MOVI Movie Gallery (MM)

Modest revenue growth driven by increased sales at the Company's Game Crazy and Movie Gallery branded stores DOTHAN, Ala., Jan. 22 /PRNewswire-FirstCall/ -- Movie Gallery, Inc. (NASDAQ:MOVI) today reported results for the third quarter of 2006, which ended October 1, 2006. The Company filed its quarterly report on Form 10-Q for the third quarter of fiscal 2006 on January 19, 2007. SFAS 143 Review Concluded As previously announced, the delay in filing the Company's Form 10-Q for the quarter ended October 1, 2006 was the result of a review of the Company's accounting treatment for end of term store lease obligations. During this process, Movie Gallery reviewed over 5,000 store leases and worked with its independent auditor to ensure compliance with Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations. As a result, the Company increased property, furnishings and equipment by $1.4 million, other long-term accrued liabilities by $8.7 million and store operating expenses by $7.3 million. The impact on previously reported financial results was immaterial, and therefore no restatement of prior period financial results was required. Third Quarter Results For the third quarter of 2006, total revenues were $583.0 million, an increase of 1.8% over the $572.4 million in the comparable period last year. Same-store total revenues for the third quarter of 2006 remained relatively flat at negative 0.4% from the comparable period last year. During the quarter, same-store total revenues increased 3.0% for the Movie Gallery branded stores and decreased 1.9% for the Hollywood branded stores compared to the third quarter of 2005. The Company reported a net loss of $36.1 million, or $1.13 per share, for the third quarter of 2006 as compared to a net loss of $12.5 million, or $0.39 per share, in the comparable period last year. Included in the net loss for the third quarter of 2006 is $18.3 million of pre-tax charges, primarily non- cash, related to accounting for asset retirement obligations, store closures, the Company's continued restructuring efforts and stock compensation expense. Specifically, $7.3 million (of which $5.3 million was charged to depreciation expense) was recorded in order to account for asset retirement obligations in accordance with SFAS 143, $6.6 million (of which $0.7 million was charged to depreciation expense) relates to planned store closures, $3.4 million was attributable to professional advisory fees incurred in conjunction with the Company's strategic planning and balance sheet restructuring efforts, and $1.0 million pertains to stock-based compensation. In addition to these items, the net loss in the third quarter of 2006 also included an increase in interest expense of $6.8 million and the impact of a $7.7 million unfavorable change in income taxes compared to the same period last year. Adjusted EBITDA, which is defined as net cash provided by operating activities before changes in operating assets and liabilities, interest, taxes and other special items, was $35.9 million for the third quarter of 2006. For the thirty-nine week period ended October 1, 2006, the Company's Adjusted EBITDA was $210.3 million. Liquidity As of January 19, 2006, Movie Gallery had no borrowings on its revolving credit facility. With approximately $51 million in available borrowings under this facility, management believes that the Company has sufficient cash and availability under the revolver to meet working capital needs. The Company and its advisors are working diligently on projects to improve the capital structure of the Company for the long-term and expect to provide further details later in the first quarter. Additional Information Additional financial and operational information for the third quarter and year-to-date 2006, including a reconciliation of non-GAAP financial measures, can be found in the tables accompanying this release. Movie Gallery will not hold a conference call to discuss its results in the third quarter of 2006 as the Company is currently compiling its year end financial results. The Company plans to announce its unaudited financial results for the year ended December 31, 2006 in mid-February, which will reflect that the Company is in compliance with its debt covenants for the fourth quarter of 2006. Management also intends to have a conference call at that time to discuss its quarterly and full year 2006 earnings. Nasdaq Update As announced on November 21, 2006, Movie Gallery received a NASDAQ Staff Determination letter indicating Movie Gallery is not in compliance with the filing requirement for continued listing as set forth in Marketplace Rule 4310(c )(14) due to the delayed filing of its Quarterly Report on Form 10-Q for the quarter ended October 1, 2006 with