UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended July 5, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From___________ to__________
Commission file number 0-24548
Movie Gallery, Inc.
(Exact name of registrant as specified in its charter)
Delaware 63-1120122
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
739 West Main Street, Dothan, Alabama 36301
(Address of principal executive offices) (Zip Code)
(334) 677-2108
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES X NO ____
The number of shares outstanding of the registrant's common stock as of August
12, 1998 was 13,422,380.
Movie Gallery, Inc.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - July 5, 1998 and January 4, 1998.................1
Consolidated Statements of Operations - Thirteen weeks ended
July 5, 1998 and July 6, 1997; Twenty-six weeks ended
July 5, 1998 and July 6, 1997..................................................2
Consolidated Statements of Cash Flows - Twenty-six weeks ended
July 5, 1998 and July 6, 1997..................................................3
Notes to Consolidated Financial Statements (Unaudited) - July 5, 1998..........4
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition..........................................6
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.....................................10
Movie Gallery, Inc.
Consolidated Balance Sheets
(in thousands)
July 5, January 4,
1998 1998
-------- --------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,216 $ 4,459
Merchandise inventory 9,756 13,512
Prepaid expenses 1,483 1,341
Store supplies and other 2,937 2,561
Deferred income taxes 255 531
-------- --------
Total current assets 15,647 22,404
Videocassette rental inventory, net 88,235 92,183
Property, furnishings and equipment, net 47,021 50,321
Deferred charges, net 7,827 8,940
Excess of cost over net assets acquired, net 81,002 83,381
Deposits and other assets 1,887 1,904
-------- --------
Total assets $241,619 $259,133
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,818 $ 21,517
Accrued liabilities 6,061 7,014
Current portion of long-term debt 388 4,751
-------- --------
Total current liabilities 19,267 33,282
Long-term debt 58,618 63,479
Other accrued liabilities 1,389 1,899
Deferred income taxes 13,381 12,844
Stockholders' equity:
Preferred stock, $.10 par value; 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value; 60,000,000
shares authorized, 13,421,030 and 13,418,885
shares issued and outstanding, respectively 13 13
Additional paid-in capital 131,694 131,686
Retained earnings 17,257 15,930
-------- --------
Total stockholders' equity 148,964 147,629
-------- --------
Total liabilities and stockholders' equity $241,619 $259,133
======== ========
See accompanying notes.
1
Movie Gallery, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Thirteen weeks ended Twenty-six weeks ended
July 5, July 6, July 5, July 6,
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues:
Rentals $ 54,090 $ 52,045 $ 113,023 $ 107,628
Product sales 9,572 9,283 21,130 19,378
--------- --------- --------- ---------
63,662 61,328 134,153 127,006
Operating costs and expenses:
Store operating expenses 33,341 32,860 68,391 66,014
Amortization of videocassette rental inventory 17,094 17,293 34,396 33,576
Amortization of intangibles 1,747 1,762 3,494 3,536
Cost of product sales 6,678 5,561 14,197 11,266
General and administrative 4,307 4,085 8,567 8,131
--------- --------- --------- ---------
Operating income (loss) 495 (233) 5,108 4,483
Interest expense, net (1,391) (1,546) (2,968) (3,042)
--------- --------- --------- ---------
Income (loss) before income taxes (896) (1,779) 2,140 1,441
Income taxes (341) (576) 813 648
--------- --------- --------- ---------
Net income (loss) $ (555) $ (1,203) $ 1,327 $ 793
========= ========= ========= =========
Basic and diluted earnings (loss) per share $ (.04) $ (.09) $ .10 $ .06
========= ========= ========= =========
Weighted average shares outstanding:
Basic 13,421 13,420 13,421 13,420
Diluted 13,421 13,420 13,895 13,420
See accompanying notes.
2
Movie Gallery, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Twenty-six weeks ended
July 5, July 6,
1998 1997
-------- --------
Operating activities
Net income $ 1,327 $ 793
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 44,189 42,399
Deferred income taxes 813 648
Changes in operating assets and liabilities:
Merchandise inventory 3,756 272
Other current assets (518) (405)
Deposits and other assets 17 256
Accounts payable (8,699) (6,289)
Accrued liabilities (1,463) 915
-------- --------
Net cash provided by operating activities 39,422 38,589
Investing activities
Business acquisitions (2) (262)
Purchases of videocassette rental inventory, net (30,448) (37,031)
Purchases of property, furnishings and equipment (2,999) (8,099)
-------- --------
Net cash used in investing activities (33,449) (45,392)
Financing activities
Net proceeds from issuance of common stock 8 --
Payments on notes payable (200) --
Proceeds from issuance of long-term debt -- 4,000
Principal payments on long-term debt (9,024) (129)
-------- --------
Net cash (used in) provided by financing activities (9,216) 3,871
-------- --------
Decrease in cash and cash equivalents (3,243) (2,932)
Cash and cash equivalents at beginning of period 4,459 3,982
-------- --------
Cash and cash equivalents at end of period $ 1,216 $ 1,050
======== ========
See accompanying notes.
