-----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, KgRqMgFVm7zDH5TE/Nzyqtwu9qnq6GLAFAII0xnBnSrAe5/3VDdcDFAxYJBI26as mgc/OOc0/i+/bVUppU7n/Q== 0000925178-99-000018.txt : 19990818 0000925178-99-000018.hdr.sgml : 19990818 ACCESSION NUMBER: 0000925178-99-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990817 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: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24548 FILM NUMBER: 99694342 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 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 4, 1999 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 13, 1999 was 13,232,415. Movie Gallery, Inc. Index Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - July 4, 1999 and January 3, 1999.................1 Consolidated Statements of Operations - Thirteen and twenty-six weeks ended July 4, 1999 and July 5, 1998............................................2 Consolidated Statements of Cash Flows - Twenty-six weeks ended July 4, 1999 and July 5, 1998...............................................................3 Notes to Consolidated Financial Statements - July 4, 1999......................4 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition..................................................6 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........11 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders.................11 Item 6. Exhibits and Reports on Form 8-K....................................11 Movie Gallery, Inc. Consolidated Balance Sheets (in thousands)
July 4, January 3, 1999 1999 ------------------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 3,937 $ 6,983 Merchandise inventory 11,063 11,824 Prepaid expenses 941 779 Store supplies and other 3,338 3,772 Deferred income taxes 343 312 --------- --------- Total current assets 19,622 23,670 Rental inventory, net 46,619 44,998 Property, furnishings and equipment, net 40,891 43,920 Goodwill and other intangibles, net 81,617 85,743 Deposits and other assets 2,456 1,799 Deferred income taxes 1,609 2,239 --------- --------- Total assets $ 192,814 $ 202,369 ========= ========= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 19,282 $ 23,396 Accrued liabilities 8,900 7,426 Current portion of long-term debt 256 442 --------- --------- Total current liabilities 28,438 31,264 Long-term debt 37,597 46,212 Other accrued liabilities 400 778 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, 13,232,415 and 13,315,915 shares issued and outstanding 13 13 Additional paid-in capital 130,852 131,248 Retained earnings (deficit) (4,486) (7,146) --------- --------- Total stockholders' equity 126,379 124,115 --------- --------- Total liabilities and stockholders' equity $ 192,814 $ 202,369 ========= ========= 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 4, July 5, July 4, July 5, 1999 1998 1999 1998 ------------------------------------------------ Revenues: Rentals $ 55,971 $ 54,090 $ 115,297 $ 113,023 Product sales 9,539 9,572 19,833 21,130 --------- --------- --------- --------- 65,510 63,662 135,130 134,153 Cost of sales: Cost of rental revenues 16,904 18,181 33,530 37,843 Cost of product sales 6,067 6,678 12,951 14,197 --------- --------- --------- --------- Gross profit 42,539 38,803 88,649 82,113 Operating costs and expenses: Store operating expenses 33,095 32,254 66,073 64,944 Amortization of intangibles 2,320 1,747 4,158 3,494 General and administrative 5,118 4,307 10,035 8,567 --------- --------- --------- --------- Operating income 2,006 495 8,383 5,108 Interest expense, net (814) (1,391) (1,680) (2,968) --------- --------- --------- --------- Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change 1,192 (896) 6,703 2,140 Income taxes 513 (341) 2,662 813 --------- --------- --------- --------- Income (loss) before extraordinary item and cumulative effect of accounting change 679 (555) 4,041 1,327 Extraordinary loss on early extinguishment of debt -- -- (682) -- Cumulative effect of accounting change -- -- (699) -- --------- --------- --------- --------- Net income (loss) $ 679 $ (555) $ 2,660 $ 1,327 ========= ========= ========= ========= Basic and diluted earnings (loss) per share: Income (loss) before extraordinary item and cumulative effect of accounting change $ .05 $ (.04) $ .30 $ .10 Extraordinary loss on early extinguishment of debt -- -- (.05) -- Cumulative effect of accounting change -- -- (.05) -- --------- --------- --------- --------- Net income (loss) $ .05 $ (.04) $ .20 $ .10 ========= ========= ========= ========= Weighted average shares outstanding: Basic 13,231 13,421 13,256 13,421 Diluted 13,623 13,421 13,619 13,895 See accompanying notes.
