-----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, VeurPr7YsoxEbsBN4oNnG+3YVjXBwfwmyg6zqiSZ0lhkE245Lr71H+PCinHYW3m1 GCrD+UdC2DjsHf0+HENqrw== 0000925178-97-000007.txt : 19970821 0000925178-97-000007.hdr.sgml : 19970821 ACCESSION NUMBER: 0000925178-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970706 FILED AS OF DATE: 19970820 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: 0105 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24548 FILM NUMBER: 97667048 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED July 6, 1997 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: 13,418,885 shares of Common Stock as of August 11, 1997. The exhibit index to this report appears at page 12 of 15 consecutively numbered pages. Movie Gallery, Inc. Index Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - July 6, 1997 and January 5, 1997.................1 Consolidated Statements of Operations - Thirteen weeks ended July 6, 1997 and June 30, 1996; Twenty-six weeks ended July 6, 1997 and June 30, 1996.................................................2 Consolidated Statements of Cash Flows - Twenty-six weeks ended July 6, 1997 and June 30, 1996.................................................3 Notes to Consolidated Financial Statements - July 6, 1997......................4 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition..........................................7 Part II. Other Information Item 1. Legal Proceedings....................................................12 Item 4. Submission of Matters to a Vote of Security Holders..................12 Item 6. Exhibits and Reports on Form 8-K.....................................12 Movie Gallery, Inc. Consolidated Balance Sheets (dollars in thousands)
July 6 January 5 1997 1997 ----------------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 1,050 $ 3,982 Merchandise inventory 10,296 10,737 Store supplies and other 4,514 4,109 Deferred income taxes 827 913 -------- -------- Total current assets 16,687 19,741 Videocassette rental inventory, net 93,553 89,929 Property, furnishings and equipment, net 53,008 50,196 Deferred charges, net 9,988 11,151 Excess of cost over net assets acquired, net 85,711 87,822 Deposits and other assets 2,482 2,738 -------- -------- Total assets $261,429 $261,577 ======== ======== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 18,032 $ 24,321 Accrued liabilities 8,747 7,622 Current portion of long-term debt 372 374 -------- -------- Total current liabilities 27,151 32,317 Long-term debt 71,756 67,883 Other accrued liabilities 2,215 2,425 Deferred income taxes 12,790 12,228 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, 13,418,885 and 13,420,791 shares issued and outstanding, respectively 13 13 Additional paid-in capital 131,686 131,686 Retained earnings 15,818 15,025 -------- -------- Total stockholders' equity 147,517 146,724 -------- -------- Total liabilities and stockholders' equity $261,429 $261,577 ======== ======== See accompanying notes.
1 Movie Gallery, Inc. Consolidated Statements of Operations (Unaudited) (dollars in thousands, except per share data)
Thirteen weeks ended Twenty-six weeks ended July 6 June 30 July 6 June 30 1997 1996 1997 1996 -------------------------------------------------------- Revenues: Rentals $ 52,045 $ 52,254 $ 107,628 $ 106,630 Product sales 9,283 8,051 19,378 16,175 ---------- ---------- ---------- ---------- 61,328 60,305 127,006 122,805 Operating costs and expenses: Store operating expenses 32,860 30,790 66,014 60,169 Amortization of videocassette rental inventory 17,293 20,904 33,576 33,002 Amortization of intangibles 1,762 1,725 3,536 3,351 Cost of sales 5,561 4,995 11,266 9,816 General and administrative 4,085 4,991 8,131 10,092 ---------- ---------- ---------- ---------- Operating income (loss) (233) (3,100) 4,483 6,375 Interest expense, net (1,546) (1,325) (3,042) (2,501) ---------- ---------- ---------- ---------- Income (loss) before income taxes (1,779) (4,425) 1,441 3,874 Income taxes (576) (1,367) 648 1,851 ---------- ---------- ---------- ---------- Net income (loss) $ (1,203) $ (3,058) $ 793 $ 2,023 ========== ========== ========== ========== Net income (loss) per share $ (.09) $ (.23) $ .06 $ .15 ========== ========== ========== ========== Pro forma net income (loss) per share: Income (loss) before income taxes $ (4,425) $ 3,874 Pro forma income taxes (1,663) 1,476 ---------- ---------- Pro forma net income (loss) $ (2,762) $ 2,398 ========== ========== Pro forma net income (loss) per share $ (.21) $ .18 ========== ========== Weighted average shares outstanding 13,420,163 13,468,700 13,420,475 13,287,784 ========== =========== ========== ========== See accompanying notes.