3
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 5, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the twenty-six week
period ended July 5, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ended January 3, 1999. 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 4, 1998.
2. Financing Obligations
The Company has a Credit Agreement with First Union National Bank of North
Carolina with respect to a reducing revolving credit facility (the "Facility").
At July 5, 1998, $58.3 million was outstanding and $18.2 million was available
for borrowing under the Facility. The available amount of the Facility reduces
quarterly with a final maturity of June 30, 2000. 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 has entered into an interest rate swap agreement with a commercial
bank which effectively fixes the Company's interest rate exposure on $37 million
of the amount outstanding under the Facility at 6.22% plus an applicable margin
percentage. The interest rate swap reduces the risk of increases in interest
rates during the remaining 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.
3. Earnings Per Share
Effective January 4, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share". This statement is effective for fiscal
periods ending after December 15, 1997 and requires restatement of prior
periods' earnings per share data. Under this Statement the calculation of
primary and fully diluted earnings per share is replaced with basic and diluted
earnings per share and requires presentation of both amounts on the income
statement. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of common stock equivalents. Diluted earnings per share is
similar to the previously reported fully diluted earnings per share. Adoption of
this Statement had no significant impact on earnings per share calculations for
any period presented.
4
Movie Gallery, Inc.
Notes to Consolidated Financial Statements (Unaudited)(continued)
3. Earnings Per Share (continued)
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 (none for the thirteen weeks ended July 5, 1998 and 474,000 for the
twenty-six weeks ended July 5, 1998; none for the thirteen weeks and twenty-six
weeks ended July 6, 1997). No adjustments were made to net income (loss) in the
computation of basic or diluted earnings per share.
4. Recently Issued Accounting Standard
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting the
Costs of Start-up Activities. The SOP is effective for the Company beginning on
January 4, 1999, and requires that start-up costs capitalized prior to January
4, 1999 be written-off and any future start-up costs to be expensed as incurred.
The unamortized balance of start-up costs as of January 3, 1998 will be written
off as a cumulative effect of an accounting change as of January 4, 1999. The
impact of adopting this SOP has not yet been determined.
5
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
And Financial Condition
The following table sets forth, for the periods indicated, statement 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
--------------------------- ---------------------------
July 5, July 6, Increase July 5, July 6, Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
--------------------------- ---------------------------
Revenues:
Rentals 85.0% 84.9% 0.1% 84.2% 84.7% (0.5)%
Product sales 15.0 15.1 (0.1) 15.8 15.3 0.5
----- ----- ----- ----- ----- -----
100.0 100.0 -- 100.0 100.0 --
Operating costs and expenses:
Store operating expenses 52.4 53.6 (1.2) 51.0 52.0 (1.0)
Amortization of rental inventory 26.9 28.2 (1.3) 25.6 26.4 (0.8)
Amortization of intangibles 2.7 2.9 (0.2) 2.6 2.8 (0.2)
Cost of product sales 10.5 9.0 1.5 10.6 8.9 1.7
General and administrative 6.7 6.7 -- 6.4 6.4 --
----- ----- ----- ----- ----- -----
Total 99.2 100.4 (1.2) 96.2 96.5 (0.3)
----- ----- ----- ----- ----- -----
Operating income (loss) 0.8 (0.4) 1.2 3.8 3.5 0.3
Interest expense, net (2.2) (2.5) 0.3 (2.2) (2.4) 0.2
----- ----- ----- ----- ----- -----
Income (loss) before income taxes (1.4) (2.9) 1.5 1.6 1.1 0.5
Income taxes (0.5) (0.9) 0.4 0.6 0.5 0.1
----- ----- ----- ----- ----- -----
Net income (loss) (0.9)% (2.0)% 1.1% 1.0% 0.6% 0.4%
===== ===== ===== ===== ===== =====
Number of stores open at end of period 842 862 (20) 842 862 (20)
====== ===== ===== ===== ===== =====
For the thirteen weeks and twenty-six weeks ended July 5, 1998, revenues were
$63.7 million and $134.2 million, respectively, increases of 3.8% and 5.6% over
the comparable periods in 1997. The increase was due to an increase in
same-store sales of 4.6% and 6.0% for the thirteen week and twenty-six week
periods, respectively, offset by fewer stores in operation during 1998 versus
1997. The increase in same-store sales for the second quarter and year-to-date
period of 1998 was the result of (i) the Company's increase in depth of copies
of hit titles compared to the prior year periods; (ii) an increase in the game
rental business due to increasing consumer acceptance of the Nintendo 64 and
Sony Playstation game platforms; and (iii) successful, chain-wide internal
marketing programs designed to generate more consumer excitement and traffic in
the Company's base of stores.
