Tower Records in Chapter 11
The legendary retailer seeks protection to prepare for sale.
By Dale Kasler -- Bee Staff Writer
Published 2:15 a.m. PST Tuesday, February 10, 2004
Tower Records filed for bankruptcy protection Monday, turning to the courts to wipe out millions in debts that have strangled the pioneering music retailer.
Clobbered by discounters, digital piracy and other competitors, the Sacramento area's most famous homegrown company filed under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Del., the city where it is legally headquartered.
West Sacramento-based Tower said the bankruptcy filing is a "prepackaged" case in which the vast majority of its creditors have already agreed in principle to a restructuring plan that would erase $80 million in bond debt, give bondholders the lion's share of Tower's ownership and then sell the business.
Tower wanted to complete the plan without a bankruptcy reorganization, but the filing became necessary when a small group of bondholders - 3 percent of them - wouldn't support the plan and could have scuttled a sale.
With so many bondholders ready to vote in favor of the plan, the court proceedings could be largely a formality. Tower's ultimate fate remains unclear, although the investment banker who's been searching for a buyer since last spring said he's making good progress.
The company said the bankruptcy filing won't affect its employees or operation of its 93 stores, but will give the company the fresh start it's been seeking since it first teetered on the brink of bankruptcy reorganization almost three years ago. The company has secured up to $100 million in new loans from one of its main lenders, CIT Group/Business Credit Inc. of New York. Its major vendors pledged to continue supplying product.
"Court approval of the prepackaged plan will reduce existing debt by $80 million, effectively eliminating the financial risks that have faced Tower for the past three years," said Chief Executive E. Allen Rodriguez in a prepared statement.
Industry leaders agreed. "I characterize it as a day that the brand Tower begins a new life," said Carl Schnock, a vice president with record label Sony Music Entertainment.
Still, others said the bankruptcy filing represents the culmination of a financial disaster that shriveled and nearly ruined an icon of the music business. Once a $1 billion-a-year giant with style, attitude and a bevy of stores circling the globe, Tower has shrunk by one-third and has sold or closed all its international stores in the past three years.
The main culprits: fierce new competition, including discount department stores, Internet merchant Amazon.com and the online file-sharing craze that eroded Tower's customer base.
"It's a real shame," said longtime Tower customer Melissa Collard of Sacramento, a professional jazz singer who was shopping at the original Tower on Watt Avenue Monday afternoon. "They've really given a lot of support to artists and musicians."
Yet she acknowledged that people like her are part of the problem: Collard buys a lot of music on Amazon.
"It really is the passing of the old guard," said Mike Dreese, president of Newbury Comics, a Boston-based record chain that's competed with Tower for decades. "Tower was really one of the last of the great family empires."
Members of the Solomon family of Sacramento, the founders and owners of Tower, couldn't be reached for comment.
Dreese said Tower risks hurting its operations by filing. "The real damage that occurs to a company occurs in terms of employee morale, defections," he said.
The "ironic piece is that the business just started to turn (upward)," Dreese said. Record sales are improving lately, and Tower spokeswoman Maya Pogoda said "the company has really been doing much better."
The bankruptcy filing had been rumored in the music industry for weeks and became public knowledge last week. Tower's board voted Friday to file for bankruptcy protection, and the papers were filed in Delaware early Monday. They were signed by Tower founder and chairman emeritus Russell Solomon, the 78-year-old industry legend who started the company in 1960.
His family controls all of Tower's stock through a series of trusts. If all goes according to plan, the bondholders will hold $30 million worth of IOUs and 85 percent of Tower's stock. The Solomon family will keep 15 percent of the ownership.
The 15 percent arrangement is unusual. Ordinarily, if some creditors aren't getting paid in full, a company's shareholders lose all stock in a bankruptcy reorganization. But sources said most bondholders bought their bonds relatively recently, after the securities had plummeted to 20 percent or less of their original value, so they're more willing to be generous.
In addition, the bondholders realized it was important to keep Russell Solomon on board.
