With shares of Movie Gallery (OTC: MOVIQ) having closed 2007 at just over 2 cents per share in the wake of the company's bankruptcy, I thought it would be fun to take a look at what the company was saying back in 2006, when its shares were trading more than 100 times higher.

You might think the company's CFO, Thomas Johnson, would have been busy looking for ways to stop the cash bleeding and return Movie Gallery's operations to something other than miserable failure.

But you'd be wrong. No, Johnson was actually conducting an interview with Bloomberg, saying that he had asked the SEC to investigate allegations of naked short selling in the company's stock:

"I'm throwing out the towel, saying 'Help me.' There are rules designed to deal with this, and people are still managing to do these naked short sales. It's extremely frustrating. It's like being on the front line and people are shooting you from every direction.''

"On the frontline... people shooting at you from every direction." I wonder if that's how Movie Gallery shareholders felt when the company recently filed a reorganization plan that canceled the stock of the company's common shareholders.

The moral of the story is this: When the bad management of a lousy company starts complaining about naked short selling ... go find a company where the management spends its time running the business.

It's a DVD-on-demand world; we just live in it. With customers increasingly turning to the likes of Netflix (NASDAQ: NFLX) and Blockbuster (NYSE: BBI) to get their film choices delivered directly to their homes, it's no wonder that traditional brick-and-mortar movie-rental chains are suffering.

Today, Hollywood Video parent Movie Gallery (NASDAQ: MOVI) -- the nation's second-largest video-rental chain, lagging behind only BBI -- said it would seek bankruptcy protection from its creditors. The retailer plans to reduce debt by $400 million. On its Chapter 11 petition filed Tuesday morning with the U.S. Bankruptcy Court in Richmond, Va., MOVI listed assets of $892 million and $1.4 billion in debt, citing increasing losses and building competitive pressures. The handwriting was on the wall in late September, when company CEO Joe Malugen said Movie Gallery would close 520 unprofitable stores to focus on 4,000 stronger locations.

Industry analyst Stacey Widlitz told Bloomberg: "I don't think bankruptcy will save [MOVI]. They have no edge versus the competition ... I think store closings will only accelerate." Another analyst with Wedbush Morgan securities noted that MOVI was "very slow to cut costs ... and that's what killed them."

Already in penny-stock territory, MOVI has dropped more than 17% today to hit a new annual low of 19 cents per share.

Beth Gaston Moon is an analyst at Schaeffer's Investment Research.

Less than two weeks ago, shares of Movie Gallery Inc. (NASDAQ: MOVI) surged more than 17% on news that the company was closing 13% of its stores. On Monday, the stock is set to tank on reports that the company is on the verge of filing for bankruptcy protection in a prepackaged deal that would exchange its debt obligations for equity.

According to The Wall Street Journal (subscription required), "The Dothan, Ala., company will file for bankruptcy this month and hopes to emerge from Chapter 11 in early 2008, according to people with direct knowledge of Movie Gallery's plans. They spoke on condition that they not be identified."

The company is burdened with a massive debt load, much of it the result of its ill-conceived $1 billion acquisition of Hollywood Video in 2005. Interestingly, Movie Gallery outbid Blockbuster Inc. (NYSE: BBI) for that prize: File that one under Pyrrhic victory.

Brick-and-mortar movie rental outlets have struggled with competition from services like Netflix Inc. (NASDAQ: NFLX) and Blockbuster's Total Access program.

When a good business closes 520 stores, 13% of its total, it's generally not a good sign. But for a cash-burning machine like Movie Gallery (NASDAQ: MOVI), it has to be seen as a good thing. The stock is up more than 17% in today's trading.

The movie rental industry's woes have been well-documented. With NetFlix (NASDAQ: NFLX) and Blockbuster (NYSE: BBI) engaged in an unprofitable price-war for the dollars of DVD by mail customers, a traditional brick and mortar player like Movie Gallery really lacks a compelling way to compete, or even a compelling raison d'etre.

The company currently boasts a market cap of under $20 million, a reflection of the company's new worth of negative $560 million, the result of a crushing debt load. While the stock will continue to have ups and downs as investors react to each new bit of news, there is tremendous risk here. The latest 10-Q should give most investors all the information they need to stay away from these shares:

As of July 1, 2007, we have a working capital deficiency of $1.1 billion. At July 1, 2007, we had $45.5 million of cash and cash equivalents and did not have any available borrowings under our March 2007 Credit Facility. These events raise substantial doubt as to our ability to continue as a going concern.

Movie Gallery (NASDAQ: MOVI), the parent company of Hollywood Video, is considering closing many of its 4,600 stores, putting the company up for sale, or both, after the second-largest brick-and-mortar video store rental chain, behind Blockbuster Inc (NYSE: BBI), failed to meet the requirements set by its lenders.

