Circuit City CEO details bankruptcy proceedings, admits possibility of liquidation

Things have been a little rocky (to say the very least) for Circuit City since it filed for bankruptcy protection back in November of last year, and now the acting president and CEO has sent out a letter informing a select few (or the world, as the case may be) of what exactly is going / could be going on. In short, the company has just recently "filed with the Bankruptcy Court a motion that seeks Court approval for a process that formally puts the company up for sale." There's a lot of fluff after that, but the long and short of it is this: a sale could be approved before an auction begins (and its working mighty hard to make sure that happens), but if that doesn't go down by the 16th, the outfit will be " forced to liquidate" soon. We're not trying to be overly dramatic or anything, so we'll encourage you to read the entire, soul-soothing email posted just after the break before going into full-on panic mode.

[Thanks, Anonymous]

01/09/2009

Message from Jim Marcum


Team,

This week, the company filed with the Bankruptcy Court a motion that seeks Court approval for a process that formally puts the company up for sale. A sale could include as a "going concern" (meaning that the acquirer would continue to operate Circuit City as a business), pieces of the company as separate business units (such as markets, regions, or operating units) or as individual assets (such as the sale of inventory). The motion was made public today in advance of a hearing to approve the motion later today.

As we told the Court in our motion, we are engaged in active and significant discussions with more than one interested party regarding a sale of the company. The discussions with each of these parties have focused on a "going concern" transaction. In particular, interested parties are contemplating providing Circuit City with financing to complete a reorganization through a stand-alone plan and/or purchasing all or substantially all of our assets. At this point, the parties have substantially completed due diligence and are in negotiations with us and our major stakeholders in order to finalize such a transaction.

Let me back up and explain in greater detail what this filing means, what led us to this point and what it means going forward.

One of the original requirements of our debtor-in-possession (DIP) credit facility was to have a sale or auction process occur no later than early March if no other resolution had been reached for the company at that time.

Since that time, as we have discussed with you, we have worked diligently to pursue various alternatives for our business – a stand-alone reorganization plan, transactions with strategic partners and sales of all or certain parts of our business.

As we have worked, the world has continued to change. Poor macroeconomic conditions are further impacting our business and our vendors' confidence. Some of our vendors, including some key merchandise vendors, are still unwilling to relax their strict terms and have not provided meaningful credit. Securing better vendor credit and terms is essential for Circuit City's survival.

Faced with these conditions, after consulting with our advisors, the Creditors' Committee and our Lenders, in December we agreed with our DIP lenders to move the auction process for the company's assets forward to this week.

Based on the negotiations with the interested parties that I mentioned above as well as discussions with our vendors and lenders, we are optimistic that we can successfully complete a transaction. Of course, nothing is certain and we can't provide any assurance or guarantee that a transaction will be completed.

A number of outcomes are possible. We could reach a sale agreement and have it approved by the Court before the auction starts on the 13th. These discussions or the auction could result in an approved sale agreement before the hearing on the 16th. Or, we could reach an agreement with the DIP lenders to amend our agreement and change or delay the timing of the hearing on the 16th. To the extent that these efforts are unsuccessful, we will need to pursue a more dire path for the company.

There's no way to sugar-coat this, so out of respect for you I'm going to be completely honest: if no sale agreement is approved, then the company will be forced to liquidate beginning soon after the hearing on the 16th. I'm sure this news will shock many of you because we're doing the right things to move our company forward and are making solid progress in improving our operations. In fact, we've been able to accomplish the following:
As planned, in the months of November and December, we completed liquidation sales in and subsequently closed 155 domestic stores that were underperforming or were no longer a strategic fit for the company.
We have achieved significant selling, general and administrative expense reductions as we restructure our business to align operations with the smaller national store base and have implemented more stringent expense controls.
We retained DJM Realty Services, Inc. to negotiate reduced rent for leased properties and to sell owned properties.

And probably most importantly
The company's sales trends improved significantly during the last two weeks of December, and the combination of the improvement in sales and focus on gross margin has enabled us to continue to operate well within the operating budget required by the amended DIP credit agreement.

What are the next steps?

I want you to understand that the management team has worked tirelessly to avoid coming to this point. In fact, the reason I am communicating this via email, instead more personally, is that Bruce Besanko and I will be on the road trying to get support from our banks and our vendors for a deal.

Over the next week we will continue working with interested parties. In the meantime, we've got to stay focused. We must continue to show improvements to the parties who are interested in buying the company and to our vendors and lenders. The auction process is set to conclude at the court hearing on January 16th, so we will soon know whether or not someone will step forward and purchase the company. While we would all prefer it to be sold in its entirety, we cannot say for certain that will happen.

If you receive questions from our guests, your families, friends or acquaintances, please continue to use the Q&A document provided on ccity.com. This news does not change the answers to those questions or the way we respond to customers. Again, the only thing that I can ask of you is to continue to work hard through this major distraction so we can continue to show improvement in our results to any potential purchasers.

Unfortunately, we won't be able to discuss the outcome until the auction process concludes on the 16th. I apologize in advance that I won't be able to discuss it further.

Thank you,

Jim