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Movie Gallery In Default; Mulling Sale

Dothan, Ala. – Movie Gallery, the nation’s No. 2 video rental chain, has defaulted on its senior credit facility, citing second quarter results that were “significantly softer than expected.”

The company, comprised of the Movie Gallery, Hollywood Video and Game Crazy chains, said it may seek a waiver from its lenders to remedy the defaults, and will try to conserve cash by accelerating store closings and consolidations. Other options it is considering include divesting assets, recapitalizing, forming a strategic alliance, or merging with or selling to a third party.

“During the last four months, we, like most of the industry, have experienced a sharp decline in our rental business, which has put unexpected pressure on our financial performance,” said chairman, president and CEO Joe Malugen. “With the help of our advisors, we are actively pursuing every avenue to restore the financial soundness of the company. We are committed to working with our lenders and other stakeholders in a transparent way to remedy the current situation.”

The news dovetailed with this week’s CEO succession at No. 1 video rental chain Blockbuster, which announced last week that it will close 282 U.S. stores this year.

Both companies are reeling from the impact of soft video demand and increased competition from online rental pioneer Netflix.

Movie Gallery operates 4,600 stores throughout the U.S. and Canada. It acquired Hollywood Video and its Game Crazy video gaming operation two years ago following a failed bidding war by founder Mark Wattles and Blockbuster. Wattles later used his share of the proceeds to fund his acquisition of 32 Ultimate Electronics stores.