$77.3 million a 17.1% increase from $69.6and $158.8 million, respectively, increases of 18.1%
and 17.5% over the comparable periods in 1999. Revenues for the first quarterhalf of
1999. The
increase was due primarily to an2000 were driven by a record 8.5% increase in same-store revenues ofin the second
quarter, following a 3.1%, as
well as a 15.5% increase in the first quarter. The 12.6% increase in
the average number of stores open duringhas also contributed to the first
quarter of 2000 versus 1999.increase in
revenues this year. The increase in same-store revenues for the first
quarter of 2000 was the result of (i) an increasea
favorable new release schedule in the numbersecond quarter of copies2000 versus the second
quarter 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;1999; (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.stores, such as the Company's $15 million 15th Anniversary Movie Trivia Game;
(iii) the change in the Easter weekend to late April; and (iv) an increase in
the sales of previously viewed movies and previously played games. 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.points and a deemphasis on the
sale of new movies in certain stores.
6
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Cost of Sales. The cost of rental revenuesRental revenue costs as a percentage of total rental revenues for the
thirteen week period ended AprilJuly 2, 2000 was 29.5%29.4%, an increasea decrease from 28.0%30.2% for the
comparable fiscal 1999 period, and was 29.4% for the twenty-six weeks ended July
2, 2000, consistent with 29.1% in the prior year quarter.year. The cost of rental revenues
includes both the amortization of rental inventory and revenue sharing expenses
incurred by the Company. The slight increasedecrease in the second quarter is primarily due to continued expansion of the
Company's participationsignificant increase 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.same-store revenues.
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 July 2, 2000 was 35.4%, a slight decline from 36.4% in the comparable
period of 1999. For the year-to-date period ended July 2, 2000, the product
sales margin increased to 38.6%37.1% from 34.7% in the first quarter of 2000 from 33.1% in the first quarter of 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 throughout 1999
and continuing in 2000, driven by the Company's increased focus on the sale ofas
previously viewed movies.discussed. Previously viewed movies carry gross margins that are
substantially higher than the average gross margins for new movie sales and increasingthe
Company's participation in various copy depth programs provides significant
resources to support aachieve larger levels of 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.sales.
Operating Costs and Expenses. Store operating expenses which include store-level
expenses such as lease payments and in-store payroll, decreased to
46.8%payroll. Store operating expenses
as a percentage of total revenuerevenues was 49.2% and 47.9% for the first quarter ofthirteen weeks and
twenty-six weeks ended July 2, 2000, from 47.4%respectively, as compared to 50.5% and
48.9% in the first
quarter of 1999. The decrease in store operating expenses as a percentage of
revenue is primarily due to the same-store revenue increase of 3.1%increases during the first
quarterhalf of 2000 and
overall cost containmentthe year as well as the centralization of certain functions at the
general and administrative level which have resulted in store level.level expense
savings.
Amortization of intangibles as a percentage of total revenue for the thirteen
weeks and twenty-six weeks ended AprilJuly 2, 2000 was 2.2%2.9% and 2.6%, a decreaserespectively,
decreases from 2.6%3.5% and 3.1% for the comparable periodperiods in the prior year.1999. 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%
in8.1%
and 7.9%, respectively, for the firstsecond quarter and year-to-date periods of 2000
from 7.1%7.8% and 7.4% for the first quarter ofcomparable 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.
7
Movie Gallery, Inc.
Management's DiscussionAs a result of the above factors, operating income increased by 111.2% for the
second quarter and Analysis of Financial Condition39.7% year-to-date in fiscal 2000 to $4.2 million and Results of Operations (continued)$11.7
million, respectively.
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 ("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."
7
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 thirteentwenty-six weeks ended AprilJuly 2, 2000 the Company generated
approximately $12.7$22.1 million in Adjusted EBITDA, a 10.0%13.8% increase over $11.5$19.4
million for the comparable period in 1999. The increase was primarily driven by
the 17.1%17.5% 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 quarterhalf of 2000 increased 21.1%40.0% to
$0.46$0.84 from $0.38$0.60 in the first quarterhalf of 1999. Contributing to this increase was a
9.7%13.2% 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$43.6 million for the thirteentwenty-six
weeks ended AprilJuly 2, 2000 as compared to $19.0$38.0 million for the thirteentwenty-six weeks
ended AprilJuly 4, 1999. The decreaseincrease 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 isdecreased levels of merchandise inventory due to
increasesfewer titles being released at sell-through price points and a deemphasis on the
sale of new movies in various other assets and offsetting decreases of inventory, accounts payable
and accrued liabilities.certain stores. Net cash provided by operating activities
continues to be sufficient to cover capital resource and debt service needs.
8
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$40.8 million for the first quarterhalf of
2000 as compared to $15.4$31.9 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 byused in financing activities was $1.2$4.0 million for the first quarterhalf of
2000 as compared to net cash used in financing activities of $6.2$9.2 million for the comparable period of 1999. The changes from the first quarter of 1999 areThis
decrease in funds used for financing activities is due primarily to significant reductionsa net increase in
long-term debt repayments during the
first quarter of 2000 to fund increased capital needs fornew store growth and stock repurchases,
and
new store development.versus a significant decrease in long-term debt for the comparable period of
1999.
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.
8
Movie Gallery, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company grows its store base through internally developed and acquired
stores and may require capital in excess of internally generated cash flow to
achieve its desired growth. The Company opened 2448 internally-developed stores
during the first quarterhalf 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 anothera second $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 duringwas completed in May 2000. During the first half of fiscalthe
year, 2000.the Company repurchased 1.4 million shares for $5.7 million, which has
been funded primarily through cash flow from operations.
At AprilJuly 2, 2000, the Company had a working capital deficit of $9.2$14.3 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 and stock repurchases.program. However, to fund a major acquisition program, or to provide
funds in the event that the Company's need for funds is
9
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 continue to expand, including its 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.
109
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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on June 13, 2000. The following actions were taken at the Annual Meeting,
for which proxies were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended:
1. The six nominees proposed by the Board of Directors were elected as
directors by the following votes:
Name For Withheld
---- --- --------
Thomas Malugen 9,813,308 1,054,668
H. Harrison Parrish 9,813,308 1,054,668
William B. Snow 9,813,303 1,054,673
Sanford C. Sigoloff 9,813,308 1,054,668
Philip B. Smith 9,813,308 1,054,668
Joe F. Troy 9,813,308 1,054,668
2. A proposal to amend the Company's 1994 Stock Plan, as amended, to
increase the number of shares available for grant from 2,600,000 to
3,000,000 was approved by a vote of 9,194,510 for versus 1,669,266
against. There were 4,200 abstentions and no broker non-votes.
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.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,August 15, 2000 /s/ J. Steven Roy
---------------------------------------------------------------------------------
J. Steven Roy, Executive Vice President
and Chief Financial Officer
11
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