the Securities and Exchange Commission ("SEC"). This notification is customary when a NASDAQ-listed company does not complete a required SEC filing in a timely manner. With the review of the company's accounting treatment for end of term store lease obligations concluded and the company's third quarter Form 10-Q now on file with the SEC, Movie Gallery is now in full compliance with Nasdaq rules. About Movie Gallery, Inc. The Company is the second largest North American video rental company with over 4,600 stores located in all 50 U.S. states and Canada operating under the brands Movie Gallery, Hollywood Video and Game Crazy. The Game Crazy brand represents 643 in-store departments and 17 free-standing stores serving the game market in urban locations across the Untied States. Since Movie Gallery's initial public offering in August 1994, the Company has grown from 97 stores to its present size through acquisitions and new store openings. For more information about the Company, please visit our website at: http://www.moviegallery.com/ Forward Looking Statements To take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, you are hereby cautioned that this release contains forward-looking statements, including descriptions of projected conditions in the home video rental industry that are based upon the Company's current intent, estimates, expectations and projections and involve a number of risks and uncertainties. Various factors exist which may cause results to differ from these expectations. These risks and uncertainties include, but are not limited to, the risk factors that are discussed from time to time in the Company's SEC reports, including, but not limited to, the Company's annual report on Form 10-K for the fiscal year ended January 1, 2006 and subsequently filed quarterly reports on Form 10-Q. In addition to the potential effect of these ongoing factors, the Company's operations and financial performance may be adversely effected if, among other factors; (i) same-store revenues are less than projected; (ii) the Company is unable to successfully restructure its real estate portfolio; (iii) the Company is unable to comply with the financial or other covenants contained in its senior credit facility, or to obtain further amendments to its senior credit facility or alternative financing; (iv) the Company's operational improvement initiatives fail to generate anticipated cost reductions; (v) the availability of new movie releases priced for sale negatively impacts the consumers' desire to rent movies; (vi) the Company is unable to obtain sufficient product on favorable terms; (vii) the Company's actual expenses or liquidity requirements differ from estimates and expectations; (viii) consumer demand for movies and games is less than expected; (ix) the availability of movies and games is less than expected; (x) competitive pressures are greater than anticipated or (xi) movie studios negatively alter revenue sharing programs. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. Contacts Analysts and Investors: Michelle K. Lewis, Movie Gallery, Inc., 503-570-1950 Media: Andrew B. Siegel of Joele Frank, Wilkinson Brimmer Katcher, 212-355-4449 ext. 127 Movie Gallery, Inc. Consolidated Statements of Operations (Unaudited, in thousands, except per share amounts) Thirteen Weeks Ended Thirty-Nine Weeks Ended ----------------------- ----------------------- October 2, October 1, October 2, October 1, 2005 2006 2005 2006 --------- --------- ---------- ---------- Revenue: Rentals $ 473,086 $ 475,779 $1,109,661 $1,539,754 Product sales 99,356 107,210 201,301 338,888 --------- --------- --------- --------- Total revenue 572,442 582,989 1,310,962 1,878,642 Cost of sales: Cost of rental revenue 136,236 141,589 345,159 470,073 Cost of product sales 70,080 78,160 141,896 249,455 -------- --------- -------- --------- Gross profit 366,126 363,240 823,907 1,159,114 Operating costs and expenses: Store operating expenses 319,919 322,643 690,592 944,495 General and administrative 40,020 44,022 93,014 134,853 Amortization of intangibles 1,163 701 2,718 2,142 -------- -------- -------- -------- Operating income (loss) 5,024 (4,126) 37,583 77,624 Interest expense, net (24,427) (31,185) (41,430) (89,331) Write-off of bridge financing - - (4,234) - Equity in losses of unconsolidated entities - - (806) - -------- -------- -------- -------- Loss before income taxes (19,403) (35,311) (8,887) (11,707) Income taxes (benefit) (6,934) 800 (2,622) (1,048) -------- -------- -------- -------- Net loss $(12,469) $(36,111) $ (6,265) $(10,659) ======== ======== ======== ======== Net loss per share: Basic $ (0.39) $ (1.13) $ (0.20) $ (0.34) Diluted $ (0.39) $ (1.13) $ (0.20) $ (0.34) Weighted average shares outstanding: Basic 31,640 31,840 31,471 