updated 10/16/2007 1:56:01 PM ET 2007-10-16T17:56:01

Video rental giant Movie Gallery Inc. filed for bankruptcy Tuesday and indicated it could close additional stores to save money, but it said it had no plans to shake up management in the process.

Movie Gallery, the nation’s No. 2 video rental chain, sought Chapter 11 bankruptcy protection after months of struggling with debt from its purchase of rival Hollywood Entertainment Corp. for $1 billion in 2005.

The Dothan-based company, which also has tried to fight off online competition, announced plans to shutter about 520 unprofitable stores last month, and it said on its Web site that it would consider shutting down stores during the reorganization.

“Right now it is too early to determine which stores will be closed during this process,” a company statement said. It also said parts of the company might be sold.

Movie Gallery said Chairman and Chief Executive Joe Malugen and other managers would remain, a move that one analyst called a mistake.

“I think that this management team has been in over their heads for a couple of years,” said Michael Pachter of Wedbush Morgan Securities in Los Angeles.

Pachter said he expected Movie Gallery to close as many as 1,000 Hollywood video stores besides the stores it said it would close in September. He said the decision to file for bankruptcy was a “stopgap between running the business poorly” and selling parts of it.

Movie Gallery shares fell 5 cents to 23 cents a share in midday trading. Shares sold for as much as $5.29 each in the last year.

Movie Gallery reported losing $14.9 million in the first quarter compared to a profit of $40.3 million during the same period last year. It filed for protection from creditors in federal bankruptcy court in Richmond, Va.

Movie Gallery denied it was going out of business.

“Movie Gallery needs to realign its cost structure due to the ongoing changes in our industry,” Malugen said in a statement.

The company said Sopris Capital Advisors LLC, a private investment group, would finance a reorganization of the company’s debt.

The plan, which requires court approval, would cancel outstanding shares in the company and give existing equity holders the chance to receive about 2 percent of the company’s new equity.

Movie Gallery also is seeking permission to receive $150 million from Goldman Sachs to finance operations during the bankruptcy proceedings. In a letter to vendors, the company said it had enough money to pay its bills during the reorganization.

The company said in August it could not make timely interest payments and would likely receive default notices from lenders. Standard & Poor’s Ratings Services cut the company’s corporate credit rating to junk-bond status in September.

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