movie gallery 2005 (09-06) agency presentation

8/6/2019 Movie Gallery 2005 (09-06) Agency Presentation

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1

Presentation To

September 6, 2005



2

Presentation To

September 7, 2005



3

Introductions

Joe Malugen

Chairman of the Board - Chief Executive Officer

Tim Price

Executive Vice President - Chief Financial Officer

Thomas Johnson

Senior Vice President - Corporate Finance & Business Development

Mark Moreland

Vice President and Treasurer



4

Agenda

Thomas Johnson

Senior Vice President - Corporate Finance &Business Development



5

Agenda

Appendices

Additional Industry Overview Support

Transaction Update

Update on the video rental industryCompany overview and integration update

Financial review and update on projections

1

2

3

A

4



6

Transaction Update

Strategic Rationale For TransactionStrength of Combined Company

• Critical mass of approximately 4,700 stores creates very strong #2 competitor in industry versusBlockbuster’s approximately 4,700 company-operated stores and 1,100 franchised stores in the US

• Greater financial strength, cash flow, and store growth potential than either company would have ona stand-alone basis

• Significantly better competitive position, ability to capitalize on an evolving industry

• Greater purchasing leverage as a combined company

Geographic Footprint of Combined Company• Acquisition combines Hollywood’s western US-focused prime urban and suburban superstore

locations with Movie Gallery’s eastern US-focused rural and secondary market dominance

Cash Savings

• Management conservatively estimates annual cash savings of $50 million to be realized gradually:$20 million in 2005, $40 million in 2006, and $50 million in 2007 and beyond

Operating Efficiencies

• Management expects to improve operational performance due to greater distribution density and theadoption of best practices of both companies



7

Transaction Update

Pro Forma Movie Gallery Store Footprint



8

Transaction Update

What We Have Learned About the Hollywood Business• Acquisition has exceeded expectations and Video business is

very similar to Movie Gallery’s

• Exceptional talent pool, particularly in financial and logisticspersonnel

• Well-maintained corporate infrastructure

• Significant prior investments have already been made in

Hollywood stores and distribution facilities

• Real estate may offer additional value creation opportunities

• Hollywood possessed better purchasing practices in terms of

quantity and title mix.• Continued implementation of “best practices” may offer further

long-term margin enhancement

• Game business has different cash flow and working capital needsthan video.



9

Transaction Update

Integration Update• Realized savings to date ahead of original plan

• Projected 2005 savings expected to exceed original plan by over $10

million ($10MM vs $23.1MM)

• Consolidated executive management (Finance, HR, Real Estate, Legal,Lease Administration, IT, and Distribution departments) and eliminated60 positions

• Closed VHQ acquisition in June

• Closed 51 Game Crazy stores

• Began fulfilling Movie Gallery distribution needs via Hollywood’sestablished DCs expected to result in approximately $12 million annualsavings (previously outsourced by Movie Gallery)



10

Industry Overview

Joe Malugen

Chairman of the Board - Chief Executive Officer



11

Industry Overview

Weak Box Office Sales

• Historically, success at the box office has translated into significantdemand for the DVD titles when they are released four to six months

later on home video.

Home Video Release Quarterly Comparison

Q1 04 Q105 05 Comp Q2 04 Q2 05 05 Comp Q3 04 Q3 05 05 Comp Q4 04 Q4 05 05 Comp

Titles > $100M

TTL Titles 3 5 67% 6 7 17% 1 3 200% 10 8 -20%

TTL Box 336 774 130% 989 1080 9% 370 386 4% 2065 1686 -18%

Titles $25M-$99.9M

TTL Titles 24 20 -17% 18 16 -11% 20 17 -15% 18 25 39%TTL Box 1184 1067 -10% 1113 813 -27% 1007 889 -12% 1086 1230 13%

Titles $10M-$99.9M

TTL Titles 34 31 -9% 30 27 -10% 32 23 -28% 29 38 31%

TTL Box 1350 1257 -7% 1310 1015 -23% 1202 1002 -17% 1261 1457 16%

Title SlateFirst Quarter Second Quarter Third Quarter* Fourth Quarter*



12

Industry Overview

Weak Box Office Sales (continued)