2 Movie Gallery, Inc. Consolidated Statements of Cash Flows (Unaudited) (in thousands)
Twenty-six weeks ended July 6 June 30 1997 1996 ------------------------------ Operating activities Net income $ 793 $ 2,023 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 42,399 40,462 Deferred income taxes 648 1,632 Changes in operating assets and liabilities: Merchandise inventory 272 436 Other current assets (405) 352 Deposits and other assets 256 398 Accounts payable (6,289) (908) Accrued liabilities 915 1,081 -------- -------- Net cash provided by operating activities 38,589 45,476 Investing activities Business acquisitions (262) (7,630) Purchases of videocassette rental inventory, net (37,031) (37,560) Purchases of property, furnishings and equipment (8,099) (10,067) -------- -------- Net cash used in investing activities (45,392) (55,257) Financing activities Net proceeds from issuance of common stock -- 524 Net proceeds from issuance of notes payable -- 10,548 Proceeds from issuance of long-term debt 4,000 5,938 Principal payments on long-term debt (129) (6,891) -------- -------- Net cash provided by financing activities 3,871 10,119 -------- -------- Increase (decrease) in cash and cash equivalents (2,932) 338 Cash and cash equivalents at beginning of period 3,982 6,255 -------- -------- Cash and cash equivalents at end of period $ 1,050 $ 6,593 ======== ======== See accompanying notes.
3 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited) July 6, 1997 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 6, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ended January 4, 1998. 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 5, 1997. The Company's historical financial statements for all periods presented have been restated to include the results of operations of Home Vision Entertainment, Inc. ("Home Vision") and Hollywood Video, Inc. ("Hollywood Video"), acquisitions consummated on July 1, 1996 and accounted for as poolings-of-interests. 2. Videocassette Rental Inventory Effective April 1, 1996, the Company changed its method of amortizing videocassette rental inventory (which includes video games and audio books). Under the new method, videocassettes considered to be base stock are amortized over thirty-six months on a straight-line basis to a $5 salvage value. New release videocassettes are amortized as follows: (i) the fourth and any succeeding copies of each title per store are amortized on a straight-line basis over six months to an average net book value of $5 which is then amortized on a straight-line basis over the next thirty months or until the videocassette is sold, at which time the unamortized book value is charged to cost of sales; and (ii) copies one through three of each title per store are amortized as base stock. Management believes the new method results in a better matching of expenses with revenues in the Company's current operating environment and that it is compatible with changes made by its primary competitors. The new method of amortization was applied to all inventory held at April 1, 1996. The adoption of the new method of amortization was accounted for as a change in accounting estimate effected by a change in accounting principle. The application of the new method of amortizing videocassette rental inventory increased depreciation expense and cost of sales for the quarter ended June 30, 1996 by approximately $7.7 million and reduced net income and earnings per share by $4.7 million and $0.36, respectively. 4 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited)(continued) July 6, 1997 3. Provision for Business Restructuring During the third quarter of 1996 the Company completed an extensive analysis of both its store base performance and organizational structure and adopted a business restructuring plan to close approximately 50 of its stores. This analysis resulted in the Company recording a $9.6 million pretax restructuring charge in the third quarter of 1996. The components of the restructuring charge included approximately $5.4 million in reserves for future cash outlays for lease terminations, miscellaneous closing costs and legal and accounting costs, as well as approximately $4.2 million in asset write downs. The store closures are expected to be completed by the end of fiscal year 1997. Approximately $1.4 million of restructuring costs were paid and charged against the liability as of July 6, 1997. The stores identified for closure had revenues and operating losses of approximately $361,000 and $57,000, respectively, for the thirteen weeks ended July 6, 1997; $989,000 and $232,000, respectively, for the twenty-six weeks ended July 6, 1997; $1,634,000 and $642,000, respectively, for the thirteen weeks ended June 30, 1996; and $3,453,000 and $888,000, respectively, for the twenty-six weeks ended June 30, 1996. Results for 1996 include all stores identified for closure under the restructuring plan while results for 1997 include only those stores under the plan which had not been closed as of the beginning of the period. 