UPDATE: Video Update to Exit Chapter 11 as Movie Gallery Subsidiary3 Aug, 2001 By: Joan Villa
Video Update will emerge from Chapter 11 as a wholly owned subsidiary of Movie Gallery with headquarters in Dothan, Ala., but retain its own nameand store brand under a reorganization plan filed in U.S. Bankruptcy Court.
Update will complete an analysis of all locations and close up to 80 stores, emerging from bankruptcy in late October with approximately 220 locations in the United States and 80 in Canada, says interim c.e.o. and restructuring officer James Skelton. The St. Paul, Minn.-based chain had more than 600 stores when it filed for bankruptcy Sept. 18.
Under terms of the plan, Movie Gallery will convert its existing $5 million debtor-in-possession financing into new stock in the reorganized Update, contribute approximately $5 million to pay for administrative and priority claims and $2.5 million for unsecured creditors, andprovide a $5 million working capital line of credit for the reorganized company. Unsecured creditors, with bills exceeding $50 million according to court records, will receive $2.5 million from Movie Gallery — a deal “heavily negotiated and agreed to by the committee of unsecured creditors [that]represents a recovery of 5 cents on the dollar,” Skelton says.
Distributor Ingram Entertainment, owed $16.3 million, topped the list ofunsecured creditors, followed by Warner Home Video at $6.5 million and the now defunct Sight & Sound Distributors at $4.5 million, according tocourt documents.
Creditors will vote on the plan following the judge's approval of the document at a hearing on Sept. 11, Skelton says.
When the plan, filed last week, is confirmed in 30 to 45 days, existing Video Update stock will be cancelled and current shareholders will not be issued equity in the reorganized company. The original $125 million in senior secured debt and the $50 million in unsecured debt take precedence over shareholder equity, leaving the company with no existingvalue, Skelton says.
Company headquarters will be moved to Movie Gallery's Dothan base. A board of directors consisting of Gallery c.e.o Joe Malugen, president Harrison Parrish, and senior v.p., secretary and general counsel PageTodd will run the company.
Update's 50 corporate employees have been offered incentives to stay through the transition but most will not transfer to the newheadquarters, while the vast majority of the chain's 3,000 store workers and regional managers will remain with the company, Skelton says.
The newly reorganized Update, as a wholly owned subsidiary, anticipates the same favorable purchasing and revenue-sharing terms that Movie Gallery has, Skelton says.
“Since Movie Gallery's involvement and their provision of a $5 milliondebtor-in-possession financing, we've been working very closely with thestudios and the Movie Gallery purchasing team to be able to mirror their revenue-sharing and purchasing agreements,” he says. “That's already inprocess.”
In May, Movie Gallery gained control of Video Update when it purchased the chain's $121 million bank debt for less than 10 cents on the dollarand became the senior secured creditor.