"Russ Solomon has always been regarded as a visionary in the business, and there is clearly a value to having him continue to be meaningfully associated with Tower," said Michael Bloom, a lawyer representing major record and video companies that supply Tower's inventory. "He's earned it; he's entitled to it."
The major bondholders, 38 in all, range from New York insurance giant AIG to lesser-known investment firms in Belgium and Bermuda. Those called by The Bee declined to comment. The bondholders' lead attorney, Peter Gurfein, couldn't be reached.
Tower's declining fortunes came to a head in 2001, when it closed several stores and persuaded bankers to extend a loan. It skirted bankruptcy proceedings a couple of times and then defaulted on $110 million in bond debt last spring after missing a $5.2 million interest payment.
The default led to an agreement in principle with most bondholders in which much of the debt would be canceled and the bondholders would wind up controlling the company, with the understanding that it would be sold.
But the small group of dissenting bondholders could have presented huge obstacles to a sale. That's what made the Chapter 11 filing necessary. Under the bankruptcy filing, a vote will be taken. If more than half the bondholders (representing two-thirds of the debt) approve the plan, the plan will go through. Tower says it already has approval from 97 percent of the bondholders, making the vote anything but suspenseful.
While most bankruptcy proceedings can take years to complete, Tower said its case can be wrapped up in 60 days.
If the bankruptcy restructuring is, indeed, largely a done deal, that leaves one big mystery: Who will buy Tower? A source close to the proceedings said the bondholders want the business sold but aren't in a big hurry now that the music industry seems to be emerging from a downturn that bankrupted or killed some competitors.
Lloyd Greif, the investment banker who's been trying to sell Tower since last spring, wouldn't comment on timing but said sale negotiations are ongoing and the bankruptcy filing plays to Tower's advantage by erasing much of the debt.
Sources say bidders include Sun Capital Partners, a Florida investment firm that bought Sam Goody, and Yucaipa Cos., a Southern California company that owns wholesale music distributor Alliance Entertainment Corp.
Billboard magazine has reported that Hicks Muse Tate and Furst, a Dallas investment firm, and Pamlico & Co., a firm led by two music industry veterans, also are in the running. The firms declined to comment.
The legendary retailer seeks protection to prepare for sale.
By Dale Kasler -- Bee Staff Writer
Published 2:15 a.m. PST Tuesday, February 10, 2004
Tower Records filed for bankruptcy protection Monday, turning to the courts to wipe out millions in debts that have strangled the pioneering music retailer.
Clobbered by discounters, digital piracy and other competitors, the Sacramento area's most famous homegrown company filed under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Del., the city where it is legally headquartered.
West Sacramento-based Tower said the bankruptcy filing is a "prepackaged" case in which the vast majority of its creditors have already agreed in principle to a restructuring plan that would erase $80 million in bond debt, give bondholders the lion's share of Tower's ownership and then sell the business.
Tower wanted to complete the plan without a bankruptcy reorganization, but the filing became necessary when a small group of bondholders - 3 percent of them - wouldn't support the plan and could have scuttled a sale.
With so many bondholders ready to vote in favor of the plan, the court proceedings could be largely a formality. Tower's ultimate fate remains unclear, although the investment banker who's been searching for a buyer since last spring said he's making good progress.
The company said the bankruptcy filing won't affect its employees or operation of its 93 stores, but will give the company the fresh start it's been seeking since it first teetered on the brink of bankruptcy reorganization almost three years ago. The company has secured up to $100 million in new loans from one of its main lenders, CIT Group/Business Credit Inc. of New York. Its major vendors pledged to continue supplying product.
"Court approval of the prepackaged plan will reduce existing debt by $80 million, effectively eliminating the financial risks that have faced Tower for the past three years," said Chief Executive E. Allen Rodriguez in a prepared statement.
Industry leaders agreed. "I characterize it as a day that the brand Tower begins a new life," said Carl Schnock, a vice president with record label Sony Music Entertainment.
Still, others said the bankruptcy filing represents the culmination of a financial disaster that shriveled and nearly ruined an icon of the music business. Once a $1 billion-a-year giant with style, attitude and a bevy of stores circling the globe, Tower has shrunk by one-third and has sold or closed all its international stores in the past three years.