4. Financing Obligations On July 10, 1996, the Company entered into a Credit Agreement with First Union National Bank of North Carolina with respect to a reducing revolving credit facility (the "Facility"). The Facility is unsecured, originally provided borrowings for up to $125 million and replaced the Company's previously existing line of credit agreement. During 1997, the Company voluntarily reduced the commitment to $90 million. The available amount of the Facility will reduce quarterly beginning on March 31, 1998 with a final maturity of June 30, 2000. The interest rate of the Facility is LIBOR-based and 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. At July 6, 1997, $71.0 million was outstanding and approximately $5.6 million was available for borrowing under the Facility. 5. Pro Forma Earnings Per Share Pro forma income taxes reflect income tax expense which would have been recognized by the Company as a C corporation if the 1996 acquisition of Hollywood Video had been consummated prior to January 1, 1996. Hollywood Video's historical operating results do not include any provision for income taxes as Hollywood Video was taxed as an S corporation for all periods prior to the merger. 5 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited)(continued) July 6, 1997 6. Recently Issued Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement No.128, Earnings per Share, which revises the disclosure requirements and increases the comparability of EPS data on an international basis by simplifying the existing computational guidelines in APB Opinion No. 15. The pronouncement, effective for the final quarter of the fiscal year ending January 4, 1998, will require the Company to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of adopting the pronouncement has not been determined, however, the Company believes it will not have a material impact on its primary or fully diluted earnings per share. 7. Contingencies The Company is currently engaged in litigation proceedings with certain former shareholders of Home Vision in connection with the merger of the Company and Home Vision in July 1996. These shareholders seek damages in excess of $7.5 million plus costs. The Company believes that the claims set forth in the complaint are without merit and intends to vigorously defend such claims. 6 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 6 June 30 Increase July 6 June 30 Increase 1997 1996 (Decrease) 1997 1996 (Decrease) ---------------------------------- ------------------------------------ Revenues: Rentals 84.9% 86.6% (1.7)% 84.7% 86.8% (2.1)% Product Sales 15.1 13.4 1.7 15.3 13.2 2.1 ------ ------ ------ ------ ------ ------ 100.0 100.0 - 100.0 100.0 - Operating costs and expenses: Store operating expenses 53.6 51.0 2.6 52.0 49.0 3.0 Amortization of rental inventory 28.2 34.7 (6.5) 26.4 26.9 (0.5) Amortization of intangibles 2.9 2.8 0.1 2.8 2.7 0.1 Cost of sales 9.0 8.3 0.7 8.9 8.0 0.9 General and administrative 6.7 8.3 (1.6) 6.4 8.2 (1.8) ------ ------ ------ ------ ------ ------ Total 100.4 105.1 (4.7) 96.5 94.8 1.7 ------ ------ ------ ------ ------ ------ Operating income (loss) (0.4) (5.1) 4.7 3.5 5.2 (1.7) Interest expense, net (2.5) (2.2) (0.3) (2.4) (2.0) (0.4) ------ ------ ------ ------ ------ ------ (2.9) (7.3) 4.4 1.1 3.2 (2.1) Income Taxes (0.9) (2.7) (1.8) 0.5 1.2 (0.7) ------ ------ ------ ------ ------ ------ Net income (loss) (2.0)% (4.6)% 2.6% 0.6% 2.0% (1.4)% ====== ====== ====== ====== ====== ====== Number of Stores open at end of period 862 859 3 862 859 3 ====== ====== ====== ====== ====== ======
The results of operations for all periods presented include the combined results of the Company, Home Vision and Hollywood Video. The acquisitions of Home Vision and Hollywood Video were both consummated on July 1, 1996 and accounted for as poolings-of-interests. For the thirteen weeks and twenty-six weeks ended July 6, 1997, revenues were $61.3 million and $127.0 million, respectively, increases of 1.7% and 3.4% over the same periods in 1996. The increases were primarily a result of an increase in the number of stores operated by the Company as well as the net positive effect of new store additions offset by the Company's store closings that resulted from a third quarter 1996 corporate restructuring. The increases were partially offset by a decrease in same store revenues of 2.1% for the second quarter and 3.9% year-to-date at stores operated by the Company for at least 13 months. The same store revenue decrease for the second quarter is primarily the result of: (i) a significant level of competitive openings over the past year in the Company's more urban locations; (ii) the Company's decision to implement aggressive promotional responses in certain competitive markets to preserve and build market share; and (iii) a continuation of overall industry softness that began in the first quarter, which resulted from a lack of strong new release titles during that period. Product sales as a percentage of total revenue for the thirteen weeks and twenty-six weeks ended July 6, 1997 were 15.1% and 15.3%, respectively, increases from 13.4% and 13.2% for the comparable periods in 1996. This change is primarily the result of a general increased effort by the Company to sell previously viewed videocassettes as well as general softness in the rental market due to the factors discussed above. 