Movie Gallery Reports Results for the Second Quarter of 2006

Movie Gallery Reports Results for the Second Quarter of 2006

- Adjusted EBITDA for the second quarter of 2006 was $57.6 million

- Adjusted EBITDA for the first half of 2006 was $174.4 million

DOTHAN, Ala., Aug. 10 /PRNewswire-FirstCall/ -- Movie Gallery, Inc. (NASDAQ:MOVI) today reported results for the second quarter of 2006, which ended July 2, 2006.

For the second quarter of 2006, total revenues were $601.3 million as compared to $504.7 million in the comparable period last year. On a pro forma basis, combining the Company's results with those of Hollywood Entertainment Corporation prior to its acquisition by the Company on April 27, 2005, the Company's revenues would have been $637.5 million in the second quarter of 2005. The Company's year-to-date revenues were approximately $1.3 billion for the twenty-six weeks ended July 2, 2006 as compared to revenue of $738.5 million in the comparable 2005 period. On a pro forma basis, revenues for the comparable twenty-six week period in 2005 would have been $1.3 billion.

Same-store total revenues for the second quarter of 2006 decreased 4.6% from the comparable period last year, reflecting continued softness in the video rental industry. Notably, same-store total revenues increased by 1.6% at Movie Gallery branded stores during the quarter, demonstrating the resiliency of Movie Gallery's eastern-focused rural and secondary market presence as well as the success of the Company's efforts to sell previously viewed titles from Hollywood branded stores at Movie Gallery stores.

The Company reported a net loss of $14.9 million, or $0.47 per diluted share in the second quarter of 2006. The Company's year-to-date net income was $25.5 million, or $0.80 per diluted share.

Adjusted EBITDA was $57.6 million for the second quarter of 2006 and the Company's year-to-date Adjusted EBITDA was $174.4 million. On a pro forma basis, the Company's Adjusted EBITDA in the second quarter of 2005 and the first half of fiscal 2005 would have been $63.5 million and $172.1 million, respectively. Reconciliations of non-GAAP financial measures are provided in the financial schedules accompanying this press release.

"Our business continues to be affected by a weak home video release schedule and other industry-wide challenges, but we are making great progress on a number of internal initiatives intended to improve Movie Gallery's financial and operational performance. We continue to expect a slow late summer, as is typical due to the seasonality of our industry, with gradually improving business conditions beginning in October when the first of several $100 million titles will be released to home video," said Joe Malugen, Chairman, President and Chief Executive Officer of Movie Gallery. "In the meantime, Movie Gallery is aggressively pursuing opportunities to increase revenues and further improve operating efficiencies. We have engaged Merrill Lynch to advise us on ways to improve our capital structure as well as Alvarez & Marsal, a leading turnaround management, restructuring and corporate advisory firm. This great company, together with its dedicated associates and partners, is taking the steps necessary to reposition Movie Gallery for renewed success."

As of July 2, 2006, Movie Gallery had cash and cash equivalents of $21.2 million and $39.3 million in available borrowings under its revolving credit facility. Furthermore, as of August 9, 2006, the Company had no borrowings on its revolving credit facility apart from open letter of credit commitments. Although there can be no assurances regarding Movie Gallery's results for the remainder of fiscal 2006 or its ability to complete sales of non-core assets, the Company believes that cash on hand, cash from operations, cash from non- core asset sales, and available borrowings under its revolving credit facility will be sufficient to operate the business, satisfy working capital and capital expenditure requirements, and meet the Company's foreseeable liquidity requirements, including remaining in compliance with the financial covenants contained in the Credit Facility and debt service for the remainder of fiscal 2006.

As of July 2, 2006, Movie Gallery was in compliance with the financial covenants contained in its credit facility.

Operational Improvement Initiatives

In conjunction with the continuing integration of Hollywood Entertainment Corporation, Movie Gallery is also pursuing cost savings and cash generation opportunities through a combination of real estate optimization strategies, lower capital spending, and non-core asset divestitures.

Real Estate Optimization -- Movie Gallery is implementing several strategies to better manage store leases and sales floor space to generate significant savings over the next three years. The Company plans to reduce the overall footprint of its store base by returning under-utilized portions to landlords and negotiating subleases where economically feasible. Movie Gallery is experiencing better than expected progress from this effort to restructure the Company's real estate assets, manage occupancy costs and unlock unrealized value. However, these real estate projects are long-term in nature will take some time to implement. Most of the financial benefits associated with these projects are expected to begin in 2007, with the bulk of the financial benefits to be realized in 2008 and beyond.