• The current slump at the box office isimpacting the home video industry

• Movie theater revenue YTD in 2005has declined 8%

• The movie theater industry experienced19 consecutive weekends of decliningbox office revenues this spring and hasbeen off on a comp basis on 3 of the 5subsequent weekends

Box office revenues have been down vs. 2004 in 25 of 32 weeks this year



13

Industry Overview

Title

Release

Date

Box

Office Title Release Date

Box

Office

Hide and Seek 07/05/05 51 Beauty Shop 08/23/05 37

Bride and Prejudice 07/05/05 7 Dust to Glory 08/23/05 1

Dear Frankie 07/05/05 1 A Lot Like Love 08/23/05 22In My Country 07/05/05 1 Layer Cake 08/23/05 1

Very Long Engagement, A 07/12/05 6 Schultze Gets the Blues 08/30/05 1

Million Dollar Baby 07/12/05 100 Sahara 08/30/05 68

State Property 2 07/12/05 2 Monster-In-Law 08/30/05 78

Space Station (IMAX) 07/19/05 58 Ong Bak: The Thai Warrior (Sub) 08/30/05 5

Constantine 07/19/05 75 3-Iron 09/06/05 1

Man of the House 07/19/05 19 Holy Girl 09/06/05 1

Up and Down 07/19/05 1 Crash 09/06/05 50Ice Princess 07/19/05 24 Nobody Knows 09/13/05 1

Upside of Anger, The 07/26/05 19 Fever Pitch 09/13/05 42

Steamboy 07/26/05 1 Winter Solstice 09/13/05 1

King's Ransom 07/26/05 4 Madison 09/13/05 1

XXX: State Of The Union 07/26/05 27 Hitchhiker's Guide to the Galaxy, The 09/13/05 50

Alexander 08/02/05 34 Twin Sisters 09/13/05 1

Guess Who 08/02/05 68 Inside Deep Throat 09/20/05 2

Because of Winn-Dixie 08/09/05 33 Turtles Can Fly 09/20/05 1

Look at Me 08/09/05 1 Brothers (Brodre) 09/20/05 2

Kung Fu Hustle 08/09/05 17 Mindhunters 09/20/05 4

Wedding Date, The 08/16/05 32 Longest Yard, The 09/20/05 158

Ballad Of Jack And Rose, The 08/16/05 1 Adventures of Shark Boy and Lava Girl, The 09/20/05 36

Sin City 08/16/05 74 Robots 09/27/05 128

Ring 2, The 08/23/05 76 Lords of Dogtown 09/27/05 12

3Q05 Title Slate



14

Industry Overview

TitleRelease

DateBox

Office TitleRelease

DateBox

Office

Interpreter, The 10/04/05 73 March Of The Penguins 11/29/05 45

Amityville Horror 10/04/05 65 Deuce Bigalow: European Gigolo 11/29/05 28

Kicking And Screaming 10/11/05 53 Broken Flowers 11/29/05 21

Kingdom of Heaven 10/11/05 47 Cave, The 11/29/05 14

Sisterhood of the Traveling Pants 10/11/05 38 Fantastic Four 12/06/05 144

Unleashed 10/11/05 25 Cinderella Man 12/06/05 63

Batman Begins 10/18/05 204 Sky High 12/06/05 58

Herbie: Fully Loaded 10/25/05 64 Must Love Dogs 12/06/05 43

Bewitched 10/25/05 63 Island, The 12/06/05 31

House of Wax 10/25/05 32 Hustle & Flow 12/06/05 19

George A. Romero's Land of the Dead 10/25/05 21 Underclassman 12/06/05 16

Star Wars Episode 3 11/01/05 382 Everything is Illuminated 12/06/05 12

Perfect Man, The 11/01/05 16 Dukes of Hazard, The 12/13/05 75

Charlie and the Chocolate Factory 11/08/05 200 40 Year-old Virgin, The 12/13/05 72Stealth 11/08/05 30 Bad News Bears 12/13/05 35

