<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1998
REGISTRATION NO. 333-56811
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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>
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- ----------------------------------------------------------------------------------------------------------
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
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</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 AUGUST 11, 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 Selling Stockholders
acquired their shares upon the Company's emergence from bankruptcy pursuant to
Section 1145(a) of the United States Bankruptcy Code or in open market
transactions thereafter. 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 August 10, 1998 was $37 per share. For
a discussion relating to factors to be considered in determining the initial
public offering price, see "Underwriting." The Company has applied 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>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2)
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<S> <C> <C> <C>
Per Share...................... $ $ $
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Total(3)....................... $ $ $
- ---------------------------------------------------------------------------------------------------------------
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</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 July
31, 1998, the Company operated 493 stores in 37 states nationwide and in Puerto
Rico under three brand names: Camelot Music, founded in 1956, and operating 304
stores with a significant store base concentration in the Midwest and Southeast
regions of the United States; The Wall, operating 148 stores primarily in the
Mid-Atlantic and Northeast regions of the United States; and Spec's Music, Inc.
("Spec's"), operating 41 stores in south Florida and Puerto Rico. The Company
acquired certain assets of The Wall effective February 28, 1998 ("The Wall
Acquisition"), and it acquired Spec's, a music retailer, on July 29, 1998 (the
"Spec's 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). 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 " -- 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 4,350
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 enables 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.
The Company believes that the total market for prerecorded music and music
videos in the United States amounted to $12.2 billion in 1997. The Company
believes that revenues in the music and music video market in the United States
have doubled over the last ten years and has grown at a compounded annual rate
of 8.2% during that time. Industry growth rates do not reflect the Company's
historical growth and are not necessarily indicative of its growth during future
periods. The Company's revenues have grown at a 7.8% compounded annual rate over
the last ten years, although its revenues grew over the past five years at a
compounded annual rate of 2.3%. 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
3
<PAGE> 6
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 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.
The Company has historically been privately held. In 1993, the Company was
acquired in a highly leveraged transaction by an investment group led by a
private investment firm and members of the Company's current management (the
"1993 Acquisition"). The 1993 Acquisition resulted 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 (the
"Petition Date"). 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 "Plan Effective Date"). Under the
Plan of Reorganization, substantially all of the claims against the Company
existing as of the Petition Date were exchanged for shares of Common Stock.
Approximately $423.0 million of unsecured claims were exchanged for 10,167,824
shares of Common Stock valued at an amount equal to one share for each $47.95 of
claim, and approximately $41.5 million of secured claims were exchanged for
2,211,111 shares of Common Stock valued at an amount equal to one share for each
$18.75 of claim. All pre-petition ownership interests in the Company were
canceled.
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 July 31, 1998, approximately 280 of the Company's 493 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 July 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, seven have been completed and
4
<PAGE> 7
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 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 July 29, 1998, the Company acquired
Spec's. See "-- Recent Developments."
RECENT DEVELOPMENTS
On July 29, 1998, the Company acquired Spec's under the terms of an
Agreement and Plan of Merger dated June 3, 1998 (the "Spec's Merger Agreement").
Spec's is a Miami, Florida-based retailer of prerecorded music operating 41
stores in south Florida and Puerto Rico. As of July 29, 1998, Spec's operated 16
mall stores and 25 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 was $28
million (including related acquisition costs and the repayment of Spec's
indebtedness) and was funded primarily with amounts available under the
Company's Amended Credit Facility (as defined herein) as well as accumulated
cash. See "Risk Factors -- Risks of Restrictions by Lenders" and "Description of
Certain Indebtedness." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." Based
on public filings by Spec's, during the twelve months ended January 31, 1998,
Spec's had revenues of $66.2 million and an operating loss of $4.1 million
(excluding restructuring charges, store closing expenses and impairment of
long-lived assets). 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).............................. 10,175,932 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) 948,594 shares of Common Stock reserved for issuance
under the Company's stock option plans of which options to purchase an
aggregate of 734,000 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 pro forma financial
information does not give effect to the Spec's Acquisition. 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 PREDECESSOR(6) THE COMPANY
--------------------------------------------- ------------ --------------- -----------
PERIOD PERIOD PERIOD PERIOD
MARCH 2, FEBRUARY 1, MARCH 2, MARCH 1,
1997 TO 1998 TO COMBINED 1997 TO 1998 TO
FISCAL FISCAL FISCAL JANUARY 31, FEBRUARY 28, FISCAL MAY 31, MAY 30,
1994 1995 1996 1998(7) 1998(7) 1997(8) 1997 1998
-------- --------- -------- ----------- ------------ -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales.............. $459,077 $ 455,652 $396,502 $372,561 $ 27,842 $400,403 $ 82,815 $ 113,456
Cost of sales.......... 289,887 302,481 263,072 243,109 17,662 260,771 53,820 71,147
-------- --------- -------- -------- ----------- -------- -------- -----------
Gross profit........... 169,190 153,171 133,430 129,452 10,180 139,632 28,995 42,309
Selling, general and
administrative
expenses............. 128,158 135,441 117,558 99,553 9,240 108,793 26,407 36,213
Depreciation and
amortization......... 21,146 26,570 23,290 20,484 527 21,011 5,454 1,765
Special items(2)....... -- 211,520 6,523 (4,443) -- (4,443) -- 350
-------- --------- -------- -------- ----------- -------- -------- -----------
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 (2,866) 3,981
Interest expense....... (30,655) (38,319) (17,418) (221) (12) (233) (61) (86)
Other income
(expenses), net...... (5,026) (4,978) (1,160) (185) 295 110 (69) 263
-------- --------- -------- -------- ----------- -------- -------- -----------
Income (loss) before
reorganization income
(expenses), income
taxes and
extraordinary item... (15,795) (263,657) (32,519) 13,452 696 14,148 (2,996) 4,158
Reorganization income
(expenses)(3)........ -- -- (31,845) 26,501 -- 26,501 (1,113) --
-------- --------- -------- -------- ----------- -------- -------- -----------
Income (loss) before
income taxes and
extraordinary item... (15,795) (263,657) (64,364) 39,953 696 40,649 (4,109) 4,158
(Provision) benefit for
income taxes......... (3,070) (474) -- (289) (115) (404) -- (1,603)
Extraordinary item, net
of tax(4)............ -- -- -- 228,911 -- 228,911 -- --
-------- --------- -------- -------- ----------- -------- -------- -----------
Net income (loss)...... $(18,865) $(264,131) $(64,364) $268,575 $ 581 $269,156 $ (4,109) $ 2,555
======== ========= ======== ======== =========== ======== ======== ===========
Basic earnings per
share(5)............. $ 0.06 $ 0.25
Diluted earnings per
share(5)............. $ 0.06 $ 0.24
Weighted average number
of common shares
outstanding -- basic(5)... 10,176,162 10,176,162
Weighted average number
of common shares
outstanding -- diluted(5).. 10,176,162 10,469,914
SELECTED STORE DATA
Number of stores:
Open at beginning of
period............. 392 401 388 315 305 315 315 305
Opened during
period............. 21 14 -- -- -- -- -- 1
Closed during
period............. 12 27 73 10 -- 10 -- 1
Acquired during
period............. -- -- -- -- -- -- -- 150
-------- --------- -------- -------- ----------- -------- -------- -----------
Open at end of
period............. 401 388 315 305 305 305 315 455
======== ========= ======== ======== =========== ======== ======== ===========
SELECTED OPERATING DATA
Gross square footage
(000's)(9)........... 1,511 1,563 1,329 1,309 1,309 1,309 1,329 1,930
Sales per square
foot(6).............. $ 304 $ 292 $ 298 -- -- $ 306 $ 62 $ 59
Comparable store sales
increase
(decrease)(10)....... (2.6%) (5.6%) (3.5%) -- -- 6.8% 1.7% 1.0%
</TABLE>
(footnotes on page 9)
8
<PAGE> 11
<TABLE>
<CAPTION>
THE COMPANY
AT MAY 30, 1998
---------------
<S> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 15,680
Working capital............................................. 114,517
Total assets................................................ 303,894
Long-term debt.............................................. --
Stockholders' equity........................................ 197,692(11)
</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. In the first quarter of
Fiscal 1998 the Company incurred a $0.4 million (expense) relating to the
Offerings.
(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 year
end and interim 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 Plan 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 Plan 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 Plan 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. The percentage change in comparable store sales is based on
comparable store sales for Camelot stores only and excludes The Wall
stores. 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) Does not reflect estimated expenses associated with the Offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
9
<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.
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."
UNCERTAINTIES REGARDING MAP GUIDELINES
During 1996, music vendors 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. MAP
guidelines set forth minimum retail prices at which a vendor's merchandise is to
be sold if a retailer desires to receive cooperative advertising support from
such vendor. 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.
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
10
<PAGE> 13
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 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, and the
Company recently completed the Spec's 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 Spec's 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. 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. Although the Company from
time to time engages in discussions with prospective acquisition candidates, the
Company is not currently a party to any definite agreement or an agreement in
principle with respect to any acquisitions.
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.
11
<PAGE> 14
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
entertainment 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.
ABSENCE OF LONG-TERM CONTRACTS WITH SUPPLIERS; POTENTIAL SUPPLIER CONSOLIDATION
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.
12
<PAGE> 15
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 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, and the proceeding is now before the District Court as
Civil Action No. 97-695 (MMS). The District Court approved a Joint Discovery
Plan on July 6, 1998. The Joint Discovery Plan mandates that all discovery be
served or issued so as to be completed on or before June 30, 1999. 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
13
<PAGE> 16
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 AND COLLATERAL ARRANGEMENTS
The Company's Amended Credit Facility contains 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 meet
certain financial covenants under the Amended Credit Facility, including minimum
consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA"). There can be no assurance that the Company will not experience
difficulty meeting its financial covenants under the Amended Credit Facility. If
the Company is unable to comply with the covenants under the Amended Credit
Facility, such indebtedness could be declared immediately due and payable. The
obligations of the Company's wholly owned subsidiary Camelot Music Inc. ("CMI")
under the Amended Credit Facility are guaranteed by the Company and by all of
CMI's subsidiaries; these obligations are collateralized by substantially all of
CMI's and its subsidiaries assets. The Company has pledged to its lenders the
capital stock of CMI, and CMI has pledged to the lenders the capital stock of
its subsidiaries. If the Company defaulted on its indebtedness, the lenders
under the Amended Credit Facility would be able to foreclose on the collateral
and utilize other remedies available to secured lenders. 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. Morgan Stanley & Co., Incorporated,
one of the underwriters of the Offerings, is under common ownership with Van
Kampen Merritt Prime Rate Income Trust ("Van Kampen"), a stockholder of the
Company. Van Kampen is not selling any shares of Common Stock in the Offerings.
See "Use of Proceeds," "Certain Transactions" and "Principal and Selling
Stockholders."
14
<PAGE> 17
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."
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.
DILUTION
Purchasers of the shares of Common Stock offered hereby will suffer
immediate and substantial dilution in the amount of $ per share. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS AGREEMENT
Upon completion of the Offerings, of the 30,000,000 authorized shares of
Common Stock, 10,177,662 shares of Common Stock are anticipated to be issued and
outstanding. Of these 10,177,662 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 August 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. See "Shares Eligible for Future Sale -- Registration Rights Agreement."
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,
15
<PAGE> 18
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 948,594 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 734,000 shares of Common Stock
reserved for issuance upon exercise of all outstanding options (whether vested
or unvested) and the 214,594 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.
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.
16
<PAGE> 19
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 has applied 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 August 10, 1998).................. 44.00 37.00
</TABLE>
On August 10, 1998, the closing bid price of the Common Stock as reported
on the OTC Bulletin Board was $37.00 per share. Based upon information provided
by the Company's transfer agent, as of July 28, 1998 there were 742 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 Amended Credit Facility limits its ability to pay
dividends under certain circumstances. 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 May
30, 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 MAY 30, 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, 10,177,662 shares issued and outstanding
(2).................................................... $ 102
Additional paid-in capital................................ 194,454
Retained earnings (3)..................................... 3,136
--------
Total stockholders' equity........................ 197,692
--------
Total capitalization.............................. $197,692
========
</TABLE>
- ---------------
(1) As of July 31, 1998, the Company had $25.0 million of indebtedness
outstanding pursuant to the term loan under the Amended Credit Facility. The
Company borrowed $25.0 million under the term loan in order to finance
substantially all of the cash purchase price 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 May 30, 1998 was $303.9
million or $26.00 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........................... $ 26.00
--------
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 354,500
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)(10)
Cost of sales......... 243,109 (3,890)(1)(2) 17,662 256,881 104,175 (9,000)(10)
-------- --------- ------- -------- -------- --------
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)(10)(11)
(12)(13)
Depreciation and
amortization........ 20,484 (14,574)(1)(4) 527 6,437 6,725 (3,038)(14)
Special items......... (4,443) -- (4,443) 4,164 (4,164)(15)
-------- --------- ------- -------- -------- --------
Income before interest
expense, other
income (expenses),
net, reorganization
income (expenses),
and income taxes.... 13,858 14,848 413 29,119 2,643 13,395
Interest expense...... (221) 55(5) (12) (178) -- (410)(16)
Other income
(expenses), net..... (185) 2,529(6)(7) 295 2,639 -- (2,639)(16)
-------- --------- ------- -------- -------- --------
Income before
reorganization
income (expenses),
and income taxes.... 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........ 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)(17)
-------- --------- ------- -------- -------- --------
Net income (loss)..... $ 39,664 $ (20,981) $ 581 $ 19,264(20) $ 437 $ 7,485
======== ========= ======= ======== ======== ========
Earnings per
share(18)...........