In addition, Movie Gallery continues to evaluate underperforming stores and stores that have overlapping trade areas in order to close stores in those markets at an accelerated pace. The Company anticipates closing approximately 175 underperforming and overlapping stores during fiscal 2006 and believes it can transfer a sufficient percentage of the customer base to other Movie Gallery and Hollywood Video stores to improve profitability in these markets.

Reduced Capital Spending -- During the second quarter of 2006 Movie Gallery opened 32 new stores and closed 42 of its existing stores. Through the remainder of 2006, the Company currently plans to open approximately 30 new stores, which were already in the pipeline for 2006. In order to maximize free cash flow, the Company plans to curtail new store openings over the next several years.

Divestiture of Certain Non-Core Assets -- Movie Gallery is continuing to review the Company's overall asset portfolio. Net proceeds from any divestitures will be used for debt reduction, working capital and other general corporate purposes.

Expense Reductions -- As a part of the Company's integration process and ongoing cost reduction efforts, Movie Gallery has reduced its salaried and administrative office staff from the date of the merger by approximately 21%, or 380 positions, as of the end of the second quarter of 2006. While this exceeds the Company's previously announced staff reduction target of 17%, or 300 positions, the Company will continue to pursue opportunities to reduce expenses and streamline the organization to improve its bottom-line results.

Engagement of Advisors -- During the second quarter Movie Gallery engaged Merrill Lynch & Co. to explore opportunities to strengthen the company's balance sheet. In addition, Alvarez & Marsal Inc. has been engaged to immediately fill several vacancies in Movie Gallery's accounting and finance functions, shorten the lead time for implementing specific turnaround initiatives, assist in the remediation of previously identified material weaknesses and deficiencies in internal control over financial reporting, facilitate the ongoing integration process and improve the Company's overall operating performance.

Conference Call Information

Management will have a conference call today (August 10, 2006) at 11:30 a.m. eastern time to discuss the quarterly financial results and the outlook for the Company. To listen to the conference, please call 1-877-340-MOVI ten minutes prior to the scheduled start time and reference passcode MOVIE GALLERY. The call may also be accessed on the Investor Relations section of the Company's website at: http://www.moviegallery.com/

About Movie Gallery

Movie Gallery is the second largest North American video rental company with approximately 4,800 stores located in all 50 U.S. states, Canada and Mexico. Since the Company's initial public offering in August 1994, Movie Gallery has grown from 97 stores to its present size through acquisitions and new store openings. For more information about the Company, please visit our website at: http://www.moviegallery.com/

Forward Looking Statements

To take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, you are hereby cautioned that this release contains forward-looking statements, including descriptions of the Company's ability to meet its liquidity requirements and comply with financial covenants contained in its credit facility, projected conditions in the home video rental industry, benefits from the Company's operational improvement initiatives, anticipated capital expenditures, that are based upon the Company's current intent, estimates, expectations and projections and involve a number of risks and uncertainties. Various factors exist which may cause results to differ from these expectations. These risks and uncertainties include, but are not limited to, the risk factors that are discussed from time to time in the Company's SEC reports, including, but not limited to, the Company's annual report on Form 10-K for the fiscal year ended January 1, 2006 and subsequently filed quarterly reports on Form 10-Q. In addition to the potential effect of these ongoing factors, the Company's operations and financial performance may be adversely effected if, among other factors; (i) same-store revenues are less than projected; (ii) the Company is unable to successfully complete sales of non-core assets or restructure its real estate portfolio; (iii) the Company is unable to comply with the revised financial covenants contained in its senior credit facility; (iv) the Company's operational improvement initiatives fail to generate anticipated cost reductions; (v) the availability of new movie releases priced for sale negatively impacts the consumers' desire to rent movies; (vi) the Company experiences unforeseen issues with the continued integration of the Hollywood Entertainment business; (vii) the Company's actual expenses or liquidity requirements differ from estimates and expectations; (viii) consumer demand for movies and games is less than expected; (ix) the availability of movies and games is less than expected; or (x) competitive pressures are greater than anticipated. The Company undertakes no obligation to update any forward- looking statements, whether as a result of new information, future events, or otherwise.

