<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
CAMELOT MUSIC HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5735 13-3735306
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
No.)
incorporation or organization) Classification Code No.)
</TABLE>
8000 FREEDOM AVENUE, N.W.
NORTH CANTON, OHIO 44720
(330) 494-2282
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
JAMES E. BONK
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
8000 FREEDOM AVENUE, N.W.
NORTH CANTON, OHIO 44720
(330) 494-2282
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS F. MCKEE, ESQ. VALERIE FORD JACOB, ESQ.
CALFEE, HALTER & GRISWOLD LLP FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
1400 MCDONALD INVESTMENT CENTER ONE NEW YORK PLAZA
800 SUPERIOR AVENUE NEW YORK, NY 10004
CLEVELAND, OHIO 44114 (212) 859-8000
(216) 622-8200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value........ $150,000,000 $51,725
==========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to paragraph (o) of Rule 457 under the Securities
Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering of the
registrant's Common Stock (the "U.S. Prospectus") and one to be used in
connection with a concurrent international offering of the Common Stock (the
"International Prospectus"). The International Prospectus will be identical to
the U.S. Prospectus except that it will have a different front cover page,
underwriting section and back cover page. The U.S. Prospectus is included herein
and is followed by the alternate pages to be used in the International
Prospectus. The alternate pages to be used in the International Prospectus have
been labeled "Alternate Page for International Prospectus."
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 15, 1998
PROSPECTUS
SHARES
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
------------------------
All of the shares of Common Stock of Camelot Music Holdings,
Inc. (together with its subsidiaries, "Camelot" or the "Company") offered hereby
are being sold by certain stockholders (the "Selling Stockholders") of the
Company. See "Principal and Selling Stockholders." The Company is not selling
shares of Common Stock in the Offerings and will not receive any proceeds from
the sale of any shares of Common Stock offered hereby.
Of the shares of Common Stock offered hereby,
shares are being offered for sale initially in the United States
and Canada by the U.S. Underwriters and shares are being offered
for sale initially in a concurrent offering outside the United States and Canada
by the International Managers. The initial public offering price and the
underwriting discount per share will be identical for both Offerings. See
"Underwriting."
Prior to the Offerings, there has been a limited public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. The initial public offering price
does not necessarily bear any direct relationship to the market prices of the
Common Stock as reported on the OTC Bulletin Board prior to the Offerings. The
closing bid price of the Common Stock on June 12, 1998 was $42 per share. For a
discussion relating to factors to be considered in determining the initial
public offering price, see "Underwriting." The Company intends to apply for
quotation of the Common Stock on the Nasdaq National Market System under the
symbol "CMLT."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total(3)....................... $ $ $
===============================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay expenses of the Offerings estimated at
$ .
(3) The Selling Stockholders have granted to the U.S. Underwriters and the
International Managers options to purchase up to an additional
shares and shares of Common Stock,
respectively, in each case exercisable within 30 days after the date hereof,
solely to cover over-allotments, if any. If such options are exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Selling Stockholders will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
------------------------
The date of this Prospectus is , 1998.
<PAGE> 4
[Photographs depicting Camelot Music and The Wall Stores, together with the
Camelot Music and The Wall logos and mottos.]
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, information in this Prospectus assumes that the
Underwriters' over-allotment options have not been exercised and reflects a
-for-one stock split consummated prior to commencement of the Offerings. Pro
forma financial information included herein gives effect to the adoption of
fresh-start reporting and the acquisition by the Company of certain assets of
The Wall Music, Inc. ("The Wall") as if each took place at the beginning of the
period presented. The Company's fiscal year ends on the Saturday closest to
February 28th. Fiscal years are identified according to the calendar year in
which they begin (i.e., the fiscal year ended February 28, 1998 is referred to
herein as "Fiscal 1997").
THE COMPANY
Camelot Music Holdings, Inc. ("Camelot" or the "Company") is a leading
mall-based retailer of prerecorded music and accessories and is one of the
largest music retailers in the United States based on store count. As of May 31,
1998, the Company operated 455 stores in 37 states nationwide under two brand
names: Camelot Music, founded in 1956, and operating 305 stores with a
significant store base concentration in the Midwest and Southeast regions of the
United States; and The Wall, operating 150 stores primarily in the Mid-Atlantic
and Northeast regions of the United States. The Company acquired certain assets
of The Wall effective February 28, 1998 ("The Wall Acquisition"). The Company
believes that each chain benefits from name recognition and a loyal customer
base in its primary markets of operation. For Fiscal 1997, the Company had pro
forma net sales of $554.1 million ($396.2 million excluding The Wall) and
earnings of $27.2 million ($15.9 million excluding (i) The Wall, (ii) special
items and (iii) the reinstatement of vendor discounts). On June 3, 1998, the
Company signed a definitive agreement to acquire Spec's Music, Inc. ("Spec's"),
a music retailer operating 42 stores in south Florida and Puerto Rico. The
Company believes that the acquisition of Spec's (the "Spec's Acquisition") will
enhance its competitive position in the Southeastern United States and give the
Company a leading position in the south Florida market. See " -- Recent
Developments."
Camelot offers a broad range of prerecorded music, including compact discs
("CDs"), cassettes, pre-recorded video cassettes, digital versatile discs
("DVDs") and accessories such as blank audio and video cassettes as well as
music and tape care products. The Company seeks to position itself as the
mall-based music specialist for prerecorded music, and advertises under the
motto "No One Knows Your Music Better." The Company's stores average 4,200
square feet in size and typically offer over 20,000 stock keeping units
("SKUs"), including both high-volume Billboard Top 100 titles ("hits") and a
broad offering of older releases and diverse music categories ("catalog"). The
Company believes its product offering is among the broadest of mall-based
retailers, enabling it to attract a diverse customer base and reduce its
dependence on any one music genre. In Fiscal 1997, the Company's average sales
per square foot, including The Wall, was approximately $293 which the Company
believes is among the highest for mall-based retailers of prerecorded music. The
Company believes its broad product offering, supported by a high level of
customer service from its knowledgeable sales force, combined with its
competitive pricing strategy and attractive locations within regional malls,
position it to benefit from the favorable trends occurring in the prerecorded
music industry.
According to industry sources, in 1997 the total market for prerecorded
music and music videos in the United States amounted to $12.2 billion. The music
and music video market in the United States has more than doubled over the last
ten years and has grown at a compounded annual rate of 8.2% during that time.
During the 1980s the music retail industry experienced rapid growth fueled by:
(i) the introduction of new products such as the CD; (ii) a relatively large
number of popular new releases which increased customer traffic and sales; and
(iii) the rapid expansion of mall-based music retailers. These factors led, in
the early 1990s, to the competitive intrusion of non-traditional music retailers
such as consumer electronics stores and discount stores and to increased price
competition. By mid-1994, these competitive factors, combined with the
contraction of the replacement CD market and a comparative lack of successful
new releases, led to deteriorating profitability in the music retail industry.
Beginning in mid-1997, conditions in the music retail industry began to improve
as a result of: (i) the significant reduction in competitive square footage
resulting from the reduction in the total number of traditional music retail
stores from approximately 5,000 in 1995 to approximately 4,200 in 1997,
including a net reduction of 600 retail stores by the top five traditional music
retailers, based on store count; (ii) an improvement
3
<PAGE> 6
in retail pricing as music vendors, beginning in 1996, strengthened minimum
advertised pricing ("MAP") guidelines, which the Company believes decreased the
intensity levels of price-based competition for prerecorded music; and (iii) a
resurgence in popular new releases.
In 1993, the Company was acquired in a highly leveraged transaction (the
"1993 Acquisition"), resulting in significant debt service obligations. This
significant debt service and the industry conditions described above combined to
impair Camelot's operating and financial condition and led the Company to file a
voluntary petition for protection under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in August 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Camelot's joint plan of reorganization (the "Plan of Reorganization") was
confirmed by the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") on December 12, 1997 and became effective on January
27, 1998 (the "Effective Date").
Prior to and during its reorganization under the protection of the
Bankruptcy Court, Camelot was able to substantially improve the competitive
positioning of its business and significantly improve its financial position.
These improvements included: (i) closing 96 underperforming stores; (ii)
renegotiating unfavorable leases on certain of its remaining stores; (iii)
returning certain overstock inventory to its vendors; and (iv) eliminating
liabilities totaling approximately $485 million, including indebtedness of
approximately $412 million. In addition, during the same period, Camelot
invested $7.5 million to upgrade, develop and implement sophisticated
merchandising, distribution, replenishment, and financial software packages, all
of which were fully operational by the end of Fiscal 1997. The Company's new and
upgraded information systems enable management to (i) allocate specific
merchandise to a specific store, thereby improving sell-through rates and
reducing returns to vendors; (ii) improve the efficiency of its replenishment
system to reduce stock-outs and lower distribution center operating costs; (iii)
better track profitability by SKU, store and region; and (iv) automate invoice
matching to reduce corporate labor costs. The Company also developed and
implemented a new marketing and data warehousing system, which became fully
operational in April 1998, to better capture transaction specific data to
facilitate the further development of the Company's customer loyalty programs
and improve the effectiveness of its advertising programs by targeting specific
customers with promotional material tailored to their buying patterns. Over the
last two fiscal years, as the Company focused on improving the competitiveness
of its business, revenues increased 1.0% as the Company closed 83 stores and
opened no new stores.
The Company believes the improved industry conditions, the modifications to
its operations and financial condition, its infrastructure investments and its
strong market position, provide Camelot with distinct competitive advantages and
position it for accelerated growth and continued improvement in profitability.
Key elements of the Company's growth strategy include:
- Strengthen Competitive Position in Existing Markets. The Company intends
to strengthen its store base and increase sales by relocating certain
existing stores to larger stores and selectively opening new stores in
existing markets. New stores will be opened to fill out existing markets
and leverage the Company's distribution, advertising and field management
costs. As of May 31, 1998, approximately 270 of the Company's 455 stores
were less than 4,000 square feet in size compared to its current
prototype store of 5,000-6,000 square feet. The Company intends to
relocate many of these stores to larger facilities within the same
regional mall. The Company believes these relocations will better
facilitate its merchandising strategy, including the broader presentation
of higher-margin catalog titles. At May 31, 1998, the Company had
identified 100 such stores for relocation. In Fiscal 1998, the Company
plans to relocate 20 stores and open four new stores in existing markets.
Of these 24 projects, four have been completed and lease commitments have
been signed for three more. In Fiscal 1999, the Company expects to
relocate 17 stores and open 20 new stores.
- Improve Operating Margins. The Company has significantly improved its
operating margin to 3.6% of net sales (2.5% excluding special items) in
Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9% excluding
special items) in Fiscal 1996. The Company believes that significant
opportunities exist to continue to improve its operating profit margin.
The Company seeks to increase its gross profit margin primarily through:
(i) improved pricing for the Company's products; (ii) enhanced trade
terms; (iii) reduced product returns, through a more systematic
allocation of products; and (iv) adjusting its
4
<PAGE> 7
merchandise mix to emphasize higher-margin catalog items as it relocates
its stores to larger facilities. In addition, the Company expects to
leverage its general and administrative and warehousing and distribution
costs as it opens new stores or acquires stores in existing markets. The
Company's warehouse and distribution center is currently operating at
between 30% and 40% of capacity and the Company believes it could support
approximately 500 additional stores without a significant increase in
capital expenditures for its warehouse and distribution facilities.
- Pursue Acquisitions. The Company believes its industry leading position,
experienced management team and improved capitalization position Camelot
to pursue selective acquisition opportunities in the music retail
industry. Camelot targets mall-based retailers of prerecorded music in
existing or contiguous market areas which possess attractive real estate
locations. The Company's strategy is to improve such retailers' operating
results by remerchandising the stores to conform to Camelot's prototype,
implementing its information systems and integrating the acquired
operations in order to benefit from economies of scale in distribution,
advertising, and management costs. Effective February 28, 1998, the
Company purchased certain assets of The Wall for $72.4 million, which
significantly enhanced Camelot's market share in the Mid-Atlantic and
Northeast regions of the United States. At May 31, 1998, the Company had
improved product mix at all of The Wall's stores, targeted for closure 11
underperforming stores, implemented its information systems and reduced
costs by eliminating The Wall's corporate infrastructure and phasing out
its distribution facilities. See "Unaudited Pro Forma Condensed
Consolidated Financial Data." On June 3, 1998, the Company signed a
definitive agreement to purchase Spec's. See "-- Recent Developments."
RECENT DEVELOPMENTS
On June 3, 1998, the Company entered into an Agreement and Plan of Merger
(the "Spec's Merger Agreement") with respect to the proposed Spec's Acquisition.
Spec's is a Miami, Florida-based retailer of prerecorded music operating 42
stores in south Florida and Puerto Rico. As of May 31, 1998, Spec's operated 16
mall stores and 26 stores in shopping centers and free-standing locations. The
Company believes the Spec's Acquisition will enhance its competitive position in
the Southeastern United States and give the Company a leading position in the
south Florida market. The cash purchase price for the Spec's Acquisition is
expected to be approximately $28 million (including related acquisition costs
and the repayment of Spec's indebtedness) and will be funded with amounts
available under the Company's Amended Credit Facility (as defined herein). See
"Risk Factors -- Risks of Restrictions by Lenders" and "Description of Certain
Indebtedness." The Spec's Acquisition is expected to close in the second quarter
of Fiscal 1998. Consummation of the acquisition is subject to certain
conditions, including approval of the Spec's Acquisition by Spec's public
stockholders and regulatory bodies, and there can be no assurance that the
Company will consummate the Spec's Acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." During the twelve months ended January 31, 1998, Spec's had
revenues of $66.2 million and an operating loss of $4.1 million. The Company
expects to achieve cost savings through the reduction or elimination of Spec's
corporate and distribution infrastructure and intends to close two
underperforming stores.
---------------
The Company was incorporated in Delaware on September 30, 1993. Its
principal executive offices are located at 8000 Freedom Avenue, N.W., North
Canton, Ohio 44720 and its telephone number is (330) 494-2282.
5
<PAGE> 8
THE OFFERINGS
The offering of shares of the Company's Common Stock, par
value $.01 per share, in the United States and Canada (the "U.S. Offering") and
the offering of shares of the Common Stock outside the United
States and Canada (the "International Offering") are collectively referred to
herein as the "Offerings."
<TABLE>
<S> <C>
Common Stock offered by the Selling
Stockholders.............................. shares
Common Stock to be outstanding after the
Offerings(1).............................. 10,174,432 shares
Use of Proceeds............................. The Company will not receive any proceeds
from the sale of Common Stock offered by the
Selling Stockholders.
Proposed Nasdaq National Market System
Symbol.................................... "CMLT"
</TABLE>
- ---------------
(1) Does not include (i) 950,094 shares of Common Stock reserved for issuance
under the Company's stock option plans of which options to purchase an
aggregate of 737,000 shares of Common Stock will be outstanding upon
completion of the Offerings and (ii) up to 1,730 shares of Common Stock
reserved for issuance to certain former creditors of the Company pursuant to
the Plan of Reorganization. See "Shares Eligible for Future Sale,"
"Management -- Executive Compensation" and "Management -- Director
Compensation."
RISK FACTORS
Purchasers of Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment decision.
6
<PAGE> 9
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
The following table presents summary unaudited pro forma financial data of
the Company for the twelve months ended and as of February 28, 1998. The column
entitled "Pro Forma Combined Fiscal 1997 (Fresh-Start)" gives effect to the
adoption by the Company of fresh-start reporting which was effective as of
January 27, 1998. The column entitled "Pro Forma Combined Fiscal 1997 (The
Wall)" gives effect both to fresh-start reporting as well as The Wall
Acquisition which was effective February 28, 1998. In both cases, the pro forma
data assume these events occurred on March 2, 1997. The summary unaudited pro
forma financial data are not necessarily indicative of operating results that
would have been achieved had these events been consummated on the date indicated
and should not be construed as representative of future operating results. The
unaudited pro forma financial data should be read in conjunction with the
financial statements and related notes thereto of the Company and The Wall and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED COMBINED
FISCAL 1997 FISCAL 1997
(FRESH-START)(1) (THE WALL)(1)
---------------- -------------
<S> <C> <C>
INCOME STATEMENT DATA
Net sales................................................... $396,208 $554,120
Cost of sales............................................... 256,881 352,056
-------- --------
Gross profit................................................ 139,327 202,064
Selling, general and administrative expenses................ 108,214 151,226
Depreciation and amortization............................... 6,437 10,124
Special items(2)............................................ (4,443) (4,443)
-------- --------
Income before interest expense, other income (expenses),
net, reorganization income (expenses), income taxes and
extraordinary item........................................ 29,119 45,157
Interest expense............................................ (178) (588)
Other income (expenses), net................................ 2,639 --
-------- --------
Income before reorganization income (expenses), income taxes
and extraordinary item.................................... 31,580 44,569
Reorganization income (expenses)(3)......................... -- --
-------- --------
Income before income taxes and extraordinary item........... 31,580 44,569
(Provision) benefit for income taxes........................ (12,316) (17,383)
Extraordinary item, net of tax(4)........................... -- --
-------- --------
Net income.................................................. $ 19,264 $ 27,186
======== ========
Earnings per share(5)....................................... $ 2.67
Weighted average shares outstanding(5)...................... 10,176
SELECTED OPERATING DATA
Gross square footage (000's)................................ 1,309 1,862
Sales per square foot....................................... $ 306 $ 293
</TABLE>
(footnotes on page 9)
7
<PAGE> 10
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)
The following table presents summary historical consolidated financial data
of the Company and its predecessor (the "Predecessor") as of the dates and for
the periods indicated. The summary historical consolidated financial data should
be read in conjunction with the financial statements and related notes thereto
of the Company and The Wall and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(6) THE COMPANY
--------------------------------------------- ------------
PERIOD PERIOD
MARCH 2, FEBRUARY 1,
1997 TO 1998 TO COMBINED
FISCAL FISCAL FISCAL JANUARY 31, FEBRUARY 28, FISCAL
1994 1995 1996 1998(7) 1998(7) 1997(8)
-------- --------- -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales......................... $459,077 $ 455,652 $396,502 $372,561 $27,842 $400,403
Cost of sales..................... 289,887 302,481 263,072 243,109 17,662 260,771
-------- --------- -------- -------- ------- --------
Gross profit...................... 169,190 153,171 133,430 129,452 10,180 139,632
Selling, general and
administrative expenses......... 128,158 135,441 117,558 99,553 9,240 108,793
Depreciation and amortization..... 21,146 26,570 23,290 20,484 527 21,011
Special items(2).................. -- 211,520 6,523 (4,443) -- (4,443)
-------- --------- -------- -------- ------- --------
Income (loss) before interest
expense, other income
(expenses), net, reorganization
income (expenses), income taxes
and extraordinary item.......... 19,886 (220,360) (13,941) 13,858 413 14,271
Interest expense.................. (30,655) (38,319) (17,418) (221) (12) (233)
Other income (expenses), net...... (5,026) (4,978) (1,160) (185) 295 110
-------- --------- -------- -------- ------- --------
Income (loss) before
reorganization income
(expenses), income taxes and
extraordinary item.............. (15,795) (263,657) (32,519) 13,452 696 14,148
Reorganization income
(expenses)(3)................... -- -- (31,845) 26,501 -- 26,501
-------- --------- -------- -------- ------- --------
Income (loss) before income taxes
and extraordinary item.......... (15,795) (263,657) (64,364) 39,953 696 40,649
(Provision) benefit for income
taxes........................... (3,070) (474) -- (289) (115) (404)
Extraordinary item, net of
tax(4).......................... -- -- -- 228,911 -- 228,911
-------- --------- -------- -------- ------- --------
Net income (loss)................. $(18,865) $(264,131) $(64,364) $268,575 $ 581 $269,156
======== ========= ======== ======== ======= ========
Earnings per share(5)............. --
Weighted average shares
outstanding(5).................. --
SELECTED STORE DATA
Number of stores:
Open at beginning of period..... 392 401 388 315 305 315
Opened during period............ 21 14 -- -- -- --
Closed during period............ 12 27 73 10 -- 10
Acquired during period.......... -- -- -- -- -- --
-------- --------- -------- -------- ------- --------
Open at end of period........... 401 388 315 305 305 305
======== ========= ======== ======== ======= ========
SELECTED OPERATING DATA
Gross square footage (000's)(9)... 1,511 1,563 1,329 1,309 1,309 1,309
Sales per square foot(6).......... $ 304 $ 292 $ 298 -- -- $ 306
Comparable store sales increase
(decrease)(10).................. (2.6%) (5.6%) (3.5%) -- -- 6.8%
</TABLE>
(footnotes on page 9)
8
<PAGE> 11
<TABLE>
<CAPTION>
THE COMPANY
AT FEBRUARY 28, 1998
---------------------------
ACTUAL AS ADJUSTED(11)
-------- ---------------
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 82,530 $ 10,179
Working capital............................................. 110,143 110,143
Total assets................................................ 342,281 269,930
Long-term debt.............................................. -- --
Stockholders' equity........................................ 194,949 194,949(12)
</TABLE>
- ---------------
(1) For information regarding the pro forma adjustments made to the Company's
historical financial data, see "Unaudited Pro Forma Condensed Consolidated
Financial Data."
(2) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company
discontinued its manual "punch card" version of its customer loyalty
program and replaced it with a more limited automated customer loyalty
program, the write-down of the fair value of long-lived assets in Fiscal
1996 resulting in a charge of $6.5 million and the write-down of goodwill
in Fiscal 1995, principally related to the 1993 Acquisition. See Note 15 to
the Company's Consolidated Financial Statements.
(3) During Fiscal 1997, reorganization income related principally to
adjustments to prepetition claims that were discharged or received no
amount of recovery, offset by net adjustments to fair value, and
professional fees and other expenses related to the bankruptcy proceedings.
During Fiscal 1996, reorganization expense primarily reflected a provision
for store closings (including related lease rejection damage claims) and
the write-off of financing costs associated with prepetition indebtedness
as well as professional fees.
(4) As a result of the Company's reorganization, in Fiscal 1997 the Company
recorded a one-time gain of $228.9 million associated with the
extinguishment of its prepetition debt.
(5) The pro forma combined net income per share data is presented in accordance
with SFAS No. 128 and assumes: (i) the Company emerged from bankruptcy and
adopted fresh-start reporting on March 2, 1997; (ii) The Wall Acquisition
occurred on March 2, 1997; and (iii) the Company's 1998 Stock Option Plan
and Outside Directors Stock Option Plan were established on March 2, 1997.
Awards of options under these plans are not dilutive on a pro forma basis
and, therefore, basic and diluted data are the same. With respect to
historical combined net income per share, see Note 3 to the Company's
Consolidated Financial Statements.
(6) The financial information for the Predecessor entity relates to the
operations of Camelot Music Holdings, Inc. prior to its emergence from the
protection of the Bankruptcy Court on the Effective Date.
(7) As of January 31, 1998, the Company adopted fresh-start reporting in
accordance with AICPA Statement of Position 90-7, which resulted in a new
entity for financial reporting purposes. Financial information for the
period March 2, 1997 to January 31, 1998 reflects the operations of the
Company's Predecessor prior to emergence from bankruptcy. Financial
information for the period February 1, 1998 to February 28, 1998 reflects
the operations of the Company after the Effective Date and the adoption of
fresh-start reporting.
(8) Combined Fiscal 1997 financial data represents a summation (on two
different bases of accounting due to the adoption of fresh-start reporting
on the Effective Date) of the financial data for the Predecessor from March
2, 1997 to January 31, 1998 and the financial data for the Company from
February 1, 1998 to February 28, 1998. See "Unaudited Pro Forma Condensed
Financial Data."
(9) Sales per square foot is based on the gross square footage for Camelot
stores only and excludes The Wall stores.
(10) The percentage change in comparable store sales is calculated as the net
change in sales for each comparable store for the equivalent period in the
prior year. Comparable stores are stores that have been operating for more
than 12 months since first opening. During the 13th month of operations,
new stores are considered comparable stores. Stores which have been
relocated are treated as comparable stores. Closed stores are not
categorized as comparable stores.
(11) Adjusted to give effect to the payment of $72.4 million in cash to finance
The Wall Acquisition immediately subsequent to the end of the fiscal year.
Does not reflect the Spec's Acquisition. See "--Recent Developments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(12) Does not reflect estimated expenses associated with the Offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
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<PAGE> 12
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating an
investment in the Common Stock offered by this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below and in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus.
COMPETITION
The prerecorded music retail industry is highly competitive. Consumers have
numerous options through which to purchase prerecorded music and other home
entertainment products, including chain retailers (such as the Company)
specializing in prerecorded music, consumer electronics superstores, non-mall
multimedia superstores, discount stores, grocery, convenience and drug stores,
direct-mail programs via telephone, the Internet or television, local music
retailers and mail order music clubs. Certain of Camelot's competitors have
greater financial and other resources than the Company. In addition, during the
past several years, many retailers sought to increase their share of the retail
prerecorded music market by engaging in near- or below-cost pricing. This
resulted in unprecedented price competition which had a material adverse effect
on the Company's results of operations and financial condition. While this
intense price competition lessened somewhat during 1997, the Company expects
that the retail sales environment will continue to present challenges into the
foreseeable future, and there can be no assurance that price competition or
other competitive challenges will not have a material adverse effect on the
Company's results of operations and financial condition. During 1996, music
vendors (including the Big Six Vendors (as defined herein)) strengthened MAP
guidelines, which are intended to promote certain minimum retail prices for
prerecorded music products by providing incentives to retailers to comply with
the terms of the programs. Efforts by music vendors to strengthen these MAP
guidelines were an important factor in the improvement in overall industry
conditions during 1997 and the Company believes that these efforts also
contributed to its improved financial performance during recent periods. In
response to consumer complaints, the United States Federal Trade Commission (the
"FTC") is currently investigating the music vendors' MAP guideline programs in
order to determine whether the programs violate provisions of federal anti-trust
laws. A decision by the FTC to institute proceedings or take other action which
results in the relaxation or elimination of the MAP guidelines would have a
material adverse effect on the Company's results of operations and financial
condition. There can be no assurance that deep-discount pricing practices will
not return, or that if they do, that the Company will be able to remain
competitive without a material adverse effect on its financial condition and
results of operation.
The Company also competes for consumer time and spending with all leisure
time activities, such as movie theaters, television, home computer and Internet
use, live theater, sporting facilities and spectator events, travel, amusement
parks, and other family entertainment centers. The impact of the increasing use
of these entertainment options in recent years has been a reduction in customer
traffic and revenues for mall-based prerecorded music retailers such as the
Company. The Company's ability to compete successfully depends on its ability to
secure and maintain attractive and convenient locations, market and manage
merchandise effectively and attractively, offer an extensive product selection
and knowledgeable customer service as well as provide effective management. See
"Business -- Competition."
RISKS RELATED TO GROWTH STRATEGY
The Company's growth strategy involves store relocations (including
enlargements), the opening of new stores, as well as selective acquisitions of
music retailers. Each component of the Company's strategy involves significant
risks. Selection of locations for new stores and the relocation of existing
stores requires the Company to identify attractive locations for its stores,
obtain leases on favorable terms for those locations and, in the case of new
stores, hire and retain qualified store personnel or, in the case of relocated
stores, accurately assess relocation costs and the likely return on investment.
Relocation of existing stores also will result in a loss of revenue and income
from those stores during transitional periods, which may have a material adverse
effect on the Company's results of operations and financial condition. There can
be no assurance as to the Company's ability to
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<PAGE> 13
successfully relocate or open new stores or as to the effect of remodelings and
store openings on the Company's financial condition and results of operations.
Selective acquisitions of other music retailers are also a component of the
Company's strategy. The Wall was the Company's first major acquisition. The
Company expects to face significant competition for acquisition candidates,
which may limit the number of acquisition opportunities and lead to higher
acquisition prices. There can be no assurance that the Company will be able to
successfully integrate and profitably manage The Wall or that it will be able to
identify, acquire, successfully integrate or profitably manage additional
acquisitions without substantial costs, delays or other financial or operational
difficulties. In addition, although the Company has entered into the Spec's
Merger Agreement, the Spec's Acquisition is subject to a number of significant
conditions, and there can be no assurance that the Spec's Acquisition will be
consummated on the current terms or at all. Further, acquisitions involve a
number of special risks, including adverse short-term effects on the Company's
results of operations, potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities, diversion of management's
attention, the failure to retain key personnel of the acquired business,
increased expenses for accounting and computer systems (including reprogramming
such computer systems to effectively handle transactions in the year 2000 and
beyond), the effects of amortization of acquired intangible assets (such as
goodwill) and risks associated with unanticipated events or liabilities, some or
all of which could have a material adverse effect on the Company's results of
operations and financial condition. Although the Company has conducted what it
believes to be a prudent level of review regarding the operational condition of
The Wall and Spec's, and expects to conduct a similar level of review regarding
any future acquisitions, the Company cannot ascertain the actual value of
acquisition targets until it assumes operating control of such entities. In
certain cases, the Company may be required to file applications and obtain
clearances under applicable federal antitrust laws or receive approval of a
target company's shareholders (as with Spec's) before consummation of an
acquisition. These regulatory requirements or shareholder solicitations may
restrict or delay the Company's acquisitions and may increase the cost of
completing such transactions.
The timing, size and success of the Company's acquisition efforts and the
associated capital commitments cannot be readily predicted. The Company intends
to use cash, borrowings under the Amended Credit Facility and/or shares of
Common Stock to finance future acquisitions. If the Company does not have
sufficient cash resources, its growth could be limited unless it is able to
obtain additional capital through debt or equity financings. The availability of
debt or equity financing is subject to, among other things, market conditions.
If the Common Stock does not maintain a sufficient market value, or if potential
acquisition candidates are otherwise unwilling to accept Common Stock in
consideration for the sale of their businesses, the Company may be required to
use more of its cash resources, if available, to finance its acquisition
activities. The failure of the Common Stock to maintain a sufficient market
value also may adversely affect the Company's ability to engage in future equity
financings. There can be no assurance that the Company will be able to obtain
the additional financing it may need to implement its business strategy on terms
that it finds acceptable, if at all.
DEPENDENCE ON HIT RELEASES
The Company's business is dependent upon the production of hit releases by
recording artists. Hit releases are important for generating customer traffic
and sales in the Company's stores. During recent years, industry growth and
sales of music and video products slowed due to a lack of strong new releases.
The dependence on these products can create cyclical trends that do not
necessarily reflect general trends in the economy. The timing of these cycles
and the future availability of hit releases is beyond the control of the
Company. The absence of new hit releases or a decline in the number of hit
releases could have a material adverse effect on the Company's results of
operations and financial condition.
RISK ASSOCIATED WITH NEW TECHNOLOGIES
Historically, prerecorded music was one of the few forms of inexpensive,
reusable home entertainment available to consumers. In recent years, the number
of new home entertainment products has grown significantly. Certain new
technologies, such as the compact disc, have benefited the music retail
industry. However, the proliferation of other entertainment technologies, such
as cable and broadcast satellite television, videos, computer games, the
Internet and other technologies, have intensified the competition among various
entertain-
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<PAGE> 14
ment alternatives for consumer entertainment spending. There can be no assurance
as to the effect of the introduction of these and other new entertainment
alternatives on the music retail industry or the Company. In addition,
technological innovations in the music industry do not necessarily result in
increased levels of sales or profitability. The success of technologies such as
Digital Audio Technology, DVD and other format innovations depends upon consumer
acceptance of the new technology, industry agreement on a standard, the
availability of product for consumer purchase and the cost of that product. The
switch of consumers from one format to another, such as the switch from records
to audio cassettes, and the later shift from cassettes to CDs, may also reduce
sales of the existing format. Sales may be adversely affected and product
returns may be increased if the Company does not carry the right balance of old
and new formats. This could cause the Company to carry excess inventory. There
can be no assurance as to the Company's success in interpreting the desires of
customers or predicting which new technologies or formats will be accepted by
consumers.
HISTORY OF LOSSES
The Company has experienced significant losses during three of the past
four fiscal years. During Fiscal 1994, 1995, and 1996, the Company realized net
losses of $18.9 million, $264.1 million and $64.4 million, respectively. These
losses were the result of many factors, including the write-down of long-lived
assets (principally goodwill), restructuring charges, changes in the competitive
environment, interest expense resulting from indebtedness incurred in the 1993
Acquisition and the comparative lack of hit releases. In Fiscal 1997, the
Company had net income of $269.2 million ($19.3 million on a pro forma basis
after adjusting for fresh-start reporting and excluding The Wall). There can be
no assurance that the Company will be profitable in future periods or that it
will not realize significant losses.
RELATIONSHIPS WITH SUPPLIERS
The Company purchases its prerecorded music directly from a large number of
manufacturers. During Fiscal 1997, approximately 77% of purchases, net of
returns, were made from the following six suppliers: BMG Distribution, Sony
Music Entertainment, Inc., Universal Music and Video Distribution, Inc.,
Warner/Electra/ Atlantic Corporation, Polygram Group Distribution, Inc. and EMI
Music Distribution (collectively, the "Big Six Vendors"). Twenty other vendors
accounted for an additional 13% of purchases, net of returns, during such
period. As is standard in the industry, the Company does not maintain long-term
contracts with any of its suppliers, and the Company's purchases are made
through purchase orders. During the bankruptcy proceedings, the Company's access
to customary trade terms was severely limited. After the Effective Date, the
Company was able to negotiate customary trade terms with most of its suppliers,
including the Big Six Vendors. The Company believes that the resumption of
customary trade terms and the enjoyment of positive vendor relations are
fundamental to its success in the marketplace. However, there can be no
assurance that the Company will be able to maintain these customary trade terms
or enjoy positive vendor relations in the future. The loss of these positive
vendor relations and/or customary trade terms could have a material adverse
effect on the results of operations and financial condition of the Company. See
"Business -- Suppliers."
A number of the Big Six Vendors have recently stopped accepting returns of
open products from all of their retail customers. This trend has had an adverse
impact on the Company's financial condition and results of operations. There can
be no assurance that this trend will be reversed or that the Company's vendors
will not make other modifications to their policies which have an adverse effect
on the Company. Seagram Co., Ltd., owner of Universal Music and Video
Distribution, Inc., has recently announced its intention to acquire Polygram
Group Distribution, Inc. Seagram Co., Ltd. has indicated publicly that it may
intend to seek cost savings through the integration of its two music vendors.
There can be no assurance that this acquisition and any resulting integration of
two of the Big Six Vendors will not have a material adverse effect on the
Company.
SEASONALITY OF SALES
The Company's business is seasonal in nature. In Fiscal 1997, approximately
35% of revenues, and all of its income before interest expense, other income
(expenses), net, reorganization income (expenses), income taxes and
extraordinary item and its net income before extraordinary item were generated
in the Company's fiscal fourth quarter. In anticipation of increased sales
activity during these months, the Company purchases substantial
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<PAGE> 15
amounts of inventory and hires a significant number of temporary employees to
bolster its permanent store staff. Quarterly results are affected by, among
other things, new product offerings, store openings and closings, and sales
performance of existing stores. Consumer spending in the peak retail season may
be affected by factors outside the Company's control, including consumer demand,
weather that affects consumer traffic and general economic conditions. A failure
to generate substantial holiday season sales, including as a result of
merchandise delivery delays due to receiving or distribution problems, could
have a material adverse effect on the results of operations and financial
condition of the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent to a large extent on its ability to attract,
motivate and retain an adequate labor force, including management, sales,
merchandising and other personnel. The Company is also dependent to a
significant extent upon the continued efforts of its senior management team,
including in particular its President and Chief Executive Officer, James E.
Bonk. The Company has entered into an employment agreement with Mr. Bonk which
expires on December 31, 2000 and has entered into severance agreements with all
of its executive officers. If, for any reason, such key personnel do not
continue to be active in management, the Company's operations could be
materially adversely affected. The Company does not maintain key-man life
insurance policies on any of its executive officers. See "Management."
MINIMUM WAGE INCREASES
The Company employs a number of sales associates and other personnel,
including temporary employees hired during the periods in which the Company
experiences significantly increased sales, who are paid on an hourly basis. Many
of these hourly employees are paid at or near the minimum wage. Increases in the
minimum wage result in adjustments to the compensation of not only those hourly
employees who are paid minimum wage, but also to the compensation paid to more
highly compensated hourly employees. Increases in the minimum wage have had a
significant effect on the Company's compensation expense during prior periods,
and any future increases could have a material adverse effect on the Company's
results of operations and financial condition.
INTERNAL REVENUE SERVICE CLAIM
The Internal Revenue Service ("IRS") asserted in the bankruptcy proceedings
a priority tax claim against the Company of approximately $7.9 million (the "IRS
Claim"). Under the Plan of Reorganization, any allowed priority tax claim of the
IRS would be paid over six years, with quarterly amortization of interest and
principal, at an interest rate of 9.0%. The Company acknowledges a priority tax
obligation to the IRS of approximately $0.8 million and has established a
reserve in that amount. The Company disputes the validity of the balance of the
IRS Claim, the large majority of which relates to a proposed disallowance by the
IRS of certain deductions for interest payments made by Camelot in connection
with its corporate-owned life insurance program (the "COLI Deductions"). The
Company filed an objection (the "COLI Objection") to the IRS Claim with the
Bankruptcy Court to the extent that the IRS seeks to disallow the COLI
Deductions. In response to the COLI Objection, the IRS filed a motion (the
"Withdrawal Motion") with the United States District Court for the District of
Delaware (the "District Court") seeking to have the COLI Objection resolved by
the District Court rather than the Bankruptcy Court. The Withdrawal Motion was
granted on May 29, 1998. The Company has established a reserve in an amount
sufficient to cover the $0.8 million priority tax obligation that it has
acknowledged in the bankruptcy proceeding. In the event that a judgment is
rendered against the Company in an amount exceeding the reserve established with
respect to this matter, the Company's results of operations would be materially
adversely affected. Such a judgment, unless paid or bonded for appeal, would
also be an Event of Default under the Company's Amended Credit Facility (as
defined).
RISKS OF RESTRICTIONS BY LENDERS
The Company's New Working Capital Facility (as defined herein) contains,
and its Amended Credit Facility will contain, certain financial and negative
covenants which, among other things, limit the ability of the Company and its
subsidiaries to incur indebtedness, make investments, create or permit liens,
make capital expenditures, make guarantees or pay dividends. Additionally, the
Company is currently and will continue to be required to
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<PAGE> 16
meet certain financial covenants under the Amended Credit Facility, including
minimum consolidated EBITDA. There can be no assurance that the Company will not
experience difficulty meeting these financial covenants. If the Company was
unable to comply with the covenants under the Amended Credit Facility, such
indebtedness could be declared immediately due and payable. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
data-based information. The Company has assessed its systems and equipment with
respect to Year 2000 and has developed a project plan. Many of the Year 2000
issues have been addressed. The Company is in the process of installing a new
back office point of sale system to address Year 2000 issues at the store level,
including the processing of credit card transactions. The remaining Year 2000
issues will be addressed either with scheduled systems upgrades or through the
Company's internal systems development staff. The incremental costs will be
charged to expense as incurred and are not expected to have a material impact on
the financial position or the results of operations of the Company. The Company
does not know the Year 2000 status of its vendors or of other third parties with
whom it does business. The Company could be adversely impacted if Year 2000
modifications are not properly completed by either the Company or its vendors,
banks or any other entity with whom the Company conducts business.
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offerings, the Company's five principal stockholders
will collectively own approximately % of the outstanding Common Stock of
the Company. As a result, these stockholders will be able to significantly
influence the outcome of all matters requiring stockholder approval, including
the election of Directors and approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
MATERIAL BENEFITS TO UNDERWRITERS
Merrill Lynch, Pierce, Fenner & Smith Incorporated is a Selling Stockholder
and will receive approximately $ million of gross proceeds from the sale
of shares in the Offerings. Merrill Lynch, Pierce, Fenner & Smith Incorporated
is one of the underwriters of the Offerings. See "Use of Proceeds," "Certain
Transactions," and "Principal and Selling Stockholders."
PRIOR BANKRUPTCY
On August 9, 1996 (the "Petition Date"), the Company and its subsidiaries
filed petitions for relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court. The Plan of Reorganization became effective on January 27,
1998. The bankruptcy proceeding, among other things, permitted the Company to
terminate certain of its leases with its current mall owners. Many of the
elements of the Company's strategy depend upon its relationships with key
vendors, mall owners and customers. Though the Company is no longer a debtor-in-
possession in any bankruptcy proceeding, the effect of this proceeding on past
or potential mall owners, customers, vendors or employees cannot be determined.
ABSENCE OF DIVIDENDS AND RESTRICTION ON PAYMENT OF DIVIDENDS
The Company does not expect to pay dividends for the foreseeable future.
The Company's New Working Capital Facility restricts, and its Amended Credit
Facility will restrict the ability of the Company to pay dividends on the Common
Stock. See "Dividend Policy" and "Description of Certain Indebtedness."
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<PAGE> 17
CERTAIN ANTI-TAKEOVER PROVISIONS IN DELAWARE LAW AND THE COMPANY'S BY-LAWS
Certain provisions of Delaware law and the Company's By-Laws could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect of
delaying or preventing a change in control of the Company. See "Description of
Capital Stock." In addition, the Company's By-Laws provide that for nominations
of Directors and other business to be brought before an annual meeting by a
stockholder, such stockholder must give written notice to the Company with
respect to such nomination or other matter a specified period in advance of the
meeting. This provision may tend to discourage a proxy contest or other takeover
bid for the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, of the 30,000,000 authorized shares of
Common Stock, 10,176,162 shares of Common Stock are anticipated to be issued and
outstanding. Of these 10,176,162 shares of Common Stock, the
shares purchased in the Offerings will be freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities Act")
by persons who are not affiliates of the Company. In addition, the 9,835,559
shares of Common Stock issued on the Effective Date and the 328,873 shares of
Common Stock issued pursuant to the Plan of Reorganization since the Effective
Date were issued pursuant to an exemption from the registration requirements of
the Securities Act (and of any state or local laws) provided by Section
1145(a)(1) of the Bankruptcy Code. At June 1, 1998, up to an additional 1,730
shares of Common Stock may be issued by the Company pursuant to the Plan of
Reorganization. All shares of Common Stock issued pursuant to the Plan of
Reorganization may be resold by the holders thereof without registration unless
any such holder is deemed to be an "underwriter" with respect to such
securities, as defined in Section 1145(b)(1) of the Bankruptcy Code. Four
stockholders (including three Selling Stockholders) holding an aggregate of
shares of Common Stock after giving effect to the Offerings may be
deemed to be underwriters pursuant to Section 1145(b)(1) and were provided with
certain demand and piggyback registration rights under the terms of a
registration rights agreement (the "Registration Rights Agreement") with the
Company. On May 5, 1998, an additional 10,000 shares of Common Stock were issued
pursuant to an order of the Bankruptcy Court to certain persons for their
significant contributions to the bankruptcy case. The Company believes that an
aggregate of shares of Common Stock, including the shares held by
the stockholders who are parties to the registration rights agreement, may
currently be sold pursuant to Rule 144 under the Securities Act in compliance
with the notice, manner of sale, current public reporting and volume limitations
of Rule 144 (of which shares of Common Stock held by the Selling
Stockholders are subject to the lock-up arrangements described herein) and
shares may be sold without restriction.
The 950,094 shares of Common Stock reserved for issuance upon exercise of
outstanding options will become eligible for resale under Rule 144 one year
subsequent to the date or dates that the holders of such options exercise the
same. Subsequent to the Offerings, the Company intends to file a registration
statement on Form S-8 with respect to the 737,000 shares of Common Stock
reserved for issuance upon exercise of all outstanding options (whether vested
or unvested) and the 213,094 shares of Common Stock reserved for issuance
pursuant to future option grants. Upon registration, such shares upon issuance
would be freely tradable by persons who are not "affiliates" of the Company. In
addition, "affiliates" of the Company could sell such shares pursuant to Rule
144 under the Securities Act in compliance with the resale volume limitations of
Rule 144.
The Company, its Directors, executive officers and management employees and
the Selling Stockholders and other shareholders holding an aggregate of
shares of Common Stock prior to the Offerings have agreed that they
will not, directly or indirectly, without the prior written consent of Merrill
Lynch on behalf of the Underwriters, offer, sell, grant any option to purchase
or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exchangeable or exercisable for, Common Stock, for a period
of 180 days after the closing date of the Offerings. Stockholders holding
shares have entered into lock-up agreements, while stockholders holding
shares have not entered into such agreements.
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No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares of Common Stock for future
sale, will have on the market price of the shares of Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock (including
shares of Common Stock issued upon the exercise of outstanding stock options),
or the perception that such sales could occur, could adversely affect the
prevailing market prices for the Common Stock. See "Shares Eligible for Future
Sale."
ABSENCE OF ESTABLISHED PUBLIC MARKET AND POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been a limited public market for the
Company's Common Stock, and there can be no assurance that an active trading
market will develop or be sustained in the Common Stock. See "Price Range of
Common Stock." The initial public offering price of the Common Stock will be
determined by negotiations among the Company, the Selling Stockholders and the
Underwriters. The initial public offering price does not necessarily bear any
direct relationship to the market prices of the Common Stock as reported on the
OTC Bulletin Board prior to the Offerings and may have no relationship to the
price at which the Common Stock will trade after completion of the Offerings.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The stock market has from time to
time experienced extreme price and volume fluctuations that have been unrelated
to the operating performance of particular companies. The market price for the
Common Stock may be highly volatile depending on various factors, including but
not limited to the state of the national economy, stock market conditions,
industry research reports, actions by governmental agencies, litigation
involving the Company, the Company's most recent quarterly earnings,
announcements by the Company or its competitors and general conditions in the
music retailing industry.
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PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the OTC Bulletin Board under the
symbol "CMHDA" since February 27, 1998. The following table sets forth the range
of high and low closing bid prices for the Common Stock for the periods
indicated as reported by the National Association of Securities Dealers, Inc.
These prices represent inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions. The Company intends to apply for quotation of the Common Stock on
the Nasdaq National Market System under the symbol "CMLT."
<TABLE>
<CAPTION>
PRICE RANGE
------------------
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1997:
Fourth Quarter (February 27, 1998)........................ $ 40.00 $ 35.00
FISCAL 1998:
First Quarter............................................. $ 41.00 $ 33.00
Second Quarter (through June 12, 1998).................... 42.00 39.00
</TABLE>
On June 12, 1998, the closing bid price of the Common Stock as reported on
the OTC Bulletin Board was $42.00 per share. Based upon information provided by
the Company's transfer agent, as of June 8, 1998 there were 768 holders of the
Common Stock. The initial public offering price of the Common Stock will not
necessarily bear any direct relationship to the trading prices on the OTC
Bulletin Board.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
therefore does not anticipate paying any dividends in the foreseeable future. In
addition, the Company's New Working Capital Facility limits its ability to pay
dividends under certain circumstances. The Amended Credit Facility will contain
the same limitations. See "Description of Certain Indebtedness." Any future
determination as to the payment of cash dividends will depend on a number of
factors, including future earnings, capital requirements, the financial
condition and prospects of the Company and any restrictions under credit
agreements existing from time to time. There can be no assurance that the
Company will pay dividends in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
17
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 28, 1998. This table should be read in conjunction with the "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT FEBRUARY 28, 1998
---------------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C>
Current maturities of long-term debt........................ $ --
========
Long-term debt, excluding current maturities (1)............ $ --
========
Stockholder's equity:
Common Stock, $.01 par value, 30,000,000 shares
authorized, 10,176,162 shares issued and outstanding
(2).................................................... $ 102
Additional paid-in capital................................ 194,266
Retained earnings (3)..................................... 581
--------
Total stockholders' equity........................ 194,949
--------
Total capitalization.............................. $194,949
========
</TABLE>
- ---------------
(1) As of June 1, 1998, the Company had no indebtedness under the New Working
Capital Facility, which currently provides the Company with a revolving line
of credit with a seasonally adjusted maximum availability of $50.0 million.
The Company has received commitment letters from its lenders with respect to
the Amended Credit Facility, which will provide, among other things, a term
loan of $25.0 million. The Company intends to borrow $25.0 million under the
term loan in order to finance substantially all of the Spec's Acquisition.