Weighted average
shares
outstanding(18).....
<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),
and income taxes.... 45,157
Interest expense...... (588)
Other income
(expenses), net..... --
-----------
Income before
reorganization
income (expenses),
and income taxes.... 44,569
Reorganization income
(expenses).......... --
-----------
Income (loss) before
income taxes........ 44,569
(Provision) benefit
for income taxes.... (17,383)
-----------
Net income (loss)..... $ 27,186(19)
===========
Earnings per
share(18)........... $ 2.67
Weighted average
shares
outstanding(18)..... 10,176,162
</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 internal software costs (SOP
98-1) of $105; (iii) eliminate Predecessor Company depreciation expense of
($18,644); and (iv) record depreciation expense of $6,182 for the adjusted
fixed asset values based on historical lives and half-year convention.
(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. The
interest income consists of interest earned on cash accumulated during the
Chapter 11 proceedings due to the nonpayment of prepetition liabilities
subject to compromise and was recorded as a reorganization item in
accordance with SOP 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code."
(8) To eliminate reorganization income (including interest income of $2,311
included therein) which will not be incurred subsequent to the Plan
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%.
THE WALL ACQUISITION PRO FORMA ADJUSTMENTS NOTES
(10) To reflect adjustment for operating results of 18 stores not acquired by
the Company for sales ($3,600); cost of sales ($2,300); and selling,
general and administrative expenses ($1,900); and to adjust operating
results for 11 stores acquired which will be closed and are reserved for as
part of the acquisition strategy as follows: sales ($10,700); cost of sales
($6,700); and selling, general and administrative expenses ($3,800).
(11) To eliminate duplicate payroll and related costs of ($4,313) associated
with the corporate employees not acquired, and to eliminate duplicate
corporate facility costs of ($400) for contracts not acquired.
(12) To eliminate duplicate payroll and related costs of ($710) associated with
distribution center employees not acquired.
(13) 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.
(14) 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.
(15) 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.
22
<PAGE> 25
(16) 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.
(17) To record the income tax effect of pro forma adjustments assuming an income
tax rate of 39%.
PRO FORMA COMBINED PER SHARE DATA
(18) 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
(19) 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.
23
<PAGE> 26
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, 1995, 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 of the Company for the period March 2, 1997 to May 31, 1997 and
March 1, 1998 to May 30, 1998 and as of May 31, 1997 and May 30, 1998 has been
derived from the unaudited financial statements 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
======== ======== ======== ========= ========== ======== ========
Basic earnings per
share(9).............
Diluted earnings per
share(9).............
Weighted average
number of common
shares
outstanding-basic(9)...
Weighted average
number of common
shares
outstanding-diluted(9)..
<CAPTION>
THE THE
COMPANY PREDECESSOR(2) COMPANY
------------ -------------- ----------
PERIOD PERIOD PERIOD
FEBRUARY 1, MARCH 2, MARCH 1,
1998 TO COMBINED 1997 TO 1998 TO
FEBRUARY 28, FISCAL MAY 31, MAY 30,
1998(4) 1997(5) 1997 1998
------------ -------- -------------- ----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............. $ 27,842 $400,403 $ 82,815 $ 113,456
Cost of sales......... 17,662 260,771 53,820 71,147
-------- -------- -------- ----------
Gross profit.......... 10,180 139,632 28,995 42,309
Selling, general and
administrative
expenses............. 9,240 108,793 26,407 36,213
Depreciation and
amortization......... 527 21,011 5,454 1,765
Special items (6)..... -- (4,443) -- 350
-------- -------- -------- ----------
Income (loss) before
interest expense,
other income
(expenses), net,
reorganization income
(expenses), income
taxes and
extraordinary item... 413 14,271 (2,866) 3,981
Interest expense...... (12) (233) (61) (86)
Other income
(expenses), net...... 295 110 (69) 263
-------- -------- -------- ----------
Income (loss) before
reorganization income
(expenses), income
taxes and
extraordinary item... 696 14,148 (2,996) 4,158
Reorganization income
(expenses)(7)........ -- 26,501 (1,113) --
-------- -------- -------- ----------
Income (loss) before
income taxes and
extraordinary item... 696 40,649 (4,109) 4,158
(Provision) benefit
for income taxes..... (115) (404) -- (1,603)
Extraordinary item,
net of tax(8)........ -- 228,911 -- --
-------- -------- -------- ----------
Net income (loss)..... $ 581 $269,156 $ (4,109) $ 2,555
======== ======== ======== ==========
Basic earnings per
share(9)............. $ 0.06 -- -- $ 0.25
Diluted earnings per
share(9)............. $ 0.06 -- -- $ 0.24
Weighted average
number of common
shares
outstanding-basic(9). 10,176,162 10,176,162
Weighted average
number of common
shares
outstanding-diluted(9 10,176,162 10,469,914
</TABLE>
(continued on following page)
24
<PAGE> 27
<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 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
======== ======== ======== ========= ========== ======== ========
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 9,203 2,555 12,565 285,878 -- --
Long-term debt, net of
current portion...... 21,283 21,283 328,845 354,235 110,882 -- --
Liabilities subject to
compromise........... -- -- -- -- -- 484,811 --
Stockholders' equity
(deficit)............ 130,418 130,579 75,643 56,778 (203,940) (268,304) 194,368
<CAPTION>
THE THE
COMPANY PREDECESSOR(2) COMPANY
------------ -------------- ----------
PERIOD PERIOD PERIOD
FEBRUARY 1, MARCH 2, MARCH 1,
1998 TO COMBINED 1997 TO 1998 TO
FEBRUARY 28, FISCAL MAY 31, MAY 30,
1998(4) 1997(5) 1997 1998
------------ -------- -------------- ----------
<S> <C> <C> <C> <C>
SELECTED STORE DATA
Number of stores:
Open at beginning of
period............. 305 315 315 305
Open during period... -- -- -- 1
Closed during
period............. -- 10 -- 1
Acquired during
period............. -- -- -- 150
-------- -------- -------- ----------
Open at end of
period............. 305 305 315 455
======== ======== ======== ==========
SELECTED OPERATING
DATA
Gross square footage
(000's)(10).......... 1,309 1,309 1,329 1,930
Sales per square
foot(11)............. -- $ 306 $ 62 $ 59
Comparable store sales
increase
(decrease)(12)....... -- 6.8% 1.7% 1.0%
BALANCE SHEET DATA (AT
END OF PERIOD)
Working capital....... $110,143 $110,143 $124,608 $ 114,517
Total assets.......... 342,281 342,281 254,132 303,894
Current portion of
long-term debt....... -- -- -- --
Long-term debt, net of
current portion...... -- -- -- --
Liabilities subject to
compromise........... -- -- 484,497 --
Stockholders' equity
(deficit)............ 194,949 194,949 (272,421) 197,692
</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 Plan 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 Plan 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 Plan 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. In the first quarter of Fiscal 1998, the Company incurred a
$0.4 million (expense) relating to the Offerings.
(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 year end and interim 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.
25
<PAGE> 28
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 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 "Plan 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 are
being charged to earnings in the periods incurred. 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 July 29, 1998, the Company acquired Spec's under the terms of the Spec's
Merger Agreement. Spec's is a Miami, Florida-based retailer of prerecorded music
operating 41 stores in Florida and Puerto Rico. As of July 29, 1998, Spec's
operated 16 mall stores and 25 stores in shopping centers and free-standing
locations. The
26
<PAGE> 29
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 was
approximately $28 million (including related acquisition costs and the repayment
of Spec's indebtedness) and was funded primarily with amounts available under
the Company's Amended Credit Facility as well as accumulated cash. See
"-- Liquidity and Capital Resources." Based on public filings by Spec's, during
the twelve months ended January 31, 1998, Spec's had revenues of $66.2 million
and an operating loss of $4.1 million (excluding restructuring charges, store
closing expenses and impairment of long-lived assets). 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) the Company's results of operations for the thirteen
weeks ended May 30, 1998 with the results of operations for the thirteen weeks
ended May 31, 1997, (ii) 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 (iii)
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"). Although
results for periods subsequent to January 31, 1998 are not comparable to results
for prior periods, information is presented on a combined basis in order to
provide investors with information covering a complete fiscal year of
operations. Management believes that presentation of information with respect to
Combined Fiscal 1997 facilitates investor comprehension of the Company's
performance for Fiscal 1997 in relation to the prior periods presented.
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.
27
<PAGE> 30
The following table shows certain statement of operations line items as a
percentage of net sales during the three most recent fiscal years and for the
first quarters of Fiscal 1998 and Fiscal 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------------------------------------------
PRO FORMA PRO FORMA FIRST FIRST
COMBINED COMBINED COMBINED QUARTER QUARTER
FISCAL FISCAL FISCAL FISCAL 1997 FISCAL 1997 FISCAL FISCAL
1995 1996 1997(1) (FRESH-START)(2) (THE WALL)(2) 1997 1998
------ ------ -------- ---------------- ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 66.4 66.3 65.1 64.8 63.5 65.0 62.7%
----- ----- ----- ----- ----- ----- -----
Gross profit................................. 33.6 33.7 34.9 35.2 36.5 35.0 37.3
Selling, general and administrative
expenses................................... 29.7 29.7 27.2 27.3 27.3 31.9 31.9
Depreciation and amortization................ 5.8 5.9 5.2 1.6 1.8 6.6 1.6
Special items(3)............................. 46.4 1.6 (1.1) (1.1) (0.7) -- 0.3
----- ----- ----- ----- ----- ----- -----
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 (3.5) 3.5
Interest expense............................. (8.4) (4.4) (0.1) -- (0.1) -- --
Other income (expenses), net................. (1.1) (0.3) -- 0.7 -- (0.1) 0.2
----- ----- ----- ----- ----- ----- -----
Income (loss) before reorganization income
(expenses), income taxes and extraordinary
item....................................... (57.8) (8.2) 3.5 8.1 8.0 (3.6) 3.7
Reorganization income (expenses)............. -- (8.0) 6.6 -- -- (1.3) --
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item......................... (57.8) (16.2) 10.1 8.1 8.0 (4.9) 3.7
(Provision) benefit for income taxes......... (0.1) -- (0.1) (3.1) (3.1) -- (1.4)
Extraordinary item, net of tax............... -- -- 57.2 -- -- -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss)............................ (57.9)% (16.2)% 67.2% 5.0% 4.9% (4.9)% 2.3%
===== ===== ===== ===== ===== ===== =====
</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.
THIRTEEN WEEKS ENDED MAY 30, 1998 COMPARED TO THE THIRTEEN WEEKS ENDED MAY 31,
1997.
Net sales. Net sales increased 37.0% to $113.5 million in the first quarter
of Fiscal 1998 compared to $82.8 million in the first quarter of Fiscal 1997.
The Company acquired 150 stores on February 28, 1998 as a result of The Wall
Acquisition. The increase in sales was primarily as result of The Wall
Acquisition which added $31.4 million to net sales for the quarter. Comparable
store sales (based on 305 Camelot stores) increased 1.0%, primarily due to
increases in retail pricing of catalog goods during the first quarter of Fiscal
1998 versus the prior year. Comparable store sales for The Wall for the first
quarter of Fiscal 1998 increased by approximately 10% compared to the first
quarter of Fiscal 1997 (when the Company did not own The Wall). During this
period, the Company opened one store and closed one store. As of May 30, 1998,
the Company operated 455 stores compared to 315 stores as of May 31, 1997.
Gross profit. Gross profit increased 45.9% to $42.3 million in the first
quarter of Fiscal 1998 compared to $29.0 million in the first quarter of Fiscal
1997. Gross profit as a percentage of net sales improved to 37.3% in the first
quarter of Fiscal 1998 from 35.0% in the first quarter of Fiscal 1997. The
increase in gross profit was a result
28
<PAGE> 31
of less promotional retail pricing, an increased mix of higher margin catalog
sales, the resumption of normal trade terms (including the availability of
prompt payment discounts) and the acquisition of The Wall stores. The Wall
Acquisition accounted for $12.2 million of the increase in gross profit.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 37.1% to $36.2 million in the first quarter of
Fiscal 1998 from $26.4 million in the first quarter of Fiscal 1997. During the
quarter The Wall stores contributed $9.2 million to the increase in selling,
general and administrative expenses (1.6% of net sales). Selling, general and
administrative expenses as a percentage of net sales was consistent with the
first quarter of Fiscal 1997 at 31.9%.
Depreciation and amortization. Depreciation and amortization decreased
67.3% to $1.8 million in the first quarter of Fiscal 1998 from $5.5 million in
the first quarter of Fiscal 1997. The reduction was the result of fresh-start
accounting and purchase accounting adjustments which significantly decreased the
depreciable basis of property, plant and equipment.
Special items. In the first quarter of Fiscal 1998 the Company incurred
$0.4 million (expense) relating to the Offerings.
Income (loss) before other income (expenses), net, reorganization expenses,
and income taxes. As a result of the foregoing, income (loss) before interest
expense, other income (expenses), net, reorganization expenses and income taxes
as a percentage of net sales increased to 3.5% or $4.0 million in the first
quarter of Fiscal 1998 as compared to a loss of $2.9 million or 3.5% as a
percentage of net sales in the first quarter of Fiscal 1997.
Other income (expenses), net. The Company's other income (expenses), net,
increased to $0.2 million (income) in the first quarter of Fiscal 1998 from $.1
million (expenses) in the first quarter of Fiscal 1997. Other income (expenses),
net includes the Company's interest income and financing charges. Other income
in the prior year quarter was netted against reorganization expenses as required
during the bankruptcy proceedings.