Product sales as a percentage of total revenue for the thirteen weeks and
twenty-six weeks ended July 5, 1998 were 15.0% and 15.8%, respectively, compared
to 15.1% and 15.3% for the comparable periods in 1997, respectively. This
increase for the twenty-six weeks ended July 5, 1998 was primarily the result of
the Company's increasing sale of previously viewed rental inventory due, in
part, to greater quantities of rental product available to consumers.
Store operating expenses, which reflect direct store expenses such as lease
payments and in-store payroll, decreased as a percentage of revenues to 52.4%
and 51.0% for the thirteen weeks and twenty-six weeks ended July 5, 1998,
respectively, from 53.6% and 52.0% for the comparable periods in 1997,
respectively. The decrease in store operating expenses as a percentage of
6
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
And Financial Condition (continued)
revenues was primarily due to the same-store sales increase during the quarter
and some decreases in several expense categories, offset, in part, by an
increase in rental product revenue sharing expense in 1998 versus 1997.
For the second quarter and year-to-date period of 1998, amortization of
videocassette rental inventory decreased as a percentage of revenue to 26.9% and
25.6%, respectively, from 28.2% and 26.4% for the comparable periods in 1997,
respectively. The decrease in amortization as a percentage of revenues was due
primarily to the increased revenues associated with the Company's same-store
sales increase for the second quarter and first two quarters of 1998.
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 in the Company's stores. Cost of product sales increased
with the increased revenue from product sales and increased as a percentage of
revenues from product sales from 59.9% and 58.1% for the second quarter and
year-to-date period of 1997, respectively, to 69.8% and 67.2% for the second
quarter and year-to-date period of 1998, respectively. The decrease in product
sales gross margins resulted primarily from (i) an intense effort by the Company
to reduce inventory levels through discounts on selected inventory, and (ii)
lower margins on the sale of previously viewed tapes due to selling those tapes
earlier than in the past, which results in a higher write-off of the unamortized
value of the tapes at the time of sale.
Net interest expense as a percentage of revenues decreased to 2.2% for the
second quarter and year-to-date period of 1998 from 2.5% and 2.4% for the second
quarter and year-to-date period of 1997, respectively. These decreases were due
primarily to both lower total debt outstanding in 1998 versus 1997 and the
increasing revenues that the Company has achieved.
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 remodeling of existing stores, the relocation of
existing stores and the continued maintenance and upgrading of the Company's
point of sale system and management information systems. The Company has funded
inventory purchases, remodeling and relocation programs, new store opening costs
and acquisitions primarily from cash flow from operations, the proceeds of two
public equity offerings, loans under revolving credit facilities and seller
financing.
During the twenty-six weeks ended July 5, 1998, the Company generated
approximately $19.4 million in Adjusted EBITDA versus approximately $10.6
million for the comparable period in 1997, an increase of approximately 82.5%.
The increase in Adjusted EBITDA is attributable primarily to both the same-store
sales increase of 6.0% and the Company's leveraging of rental inventory
purchases in the first and second quarters of 1998 versus the comparable periods
in 1997. "Adjusted EBITDA" is earnings before interest, taxes, depreciation and
amortization, less the Company's purchase of videocassette rental inventory
which excludes inventory purchases specifically for new store openings. Adjusted
EBITDA does not take into account capital expenditures, other than purchases of
videocassette rental inventory, and does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
("GAAP"), is not to be considered as an alternative to net income or any other
GAAP measurements as a measure of operating performance and is not indicative of
cash available to fund cash needs. The Company's definition of Adjusted EBITDA
may not be identical to similarly titled measures of other companies. The
Company believes that in addition to cash flows and net income, Adjusted EBITDA
is a useful financial performance measurement for assessing the operating
performance of the Company because, together with net income and cash flows,
Adjusted EBITDA is widely used in the videocassette specialty retailing industry
to provide investors with an additional basis to evaluate the ability of the
Company to incur and service its debt and to fund growth.