Contacts
Financial: Thomas D. Johnson, Jr., Movie Gallery, Inc., 503-570-1950
Media: Andrew B. Siegel of Joele Frank, Wilkinson Brimmer Katcher,
212-355-4449 ext. 127

Movie Gallery, Inc.
Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)

Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- ----------------------
July 3, July 2, July 3, July 2,
2005 2006 2005 2006
--------- --------- --------- ---------
Revenue:
Rentals $420,332 $493,546 $637,073 $1,063,975
Product sales 84,397 107,739 101,447 231,677
--------- --------- --------- ---------
Total revenue 504,729 601,285 738,520 1,295,652

Cost of sales:
Cost of rental revenue 142,751 154,904 209,111 328,481
Cost of product sales 59,439 77,413 71,629 171,293
-------- --------- -------- ---------
Gross profit 302,539 368,968 457,780 795,878

Operating costs and expenses:
Store operating expenses 262,194 307,772 370,673 621,851
General and administrative 37,402 46,245 52,994 90,834
Amortization of intangibles 954 708 1,554 1,441
-------- -------- -------- --------
Operating income 1,989 14,243 32,559 81,752

Interest expense, net (16,923) (30,694) (17,003) (58,147)
Write-off of bridge
financing (4,234) - (4,234) -
Equity in losses of
unconsolidated entities (469) - (806) -
-------- -------- -------- --------
Income (loss) before
income taxes (19,637) (16,451) 10,516 23,605
Income taxes (7,448) (1,553) 4,312 (1,847)
-------- -------- -------- --------
Net income (loss) $(12,189) $(14,898) $6,204 $25,452
======== ======== ======== ========

Net income (loss) per share:
Basic $(0.39) $(0.47) $0.20 $0.80
Diluted $(0.39) $(0.47) $0.19 $0.80

Weighted average shares outstanding:
Basic 31,574 31,828 31,386 31,759
Diluted 31,574 31,828 31,831 31,828

Cash dividends per
common share $0.03 $0.00 $0.06 $0.00

The accompanying notes are an integral part of this financial statement.

Movie Gallery, Inc.
Unaudited Financial Highlights
and Supplemental Information
(amounts in thousands, except stores)

Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- ----------------------
July 3, July 2, July 3, July 2,
2005 2006 2005 2006
--------- --------- --------- --------
Adjusted EBITDA $60,230 $57,631 $99,730 $174,426

Total same-store revenues (5.5%) (4.6%) (0.3%) (5.6%)
Movie Gallery same-store
revenues (8.1%) 1.6% (3.2%) (1.3%)
Hollywood same-store revenues (4.4%) (7.3%) 0.9% (7.5%)

Total same-store rental
revenues (8.4%) (5.3%) (2.7%) (6.6%)
Movie Gallery same-store
revenues (8.7%) 1.1% (2.9%) (2.5%)
Hollywood same-store revenues (8.2%) (8.5%) (2.7%) (8.7%)

Total same-store product sales 10.6% (1.5%) 12.7% (1.2%)
Movie Gallery same-store sales (1.2%) 6.1% (5.6%) 12.3%
Hollywood same-store sales 12.9% (2.9%) 16.6% (3.4%)

Margin data
Rental margin 66.0% 68.6% 67.2% 69.1%
Product sales margin 29.6% 28.1% 29.4% 26.1%
Total gross margin 59.9% 61.4% 62.0% 61.4%

Percent of total revenue:
Rental revenue 83.3% 82.1% 86.3% 82.1%
Product sales 16.7% 17.9% 13.7% 17.9%
Store operating expenses 51.9% 51.2% 50.2% 48.0%
General and administrative
expenses 7.4% 7.7% 7.2% 7.0%

Cash Flow Data:
Net cash provided by
(used in) operating
activities $29,298 $(14,602) $39,350 $(35,185)
Net cash flow used in
investing activities (1,109,482) (7,355) (1,124,748) (13,717)
Net cash provided by
(used in) financing
activities 1,109,657 7,222 1,112,356 (66,515)

Capital Expenditures (21,838) (6,108) (32,450) (15,091)

