Tower Records Inc. is singing a new tune: Chapter 11.
The music and entertainment chain on Monday filed for Chapter 11 bankruptcy protection, burdened by too much debt and hammered by competition from large retailers, and Internet music downloading and piracy.
The bankruptcy filings for Tower and its privately held parent, MTS Inc., cap a long period of distress for the money-losing chain of 93 stores, which sources say was unable to find a suitable buyer.
MTS, based in West Sacramento, California, said its 3,100 employees, vendors and in-store and online customers will not notice operating changes because of the filing.
“Our issues are financial, not operational,” Tower Chief Executive E. Allen Rodriguez said in a statement. He said the bankruptcy filing will “provide the greatest recovery for our bondholders” and give Tower a viable capital structure.
Under a pre-packaged restructuring, the founding Solomon family would relinquish control of Tower and MTS to creditors and retain a 15 percent stake. Trusts set up by founder Russell Solomon own 98.4 percent of MTS, and Solomon’s children own the rest. MTS expects to exit Chapter 11 within 45 to 60 days.
Tower, which sold record albums for $1.98 when it opened its first store in Sacramento in 1960, has been hurt from stiff competition from such retailers as Wal-Mart Stores Inc. and Best Buy Co. and high lease costs. MTS said digital downloading and file copying crimped sales and rising losses.
MTS said sales at stores open at least a year fell less than 5 percent in 2003, compared with 10 percent to 15 percent declines for some rivals. Still, it said it could no longer pay its debts without hurting operations, and expected to be unable to refinance a $110 million senior bond coming due in 2005.
MTS and 15 affiliates sought protection from creditors from the U.S. Bankruptcy Court in Wilmington, Delaware. MTS listed more than $100 million of assets and more than $100 million of debts in its filing.
DEBT SWAP
MTS plans to swap the $110 million bond for $30 million of new senior notes and an 85 percent equity stake. Last June it defaulted on the bond when it missed a $5.2 million interest payment. It said all shareholders and holders of more than 97 percent of its subordinated bonds approved the bond swap.
The CIT Group/Business Credit Inc. and other lenders are providing up to $100 million of debtor-in-possession financing to keep MTS operating as it reorganizes.
MTS last year hired investment bank Jefferies & Co. to negotiate with bondholders, and Los Angeles-based Greif & Co. to find a buyer for Tower. A year earlier, the company had sold its strong-performing Japanese division for $129 million.
In a regulatory filing last June, MTS reported $442 million of debt, including $194.5 million of long-term bond debt and $247.4 million in operating leases. The company posted a net loss of $39.8 million for the nine months ended April 2003, as sales fell 9 percent from a year earlier to $428.9 million.
