**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

| **(Mark One)** |
|----------------|
| **ý**     |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |   |   |
|           |   | **For the  quarterly period ended July 6, 2003** |
|           |   |   |   |   |
| **OR**         |
|           |   |   |   |   |
| **o**          |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |   |   |
|           |   | **For the  transition period  from                   to                 ** |

 

### **Commissionfile number 0-24548**

 

**Movie Gallery, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **63-1120122**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  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 whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ý  NO  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

YES  ý  NO  o

 

The number of sharesoutstanding of the registrant’s common stock as of  August 13, 2003 was 32,502,419.

 

 

----

 

#### **MovieGallery, Inc.**

#### **Index**

 
| Part I.                                                                                                           | Financial  Information                                                                      |   |
|-------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                                                                                              |                                                                                        |   |
| Item 1.                                                                                                           | Consolidated  Financial Statements (Unaudited)                                              |   |
|                                                                                                              |                                                                                        |   |
| Consolidated Balance Sheets  –  January 5, 2003 and July 6, 2003                                        | 3                                                                                           |
|                                                                                                              |                                                                                        |
| Consolidated Statements of Income –  Thirteen weeks and twenty-six weeks ended July 7, 2002 and July 6, 2003 | 4                                                                                           |
|                                                                                                              |                                                                                        |
| Consolidated Statements of Cash Flows –  Twenty-six weeks ended July 7, 2002 and July 6, 2003                | 5                                                                                           |
|                                                                                                              |                                                                                        |
| Notes to Consolidated Financial Statements  – July 6, 2003                                                   | 6                                                                                           |
|                                                                                                              |                                                                                        |
| Item 2.                                                                                                           | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 10     |
|                                                                                                              |                                                                                        |   |
| Item 3.                                                                                                           | Quantitative and Qualitative Disclosures  About Market Risk                                 | 16     |
|                                                                                                              |                                                                                        |   |
| Item 4.                                                                                                           | Controls and Procedures                                                                     | 16     |
|                                                                                                              |                                                                                        |   |
| Part II.                                                                                                          | Other Information                                                                           | 16     |
|                                                                                                              |                                                                                        |   |
| Item 4.                                                                                                           | Submission of Matters to a Vote of Security  Holders                                        | 16     |
|                                                                                                              |                                                                                        |   |
| Item 6.                                                                                                           | Exhibits and Reports on Form 8-K                                                            | 16     |
|                                                                                                                   |                                                                                             |        |  |

 

2

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**Movie Gallery, Inc.**

**ConsolidatedBalance Sheets**

**(in thousands)**

 
|                                                                                                                                |   | **January 5,  2003** |    | **July 6,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|-------------------|--------|
|                                                                                                                                |   |                 |    | **(Unaudited)**   |   |
| **Assets**                                                                                                                          |   |                 |    |              |   |
| Current assets:                                                                                                                     |   |                 |    |              |   |
| Cash and cash equivalents                                                                                                           |   | $                    | 39,526  |              | **$**  | **23,451** |   |
| Merchandise inventory                                                                                                               |   | 18,646               |    | **19,136**        |   |
| Prepaid expenses                                                                                                                    |   | 1,533                |    | **2,064**         |   |
| Store supplies and other                                                                                                            |   | 7,585                |    | **8,435**         |   |
| Total current assets                                                                                                                |   | 67,290               |    | **53,086**        |   |
|                                                                                                                                |   |                 |    |              |   |
| Rental inventory, net                                                                                                               |   | 82,880               |    | **89,781**        |   |
| Property, furnishings and equipment, net                                                                                            |   | 86,993               |    | **98,884**        |   |
| Goodwill                                                                                                                            |   | 116,119              |    | **128,184**       |   |
| Other intangibles, net                                                                                                              |   | 6,677                |    | **7,864**         |   |
| Deposits and other assets                                                                                                           |   | 3,615                |    | **4,872**         |   |
| Total assets                                                                                                                        |   | $                    | 363,574 |              | **$**  | **382,671** |   |
|                                                                                                                                |   |                 |    |              |   |
| **Liabilities and stockholders’ equity**                                                                                       |   |                 |    |              |   |
| Current liabilities:                                                                                                                |   |                 |    |              |   |
| Accounts payable                                                                                                                    |   | $                    | 66,996  |              | **$**  | **46,690** |   |
| Accrued liabilities                                                                                                                 |   | 23,524               |    | **32,353**        |   |
| Deferred revenue                                                                                                                    |   | 9,636                |    | **8,397**         |   |
| Deferred income taxes                                                                                                               |   | 742                  |    | **1,365**         |   |
| Total current liabilities                                                                                                           |   | 100,898              |    | **88,805**        |   |
|                                                                                                                                |   |                 |    |              |   |
| Other accrued liabilities                                                                                                           |   | 249                  |    | **311**           |   |
| Deferred income taxes                                                                                                               |   | 3,376                |    | **4,940**         |   |
|                                                                                                                                |   |                 |    |              |   |
| Stockholders’ equity:                                                                                                          |   |                 |    |              |   |
| Preferred stock, $.10 par value; 2,000,000 shares authorized, no  shares issued or outstanding                                      |   | —               |    | **—**        |   |
| Common stock, $.001 par value; 65,000,000 shares authorized,  32,061,871 and 32,389,854 shares issued and outstanding, respectively |   | 32                   |    | **32**            |   |
| Additional paid-in capital                                                                                                          |   | 216,631              |    | **220,405**       |   |
| Retained earnings                                                                                                                   |   | 42,647               |    | **65,408**        |   |
| Accumulated other comprehensive income (loss)                                                                                       |   | (259                 | )       | **2,770**         |   |
| Total stockholders’ equity                                                                                                     |   | 259,051              |    | **288,615**       |   |
| Total liabilities and stockholders’ equity                                                                                     |   | $                    | 363,574 |              | **$**  | **382,671** |   |

 

*See accompanying notes.*

 

