-----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, VoWQRTjDMEqDNwPDUnUYReOGXJrbbcVE8i8+EmN+al8cgaoLXhpBWObRzpAsGBKN Yh0LGZXj2ws5CP3Z3VYtgw== /in/edgar/work/0000925178-00-000008/0000925178-00-000008.txt : 20001116 0000925178-00-000008.hdr.sgml : 20001116 ACCESSION NUMBER: 0000925178-00-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001001 FILED AS OF DATE: 20001115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOVIE GALLERY INC CENTRAL INDEX KEY: 0000925178 STANDARD INDUSTRIAL CLASSIFICATION: [7841 ] IRS NUMBER: 631120122 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24548 FILM NUMBER: 769867 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 0001.txt 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 October 1, 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.) 900 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 November 9, 2000 was 11,136,167. Movie Gallery, Inc. Index Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - October 1, 2000 and January 2, 2000..............1 Consolidated Statements of Income - Thirteen and thirty-nine weeks ended October 1, 2000 and October 3, 1999......................................2 Consolidated Statements of Cash Flows - Thirty-nine weeks ended October 1, 2000 and October 3, 1999............................................3 Notes to Consolidated Financial Statements - October 1, 2000...................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...........11 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K.....................................11 Movie Gallery, Inc. Consolidated Balance Sheets (in thousands)
October 1, January 2, 2000 2000 --------------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 4,640 $ 6,970 Merchandise inventory 8,659 15,148 Prepaid expenses 1,065 814 Store supplies and other 3,380 3,395 Deferred income taxes 120 229 --------- --------- Total current assets 17,864 26,556 Rental inventory, net 57,496 52,357 Property, furnishings and equipment, net 51,004 44,320 Goodwill and other intangibles, net 78,793 83,539 Deposits and other assets 2,468 2,543 Deferred income taxes -- 212 --------- --------- Total assets $ 207,625 $ 209,527 ========= ========= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 18,933 $ 26,243 Accrued liabilities 10,336 12,989 Current portion of long-term debt 59 263 --------- --------- Total current liabilities 29,328 39,495 Long-term debt 50,250 44,377 Other accrued liabilities 237 234 Deferred income taxes 1,691 -- Stockholders' equity: Preferred stock, $.10 par value; 2,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, $.001 par value; 35,000,000 shares authorized, 11,136,167 and 12,549,667 shares issued and outstanding 11 13 Additional paid-in capital 121,841 127,537 Retained earnings (deficit) 4,267 (2,129) --------- --------- Total stockholders' equity 126,119 125,421 --------- --------- Total liabilities and stockholders' equity $ 207,625 $ 209,527 ========= ========= See accompanying notes.
1 Movie Gallery, Inc. Consolidated Statements of Income (Unaudited) (in thousands, except per share data)
Thirteen weeks ended Thirty-nine weeks ended October 1, October 3, October 1, October 3, 2000 1999 2000 1999 -------------------------------------------------- Revenues: Rentals $ 64,527 $ 59,056 $200,613 $174,353 Product sales 10,823 8,686 33,575 28,519 -------- -------- -------- -------- 75,350 67,742 234,188 202,872 Cost of sales: Cost of rental revenues 20,065 18,423 60,123 51,953 Cost of product sales 6,879 5,410 21,196 18,361 -------- -------- -------- -------- Gross margin 48,406 43,909 152,869 132,558 Operating costs and expenses: Store operating expenses 38,375 34,997 114,483 101,070 Amortization of intangibles 1,674 1,793 5,740 5,951 General and administrative 6,464 5,477 19,038 15,512 -------- -------- -------- -------- Operating income 1,893 1,642 13,608 10,025 Interest expense, net (942) (744) (2,767) (2,424) -------- -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change 951 898 10,841 7,601 Income taxes 390 352 4,445 3,014 -------- -------- -------- -------- Income before extraordinary item and cumulative effect of accounting change 561 546 6,396 4,587 Extraordinary loss on early extinguishment of debt, net of tax -- -- -- (682) Cumulative effect of accounting change, net of tax -- -- -- (699) -------- -------- -------- -------- Net income $ 561 $ 546 $ 6,396 $ 3,206 ======== ======== ======== ======== Basic and diluted earnings per share: Income before extraordinary item and cumulative effect of accounting change $ .05 $ .04 $ .55 $ .34 Extraordinary loss on early extinguishment of debt, net of tax -- -- -- (.05) Cumulative effect of accounting change, net of tax -- -- -- (.05) -------- -------- -------- -------- Net income $ .05 $ .04 $ .55 $ .24 ======== ======== ======== ======== Weighted average shares outstanding: Basic 11,136 13,127 11,578 13,213 Diluted 11,186 13,515 11,608 13,582 See accompanying notes.
