-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GQF/4LSmhqlhZleOoYG7nlQgFnecH6iLKPuGqLxKyCnbeLIa3Mqs/exCa7NCprfq F0EZlZmSSpPTBrMJOQeqaA== 0000898430-96-001884.txt : 19960515 0000898430-96-001884.hdr.sgml : 19960515 ACCESSION NUMBER: 0000898430-96-001884 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOVIE GALLERY INC CENTRAL INDEX KEY: 0000925178 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-VIDEO TAPE RENTAL [7841] IRS NUMBER: 631120122 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24548 FILM NUMBER: 96564316 BUSINESS ADDRESS: STREET 1: 739 W MAIN ST CITY: DOTHAN STATE: AL ZIP: 36301 BUSINESS PHONE: 3346772108 MAIL ADDRESS: STREET 1: 739 W MAIN ST CITY: DOTHAN STATE: AL ZIP: 36301 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD OF ________ 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 ---- ----- Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 12,379,308 shares of Common Stock as of May 8, 1996 - ------------------------------------------------------------------------------ The exhibit index to this report appears at page 11 of 13 consecutively numbered pages. Movie Gallery, Inc. Index Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 1996 and December 31, 1995.................................................... 1 Consolidated Statements of Income - Three months ended March 31, 1996 and 1995............................... 2 Consolidated Statements of Cash Flows - Three months ended March 31, 1996 and 1995..................................... 3 Notes to Consolidated Financial Statements - March 31, 1996............. 4 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.......................... 7 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K...............................11 Movie Gallery, Inc. Consolidated Balance Sheets (dollars in thousands) March 31 December 31 1996 1995 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 1,091 $ 5,689 Recoverable income tax 924 1,278 Merchandise inventory 7,469 9,511 Accounts receivable 2,171 1,701 Prepaid expenses and other 1,636 1,958 -------- -------- Total current assets 13,291 20,137 Videocasette rental inventory, net 72,691 63,893 Property, furnishing and equipment, net 37,803 33,974 Deferred charges, net 11,669 12,039 Excess of cost over net assets acquired 82,517 76,077 Deposits and other assets 2,176 1,761 -------- -------- Total assets $220,147 $207,881 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 38,800 $ 31,000 Accounts payable 10,674 15,575 Accrued liabilities 3,591 3,520 Current portion of long-term debt 5,449 4,988 -------- -------- Total current liabilities 58,514 55,083 Long-term debt 1,407 5,793 Deferred income taxes 13,309 10,634 Stockholders' equity Preferred stock, $.10 par value 2,000,000 shares authorized, no shares issued and outstanding - Common stock, $.001 par value; 30,000,000 shares authorized, 12,341,704 and 12,108,863 shares issued and outstanding respectively 12 12 Additional paid-in capital 122,908 117,463 Retained earnings 23,997 18,896 -------- -------- Total stockholders' equity 146,917 136,371 -------- -------- Total liabilities and stockholders' equity $220,147 $207,881 ======== ======== See accompanying notes - ---------------------- 1 Movie Gallery, Inc. Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data) Three Months Ended March 31 1996 1995 ----------- ---------- Revenues: Rentals $ 46,906 $ 19,446 Product sales 6,806 2,674 ----------- ---------- 53,712 22,120 Operating costs and expenses: Store operating expenses 24,836 9,414 Amortization of videocassette rental inventory 10,388 3,843 Amortization of intangibles 1,522 453 Costs of sales 3,960 1,858 General and administrative 3,971 1,832 ----------- ---------- Operating income 9,035 4,720 Interest expense, net (808) (139) ----------- ---------- Income before income taxes 8,227 4,581 Income taxes 3,126 1,718 ----------- ---------- Net income $ 5,101 $ 2,863 =========== ========== Net income per share $ .41 $ .30 =========== ========== Shares used in computing net income per share 12,336,484 9,475,159 =========== ========== See accompanying notes - ---------------------- 2 Movie Gallery, Inc. Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) Three Months Ended March 31 1996 1995 -------- -------- OPERATING ACTIVITIES Net income $ 5,101 $ 2,863 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 11,887 4,346 Amortization 1,522 453 Deferred income taxes 2,675 525 Changes in operating assets and liabilities: Recoverable income tax 355 1,223 Merchandise inventory 2,101 (389) Other current assets (148) (155) Deposits (416) (386) Accounts payable (4,902) 688 Accrued liabilities 71 (396) -------- -------- Net cash provided by operating activities 18,246 8,772 INVESTING ACTIVITIES Business acquisitions (5,050) (6,415) Purchase of videocassette rental inventory, net (17,045) (8,563) Purchase of property, furnishings and equipment (4,648) (2,964) -------- -------- Net cash used in investing activities (26,743) (17,942) FINANCING ACTIVITIES Proceeds from issuance of common stock 24 213 Proceeds from issuance of note payable 7,800 8,700 Principal payments on long-term debt (3,925) (375) -------- -------- Net cash provided by financing activities 3,899 8,538 -------- -------- (Decrease) increase in cash and cash equivalents (4,598) (632) Cash and cash equivalents at beginning of period 5,689 3,220 -------- -------- Cash and cash equivalents at end of period $ 1,091 $ 2,588 ======== ======== See accompanying notes - ---------------------- 3 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited) 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, they 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 three-month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. 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 year ended December 31, 1995. 2. VIDEOCASSETTE RENTAL INVENTORY Videocassette rental inventory and related accumulated amortization are as follows: March 31 December 31 1996 1995 -------- ----------- (in thousands) Videocassette rental inventory $112,400 $ 93,231 Accumulated amortization (39,709) (29,338) -------- -------- $ 72,691 $ 63,893 ======== ======== 3. PROPERTY, FURNISHINGS AND EQUIPMENT Property, furnishings and equipment are stated at cost and include costs incurred in the development and construction of new stores. Depreciation is provided over the estimated lives of the related assets on a straight-line basis. Property, furnishings and equipment consists of the following: 4 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited) (continued) 3. PROPERTY, FURNISHINGS AND EQUIPMENT (CONTINUED) March 31 December 31 1996 1995 -------- ----------- (in thousands) Land and buildings $ 1,879 $ 1,879 Furniture and fixtures 18,269 16,352 Equipment 13,327 12,159 Leasehold improvements 10,036 8,280 -------- -------- 43,511 38,670 Accumulated depreciation (5,708) (4,696) -------- -------- $ 37,803 $ 33,974 ======== ======== 4. STOCKHOLDERS' EQUITY In July 1994, the Board of Directors adopted and the stockholders of the Company approved, the 1994 Stock Option Plan (the "Plan"). The Plan, as amended, provides for the award of incentive stock options, stock appreciation rights, bonus rights and other incentive grants to employees, independent contractors and consultants. The Company has reserved 1,250,000 shares for issuance under the Plan. At March 31, 1996, options representing the right to purchase 1,205,950 shares had been issued at prices ranging from $14.00 to $42.63 per share, 1,400 of which were exercised during the three months ended March 31, 1996. Of the 1,075,550 options outstanding, options to purchase 431,850 shares were exercisable, and the remaining options become exercisable over one to five years. 5. ACQUISITIONS During the three months ended March 31, 1996, the Company acquired the assets and assumed certain liabilities, (principally store leases) of 31 video specialty stores from 11 unrelated sellers for approximately $10.2 million, including 228,080 shares of common stock. The purchase method of accounting was used to record the acquisitions. The excess of the cost over the estimated fair value of the assets acquired of $6.4 million will be amortized over 20 years on a straight-line basis. The results of operations of the acquired stores have been included in the operations of the Company since their respective dates of acquisition. 5 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited) (continued) 5. ACQUISITIONS (CONTINUED) The following unaudited pro forma information presents the results of operations as though the aforementioned acquisitions and other acquisitions which have occurred since January 1, 1995 had occurred as of the beginning of the year in which the acquisition occurred and the beginning of the immediately preceding year. Pro forma Three Months Ended March 31 1996 1995 ------------------------------------ (in thousands, except per share data) Revenues $55,364 $50,417 Net income 5,304 5,241 Net income per share $ .43 $ .42 6 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, statement of income data expressed as a percentage of total revenue, the percentage increase or decrease from the comparable period and number of stores open at the end of each period. Three months ended March 31 ---------------------------------------- Increase 1996 1995 (Decrease) ---------- ---------- ---------- Revenues: Rentals 87.3% 87.9% (0.6)% Product sales 12.7 12.1 0.6 -------- -------- -------- 100.0 100.0 - Operating costs and expenses: Operating expenses 46.2 42.6 3.6 Amortization of rental inventory 19.4 17.4 2.0 Amortization of intangibles 2.8 2.0 0.8 Cost of sales 7.4 8.4 (1.0) General and administrative 7.4 8.3 (0.9) -------- -------- -------- Total 83.2 78.7 4.5 -------- -------- -------- Operating income 16.8 21.3 (4.5) -------- -------- -------- Interest expense, net (1.5) (0.6) (0.9) -------- -------- -------- Income before income taxes 15.3 20.7 (5.4) Income taxes 5.8 7.8 (2.0) -------- -------- -------- Net income 9.5 12.9 (3.4) ======== ======== ======== Number of stores open at end of period 707 335 372 ======== ======== ======== 7 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) For the three months ended March 31, 1996, revenues were approximately $53.7 million, an increase of 143% over the same period in 1995. The increase was a result of an increase in the number of stores operated by the Company and an increase in same store sales of 2% at stores operated by the Company for at least 13 months. Product sales increased as a percentage of revenue from 12.1% for the three months ended March 31, 1995 to 12.7% for the three months ended March 31, 1996 as a result of (i) an emphasis on the sale of previously viewed rental inventory; and (ii) an increase in the variety of movie memorabilia and confectionery items sold in the stores. Store operating expenses, which reflect direct store expenses such as lease payments and in-store payroll increased as a percentage of revenues from 42.6% for the three months ended March 31, 1995 to 46.2% for the three months ended March 31, 1996. The increase in store operating expenses is due primarily to an increase in rent and other expenses in connection with the integration of developed and acquired stores into the Company's store base. Amortization of videocassette rental inventory increased as a percentage of revenue to 19.4% for the three months ended March 31, 1996 from 17.4% for the three months ended March 31, 1995 due to an increase in purchasing levels during 1995. The purchase of videocassette rental inventory represents the Company's single largest operating expenditure and the amortization of that inventory over its estimated useful life results in a substantial charge against income. The method of amortization has evolved over time in the video specialty store industry as the business has changed. The Company adopted its current method in April 1993 in preparation for its initial public offering which occurred in August 1994. The method adopted was similar to the amortization method employed by the established industry leader, Blockbuster Entertainment, and others in the industry. During late 1994 and in March 1996, Blockbuster and another large public video specialty store chain announced that they had revised their methods to accelerate the rate of amortization. Due to these changes and the evolving nature of the video specialty retail industry, the Company began a comprehensive analysis of its amortization policy during the first quarter. This analysis is continuing and the Company anticipates adopting a change in its amortization method during the second quarter consistent with the Company's operations and industry trends. The Company believes that the change will be to a method which is similar to that used by other industry leaders. While the extent of this change has not been determined, the change will accelerate the rate of amortization of its videocassette inventory thereby increasing operating expenses and reducing net income. A change would have no impact on the Company's cash flow from operations. Cost of sales increased with the increased revenue from product sales and decreased as a percentage of revenues from product sales from 69.5% for the three months ended March 31, 1995 to 58.2% for the three months ended March 31, 1996. The increase in product sales gross margins resulted primarily from an increase in the sale of previously viewed rental inventory, the unamortized value of which is expensed to cost of sales and generally generates higher margins than other product categories, and from an increase in margins on sell- through products. 8 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) General and administrative expenses decreased for the three months ended March 31, 1996 versus comparable periods in 1995 primarily as a result of operating efficiencies attained through a larger revenue base. Amortization of intangibles increased as a percentage of revenue to 2.8% for the three months ended March 31, 1996 from 2.0% for the three months ended March 31, 1995 due to cumulative effect of the substantial number of acquisitions which occurred subsequent to the Company's initial public offering in August 1994 and which were accounted for under the purchase method of accounting. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital needs are for acquiring and opening new stores and for the purchase of videocassette inventory. Other capital needs include the remodeling of existing stores and the continued upgrading and installation of the Company's point-of-sale and management information systems. Typically, the Company has funded its inventory purchases, its remodeling program and a majority of its new store opening costs from cash flow from operations. The Company has funded the balance of its capital needs, primarily for the acquisition of additional video stores, from the proceeds of two public offerings, loans under the Company's credit facility and seller financing. Net cash provided by operating activities was $18.2 million during the first quarter of 1996 (the "96 Quarter") as compared to $8.8 million during the first quarter of 1995 (the "95 Quarter"). The increase was primarily due to higher net income before depreciation, amortization and deferred taxes, a decrease in merchandise inventory, offset by a reduction in payables. Net cash used in investing activities was $26.7 million during the 96 Quarter as compared to $17.9 million during the 95 Quarter, primarily as a result of a net increase in the purchase of videocassette rental inventory resulting from the Company's growth. Net cash provided by financing activities decreased from $8.5 million in the 95 Quarter to $3.9 million in the 96 Quarter. This decrease was primarily the result of a $3.9 million reduction in long-term debt during the 96 Quarter. The Company currently has a $60 million credit facility with its bank, of which approximately $20 million was available at May 8, 1996. It is anticipated that future acquisitions will be completed using funds available under its credit facility, financing provided by sellers, alternative financing arrangements such as capital raised in public or private debt or equity offerings and the use of the Company's Common Stock. The Company currently has registered and available for issuance in future acquisitions over $100 million of its Common Stock. Since the last quarter of 1995, the Company has issued an aggregate of 544,500 shares of its Common stock in connection with the acquisition of 92 additional stores. 9 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) At March 31, 1996, the Company had a working capital deficit of $45.2 million, due to the accounting treatment of its inventory. Videocassette and video game rental inventory are treated as non-current assets under generally accepted accounting principles because they are not assets which are 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 these assets as noncurrent results in their 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. 10 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Part II - Other Information Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- a) Exhibits - 11 Computation of Earnings Per Share 27 Financial Data Schedule b) Reports on Form 8-K A Form 8-K dated February 28, 1996, in connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, was filed outlining cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of the Company. 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 14, 1996 /s/ J. Steven Roy -------------------------------------- J. Steven Roy, Senior Vice President and Chief Financial Officer 11 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 Movie Gallery, Inc. Computation of Earnings Per Share Three Months Ended March 31 1996 1995 ----------- ---------- Net income $ 5,100,800 $2,862,959 =========== ========== Shares: Weighted average common shares outstanding 12,138,659 9,203,450 Net effect of dilutive stock options 197,825 271,709 ----------- ---------- Weighted average common and common equivalent shares outstanding 12,336,484 9,475,159 =========== ========== Earnings per common and common equivalent share $ .41 $ .30 =========== ========== EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FROM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 JAN-01-1996 MAR-31-1996 1,091 0 2,171 0 7,469 13,291 155,911 45,417 220,147 58,514 0 0 0 12 146,905 220,147 6,806 53,712 3,960 44,677 0 0 808 8,227 3,126 5,101 0 0 0 5,101 0.41 0 Includes $112,400 of videocassette rental inventory. Includes $39,709 of accumulated amortization on videocassette rental inventory.
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