7 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Store operating expenses, which reflect direct store expenses such as lease payments and in-store payroll, increased as a percentage of revenues to 53.6% for the thirteen weeks ended July 6, 1997 from 51.0% for the comparable fiscal period in 1996. For the twenty-six weeks ended July 6, 1997, store operating expenses as a percentage of revenue was 52.0%, an increase from 49.0% for the comparable period in 1996. The increase in store operating expenses as a percentage of revenues is primarily due to the shortfall in revenue resulting from negative same-store revenues. Store operating expenses were also negatively impacted by increases in both fixed asset depreciation and rent and other expenses in connection with the normal renewal of leases in existing stores as well as the integration of developed stores into the Company's store base. During the second quarter of fiscal year 1996, the Company changed its method of amortizing videocassette rental inventory (which includes video games and audio books). The new amortization policy has the effect of accelerating the Company's rate of amortization of its inventory. The application of the new amortization policy, accounted for as a change in accounting estimate effected by a change in accounting principle, resulted in a one-time increase in amortization of videocassette rental inventory by $7.7 million during the second quarter of 1996. Net of the approximately $7.7 million charge discussed above, videocassette amortization expense as a percentage of revenue under the new method was approximately 22.0% for the thirteen weeks ended June 30, 1996 and 20.6% for the twenty-six weeks ended June 30, 1996. For the second quarter and the year-to-date 1997 periods, amortization of videocassette rental inventory increased as a percentage of revenue to 28.2% and 26.4%, respectively. The increase in amortization of videocassette rental inventory as a percentage of revenue is primarily the result of (i) higher overall videocassette rental inventory purchasing levels, which are based on revenue projections that were in excess of actual results achieved and (ii) an effort on the Company's part to buy top new release titles in more volume in order to satisfy customer demand. Such increased new release title purchases had the effect of increasing videocassette amortization expense due to the policy's accelerated amortization of copies four and above of any title within a given store. Cost of sales increased with the increased revenue from product sales and decreased as a percentage of revenues from product sales from 62.0% for the thirteen weeks ended June 30, 1996 to 59.9% for the thirteen weeks ended July 6, 1997. For the twenty-six weeks ended July 6, 1997, cost of sales as a percentage of revenue from product sales was 58.1%, a decrease from 60.7% for the comparable period in 1996. The increase in product sales gross margins resulted primarily from (i) 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 (ii) higher margins on sell-through products introduced within the last year. General and administrative expenses as a percentage of revenue decreased to 6.7% for the thirteen weeks ended July 6, 1997 versus 8.3% for the comparable period in 1996. For the twenty-six weeks ended July 6, 1997, general and administrative expenses as a percentage of revenue was 6.4%, a decrease from 8.2% for the comparable period in 1996. The decrease is primarily due to the efficiencies gained from the leveraging of overhead associated with acquisition activity in 1996, in particular the acquisitions of Home Vision and Hollywood Video, and a reduction in corporate overhead over the past year. 8 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Net interest expense as a percentage of revenue increased to 2.5% for the second quarter of 1997 from 2.2% for the thirteen weeks ended June 30, 1996. For the fiscal year-to-date period ended July 6, 1997, net interest expense as a percentage of revenue increased to 2.4% from 2.0% for the comparable period in 1996. The increase for these periods is due to the increased amount of debt financing that has been used to fund the Company's growth during the first half of 1996. The Company's income tax provision as a percentage of net income for the twenty-six weeks ended July 6, 1997 was 45.0%. The difference between the Company's effective rate and the blended federal and state statutory rate of 38.0% is due to the non-deductibility of certain goodwill associated with past tax-free acquisitions made by the Company. 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 upgrading and installation of the Company's POS 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 6, 1997, the Company generated approximately $9.9 million in Adjusted EBITDA versus approximately $9.3 million for the comparable period in 1996, an increase of approximately 6.5%. "Adjusted EBITDA" is earnings before interest, taxes, depreciation and amortization, excluding non-recurring charges and less the Company's purchase of videocassette rental inventory. Included in the Company's videocassette rental inventory purchases for the twenty-six weeks ended July 6, 1997 is approximately $775,000 associated with 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. Net cash provided by operating activities was $38.6 million for the twenty-six weeks ended July 6, 1997 as compared to $45.5 million for the comparable period of 1996. The decrease was primarily due to lower net income and a substantial decrease in accounts payable partially offset by increased depreciation and amortization expense. 