3

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**Movie Gallery, Inc.**

**ConsolidatedStatements of Income**

**(Unaudited)**

**(in thousands, except per share data)**

 
|                                 |   | **Thirteen Weeks Ended** |    | **Twenty-Six Weeks Ended** |       |
|--------------------------------------|--------|--------------------------|---------|----------------------------|------------|
|                                 |   | **July 7,  2002**        |    | **July 6,  2003**          |       | **July 7,  2002** |   | **July 6,  2003** |   |
|                                 |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Revenues:                            |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Rentals                              |   | $                        | 115,634 |                       | **$**      | **148,576** | ** ** | $ | 232,052 |   | **$** | **301,757** | ** ** |
| Product sales                        |   | 6,944                    |    | **12,422**                 | ** ** | 13,656 |   | **27,890** | ** ** |
| Total revenues                       |   | 122,578                  |    | **160,998**                | ** ** | 245,708 |   | **329,647** | ** ** |
|                                 |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Cost of sales:                       |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Cost of rental revenues              |   | 32,977                   |    | **42,823**                 | ** ** | 64,734 |   | **90,407** | ** ** |
| Cost of product sales                |   | 5,382                    |    | **9,771**                  | ** ** | 9,922 |   | **22,442** | ** ** |
| Gross margin                         |   | 84,219                   |    | **108,404**                | ** ** | 171,052 |   | **216,798** | ** ** |
|                                 |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Operating costs and expenses:        |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Store operating expenses             |   | 60,835                   |    | **79,415**                 | ** ** | 120,675 |   | **153,899** | ** ** |
| General and administrative           |   | 12,547                   |    | **11,729**                 | ** ** | 22,137 |   | **22,505** | ** ** |
| Amortization of intangibles          |   | 360                      |    | **470**                    | ** ** | 697 |   | **896** | ** ** |
| Stock option compensation            |   | 749                      |    | **1,029**                  | ** ** | 946 |   | **1,498** | ** ** |
| Operating income                     |   | 9,728                    |    | **15,761**                 | ** ** | 26,597 |   | **38,000** | ** ** |
|                                 |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Interest expense, net                |   | (394                     | )       | **(143**                   | **)**      | (840 | ) | **(242** | **)** |
| Income before income taxes           |   | 9,334                    |    | **15,618**                 | ** ** | 25,757 |   | **37,758** | ** ** |
|                                 |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Income taxes                         |   | 3,734                    |    | **6,141**                  | ** ** | 10,283 |   | **14,997** | ** ** |
| Net income                           |   | $                        | 5,600   |                       | **$**      | **9,477** | ** ** | $ | 15,474 |   | **$** | **22,761** | ** ** |
|                                 |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Net income per share:                |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Basic                                |   | $                        | 0.19    |                       | **$**      | **0.29** | ** ** | $ | 0.54 |   | **$** | **0.71** | ** ** |
| Diluted                              |   | $                        | 0.18    |                       | **$**      | **0.28** | ** ** | $ | 0.52 |   | **$** | **0.69** | ** ** |
|                                 |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Weighted average shares outstanding: |   |                     |    |                       | ** ** |   |   |   | ** ** |
| Basic                                |   | 29,841                   |    | **32,275**                 | ** ** | 28,583 |   | **32,186** | ** ** |
| Diluted                              |   | 31,115                   |    | **33,310**                 | ** ** | 29,866 |   | **33,197** | ** ** |

 

*See accompanying notes.*

 

4

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**Movie Gallery, Inc.**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(in thousands)**

 
|                                                                               |   | **Twenty-Six Weeks Ended** |   |
|------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                               |   | **July 7,  2002**          |   | **July 6,  2003** |   |
|                                                                               |   |                       |   |   |   |
| **Operating activities:**                                                          |   |                       |   |   |   |
| Net income                                                                         |   | $                          | 15,474 |   | **$** | **22,761** | ** ** |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                       |   |   | ** ** |
| Rental inventory amortization and non-cash cost of rental inventory  sold          |   | 46,346                     |   | **65,954** | ** ** |
| Depreciation and intangibles amortization                                          |   | 9,567                      |   | **10,981** | ** ** |
| Stock option compensation                                                          |   | 946                        |   | **1,498** | ** ** |
| Tax benefit of stock options exercised                                             |   | 3,875                      |   | **1,607** | ** ** |
| Deferred income taxes                                                              |   | 3,309                      |   | **2,187** | ** ** |
| Changes in operating assets and liabilities:                                       |   |                       |   |   | ** ** |
| Merchandise inventory                                                              |   | (2,341                     | )      | **(244** | **)** |
| Other current assets                                                               |   | 197                        |   | **(1,305** | **)** |
| Deposits and other assets                                                          |   | (869                       | )      | **(1,204** | **)** |
| Accounts payable                                                                   |   | 4,970                      |   | **(20,306** | **)** |
| Accrued liabilities and deferred revenue                                           |   | 2,347                      |   | **5,374** | ** ** |
| Net cash provided by operating activities                                          |   | 83,821                     |   | **87,303** | ** ** |
|                                                                               |   |                       |   |   | ** ** |
| **Investing activities:**                                                          |   |                       |   |   | ** ** |
| Business acquisitions                                                              |   | (32,206                    | )      | **(16,709** | **)** |
| Purchases of rental inventory                                                      |   | (52,567                    | )      | **(69,391** | **)** |
| Purchases of property, furnishings and equipment                                   |   | (12,907                    | )      | **(20,976** | **)** |
| Net cash used in investing activities                                              |   | (97,680                    | )      | **(107,076** | **)** |
|                                                                               |   |                       |   |   | ** ** |
| **Financing activities:**                                                          |   |                       |   |   | ** ** |
| Proceeds from issuance of common stock                                             |   | 66,769                     |   | **—** | ** ** |
| Proceeds from exercise of stock options                                            |   | 2,434                      |   | **669** | ** ** |
| Net payments on long-term debt                                                     |   | (26,000                    | )      | **—** | ** ** |
| Net cash provided by financing activities                                          |   | 43,203                     |   | **669** | ** ** |
|                                                                               |   |                       |   |   | ** ** |
| Effect of exchange rate changes on cash and cash equivalents                       |   | 207                        |   | **3,029** | ** ** |
| Increase (decrease) in cash and cash equivalents                                   |   | 29,551                     |   | **(16,075** | **)** |
| Cash and cash equivalents at beginning of period                                   |   | 16,349                     |   | **39,526** | ** ** |
| Cash and cash equivalents at end of period                                         |   | $                          | 45,900 |   | **$** | **23,451** | ** ** |

