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Tower Records is likely to file for bankruptcy: source

Tower Records, the pioneering record retailer that invented the music megastore, is likely to file for bankruptcy to aid a potential sale, a source close to the matter said.

A 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 Thursday, speaking on condition of anonymity. The bankruptcy was likely to come within a week, the source said.

MTS Inc, the privately held parent of the West Sacramento, California-based record retailer, declined to comment on the possible Chapter 11 filing. Such a filing would be nearly a year after MTS decided to sell Tower because it could not pay US$5.2 million in debt on US$110 million in bonds sold in 1998.

Tower Records, begun with a single 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 US$1 billion were routine.

The retailer's decline began in 1998 as falling sales, lack of hits and discounters such as Best Buy and Wal-Mart Stores Inc cut into profits of traditional record stores.

The company borrowed US$110 million in 1998 to expand into Great Britain, Asia, Canada and South America shortly after founder Russ Solomon boasted in a magazine interview that his company "can compete with anybody" and predicted a coming industry shakedown in which some companies would die and the "good ones will get bigger."

Yet as its troubles mounted, the company became known among music shoppers for steep prices -- typically US$18.99 for CDs, compared to US$4 and US$5 less at discount stores.

The company's June 2003 filing with the Securities and Exchange Commission reported US$441 million in long-term debt and operating leases as of April last year.
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