Reorganization expenses. The Company recorded no reorganization expenses in
the first quarter of Fiscal 1998 compared to reorganization expenses of $1.1
million in the first quarter of Fiscal 1997. During Fiscal 1997 the
reorganization expenses primarily reflected professional fees and other expenses
related to the bankruptcy proceedings. No expense has been incurred in Fiscal
1998 due to the Company's emergence from Chapter 11 on January 31, 1998.
Income taxes. The Company's provision for income taxes for the first
quarter of Fiscal 1998 was $1.6 million compared to no income tax recorded
during the first quarter of Fiscal 1997. The Company anticipates an effective
tax rate of approximately 39.7% with respect to Fiscal 1998 pretax income. 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. Under the provisions of the Internal
Revenue Code, no net operating losses remain to offset the Company's future
operating income. In addition, the write-off of unprofitable stores as a part of
the Plan, the forgiveness of debt and the related reduction in future interest
expense and the write-off of reorganization expense as a part of emergence from
bankruptcy will all contribute to future taxable income. Therefore, no valuation
allowance has been established to offset these deferred tax assets.
Net income. As a result of the foregoing, the Company recognized net income
of $2.6 million during the first quarter of Fiscal 1998, as compared to a net
loss of ($4.1) million in the first quarter of Fiscal 1997. Excluding special
items and reorganization expenses, the Company recognized net income in the
first quarter of Fiscal 1998 of $2.9 million, as compared to a net loss of
$(3.0) million in the first quarter of Fiscal 1997.
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.
29
<PAGE> 32
On a pro forma combined basis giving effect to the adoption of fresh-start
reporting at the beginning of Fiscal 1997 ("Pro Forma (Fresh-Start)"), Pro Forma
(Fresh-Start) net sales during Fiscal 1997 were $396.2 million. On a pro forma
combined basis giving further effect to The Wall Acquisition as if it had
occurred at the beginning of Fiscal 1997 ("Pro Forma (The Wall) "), Pro Forma
(The Wall) net sales during Fiscal 1997 were $55.4 million.
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 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.
The Company has modified its inventory distribution systems in response to this
trend. Opened products returned by customers are segregated from other returns
and sent to liquidators for resale. The Company has also begun a program of
repackaging certain opened product and selling it as used product at selected
stores. In addition, the Company has modified its return policies to more
closely monitor customer returns in an effort to reduce returns of opened
product. The costs associated with this effort have not been material.
Pro Forma (Fresh-Start) gross profit as a percentage of net sales was
34.9%, primarily reflecting the effect of the elimination of the cost of sales
associated with the operations of ten stores closed during Fiscal 1997 and the
reinstatement of vendor discounts. Pro Forma (The Wall) gross profit as a
percentage of net sales was 36.5%, primarily reflecting the higher margins
associated with The Wall's operations.
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.
Pro Forma (Fresh-Start) and Pro Forma (The Wall) selling, general and
administrative expenses were 27.2% of net sales. The pro forma selling, general
and administrative expenses resulted from the exclusion of net sales from the
ten Camelot stores closed during Fiscal 1997 and from The Wall stores that were
not acquired by The Company or which were targeted for closure subsequent to The
Wall Acquisition.
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.
Pro Forma (Fresh-Start) depreciation and amortization expense was 1.6% of
net sales, primarily reflecting the elimination of depreciation and amortization
expense resulting from fair value adjustments to property, plant and equipment
elimination of Predecessor Company goodwill amortization. Pro Forma (The Wall)
depreciation and amortization expense was 1.8% of net sales, and primarily
reflects the elimination of historic depreciation and amortization expense,
offset in part by new amortization expense for revalued property, plant and
equipment.
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
30
<PAGE> 33
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.
Special items on a Pro Forma (Fresh-Start) basis as a percentage of net
sales were comparable with historic combined Fiscal 1997 levels. Reflecting the
higher pro forma sales resulting from The Wall Acquisition, special items as a
percentage of Pro Forma (The Wall) net sales were (0.7%).
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.
Pro Forma (Fresh-Start) other income (expenses) net was 0.7% of net sales
and primarily reflects the reclassification of interest income from
reorganization income.
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. No reorganization income was recognized on a pro forma
basis.
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.
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.
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<PAGE> 34
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.
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.
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<PAGE> 35
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, 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 provided 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), bore interest at floating rates and
matured on January 27, 2002. The aggregate availability under the New Working
Capital Facility was limited to a borrowing base equal to 35.0% of inventory
during peak periods and 30.0% of inventory during non-peak periods. On June 12,
1998, the Company signed the first amendment and waiver to the New Working
Capital Facility (the "Amended Credit Facility"). The Amended Credit Facility
increases the borrowing base to 60.0% of inventory during all periods, modifies
existing limitations on capital expenditures, waived certain covenants in order
to permit the Spec's Acquisition and provided a $25.0 million term loan to
finance the Spec's Acquisition. The term loan 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 Amended Credit Facility are guaranteed by the Company and all of CMI's
subsidiaries; those obligations are collateralized by substantially all of the
Company's and its subsidiaries' assets. The Company has pledged to the lenders
under the Amended Credit Facility the capital stock of CMI, and CMI has in turn
pledged to such lenders the capital stock of its subsidiaries. The Company and
its subsidiaries are currently subject to certain customary negative covenants
under the Amended Credit 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
Amended Credit Facility also requires the Company to maintain minimum
consolidated levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The Company is currently in compliance with all of
these covenants. See "Description of Certain Indebtedness." As of July 31, 1998,
the Company had $25.0 million outstanding under the term loan portion of the
Amended Credit Facility.
On July 29, 1998, the Company acquired Spec's for a cash purchase price of
$3.30 per share. Approximately $28 million was required to fund the payment of
the purchase price and the repayment of Spec's outstanding indebtedness and
acquisition costs. The Company funded the Spec's Acquisition with the $25.0
million term loan provided under the Amended Credit Facility and accumulated
cash balances. Management believes the principal effects of the Spec's
Acquisition on its financial position will be the debt service and amortization
requirements associated with the term loan. The Company also anticipates
recording approximately $18 million in goodwill as a result of the Spec's
Acquisition, which will be amortized over a 30-year period.
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. The Company's cash flow from operating activities increased to
$6.1 million for the period March 1, 1998 to May 30, 1998 compared to cash flow
from operating activities of $6.0 million for the period March 2, 1997 to May
31, 1997.
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<PAGE> 36
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. Net cash used
in investing activities increased to $73.0 million for the period March 1, 1998
to May 30, 1998 compared to net cash used in investing activities of $1.9
million for the period March 2, 1997 to May 31, 1997, as a result of $71.2
million invested in connection with The Wall Acquisition. 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. The Company made capital
expenditures of $1.8 million for the period March 1, 1998 to May 30, 1998
compared to capital expenditures of $1.9 million for the period March 2, 1997 to
May 31, 1997. Capital expenditures for both periods 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 Company's then-existing credit agreement and the payment
of financing fees, offset in part by the proceeds of such borrowings and other
long term debt. No cash was used in financing activities for the period March 1,
1998 to May 30, 1998 compared to net cash used in financing activities of $0.025
million for the period March 2, 1997 to May 31, 1997.
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 Company generally
is able to determine whether a new store will be profitable after the store has
been open for a period of 12 months.
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. Such a judgment, unless paid or bonded for
appeal, would be an Event of Default under the Company's Amended Credit
Facility. See "Business -- Legal Proceedings" and "Risk Factors -- Internal
Revenue Service Claim."
As of May 30, 1998, the Company had cash and working capital of
approximately $15.7 million and $114.5 million, respectively, compared to cash
of $82.5 million and working capital of $110.1 million at February 28, 1998.
Approximately $72.4 million in cash was used subsequent to year-end to pay the
purchase price for The Wall Acquisition. The Company's primary sources of funds
are expected to be cash from operations supplemented by borrowings under the
Amended Credit Facility. The Company's primary ongoing cash requirements will be
to finance working capital, primarily inventory purchases, and to make capital
expenditures for store relocations and new store openings and for upgraded POS
systems and continuing information systems maintenance. Management believes that
cash flows from its restructured operations and available working capital,
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<PAGE> 37
supplemented by the borrowings under the Amended Credit Facility, will enable
the Company to meet its working capital and capital expenditure needs in Fiscal
1998 and Fiscal 1999.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the period from March 3, 1996 to May 30, 1998, as well as
such data expressed as a percentage of yearly totals for the period indicated.
This data has been derived from unaudited Consolidated Financial Statements
that, in the opinion of the Company, include all adjustments necessary for fair
presentation of such information when read in conjunction with the Company's
audited Consolidated Financial Statements and notes thereto. The Company's
business is seasonal in nature. In Fiscal 1997, approximately 35% of its
revenues, and all of its income (loss) before interest expense, other income
(expenses) net, reorganization income (expenses) net, income taxes and
extraordinary item and its net income before extraordinary item was generated in
the Company's fiscal fourth quarter. Quarterly results are affected by, among
other things, new product offerings, store openings and closings, and sales
performance of existing stores.
<TABLE>
<CAPTION>
FISCAL 1996
($ 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 $400,403
Gross profit............ 28,995 31,451 28,621 50,565 139,632
Operating income (loss)
(1)................... (2,866) (346) 183 17,300 14,271
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998
($ IN THOUSANDS)
FIRST QUARTER
----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............. $113,456
Gross profit.......... 42,309
Operating income...... 3,981
</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
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<PAGE> 38
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 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.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), issued in June, 1998
and effective for all fiscal quarters of fiscal years beginning after June 15,
1999, with earlier application permitted, requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. 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, (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
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<PAGE> 39
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.
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<PAGE> 40
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 July 31, 1998, the Company operated 493 stores in 37
states nationwide and in Puerto Rico under three brand names: Camelot Music,
founded in 1956, operating 304 stores with a significant store base
concentration in the Midwest and Southeast regions of the United States; The
Wall, operating 148 stores primarily in the Mid-Atlantic and Northeast regions
of the United States; and Spec's, operating 41 stores in South Florida and
Puerto Rico. The Company acquired certain assets of The Wall effective February
28, 1998 and it acquired Spec's on July 29, 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 July 29, 1998, the Company
acquired Spec's, a music retailer operating 41 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 4,350 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 enables 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.
The Company believes that the total market for prerecorded music and music
videos in the United States amounted to $12.2 billion in 1997. The Company
believes that revenues in the music and music video market in the United States
have doubled over the last ten years and has grown at a compounded annual rate
of 8.2% during such period. Industry growth rates do not reflect the Company's
historical growth and are not necessarily indicative of its growth during future
periods. The Company's revenues have grown at a 7.8% compounded annual rate over
the last ten years, although its revenues grew over the past five years at a
compounded annual rate of 2.3%. 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 Company has historically been privately held. In 1993, the Company was
acquired in a highly leveraged transaction by an investor group led by a private
investment firm and members of the Company's current management. The 1993
Acquisition resulted 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
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<PAGE> 41
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.
Under the Plan of Reorganization, substantially all of the claims against the
Company existing as of the Petition Date were exchanged for shares of Common
Stock. Approximately $423.0 million of unsecured claims were exchanged for
10,167,824 shares of Common Stock valued at amount equal to one share for each
$47.95 of claim, and approximately $41.5 million of secured claims were
exchanged for 2,211,111 shares of Common Stock valued at an amount equal to one
share for each $18.75 of claim. All pre-petition ownership interests in the
Company were cancelled.
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:
- 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 July 31, 1998, approximately 280 of the Company's 493 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 July 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, seven 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 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
39
<PAGE> 42
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.
- 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,
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 July 29, 1998, the Company acquired
Spec's. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments."
RECENT ACQUISITIONS
The Company has completed two acquisitions since the January 27, 1998 Plan
Effective Date. Effective February 28, 1998, the Company acquired certain assets
and assumed certain liabilities and operating lease commitments of The Wall
pursuant to an Asset Purchase Agreement dated December 10, 1997. Prior to its
acquisition by the Company, The Wall was a mall-based music store chain owned by
W.H. Smith (USA), Inc. that operated 150 stores in the Mid-Atlantic region of
the United States. The total purchase price paid by the Company for the business
of The Wall was $89.4 million, including a cash purchase price of $72.4 million,
assumption of liabilities aggregating $14.7 million, and acquisition costs of
$2.3 million. The purchase price was subject to adjustment based on the
resolution of certain contingencies related to merchandise inventory return
reserves and finalization of acquisition costs. No adjustment to the purchase
price was made.
On July 29, 1998, the Company completed its acquisition of all of the
issued and outstanding shares of Common Stock of Spec's. Spec's operates 41
stores in south Florida and Puerto Rico, including 16 mall stores and 25 stores
in shopping centers and free standing locations. Prior to the acquisition,
Spec's was a public company and its Common Stock was traded on the Nasdaq
SmallCap Market. Under the terms of an Agreement and Plan of Merger dated June
3, 1998, SM Acquisition, Inc., a wholly-owned subsidiary of the Company, was
merged with and into Spec's (the "Merger"). Upon consummation of the Merger,
each share of Spec's Common Stock issued and outstanding prior to the Merger was
converted into the right to receive $3.30 per share in cash, and each
outstanding option to purchase shares of Spec's Common Stock was surrendered in
exchange for a cash payment equal to the excess, if any, of $3.30 per share over
the exercise price of such option. The total purchase price payable in
connection with the Spec's Acquisition was approximately $28 million, including
repayment of bank debt of approximately $9.2 million, the assumption of
liabilities of approximately $11 million, and acquisition costs of approximately
$2.0 million. In addition, Ann Spector Lieff, Spec's President and Chief
Executive Officer, entered into a consulting and non-competition agreement under
the terms of which she agreed to be available to consult with the Company's
Chief Executive Officer for a period beginning 60 days after the date of the
Merger and ending on the first anniversary of the Merger. Under the terms of
this agreement, Ms. Lieff will be entitled to continue to receive salary
payments for 60 days after the Merger and will receive a severance payment of
$58,000 at the end of such period. Thereafter, Ms. Lieff will receive consulting
fees aggregating approximately $100,000 during the term of the agreement. The
agreement also provides that Ms. Lieff may not directly or indirectly engage in
the specialty music business in any area in which the Company conducts business
during the term of the agreement.
