DOTHAN, AL-Movie Gallery Inc. implemented a slew of new initiatives, which resulted in a narrowing of its losses for the full-year and final quarter of 2006. They are the result of a strategic planning and balance-sheet restructuring program begun in April with a real estate assessment and accelerated in August with the help of Merrill Lynch & Co., and turnaround specialists Alvarez & Marsal.

The move came as the locally based second-largest movie rental chain was suffering losses from competition with rival Blockbuster and Netflix, the online movie rental company. In addition, the company was grappling with absorption of its 2005 acquisition of Hollywood Entertainment Corp., which left it with nearly $1.3 billion in debt.

During 2006, Movie Gallery closed 230 under-performing and overlapping stores and opened just 123 new units, which Joseph Malugen, chairman, president and CEO, said during a conference call, “were already in the pipeline. We don’t expect many openings this year,” he added.

During fourth-quarter 2006, Movie Gallery’s net profits narrowed to a minus $15.1 million, versus a loss of $546.5 million in the same quarter a year ago, Its full-year net loss was $25.7 million, compared with a loss of $552.7 million for 2005.

Fourth-quarter revenues were $663.3 million, down 1.9% from the prior-year’s final quarter. Comp-store revenues were nearly flat at Movie Gallery branded stores, but down 4.1% at Hollywood Video units, taking overall comps down 2.9%.

Total 2006 revenues climbed to $2.5 billion, up 25% from $2 billion in fiscal 2005, a year that included the Hollywood Video buy. Of the total, Movie Gallery units contributed $871 million; nearly $1.4 billion came from Hollywood Video stores, and $325 million from Game Crazy.

The debt toll had put the company in a “defensive posture, unable to buy titles as deep as we’d like,” especially in the final quarter of the year, said Malugen. He opened the conference all by elaborating on refinancing, obtained March 9. It consists of a new $900-million senior secured credit facility that is expected to shave annual interest expenses by $6 million and provide more available cash.

Two days earlier, it had acquired MovieBeam Inc., an at-home movie delivery network that utilizes a set-top box. It provides video-on-demand rentals in approximately 31 metropolitan areas. Malugen describes it as a “self-install, plug-and-play system.”

The new owner will begin serving existing customers immediately with 100 movies and add eight to 10 new titles a week. Malugen noted that 28 million homes have video-on-demand, and the number is expected to double. He called the MovieBeam technology “a strong complement to the in-store rental experience,” and believes it positions the company to provide expanded on-demand capabilities in the future.

“We’re committed to brick and mortar,” he also said while describing the company’s plans to re-structure leases and “right-size” real estate at 2,200 units. Hollywood units, which now average 6,600 sf, and Movie Gallery stores, now about 4,200 sf, will be reduced to 4,000 sf and 3,000 sf, respectively. “The bulk of the financial benefits will accrue in 2008 and beyond,” he said.

The company is also testing automated video vending machines and expects to have 200 in operation this year. They will be located primarily in supermarkets and drug stores. “The industry is very challenging and constantly evolving,” Malugen said.

Asked about competition from Blockbuster’s waive of late fees, he said, “there’s nothing proprietary about a no late fee program, but it limits availability (of top titles) to customers.” He said, “we continue to watch this,” and suggested that Blockbusters has begun downplaying its program. He also noted that late fees produce revenue, which he said amounts to less than 10% of all for Movie Gallery.

The company did not provide guidance for 2007, but Thomas Johnson, EVP and CFO, said, “we’re extremely disciplined. With our new credit facility in place, Movie Gallery has the solid capital structure and enhanced liquidity we need to grow our business and return to profitability.”

Following the call, shares of MOVI closed on the Nasdaq at $4.81 a share, down slightly for the day. This compares with a 52-week low of $1.85 a share and a 52-week high of $7.70 a share.

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