31,786 Diluted 31,640 31,840 31,471 31,786 Cash dividends per common share $ - $ - $ 0.06 $ - Movie Gallery, Inc. Unaudited Financial Highlights and Supplemental Information (amounts in thousands, except stores) Thirteen Weeks Ended Thirty-Nine Weeks Ended ----------------------- --------------------- October 2, October 1, October 2, October 1, 2005 2006 2005 2006 --------- --------- --------- --------- Adjusted EBITDA $ 51,873 $ 35,915 $ 151,603 $ 210,341 Total same-store revenues (9.0%) (0.4%) (3.1%) (4.0%) Movie Gallery same-store revenues (9.8%) 3.0% (5.3%) 0.0% Hollywood same-store revenues (8.6%) (1.9%) (2.2%) (5.9%) Total same-store rental revenues (10.3%) (1.9%) (5.2%) (5.2%) Movie Gallery same-store revenues (10.8%) 3.1% (5.5%) (0.8%) Hollywood same-store revenues (10.1%) (4.6%) (5.1%) (7.5%) Total same-store product sales (2.2%) 6.5% 7.8% 1.1% Movie Gallery same-store sales 2.5% 1.0% (3.1%) 8.8% Hollywood same-store sales (3.0%) 7.5% 10.0% (0.2%) Margin data Rental margin 71.2% 70.2% 68.9% 69.5% Product sales margin 29.5% 27.1% 29.5% 26.4% Total gross margin 64.0% 62.3% 62.8% 61.7% Percent of total revenue: Rental revenue 82.6% 81.6% 84.6% 82.0% Product sales 17.4% 18.4% 15.4% 18.0% Store operating expenses 55.9% 55.3% 52.7% 50.3% General and administrative expenses 7.0% 7.6% 7.1% 7.2% Cash Flow Data: Net cash provided by (used in) operating activities $ 9,390 $ 116 $ 48,740 $ (35,069) Net cash flow (used in) investing activities (16,129) (874) (1,140,877) (14,591) Net cash provided by (used in) financing activities 21,974 (237) 1,134,330 (66,752) Capital Expenditures (16,423) (4,054) (48,873) (19,145) Balance Sheet Data: Cash and cash equivalents $ 68,755 $ 19,634 $ 68,755 $ 19,634 Merchandise inventories 143,209 123,929 143,209 123,929 Rental inventories, net 342,227 340,078 342,227 340,078 Accounts payable 159,814 78,799 159,814 78,799 Long-term obligation, including current portion 1,170,168 1,103,930 1,170,168 1,103,930 Store count: Beginning of period 4,730 4,763 2,482 4,749 New store builds 80 13 234 115 Stores acquired - - 2,138 - Stores closed (25) (101) (69) (189) --------- --------- ---------- --------- End of period 4,785 4,675 4,785 4,675 ========= ========= ========== ========= Disclosures Regarding Non-GAAP Financial Information In this press release, we have provided a non-GAAP financial measure, Adjusted EBITDA, which is defined as operating income plus depreciation, amortization, non-cash stock compensation, and special items, less purchases of rental inventory. Adjusted EBITDA is presented as an alternative measure of operating performance that is used in making business decisions, executive compensation decisions, and as an alternative measure of liquidity. It is a widely accepted financial indicator in the home video specialty retail industry of a company's ability to incur and service debt, finance its operations, and meet its growth plans. However, our computation of Adjusted EBITDA is not necessarily identical to similarly captioned measures presented by other companies in our industry. We encourage you to compare the components of our reconciliation of Adjusted EBITDA to operating income and our reconciliation of Adjusted EBITDA to cash flows from operations in relation to similar reconciliations provided by other companies in our industry. Our presentation of net cash provided by operating activities and Adjusted EBITDA treats rental inventory as being expensed upon purchase instead of being capitalized and amortized. We believe this presentation is meaningful and appropriate because our annual cash investment in rental inventory is substantial and in many respects is similar to recurring merchandise inventory purchases considering our operating cycle and the relatively short useful lives of our rental inventory. Adjusted EBITDA excludes the impact of changes in operating assets and liabilities. This adjustment eliminates temporary effects attributable to timing differences between accrual accounting and actual cash receipts and disbursements, and other normal, recurring and seasonal fluctuations in working capital that have no long-term or continuing effect on our liquidity. Investors should consider our presentation of Adjusted EBITDA in light of its relationship to operating income and net income in our statements of operations. Investors should also consider our presentation of Adjusted EBITDA in light of its relationship to cash flows from operations, cash flows from investing activities and cash flows from financing activities as shown in our statements of cash flows. Adjusted EBITDA is not necessarily a measure of "free cash flow" because it does not reflect periodic changes in the level of our working capital or our investments in new store openings, business