40
<PAGE> 43
INDUSTRY
The Company believes that the total market for prerecorded music and music
videos in the United States in 1997 amounted to $12.2 billion. The Company
believes that revenues in the music and music video market in the United States
have doubled over the last ten years and has grown at a compound annual rate of
8.2% during such period. Industry growth rates do not reflect the Company's
historical growth and are not necessarily indicative of its growth during future
periods. The Company's revenues have grown at a 7.8% compounded annual rate over
the last ten years, although its revenues grew over the past five years at a
compounded annual rate of 2.3%. 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," "The Wall" and
"Spec's" names. The Company's 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
1,500 to 23,500 square feet, averaging 4,350 square feet. As of July 31, 1998,
approximately 280 of the Company's 493 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 July 31, 1998, the Company
operated 304 Camelot Music stores in 34 states, 148 The Wall stores in the
Mid-Atlantic and Northeastern regions of the United States and 41 Spec's stores
in south Florida and Puerto Rico. 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.
41
<PAGE> 44
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 July 31, 1998.
<TABLE>
<CAPTION>
STORE SIZE
(SQUARE FOOTAGE) NUMBER OF STORES
---------------- ----------------
<S> <C>
Over 5,000.............................................. 126
4,000 to 4,999.......................................... 85
Under 3,999............................................. 282
----
Total......................................... 493
====
</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, The Wall and Spec's 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 to local
customer tastes and to maximize the availability of the most popular items at
each store relative to store size and location.
42
<PAGE> 45
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 (i.e.,
carriers with whom the Company contracts for less than all available storage
space) 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-specific or
transaction-specific data. The automated Repeat Performer program captures
demographic and music
43
<PAGE> 46
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
44
<PAGE> 47
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 July 31, 1998, the Company employed approximately 2,215 full-time
employees and 3,995 part-time employees. As of such date, the Company employed
approximately 167 individuals at its corporate headquarters, 305 at its
distribution center, and 5,738 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," "The Wall" and
"Spec's" names, which have become important to the Company's business as a
result of its advertising and promotional activities. These
45
<PAGE> 48
names and 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 20 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 SPEC'S COMPANY TOTAL
---------------- ------- -------- ------ -------------
<S> <C> <C> <C> <C>
1998............................................. 42 16 10 68
1999............................................. 29 14 6 49
2000............................................. 35 12 7 54
2001............................................. 50 24 2 76
2002............................................. 27 23 1 51
2003............................................. 34 14 3 51
2004............................................. 42 24 9 75
2005 and thereafter.............................. 45 21 3 69
--- --- -- ---
304 148 41 493
=== === == ===
</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.
46
<PAGE> 49
The following table shows the distribution of the Company's stores by state
as of July 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF STORES
-----------------------------
CAMELOT
STATE MUSIC THE WALL SPEC'S
----- ------- -------- ------
<S> <C> <C> <C>
Alabama................................................. 8 -- --
Arkansas................................................ 5 -- --
California.............................................. 9 -- --
Florida................................................. 33 -- 37
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 32 --
North Carolina.......................................... 18 1 --
Ohio.................................................... 25 1 --
Oklahoma................................................ 6 -- --
Oregon.................................................. 5 -- --
Pennsylvania............................................ 14 57 --
South Carolina.......................................... 9 -- --
Tennessee............................................... 13 -- --
Texas................................................... 34 -- --
Virginia................................................ 7 14 --
Washington.............................................. 11 -- --
West Virginia........................................... 4 2 --
Wisconsin............................................... 6 -- --
Puerto Rico............................................. -- -- 4
All other states........................................ 16 6 --
---- --- ---
Totals........................................ 304 148 41
==== === ===
</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 Company acknowledges a priority tax obligation to the IRS of
approximately $0.8 million, and disputes the
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<PAGE> 50
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, and the proceeding is now before the District Court as Civil Action No.
97-695 (MMS). The District Court approved a Joint Discovery Plan on July 6,
1998. The Joint Discovery Plan mandates that all discovery be served or issued
so as to be completed on or before June 30, 1999. 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.
48
<PAGE> 51
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of July 31, 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............. 50 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
49
<PAGE> 52
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.
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<PAGE> 53
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 Plan 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
51
<PAGE> 54
to receive stock 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 Plan 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 Plan 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 Plan 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 Plan 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 Plan Effective Date are intended to
qualify as ISOs and will become exercisable no later than four years from the
Plan Effective Date; however, up to 50% of these options may become exercisable
prior to the second anniversary of the Plan 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 Plan 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 Plan 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 Plan
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 Plan 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 Plan
Effective Date provide that the option exercise price may be paid by personal
check, bank draft or money order;
52
<PAGE> 55
through 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 executive
officers, including Ms. Thorn and Messrs. Rogers, Garrett, Rinehimer and
Mundorf, and other officers, including Messrs. Marsh (Vice President of
Information Systems and Chief Information Officer) and Scott (Vice President of
Logistics), 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
53
<PAGE> 56
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.
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 Plan 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. For Fiscal 1994, Fiscal 1995 and Fiscal 1996,
the Company's indebtedness to Van Kampen totaled $30,710,959, $32,601,087 and
$33,712,679, respectively. All indebtedness was converted to equity on the Plan
Effective Date.
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<PAGE> 57
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.
On the January 27, 1998 Plan Effective Date, the Company issued the
following amounts of shares of Common Stock to each current owner of more than
5% of the outstanding Common Stock in exchange for the amount of claims noted:
Van Kampen Merritt, 1,994,717 shares in exchange for claims aggregating
$88,287,616; Fernwood Associates, L.P., 1,549,595 shares in exchange for claims
aggregating $62,860,596; Merrill Lynch, 1,466,362 shares in exchange for claims
aggregating $59,484,183; Oaktree Capital Management, LLC, 961,740 shares in
exchange for claims aggregating $39,013,798; Daystar Partners LLC, 358,115
shares in exchange for claims aggregating $14,527,212; First Union National
Bank, 652,952 shares in exchange for claims aggregating $26,487,528; and Yale
University, 594,944 shares in exchange for claims aggregating $26,165,121.
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 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.
Van Kampen, Fernwood Associates, L.P., Oaktree Capital Management, LLC and
Merrill Lynch are parties to the Registration Rights Agreement with the Company.
See "Shares Eligible for Future Sale -- Registration Rights Agreement."
The Company believes that these transactions were on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties.
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<PAGE> 58
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of July 28, 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(6)............... 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 J. 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) 1.6%
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 10,175,932 shares outstanding as of July 28, 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.
(6) Matthew S. Barrett, Managing Director of Oaktree Capital Management, LLC
since April, 1995, was formerly a director of the Company from January, 1998
to March, 1998.
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<PAGE> 59
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 July 28, 1998, 10,175,932 shares of Common
Stock were issued and outstanding and, based on information provided by the
Company's transfer agent, held by 742 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
has applied 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 PLAN EFFECTIVE DATE
Under the terms of the Plan of Reorganization, all authorized capital stock
of the Company existing immediately prior to the Plan 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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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, of the 30,000,000 authorized shares of
Common Stock, 10,177,662 shares are anticipated to be outstanding. Of these
10,177,662 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 Plan
Effective Date and the 328,873 shares of Common Stock issued pursuant to the
Plan of Reorganization since the Plan 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
August 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, 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 Plan 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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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 947,094 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 734,000 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
12, 1998, the Company signed the Amended Credit Facility.
The Amended Credit Facility provides 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 provides 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 provides the Company with a $25.0 million term loan
in addition to the working capital facility. The $25.0 million term loan
provided most of the cash 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 Amended
Credit Facility are guaranteed by the Company and by all of CMI's subsidiaries
and are collateralized by substantially all of CMI's and its subsidiaries'
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 Amended Credit 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 first to prepay the term loan and second to reduce the commitments
under the revolving credit 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.
Covenants
The Amended Credit Facility limits 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 subsidiaries, (v)
investments, loans, advances and purchases of securities, (vi) the amounts of
capital expenditures
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(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 under the revolving
credit facility of more than $40.0 million during peak periods and $25.0 million
during non-peak periods. The Amended Credit Facility also requires 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 includes 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.
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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
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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.
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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
66
<PAGE> 69
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 vendors and service providers
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
has applied for quotation of the Common Stock on the Nasdaq National Market
System under the symbol "CMLT."
67
<PAGE> 70
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.
68
<PAGE> 71
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 PricewaterhouseCoopers LLP, 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.
69
<PAGE> 72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAMELOT MUSIC HOLDINGS, INC. AND ITS PREDECESSOR
Condensed Consolidated Balance Sheet (Unaudited) as of May
30, 1998.................................................. F-2
Condensed Consolidated Statements of Operations (Unaudited)
for the period March 1, 1998 to May 30, 1998 and the
period March 2, 1997 to May 31, 1997...................... F-3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the period March 1, 1998 to May 30, 1998 and the
period March 2, 1997 to May 31, 1997...................... F-4
Notes to Condensed Consolidated Financial Statements........ F-5
Report of Independent Accountants........................... F-8
Consolidated Balance Sheets as of February 28, 1998 and
March 1, 1997............................................. F-9
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-10
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-11
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-12
Notes to Consolidated Financial Statements.................. F-13
THE WALL MUSIC, INC.
Independent Auditor's Report................................ F-38
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-39
Statements of Stockholder's Equity for the nine months ended
February 28, 1998 (unaudited) and for the year ended June
1, 1997................................................... F-40
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-41
Notes to Financial Statements............................... F-42
</TABLE>
F-1
<PAGE> 73
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MAY 30,
1998
--------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,680
Accounts payable.......................................... 2,922
Inventories............................................... 176,659
Deferred income taxes..................................... 6,556
Other current assets...................................... 3,098
--------
Total current assets.............................. 204,915
--------
Property, plant and equipment, net.......................... 40,519
--------
Other non-current assets:
Goodwill, net of accumulated amortization of $224 in
1998................................................... 26,726
Intangible assets, net of accumulated amortization of $858
in 1998................................................ 1,336
Deferred income taxes..................................... 18,547
Favorable lease values, net of accumulated amortization of
$895 in 1998........................................... 11,253
Other assets.............................................. 598
--------
Total other non-current assets.................... 58,460
--------
Total assets...................................... $303,894
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................... $ 62,805
Accrued expenses and other liabilities.................... 27,593
--------
Total current liabilities......................... 90,398
--------
Long-term liabilities:
Revolving credit agreement................................ --
Unfavorable lease values, net of accumulated amortization
of $987 in 1998........................................ 12,411
Other long-term liabilities............................... 3,393
--------
Total long-term liabilities....................... 15,804
--------
Commitments and contingencies............................... --
--------
Total liabilities................................. 106,202
--------
Stockholders' equity:
Common stock.............................................. 102
Additional paid-in capital................................ 194,454
Retained earnings......................................... 3,136
--------
Total stockholders' equity........................ 197,692
--------
Total liabilities and stockholders' equity........ $303,894
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
<PAGE> 74
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
PERIOD PERIOD
MARCH 1, MARCH 2,
1998 TO 1997 TO
MAY 30, MAY 31,
1998 1997
------------ -----------
<S> <C> <C>
Net sales................................................... $ 113,456 $ 82,815
Cost of sales............................................... 71,147 53,820
----------- --------
Gross profit.............................................. 42,309 28,995
Selling, general and administrative expenses................ 36,213 26,407
Depreciation and amortization............................... 1,765 5,454
Special items 350 --
----------- --------
Income (loss) before other income (expenses), net,
reorganization expenses and income taxes........ 3,981 (2,866)
----------- --------
Other income (expenses), net:
Interest income........................................... 387 --
Interest expense.......................................... (86) (61)
Amortization of financing fees............................ (56) (115)
Other, net................................................ (68) 46
----------- --------
Total other income (expenses), net................ 177 (130)
----------- --------
Income (loss) before reorganization expenses and
income taxes.................................... 4,158 (2,996)
Reorganization expenses..................................... -- (1,113)
----------- --------
Income (loss) before income taxes................. 4,158 (4,109)
(Provision) for income taxes:
Current................................................... (1,601) --
Deferred.................................................. (2) --
----------- --------
Total (provision) for income taxes................ (1,603) --
----------- --------
Net income (loss)................................. $ 2,555 ($ 4,109)
=========== ========
Computation of earnings per share:
Basic:
Average shares outstanding................................ 10,176,162 *
=========== ========
Per share.............................................. $ 0.25 *
=========== ========
Diluted:
=========== ========
Average shares outstanding................................ 10,176,162 *
Net effect of dilutive stock options...................... 293,752 *
----------- --------
Total equivalent shares................................ 10,469,914 *
=========== ========
Per share............................................ $ 0.24 *
=========== ========
</TABLE>
- ---------------
* Historical per share data for the Predecessor Company is not meaningful since
the Company has been recapitalized and has adopted fresh-start reporting as of
January 31, 1998.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
<PAGE> 75
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ ------------
PERIOD PERIOD
MARCH 1, MARCH 2,
1998 TO 1997 TO
MAY 30, 1998 MAY 31, 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 2,555 $(4,109)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization excluding financing
fees.................................................. 1,765 5,454
Amortization of favorable/unfavorable leases........... (92) --
Amortization of financing fees......................... 56 115
Deferred income taxes.................................. 2 --
Changes in assets and liabilities:
Accounts receivable.................................... (1,073) (34)
Inventories............................................ (29,987) 1,942
Other current assets................................... 1,779 3,040
Other assets........................................... (155) 43
Accounts payable, trade................................ 32,102 153
Accrued expenses and other liabilities................. (2,449) (799)
Accrued income taxes................................... 1,641 (83)
Liabilities subject to compromise...................... -- (314)
Changes due to reorganization activities:
Accrued professional fees.............................. -- 557
-------- -------
Net cash provided by operating activities............ 6,144 5,965
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment................ (1,803) (1,862)
Acquisition of The Wall, net of cash acquired............. (71,191) --
-------- -------
Net cash used in investing activities................ (72,994) (1,862)
-------- -------
Cash flows from financing activities:
Payment of financing fees................................. -- (25)
-------- -------
Net cash used in financing activities................ -- (25)
-------- -------
(Decrease) increase in cash and cash equivalents............ (66,850) 4,078
Cash and cash equivalents at beginning of period............ 82,530 41,260
-------- -------
Cash and cash equivalents at end of period.................. $ 15,680 $45,338
======== =======
Supplemental Data:
Non-cash investing activities:
Common stock issued in settlement of payable for
professional services.................................. $ 188 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
<PAGE> 76
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED)
1. BASIS OF PRESENTATION:
CM Holdings, Inc. ("Predecessor Company") was incorporated on September 30,
1993, and acquired all of the outstanding common stock of Camelot Music, Inc. 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. 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 accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
The accompanying interim condensed consolidated financial statements are
unaudited, however in the opinion of management, all adjustments necessary for a
fair presentation of such consolidated 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. The significant accounting policies and certain financial
information which is required for financial statements in accordance with
generally accepted accounting principles, but not for interim financial
statement reporting purposes, have been condensed or omitted. The accompanying
condensed consolidated financial statements of the Company should be read in
conjunction with the audited consolidated financial statements of the Company
and the Predecessor Company for the fiscal year ended February 28, 1998, which
are included within this Registration Statement.