See "Risk Factors -- Risks of Restrictions by Lenders," "Prospectus
Summary -- Recent Developments," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
(2) See Note 13 to the Company's Consolidated Financial Statements.
(3) Does not reflect estimated expenses associated with the Offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
18
<PAGE> 21
DILUTION
The net tangible book value of the Company as of February 28, 1998 was
$301.7 million or $29.65 per share of Common Stock. Net tangible book value per
share is determined by dividing the net tangible book value by the number of
outstanding shares of Common Stock, including the assumed exercise of all vested
options, after consummation of the Offerings. The net tangible book value
dilution per share shown below represents the difference between the amount per
share paid by purchasers of Common Stock in the Offerings and the net tangible
book value per share of Common Stock. The following table illustrates the per
share dilution:
<TABLE>
<S> <C>
Initial public offering price per share..................... $
Net tangible book value per share........................... 29.65
--------
Net tangible book value dilution per share.................. $
========
</TABLE>
The following table summarizes, on a pro forma basis as of May 31, 1998,
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share of Common
Stock paid by the current stockholders and by the investors purchasing shares of
Common Stock in the Offerings, at the assumed initial public offering price of
$ per share of Common Stock.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current Stockholders (1)............ % $ % $
New investors.......................
---------- ----- ------------ -----
Total..................... 100.0% $ 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) Ownership figures for current stockholders exclude an aggregate of 356,000
shares of Common Stock that may be acquired upon the exercise of currently
exercisable options at an exercise price of $20.75 per share under the
Company's stock option plans. See "Management -- Stock Option Plan" and
"Management -- Director Compensation."
19
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The accompanying unaudited pro forma condensed consolidated statement of
operations for Fiscal 1997 reflects the historical statement of operations of
the Company, adjusted to reflect the effects of (i) fresh-start reporting and
(ii) The Wall Acquisition (each as discussed herein), as if each had occurred as
of the beginning of the period presented.
The Company adopted the American Institute of Certified Public Accountants
Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." Pursuant to the guidance provided by
SOP 90-7, the Company adopted fresh-start reporting for its Consolidated
Financial Statements effective as of January 31, 1998, the last day of the
Company's fiscal month end. Under fresh-start reporting, the reorganization
value of the Company has been allocated to the emerging Company's assets on the
basis of the purchase method of accounting. All of the reorganization value was
attributable to specific tangible assets of the emerging entity and no amount
has been recorded as intangible assets or as "Reorganization Value in Excess of
Amounts Allocable to Identifiable Assets."
Effective February 28, 1998, the Company acquired certain assets and
assumed certain liabilities and operating lease commitments of The Wall from WH
Smith Group Holdings USA, Inc. for a cash purchase price of $72.4 million. The
Wall was a wholly owned subsidiary of WH Smith Group Holdings USA, Inc. and an
indirect wholly owned subsidiary of the WH Smith Group, plc, a publicly held
United Kingdom corporation. The purchase price exceeded the fair value of the
net assets acquired by approximately $27.0 million, which amount will be
amortized on a straight line basis over 30 years. The acquisition was accounted
for under the purchase method of accounting.
The unaudited pro forma condensed consolidated financial data and
accompanying notes should be read in conjunction with the Consolidated Financial
Statements and related notes of the Company and the financial statements and
related notes of The Wall, all of which are included elsewhere in this
Prospectus. The Company believes that the assumptions used in the following
statements provide a reasonable basis on which to present the pro forma
financial data. The fresh-start reporting allocation is subject to the
resolution of the contingency with the IRS discussed in Note 18 to the
Consolidated Financial Statements of the Company. The purchase price allocation
related to The Wall Acquisition is subject to final adjustment based on the
resolution of certain contingencies related to merchandise inventory return
reserves and the finalization of acquisition costs. The unaudited pro forma
condensed consolidated financial data are provided for informational purposes
only and should not be construed to be indicative of the Company's results of
operations had The Wall Acquisition been consummated on the dates assumed and
are not intended to constitute projections with regards to the Company's results
of operations for any future period.
20
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------ HISTORICAL
HISTORICAL THE ------------
-------------- COMPANY THE WALL
PREDECESSOR (PERIOD (PERIOD
(PERIOD FEBRUARY 1, MARCH 2,
MARCH 2, 1997 PRO FORMA 1998 TO PRO FORMA 1997 TO PRO FORMA
TO JANUARY 31, ADJUSTMENTS FEBRUARY 28, FRESH-START FEBRUARY 28, ADJUSTMENTS
1998) (FRESH-START) 1998) COMBINED 1998) (THE WALL)
-------------- ------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............... $372,561 $ (4,195)(1) $27,842 $396,208 $172,212 $(14,300)(11)
Cost of sales........... 243,109 (3,890)(1)(2) 17,662 256,881 104,175 (9,000)(11)
-------- --------- ------- -------- -------- --------
Gross profit.......... 129,452 (305) 10,180 139,327 68,037 (5,300)
Selling, general and
administrative
expenses.............. 99,553 (579)(1)(3) 9,240 108,214 54,505 (11,493)(11)(12)
(13)(14)
Depreciation and
amortization.......... 20,484 (14,574)(1)(4) 527 6,437 6,725 (3,038)(15)
Special items........... (4,443) -- (4,443) 4,164 (4,164)(16)
-------- --------- ------- -------- -------- --------
Income before interest
expense, other income
(expenses), net,
reorganization income
(expenses), income
taxes and
extraordinary item.... 13,858 14,848 413 29,119 2,643 13,395
Interest expense........ (221) 55(5) (12) (178) -- (410)(17)
Other income (expenses),
net................... (185) 2,529(6)(7) 295 2,639 -- (2,639)(17)
-------- --------- ------- -------- -------- --------
Income before
reorganization income
(expenses), income
taxes, and
extraordinary item.... 13,452 17,432 696 31,580 2,643 10,346
Reorganization income
(expenses)............ 26,501 (26,501)(7)(8) -- -- --
-------- --------- ------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item.... 39,953 (9,069) 696 31,580 2,643 10,346
(Provision) benefit for
income taxes.......... (289) (11,912)(9) (115) (12,316) (2,206) (2,861)(18)
Extraordinary item, net
of tax................ 228,911 (228,911)(10) -- -- --
-------- --------- ------- -------- -------- --------
Net income (loss)....... $268,575 $(249,892) $ 581 $ 19,264(20) $ 437 $ 7,485
======== ========= ======= ======== ======== ========
Earnings per
share(19).............
Weighted average shares
outstanding(19).......
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
INCOME STATEMENT DATA
Net sales............... $554,120
Cost of sales........... 352,056
--------
Gross profit.......... 202,064
Selling, general and
administrative
expenses.............. 151,226
Depreciation and
amortization.......... 10,124
Special items........... (4,443)
--------
Income before interest
expense, other income
(expenses), net,
reorganization income
(expenses), income
taxes and
extraordinary item.... 45,157
Interest expense........ (588)
Other income (expenses),
net................... --
--------
Income before
reorganization income
(expenses), income
taxes, and
extraordinary item.... 44,569
Reorganization income
(expenses)............ --
--------
Income (loss) before
income taxes and
extraordinary item.... 44,569
(Provision) benefit for
income taxes.......... (17,383)
Extraordinary item, net
of tax................ --
--------
Net income (loss)....... $ 27,186(20)
========
Earnings per
share(19)............. $ 2.67
Weighted average shares
outstanding(19)....... 10,176
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statement
of operations.
21
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FRESH-START REPORTING PRO FORMA ADJUSTMENTS NOTES
(1) To eliminate operating results of ten stores closed in conjunction with the
Company's reorganization as follows: sales ($4,195); cost of sales
($2,740); selling, general and administrative expenses ($1,123); and
depreciation and amortization ($377).
(2) During the reorganization period certain trade vendors denied the Company
the right to take prompt payment discounts. The amounts and period of
denial varied by vendor. The adjustment of ($1,150) reinstates cash
discounts to normal and customary trade payment terms.
(3) To adjust selling, general and administrative expenses for the following:
(i) record the effects of fair value adjustments for favorable and
unfavorable lease value amortization of $578; (ii) record the effects of
fair value adjustments for average rent expense of $1,011; and (iii) record
the effects of capitalizing internal use software costs (SOP 98-1) of
($1,045).
(4) To reduce depreciation and amortization expense for the following: (i)
eliminate Predecessor Company goodwill amortization of ($1,840); (ii)
record the effects of amortizing capitalized software costs (SOP 98-1) of
$105; and (iii) reduce depreciation expense by ($12,462) for fair value
adjustments to property, plant and equipment.
(5) To eliminate historical commitment fee expense of ($221) and record new
commitment fee expense of $166 based on the terms of the New Working
Capital Facility of .375%.
(6) To adjust amortization of deferred financing fees for the New Working
Capital Facility by ($218).
(7) To reclassify interest income of $2,311 from reorganization income.
(8) To eliminate reorganization income (including interest income of $2,311
included therein) which will not be incurred subsequent to the Effective
Date.
(9) To reverse income tax effect of fresh-start reporting adjustments and
record the income tax effect of pro forma adjustments for items that are
deductible for income tax purposes, using an assumed rate of 39%.
(10) To eliminate gain on discharge of debt pursuant to the Plan of
Reorganization.
THE WALL ACQUISITION PRO FORMA ADJUSTMENTS NOTES
(11) To reflect adjustment for operating results of 18 stores not acquired by
the Company and 11 stores acquired which will be closed as part of the
acquisition strategy as follows: sales ($14,300); cost of sales ($9,000);
and selling, general and administrative expenses ($5,700).
(12) To eliminate payroll and related costs of ($5,900) associated with the
corporate employees terminated, to increase costs by $1,587 to add
functions at the Company's headquarters and to eliminate corporate facility
costs of ($400) for contracts not acquired.
(13) To eliminate payroll and related costs of ($1,600) associated with
distribution center employees terminated and to increase costs by $890 to
add employees at the Company's distribution center.
(14) To adjust selling, general and administrative expenses for the following:
(i) record the effects of fair value adjustments for favorable and
unfavorable lease value amortization of ($1,120) and (ii) record the
effects of fair value adjustments for average rent expense of $750.
(15) To reduce depreciation and amortization for the following: (i) to reverse
historical depreciation and amortization of ($6,725); (ii) to record new
goodwill amortization of $898 (based on straight-line amortization over a
30-year period); (iii) to record trade name amortization of $380 (based on
straight-line amortization over a two-year period); and (iv) to record new
depreciation expense of $2,409 for revalued property, plant and equipment.
(16) To eliminate special charges of ($4,164) which represent the write-down on
long-lived assets which were either not acquired or recorded at fair value.
(17) To eliminate interest income of $2,639 and reflect additional interest
expense of $410 as a result of incremental borrowings needed to finance The
Wall Acquisition.
(18) To record the income tax effect of pro forma adjustments assuming an income
tax rate of 39%.
PRO FORMA COMBINED PER SHARE DATA
(19) The pro forma combined net income per share data is presented in accordance
with SFAS No. 128 and assumes: (i) the Company emerged from bankruptcy and
adopted fresh-start reporting on March 2, 1997; (ii) The Wall Acquisition
occurred on March 2, 1997; and (iii) the Company's 1998 Stock Option Plan
and Outside Directors Stock Option Plan were established on March 2, 1997.
Awards of options under these plans are not dilutive on a pro forma basis
and, therefore, basic and diluted data are the same. With respect to
historical combined net income per share, see Note 3 to the Company's
Consolidated Financial Statements.
OTHER INFORMATION
(20) Pro forma fresh-start combined net income of $19.3 million in Fiscal 1997
would have been $15.9 million when adjusted to reflect (i) the elimination
of a $4.4 million ($2.7 million, net of tax) special item and (ii) a $1.2
million ($0.7 million, net of tax) increase to cost of goods sold to
reflect the absence of customary trade payment terms during fiscal 1997.
Pro forma combined net income of $27.2 million for Fiscal 1997, adjusted
for (i) and (ii) above and a $2.1 million ($1.3 million, net of tax)
increase to selling, general and administrative expenses to reflect
accruals associated with The Wall Acquisition, would have been $22.5
million.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)
The selected consolidated financial data as of and for the fiscal year
ended August 31, 1993 and the 30 days ended September 30, 1993 have been derived
from the audited and internal financial statements of the Pre-Predecessor prior
to the 1993 Acquisition. The selected consolidated financial data as of and for
the period from October 1, 1993 to February 26, 1994 and the fiscal years ended
February 25, 1996, March 2, 1996 and March 1, 1997 and the period March 2, 1997
to January 31, 1998 have been derived from the audited financial statements of
the Predecessor. The selected consolidated financial data of the Company as of
and for the period February 1, 1998 to February 28, 1998 has been derived from
the audited financial statement of the Company. The selected consolidated
financial data set forth below should be read in conjunction with the audited
and unaudited historical financial statements of the Company, including the
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that appear elsewhere in this Prospectus. As a result
of the implementation of fresh-start reporting, the consolidated financial data
for the Company is not comparable to that of the Predecessor or the
Pre-Predecessor. As a result of implementing purchase accounting for the 1993
Acquisition, the consolidated financial data of the Pre-Predecessor is not
comparable to that of the Predecessor.
<TABLE>
<CAPTION>
PRE-PREDECESSOR(1) PREDECESSOR(2)
--------------------------- -----------------------------------------------------------------
PERIOD
OCTOBER 1,
1993 PERIOD
FISCAL YEAR 30 DAYS TO MARCH 2,
ENDED ENDED FEBRUARY 1997 TO
AUGUST 31, SEPTEMBER 30, 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993(3) 1994 1994 1995 1996 1998(4)
----------- ------------- ----------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales.................... $421,467 $ 28,958 $206,246 $ 459,077 $ 455,652 $396,502 $372,561
Cost of sales................ 256,773 17,737 123,227 289,887 302,481 263,072 243,109
-------- -------- -------- --------- ---------- -------- --------
Gross profit................. 164,694 11,221 83,019 169,190 153,171 133,430 129,452
Selling, general and
administrative expenses.... 116,174 9,611 53,249 128,158 135,441 117,558 99,553
Depreciation and
amortization............... 13,110 1,135 7,465 21,146 26,570 23,290 20,484
Special items (6)............ -- -- 8,330 -- 211,520 6,523 (4,443)
-------- -------- -------- --------- ---------- -------- --------
Income (loss) before interest
expense, other income
(expenses), net,
reorganization income
(expenses), income taxes
and extraordinary item..... 35,410 475 13,975 19,886 (220,360) (13,941) 13,858
Interest expense............. (2,022) (188) (10,693) (30,655) (38,319) (17,418) (221)
Other income (expenses),
net........................ (1,210) (93) (1,548) (5,026) (4,978) (1,160) (185)
-------- -------- -------- --------- ---------- -------- --------
Income (loss) before
reorganization income
(expenses), income taxes
and extraordinary item..... 32,178 194 1,734 (15,795) (263,657) (32,519) 13,452
Reorganization income
(expenses)(7).............. -- -- -- -- -- (31,845) 26,501
-------- -------- -------- --------- ---------- -------- --------
Income (loss) before income
taxes and extraordinary
item....................... 32,178 194 1,734 (15,795) (263,657) (64,364) 39,953
(Provision) benefit for
income taxes............... (10,949) (34) (2,678) (3,070) (474) -- (289)
Extraordinary item, net of
tax(8)..................... -- -- -- -- -- -- 228,911
-------- -------- -------- --------- ---------- -------- --------
Net income (loss)............ $ 21,229 $ 160 $ (944) $ (18,865) $ (264,131) $(64,364) $268,575
======== ======== ======== ========= ========== ======== ========
Earnings per share(9)........
Weighted average shares
outstanding(9).............
SELECTED STORE DATA
Number of stores:
Open at beginning of
period................... 324 365 366 392 401 388 315
Open during period......... 20 1 7 21 14 -- --
Closed during period....... 5 -- -- 12 27 73 10
Acquired during period..... 26 -- 19 -- -- -- --
-------- -------- -------- --------- ---------- -------- --------
Open at end of period...... 365 366 392 401 388 315 305
======== ======== ======== ========= ========== ======== ========
<CAPTION>
THE
COMPANY
------------
PERIOD
FEBRUARY 1,
1998 TO COMBINED
FEBRUARY 28, FISCAL
1998(4) 1997(5)
------------ --------
<S> <C> <C>
INCOME STATEMENT DATA
Net sales.................... $ 27,842 $400,403
Cost of sales................ 17,662 260,771
-------- --------
Gross profit................. 10,180 139,632
Selling, general and
administrative expenses.... 9,240 108,793
Depreciation and
amortization............... 527 21,011
Special items (6)............ -- (4,443)
-------- --------
Income (loss) before interest
expense, other income
(expenses), net,
reorganization income
(expenses), income taxes
and extraordinary item..... 413 14,271
Interest expense............. (12) (233)
Other income (expenses),
net........................ 295 110
-------- --------
Income (loss) before
reorganization income
(expenses), income taxes
and extraordinary item..... 696 14,148
Reorganization income
(expenses)(7).............. -- 26,501
-------- --------
Income (loss) before income
taxes and extraordinary
item....................... 696 40,649
(Provision) benefit for
income taxes............... (115) (404)
Extraordinary item, net of
tax(8)..................... -- 228,911
-------- --------
Net income (loss)............ $ 581 $269,156
======== ========
Earnings per share(9)........ --
Weighted average shares
outstanding(9)............. --
SELECTED STORE DATA
Number of stores:
Open at beginning of
period................... 305 315
Open during period......... -- --
Closed during period....... -- 10
Acquired during period..... -- --
-------- --------
Open at end of period...... 305 305
======== ========
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
PRE-PREDECESSOR(1) PREDECESSOR(2)
--------------------------- ----------------------------------------------------------------
PERIOD
OCTOBER 1,
1993 PERIOD
FISCAL YEAR 30 DAYS TO MARCH 2,
ENDED ENDED FEBRUARY 1997 TO
AUGUST 31, SEPTEMBER 30, 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993(3) 1994 1994 1995 1996 1998(4)
----------- ------------- ----------- ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Gross square footage
(000's)(10)................. 1,273 1,281 1,393 1,511 1,563 1,329 1,309
Sales per square foot(11)..... $ 331 -- -- $ 304 $ 292 $ 298 --
Comparable store sales
increase (decrease)(12)..... -- -- -- (2.6%) (5.6%) (3.5%) --
BALANCE SHEET DATA (AT END OF
PERIOD)
Working capital............... $ 73,263 $ 73,329 $ 30,448 $ 58,127 $(167,129) $125,329 $149,018
Total assets.................. 227,720 236,052 545,484 551,370 308,670 258,648 260,319
Current portion of long-term
debt........................ 578 9,202 2,555 12,565 285,878 -- --
Long-term debt, net of current
portion..................... 21,328 21,328 328,845 354,235 110,882 -- --
Liabilities subject to
compromise.................. -- -- -- -- -- 484,811 --
Stockholders' equity
(deficit)................... 130,418 130,578 75,643 56,778 (203,940) (268,304) 194,368
<CAPTION>
THE
COMPANY
------------
PERIOD
FEBRUARY 1,
1998 TO COMBINED
FEBRUARY 28, FISCAL
1998(4) 1997(5)
------------ --------
<S> <C> <C>
SELECTED OPERATING DATA
Gross square footage
(000's)(10)................. 1,309 1,309
Sales per square foot(11)..... -- $ 306
Comparable store sales
increase (decrease)(12)..... -- 6.8%
BALANCE SHEET DATA (AT END OF
PERIOD)
Working capital............... $110,143 $110,143
Total assets.................. 342,281 342,281
Current portion of long-term
debt........................ -- --
Long-term debt, net of current
portion..................... -- --
Liabilities subject to
compromise.................. -- --
Stockholders' equity
(deficit)................... 194,949 194,949
</TABLE>
- ---------------
(1) The financial information for the Pre-Predecessor entity relates to the
operations of Camelot Music, Inc. prior to the 1993 Acquisition which was
effective September 30, 1993.
(2) The financial information for the Predecessor entity relates to the
operations of Camelot Music Holdings, Inc. prior to its emergence from
bankruptcy on the Effective Date.
(3) In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been recorded in the interim
financial statements presented. The Company's business is seasonal, and
therefore, the interim results are not indicative of the results for a full
year.
(4) As of January 31, 1998, the Company adopted fresh-start reporting in
accordance with AICPA Statement of Position 90-7, which resulted in a new
entity for financial reporting purposes. Financial information for the
period from March 2, 1997 to January 31, 1998 reflects the operations of
the Company's Predecessor prior to its emergence from bankruptcy. Financial
information for the period from February 1, 1998 to February 28, 1998
reflects the operations of the Company after the Effective Date and the
adoption of fresh-start reporting.
(5) Combined Fiscal 1997 consolidated financial data represents a summation (on
two different bases of accounting due to the adoption of fresh-start
reporting on the Effective Date) of the financial data for the Predecessor
entity from March 2, 1997 to January 31, 1998 and the financial data for
the Company from February 1, 1998 to February 28, 1998. See "Unaudited Pro
Forma Condensed Consolidated Financial Data."
(6) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company
discontinued its manual "punch card" version of its customer loyalty
program and replaced it with a more limited automated program, the
write-down of the fair value of long-lived assets in Fiscal 1996 resulting
in a charge of $6.5 million, the write-down of goodwill in Fiscal 1995,
principally related to the 1993 Acquisition and restructuring charges of
$8.3 million.
(7) During Fiscal 1997, reorganization income related principally to
adjustments to prepetition claims that were discharged or received no
amount of recovery, offset by net adjustments to fair value, and
professional fees and other expenses related to the bankruptcy proceedings.
During Fiscal 1996, reorganization expense primarily reflected a provision
for store closings (including related lease rejection damage claims) and
the write-off of financing costs associated with prepetition indebtedness
as well as professional fees.
(8) As a result of the Company's reorganization, in Fiscal 1997 the Company
recorded a one-time gain of $228.9 million associated with the
extinguishment of prepetition claims of approximately $428 million.
(9) See Note 3 to the Company's Consolidated Financial Statements.
(10) Gross square footage is based on Camelot stores only and excludes The Wall
stores.
(11) Sales per square foot is based on the gross square footage for Camelot
stores only and excludes The Wall stores.
(12) The percentage change in comparable store sales is calculated as the net
change in sales for each comparable store for the equivalent period in the
prior year. Comparable stores are stores that have been operating for more
than 12 months since first opening. During the 13th month of operations,
new stores are considered comparable stores. Stores which have been
relocated are treated as comparable stores. Closed stores are not
categorized as comparable stores.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Camelot was founded in 1956 as a third-party supplier of music to general
merchandise retailers such as regional drug, grocery, variety and discount
stores. In 1965, the Company opened its first retail outlet as a leased
department in a Canton, Ohio area discount store. Over the next several years,
the Company began to operate mall-based prerecorded music stores and
approximately 100 leased music departments in discount stores. The Company has
been privately held since its founding.
On November 12, 1993, Investcorp S.A., an international investment banking
firm, arranged for certain of its affiliates, other non-U.S. investors and
Camelot senior management to purchase the stock of Camelot Music, Inc. for
approximately $420.0 million (the "1993 Acquisition"). This purchase price was
funded with $80.0 million in cash, approximately $240.0 million of borrowings by
the Company's predecessor from institutional lenders provided under the terms of
a credit agreement, $50.0 million of subordinated debentures and $50.0 million
of Camelot Music, Inc.'s preferred stock.
During the 1980s the music retail industry experienced rapid growth fueled
by: (i) the introduction of new products such as the CD; (ii) a relatively large
number of popular new releases which increased customer traffic and sales; and
(iii) the rapid expansion of mall-based music retailers. These factors led, in
the early 1990s, to the competitive intrusion of non-traditional music retailers
such as consumer electronics stores and discount stores and to increasing price
competition. By mid-1994 these competitive factors, combined with the
contraction of the replacement CD market and a comparative lack of successful
new releases, led to deteriorating profitability in the music retail industry.
Beginning in mid-1997, conditions in the music retail industry began to improve
as a result of: (i) the significant reduction in competitive square footage
resulting from the reduction in the total number of traditional music retail
stores from approximately 5,000 in 1995 to approximately 4,200 in 1997,
including a net reduction of 600 retail stores by the top five traditional music
retailers, based on store count; (ii) an improvement in retail pricing as music
vendors, beginning in 1996, strengthened MAP guidelines, which the Company
believes decreased the intensity levels of price-based competition for
prerecorded music; and (iii) a resurgence in popular new releases.
The significant debt service burden resulting from the 1993 Acquisition and
the industry conditions described above combined to impair Camelot's operating
and financial condition and led the Company to file a voluntary bankruptcy
petition in August 1996. The Plan of Reorganization was confirmed by the
Bankruptcy Court and became effective on January 27, 1998 (the "Effective
Date"). Over the last two fiscal years, as the Company focused on improving the
competitiveness of its business, revenues increased 1.0% as the Company closed
83 stores and opened no new stores. During this same period the Company
significantly improved its operating margin to 3.6% of net sales (2.5% excluding
special items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9%
excluding special items).
Because the Company is not offering any shares of Common Stock in the
Offerings, expenses incurred by the Company in connection with the Offerings
will be expensed during the period in which the Offerings are completed and will
result in a charge to earnings for such period. The Company currently estimates
incurring expenses associated with the Offerings of $1.0 million. In addition,
on June 4, 1998 each non-employee Director of the Company received an option to
purchase shares of Common Stock at an exercise price of $20.75 per share See
"Management -- Executive Compensation -- Stock Option Plan" and "-- Director
Compensation." Based upon the difference between the exercise price of these
options and the market price of a share of the Company's Common Stock on the
date of grant, the Company will recognize approximately $241,000 in compensation
expense in connection with these option awards during the second quarter of
Fiscal 1998.
RECENT DEVELOPMENTS
On June 3, 1998, the Company entered into the Spec's Merger Agreement.
Spec's is a Miami, Florida-based retailer of prerecorded music operating 42
stores in Florida and Puerto Rico. As of May 31, 1998, Spec's operated 16 mall
stores and 26 stores in shopping centers and free-standing locations. The
Company believes the
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<PAGE> 28
Spec's Acquisition will enhance its competitive position in the Southeastern
United States and give the Company a leading position in the south Florida
market. The cash purchase price for the Spec's Acquisition is expected to be
approximately $28 million (including related acquisition costs and the repayment
of Spec's indebtedness) and will be funded with amounts available under the
Company's Amended Credit Facility. The Spec's Acquisition is expected to close
in the second quarter of Fiscal 1998. Consummation of the Spec's Acquisition is
subject to certain conditions, including approval of the acquisition by Spec's
public stockholders and regulatory bodies, and there can be no assurance that
the Company will consummate the Spec's Acquisition. See "-- Liquidity and
Capital Resources." During the twelve months ended January 31, 1998, Spec's had
revenues of $66.2 million and an operating loss of $4.1 million. The Company
expects to achieve cost savings through the reduction or elimination of Spec's
corporate and distribution infrastructure and intends to close two
underperforming stores.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Historical Financial and Operating Data and the Consolidated
Financial Statements of the Company and accompanying notes included elsewhere in
this Prospectus. The Company's fiscal year ends on the Saturday closest to
February 28. Any fiscal years or period designated herein is by the calendar
year in which the fiscal year commences. The Company completed a comprehensive
financial restructuring pursuant to the Plan of Reorganization under the United
States Bankruptcy Code, which became effective on January 27, 1998. The
Company's emergence from bankruptcy required the Company, in accordance with SOP
90-7, to adopt "fresh-start reporting" as of January 31, 1998. See Note 2 to the
Company's Consolidated Financial Statements included elsewhere herein. Due to a
revaluation of assets and liabilities and adoption of a new basis of accounting
resulting from fresh-start reporting, the results of operations for periods
subsequent to January 31, 1998 are not comparable to the results of operations
for prior periods. The following discussion and analysis of the results of
operations compare (i) a summation of the Company's results of operations for
the period February 1, 1998 to February 28, 1998 and the period March 2, 1997 to
January 31, 1998 ("Combined Fiscal 1997" or "Fiscal 1997") with the results of
operations for the 52 week period ended March 1, 1997 ("Fiscal 1996") and (ii)
the Company's results of operations for Fiscal 1996 with the results of
operations for the 53-week period ended March 2, 1996 ("Fiscal 1995").
During Fiscal 1995, the Company experienced adverse business conditions
resulting principally from increased competition, which led to diminished
operating results and downward revisions to forecasted future results.
Accordingly, management determined that certain long-lived assets were impaired
and wrote those assets down by $202.9 million. Additional impaired asset
write-downs of $6.5 million were recorded in Fiscal 1996. These charges are
reflected in "special items." Income (loss) before interest expense, other
income (expenses), net, reorganization income (expenses), income taxes and
extraordinary item would have been a loss of $8.8 million in Fiscal 1995 (a loss
of 1.9% of net sales) and a loss of $7.4 million in Fiscal 1996 (a loss of 1.9%
of net sales), excluding such charges.
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<PAGE> 29
The following table shows certain statement of operations line items as a
percentage of net sales during the three most recent fiscal years.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------------------
PRO FORMA PRO FORMA
COMBINED COMBINED COMBINED
FISCAL FISCAL FISCAL FISCAL 1997 FISCAL 1997
1995 1996 1997(1) (FRESH-START)(2) (THE WALL)(2)
------ ------ -------- ---------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 66.4 66.3 65.1 64.8 63.5
----- ----- ----- ----- -----
Gross profit................................. 33.6 33.7 34.9 35.2 36.5
Selling, general and administrative
expenses................................... 29.7 29.7 27.2 27.3 27.3
Depreciation and amortization................ 5.8 5.9 5.2 1.6 1.8
Special items(3)............................. 46.4 1.6 (1.1) (1.1) (0.7)
----- ----- ----- ----- -----
Income (loss) before interest expense, other
income (expenses), net, reorganization
income (expenses), income taxes and
extraordinary item......................... (48.3) (3.5) 3.6 7.4 8.1
Interest expense............................. (8.4) (4.4) (0.1) -- (0.1)
Other income (expenses), net................. (1.1) (0.3) -- 0.7 --
----- ----- ----- ----- -----
Income (loss) before reorganization income
(expenses), income taxes and extraordinary
item....................................... (57.8) (8.2) 3.5 8.1 8.0
Reorganization income (expenses)............. -- (8.0) 6.6 -- --
----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item......................... (57.8) (16.2) 10.1 8.1 8.0
(Provision) benefit for income taxes......... (0.1) -- (0.1) (3.1) (3.1)
Extraordinary item, net of tax............... -- -- 57.2 -- --
----- ----- ----- ----- -----
Net income (loss)............................ (57.9)% (16.2)% 67.2% 5.0% 4.9%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Results of operations for Fiscal 1997 are presented on a combined basis
reflecting a summation of the Predecessor's operations for the period March
2, 1997 to January 31, 1998 and the Company's operations for the period
February 1, 1998 to February 28, 1998.
(2) See "Unaudited Pro Forma Condensed Consolidated Financial Data" and the
notes thereto.
(3) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company
discontinued its manual "punch card" version of its customer loyalty program
and replaced it with a more limited automated customer loyalty program, the
write-down of the fair value of long-lived assets in Fiscal 1996 resulting
in a charge of $6.5 million and an impaired asset write-down of $202.9
million for Fiscal 1995, including $201.1 million associated with the
write-down of goodwill, principally related to the 1993 Acquisition.
COMBINED FISCAL 1997 COMPARED TO FISCAL 1996
Net sales. Net sales increased 1.0% to $400.4 million in Fiscal 1997
compared to $396.5 million in Fiscal 1996. Comparable store sales increased
6.8%, primarily as a result of retail price increases on selected catalog titles
resulting from the institution of MAP pricing and decreased competition in the
marketplace and secondarily due to a comparably stronger new release schedule.
During Fiscal 1997, the Company did not open any stores and closed ten stores.
The Company acquired 150 stores on February 28, 1998 as a result of The Wall
Acquisition. The Company operated 455 stores at the end of Fiscal 1997 compared
to 315 stores at the end of Fiscal 1996.
Gross profit. Gross profit increased 4.6% to $139.6 million in Fiscal 1997
compared to $133.4 million in Fiscal 1996. Gross profit as a percentage of net
sales improved to 34.9% in Fiscal 1997 from 33.7% in Fiscal 1996. For purposes
of determining the Company's gross profit, cost of sales is comprised of product
costs, freight, inventory shrink and prompt payment discounts. The increase in
gross profit was the result of decreased
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<PAGE> 30
competition and an increasing mix of higher margin catalog sales and the
resumption of normal trade terms (including the availability of prompt payment
discounts), offset in part by lower margins earned on non-music products such as
laser video and software products that the Company was in the process of
discontinuing. The Company recorded a charge of $2.0 million in Fiscal 1997 for
the discontinuance of these product lines. Gross margins were also impacted
negatively as a result of a recent industry-wide trend in which vendors have
implemented policies prohibiting the return of open products for credit. The
Company expects the trend to continue in Fiscal 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 7.5% to $108.8 million in Fiscal 1997 from
$117.6 million in Fiscal 1996. Selling, general and administrative expenses, as
a percentage of net sales, decreased to 27.2% in Fiscal 1997 compared to 29.7%
in Fiscal 1996. Selling, general and administrative expenses include payroll,
occupancy and net advertising costs, utilities, distribution costs and general
and administrative costs. The improvement in selling, general and administrative
expenses as a percentage of net sales was principally due to (i) temporary rent
concessions negotiated during the reorganization which have reduced store
occupancy costs as a percentage of net sales, (ii) increases in cooperative
advertising support from vendors and (iii) cost savings associated with
restructuring and automating the Company's customer loyalty program. The Company
expects these rent concessions to be phased out during 1999 and 2000.
Depreciation and amortization. Depreciation and amortization decreased 9.9%
to $21.0 million in Fiscal 1997 from $23.3 million in Fiscal 1996. The reduction
was primarily attributable to store closings during Fiscal 1996 and Fiscal 1997.
Special items. In Fiscal 1997 the Company discontinued the manual "punch
card" version of its customer loyalty program and replaced it with an automated
program targeted to its most frequent and highest spending customers. The
reduction in the program resulted in the reversal of program reward redemption
reserves aggregating $4.4 million (income). In Fiscal 1996 the Company wrote
down the fair value of long-lived assets resulting in a charge of $6.5 million.
Income (loss) before interest expense, other income (expenses), net,
reorganization income (expenses), income taxes and extraordinary item. As a
result of the foregoing, income (loss) before interest expense, other income
(expenses), net, reorganization income (expenses), income taxes and
extraordinary item as a percentage of net sales increased to 3.6% (2.5%
excluding special items) or $14.3 million in Fiscal 1997 as compared to a loss
of $13.9 million or a loss of 3.5% as a percentage of net sales (a loss of 1.9%
excluding special items) in Fiscal 1996.
Interest expense. The Company's interest expense declined to $0.2 million
in Fiscal 1997 from $17.4 million in Fiscal 1996. The decline in interest
expense was primarily attributable to the cessation of accruals on prepetition
indebtedness upon the filing of the Company's bankruptcy petition.
Other income (expenses), net. The Company's other income (expenses), net
decreased to $0.1 million in Fiscal 1997 from $18.6 million in Fiscal 1996.
Other income (expenses), net includes the Company's financing charges. Financing
costs decreased to $0.4 million in Fiscal 1997 from $1.9 million in Fiscal 1996.
Reorganization income (expenses). The Company realized reorganization
income of $26.5 million in Fiscal 1997 compared to reorganization expense of
$31.8 million in Fiscal 1996. During Fiscal 1997, the reorganization income
related principally to adjustments to prepetition claims that were discharged or
received no amount of recovery, offset by net adjustments to fair values, and
professional fees and other expenses related to the bankruptcy proceedings.
During Fiscal 1996, the reorganization expense primarily reflected a provision
for store closings (including related lease rejection damage claims), and the
write-off of financing costs associated with prepetition indebtedness, as well
as professional fees.
Income taxes. The Company's provision for income taxes during Fiscal 1997
was $0.4 million compared to no income tax recorded during Fiscal 1996.
Differences between the effective tax rate and the statutory tax rate are due
primarily to the recording of valuation allowances against deferred tax assets.
The Company anticipates an effective tax rate of approximately 40% with respect
to Fiscal 1998 pre-tax income.
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<PAGE> 31
Extraordinary item. As a result of the Company's reorganization, in Fiscal
1997 the Company recorded a one-time gain of $228.9 million associated with the
extinguishment of its prepetition claims of approximately $428 million.
Net income. As a result of the foregoing, the Company recognized net income
of $269.2 million during Fiscal 1997, as compared to a net loss of $64.4 million
in Fiscal 1996. Excluding special items, reorganization income (expenses) and
extraordinary item, the Company recognized net income in Fiscal 1997 of $9.3
million, as compared to a net loss of $26.0 million in Fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales. Net sales decreased 13.0% to $396.5 million in Fiscal 1996 from
$455.7 million in Fiscal 1995. Comparable store sales declined 3.2% in Fiscal
1996 due to the comparative lack of strong product releases, a decline in CD
replacement sales and increased price-based competition led by price decreases
by non-traditional music retailers, such as consumer electronics retailers. The
decrease in total sales was primarily due to the closing of 73 stores in Fiscal
1996, a decrease in comparable store sales and the impact of one less week of
sales in Fiscal 1996. The Company opened no new stores in Fiscal 1996.
Gross profit. Gross profit decreased 12.9% to $133.4 million in Fiscal 1996
compared to $153.2 million in Fiscal 1995. Gross profit as a percentage of net
sales remained relatively constant at 33.7% in Fiscal 1996 and 33.6% in Fiscal
1995. The decrease in gross profit was primarily due to the effects of increased
price-based competition and the comparative lack of strong new releases.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 13.2% to $117.6 million in Fiscal 1996 from
$135.4 million in Fiscal 1995. Selling, general and administrative expenses, as
a percentage of net sales, remained constant at 29.7% in Fiscal 1996 and Fiscal
1995. The decrease in selling, general and administrative expenses was
principally due to the reduction in the number of stores operated by the Company
from 388 to 315 and a related reduction in corporate and store operating costs.
Depreciation and amortization. Depreciation and amortization decreased
12.3% to $23.3 million in Fiscal 1996 from $26.6 million in Fiscal 1995. The
decrease was a result of store closings.
Special items. During Fiscal 1995, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("Statement No. 121"),
issued in March 1995. In connection with the adoption of Statement No. 121, the
Company recorded an impaired asset write-down of $202.9 million for Fiscal 1995,
including $201.1 million associated with the write-down of goodwill, principally
related to the 1993 Acquisition. Additional impaired asset write-downs of $6.5
million were recorded in Fiscal 1996. These write-downs resulted from the
identification by management of significant adverse changes in the Company's
business climate late in the third quarter of Fiscal 1995 that continued into
Fiscal 1996. These changes were largely due to increasing competition which led
to operating results that were less than expected. As a result, management
reviewed the carrying values of long-lived assets, primarily goodwill and
property, plant and equipment, for recoverability and possible impairment,
particularly in light of sales declines that began in 1995 and continued during
1996. These sales declines resulted from general declines in customer traffic in
malls, the increase in non-mall, high-volume, low-priced superstores and the
lack of strong music product releases. While the Company's mall-based music
stores reacted with increased promotional pricing, the Company's higher cost
structure relative to these non-mall superstores, which was principally related
to occupancy costs, limited the Company's ability to compete effectively.
In addition, in Fiscal 1995, the Company incurred a charge of $3.4 million
for the expiration of put agreements, which had been issued in November 1993.
Additionally, due to the increasingly competitive retail environment, the
Company incurred a restructuring charge in Fiscal 1995 of $5.2 million,
primarily related to store closings prior to the Petition Date.
Income (loss) before interest expense, other income (expenses), net,
reorganization income (expenses), income taxes and extraordinary item. As a
result of the foregoing, income (loss) before interest expense, other income
(expenses), net, reorganization income (expenses), income taxes and
extraordinary item decreased to $13.9 million in Fiscal 1996 from $220.4 million
in Fiscal 1995.
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<PAGE> 32
Interest expense. The Company's interest expense declined to $17.4 million
in Fiscal 1996 from $38.1 million in Fiscal 1995. In connection with the
bankruptcy proceedings, the Company did not record interest on its prepetition
debt subsequent to the Petition Date. During the bankruptcy proceedings, the
Company entered into an agreement with various lenders to obtain
debtor-in-possession financing (the "DIP Agreement"). After the Petition Date,
borrowings under the DIP Agreement were significantly lower than the prepetition
debt obligations. Therefore, the Company's financing costs in Fiscal 1996 were
significantly lower than in Fiscal 1995.
Other income (expenses), net. Other income (expenses), net decreased to
$1.2 million in Fiscal 1996 from $5.2 million in Fiscal 1995. Other expenses
included the net costs of corporate owned life insurance programs of $1.3
million in Fiscal 1996 and $1.5 million in Fiscal 1995. The Fiscal 1996 expenses
also reflect the receipt of $1.9 million upon the termination of a business
development agreement.
Reorganization income (expenses). Reorganization income (expenses) was
$31.8 million in Fiscal 1996 as a result of the bankruptcy proceedings,
including professional fees of $4.9 million, the write-off of financing fees
from the 1993 Acquisition of $16.0 million, a provision for store closing costs
of $4.9 million and related lease rejection claims of $7.6 million.
Income Taxes. There was no provision for income taxes during Fiscal 1996.
In Fiscal 1995, the Company's provision for income taxes was $0.5 million.
Net income. As a result of the foregoing, the Company recognized a net loss
of $64.3 million in Fiscal 1996 and a net loss of $264.1 million in Fiscal 1995.
Excluding special items and reorganization expense, the Company recognized a net
loss of $26.0 million in Fiscal 1996, as compared to a net loss of $52.6 million
in Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs fluctuate during the course of the fiscal year.
During the first three quarters, the Company's cash flow from operations
typically is consumed by payments to suppliers and store maintenance, renovation
expenditures and opening new stores, including relocations. During the fourth
quarter, the Company has historically relied on borrowings under its credit
facilities to provide it with liquidity to purchase inventory for sale during
the holiday season.
Pursuant to the Plan of Reorganization, a wholly owned subsidiary of the
Company, Camelot Music, Inc. ("CMI"), entered into a Revolving Credit Agreement
dated January 27, 1998 (the "New Working Capital Facility") with a number of
financial institutions. The New Working Capital Facility provides the Company
with advances of up to $50.0 million during peak periods (October to December)
and $35.0 million during non-peak periods (January to September), bears interest
at floating rates and matures on January 27, 2002. The aggregate availability
under the New Working Capital Facility is limited to a borrowing base equal to
35.0% of inventory during peak periods and 30.0% of inventory during non-peak
periods. The Company has received commitment letters from its lenders with
respect to a proposed amendment to the New Working Capital Facility (the
"Amended Credit Facility"). The Amended Credit Facility will increase the
borrowing base to 60.0% of inventory during all periods, modify existing
limitations on capital expenditures, waive certain covenants in order to permit
the Spec's Acquisition and provide a $25.0 million term loan to finance the
Company's acquisition of Spec's. The term loan to be provided under the Amended
Credit Facility will be amortized in semi-annual installments over a three year
period beginning January 31, 1999. The amortization payments will be $3.0
million, $2.0 million, $6.0 million, $4.0 million, $6.0 million and $4.0
million. CMI's obligations under the New Working Capital Facility are, and its
obligations under the Amended Credit Facility will be, guaranteed by the Company
and all of the Company's subsidiaries and are collateralized by substantially
all of the Company's and its subsidiaries' assets. CMI has also pledged to the
lenders the capital stock of its subsidiaries. The Company and its subsidiaries
are currently subject to certain customary negative covenants under the New
Working Capital Facility which, under certain circumstances, limit their ability
to incur additional indebtedness, pay dividends, make capital expenditures and
engage in certain extraordinary corporate transactions. The New Working Capital
Facility also requires the Company to maintain minimum consolidated EBITDA
levels. Except for the various proposed modifications described above, the
Company and its subsidiaries will remain subject to these negative covenants and
consolidated EBITDA requirements under the Amended Credit Facility. The Company
is currently
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<PAGE> 33
in compliance with all of these covenants. See "Description of Certain
Indebtedness." As of June 1, 1998, no borrowings were outstanding under the New
Working Capital Facility.
On June 3, 1998, the Company entered into the Spec's Merger Agreement,
under the terms of which the Company will acquire Spec's for a cash purchase
price of $3.30 per share. Approximately $28 million will be required to fund the
payment of the purchase price and the repayment of Spec's outstanding
indebtedness and acquisition costs. The Company anticipates that it will fund
the Spec's Acquisition with accumulated cash balances as well as the $25.0
million term loan provided under the Amended Credit Facility.
The Company's cash flow from operating activities increased to $54.9
million in Fiscal 1997 compared to cash flow from operating activities of $16.3
million in Fiscal 1996. The increase in cash generated from operating activities
primarily reflects the Company's net income of $269.2 million in Fiscal 1997
($19.3 million on a pro forma basis after adjusting for fresh-start reporting
and excluding The Wall) as compared to a net loss of $64.4 million in Fiscal
1996, together with increases in trade payables resulting from improved credit
terms, increases in accrued expenses and amounts payable in connection with The
Wall Acquisition. Net cash used in investing activities increased to $12.9
million in Fiscal 1997, as compared to $4.0 million in Fiscal 1996, primarily as
a result of the Company's higher level of capital expenditures during Fiscal
1997. The Company made capital expenditures of $9.8 million during Fiscal 1997
as compared with capital expenditures of $4.3 million in Fiscal 1996. Capital
expenditures during Fiscal 1997 were comprised of $2.5 million in enhancements
to information systems (including enhancements associated with the anticipated
integration of The Wall's operations) and $7.3 million in store remodeling,
maintenance and expansions. Fiscal 1996 capital expenditures were primarily
attributable to store remodeling, maintenance and expansions. Net cash used in
financing activities increased to $0.8 million in Fiscal 1997 as compared to
$0.6 million in Fiscal 1996. Net cash used in financing activities in Fiscal
1997 primarily related to the payment of financing fees, while net cash used in
financing activities in Fiscal 1996 related to repayment of borrowings under the
DIP Agreement and the payment of financing fees, offset in part by the proceeds
of such borrowings and other long term debt.
The Company currently anticipates that capital expenditures aggregating
approximately $22.4 million will be incurred in Fiscal 1998, of which $12.6
million is anticipated to relate to new, relocated and remodeled stores, $6.0
million is anticipated to relate to an upgraded store point of sale ("POS")
system, and the balance of which relates to general corporate purposes. The
Company anticipates making capital expenditures of $22.6 million during Fiscal
1999, substantially all of which is anticipated to relate to new, relocated and
remodeled stores. The Company expects that the total investment for each new
store will be approximately $0.6 million, including inventory (net of vendor
funding), leasehold improvements, signage, and furniture, fixtures and equipment
and excluding pre-opening expenses. Pre-opening expenses, which consist
primarily of non-recurring costs such as employee recruiting and training,
supplies and various miscellaneous expenditures, are expected to average
approximately $15,000 per store and will be expensed as incurred. The cost of
opening a new store can vary based on the size of the particular store,
construction costs in various markets and other factors.
The IRS asserted in the bankruptcy proceedings a priority tax claim against
the Company of approximately $7.9 million. Under the Plan of Reorganization, any
allowed priority tax claim of the IRS would be paid over six years, with
quarterly amortization of interest and principal, at an interest rate of 9.0%.
The Company acknowledges a priority tax obligation to the IRS of approximately
$0.8 million and has established a reserve in that amount. The Company disputes
the validity of the balance of the IRS claim. In the event that a judgment is
rendered against the Company in an amount exceeding the reserves established
with respect to this matter, the Company's results of operations would be
materially adversely affected. See "Business -- Legal Proceedings" and "Risk
Factors -- Internal Revenue Service Claim."
