Movie Gallery to file chapter 11, WSJ says

UPDATE: Some believe company trying to fend off bankruptcy

by Cindy Spielvogel -- Video Business, 10/6/2007

OCT. 6 | Movie Gallery will file a chapter 11 bankruptcy this month, according to sources in a story posted by the Wall Street Journal late Friday.

The bankruptcy will be a pre-negotiated deal that will convert bonds into stock, according to the story.

Movie Gallery’s last official filing with the Securities and Exchange Commission reported that the company is closing 520 stores as part of its attempt to bring itself back to financial health.

The company, which had failed to make some loan payments, had forbearance agreements with lenders that expired Sept. 30.

Movie Gallery would not comment on the bankruptcy possibility.

Other sources believe the company is still looking at ways to fend off a bankruptcy or at least come out of it with something salvaged for stockholders.

In previous announcements about the company's financial troubles, chairman and CEO Joe Malugen, a major stockholder himself, has stressed his intention to keep the company operating.

His recent announcement of store closings was viewed by many as a positive means of making the company more efficient, sending the stock upward to close at 58¢ from 51¢ the day before.

The Journal story, however, sent the stock below 30¢. But some believe the company will see brighter, if leaner, days ahead, with or without a bankruptcy.

Sources say that if a prepackaged bankruptcy goes through with bonds and some other debt converted to stock, existing stockholders still will be allowed to retain a portion of the shares. Some believe the debt-to-stock scenario could happen even without a bankruptcy.

But others believe the company’s options have run out and that a bankruptcy is inevitable because the more than $1 billion in debt Movie Gallery took on after acquiring Hollywood Entertainment is too much to overcome.