2. FRESH-START REPORTING
On January 31, 1998, the Company implemented the recommended accounting
principles for entities emerging from Chapter 11 set forth in the American
Institute of Certified Public Accountants Statement of Position 90-7 on
Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP
90-7). Under this concept, all assets and liabilities were restated to reflect
the reorganization value of the reorganized entity, which approximated its fair
value at the date of reorganization. In addition, the accumulated deficit of the
Company was eliminated and its capital structure was recast in conformity with
the plan of reorganization (the "Plan"). As such, the accompanying Company
condensed consolidated financial statements as of May 30, 1998 and for the
period March 1, 1998 to May 30, 1998, represents that of the Successor Company.
The condensed consolidated statement of operations and cash flows for the period
March 2, 1997 to May 31, 1997 represent activity of the Predecessor Company and
may not be comparable to those of the Successor Company.
3. EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was 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 common stock options from
the Successor Company's Stock Option Plan. As required by SFAS No. 128, all
outstanding common stock options are considered included even though their
exercise may be contingent upon vesting.
F-5
<PAGE> 77
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. SPECIAL ITEMS:
In the first quarter of Fiscal 1998, the Successor Company incurred $.4
million of expenses related to a filing of a registration statement with the
Securities and Exchange Commission.
5. 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. At May 30, 1998, 343,500 options were
exercisable and 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 TOTAL
NUMBER OF PER SHARE EXERCISE
SHARES AVERAGE* PRICE
--------- ------------ -----------
<S> <C> <C> <C>
Shares under option at February 28, 1998.................... 687,000 $20.75 $14,255
Granted..................................................... -- -- --
Exercised................................................... -- -- --
Forfeited................................................... -- -- --
------- ------ -------
Shares under option May 30, 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-6
<PAGE> 78
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- 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..................................... 5.49%
Dividend yield.............................................. 0.00%
Volatility factor........................................... 36.89%
Weighted average expected life.............................. 2 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 quarter ended May 30, 1998
were as follows:
<TABLE>
<S> <C>
Net earnings -- as reported................................. $2,555
Net earnings -- pro forma................................... $1,683
Basic earnings per share.................................... $ 0.17
Diluted earnings per share.................................. $ 0.16
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
The Successor Company is a party to various claims, legal actions and
complaints arising in the ordinary course of 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 Successor
Company.
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" issued in June, 1998 and effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, with earlier application permitted,
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. 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.
8. SUBSEQUENT EVENT:
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"). Pursuant to the Merger Agreement, the Successor
Company will acquire all of Spec's outstanding common stock in exchange for
$3.30 per share. The board of directors of both the Successor Company and Spec's
have approved the merger. Spec's shareholders approved the merger and the
transaction closed on July 29, 1998.
F-7
<PAGE> 79
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-8
<PAGE> 80
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-9
<PAGE> 81
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<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)
=========== ======== ======== =========
Basic and diluted earnings per share... $ .06 * * *
=========== ======== ======== =========
Weighted average number of common
shares outstanding -- basic and
diluted.............................. 10,176,162
===========
</TABLE>
- ---------------
* Historical per share data for the Predecessor Company is not meaningful since
the Company has been recapitalized and has adopted fresh-start reporting as of
January 31, 1998.
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 82
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-11
<PAGE> 83
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-12
<PAGE> 84
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-13
<PAGE> 85
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-14
<PAGE> 86
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-15
<PAGE> 87
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-16
<PAGE> 88
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: 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. As required by SFAS No. 128 all
outstanding common stock options which have a dilutive effect are
considered outstanding even though their exercise may be contingent upon
vesting. For the period February 1, 1998 to February 28, 1998 all common
shares issuable under the Successor Company's Stock Option Plan were
antidilutive.
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.
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
F-17
<PAGE> 89
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:
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-18
<PAGE> 90
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-19
<PAGE> 91
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-20
<PAGE> 92
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; (3) eliminate Predecessor Company depreciation expense of ($18,644);
and (4) record depreciation expense of $6,182 for the adjusted fixed asset
values based on historical lives and half-year convention.
(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-21
<PAGE> 93
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-22
<PAGE> 94
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-23
<PAGE> 95
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-24
<PAGE> 96
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-25
<PAGE> 97
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-26
<PAGE> 98
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-27
<PAGE> 99
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-28
<PAGE> 100
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 TOTAL
NUMBER OF PER SHARE EXERCISE
SHARES AVERAGE* 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-29
<PAGE> 101
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
Basic and diluted earnings per share*....................... $0.04
</TABLE>
- ---------------
* Per share amounts not in thousands of dollars
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-30
<PAGE> 102
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-31
<PAGE> 103
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-32
<PAGE> 104
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-33
<PAGE> 105
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-34
<PAGE> 106
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-35
<PAGE> 107
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-36
<PAGE> 108
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-37
<PAGE> 109
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-38
<PAGE> 110
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-39
<PAGE> 111
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-40
<PAGE> 112
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 (2,819) (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) 6,019 1,874
Other current assets................................ (2,179) 1,513 2,049
Accounts payable, trade............................. 2,613 (3,359) (5,833)
Accrued expenses.................................... 5,979 (1,504) (1,275)
------- -------- --------
Net cash provided by (used in) operating
activities........................................ 4,243 4,220 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) (384) (379)
CASH AND CASH EQUIVALENTS
Beginning of period.................................... 1,782 2,161 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-41
<PAGE> 113
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-42
<PAGE> 114
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-43
<PAGE> 115
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-44
<PAGE> 116
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> 117
- ------------------------------------------------------
- ------------------------------------------------------
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................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 38
Management............................ 49
Certain Transactions.................. 54
Principal and Selling Stockholders.... 56
Description of Capital Stock.......... 57
Shares Eligible For Future Sale....... 59
Description of Certain Indebtedness... 62
Certain United States Federal Tax
Consequences for Non-United States
Holders............................. 64
Underwriting.......................... 66
Legal Matters......................... 68
Experts............................... 69
Available Information................. 69
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> 118
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 AUGUST 11, 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 Selling Stockholders acquired
their shares upon the Company's emergence from bankruptcy pursuant to Section
1145(a) of the United States Bankruptcy Code or in open market transactions
thereafter. 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 August 10, 1998 was $37 per share.
For a discussion relating to factors to be considered in determining the initial
public offering price, see "Underwriting." The Company has applied 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> 119
[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
66
<PAGE> 120
[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 vendors and service providers
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 has applied 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.
67
<PAGE> 121
[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.
68
<PAGE> 122
[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 PricewaterhouseCoopers LLP, 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
69
<PAGE> 123
[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.
70
<PAGE> 124
[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................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 38
Management............................ 49
Certain Transactions.................. 54
Principal and Selling Stockholders.... 56
Description of Capital Stock.......... 57
Shares Eligible For Future Sale....... 59
Description of Certain Indebtedness... 62
Certain United States Federal Tax
Consequences for Non-United States
Holders............................. 64
Underwriting.......................... 66
Legal Matters......................... 69
Experts............................... 69
Available Information................. 69
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> 125
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> 126
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 shares of Common
Stock 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 Act 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. On June 29,
1998, a former employee exercised options to purchase 1,500 shares of Common
Stock and these 1,500 shares of Common Stock were issued by the Company pursuant
to an exemption from the registration requirements of the Act provided by Rule
701 of the Act.
II-2
<PAGE> 127
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> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on August 11, 1998.
CAMELOT MUSIC HOLDINGS, INC.
By: /s/ JAMES E. BONK
------------------------------------
James E. Bonk,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on August 11, 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
LEE ANN THORN* Treasurer and Chief Financial Officer
- ---------------------------------------- (Principal Financial and Accounting Officer)
Lee Ann Thorn
JACK K. ROGERS* Executive Vice President, Chief Operating Officer, Secretary
- ---------------------------------------- and Director
Jack K. Rogers
GEORGE R. ZOFFINGER* Director
- ----------------------------------------
George R. Zoffinger
STEPHEN H. BAUM* Director
- ----------------------------------------
Stephen H. Baum
HERBERT J. MARKS* Director
- ----------------------------------------
Herbert J. Marks
MICHAEL B. SOLOW* Director
- ----------------------------------------
Michael B. Solow
MARC L. LUZZATTO* Director
- ----------------------------------------
Marc L. Luzzatto
</TABLE>
- ---------------
* The undersigned, by signing his name hereto, does sign this Amendment No. 1 to
this Registration Statement on behalf of the above Directors and Officers of
Camelot Music Holdings, Inc. pursuant to a Power of Attorney executed on
behalf of each such Director and Officer and which has been filed with the
Securities and Exchange Commission.
By: /s/ JAMES E. BONK
------------------------------------
James E. Bonk,
As Attorney-In-Fact
II-4
<PAGE> 129
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of U.S. Purchase Agreement
1.2 Intersyndicate 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+
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)
</TABLE>
II-9
<PAGE> 130
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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 Employment and Severance Agreement between Camelot Music,
Inc. and Larry K. Mundorf*
10.19 Indemnity Agreement between Camelot Music Holdings, Inc. and
Stephen H. Baum, dated June 4, 1998*
10.20 Indemnity Agreement between Camelot Music Holdings, Inc. and
George R. Zoffinger, dated June 4, 1998*
10.21 Indemnity Agreement between Camelot Music Holdings, Inc. and
Michael B. Solow, dated June 4, 1998*
10.22 Indemnity Agreement between Camelot Music Holdings, Inc. and
Marc L. Luzzatto, dated June 4, 1998*
10.23 Indemnity Agreement between Camelot Music Holdings, Inc. and
Herbert J. Marks, dated June 4, 1998*
10.24 Indemnity Agreement between Camelot Music Holdings, Inc. and
James E. Bonk, dated June 4, 1998*
10.25 Indemnity Agreement between Camelot Music Holdings, Inc. and
Jack K. Rogers, dated June 4, 1998*
10.26 Indemnity Agreement between Camelot Music Holdings, Inc. and
Lee Ann Thorn, dated June 4, 1998*
10.27 Indemnity Agreement between Camelot Music Holdings, Inc. and
Charles R. Rinehimer III, dated June 4, 1998*
10.28 Indemnity Agreement between Camelot Music Holdings, Inc. and
Lewis S. Garrett, dated June 4, 1998*
10.29 Indemnity Agreement between Camelot Music Holdings, Inc. and
Larry K. Mundorf, dated June 4, 1998*
10.30 Camelot Music Holdings, Inc. 1998 Deferred Compensation
Plan*
10.31 Form of Stock Option Agreement for 1998 Outside Directors
Stock Option Plan*
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 PricewaterhouseCoopers LLP
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>
- ---------------
* Management compensatory plan or arrangement.
+ Filed as an exhibit to the Company's Form S-1 on June 15, 1998.
** To be filed by amendment.
II-10
<PAGE> 131
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> 132
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 1.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7/16/98
CAMELOT MUSIC HOLDINGS, INC.