 

*See accompanying notes.*

 

5

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**Movie Gallery, Inc.**

 

**Notes to Consolidated Financial Statements(Unaudited)**

 

**July 6, 2003**

 

**1. Basis of Presentation**

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the unaudited consolidatedfinancial statements do not include all of the information and footnotesrequired by generally accepted accounting principles for complete consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the twenty-six weekperiod ended July 6, 2003 are not necessarily indicative of the results thatmay be expected for the fiscal year ending January 4, 2004.  For further information, refer to the consolidatedfinancial statements and footnotes thereto included in our Annual Report onForm 10-K for the fiscal year ended January 5, 2003.

 

*Stock Option Plan*

 

We account for stock-basedemployee compensation under the recognition and measurement principles of APBOpinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations.  Stock optioncompensation is reflected in net income for variable options outstanding underthe plan.  No stock option compensationis reflected in net income for the remaining options outstanding under theplan, as the exercise price was equal to the market value of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net income and earnings per share ifwe had applied the fair value recognition provision of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
|                                                                                                          |   | **Thirteen Weeks Ended**                  |   | **Twenty-Six Weeks Ended** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|----------------------------|--------|
|                                                                                                          |   | **July 7,  2002**                         |   | **July 6,  2003**          |   | **July 7,  2002** |   | **July 6,  2003** |   |
|                                                                                                          |   | **(in thousands, except per share data)** |   |
|                                                                                                          |   |                                      |   |                       |   |   |   |   |   |
| Net income, as reported                                                                                       |   | $                                         | 5,600  |                       | $      | 9,477 |   | $ | 15,474 |   | $ | 22,761 |   |
| Add:  Stock option  compensation included in reported net income, net of tax                             |   | 449                                       |   | 622                        |   | 568 |   | 903 |   |
| Deduct:  Stock option compensation  determined under fair value based methods for all awards, net of tax |   | (273                                      | )      | (140                       | )      | (560 | ) | (272 | ) |
|                                                                                                          |   |                                      |   |                       |   |   |   |   |   |
| Pro forma net income                                                                                          |   | $                                         | 5,776  |                       | $      | 9,959 |   | $ | 15,482 |   | $ | 23,392 |   |
|                                                                                                          |   |                                      |   |                       |   |   |   |   |   |
| Net income per share:                                                                                         |   |                                      |   |                       |   |   |   |   |   |
| Basic                                                                                                         |   | $                                         | 0.19   |                       | $      | 0.29 |   | $ | 0.54 |   | $ | 0.71 |   |
| Diluted                                                                                                       |   | $                                         | 0.18   |                       | $      | 0.28 |   | $ | 0.52 |   | $ | 0.69 |   |
|                                                                                                          |   |                                      |   |                       |   |   |   |   |   |
| Pro forma net income per share:                                                                               |   |                                      |   |                       |   |   |   |   |   |
| Basic                                                                                                         |   | $                                         | 0.19   |                       | $      | 0.31 |   | $ | 0.54 |   | $ | 0.73 |   |
| Diluted                                                                                                       |   | $                                         | 0.18   |                       | $      | 0.30 |   | $ | 0.51 |   | $ | 0.70 |   |

 

6

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*Recently Issued Accounting Pronouncements*

 

In November 2002, the EmergingIssues Task Force (“EITF”) reached a concensus on Issue No. 02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor,* effective for fiscal years beginning after December 15,2002.  EITF 02-16 generally requiresthat cash consideration received from a vendor be considered as a reduction ofthe prices of the vendor’s products, reflected as a reduction of cost of salesin the customer’s income statement.  Thepresumption can be overcome if the vendor receives an identifiable benefit inexchange for the consideration, in which case the consideration should berecorded as revenue, or if the consideration represents a reimbursement of aspecific identifiable incremental cost incurred by the customer in selling thevendor’s products where the consideration should  be characterized as a reduction of that cost.  Our adoption of this standard as of January6, 2003 did not have a material impact on our financial position or results ofoperations.

 

**2. Rental Inventory**

 

In the fourth quarter of 2002,we made a strategic decision to make a portion of our base stock VHS rentalinventory available for sale during the holiday period as previously viewedinventory.  The sale of base stock VHSrental inventory was designed to make room on our store shelves for asignificant investment in base stock DVD rental inventory which arrived instores in the first quarter of 2003. Our decision to make this investment in base stock DVD was primarilydriven by the continued growth in consumer acceptance of the DVD platform inour core markets throughout the last year. DVD rental revenue represented approximately 50% of our movie rentalrevenue as of the end of fiscal 2002 versus approximately 20% as of the end offiscal 2001.  As a result of thesignificant shift from VHS to DVD that occurred in our rental inventory base,we changed the estimates used to amortize rental inventory in the fourthquarter of fiscal 2002 as discussed below. The revised estimates reflect a reduction in the estimated useful livesof the rental inventory and a reduced salvage value for both VHS and gameinventory.  We believe the revisedestimated useful lives and salvage values are better matched to our currentrental business and are consistent with industry trends.

 

Rentalinventory is stated at cost and amortized over its economic useful life. Theup-front fees and minimum costs of rental product purchased under revenue-sharingarrangements are capitalized and amortized in accordance with our rentalinventory amortization policy. Revenue-sharing payments are expensed as incurred and are included incost of rental revenues.  Effective asof the beginning of the fourth quarter of 2002, the cost of base stock, orcatalog, movie inventory is amortized on an accelerated basis over the firsttwelve months and then on a straight-line basis over the next twelve months toits salvage value, $4 for DVD and $2 for VHS. The cost of non-base stock, or new release, movie inventory is amortizedto its salvage value on an accelerated basis over six months.  Video games are amortized on a straight-linebasis to a $5 salvage value over twelve months.

