Movie Gallery warns of potential non-compliance with loan covenants at 1Q07

By Sara Rosenberg

New York, March 24 - Movie Gallery Inc. is warning that it may not be able to comply with some financial covenants for the first quarter of 2007 without further amendments to its credit facility, according to a 10-K filed with the Securities and Exchange Commission Friday.

"We are exploring several alternative strategies to remain in compliance with the terms of our credit facility, including, among other things, operational improvements through capitalizing on merger integration synergy opportunities, raising additional equity, divesting certain non-core assets and sale/leaseback transactions," the filing said.

The Dothan, Ala.-based video rental company just completed an amendment to its credit facility on March 15, and before that on Sept. 21, 2005, in order to avoid non-compliance with financial covenants.

Through the most recent amendment, the company gained room under its leverage ratio, fixed-charge coverage ratio and interest coverage ratio, but starting with the first quarter of 2007, the leverage ratio drops to 2.25 from the 6.50 requirement in fourth quarter 2006, the fixed-charge coverage ratio goes up to 1.10 from the 1.00 requirement in fourth quarter 2006 and the interest coverage ratio moves to 3.00 from the 1.45 requirement in fourth quarter 2006.

Wachovia Bank is the administrative agent on the deal.

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