(a Delaware corporation)
__________ Shares of Common Stock
U.S. PURCHASE AGREEMENT
-----------------------
Dated: August , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
U.S. PURCHASE AGREEMENT...........................................................................................1
SECTION 1. REPRESENTATIONS AND WARRANTIES..............................................................4
(a) Representations and Warranties by the Company and CMI..................................................4
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS.....................................................4
(ii) INDEPENDENT ACCOUNTANTS.......................................................................5
(iii) FINANCIAL STATEMENTS..........................................................................5
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS........................................................6
(v) GOOD STANDING OF THE COMPANY..................................................................6
(vi) GOOD STANDING OF SUBSIDIARIES.................................................................6
(vii) CAPITALIZATION................................................................................6
(viii) AUTHORIZATION OF AGREEMENTS...................................................................7
(ix) DESCRIPTION OF SECURITIES.....................................................................7
(x) ABSENCE OF DEFAULTS AND CONFLICTS.............................................................7
(xi) ABSENCE OF LABOR DISPUTES.....................................................................8
(xii) ABSENCE OF PROCEEDINGS........................................................................8
(xiii) ACCURACY OF EXHIBITS..........................................................................8
(xiv) POSSESSION OF INTELLECTUAL PROPERTY...........................................................8
(xv) ABSENCE OF FURTHER REQUIREMENTS...............................................................9
(xvi) POSSESSION OF LICENSES AND PERMITS............................................................9
(xvii) TITLE TO PROPERTY............................................................................10
(xviii) INVESTMENT COMPANY ACT.......................................................................10
(xix) ENVIRONMENTAL LAWS...........................................................................10
(xx) REGISTRATION RIGHTS..........................................................................11
(xxi) STABILIZATION OR MANIPULATION................................................................11
(xxii) ACCOUNTING CONTROLS..........................................................................11
(xxiii) TAX RETURNS..................................................................................11
(xxiv) YEAR 2000....................................................................................11
(b) Representations and Warranties by the Selling Shareholders............................................12
(i) ACCURATE DISCLOSURE..........................................................................12
(ii) AUTHORIZATION OF AGREEMENTS..................................................................12
(iii) GOOD AND MARKETABLE TITLE....................................................................12
(iv) DUE EXECUTION OF AGREEMENTS..................................................................13
(v) ABSENCE OF MANIPULATION......................................................................13
(vi) ABSENCE OF FURTHER REQUIREMENTS..............................................................13
(vii) RESTRICTION ON SALE OF SECURITIES............................................................14
(viii) CERTIFICATES SUITABLE FOR TRANSFER...........................................................14
(ix) NO ASSOCIATION WITH NASD.....................................................................14
(x) POWER AND AUTHORITY..........................................................................14
(c) Officer's Certificates................................................................................14
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
(c) Officer's Certificates................................................................................14
SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING..............................................15
(a) Initial Securities....................................................................................15
(b) Option Securities.....................................................................................15
(c) Payment...............................................................................................15
(d) Denominations; Registration...........................................................................16
(e) Appointment of Qualified Independent Underwriter......................................................16
SECTION 3. COVENANTS OF THE COMPANY.....................................................................17
(a) Compliance with Securities Regulations and Commission Requests........................................17
(b) Filing of Amendments..................................................................................17
(c) Delivery of Registration Statements...................................................................17
(d) Delivery of Prospectuses..............................................................................18
(e) Continued Compliance with Securities Laws.............................................................18
(f) Blue Sky Qualifications...............................................................................18
(g) Rule 158..............................................................................................19
(h) Listing...............................................................................................19
(i) Restriction on Sale of Securities.....................................................................19
(j) Reporting Requirements................................................................................19
(k) Compliance with NASD Rules............................................................................19
SECTION 4. PAYMENT OF EXPENSES..........................................................................20
(a) Expenses..............................................................................................20
(b) Expenses of the Selling Shareholders..................................................................20
(c) Termination of Agreement..............................................................................21
(d) Allocation of Expenses................................................................................21
SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS.................................................21
(a) Effectiveness of Registration Statement...............................................................21
(b) Opinion of Counsel for Company........................................................................21
(c) Opinion of Counsel for the Selling Shareholders.......................................................22
(d) Opinion of Counsel for U.S. Underwriters..............................................................22
(e) Officers' Certificate.................................................................................22
(f) Certificate of Selling Shareholders...................................................................23
(g) Accountants' Comfort Letters..........................................................................23
(h) Bring-down Comfort Letters............................................................................23
(i) Approval of Listing...................................................................................23
(j) No Objection..........................................................................................23
(k) Lock-up Agreements....................................................................................23
(l) Purchase of Initial International Securities..........................................................23
(m) Other Agreements......................................................................................23
(n) Conditions to Purchase of U.S. Option Securities......................................................24
(o) Additional Documents..................................................................................25
(p) Termination of Agreement..............................................................................25
SECTION 6. INDEMNIFICATION..............................................................................25
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
(a) Indemnification of U.S. Underwriters..................................................................25
(b) Indemnification of Company, Directors and Officers and Selling Shareholders...........................27
(c) Actions against Parties; Notification.................................................................28
(d) Settlement without Consent if Failure to Reimburse....................................................29
(e) Indemnification for Reserved Securities...............................................................29
(f) Other Agreements with Respect to Indemnification......................................................29
SECTION 7. CONTRIBUTION.................................................................................29
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY...............................31
SECTION 9. TERMINATION OF AGREEMENT.....................................................................31
(a) Termination; General..................................................................................31
(b) Liabilities...........................................................................................31
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS..............................................31
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS...........................................32
SECTION 12. NOTICES......................................................................................33
SECTION 13. PARTIES......................................................................................33
SECTION 14. GOVERNING LAW AND TIME.......................................................................33
SECTION 15. EFFECT OF HEADINGS...........................................................................33
<CAPTION>
SCHEDULES
<S> <C> <C> <C>
Schedule A List of Underwriters.......................................................Sch A-1
Schedule B List of Selling Shareholders...............................................Sch B-1
Schedule C Pricing Information........................................................Sch C-1
Schedule D List of Persons Subject to Lock-up.........................................Sch D-1
EXHIBITS
Exhibit A-1 Form of Opinion of Calfee, Halter & Griswold LLP...............................A-1
Exhibit A-2 Form of Opinion of Obermayer Rebmann Maxwell & Hippel..........................A-6
Exhibit B-1 Form of Opinion of Simpson Thacher & Barlett...................................B-1
Exhibit B-2 Form of Opinion for the Selling Shareholders...................................B-4
Exhibit C Form of Lock-Up Letter.........................................................C-1
Exhibit D-1 Form of Comfort Letter of Coopers & Lybrand L.L.P..............................D-1
Exhibit D-2 Form of Comfort Letter of Deloitte & Touche LLP................................D-4
</TABLE>
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<PAGE> 5
CAMELOT MUSIC HOLDINGS, INC.
(a Delaware corporation)
__________ Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
-----------------------
August , 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
McDonald & Company Securities, Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Camelot Music Holdings, Inc., a Delaware corporation (the "Company"),
Camelot Music, Inc., a Pennsylvania corporation ("CMI"), and the persons listed
in Schedule B hereto (the "Selling Shareholders"), confirm their respective
agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in
Schedule A hereto (collectively, the "U.S. Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Morgan Stanley & Co. Incorporated and McDonald
& Company Securities, Inc. are acting as representatives (in such capacity, the
"U.S. Representatives"), with respect to (i) the sale by the Selling
Shareholders, acting severally and not jointly, and the purchase by the U.S.
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in Schedules A and B hereto, and (ii) the grant by the Selling
Shareholders to the U.S.
-1-
<PAGE> 6
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of __________ additional shares
of Common Stock to cover over-allotments, if any. The aforesaid __________
shares of Common Stock (the "Initial U.S. Securities") to be purchased by the
U.S. Underwriters and all or any part of the __________ shares of Common Stock
subject to the option described in Section 2(b) hereof (the "U.S. Option
Securities") are hereinafter called, collectively, the "U.S. Securities."
It is understood that the Company, CMI and the Selling Shareholders are
concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the offering by the Selling
Shareholders of an aggregate of __________ shares of Common Stock (the "Initial
International Securities") through arrangements with certain underwriters
outside the United States and Canada (the "International Managers") for which
Merrill Lynch International, Morgan Stanley & Co. International Limited and
McDonald & Company Securities, Inc. are acting as lead managers (the "Lead
Managers") and the grant by the Selling Shareholders to the International
Managers, acting severally and not jointly, of an option to purchase all or any
part of the International Managers' pro rata portion of up to __________
additional shares of Common Stock solely to cover over-allotments, if any (the
"International Option Securities" and, together with the U.S. Option Securities,
the "Option Securities"). The Initial International Securities and the
International Option Securities are hereinafter called the "International
Securities." It is understood that the Selling Shareholders are not obligated to
sell and the U.S. Underwriters are not obligated to purchase any Initial U.S.
Securities unless all of the Initial International Securities are
contemporaneously purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters," the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities," and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (in such capacity, the "Global Coordinator").
The Company and the Selling Shareholders understand that the U.S.
Underwriters propose to make a public offering of the U.S. Securities as soon as
the U.S. Representatives deem advisable after this Agreement has been executed
and delivered.
The Company, the Selling Shareholders and the U.S. Underwriters agree
that up to _______ shares of the Initial U.S. Securities to be purchased by the
U.S. Underwriters (the "Reserved Securities") shall be reserved for sale by the
U.S. Underwriters to certain eligible employees and other persons, as part of
the distribution of the Securities by the U.S. Underwriters, subject to the
terms of this Agreement, the applicable rules, regulations and
-2-
<PAGE> 7
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees and
other persons by the end of the first business day after the date of this
Agreement, such Reserved Securities may be offered to the public as part of the
public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-56811) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of U.S. Prospectus is identical to the Form
of International Prospectus, except for the front cover pages, the back cover
pages and the information under the caption "Underwriting." The information
included in any such prospectus or in any such Term Sheet, as the case may be,
that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each Form of U.S. Prospectus and Form of
International Prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final Form
of U.S. Prospectus and the final Form of International Prospectus in the forms
first furnished to the Underwriters for use in connection with the offering of
the Securities are herein called the "U.S. Prospectus" and the "International
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "U.S. Prospectus" and "International Prospectus" shall
refer to the preliminary U.S. Prospectus dated July _____, 1998 and the
preliminary International Prospectus dated July ______, 1998, respectively, each
together with the applicable Term Sheet, and all references in this Agreement to
the date of such Prospectuses shall mean the date of the applicable Term Sheet.
For purposes of this Agreement,
-3-
<PAGE> 8
all references to the Registration Statement, any preliminary prospectus, the
U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment
or supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) Representations and Warranties by the Company and CMI. The Company
and CMI, jointly and severally, represent and warrant to each U.S. Underwriter
as of the date hereof, as of the Closing Time referred to in Section 2(c)
hereof, and as of each Date of Delivery (if any) referred to in Section 2(b)
hereof, and agree with each U.S. Underwriter, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any U.S. Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments
and supplements thereto complied and will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations and did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
the Prospectuses, any preliminary prospectuses and any supplement
thereto or prospectus wrapper prepared in connection therewith, at
their respective times of issuance and at the Closing Time, complied
and will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectuses and such
preliminary prospectuses, as amended or supplemented, if applicable,
are distributed in connection with the offer and sale of Reserved
Securities. Neither of the Prospectuses nor any amendments or
supplements thereto (including any prospectus wrapper), at the time the
Prospectuses or any amendments or supplements thereto were issued and
at the Closing Time (and, if any U.S. Option Securities are purchased,
at the Date of Delivery), included or will include an untrue statement
of a material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectuses shall not be "materially different," as such term is
used in Rule 434, from the prospectuses included in the Registration
Statement at the time it became effective. The
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<PAGE> 9
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
Prospectuses made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through the U.S.
Representatives or the Lead Managers expressly for use in the
Registration Statement or the Prospectuses.
Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. the accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The financial statements included
in the Registration Statement and the Prospectuses, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries and of the Company's
predecessors and their consolidated subsidiaries at the dates indicated
and the statement of operations, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries and of the Company's
predecessors and their consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except as otherwise
noted therein). The financial statements included in the Registration
Statement and the Prospectuses, together with the related schedules and
notes, present fairly the financial position of The Wall Music, Inc. at
the dates indicated and the statement of operations, stockholders'
equity and cash flows of The Wall Music, Inc. for the periods
specified; said financial statements have been prepared in conformity
with GAAP applied on a consistent basis throughout the periods
involved. The supporting schedules included in the Registration
Statement present fairly in accordance with GAAP the information
required to be stated therein. The selected financial data and the
summary financial information included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in
the Registration Statement. The pro forma financial statements and the
related notes thereto included in the Registration Statement and the
Prospectuses present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly
compiled on the bases described therein, and the assumptions used in
the preparation thereof are
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<PAGE> 10
reasonable and the adjustments used therein are appropriate to give
effect to the transactions and circumstances referred to therein.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein, (A)
there has been no material adverse change in the condition (financial
or otherwise), earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the
Company or any of its subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been
no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as foreign corporation to transact business and is in good standing in
each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. Each subsidiary of the
Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectuses and is
duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to
be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement, all of the
issued and outstanding capital stock of each such Subsidiary has been
duly authorized and validly issued, is fully paid and non-assessable
and is owned by the Company, directly or through subsidiaries, free and
clear of any security interest, mortgage, pledge, lien, encumbrance,
claim or equity; none of the outstanding shares of capital stock of any
Subsidiary was issued in violation of the preemptive or similar rights
of any securityholder of such Subsidiary. The only subsidiaries of the
Company are the subsidiaries listed on Exhibit 21 to the Registration
Statement.
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<PAGE> 11
(vii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectuses under
the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to reservations, agreements or employee benefit plans referred
to in the Prospectuses or pursuant to the exercise of convertible
securities or options referred to in the Prospectuses). The shares of
issued and outstanding capital stock of the Company, including the
Securities to be purchased by the U.S. Underwriters and the
International Managers from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock of the Company,
including the Securities to be purchased by the U.S. Underwriters from
the Selling Shareholders, was issued in violation of the preemptive or
other similar rights of any securityholder of the Company.