 

The changes inour estimates for rental inventory amortization were applied to all inventoryheld at the beginning of the fourth quarter of fiscal 2002.  The changes were accounted for as a changein accounting estimate during the fourth quarter ended January 5, 2003. Thechange in estimate decreased rental inventory and increased depreciationexpense for the twenty-six weeks ended July 6, 2003 by approximately $4.1million and reduced net income by $0.07 per diluted share.

 

Prior to thefourth quarter of 2002, the cost of base stock movie inventory was amortized onan accelerated basis to a net book value of $8 over six months and to a $4salvage value over the next thirty months. The cost of non-base stock movie inventory was amortized on anaccelerated basis over six months to a net book value of $4, which was thenamortized on a straight-line basis over the next 30 months or until the moviewas sold, at which time the unamortized book value was charged to cost ofrental revenues.  Video games wereamortized on a straight-line basis to a $10 salvage value over eighteen monthsor until the game was sold, at which time the unamortized book value wascharged to cost of rental revenues.

 

7

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**3. Goodwill and Other Intangible Assets**

 

The components of amortizedother intangible assets are as follows (in thousands):

 
|                          |   |                                      |       | **January 5, 2003**        |       | **July 6, 2003**              |       |
|-------------------------------|--------|-------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
|                          |   | **Weighted-Average  Amortization Period** |       | **Gross Carrying  Amount** |       | **Accumulated  Amortization** |       | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                          |   |                                      | ** ** |                       | ** ** |                          | ** ** |   | ** ** |   | ** ** |
| Non-compete agreements        |   | 9  years                                  |       | $                          | 9,492      |                          | $          | (6,493 | ) | $ | 10,201 |   | $ | (7,047 | ) |
| Customer lists                |   | 7  years                                  |       | 3,996                      |       | (318                          | )          | 5,373 |   | (663 | ) |
| Total other intangible assets |   |                                      |       | $                          | 13,488     |                          | $          | (6,811 | ) | $ | 15,574 |   | $ | (7,710 | ) |

 

Estimated amortization expensefor other intangible assets for the remainder of 2003 and the five succeedingfiscal years  is as follows (inthousands):

 
| 2003 (remainder) |   | $     | 975    |   |
|------------------|--------|-------|--------|--------|
| 2004             |   | 1,923 |   |
| 2005             |   | 1,450 |   |
| 2006             |   | 1,124 |   |
| 2007             |   | 985   |   |
| 2008             |   | 791   |   |

 

The changes in the carryingamounts of goodwill for the twenty-six weeks ended July 6, 2003, are as follows(in thousands):

 
| Balance as of January 5, 2003 |   | $      | 116,119 |   |
|-------------------------------|--------|--------|---------|--------|
| Goodwill acquired             |   | 12,065 |    |
| Balance as of July 6, 2003    |   | $      | 128,184 |   |

 

**4. Financing Obligations**

 

On June 27, 2001, we enteredinto a credit agreement with a syndicate of banks, led by SouthTrust Bank, withrespect to a revolving credit facility. Our credit facility is unsecured and, as amended, provides forborrowings of up to $65 million through final maturity on July 4, 2005.  The interest rate on our credit facility isbased on LIBOR plus an applicable margin percentage, which depends on cash flowgeneration and borrowings outstanding. As of July 6, 2003, there were standby letters of credit outstandingunder our credit facility of $1,172,000.

 

**5. Earnings Per Share**

 

Basic earnings per share iscomputed based on the weighted average number of shares of common stockoutstanding during the periods presented. Diluted earnings per share is computed based on the weighted average numberof shares of common stock outstanding during the periods presented, increasedsolely by the effects of shares to be issued from the exercise of dilutivecommon stock options (1,274,000 and 1,035,000 for the thirteen weeks ended July7, 2002 and July 6, 2003, respectively; 1,283,000 and 1,011,000 for thetwenty-six weeks ended July 7, 2002 and July 6, 2003, respectively).  No adjustments were made to net income inthe computation of basic or diluted earnings per share.

 

8

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**6. Comprehensive Income**

 

Comprehensive income was asfollows (in thousands):

 
|                                    |   | **Thirteen Weeks Ended** |   | **Twenty-Six Weeks Ended** |   |
|-----------------------------------------|--------|--------------------------|--------|----------------------------|--------|
|                                    |   | **July 7,  2002**        |   | **July 6,  2003**          |   | **July 7,  2002** |   | **July 6,  2003** |   |
|                                    |   |                     |   |                       |   |   |   |   |   |
| Net income                              |   | $                        | 5,600  |                       | $      | 9,477 |   | $ | 15,474 |   | $ | 22,761 |   |
| Foreign currency translation adjustment |   | 190                      |   | 1,972                      |   | 207 |   | 3,029 |   |
| Comprehensive income                    |   | $                        | 5,790  |                       | $      | 11,449 |   | $ | 15,681 |   | $ | 25,790 |   |

 

9

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**Movie Gallery, Inc.**

** **

**Management’s Discussion and Analysis ofFinancial Condition**

**and Results of Operations**

 

**Results of Operations**

 

The following table sets forth, for the periods indicated, statementsof income data and Adjusted EBITDA (see “Liquidity and Capital Resources” belowfor our calculation of Adjusted EBITDA) expressed as a percentage of totalrevenue, and the number of stores open at the end of each period.

