Movie Gallery Plans Chapter 11 Filing

Rhett Pardon
DOTHAN, Ala. — Video rental giant Movie Gallery plans to file for Chapter 11 bankruptcy protection this month and looks ahead to restructure its finances in a pre-negotiated deal with key creditors.

The Dothan, Ala., company, which rents adult titles, hopes to emerge from Chapter 11 in early 2008, according to the Wall Street Journal, whose sources spoke on condition that they not be identified.

The company hasn't publicly acknowledged the possibility of the Chaper 11 filing, but a growing number of financial analysts have predicted it.

Movie Gallery, which operates more than 4,600 video rental stores in the U.S., Canada and Mexico, has been facing performance issues since acquiring competitor Hollywood Entertainment in 2005.

Sluggish rental trends have made it difficult for the company to stay current on its required debt payments.

In July, when it said it had $1.2 billion in debt, Movie Gallery failed to comply with terms of a senior loan, leading to speculation of a potential Chapter 11 filing. Since then, the company has looked to preserve cash and tried to negotiate with its lenders a financial restructuring to solve its debt troubles.

Earlier this month, Movie Gallery said it would close about 520 underperforming Movie Gallery and Hollywood Video stores. Prior to that, the company delayed the planned launch of a DVD-by-mail subscription service.

Under the plan that includes the bankruptcy filing, Movie Gallery would convert its bonds to stock, and a portion of its second-lien debt also will be converted to stock.