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Alleged Video Update Fraud Won't Hurt Movie Gallery

11 Apr, 2002 By: Holly J. Wagner

Former executives of Video Update may have embezzled money from the company before Movie Gallery bought the ailing chain last year, according to a document filed with the federal Securities and Exchange Commission (SEC) today.

"During the course of [Video Update's] ongoing bankruptcy proceedings, there were investigations into allegations of theft, misappropriation of funds, and the destruction of company documents by former management of the company," the SEC filing states. "Current management of the company believes that all instances of potential fraud have been properly recorded in the financial statements of the company and has not recorded additional accruals or estimates related to possible contingencies related to any fraud perpetrated against the company by its former management."

Movie Gallery CFO and EVP J. Steven Roy said the issue emerged during the Video Update bankruptcy proceedings and should not harm Movie Gallery going forward. He would not discuss amounts or which Video Update executives were involved in the alleged scam.

Jefferies & Co. analyst Ravir Dhar confirmed as much to The Wall Street Journal.Information about the alleged fraud surfaced in a document Movie Gallery filed in support of a 8.25 million share offering.

Movie Gallery acquired 320 Video Update stores that survived that chain's bankruptcy in a deal that grew Movie Gallery by about 30 percent. The bankruptcy court approved that acquisition in January.

Video Update filed for Chapter 11 bankruptcy protection in September 2000, listing total assets of $129.5 million against debts of $210 million. The 450-store chain quickly closed more than 100 underperforming locations, and worked with studios to renegotiate purchase to replenish new release movie inventory in many understocked stores.

Last May Movie Gallery took over as Update's senior secured creditor when it purchased 92 percent of the outstanding $121 million bank debt for about $8.5 million from a syndicate of financial institutions led by BNP Paribas, according to SEC filings.

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