2 Movie Gallery, Inc. Consolidated Statements of Cash Flows (Unaudited) (in thousands)
Twenty-six weeks ended July 4, July 5, 1999 1998 ---------------------- Operating activities Net income $ 2,660 $ 1,327 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt 682 -- Cumulative effect of accounting change 699 -- Depreciation and amortization 36,424 44,189 Deferred income taxes 1,326 813 Changes in operating assets and liabilities: Merchandise inventory 1,031 3,756 Other current assets 272 (518) Deposits and other assets (1,030) 17 Accounts payable (4,114) (8,699) Accrued liabilities 91 (1,463) -------- -------- Net cash provided by operating activities 38,041 39,422 Investing activities Business acquisitions (2,485) (2) Purchases of rental inventory, net (25,843) (30,448) Purchases of property, furnishings and equipment (3,562) (2,999) -------- -------- Net cash used in investing activities (31,890) (33,449) Financing activities Net proceeds from issuance of common stock 6 8 Purchases of treasury stock (402) -- Payments on notes payable -- (200) Principal payments on long-term debt (8,801) (9,024) -------- -------- Net cash used in financing activities (9,197) (9,216) -------- -------- Decrease in cash and cash equivalents (3,046) (3,243) Cash and cash equivalents at beginning of period 6,983 4,459 -------- -------- Cash and cash equivalents at end of period $ 3,937 $ 1,216 ======== ======== See accompanying notes.
3 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited) July 4, 1999 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 4, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 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 3, 1999. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no impact on stockholders' equity or net income. Amortization of rental inventory and revenue sharing expenses have been combined and are presented as cost of rental revenue on the statement of operations. 2. Rental Inventory Effective July 6, 1998, the Company changed its method of amortizing videocassette and video game rental inventory. This new method accelerates the rate of amortization and has been adopted as a result of an industry trend towards significant increases in copy-depth availability from movie studios, which have resulted in earlier satisfaction of consumer demand, thereby, accelerating the rate of revenue recognition. Under the new method, the cost of base stock videocassettes, consisting of two copies per title for each store, is amortized on an accelerated basis to a net book value of $8 over six months and to a $4 salvage value over the next thirty months. The cost of non-base stock videocassettes, consisting of the third and succeeding copies of each title per store, is amortized on an accelerated basis over six months to a net book value of $4 which is then amortized on a straight-line basis over the next 30 months or until the videocassette is sold, at which time the unamortized book value is charged to cost of sales. Video games are amortized on a straight-line basis to a $10 salvage value over eighteen months. The new method of amortization has been applied to all rental inventory held at July 6, 1998. The adoption of the new method of amortization has been accounted for as a change in accounting estimate effected by a change in accounting principle. Prior to July 6, 1998, videocassettes and video games considered to be base stock were amortized over thirty-six months on a straight-line basis to a $5 salvage value. New release videocassettes and video games were amortized as follows: (i) the fourth and any succeeding copies of each title per store were amortized on a straight-line basis over six months to an average net book value of $5 which was then amortized on a straight-line basis over the next thirty months or until the videocassette or video game was sold, at which time the unamortized book value was charged to cost of sales and (ii) copies one through three of each title per store were amortized as base stock. 3. Financing Obligations On January 7, 1999, the Company entered into a new Credit Agreement with First Union National Bank of North Carolina ("First Union") with respect to a revolving credit facility (the "Facility"). The Facility provides for borrowings of up to $65 million, is unsecured and will mature in its entirety on January 7, 2002. The Company may increase the amount of the Facility to $85 million if existing banks increase their commitments or if any new banks enter the Credit Agreement. The interest rate of the Facility is based on LIBOR plus an applicable margin percentage, which depends on the Company's cash flow generation and borrowings outstanding. The Company may repay the Facility at any time without penalty. The more restrictive covenants of the Facility restrict borrowings based upon cash flow levels. 4 Movie Gallery, Inc. Notes to Consolidated Financial Statements (Unaudited)(continued) 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. 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 (392,000 and none for the thirteen weeks ended July 4, 1999 and July 5, 1998, respectively; 363,000 and 474,000 for the twenty-six weeks ended July 4, 1999 and July 5, 1998, respectively). No adjustments were made to net income in the computation of basic or diluted earnings per share. 5. 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 twenty-six weeks ended July 4, 1999 was not material. 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, statements of operations data expressed as a percentage of total revenue, the percentage increase or decrease from the comparable period and the number of stores open at the end of each period.