As of February 28, 1998, the Company had cash and working capital of
approximately $82.5 million and $110.1 million, respectively. Approximately
$72.4 million in cash was used subsequent to year-end to pay the purchase price
for The Wall Acquisition. The Company's primary sources of funds are expected to
be cash from operations supplemented by borrowings under the Amended Credit
Facility. The cash purchase price for Spec's is expected to be approximately $28
million (including related acquisition costs and the repayment of Spec's
indebtedness) and will be funded with amounts available under the Amended Credit
Facility. The Company's primary ongoing cash requirements will be to finance
working capital, primarily inventory purchases, and to make capital expenditures
for store relocations and new store openings and for upgraded POS systems and
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<PAGE> 34
continuing information systems maintenance. Management believes that cash flows
from its restructured operations and available working capital, supplemented by
the borrowings under the Amended Credit Facility, will enable the Company to
meet its working capital and capital expenditure needs in Fiscal 1998 and Fiscal
1999.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the period from March 3, 1996 to February 28, 1998, as well
as such data expressed as a percentage of yearly totals for the period
indicated. This data has been derived from unaudited Consolidated Financial
Statements that, in the opinion of the Company, include all adjustments
necessary for fair presentation of such information when read in conjunction
with the Company's audited Consolidated Financial Statements and notes thereto.
The Company's business is seasonal in nature. In Fiscal 1997, approximately 35%
of its revenues, and all of its income (loss) before interest expense, other
income (expenses) net, reorganization income (expenses) net, income taxes and
extraordinary item and its net income before extraordinary item was generated in
the Company's fiscal fourth quarter. Quarterly results are affected by, among
other things, new product offerings, store openings and closings, and sales
performance of existing stores.
<TABLE>
<CAPTION>
FISCAL 1996
($ IN THOUSANDS)
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 90,704 $ 90,132 $83,600 $132,066 $396,502
Gross profit............ 31,318 30,393 28,131 43,588 133,430
Operating income (loss)
(1)................... (6,398) (6,642) (7,352) 6,451 (13,941)
</TABLE>
<TABLE>
<CAPTION>
COMBINED FISCAL 1997
($ IN THOUSANDS)
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (2) TOTAL
------------- -------------- ------------- -------------- --- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 82,815 $ 89,257 $88,178 $140,153 $400,403
Gross profit............ 29,690 31,906 28,621 49,415 139,632
Operating income (loss)
(1)................... (1,913) 366 (503) 16,321 14,271
</TABLE>
- ---------------
(1) For purposes of this presentation, operating income (loss) means the
Company's income (loss) before interest expense, other income (expenses)
net, reorganization income (expenses) net, income taxes and extraordinary
item for each of the periods presented.
(2) Results for the fourth quarter of Fiscal 1997 are presented on a combined
basis reflecting a summation of the Predecessor's operations to January 31,
1998 and the Company's operations for the period February 1, 1998 to
February 28, 1998.
INFLATION
The Company believes that the inflationary environment in the Company's
markets in the past several years has not had a material impact on the Company's
revenues or results of operations. Borrowings under the Amended Credit Facility,
however, will be at variable rates of interest and increases in such interest
rates, if not mitigated by other Company actions, could adversely impact the
Company's results of operations.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
data-based information. The Company has assessed its systems and equipment with
respect to Year 2000 and has developed a project plan. Many of the Year 2000
issues have been addressed. The Company is in the process of installing a new
back office POS system to address Year 2000 issues at the store level, including
the processing of credit card transactions. The remaining Year 2000 issues will
be addressed either with scheduled systems upgrades or through the Company's
internal systems development staff. The incremental costs will be charged to
expense as incurred and are not expected to have a material impact on the
financial position or the results of operations of the
32
<PAGE> 35
Company. The Company does not know the Year 2000 status of its vendors or of
other third parties with whom it does business. The Company could be adversely
impacted if Year 2000 modifications are not properly completed by either the
Company or its vendors, banks or any other entity with whom the Company conducts
business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 128, "Earnings per
Share" ("Statement No. 128"), issued in February 1997 and effective for fiscal
years ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share ("EPS"). The Company has complied
with Statement No. 128.
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective
for fiscal years ending after December 15, 1997, establishes standards for
reporting and display of the total net income and the components of all other
nonowner changes in equity, or comprehensive income (loss) in the statement of
operations, in a separate statement of comprehensive income (loss) or within the
statement of changes of stockholder's equity. The Company has had no significant
items of other comprehensive income.
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), issued in June
1997 and effective for fiscal years beginning after December 15, 1997, will
change the way companies report selected segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial statements. The Company has evaluated the
impact of the application of the new rules on the Company's Consolidated
Financial Statements and the new rules will not change its financial
presentation.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), issued in March 1998 and effective for fiscal years
beginning after December 15, 1998 with earlier application permitted, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company has adopted SOP 98-1 as of the date of emergence
from bankruptcy as required by fresh-start reporting. See Note 4 to the
Company's Consolidated Financial Statements.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"), issued in April
1998 and effective for fiscal years beginning after December 15, 1998 with
earlier application permitted, provides guidance on the financial reporting of
start-up costs and organization costs. The Company has adopted SOP 98-5 as of
the date of emergence from bankruptcy as required by fresh-start reporting. See
Note 4 to the Company's Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including statements
regarding, among other items, (i) the Company's anticipated growth strategies,
including the Company's intention to expand current stores and open new stores,
(ii) the Company's intention to consider additional acquisitions, as well as the
Company's plans to consummate the Spec's Acquisition, (iii) anticipated trends
in the Company's businesses, (iv) future expenditures for capital projects,
including the Company's intention to install a new back office point of sale
system, and (v) the Company's intention to seek to improve its operational
efficiencies. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from these forward-looking statements as a result of the factors
described in "Risk Factors" including, among others, (i) changes in the
competitive marketplace, including pricing changes and addition of new stores by
the Company's competitors, and (ii) changes in the trends in the retail music
industry. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this Prospectus will
in fact transpire.
33
<PAGE> 36
BUSINESS
Camelot is a leading mall-based retailer of prerecorded music and
accessories and is one of the largest music retailers in the United States based
on store count. As of May 31, 1998, the Company operated 455 stores in 37 states
nationwide under two brand names: Camelot Music, founded in 1956, operating 305
stores with a significant store base concentration in the Midwest and Southeast
regions of the United States; and The Wall, operating 150 stores primarily in
the Mid-Atlantic and Northeast regions of the United States. The Company
acquired certain assets of The Wall effective February 28, 1998. The Company
believes that each chain benefits from name recognition and a loyal customer
base in their primary markets of operation. For Fiscal 1997, the Company had pro
forma net sales and earnings of $554.1 million ($396.2 million excluding The
Wall) and earnings of $27.2 million ($15.9 million excluding (i) The Wall, (ii)
special items and (iii) the reinstatement of vendor discounts). On June 3, 1998,
the Company signed a definitive agreement to acquire Spec's, a music retailer
operating 42 stores in south Florida and Puerto Rico. The Company believes that
the Spec's Acquisition will enhance its competitive position in the Southeastern
United States and give the Company a leading position in the south Florida
market. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments."
Camelot offers a broad range of prerecorded music, including CDs,
cassettes, prerecorded video cassettes, DVDs and accessories such as blank audio
and video cassettes and music and tape care products. The Company seeks to
position itself as the mall-based music specialist for prerecorded music, and
advertises under the motto "No One Knows Your Music Better." The Company's
stores average 4,200 square feet in size and typically offer over 20,000 SKUs,
including both high-volume hits and the Company's catalog. The Company believes
its product offering is among the broadest of mall-based retailers, enabling it
to attract a diverse customer base thereby reducing its dependence on any one
genre of music. In Fiscal 1997, the Company's average sales per square foot was
approximately $293, including The Wall, which the Company believes is among the
highest for mall-based retailers of prerecorded music. The Company believes its
broad product offering, supported by a high level of customer service from its
knowledgeable sales force, combined with its competitive pricing strategy and
attractive locations within regional malls, positions Camelot to benefit from
the favorable trends occurring in the prerecorded music industry.
According to industry sources, in 1997 the total market for prerecorded
music and music videos in the United States amounted to $12.2 billion. The music
and music video market in the United States has more than doubled over the last
ten years and has grown at a compounded annual rate of 8.2% during such period.
During the 1980s the music retail industry experienced rapid growth fueled by:
(i) the introduction of new products such as the CD; (ii) a relatively large
number of popular new releases which increased customer traffic and sales; and
(iii) the rapid expansion of mall-based music retailers. These factors led, in
the early 1990s, to the competitive intrusion of non-traditional music retailers
such as consumer electronics stores and discount stores and to increasing price
competition. By mid-1994, these competitive factors, combined with the
contraction of the replacement CD market and a comparative lack of successful
new releases led to deteriorating profitability in the music retail industry.
Beginning in mid-1997, conditions in the music retail industry began to improve
as a result of: (i) the significant reduction in competitive square footage
resulting from the reduction in the total number of traditional music retail
stores from approximately 5,000 in 1995 to approximately 4,200 in 1997,
including a net reduction of 600 retail stores by the top five traditional music
retailers, based on store count; (ii) an improvement in retail pricing as music
vendors, beginning in 1996, strengthened MAP guidelines, which the Company
believes decreased the intensity levels of price-based competition for
prerecorded music; and (iii) a resurgence in popular new releases.
In 1993, the Company was acquired in a highly leveraged transaction,
resulting in significant debt service obligations. This significant debt service
and the industry conditions described above combined to impair Camelot's
operating and financial condition and led the Company to file a voluntary
petition for protection under Chapter 11 of the Bankruptcy Code in August 1996.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Camelot's Plan of Reorganization was confirmed by the Bankruptcy
Court on December 12, 1997 and became effective on January 27, 1998.
34
<PAGE> 37
Prior to and during its reorganization under the protection of the
Bankruptcy Court, Camelot was able to substantially improve the competitive
positioning of its business and significantly improve its financial position.
These improvements included: (i) closing 96 underperforming stores; (ii)
renegotiating unfavorable leases on certain of its remaining stores; (iii)
returning certain overstock inventory to its vendors; and (iv) eliminating its
liabilities totaling approximately $485 million, including indebtedness of
approximately $412 million. In addition, during the same period, Camelot
invested $7.5 million to upgrade, develop and implement sophisticated
merchandising, distribution, replenishment, and financial software packages, all
of which were fully operational by the end of Fiscal 1997. The Company's new and
upgraded information systems enable management to (i) allocate specific
merchandise to a specific store, thereby improving sell-through rates and
reducing returns to vendors; (ii) improve the efficiency of its replenishment
system to reduce stock-outs and lower distribution center operating costs; (iii)
better track profitability by SKU, store and region; and (iv) automate invoice
matching to reduce corporate labor costs. The Company also developed and
implemented a new marketing and data warehousing system, which became fully
operational in April 1998, to better capture transaction specific data to
facilitate the further development of the Company's customer loyalty programs
and improve the effectiveness of its advertising programs by targeting specific
customers with promotional material tailored to their buying patterns. Over the
last two fiscal years, as the Company focused on improving the competitiveness
of its business, revenues increased 1.0% as the Company closed 83 stores and
opened no new stores.
The Company believes the improved industry conditions, the modifications to
its operations and financial condition, its infrastructure investments and its
strong market position, provide Camelot with distinct competitive advantages and
position it for accelerated growth and continued improvement in profitability.
Key elements of the Company's growth strategy include:
X Strengthen Competitive Position in Existing Markets. The Company intends
to strengthen its store base and increase sales by relocating certain
existing stores to larger stores and selectively opening new stores in
existing markets. New stores will be opened to fill out existing markets
and leverage the Company's distribution, advertising and field management
costs. As of May 31, 1998, approximately 270 of the Company's 455 stores
were less than 4,000 square feet in size compared to its current
prototype store of 5,000-6,000 square feet. The Company intends to
relocate many of these stores to larger facilities within the same
regional mall. The Company believes these relocations will better
facilitate its merchandising strategy, including the broader presentation
of higher-margin catalog titles. At May 31, 1998, the Company had
identified 100 such stores for relocation. In Fiscal 1998, the Company
plans to relocate 20 stores and open four new stores in existing markets.
Of these 24 projects, four have been completed and lease commitments have
been signed for three more. In Fiscal 1999, the Company expects to
relocate 17 stores and open 20 new stores.
X Improve Operating Margins. The Company has significantly increased its
operating profit margin to 3.6% of net sales (2.5% excluding special
items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9%
excluding special items) in Fiscal 1996. The Company believes that
significant opportunities exist to continue to increase its operating
profit margin. The Company seeks to increase its gross profit margin
primarily through: (i) improved pricing for the Company's products; (ii)
enhanced trade terms; (iii) reduced product returns through a more
systematic allocation of products; and (iv) adjusting its merchandise mix
to emphasize higher-margin catalog items as it relocates its stores to
larger facilities. In addition, the Company expects to leverage its
general and administrative and warehousing and distribution costs as it
opens new stores or acquires stores in existing markets. The Company's
warehouse and distribution center is currently operating between 30% and
40% of capacity and the Company believes it could support approximately
500 additional stores without a significant increase in capital
expenditures for its warehouse and distribution facilities.
X Pursue Acquisitions. The Company believes its industry leading position,
experienced management team and improved capitalization position Camelot
to pursue selective acquisition opportunities in the music retailing
industry. Camelot targets mall-based retailers of prerecorded music in
existing or contiguous market areas which possess attractive real estate
locations. The Company's strategy is to improve such retailers' operating
results by remerchandising the stores to conform to Camelot's prototype,
implement-
35
<PAGE> 38
ing its information systems and integrating the acquired operations in order to
benefit from economies of scale in distribution, advertising, and management
costs. Effective February 28, 1998, the Company purchased certain assets of The
Wall for $72.4 million, which significantly enhanced Camelot's market share
in the Mid-Atlantic and Northeast regions of the United States. At May 31,
1998, the Company had improved product mix at all of The Wall's stores,
targeted for closure 11 underperforming stores, implemented its information
systems and reduced costs by eliminating The Wall's corporate
infrastructure and phasing out its distribution facilities. See "Unaudited
Pro Forma Condensed Consolidated Financial Data." On June 3, 1998, the
Company signed a definitive agreement to purchase Spec's. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments."
INDUSTRY
According to industry sources, in 1997 the total market for prerecorded
music and music videos in the United States amounted to $12.2 billion. The music
and music video market in the United States has more than doubled over the last
ten years and has grown at a compound annual rate of 8.2% during such period.
The music retail industry is comprised of a number of participants operating in
a variety of store formats. Participants in the industry include dedicated music
retailers, such as the Company, operating in mall-based stores, shopping centers
and free standing locations, as well as mass merchants (such as Wal-Mart, K-Mart
and Target), electronics superstores (such as Best Buy and Circuit City),
department stores (such as Sears and Montgomery Ward) and other retailers that
offer music as part of a wide variety of product offerings. Other retailers of
music products include mail-order music clubs and, in recent years, companies
that offer CDs and tapes via the Internet. During the 1980s, the music retail
industry experienced significant growth in sales and earnings fueled by the
introduction of new products and the release of extremely popular recordings.
The most important new product was the CD. The popularity of the CD format
caused many consumers to replace their old vinyl album and cassette collections
with CDs. Expansion of the retail music business attracted new entrants into the
industry. During the mid 1990s, this increased competition arising out of the
entry of non-traditional competitors, such as electronics superstores, as well
as the contraction of the CD replacement market, the relative lack of hit
releases and the lack of new technology formats, combined to depress profit
margins for music retailers. The total number of traditional music retail stores
decreased from approximately 5,000 in 1995 to approximately 4,200 in 1997,
including a net reduction of 600 retail stores by the top five traditional music
retailers, based on store count.
Conditions in the music retail industry improved during 1997. Store
closings prompted by the financial condition of many industry participants have
led to a better leasing environment, with many mall owners increasingly willing
to allow retailers to improve locations and reduce occupancy costs. Music
distribution companies have taken steps to reduce retail price competition
through the implementation and enforcement of new MAP guidelines. MAP guidelines
generally state that a music distribution company will not authorize any
advertising funds for any media or in-store programs that advertise a price
lower than a specified price. In addition, a music retailer who violates the MAP
guidelines will not receive advertising funds from the music distribution
company for a period ranging from 60 to 90 days. The Company believes the music
retail industry will experience additional consolidation in the next few years,
as the increasing level of sophistication required to operate profitably will
continue to make it difficult for smaller retailers to compete effectively.
STORE FORMAT
The Company operates its stores under the "Camelot Music" and "The Wall"
names. The Company's Camelot Music and The Wall stores provide a broad selection
of CDs, tapes and video and related products in a customer friendly environment.
Substantially all of the Company's stores are located in shopping malls and
range in size from 1,600 to 20,380 square feet, averaging 4,200 square feet. As
of May 31, 1998, approximately 270 of the Company's 455 stores were less than
4,000 square feet in size compared to its current prototype store of 5,000-6,000
square feet in size. The larger stores are in more prominent mall locations and
carry a broader inventory of catalog products in order to appeal to the
high-volume purchaser. The Company emphasizes in-store presentation, broad
product selection and competitive pricing to attract the casual buyer. At
February 28, 1998, the Company operated 305 Camelot Music stores in 34 states
and 150 The Wall stores in the Mid-Atlantic and
36
<PAGE> 39
Northeastern regions of the United States. As a result of The Wall's name
recognition and loyal customer base in its primary markets, the Company has
determined to maintain separate identities for its stores.
The following table sets forth information regarding the size ranges of the
Company's stores and the number of stores within each range as of May 31, 1998.
<TABLE>
<CAPTION>
STORE SIZE
(SQUARE FOOTAGE) NUMBER OF STORES
---------------- ----------------
<S> <C>
Over 5,000.............................................. 103
4,000 to 4,999.......................................... 80
Under 3,999............................................. 272
----
Total......................................... 455
====
</TABLE>
The Company's strategy for its mall stores is to operate profitable stores
in high-traffic locations while controlling occupancy costs. The Company's site
selection strategy focuses on using the more favorable leasing environment to
establish dominant positions in key regional malls. Camelot has identified a
target group of approximately 100 stores where opportunities exist to strengthen
the Company's competitive position by improving and expanding store locations
within these malls and, often, obtaining exclusive arrangements with mall
owners.
PRODUCTS
The Company's stores focus on providing a broad selection of prerecorded
music, but also carry a limited selection of prerecorded videocassettes, blank
audio and videocassettes, music and tape care products, carrying cases, storage
units, sheet music and personal electronics. During the past several years,
sales of prerecorded music have accounted for approximately 88% of the Company's
revenues.
Camelot Music and The Wall stores offer a wide array of CDs and prerecorded
audio cassettes. Sales of CDs are expected to continue to become a larger
portion of total prerecorded music sales, while sales of prerecorded audio
cassettes are expected to decline as a proportion of such sales. The Company's
strategy is to provide a greater number of titles to choose from than its
mall-based rivals. The Company's stores typically carry between approximately
18,000 and 25,000 titles of prerecorded music, depending on store size and
location. These titles include "hits," which represent the best-selling newer
releases, and catalog items, representing older but still popular releases that
customers purchase to build their collections.
The Company's stores offer a full assortment of CDs, prerecorded audio
cassettes, prerecorded video cassettes and related accessories. Sales by
category as a percentage of net sales over the past three fiscal years were as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------
COMBINED
PRODUCT FISCAL 1995 FISCAL 1996 FISCAL 1997
- ---------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Compact discs............................................. 57.4% 63.3% 67.0%
Prerecorded audio cassettes............................... 20.7 17.3 14.8
Singles................................................... 5.3 5.7 5.8
Accessories............................................... 5.3 5.6 5.9
Prerecorded video cassettes............................... 5.5 4.3 4.5
Cut outs and budget....................................... 1.6 0.9 0.3
Laser..................................................... 3.2 2.0 1.0
Software/games............................................ 0.5 0.3 0.2
Other..................................................... 0.5 0.6 0.5
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The Company seeks to have the most popular hits available at all times
while maximizing the selection of popular catalog titles. Store management works
with corporate merchandise allocators to tailor product offerings
37
<PAGE> 40
to local customer tastes and to maximize the availability of the most popular
items at each store relative to store size and location.
Typically, the Company's stores carry approximately 1,500 titles of
prerecorded videocassettes. The Company has discontinued sales of lower margin
laserdiscs and computer software products in an effort to focus on higher margin
prerecorded music products.
DISTRIBUTION
Central to the Company's strategy of providing broad merchandise selection
to its customers is its ability to distribute products quickly and
cost-effectively to its stores. The Company's distribution center, located
adjacent to the corporate headquarters in North Canton, Ohio, receives and ships
the vast majority of the Company's merchandise (although many new releases are
shipped directly to the stores from suppliers). Distribution center employees
pick, pack and ship over 37 million units annually. The Company's distribution
center currently operates at between 30% and 40% of total capacity, providing
sufficient excess capacity to support significant future store growth and
distribution requirements of potential acquisitions. The Company currently has
the right to use The Wall's distribution center under a contractual arrangement
with WH Smith Group Holdings (USA), Inc. This arrangement will expire in August
1998. Subsequent to that time, the Company will service all of its stores from
its existing facility.
Inventory is shipped to each store at least once a week via several common
carriers, supplemented with expedited shipments as required by individual store
sales velocity analysis. All carriers are "less-than-load" carriers enabling the
Company to maximize transportation efficiencies while minimizing costs. The
Company's sophisticated inventory management system links together store POS
merchandising and distribution systems, enabling the distribution center to
replenish inventory in stores within two to four days of sale, depending upon
geographic proximity to the distribution facility. Enhancements to this system
implemented at the Company's Camelot Music stores in the early part of Fiscal
1998 permit the Company to manage the replacement of individual SKUs on an
automated basis, based on model stocks calculated by reference to sales
information. These enhancements enable the Company to react more quickly to
increasing sales velocities for specific titles resulting from promotions,
concert tours or other media events, and also permit it to ramp down
replenishment as sales of specific titles decline. The Company anticipates that
The Wall stores will be incorporated into this enhanced inventory management
system during the current fiscal year.
MARKETING
The Company employs marketing and advertising programs to increase customer
awareness of Camelot as the mall music specialist. The programs include regular
use of local, regional and national media outlets such as radio, television,
newspaper, magazines, freestanding inserts, direct mail and the Company's site
on the World Wide Web. While emphasizing Camelot's music specialist position,
the Company's marketing programs also promote the immediate availability of new
hit music releases as well as the Company's extensive catalog selection.
In the retail entertainment industry, music and video companies generally
provide funds on a title-by-title basis to promote new releases and,
occasionally, on a label-wide basis. When the Company runs pre-authorized
advertising with respect to a specific title or label, the related supplier
generally reimburses the Company for 100% of the cost of such advertising as
well as the associated costs of production and development of the creative
concept. A significant portion of the Company's total advertising costs has been
funded by suppliers through these programs. See Note 3 to the Company's
Consolidated Financial Statements.
Customer-specific relationship marketing programs are a key component of
the Company's marketing effort. Camelot discontinued the manual "punch card"
version of its "Repeat Performer" frequent buyer program in mid-1997. The
Company's new marketing information system has permitted it to replace the
manual version of the Repeat Performer program with a more limited electronic,
automated frequent buyer program targeting the Company's most frequent and
highest spending customers. Camelot initiated a limited chainwide roll-out of
this program to its most frequent and highest spending customers during 1997,
and intends to significantly expand the program in 1998. The manual version of
the program was not capable of tracking sales or providing customer-
38
<PAGE> 41
specific or transaction-specific data. The automated Repeat Performer program
captures demographic and music preference data upon customer sign-up as well as
item-specific transaction data each time Repeat Performer customers make a
purchase. The Company also collects e-mail addresses of its customers to which
it can send promotional materials. Customers are rewarded for attaining specific
purchase levels by receiving discounts on merchandise. The rewards encourage
loyalty and promote use of the bar-coded Repeat Performer card at each
transaction. The Company thereby obtains valuable information about the buying
preferences of its most loyal customers. The collected data is used to develop
customer-specific direct mail programs that are designed to generate increased
sales levels and purchase frequency. The customer-specific information obtained
through the Repeat Performer program allows the Company to better understand its
customers and to tailor direct mail marketing programs to individual customer
preferences. The direct mail programs generally are funded by music and video
companies who wish to promote their products directly to Camelot customers who
are known to purchase items similar to the advertised titles.
The Company also intends to assimilate The Wall stores into its overall
marketing strategy. While the Company plans to maintain and support the separate
identity of The Wall stores, its objective is to integrate The Wall into global
marketing campaigns supporting both Camelot Music and The Wall stores. As part
of this effort, the Company intends to implement modifications to The Wall's
"Buzz Club" frequent buyer program during the current fiscal year to conform it
to the new Repeat Performer program. The Company also expects to continue The
Wall's lifetime warranty program for damaged goods.
The capabilities of the Company's new marketing system also permit it to
measure the effectiveness of individual promotional efforts, including radio,
television and direct mail programs, internal merchandising changes, new signage
and visual marketing presentations, new store configurations, changed inventory
mix and other in-store initiatives. The ability to measure the effectiveness of
these programs will permit Camelot to modify marketing efforts based on the
effectiveness of these campaigns.
SUPPLIERS
The Company purchases its prerecorded music directly from a large number of
manufacturers. During Fiscal 1997, approximately 77% of purchases, net of
returns, were made from the Big Six Vendors. Twenty other vendors accounted for
an additional 13% of purchases during such period. Historically, Camelot has
enjoyed trade terms that have generally included (a) the ability to return
unsold current releases at invoice cost less customary merchandise return
charges, (b) a 2% discount for payments made within 60 days of invoice and (c)
credit limits sufficient to permit at least 60 days dating on inventory
purchases. Return privileges enable the Company to ensure that it will have
sufficient product in stock to meet customer demand without subjecting the
Company to extensive risk that a particular item will not meet sales
expectations. During the bankruptcy proceedings, the Company's access to these
customary trade terms was severely limited. After the Effective Date, the
Company was once again able to negotiate customary trade terms with most of its
suppliers, including the Big Six Vendors. Recently, a number of vendors have
implemented policies prohibiting the return of opened product for credit.
INFORMATION SYSTEMS
The Company has made significant investments in its information systems
during the past three years, including the installation of new merchandising and
marketing systems, which will be implemented throughout its stores during Fiscal
1998. Camelot's merchandising systems provide it with the ability to monitor
inventory levels, analyze changes in inventory and replenish inventory on an
automated basis, based on model stocks calculated by reference to sales
information. These capabilities permit the Company to react quickly to changes
in sales velocities for specific titles or products and to better measure the
effectiveness of advertising, promotional and merchandising programs. The
Company's marketing system provides it with the ability to collect a variety of
customer and transaction specific data from participants in its relationship
marketing programs, which allows it to tailor relationship marketing efforts to
each customer's purchase patterns and music preferences. This system is part of
the Company's larger Data Warehouse/COREMA system, which enables it to record
and preserve two years of transaction-specific information for every store. The
Company is also in the process of replatforming its back-office POS system. The
new system will enable the Company to standardize the Camelot Music and The
39
<PAGE> 42
Wall POS systems and bring those systems into Year 2000 compliance while
retaining existing in-store POS devices at its Camelot Music stores.
EMPLOYEES
As of June 8, 1998, the Company employed approximately 1,651 full-time
employees and 3,901 part-time employees. As of such date, the Company employed
approximately 169 individuals at its corporate headquarters, 276 at its
distribution center, and 5,107 at its stores. None of the Company's employees is
represented by a union. The Company believes that its employee relations are
good.
COMPETITION
The prerecorded music market is highly competitive. Competition is based on
breadth of product offering, price, location of stores, convenience and customer
service. Consumers have numerous options in purchasing prerecorded music and
other home entertainment products, including chain retailers specializing in
prerecorded music, consumer electronic superstores, non-mall multimedia
superstores, discount stores, grocery, convenience and drug stores, direct-mail
programs via telephone, the Internet or television and local music retailers.
Additionally, consumers have more home entertainment options available with the
increasing use of personal computers in homes. The impact of these trends in
recent years has been a reduction in customer traffic and revenues for
mall-based music retailers such as the Company.
While several major retail chains have recently opened and expanded their
store presence in the markets in which the Company operates, there has been some
easing in the competitive environment in 1997 as a result of the closing of
under-performing stores by several mall-based competitors and the downsizing of
music departments within certain non-mall competitors. Pricing pressures have
also eased as a result of less near- or below-cost pricing by certain non-mall
competitors. Several major suppliers of prerecorded music have begun to enforce
MAP programs, which provide incentives for retailers to comply with the terms of
the programs. Enforcement of the MAP programs has contributed to stabilizing
retail prices of prerecorded music in 1997. However, the FTC is currently
investigating the MAP programs, and there can be no assurance that such programs
will continue in the future. There can be no assurance that deep-discount
pricing practices will not return, or that if they do, that the Company will be
able to remain competitive without a material adverse effect on its results of
operations and financial condition.
The Company expects that the retail sales environment will continue to
present challenges into the foreseeable future. In response to these challenges,
the Company will focus on securing and maintaining the most desirable locations
within quality regional malls, efficient inventory management, and offering
broad, market-specific merchandise selections at competitive prices.
The Company also competes for consumer entertainment dollars with leisure
time activities such as movie theaters, television, home computer and Internet
use, live theater, sporting events, travel, amusement parks and other
entertainment centers.
SEASONALITY
The Company's business is seasonal in nature. In Fiscal 1997, approximately
35% of revenues and all of its income (loss) before interest expense, other
income (expenses) net, reorganization income (expenses) net, income taxes and
extraordinary item, and net income before extraordinary item was generated in
the Company's fiscal fourth quarter. Quarterly results are affected by, among
other things, new product offerings, store openings and closings, and sales
performance of existing stores. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Selected Quarterly Results of
Operations."
TRADEMARKS AND SERVICE MARKS
The Company operates its stores under the "Camelot Music" and "The Wall"
names, which have become important to the Company's business as a result of its
advertising and promotional activities. These names and
40
<PAGE> 43
other names used in the Company's business have been registered with the United
States Patent and Trademark Office. The Company has not experienced any
significant patent infringement in recent years.
PROPERTIES
The Company owns its headquarters facility and distribution center in North
Canton, Ohio. All stores operated by Camelot and The Wall are under operating
leases with various remaining terms through the year 2009. The leases have terms
ranging from one to 18 years. In most instances, the Company pays, in addition
to minimum rent, real estate taxes, utilities, common area maintenance costs and
percentage rents which are based upon sales volume. Certain store leases provide
the Company with an early cancellation option if sales for a designated period
do not reach a specified level as defined in the lease. The following table
lists the number of leases due to expire or terminate in each fiscal year based
on fixed lease term, giving effect to early cancellation options and excluding
renewal options.
<TABLE>
<CAPTION>
CAMELOT
EXPIRATION DATES MUSIC THE WALL COMPANY TOTAL
---------------- ------- -------- -------------
<S> <C> <C> <C>
1998..................................................... 42 18 60
1999..................................................... 29 14 43
2000..................................................... 35 12 47
2001..................................................... 50 24 74
2002..................................................... 27 23 50
2003..................................................... 34 14 48
2004..................................................... 43 24 67
2005 and thereafter...................................... 45 21 66
--- --- ---
305 150 455
=== === ===
</TABLE>
The Company's leases generally do not contain renewal options. Although the
Company has historically been successful in renewing most of its store leases
when they have expired, there can be no assurance that Camelot will continue to
be able to do so on acceptable terms or at all. Many of the Company's current
landlords were landlords under leases with respect to which the Company's
obligations were terminated during the bankruptcy proceedings. If the Company is
unable to renew leases for its stores as they expire, or find favorable
locations on acceptable terms, there can be no assurance that such failures will
not have a material adverse effect on the Company's financial condition and
results of operations.
41
<PAGE> 44
The following table shows the distribution of the Company's stores by state
as of June 1, 1998. In addition, as of June 1, 1998, Spec's operates a total of
42 stores, of which 38 are located in Florida and four are located in Puerto
Rico.
<TABLE>
<CAPTION>
NUMBER OF STORES
-------------------
CAMELOT
STATE MUSIC THE WALL
----- ------- --------
<S> <C> <C>
Alabama..................................................... 8 --
Arkansas.................................................... 5 --
California.................................................. 9 --
Florida..................................................... 33 --
Georgia..................................................... 14 --
Illinois.................................................... 10 --
Indiana..................................................... 8 --
Kansas...................................................... 5 --
Kentucky.................................................... 7 --
Louisiana................................................... 5 --
Maryland.................................................... 5 9
Massachusetts............................................... -- 6
Michigan.................................................... 8 --
Missouri.................................................... 10 --
New Jersey.................................................. 4 20
New York.................................................... 5 33
North Carolina.............................................. 18 1
Ohio........................................................ 26 1
Oklahoma.................................................... 6 --
Oregon...................................................... 5 --
Pennsylvania................................................ 14 58
South Carolina.............................................. 9 --
Tennessee................................................... 13 --
Texas....................................................... 34 --
Virginia.................................................... 7 14
Washington.................................................. 11 --
West Virginia............................................... 4 2
Wisconsin................................................... 6 --
All other states............................................ 16 6
---- ---
Totals............................................ 305 150
==== ===
</TABLE>
The Company is subject to extensive regulation under environmental and
occupational health and safety laws and regulations. In addition, the
Comprehensive Environmental Response, Compensation and Liability Act generally
imposes joint and several liability for clean-up and enforcement costs, without
regard to fault, on parties allegedly responsible for contamination at a site.
While the Company is not aware of any current environmental liability, no
assurance can be given that the Company will not be liable in the future.
LEGAL PROCEEDINGS
The Company is involved from time to time in various routine legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to the ordinary course of its business. Except as described below,
the Company is not now involved in any litigation, individually or in the
aggregate, which could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
The IRS asserted in the bankruptcy proceedings a priority tax claim against
the Company of approximately $7.9 million on January 10, 1997. Under the Plan of
Reorganization, any allowed priority tax claim of the IRS would be paid over six
years, with quarterly amortization of interest and principal, at an interest
rate of 9.0%. The
42
<PAGE> 45
Company acknowledges a priority tax obligation to the IRS of approximately $0.8
million, and disputes the validity of the balance of the IRS Claim, the large
majority of which relates to a proposed disallowance by the IRS of the COLI
Deductions. On October 15, 1997, the Debtors filed the COLI Objection to the IRS
Claim to the extent that the IRS seeks to disallow the COLI Deductions. In
response to the COLI Objection, on November 21, 1997 the IRS filed the
Withdrawal Motion with the District Court seeking to have the COLI Objection
resolved by the District Court rather than the Bankruptcy Court. On May 29,
1998, the District Court granted the Withdrawal Motion. In the event that a
judgment is rendered against the Company in an amount exceeding the reserve
established with respect to this matter, the Company's results of operations
would be materially adversely affected.
43
<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Bonk................ 50 President, Chief Executive Officer and Chairman of the Board of
Directors
Jack K. Rogers............... 48 Executive Vice President, Chief Operating Officer, Secretary
and Director
Lee Ann Thorn................ 37 Chief Financial Officer and Treasurer
George R. Zoffinger.......... 50 Director
Stephen H. Baum.............. 56 Director
Herbert J. Marks............. 53 Director
Michael B. Solow............. 39 Director
Marc L. Luzzatto............. 42 Director
Larry K. Mundorf............. 49 Vice President of Marketing
Lewis S. Garrett............. 48 Vice President of Buying and Merchandising
Charles R. Rinehimer III..... 50 Vice President of Stores
</TABLE>
James E. Bonk has served as President, Chief Executive Officer and Chairman
of the Board of the Company since January 1998, and as President, Chief
Executive Officer and Director of the Company since November 1993. Prior to that
time he served as Executive Vice President, Chief Operating Officer and Director
of the Company since June 1986. Mr. Bonk joined the Company as a store manager
in 1968 and held various positions of increasing responsibility from 1968
through 1986.
Jack K. Rogers has served as Executive Vice President, Chief Operating
Officer, Secretary and a Director of the Company since January 1998. He
previously served Camelot as Executive Vice President and Chief Financial
Officer from November 1993 to January 1998 and as Vice President Finance, Chief
Financial Officer, Secretary and Director of Camelot from June 1988 to November
1993.
Lee Ann Thorn has served as Chief Financial Officer and Treasurer of the
Company since January 1998. Prior to that time she served as Vice President of
Finance and Treasurer of Camelot from November 1993 to January 1998, and also
served as Director of Taxes and Payroll for Camelot from May 1988 to November
1993.
George R. Zoffinger has served as a Director of the Company since January
1998. He has been President and Chief Executive Officer of Constellation Capital
Corp. since March 1998. Mr. Zoffinger served as President, Chief Executive
Officer and Director of Value Property Trust from 1995 until that company was
purchased by Wellsford Real Properties, Inc. in March 1998. Mr. Zoffinger served
as Chairman of the Board of CoreStates New Jersey National Bank from 1994
through its merger into CoreStates Bank, N.A. in 1996. From 1991 through 1994,
he served as President and Chief Executive Officer of Constellation Bancorp and
its principal subsidiary, Constellation Bank, N.A. Mr. Zoffinger is also a
member of the Board of Directors of NJ Resources, Inc.
Stephen H. Baum has served as a Director of the Company since January 1998.
He has been a principal of The Mead Point Group, an advisor to senior management
of service enterprises since 1991. Mr. Baum is chief judge for the Connecticut
Award for Excellence and was a senior examiner with the Malcolm Baldridge
National Quality Award for several years. He co-founded The Mead Point Group in
1991. Prior to founding The Mead Point Group, Mr. Baum was a partner for ten
years with Booz, Allen & Hamilton, where he led the consumer services practice.
Herbert J. Marks has served as a Director of the Company since January
1998. He has served at RBC Dominion Securities as Vice President and Manager of
the Merger Arbitrage Group since 1997. He has also
44
<PAGE> 47
served as Senior Vice President and Managing Director of Tribeca Investments,
L.L.C. (a subsidiary of the Travelers Group), Senior Vice President and Director
of Research for Kellner Dileo & Co., Senior Vice President and Manager of the
Risk Arbitrage Department of Kidder Peabody & Co. and Senior Vice President of
the Risk Arbitrage Group of Lehman Brothers Inc.
Michael B. Solow has served as a Director of the Company since March 1998.
Mr. Solow is currently a partner and Practice Manager for Financial Services
Practice at Hopkins & Sutter, a Chicago, Illinois law firm where he has
practiced since 1985. Mr. Solow is also a member of the Board of Directors for
Chrisken Residential Trust, Inc. and Edwards Arts Products, and has previously
served on other corporate boards.
Marc L. Luzzatto has served as a Director of the Company since March 1998.
Mr. Luzzatto has served as the President and Chief Operating Officer of The Welk
Group, Inc., a Santa Monica, California-based company with interests in various
entertainment, hospitality and real estate businesses, since 1995. He has been
an executive of The Welk Group, Inc. since 1990. Mr. Luzzatto is also a member
of the Board of Directors for Welk Direct Marketing, Inc. Mr. Luzzatto has
served in various capacities in the investment banking, real estate and legal
professions.
Larry K. Mundorf has served as Vice President of Marketing for the Company
since February 1998. Mr. Mundorf served as President and Chief Operating Officer
of National Record Mart, Inc., a music retailer headquartered in Pittsburgh,
Pennsylvania, from January 1997 to February 1998 and as that company's Executive
Vice President and Chief Operating Officer from January 1996 to January 1997. He
served as Vice President of Marketing for Alpha Enterprises, a Canton,
Ohio-based supplier to the music and video industry, from 1991 to 1995. Prior to
that time, Mr. Mundorf spent 23 years with Camelot, last serving as the
Company's Senior Vice President of Operations.
Lewis S. Garrett has served as Vice President of Buying and Merchandising
of the Company since January 1986, supervising all of the Company's buying and
allocation functions. He joined Camelot in 1972. In addition, Mr. Garrett is the
Chairman of The National Association of Recording Merchandisers Retailers'
Advisory Committee.
Charles R. Rinehimer III has served as Vice President of Stores of the
Company since May 1994. Previously, Mr. Rinehimer served as Vice President of
Store Operations for American Greetings (Summit Corporation) from 1989 to May
1994.
TERMS OF DIRECTORS
The Board of Directors consists of seven Directors. The Directors of the
Company are elected annually for one-year terms. In accordance with Section 8.02
of the Plan of Reorganization, five members of the Board of Directors of the
Company (Messrs. Zoffinger, Baum, Marks, Luzzatto and Solow) were appointed by
the holders of a majority of the Common Stock upon the Company's emergence from
bankruptcy. In addition, James Bonk's employment agreement provides that he will
be elected Chairman of the Board of Directors of the Company during the term of
the agreement.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three standing committees: a Compensation
Committee, an Audit Committee and an Executive Committee. The Compensation
Committee has the authority to (i) administer the Company's stock option plans,
including the selection of optionees and the timing of option grants, and (ii)
review and monitor key employee compensation and benefits policies and
administer the Company's management compensation plans. The members of the
Compensation Committee are Messrs. Solow, Baum and Zoffinger. See
"Management -- Executive Compensation."
The Audit Committee recommends the annual appointment of the Company's
auditors, with whom the Audit Committee reviews the scope of audit and non-audit
assignments and related fees, the accounting principles used by the Company in
financial reporting, internal financial auditing procedures and the adequacy of
the Company's internal control procedures. Messrs. Marks and Luzzatto serve as
members of the Audit Committee.
45
<PAGE> 48
The Executive Committee exercises the powers and authority of the full
Board during the period between meetings of the entire Board of Directors.
Messrs. Bonk, Rogers, Solow and Zoffinger serve as members of the Executive
Committee.
EXECUTIVE COMPENSATION
The following compensation information has been prepared based upon the
actual compensation and benefits earned during Fiscal 1997, as well as various
employee retention and compensation arrangements which were entered into in
connection with the bankruptcy proceedings. The table below sets forth
information concerning the annual and long-term compensation for services in all
capacities for the Company for Fiscal 1997, with respect to those persons who
were (i) the Chief Executive Officer and (ii) the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") at February 28, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(1) OPTIONS/SARS COMPENSATION(2)
----------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
James E. Bonk.................... 1997 $358,380 $754,000 110,000 $322,813
President and Chief Executive
Officer
Jack K. Rogers................... 1997 239,630 375,000 80,000 322,631
Executive Vice President, Chief
Operating Officer and Secretary
Lee Ann Thorn.................... 1997 147,090 230,000 40,000 2,234
Chief Financial Officer and
Treasurer
Lewis S. Garrett................. 1997 170,880 182,500 40,000 233,265
Vice President of Buying and
Merchandising
Charles R. Rinehimer III......... 1997 170,880 187,500 40,000 2,693
Vice President, Stores
</TABLE>
- ---------------
(1) Represents (a) annual incentive bonuses earned by Messrs. Bonk and Rogers,
Ms. Thorn and Messrs. Garrett and Rinehimer of $300,000, $125,000, $80,000,
$87,500 and $87,500, respectively, and (b) one-time bankruptcy retention and
success bonuses earned by Messrs. Bonk and Rogers, Ms. Thorn and Messrs.
Garrett and Rinehimer of $454,000, $250,000, $150,000, $95,000 and $100,000,
respectively.
(2) Represents (a) payments made by the Company in connection with the buyout of
its obligations under its Supplemental Executive Retirement Plan to Messrs.
Bonk, Rogers and Garrett of $319,580, $319,580 and $231,054, respectively,
and (b) employer matching contributions to the Company's 401(k) Plan on
behalf of the Named Executive Officers.
STOCK OPTION PLAN
The Plan of Reorganization provided for the adoption of the Camelot Music
Holdings, Inc. 1998 Stock Option Plan (the "Option Plan"). The Option Plan
became effective as of the Effective Date and is administered by the
Compensation Committee of the Board of Directors or such other committee of the
Board of Directors as it may designate (hereinafter, the "Committee"). Executive
and other key salaried employees, including officers, and directors (whether or
not also employees) of the Company and its subsidiaries, are eligible to receive
stock
46
<PAGE> 49
option grants under the Option Plan, as described below. Options granted under
the Option Plan may be either "incentive stock options" ("ISOs"), within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or stock options other than ISOs. Subject to certain limitations
prescribed by the Option Plan, the Board of Directors may amend, alter, suspend
or terminate the Option Plan, and the Committee may amend options outstanding
under the Option Plan.
As of the Effective Date, 7.5% of the total issued and outstanding shares
of Common Stock were reserved for issuance upon exercise of stock options under
the Option Plan. As further shares of Common Stock are issued in respect of the
ongoing bankruptcy claims reconciliation process, the number of shares reserved
for the Option Plan will be adjusted so that at all times the number of shares
of Common Stock reserved for issuance upon exercise of options will equal 7.5%
of the total shares of Common Stock outstanding on a fully diluted basis. In
addition, the Option Plan provides that the Committee shall adjust the shares
available under the Option Plan and subject to outstanding options to preserve
the benefits intended under the Option Plan or with respect to any options upon
certain changes in the outstanding Common Stock, such as by reason of a stock
dividend or stock split or a recapitalization, reorganization, merger, issuance
of rights to purchase Common Stock or other securities of the Company (other
than under the Option Plan), or an extraordinary dividend, spin-off, liquidation
or other substantial distribution of Company assets. The Option Plan provides
that in the event of a change in control of the Company, as defined in the
Option Plan, all outstanding options shall become fully exercisable, and the
Committee shall have discretion, either by the terms of the option or by a
resolution adopted prior to the occurrence of such event, to substitute for
Common Stock covered by any outstanding options, cash or other stock or
securities or other consideration issuable by another party to, or receivable by
the Company's shareholders in connection with, such transaction, adjusted for
the exercise price of the option and as otherwise provided in the Option Plan.
Pursuant to the Option Plan, as of the Effective Date, options to purchase
687,000 shares of Common Stock (representing approximately 83% of the total
shares of Common Stock reserved for issuance under the Option Plan as of the
Effective Date) were granted to 79 members of Camelot's management with an
exercise price of $20.75 per share. Both the number of shares subject to such
options granted on the Effective Date and the exercise price thereof are subject
to adjustment as further shares of Common Stock are issued in respect of the
ongoing bankruptcy claims reconciliation process, and in accordance with the
Option Plan's provisions regarding changes in capital of the Company, referred
to above. All such options granted on the Effective Date are intended to qualify
as ISOs and will become exercisable no later than four years from the Effective
Date; however, up to 50% of these options may become exercisable prior to the
second anniversary of the Effective Date, with the balance becoming exercisable
at any time thereafter, if the fair market value of the Common Stock exceeds
certain thresholds established at the time such options were granted. On the
Effective Date, Mr. Bonk and Mr. Rogers were granted options under the Option
Plan to purchase 110,000 and 80,000 shares of Common Stock, respectively, and
Messrs. Garrett and Rinehimer and Ms. Thorn were each granted options under the
Option Plan to purchase 40,000 shares of Common Stock. In the aggregate, the
number of options granted to these five senior executives represents
approximately 45% of the total number of shares for which options were granted
as of the Effective Date under the Option Plan.
Options to purchase the balance of the shares of Common Stock reserved
under the Option Plan may be granted by the Committee subsequent to the
Effective Date, and such options will have exercise prices and shall be
exercisable at such times (not extending beyond ten years from the grant date of
the option) and subject to such conditions as determined by the Committee, in
accordance with the Option Plan, at the time such options are granted. However,
ISOs may not be granted under the Plan after the expiration of ten years
following the Effective Date, to the extent required by the Code, and may not
have an exercise price less than 100% of the fair market value of the stock
covered thereby on the ISO's date of grant. Options granted under the Option
Plan generally may not be exercised after ten years from the date granted and
are subject to earlier termination upon termination of the optionee's employment
with the Company or its subsidiaries under certain circumstances specified in
the Option Plan and the optionee's option. The Option Plan provides that the
exercise price of an option may be paid in any manner permitted by applicable
law and prescribed by the Committee in the option, including, in the Committee's
discretion, a broker-assisted exercise program. Options granted as of the
Effective Date provide that the option exercise price may be paid by personal
check, bank draft or money order; through
47
<PAGE> 50
delivery of a full recourse promissory note with the consent of, and upon such
payment and other terms and conditions as prescribed by, the Committee; or using
a broker-assisted exercise program.
