A cash-strapped Circuit City said it voluntarily filed for Chapter 11 bankruptcy protection last week to ensure that vendors would continue to ship it through the critical holiday selling season.
Under the provisions of the filing, the chain will continue to operate the business as a debtor in possession (DIP) with the help of $1.1 billion in financing from its current lenders, led by Bank of America.
The DIP credit facility will be reduced to $900 million after the holiday season, the filing showed.
Manufacturers' concerns over the chain's viability "escalated considerably" since it announced the closing of 155 stores earlier this month, the retailer said, despite "aggressive efforts" to secure vendor support.
The company has $3.4 billion in assets, $2.3 billion in debt and more than 100,000 creditors, according to the filing, entered by Circuit City and several affiliated entities with the United States Bankruptcy Court for the Eastern District of Virginia in Richmond, Va.
Hewlett-Packard is the chain's largest unsecured creditor, with $118.8 million in claims, followed by Samsung ($115.8 million), Sony ($60 million), LG's Zenith unit ($41.2 million) and Toshiba ($17.9 million).
Operating under the protection of Chapter 11 will provide vendors with assurances that they will be paid for merchandise received after the filing, so its stores can be sufficiently stocked for the holidays, the chain said.
The Chapter 11 reorganization will also give Circuit City "valuable additional time" to develop and execute a comprehensive corporate restructuring plan that may include further consolidation. The company said it will continue to shed leases at previously closed locations and will continue to "assess the productivity" of all stores and assets, review additional cost-cutting initiatives and explore strategic alternatives to help streamline operations.
The effort will allow the company to emerge as a stronger business, with an improved national distribution channel for its vendors and a more compelling offering for its customers, it said.
As part of the restructuring, the company laid off about 700 corporate, regional and district support personnel from its headquarters here on Nov. 7 to realign staffing levels with the 20 percent reduction in its store base to 566 locations. Together with store-level layoffs, the headcount reductions represent 20 percent of all employees.
In the filing, chief financial officer Bruce Besanko attributed Circuit City's operational losses over the past two years to a number of factors affecting all retailers, including the tightening credit markets and the resulting downturn in consumer spending. The ongoing losses forced the company to borrow $898 million against its revolving credit line, which reduced liquidity and jeopardized continued operations.
In a statement, Circuit City vice chairman and acting president/CEO James Marcum said, "We recently have taken intensive measures to overcome our deteriorating liquidity position. The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively."
He continued, "We appreciate the support we have received from our lenders in the midst of such a tight credit market. With this support, we believe we have the opportunity to leverage our market position and the strength of our brand to restore Circuit City to solid financial footing."
The filing comes at an especially inopportune time for the retailer, with the start of the holiday season just more than two weeks away. In an open letter to customers posted on Circuit City's Web site, Marcum sought to shore up consumer confidence by stressing, "It is important for you to understand that this announcement does not mean that Circuit City is going out of business. Our 566 U.S. stores are operating normally, and we look forward to continuing to take care of your consumer electronics shopping needs."
Circuit City will use a portion of the new $1.1 billion DIP revolving credit facility to pay off debt from its previous $1.3 billion asset-based credit line. Both loans were packaged by a lender group that includes Bank of America, Wells Fargo and GE Capital. The DIP financing, which was approved by the bankruptcy court, provides additional immediate liquidity that will allow the company to pay vendors and other suppliers for goods and services received after the Chapter 11 filing, the retailer said.
The bankruptcy court also approved Circuit City's requests for customary authority that will enable it to continue operating the business without interruption. The approvals included the authority to make wage and salary payments, continue various benefits for employees, and to honor customer programs such as returns, exchanges and gift cards.
Separately, the New York Stock Exchange (NYSE) has suspended Circuit City's common stock following its Chapter 11 bankruptcy filing. The retailer's common stock is now trading over the counter.