Devil's Rejects 11/08/05 20 Valiant 12/13/05 22

Madagascar 11/15/05 187 Four Brothers 12/20/05 65

Skeleton Key, The 11/15/05 51 Serenity 12/20/05 38

War of the Worlds 11/22/05 226 Brothers Grimm, The 12/20/05 21

Polar Express 11/22/05 163 Rebound (aka Rage Control) 12/20/05 17

Honeymooners, The 11/22/05 13 Into the Blue 12/27/05 36Mr. And Mrs. Smith 11/29/05 180 Dark Water 12/27/05 26

Christmas With the Kranks 11/29/05 74 Cry Wolf 12/27/05 15

Attractive 4Q05 Title Releases

• 4Q05 will see an improvement in number of video releases includingsome of the year’s biggest titles and likely best rentals



15

Industry Overview

Significant DVD Catalog Release

•Year to date in 2005, the number of DVD titles continues to increasedriven in part by the TV series on DVD category.

11,313

10,089

7,351

5,629

3,958

2,742

1,522

-

2,000

4,000

6,000

8,000

10,000

12,000

1998 1999 2000 2001 2002 2003 2004

No. of Titles Released on DVD, 1998 - 2004

CAGR 55%

Source: DVD Release report



16

Industry Overview

One Quarter of Library Unwatched

Watch All 1x

24%

Watch All 2x+

51%

Never Open or

Watch

7%Watch Some

6%

Open/Don't Watch

12%

Source: Fox Research



17

Industry Overview

High Definition Is Expected To Drive Significant Growth• New technology offers 4x and 3x picture and sound quality of DVD,

respectively

• Expected $30 - $35 price point will make rental a more compellingalternative

• Interactive technology

• Makes use of growing HDTV in American households

• Hi-Def DVD delayed because of the ongoing battle over Blu-Ray and HDDVD technology

• Until one format dominates, expectation is that consumers will delaypurchases of the new high definition players, resulting in less copy depthcoming out of the movie studios and therefore slower consumerpenetration / acceptance

• Further delays will continue to impact consumer behavior



19

Industry Overview

Rapid Acceptance of HDTV

• HDTV has grown as fast, or faster, than previous technologies like colorTV, satellite TV and the DVD.

• The ultimate success of the next generation DVD depends upon theindustry uniting behind one new standard.

9

18

33

55

86

2003 '04 '05E '06E '07E

HDTV Installed Base

(millions of units)

Source: Consumer Electronics Association



20

Industry Overview

Packaged Media Will Dominate

Total Home Entertainment Consumer Spending: U.S.

$0

$5

$10

$15

$20

$25

$30

$35

2000 2001 2002 2003 2004 2005P 2006P 2007P 2008P 2009P 2010P

$B

VHS Sell-through VHS Rental DVD Sell-through DVD Rental HD S/T HD Rental

Source: Videoscan, Rentrak, Centris, Alexander & Assoc., Adams Research, Video Business, Video Store, Fox Research, & Company estimates



21

Industry Overview

• Microsoft’s Xbox 360 to launch in November 2005

• Interactive technology

• “TV” quality graphics

• Sony and Nintendo expected to launch during2006

• History shows that new game platforms drivesignificant growth during the first 24 months

Next Generation Game Platforms Expected to DriveGrowth in the Gaming Segment

Microsoft Xbox 360



22

Industry Overview

Previously Viewed Movies

• Sales of previously viewed titles have increasedsubstantially as consumers weigh the relative

economics of renting versus purchasing a pre-ownedmovie or game

• Relative cost to consumer 4 weeks after streetdate: $19.99 new; $9.99 used

• Volume of previously viewed movies available forsale should increase significantly as new adapters ofHD DVD upgrade their libraries

• Effective way to manage company inventories astitles mature

• Competitive advantage over pure retail business whodon’t sell used product, e.g. Wal-Mart, Circuit City,Best Buy