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information relating to grants of
stock options made during Fiscal 1997 to the Named Executive Officers under the
Company's Stock Option Plan. Such grants are reflected in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS/SARS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR FOR OPTION TERM
OPTIONS/SARS IN BASE EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ------------ ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James E. Bonk................. 110,000 16.0% $20.75 1/27/2008 $1,437,975 $3,640,588
Jack K. Rogers................ 80,000 11.6 20.75 1/27/2008 1,045,800 2,647,700
Lee Ann Thorn................. 40,000 5.8 20.75 1/27/2008 522,900 1,323,850
Lewis S. Garrett.............. 40,000 5.8 20.75 1/27/2008 522,900 1,323,850
Charles R. Rinehimer III...... 40,000 5.8 20.75 1/27/2008 522,900 1,323,850
</TABLE>
FISCAL YEAR END OPTION VALUE TABLE
The following table provides certain information concerning the number of
securities underlying unexercised stock options held by each of the Named
Executive Officers as of February 28, 1998. None of the Named Executive Officers
exercised any stock options during Fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
FEBRUARY 28, 1998 FEBRUARY 28, 1998(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James E. Bonk.............................. 0 110,000 $0.00 $2,062,500
Jack K. Rogers............................. 0 80,000 0.00 1,500,000
Lee Ann Thorn.............................. 0 40,000 0.00 750,000
Lewis S. Garrett........................... 0 40,000 0.00 750,000
Charles R. Rinehimer III................... 0 40,000 0.00 750,000
</TABLE>
- ---------------
(1) Represents the total gain which would be realized if all in-the-money
options beneficially owned at February 28, 1998 were exercised, determined
by multiplying the number of shares underlying the options by the difference
between the per share exercise price and $39.50, the estimated fair market
value per share of Common Stock as of such date based upon the mean between
the bid and asked prices of a share of Common Stock as reported on the OTC
Bulletin Board on February 27, 1998.
EMPLOYMENT CONTRACTS
The Company maintains written severance agreements with Mr. Bonk and all
other executive officers. The severance arrangements with Mr. Bonk are a part of
his employment contract, as described below. The contracts with the other
executive officers provide severance benefits in the event the executive is
terminated without cause at any time prior to the executive's normal retirement
date. An executive would be terminated without cause if the executive's
employment is terminated by reason of layoff or reduction in force or for any
other reason except (i) the resignation by the executive unless such resignation
is preceded by, or reasonably contemporaneous with, (a) a change of the holders
of 50% or more of the equity of the Company, (b) a change in the majority of the
Company's Board of Directors, (c) merger with less than 50% of the merged entity
owned by pre-merger stockholders or (d) sale or abandonment of more than 50% of
the Company's revenue-generating assets; or (ii) a termination of the
executive's employment arising from gross incompetence, insubordination,
dishonesty in performance of the Company's duties, or conviction of fraud,
theft, embezzlement or any felony.
48
<PAGE> 51
The benefits under the contracts with the executive officers other than Mr.
Bonk are for 12 months of salary continuation subject to mitigation, except that
the contract with Mr. Rogers provides for severance benefits of 18 months with
only the final six months subject to mitigation. These benefits include payment
of monthly salary and the continuance of group medical, dental and long-term
disability insurance.
As of the Effective Date, Camelot amended and extended its employment
agreement with Mr. Bonk. Under the terms of the agreement, which expires on
December 31, 2000, Mr. Bonk will receive a base salary of at least $400,000 per
year and is entitled to participate in the Company's option and bonus plans.
This agreement also provides Mr. Bonk with the following severance payments and
continued benefits: (i) a lump sum payment of one year's base salary (in the
event of Mr. Bonk's death or disability or upon the failure of the Company to
renew the agreement for an additional three-year term); and (ii) monthly base
salary payments and benefits continuation over the greater of (a) two years or
(b) the balance of the term of the agreement if the Company terminates him
without cause or in the event of constructive discharge (as defined in such
employment agreement) including a change of control of the Company. These
payments are subject to mitigation, but only for periods beyond 18 months in the
case of the salary payments. The agreement also contains a covenant not to
compete with the business of Camelot for a specified period of time in the event
of termination.
DIRECTOR COMPENSATION
Each non-employee Director of the Company receives a quarterly retainer of
$3,000, and a fee of $1,000 for each Board meeting attended and a fee of $500
for each Committee meeting attended. Directors may elect to defer some or all of
these fees and use deferred amounts to purchase shares of Common Stock once each
year at the fair market value of a share on the date of purchase. The Company
has also established an Outside Directors' Stock Option Plan (the "Director
Plan"). Under the terms of the Director Plan, each Director who is not an
employee of the Company or its subsidiaries (an "Outside Director") received a
one-time award of options to purchase 2,500 shares of Common Stock at $20.75,
which options were vested upon their award. In addition, upon the consummation
of the Offerings, each Outside Director will receive a one-time award of options
to purchase 7,500 shares of Common Stock at the initial public offering price,
which options will vest over a three year period. Further, under the Director
Plan, each Outside Director will receive an annual grant to purchase 1,500
shares of Common Stock at the fair market value at the time of the grant, which
options will vest over a one year period. Upon election, each new Outside
Director will receive a one-time award of options to purchase 10,000 shares of
Common Stock at the fair market value at the time of the grant, which options
will vest over a three year period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Shortly before December 12, 1997, the date on which the Plan of
Reorganization was confirmed by the Bankruptcy Court, Jon P. Hedley and Charles
J. Philippin, two of Camelot's Directors, resigned. Messrs. Hedley and Philippin
had been the only members of the Company's Compensation Committee. Accordingly,
upon their resignations, such Committee was effectively dissolved. Mr. Philippin
had also been President of the Company's Predecessor until his resignation, and
Mr. Hedley had been the Vice President, Secretary and Treasurer of the Company's
Predecessor until his resignation. Messrs. Hedley and Philippin were also both
members of senior management of Investcorp S.A. which the Company believes held,
through various affiliates, the vast majority of the outstanding equity
interests in, and the direct debt obligations of, the Company.
CERTAIN TRANSACTIONS
Mr. Solow, a Director of the Company, is a member of the law firm of
Hopkins & Sutter. The Company reimbursed Hopkins & Sutter for services which
Hopkins & Sutter provided to Van Kampen American Prime Rate Income Trust ("Van
Kampen") as a prepetition lender.
Mr. Luzzatto, a Director of the Company, is the President and Chief
Executive Officer and a Director of the Welk Group, Inc. (the "Welk Group").
During each of the past three fiscal years, the Company has purchased
prerecorded music from the Welk Group. The Company's purchases from the Welk
Group aggregated $147,256 in Fiscal 1997, $72,245 in Fiscal 1996 and $60,810 in
Fiscal 1995.
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First Union National Bank ("First Union") and Van Kampen, the beneficial
owners of shares representing 5.9% and 19.6% of the Company's Common Stock,
respectively, are lenders under the New Working Capital Facility and have
executed commitment letters with respect to the Amended Credit Facility. The
maximum amount of First Union's commitment under that facility is $15.0 million,
including $10.0 million under the revolving portion of that facility and $5.0
million under the term loan portion of that facility. The maximum amount of Van
Kampen's commitment under that facility is $7.5 million, including $5.0 million
under the revolving portion of that facility and $2.5 million under the term
loan portion of that facility.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of May 31, 1998, and as adjusted to
reflect the sale of the Common Stock offered hereby, by (i) the Selling
Stockholders, (ii) each Director, (iii) each Named Executive Officer, (iv) all
Directors and executive officers as a group, and (v) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock on a
fully diluted basis.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERINGS NUMBER THE OFFERINGS(2)
NAME AND ADDRESS ---------------------- OF SHARES --------------------
OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------------- --------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
5% SHAREHOLDERS:
Van Kampen-Merritt Prime Rate Income Trust....... 1,994,717 19.6%
1 Parkview Plaza
Oakbrook Terrace, Illinois 60180
Fernwood Associates, L.P......................... 1,549,596 15.2%
667 Madison Avenue, 20th Floor
New York, New York 10021
Merrill Lynch, Pierce, Fenner & Smith 1,435,782 14.1%
Incorporated.....................................
Debt & Equity Market Group
World Financial Center, North Tower
New York, New York 10281
Oaktree Capital Management, LLC.................. 968,416 9.5%
(in its capacity as general partner and
investment manager of OCM Opportunities Fund,
L.P. and Columbia/HCA Master Retirement Trust
(separate account I))
550 South Hope Street, 22nd Floor
Los Angeles, California 90071
Daystar Partners LLC............................. 750,892 7.4%
411 Theodore Fremd Avenue
Rye, New York 10580
First Union National Bank........................ 602,952 5.9%
301 South Cole Street BC-5
Charlotte, North Carolina 28258
Yale University.................................. 549,944 5.4%
c/o Daystar Partners LLC
411 Theodore Fremd Avenue
Rye, New York 10580
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
James E. Bonk.................................... 55,000(3) * 55,000(3)
Jack K. Rogers................................... 40,000(3) * 40,000(3)
Lee Ann Thorn.................................... 20,000(3) * 20,000(3)
Lewis S. Garrett................................. 20,000(3) * 20,000(3)
Charles R. Rinehimer III......................... 20,000(3) * 20,000(3)
George R. Zoffinger.............................. 5,500(3)(4) 5,500(3)
Stephen H. Baum.................................. 2,500(3) 2,500(3)
Herbert L. Marks................................. 2,500(3) 2,500(3)
Marc L. Luzzatto................................. 2,500(3) 2,500(3)
Michael B. Solow................................. 2,500(3) 2,500(3)
All Directors and Executive Officers as a 170,500(5) 1.6% 170,500(5)
Group..........................................
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and includes voting
and investment power with respect to the shares. As to each stockholder, the
percentage ownership is calculated by dividing (i) the sum of the number of
shares of Common Stock owned by such stockholder plus the number of shares
of Common Stock that such stockholder would receive upon the exercise of
currently exercisable options held by such stockholder by (ii) the sum of
the total number of outstanding shares of Common Stock plus the total number
of shares issuable upon exercise of exercisable options.
(2) Based on 10,174,432 shares outstanding as of June 8, 1998. Assumes no
exercise by the underwriters of their over-allotment options.
(3) Includes shares that may be acquired upon exercise of stock options that are
exercisable within 60 days of the date of this Prospectus.
(4) Includes 3,000 shares owned by Mr. Zoffinger's wife. Mr. Zoffinger disclaims
beneficial ownership of these 3,000 shares.
(5) Includes 167,500 shares that may be acquired upon exercise of stock options
that are exercisable within 60 days of the date of this Prospectus.
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate") authorizes 30,000,000 shares of Common Stock, $.01 par value, and
no shares of preferred stock. As of June 8, 1998, 10,174,432 shares of Common
Stock were issued and outstanding and, based on information provided by the
Company's transfer agent, held by 768 holders of record. To the extent
prohibited by the Bankruptcy Code, the Company may not issue non-voting equity
securities.
Holders of Common Stock are entitled to receive dividends as declared from
time to time by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities subject to prior distribution rights of any
preferred stock then outstanding. The Common Stock has no preemptive or
conversion rights and is not subject to further calls or assessments by the
Company. There are no redemption or sinking fund provisions applicable to the
Common Stock. All currently outstanding Common Stock of the Company is duly
authorized, validly issued, fully paid and nonassessable.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, and do not have the right to vote
cumulatively in the election of Directors. The Board of Directors presently
consists of seven members. All Directors hold office for a term of one year and
until their successor is duly elected and qualified. Any Director may be
removed, with or without cause, by the affirmative vote of a majority of the
voting power of all shares of the Company entitled to vote generally in the
election of Directors. In general, the Certificate can be amended by the
affirmative vote of a majority of the Company's then outstanding shares having
voting power thereon. Special meetings of stockholders may be called only by the
Chief Executive Officer, by a majority of the Board of Directors or by the
holders of 33 1/3% of the voting power of all shares of the Company entitled to
vote generally in the election of Directors.
The Amended and Restated By-Laws of the Company (the "By-Laws") provide
that in order for a stockholder to properly bring nominations or other business
before an annual meeting, the stockholder must give timely, written notice
thereof in the manner specified in the By-Laws to the Company and such other
business must be a proper matter for stockholder action. To be timely, a
stockholder's notice generally must be delivered to the Secretary of the Company
at its principal executive offices not less than 70 nor more than 90 days prior
to the first anniversary of the preceding year's annual meeting. If the Company
has not publicly announced the date of the annual meeting at least 80 days prior
to the first anniversary of the preceding year's meeting, a stockholder's notice
will be timely if delivered no later than the close of business on the tenth day
following the date of such public announcement.
The Common Stock is currently traded on the OTC Bulletin Board. The Company
intends to apply for quotation of the Common Stock on the Nasdaq National Market
System under the symbol "CMLT."
THE DELAWARE BUSINESS COMBINATION ACT
Section 203 of the General Corporation Law of the State of Delaware (the
"Delaware Business Combination Act") imposes a three-year moratorium on business
combinations between a Delaware corporation and an "interested stockholder" (in
general, a stockholder owning 15% or more of a corporation's outstanding voting
stock) or an affiliate or associate thereof unless (a) prior to the interested
stockholder becoming such, the board of directors of the corporation approved
either the business combination or the transaction resulting in the interested
stockholder becoming such; (b) upon consummation of the transaction resulting in
the interested stockholder becoming such, the interested stockholder owns 85% of
the voting stock outstanding at the time the transaction commenced (excluding
from the calculation of outstanding shares beneficially owned by directors who
are also officers and certain employee benefit plans); or (c) on or after the
interested stockholder becomes such, the business combination is approved by (i)
the board of directors and (ii) the holders of at least 66 2/3% of the
outstanding shares (other than those beneficially owned by the interested
stockholder) at a meeting of stockholders.
The Delaware Business Combination Act defines the term "Business
Combination" to encompass a wide variety of transactions with, or caused by, an
interested stockholder in which the interested stockholder receives or could
receive a benefit on other than a pro rata basis with other stockholders. These
transactions include
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mergers, certain asset sales, certain issuances of additional shares to the
interested stockholder, transactions with the Company which increase the
proportionate interest of the interested stockholder or transactions in which
the interested stockholder receives certain other benefits.
By a provision in its original certificate of incorporation or an amendment
thereto or to its by-laws adopted by a majority of the shares entitled to vote
thereon, a corporation may elect not to be governed by the Delaware Business
Combination Act (provided that any amendment to the certificate of incorporation
will not become effective until 12 months after its adoption). The Company has
not made such an election and, as a result of the quotation of its shares of
Common Stock on the Nasdaq National Market System, the Company will become
subject to the Delaware Business Combination Act subsequent to the Offerings.
CANCELLATION OF CAPITAL STOCK OUTSTANDING PRIOR TO THE EFFECTIVE DATE
Under the terms of the Plan of Reorganization, all authorized capital stock
of the Company existing immediately prior to the Effective Date, whether issued
or unissued, and including any right to acquire such capital stock pursuant to
any agreement, arrangement, or understanding, or upon exercise of conversion
rights, exchange rights, warrants, options or other rights, was deemed canceled
and of no further force or effect without any action on the part of the Board of
Directors. The holders of such cancelled capital stock and any cancelled right
to acquire such stock have no rights arising from or relating to such capital
stock (or the stock certificates representing such cancelled stock) or any right
to acquire such capital stock.
DIRECTOR LIABILITY
As permitted by the Delaware General Corporation law, the Certificate
contains a provision which under certain circumstances eliminates the personal
liability of the directors of the Company to the Company or its stockholders, in
their capacity as directors of the Company, for monetary damages for the breach
of fiduciary duty as a director. The provision in the Certificate does not
change a Director's duty of care, but it does eliminate the possibility of
monetary liability for certain violations of that duty, including violations
based on grossly negligent business decisions. The provision does not affect the
availability of equitable remedies for a breach of the duty of care, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty;
however, in certain circumstances equitable remedies may not be available as a
practical matter. The provision in the Certificate does not in any way affect a
Director's liability under the federal securities laws. In addition, the By-
Laws indemnify its past and present directors for and provide advancements in
respect of any expense, liability or loss incurred in connection with any
threatened, pending or completed action, suit or proceeding by an individual by
reason of the fact that he is or was a director or officer of the Company or
serving at the request of the Company in another capacity. The Company has also
entered into indemnity agreements pursuant to which it has agreed, among other
things, to indemnify its Directors for settlements in derivative actions.
ANTI-TAKEOVER EFFECT OF CERTAIN BY-LAW PROVISIONS
It is possible that the provisions of the Company's By-Laws that require
stockholders to provide advance notice of nominations of Directors and other
business to be brought before an annual meeting may tend to discourage a proxy
contest or other takeover bid for the Company. The provisions of the Delaware
Business Combination Statute also may discourage other companies from making a
tender offer for, or acquisitions of substantial amounts of, the Company's
Common Stock. This could have an incidental effect of inhibiting changes in
management and may also prevent temporary fluctuations in the market price of
the Company's Common Stock which often result from actual or rumored takeover
attempts. In addition, the provisions of the Certificate eliminating certain
liabilities of Directors, the indemnification provisions of the By-Laws and the
indemnity agreements may have the effect of reducing the likelihood of
derivative litigation against Directors and to deter stockholders from bringing
a lawsuit against Directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and the
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
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<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, of the 30,000,000 authorized shares of
Common Stock, 10,176,162 shares are anticipated to be outstanding. Of these
10,176,162 shares of Common Stock, the shares purchased in the
Offerings by persons who are not "affiliates" of the Company will be freely
tradable, without restriction under the Securities Act.
In addition, the 9,835,559 shares of Common Stock issued on the Effective
Date and the 328,873 shares of Common Stock issued pursuant to the Plan of
Reorganization since the Effective Date were issued pursuant to the exemption
from the registration requirements of the Securities Act (and of any state or
local laws) provided by Section 1145(a)(1) of the Bankruptcy Code. At May 31,
1998, up to an additional 1,730 shares of Common Stock may be issued by the
Company pursuant to the Plan of Reorganization. All shares of Common Stock
issued pursuant to the Plan of Reorganization may be resold by the holders
thereof without registration unless, as more fully described below, any such
holder is deemed to be an "underwriter" with respect to such securities, as
defined in Section 1145(b)(1) of the Bankruptcy Code. Generally, Section
1145(b)(1) defines an "underwriter" as any person who (a) purchases a claim
against, interest in, or claim for an administrative expense in the case
concerning, the debtor, if such purchase is with a view to distribution of any
security received or to be received in exchange for such claim or interest, (b)
offers to sell securities offered or sold under the plan for the holders of such
securities, (c) offers to buy securities offered or sold under the plan from the
holders of such securities, if such offer to buy is made with a view to
distribution of such securities and under an agreement made in connection with
the plan, with the consummation of the plan or with the offer or sale of
securities under the plan or (d) is an "issuer" as such term is used in Section
2(11) of the Securities Act with respect to the securities. Although the
definition of the term "issuer" appears in Section 2(4) of the Securities Act,
the reference (contained in Section 1145(b)(1)(D) of the Bankruptcy Code) to
Section 2(11) of the Securities Act purports to include as "underwriters" all
persons who directly or indirectly, through one or more intermediaries, control,
are controlled by or are under common control with, an issuer of securities.
"Control" (as such term is defined in Rule 405 of Regulation C under the
Securities Act) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise. The
following holders of Common Stock who, due to the magnitude of their holdings as
of the Effective Date, may be deemed to be "underwriters" pursuant to Section
1145(b) of the Bankruptcy Code, are parties with the Company to the Registration
Rights Agreement, affording them certain demand and piggyback registration and
other rights, all as more fully set forth therein and as described below: Van
Kampen - Merritt Prime Rate Income Trust; Fernwood Associates, L.P.; Merrill
Lynch, Pierce, Fenner & Smith Incorporated; and Oaktree Capital Management LLC
(in its capacity as general partner and investment manager of OCM Opportunities
Fund, L.P. and Columbia/HCA Master Retirement Trust) (collectively the
"Securities Holders" and individually a "Security Holder"). These four
stockholders have agreed not to sell their shares for 180 days after the date
hereof. On May 5, 1998, an additional 10,000 shares of Common Stock were issued
pursuant to an order of the Bankruptcy Court to certain persons for their
significant contributions to the bankruptcy case.
The Company believes that shares of Common Stock currently
may be sold pursuant to Rule 144 under the Securities Act in compliance with the
resale volume limitations of Rule 144. These volume limitations will apply only
if and as long as the holders of these shares are "affiliates" of the Company
for purposes of Rule 144. In general, under Rule 144 under the Securities Act as
currently in effect, a person (or persons whose shares must be aggregated),
including a person who may be deemed an "affiliate" of the Company, who has
beneficially owned "restricted securities" for at least one year, may sell
within any three month period that number of shares that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock or the reported
average weekly trading volume of the then outstanding shares of Common Stock for
the four weeks preceding each such sale. The sales under Rule 144 also are
subject to certain manner of sale restrictions and notice requirements and to
the availability of current public information about the Company. In addition, a
person (or persons whose shares must be aggregated) who owns restricted
securities, who is not deemed an "affiliate" of the Company at any time during
the 90 days preceding a sale and who acquired such shares at least two years
prior to their resale, is entitled to sell such shares under Rule 144(k) without
regard to the foregoing requirements. Sales of restricted securities by
affiliates of the Company, even after the two-year holding period, must continue
to be made in broker's transactions subject to the volume limitations described
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<PAGE> 57
above. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly, or indirectly through the use of one or more intermediaries, controls,
or is controlled by, or is under common control with, such issuer.
Up to 950,094 shares of Common Stock reserved for issuance upon exercise of
outstanding options will become eligible for resale under Rule 144 one year
subsequent to the date or dates that the holders of such options exercise the
same. Subsequent to the Offerings, however, the Company intends to file a
registration statement on Form S-8 with respect to the 737,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options and the 213,094
shares of Common Stock reserved for issuance pursuant to future option grants.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, any Securities Holder or
Securities Holders may, subject to certain limitations, require the Company to
file a registration statement with respect to some or all of the Common Stock
held by such Securities Holder or Holders (subject to minimum threshold
requirements); provided, that no more than two demands may be made during the
First Phase (a period of approximately 15 months after January 27, 1998); and
provided, further, that if, during the First Phase, the initial demand
registration is a shelf registration, no further demands may be made during the
First Phase. During the First Phase, the minimum threshold requirement is 10% of
the outstanding Common Stock for demand registration and 15% for shelf
registration. In the event of a demand registration, the non-requesting
Securities Holders and the Company would enjoy "piggy-back" rights with respect
to such demand registration, allowing them to participate in the registration on
the same terms and conditions as the initiating Securities Holder or Holders;
provided that, if marketing factors require a limitation on the number of shares
offered, first shares being offered by the Company and then shares offered by
piggy-backing stockholders would be reduced. In addition, if the Company offers
Common Stock pursuant to a registration statement (other than a registration on
Form S-4 or S-8), the Securities Holders would enjoy similar piggy-back rights;
provided, that if marketing factors require a limitation on the number of shares
offered, the shares being offered by the piggy-backing stockholders would be
reduced. The Securities Holders also enjoy the right to participate in private
sales of Common Stock by the Company (other than private sales in connection
with an acquisition or compensation plan); provided that, if marketing factors
require a limitation on the number of shares offered, the shares being offered
by the piggy-backing stockholders would be reduced. Subject to certain
exceptions, the Company will bear all of its own expenses, and certain expenses
incurred by the Securities Holders (including reasonable fees and disbursements
of counsel), in connection with any registration of Common Stock pursuant to the
Registration Rights Agreement. In addition, the Company will indemnify the
Securities Holders for certain liabilities, including liabilities under the
Securities Act, in connection with any such registration.
In addition, pursuant to the Registration Rights Agreement, if the Company
offers stock pursuant to a registration statement, none of the Securities
Holders can exercise their demand registration rights during the period
beginning on the date the Company issued notice of its intent to file a
registration statement and ending 90 days after the closing date of the related
offering. In addition, none of the Securities Holders can offer to sell their
shares pursuant to a demand registration during the 90-day period following
receipt by each Securities Holder of a certificate of an officer of the Company
to the effect that the Board of Directors of the Company has in good faith and
for valid business reasons requested that the Securities Holders refrain from
selling their shares; provided, however, that the identity of a potential
purchaser from a Securities Holder shall not constitute a valid business reason.
LOCK-UP AGREEMENTS
The Company, its Directors and executive officers, members of management,
the Selling Stockholders and certain other holders of shares of
Common Stock have agreed, subject to certain exceptions, not to directly or
indirectly (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under
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the Securities Act with respect to the foregoing or (ii) enter into any swap or
other agreement that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior consent of Merrill Lynch on behalf of the Underwriters for a
period of 180 days after the date of this Prospectus.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock (including shares issued upon the exercise of the
outstanding stock options), or the perception that such sales could occur, could
adversely affect the prevailing market prices for the Common Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The summary of the Amended Credit Facility contained herein does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Amended Credit Facility, a copy of which will be filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
CMI, a wholly owned subsidiary of the Company, entered into the New Working
Capital Facility, dated as of January 27, 1998, among Camelot Music, Inc., as
Borrower, Bank of America National Trust and Savings Association, First Union
National Bank, Societe Generale, Van Kampen American Capital Prime Rate Income
Trust and The Chase Manhattan Bank, as lenders, and The Chase Manhattan Bank, as
Agent. The Company has guaranteed CMI's obligations under the facility. On June
3, 1998 the Company received commitment letters from these lenders with respect
to a proposed amendment to the New Working Capital Facility.
The New Working Capital Facility provided for loans of up to $50.0 million
during the peak period (October through December) and up to $35.0 million during
the non-peak period (including in each case up to $5.0 million of letters of
credit issued by the Agent). In no case can the amount of loans exceed the
borrowing base. The Amended Credit Facility will provide a borrowing base set at
the lesser of the commitments from the lenders or 60% of eligible inventory
during all periods. In Fiscal 1997, eligible inventory during the peak period
ranged between approximately $103 million and $139 million, while eligible
inventory during the non-peak period ranged between $96 million and $121
million. The Amended Credit Facility also will provide the Company with a $25.0
million term loan in addition to the working capital facility. The $25.0 million
term loan will provide financing necessary to complete the Spec's Acquisition.
The term loan provided under the Amended Credit Facility will be amortized in
semi-annual installments over a three-year period beginning January 31, 1999.
The amortization payments will be $3.0 million, $2.0 million, $6.0 million, $4.0
million, $6.0 million and $4.0 million. The Amended Credit Facility will
terminate on January 27, 2002. CMI's obligations under the new and amended
facilities are guaranteed by the Company and by all of CMI's subsidiaries and
are collateralized by substantially all of CMI's assets. The Company has pledged
to the lenders its capital stock of CMI, and CMI has pledged to the lenders the
capital stock of its subsidiaries.
Interest Rate
Under the New Working Capital Facility loans bear interest, at the option
of CMI, at either (a) the Eurodollar Rate (as defined) plus 1.75% or (b) the
greater of (i) the Prime Rate charged by the Agent, (ii) the Base CD Rate (as
defined) plus 1% and (iii) the Federal Funds Effective Rate (as defined) plus
1/2 of 1%. CMI also pays an annual commitment fee of 3/8 of 1% on the available
commitment. CMI is required to use any excess proceeds from asset sales of more
than $750,000 to reduce the commitments under the facility. In addition, CMI is
required for 45 consecutive days during each year to reduce the principal amount
of all outstanding working capital loans to zero. It is expected that the
Amended Credit Facility interest rate provisions will not materially change.
Covenants
The Amended Credit Facility will limit the ability of the Company and its
subsidiaries to incur additional indebtedness, except (a) existing indebtedness,
(b) indebtedness incurred under the Amended Credit Facility, (c) certain
indebtedness pursuant to financing leases incurred to acquire, install and
implement POS systems and pursuant to other financing leases, (d) intercompany
indebtedness, (e) certain indebtedness incurred to finance the acquisition of
fixed or capital assets (up to $5.0 million at any time outstanding), (f)
certain additional indebtedness, and (g) certain indebtedness of other persons
who become parties to the facility or assumed in connection with certain
permitted acquisitions or mergers, provided that the indebtedness incurred under
(e) and (f) (together with certain permitted contingent obligations) is limited
in the aggregate outstanding amount at any given time.
In addition, the Company and its subsidiaries are subject to additional
negative covenants, including, subject to exceptions, covenants limiting (i) the
incurrence or creation of liens, (ii) the incurrence or creation of contingent
obligations and similar guarantees, (iii) any merger, consolidation, sale of all
or substantially all of its property or other fundamental changes, (iv) sales of
its property or assets, including capital stock of its
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subsidiaries, (v) investments, loans, advances and purchases of securities, (vi)
the amounts of capital expenditures (e.g., limits of $20.0 million in 1998 (with
an additional $8.0 million allowable for POS system expenditures) and $25.0
million in 1999), (vii) the payment of dividends or making payments for the
purchase, redemption, retirement or other acquisition of any shares of capital
stock, (viii) transactions with affiliates, (ix) changes in the Company's fiscal
year and (x) changes in the Company's line of business. In connection with the
payment of dividends, the facility provides that the Company can pay cash
dividends during any fiscal year to the holders of its capital stock in an
amount not to exceed 30% of consolidated net income for the preceding fiscal
year, provided that after payment of such dividends there remains borrowing
capacity of more than $40.0 million during peak periods and $25.0 million during
non-peak periods. The Amended Credit Facility also will require consolidated
EBITDA to be at least $32.0 million annually and require the Company to maintain
trade credit in amounts and on terms at least as favorable as those included in
the Company's budget. The Company must also maintain a system of cash management
consistent with its currently existing cash management system which concentrates
in one concentration account at least three times each week all funds received
and used in the Company's business. The Company expects that it will be able to
comply with these covenants for the foreseeable future.
Events of Default
The Amended Credit Facility is also expected to include standard events of
default, including, subject to exceptions, those related to (i) defaults in the
payment of principal and interest, (ii) materially incorrect representations and
warranties, (iii) defaults in the observance or performance of any of the
affirmative or negative covenants included in the facility or in the related
security and pledge documents, (iv) cross defaults on other indebtedness of more
than $1.0 million, (v) certain events of bankruptcy, (vi) certain ERISA events,
(vii) certain judgments or decrees involving more than $1.0 million, (viii) the
failure of the facility and related documents to be in full force and effect,
(ix) CMI ceasing to own all of its subsidiaries or the Company ceasing to own
all of CMI, and (x) any person (other than certain permitted holders), singly or
in concert with one or more other persons, acquiring or having the power to vote
or direct the voting of, 35% or more of the outstanding Common Stock of the
Company on a fully diluted basis.
58
<PAGE> 61
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal tax
consequences of the acquisition, ownership and disposition of Common Stock by a
Non-United States Holder. This discussion is based upon the United States
federal tax law now in effect, which is subject to change, possibly
retroactively. For purposes of this discussion, a "Non-United States Holder'
means a holder other than a citizen or resident of the United States; a
corporation, a partnership or other entity created or organized in the United
States or under the laws of the United States or of any political subdivision
thereof; or an estate or trust whose income is includible in gross income for
United States federal income tax purposes regardless of its source. This
discussion does not address aspects of United States federal taxation other than
income and estate taxation and does not address all aspects of income and estate
taxation or any aspects of state, local, or non-United States taxes. This
discussion does not consider any specific facts or circumstances that may apply
to a particular Non-United States Holder (including certain United States
expatriates). Prospective investors are urged to consult their tax advisors
regarding the United States federal tax consequences of acquiring, holding and
disposing of Common Stock, as well as any tax consequences that may arise under
the laws of any foreign, state, local or other taxing jurisdiction.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% (or at a
reduced tax treaty rate), unless the dividend is effectively connected with the
conduct of a trade or business within the United States by the Non-United States
Holder, in which case the dividend will be subject to the United States federal
income tax on net income on the same basis that applies to United States persons
generally. In the case of a Non-United States Holder which is a corporation,
such effectively connected income also may be subject to the branch profits tax.
Non-United States Holders should consult their tax advisors concerning any
applicable income tax treaties that may provide for a lower rate of withholding
or other rules different from those described above.
Under currently effective United States Treasury regulations (the "Current
Regulations"), dividends paid to an address in a foreign country are presumed to
be paid to a resident of that country (unless the payor has knowledge to the
contrary) for purposes of the withholding discussed above and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under United States Treasury
regulations issued on October 6, 1997 (the "Final Regulations") generally
effective for payments made after December 31, 1999, a Non-United States Holder
(including, in certain cases of Non-United States Holders that are fiscally
transparent entities, the owner or owners of such entities) will be required to
provide to the payor certain documentation that such Non-United States Holder
(or the owner or owners of such fiscally transparent entities) is a resident of
the relevant country in order to claim a reduced rate of withholding pursuant to
an applicable income tax treaty.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder, (ii) in
the case of a Non-United States Holder who is a nonresident alien individual and
holds the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of disposition and either such
individual has a "tax home" in the United States or the gain is attributable to
an office or other fixed place of business maintained by such individual in the
United States or (iii) the Company is or has been a "U.S. real property holding
corporation" for United States federal income tax purposes (which the Company
does not believe that it is or is likely to become). Gain that is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder will be subject to the United States Federal income
tax on net income on the same basis that applies to United States persons
generally (and, with respect to corporate holders, under certain circumstances,
the branch profits tax) but will not be subject to withholding. Non-United
States Holders should consult their own tax advisors concerning any applicable
treaties that may provide for different rules. If the Company were or were to
become a U.S. real property holding corporation at any time
59
<PAGE> 62
during this period, gains realized upon a disposition of Common Stock by a
Non-United States Holder which did not directly or indirectly own more than 5%
of the Common Stock during this period generally would not be subject to United
States federal income tax, provided that the Common Stock is regularly traded on
an established securities market.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (for United States estate tax purposes) of the United States
at the date of death will be included in such individual's estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company generally must report annually to the IRS and to each
Non-United States Holder the amount of dividends paid to, and the tax withheld
with respect to, such holder, regardless of whether any tax was actually
withheld. This information may also be made available to the tax authorities of
a country in which the Non-United States Holder resides.
Under the Current Regulations, United States information reporting
requirements and backup withholding tax will generally not apply to dividends
paid on the Common Stock to a Non-United States Holder at an address outside the
United States. Payments by a United States office of a broker of the proceeds of
a sale of the Common Stock is subject to both backup withholding at a rate of
31% and information reporting unless the beneficial owner certifies its
Non-United States Holder status under penalties of perjury or otherwise
establishes an exemption. Information reporting requirements (but not backup
withholding) will also apply to payments of the proceeds of sales of the Common
Stock by foreign offices of United States brokers, or foreign brokers with
certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the beneficial owner is a Non-United
States Holder (and the broker does not have knowledge to the contrary) and
certain other conditions are met, or the beneficial owner otherwise establishes
an exemption.
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Common Stock to a Non-United States Holder may
be subject to information reporting and backup withholding unless such recipient
provides to the payor certain documentation as to its status as a Non-United
States Holder or otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will, in certain circumstances, be refunded or credited
against the Non-United States Holder's United States federal income tax
liability, provided that the required information is furnished to the IRS.
60
<PAGE> 63
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Morgan Stanley & Co. Incorporated and McDonald & Company Securities, Inc. are
acting as representatives (the "U.S. Representatives") of each of the
Underwriters named below (the "U.S. Underwriters"). Subject to the terms and
conditions set forth in a U.S. purchase agreement (the "U.S. Purchase
Agreement") among the Company, CMI, the Selling Stockholders and the U.S.
Underwriters, and concurrently with the sale of shares of Common
Stock to the International Managers (as defined below), the Selling Stockholders
have agreed to sell to the U.S. Underwriters, and each of the U.S. Underwriters
severally and not jointly has agreed to purchase from the Selling Stockholders,
the number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................
Morgan Stanley & Co. Incorporated......................
McDonald & Company Securities, Inc.....................
-----------
Total.....................................
===========
</TABLE>
The Company, CMI and the Selling Stockholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom
Merrill Lynch International, Morgan Stanley & Co. International Limited and
McDonald & Company Securities, Inc are acting as lead managers (the "Lead
Managers"). Subject to the terms and conditions set forth in the International
Purchase Agreement, and concurrently with the sale of shares of
Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
the Selling Stockholders have agreed to sell to the International Managers, and
the International Managers severally have agreed to purchase from the Selling
Stockholders, an aggregate of shares of Common Stock. The initial
public offering price per share and the total underwriting discount per share of
Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the U.S.
Purchase Agreement and the International Purchase Agreement, the commitments of
non-defaulting Underwriters may be increased. The closings with respect to the
sale of shares of Common Stock to be purchased by the U.S. Underwriters and the
International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose initially to offer the shares of
Common Stock to the public at the initial public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share of Common Stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Selling Stockholders have granted options to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of additional shares of Common
61
<PAGE> 64
Stock at the initial public offering price set forth on the cover page of this
Prospectus, less the underwriting discount. The U.S. Underwriters may exercise
these options solely to cover over-allotments, if any, made on the sale of the
Common Stock offered hereby. To the extent that the U.S. Underwriters exercise
these options, each U.S. Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such U.S. Underwriter's initial amount reflected in the
foregoing table. The Selling Stockholders also have granted options to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of additional shares
of Common Stock to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to of the shares offered to be
sold to certain employees of the Company and other persons having business
relationships with the Company. The number of shares of Common Stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of the Offerings will be
offered by the Underwriters to the general public on the same terms as the other
shares offered hereby.
The Company, its directors and executive officers, members of management,
the Selling Stockholders and certain holders of the Common Stock have agreed,
subject to certain exceptions, not to directly or indirectly (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
the Common Stock whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, without the
prior consent of Merrill Lynch on behalf of the Underwriters for a period of 180
days after the date of this Prospectus. See "Shares Eligible for Future Sale."
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. persons or
to Canadian persons or to persons they believe intend to resell to U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
Prior to the Offerings, there has been a limited public market for the
Common Stock of the Company. The initial public offering price will be
determined through negotiations among the Selling Stockholders and the U.S.
Representatives and the Lead Managers. The factors considered in determining the
initial public offering price, in addition to prevailing market conditions, are
price-earnings ratios of publicly traded companies that the U.S. Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, and an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to the Offerings at or above the public
offering price.
The Common Stock is currently traded on the OTC Bulletin Board. The Company
intends to apply for quotation of the Common Stock on the Nasdaq National Market
System under the symbol "CMLT."
62
<PAGE> 65
Because Merrill Lynch may be deemed to be an affiliate of the Company, the
Offerings will be conducted in accordance with Conduct Rule 2720 of the National
Association of Securities Dealers, Inc., which requires that the public offering
price of an equity security be no higher than the price recommended by a
Qualified Independent Underwriter which has participated in the preparation of
the Registration Statement and performed its usual standard of due diligence
with respect thereto. McDonald & Company Securities, Inc. has agreed to act as
Qualified Independent Underwriter with respect to the Offerings, and the public
offering price of the Common Stock will be no higher than that recommended by
McDonald & Company Securities, Inc.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the U.S. Underwriters and the International Managers may be required to
make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce the short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Merrill Lynch, a co-manager of the Offerings, is also a Selling Stockholder
and will receive a portion of the proceeds of the Offerings. Morgan Stanley &
Co. Incorporated, a co-manager of the Offerings, is under common ownership with
Van Kampen-Merritt Prime Rate Income Trust, which is the largest stockholder of
the Company.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Calfee, Halter & Griswold
LLP, Cleveland, Ohio. Calfee, Halter & Griswold LLP provides legal services to
McDonald & Company Securities, Inc. on a regular basis. Certain legal matters
relating to the Offerings will be passed upon for the Underwriters by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York.
63
<PAGE> 66
EXPERTS
The Consolidated Financial Statements of Camelot Music Holdings, Inc.
("Successor Company") as of February 28, 1998 and for the period February 1,
1998 to February 28, 1998 ("Successor period") and of CM Holdings, Inc.
("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 ("Predecessor periods"), appearing in this Prospectus, have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in their report thereon appearing elsewhere in this Prospectus, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of The Wall Music, Inc. for the year ended June 1,
1997 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to the sale of substantially all of the tangible assets and the transfer of
certain liabilities of The Wall Music, Inc. effective February 28, 1998), and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain portions of which are omitted as
permitted by the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto
and the financial statements, notes and schedules filed as a part thereof.
Statements made in this Prospectus regarding the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, NY 10048 and
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such materials can also be inspected at the offices
of the Nasdaq National Market System at 1735 K Street, N.W., Washington, D.C.
20006 or on the Commission's site on the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements for each fiscal year and interim reports
for each of the first three quarters of its fiscal year containing unaudited
interim financial information.
64
<PAGE> 67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAMELOT MUSIC HOLDINGS, INC. AND ITS PREDECESSOR
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of February 28, 1998 and
March 1, 1997............................................. F-3
Consolidated Statements of Operations for the period
February 1, 1998 to February 28, 1998, the period March 2,
1997 to January 31, 1998, the 52 week period ended March
1, 1997 and the 53 week period ended March 2, 1996........ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the period February 1, 1998 to February 28, 1998, the
period March 2, 1997 to January 31, 1998, the 52 week
period ended March 1, 1997 and the 53 week period ended
March 2, 1996............................................. F-5
Consolidated Statements of Cash Flows for the period
February 1, 1998 to February 28, 1998, the period March 2,
1997 to January 31, 1998, the 52 week period ended March
1, 1997 and the 53 week period ended March 2, 1996........ F-6
Notes to Consolidated Financial Statements.................. F-7
THE WALL MUSIC, INC.
Independent Auditor's Report................................ F-32
Statements of Operations for the nine months ended February
28, 1998 (unaudited) and March 1, 1997 (unaudited) and for
the year ended June 1, 1997............................... F-33
Statements of Stockholder's Equity for the nine months ended
February 28, 1998 and for the year ended June 1, 1997..... F-34
Statements of Cash Flows for the nine months ended February
28, 1998 (unaudited) and March 1, 1997 (unaudited) and for
the year ended June 1, 1997............................... F-35
Notes to Financial Statements............................... F-36
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Camelot Music Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Camelot
Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and of CM
Holdings, Inc. ("Predecessor Company") as of March 1, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows of
the Successor Company for the period February 1, 1998 to February 28, 1998
("Successor period"), and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 ("Predecessor periods"), respectively. These consolidated
financial statements are the responsibility of the management of Camelot Music
Holdings, Inc. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and the significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
On January 27, 1998, the Company emerged from bankruptcy. As described in
Notes 2, 3 and 4 to the consolidated financial statements, the Company accounted
for the reorganization as of January 31, 1998 and adopted "fresh-start
reporting". As a result, the Successor Company's consolidated financial
statements are not comparable to the Predecessor Company's consolidated
financial statements since they are presented on a new basis of accounting.
In our opinion, the aforementioned Successor Company consolidated financial
statements present fairly, in all material respects, the consolidated financial
position of the Successor Company as of February 28, 1998, and the consolidated
results of its operations and its cash flows for the Successor period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the Predecessor Company consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Predecessor Company as of March 1, 1997, and the consolidated results of its
operations and its cash flows for the Predecessor periods, in conformity with
generally accepted accounting principles.
As discussed in Notes 3 and 15 to the consolidated financial statements for
the 53 week period ended March 2, 1996, the Predecessor Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". In
addition, as discussed in Notes 3 and 4 to the consolidated financial
statements, on January 31, 1998, in conjunction with the Company's adoption of
"fresh-start reporting", the Predecessor Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and Statement of Position 98-5, "Accounting for the Costs of
Start-Up Activities".
Cleveland, Ohio
June 10, 1998
COOPERS & LYBRAND L.L.P.
F-2
<PAGE> 69
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 82,530 $ 41,260
Accounts receivable....................................... 1,849 979
Inventories............................................... 146,672 112,537
Deferred income taxes..................................... 6,557 --
Other current assets...................................... 4,877 5,287
-------- --------
Total current assets.............................. 242,485 160,063
-------- --------
Property, plant and equipment, net.......................... 40,220 56,738
-------- --------
Other non-current assets:
Goodwill, net of accumulated amortization of $0 in 1997
and $4,025 in 1996..................................... 26,950 41,188
Intangible assets, net of accumulated amortization of $707
in 1997 and $265 in 1996............................... 1,487 350
Deferred income taxes..................................... 18,548 --
Favorable lease values, net of accumulated amortization of
$276 in 1997........................................... 12,148 --
Other assets.............................................. 443 309
-------- --------
Total other non-current assets.................... 59,576 41,847
-------- --------
Total assets...................................... $342,281 $258,648
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade................................... $ 30,703 $ 11,398
Accrued expenses and other liabilities.................... 101,639 23,336
-------- --------
Total current liabilities......................... 132,342 34,734
-------- --------
Long-term liabilities:
Revolving credit agreement................................ -- --
Unfavorable lease values, net of accumulated amortization
of $158 in 1997........................................ 13,398 --
Other long-term liabilities............................... 1,592 7,407
-------- --------
Total long-term liabilities....................... 14,990 7,407
-------- --------
Liabilities subject to compromise........................... -- 484,811
Commitments and contingencies (Notes 2, 4, 7, 12, 16 and
18)....................................................... -- --
-------- --------
Total liabilities................................. 147,332 526,952
-------- --------
Stockholders' equity (deficit):
Common stock.............................................. 102 10
Additional paid-in capital................................ 194,266 79,990
Retained earnings (accumulated deficit)................... 581 (348,304)
-------- --------
Total stockholders' equity (deficit).............. 194,949 (268,304)
-------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $342,281 $258,648
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 70
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY
--------- PREDECESSOR COMPANY
PERIOD ----------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales............................... $27,842 $372,561 $396,502 $ 455,652
Cost of sales........................... 17,662 243,109 263,072 302,481
------- -------- -------- ---------
Gross profit.......................... 10,180 129,452 133,430 153,171
Selling, general and administrative
expenses.............................. 9,240 99,553 117,558 135,441
Depreciation and amortization........... 527 20,484 23,290 26,570
Special items........................... -- (4,443) 6,523 211,520
------- -------- -------- ---------
Income (loss) before other
income (expenses), net,
reorganization income
(expenses), income taxes and
extraordinary item.......... 413 13,858 (13,941) (220,360)
------- -------- -------- ---------
Other income (expenses), net:
Interest income....................... 328 -- -- 263
Interest expense (contractual interest
expense was (1) $58,157 and (2)
$41,329)........................... (12) (221)(1) (17,418)(2) (38,319)
Amortization of financing fees........ (7) (434) (1,856) (3,738)
Other, net............................ (26) 249 696 (1,503)
------- -------- -------- ---------
Total other income (expenses),
net......................... 283 (406) (18,578) (43,297)
------- -------- -------- ---------
Income (loss) before
reorganization income
(expenses), income taxes and
extraordinary item.......... 696 13,452 (32,519) (263,657)
Reorganization income (expenses)........ -- 26,501 (31,845) --
------- -------- -------- ---------
Income (loss) before income
taxes and extraordinary
item........................ 696 39,953 (64,364) (263,657)
(Provision) benefit for income taxes:
Current............................... -- (289) -- (376)
Deferred.............................. (115) -- -- (98)
------- -------- -------- ---------
Total (provision) benefit for
income taxes................ (115) (289) -- (474)
------- -------- -------- ---------
Income (loss) before
extraordinary item.......... 581 39,664 (64,364) (264,131)
Extraordinary item, net of
tax......................... -- 228,911 -- --
------- -------- -------- ---------
Net income (loss) *........... $ 581 $268,575 $(64,364) $(264,131)
======= ======== ======== =========
</TABLE>
- ---------------
* Earnings (loss) per share (Note 3)
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 71
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCKS ADDITIONAL EARNINGS
-------------------- PAID-IN PUT (ACCUMULATED
SHARES DOLLARS CAPITAL AGREEMENTS DEFICIT) TOTAL
---------- ------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balances at February 25,
1995.................... 1,000,000 $ 10 $ 79,990 $(3,413) $ (19,809) $ 56,778
Net loss................ -- -- -- -- (264,131) (264,131)
Expiration of put
agreements............ -- -- -- 3,413 -- 3,413
---------- ---- -------- ------- --------- ---------
Balances at March 2,
1996.................... 1,000,000 10 79,990 -- (283,940) (203,940)
Net loss................ -- -- -- -- (64,364) (64,364)
---------- ---- -------- ------- --------- ---------
Balances at March 1,
1997.................... 1,000,000 10 79,990 -- (348,304) (268,304)
Net income.............. -- -- -- -- 268,575 268,575
Adoption of "fresh-start
reporting"*........... 9,176,162 92 114,276 -- 79,729 194,097
---------- ---- -------- ------- --------- ---------
Balances at January 31,
1998.................... 10,176,162 $102 $194,266 $ -- $ -- $ 194,368
========== ==== ======== ======= ========= =========
SUCCESSOR COMPANY:
Balances at February 1,
1998.................... 10,176,162 $102 $194,266 $ -- $ -- $ 194,368
Net income.............. -- -- -- -- 581 581
---------- ---- -------- ------- --------- ---------
Balances at February 28,
1998.................... 10,176,162 $102 $194,266 $ -- $ 581 $ 194,949
========== ==== ======== ======= ========= =========
</TABLE>
- ---------------
* Cancellation of 1,000,000 shares of the Predecessor Company and issuance of
10,176,162 shares of the Successor Company.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 72
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY
------------ PREDECESSOR COMPANY
PERIOD --------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 581 $268,575 $(64,364) $(264,131)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization excluding financing
fees............................................. 527 20,484 23,290 26,570
Amortization of favorable/unfavorable lease
values........................................... 118 -- -- --
Amortization of financing fees..................... 7 434 1,856 3,738
Noncash portion of restructuring charges........... -- -- -- 5,238
Write-down of long-lived assets.................... -- -- 6,523 202,869
Expiration of put agreements....................... -- -- -- 3,413
Deferred income taxes.............................. 115 -- -- 98
Other, net......................................... -- -- 451 607
Changes in assets and liabilities:
Accounts receivable and refundable income taxes.... (234) (1,438) 2,578 3,437
Inventories........................................ 1,739 4,763 15,216 28,418
Other current assets............................... (87) 2,623 (2,197) (283)
Other assets....................................... 706 -- 131 427
Accounts payable, trade............................ (1,449) 22,124 (12,540) 20,149
Accrued expenses and other liabilities............. (874) (5,972) 17,509 (8,414)
Accrued income taxes............................... -- 308 647 5,401
Liabilities subject to compromise.................. -- (58,507) -- --
Changes due to reorganization activities:
Gain on discharge of prepetition liabilities....... -- (228,911) -- --
Net adjustment in accounts for fair values......... -- 25,527 -- --
Accrued professional fees.......................... -- 2,187 1,717 --
Write-off of financing fees........................ -- -- 15,953 --
Provision for store closing costs.................. -- -- 3,988 --
Provision for lease rejection damages.............. -- -- 7,658 --
Employment termination costs....................... -- 454 803 --
Write-off of capital lease obligation.............. -- -- (1,677) --
Other expenses directly related to bankruptcy...... -- 1,137 (1,261) --
------- -------- -------- ---------
Net cash provided by operating activities........ 1,149 53,788 16,281 27,537
------- -------- -------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment........... (1,807) (8,029) (4,330) (20,873)
Proceeds from sale of equipment...................... 2 10 239 137
Acquisition of The Wall, net of cash acquired........ (2,884) -- -- --
Other assets and liabilities, net.................... (234) 94 93 409
------- -------- -------- ---------
Net cash used in investing activities............ (4,923) (7,925) (3,998) (20,327)
------- -------- -------- ---------
Cash flows from financing activities:
Payment of financing fees............................ -- (819) (615) --
Proceeds from lines of credit and other short-term
borrowings......................................... -- -- 25,000 195,500
Payments on lines of credit and other short-term
borrowings......................................... -- -- (25,000) (174,000)
Payments on long-term debt........................... -- -- (27) (2,560)
------- -------- -------- ---------
Net cash (used in) provided by financing
activities.................................... -- (819) (642) 18,940
------- -------- -------- ---------
Net (decrease) increase in cash and cash
equivalents................................... (3,774) 45,044 11,641 26,150
Cash and cash equivalents at beginning of period....... 86,304 41,260 29,619 3,469
------- -------- -------- ---------
Cash and cash equivalents at end of period............. $82,530 $ 86,304 $ 41,260 $ 29,619
======= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 73
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION AND BUSINESS:
CM Holdings, Inc. ("Predecessor Company") was incorporated on September 30,
1993, and acquired all of the outstanding common stock of Camelot Music, Inc.
