Tower Records filed a Chapter 11 petition in federal bankruptcy court yesterday (Aug. 20). The owners want the court to facilitate a prompt sale of their business "as a going concern" so that a buyer
MTS Inc. and all of its subsidiaries, including Tower Records and Bayside Entertainment Distribution, filed a Chapter 11 petition in federal bankruptcy court yesterday (Aug. 20) in Delaware. The owners want the court to facilitate a prompt sale of their business "as a going concern" so that a buyer could take control prior to the 2006 holiday season.
According to the filing, eight entities own and operate the 89-store chain of music and entertainment retail stores plus a direct sales network and warehouse distribution facility under the Tower Records name. They are Three A's Holdings, Jeremy's Holdings, Tower Direct, 33rd Street Records, Pipernick, MTS, Columbus Bay and R.T. Records.
Tower Records intends to conduct an asset sale under Section 363 of the Bankrupcty Code, according to a company statement. “The process, which is subject to court approval, sets in motion a timeline of events that will ultimately insure a sale of the company within 60 days of the filing date,” the company said.
The debtors want the bankruptcy court to establish bid procedures and set an auction date for the sale of their assets. They also requested an expedited schedule to permit a buyer to take control prior to the 2006 holiday season.
First day motions are expected to be heard tomorrow (Aug. 22).
The announcement that Tower will pursue a 363-asset sale means the company failed in its attempt to land an equity sponsor for a pre-packaged Chapter 11 filing. Nevertheless, a number of suitors have already expressed to Billboard the willingness to become bidders, in the event of a Chapter 11 auction.
Tower also said that it has secured an $85 million debtor-in-posession financing with its current bank group let by CIT Financial. Sources say that the company expects to buy product from suppliers with cash in advance.
The filing reveals there are "thousands of potential creditors." Sources estimate that Tower Records owes trade suppliers about $90 million, but the document doesn't list secured creditors like the bank and the major music and video vendors. Among the 40 largest unsecured creditors are Six Degrees Records ($1.9 million) in San Francisco; International Periodical ($1.3 million) in Chicago, which is a subsidiary of Source Interlink; City Hall Records ($595,000) in San Rafael, Calif.; and Baker & Taylor Book ($437,000) in Charlotte, N.C.
The debtors also filed a Chapter 11 petition in 2004 to implement a pre-packaged plan of reorganization. That case remains open, but the debtors claim in court documents that the only remaining matters are certain claims resolution issues.
In the 2004 restructure, the debtors converted $110 million of unsecured notes into common stock comprising 85% of the outstanding equity in MTS and $30 million in new notes. The court confirmed that restructure in March 2004.
After that confirmation, the debtors initially experienced strong financial performance, the new filing says. Still, the debtors' sales fell significantly during the last year primarily due to an "industry-wide decline in the sales of physical music and video products" and "intense competition from music downloading (legal and illegal), 'big-box' retailers which use music and video products as loss-leaders and other industry-wide factors."