23

Industry Overview

Non-AvidNonNon--AvidAvidSuperAvidSuperAvidSuperAvid AvidAvidAvidNearly Everyone Owns a Previously Viewed Movie

Final WaveFinal WaveFinal WaveMainstreamMainstreamMainstreamLater

Techno

LaterLater

TechnoTechno

Early

Adopters

EarlyEarly

AdoptersAdopters

96%

92%

90%

98%

Source: Fox Research



24

Industry Overview

Trading / Re-Selling

• Trading of movies will likely become moreimportant as consumers look to upgrade

traditional DVD libraries with the new HDDVD format

• Likewise, game trading should see notable

increases with the upcoming launch of newMicrosoft (Q4 2005), Sony (2006) andNintendo (2006) game platforms

• All Hollywood stores trade DVDs today andall Game Crazy stores trade games



25

Industry Overview

Non-AvidNonNon--AvidAvidSuperAvidSuperAvidSuperAvid AvidAvidAvidTrading Emerging

Final WaveFinal WaveFinal WaveMainstreamMainstreamMainstreamLater

Techno

LaterLater

TechnoTechno

Early

Adopters

EarlyEarly

AdoptersAdopters

15%

12%

9%

24%

Among those with PVMSource: Fox Research



26

Industry Overview

We Believe Home Video Will Remain A Stable, GrowingBusiness

• Still a growth business - AMR data shows growing industry for at

least next 5 years

• Largest share of studio revenues

• Value proposition – movie rentals remain one of the least expensiveforms of entertainment

• Consolidation of smaller players will drive growing market share forindustry leaders

• Rental is an impulse action – niche retail shopping experience

• Possibility of a shrinking theatrical release window should benefit the

rental business – closer to studio marketing spend



27

Financial Overview

Tim Price

Executive Vice President - Chief Financial Officer

Fi i l O i



28

($ in millions)

$38.7

$81.2

($1.4)

(2.1)

($34.0)

($6.1)

$0.3

$0.9

March Plan Q3

2005 EBITDA

Change in

Store Count

Gross Margin

Impact

Comp Store

Sales

Depreciation September Plan

Q3 2005 EBITDA

Synergies

Components of 3Q05 EBITDA Change from March Planto Current Estimate

Financial Overview

Reflects closureof 51

underperformingGame Crazy

stores during Q2

Higher COGSrates driven by

lower thananticipatedrevenues

Driven byestimated compstore declines

of 9% forHollywood

Video and 8%

for MovieGallery for Q3

Reduceddepreciation

expense due to

reduced storeopenings

Actualsynergiesabove the

$2.5MMforecasted in

the March Plan

Change in

OperatingExpenses

Reduced non-rent expense

leverage

Fi i l O i



29

($ in millions)

$382.0

$292.3

($2.3)

($0.4) ($55.7)

($17.7)($10.0 )

($8.9 )

March Plan

2005 FYEEBITDA

Change in

Store Count

Gross Margin

Impact

Comp Store

Sales

Synergies September Plan

2005 FYEEBITDA

Depreciation

FY 2005 EBITDA Change from March Plan to theRevised Forecast

Financial Overview

Reflects closureof 51

underperformingGame Crazy

stores during Q2 Higher COGS

rates driven bylower thananticipatedrevenues

Driven byestimated compstore declines

of 5% forHollywood

Video and MovieGallery for FY

‘05

Reduceddepreciation

expense due toreduced store

openings

Synergies inthe March Plan

were ProForma and

included a Q1impact

Change in

OperatingExpenses

Reduced non-rent expense

leverage

Financial Overview



30

Financial Overview

Cash Flow Summary

Q21Q3 Q4

Cash at beginning of period $22.6 $51.1 $41.3

Operating cash flow (excluding rental purchases / depreciation) 13.1 18.2 88.0

Rental purchases (71.7) (82.9) (98.1)

Rental depreciation2 87.9 80.7 82.1

Capital expenditures (21.8) (21.0) (13.5)Debt borrowing / (repayment) 1,141.2 (3.5) (36.1)

Business Acquisitions (1,089.4) 0.0 0.0

Long-term debt financing fees (29.1) 0.0 0.0

Other (1.6) (1.2) (1.2)

Cash at end of period $51.1 $41.3 $62.4

1Q2 based on externally reported cash flow, and includes 13 weeks of

Movie Gallery and 10 weeks of Hollywood Entertainment results.2Q2 rental depreciation inlcudes a one-time VHS inventory valuation of $10.1 mil.