(the "Camelot Acquisition") on November 12, 1993. The Predecessor Company
subsequently changed its name to Camelot Music Holdings, Inc. and together with
Camelot Music, Inc. ("Camelot") emerged from bankruptcy on January 27, 1998 (see
Notes 2 and 4). Camelot Music Holdings, Inc. and its subsidiaries are referred
to herein as the "Successor Company". The Predecessor Company and the Successor
Company are collectively referred to herein as the "Company".
The Company is a mall-based specialty retailer of pre-recorded music,
pre-recorded video cassettes and other entertainment products and related
accessories and operates in thirty-seven states across the United States. The
Company operates in a single industry segment, the operation of a chain of
retail entertainment stores. At February 28, 1998, the Company operated four
hundred fifty-five stores nationwide under the "Camelot Music" and "The Wall"
names.
2. STATUS OF REORGANIZATION UNDER CHAPTER 11:
On August 9, 1996 (the "petition date"), CM Holdings, Inc. and Camelot
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
The Chapter 11 proceedings were jointly administered, with the Predecessor
Company managing the business in the ordinary course as debtors-in-possession
subject to the control and supervision of the Bankruptcy Court.
Under Chapter 11 proceedings, litigation and actions by creditors to
collect certain claims in existence at the petition date ("prepetition") are
stayed, absent specific Bankruptcy Court authorization to pay such claims. The
Predecessor Company believes that appropriate provisions were made in the
accompanying financial statements for the prepetition claims that could be
estimated at the date of those financial statements. Such claims are reflected
in the March 1, 1997 consolidated balance sheet as "liabilities subject to
compromise" (See Note 12). Claims collateralized by the Predecessor Company's
assets (secured claims) were stayed, although holders of such claims had the
right to move the Bankruptcy Court for relief from the stay. Secured claims were
collateralized by a pledge of stock of Camelot as well as certain non-store
properties.
Under the Bankruptcy Code, a creditor's claim was treated as secured only
to the extent of the value of such creditor's collateral, and the balance of
such creditor's claim was treated as unsecured.
The Predecessor Company received approval from the Bankruptcy Court to pay
or otherwise honor employee wages and benefits and certain other prepetition
obligations necessary for the continuing existence of the Predecessor Company
prior to a plan of reorganization. Generally, unsecured debt did not accrue
interest after the petition date. In addition, the Predecessor Company had
determined that there was insufficient collateral to cover the interest portion
of scheduled payments on most prepetition debt obligations. Therefore, the
Predecessor Company discontinued accruing interest on those obligations.
Contractual interest on those obligations amounted to $58,157 for the period
March 2, 1997 to January 31, 1998 and $41,329 for the 52 week period ended March
1, 1997, which was $57,936 and $23,911, respectively, in excess of reported
interest expense. Refer to Note 11 for a discussion of the financing
arrangements entered into subsequent to the Chapter 11 filings.
As debtor-in-possession, the Predecessor Company had the right, subject to
Bankruptcy Court approval and certain other limitations, to assume or reject
certain executory contracts, including unexpired leases. In this context,
"assumption" meant that the Predecessor Company agreed to perform its
obligations and cure certain existing defaults under the contract or lease, and
"rejection" meant that the Predecessor Company was relieved
F-7
<PAGE> 74
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
2. STATUS OF REORGANIZATION UNDER CHAPTER 11 -- CONTINUED:
from its obligations to perform further on the contract or lease and was subject
only to a claim for damages for the breach thereof. Any claim for damages
resulting from the rejection of an executory contract or an unexpired lease was
treated as a general unsecured claim in the Chapter 11 proceedings. The
Predecessor Company reviewed its executory contracts and rejected 95 leases. An
estimate of the allowed claims related to the rejected leases of $14,349 was
provided for and included in liabilities subject to compromise.
An official committee of unsecured creditors (the "Committee") was formed
to act in the Chapter 11 proceedings. The Committee had the right to review and
object to certain business transactions. Pursuant to the order of the Bankruptcy
Court, the Committee retained counsel and other professionals at the expense of
the Predecessor Company.
On December 12, 1997, the Bankruptcy Court entered an order confirming the
Predecessor Company's Joint Plan of Reorganization (the "Plan") which was
submitted by the Predecessor Company on October 1, 1997, amended on November 7,
1997, and became effective January 27, 1998. Pursuant to the Plan,
administrative and priority claims of $5,632 will be fully paid in cash. The
remaining prepetition claims were settled principally with the issuance of
equity in the reorganized company (Successor Company) to the claimholders. The
stockholders in the Predecessor Company received no recovery nor were they
issued any shares in the Successor Company under the Plan. Under the Plan,
approximately 10,166,162 common shares in the Successor Company are to be issued
to the claim holders. None of the claimholders receiving shares of the Successor
Company were pre-confirmation shareholders of the Predecessor Company. The
Successor Company expects to register the common shares with the filing of a
Form S-1 with the Securities and Exchange Commission (see Note 21).
As of January 31, 1998, in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code",
the Predecessor Company adopted "fresh-start reporting" and reflected the
effects of such adoption in its consolidated financial statements for the eleven
months then ended (see Note 4).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies used in the preparation of the
consolidated financial statements are as follows:
A. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS: During the period
August 9, 1996 to January 31, 1998, the Company has accounted for all
transactions related to the Chapter 11 proceedings in accordance with SOP
90-7 for entities reporting during reorganization proceedings before and
after filing of a reorganization plan; as appropriate. Accordingly,
liabilities subject to compromise under the Chapter 11 proceedings have
been segregated on the consolidated balance sheet and were recorded at the
amounts that have been or are expected to be allowed on known claims rather
than estimates of consideration those claims may receive in a plan of
reorganization. In addition, the consolidated statements of operations and
cash flows separately disclose expenses and cash transactions,
respectively, related to the Chapter 11 proceedings.
On January 31, 1998, the Company accounted for all transactions
related to entities emerging from Chapter 11 reorganization set forth in
SOP 90-7 ("fresh-start reporting" -- see Note 4).
B. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated
Predecessor Company financial statements include the accounts of CM
Holdings, Inc. and its wholly owned subsidiary Camelot and its inactive
subsidiaries -- G.M.G. Advertising, Inc. and Grapevine Records and Tapes,
Inc. The accompanying
F-8
<PAGE> 75
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
consolidated financial statements of the Successor Company include the
accounts of Camelot Music Holdings, Inc., and its wholly owned subsidiary
Camelot and its recently formed subsidiaries -- Camelot Midwest Region,
Inc.; Camelot Northeast Region, Inc.; Camelot Southeast Region, Inc.;
Camelot Western Region, Inc.; Camelot Distribution Co., Inc.; and its
inactive subsidiaries G.M.G. Advertising, Inc. and Grapevine Records and
Tapes, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
C. FISCAL PERIODS: The Company's fiscal year ends on the Saturday
closest to February 28. Any fiscal years or period ends designated in the
consolidated financial statements and the related notes are by the calendar
year in which the fiscal year commences.
D. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
E. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: During the period
February 26, 1995 to January 31, l998, the Predecessor Company adopted the
following accounting standards based on the effective date of those
standards or as required by "fresh-start reporting": (1) Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of"; (2) SFAS No. 123, "Accounting for Stock-Based Compensation"; (3) SFAS
No. 128, "Earnings Per Share"; (4) SFAS No. 129, "Disclosure of Information
about Capital Structure"; (5) SFAS No. 130, "Reporting Comprehensive
Income"; (6) SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information"; (7) SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and (8) SOP 98-5,
"Accounting for the Costs of Start-Up Activities".
The adoption of SFAS No. 123, SFAS No. 128, SFAS No. 129, SFAS No. 130
and SFAS No. 131 had no significant effects on the Company's consolidated
financial statements. The effect of adopting SFAS No. 121 is discussed in
Note 15 and the effects of adopting SOP 98-1 and SOP 98-5 are discussed in
Note 4.
F. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash equivalents are stated at cost, which approximates
market value.
G. CONCENTRATION OF CREDIT RISKS: The Company maintains centralized
cash management programs whereby excess cash balances are invested in short
term funds and are considered cash equivalents. Certain cash balances are
insured by the Federal Deposit Insurance Corporation up to $100. As of
February 28, 1998 and March 1, 1997 uninsured bank cash balances were
$80,648 and $40,835, respectively.
H. CONCENTRATION OF BUSINESS RISKS: The Company purchases its
pre-recorded music directly from a large number of suppliers, with
approximately 77% of purchases, net of returns, being made from six
suppliers. Prior to the bankruptcy proceedings, the Company had not
experienced difficulty in obtaining satisfactory sources of supply. In
connection with its emergence from bankruptcy, the Company obtained
commitments to reinstate customary trade terms and management believes that
it will retain access to
F-9
<PAGE> 76
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
adequate sources of supply. However, a loss of a major supplier could cause
a possible loss of sales, which would have an adverse affect on
consolidated operating results and result in a decrease in vendor support
for the Company's advertising programs.
I. INVENTORIES AND RETURN COSTS: Inventories are valued at the lower
of cost or market. Cost is determined principally by the average cost
method. Inventories consist primarily of resaleable prerecorded music,
video cassettes, video games and other related products. Vendors typically
offer incentives of approximately 1% upon the purchase of product. The
Company is entitled to return product purchases from these vendors. The
vendors often reduce the return credit with a product return charge ranging
from 0% to 20% of the original product purchase price depending on the type
of product being returned. The Company records the product return charges
in cost of sales.
J. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is
stated at cost. Significant additions and improvements are capitalized
while expenditures for maintenance and repairs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the
related accumulated depreciation are eliminated from the accounts in the
year of disposal. Gains and losses resulting from disposals are included in
operations. In accordance with "fresh-start reporting", the pre-effective
date accumulated depreciation and amortization has been eliminated, and a
new depreciation and amortization base has been established equal to the
fair value of the existing property, plant and equipment. Depreciation is
computed using the straight-line method based on the following ranges of
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................. 10-40 years
Leasehold improvements...................... Shorter of life of lease or 7 years
Furniture, fixtures and equipment........... 5-7 years
</TABLE>
Effective January 31, 1998, the direct costs of computer software
developed or obtained for internal use are capitalized and amortized over
the estimated useful life on a straight-line basis. All other related costs
are expensed as incurred.
K. GOODWILL: Goodwill in the Predecessor Company's consolidated
financial statements represented primarily the adjusted amount of the cost
of acquisition in excess of fair value of the Camelot Acquisition and was
amortized using the straight-line method over a 40 year period until March
2, l996. The remaining amount was being amortized using the straight-line
method over a 22 year period. In connection with the emergence from Chapter
11 and in accordance with SOP 90-7, the remaining Predecessor Company
goodwill was written off at January 31, 1998. The Successor Company
goodwill represents the adjusted amount of the cost of acquisition in
excess of fair value of The Wall acquisition (see Note 7) and is being
amortized using the straight-line method over a 30 year period.
L. INTANGIBLE ASSETS AND FAVORABLE (UNFAVORABLE) LEASE
VALUES: Financing fees are amortized on a straight-line basis over the
terms of the related financings, which vary with the terms of the related
agreements ranging from one to four years. As a result of the Chapter 11
proceedings, the net book value of the financing fees related to
prepetition financing was written off during the 52 week period ended March
1, l997.
Favorable lease values and non-compete agreements acquired by the
Predecessor Company in connection with store acquisitions were being
amortized using the straight-line method over the lives of the
F-10
<PAGE> 77
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
related agreements. Primarily as a result of store closings, the net book
value of these assets was written off during the 52 week period ended March
1, 1997. Favorable (unfavorable) lease values of the Successor Company
established in "fresh-start reporting" and acquired in connection with The
Wall store acquisitions are being amortized to rent expense using the
effective interest method over the lives of the related lease agreements.
The trade name of the Successor Company acquired in The Wall
acquisition is being amortized on a straight-line basis over two years.
M. FAIR VALUE OF LONG-LIVED ASSETS: The Company records impairment
losses on long-lived assets used in operations, and the related goodwill,
when events and circumstances indicate that the assets might be impaired
and the undiscounted cash flows estimated to be generated by those assets
are less than the carrying amounts of those assets in accordance with SFAS
No. 121.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS: It was not practicable to
estimate the fair value of the Predecessor Company's prepetition debt
obligations as the Predecessor Company was in Chapter 11 proceedings. The
ultimate plan of reorganization could have significantly impacted the
estimated fair value of those obligations. Financial instruments of the
Successor Company consist of a revolving credit facility (including letters
of credit) which is carried at an amount which approximates fair value (see
Note 11).
O. ADVERTISING COSTS: Nonreimbursable advertising costs are expensed
during the period incurred. The amount charged to advertising expense
during the period February 1, 1998 to February 28, 1998, the period March
2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the
53 week period ended March 2, 1996 was $167, $5,810, $6,128 and $6,458,
respectively.
P. STORE OPENING AND OTHER START-UP COSTS: The expenses associated
with the opening of new stores and other start-up costs are charged to
expense as incurred.
Q. EARNINGS (LOSS) PER SHARE: In February l997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which
is effective for the Successor Company for Fiscal 1997. This standard
requires the Successor Company to disclose basic earnings per share and
diluted earnings per share. Basic earnings per share is calculated by
dividing net income (loss) by the weighted average shares outstanding.
Diluted earnings per share is calculated by dividing net income (loss), by
the sum of the weighted average shares and additional common shares that
would have been outstanding if the dilutive potential common shares had
been issued for the Successor Company's common stock options from the
Successor Company's Stock Option Plan. For the period February 1, 1998 to
February 28, 1998, the additional dilutive potential common shares were
687,000. As required by SFAS No. 128 all outstanding common stock options
are considered included even though their exercise may be contingent upon
vesting.
No earnings per share information has been included in the
accompanying consolidated financial statements since to compute such
information on a one month period is not considered meaningful.
R. INCOME TAXES: The Company uses the liability method of accounting
for income taxes. Deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in the period that
includes the enactment date.
F-11
<PAGE> 78
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
S. STOCK-BASED COMPENSATION: The Company follows Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options. Under APB No. 25, because the exercise price of employee stock
options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recorded. The Company adopted the
disclosure-only provisions of SFAS No. 123 for options issued to employees
and directors.
T. DIVIDEND POLICY: The Company has never declared or paid cash
dividends on its common stock. The Successor Company currently intends to
retain any earnings for use in its business and therefore does not
anticipate paying any dividends in the foreseeable future. In addition, the
Successor Company's revolving credit facility limits its ability to pay
dividends under certain circumstances. Any future determination as to the
payment of cash dividends will depend on a number of factors, including
future earnings, capital requirements, the financial condition and
prospects of the Successor Company and any restrictions under credit
agreements existing from time to time.
U. RECLASSIFICATIONS: Certain amounts in the Predecessor Company's
Consolidated Financial Statements have been reclassified to conform to the
Successor Company's Consolidated Financial Statements.
4. FRESH-START REPORTING:
The AICPA has issued Statement of Position ("SOP") 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code". Pursuant to
the guidance provided by SOP 90-7, the Predecessor Company adopted "fresh-start
reporting" for its consolidated financial statements effective as of January 31,
1998, the last day of the Predecessor Company's fiscal month end. Under
fresh-start reporting, the reorganization value of the Company has been
allocated to the emerging Company's assets on the basis of the purchase method
of accounting. Deferred income taxes were reported in conformity with the
liability method of accounting for income taxes and no pre-confirmation net
operating loss carryforwards were available at February 1, 1998. All of the
reorganization value was attributable to specific tangible assets of the
emerging entity and no amount has been recorded as intangible assets or as
"Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" in
the accompanying consolidated balance sheet as of January 31, 1998.
The fresh-start reporting entity value was determined to be $194,368 (net
of $5,632 of administrative and priority claims payments). This value which
results in a per share common stock value of eighteen dollars and seventy five
cents was determined by the Company with the assistance of its special financial
advisor during the Chapter 11 reorganization. The significant factors used in
the determination of this value were a four year analysis of the Company's
forecasted cash flows discounted at 14.0% to a present value and certain
additional financial analyses and forecasts prepared by management.
Under fresh-start reporting, the final consolidated balance sheet of the
Predecessor Company as of January 31, 1998, becomes the opening consolidated
balance sheet of the Successor Company. Since fresh-start reporting has been
reflected in the accompanying consolidated balance sheet as of January 31, 1998,
the consolidated balance sheet as of that date is not comparable to any such
statement as of any prior date or for any prior period.
The adjustments to reflect the consummation of the Plan, including the
subsequent gain on debt discharge of prepetition liabilities and the adjustment
to record assets and liabilities at their fair values have been reflected in the
accompanying consolidated financial statements as of January 31, 1998.
Accordingly, a black line is shown to separate the February 28, 1998
consolidated balance sheet and the consolidated statement of operations and cash
flows for the period February 1, 1998 to February 28, 1998 from the prior years
since they are not prepared on a comparable basis.
F-12
<PAGE> 79
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FRESH-START REPORTING -- CONTINUED:
The effect of the Plan on the Company's Consolidated Balance Sheet as of
January 31, 1998 is as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS TO RECORD THE PLAN
----------------------------------------
PRE-FRESH FRESH-START
START ------------------------- FRESH-START
BALANCE SHEET FAIR VALUE BALANCE SHEET
JANUARY 31, DEBT ACCOUNTING ADJUSTMENTS JANUARY 31,
1998 DISCHARGE(A) Changes(b) (C)(D) 1998
------------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 87,842 $ (1,538) $ -- $ -- $ 86,304
Accounts receivable..................... 2,401 297 -- -- 2,698
Inventories............................. 107,774 -- -- 1,007 108,781
Deferred income taxes................... -- -- -- 6,334 6,334
Other current assets.................... 2,207 -- -- -- 2,207
-------- --------- -------- -------- --------
Total current assets.............. 200,224 (1,241) -- 7,341 206,324
-------- --------- -------- -------- --------
Property, plant and equipment. net........ 46,062 -- -- (21,662) 24,400
-------- --------- -------- -------- --------
Other non-current assets:
Goodwill, net........................... 39,348 -- -- (39,348) --
Intangible assets, net.................. 813 -- (78) -- 735
Favorable lease values, net............. -- -- -- 9,256 9,256
Deferred income taxes................... -- -- -- 18,886 18,886
Other assets............................ 718 -- -- -- 718
-------- --------- -------- -------- --------
Total other non-current assets.... 40,879 -- (78) (11,206) 29,595
-------- --------- -------- -------- --------
Total assets...................... $287,165 $ (1,241) $ (78) $(25,527) $260,319
======== ========= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade................. $ 33,522 $ -- $ -- $ -- $ 33,522
Accrued expenses and other
liabilities........................... 21,836 3,322 -- (1,374) 23,784
-------- --------- -------- -------- --------
Total current liabilities......... 55,358 3,322 -- (1,374) 57,306
-------- --------- -------- -------- --------
Long-term liabilities:
Revolving credit agreement.............. -- -- -- -- --
Unfavorable lease values, net........... -- -- -- 7,100 7,100
Other long-term liabilities............. 6,229 772 -- (5,456) 1,545
-------- --------- -------- -------- --------
Total long-term liabilities....... 6,229 772 -- 1,644 8,645
-------- --------- -------- -------- --------
Liabilities subject to compromise......... 428,614 (428,614) -- -- --
Commitments and contingencies............. -- -- -- -- --
-------- --------- -------- -------- --------
Total liabilities................. 490,201 (424,520) -- 270 65,951
-------- --------- -------- -------- --------
Stockholders' equity (deficit):
Common stock............................ 10 102 -- (10) 102
Additional paid-in capital.............. 79,990 194,266 -- (79,990) 194,266
Retained earnings (accumulated
deficit).............................. (283,036) 228,911 (78) 54,203 --
-------- --------- -------- -------- --------
Total stockholders equity
(deficit)....................... (203,036) 423,279 (78) (25,797) 194,368
-------- --------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)....................... $287,165 $ (1,241) $ (78) $(25,527) $260,319
======== ========= ======== ======== ========
</TABLE>
- ---------------
(a) To record the settlement of liabilities subject to settlement under
reorganization proceeding and the payment of administrative expenses in
connection with the Plan.
(b) To record the effects of adopting SOP 98-1 ($0) and SOP 98-5 ($78) as of the
Plan's effective date.
(c) To record the adjustments to state assets and liabilities at fair value and
to eliminate the deficit in accumulated deficit against additional paid-in
capital.
(d) The fair value adjustments are subject to the resolution of the contingency
with the Internal Revenue Service discussed in Note 18.
F-13
<PAGE> 80
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FRESH-START REPORTING -- CONTINUED:
The following unaudited Consolidated Pro Forma Statement of Operations
reflects the financial results of the Company as if the Plan and change in
accounting principles had been effective March 1, 1997:
<TABLE>
<CAPTION>
COMBINED 52 WEEK PERIOD ENDED FEBRUARY 28, 1998
---------------------------------------------------------------------------
Adjustments(2)
-------------------------------
AS REPORTED(1) STORE CLOSINGS(A) OTHER Pro Forma(2)
--------------- ------------------ --------- -------------
<S> <C> <C> <C> <C>
Net sales......................... $400,403 $(4,195) $ -- $396,208
Costs of sales.................... 260,771 (2,740) (1,150)(b) 256,881
-------- ------- --------- --------
Gross profit.................... 139,632 (1,455) 1,150 139,327
Selling, general and
administrative expenses......... 108,793 (1,123) 544(c) 108,214
Depreciation and amortization..... 21,011 (377) (14,197)(d) 6,437
Special items..................... (4,443) -- -- (4,443)
-------- ------- --------- --------
Income (loss) before other income
(expenses), net, reorganization
income, income taxes and
extraordinary item.............. 14,271 45 14,803 29,119
-------- ------- --------- --------
Other income (expenses), net:
Interest income................. 328 -- 2,311(g) 2,639
Interest expense................ (233) -- 55(e) (178)
Amortization of financing
fees......................... (441) -- 218(f) (223)
Other........................... 223 -- -- 223
-------- ------- --------- --------
Total other income
(expenses), net....... (123) -- 2,584 2,461
-------- ------- --------- --------
Income (loss) before
reorganization income, income
taxes and extraordinary item.... 14,148 45 17,387 31,580
Reorganization income............. 26,501 -- (26,501)(g)(h) --
-------- ------- --------- --------
Income (loss) before income taxes
and extraordinary item.......... 40,649 45 (9,114) 31,580
(Provision) benefit for income
taxes........................... (404) -- (11,912)(i) (12,316)
-------- ------- --------- --------
Income (loss) before extraordinary
item............................ 40,245 45 (21,026) 19,264
Extraordinary item, net of tax.... 228,911 -- (228,911)(j) --
-------- ------- --------- --------
Net income (loss)................. $269,156 $ 45 $(249,937) $ 19,264
======== ======= ========= ========
</TABLE>
- ---------------
See accompanying unaudited consolidated pro forma notes on the next page.
F-14
<PAGE> 81
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FRESH-START REPORTING -- CONTINUED:
(1) As reported amounts are the summation of the Predecessor Company for the
period March 2, 1997 to January 31, 1998 and the Successor Company for the
period February 1, 1998 to February 28, 1998.
(2) The pro forma amounts are based on certain assumptions and estimates. The
pro forma results do not necessarily represent results which would have
taken place on the basis assumed above, nor are they indicative of the
results of future "fresh-start" operations. The pro forma adjustments are
also subject to the resolution of the contingency with the Internal Revenue
Service discussed in Note 18.
(a) To eliminate operating results of ten stores closed in conjunction with the
Plan.
(b) During the reorganization period certain trade vendors denied the Company
the right to take prompt payment discounts. The amounts and period of denial
varied by vendor. The adjustment of $(1,150) reinstates cash discounts to
normal and customary trade payment terms.
(c) To adjust selling, general and administrative expenses for the following:
(1) record the effects of fair value adjustments for favorable and
unfavorable lease value amortization of $578; (2) record the effects of fair
value adjustments for average rent expense of $1,011; and (3) record the
effects of capitalizing internal use software costs (SOP 98-1) of $(1,045).
(d) To reduce depreciation and amortization for the following: (1) eliminate
Predecessor Company goodwill amortization of $(1,840); (2) record the
effects of amortizing capitalized internal software costs (SOP 98-1) of
$105; and (3) reduce depreciation expense by $(12,462) for fair value
adjustments to property, plant and equipment.
(e) To eliminate historical commitment fee expense of $(221) and record new
commitment fee expense of $166 based on the terms of the Amended Credit
Facility of .375%.
(f) To adjust amortization of deferred financing fees for the Amended Credit
Facility by $(218).
(g) To reclass interest income from reorganization income.
(h) To eliminate reorganization income (including interest income of $2,311
included therein) which will not be incurred subsequent to the effective
date of the Plan.
(i) To reverse income tax effect of fresh-start reporting adjustments and record
the income tax effect of pro forma adjustments for items that are deductible
for income tax purposes, using an assumed income tax rate of 39%.
(j) To eliminate gain on discharge of debt pursuant to the Plan.
F-15
<PAGE> 82
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
5. REORGANIZATION INCOME (EXPENSES):
The net reorganization income (expenses) incurred as a result of the
Chapter 11 filings and subsequent reorganization efforts have been segregated
from ordinary operations in the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------
PERIOD 52 WEEK
MARCH 2, PERIOD
1997 TO ENDED
JANUARY 31, MARCH 1,
1998 1997
----------- --------
<S> <C> <C>
Net adjustment to fair values............................... $(25,527) $ --
Adjustments to claims (including $1,017 of post March 1,
1997 net activity)........................................ 57,511 --
Restructuring costs......................................... (1,548) (11,869)
Bankruptcy related expenses................................. (6,246) (4,866)
Financing fees.............................................. -- (15,953)
Interest income............................................. 2,311 843
-------- --------
$ 26,501 $(31,845)
======== ========
</TABLE>
Net adjustments to fair values reflect the net change to state assets and
liabilities at fair value. Adjustments to claims represent prepetition claims
that were either discharged or received no amount of recovery. Restructuring
costs include costs and expenses from closing of facilities, consolidation of
operations, and certain expenses related to the rejection of executory contracts
as well as gains and losses from the disposition of related assets. Bankruptcy
related expenses relate to professional fees and other expenses related to the
bankruptcy proceedings. Financing fees consist of the write-off of the
unamortized portion of deferred financing fees relating to collateralized debt
as of the petition date. Interest income is attributable to the accumulation of
cash and short-term investments subsequent to the petition date.
6. EXTRAORDINARY ITEM:
The Plan resulted in the discharge of $428,614 of prepetition claims and
the recognition of $297 in prepetition vendor receivables against/due to the
Predecessor Company during Chapter 11 through the distribution of $5,632 in cash
and the issuance of 10,166,162 shares of new common stock to creditors. The
value of cash and securities distributed less the vendor receivables was
$228,911 less than the allowed claims, and the resultant gain was recorded as an
extraordinary item, net of related tax effects of $0.
7. ACQUISITION:
Effective February 28, 1998, the Company acquired certain assets and
assumed certain liabilities and operating lease commitments of The Wall Music,
Inc. ("The Wall") pursuant to an Asset Purchase Agreement ("Purchase Agreement")
dated December 10, 1997 which closed on March 2, 1998. The Wall is a mall-based
music store chain that operated one hundred fifty stores in the Mid-Atlantic
region of the United States. The Company acquired all of these stores of which
eleven stores will be closed as part of the Company's acquisition
F-16
<PAGE> 83
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
7. ACQUISITION -- CONTINUED:
strategy. The Company has accrued $410 in exit costs related to these closings.
The purchase of The Wall was funded by the Company's cash and cash equivalents.
The acquisition has been accounted for as a purchase, and included a cash
payment of $72,351, the assumption of liabilities aggregating $14,723, and
acquisition costs of $2,300. Accordingly, the assets and liabilities of the
acquired business are included in the consolidated balance sheet at February 28,
1998 and no results of operations are included in the consolidated statement of
operations. The purchase price is subject to final adjustment based on the
resolution of certain contingencies related to merchandise inventory return
reserves and finalization of acquisition costs. The Company does not believe the
final purchase price will differ significantly from the preliminary purchase
price recorded at February 28, 1998. The excess of the purchase price over the
fair values of the net assets acquired (goodwill) of $26,950 will be amortized
on a straight-line basis over 30 years.
The following summarized unaudited pro forma financial information assumes
the acquisition of The Wall had occurred as of March 2, 1997 and March 3, 1996:
<TABLE>
<CAPTION>
PRO FORMA
COMBINED 52 PRO FORMA
WEEK PERIOD 52 WEEK
ENDED PERIOD ENDED
FEBRUARY 28, MARCH 1, 1997
1998 (PREDECESSOR)
------------ -------------
<S> <C> <C>
Net sales.................................................. $558,315 $541,040
======== ========
Net income (loss).......................................... $282,050 $(57,564)
======== ========
</TABLE>
Pro forma adjustments for the combined 52 week period ended February 28,
1998 were applied to the summation of the as reported amounts of the Predecessor
Company for the period March 2, 1997 to January 31, 1998 and the Successor
Company for the period February 1, 1998 to February 28, 1998.
The pro forma amounts are based upon certain assumptions and estimates, and
do not reflect any benefits from economies which might be achieved from combined
operations. The pro forma results do not necessarily represent results which
would have taken place on the basis assumed above, nor are they indicative of
the results of future combined operations.
F-17
<PAGE> 84
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
8. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
<S> <C> <C>
Land and buildings.......................................... $ 5,470 $ 12,365
Leasehold improvements...................................... 12,245 31,643
Office furniture and fixtures............................... 535 1,899
Store furniture and fixtures................................ 13,123 41,175
Machinery and equipment..................................... 5,003 13,139
Remodeling-in-progress...................................... 4,371 1,499
------- --------
40,747 101,720
Less accumulated depreciation and amortization.............. (527) (44,982)
------- --------
Total............................................. $40,220 $ 56,738
======= ========
</TABLE>
9. INTANGIBLE ASSETS:
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
<S> <C> <C>
Financing fees.............................................. $1,434 $ 615
Trade name.................................................. 760 --
------ ------
2,194 615
Less accumulated amortization............................... (707) (265)
------ ------
Total............................................. $1,487 $ 350
====== ======
</TABLE>
F-18
<PAGE> 85
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
10. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consisted of the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
<S> <C> <C>
Payroll and related costs................................... $ 8,256 $ 6,775
Taxes other than income..................................... 3,266 3,892
Gift certificate liability.................................. 5,391 2,456
Payable for acquisition, including expenses (see Notes 7 and
20)....................................................... 71,614 --
Customer product guarantee program.......................... 3,275 --
Customer loyalty program liability.......................... 744 6,101
Reorganization liabilities.................................. 4,532 1,273
Other....................................................... 4,561 2,839
-------- -------
Total............................................. $101,639 $23,336
======== =======
</TABLE>
11. FINANCING ARRANGEMENTS:
Predecessor Company:
As a result of Chapter 11 proceedings, all remaining indebtedness of the
Predecessor Company as of the petition date became immediately due and payable
in accordance with the terms of the instruments governing such indebtedness.
While the Chapter 11 proceedings were pending, the Predecessor Company was
prohibited from making any payments of obligations owing as of the petition
date, except as permitted by the Bankruptcy Court and contractual terms of debt
obligations were suspended subject to settlement. Furthermore, the Predecessor
Company was not able to borrow additional funds under any of its prepetition
credit arrangements. Borrowings outstanding at March 1, 1997 of $285,800, and
related accrued interest of $9,817, were classified as liabilities subject to
compromise because the principal balance was under secured.
The Predecessor Company obtained debtor-in-possession financing with a
syndicate of financial institutions whereby a maximum of $35,000 revolving
credit facility ("DIP Facility"), which included a letter of credit sub-
facility of $10,000, was available to fund working capital, issue letters of
credit and make other payments during the Chapter 11 proceedings. The DIP
Facility was available through the earlier of February 9, 1998 or the effective
date of the Plan. The maximum amount available under the DIP Facility was
subject to a borrowing base limitation equal to 35% of eligible inventory (as
defined) during the peak period (as defined) and 30% of eligible inventory
during the non-peak period, plus cash and investments held at the Predecessor
Company's cash management bank less the Predecessor Company's cash collateral.
Borrowings under the DIP Facility bore interest, at the Predecessor Company's
option, at the Base Rate (defined as the higher of the Prime Rate or the Base CD
Rate plus 1% or the Federal Funds Effective Rate plus 1/2%) plus 1% (9.25% at
March 1, 1997).
Interest on Base Rate loans was payable monthly in arrears. The Predecessor
Company paid a commitment fee of 1/2% on the average daily unused portion of
the DIP Facility. The Predecessor Company had no outstanding borrowings against
the DIP Facility at March 1, 1997. At March 1, 1997, the Predecessor Company had
$3,270 of letters of credit outstanding.
F-19
<PAGE> 86
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
11. FINANCING ARRANGEMENTS -- CONTINUED:
The weighted average interest rate on these borrowings was 9.84% for the 53
week period ended March 2, 1996.
The Predecessor Company's various prepetition loan agreements had covenants
which, among other things, limited the payment of dividends and capital
expenditures, specified levels of consolidated net worth and minimum
consolidated adjusted operating profit as well as maintenance of specified
ratios including interest coverage and current ratios. However, as a result of
the automatic stay resulting from the Chapter 11 proceedings, the Predecessor
Company's lenders could not enforce any rights, exercise any remedies or realize
on any claims in the event that the Predecessor Company failed to comply with
any of the covenants contained in the various prepetition loan agreements.
The Predecessor Company was subject to various financial and other
covenants under the terms of the DIP Facility including, among other things,
minimum EBITDA (as defined in the DIP Facility) and limitations on indebtedness,
investments, payments of indebtedness and capital expenditures. The Company was
in compliance with the DIP Facility covenants at March 1, 1997 or obtained
appropriate waivers.
Successor Company:
The Successor Company entered into a Revolving Credit Agreement dated as of
January 27, 1998. The facility provides for loans of up to $50,000 during the
peak period (October through December) and up to $35,000 during the non-peak
period (including in each case up to $5,000 of letters of credit). In no case
can the amount of loans exceed the borrowing base, as defined. The borrowing
base means, during the peak period, 35% of eligible inventory and during the
non-peak period, 30% of eligible inventory. The Successor Company had no
borrowings under the facility during the period January 27, 1998 to February 28,
1998 and had $35,000 of availability at February 28, 1998. The facility
terminates on January 27, 2001. The Successor Company's obligations are
guaranteed by Camelot Music Holdings, Inc. ("CMHI") and by all of Camelot's
subsidiaries and are collateralized by substantially all of Camelot's assets.
CMHI has pledged to the lenders its capital stock of Camelot and Camelot has
pledged to the lenders the capital stock of its subsidiaries.
Loans bear interest, at the option of the Successor Company, at either (a)
the Eurodollar Rate (as defined) plus 1.75% or (b) the greater of (i) the bank's
Prime Rate, (ii) the Base CD Rate (as defined) plus 1%, or (iii) the Federal
Funds Effective Rate (as defined) plus 1/2 of 1%. The Successor Company also
pays an annual commitment fee of 3/8 of 1% on the available commitment. The
Successor Company is required to use any excess proceeds from asset sales of
more than $750 to reduce the commitments under the facility. In addition, the
Successor Company is required for 45 consecutive days during each year to reduce
the principal amount of all outstanding loans to zero.
The Revolving Credit Agreement contains certain customary negative
covenants which under certain circumstances, limit the Successor Company's
ability to incur additional indebtedness, pay dividends, make capital
expenditures and engage in certain extraordinary corporate transactions. The
Revolving Credit Agreement also requires the Successor Company to maintain
minimum consolidated EBITDA (as defined) levels. The Successor Company was in
compliance with these covenants at February 28, 1998.
As of June 3, 1998, the Successor Company received commitment letters from
its lenders to modify the Revolving Credit Agreement to include; among other
things, a term loan provision (see Note 21).
F-20
<PAGE> 87
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
11. FINANCING ARRANGEMENTS -- CONTINUED:
Long-term debt, in accordance with its contracted terms, consisted of the
following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
--------- -----------
FEBRUARY
28, MARCH 1,
1998 1997
-------- --------
<S> <C> <C>
Revolving Credit Agreement.................................. $ -- $ --
Senior Credit Facility:
Tranche A Term Loan....................................... -- 57,000
Tranche B Term Loan....................................... -- 78,000
Tranche C Term Loan....................................... -- 60,000
Revolving Credit Commitment............................... -- 90,800
Subordinated Debentures..................................... -- 55,748
Senior Debentures........................................... -- 55,212
--------- ---------
Total............................................. -- 396,760
--------- ---------
Less long-term debt classified as current -- --
Less amounts included as liabilities subject to
compromise........................................... -- (396,760)
--------- ---------
$ -- $ --
========= =========
</TABLE>
The Predecessor Company accrued interest on its unsecured and under secured
obligations through the petition date; however, due to the uncertainties
relating to a final plan of reorganization, the Predecessor Company ceased
accruing interest on such obligations effective on the petition date (see Note
2).
12. LIABILITIES SUBJECT TO COMPROMISE:
Liabilities subject to compromise consisted of the following:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-------------
MARCH 1,
1997
-------------
<S> <C>
Bank debt and related interest.............................. $295,617
Subordinated debentures and related interest of $2,741...... 58,489
Senior debentures and related interest of $2,439............ 57,651
Trade claims................................................ 54,675
Lease claims................................................ 14,349
Priority tax claims......................................... 1,219
Other claims................................................ 2,811
--------
Total............................................. $484,811
========
</TABLE>
F-21
<PAGE> 88
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
12. LIABILITIES SUBJECT TO COMPROMISE -- CONTINUED:
Liabilities subject to compromise under the Chapter 11 proceedings included
substantially all current and long-term debt and trade and other payables as of
the petition date. As discussed in Note 2, payment of these liabilities,
including the maturity of debt obligations, was stayed while the Predecessor
Company operated as a debtor-in-possession.
As part of the Chapter 11 proceedings, the Predecessor Company notified all
known or potential claimants for the purpose of identifying all prepetition
claims against the Company. The Bankruptcy Court entered an order setting
January 30, 1997 as the bar date (the "Bar Date") for submission of proofs of
claim in the Chapter 11 proceedings. With certain exceptions, a creditor who
failed to submit on or before the Bar Date a proof of claim in respect of a
claim against the Predecessor Company is forever barred from asserting such
claim against the Predecessor Company.
On December 12, 1997, as described in Notes 2, 4 and 5, the Predecessor
Company's Plan was confirmed whereby substantially all claims arising in
connection with the Chapter 11 proceedings have been resolved. Accordingly,
management believes that the amount of liabilities subject to compromise as
reported are fairly stated.
13. STOCKHOLDERS' EQUITY (DEFICIT):
The following is a summary of the capitalization of the Predecessor Company
at March 1, 1997:
<TABLE>
<S> <C>
Class A Stock:............................ 910,000 shares authorized; 850,000 shares
issued and outstanding
Class C Stock:............................ 557,000 shares authorized; 143,750 shares
issued and outstanding
Class D Voting Stock:..................... 6,250 shares authorized; 6,250 shares
issued and outstanding
Class E Stock:............................ 375,010 shares authorized; no shares
issued or outstanding
Common Stock:............................. 1,848,260 shares authorized; no shares
issued or outstanding
</TABLE>
The Class A Stock, Class C Stock, Class D Voting Stock and Common Stock had
one cent par values per share. The Class E Stock had a one dollar par value per
share. The transfer of any shares of stock were restricted and voting rights,
liquidation rights and dividend rights were as specified in the Predecessor
Company's Certificate of Designation.
On December 12, 1997, the Company's Plan was confirmed in Bankruptcy Court
whereby the reorganized company emerged and issued approximately 10,166,162
common shares of stock to the various claim holders pursuant to the terms of the
Plan. The stockholders in the Predecessor Company received no recovery nor were
they issued any shares in the Successor Company under the Plan. None of the
claim holders receiving shares of the Successor Company were pre-confirmation
shareholders of the Predecessor Company.
The capitalization of the Successor Company at February 28, 1998 consists
of 30,000,000 shares of authorized one cent par value voting common stock of
which 9,835,559 shares were issued and outstanding at
F-22
<PAGE> 89
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
13. STOCKHOLDERS' EQUITY (DEFICIT) -- CONTINUED:
February 28, 1998 and 340,603 shares will be issued pursuant to the Plan and in
lieu of payment of $188 in administrative expenses.
14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS:
The Predecessor Company had established a Management Stock Incentive Plan
for certain key employees and a Stock Purchase Agreement with certain key
employee shareholders. No compensation expense was recognized based on the terms
of these agreements and the agreements were terminated as of the effective date
of the Plan with none of the key employees receiving any shares in the Successor
Company as a result of these agreements.
Effective January 27, 1998, the Successor Company established the Camelot
Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock to
officers, directors and key employees responsible for the direction and
management of the Company. Vesting of the options was over a four year period
with a maximum term of ten years. Based on the terms of the Stock Option Plan
vesting has been accelerated based on the market performance of the Company's
common stock whereby 50% of the options vested on March 13, 1998 and the
remaining vest on January 28, 2000. None of the options were exercisable at
February 28, 1998. At February 28, 1998, 825,094 shares of common stock were
reserved for future issuance under the Stock Option Plan based on a requirement
that 7.5% of total outstanding shares on a diluted basis be reserved for the
Stock Option Plan.
Information relating to stock options is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF PER SHARE
SHARES AVERAGE* TOTAL PRICE
--------- ------------ -----------
<S> <C> <C> <C>
Shares under option at January 27, 1998.......... -- $ -- $ --
Granted.......................................... 687,000 20.75 14,255
Exercised........................................ -- -- --
Forfeited........................................ -- -- --
------- ------ ---------
Shares under option February 28, 1998............ 687,000 $20.75 $ 14,255
======= ====== =========
</TABLE>
- ---------------
* Per share data not in thousands of dollars
All outstanding options are qualified options. No compensation expense
related to stock option grants was recorded for the period January 28, 1998 to
February 28, 1998 as the option exercise prices were above the fair value on the
date of grant.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
F-23
<PAGE> 90
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS -- CONTINUED:
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.61%
Dividend yield.............................................. 0%
Volatility factor........................................... 55.33%
Weighted average expected life.............................. 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma net income and net income per share for the one month period ended
February 28, 1998 were as follows:
<TABLE>
<S> <C>
Net earnings -- as reported................................. $581
Net earnings -- pro forma................................... $445
Earnings per share.......................................... See Note 3Q
</TABLE>
On June 4, 1998, the Successor Company's Board of Directors approved a
Director Stock Option Plan (see Note 21).
15. SPECIAL ITEMS:
Special items consisted of the following:
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------
PERIOD PERIOD 52 WEEK 53 WEEK
FEBRUARY 1, MARCH 2, PERIOD PERIOD
1998 TO 1997 TO ENDED ENDED
FEBRUARY 28, JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ ----------- -------- --------
<S> <C> <C> <C> <C>
Put agreements................................. $ -- $ -- $ -- $ 3,413
Write-down of long-lived assets................ -- 6,523 202,869
Restructuring charges.......................... -- -- -- 5,238
Reduction of customer loyalty program
liability.................................... -- (4,443) -- --
------- ------- ------ --------
Total................................ $ -- $(4,443) $6,523 $211,520
======= ======= ====== ========
</TABLE>
F-24
<PAGE> 91
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
15. SPECIAL ITEMS -- CONTINUED:
Put Agreements: Effective November 12, 1993 the Predecessor Company entered
into Put Agreements ("Put") with four existing shareholders. The Put provided
the Predecessor Company an option to sell 375,010 shares of its Class E
preferred stock at an aggregate purchase price of $50,000. In consideration for
the Put, the Predecessor Company paid fees of $3,413 to the four shareholders.
The Put was exercisable upon the execution by the Predecessor Company of a
purchase agreement to acquire a company in a business similar to Camelot. The
Put, pursuant to its original terms, expired on December 31, 1995.