 
|                                   |   | **Thirteen Weeks Ended** |   | **Twenty-Six Weeks Ended** |   |
|----------------------------------------|--------|--------------------------|--------|----------------------------|--------|
|                                   |   | **July 7,  2002**        |   | **July 6,  2003**          |   | **Increase  (Decrease)** |   | **July 7,  2002** |   | **July 6,  2003** |   | **Increase  (Decrease)** |   |
| Revenues:                              |   |                     |   |                       |   |   |   |   |   |   |   |   |   |
| Rentals                                |   | 94.3                     | %      | 92.3                       | %      | (2.0 | )% | 94.4 | % | 91.5 | % | (2.9 | )% |
| Product sales                          |   | 5.7                      |   | 7.7                        |   | 2.0 |   | 5.6 |   | 8.5 |   | 2.9 |   |
| Total revenues                         |   | 100.0                    |   | 100.0                      |   | — |   | 100.0 |   | 100.0 |   | — |   |
| Cost of sales:                         |   |                     |   |                       |   |   |   |   |   |   |   |   |   |
| Cost of rental revenues                |   | 26.9                     |   | 26.6                       |   | (0.3 | ) | 26.4 |   | 27.4 |   | 1.0 |   |
| Cost of product sales                  |   | 4.4                      |   | 6.1                        |   | 1.7 |   | 4.0 |   | 6.8 |   | 2.8 |   |
| Gross margin                           |   | 68.7                     |   | 67.3                       |   | (1.4 | ) | 69.6 |   | 65.8 |   | (3.8 | ) |
| Operating costs and expenses:          |   |                     |   |                       |   |   |   |   |   |   |   |   |   |
| Store operating expenses               |   | 49.6                     |   | 49.3                       |   | (0.3 | ) | 49.1 |   | 46.7 |   | (2.4 | ) |
| General and administrative             |   | 10.3                     |   | 7.3                        |   | (3.0 | ) | 9.0 |   | 6.8 |   | (2.2 | ) |
| Amortization of intangibles            |   | 0.3                      |   | 0.3                        |   | — |   | 0.3 |   | 0.3 |   | — |   |
| Stock option compensation              |   | 0.6                      |   | 0.6                        |   | — |   | 0.4 |   | 0.5 |   | 0.1 |   |
| Operating income                       |   | 7.9                      |   | 9.8                        |   | 1.9 |   | 10.8 |   | 11.5 |   | 0.7 |   |
|                                   |   |                     |   |                       |   |   |   |   |   |   |   |   |   |
| Interest expense, net                  |   | (0.3                     | )      | (0.1                       | )      | 0.2 |   | (0.3 | ) | (0.1 | ) | 0.2 |   |
| Income before income taxes             |   | 7.6                      |   | 9.7                        |   | 2.1 |   | 10.5 |   | 11.4 |   | 0.9 |   |
| Income taxes                           |   | 3.0                      |   | 3.8                        |   | 0.8 |   | 4.2 |   | 4.5 |   | 0.3 |   |
| Net income                             |   | 4.6                      | %      | 5.9                        | %      | 1.3 | % | 6.3 | % | 6.9 | % | 0.6 | % |
|                                   |   |                     |   |                       |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA                        |   | 14.8                     | %      | 17.5                       | %      | 2.7 | % | 15.5 | % | 17.2 | % | 1.7 | % |
|                                   |   |                     |   |                       |   |   |   |   |   |   |   |   |   |
| Number of stores open at end of period |   | 1,560                    |   | 1,936                      |   | 376 |   | 1,560 |   | 1,936 |   | 376 |   |

 

*Revenue.* For the thirteen weeks and twenty-six weeks ended July 6, 2003, totalrevenues were $161.0 million and $329.6 million, respectively, increases of31.3% and 34.2% over the comparable periods in 2002.  The increase for the year was due primarily to the 24.1% growthin our store base to 1,936 stores at the end of the second quarter of 2003 from1,560 at the end of the second quarter last year.  Increases in same-store revenues of 6.5% and 9.0% for the secondquarter and year-to-date period of 2003, respectively, also contributed to theoverall increase in total revenues.  Theincrease in same-store revenues was the result of: (i) continued growth of DVDrental and sales revenue; (ii) increases in the sales of previously viewedmovies and previously played games; (iii) higher video game rental revenues drivenby our increased commitment to game investments over the last year; (iv) strongperformance of new release titles in the first half of 2003 versus the firsthalf of 2002; (v) increased revenue from product sales as a result of asignificant expansion of new movie inventory available in the stores beginningin the latter half of 2002; (vi) continued revenue growth in the Video Updatestores we acquired in December 2001; and (vii) favorable weather in many of ourmarkets during the first half of 2003 versus the first half of 2002. Therevenue increases were partially offset by the continued decline in rentalrevenue from VHS product due to the consumer transition to DVD.

 

*Cost of Sales.*  The gross margin on rental revenue for the second quarter andyear-to-date period of 2003 was 71.2% and 70.0%, respectively, versus 71.5% and72.1% for the comparable quarter and year-to-date period of

 

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2002.  The cost of rental revenues includes the amortization of rentalinventory, revenue sharing expenses incurred and the cost of previously viewedrental inventory sold during the period. The decrease in the gross margin on rental revenue was primarily due to:(i) a change in estimate related to our amortization policy for rentalinventory during the fourth quarter of fiscal 2002 (see Note 2 to ourconsolidated financial statements) and (ii) amortization resulting from theinvestment in DVD catalog inventory that took place in the first quarter of2003 designed to address  increasingconsumer demand for movies on the DVD format. The change in estimate decreased rental inventory and increaseddepreciation expense for the first half of 2003 by approximately $4.1 millionand reduced net income by $0.07 per diluted share.

 

Cost of product sales includes the costs ofnew DVD, VHS, concessions and other goods sold.  The gross margin on product sales decreased to 21.3% for thesecond quarter of 2003 from 22.5% in the second quarter of 2002, and decreasedto 19.5% for the year-to-date period of 2003 versus 27.3% in the comparableperiod of 2002.  The decrease in thegross margin reflects an expected trend due to an increase in the sale of newmovies which generate lower margins than our other product offerings.  The increase in new movie sales is a resultof our increased inventory commitment, beginning in the latter half of 2002, toaccommodate an increased consumer demand for retail movies and to complementour rental business.