USA Today said the 2,000+ Hollywood Video stores in urban areas, which are in direct competition with Blockbuster, look most vulnerable. By contrast, the Movie Gallery stores are "in smaller markets without much competition," Sterne Agee analyst Arvind Bhatia told the newspaper. JP Morgan believes Blockbuster could benefit from any store closings.

Unfortunately, it's not only Movie Gallery facing these problems. Industry-wide video store rentals fell 13.1% in Q1 compared to the same quarter in 2006, according to Blockbuster. With new movies being released on DVD this quarter, including 300 and Blades of Glory, the business could see a boost in revenues soon.

But it's Movie Gallery that has to fight with the growing online business from Netflix (NASDAQ: NFLX) and Blockbuster. The company asked its lenders to relax some debt conditions and hired Lazard Freres as a financial advisor. While analysts are skeptical about Movie Gallery finding a buyer, the company's real estate may be attractive to some private-equity groups and could warrant a look.

The country's second largest retail movie rental chain, Movie Gallery (NASDAQ:MOVI) has collapsed in early trading, down 75% to $.50. The stock has traded as high as $6.78 over the last 52 weeks.

The company blames soft sales for causing it to fail to honor the financial terms of its senior credit facility. Movie Gallery says it is down to $50 million in cash, and may have to sell the company. But, it is unclear whether creditors can simply step in an take the company over, a move that would certainly hurt holders of the common stock.

Movie Gallery is actually a fairly big business. With sales of $2.5 billion last year, it has revenue that is close to 40% of Blockbuster's, which is the No.1 retailer in the industry. Blockbuster's (NYSE:BBI) shares have been up recently as the company brought on a new CEO. But, the stock is still about 50% below where it traded two years ago.

The Movie Gallery troubles should cause concern among Blockbuster shareholders. Traffic at Movie Gallery stores is down sharply and there is no reason to believe that the Q2 trend would not have also hurt the larger company.

Douglas A. McIntyre is a partner at 24/7 Wall St.

MOST NOTEWORTHY: Caterpillar Inc (CAT), Movie Gallery (MOVI), Cache, Inc (CACH) and Manor Care, Inc (HCR) were today's noteworthy downgrades:

• UBS downgraded shares of Caterpillar (NYSE: CAT) to Reduce from Neutral and lowered their target to $70 from $78 to reflect decelerating revenues in the company's core businesses, global capacity additions in construction machinery, competitive concerns and valuation.

• Soleil downgraded Movie Gallery (NASDAQ: MOVI) to Sell from Hold following comments after yesterday's close about missing certain debt covenants.

• Suntrust downgraded shares of Cache (NASDAQ: CACH) to Neutral from Buy citing the company's attempt to reconstruct itself in a difficult economic period with tough comps and in a waning trend cycle.

• Manor Care (NYSE: HCR) was cut to Market Perform from Outperform at Wachovia, citing the acquisition by the Carlyle Group. Soleil cut Manor Care to Hold from Buy on the news...

• UBS downgraded BG Group (NYSE: BRG) to Neutral from Buy.

• Roth downgraded MRV Communications (NASDAQ: MRVC) to Hold from Buy.

• Matrix lowered Brown-Forman (NYSE: BF.B) to Hold from Buy.

• JP Morgan cut Liberty International (OTC: LBYIY) to Neutral from Overweight.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Amazon (NASDAQ:AMZN) is launching a new and improved version of its Unbox video service. Research firm Stifel Nicolaus says the product puts the online store company right up there with Apple (NASDAQ:AAPL) for delivering net video to TV. In a description of the emerging net TV market, the research note states: "Amazon is farthest along in bringing online video to the television."

Unbox is available to over 1.5 million Internet-connected Tivo (NASDAQ:TIVO) subscribers. There is rapidly growing interest in getting feature length programming over the Internet to the TV. Blockbuster (NYSE:BBI) has indicated its plan to buy video on demand (VOD) firm Movielink. And movie rental firm Movie Gallery (NASDAQ:MOVI) plans to buy Disney's (NYSE:DIS) Moviebeam VOD business.

If Amazon is ahead in the race for Internet TV, it may be a relief to its shareholders. There has been a concern that the online store model will eventually produce slower growth as the number of people shopping on the Internet begins to peak. And investors have also been concerned that Amazon features like free shipping continue to pressure margins. The online retailer's shares are up only 5% over the last year.

But if online TV is as big a deal as companies like Apple and Blockbuster think it is, Amazon may get a new lease on its relationship with the Street.

Douglas A. McIntyre is a partner at 24/7 Wall St.