Write-down of Long-Lived Assets: Management identified significant adverse
changes in the Predecessor Company's business climate late in the third quarter
of the 53 week period ended March 2, 1996 that persisted subsequent to year end.
These changes were largely due to increasing competition in the Predecessor
Company's marketplace, which led to operating results and forecasted future
results that were less than previously planned. These factors led to the
conclusion that there was a potential impairment in the recorded value of
goodwill and certain property, plant and equipment. Management performed an
analysis of the recoverability of its long-lived assets based upon a variety of
valuation methods including discounted cash flow and earnings before interest,
taxes and depreciation expense. In management's judgment, there was an
impairment of certain of the Predecessor Company's property, plant and equipment
and the carrying value of the Predecessor Company's goodwill was reduced
resulting in an impairment loss of $202,869 which is included in the
consolidated statement of operations for that period.
As a result of the Predecessor Company's financial performance and the
Chapter 11 proceedings, the Predecessor Company closed seventy-three locations
during the 52 week period ended March 1, 1997. In addition, the Predecessor
Company re-evaluated the carrying amount of its property, plant and equipment.
Based on this evaluation, the Predecessor Company determined that property,
plant and equipment with a carrying amount of $17,152 was impaired, resulting in
a write-down of $6,523 to estimated fair value, which amount is included in the
consolidated statement of operations for that period.
Restructuring Charges: In response to an increasingly competitive retail
environment, the Predecessor Company began a "reengineering" project during the
53 week period ended March 2, 1996 in order to lower costs through corporate
overhead reductions and the identification of under performing stores. As part
of this project, the Predecessor Company identified required changes in
corporate and retail operations and, therefore, assessed the realizable value of
certain assets and the cost of restructuring measures. As a result,
restructuring charges of $5,238 were recorded in the consolidated statement of
operations for that period.
Customer Loyalty Program Liability: During the period March 2, 1997 to
January 31, 1998, the Company discontinued its manual "Punch Card" version of
its customer loyalty program and replaced it with a limited automated program
targeted to its most frequent and highest spending customers. The reduction in
the program resulted in the reversal of program reward redemption reserves
aggregating $4,443 which was recorded in the consolidated statement of
operations for that period.
16. LEASES:
The Company leases its retail stores under noncancelable leases expiring in
various years through fiscal 2007. Several of the leases are subject to renewal
options under various terms and generally all the leases require the Company to
pay real estate taxes and common area maintenance charges.
F-25
<PAGE> 92
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
16. LEASES -- CONTINUED:
Minimum rental commitments are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
------------
<S> <C>
1998........................................................ $ 39,001
1999........................................................ 35,888
2000........................................................ 33,550
2001........................................................ 29,906
2002........................................................ 24,668
Thereafter.................................................. 43,509
--------
Total minimum payments............................ $206,522
========
</TABLE>
Rental expense totaled $2,236, $25,593, $29,361 and $33,404 for the period
February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31,
1998, the 52 week period ended March 1, 1997 and the 53 week period ended March
2, 1996, respectively. Rental expense included contingent rentals of $157,
$2,259, $2,187 and $2,813 for the respective periods. The contingent rentals are
based on sales volume.
17. INCOME TAXES:
The (provision) benefit for income taxes includes current and deferred
income taxes as follows:
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY
-------------- PREDECESSOR COMPANY
PERIOD ------------------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
-------------- --------------------- ------------ -------------
<S> <C> <C> <C> <C>
Current taxes:
Federal........................ $ -- $ -- $ -- $(538)
State and local................ -- (289) -- 162
----- ----- ----- -----
Total.................. -- (289) -- (376)
----- ----- ----- -----
Deferred taxes:
Federal........................ (97) -- -- --
State and local................ (18) -- -- (98)
----- ----- ----- -----
Total.................. (115) -- -- (98)
----- ----- ----- -----
Total (provision)
benefit.............. $(115) $(289) $ -- $(474)
===== ===== ===== =====
Income tax (provision) benefit
from continuing operations
before extraordinary item...... $(115) -- -- $(474)
Tax benefit of extraordinary
item........................... -- -- -- --
----- ----- ----- -----
Total............................ $(115) $(289) $ -- $(474)
===== ===== ===== =====
</TABLE>
F-26
<PAGE> 93
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
17. INCOME TAXES -- CONTINUED:
The significant differences between the Federal U.S. statutory rate and the
Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY
------------ PREDECESSOR COMPANY
PERIOD ----------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Statutory tax rate...................... 35.0% 35.0% (35.0)% (35.0)%
Goodwill amortization and Fiscal 1995
write-off............................. -- 2.0 1.1 26.7
Corporate owned life insurance.......... (0.4) (1.3) 4.9 --
State taxes, net of federal benefit..... 4.0 .9 -- --
Utilization of loss carryforwards....... -- (35.7) -- --
IRC section 108 ordering rules.......... (22.1) -- -- --
Valuation allowance -- due to
uncertainty of utilization of net
operating loss carryforwards.......... -- 29.0 8.4
Other adjustments, net.................. -- -- -- .1
----- ----- ----- -----
Effective tax rate...................... 16.5% .9% 0.0% 0.2%
===== ===== ===== =====
</TABLE>
At February 28, 1998 and March 1, 1997, the Company had total deferred tax
assets of $26,344 and $55,989 and total deferred tax liabilities of $1,239 and
$192, respectively. As part of the emergence from Chapter 11 proceedings, the
Company believes that it is more likely than not that it will be able to use the
deferred tax assets at February 28, 1998 in the future. Therefore, no valuation
allowance has been established to offset these deferred tax assets. At March 1,
1997, the Company had net operating loss carryforwards of $76,000 for federal
and state income tax purposes expiring in years 2010 through 2012. For financial
reporting purposes, a full valuation allowance at March 1, 1997 was recognized
to offset the net deferred tax assets as management determined that the assets
may not be realized.
At January 31, 1998, as part of the fresh-start reporting, a reduction in
the deferred tax valuation allowance of $55,797 was recorded. A portion of this
reduction related to the utilization of net operating loss carryforwards against
the cancellation of indebtedness resulting from the emergence from Chapter 11
(see Note 2). Under the provision of the Internal Revenue Code ("IRC"), no
provision for income taxes was recorded on the remaining gain on the
cancellation of indebtedness. The remaining March 1, 1997 valuation allowance
was reversed as a part of the Company's adoption of fresh-start reporting and is
included in reorganization income (see Note 5). Deferred tax assets after
fresh-start reporting at the emergence date were $25,220.
F-27
<PAGE> 94
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
17. INCOME TAXES -- CONTINUED:
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
<S> <C> <C>
Net current deferred income tax assets:
Inventory reserves..................................... $ 1,817 $ 2,775
Reorganization expenses................................ 1,830 4,967
Other, net............................................. 2,910 3,986
------- --------
6,557 11,728
------- --------
Net long-term deferred income tax assets:
Depreciation differences............................... 16,138 4,361
Amortization of financing fees......................... -- 5,749
Net federal and state operating loss................... -- 28,306
Leases................................................. -- 2,265
Other, net............................................. 2,410 3,388
------- --------
18,548 44,069
------- --------
Valuation allowance.................................... -- (55,797)
------- --------
Net deferred tax assets on the consolidated balance
sheets............................................... $25,105 $ --
======= ========
</TABLE>
18. COMMITMENTS AND CONTINGENCIES:
Claims and Legal Actions: The Company is a party to various claims, legal
actions and complaints arising in the ordinary course of its business, including
proposed pre-petition assessments by the Internal Revenue Service aggregating
approximately $7,900 of which the Company has accrued $800. In the opinion of
management, all such matters not accrued for are without merit or involve such
amounts that unfavorable disposition will not have a material impact on the
financial position, results of operations or cash flows of the Company.
Self-Insurance Commitments: The Company is self-insured with respect to
workers' compensation benefits within the State of Ohio and medical benefits for
all of its employees. The Company maintains insurance coverage for workers'
compensation claims in excess of $300 per incident and for annual medical claims
in excess of $75 per employee.
Management Consulting Agreement: The Company was party to a five year
management consulting agreement with Investcorp S.A. ("Investcorp"). Fees under
this agreement were $500 per year payable annually, in advance, with the first
three years paid on November 12, 1993. The final two year payment was not paid
to Investcorp as a result of the rejection of the contract under Chapter 11
proceedings.
19. ELECTIVE SAVINGS AND PLAN:
The Company sponsors an Elective Savings 401(k) and Profit Sharing Plan
(the "401(k) Plan"). The 401(k) Plan covers substantially all employees and
provides for a 22.5% to 50% matching contribution of employee
F-28
<PAGE> 95
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
19. ELECTIVE SAVINGS AND PLAN -- CONTINUED:
elective contributions up to a maximum of 10% of wages, not to exceed the
statutory limit. Such matching contributions were approximately $56, $239, $309,
and $266 for the period February 1, 1998 to February 28, 1998, the period March
2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53
week period ended March 2, 1996, respectively. The Company may, at the
discretion of the Board of Directors, contribute additional funds to the Plan as
deemed appropriate. No such contributions were made during the respective
periods.
20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY
------------ PREDECESSOR COMPANY
PERIOD ----------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid (received) during the fiscal
year for:
Interest............................ $ 11 $ 152 $ 2,585 $32,136
Income taxes paid (refunded), net... 3 58 129 (3,221)
Reorganization items................ -- 5,759 5,956 --
Non-cash reorganization activities:
Reclassification of liabilities
subject to compromise............. $ -- $ -- $477,153 $ --
Decrease in accounts payable,
accrued expenses and other
liabilities....................... -- -- (80,393) --
Reduction of debt................... -- -- (396,760) --
</TABLE>
F-29
<PAGE> 96
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- CONTINUED:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-----------------------------
PERIOD FEBRUARY 1, 1998 TO
FEBRUARY 28, 1998
-----------------------------
FRESH-START ACQUISITION OF
REPORTING THE WALL
----------- --------------
<S> <C> <C>
Supplemental disclosures of investing activities:
Assets at fair value:
Cash...................................................... $ 86,304 $ 153
Accounts receivable....................................... 2,698 1,550
Inventories............................................... 108,781 39,630
Prepaid expenses and other................................ 8,541 2,583
Property, plant and equipment............................. 24,400 14,541
Goodwill.................................................. -- 26,950
Other long-term assets.................................... 29,595 3,967
--------- -------
Total assets...................................... 260,319 89,374
--------- -------
Liabilities at fair value:
Accounts payable.......................................... 33,522 --
Accrued expenses and other liabilities.................... 23,784 1,418
Other current liabilities................................. -- 6,633
Long-term liabilities..................................... 8,645 6,672
--------- -------
Total liabilities................................. 65,951 14,723
--------- -------
Common stock issued in exchange for debt discharged....... (194,368) --
Cash acquired............................................. -- (153)
Payable for acquisition, including expenses............... -- 71,614
--------- -------
Cash paid, net of cash acquired........................... $ -- $ 2,884
========= =======
</TABLE>
21. SUBSEQUENT EVENTS:
Plan of Merger: On June 3, 1998, the Successor Company entered into an
agreement and plan of merger (the "Merger Agreement") with respect to the
proposed acquisition of Spec's Music, Inc. ("Spec's"). Spec's is a Miami,
Florida based music retailer, and operates forty-two stores in Florida and
Puerto Rico. As of June 3, 1998, Spec's operated sixteen mall stores and
twenty-six stores in shopping centers and free-standing locations. Spec's also
owns three specialty Latin businesses, including a music distribution company
and the Latin music record label "Hits Only" and its recording studio, and
maintains an inventory of music produced by a majority of the independent Latin
labels. The acquisition will be accounted for as a purchase, and will include a
cash payment of approximately $26,000 (including repayment of assumed bank debt
of approximately $7,000), the assumption of additional liabilities of
approximately $13,000, and acquisition costs of approximately $2,000. The
acquisition will be funded primarily by the proceeds of a new term loan and the
balance funded by operating cash. Consummation of the acquisition is subject to
certain conditions, including approval of the acquisition by Spec's public
stockholders. The acquisition is anticipated to close in July 1998.
Revolving Credit Agreement Amendment and Waiver: In early June 1998, the
Successor Company received commitment letters from its lenders to modify its
Revolving Credit Agreement (the "Amended Credit Facility"). The commitment
includes the addition of a $25,000 term loan that will bear interest at the same
rate as the
F-30
<PAGE> 97
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
21. SUBSEQUENT EVENTS -- CONTINUED:
existing Revolving Credit Agreement. The proceeds of the term loan will be used
to finance the acquisition of Spec's. Mandatory repayments of the term loan are
$3,000 in Fiscal 1998, $8,000 in Fiscal 1999, $10,000 in Fiscal 2000, and $4,000
in Fiscal 2001. In addition, the modification also increased the eligible
borrowing base to 60% of eligible inventory as well as modified the current
capital expenditures limitation and waived certain covenants in order to permit
the Spec's acquisition. The Successor Company will pay a fee of $125 for the
commitment to modify the Revolving Credit Agreement.
Outside Directors Stock Option Plan: On June 4, 1998, the Successor
Company's Board of Directors approved the Outside Directors Stock Option Plan
(the "Directors Plan"). Eligible participants include all non-employee
directors. A total of 125,000 shares were reserved for future issuance under the
Directors Plan. On June 4, 1998, each of the five outside directors received a
grant of 2,500 stock options at an option price of twenty dollars and
seventy-five cents per share. Vesting on the options is immediate upon grant. In
addition, upon the effective date of the registration statement for the
Company's initial public offerings each outside director will also receive a
grant of 7,500 options at an option price equal to the fair market value of a
share of common stock on the date of the contemplated public offering of the
shares. These options have a three-year vesting schedule. The Company will
recognize approximately $241 in compensation expense in connection with these
option awards during the second quarter of Fiscal 1998.
Initial Public Offerings: The Company announced its intention to register
with the Securities and Exchange Commission for initial public offerings of
common stock. The offerings will be made by institutional stockholders who
received shares of common stock as part of the Company's emergence from Chapter
11.
F-31
<PAGE> 98
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
The Wall Music. Inc.:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of The Wall Music, Inc. (the "Company"), for the year
ended June 1, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and cash flows for the year
ended June 1, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company sold
substantially all of its tangible assets and transferred certain liabilities
effective February 28, 1998.
Deloitte & Touche LLP
Atlanta, Georgia
August 21, 1997
(February 28, 1998 as to Note 1)
F-32
<PAGE> 99
THE WALL MUSIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------ YEAR ENDED
FEBRUARY 28, MARCH 1, JUNE 1,
1998 1997 1997
------------ -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES................................................ $141,314 $130,338 $161,236
COST AND EXPENSES:
Cost of sales.......................................... 85,701 80,955 99,429
Selling, general, and administrative expenses.......... 41,565 40,758 53,698
Depreciation and amortization.......................... 4,666 6,138 8,197
Writedown of long-lived assets......................... 23,159 27,323
-------- -------- --------
INCOME (LOSS) BEFORE TAXES............................... 9,382 (20,672) (27,411)
INCOME TAX BENEFIT (EXPENSE)............................. (3,177) 2,767 3,738
-------- -------- --------
NET INCOME (LOSS)........................................ $ 6,205 $(17,905) $(23,673)
======== ======== ========
</TABLE>
See notes to financial statements.
F-33
<PAGE> 100
THE WALL MUSIC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED JUNE 1, 1997
AND THE NINE MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- -------------------- ADDITIONAL
SHARES SHARES PAID-IN ACCUMULATED
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT
----------- ------ ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- June 2, 1996....... 749 $749 100 $ -- $110,656 $(23,303)
Conversion of stock........... (749) (749) 400 -- 749 --
Net loss...................... -- -- -- -- -- (23,673)
----- ---- --- ----- -------- --------
BALANCE -- June 1, 1997....... -- $ -- 500 $ -- $111,405 $(46,976)
----- ---- --- ----- -------- --------
Net income (unaudited)........ -- -- -- -- -- 6,205
----- ---- --- ----- -------- --------
BALANCE -- February 28, 1997.. -- $ -- 500 $ -- $111,405 $(40,771)
===== ==== === ===== ======== ========
</TABLE>
See notes to financial statements.
F-34
<PAGE> 101
THE WALL MUSIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------ YEAR ENDED
FEBRUARY 28, MARCH 1, JUNE 1,
1998 1997 1997
------------ -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 6,205 $(17,905) $(23,673)
Adjustments to reconcile net income (loss) from operating
activities to net cash provided by (used in) operating
activities:
Depreciation, amortization and writedown of long-lived
assets.............................................. 4,666 29,297 35,520
Deferred income taxes.................................. 209 2,306 (3,758)
Gain (loss) on disposition of property and equipment... 81 (163) (132)
Increase (decrease) in cash flow resulting from changes
in assets and liabilities:
Accounts receivable................................. 45 (135) (60)
Inventories......................................... (3,091) (6,724) 696
Due from parent company............................. (10,285) 1,555 1,874
Other current assets................................ (2,179) 1,513 2,049
Accounts payable, trade............................. 2,613 (3,359) (5,833)
Accrued expenses.................................... 5,979 (1,896) (1,275)
------- -------- --------
Net cash provided by (used in) operating
activities........................................ 4,243 4,489 5,408
INVESTING ACTIVITIES:
Additions to property and equipment...................... (2,061) (4,642) (5,825)
Deferred transaction costs............................... (3,350) -- --
Proceeds from sale of property and equipment............. 417 38 38
------- -------- --------
Net cash used in investing activities............... (4,994) (4,604) (5,787)
NET DECREASE IN CASH AND CASH EQUIVALENTS................ (751) (115) (379)
CASH AND CASH EQUIVALENTS
Beginning of period.................................... 1,782 1,892 2,161
------- -------- --------
End of period.......................................... $ 1,031 $ 1,777 $ 1,782
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid for income taxes............................. $ 29 $ 86 $ 115
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES--
Conversion of preferred shares to common shares........ $ -- $ 749 $ 749
======= ======== ========
</TABLE>
See notes to financial statements.
F-35
<PAGE> 102
THE WALL MUSIC, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 1, 1997 AND FOR THE NINE MONTHS ENDED
FEBRUARY 28, 1998 (UNAUDITED) AND MARCH 1, 1997 (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUBSEQUENT EVENT
The Wall Music, Inc. (the "Company") is a wholly owned subsidiary of W H
Smith Group Holdings (USA), Inc. (the "Parent"). The Parent is a wholly owned
subsidiary of W H Smith Group plc, a publicly-held United Kingdom corporation.
Prior to the sale of certain assets and transfer of certain liabilities on
February 28, 1998, the Company was a specialty music retailer operating in ten
states in the Northeastern and Mid-Atlantic regions of the United States. The
Company sold compact discs, cassettes, pre-recorded video cassettes, and other
entertainment products and related accessories.
Pursuant to an Asset Purchase Agreement dated December 10, 1997 (the
"Purchase Agreement"), the Parent sold certain assets and transferred certain
liabilities of the Company to Camelot Music, Inc. ("Camelot") effective February
28, 1998. In connection with the acquisition, Camelot assumed all of the
Company's store leases in effect on February 28, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- These financial statements have been prepared from
the separate books and records of the Company and represent the results of
operations, changes in stockholders', and cash flows of the Company immediately
prior to the acquisition by Camelot of substantially all tangible assets and
certain liabilities of the Company.
The financial statements of the Company for the nine months ended February
28, 1998 and March 1, 1997 are unaudited and, in the opinion of management,
include all adjustments consisting solely of normal recurring adjustments
necessary to fairly state the Company's results of operations, changes in
stockholder's equity, and cash flows for the periods presented. The results of
operations for the nine months ended February 28, 1998 and March 1, 1997 are not
necessarily indicative of the results to be expected for the full year.
The Company had certain transactions with its Parent (see Note 7).
Fiscal Year -- The Company's fiscal year is comprised of the 52- or 53-week
period ending on the Sunday closest to May 31. The year ended June 1, 1997
("fiscal 1997") contained 52 weeks.
Cash and Cash Equivalents -- For the purpose of reporting cash flows, cash
and cash equivalents include cash on hand and cash invested in highly liquid
investments with a purchased maturity of three months or less.
Inventories -- Inventories are valued at the lower of average cost or
market.
Preopening Costs -- Costs associated with opening new stores are expensed
when incurred.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the terms of the leases, including likely renewal options, or ten
years.
Goodwill -- Excess of cost over net assets acquired is amortized over
various periods ranging from 25 to 40 years.
Favorable Lease Values -- Intangible assets related to leases are amortized
over the terms of the associated leases.
Income Taxes -- The Company was a member of a consolidated group for
federal income tax filing purposes. The Company's Parent allocated income tax
expense or benefit to each of its subsidiaries based on each
F-36
<PAGE> 103
THE WALL MUSIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary's pretax income or loss. If the Company had computed income taxes on
a separate return basis, income tax expense for the year ended June 1, 1997 and
for the nine months ended February 28, 1998 and March 1, 1997 would have been
approximately zero. (See also Note 5.)
Impairment of Long-Lived Assets -- During the year ended June 1, 1997, the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1997, the Company evaluated the recoverability of long-lived
assets on a store-by-store basis. For each operating unit determined to be
impaired, the Company recognized an impairment loss equal to the difference
between the carrying value and the fair value of the operating unit's assets.
Fair value, on an individual operating-unit basis, was estimated to be the
present value of expected future cash flows, as determined by management. As a
result of this evaluation, the Company wrote-down intangible assets by
$17,475,000 and property and equipment by $9,849,000 in Fiscal 1997.
4. LEASE OBLIGATIONS
The Company has operating leases that relate primarily to its retail
stores. Lease terms generally range from 3 to 20 years with renewal options.
Certain store leases provide for additional contingent rentals based on a
percentage of sales in excess of a base amount. Certain other leases provide for
scheduled rent increases over the term of the lease; rent expense for such
leases is recognized in equal annual amounts over the term of each such lease.
Total rent expense for the year ended June 1, 1997 (including contingent rentals
of $104,000) was $17,592,000.
Future minimum lease payments as of June 1, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
----------- ---------
<S> <C>
1998........................................................ $16,904
1999........................................................ 15,826
2000........................................................ 14,097
2001........................................................ 13,139
2002........................................................ 11,740
Thereafter.................................................. 25,489
-------
$97,195
=======
</TABLE>
F-37
<PAGE> 104
THE WALL MUSIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The components of income tax benefit (expense) for the year ended June 1,
1997 follow (in thousands):
<TABLE>
<S> <C>
Current:
Federal................................................... $ 122
State..................................................... (142)
------
(20)
------
Deferred:
Federal................................................... 6,539
State..................................................... 1,403
------
7,942
------
Change in valuation allowance............................. (4,184)
------
Total income tax benefit.......................... $3,738
======
</TABLE>
The income tax benefit computed using the federal statutory rate is
reconciled to the reported income tax benefit as follows for the year ended June
1, 1997:
<TABLE>
<S> <C>
Computed tax benefit at federal statutory rate.............. 34.0%
State taxes, net............................................ 8.2
Nondeductible amortization.................................. (13.3)
Change in valuation allowance............................... (15.3)
-----
13.6%
=====
</TABLE>
In fiscal 1997, the Company determined that it was unlikely to realize the
benefit of deferred state income tax assets. Accordingly, the Company
established a reserve for the full amount of such deferred taxes.
6. PENSION AND RETIREMENT PLANS
Employees were eligible to participate in the W H Smith, Inc. Savings and
Retirement Plan that qualified as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. The plan covered substantially all
employees. After one year of continuous service, the Company matched 100% of
employee contributions up to 3% of each employee's salary. The Company recorded
expense in fiscal 1997 related to this plan of $220,000.
In addition, the Company participated in an unfunded Supplemental Executive
Retirement Plan ("SERP") which provided supplemental pension benefits to key
executives. Expense for this plan was $75,000 for the year ended June 1, 1997.
7. RELATED PARTY TRANSACTIONS
The Company regularly received and remitted working capital to the Parent
based on cash flow required for or generated from operations.
The Company supplied inventory and administrative services for airport
music stores operated by its sister company W H Smith, Inc. ("Smith"). During
fiscal 1997, the Company provided Smith $1,650,000 in inventory (at average
cost) and charged Smith $76,000 for related administrative costs.
The Company participated in group insurance programs managed by the Parent.
The Parent charged the Company for its insurance premiums and for its
self-insured medical and workers compensation expense. Such charges aggregated
$1,206,000 for the year ended June 1, 1997.
The Company also recorded a management fee representing the allocated costs
of certain corporate services provided by the Parent. Such expenses totaled
$250,000 during fiscal 1997.
F-38
<PAGE> 105
A map of the United States depicting locations of Camelot Music and The
Wall stores as of June 1, 1998, text stating "Customer Satisfaction Through
Broad Product Selection and Service," and the Camelot Music and The Wall logos.
<PAGE> 106
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Price Range of Common Stock........... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 20
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 34
Management............................ 44
Certain Transactions.................. 49
Principal and Selling Stockholders.... 51
Description of Capital Stock.......... 52
Shares Eligible For Future Sale....... 54
Description of Certain Indebtedness... 57
Certain United States Federal Tax
Consequences for Non-United States
Holders............................. 59
Underwriting.......................... 61
Legal Matters......................... 63
Experts............................... 64
Available Information................. 64
Index to Consolidated Financial
Statements and Notes Thereto........ F-1
</TABLE>
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
SHARES
[LOGO]
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
======================================================
<PAGE> 107
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 15, 1998
PROSPECTUS
SHARES
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
------------------------
All of the shares of Common Stock of Camelot Music Holdings, Inc.
(together with its subsidiaries, "Camelot" or the "Company") offered hereby are
being sold by certain stockholders (the "Selling Stockholders") of the Company.
See "Principal and Selling Stockholders." The Company is not selling shares of
Common Stock in the Offerings and will not receive any proceeds from the sale of
any shares of Common Stock offered hereby.
Of the shares of Common Stock offered hereby, shares
are being offered for sale initially outside the United States and Canada by the
International Managers and shares are being offered for sale initially
in a concurrent offering in the United States and Canada by the U.S.
Underwriters. The initial public offering price and the underwriting discount
per share will be identical for both Offerings. See "Underwriting."
Prior to the Offerings, there has been a limited public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. The initial public offering
price does not necessarily bear any direct relationship to the market prices of
the Common Stock as reported on the OTC Bulletin Board prior to the Offerings.
The closing bid price of the Common Stock on June 12, 1998 was $42.00 per share.
For a discussion relating to factors to be considered in determining the initial
public offering price, see "Underwriting." The Company intends to apply for
quotation of the Common Stock on the Nasdaq National Market System under the
symbol "CMLT."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................... $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
====================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay expenses of the Offerings estimated at
$ .
(3) The Selling Stockholders have granted the International Managers and the
U.S. Underwriters options to purchase up to an additional
shares and shares of Common Stock, respectively, in each case
exercisable within 30 days after the date hereof, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Selling Stockholders
will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
------------------------
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
------------------------
The date of this Prospectus is , 1998.
<PAGE> 108
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International, Morgan Stanley & Co. International Limited and
McDonald & Company Securities, Inc. are acting as lead managers (the "Lead
Managers") for each of the International Managers named below (the
"International Managers"). Subject to the terms and conditions set forth in an
international purchase agreement (the "International Purchase Agreement") among
the Company, CMI, the Selling Stockholders and the International Managers, and
concurrently with the sale of shares of Common Stock to the U.S.
Underwriters (as defined below), the Selling Stockholders have agreed to sell to
the International Managers, and each of the International Managers severally and
not jointly has agreed to purchase from the Selling Stockholders, the number of
shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- -----------
<S> <C>
Merrill Lynch International.................................
Morgan Stanley & Co. International Limited..................
McDonald & Company Securities, Inc..........................
Total.............................................
===========
</TABLE>
The Company, CMI and the Selling Stockholders have also entered into a U.S.
purchase agreement (the "U.S. Purchase Agreement") with certain underwriters in
the United States and Canada (the "U.S. Underwriters" and together with the
International Managers, the "Underwriters") for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated
and McDonald & Company Securities, Inc. are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Selling Stockholders have agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters severally have agreed to purchase from
the Selling Stockholders, an aggregate of shares of Common Stock. The
initial public offering price per share and the total underwriting discount per
share of Common Stock are identical under the International Purchase Agreement
and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the
International Purchase Agreement and the U.S. Purchase Agreement, the
commitments of non-defaulting Underwriters may be increased. The closings with
respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The Lead Managers have advised the Company and the Selling Stockholders
that the International Managers propose initially to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of $ per share of Common Stock. The International Managers may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Selling Stockholders have granted options to the International
Managers, exercisable for 30 days after the date of this Prospectus, to purchase
up to an aggregate of additional shares of Common Stock at the
initial public offering price set forth on the cover page of this Prospectus,
less the underwriting discount. The International Managers may exercise these
options solely to cover over-allotments, if any, made on the sale of the Common
Stock offered hereby. To the extent that the International Managers exercise
these options, each International Manager will be obligated, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such International Manager's initial amount reflected in the
foregoing table. The Selling Stockholders also have granted options to the U.S.
Underwriters, exercisable for 30 days after the
61
<PAGE> 109
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
date of this Prospectus, to purchase up to an aggregate of additional
shares of Common Stock to cover over-allotments, if any, on terms similar to
those granted to the International Managers.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to of the shares offered to be
sold to certain employees of the Company and other persons having business
relationships with the Company. The number of shares of Common Stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of the Offerings will be
offered by the Underwriters to the general public on the same terms as the other
shares offered hereby.
The Company, its directors and executive officers, member of management,
the Selling Stockholders and certain holders of Common Stock have agreed,
subject to certain exceptions, not to directly or indirectly (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
the Common Stock whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, without the
prior written consent of Merrill Lynch on behalf of the Underwriters for a
period of 180 days after the date of this Prospectus. See "Shares Eligible for
Future Sale."
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. persons or
to Canadian persons or to persons they believe intend to resell to U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
Prior to the Offerings, there has been a limited public market for the
Common Stock of the Company. The initial public offering price will be
determined through negotiations among the Selling Stockholders and the U.S.
Representatives and the Lead Managers. The factors considered in determining the
initial public offering price, in addition to prevailing market conditions, are
price earnings ratios of publicly traded companies that the U.S. Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, and an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the Offerings at or above the
initial public offering price.
The Common Stock is also currently traded on the OTC Bulletin Board. The
Company intends to apply for quotation of the Common Stock on the Nasdaq
National Market System under the symbol "CMLT."
Because Merrill Lynch may be deemed to be an affiliate of the Company, the
Offerings will be conducted in accordance with Conduct Rule 2720 of the National
Association of Securities Dealers, Inc., which requires that the public offering
price of an equity security be no higher than the price recommended by a
Qualified Independent Underwriter which has participated in the preparation of
the Registration Statement and performed its usual standard of due diligence
with respect thereto. McDonald & Company Securities, Inc. has agreed to act as
Qualified Independent Underwriter with respect to the Offerings, and the public
offering price of the Common Stock will be no higher than that recommended by
McDonald & Company Securities, Inc.
62
<PAGE> 110
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the U.S. Underwriters and the International Managers may be required to
make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Each International Manager has agreed that (i) it has not offered or sold
and, prior to the expiration of the period of six months from the Closing Date,
will not offer or sell any shares of Common Stock to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issuance of Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or any
other material relating to the Company, the Selling Stockholders or shares of
Common Stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of Common Stock may not be offered or sold, directly or
indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the shares of Common Stock may be distributed
or published, in or from any country or jurisdiction except in compliance with
any applicable rules and regulations of any such country or jurisdiction.
63
<PAGE> 111
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Merrill Lynch, a co-manager of the Offerings, is also a Selling Stockholder
and will receive a portion of the proceeds of the Offerings. Morgan Stanley &
Co. Incorporated, a co-manager of the Offerings, is under common ownership with
Van Kampen-Merritt Prime Rate Income Trust, which is the largest shareholder of
the Company.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Calfee, Halter & Griswold
LLP, Cleveland, Ohio. Calfee, Halter & Griswold LLP provides services to
McDonald & Company Securities, Inc. on a regular basis. Certain legal matters
relating to the Offerings will be passed upon for the Underwriters by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York.
EXPERTS
The Consolidated Financial Statements of Camelot Music Holdings, Inc.
("Successor Company") as of February 28, 1998 and for the period February 1,
1998 to February 28, 1998 ("Successor period") and of CM Holdings, Inc.
("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 ("Predecessor periods"), appearing in this Prospectus, have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in their report thereon appearing elsewhere in this Prospectus, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of The Wall Music, Inc. for the year ended June 1,
1997 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to the sale of substantially all of the tangible assets and the transfer of
certain liabilities of The Wall Music, Inc. effective February 28, 1998), and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain portions of which are omitted as
permitted by the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto
and the financial statements, notes and schedules filed as a part thereof.
Statements made in this Prospectus regarding the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, NY 10048 and
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the
64
<PAGE> 112
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such materials can also be inspected at the offices of the Nasdaq
National Market System at 1735 K Street, N.W., Washington, D.C. 20006 or on the
Commission's site on the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements for each fiscal year and interim reports
for each of the first three quarters of its fiscal year containing unaudited
interim financial information.
65
<PAGE> 113
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Price Range of Common Stock........... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 20
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 34
Management............................ 44
Certain Transactions.................. 49
Principal and Selling Stockholders.... 51
Description of Capital Stock.......... 52
Shares Eligible For Future Sale....... 54
Description of Certain Indebtedness... 57
Certain United States Federal Tax
Consequences for Non-United States
Holders............................. 59
Underwriting.......................... 61
Legal Matters......................... 64
Experts............................... 64
Available Information................. 64
Index to Consolidated Financial
Statements and Notes Thereto........ F-1
</TABLE>
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
SHARES
[LOGO]
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
======================================================
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by the
Company in connection with the distribution of the shares of Common Stock being
registered hereby. Except for the Securities and Exchange Commission
Registration Fee, the National Association of Securities Dealers, Inc. Filing
Fee and the Nasdaq National Market Listing Fee, all amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $51,725
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 15,500
Nasdaq National Market Listing Fee.......................... *
Printing and Engraving Costs................................ *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses (excluding Blue Sky)................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent and Registrar Fees........................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL permits the Company to indemnify its directors,
officers, employees and agents (each an "Insider") against liability for each
such Insider's acts taken in his or her capacity as an Insider in a civil
action, suit or proceeding if such actions were taken in good faith and in a
manner which the Insider believed to be in or not opposed to the best interests
of the Company, and in a criminal action, suit or proceeding, if the Insider had
no reasonable cause to believe his or her conduct was unlawful, including under
certain circumstances, suits by or in the right of the Company for any expenses,
including attorneys' fees, and for any liabilities which the Insider may have
incurred in consequence of such action, suit or proceeding under conditions
stated in said Section 145; provided that the Company may modify the extent of
such indemnification by individual contracts with its directors and executive
officers.
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate") provides that, to the fullest extent permitted by the DGCL, the
Company will indemnify all present or former directors or officers (and their
respective heirs, executors or administrators) of the Company from any pending,
threatened or completed action, suit or proceeding (brought in the right of the
Company or otherwise), by reason of the fact that such person is or was serving
as an officer or director of the Company, or at the request of the Company as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, for and against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person (or such heirs,
executors or administrators) in connection with such action, suit or proceeding,
including appeals.
As permitted by Section 102(b)(7) of the DGCL, the Certificate provides
that a director of the Company will not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of a director's duty of
loyalty to a company or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL, as amended, which concerns unlawful
payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
II-1
<PAGE> 115
The Certificate permits the Company to secure insurance on behalf of any
director, officer, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether the Company would have
the power to indemnify such person against such liability under the DGCL. The
Company's directors and officers are covered under a liability insurance policy.
Such policy affords the Company's directors and officers with insurance coverage
for losses arising from claims based on breaches of duty, negligence, error and
other wrongful acts. The Company has also entered into indemnity agreements
pursuant to which it has agreed, among other things, to indemnify its Directors
for settlements in derivative actions.
The Registrant has entered into indemnity agreements (the "Indemnity
Agreements") with the current Directors and executive officers of the Registrant
and expects to enter into similar agreements with any Director or executive
officer elected or appointed in the future at the time of their election or
appointment. Pursuant to the Indemnity Agreements, the Registrant will indemnify
a Director or executive officer of the Registrant (the "Indemnitee") if the
Indemnitee is a party to or otherwise involved in any legal proceeding by reason
of the fact that the Indemnitee is or was a Director or executive officer of the
Registrant, or is or was serving at the request of the Registrant in certain
capacities with another entity, against all expenses, judgments, settlements,
fines and penalties, actually and reasonably incurred by the Indemnitee in
connection with the defense or settlement of such proceeding. Indemnity is only
available if the Indemnitee acted in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant. The same coverage is provided whether or not the suit or proceeding
is a derivative action. Derivative actions may be defined as actions brought by
one or more shareholders of a corporation to enforce a corporate right or to
prevent or remedy a wrong to the corporation in cases where the corporation,
because it is controlled by the wrongdoers or for other reasons, fails or
refuses to take appropriate action for its own protection. The Indemnity
Agreements mandate advancement of expenses to the Indemnitee if the Indemnitee
provides the Registrant with a written promise to repay the advanced amounts in
the event that it is determined that the conduct of the Indemnitee has not met
the applicable standard of conduct. In addition, the Indemnity Agreements
provide various procedures and presumptions in favor of the Indemnitee's right
to receive indemnification under the Indemnity Agreement. A copy of the form of
Indemnity Agreement is included herein as Exhibit 10.11.
Under the Plan of Reorganization, all obligations of the Company to
indemnify or to pay contribution or reimbursement to individuals who served as
directors or officers of the Company at any time during the bankruptcy
proceedings were expressly assumed and affirmed by the Company. All other
indemnity, contribution or reimbursement obligations of the Company were
rejected and terminated under the Plan of Reorganization.
Reference is made to Section 6 of the Purchase Agreement filed as Exhibit
1.1 to this Registration Statement for information concerning the indemnity
arrangements between the Company and the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Company which were not registered under the Act have
been issued or sold by the Company within the past three years except as
follows:
As of January 27, 1998, pursuant to the Plan of Reorganization, the Company
issued 9,835,559 shares of Common Stock to various claimholders in the
bankruptcy case in satisfaction of substantially all of its pre-petition debt
and other liabilities. As of May 5, 1998, an additional 328,873 were issued
pursuant to the Plan of Reorganization. A total of 10,164,432 shares of Common
Stock have been issued by the Company pursuant to the exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 1145(a)(1) of the Bankruptcy Code. On May 5, 1998 the Company issued an
additional 10,000 shares of Common Stock pursuant to an order of the Bankruptcy
Court to certain persons who made a significant contribution to the bankruptcy
case.
II-2
<PAGE> 116
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
See Exhibit Index at page E-1 of this Registration Statement.
(b) Financial Statement Schedules:
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
----------- --------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts II-12
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Purchase Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide public offering thereof.
II-3
<PAGE> 117
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio,
on June 15, 1998.
CAMELOT MUSIC HOLDINGS, INC.
By: /s/ JAMES E. BONK
------------------------------------
James E. Bonk,
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer or both, of Camelot Music Holdings, Inc., a Delaware
corporation, hereby constitutes and appoints James E. Bonk, Jack K. Rogers, and
Lee Ann Thorn, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and any related registration statement filed pursuant to Rule 462(b) under the
Securities Act, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite,
necessary or advisable to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney has been signed by the following
persons in the capacities indicated on June 15, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JAMES E. BONK Chairman, President and Chief Executive Officer
- ---------------------------------------- and Director (Principal Executive Officer)
James E. Bonk
/s/ LEE ANN THORN Treasurer and Chief Financial Officer
- ---------------------------------------- (Principal Financial and Accounting Officer)
Lee Ann Thorn
/s/ JACK K. ROGERS Executive Vice President, Chief Operating Officer, Secretary
- ---------------------------------------- and Director
Jack K. Rogers
/s/ GEORGE R. ZOFFINGER Director
- ----------------------------------------
George R. Zoffinger
/s/ STEPHEN H. BAUM Director
- ----------------------------------------
Stephen H. Baum
/s/ HERBERT J. MARKS Director
- ----------------------------------------
Herbert J. Marks
/s/ MICHAEL B. SOLOW Director
- ----------------------------------------
Michael B. Solow
/s/ MARC L. LUZZATTO Director
- ----------------------------------------
Marc L. Luzzatto
</TABLE>
II-4
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of U.S. Purchase Agreement*
1.2 Form of International Purchase Agreement*
2.1 Second Amended Joint Plan of Reorganization dated November
7, 1997, which is incorporated by reference to Exhibit 2.1
to the Company's Form 10 as filed on February 13, 1998 (File
No. 0-23807)
2.2 Asset Purchase Agreement by and among Camelot Music, Inc.,
The Wall Music, Inc. and WH Smith Group Holdings (USA), Inc.
dated as of December 10, 1997, which is incorporated by
reference to Exhibit 2.2 to the Company's Form 10 as filed
on February 13, 1998 (File No. 0-23807)
2.3 Assignment of The Wall Purchase Agreement, which is
incorporated by reference to Exhibit 2.3 to the Company's
Form 10 as filed on February 13, 1998 (File No. 0-23807)
2.4 Agreement and Plan of Merger among Camelot Music Holdings,
Inc., SM Acquisition, Inc. and Spec's Music, Inc., dated as
of June 3, 1998*
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant, which is incorporated by reference to
Exhibit 3.1 to the Company's Form 10 as filed on February
13, 1998 (File No. 0-23807)
3.3 Amended and Restated By-Laws of the Registrant, which is
incorporated by reference to Exhibit 3.2 to the Company's
Form 10 as filed on February 13, 1998 (File No. 0-23807)
4.1 Specimen certificate for the Registrant's Common Stock which
is incorporated by reference to Exhibit 4.1 to the Company's
Form 10 as filed on February 13, 1998 (File No. 0-23807)
5.1 Opinion of Calfee, Halter & Griswold LLP as to the validity
of the shares of Common Stock*
10.1 Revolving Credit Agreement, dated as of January 27, 1998,
among Camelot Music, Inc., the several lenders named therein
and The Chase Manhattan Bank, as agent for the lenders,
which is incorporated by reference to Exhibit 10.1 to the
Company's Form 10 as filed on February 13, 1998 (File No.
0-23807)
10.2 Registration Rights Agreement, dated as of January 27, 1998,
by and among the Registrant and the security holders named
therein, which is incorporated by reference to Exhibit 10.2
to the Company's Form 10 as filed on February 13, 1998 (File
No. 0-23807)
10.3 Second Amended and Restated Employment Agreement, dated as
of January 1, 1998, between Camelot Music, Inc. and James E.
Bonk, which is incorporated by reference to Exhibit 10.3 to
the Company's Form 10 as filed on February 13, 1998 (File
No. 0-23807)**
10.4 Camelot Music Holdings, Inc. 1998 Stock Option Plan, which
is incorporated by reference to Exhibit 10.4 to the
Company's Form 10 as filed on February 13, 1998 (File No.
0-23807)
10.5 Form of Stock Option Agreement**
10.6 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Jack K. Rogers**
10.7 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Lewis S. Garrett**
10.8 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 21, 1996, between
Camelot Music, Inc. and Charles Marsh**
10.9 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Charles R. Rinehimer III**
10.10 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Lee Ann Thorn**
10.11 Form of Indemnity Agreement
</TABLE>
II-9
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.12 Camelot Music Holdings, Inc. 1998 Stock Option Plan, which
is incorporated by reference to Exhibit 10.4 to the
Company's Form 10 as filed on February 13, 1998 (File No.
0-23807)
10.13 Camelot Music Holdings, Inc. 1998 Outside Directors Stock
Option Plan*
10.14 Amendment No. 1 to the Revolving Credit Agreement*
10.15 Form of Customary Trade Terms Commitment and Option Exercise
Notice
10.16 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Roger D. Marks**
10.17 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 17, 1996, between
Camelot Music, Inc. and William H. Scott**
10.18 Amended and Restated Severance and Bonus Management
Incentive Agreement between Camelot Music, Inc. and Larry K.
Mundorf*
21.1 Subsidiaries of the Registrant which is incorporated by
reference to Exhibit 21.1 to the Company's Form 10 as filed
on February 13, 1998 (File No. 0-23807)
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Calfee, Halter & Griswold LLP (included in
Exhibit 5.1 of this Registration Statement)
24.1 Power of Attorney and related certified resolution
27.1 Financial Data Schedule of the Predecessor
27.2 Financial Data Schedule of the Company
</TABLE>
- ---------------
* To be filed by amendment.
** Management compensatory plan or arrangement.
II-10
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
Camelot Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and
for the period February 1, 1998 to February 28, 1998 and of CM Holdings, Inc.
("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996, which financial statements are included in the Prospectus,
we have also audited the financial statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
June 10, 1998
II-11
<PAGE> 121
CAMELOT MUSIC HOLDINGS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------
ADDITIONS
----------------------- BALANCE
BALANCE CHARGED TO CHARGED TO DEDUCTIONS AT END
AT BEGINNING COSTS AND OTHER FROM OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Inventory Reserves:
Year Ended March 2, 1996........... $ 3,883 $ 1,790 $ -- $ -- $ 5,673
Year Ended March 1, 1997........... 5,673 3,992 -- 2,533(1) 7,132
Eleven Months Ended January 31,
1998............................ 7,132 3,361 -- 10,493(2) --
Valuation Allowance on deferred tax
assets:
Year Ended March 2, 1996........... 25,309 12,030 -- -- 37,339
Year Ended March 1, 1997........... 37,339 18,458 -- -- 55,797
Eleven Months Ended January 31,
1998............................ 55,797 -- -- 55,797(3) --
SUCCESSOR COMPANY:
Inventory Reserves:
One Month Ended February 28,
1998............................ $ -- $ 235 $ -- $ -- $ 235
Valuation Allowance on deferred tax
assets:
One Month Ended February 28,
1998............................ -- -- -- -- --
</TABLE>
- ---------------
(1) The deduction in reserves of $2,533 relates to the disposal of related
inventory.
(2) $5,351 of the deduction relates to "fresh-start reporting" adjustments in
the eleven months ended January 31, 1998 and the remaining balance of $5,142
relates to the disposal of related inventory.
(3) The deduction in the eleven months ended January 31, 1998 occurred in
conjunction with the "fresh-start reporting" adjustments.
II-12
<PAGE> 1
Exhibit 10.5
CAMELOT MUSIC HOLDINGS, INC.
INCENTIVE STOCK OPTION AWARD AGREEMENT
This Agreement (this "Agreement"), dated January, 27 1998, is made
between Camelot Music Holdings, Inc. (the "Company") and ______________ (the
"Optionee"). All capitalized terms that are not defined herein shall have the
meaning as defined in the Camelot Music Holdings, Inc. 1998 Stock Option Plan
(the "Plan"). References to "he," "him," and "his" shall mean the feminine form
of such terms, when applicable.
W I T N E S E T H:
- - - - - - - - -
1. GRANT OF OPTION. The Company hereby grants to the Optionee, subject
to the terms and conditions of the Plan and the terms and conditions herein set
forth, the right and option to purchase from the Company all or any part of an
aggregate of ____________ shares of the $0.01 par value common stock of the
Company (the "Stock") at a per share purchase price equal to $20.75, subject to
proportionate adjustment as provided in Section 5(b) of the Plan (the "Option"),
such option to be exercisable as hereinafter provided. The Option shall be
treated as an "incentive stock option" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended.
<PAGE> 2
2. TERMS AND CONDITIONS. It is understood and agreed that the Option
evidenced hereby is subject to the following terms and conditions:
(a) EXPIRATION DATE. The Option shall expire ten (10) years after the
date indicated above.
(b) EXERCISE OF OPTION.
(i) Subject to the other terms of this Agreement and the Plan, the
Option may be exercised at any time on or after the date which is four (4) years
from the date hereof as to the total number of shares of Stock subject to the
Option, or any portion thereof, for which the Option was not previously
exercised; PROVIDED, HOWEVER, the Option shall become exercisable prior to such
date as to that portion of the total number of shares of Stock covered by the
Option set forth on Schedule II attached hereto, subject to satisfaction of the
Fair Market Value of Stock targets set forth on such Schedule II; PROVIDED
FURTHER, HOWEVER, that, irrespective of satisfaction of such targets, upon the
occurrence of a Change in Control, the Option shall automatically become fully
vested and exercisable for all of the shares of Stock subject to the Option with
respect to which the Option was not previously exercised.
