Movie Gallery warns of credit facility covenant default danger, need for alternative financing

By Caroline Salls

Pittsburgh, Jan. 19 - Movie Gallery, Inc. warned that the financial covenants under its $863.4 million senior secured credit facility will become significantly more restrictive following the first quarter of 2007, and unless it obtains an amendment to the covenants, it risks default on the credit facility, according to a 10-Q filing with the Securities and Exchange Commission.

Specifically, unless is the company can obtain an amendment to the financial covenants, its projected operating results indicate that it will fail the more restrictive financial covenant tests as of April 1.

If the credit facility is accelerated, the company said it would be required to search for alternative measures to finance its current and ongoing business obligations.

However, Movie Gallery said its ability to obtain future financing or to sell assets to provide additional funding could be adversely affected because it has substantial debt and substantially all of its assets have been secured as collateral under the credit facility.

In addition, the company said uncertainty surrounding its ability to finance its debt obligations has caused some trade creditors to impose increasingly less favorable terms, and continuing uncertainty could result in even more unfavorable terms from the trade creditors, which could adversely impact liquidity and operating results.

If the credit facility were accelerated by lenders because of a covenant violation, the company said its 11% senior notes could also be accelerated.

The company said it is exploring several alternative strategies to facilitate further amendments to or a refinancing of the credit facility, including raising additional equity, sale/leaseback transactions and subleasing and restructuring store leases.

According to the 10-Q, the company's primary capital needs are for seasonal working capital, debt service, new store investment and remodeling and relocating existing stores. Movie Gallery funds its capital needs primarily by cash flow from operations and, as necessary, borrowings under the revolver portion of the $836.4 million senior secured credit facility.

For the 39 weeks ended Oct. 1, the company reported that net cash from operating activities resulted in a use of $35.1 million in cash, resulting in an increased use of borrowings under the credit facility to fund the company's capital needs.

At Oct. 1, Movie Gallery had cash and cash equivalents of $19.6 million and $31.2 million in available borrowings under the credit facility, and the company said it believes that cash flow available from operations and borrowings under the credit facility will be sufficient to operate its business, satisfy working capital and capital expenditure requirements, and meet its foreseeable liquidity requirements, including debt service, for the remainder of fiscal 2006.

Movie Gallery is a Dothan, Ala.-based movie rental company.

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