9 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Net cash used in investing activities was $45.4 million for the twenty-six weeks ended July 6, 1997 as compared to $55.3 million for the comparable period in 1996, primarily as a result of a decrease in the total cash expended both for stores acquired and for property, furnishings and equipment. Net cash provided by financing activities decreased from $10.1 million in the first and second quarters of 1996 to $3.9 million in the comparable period in 1997. This decrease was primarily the result of a diminished level of acquisition activity discussed above. During Fiscal 1996, the Company replaced its existing $60 million revolving credit facility with a $125 million reducing revolving credit facility (the "Facility"). The Facility has a maturity date of June 30, 2000. The interest rate of the Facility is LIBOR-based and the Company may repay the Facility at any time without penalty. The Facility has covenants that restrict borrowing based upon cash flow levels. During 1997, the Company voluntarily reduced the commitment to $90 million. At July 6, 1997, $71.0 million was outstanding under the Facility with additional availability of approximately $5.6 million. The Company grows its store base through internally developed and acquired stores and requires 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, or alternative financing arrangements such as funds raised in public or private debt or equity offerings. However, there can be no assurance that financing will be available to the Company on terms which will be acceptable, if at all. At July 6, 1997, the Company had a working capital deficit of $10.5 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. 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 1997, including its anticipated new store openings. However, to fund a resumption of the Company's acquisition program (which was temporarily suspended in the latter half of 1996), to provide funds in the event that the Company's need for funds is greater than expected, 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. 10 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) 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 5, 1997. 11 Part II - Other Information Item 1. Legal Proceedings In June 1997, certain former shareholders of Home Vision Entertainment, Inc. (the "Home Vision Shareholders") filed a complaint against the Company in the U. S. District Court for the District of Maine. According to the complaint, the Home Vision Shareholders have asserted a claim for breach of contract in connection with the merger of the Company and Home Vision in July 1996. These shareholders seek damages in excess of $7.5 million plus costs. The Company believes that the claims set forth in the complaint are without merit and intends to vigorously defend such claims. In June 1997, the Company filed a complaint against certain former shareholders of Home Vision in the Circuit Court of Houston County, Alabama. The complaint alleges breach of contract and fraud in connection with the aforesaid merger. Movie Gallery seeks compensatory and punitive damages. Investors are cautioned that due to the inherent uncertainties involved in litigation, the foregoing forward-looking statements concerning Movie Gallery's belief with respect to the merits of the Home Vision shareholders' complaint and its intentions with respect thereto could differ materially from actual results. 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, 1997. 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 11,913,004 133,332 H. Harrison Parrish 11,913,704 132,632 William B. Snow 11,913,839 132,497 Sanford C. Sigoloff 11,913,504 132,832 Phillip B. Smith 11,914,139 132,197 Joseph F. Troy 11,914,139 132,197
2. A proposal to amend the Company's 1994 Stock Plan, as amended, to increase the number of shares available for grant from 1,750,000 to 2,250,000 was approved by a vote of 9,416,077 for versus 2,594,573 against. There were 7,475 abstentions and 28,211 broker non-votes. 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 None. 12 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: August 20, 1997 /s/ J. Steven Roy ------------------------------------ J. Steven Roy, Senior Vice President and Chief Financial Officer 13 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 Movie Gallery, Inc. Computation of Earnings Per Share
Thirteen weeks ended Twenty-six weeks ended July 6 June 30 July 6 June 30 1997 1996 1997 1996 ------------ ----------- ----------- ----------- Net income (loss) $(1,203,000) $(3,058,000) $ 793,000 $ 2,023,000 =========== =========== =========== =========== Shares: Weighted average common shares outstanding 13,420,163 13,205,856 13,420,475 13,057,270 Net effect of dilutive stock options - 262,844 - 230,514 ------------ ----------- ----------- ---------- Weighted average common and common equivalent shares outstanding 13,420,163 13,468,700 13,420,475 13,287,784 =========== =========== =========== ========== Net income (loss) per common and common equivalent share $ (.09) $ (.23) $ .06 $ .15 =========== =========== ========== ==========
14 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000925178 MOVIE GALLERY, INC. 1,000 6-MOS JAN-04-1998 JAN-06-1997 JUL-06-1997 1,050 0 1,002 0 10,296 16,687 258,019 111,458 261,429 27,151 0 0 0 13 147,504 261,429 19,378 127,006 11,266 122,523 0 0 3,042 1,441 648 793 0 0 0 793 0.06 0 INCLUDES $183,416 OF VIDEOCASSETTE RENTAL INVENTORY. INCLUDES $89,863 OF ACCUMULATED AMORTIZATION ON VIDEOCASSETTE RENTAL INVENTORY.
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