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Gallery Buys Time, Again

28 Aug, 2007 By: Erik Gruenwedel

Financially troubled Movie Gallery Aug. 28 said it has extended for a third time until Sept. 30 its forbearance agreement with senior lenders.

The previous extension to Aug. 28 prolonged a previous Aug. 14 deadline.

The Dothan, Ala.-based No. 2 domestic video rental chain earlier this month warned it had incurred significant losses in the second quarter (ended July 1), raising doubts it could meet its debt requirements and continue operations.

The company's financial disclosure made it likely it won't meet those obligations, and analysts warned creditors could begin foreclosure proceedings.

Gallery lost $325 million in the second quarter, compared to $25 million during the same period last year, according to a filing with the Securities and Exchange Commission. Revenue fell 6% to $561 million, from $601 million last year.

Gallery, which operates more than 4,500 stores, has struggled since it outbid No. 1 Blockbuster Inc. in 2005, paying $1.1 billion to acquire then No. 2 Hollywood Video.

Chairman and CEO Joe Malugen said the additional extension allowed the rental company to continue restructuring, which includes store closures, layoffs and other downsizing measures.

“We are pleased to have the continued cooperation of our lenders as well as the ongoing support of our valued employees,” Malugen said in a statement.

Independent analyst Dennis McAlpine said Gallery has shrewdly intertwined its future existence with its lenders' money. He said the banks don't want Gallery to declare bankruptcy, thereby diminishing the value of their loans.

McAlpine said lenders will continue working with Gallery to restructure the debt to a more manageable amount while at the same time eliminating all extraneous costs.

“[Gallery has] learned one of the great lessons of life: If you are going to have financial troubles, make sure the bank hurts as much as you do,” McAlpine said.

Michael Pachter, media analyst with Wedbush Morgan Securities in Los Angeles, countered that the ongoing extensions simply delay the inevitable insolvency.

“It is really annoying,” he said.

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