 

*Operating Costs and Expenses.*  Store operating expenses, which includestore-level expenses such as lease payments and in-store payroll, decreased to49.3% and 46.7% of total revenue for the second quarter and year-to-date periodof 2003, respectively.  This reflects adecrease from 49.6% and 49.1% in the comparable periods of 2002, respectively.The decrease in store operating expenses as a percentage of total revenue wasdue to: (i) the leveraging of expenses, particularly in the Video Update storesacquired late in 2001, against an increase in same-store revenues of 6.5% and9.0% in the second quarter and year-to-date period of 2003, respectively; (ii)continued initiatives to reduce operating costs; and (iii) continued closure ofunder-performing units.

 

General and administrative expenses as a percentage of revenue were7.3% and 6.8% for the second quarter and year-to-date period of 2003,respectively, compared to 10.3% and 9.0% for the comparable periods in 2002.The decline in general and administrative expenses as a percentage of revenuefor the second quarter was primarily due to a legal settlement charge of $4.0million incurred in the second quarter of 2002 regarding our extended viewingfee policy.  This decline was offsetslightly by overhead increases in the second quarter of 2003 to support newinitiatives and our future growth plans, which include expansion into newgeographic areas where our market penetration is lower. The year-to-datedecline in general and administrative expenses as a percentage of revenue isalso attributable to the legal settlement, as well as costs and expensesassociated with the conversion of the Video Update stores’ point of sale systemthat were incurred in the first quarter of 2002.

 

Stock option compensation represents the non-cash charge associatedwith certain stock options that were repriced during the first quarter of 2001and are subsequently accounted for as variable stock options under FASBInterpretation No. 44,*Accounting for Certain Transactions involving StockCompensation, an interpretation of APB Opinion No. 25*. We expect torecord adjustments to income from stock option compensation in future periods.

 

Interest expense includes fees for the unused borrowings availableunder our credit facility and amortization of the associated debt issue costs,as well as the costs of any outstanding borrowings under our credit facility,net of interest income.  Interestexpense as a percentage of total revenue decreased to 0.1% in the secondquarter and year-to-date period ended July 6, 2003 from 0.3% in the comparableperiods of 2002.  The decrease wasprimarily due to the repayment of all outstanding debt in May 2002.

 

As a result of the impact of the above factors on revenues andexpenses, operating income increased by 62.0% and 42.9% for the second quarterand year-to-date period of 2003 to $15.8 million and $38.0 million,respectively.  Operating income includesstock option compensation expense and, for the second quarter of 2002, wasreduced by the $4 million legal settlement charge previously discussed.

 

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**Liquidity and Capital Resources**

 

Our primary capital needs are for opening and acquiring new stores andfor purchasing inventory. Other capital needs include refurbishing, remodelingand relocating existing stores; refreshing, rebranding and supplying newcomputer hardware for acquired stores; and infrastructure improvements,primarily computer hardware and software at our support center.  We fund inventory purchases, remodeling,rebranding and relocation programs, new store opening costs and acquisitionsprimarily from cash flow from operations, and, if necessary, loans underrevolving credit facilities.  At July 6,2003, we had cash and cash equivalents of $23.5 million, no long-term debt and$63.8 million in available borrowings under our credit facility.

 

During the twenty-six weeks ended July 6, 2003, we generated $56.7million in Adjusted EBITDA, a 49.2% increase over $38.0 million for thecomparable period in the prior year. This increase was primarily driven by the revenue growth as discussedabove and continued efforts to maximize economies of scale within our expensestructure.  Adjusted EBITDA is definedas earnings before interest, taxes, depreciation and amortization, non-cashcompensation and non-recurring items, less our purchases of rental inventorywhich excludes rental inventory purchases specifically for new storeopenings.  Adjusted EBITDA is presentednot as an alternative measure of operating results or cash flow from operations(as determined in accordance with accounting principles generally accepted inthe United States), but because, in the home video retail industry, it is awidely accepted financial indicator of a company’s ability to finance itsoperations and meet its growth plans, in that it treats rental inventory asbeing expensed upon purchase instead of being capitalized and amortized.  This measure is also used by us internallyto make new store and acquisition investment decisions and to calculate awardsunder incentive based compensation programs. Our calculation of Adjusted EBITDA is not necessarily comparable toreported EBITDA and/or Adjusted EBITDA of other companies due to the lack ofuniform definitions of EBITDA and Adjusted EBITDA.  Our calculation of Adjusted EBITDA is as follows (in thousands):

 
|                                                                       |   | **Thirteen Weeks Ended** |   | **Twenty-Six Weeks Ended** |       |
|----------------------------------------------------------------------------|--------|--------------------------|--------|----------------------------|------------|
|                                                                       |   | **July 7,  2002**        |   | **July 6,  2003**          |       | **July 7,  2002** |   | **July 6,  2003** |   |
|                                                                       |   |                     |   |                       | ** ** |   |   |   | ** ** |
| Operating income                                                           |   | $                        | 9,728  |                       | **$**      | **15,761** | ** ** | $ | 26,597 |   | **$** | **38,000** | ** ** |
| Rental inventory amortization and   non-cash cost of rental inventory sold |   | 23,750                   |   | **30,179**                 | ** ** | 46,346 |   | **65,954** | ** ** |
| Depreciation and intangibles amortization                                  |   | 4,847                    |   | **5,658**                  | ** ** | 9,567 |   | **10,981** | ** ** |
| Stock option compensation                                                  |   | 749                      |   | **1,029**                  | ** ** | 946 |   | **1,498** | ** ** |
| Legal settlement                                                           |   | 4,000                    |   | **—**                 | ** ** | 4,000 |   | **—** | ** ** |
| Purchases of rental inventory                                              |   | (26,738                  | )      | **(27,004**                | **)**      | (52,567 | ) | **(69,391** | **)** |
| DVD catalog investment                                                     |   | —                   |   | **—**                 | ** ** | — |   | **5,421** | ** ** |
| New store rental inventory purchases                                       |   | 1,824                    |   | **2,505**                  | ** ** | 3,099 |   | **4,229** | ** ** |
| Adjusted EBITDA                                                            |   | $                        | 18,160 |                       | **$**      | **28,128** | ** ** | $ | 37,988 |   | **$** | **56,692** | ** ** |

 

We fund short-term working capital needs, including the purchase ofrental inventory, primarily through cash flow from operations and temporaryborrowings under our credit facility. Net cash provided by operating activitieswas $87.3 million for the twenty-six weeks ended July 6, 2003 compared to $83.8million for the twenty-six weeks ended July 7, 2002.  The increase was primarily attributable to the increases inoperating income offset by significant reductions in accounts payable duringthe first half of 2003 versus 2002.  Netcash provided by operating activities continues to be sufficient to cover themajority of our rental inventory replenishment and capital resource needs.