(ii) Any exercise of all or any part of the Option shall be accompanied
by a written notice to the Company specifying the number of shares of Stock as
to which the Option is being exercised. Upon the valid exercise of all or any
part of the Option, a certificate (or certificates) for the number of shares of
Stock with respect to which the Option is exercised shall be issued in the name
of the Optionee, subject to
-2-
<PAGE> 3
the other terms and conditions of this Agreement and the Plan. Notation of any
partial exercise shall be made by the Company on Schedule I attached hereto.
(iii) At the time of any exercise of the Option, the purchase price of
the shares of Stock as to which the Option shall be exercised shall be paid to
the Company (A) in United States dollars by personal check, bank draft or money
order; (B) with the consent of the Committee, through delivery of a full
recourse promissory note upon such payment and other terms and conditions,
including interest (at no less than such rate as shall then preclude the
imputation of interest under the Code), as may be prescribed by the Committee;
or (C) by delivery of a notice that the Optionee has placed a sell order with a
broker with respect to shares of Stock then issuable upon exercise of the
Option, and that the broker has been directed to pay a sufficient portion of the
net proceeds of the sale of Stock to the Company in satisfaction of the Option
exercise price.
(iv) The Option shall terminate upon the termination, for any reason, of
the Optionee's employment with the Company or a Subsidiary, and no shares of
Stock may thereafter be purchased under the Option, except as follows:
(A) In the event of the death of the Optionee while an employee of the
Company or a Subsidiary, the Option, to the extent exercisable in accordance
with Section 2(b)(i) hereof as of the date of his death, may be exercised
after the Optionee's death by his heir, the legal representative of the
Optionee's estate or by the legatee of the Optionee under his last will for
a
-3-
<PAGE> 4
period of two (2) years from the date of his death or until the expiration
of the stated period of the Option, whichever period is the shorter.
(B) If the Optionee's employment with the Company or a Subsidiary shall
terminate by reason of "Permanent Disability" (as defined in the last
sentence of this Section 2(b)(iv)(B)), the Option, to the extent exercisable
In accordance with Section 2(b)(i) hereof as of the date of such termination
of employment, may be exercised after such termination by the Optionee or
his legal representative, but may not be exercised after the expiration of
the period of one (1) year from the date of such termination or of the
stated period of the Option, whichever period is the shorter. For purposes
of this Agreement, "Permanent Disability" shall mean "permanent and total
disability," as defined in Section 22(e)(3) of the Code, and a condition
which would constitute a "permanent disability" under the Camelot Music
Group Long-Term Disability Insurance Plan.
(C) If the Optionee's employment with the Company or a Subsidiary is
terminated due to voluntary resignation of the Optionee prior to attaining
four (4) years of service as an employee of the Company and/or any of its
Subsidiaries (including, without limitation, any such service rendered as an
employee of the Company and/or any of its Subsidiaries prior or subsequent
to the Chapter 11 bankruptcy filings of the Company and its then
Subsidiaries), the
-4-
<PAGE> 5
Option shall terminate on the date of such termination of employment and
shall cease to thereafter be exercisable with respect to any shares of
Stock.
(D) Upon termination of the Optionee's employment with the Company or a
Subsidiary under any circumstances other than any of those described in
paragraph (A), (B) or (C) above of this Section 2(b)(iv), the Option, to the
extent the Option is exercisable in accordance with Section 2(b)(i) hereof
as of the date of such termination or thereafter becomes exercisable by
reason of a Change in Control in accordance with Section 2(b)(i) hereof, may
thereafter be exercised, but may not be exercised after the expiration of
the period of three (3) months from the date of such termination, or of the
stated period of the Option, whichever period is the shorter.
(E) If the Optionee dies after termination of his employment with the
Company and/or a Subsidiary under paragraphs (B) or (D) of this Section
2(b)(iv) above during the one-year or three-month period specified,
respectively, in such paragraphs, any unexercised Option, to the extent the
Option would have been exercisable in accordance with such applicable
paragraph (B) or (D) hereof, may be exercised after the Optionee's death by
the Optionee's heir, the legal representative of his estate or by the
legatee of the Optionee under his last will until the expiration of the
period of two (2) years from the date of his death or the stated period of
the Option, whichever period is the shorter.
-5-
<PAGE> 6
(c) TRANSFER. The Option shall not be transferable otherwise than by
will or the laws of descent and distribution, and is exercisable, during the
lifetime of the Optionee, only by him; PROVIDED, HOWEVER, that the Option (or
any portion thereof) may be exercised after the Optionee's death by the
beneficiary most recently named by the Optionee in a written designation thereof
filed with the Company, or, in lieu of any such surviving beneficiary, by the
Optionee's heir, the legatee of the Optionee under the Optionee's last will or
the legal representative of the Optionee's estate.
(d) WITHHOLDING TAXES. At the time of receipt of Stock upon the exercise
of all or any part of the Option, the Optionee shall be required to pay to the
Company in cash any taxes of any kind required by law to be withheld with
respect to such Stock. In no event shall Stock be delivered to any person
exercising the Option until such person has paid to the Company in cash, or made
arrangements satisfactory to the Company regarding the payment of, the amount of
any taxes of any kind required by law to be withheld with respect to the Stock
subject to the Option, and the Company shall have the right to deduct any such
taxes from any payment of any kind otherwise due to the Optionee.
(e) NO RIGHTS AS STOCKHOLDER. Neither the Optionee nor any other person
shall become the beneficial owner of the shares of Stock subject to the Option,
nor have any rights to dividends or other rights of a shareholder with respect
to any such shares, until the Optionee or his legal representative or legatee
has exercised the Option in accordance with the provisions hereof and of the
Plan.
-6-
<PAGE> 7
(f) NO RIGHT TO CONTINUED EMPLOYMENT. The Option shall not confer upon
the Optionee any right to be retained in the service of the Company or a
Subsidiary, nor, subject to the terms and conditions of any applicable
employment or other agreement, restrict the right of the Company or any
Subsidiary to terminate his employment at any time with or without cause.
(g) INCONSISTENCY WITH PLAN. Notwithstanding any provision herein to the
contrary, the Option provides the Optionee with no greater rights or claims than
are specifically provided for under, or contemplated by, the Plan. If and to the
extent that any provision contained herein is inconsistent with the Plan, the
Plan shall govern.
(h) COMPLIANCE WITH LAWS, REGULATIONS, ETC. The Option and the
obligation of the Company to sell and deliver shares of Stock hereunder shall be
subject in all respects to (i) all applicable federal and state laws, rules and
regulations and (ii) any registration, qualification, approvals or other
requirements imposed by any government or regulatory agency or body which the
Committee shall, in its sole discretion, determine to be necessary or
applicable. Moreover, the Option may not be exercised if its exercise, or the
receipt of shares of Stock pursuant thereto, would be contrary to applicable
law.
3. INVESTMENT REPRESENTATION. If at the time of exercise of all or part
of the Option the Stock is not registered under the Securities Act, and/or there
is no current prospectus in effect under the Securities Act with respect to the
Stock, the Optionee shall execute, prior to the issuance of any shares of Stock
to the Optionee by
-7-
<PAGE> 8
the Company, an agreement (in such form as the Committee may specify) in which
the Optionee represents and warrants that the Optionee is purchasing or
acquiring the shares acquired under this Agreement for the Optionee's own
account, for investment only and not with a view to the resale or distribution
thereof, and represents and agrees that any subsequent offer for sale or
distribution of any of such shares shall be made only pursuant to either (i) a
registration statement on an appropriate form under the Securities Act, which
registration statement has become effective and is current with regard to the
shares being offered or sold, or (ii) a specific exemption from the registration
requirements of the Securities Act, but in claiming such exemption the Optionee
shall, prior to any offer for sale or sale of such shares, obtain a prior
favorable written opinion, in form and substance satisfactory to the Committee,
from counsel for or approved by the Committee, as to the applicability of such
exemption thereto.
4. OPTIONEE BOUND BY PLAN. The Optionee hereby acknowledges receipt of a
copy of the Plan and agrees to be bound by all of the terms and provisions
thereof, including the terms and provisions adopted after the granting of the
Option but prior to the complete exercise hereof, subject to the last paragraph
of Section 13 of the Plan as in effect on the date hereof.
5. NOTICES. Any notice hereunder to the Company shall be addressed to
it, c/o Camelot Music, Inc., at 8000 Freedom Avenue N.W., North Canton, Ohio
44720. Attention: Chief Financial Officer, and any notice hereunder to the
Optionee
-8-
<PAGE> 9
shall be addressed to him at___________________________________________ subject
to the right of either party to designate at any time hereafter in writing some
other address.
6. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Delaware applicable to contracts executed and to be performed entirely within
said state.
7. SEVERABILITY. If any of the provisions of this Agreement should be
deemed unenforceable, the remaining provisions shall remain in full force and
effect.
8. MODIFICATION. This Agreement may not be modified or amended, nor may
any provision hereof be waived, in any way except in writing signed by the
parties hereto.
9. COUNTERPARTS. This Agreement has been executed in two counterparts
each of which shall constitute one and the same instrument.
-9-
<PAGE> 10
IN WITNESS WHEREOF, Camelot Music Holdings, Inc., has caused this
Agreement to be executed by an appropriate officer and the Optionee has executed
this Agreement, both on the day and year first above written.
CAMELOT MUSIC HOLDINGS, INC.
By:_____________________
Title:_________________________
OPTIONEE
___________________(L.S.)
-10-
<PAGE> 11
SCHEDULE I
----------
NOTATIONS AS TO PARTIAL EXERCISE
--------------------------------
<TABLE>
<CAPTION>
==========================================================================================
Number of Balance of
Date of Shares of Stock Shares of Stock Authorized Notation
Exercise Purchased on Option Signature Date
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
==========================================================================================
</TABLE>
-11-
<PAGE> 12
SCHEDULE II
-----------
Exercisability of Option
------------------------
Subject to paragraph (b) of Section 2 of this Agreement, prior to the fourth
anniversary of the Effective Date, the Option shall be exercisable for the
fraction set forth below of the total number of shares of Stock stated in
Section 1 of this Agreement on the date or dates on which the corresponding Fair
Market Value of Stock objectives are first achieved:
<TABLE>
<CAPTION>
First date on which the average of the Fair Market
Value of the Stock for a period of ten (10) consecutive
business days has exceeded the price stated in Section
1 of this Agreement (using such price stated in Section Fraction of Total
1 as the base) by: Shares Subject to Option
- ------------------------------------------------------- ------------------------
<C> <S>
15% one-third
30% two-thirds
45% all shares
</TABLE>
The foregoing to the contrary notwithstanding, but subject to paragraph (b) of
Section 2 of this Agreement, prior to the second anniversary of the Effective
Date the Option shall not be exercisable for more than one-half of the total
number of shares of Stock subject to the Option; from and after the second
anniversary of the Effective Date, the Option may become exercisable, in
accordance with the foregoing schedule, for the total number of shares subject
to the Option.
As an example, if on a date which is 11 months after the Effective Date, the
average of the Fair Market Value of the Stock for a period of ten (10)
consecutive business days exceeds the price stated in Section 1 of this
Agreement by 15 %, the Option shall become exercisable (in accordance with
Section 2(b)) for one-third of the shares of Stock stated in Section 1 of this
Agreement at the time such average price is first attained. As an alternative
example, if on a date 11 months after the Effective Date, the average of the
Fair Market Value of the Stock for a period of ten (10) consecutive business
days exceeds the price stated in Section 1 of this Agreement by 45 %, the Option
shall become exercisable (in accordance with Section 2(b)) for 50% of the shares
of Stock stated in Section 1 of this Agreement at the time such average price is
first attained and shall become exercisable (subject to Section 2(b)) for the
remaining 50% of such total number of shares on the second anniversary of the
Effective Date.
<PAGE> 1
Exhibit 10.6
AMENDED AND RESTATED SEVERANCE AND
BONUS PROGRAM MANAGEMENT INCENTIVE AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AND BONUS PROGRAM MANAGEMENT
INCENTIVE AGREEMENT (this "Agreement") is made and entered into as of the 11th
day of October, 1996, by and between Camelot Music, Inc., a Pennsylvania
corporation and a debtor and debtor in possession ("Employer"), and Jack K.
Rogers ("Employee"), and shall become effective on the date (the "Effective
Date") that this Agreement is approved by the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court").
R E C I T A L S:
A. In early 1996, Employer attempted to resolve certain financial
difficulties in the context of an out-of-court restructuring.
B. Because Employer believed that the success of the financial
restructuring would be aided significantly by the continued efforts of certain
employees (the "Key Employees"), including Employee, Employer entered into those
certain Severance and Bonus Program Management Incentive Agreements, dated May
2, 1996 (the "Existing Agreements") with the Key Employees, in order to induce
the Key Employees to remain in Employer's employ.
C. Pursuant to the Existing Agreements, Employer agreed to provide
certain severance benefits and to make certain bonus payments to the Key
Employees.
D. Pursuant to Employee's Existing Agreement, Employer agreed, among
other things, to provide Employee with twelve (12) months of continued salary
and fringe benefits in the event that Employer terminated Employee without cause
at
<PAGE> 2
any time prior to Employee's normal retirement date. In addition, Employer
agreed to make conditional lump sum cash payments of $12,500 to Employee on
March 31, 1996 (the "First Bonus Payment") and on August 31, 1996 (the "Second
Bonus Payment"). The First Bonus Payment was paid in accordance with the terms
of the Existing Agreement, but the Second Bonus Payment remains unpaid (although
past due as of September 1, 1996).
E. Employer was unable to resolve its financial difficulties in the
context of the financial restructuring, and as such, on August 9, 1996 (the
"Petition Date"), Employer (together with various affiliated entities) filed
petitions for relief under Chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") with the Bankruptcy Court (the "Chapter 11 Case"). Employer
has continued to operate its business and manage its affairs as a debtor in
possession.
F. Employer believes that Employee's continued services are especially
critical to its success now that the Chapter 11 Case has been commenced, and
desires to assume the obligations set forth in the Existing Agreement pursuant
to Section 365(a) of the Bankruptcy Code, as modified herein.
NOW, THEREFORE, in consideration of the foregoing, Employer and Employee
hereby agree to amend and restate the Existing Agreement in its entirety as
follows:
1. SEVERANCE. In the event Employee's employment is "Terminated without
Cause" or Employee voluntarily terminates his employment as a result of a
"Constructive Discharge" by Employer prior to Employee's normal retirement date,
-2-
<PAGE> 3
Employee shall be entitled to receive as severance payment, and Employer shall
pay to Employee severance payments in an amount equal to eighteen (18) months'
worth of the greater of (a) the salary payment Employee received immediately
prior to such termination or (b) the amount of salary payment Employee is
receiving at the date of this Agreement, payable at the same intervals as
Employee's salary had been paid. Such severance payments shall be made for a
period of eighteen (18) full calendar months following such termination,
together with a pro rata amount for any partial calendar month following such
termination, and except with respect to the last six (6) months of payments,
shall not be subject to mitigation. In addition, Employer shall provide to
Employee during the period when severance payments are paid either (a) all the
fringe benefits maintained by Employer which were available to Employee on the
date of termination or, if different, (0) all of the fringe benefits available
to Employee at the date of this Agreement as described on Schedule A attached
hereto; Employee may elect between options (a) and (b) at the time of Employee's
termination. Such benefits will be provided on the terms and conditions in
effect as of the date either of termination or this Agreement as chosen by
Employee, but in either case shall be subject to mitigation. The amount of
Employee's salary as of the date of this Agreement is also set forth on Schedule
A. The aforesaid severance payments and maintenance of fringe benefits shall be
in addition to and not in lieu of the base salary, bonus compensation,
accumulated vacation pay and other employee benefits payable to Employee at the
time of termination, on account of service prior to Employee's termination.
-3-
<PAGE> 4
For purposes of this Agreement, the term "Terminated without Cause"
shall mean termination by reason of layoff or reduction in force or for any
other reason except the "Employee's Voluntary Act" or "Termination for Cause" by
Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting
by Employee unless such resignation or quitting is the result of a "Constructive
Discharge", or is preceded by, or reasonably contemporaneous with a "Change in
Control". The term "Termination for Cause" is defined as a termination of
Employee arising from gross incompetence, insubordination, dishonesty in
performance of company duties, or conviction of fraud, theft, embezzlement or
any felony. However, any termination for insubordination is subject to written
notice by Employer and a thirty (30) day cure period to correct the alleged
insubordination. The term "Constructive Discharge" shall mean a termination of
employment due to (a) a reduction in Employee's base salary of 5% or more in any
calendar year or an aggregate reduction in Employee's base salary of 10% or more
in any four calendar years, (0) a material reduction in Employee's position,
function, duties or responsibilities, (c) a material change in Employee's
reporting relationships, (d) a required relocation of more than 50 miles from
existing headquarters, (e) a material breach of contract by Employer, (f) sale
or abandonment of substantially all of the assets of Employer (more than 50% of
the revenue base) or (g) a merger, consolidation or other combination of the
Employer with another entity; PROVIDED, HOWEVER, if Employee elects, in writing,
to continue to be employed after a specific event of Constructive Discharge,
Employee will not be able to subsequently claim Constructive Discharge as a
result of such event. The term "Change in Control"
-4-
<PAGE> 5
shall mean a change of the holders of 50% or more of the equity of Employer
(other than as a result of the issuance of equity to creditors on emergence from
bankruptcy pursuant to a plan of reorganization proposed by Employer), a change
in the majority of the Board of Directors of Employer (other than pursuant to a
plan of reorganization proposed by Employer), merger with less than 50% of the
merged entity owned by pre- merger shareholders, or sale or abandonment of more
than 50% of Employer's revenue- generating assets.
2. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the
contrary, to the extent that Employee is an at-will employee on the date of
execution and delivery of this Agreement, Employee remains an at-will employee
thereafter. An at-will employee may be discharged or may quit for any or no
reason, and the rights of Employee and Employer upon termination shall be as set
forth herein. Nothing in this Agreement obligates Employee to remain in
Employer's employ for any particular period or prevents Employee from resigning
at any time for any reason with or without notice to Employer.
3. BONUS PAYMENT. In addition to the annual base salary, bonus
compensation, accumulated vacation pay and other employee benefits otherwise
payable to Employee, and in addition to the severance payments described in
Section 1, in the event that Employee shall be actively employed by Employer on
the date that this Agreement is approved by the Bankruptcy Court (the "Bonus
Payment Date"), Employee shall be entitled to receive a lump-sum cash payment of
the amount specified on Schedule B attached hereto and made a part of this
Agreement (the "Bonus
-5-
<PAGE> 6
Payment") within three (3) business days of the Bonus Payment Date. In
consideration of payment and receipt of the Bonus Payment, Employee agrees to
remain in the employ of Employer from receipt of such payment until the end of
Employer's fiscal year on March 1, 1997 (the "Employment Period"). In the event
that Employee's employment is terminated as a result of Employee's Voluntary
Act, prior to the expiration of the Employment Period, Employee agrees to repay
to Employer the entire amount of the Bonus Payment. To secure such repayment,
Employer has a right of setoff against any payments payable to Employee pursuant
to this Agreement or otherwise.
4. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
prior understanding whether written or oral.
5. AMENDMENT. This Agreement may be amended only by written agreement
signed by each of the parties hereto.
6. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Ohio.
7. NOTICE. Any notice to be given in connection with this Agreement
shall be deemed to have been effectively given if hand-delivered to the
recipient or sent by certified mail, return receipt requested, to the recipient
at the address last provided by recipient for purposes of receiving notices
hereunder or, unless or until such address shall be so furnished, to the address
indicated opposite his, her or its signature to this Agreement.
-6-
<PAGE> 7
8. ASSIGNABILITY. This Agreement, and all actions and decisions
hereunder, shall inure to the benefit of and be binding upon Employer, its
representatives, successors and assigns, and upon Employee, and Employee's
heirs, executors, successors and assigns. None of the rights of Employee to
receive any form of compensation or benefit payable pursuant to this Agreement
shall be assignable or transferable except through a testamentary disposition or
by the laws of descent and distribution upon the death of Employee. Any
attempted assignment, transfer, conveyance or other disposition (other than as
aforesaid) of any interest in the rights of Employee to receive any form of
compensation or benefit to be paid by Employer pursuant to this Agreement shall
be void.
9. SEVERABILITY. In the event that any provision of this Agreement shall
be held to be illegal, invalid or unenforceable for any reason, said illegality,
invalidity or unenforceability shall not affect the remaining provisions, but
shall be fully severable and the Agreement shall be construed and enforced as if
said illegal, invalid or unenforceable provisions had never been inserted
herein.
10. EFFECTIVENESS. Employer hereby represents and warrants to Employee
that execution and performance of this Agreement shall become a valid and
binding obligation of Employer upon the approval of this Agreement by the
Bankruptcy Court.
11. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to
interpret and apply the terms and conditions of this Agreement consistent with
applicable law.
-7-
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
and year first above written.
CAMELOT MUSIC, INC.
By /s/ LeeAnn Thorn
--------------------------------
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
By /s/ Jack K. Rogers
--------------------------------
Jack K. Rogers
6285 California Avenue
Louisville, OH 44641
-8-
<PAGE> 9
Schedule A
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Jack K. Rogers
Amount of Monthly Salary Payment as of date of this Agreement: $18,750
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued during the severance period:
Group Medical
Group Dental
Group Long-Term Disability
Group Life Insurance
Use of Leased Company Automobile
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued under the terms of a separate contract:
Second Amended and Restated Supplemental Executive Retirement
Agreement, dated as of this Agreement
Fringe Benefits Available to Employee as of the date of this Agreement which
will not be continued after date of termination:
Individual Split Dollar Insurance Program as per agreement dated
September 1, 1986 and amended on December 31, 1990
<PAGE> 10
SCHEDULE B
----------
Schedule B
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Jack K. Rogers
Gross Amount of Lump Sum Cash Payment (subject to normal withholding taxes)
Payable on Bonus Payment Date:
Bonus Payment: $12,500
<PAGE> 1
Exhibit 10.7
AMENDED AND RESTATED SEVERANCE AND
BONUS PROGRAM MANAGEMENT INCENTIVE AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AND BONUS PROGRAM MANAGEMENT
INCENTIVE AGREEMENT (this "Agreement") is made and entered into as of the 11th
day of October, 1996, by and between Camelot Music, Inc., a Pennsylvania
corporation and a debtor and debtor in possession ("Employer"), and Lewis S.
Garrett ("Employee"), and shall become effective on the date (the "Effective
Date") that this Agreement is approved by the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court").
R E C I T A L S:
A. In early 1996, Employer attempted to resolve certain financial
difficulties in the context of an out-of-court restructuring.
B. Because Employer believed that the success of the financial
restructuring would be aided significantly by the continued efforts of certain
employees (the "Key Employees"), including Employee, Employer entered into those
certain Severance and Bonus Program Management Incentive Agreements, dated May
2, 1996 (the "Existing Agreements") with the Key Employees, in order to induce
the Key Employees to remain in Employer's employ.
C. Pursuant to the Existing Agreements, Employer agreed to provide
certain severance benefits and to make certain bonus payments to the Key
Employees.
<PAGE> 2
D. Pursuant to Employee's Existing Agreement, Employer agreed, among
other things, to provide Employee with six (6) months of continued salary and
fringe benefits in the event that Employer terminated Employee without cause at
any time prior to Employee's normal retirement date. In addition, Employer
agreed to make conditional lump sum cash payments of $10,000 to Employee on
March 31, 1996 (the "First Bonus Payment") and on August 31,1996 (the "Second
Bonus Payment"). The First Bonus Payment was paid in accordance with the terms
of the Existing Agreement, but the Second Bonus Payment remains unpaid (although
past due as of September 1, 1996).
E. Employer was unable to resolve its financial difficulties in the
context of the financial restructuring, and as such, on August 9, 1996 (the
"Petition Date"), Employer (together with various affiliated entities) filed
petitions for relief under Chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") with the Bankruptcy Court (the "Chapter 11 Case"). Employer
has continued to operate its business and manage its affairs as a debtor in
possession.
F. Employer believes that Employee's continued services are especially
critical to its success now that the Chapter 11 Case has been commenced, and
desires to assume the obligations set forth in the Existing Agreement pursuant
to Section 365(a) of the Bankruptcy Code, as modified herein.
-2-
<PAGE> 3
NOW, THEREFORE, in consideration of the foregoing, Employer and Employee
hereby agree to amend and restate the Existing Agreement in its entirety as
follows:
1. SEVERANCE. In the event Employee's employment is "Terminated without
Cause" by Employer prior to Employee's normal retirement date, Employee shall be
entitled to receive as severance payment, and Employer shall pay to Employee
severance payments in an amount equal to twelve (12) months' worth of the
greater of (a) the salary payment Employee received immediately prior to such
termination or (0) the amount of salary payment Employee is receiving at the
date of this Agreement, payable at the same intervals as Employee's salary had
been paid. Such severance payments shall be made for a period of twelve (12)
full calendar months following such termination, together with a pro rata amount
for any partial calendar month following such termination, and shall be subject
to mitigation. In addition, Employer shall provide to Employee during the period
when severance payments are paid either (a) all the fringe benefits maintained
by Employer which were available to Employee on the date of termination or, if
different, (0) all of the fringe benefits available to Employee at the date of
this Agreement as described on Schedule A attached hereto; Employee may elect
between options (a) and (0) at the time of Employee's termination. Such benefits
will be provided on the terms and conditions in effect as of the date either of
termination or this Agreement as chosen by Employee. The amount of Employee's
salary as of the date of this Agreement is also set forth on Schedule A. The
aforesaid
-3-
<PAGE> 4
severance payments and maintenance of fringe benefits shall be in addition to
and not in lieu of the base salary, bonus compensation, accumulated vacation pay
and other employee benefits payable to Employee at the time of termination, on
account of service prior to Employee's termination.
For purposes of this Agreement, the term "Terminated without Cause"
shall mean termination by reason of layoff or reduction in force or for any
other reason except "Employee's Voluntary Act" or "Termination for Cause" by
Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting
by Employee unless such resignation or quitting is preceded by, or reasonably
contemporaneous with, a "Change in Control". The term "Termination for Cause"
shall mean a termination of Employee arising from gross incompetence,
insubordination, dishonesty in performance of company duties, or conviction of
fraud, theft, embezzlement or any felony. However, any termination for
insubordination is subject to written notice by Employer and a thirty (30) day
cure period to correct the alleged insubordination. The term "Change in Control"
shall mean a change of the holders of 50% or more of the equity of Employer
(other than as a result of the issuance of equity to creditors on emergence from
bankruptcy pursuant to a plan of reorganization proposed by Employer), a change
in the majority of the Board of Directors of Employer (other than pursuant to a
plan of reorganization proposed by Employer), merger with less than 50% of the
merged entity owned by pre-merger shareholders, or sale or abandonment of more
than 50% of Employer's revenue-generating assets.
-4-
<PAGE> 5
2. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the
contrary, to the extent that Employee is an at-will employee on the date of
execution and delivery of this Agreement, Employee remains an at-will employee
thereafter. An at-will employee may be discharged or may quit for any or no
reason, and the rights of Employee and Employer upon termination shall be as set
forth herein. Nothing in this Agreement obligates Employee to remain in
Employer's employ for any particular period or prevents Employee from resigning
at any time for any reason with or without notice to Employer.
3. BONUS PAYMENT. In addition to the annual base salary, bonus
compensation, accumulated vacation pay and other employee benefits otherwise
payable to Employee, and in addition to the severance payments described in
Section 1, in the event that Employee shall be actively employed by Employer on
the date that this Agreement is approved by the Bankruptcy Court (the "Bonus
Payment Date"), Employee shall be entitled to receive a lump-sum cash payment of
the amount specified on Schedule B attached hereto and made a part of this
Agreement (the "Bonus Payment") within three (3) business days of the Bonus
Payment Date. In consideration of payment and receipt of the Bonus Payment,
Employee agrees to remain in the employ of Employer from receipt of such payment
until the end of Employer's fiscal year on March 1, 1997 (the "Employment
Period"). In the event that Employee's employment is terminated as a result of
Employee's Voluntary Act prior to the expiration of the Employment Period,
Employee agrees to repay to Employer the entire
-5-
<PAGE> 6
amount of the Bonus Payment. To secure such repayment, Employer has a right of
setoff against any payments payable to Employee pursuant to this Agreement or
otherwise.
4. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
prior understanding whether written or oral.
5. AMENDMENT. This Agreement may be amended only by written agreement
signed by each of the parties hereto.
6. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Ohio.
7. NOTICE. Any notice to be given in connection with this Agreement
shall be deemed to have been effectively given if hand-delivered to the
recipient or sent by certified mall, return receipt requested, to the recipient
at the address last provided by recipient for purposes of receiving notices
hereunder or, unless or until such address shall be so furnished, to the address
indicated opposite his, her or its signature to this Agreement.
8. ASSIGNABILITY. This Agreement, and all actions and decisions
hereunder, shall inure to the benefit of and be binding upon Employer, its
representatives, successors and assigns, and upon Employee, and Employee's
heirs, executors, successors and assigns. None of the rights of Employee to
receive any form of compensation or benefit payable pursuant to this Agreement
shall be assignable or
-6-
<PAGE> 7
transferable except through a testamentary disposition or by the laws of descent
and distribution upon the death of Employee. Any attempted assignment, transfer,
conveyance or other disposition (other than as aforesaid) of any interest in the
rights of Employee to receive any form of compensation or benefit to be paid by
Employer pursuant to this Agreement shall be void.
9. SEVERABILITY. In the event that any provision of this Agreement shall
be held to be illegal, invalid or unenforceable for any reason, said illegality,
invalidity or unenforceability shall not affect the remaining provisions, but
shall be fully severable and the Agreement shall be construed and enforced as if
said illegal, invalid or unenforceable provisions had never been inserted
herein.
10. EFFECTIVENESS. Employer hereby represents and warrants to Employee
that execution and performance of this Agreement shall become a valid and
binding obligation of Employer upon the approval of this Agreement by the
Bankruptcy Court.
11. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to
interpret and apply the terms and conditions of this Agreement consistent with
applicable law.
-7-
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
and year first above written.
CAMELOT MUSIC, INC.
By /s/ Jack K. Rogers
-----------------------
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
By /s/ Lewis S. Garrett
-----------------------
Lewis S. Garrett
2531 Wildflower Lane, N.E.
Massillon, Ohio 44646
-8-
<PAGE> 9
Schedule A
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Lewis S. Garrett
Amount of Monthly Salary Payment as of date of this Agreement: $13,750
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued during the severance period:
Group Medical
Group Dental
Group Long-Term Disability
Group Life Insurance
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued under the terms of a separate contract:
Second Amended and Restated Supplemental Executive Retirement
Agreement, dated as of the date of this Agreement
Fringe Benefits Available to Employee as of the date of this Agreement which
will not be continued after the date of termination:
Individual Split Dollar Insurance Program as per agreement
dated September 1, 1986 and amended on December 31, 1990
<PAGE> 10
Schedule B
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Lewis S. Garrett
Gross Amount of Lump Sum Cash Payment (subject to normal withholding taxes)
Payable on Bonus Payment Date:
Bonus Payment: $10,000
<PAGE> 1
Exhibit 10.8
AMENDED AND RESTATED SEVERANCE AND
BONUS PROGRAM MANAGEMENT INCENTIVE AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AND BONUS PROGRAM MANAGEMENT
INCENTIVE AGREEMENT (this "Agreement") is made and entered into as of the 21st
day of October, 1996, by and between Camelot Music, Inc., a Pennsylvania
corporation and a debtor and debtor in possession ("Employer"), and Charles
Marsh ("Employee"), and shall become effective on the date (the "Effective
Date") that this Agreement is approved by the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
R E C I T A L S:
A. In early 1996, Employer attempted to resolve certain financial
difficulties in the context of an out-of-court restructuring.
B. In order to induce Employee to relocate from St. Louis, Missouri to
North Canton, Ohio and to accept Employer's offer of employment, Employer and
Employee entered into that certain Letter Agreement, dated January 10, 1996 (the
"Letter Agreement"), which was in part incorporated into that certain Severance
and Bonus Program Management Incentive Agreement, dated May 2, 1996 (the
"Existing Agreement") by and between Employer and Employee.
<PAGE> 2
C. Pursuant to the Letter Agreement, Employer agreed to provide Employee
with certain severance, relocation and loss protection benefits and to make
certain bonus payments to Employee.
D. Pursuant to the Existing Agreement, Employer agreed, among other
things, to provide Employee with twelve (12) months of continued salary and
fringe benefits in the event that Employer terminated Employee without cause at
any time prior to Employee's normal retirement date. In addition, Employer
agreed to make conditional lump sum cash payments of $25,000 to Employee on
March 31,1996 (the "First Bonus Payment") and on August 31,1996 (the "Second
Bonus Payment"). The First Bonus Payment was paid in accordance with the terms
of the Existing Agreement, but the Second Bonus Payment remains unpaid (although
past due as of September 1, 1996).
E. Employer was unable to resolve its financial difficulties in the
context of the financial restructuring, and as such, on August 9, 1996 (the
"Petition Date"), Employer (together with various affiliated entities) filed
petitions for relief under Chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") with the Bankruptcy Court (the "Chapter 11 Case"). Employer
has continued to operate its business and manage its affairs as a debtor in
possession.
F. Employer believes that Employee's continued services are especially
critical to its success now that the Chapter 11 Case has been commenced, and
desires to assume the obligations set forth in the Existing Agreement pursuant
to Section 365(a)
-2-
<PAGE> 3
of the Bankruptcy Code, as modified to incorporate the relocation and loss
protection provisions of the Letter Agreement.
NOW, THEREFORE, in consideration of the foregoing, Employer and Employee
hereby agree to amend and restate the Existing Agreement in its entirety as
follows:
1. SEVERANCE. In the event Employee's employment is "Terminated without
Cause" by Employer prior to Employee's normal retirement date, Employee shall be
entitled to receive as severance payment, and Employer shall pay to Employee
severance payments in an amount equal to twelve (12) months' worth of the
greater of (a) the salary payment Employee received immediately prior to such
termination or (0) the amount of salary payment Employee is receiving at the
date of this Agreement, payable at the same intervals as Employee's salary had
been paid. Such severance payments shall be made for a period of twelve (12)
full calendar months following such termination, together with a pro rata amount
for any partial calendar month following such termination, and shall be subject
to mitigation. In addition, Employer shall provide to Employee during the period
when severance payments are paid either (a) all the fringe benefits maintained
by Employer which were available to Employee on the date of termination or, if
different, (0) all of the fringe benefits available to Employee at the date of
this Agreement as described on Schedule A attached hereto; Employee may elect
between options (a) and (0) at the time of Employee's termination. Such benefits
will be provided on the terms and conditions in effect as of the date either of
-3-
<PAGE> 4
termination or this Agreement as chosen by Employee. The amount of Employee's
salary as of the date of this Agreement is also set forth on Schedule A. The
aforesaid severance payments and maintenance of fringe benefits shall be in
addition to and not in lieu of the base salary, bonus compensation, accumulated
vacation pay and other employee benefits payable to Employee at the time of
termination, on account of service prior to Employee's termination.
For purposes of this Agreement, the term "Terminated without Cause"
shall mean termination by reason of layoff or reduction in force or for any
other reason except "Employee's Voluntary Act" or "Termination for Cause" by
Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting
by Employee unless such resignation or quitting is preceded by, or reasonably
contemporaneous with, a "Change in Control". The term "Termination for Cause"
shall mean a termination of the employee arising from gross incompetence,
insubordination, dishonesty in performance of company duties, or conviction of
fraud, theft, embezzlement or any felony. However, any termination for
insubordination is subject to written notice by the Debtor and a thirty (30) day
cure period to correct the alleged insubordination. The term "Change in Control"
shall mean a change of the holders of 50% or more of the equity of Employer
(other than as a result of the issuance of equity to creditors on emergence from
bankruptcy pursuant to a plan of reorganization proposed by Employer), a change
in the majority of the Board of Directors of Employer (other than pursuant to a
plan of reorganization proposed by Employer), merger with less than 50%
-4-
<PAGE> 5
of the merged entity owned by pre-merger shareholders, or sale or abandonment of
more than 50% of Employer's revenue-generating assets.
2. RELOCATION AND LOSS PROTECTION. In the event that Employee's
employment is terminated as a result of a sale, merger, liquidation or similar
transaction involving Employer prior to June 30, 1999, Employer shall pay the
costs of Employee's relocation within the United States. Furthermore, in such
instance, Employer shall reimburse Employee for up to $25,000 in losses incurred
upon the sale of his Canton-area residence.
3. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the
contrary, to the extent that Employee is an at-will employee on the date of
execution and delivery of this Agreement, Employee remains an at-will employee
thereafter. An at-will employee may be discharged or may quit for any or no
reason, and the rights of Employee and Employer upon termination shall be as set
forth herein. Nothing in this Agreement obligates Employee to remain in
Employer's employ for any particular period or prevents Employee from resigning
at any time for any reason with or without notice to Employer.
4. BONUS PAYMENT. In addition to the annual base salary, bonus
compensation, accumulated vacation pay and other employee benefits otherwise
payable to Employee, and in addition to the severance payments described in
Section 1 and the relocation and loss protection benefits described in Section
2, in the event that Employee shall be actively employed by Employer on the date
that this Agreement is
-5-
<PAGE> 6
approved by the Bankruptcy Court (the "Bonus Payment Date"), Employee shall be
entitled to receive a lump-sum cash payment of the amount specified on Schedule
B attached hereto and made a part of this Agreement (the "Bonus Payment") within
three (3) business days of the Bonus Payment Date. In consideration of payment
and receipt of the Bonus Payment, Employee agrees to remain in the employ of
Employer from receipt of such payment until the end of Employer's fiscal year on
March 1, 1997 (the "Employment Period"). In the event that Employee's employment
is terminated as a result of Employee's Voluntary Act prior to the expiration of
the Employment Period, Employee agrees to repay to Employer the entire amount of
the Bonus Payment. To secure such repayment, Employer has a right of setoff
against any payments payable to Employee pursuant to this Agreement or
otherwise.
5. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
prior understanding whether written or oral.
6. AMENDMENT. This Agreement may be amended only by written agreement
signed by each of the parties hereto.
7. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Ohio.
8. NOTICE. Any notice to be given in connection with this Agreement
shall be deemed to have been effectively given if hand-delivered to the
recipient or sent by certified mail, return receipt requested, to the recipient
at the address last provided
-6-
<PAGE> 7
by recipient for purposes of receiving notices hereunder or, unless or until
such address shall be so furnished, to the address indicated opposite his, her
or its signature to this Agreement.
9. ASSIGNABILITY. This Agreement, and all actions and decisions
hereunder, shall inure to the benefit of and be binding upon Employer, its
representatives, successors and assigns, and upon Employee, and Employee's
heirs, executors, successors and assigns. None of the rights of Employee to
receive any form of compensation or benefit payable pursuant to this Agreement
shall be assignable or transferable except through a testamentary disposition or
by the laws of descent and distribution upon the death of Employee. Any
attempted assignment, transfer, conveyance or other disposition (other than as
aforesaid) of any interest in the rights of Employee to receive any form of
compensation or benefit to be paid by Employer pursuant to this Agreement shall
be void.
10. SEVERABILITY. In the event that any provision of this Agreement
shall be held to be illegal, invalid or unenforceable for any reason, said
illegality, invalidity or unenforceability shall not affect the remaining
provisions, but shall be fully severable and the Agreement shall be construed
and enforced as if said illegal, invalid or unenforceable provisions had never
been inserted herein.
11. EFFECTIVENESS. Employer hereby represents and warrants to Employee
that execution and performance of this Agreement shall become a valid and
-7-
<PAGE> 8
binding obligation of Employer upon the approval of this Agreement by the
Bankruptcy Court.
12. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to
interpret and apply the terms and conditions of this Agreement consistent with
applicable law.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
and year first above written.
CAMELOT MUSIC, INC.
By /s/ Jack K. Rogers
-------------------------
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
/s/ Charles Marsh
----------------------------
Charles Marsh
6030 Beach Road
Wadsworth, Ohio 44281
-8-
<PAGE> 9
Schedule A
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Charles L. Marsh
Amount of Monthly Salary Payment as of date of this Agreement: $11,250 Fringe
Benefits Available to Employee as of the date of this Agreement which will be
continued during the severance period:
Group Medical
Group Dental
Group Long-Term Disability
Group Life Insurance
<PAGE> 10
Schedule B
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Charles L. Marsh
Gross Amount of Lump Sum Cash Payment (subject to normal withholding taxes)
Payable on Bonus Payment Date:
Bonus Payment: $25,000
<PAGE> 1
Exhibit 10.9
AMENDED AND RESTATED SEVERANCE AND
BONUS PROGRAM MANAGEMENT INCENTIVE AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AND BONUS PROGRAM MANAGEMENT
INCENTIVE AGREEMENT (this "Agreement") is made and entered into as of the 11th
day of October, 1996, by and between Camelot Music, Inc., a Pennsylvania
corporation and a debtor and debtor in possession ("Employer"), and Charles R.
Rinehimer III ("Employee"), and shall become effective on the date (the
"Effective Date") that this Agreement is approved by the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
R E C I T A L S:
A. In early 1996, Employer attempted to resolve certain financial
difficulties in the context of an out-of-court restructuring.
B. Because Employer believed that the success of the financial
restructuring would be aided significantly by the continued efforts of certain
employees (the "Key Employees"), including Employee, Employer entered into those
certain Severance and Bonus Program Management Incentive Agreements, dated May
2, 1996 (the "Existing Agreements") with the Key Employees, in order to induce
the Key Employees to remain in Employer's employ.
C. Pursuant to the Existing Agreements, Employer agreed to provide
certain severance benefits and to make certain bonus payments to the Key
Employees.
<PAGE> 2
D. Pursuant to Employee's Existing Agreement, Employer agreed, among
other things, to provide Employee with six (6) months of continued salary and
fringe benefits in the event that Employer terminated Employee without cause at
any time prior to Employee's normal retirement date. In addition, Employer
agreed to make conditional lump sum cash payments of $10,000 to Employee on
March 31, 1996 (the "First Bonus Payment") and on August 31,1996 (the "Second
Bonus Payment"). The First Bonus Payment was paid in accordance with the terms
of the Existing Agreement, but the Second Bonus Payment remains unpaid (although
past due as of September 1, 1996).
E. Employer was unable to resolve its financial difficulties in the
context of the financial restructuring, and as such, on August 9, 1996 (the
"Petition Date"), Employer (together with various affiliated entities) filed
petitions for relief under Chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") with the Bankruptcy Court (the "Chapter 11 Case"). Employer
has continued to operate its business and manage its affairs as a debtor in
possession.
F. Employer believes that Employee's continued services are especially
critical to its success now that the Chapter 11 Case has been commenced, and
desires to assume the obligations set forth in the Existing Agreement pursuant
to Section 365(a) of the Bankruptcy Code, as modified herein.
-2-
<PAGE> 3
NOW, THEREFORE, in consideration of the foregoing, Employer and Employee
hereby agree to amend and restate the Existing Agreement in its entirety as
follows:
1. SEVERANCE. In the event Employee's employment is "Terminated without
Cause" by Employer prior to Employee's normal retirement date, Employee shall be
entitled to receive as severance payment, and Employer shall pay to Employee
severance payments in an amount equal to twelve (12) months' worth of the
greater of (a) the salary payment Employee received immediately prior to such
termination or (0) the amount of salary payment Employee is receiving at the
date of this Agreement, payable at the same intervals as Employee's salary had
been paid. Such severance payments shall be made for a period of twelve (12)
full calendar months following such termination, together with a pro rata amount
for any partial calendar month following such termination, and shall be subject
to mitigation. In addition, Employer shall provide to Employee during the period
when severance payments are paid either (a) all the fringe benefits maintained
by Employer which were available to Employee on the date of termination or, if
different, (0) all of the fringe benefits available to Employee at the date of
this Agreement as described on Schedule A attached hereto; Employee may elect
between options (a) and (0) at the time of Employee's termination. Such benefits
will be provided on the terms and conditions in effect as of the date either of
termination or this Agreement as chosen by Employee. The amount of Employee's
salary as of the date of this Agreement is also set forth on Schedule A. The
aforesaid
-3-
<PAGE> 4
severance payments and maintenance of fringe benefits shall be in addition to
and not in lieu of the base salary, bonus compensation, accumulated vacation pay
and other employee benefits payable to Employee at the time of termination, on
account of service prior to Employee's termination.
For purposes of this Agreement, the term "Terminated without Cause"
shall mean termination by reason of layoff or reduction in force or for any
other reason except "Employee's Voluntary Act" or "Termination for Cause" by
Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting
by Employee unless such resignation or quitting is preceded by, or reasonably
contemporaneous with, a "Change in Control". The term "Termination for Cause"
shall mean a termination of Employee arising from gross incompetence,
insubordination, dishonesty in performance of company duties, or conviction of
fraud, theft, embezzlement or any felony. However, any termination for
insubordination is subject to written notice by Employer and a thirty (30) day
cure period to correct the alleged insubordination. The term "Change in Control"
shall mean a change of the holders of 50% or more of the equity of Employer
(other than as a result of the issuance of equity to creditors on emergence from
bankruptcy pursuant to a plan of reorganization proposed by Employer), a change
in the majority of the Board of Directors of Employer (other than pursuant to a
plan of reorganization proposed by Employer), merger with less than 50% of the
merged entity owned by pre-merger shareholders, or sale or abandonment of more
than 50% of Employer's revenue-generating assets.
-4-
<PAGE> 5
2. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the
contrary, to the extent that Employee is an at-will employee on the date of
execution and delivery of this Agreement, Employee remains an at-will employee
thereafter. An at-will employee may be discharged or may quit for any or no
reason, and the rights of Employee and Employer upon termination shall be as set
forth herein. Nothing in this Agreement obligates Employee to remain in
Employer's employ for any particular period or prevents Employee from resigning
at any time for any reason with or without notice to Employer.
3. BONUS PAYMENT. In addition to the annual base salary, bonus
compensation, accumulated vacation pay and other employee benefits otherwise
payable to Employee, and in addition to the severance payments described in
Section 1, in the event that Employee shall be actively employed by Employer on
the date that this Agreement is approved by the Bankruptcy Court (the "Bonus
Payment Date"), Employee shall be entitled to receive a lump-sum cash payment of
the amount specified on Schedule B attached hereto and made a part of this
Agreement (the "Bonus Payment") within three (3) business days of the Bonus
Payment Date. In consideration of payment and receipt of the Bonus Payment,
Employee agrees to remain in the employ of Employer from receipt of such payment
until the end of Employer's fiscal year on March 1, 1997 (the "Employment
Period"). In the event that Employee's employment is terminated as a result of
Employee's Voluntary Act prior to the expiration of the Employment Period,
Employee agrees to repay to Employer the entire
-5-
<PAGE> 6
amount of the Bonus Payment. To secure such repayment, Employer has a right of
setoff against any payments payable to Employee pursuant to this Agreement or
otherwise.
4. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
prior understanding whether written or oral.
5. AMENDMENT. This Agreement may be amended only by written agreement
signed by each of the parties hereto.
6. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Ohio.
7. NOTICE. Any notice to be given in connection with this Agreement
shall be deemed to have been effectively given if hand-delivered to the
recipient or sent by certified mail, return receipt requested, to the recipient
at the address last provided by recipient for purposes of receiving notices
hereunder or, unless or until such address shall be so furnished, to the address
indicated opposite his, her or its signature to this Agreement.