2 Movie Gallery, Inc. Consolidated Statements of Cash Flows (Unaudited) (in thousands)
Thirty-nine weeks ended October 1, October 3, 2000 1999 ------------------------ Operating activities Net income $ 6,396 $ 3,206 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 56,014 53,247 Deferred income taxes 2,012 1,302 Changes in operating assets and liabilities: Merchandise inventory 6,489 (244) Other current assets (236) (118) Deposits and other assets 75 (1,072) Accounts payable (7,310) (701) Accrued liabilities (2,650) (1,062) -------- -------- Net cash provided by operating activities 60,790 55,939 Investing activities Business acquisitions (1,257) (3,505) Purchases of rental inventory, net (44,149) (38,577) Purchases of property, furnishings and equipment (17,685) (7,055) -------- -------- Net cash used in investing activities (63,091) (49,137) Financing activities Net proceeds from issuance of common stock -- 43 Purchases and retirement of common stock (5,698) (2,100) Proceeds from issuance of long-term debt 5,873 -- Principal payments on long-term debt (204) (6,915) -------- -------- Net cash used in financing activities (29) (8,972) -------- -------- Decrease in cash and cash equivalents (2,330) (2,170) Cash and cash equivalents at beginning of period 6,970 6,983 -------- -------- Cash and cash equivalents at end of period $ 4,640 $ 4,813 ======== ======== See accompanying notes.
3 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited) October 1, 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 thirty-nine week period ended October 1, 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. 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 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 (50,000 and 388,000 for the thirteen weeks ended October 1, 2000 and October 3, 1999, respectively; 30,000 and 369,000 for the thirty-nine weeks ended October 1, 2000 and October 3, 1999, respectively). No adjustments were made to net income in the computation of basic or diluted earnings per share. 4. Cumulative Effect of a Change in Accounting Principle In April 1998, the American Institute of Certified Public Accountants issued Statement of 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 and thirty-nine weeks ended October 3, 1999 was not material. 5 Movie Gallery, Inc. Management's Discussion and Analysis of Financial Condition and 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 Thirty-nine weeks ended --------------------------------- ------------------------------------- October 1, October 3, Increase October 1, October 3, Increase 2000 1999 (Decrease) 2000 1999 (Decrease) --------- --------- --------- --------- --------- --------- Revenues: Rentals 85.6% 87.2% (1.6)% 85.7% 85.9% (0.2)% Product sales 14.4 12.8 1.6 14.3 14.1 0.2 -------- -------- -------- --------- --------- --------- 100.0 100.0 -- 100.0 100.0 -- Cost of sales: Cost of rental revenues 26.7 27.2 (0.5) 25.7 25.6 0.1 Cost of product sales 9.1 8.0 1.1 9.0 9.1 (0.1) -------- -------- -------- --------- --------- --------- Gross margin 64.2 64.8 (0.6) 65.3 65.3 -- Operating costs and expenses: Store operating expenses 50.9 51.7 (0.8) 48.9 49.9 (1.0) Amortization of intangibles 2.2 2.6 (0.4) 2.5 2.9 (0.4) General and administrative 8.6 8.1 0.5 8.1 7.6 0.5 -------- -------- -------- --------- --------- --------- Operating income 2.5 2.4 0.1 5.8 4.9 0.9 Interest expense, net (1.3) (1.1) (0.2) (1.2) (1.2) -- -------- -------- -------- --------- --------- --------- Income before income taxes, extraordinary item and cumulative effect of accounting change 1.2 1.3 (0.1) 4.6 3.7 0.9 Income taxes 0.5 0.5 -- 1.9 1.5 0.4 -------- -------- -------- --------- --------- --------- Income before extraordinary item and cumulative effect of accounting change 0.7 0.8 (0.1) 2.7 2.2 0.5 Extraordinary loss on early extinguishment of debt, net of tax -- -- -- -- (0.3) 0.3 Cumulative effect of accounting change, net of tax -- -- -- -- (0.3) 0.3 -------- -------- -------- --------- --------- --------- Net income 0.7% 0.8% (0.1)% 2.7% 1.6% 1.1% ======== ======== ======== ========= ========= ========= Adjusted EBITDA (in thousands) $ 7,620 $ 6,487 $ 1,133 $ 29,717 $ 25,911 $ 3,806 ======== ======== ======== ========= ========= ========= Cash earnings (in thousands) $ 2,235 $ 2,339 $ (104) $ 12,136 $ 10,538 $ 1,598 ======== ======== ======== ========= ========= ========= Number of stores open at end of period 976 906 70 976 906 70 ======== ======== ======== ========= ========= =========