Thirteen weeks ended Twenty-six weeks ended -------------------------------------------------------- July 4, July 5, Increase July 4, July 5, Increase 1999 1998 (Decrease) 1999 1998 (Decrease) -------------------------------------------------------- Revenues: Rentals 85.4% 85.0% 0.4% 85.3% 84.2% 1.1% Product sales 14.6 15.0 (0.4) 14.7 15.8 (1.1) ----- ----- ----- ----- ----- ----- 100.0 100.0 -- 100.0 100.0 -- Cost of sales: Cost of rental revenues 25.8 28.5 (2.7) 24.8 28.2 (3.4) Cost of product sales 9.3 10.5 (1.2) 9.6 10.6 (1.0) ----- ----- ----- ----- ----- ----- Gross profit 64.9 61.0 3.9 65.6 61.2 4.4 Operating costs and expenses: Store operating expenses 50.5 50.7 (0.2) 48.9 48.4 0.5 Amortization of intangibles 3.5 2.7 0.8 3.1 2.6 0.5 General and administrative 7.8 6.8 1.0 7.4 6.4 1.0 ----- ----- ----- ----- ----- ----- Operating income 3.1 0.8 2.3 6.2 3.8 2.4 Interest expense, net (1.3) (2.2) 0.9 (1.2) (2.2) 1.0 ----- ----- ----- ----- ----- ----- Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change 1.8 (1.4) 3.2 5.0 1.6 3.4 Income taxes 0.8 (0.5) 1.3 2.0 0.6 1.4 ----- ----- ----- ----- ----- ----- Income (loss) before extraordinary item and cumulative effect of accounting change 1.0 (0.9) 1.9 3.0 1.0 2.0 Extraordinary loss on early extingushment of debt -- -- -- (0.5) -- (0.5) Cumulative effect of accounting change -- -- -- (0.5) -- (0.5) ----- ----- ----- ----- ----- ----- Net income (loss) 1.0% (0.9)% 1.9% 2.0% 1.0% 1.0% ===== ===== ===== ===== ===== ===== Number of stores open at end of period 903 842 61 903 842 61 ===== ===== ===== ===== ===== =====
6 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) For the thirteen weeks and twenty-six weeks ended July 4, 1999, total revenues were $65.5 million and $135.1 million, respectively, increases of 2.9% and 0.7% over the comparable periods in 1998. Revenues for the second quarter of 1999 were driven by an approximate 3.0% increase in same-store rental revenues, which follows a 2% increase in rental revenues for the first quarter of 1999. Overall same-store revenues for the second quarter of 1999 increased 1.4% due to the rental revenue growth, offset partially by a decrease in product sales revenue. For the fiscal year-to-date period, same-store revenues increased by approximately 1%. The increase in same-store rental revenues for the second quarter and year-to-date period of 1999 was the result of (i) an increase in the number of copies of new release videocassettes available to customers as a result of the Company's continuing focus on the use of copy-depth initiatives, including revenue sharing programs and other depth of copy programs available from movie studios; (ii) an increase in the game rental business due to both increasing consumer acceptance of the Nintendo 64 and Sony Playstation game platforms and an increase in the number of game titles available for these platforms; and (iii) chain-wide internal marketing programs designed to generate more consumer excitement and traffic in the Company's base of stores. The decrease in product sales for the second quarter of 1999 is primarily due to a decrease in titles released directly to sell-through by movie studios, offset in part by increases in previously viewed movie sales. In addition to the fewer titles released directly to sell-through, the year-to-date period product sales were negatively impacted by a short-term disruption in the supply of videocassettes held for sale from our primary distributor during the first quarter. Rental revenue costs as a percentage of rental revenues for the thirteen week and twenty-six week periods ended July 4, 1999 were 30.2% and 29.1%, respectively, a decrease from 33.6% and 33.5% for the comparable fiscal 1998 periods. These costs include both the amortization of rental inventory and revenue sharing expenses incurred by the Company. The decreases are primarily due to the Company's change in amortization policy during the third quarter of 1998, the Company's reduced per unit costs of acquiring rental product through the various copy-depth programs available from the movie studios, as well as the more efficient allocation of product to our store base. Effective July 6, 1998, the Company changed its amortization policy for rental inventory. The major impetus for the change in amortization policy is the changing purchasing economics within the industry, which have resulted in a significant increase in new release videos available for rental. While revenue sharing agreements and other copy-depth