Dec. 23 (Bloomberg) -- Movie Gallery Inc., the U.S. video- rental chain that went bankrupt two months ago amid increased competition from Blockbuster Inc. and Netflix Inc., filed a plan to reorganize and emerge from court protection early next year.

The company has an agreement with Sopris Capital Advisors LLC to sponsor a plan converting $325 million in 11 percent senior notes and $72 million in second-lien debt into new stock. Sopris will backstop a $50 million rights offering to eligible noteholders, the Dothan, Alabama-based company said yesterday in its filing with the U.S. Bankruptcy Court in Richmond, Virginia.

``The debtors have determined that it is in their best interests to pursue the restructuring,'' Movie Gallery said in court papers.

A hearing on the plan is scheduled for Jan. 29 in Richmond. Movie Gallery listed assets of $892 million and debt of $1.4 billion in its Chapter 11 petition filed Oct. 16. The chain, which operated 4,500 stores, pledged then to cut debt by $400 million.

Chief Executive Officer Joe Malugen said Sept. 25 that the company was closing about 520 unprofitable locations, allowing it to focus on stores that have ``stronger operating performance and prospects for future growth.''

The proposed reorganization will improve cash flow by cutting interest payments, the company said when it filed bankruptcy.

Movie Gallery had a net loss of $25.7 million last year on sales of $2.54 billion. The company operates under the names Movie Gallery, Hollywood Video and Game Crazy. Its Canadian affiliates aren't included in the bankruptcy.

The case is In re Movie Gallery Inc., 07-33849, U.S. Bankruptcy Court, Eastern District Virginia (Richmond).

To contact the reporter on this story: David E. Rovella in New York at drovella@bloomberg.net.

Last Updated: December 23, 2007 16:35 EST