(viii) AUTHORIZATION OF AGREEMENTS. This Agreement and the
International Purchase Agreement have been duly authorized, executed
and delivered by the Company and CMI. The Merger Agreement, dated as of
June 3, 1998, between the Company and Spec's Music, Inc. (the "Merger
Agreement") has been authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject,
as to enforceability, to bankruptcy, insolvency, moratorium, stay and
other laws affecting creditors rights generally and to general
principles of equity. The First Amendment and Waiver dated as of June
12, 1998 to the New Working Capital Facility, dated as of January 27,
1998, among CMI, as Borrower, The Lenders Party thereto and The Chase
Manhattan Bank, as Agent (the "Credit Facility Amendment"), has been
authorized, executed and delivered by the Company and constitutes a
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency, moratorium, stay and other laws affecting
creditors rights generally and to general principles of equity.
(ix) DESCRIPTION OF SECURITIES. The Common Stock conforms to
all statements relating thereto contained in the Prospectuses and such
description conforms to the rights set forth in the instruments
defining the same; no holder of the Securities will be subject to
personal liability solely by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the
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<PAGE> 12
execution, delivery and performance of this Agreement, the
International Purchase Agreement, the Merger Agreement and the Credit
Facility Amendment and the consummation of the transactions
contemplated in this Agreement, the International Purchase Agreement,
the Merger Agreement and the Credit Facility Amendment and in the
Registration Statement and compliance by the Company and CMI, as the
case may be, with their obligations under this Agreement, the
International Purchase Agreement, the Merger Agreement and the Credit
Facility Amendment have been duly authorized by all necessary corporate
action and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach
of, or default or Repayment Event (as defined below) under, or result
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any subsidiary pursuant to,
the Agreements and Instruments, nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or
any subsidiary or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any subsidiary or any of their assets, properties or
operations. As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or
a portion of such indebtedness by the Company or any subsidiary.
(xi) ABSENCE OF LABOR DISPUTES. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company or CMI, is imminent, and neither the Company nor CMI is
aware of any existing or imminent labor disturbance by the employees of
any of its or any subsidiary's principal suppliers, vendors, customers
or contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company or CMI, threatened, against or affecting
the Company or any subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or, except as
disclosed in the Registration Statement, which might reasonably be
expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the
consummation of the transactions contemplated in this Agreement and the
International Purchase Agreement or the performance by the Company and
CMI of their obligations hereunder or thereunder; the aggregate of all
pending legal or governmental proceedings to which the Company or any
subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
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<PAGE> 13
(xiii) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectuses or to be filed as exhibits thereto which
have not been so described and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company or
CMI of their obligations hereunder, in connection with the offering,
issuance or sale of the Securities under this Agreement and the
International Purchase Agreement or the consummation of the
transactions contemplated by this Agreement, the International Purchase
Agreement, the Merger Agreement and the Credit Facility Amendment,
except (i) such as have been already obtained under the 1933 Act or the
1933 Act Regulations or as may be required under state securities or
blue sky laws, (ii) such as have been obtained under the Securities
Exchange Act of 1934 (the "1934 Act") or the rules and regulations of
the Commission under the 1934 Act and (iii) such as have been obtained
under the laws and regulations of jurisdictions outside the United
States in which the Reserved Securities are offered.
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; except
for such Governmental Licenses the failure of which to obtain would
not, singly or in the aggregate, have a Material Adverse Effect; the
Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse
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<PAGE> 14
Effect; and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xvii) TITLE TO PROPERTY. The Company and its subsidiaries
have good and marketable title to all real property owned by the
Company and its subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectuses or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries; and all of
the leases and subleases material to the business of the Company and
its subsidiaries, considered as one enterprise, and under which the
Company or any of its subsidiaries holds properties described in the
Prospectuses, are in full force and effect, and neither the Company nor
any subsidiary has any notice of any claim of any sort that has been
asserted by anyone adverse to the rights of the Company or any
subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary
to the continued possession of the leased or subleased premises under
any such lease or sublease, except for such claims as would not, singly
or in the aggregate, have a Material Adverse Effect.
(xviii) INVESTMENT COMPANY ACT. Neither the Company nor CMI is
or upon the issuance and sale of the Securities as herein contemplated
will be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
(xix) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
or petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, licenses, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands,
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<PAGE> 15
demand letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against
the Company or any of its subsidiaries and (D) there are no events,
facts or circumstances that might reasonably be expected to form the
basis of any liability or obligation of the Company or any of its
subsidiaries, including, without limitation, any order, decree, plan or
agreement requiring clean-up or remediation, or any action, suit or
proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to any
Hazardous Materials or any Environmental Laws.
(xx) REGISTRATION RIGHTS. Except as described in the
Prospectus, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act other than persons who have waived such rights.
(xxi) STABILIZATION OR MANIPULATION. Neither the Company, CMI
nor any of their officers, directors or controlling persons has taken,
directly or indirectly, any action designed to cause or to result in,
or that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale of the Securities.
(xxii) ACCOUNTING CONTROLS. The Company and its subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (A) transactions are executed in accordance
with management's general or specific authorization; (B) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with GAAP and to maintain accountability for assets; (C)
access to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(xxiii) TAX RETURNS. The Company and its subsidiaries have
filed all federal, state, local and foreign tax returns that are
required to have been filed by them pursuant to applicable foreign,
federal, state, local or other law or have duly requested extensions
thereof, except insofar as the failure to file such returns or request
such extensions would not reasonably be expected to result in a
Material Adverse Effect, and has paid all taxes due pursuant to such
returns or pursuant to any assessment received by the Company and its
Subsidiaries, except for such taxes or assessments, if any, as are
being contested in good faith and as to which adequate reserves have
been provided. The charges, accruals and reserves on the books of the
Company in respect of any income and corporation tax liability of the
Company and each subsidiary for any years not finally determined are
adequate to meet any assessments or re-assessments for additional
income tax for any years not finally determined, except to the extent
of any inadequacy that would not reasonably be expected to result in a
Material Adverse Effect.
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<PAGE> 16
(xxiv) YEAR 2000. All disclosure regarding year 2000
compliance that is required to be described under the 1933 Act and 1933
Regulations (including disclosures required by Staff Legal Bulletin No.
5) has been included in the Prospectus. Neither the Company nor any of
its subsidiaries will incur significant operating expenses or costs to
ensure that its information systems will be year 2000 compliant, other
than as disclosed in the Prospectus.
(b) Representations and Warranties by the Selling Shareholders. Each
Selling Shareholder, severally and not jointly, represents and warrants to each
U.S. Underwriter as of the date hereof, as of the Closing Time, and, if the
Selling Shareholder is selling Option Securities on a Date of Delivery, as of
each such Date of Delivery, and agrees with each U.S. Underwriter, as follows:
(i) ACCURATE DISCLOSURE. The Selling Shareholder has reviewed
and is familiar with the Registration Statement and the Prospectuses
and neither of the Prospectuses nor any amendments or supplements
thereto (including any prospectus wrapper) includes any untrue
statement of a material fact with respect to such Selling Shareholder
or omits to state a material fact with respect to such Selling
Shareholder necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
such Selling Shareholder is not prompted to sell the Securities to be
sold by such Selling Shareholder hereunder by any information
concerning the Company or any subsidiary of the Company which is not
set forth in the Prospectuses.
(ii) AUTHORIZATION OF AGREEMENTS. Such Selling Shareholder has
the full right, power and authority to enter into this Agreement, the
International Purchase Agreement and the Power of Attorney and Custody
Agreement and to sell, transfer and deliver the Securities to be sold
by such Selling Shareholder hereunder. The execution and delivery of
this Agreement, the International Purchase Agreement and the Power of
Attorney and Custody Agreement and the sale and delivery of the
Securities to be sold by such Selling Shareholder and the consummation
of the transactions contemplated herein and compliance by such Selling
Shareholder with its obligations hereunder have been duly authorized by
such Selling Shareholder and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or default under, or result in the creation
or imposition of any tax, lien, charge or encumbrance upon the
Securities to be sold by such Selling Shareholder or any property or
assets of such Selling Shareholder pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, license, lease
or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder may be bound, or to which
any of the property or assets of such Selling Shareholder is subject,
nor will such action result in any violation of the provisions of the
charter or by-laws or other organizational instrument of such Selling
Shareholder, if applicable, or any
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<PAGE> 17
applicable treaty, law, statute, rule, regulation, judgment, order,
writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over such Selling Shareholder
or any of its properties.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Shareholder has
and will at the Closing Time and, if any Option Securities are
purchased, on the Date of Delivery have good and marketable title to
the Securities to be sold by such Selling Shareholder hereunder, free
and clear of any security interest, mortgage, pledge, lien, charge,
claim, equity or encumbrance of any kind, other than pursuant to this
Agreement and the International Purchase Agreement; and upon delivery
of such Securities and payment of the purchase price therefor as herein
contemplated, assuming each Underwriter has no notice of any adverse
claim, each of the Underwriters will receive good and marketable title
to the Securities purchased by it from such Selling Shareholder, free
and clear of any security interest, mortgage, pledge, lien, charge,
claim, equity or encumbrance of any kind.
(iv) DUE EXECUTION OF AGREEMENTS. Such Selling Shareholder has
duly executed and delivered, in the form heretofore furnished to the
U.S. Representatives, the Power of Attorney and Custody Agreement
(collectively, the "Power of Attorney and Custody Agreement") with the
attorneys-in-fact named therein (the "Attorney-in-Fact") and The Bank
of New York, as custodian (the "Custodian); the Custodian is authorized
by such Selling Shareholder to deliver the Securities to be sold by
such Selling Shareholder hereunder and to accept payment therefor; and
the Attorney-in-Fact is authorized to execute and deliver this
Agreement and the certificate referred to in Section 5(f) or that may
be required pursuant to Sections 5(n) and 5(o) on behalf of such
Selling Shareholder, to sell, assign and transfer to the U.S.
Underwriters the Securities to be sold by such Selling Shareholder
hereunder, to determine the purchase price to be paid by the U.S.
Underwriters to such Selling Shareholder, as provided in Section 2(a)
hereof, to authorize the delivery of the Securities to be sold by such
Selling Shareholder hereunder, to accept payment therefor, and
otherwise to act on behalf of such Selling Shareholder in connection
with this Agreement. This Agreement and the International Purchase
Agreement have been duly executed and delivered by or on behalf of such
Selling Shareholder.
(v) ABSENCE OF MANIPULATION. Such Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
consent, approval, authorization, order, registration, qualification or
decree of, any court or governmental
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<PAGE> 18
authority or agency, domestic or foreign, is necessary or required for
the performance by each Selling Shareholder of its obligations
hereunder or in the International Purchase Agreement or the Power of
Attorney and Custody Agreement, or in connection with the sale and
delivery of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement and the International
Purchase Agreement except (i) such as may have previously been made or
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or under state securities laws and (ii) such as have been
obtained under the laws and regulations of jurisdictions outside the
United States in which the Reserved Securities are offered.
(vii) RESTRICTION ON SALE OF SECURITIES. During a period of
180 days from the date of the Prospectuses, such Selling Shareholder
will not, without the prior written consent of Merrill Lynch, (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 to purchase or otherwise transfer or dispose of,
directly or indirectly, any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to the extent they are sold hereunder.
(viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for
all of the Securities to be sold by such Selling Shareholder pursuant
to this Agreement and the International Purchase Agreement, in suitable
form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank with signatures
guaranteed, have been placed in custody with the Custodian with
irrevocable conditional instructions to deliver such Securities to the
U.S. Underwriters pursuant to this Agreement and to the International
Managers pursuant to the International Purchase Agreement.
(ix) NO ASSOCIATION WITH NASD. Neither such Selling
Shareholder nor any of his/her/its affiliates (within the meaning of
NASD Conduct Rule 2720(b)(1)(a)) directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common
control with, or is an associated person (within the meaning of Article
I, Section 1(q) of the By-laws of the National Association of
Securities Dealers, Inc.) of, any member firm of the National
Association of Securities Dealers, Inc., other than as described on an
appendix to the Power of Attorney and Custody Agreement to which such
Selling Shareholder is a party.
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<PAGE> 19
(x) POWER AND AUTHORITY. If such Selling Shareholder is a
corporation, partnership or trust, such Selling Shareholder has been
duly organized or incorporated and is validly existing as a
corporation, partnership or limited partnership in good standing under
the laws of its jurisdiction of incorporation or organization, as
applicable.
(c) Officer's Certificates. Any certificate signed by any officer of
the Company, CMI or any of their respective subsidiaries delivered to the Global
Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters
shall be deemed a representation and warranty by the Company and CMI to each
U.S. Underwriter as to the matters covered thereby; and any certificate signed
by or on behalf of any Selling Shareholder as such and delivered to the U.S.
Representatives or to counsel for the U.S. Underwriters, pursuant to the terms
of this Agreement, shall be deemed a representation and warranty by such Selling
Shareholder to the U.S. Underwriters as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, each Selling Shareholder, severally and not jointly, agree to sell to
each U.S. Underwriter, severally and not jointly, and each U.S. Underwriter,
severally and not jointly, agrees to purchase from each Selling Shareholder, at
the price per share set forth in Schedule C, that proportion of the number of
Initial U.S. Securities set forth in Schedule B opposite the name of such
Selling Shareholder, as the case may be, which the number of Initial U.S.
