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Tower Records To Seek Chapter 11 -sources

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Tower Records to Seek Chapter 11 -Sources

MTS Inc., the parent of high-profile entertainment retailer Tower Records, plans to file soon for bankruptcy protection after failing to find a suitable buyer, people familiar with the situation told Reuters on Thursday.

A Chapter 11 filing for protection from creditors by MTS would cap a long period of financial distress for privately held Tower, a chain of nearly 100 stores located mainly in the United States that sell music and video entertainment in various formats.

The Chapter 11 fling will involve a major debt-for-equity swap that would likely switch control of the company from the founding Sacramento, California-based Solomon family to creditors that include bondholders and banks, sources said.

Like other retailers in the recorded entertainment industry, Tower suffers from stiff competition from mass market retailers such as Wal-Mart Stores Inc. and high costs from retail leases. Digital downloading and file copying has hammered sales and led to widening losses, the company has said.

The bankruptcy filing is likely to happen within the next week in Delaware, barring last minute hitches or objections from creditor groups working to hammer out the "prepackaged" bankruptcy plan. Most creditors appear to have agreed to the plan, sources said.

The plan, which must be approved by a bankruptcy judge, won't involve significant store closings or employee layoffs, or even a liquidation, as some feared.

But some observers say the long-term future of the glitzy store chain founded in 1960 is clouded, particularly due to competition from digital downloading, a medium that doesn't require expensive retail locations.

"How do you compete with free?" asked William Brandt, chief executive of restructuring firm Development Specialists Inc., referring to competition from Internet music downloading. "They need to look for an industry-wide solution to the problem which they failed to lead. A better solution has to be found."

Tower teetered toward bankruptcy last year when it defaulted on $5.2 million in coupon payments on a $110 million bond issue.

It then hired investment bank Jefferies & Co. to help negotiate with bondholders and Los Angeles-based Greif & Co. to help find buyers under a forebearance agreement from lenders. The year before, it sold its top-performing Japanese division for $129 million, but the sale failed to stem a loss of sales due to shifting consumer demands.

In a regulatory filing last April, MTS reported debt of $441.9 million, including $194.5 million in bank and bond debt, along with $247.4 million in operating leases.

Sales for the nine months to April 2003 fell 9 percent to $429 million, while losses rose 47 percent to $36.3 million, said MTS in the filing.



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It cracks me up when people say the free downloading isnt affecting the music business. Tower should have prepared. New technologies change everything...

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like I said over on ZP...they are subject to the rules of inventory like every other business.

They could have been sell ing iPods...Mp3 players... napster subscriptions...point of sale mp3 purchases ....etc...etc...

Instead they stuck with the old model.... carry lots of trendy music ...and sell it for 18.99 a pop...too bad ....in the day....Tower records on the Sunset Strip was the place to peoplewatch on a Saturday night.

Hope they make it back with a new business plan.

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