acquisitions, or other long-term investments or required debt prepayments we may make. However, it is an important measure used internally by executive management of our Company in making decisions about where to allocate resources. Because we use Adjusted EBITDA as a measure of performance and as a measure of liquidity, the tables below reconcile Adjusted EBITDA to both operating income and net cash flow provided by operating activities, the most directly comparable amounts reported under GAAP. The following table provides a reconciliation of Adjusted EBITDA to operating income: Thirteen Weeks Ended ---------------------- October 2, October 1, 2005 2006 --------- --------- Operating income $ 5,024 $ (4,128) Rental amortization 75,319 47,509 Rental purchases (66,072) (43,010) Depreciation and intangible amortization 30,423 27,134 Accretion on asset retirement obligations - 3,022 Loss on sale of assets - 4,372 Stock compensation 535 1,016 Extended viewing fee adjustment 6,644 - --------- --------- Adjusted EBITDA $ 51,873 $ 35,915 ========= ========= The following table provides a reconciliation of Adjusted EBITDA to net cash provided by operating activities: Thirteen Weeks Ended -------------------- October 2, October 1, 2005 2006 --------- --------- Net cash provided by (used in) operating activities $ 9,390 $ 116 Changes in operating assets and liabilities 3,966 3,763 Investment in base stock inventory 6,884 1,093 Tax benefit of stock options exercised (355) - Deferred income taxes 9,221 669 Amortization of debt issuance cost (1,370) (1,709) Interest expense 24,426 31,184 Income taxes (6,933) 799 Extended viewing fee adjustment 6,644 - --------- --------- Adjusted EBITDA $ 51,873 $ 35,915 ========= ========= The following table provides a reconciliation of Adjusted EBITDA to operating income for the 39 weeks ended October 1, 2006: Thirty-Nine Weeks Ended ------------------------ October 2, October 1, 2005 2006 --------- --------- Operating income $ 37,583 77,624 Rental amortization 206,134 167,259 Rental purchases (174,251) (125,246) Depreciation and intangible amortization 61,569 79,214 Accretion on asset retirement obligations - 3,022 Loss on sale of assets - 3,675 Stock compensation 1,098 2,073 Credit facility amendment fees - 2,720 Merger transaction bonuses 1,500 - Extended viewing fee adjustment 17,970 - --------- --------- Adjusted EBITDA $ 151,603 $ 210,341 ========= ========= The following table provides a reconciliation of Adjusted EBITDA to net cash provided by operating activities: Thirty-Nine Weeks Ended ------------------------ October 2, October 1, 2005 2006 --------- --------- Net cash provided by (used in) operating activities $ 48,740 (35,069) Changes in operating assets and liabilities 16,955 148,850 Investment in base stock inventory 16,569 10,527 Tax benefit of stock options exercised (3,301) - Deferred income taxes 11,557 (18) Amortization of debt issuance cost (2,235) (4,952) Credit facility amendment fees - 2,720 Interest expense 45,663 89,331 Income taxes (2,621) (1,048) Merger transaction bonuses 1,500 - Equity in losses on unconsolidated entities 806 - Extended viewing fee adjustment 17,970 - --------- --------- Adjusted EBITDA $ 151,603 $ 210,341 ========= ========= The following table provides a reconciliation of Adjusted EBITDA to operating income for the 52 weeks ended October 1, 2006: 52 Weeks Ended October 1, 2006 --------- Operating income $(436,338) Rental amortization 236,054 Rental purchases (214,868) Depreciation and intangible amortization 110,300 Accretion on asset retirement obligations 3,022 Impairment of goodwill 522,950 Impairment of intangibles 4,940 Loss on sale of assets 3,181 Store closure adjustment 7,844 Stock compensation 2,593 Credit facility amendment fees 2,720 Extended viewing fee adjustment 984 --------- Adjusted EBITDA $ 243,382 ========= The following table provides a reconciliation of Adjusted EBITDA to net cash provided by operating activities: 52 Weeks Ended October 1, 2006 --------- Net cash provided by (used in) operating activities $ 48,597 Changes in operating assets and liabilities 71,322 Investment in base stock inventory 14,325 Tax benefit of stock options exercised 3,395 Deferred income taxes (20,131) Amortization of debt issuance cost (6,470) Store closure adjustment 7,844 Credit facility amendment fees 2,720 Interest expense 116,431 Income taxes 4,365 Extended viewing fee adjustment 984 --------- Adjusted EBITDA $ 243,382 ========= DATASOURCE: Movie Gallery, Inc. CONTACT: Analysts and Investors, Michelle K. Lewis of Movie Gallery, Inc., +1-503-570-1950, Media, Andrew B. Siegel of Joele Frank, Wilkinson Brimmer Katcher, +1-212-355-4449 ext. 127 Web site: http://www.moviegallery.com/

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