initiatives have increased customer satisfaction and driven increased rental revenue, the overall demand for each new release is satisfied sooner. In order to match more accurately the valuation of tape inventory with accelerated consumer demand, the Company has changed its amortization policy for rental inventory as described in Note 2 of the "Notes to Consolidated Financial Statements." Product sales costs as a percentage of product sales for the thirteen week and twenty-six week periods ended July 4, 1999 were 63.6% and 65.3%, respectively, compared to 69.8% and 67.2% for the comparable periods in 1998. The increased gross margin from product sales is primarily due to an increase in previously viewed movie sales and a decrease in new movie sales during 1999. Previously viewed movies carry gross margins that are substantially higher than the average gross margins for new movie sales. As a result of the improved margins on both rental revenues and product sales, total gross profit margins for the thirteen week and twenty-six week periods ended July 4, 1999 increased to 64.9% and 65.6%, respectively, from 61.0% and 61.2% for the comparable periods in 1998. 7 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Store operating expenses as a percentage of revenues was 50.5% and 48.9% for the thirteen weeks and twenty-six weeks ended July 4, 1999, respectively, as compared to 50.7% and 48.4% in 1998. The increase in store operating expenses was primarily the result of the acquisition of 88 stores from Blowout Entertainment, Inc. ("Blowout") in May of 1999. The overall strong increase in revenues for the second quarter of 1999 resulted in a decrease in store operating expenses as a percentage of total revenue, while the year-to-date period percentage of store operating expenses to total revenue increased slightly. Amortization of intangibles as a percentage of total revenue for the thirteen weeks and twenty-six weeks ended July 4, 1999 was 3.5% and 3.1%, respectively, increases from 2.7% and 2.6% for the comparable periods in 1998. The increased amortization of intangibles is primarily the result of the write off of certain intangible assets as a part of the Company's ongoing review of its intangible assets for impairment, as prescribed by Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." General and administrative expenses as a percentage of revenue increased to 7.8% and 7.4%, respectively, for the second quarter and year-to-date periods of 1999 from 6.8% and 6.4% for the comparable periods in 1998. The increase is primarily the result of increased staffing costs associated with the Company's ramp up in new store development, as well as expense increases resulting from the acquisition of stores from Blowout in May of 1999. Net interest expense as a percentage of revenues decreased to 1.3% and 1.2%, respectively, for the second quarter and year-to-date period of fiscal 1999 from 2.2% for the comparable periods in 1998. These decreases were due primarily to reductions in total debt outstanding from 1998 to 1999. 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 its debt obligations discussed below in "Liquidity and Capital Resources." Effective January 4, 1999, the Company adopted the provisions of the American Institute of Certified 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 5 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. 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 4, 1999 and July 5, 1998, the Company generated approximately $19.4 million in Adjusted EBITDA. "Adjusted EBITDA" is 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. Net cash provided by operating activities was $38.0 million for the twenty-six weeks ended July 4, 1999 as compared to $39.4 million for the twenty-six weeks ended July 5, 1998. Net cash provided by operating activities continues to be sufficient to cover capital resource and debt service needs. Net cash used in investing activities was $31.9 million for the year-to-date period of fiscal 1999 as compared to $33.4 million for the comparable period of 1998. This decrease in funds used for investing activities is the result of a decrease in the expenditures of capital for rental inventory, offset in part by increased capital expenditures related to property, furnishings and equipment in 1999 versus 1998 and the capital required to consummate the acquisition of Blowout in May 1999. 