 

Net cash used in investing activities was $107.1 million for the firsthalf of 2003 versus $97.7 million for the comparable period in 2002.  The increase was primarily due to increasedrental inventory purchases in 2003 to

 

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support a larger store base,the DVD catalog investment in the first quarter of 2003 and significantly morenew store builds in 2003 versus the first half of 2002.  The increase was offset partially by areduction in business acquisitions in 2003 versus 2002.

 

Net cash provided by financing activities was $0.7 million for the firsthalf of 2003, versus $43.2 million for the comparable period in 2002.  Net cash provided by financing activities inthe first half of 2002 includes the net proceeds from our stock offering in May2002, partially offset by the repayment of amounts outstanding under our creditfacility. Financing activities in 2003 relate solely to cash received from theexercise of stock options.

 

We grow our store base through internally developed and acquiredstores. We opened 84 internally developed stores, acquired 92 stores and closed24 stores during the first half of 2003. We expect to open between 200 and 225 new internally developed stores in2003. To the extent available, new stores and future acquisitions will befunded using cash from operations, funds available under our credit facility,financing provided by sellers, alternative financing arrangements such as fundsraised in public or private debt or equity offerings or shares of our stockissued to sellers.  However, we cannotassure you that financing will be available to us on terms which will beacceptable, if at all.

 

At July 6, 2003, we had a working capital deficit of $35.7 million, dueto the accounting treatment of rental inventory. Rental inventory is treated asa noncurrent asset under accounting principles generally accepted in the UnitedStates because it is a depreciable asset and a portion of this asset is notreasonably expected to be completely realized in cash or sold in the normalbusiness cycle. Although the rental of this inventory generates the majorportion of our revenue, the classification of this asset as noncurrent resultsin its exclusion from working capital. The aggregate amount payable for this inventory, however, is reported asa current liability until paid and, accordingly, is reflected as a reduction inworking capital. Consequently, we believe that working capital is not anappropriate measure of our liquidity and we anticipate that we will continue tooperate with a working capital deficit.

 

The following table discloses our contractual obligations andcommercial commitments as of July 6, 2003:

 
|                                  |   | **Payments  Due by Period** |    |
|---------------------------------------|--------|-----------------------------|---------|
|                                  |   | **(in  thousands)**         |    |
| **Contractual Obligations**           |   | **Total**                   |    | **< 1  Year** |   | **1-3  Years** |   | **4-5  Years** |   | **>5  Years** |   |
| Credit facility – outstanding(1) |   | $                           | —  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases                      |   | 243,225                     |    | 7,429 |   | 185,158 |   | 37,639 |   | 12,999 |   |
| Unconditional purchase obligations    |   | 12,838                      |    | 4,000 |   | 8,838 |   | — |   | — |   |
| Total contractual cash obligations    |   | $                           | 256,063 |   | $ | 11,429 |   | $ | 193,996 |   | $ | 37,639 |   | $ | 12,999 |   |

 

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(1) The total commercial commitment under ourcredit facility is $65 million, which expires on July 4, 2005.  As of July 6, 2003, there were standbyletters of credit outstanding under our credit facility of $1,172,000, of which$322,000 expires in 2003 and $850,000 expires in 2004.

 

We believe our projected cash flow from operations, cash on hand,borrowing capacity under our credit facility and trade credit will provide thenecessary capital to fund our current plan of operations, including ouranticipated new store openings and acquisition program, through fiscal 2003.However, to fund a major acquisition, or to provide funds in the event that ourneed for funds is greater than expected, or if the financing sources identifiedabove are not available to the extent anticipated or if we increase our growthplan, we may need to seek additional or alternative sources of financing.  This financing may not be available onsatisfactory terms.  Failure to obtainfinancing to fund our expansion plans or for other purposes could have a materialadverse effect on our operating results.

 

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Our ability to fund our current plan of operations and our growth planswill depend upon our future performance, which is subject to general economic,financial, competitive and other factors that are beyond our control.  We cannot assure you that our business willcontinue to generate sufficient cash flow from operations in the future to fundcapital resource needs, cover the ongoing costs of operating our business andservice any debt incurred in the future. If we are unable to satisfy these requirements with cash flow fromoperations and cash on hand, we may be required to sell assets or to obtainadditional financing.  We cannot assureyou that any such sales of assets or additional financing could be obtained.

 

**Recently Issued Accounting Pronouncements**

 

In November 2002, the Emerging Issues Task Force (“EITF”) reached aconcensus on Issue No. 02-16, *Accounting by a Customer (Including a Reseller) for CertainConsideration Received from a Vendor,* effective for fiscal yearsbeginning after December 15, 2002.  EITF02-16 generally requires that cash consideration received from a vendor beconsidered as a reduction of the prices of the vendor’s products, reflected asa reduction of cost of sales in the customer’s income statement.  The presumption can be overcome if thevendor receives an identifiable benefit in exchange for the consideration, inwhich case the consideration should be recorded as revenue, or if theconsideration represents a reimbursement of a specific identifiable incrementalcost incurred by the customer in selling the vendor’s products where theconsideration should  be characterizedas a reduction of that cost.  Ouradoption of this standard as of January 6, 2003 did not have a material impacton our financial position or results of operations.