Financial Overview



31

Financial Overview

Fiscal 2005 Revenue AssumptionsAcquisition Model Forecast Variance B/(W) Model

Q2 Q3 Q4 FY'05 Total Q2 Q3 Q4 FY'05 Total Q2 Q3 Q4 FY'05 Total

Sales

MOVI $211.6 $215.4 $241.4 $898.4 $199.1 $202.3 $228.8 $864.0 ($12.6) ($13.1) ($12.6) ($34.4)

Comp % 1.4% (8.0%) (7.9%) (3.5%) (4.5%) (5.9%)

Hollywood

Video 357.2 361.2 406.7 1,525.3 355.2 320.9 381.7 1,459.5 (2.0) (40.3) (25.0) (65.8)

Comp % (1.7%) (7.9%) (8.6%) (3.8%) (4.8%) (3.1%)

Game Crazy 69.8 76.6 134.2 352.6 69.6 64.6 128.9 337.4 (0.3) (12.0) (5.3) (15.2)

Comp % 10.4% 2.2% 14.7% 10.5%

HLYW Consolidated $427.1 $437.8 $541.0 $1,877.9 $424.8 $385.4 $510.6 $1,796.9 ($2.3) ($52.4) ($30.4) ($81.0)

Comp % (4.4%) (6.4%) 0.7% (1.4%)Total Company $638.7 $653.2 $782.4 $2,776.3 $623.9 $587.7 $739.5 $2,660.9 ($14.8) ($65.5) ($42.9) ($115.4)

Number of New Stores - Increase / (Decrease)

MOVI - Build 90 119 118 400 80 91 14 244 (10) (28) (104) (156)

VHQ Acquisition 61 0 0 61 61 0 0 61 0 0 0 0

Other Acquired 12 12 13 44 8 0 0 26 (4) (12) (13) (18)

Hollywood Video - Build 18 16 23 80 16 16 8 63 (2) 0 (15) (17)

Game Crazy - Build 0 0 0 5 2 1 0 6 2 1 0 1Subtotal New and Acquired 181 147 154 590 167 108 22 400 (14) (39) (132) (190)

Closures (22) (21) (16) (81) (80) (18) (18) (137) (58) 3 (2) (56)

Net 159 126 138 509 87 90 4 263 (72) (36) (134) (246)

`

Capital Expenditures (1) ($30.4) ($33.9) ($34.8) ($127.2) ($32.9) ($26.8) ($15.0) ($104.1) ($2.5) $7.1 $19.8 $23.1

(1) Capital Expenditures include property, plant, and equipment, new rental inventory, and business acquisit ions. Figure is adjusted for a Q2 HLYW purchase

accounting entry of $26M due to step-up of fixed assets. Exc ludes the Hollywood acquisit ion.

