Tower Records Considering Bankruptcy, Source Says

Tower Records, the pioneering record retailer that invented the music mega-store and became a cultural icon in the nation’s biggest cities and throughout 21 states, is considering a bankruptcy filing to aid a potential sale, a source close to the situation said Thursday.

The possible Chapter 11 filing could involve swapping debt for equity in a move to reduce Tower’s debt burden and clear the way for a potential buyer, the source said.

MTS Inc., the retailer’s privately held parent, would not comment on the possible Chapter 11 filing. The West Sacramento-based company decided nine months ago to sell Tower Records because it could not pay $5.2 million in debt on $110 million in bonds sold in 1998.

At the time, MTS had lost money for 13 straight quarters.

Several previous reports of imminent bankruptcy filings have proved premature.

Tower Records, begun with one store in 1960, the same year as the twist dance craze, became internationally recognized for its in-store concerts and a deep selection of popular and obscure music. But the chain has fallen victim to a slump in the music business and its own missteps in a rapidly changing retailing environment.

“It doesn’t surprise me,” said Phil Leigh, digital music analyst with Digital Inside Media. “The brick-and-mortar retailers are facing a serious problem. They’ve got to deal with Borders and Wal-Mart and the trend toward digital distribution.”

Tower Records owns about 100 stores, down from 171 during its heyday when annual sales topping $1 billion were routine.

The decline began in 1998 as falling sales, lack of hits and discounters such as Wal-Mart Stores Inc. cut into profits of traditional record stores. That year, the company borrowed $110 million to further expand overseas.

As its troubles mounted, however, the company became known among music fans for high prices.

In the last two years, the company briefly hired corporate turnaround specialist Betsy Burton, shook up its management structure, cut jobs and closed some stores.

Burton’s replacement at the helm was former Univision Communications Inc. executive and investment banker E. Allen Rodriguez. But debt and losses continued, leading to the decision last year to sell.

Tower’s June filing with the Securities and Exchange Commission reported $441 million in long-term debt and operating leases as of April 30.