The main culprits: fierce new competition, including discount department stores, Internet merchant Amazon.com and the online file-sharing craze that eroded Tower's customer base.
"It's a real shame," said longtime Tower customer Melissa Collard of Sacramento, a professional jazz singer who was shopping at the original Tower on Watt Avenue Monday afternoon. "They've really given a lot of support to artists and musicians."
Yet she acknowledged that people like her are part of the problem: Collard buys a lot of music on Amazon.
"It really is the passing of the old guard," said Mike Dreese, president of Newbury Comics, a Boston-based record chain that's competed with Tower for decades. "Tower was really one of the last of the great family empires."
Members of the Solomon family of Sacramento, the founders and owners of Tower, couldn't be reached for comment.
Dreese said Tower risks hurting its operations by filing. "The real damage that occurs to a company occurs in terms of employee morale, defections," he said.
The "ironic piece is that the business just started to turn (upward)," Dreese said. Record sales are improving lately, and Tower spokeswoman Maya Pogoda said "the company has really been doing much better."
The bankruptcy filing had been rumored in the music industry for weeks and became public knowledge last week. Tower's board voted Friday to file for bankruptcy protection, and the papers were filed in Delaware early Monday. They were signed by Tower founder and chairman emeritus Russell Solomon, the 78-year-old industry legend who started the company in 1960.
His family controls all of Tower's stock through a series of trusts. If all goes according to plan, the bondholders will hold $30 million worth of IOUs and 85 percent of Tower's stock. The Solomon family will keep 15 percent of the ownership.
The 15 percent arrangement is unusual. Ordinarily, if some creditors aren't getting paid in full, a company's shareholders lose all stock in a bankruptcy reorganization. But sources said most bondholders bought their bonds relatively recently, after the securities had plummeted to 20 percent or less of their original value, so they're more willing to be generous.
In addition, the bondholders realized it was important to keep Russell Solomon on board.
"Russ Solomon has always been regarded as a visionary in the business, and there is clearly a value to having him continue to be meaningfully associated with Tower," said Michael Bloom, a lawyer representing major record and video companies that supply Tower's inventory. "He's earned it; he's entitled to it."
The major bondholders, 38 in all, range from New York insurance giant AIG to lesser-known investment firms in Belgium and Bermuda. Those called by The Bee declined to comment. The bondholders' lead attorney, Peter Gurfein, couldn't be reached.
Tower's declining fortunes came to a head in 2001, when it closed several stores and persuaded bankers to extend a loan. It skirted bankruptcy proceedings a couple of times and then defaulted on $110 million in bond debt last spring after missing a $5.2 million interest payment.
The default led to an agreement in principle with most bondholders in which much of the debt would be canceled and the bondholders would wind up controlling the company, with the understanding that it would be sold.
But the small group of dissenting bondholders could have presented huge obstacles to a sale. That's what made the Chapter 11 filing necessary. Under the bankruptcy filing, a vote will be taken. If more than half the bondholders (representing two-thirds of the debt) approve the plan, the plan will go through. Tower says it already has approval from 97 percent of the bondholders, making the vote anything but suspenseful.
While most bankruptcy proceedings can take years to complete, Tower said its case can be wrapped up in 60 days.
If the bankruptcy restructuring is, indeed, largely a done deal, that leaves one big mystery: Who will buy Tower? A source close to the proceedings said the bondholders want the business sold but aren't in a big hurry now that the music industry seems to be emerging from a downturn that bankrupted or killed some competitors.
Lloyd Greif, the investment banker who's been trying to sell Tower since last spring, wouldn't comment on timing but said sale negotiations are ongoing and the bankruptcy filing plays to Tower's advantage by erasing much of the debt.
Sources say bidders include Sun Capital Partners, a Florida investment firm that bought Sam Goody, and Yucaipa Cos., a Southern California company that owns wholesale music distributor Alliance Entertainment Corp.
Billboard magazine has reported that Hicks Muse Tate and Furst, a Dallas investment firm, and Pamlico & Co., a firm led by two music industry veterans, also are in the running. The firms declined to comment.