8. ASSIGNABILITY. This Agreement, and all actions and decisions
hereunder, shall inure to the benefit of and be binding upon Employer, its
representatives, successors and assigns, and upon Employee, and Employee's
heirs, executors, successors and assigns. None of the rights of Employee to
receive any form of compensation or benefit payable pursuant to this Agreement
shall be assignable or
-6-
<PAGE> 7
transferable except through a testamentary disposition or by the laws of descent
and distribution upon the death of Employee. Any attempted assignment, transfer,
conveyance or other disposition (other than as aforesaid) of any interest in the
rights of Employee to receive any form of compensation or benefit to be paid by
Employer pursuant to this Agreement shall be void.
9. SEVERABILITY. In the event that any provision of this Agreement shall
be held to be illegal, invalid or unenforceable for any reason, said illegality,
invalidity or unenforceability shall not affect the remaining provisions, but
shall be fully severable and the Agreement shall be construed and enforced as if
said illegal, invalid or unenforceable provisions had never been inserted
herein.
10. EFFECTIVENESS. Employer hereby represents and warrants to Employee
that execution and performance of this Agreement shall become a valid and
binding obligation of Employer upon the approval of this Agreement by the
Bankruptcy Court.
11. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to
interpret and apply the terms and conditions of this Agreement consistent with
applicable law.
-7-
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
and year first above written.
CAMELOT MUSIC, INC.
By /s/ Jack K. Rogers
----------------------------------
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
/s/ Charles R. Rinehimer III
----------------------------------
Charles R. Rinehimer III
1547 Hunting Hollow
Hudson, Ohio 44236
-8-
<PAGE> 9
Schedule A
----------
to
Severance and Bonus Program
Management Incentive Agreement
Name of Employee: Charles R. Rinehimer III
Amount of Monthly Salary Payment as of date of this Agreement: 13,750
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued during the severance period:
Group Medical
Group Dental
Group Long-Term Disability
Group Life Insurance
<PAGE> 10
Schedule B
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Charles R. Rinehimer III
Gross Amount of Lump Sum Cash Payment (subject to normal withholding taxes)
Payable on Bonus Payment Date:
Bonus Payment: $10,000
<PAGE> 1
Exhibit 10.10
AMENDED AND RESTATED SEVERANCE AND
BONUS PROGRAM MANAGEMENT INCENTIVE AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AND BONUS PROGRAM MANAGEMENT
INCENTIVE AGREEMENT (this "Agreement") is made and entered into as of the 11th
day of October, 1996, by and between Camelot Music, Inc., a Pennsylvania
corporation and a debtor and debtor in possession ("Employer"), and Lee Ann
Thorn ("Employee"), and shall become effective on the date (the "Effective
Date") that this Agreement is approved by the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
R E C I T A L S:
A. In early 1996, Employer attempted to resolve certain financial
difficulties in the context of an out-of- court restructuring.
B. Because Employer believed that the success of the financial
restructuring would be aided significantly by the continued efforts of certain
employees (the "Key Employees"), including Employee, Employer entered into those
certain Severance and Bonus Program Management Incentive Agreements, dated May
2, 1996 (the "Existing Agreements") with the Key Employees, in order to induce
the Key Employees to remain in Employer's employ.
<PAGE> 2
C. Pursuant to the Existing Agreements, Employer agreed to provide
certain severance benefits and to make certain bonus payments to the Key
Employees.
D. Pursuant to Employee's Existing Agreement, Employer agreed, among
other things, to provide Employee with six (6) months of continued salary and
fringe benefits in the event that Employer terminated Employee without cause at
any time prior to Employee's normal retirement date. In addition, Employer
agreed to make conditional lump sum cash payments of $12,500 to Employee on
March 31, 1996 (the "First Bonus Payment") and on August 31, 1996 (the "Second
Bonus Payment"). The First Bonus Payment was paid in accordance with the terms
of the Existing Agreement, but the Second Bonus Payment remains unpaid (although
past due as of September 1, 1996).
E. Employer was unable to resolve its financial difficulties in the
context of the financial restructuring, and as such, on August 9, 1996 (the
"Petition Date"), Employer (together with various affiliated entities) filed
petitions for relief under Chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") with the Bankruptcy Court (the "Chapter 11 Case"). Employer
has continued to operate its business and manage its affairs as a debtor in
possession.
-2-
<PAGE> 3
F. Employer believes that Employee's continued services are especially
critical to its success now that the Chapter 11 Case has been commenced, and
desires to assume the obligations set forth in the Existing Agreement pursuant
to Section 365(a) of the Bankruptcy Code, as modified herein.
NOW, THEREFORE, in consideration of the foregoing, Employer and Employee
hereby agree to amend and restate the Existing Agreement in its entirety as
follows:
1. SEVERANCE. In the event Employee's employment is "Terminated without
Cause" by Employer prior to Employee's normal retirement date, Employee shall be
entitled to receive as severance payment, and Employer shall pay to Employee
severance payments in an amount equal to twelve (12) months' worth of the
greater of (a) the salary payment Employee received immediately prior to such
termination or (b) the amount of salary payment Employee is receiving at the
date of this Agreement, payable at the same intervals as Employee's salary had
been paid. Such severance payments shall be made for a period of twelve (12)
full calendar months following such termination, together with a pro rata amount
for any partial calendar month following such termination, and shall be subject
to mitigation. In addition, Employer shall provide to Employee during the period
when severance payments are paid either (a) all the fringe benefits maintained
by Employer which were available to Employee on the date of
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<PAGE> 4
termination or, if different, (b) all of the fringe benefits available to
Employee at the date of this Agreement as described on Schedule A attached
hereto; Employee may elect between options (a) and (b) at the time of Employee's
termination. Such benefits will be provided on the terms and conditions in
effect as of the date either of termination or this Agreement as chosen by
Employee. The amount of Employee's salary as of the date of this Agreement is
also set forth on Schedule A. The aforesaid severance payments and maintenance
of fringe benefits shall be in addition to and not in lieu of the base salary,
bonus compensation, accumulated vacation pay and other employee benefits payable
to Employee at the time of termination, on account of service prior to
Employee's termination.
For purposes of this Agreement, the term "Terminated without Cause"
shall mean termination by reason of layoff or reduction in force or for any
other reason except "Employee's Voluntary Act" or "Termination for Cause" by
Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting
by Employee unless such resignation or quitting is preceded by, or reasonably
contemporaneous with, a "Change in Control". The term "Termination for Cause"
shall mean a termination of Employee arising from gross incompetence,
insubordination, dishonesty in performance of company duties, or conviction of
fraud, theft,
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<PAGE> 5
embezzlement or any felony. However, any termination for insubordination is
subject to written notice by Employer and a thirty (30) day cure period to
correct the alleged insubordination. The term "Change in Control" shall mean a
change of the holders of 50% or more of the equity of Employer (other than as a
result of the issuance of equity to creditors on emergence from bankruptcy
pursuant to a plan of reorganization proposed by Employer), a change in the
majority of the Board of Directors of Employer (other than pursuant to a plan of
reorganization proposed by Employer), merger with less than 50% of the merged
entity owned by pre-merger shareholders, or sale or abandonment of more than
50% of Employer's revenue-generating assets.
2. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the
contrary, to the extent that Employee is an at-will employee on the date of
execution and delivery of this Agreement, Employee remains an at-will employee
thereafter. An at-will employee may be discharged or may quit for any or no
reason, and the rights of Employee and Employer upon termination shall be as set
forth herein. Nothing in this Agreement obligates Employee to remain in
Employer's employ for any particular period or prevents Employee from resigning
at any time for any reason with or without notice to Employer.
-5-
<PAGE> 6
3. BONUS PAYMENT. In addition to the annual base salary, bonus
compensation, accumulated vacation pay and other employee benefits otherwise
payable to Employee, and in addition to the severance payments described in
Section 1, in the event that Employee shall be actively employed by Employer on
the date that this Agreement is approved by the Bankruptcy Court (the "Bonus
Payment Date"), Employee shall be entitled to receive a lump-sum cash payment of
the amount specified on Schedule B attached hereto and made a part of this
Agreement (the "Bonus Payment") within three (3) business days of the Bonus
Payment Date. In consideration of payment and receipt of the Bonus Payment,
Employee agrees to remain in the employ of Employer from receipt of such payment
until the end of Employer's fiscal year on March 1, 1997 (the "Employment
Period"). In the event that Employee's employment is terminated as a result of
Employee's Voluntary Act prior to the expiration of the Employment Period,
Employee agrees to repay to Employer the entire amount of the Bonus Payment. To
secure such repayment, Employer has a right of setoff against any payments
payable to Employee pursuant to this Agreement or otherwise.
4. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
prior understanding whether written or oral.
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<PAGE> 7
5. AMENDMENT. This Agreement may be amended only by written agreement
signed by each of the parties hereto.
6. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Ohio.
7. NOTICE. Any notice to be given in connection with this Agreement
shall be deemed to have been effectively given if hand-delivered to the
recipient or sent by certified mail, return receipt requested, to the recipient
at the address last provided by recipient for purposes of receiving notices
hereunder or, unless or until such address shall be so_ furnished, to the
address indicated opposite his, her or its signature to this Agreement.
8. ASSIGNABILITY. This Agreement, and all actions and decisions
hereunder, shall inure to the benefit of and be binding upon Employer, its
representatives, successors and assigns, and upon Employee, and Employee's
heirs, executors, successors and assigns. None of the rights of Employee to
receive any form of compensation or benefit payable pursuant to this Agreement
shall be assignable or transferable except through a testamentary disposition or
by the laws of descent and distribution upon the death of Employee. Any
attempted assignment, transfer, conveyance or other disposition (other than as
aforesaid) of any interest in the rights of Employee
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<PAGE> 8
to receive any form of compensation or benefit to be paid by Employer pursuant
to this Agreement shall be void.
9. SEVERABILITY. In the event that any provision of this Agreement shall
be held to be illegal, invalid or unenforceable for any reason, said illegality,
invalidity or unenforceability shall not affect the remaining provisions, but
shall be fully severable and the Agreement shall be construed and enforced as if
said illegal, invalid or unenforceable provisions had never been inserted
herein.
10. EFFECTIVENESS. Employer hereby represents and warrants to Employee
that execution and performance of this Agreement shall become a valid and
binding obligation of Employer upon the approval of this Agreement by the
Bankruptcy Court.
11. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to
interpret and apply the terms and conditions of this Agreement consistent with
applicable law.
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<PAGE> 9
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
and year first above written.
CAMELOT MUSIC, INC.
By Jack K. Rogers
--------------------------
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
/s/ Lee Ann Thorn
----------------------------
Lee Ann Thorn
1045 Chelmsford St., N.W.
North Canton, OH 44720
-9-
<PAGE> 10
Schedule A
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Lee Ann Thorn
Amount of Monthly Salary Payment as of date of this Agreement: $11,250
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued during the severance period:
Group Medical
Group Dental
Group Long-Term Disability
Group Life Insurance
<PAGE> 11
Schedule B
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Lee Ann Thorn
Gross Amount of Lump Sum Cash Payment (subject to normal withholding taxes)
Payable on Bonus Payment Date:
Bonus Payment: $12,500
<PAGE> 1
Exhibit 10.11
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the ____ day of ________, 1998,
by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and ____________________ ("Indemnitee"), a Director of the
Corporation.
WHEREAS, it is essential to the Corporation to retain and
attract as Directors and/or Officers the most capable persons available; and
WHEREAS, the substantial increase in corporate litigation
subjects directors and officers to expensive litigation risks at the same time
that the availability of directors' and officers' liability insurance has been
severely limited; and
WHEREAS, it is now the express policy of the Corporation to
indemnify its Directors and/or Officers so as to provide them with the maximum
possible protection permitted by law; and
WHEREAS, in addition, because the statutory indemnification
provisions of the Delaware General Corporation Law expressly provide that they
are non-exclusive, it is the policy of the Corporation to indemnify directors
and officers of the Corporation who have entered into settlements of derivative
suits provided they have not breached the applicable statutory standard of
conduct; and
WHEREAS, Indemnitee does not regard the protection available
under the Corporation's Certificate of Incorporation and insurance, if any, as
adequate in the present circumstances, and considers it necessary and desirable
to his or her service as a Director and/or Officer to have adequate protection,
and the Corporation desires Indemnitee to serve in such capacity; and
WHEREAS, the Delaware General Corporation Law provides that
indemnification of directors and officers of a corporation may be authorized by
agreement, and thereby contemplates that contracts of this nature may be entered
into between the Company and Indemnitee with respect to indemnification of
Indemnitee as a Director and/or Officer of the Corporation.
NOW, THEREFORE, the Corporation and Indemnitee do hereby agree
as follows:
1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue
to serve as a Director of the Corporation for so long as he or she is duly
elected or appointed or until such time as he or she tenders his or her
resignation in writing.
2. DEFINITIONS. As used in this Agreement:
(a) The term "Proceeding" shall include any
threatened, pending, or completed action, suit or proceeding, whether
brought by or
<PAGE> 2
in the right of the Corporation or otherwise and whether of a civil,
criminal, administrative or investigative nature, in which Indemnitee
may be or may have been involved as a party or otherwise, by reason of
the fact that Indemnitee is or was a Director and/or Officer of the
Corporation, by reason of any action taken by Indemnitee or of any
inaction on his or her part while acting as such a Director and/or
Officer, or by reason of the fact that he or she is or was serving at
the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise; in each case whether or not he or
she is acting or serving in any such capacity at the time any liability
or expense is incurred for which indemnification or reimbursement can
be provided under this Agreement.
(b) The term "Expenses" shall include, without
limitation, expenses of investigations, judicial or administrative
proceedings or appeals, attorneys' fees and disbursements and any
expenses of establishing a right to indemnification under Paragraph 8
of this Agreement, but shall not include the amount of judgments, fines
or penalties against or settlements paid by Indemnitee.
(c) References to "other enterprise" shall include,
without limitation, employee benefit plans; references to "fines" shall
include, without limitation, any excise tax assessed with respect to
any employee benefit plan; references to "serving at the request of the
Corporation" shall include, without limitation, any service as a
Director and/or Officer of the Corporation which imposes duties on, or
involves services by, such Director and/or Officer with respect to an
employee benefit plan, its participants or beneficiaries; and a person
who acted in good faith and in a manner he or she reasonably believed
to be in the best interests of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in
this Agreement.
3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall
indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if
Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any Proceeding (other than a Proceeding by or in the right of the
Corporation to procure a judgment in its favor) by reason of the fact that
Indemnitee is or was a Director and/or Officer of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against all Expenses, judgments, settlements, fines
and penalties, actually and reasonably incurred by Indemnitee in connection with
the defense or settlement of such Proceeding, but only if Indemnitee acted in
good faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the Corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe that his or her conduct was
unlawful. The termination of any such Proceeding by judgment, order of court,
settlement, conviction or upon a plea of nolo contendere, or its
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<PAGE> 3
equivalent, shall not, of itself, create a presumption that Indemnitee did not
act in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the Corporation, and with respect to any
criminal proceeding, that such person had reasonable cause to believe that his
or her conduct was unlawful.
4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF
THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with
the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to
be made a party to any Proceeding by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a Director and/or Officer of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all Expenses actually and reasonably incurred by Indemnitee
in connection with the defense or settlement of such Proceeding, but only if he
or she acted in good faith and in a manner which he or she reasonably believed
to be in or not opposed to the best interests of the Corporation, except that no
indemnification for Expenses shall be made under this Paragraph 4 in respect of
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Corporation, unless and only to the extent that any court in which
such Proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such expenses as
such court shall deem proper.
5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY
OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee
in accordance with the provisions of this Paragraph 5 if Indemnitee is a party
to or threatened to be made a party to any Proceeding by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that
Indemnitee is or was a Director and/or Officer of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership, joint venture,
trust or other enterprise, against all amounts actually and reasonably paid in
settlement by Indemnitee in connection with any such Proceeding, but only if he
or she acted in good faith and in a manner which he or she reasonably believed
to be in or not opposed to the best interests of the Corporation.
6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee has been successful on the merits or otherwise in defense of any
Proceeding or in defense of any claim, issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf
of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by
the Corporation in advance upon the written request of Indemnitee if Indemnitee
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<PAGE> 4
shall undertake to repay such amount to the extent that it is ultimately
determined that Indemnitee is not entitled to indemnification hereunder.
8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION;
PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5
shall be made no later than thirty (30) days after receipt by the Corporation of
the written request of Indemnitee, unless a determination is made within said
thirty-day period by (a) the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such Proceeding, or (b)
independent legal counsel, agreed to by the Corporation, in a written opinion
(which counsel shall be appointed if such a quorum is not obtainable), that the
Indemnitee has not met the relevant standards for indemnification set forth in
Paragraphs 3, 4 or 5.
The right to indemnification or advances as provided by this
Agreement shall be enforceable by Indemnitee in any court of competent
jurisdiction. There shall exist in such action a rebuttable presumption that
Indemnitee has met the applicable standard(s) of conduct and is therefore
entitled to indemnification pursuant to this Agreement, and the burden of
proving that the relevant standards have not been met by Indemnitee shall be on
the Corporation. Neither the failure of the Corporation (including its Board of
Directors or independent legal counsel) prior to the commencement of such action
to have made a determination that indemnification is proper in the circumstances
because Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Corporation (including its Board of Directors or
independent legal counsel) that Indemnitee has not met such applicable standard
of conduct, shall (i) constitute a defense to the action, (ii) create a
presumption that Indemnitee has not met the applicable standard of conduct, or
(iii) otherwise alter the presumption in favor of Indemnitee referred to in the
preceding sentence. Indemnitee's expenses reasonably incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be indemnified by the Corporation.
9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee
acknowledges that the Securities and Exchange Commission ("SEC") has expressed
the opinion that indemnification of directors and officers from liabilities
under the Securities Act of 1933 ("Act") is against public policy as expressed
in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it
will not be a breach of this Agreement for the Corporation to undertake with the
Commission in connection with the registration for sale of any stock or other
securities of the Corporation from time to time that, in the event a claim for
indemnification against such liabilities (other than the payment by the
Corporation of expenses incurred or paid by a director or officer of the
Corporation in the successful defense of any action, suit or proceeding) is
asserted in connection with such stock or other securities being registered, the
Corporation will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of competent jurisdiction on
the question of whether or not such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
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<PAGE> 5
of such issue. Indemnitee further agrees that such submission to a court of
competent jurisdiction shall not be a breach of this Agreement.
10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The
indemnification provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may be entitled under the Certificate of
Incorporation or the By-Laws of the Corporation, any agreement, any vote of
stockholders or disinterested directors, the General Corporation Law of the
State of Delaware, or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
The indemnification under this Agreement shall continue as to
Indemnitee even though he or she may have ceased to be a Director and/or Officer
and shall inure to the benefit of the heirs, executors and personal
representatives of Indemnitee.
11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under
any provision of this Agreement to indemnification by the Corporation for some
claims, issues or matters, but not as to other claims, issues or matters, or for
some or a portion of the Expenses, judgments, fines or penalties actually and
reasonably incurred by Indemnitee or amounts actually and reasonably paid in
settlement by Indemnitee in the investigation, defense, appeal or settlement of
any Proceeding, but not for the total amount thereof, the Corporation shall
nevertheless indemnify Indemnitee for the portion of such claims, issues or
matters or Expenses, judgments, fines, penalties or amounts paid in settlement
to which Indemnitee is entitled.
12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON
AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by
the Corporation hereunder and later receives payments from any insurance carrier
covering the same Expenses, judgments, fines, penalties or amounts paid in
settlement so indemnified by the Corporation hereunder, Indemnitee shall
immediately reimburse the Corporation hereunder for all such amounts received
from the insurer.
Notwithstanding anything contained herein to the contrary,
Indemnitee shall not be entitled to recover amounts under this Agreement which,
when added to the amount of indemnification payments made to, or on behalf of,
Indemnitee, under the Certificate of Incorporation or By-Laws of the
Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties
and amounts paid in settlement actually and reasonably incurred by Indemnitee
("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to
Indemnitee, Indemnitee shall be obligated to immediately reimburse the
Corporation for such Excess Amounts.
13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and
obligations of the Corporation and Indemnitee hereunder shall continue in full
force and effect despite the subsequent amendment or modification of the
Corporation's Certificate of Incorporation or By-Laws, as such are in effect on
the date hereof, and such rights and obligations shall not be affected by any
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<PAGE> 6
such amendment or modification, any resolution of directors or stockholders of
the Corporation, or by any other corporate action which conflicts with or
purports to amend, modify, limit or eliminate any of the rights or obligations
of the Corporation and/or Indemnitee hereunder.
14. AMENDMENT AND MODIFICATION. This Agreement may only be
amended, modified or supplemented by the written agreement of the Corporation
and Indemnitee.
15. ASSIGNMENT. This Agreement shall not be assigned by the
Corporation or Indemnitee without the prior written consent of the other party
thereto, except that the Corporation may freely assign its rights and
obligations under this Agreement to any subsidiary for whom Indemnitee is
serving as a director and/or officer thereof; provided, however, that no
permitted assignment shall release the assignor from its obligations hereunder.
Subject to the foregoing, this Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, including, without limitation, any successor
to the Corporation by way of merger, consolidation and/or sale or disposition of
all or substantially all of the capital stock of the Corporation.
16. SAVING CLAUSE. If this Agreement or any portion thereof
shall be invalidated on any ground by any court of competent jurisdiction, the
Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments,
fines, penalties and amounts paid in settlement with respect to any Proceeding
to the full extent permitted by any applicable portion of this Agreement that
shall not have been invalidated or by any other applicable law.
17. COUNTERPARTS. This Agreement may be executed in two or
more fully or partially executed counterparts each of which shall be deemed an
original binding the signer thereof against the other signing parties, but all
counterparts together shall constitute one and the same instrument. Executed
signature pages may be removed from counterpart agreements and attached to one
or more fully executed copies of this Agreement.
18. NOTICE. Indemnitee shall, as a condition precedent to his
or her right to be indemnified under this Agreement, give to the Corporation
notice in writing as soon as practicable of any claim made against him for which
indemnity will or could be sought under this Agreement. Notice to the
Corporation shall be directed to the Corporation at its headquarters located at
8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or
such other address as the Corporation shall designate in writing to Indemnitee).
Notice shall be deemed received three days after the date postmarked if sent by
prepaid mail, properly addressed. In addition, Indemnitee shall give the
Corporation such information and cooperation as it may reasonably require within
Indemnitee's power.
19. APPLICABLE LAW. All matters with respect to this
Agreement, including, without limitation, matters of validity, construction,
effect and performance shall be governed by the internal laws of the State of
Delaware
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<PAGE> 7
applicable to contracts made and to be performed therein between the residents
thereof (regardless of the laws that might otherwise be applicable under
principles of conflicts of law).
IN WITNESS WHEREOF, the parties hereby have caused this
Agreement to be duly executed and signed as of the day and year first above
written.
CAMELOT MUSIC HOLDINGS, INC.
THE "CORPORATION"
By
---------------------------------
Its
---------------------------------
"INDEMNITEE"
------------------------------------
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<PAGE> 1
Exhibit 10.15
FORM CUSTOMARY TRADE TERMS COMMITMENT
AND
OPTION EXERCISE NOTICE
To: Camelot Distribution Co., Inc.
1. We are an Eligible Supplier, as that term is defined in the First Amended
Joint Chapter 11 Plan of Reorganization CM Holdings, Inc., Camelot Music,
Inc., G.M.G. Advertising, Inc. and Grapevine Records and Tapes, Inc., dated
October 28, 1997 (the "Plan"). Capitalized terms used in this agreement that
are defined in the Plan shall have the meanings ascribed to them in the Plan.
2. We hereby commit to (a) sell goods to Camelot Distribution Co., Inc. on
Customary Trade Terms effective as of the Effective date, (b) provide Camelot
Distribution Co., Inc. with credit limits sufficient to insure a minimum of
60 days dating (or, if greater, such number of days dating as we customarily
extend to creditworthy customers) with respect to each item of inventory
purchased by Camelot Distribution Co., Inc., and (c) provide Camelot
Distribution Co., Inc. with a credit equal to the value of any customary
discounts (including without limitation, the 2% prompt payment discount) that
we have denied Camelot Music, Inc. from and after June 1, 1997.
3. We acknowledge that the Plan provides for the administration of the Exchange
Option, pursuant to which the Holders of Allowed Prepetition Lender Secured
Claims have agreed to pay Cash to electing Eligible Suppliers in an amount
equal to 50% of the Allowed Class 5-A General Unsecured Claims tendered by
such Eligible Suppliers. We further acknowledge that such Cash payments are
to be made from the Secured Claim Distribution.
4. We hereby exercise the Exchange Option with respect to:
[CHECK ONE] ALL 75% X NONE
----- ----- -----
of our Allowed Class 5-A General Unsecured Claim.
5. We acknowledge that our entitlement to the Cash payment from the Secured
Claim Distribution is contingent upon the allowance of our Class 5-A General
Unsecured Claim, and is further contingent upon and in exchange for (a) the
tender by us to the Holders of Allowed Prepetition Lender Secured Claims of
the distributions to which we would otherwise be entitled as a Holder of an
Allowed Class 5-A General Unsecured Claim and (b) our commitment to provide
the credit terms and other benefits described in paragraph 2 of this
agreement.
6. We understand that this agreement may be revoked by us in writing delivered
to Camelot and the Bank Agent at any time up to the Business Day prior to the
commencement of the Confirmation Hearing. Subsequent to such date, however,
the parties to this agreement, their successors and assigns shall be legally
bound by the terms of this agreement, which shall be governed by the laws of
the State of New York.
7. This agreement supersedes all prior agreements, statements and discussions
between the parties as to the subject matter hereof, and sets forth the
entire agreement of the parties with respect to the matters covered hereby;
provided, however, that to the extent that any provisions of this agreement
conflict with the Plan, the provisions of the Plan shall control.
Dated , 1997
--------
----------------------------------
----------------------------------
----------------------------------
[NAME & ADDRESS OF ELIGIBLE SUPPLIER]
By:
-------------------------------
Title:
----------------------------
<PAGE> 1
Exhibit 10.16
AMENDED AND RESTATED SEVERANCE AND
BONUS PROGRAM MANAGEMENT INCENTIVE AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AND BONUS PROGRAM MANAGEMENT
INCENTIVE AGREEMENT (this "Agreement") is made and entered into as of the 11th
day of October, 1996, by and between Camelot Music, Inc., a Pennsylvania
corporation and a debtor and debtor in possession ("Employer"), and Roger D.
Marks ("Employee"), and shall become effective on the date (the "Effective
Date") that this Agreement is approved by the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
R E C I T A L S:
A. In early 1996, Employer attempted to resolve certain financial
difficulties in the context of an out-of-court restructuring.
B. Because Employer believed that the success of the financial
restructuring would be aided significantly by the continued efforts of certain
employees (the "Key Employees"), including Employee, Employer entered into those
certain Severance and Bonus Program Management Incentive Agreements, dated May
2, 1996 (the "Existing Agreements") with the Key Employees, in order to induce
the Key Employees to remain in Employer's employ.
C. Pursuant to the Existing Agreements, Employer agreed to provide
certain severance benefits and to make certain bonus payments to the Key
Employees.
<PAGE> 2
D. Pursuant to Employee's Existing Agreement, Employer agreed, among
other things, to provide Employee with six (6) months of continued salary and
fringe benefits in the event that Employer terminated Employee without cause at
any time prior to Employee's normal retirement date. In addition, Employer
agreed to make conditional lump sum cash payments of $10,000 to Employee on
March 31, 1996 (the "First Bonus Payment") and on August 31,1996 (the "Second
Bonus Payment"). The First Bonus Payment was paid in accordance with the terms
of the Existing Agreement, but the Second Bonus Payment remains unpaid (although
past due as of September 1, 1996).
E. Employer was unable to resolve its financial difficulties in the
context of the financial restructuring, and as such, on August 9, 1996 (the
"Petition Date"), Employer (together with various affiliated entities) filed
petitions for relief under Chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") with the Bankruptcy Court (the "Chapter 11 Case"). Employer
has continued to operate its business and manage its affairs as a debtor in
possession.
F. Employer believes that Employee's continued services are especially
critical to its success now that the Chapter 11 Case has been commenced, and
desires to assume the obligations set forth in the Existing Agreement pursuant
to Section 365(a) of the Bankruptcy Code, as modified herein.
-2-
<PAGE> 3
NOW, THEREFORE, in consideration of the foregoing, Employer and Employee
hereby agree to amend and restate the Existing Agreement in its entirety as
follows:
1. SEVERANCE. In the event Employee's employment is "Terminated without
Cause" by Employer prior to Employee's normal retirement date, Employee shall be
entitled to receive as severance payment, and Employer shall pay to Employee
severance payments in an amount equal to twelve (12) months' worth of the
greater of (a) the salary payment Employee received immediately prior to such
termination or (0) the amount of salary payment Employee is receiving at the
date of this Agreement, payable at the same intervals as Employee's salary had
been paid. Such severance payments shall be made for a period of twelve (12)
full calendar months following such termination, together with a pro rata amount
for any partial calendar month following such termination, and shall be subject
to mitigation. In addition, Employer shall provide to Employee during the period
when severance payments are paid either (a) all the fringe benefits maintained
by Employer which were available to Employee on the date of termination or, if
different, (b) all of the fringe benefits available to Employee at the date of
this Agreement as described on Schedule A attached hereto; Employee may elect
between options (a) and (0) at the time of Employee's termination. Such benefits
will be provided on the terms and conditions in effect as of the date either of
termination or this Agreement as chosen by Employee. The amount of Employee's
salary as of the date of this Agreement is also set forth on Schedule A. The
aforesaid
-3-
<PAGE> 4
severance payments and maintenance of fringe benefits shall be in addition to
and not in lieu of the base salary, bonus compensation, accumulated vacation pay
and other employee benefits payable to Employee at the time of termination, on
account of service prior to Employee's termination.
For purposes of this Agreement, the term "Terminated without Cause"
shall mean termination by reason of layoff or reduction in force or for any
other reason except "Employee's Voluntary Act" or "Termination for Cause" by
Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting
by Employee unless such resignation or quitting is preceded by, or reasonably
contemporaneous with, a "Change in Control". The term "Termination for Cause"
shall mean a termination of Employee arising from gross incompetence,
insubordination, dishonesty in performance of company duties, or conviction of
fraud, theft, embezzlement or any felony. However, any termination for
insubordination is subject to written notice by Employer and a thirty (30) day
cure period to correct the alleged insubordination. The term "Change in Control"
shall mean a change of the holders of 50% or more of the equity of Employer
(other than as a result of the issuance of equity to creditors on emergence from
bankruptcy pursuant to a plan of reorganization proposed by Employer), a change
in the majority of the Board of Directors of Employer (other than pursuant to a
plan of reorganization proposed by Employer), merger with less than 50% of the
merged entity owned by pre-merger shareholders, or sale or abandonment of more
than 50% of Employer's revenue-generating assets.
-4-
<PAGE> 5
2. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the
contrary, to the extent that Employee is an at-will employee on the date of
execution and delivery of this Agreement, Employee remains an at-will employee
thereafter. An at-will employee may be discharged or may quit for any or no
reason, and the rights of Employee and Employer upon termination shall be as set
forth herein. Nothing in this Agreement obligates Employee to remain in
Employer's employ for any particular period or prevents Employee from resigning
at any time for any reason with or without notice to Employer.
3. BONUS PAYMENT. In addition to the annual base salary, bonus
compensation, accumulated vacation pay and other employee benefits otherwise
payable to Employee, and in addition to the severance payments described in
Section 1, in the event that Employee shall be actively employed by Employer on
the date that this Agreement is approved by the Bankruptcy Court (the "Bonus
Payment Date"), Employee shall be entitled to receive a lump-sum cash payment of
the amount specified on Schedule B attached hereto and made a part of this
Agreement (the "Bonus Payment") within three (3) business days of the Bonus
Payment Date. In consideration of payment and receipt of the Bonus Payment,
Employee agrees to remain in the employ of Employer from receipt of such payment
until the end of Employer's fiscal year on March 1, 1997 (the "Employment
Period"). In the event that Employee's employment is terminated as a result of
Employee's Voluntary Act prior to the expiration of the Employment Period,
Employee agrees to repay to Employer the entire
-5-
<PAGE> 6
amount of the Bonus Payment. To secure such repayment, Employer has a right of
setoff against any payments payable to Employee pursuant to this Agreement or
otherwise.
4. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
prior understanding whether written or oral.
5. AMENDMENT. This Agreement may be amended only by written agreement
signed by each of the parties hereto.
6. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Ohio.
7. NOTICE. Any notice to be given in connection with this Agreement
shall be deemed to have been effectively given if hand-delivered to the
recipient or sent by certified mail, return receipt requested, to the recipient
at the address last provided by recipient for purposes of receiving notices
hereunder or, unless or until such address shall be so furnished, to the address
indicated opposite his, her or its signature to this Agreement.
8. ASSIGNABILITY. This Agreement, and all actions and decisions
hereunder, shall inure to the benefit of and be binding upon Employer, its
representatives, successors and assigns, and upon Employee, and Employee's
heirs, executors, successors and assigns. None of the rights of Employee to
receive any form of compensation or benefit payable pursuant to this Agreement
shall be assignable or
-6-
<PAGE> 7
transferable except through a testamentary disposition or by the laws of descent
and distribution upon the death of Employee. Any attempted assignment, transfer,
conveyance or other disposition (other than as aforesaid) of any interest in the
rights of Employee to receive any form of compensation or benefit to be paid by
Employer pursuant to this Agreement shall be void.
9. SEVERABILITY. In the event that any provision of this Agreement shall
be held to be illegal, invalid or unenforceable for any reason, said illegality,
invalidity or unenforceability shall not affect the remaining provisions, but
shall be fully severable and the Agreement shall be construed and enforced as if
said illegal, invalid or unenforceable provisions had never been inserted
herein.
10. EFFECTIVENESS. Employer hereby represents and warrants to Employee
that execution and performance of this Agreement shall become a valid and
binding obligation of Employer upon the approval of this Agreement by the
Bankruptcy Court.
11. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to
interpret and apply the terms and conditions of this Agreement consistent with
applicable law.
-7-
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
and year first above written.
CAMELOT MUSIC, INC.
By Jack K. Rogers
----------------------------
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
(Address for Employee) /s/ Roger D. Marks
- ----------------------------- ------------------------------
- ----------------------------- Roger D. Marks
- -----------------------------
- -----------------------------
-8-
<PAGE> 9
Schedule A
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Roger D. Marks
Amount of Monthly Salary Payment as of date of this Agreement: $11,250
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued during the severance period:
Group Medical
Group Dental
Group Long-Term Disability
Group Life Insurance
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued under the terms of a separate contract:
First Amended and Restated Supplemental Executive Retirement
Agreement, dated as of the date of this Agreement
<PAGE> 10
Schedule B
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: Roger D. Marks
Gross Amount of Lump Sum Cash Payment (subject to normal withholding taxes)
Payable on Bonus Payment Date:
Bonus Payment: $10,000
<PAGE> 1
Exhibit 10.17
AMENDED AND RESTATED SEVERANCE AND
BONUS PROGRAM MANAGEMENT INCENTIVE AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AND BONUS PROGRAM MANAGEMENT
INCENTIVE AGREEMENT (this "Agreement") is made and entered into as of the 17th
day of October, 1996, by and between Camelot Music, Inc., a Pennsylvania
corporation and a debtor and debtor in possession ("Employer"), and William H.
Scott ("Employee"), and shall become effective on the date (the "Effective
Date") that this Agreement is approved by the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
R E C I T A L S:
A. In early 1996, Employer attempted to resolve certain financial
difficulties in the context of an out-of-court restructuring.
B. Because Employer believed that the success of the financial
restructuring would be aided significantly by the continued efforts of certain
employees (the "Key Employees"), including Employee, Employer entered into those
certain Severance and Bonus Program Management Incentive Agreements, dated May
2, 1996 (the "Existing Agreements") with the Key Employees, in order to induce
the Key Employees to remain in Employer's employ.
C. Pursuant to the Existing Agreements, Employer agreed to provide
certain severance benefits and to make certain bonus payments to the Key
Employees.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing, Employer and Employee
hereby agree to amend and restate the Existing Agreement in its entirety as
follows:
1. SEVERANCE. In the event Employee's employment is "Terminated without
Cause" by Employer prior to Employee's normal retirement date, Employee shall be
entitled to receive as severance payment, and Employer shall pay to Employee
severance payments in an amount equal to twelve (12) months' worth of the
greater of (a) the salary payment Employee received immediately prior to such
termination or (b) the amount of salary payment Employee is receiving at the
date of this Agreement, payable at the same intervals as Employee's salary had
been paid. Such severance payments shall be made for a period of twelve (12)
full calendar months following such termination, together with a pro rata amount
for any partial calendar month following such termination, and shall be subject
to mitigation. In addition, Employer shall provide to Employee during the period
when severance payments are paid either (a) all the fringe benefits maintained
by Employer which were available to Employee on the date of termination or, if
different, (b) all of the fringe benefits available to Employee at the date of
this Agreement as described on Schedule A attached hereto; Employee may elect
between options (a) and (b) at the time of Employee's termination. Such benefits
will be provided on the terms and conditions in effect as of the date either of
termination or this Agreement as chosen by Employee. The amount of Employee's
salary as of the date of this Agreement is also set forth on Schedule A. The
aforesaid
-3-
<PAGE> 3
severance payments and maintenance of fringe benefits shall be in addition to
and not in lieu of the base salary, bonus compensation, accumulated vacation pay
and other employee benefits payable to Employee at the time of termination, on
account of service prior to Employee's termination.
For purposes of this Agreement, the term "Terminated without Cause"
shall mean termination by reason of layoff or reduction in force or for any
other reason except "Employee's Voluntary Act" or "Termination for Cause" by
Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting
by Employee unless such resignation or quitting is preceded by, or reasonably
contemporaneous with, a "Change in Control". The term "Termination for Cause"
shall mean a termination of Employee arising from gross incompetence,
insubordination, dishonesty in performance of company duties, or conviction of
fraud, theft, embezzlement or any felony. However, any termination for
insubordination is subject to written notice by Employer and a thirty (30) day
cure period to correct the alleged insubordination. The term "Change in Control"
shall mean a change of the holders of 50% or more of the equity of Employer
(other than as a result of the issuance of equity to creditors on emergence from
bankruptcy pursuant to a plan of reorganization proposed by Employer), a change
in the majority of the Board of Directors of Employer (other than pursuant to a
plan of reorganization proposed by Employer), merger with less than 50% of the
merged entity owned by pre-merger shareholders, or sale or abandonment of more
than 50% of Employer's revenue-generating assets.
-4-
<PAGE> 4
2. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the
contrary, to the extent that Employee is an at-will employee on the date of
execution and delivery of this Agreement, Employee remains an at-will employee
thereafter. An at-will employee may be discharged or may quit for any or no
reason, and the rights of Employee and Employer upon termination shall be as set
forth herein. Nothing in this Agreement obligates Employee to remain in
Employer's employ for any particular period or prevents Employee from resigning
at any time for any reason with or without notice to Employer.
3. BONUS PAYMENT. In addition to the annual base salary, bonus
compensation, accumulated vacation pay and other employee benefits otherwise
payable to Employee, and in addition to the severance payments described in
Section 1, in the event that Employee shall be actively employed by Employer on
the date that this Agreement is approved by the Bankruptcy Court (the "Bonus
Payment Date"), Employee shall be entitled to receive a lump-sum cash payment of
the amount specified on Schedule B attached hereto and made a part of this
Agreement (the "Bonus Payment") within three (3) business days of the Bonus
Payment Date. In consideration of payment and receipt of the Bonus Payment,
Employee agrees to remain in the employ of Employer from receipt of such payment
until the end of Employer's fiscal year on March 1, 1997 (the "Employment
Period"). In the event that Employee's employment is terminated as a result of
Employee's Voluntary Act prior to the expiration of the Employment Period,
Employee agrees to repay to Employer the entire
-5-
<PAGE> 5
amount of the Bonus Payment. To secure such repayment, Employer has a right of
setoff against any payments payable to Employee pursuant to this Agreement or
otherwise.
4. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
prior understanding whether written or oral.
5. AMENDMENT. This Agreement may be amended only by written agreement
signed by each of the parties hereto.
6. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Ohio.
7. NOTICE. Any notice to be given in connection with this Agreement
shall be deemed to have been effectively given if hand-delivered to the
recipient or sent by certified mail, return receipt requested, to the recipient
at the address last provided by recipient for purposes of receiving notices
hereunder or, unless or until such address shall be so furnished, to the address
indicated opposite his, her or its signature to this Agreement.
8. ASSIGNABILITY. This Agreement, and all actions and decisions
hereunder, shall inure to the benefit of and be binding upon Employer, its
representatives, successors and assigns, and upon Employee, and Employee's
heirs, executors, successors and assigns. None of the rights of Employee to
receive any form of compensation or benefit payable pursuant to this Agreement
shall be assignable or
-6-
<PAGE> 6
transferable except through a testamentary disposition or by the laws of descent
and distribution upon the death of Employee. Any attempted assignment, transfer,
conveyance or other disposition (other than as aforesaid) of any interest in the
rights of Employee to receive any form of compensation or benefit to be paid by
Employer pursuant to this Agreement shall be void.
9. SEVERABILITY. In the event that any provision of this Agreement shall
be held to be illegal, invalid or unenforceable for any reason, said illegality,
invalidity or unenforceability shall not affect the remaining provisions, but
shall be fully severable and the Agreement shall be construed and enforced as if
said illegal, invalid or unenforceable provisions had never been inserted
herein.
10. EFFECTIVENESS. Employer hereby represents and warrants to Employee
that execution and performance of this Agreement shall become a valid and
binding obligation of Employer upon the approval of this Agreement by the
Bankruptcy Court.
11. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to
interpret and apply the terms and conditions of this Agreement consistent with
applicable law.
-7-
<PAGE> 7
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
and year first above written
CAMELOT MUSIC, INC.
By /s/ Jack K. Rogers
---------------------------
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
/s/ William H. Scott
------------------------------
William H. Scott
9246 Bletchley Drive, N.W.
N. Canton, OH 44720
-8-
<PAGE> 8
Schedule A
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: William H. Scott
Amount of Monthly Salary Payment as of date of this Agreement: $10,420
Fringe Benefits Available to Employee as of the date of this Agreement which
will be continued during the severance period:
Group Medical
Group Dental
Group Long-Term Disability
Group Life Insurance
<PAGE> 9
Schedule B
----------
to
Amended and Restated Severance and
Bonus Program Management Incentive Agreement
Name of Employee: William H. Scott
Gross Amount of Lump Sum Cash Payment (subject to normal withholding taxes)
Payable on Bonus Payment Date:
Bonus Payment: $12,500
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to inclusion in the Prospectus constituting part, and/or,
of this Registration Statement on Form S-1 of our reports dated June 10, 1998
relating to the consolidated financial statements and financial statement
schedule of Camelot Music Holdings, Inc. ("Successor Company") and CM Holdings,
Inc. ("Predecessor Company") which appears in such Prospectus and/or
Registration Statement. We also consent to the reference to our firm under the
caption "Experts" in such Prospectus.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
June 15, 1998
II-5
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Registration Statement of Camelot
Music Holdings, Inc. on Form S-1 of our report dated August 21, 1997 (February
28, 1998 as to Note 1) relating to the financial statements of The Wall Music,
Inc. for the year ended June 1, 1997 appearing in the Prospectus which is a part
of this Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Atlanta, Georgia
June 11, 1998
II-6
<PAGE> 1
EXHIBIT 24.1
CAMELOT MUSIC HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Camelot Music Holdings, Inc. hereby
constitutes and appoints James E. Bonk, Jack K. Rogers and Lee Ann Thorn, or any
one or more of them, its attorneys-in-fact and agents, each with full power of
substitution and resubstitution for it in any and all capacities, to sign any or
all amendments or post-effective amendments to this Registration Statement, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each of
such attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary in connection with such
matters and hereby ratifying and confirming all that each of such
attorneys-in-fact and agents or his substitute or substitutes may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland,
Ohio this 11th day of June, 1998.
CAMELOT MUSIC HOLDINGS, INC.
By: /s/ JACK K. ROGERS
------------------------------------
II-7
<PAGE> 2
EXHIBIT 24.1 -- (CONTINUED)
CAMELOT MUSIC HOLDINGS, INC.
CERTIFIED RESOLUTION
I, Jack K. Rogers, Secretary of Camelot Music Holdings, Inc., a Delaware
corporation (the "Company"), do hereby certify that the following is a true copy
of a resolution adopted by the Board of Directors on June 4, 1998, and that the
same has not been changed and remains in full force and effect.
RESOLVED, that each of James E. Bonk, Jack K. Rogers and Lee Ann Thorn is
hereby appointed as attorney of the Company with full power of substitution and
resubstitution for and in the name, place and stead of the Company to sign,
attest and file a Registration Statement on Form S-1, or any other appropriate
form that may be used from time to time, and any related registration statement
filed pursuant to Rule 462(b) under the Securities Act, with respect to the
issue and sale of the Company's Common Stock (the "Securities"), and any and all
amendments and exhibits to such Registration Statement and any and all
applications or other documents to be filed with the Commission and any and all
applicable applications or other documents in connection with the inclusion in
any automated interdealer quotation system of the securities covered by such
Registration Statement or any and all applications or other documents to be
filed with any governmental or private agency or official relative to the
issuance of said Securities, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorneys or any such
substitute or substitutes and, without implied limitation, including in the
above the authority to do the foregoing things on behalf of the Company in the
name of the person so acting or on behalf and in the name of any duly authorized
officer of the Company; and that each of the Chairman, the President and
Secretary and the Chief Financial Officer of the Company is hereby authorized,
for and on behalf of the Company, to execute a Power of Attorney evidencing the
foregoing appointment.
/s/ JACK K. ROGERS
--------------------------------------
Jack K. Rogers, Secretary
Dated: June 11, 1998
II-8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF THE PREDECESSOR AND SUCCESSOR
COMPANIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> MAR-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 86,304
<SECURITIES> 0
<RECEIVABLES> 2,698
<ALLOWANCES> 0
<INVENTORY> 108,781
<CURRENT-ASSETS> 206,324
<PP&E> 24,400
<DEPRECIATION> 0
<TOTAL-ASSETS> 260,319
<CURRENT-LIABILITIES> 57,306
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 194,266
<TOTAL-LIABILITY-AND-EQUITY> 260,319
<SALES> 372,561
<TOTAL-REVENUES> 372,561
<CGS> 243,109
<TOTAL-COSTS> 99,553
<OTHER-EXPENSES> 20,484<F1>
<LOSS-PROVISION> (4,443)<F2>
<INTEREST-EXPENSE> 655<F3>
<INCOME-PRETAX> 39,953
<INCOME-TAX> 289
<INCOME-CONTINUING> 39,664
<DISCONTINUED> 0
<EXTRAORDINARY> 228,911
<CHANGES> 0
<NET-INCOME> 268,575
<EPS-PRIMARY> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1>Depreciation and amortization expense.
<F2>Special items. See last complete paragraph in Footnote 15 to the Company's
Consolidated Financial Statements.
<F3>Interest expense and amortization of Financing Fees.
<F4>No earnings per share information presented -- see Note 3Q of the Company's
Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF THE PREDECESSOR AND SUCCESSOR
COMPANIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> FEB-28-1998
<CASH> 82,530
<SECURITIES> 0
<RECEIVABLES> 1,849
<ALLOWANCES> 0
<INVENTORY> 146,672
<CURRENT-ASSETS> 242,485
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 342,281
<CURRENT-LIABILITIES> 132,342
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 194,847
<TOTAL-LIABILITY-AND-EQUITY> 342,281
<SALES> 27,842
<TOTAL-REVENUES> 27,842
<CGS> 17,662
<TOTAL-COSTS> 9,240
<OTHER-EXPENSES> 527<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19<F2>
<INCOME-PRETAX> 696
<INCOME-TAX> 115
<INCOME-CONTINUING> 581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 581
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<FN>
<F1>DEPRECIATION AND AMORTIZATION EXPENSE.
<F2>INTEREST EXPENSE AND AMORTIZATION OF FINANCING FEES.
<F3>NO EARNINGS PER SHARE INFORMATION PRESENTED - SEE NOTE 3Q OF THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
