Mars Music Assets Up for Auction Thursday

The Mars Music superstore chain has abandoned plans to re-organize under its current ownership and will liquidate its assets.

A bankruptcy auction will be held this Thursday in Florida.

Liquidator Great American Group has entered an opening bid for all the assets, with plans to liquidate Mars' substantial inventory this fall in "going-out-of-business" sales at the Mars store locations if no higher bids come in.

Other potential bidders, however, are reportedly considering buying the assets in order to keep at least some of the stores open under new ownership.

According to the bankruptcy filing, several interested parties have already signed non-disclosure agreements and are reviewing both Mars' operations and potential business plans. Aside from liquidators, potential bidders could include investment groups, as well as other MI retailers looking to expand their geographic reach.

Mars founder and CEO Mark Begelman has resigned from the company and the Mars board, but it is not known whether he is working with any of the potential bidder groups.

Mars originally filed Chapter 11 bankruptcy with the intention of closing underperforming stores, arranging new financing, and continuing with a trimmed down operation. The company put together business plans for both 29 and 20 store chains.

In the end, however, the company could not obtain financing, and decided it had "little choice but liquidate assets," according to bankruptcy documents.

The liquidation could mean bad news for many in the musical instrument industry, both because many manufacturers may not be paid in full -- or at all -- for goods sold to Mars, and because massive liquidation sales this fall in several major markets could depress sales for other retailers.

As of October 6, 2002, Mars had $63.7 million of inventory at cost, plus another $1.1 million of inventory in a rental pool, according to the bankruptcy document. This inventory has declined since that date as inventory was sold, without new goods coming in. The liquidator has agreed to pay roughly 74% of the at cost value of the new inventory if its bid is approved, and roughly 26% of the at cost value of the rental pool inventory.

Congress Financial, Mars' primary lender, is owed about $33 million in secured loans.

Unsecured creditors generally receive payment only after and if secured creditors are paid. Certain other expenses, including attorneys' fees and costs incurred after the start of bankruptcy, also enjoy preference over unsecured creditors.

Nineteen of the twenty top unsecured Mars creditors are musical instrument are accessories vendors, with claims totaling over $13.6 million according to the bankruptcy filings. They include:

• Roland Corporation $ 1,923,424.51
• JBL Consumer Products $1,748,796.78
• Fender Musical Instruments $1,722,773.43
• Gibson Nashville $ 908,838.99
• Kaman Music Corporation $ 882,181.78
• Korg USA, Inc. $ 878,166.09
• Pearl Corporation $ 700,769.44
• Mackie Designs $ 649,881.98
• Washburn International $ 631,551.17
• Jupiter Band Instruments $ 552,225.98
• Crown International $ 520,462.37
• Shure Brothers Inc. $ 506.988.43
• Audio Technica $ 345,768.88
• Zildjian $ 326,012.29
• Line 6, Inc. $ 323,830.12
• Taylor Guitars $ 299,105.82
• American DJ Supply, Inc. $ 258,650.48
• Gemini Sound Products $ 256,760.70
• Warner Brothers Publications $ 219,940.09

Creditors with claims too small to put them in the top 20 are not disclosed in the current filings, but it is certain that other musical instrument companies are among those with smaller -- but still significant -- unsecured claims.

Mars bankruptcy attorney Paul Battista said that there is still hope that unsecured creditors might receive some payment, but that it is uncertain. "The Debtor and the Committee are hopeful that monies will be available for unsecured creditors. We will not know for sure until several other matters get resolved."

Beginning with the acquisition of a small chain of Florida-based music stores in 1996, Mars pursued a very aggressive expansion plan, building dozens of superstores through the South and some far reaches of the US, complemented by an e-commerce web site.

At its peak, Mars Music consisted of 50 stores, but had already reduced its size to 41 stores by the time of the Chapter 11 filing.