Movie Gallery, Inc. today announced that it and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division (the “Bankruptcy Court”) to re-align the Company’s business operations and restructure its debt. The Company intends to work with its constituencies to exit bankruptcy as expeditiously as possible while executing on its reorganization plans. Movie Gallery’s Canadian subsidiary was not a part of the filing and will continue operating outside of the Chapter 11 cases.

The Company also announced today that it has agreed to the terms of a restructuring plan with Sopris Capital Advisors LLC (”Sopris”), a private investment fund, under which Sopris has agreed to fund a plan of reorganization consistent with the terms set forth in a restructuring term sheet. If approved by the Bankruptcy Court, the plan of reorganization would provide for the following:

— Conversion of the Company’s $325 million 11% senior notes and other
general unsecured claims into new equity of reorganized Movie Gallery;
— Conversion of approximately $72 million of the Company’s $175 million
second lien indebtedness, held by Sopris, into new equity of
reorganized Movie Gallery;
— The Company’s first lien indebtedness would remain in place on
restructured terms to be agreed upon by the Company, Sopris and the
first lien lenders;
— Amendments to the Company’s remaining second lien debt (following
conversion of the second lien debt held by Sopris) to revise interest
rates based upon the terms of the restructured first lien debt and
modify certain PIK interest terms and conditions;
— A commitment by Sopris to backstop a $50 million equity rights offering
to be made available to all eligible holders of the 11% senior notes;
and
— Provisions for holders of the Company’s common equity to receive under
certain circumstances a minority share of the equity in reorganized
Movie Gallery, estimated at approximately 2% of the total equity
interests. Under the proposal, existing shares of common stock will be
cancelled.

The proposed restructuring term sheet is supported by holders who own a majority of the 11% senior note holders and a majority of the second lien lenders, each of whom has signed an agreement to support a plan of reorganization consistent with the terms set forth in a restructuring term sheet. The Company is continuing to negotiate with its first lien lenders regarding the revised terms and conditions of the first lien indebtedness under the plan of reorganization and hopes to reach an agreement shortly. Importantly, the proposed plan of reorganization would reduce the Company’s total indebtedness by approximately $400 million and would be expected to improve cash flow by significantly reducing on-going interest expense.

The Company is also in advanced negotiations with a number of the major motion picture studios. The Company has sought permission from the Bankruptcy Court to enter into agreements with the studios to restore normal credit terms.

“Movie Gallery needs to re-align its cost structure due to the ongoing changes in our industry,” said Joe Malugen, Chairman, President and Chief Executive Officer of Movie Gallery. “Although the Company has taken numerous steps to reduce its debt and strengthen its balance sheet through closing unprofitable stores, headcount reductions and other means, these actions were not sufficient to offset the significant shift in our business and the cost of our substantial debt obligations. After careful consideration of all available alternatives, the Company’s Board of Directors determined that a Chapter 11 filing was a necessary and prudent step and the best way to obtain the financing necessary to maintain regular operations and allow for a successful restructuring.”

Malugen continued, “Filing for Chapter 11 allows us to operate our business without interruption while continuing to implement a debt restructuring in a controlled, Court-supervised environment. The support we are receiving from our creditors as we enter this process is a testament to their confidence in Movie Gallery’s ability to emerge from bankruptcy as a stronger more competitive company. We are pleased to have a financial sponsor that is deeply committed to the future success of the Company and we expect that the support from our creditors and studio suppliers will significantly accelerate Movie Gallery’s emergence from bankruptcy protection.”

In conjunction with the filing, the Company is seeking approval to enter into a $150 million debtor-in-possession (DIP) financing agreement arranged by Goldman Sachs Credit Partners. If approved by the Bankruptcy Court the DIP financing will be used to provide up to $50 million of incremental liquidity in the form of a new revolving loan, in addition to a letter of credit facility and a $100 million term loan. The DIP financing will be made available to refinance the Company’s existing revolving credit facility at a lower interest rate and provide the Company with additional working capital.

Movie Gallery has asked the Court for additional authorizations, including permission to continue paying employee wages and salaries and to provide employee benefits without interruption.

During the Chapter 11 process, vendors should expect to be paid for post-petition purchases of goods and services in the ordinary course of business. The Company has also asked for Court permission to continue to honor its current customer policies regarding merchandise returns and outstanding gift cards and customer loyalty programs so that the Chapter 11 process will not impact the Company’s customers.

Mr. Malugen, concluded, “I would like to thank our customers and vendors for their continued support during this process. We also appreciate the ongoing loyalty and support of our employees, whose dedication and hard work are critical to our success and to the future of the Company. Our management team is committed to making this financial restructuring successful and leading Movie Gallery toward a bright future.”

The Company and its domestic subsidiaries filed their voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division. The main case has been assigned case number 07-33849. Additional information about Movie Gallery’s restructuring is available at the Company’s website www.moviegallery.com or via the Company’s restructuring information line, 888-647-1730. For access to Court documents and other general information about the Chapter 11 cases, please visit www.kccllc.net/moviegallery.

About Movie Gallery

The Company is the second largest North American video rental company with approximately 4,430 stores located in all 50 U.S. states and Canada operating under the brands Movie Gallery, Hollywood Video and Game Crazy. The Game Crazy brand represents 595 in-store departments and 14 free-standing stores serving the game market in urban locations across the United States. Since Movie Gallery’s initial public offering in August 1994, the Company 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: www.moviegallery.com

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