7
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
And Financial Condition (continued)
Net cash provided by operating activities was $39.4 million for the twenty-six
weeks ended July 5, 1998 as compared to $38.6 million for the comparable period
in 1997. The increase was primarily due to an increase in depreciation and
amortization, offset in part by a decrease in accounts payable and other accrued
liabilities, as well as a decrease in merchandise inventory. Over the past two
quarters, the Company's merchandise inventory and accounts payable have been
reduced by 27.8% and 40.4%, respectively. Some of these decreases are associated
with seasonal changes; however, much of the merchandise inventory reduction is
attributable to the Company attempting to reduce and refine its sell-through
inventory presentation by selling older, less-attractive titles to consumers at
a discount and replacing this merchandise with fewer, more attractive product
offerings. The accounts payable decrease is due both to seasonality as well as
the fact that the Company has lowered its overall tape purchases versus a year
ago through copy depth initiatives and revenue sharing, which has lowered its
outstanding payables amount at quarter end.
Net cash used in investing activities was $33.4 million for the twenty-six weeks
ended July 5, 1998 as compared to $45.4 million for the comparable period in
1997, primarily as a result of a decrease in the expenditures of capital for
both videocassette rental inventory and property, furnishings and equipment.
Net cash used in financing activities was $9.2 million for the twenty-six weeks
ended July 5, 1998 as compared to net cash provided by financing activities of
$3.9 million for the comparable period in 1997. This change resulted directly
from the Company's improved Adjusted EBITDA performance and allowed the Company
to decrease its debt outstanding during the first two quarters of 1998 versus an
increase in debt in the comparable period of the prior year.
The Company has a Credit Agreement with First Union National Bank of North
Carolina with respect to a reducing revolving credit facility (the "Facility").
At July 5, 1998, $58.3 million was outstanding and $18.2 million was available
for borrowing under the Facility. The available amount of the Facility reduces
quarterly with a final maturity of June 30, 2000. 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. 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 that will be acceptable, if at all.
At July 5, 1998, the Company had a working capital deficit of $3.6 million, due
to the accounting treatment of its videocassette rental inventory. Videocassette
rental inventory is treated as a noncurrent asset under generally accepted
accounting principles because it is not an asset that 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.
8
Movie Gallery, Inc.
Management's Discussion and Analysis of Results of Operations
And Financial Condition (continued)
The Company believes its projected cash flow from operations, borrowing capacity
with the Facility, cash on hand and trade credit will provide the necessary
capital to fund its current plan of operations for Fiscal 1998, including its
anticipated new store openings. However, to fund a resumption of the Company's
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.
OTHER MATTERS
The Company has performed an analysis of its operating systems to determine
systems' compatibility with the upcoming year 2000. Substantially all of the
Company's operating systems are year 2000 compliant, and the Company does not
believe that there will be any material exposure related to year 2000
compatibility.
This report contains certain forward-looking statements regarding the Company.
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and in that regard is
cautioning the readers of this report that a number of important risk factors
could affect the Company's actual results of operations and may cause changes in
the Company's strategy with the result that the Company's operations and results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risk factors include competitive
factors and weather conditions within the Company's geographic markets, adequate
product availability from Hollywood 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 4, 1998.
9
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 3, 1998. The following actions were taken at the Annual Meeting, for which
proxies were solicited pursuant to Regulation 14 under the Securities Exchange
Act of 1934, as amended:
1. The six nominees proposed by the Board of Directors were
elected as directors by the following votes:
Name For Withheld
------------------- ---------- --------
Joe Thomas Malugen 10,660,348 31,335
H. Harrison Parrish 10,660,548 31,135
William B. Snow 10,660,468 31,215
Sanford C. Sigoloff 10,646,798 44,885
Phillip B. Smith 10,660,298 31,385
Joseph F. Troy 10,657,548 34,135
2. A proposal to amend the Company's 1994 Stock Plan, as
amended, to increase the number of shares available for
grant from 2,250,000 to 2,600,000 was approved by a vote of
8,238,915 for versus 2,384,268 against. There were 23,500
abstentions and 45,000 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
27.1 Financial Data Schedule - Restated for July 6, 1997
b) Reports on Form 8-K
None.
10
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: August 18, 1998 /s/ J. Steven Roy
-----------------------------------------
J. Steven Roy, Executive Vice President
and Chief Financial Officer
11