8 Movie Gallery, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Net cash used in financing activities was $9.2 million for the year-to-date periods of 1999 and 1998. Long-term debt paydowns were approximately the same during the first half of 1999 and 1998. On January 7, 1999, the Company entered into a new Credit Agreement with First Union National Bank of North Carolina with respect to a revolving credit facility (the "Facility"). The Facility provides for borrowings of up to $65 million, is unsecured and will mature in its entirety on January 7, 2002. The Company may increase the amount of the Facility to $85 million if existing banks increase their commitments or if any new banks enter the Credit Agreement. The interest rate of the Facility is based on LIBOR plus an applicable margin percentage, which depends on the Company's cash flow generation and borrowings outstanding. The Company may repay the Facility at any time without penalty. The more restrictive covenants of the Facility restrict borrowings based upon cash flow levels. 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 has announced a planned increase in its unit growth in 1999, which is planned to be accomplished both through opening internally developed stores and making selective, accretive and strategically consistent acquisitions, if available to the Company on reasonable terms. 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. At July 4, 1999, the Company had a working capital deficit of $8.8 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 Fiscal 1999, including its anticipated new store openings. However, to fund a resumption of an aggressive 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 Results of Operations and Financial Condition (continued) Other Matters In March 1999, the Company entered into a definitive agreement to purchase the assets and assume the leases of 88 stores operated by Blowout for an aggregate purchase price of approximately $2.4 million. Blowout operates video stores within large retailers such as Wal-Mart. The acquisition closed in May 1999. The Company plans to launch an e-commerce sales and information site at www.moviegallery.com by the middle of September. This site will primarily sell new videocassette and DVD movies, previously viewed movies and games to its customer base. The Company anticipates early stage losses related to this venture. However, the Company does not currently believe that these losses will exceed $800,000 during the remaining portion of 1999. 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, including its point-of-sale system. While the Company has begun to actively replace or modify certain software and hardware so that they will properly function on January 1, 2000 and thereafter, the costs associated with these modifications or replacements have not been material to the Company nor does the Company believe these costs will be material in the future. The Company's payroll software is not currently year 2000 compliant. However, the Company is in the process of replacing its payroll system with a year 2000 compliant package that will provide management with better functionality and reporting. While the current payroll software is the Company's largest year 2000 issue to resolve, the Company believes that its planned software and hardware modifications, as well as its replacement efforts will result in no significant operational problems. However, if such modifications and conversions are not made, or are not completed timely, the year 2000 issue could have a material adverse impact on the operations of the Company. The Company is currently not aware of any major vendor that is not actively managing the process of being year 2000 compliant by December 31, 1999. Thus, the Company does not believe that there are any vendors with a year 2000 issue that would materially impact the results of operations or the liquidity of the Company. However, the Company has no means of ensuring that vendors will be adequately prepared for the year 2000. The Company is developing contingency plans in the event it experiences system failure related to the year 2000. The Company plans to evaluate the status of year 2000 compliance throughout 1999 to determine whether such contingency plans are adequate, although at this time the Company knows of no reason its modifications and replacements of operating systems will not be effective and completed in a timely manner. 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 movie studios, the Company's 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 3, 1999. 