Balance Sheet Data:
Cash and cash equivalents $51,122 $21,151 $51,122 $21,151
Merchandise inventories 143,798 121,855 143,798 121,855
Rental inventories, net 344,240 343,484 344,240 343,484
Accounts payable 194,652 92,156 194,652 92,156
Long-term obligation,
including current
portion 1,143,359 1,100,943 1,143,359 1,100,943

Total Store count:
Beginning of period 2,543 4,773 2,482 4,749
New store builds 92 32 154 102
Stores acquired 2,120 - 2,138 -
Stores closed (25) (42) (44) (88)
--------- --------- --------- ---------
End of period 4,730 4,763 4,730 4,763
========= ========= ========= =========

Disclosures Regarding Non-GAAP Financial Information

In this press release, we have provided a non-GAAP financial measure, Adjusted EBITDA, which is defined as operating income plus depreciation, amortization, non-cash stock compensation, and special items, less purchases of rental inventory. Adjusted EBITDA is presented as an alternative measure of operating performance that is used in making business decisions, executive compensation decisions, and as an alternative measure of liquidity. It is a widely accepted financial indicator in the home video specialty retail industry of a company's ability to incur and service debt, finance its operations, and meet its growth plans. However, our computation of Adjusted EBITDA is not necessarily identical to similarly captioned measures presented by other companies in our industry. We encourage you to compare the components of our reconciliation of Adjusted EBITDA to operating income and our reconciliation of Adjusted EBITDA to cash flows from operations in relation to similar reconciliations provided by other companies in our industry. Our presentation of net cash provided by operating activities and Adjusted EBITDA treats rental inventory as being expensed upon purchase instead of being capitalized and amortized. We believe this presentation is meaningful and appropriate because our annual cash investment in rental inventory is substantial and in many respects is similar to recurring merchandise inventory purchases considering our operating cycle and the relatively short useful lives of our rental inventory. Adjusted EBITDA excludes the impact of changes in operating assets and liabilities. This adjustment eliminates temporary effects attributable to timing differences between accrual accounting and actual cash receipts and disbursements, and other normal, recurring and seasonal fluctuations in working capital that have no long-term or continuing affect on our liquidity. Investors should consider our presentation of Adjusted EBITDA in light of its relationship to operating income and net income in our statements of operations. Investors should also consider our presentation of Adjusted EBITDA in light of its relationship to cash flows from operations, cash flows from investing activities and cash flows from financing activities as shown in our statements of cash flows. Adjusted EBITDA is not necessarily a measure of "free cash flow" because it does not reflect periodic changes in the level of our working capital or our investments in new store openings, business acquisitions, or other long-term investments or required debt prepayments we may make. However, it is an important measure used internally by executive management of our Company in making decisions about where to allocate resources. Because we use Adjusted EBITDA as a measure of performance and as a measure of liquidity, the tables below reconcile Adjusted EBITDA to both operating income and net cash flow provided by operating activities, the most directly comparable amounts reported under GAAP.

The following table provides a reconciliation of Adjusted EBITDA to operating income:

Thirteen Weeks Ended
----------------------
July 3, July 2,
2005 2006
--------- ---------
Operating income $1,989 $14,243
Rental amortization 71,099 54,378
Rental purchases (48,451) (36,293)
Depreciation and intangible amortization 22,345 25,363
Impairment of goodwill - -
Impairment of intangibles - -
Gain on sale of assets - (697)
Transaction bonuses 1,500 -
Store closure adjustment - -
Stock compensation 422 637
Credit facility amendment fees - -
Extended viewing fee adjustment 11,326 -
--------- ---------
Adjusted EBITDA $60,230 $57,631
========= =========

The following table provides a reconciliation of Adjusted EBITDA to net cash provided by operating activities:

Thirteen Weeks Ended
--------------------
July 3, July 2,
2005 2006
--------- ---------
Net cash provided by (used in)
operating activities $29,298 $(14,602)
Changes in operating assets and liabilities (6,783) 41,961
Loses for unconsolidated entities 469 -
Investment in base stock inventory 6,427 3,531
Tax benefit of stock options exercised (865) -
Deferred income taxes 5,920 (687)
Amortization of debt issuance cost (771) (1,711)
Transaction bonuses 1,500 -
Store closure adjustment - -
Credit facility amendment fees - -
Interest expense 21,157 30,693
Income taxes (7,448) (1,554)
Extended viewing fee adjustment 11,326 -
--------- ---------
Adjusted EBITDA $60,230 $57,631
========= =========