Financial Overview



32

Financial Overview

Integration Synergies Headcount 2005 2006 2007

EBITDA Related

COGS

Distribution Consolidation n/a $3.9 $11.5 $12.2

Buying Leverage n/a 1.0 1.0 1.0

n/a 4.9 12.5 13.2

Store Operating ExpenseGift card vendor leverage n/a 0.3 0.4 0.4

Utility Program Consolidation & Optimization 3 0.2 0.5 0.5

3 0.5 0.9 0.9

Operating and G&A Expense

Other - Marketing / Internet / Survey 10 0.3 0.5 0.5

Game Crazy Management Consolidation 14 1.4 2.3 2.4

Executive Management Consolidation 5 2.9 5.0 5.0

29 $4.6 $7.8 $7.9

EBITDA Impact 32 $9.9 $21.2 $22.0

Balance Sheet Related

Real Estate / Construction Consol. (Capitalized) 45 $5.2 $7.7 $8.0

New "Sell-Through" Inventory Optimization n/a 8.0 0.0 0.0

45 13.2 7.7 8.0

Total 77 $23.1 $28.9 $30.0

Additional Opportunities

Operational Savings tbd $0.0 $13.5 $17.8

Buying Leverage n/a 0.0 2.0 2.0

$0.0 $15.5 $19.8

Total 77 $23.1 $44.4 $49.8

Financial Overview



33

Key Forecast Assumptions: 2005 - 2009

Financial Overview

MOVI HLYW GC

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

Same Store Sales (4.5%) 1.1% 3.0% 3.2% 3.3% (4.8%) (1.7%) 0.2% 2.1% 2.1% 10.5% 19.7% 22.2% 9.7% 2.1%

Margins

Rental (1) 67.8% 70.1% 70.1% 70.1% 70.1% 69.8% 69.7% 69.7% 69.7% 69.7% na na na na naMerch 27.8% 28.8% 28.8% 28.8% 28.8% 23.6% 23.8% 23.8% 23.8% 23.8% 26.0% 25.4% 25.8% 25.7% 26.3%

Expense Ratios

OPEX 52.9% 53.4% 52.8% 52.3% 51.9% 50.6% 51.3% 51.3% 50.0% 49.9% 23.2% 20.9% 18.0% 16.6% 16.4%

G&A 7.7% 6.9% 6.8% 6.9% 6.9% 7.6% 5.1% 5.1% 5.1% 5.0% 4.7% 3.5% 2.9% 2.6% 2.6%

Operating Income 4.0% 6.4% 7.1% 7.5% 7.9% 8.0% 9.6% 9.4% 10.7% 10.9% (1.9%) 1.0% 4.9% 6.5% 7.3%

LIBOR 3.56% 4.36% 4.90% 4.90% 4.90% na na na na na na na na na na

Cash Taxes ($ mil) $4.0 $4.0 $0.1 $51.3 $94.0 na na na na na na na na na na

New Stores

Built 244 150 175 200 200 63 25 25 25 25 6 - - - -

Acquired 87 20 20 20 20 - - - - - - - - - -

Closed (70) (70) (70) (70) (70) (13) (25) (25) (25) (25) (54) - - - -

Net Total 261 100 125 150 150 50 - - - - (48) - - - -

Investment ($ mil)

Built $31.7 $19.6 $23.1 $26.7 $26.9 $22.1 $7.3 $7.4 $7.5 $7.5 $0.9 $0.0 $0.0 $0.0 $0.0

Acquired 19.1 4.4 4.5 4.5 4.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Maint/G&A (2) 21.7 20.3 20.3 20.3 20.3 11.2 9.4 14.4 14.2 15.7 0.4 0.9 1.0 1.1 1.2

Total Investment $72.6 $44.3 $47.9 $51.5 $51.8 $33.3 $16.7 $21.7 $21.7 $23.3 $1.3 $0.9 $1.0 $1.1 $1.2

(1) MOVI 2005 rental margin is impacted by a $10.1M VHS valuation adjustment.

(2) Adjusted for a HLYW Q2 2005 $26M capital entry due to purchase accounting.



Financial Overview



35

Financial Overview

Need for Financial Covenant Amendment• In active dialogue with Wachovia, and will approach entire bank group in

Q3 for an adjustment to leverage covenants

• Will require 51% vote

• Secondary trading levels suggest continued support for the Company,with the institutional bank debt and bonds trading at or above par

Leverage Ratio Comparison

2.7x

1.9x

3.5x

3.1x

2.3x

1.1x1.0x0.9x

1.3x1.7x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2005 2006 2007 2008 2009Acquisition Model Current Forecast Existing Covenant Level

movie gallery 2005 (09-06) agency presentation

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