6 Movie Gallery, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Revenue. For the thirteen weeks and thirty-nine weeks ended October 1, 2000, total revenues were $75.4 million and $234.2 million, respectively, increases of 11.2% and 15.4% over the comparable periods in 1999. The revenue increases were driven by an 11.0% increase in the average number of stores open for the year as well as a 3.6% increase in same-store revenues for the year-to-date period. Same-store revenues for the third quarter were essentially flat due to a poor new release schedule and competition with the Summer Olympics. The increase in year-to-date same-store revenues was the result of several positive factors in the first and second quarters, including (i) increased product availability for the customer; (ii) a favorable new release schedule in the second quarter of 2000 versus the second quarter of 1999; (iii) successful, chain-wide internal marketing programs designed to generate more consumer excitement and traffic in the Company's base of stores; (iv) an increase in the sales of previously viewed movies and previously played games; and (v) increases in other ancillary sales. 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 and a deemphasis on the sale of older sell-through titles in certain stores. Cost of Sales. Rental revenue costs as a percentage of rental revenues for the thirteen week period ended October 1, 2000 was 31.1%, consistent with 31.2% for the comparable 1999 period, and was 30.0% for the thirty-nine weeks ended October 1, 2000, only a slight increase from 29.8% in the prior year. The cost of rental revenues includes both the amortization of rental inventory and revenue sharing expenses incurred by the Company. 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 October 1, 2000 was 36.4%, a slight decrease from 37.7% in the comparable period of 1999. For the year-to-date period ended October 1, 2000, the product sales margin increased to 36.9% from 35.6% in 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 as discussed above. Previously viewed movies carry gross margins that are substantially higher than the average gross margins for new movie sales and the Company's participation in various copy depth programs provides significant resources to achieve larger levels of previously viewed movie inventory. Operating Costs and Expenses. Store operating expenses include store-level expenses such as lease payments and in-store payroll. Store operating expenses as a percentage of revenues were 50.9% and 48.9% for the thirteen weeks and thirty-nine weeks ended October 1, 2000, respectively, as compared to 51.7% and 49.9% in 1999. The decrease in store operating expenses as a percentage of revenue is primarily due to the same-store revenue increases for the year-to-date period as well as the centralization of certain functions at the general and administrative level which have resulted in store level expense savings. Amortization of intangibles as a percentage of total revenue for the thirteen weeks and thirty-nine weeks ended October 1, 2000 was 2.2% and 2.5%, respectively, slight decreases from 2.6% and 2.9% for the comparable periods in 1999. This decrease is primarily due to the increase in revenue. General and administrative expenses as a percentage of revenue increased to 8.6% and 8.1%, respectively, for the third quarter and year-to-date periods of 2000 from 8.1% and 7.6% for the comparable 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. As a result of the above factors, operating income increased by 15.3% for the third quarter and 35.7% year-to-date in fiscal 2000 to $1.9 million and $13.6 million, respectively. 7 Movie Gallery, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 fully in Note 2 of the "Notes to Consolidated Financial Statements." Cumulative Effect Accounting Change. Effective January 4, 1999, the Company adopted the provisions of the American Institute of Certified Public Accountants Statement of 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." 