The following table provides a reconciliation of Adjusted EBITDA to operating income for the 52 weeks ended July 2, 2006:

52 Weeks
Ended
July 2,
2006
---------
Operating income $(427,186)
Rental amortization 263,864
Rental purchases (237,930)
Depreciation and intangible amortization 113,589
Impairment of goodwill 522,950
Impairment of intangibles 4,940
Gain on sale of assets (1,191)
Transaction bonuses -
Store closure adjustment 7,844
Stock compensation 2,112
Credit facility amendment fees 2,720
Extended viewing fee adjustment 7,628
---------
Adjusted EBITDA $259,340
=========

The following table provides a reconciliation of Adjusted EBITDA to net cash provided by operating activities:

52 Weeks
Ended
July 2,
2006
---------
Net cash provided by (used in) operating activities $57,871
Changes in operating assets and liabilities 71,525
Loses for unconsolidated entities -
Investment in base stock inventory 20,116
Tax benefit of stock options exercised 3,287
Deferred income taxes (11,579)
Amortization of debt issuance cost (6,378)
Transaction bonuses -
Store closure adjustment 7,844
Credit facility amendment fees 2,720
Interest expense 109,673
Income taxes (3,367)
Extended viewing fee adjustment 7,628
---------
Adjusted EBITDA $259,340
=========

We have also provided a pro forma Adjusted EBITDA, which combines the results of Movie Gallery and Hollywood for the full 13 weeks ended July 2, 2005, excluding certain merger-related expenses paid by Hollywood prior to the completion of the merger. We believe this presentation is meaningful and appropriate because it provides investors more comparable year-over-year results. Management uses this information to analyze results from continuing operations and to view trends and changes in these results. We have also presented pro forma Adjusted EBITDA because the financial covenants under our senior credit facility are calculated based upon our results for the preceding four quarters. You should note, however, that calculations of pro forma Adjusted EBTIDA and Adjusted EBITDA contained herein are calculated in a different manner than that required under our senior credit facility. The following table provides a calculation of pro forma Adjusted EBITDA to Adjusted EBITDA as reconciled above to operating income:

Hollywood Ent.
13 Weeks Ended April 1, 2005 to
July 3, 2005 April 26, 2005 Pro Forma
-------------- -------------- -----------
Operating income $1,989 $(7,137) $(5,148)
Rental amortization 71,099 12,858 83,957
Rental purchases (48,451) (23,161) (71,612)
Depreciation and
intangible amortization 22,345 5,267 27,612
Transaction bonus 1,500 - 1,500
Stock compensation 422 - 422
Merger fees - 15,336 15,336
Extended viewing fee
adjustment 11,326 122 11,448
---------- ---------- ----------
Adjusted EBITDA $60,230 $3,285 $63,515
========== ========== ==========

The following table reconciles Adjusted EBITDA and pro forma Adjusted EBITDA to net cash provided by operating activities:

Hollywood Ent.
13 Weeks Ended April 1, 2005 to
July 3, 2005 April 26, 2005 Pro Forma
-------------- -------------- -----------
Net cash provided by (used
in) operating activities $29,298 $(22,114) $7,184
Changes in operating
assets and liabilities (6,783) 5,930 (853)
Losses for unconsolidated
entities 469 - 469
Investment in base stock
inventory 6,427 928 7,355
Tax benefit of stock
options exercised (865) - (865)
Deferred income taxes 5,920 19,163 25,083
Change in deferred rent - 355 355
Amortization of debt
issuance cost (771) (247) (1,018)
Merger fees - 15,336 15,336
Transaction bonus 1,500 - 1,500
Interest expense 21,157 2,147 23,304
Income taxes (7,448) (18,335) (25,783)
Extended viewing fee
adjustment 11,326 122 11,448
---------- ---------- ----------
Adjusted EBITDA $60,230 $3,285 $63,515
========== ========== ==========

Source: Movie Gallery, Inc.

CONTACT: Financial: Thomas D. Johnson, Jr., of Movie Gallery, Inc.,
+1-503-570-1950, Media: Andrew B. Siegel of Joele Frank, Wilkinson Brimmer
Katcher, for Movie Gallery, Inc., +1-212-355-4449, ext. 127

Web site: http://www.moviegallery.com/

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