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The second-largest movie rental company in the U.S. announced Oct. 16 it filed for Chapter 11 in the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division. The Dothan, Ala.-based company laid out plans to reduce debt and reorganize while in bankruptcy, with intentions to convert some $400 million in debt to equity. The Chapter 11 filing by Movie Gallery was no surprise as it made a tragic mistake when it purchased its bigger rival Hollywood Entertainment Corp. two years ago. With a huge debt load, the company had trouble repaying its loans over the past year attributing to its bankruptcy filing. Movie Gallery's plan to emerge was confirmed April 9. Ahead of winning approval for its reorganization plan, the company was shuttering locations at a furious pace. After gaining approval for going-out-of-business sales at more than 500 locations in November, and then winning the OK to auction off 400 additional leases to stores March 20, Movie Gallery said April 2 it planned to shutter 160 more, for a total of 1,080. THE FINAL SCENE Over the weeks leading up to the filing, the cracks surfaced dramatically. On Sept. 25, Movie Gallery announced it was selling 520 unprofitable locations to save money, but on the surface, the move seemed too little too late. Overall, the company carried $1.2 billion in debt as of July, comprising about $325 million in bonds; $725 million in first-lien loans, which have first claim to the assets; and $175 million in second-lien loans. Movie Gallery's $1.2 billion debt developed into an albatross around its neck. The burden was more apparent when Movie Gallery missed several deadlines to pay its second-lien term loan in September, which pushed credit-rating agency Standard & Poor's to give Movie Gallery's debt a default rating of D. A D rating means that Movie Gallery has defaulted on a loan and the rating agency believes the company will not be able to meet its other debt obligations. SOURCE OF TROUBLE With profits in the DVD rental sector harder to come by over the last couple of years, Movie Gallery boldly went ahead and purchased Hollywood Entertainment in 2005 for $1.2 billion, which included the assumption of $350 million in debt. The acquisition catapulted Movie Gallery to the No. 2 slot among movie rental companies in the U.S., behind Blockbuster Inc. But stiff competition for the entertainment dollar from rivals and cable proved too much for Movie Gallery. Blockbuster expanded its offerings, combining online rentals and in-store returns, while Netflix Inc. expanded into movie downloads. Movie Gallery, on the other hand, has no online component. Couple that with other delivery platform services like on-demand and it added up to a perfect storm. The company's poor track record speaks for itself; Movie Gallery hasn't generated a profit since its Hollywood deal. And its stock performance reflected its pain falling to mere pennies from a mid-$20 range ahead of its Hollywood buy. - Gerald Magpily and Carolyn Murphy
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