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 thirty-nine weeks ended October 1, 2000 the Company generated approximately $29.7 million in Adjusted EBITDA, a 14.7% increase over $25.9 million for the comparable period in 1999. The increase was primarily driven by the operating earnings generated by a 15.4% 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 thirty-nine weeks ended October 1, 2000 increased 34.6% to $1.05 from $0.78 in the comparable period of 1999. Contributing to this increase was a 14.5% 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 $60.8 million for the thirty-nine weeks ended October 1, 2000 as compared to $55.9 million for the thirty-nine weeks ended October 3, 1999. The increase in net cash provided by operating activities was primarily the result of increased net income and depreciation, as well as decreased levels of merchandise inventory due to fewer titles being released at sell-through price points and a deemphasis on the sale of new movies in certain stores. The increase was partially offset by reductions in accounts payable and accrued liabilities. 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 $63.1 million for the thirty-nine weeks ended October 1, 2000 as compared to $49.1 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 used in financing activities was $29,000 for the thirty-nine weeks ended October 1, 2000 as compared to $9.0 million for the comparable period of 1999. This decrease in funds used for financing activities is due to a net increase in long-term debt during 2000 to fund new store growth and stock repurchases, versus a decrease in long-term debt for the comparable period of 1999. 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 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. The Company opened 74 internally-developed stores during the first three quarters 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 a second $5 million stock repurchase plan which was completed in May 2000. During fiscal 2000, the Company has repurchased 1.4 million shares for $5.7 million, which has been funded through cash flow from operations and borrowings under the Facility. At October 1, 2000, the Company had a working capital deficit of $11.5 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. However, to fund a major 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. 9 Movie Gallery, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Other Matters Supply Contract. During the third quarter of 2000, the Company made a $2.5 million payment to a vendor pursuant to preliminary negotiations regarding an agreement that, if executed, would modify the terms of an existing supply contract with the vendor. The Company and the vendor have failed to reach a final agreement on the terms of modification to the existing supply contract and the Company has requested a refund of the $2.5 million payment. The vendor has refused the Company's request for repayment, however, the Company believes it is entitled to a refund and has the right to offset future amounts due under the existing supply contract with funds currently held by the vendor. 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, 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. 10 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 6. Exhibits and Reports on Form 8-K a) Exhibits 27 Financial Data 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. -------------------------------------- Date: November 15, 2000 /s/ J. Steven Roy -------------------------------------- J. Steven Roy, Executive Vice President and Chief Financial Officer 11 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000925178 Movie Gallery, Inc. 1,000 9-MOS DEC-31-2000 JAN-03-2000 OCT-01-2000 4,640 0 311 0 8,659 17,864 192,397 83,897 207,625 29,328 0 0 0 11 126,108 207,625 33,575 234,188 21,196 220,580 0 0 2,767 10,841 4,445 6,396 0 0 0 6,396 0.55 0.55 INCLUDES $86,155 OF RENTAL INVENTORY. INCLUDES $28,659 OF ACCUMULATED AMORTIZATION ON RENTAL INVENTORY.
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