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 3, 1999 in the Company's annual report on Form 10-K. Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on June 8, 1999. 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 11,627,170 28,018 H. Harrison Parrish 11,627,670 27,518 William B. Snow 11,627,670 27,518 Sanford C. Sigoloff 11,627,670 27,518 Philip B. Smith 11,627,670 27,518 Joseph F. Troy 11,627,670 27,518 2. A proposal to amend the Company's Certificate of Incorporation to decrease the authorized shares of common stock from 60,000,000 to 35,000,000 was approved by a vote of 11,637,828 for versus 7,520 against. There were 9,840 abstentions and no broker non-votes. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 3.1.1 Certificate of Amendment of Certificate of Incorporation dated June 6, 1996 3.1.2 Certificate of Amendment of Certificate of Incorporation dated July 1, 1999 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. --------------------------------------- (Registrant) Date: August 17, 1999 /s/ J. Steven Roy --------------------------------------- J. Steven Roy, Executive Vice President and Chief Financial Officer 11 EX-3.1.1 2 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MOVIE GALLERY, INC. Movie Gallery, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: 1. That at a meeting of the board of directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: Resolved, that the Certificate of Incorporation of the Corporation be amended by changing the first paragraph of Article Fourth so that, as amended, Article Fourth shall be and read as follows: "1. The Corporation is authorized to issue two classes of stock, to be designated "Common Stock" and "Preferred Stock," respectively. The total number of shares which the Corporation is authorized to issue is sixty-two million (62,000,000) shares. The number of shares of Common Stock authorized to be issued is sixty million (60,000,000), with a par value of $0.001 per share. The number of shares of Preferred Stock authorized to be issued is two million (2,000,000), with a par value of $0.10 per share." 2. That thereafter, pursuant to resolution of its board of directors, an annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. 3. That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 4. That the capital of the Corporation shall not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by H. Harrison Parrish, its President and S. Page Todd, its secretary this 6th day of June, 1996. /s/ H. Harrison Parrish ------------------------------- H. Harrison Parrish, President /s/ S. Page Todd ------------------------------- S. Page Todd, Secretary EX-3.1.2 3 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MOVIE GALLERY, INC. Movie Gallery, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: 1. That at a meeting of the board of directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: Resolved, that the first paragraph of Article Fourth of the Company's Certificate of incorporation be amended to read in its entirety as follows: "1. The Corporation is authorized to issue two classes of stock, to be designated "Common Stock" and "Preferred Stock," respectively. The total number of shares which the Corporation is authorized to issue is thirty-seven million (37,000,000) shares. The number of shares of Common Stock authorized to be issued is thirty-five million (35,000,000), with a par value of $0.001 per share. The number of shares of Preferred Stock authorized to be issued is two million (2,000,000), with a par value of $0.10 per share." 2. That thereafter, pursuant to resolution of its board of directors, an annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. 3. That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 4. That the capital of the Corporation shall not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by H. Harrison Parrish, its President and S. Page Todd, its Secretary this 1st day of July, 1999. /s/ Harrison Parrish, President ------------------------------- Harrison Parrish, President /s/ S. Page Todd, Secretary ------------------------------- S. Page Todd, Secretary EX-27 4 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-02-2000 JAN-04-1999 JUL-04-1999 3,937 0 291 0 11,063 19,622 271,537 184,027 192,814 28,438 0 0 0 13 126,366 192,814 19,833 135,130 12,951 126,747 0 0 1,680 6,703 2,662 4,041 0 (682) (699) 2,660 0.20 0.20 Includes $188,529 of rental inventory. Includes $141,910 of accumulated amortization on rental inventory.
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