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Gallery Eyes Early 2008 Bankruptcy Exit

26 Dec, 2007 By: Erik Gruenwedel

Movie Galley Inc. believes it can surface from bankruptcy as early as the second quarter of 2008, according to a financial reorganization plan filed Dec. 22.

Gallery's new fiscal strategy before the U.S. Bankruptcy Court of the Eastern District of Virginia is based on a previously announced plan that is backed in large part by private equity firm Sopris Capital Advisors LLC.

A court hearing on the plan is set for Jan. 29, 2008.

Sopris holds a substantial amount of Gallery's senior notes (bonds) in addition to about $72 million of the Dothan, Ala.-based No. 2 movie rental company's $175 million in second-lien debt.

Under terms of the plan, Sopris' $72 million would be converted into equity in the newly reorganized Gallery. The lender would also commit $50 million in equity rights to holders of Gallery's senior debt.

More than $600 million in first-lien debt would be restructured with interest based on the adjusted Eurodollar rate plus 1000 basis points. A basis point, which represents 1/100th of 1%, is typically used to round off changes in interest rates, equity indexes and yields.

Upon court approval of the fiscal restructuring, Gallery would issue 25 million shares of new common stock to holders of outstanding claims and warrants. Current holders of Gallery common stock, including top shareholder, founder and CEO Joe Malugen, would get nothing.

A newly established board of directors would include Malugen and six members directly and indirectly selected by Sopris with approval of first- and second-lien holders.

“The filing of our plan is a significant step toward emerging from Chapter 11 as a stronger, more competitive company,” Malugen said in a statement.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said the reorganization is designed to wipe out existing equity and start with a clean slate. The new creditors would control the company with much of the former debt converted into a hybrid of debt and equity.

Regardless, Pachter questions whether a revamped Gallery can compete in the margin-thin rental business.

“Technically they will emerge from bankruptcy but may still struggle to be profitable,” he said.

Separately, the bankruptcy court said it would hear motions Feb. 20-21, regarding Gallery's attempt to rescind a license and product agreement with Hollywood Video founder and former CEO Mark Wattles.

Wattles claims revocation of the license agreement would adversely affect his stake in, and continued operations of, 20 Hollywood Video locations that he claims generate about $30 million in annual revenue and employ 400 people.

Wattles, who sold Hollywood Video to Movie Gallery in 2005 for $1.1 billion, is reportedly involved in third-party efforts to acquire portions of the bankrupt chain.

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