 

## **Critical AccountingPolicies**

 

Our significant accounting policies are described in Note 1 to ourconsolidated financial statements as filed in our Annual Report on Form 10-Kfor the fiscal year ended January 5, 2003. Our discussion and analysis of financial condition and results ofoperations are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of the financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,we evaluate the estimates that we have made. These estimates have been basedupon historical experience and on various other assumptions that we believe tobe reasonable under the circumstances. Actual results may differ from theseestimates under different conditions or using different assumptions. We believeour most critical accounting policies include our policies with respect torental inventory amortization, the recognition of extended viewing fee revenue,impairment of long-lived assets, purchase price allocation of acquiredbusinesses and deferred income taxes. These policies are discussed in Item 7 of our Annual Report on Form 10-Kfor the fiscal year ended January 5, 2003.

##### ** **

##### **Forward Looking Statements**

 

This quarterly report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended, whichrepresent our expectations or beliefs about future events and financialperformance.  Forward-looking statementsare identifiable by the fact that they do not relate strictly to historicalinformation and may include words such as “believe,” “anticipate,” “expect,”“intend,” “plan,” “will,” “may,” “estimate” or other similar expressions andvariations thereof.  In addition, anystatements that refer to expectations, projections or other characterizationsof future events or circumstances are forward-looking statements.  Our forward-looking statements are based onmanagement’s current intent, belief, expectations, estimates and projectionsregarding our company and our industry. Forward-looking statements are subject to known and unknown risks and uncertainties,including those described in our Annual Report on Form 10-K for the fiscal yearended January 5, 2003.  In light ofthese risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this Form 10-Q might not occur. In addition, actual results could differ materially from those suggestedby the forward-looking statements, and therefore you should not place unduereliance on the forward-looking statements. We undertake no obligation to publicly update or revise any

 

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forward-looking statements,whether as a result of new information, future events or otherwise.  We desire to take advantage of the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995 andin that regard we caution the readers of this Form 10-Q that the importantfactors described in our Annual Report on Form 10-K for the fiscal year endedJanuary 5, 2003, among others, could affect our actual results of operationsand may cause changes in our strategy with the result that our operations andresults may differ materially from those expressed in any forward-lookingstatements made by us, or on our behalf.

 

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Item 3.   Quantitative and Qualitative DisclosuresAbout Market Risk

 

There havebeen no material changes in our inherent market risk since the disclosures madeas of January 5, 2003 in our Annual Report on Form 10-K.

 

Item 4.   Controls and Procedures

 

Pursuant toRule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”),our management, with the participation of the Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in ensuring that information required tobe disclosed in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.  No changein our internal controls over financial reporting occurred during the mostrecent fiscal quarter that materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

 

#### **Part II - OtherInformation**

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

Our AnnualMeeting of Stockholders was held on June 11, 2003.  The following action was taken at the Annual Meeting, for whichproxies were solicited pursuant to Regulation 14 under the Securities ExchangeAct of 1934, as amended:

 

1.               The five nominees proposed by the Boardof Directors were elected as directors by the following votes:

 
| **Name**            |   | **For**    |   | **Withheld** |   |
|---------------------|--------|------------|--------|--------------|--------|
| Joe T. Malugen      |   | 18,760,838 |   | 11,867,603   |   |
| H. Harrison Parrish |   | 19,198,638 |   | 11,429,803   |   |
| William B. Snow     |   | 18,914,447 |   | 11,713,994   |   |
| Sanford C. Sigoloff |   | 18,370,307 |   | 12,258,134   |   |
| John J. Jump        |   | 25,959,468 |   | 4,668,973    |   |

 

2.               A proposal to adopt the Movie Gallery,Inc. 2003 Stock Plan was approved by a vote of 22,339,315 for

versus5,169,797 against.  There were 15,811abstentions.

 

3.               A proposal to adopt the Movie Gallery,Inc. 2003 Employee Stock Purchase Plan was approved by a vote of 27,347,791 forversus 162,468 against.  There were14,664 abstentions.

 

4.               A proposal to ratify the appointment ofErnst & Young LLP as the Company’s independent auditors for

the 2003fiscal year was approved by a vote of 29,072,406 for versus 1,545,399 against.  There were 10,636 abstentions.

 

**Item6.  Exhibits and Reports on Form 8-K**

 
| a)     |   | Exhibits |
|--------|--------|----------|
|   |   | 10.1     | Amendment to  Credit Agreement between Movie Gallery, Inc. and SouthTrust Bank dated May  19, 2003. |

 

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|   |   | 31.1                                                                | Certification  of Chief Executive Officer Pursuant to 15 U.S.C. §7241, as adopted Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|---------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                |                                                                                                                                               |
|   |   | 31.2                                                                | Certification  of Chief Financial Officer Pursuant to 15 U.S.C. §7241, as adopted Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                |                                                                                                                                               |
|   |   | 32.1                                                                | Certification  of Chief Executive Officer Pursuant to 18 U.S.C §1350, as adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002   |
|   |   |                                                                |                                                                                                                                               |
|   |   | 32.2                                                                | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. §1350, as adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002  |
|   |   |                                                                |                                                                                                                                               |
| b)     |   | Reports on  Form 8-K                                                |
|   |   |                                                                |                                                                                                                                               |
|   |   | We filed a  Form 8-K reporting on Items 7 and 12 on April 14, 2003. |
|   |   |                                                                |                                                                                                                                               |
|   |   | We filed a  Form 8-K reporting on Items 7 and 12 on May 8, 2003.    |

 

 

**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 theundersigned thereunto duly authorized.

 

 
|                        |                                         | Movie  Gallery, Inc. |   |
|-----------------------------|----------------------------------------------|----------------------|--------|
|                        |                                         | (Registrant)         |
|                        |                                         |
|                        |                                         |
| Date:  August 20, 2003 | /s/ J.  Steven Roy                           |                 |
|                        | J. Steven  Roy, Executive Vice President and |
|                        | Chief  Financial Officer                     |
|                             |                                              |                      |        |  |

 

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