Securities set forth in Schedule A opposite the name of such U.S. Underwriter,
plus any additional number of Initial U.S. Securities which such U.S.
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, bears to the total number of Initial U.S. Securities,
subject, in each case, to such adjustments among the U.S. Underwriters as the
Global Coordinator in its sole discretion shall make to eliminate any sales or
purchases of fractional securities.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Selling Shareholders hereby grant an option to the U.S.
Underwriters, severally and not jointly, to purchase up to an additional
__________ shares of Common Stock, as set forth in Schedule B, at the price per
share set forth in Schedule C, less an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial U.S.
Securities but not payable on the U.S. Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time on one or more occasions only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Selling Shareholders setting forth the number of U.S. Option
Securities as to which the several U.S. Underwriters are then exercising the
option and the time and date of payment and delivery for such U.S. Option
Securities. Any such time and date of delivery for the U.S. Option Securities (a
"Date of Delivery") shall be determined by the Global Coordinator, but shall not
be
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<PAGE> 20
later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the U.S. Option Securities, each of the
U.S. Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of U.S. Option Securities then being purchased
which the number of Initial U.S. Securities set forth in Schedule A opposite the
name of such U.S. Underwriter bears to the total number of Initial U.S.
Securities, subject in each case to such adjustments as the Global Coordinator
in its discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004,
or at such other place as shall be agreed upon by the Global Coordinator and the
Company and the Selling Shareholders, at 9:00 A.M. (Eastern time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Global Coordinator, the Company
and the Attorney-in-Fact on behalf of the Selling Shareholders (such time and
date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company and the Attorney-in-Fact on behalf of the
Selling Shareholders, on each Date of Delivery as specified in the notice from
the Global Coordinator to the Company and the Attorney-in-Fact on behalf of the
Selling Shareholders.
Payment shall be made to the Selling Shareholders by wire transfer of
immediately available funds to bank accounts designated by the Custodian
pursuant to each Selling Shareholder's Power of Attorney and Custody Agreement,
against delivery to the U.S. Representatives for the respective accounts of the
U.S. Underwriters of certificates for the U.S. Securities to be purchased by
them. It is understood that each U.S. Underwriter has authorized the U.S.
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial U.S. Securities and the U.S.
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the U.S. Underwriters, may (but shall
not be obligated to) make payment of the purchase price for the Initial U.S.
Securities or the U.S. Option Securities, if any, to be purchased by any U.S.
Underwriter whose funds have not been received by the Closing Time or the
relevant Date of Delivery, as the case may be, but such payment shall not
relieve such U.S. Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing
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<PAGE> 21
Time or the relevant Date of Delivery, as the case may be. The certificates for
the Initial U.S. Securities and the U.S. Option Securities, if any, will be made
available for examination and packaging by the U.S. Representatives in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company and
the Selling Shareholders hereby confirm their engagement of McDonald & Company
Securities, Inc. as, and McDonald & Company Securities, Inc. hereby confirms its
agreement with the Company and the Selling Shareholders to render services as, a
"qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. with
respect to the offering and sale of the Securities. McDonald & Company
Securities, Inc., solely in its capacity as qualified independent underwriter
and not otherwise, is referred to herein as the "Independent Underwriter."
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
U.S. Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Global Coordinator immediately, and confirm the notice in writing,
(i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectuses or any
amended Prospectuses shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)),
any Term Sheet or any amendment, supplement or revision to either the
prospectus included in the Registration Statement at the time it became
effective or to the Prospectuses, will furnish the Global Coordinator
with copies
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of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use
any such document to which the Global Coordinator or counsel for the
U.S. Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the U.S. Representatives and counsel for
the U.S. Underwriters, without charge, signed copies of the
Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates
of experts, and will also deliver to the U.S. Representatives, without
charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the
U.S. Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the U.S. Underwriters will be identical
to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each U.S. Underwriter, without charge, as many copies of each
preliminary prospectus as such U.S. Underwriter reasonably requested,
and the Company hereby consents to the use of such copies for purposes
permitted by the 1933 Act. The Company will furnish to each U.S.
Underwriter, without charge, during the period when the U.S. Prospectus
is required to be delivered under the 1933 Act or the 1934 Act, such
number of copies of the U.S. Prospectus (as amended or supplemented) as
such U.S. Underwriter may reasonably request. The U.S. Prospectus and
any amendments or supplements thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to
permit the completion of the distribution of the Securities as
contemplated in this Agreement, the International Purchase Agreement
and in the Prospectuses. If at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result
of which it is necessary, in the opinion of counsel for the U.S.
Underwriters or for the Company, to amend the Registration Statement or
amend or supplement any Prospectus in order that the Prospectuses will
not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion
of such counsel, at any such time to amend the Registration Statement
or amend or supplement any Prospectus in order to comply with the
requirements of the 1933 Act or the 1933 Act Regulations, the Company
will promptly prepare and file with the Commission, subject to Section
3(b), such amendment or
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<PAGE> 23
supplement as may be necessary to correct such statement or omission or
to make the Registration Statement or the Prospectuses comply with such
requirements, and the Company will furnish to the U.S. Underwriters
such number of copies of such amendment or supplement as the U.S.
Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the U.S. Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions (domestic or foreign) as the
Global Coordinator may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that neither the Company nor
any of the Selling Shareholders shall be obligated to file any general
consent to service of process or to qualify as a foreign corporation or
as a dealer in securities in any jurisdiction in which it is not so
qualified or to subject itself to taxation in respect of doing business
in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for
a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Listing. The Company will use its best efforts to effect
the quotation of the Common Stock (including the Securities) on the
Nasdaq National Market.
(i) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectuses, the Company will not, without
the prior written consent of the Global Coordinator, (i) directly or
indirectly, 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 to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Securities to be sold hereunder or under the
International Purchase Agreement, (B) any shares of Common Stock issued
by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to
in
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<PAGE> 24
the Prospectuses, (C) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to existing employee benefit
plans of the Company referred to in the Prospectuses or (D) any shares
of Common Stock issued pursuant to any non-employee director stock plan
or dividend reinvestment plan, or to any registration statement under
the 1933 Act filed with respect to shares of Common Stock issued or to
be issued in any such transactions.
(j) Reporting Requirements. The Company, during the period
when the Prospectuses are required to be delivered under the 1933 Act
or the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
(k) Compliance with NASD Rules. The Company hereby agrees that
it will ensure that the Reserved Securities will be restricted as
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Agreement. The Underwriters will notify the Company as to which persons
will need to be so restricted. At the request of the Underwriters, the
Company will direct the transfer agent to place a stop transfer
restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the
Reserved Securities, the Company agrees to reimburse the Underwriters
for any reasonable expenses (including, without limitation, legal
expenses) they incur in connection with such release.
SECTION 4. PAYMENT OF EXPENSES. (a) Expenses. The Company and CMI will
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Agreement, any
Agreement among Underwriters and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Securities, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the Underwriters, including any stock or other transfer taxes
and any stamp or other duties payable upon the sale, issuance or delivery of the
Securities to the Underwriters and the transfer of the Securities between the
U.S. Underwriters and the International Managers, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any
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<PAGE> 25
supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the NASD of the terms of the sale of the Securities, (x) the
fees and expenses incurred in connection with the quotation of the Securities on
the Nasdaq National Market, (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to employees and others having a business relationship
with the Company and (xii) the fees and expenses of the Independent Underwriter
incurred in its capacity as the "qualified independent underwriter" with respect
to the transactions contemplated hereby. In connection with any roadshow, the
Company and the Underwriters will each bear 50% of the cost of an airplane.
(b) Expenses of the Selling Shareholders. The Selling Shareholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of
their respective counsel and accountants, provided that the Company shall pay
the reasonable fees and disbursements of one single counsel for the Selling
Shareholders.
(c) Termination of Agreement. If this Agreement is terminated by the
U.S. Representatives in accordance with the provisions of Section 5, Section
9(a)(i) or Section 11 hereof, the Company and CMI shall reimburse the U.S.
Underwriters for all of their out-of-pocket expenses, including the reasonable
fees and disbursements of counsel for the U.S. Underwriters; provided that these
expenses shall be reimbursed by (i) the Selling Shareholders if the Agreement is
terminated due to failure to comply with Sections 5(c) and 5(f) hereof and (ii)
the defaulting Selling Shareholder if this Agreement is terminated pursuant to
Section 11 hereof.
(d) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company, CMI and the Selling Shareholders may make
for the sharing of such costs and expenses.
SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS. The
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company, CMI and the
Selling Shareholders contained in Section 1 hereof or in certificates of any
officer of the Company or any subsidiary of the Company or on behalf of any
Selling Shareholder, to the performance by the Company and CMI of their
respective covenants and other obligations hereunder, and to the following
further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have
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<PAGE> 26
been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the U.S. Underwriters. A
prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinions, dated as of
Closing Time, of Calfee, Halter & Griswold L.L.P., counsel for the
Company, and Obermayer Rebmann Maxwell & Hippel LLP, Pennsylvania
counsel for CMI, in form and substance satisfactory to counsel for the
U.S. Underwriters, together with signed or reproduced copies of such
letter for each of the other U.S. Underwriters, to the effect set forth
in Exhibits A-1 and A-2 hereto, respectively, and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
(c) Opinion of Counsel for the Selling Shareholders. At
Closing Time, the U.S. Representatives shall have received the
favorable opinions, dated as of Closing Time, of Simpson Thacher &
Bartlett, counsel for the Selling Shareholders and of other counsel for
the Selling Shareholders as counsel for the U.S. Underwriters may deem
necessary, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter
for each of the other U.S. Underwriters to the effect set forth in
Exhibit B-1 and B-2 hereto, respectively, and to such further effect as
counsel to the U.S. Underwriters may reasonably request.
(d) Opinion of Counsel for U.S. Underwriters. At Closing Time,
the U.S. Representatives shall have received the favorable opinion,
dated as of Closing Time, of Fried, Frank, Harris, Shriver & Jacobson,
counsel for the U.S. Underwriters, together with signed or reproduced
copies of such letter for each of the other U.S. Underwriters with
respect to certain matters set forth in clauses (i), (ii), (iv), (v)
(solely as to preemptive or other similar rights arising by operation
of law or under the charter or by-laws of the Company), (vii), (ix),
(x), (xii) and (xiv) (solely as to the information in the Prospectuses
under "Description of Capital Stock") and the penultimate paragraph of
Exhibit A-1 hereto and with respect to the matters set forth in
opinions (1) and (2) of Exhibit B-1 hereto. In giving such opinion such
counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York and the
federal law of the United States and the General Corporation Law of the
State of Delaware, upon the opinions of counsel satisfactory to the
U.S. Representatives. Such counsel may also state that, insofar as such
opinion involves factual matters, they have
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relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and of the Selling Shareholders and
certificates of public officials.
(e) Officers' Certificate. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectuses, any material adverse
change in the condition (financial or otherwise), earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the U.S. Representatives shall have received a
certificate of the Chief Executive Officer or President of each of the
Company and CMI and of the chief financial or chief accounting officer
of each of the Company and CMI, dated as of Closing Time, to the effect
that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and
correct with the same force and effect as though expressly made at and
as of Closing Time, (iii) the Company and CMI, as the case may be, has
complied with all agreements and satisfied all conditions on their part
to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(f) Certificate of Selling Shareholders. At Closing Time, the
U.S. Representatives shall have received a certificate of the
Attorney-in-Fact on behalf of each Selling Shareholder, dated as of
Closing Time, to the effect that (i) the representations and warranties
of each Selling Shareholder contained in Section 1(b) hereof are true
and correct in all respects with the same force and effect as though
expressly made at and as of Closing Time and (ii) each Selling
Shareholder has complied with all agreements and all conditions on its
part to be performed under this Agreement at or prior to Closing Time.
(g) Accountants' Comfort Letters. At the time of the execution
of this Agreement, the U.S. Representatives shall have received from
Coopers & Lybrand L.L.P. a letter in the form of Exhibit D-1 hereto and
from Deloitte & Touche, LLP a letter in the form of Exhibits D-2 hereto
dated such date, in form and substance satisfactory to the U.S.
Representatives, together with signed or reproduced copies of such
letter for each of the other U.S. Underwriters containing statements
and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(h) Bring-down Comfort Letters. At Closing Time, the U.S.
Representatives shall have received from Coopers & Lybrand L.L.P. and
Deloitte & Touche LLP letters, dated as of Closing Time, to the effect
that they reaffirm the statements made in the letters furnished
pursuant to subsection (g) of this Section, except that the specified
date referred to shall be a date not more than three business days
prior to Closing Time.
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(i) Approval of Listing. At Closing Time, the Securities shall
have been approved for quotation on the Nasdaq National Market, subject
only to official notice of issuance.
(j) No Objection. The NASD shall have confirmed that it has
not raised any objection with respect to the fairness and
reasonableness of the underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
U.S. Representatives shall have received an agreement substantially in
the form of Exhibit C hereto signed by the persons listed on Schedule D
hereto.
(l) Purchase of Initial International Securities.
Contemporaneously with the purchase by the U.S. Underwriters of the
Initial U.S. Securities under this Agreement, the International
Managers shall have purchased the Initial International Securities
under the International Purchase Agreement.
(m) Other Agreements. Prior to the Closing Time, (i) the U.S.
Representatives shall have received copies of a Custody Agreement and
Power of Attorney executed by each of the Selling Shareholders and (ii)
the Credit Facility Amendment shall remain in full force and effect.
(n) Conditions to Purchase of U.S. Option Securities. In the
event that the U.S. Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the U.S. Option
Securities, the representations and warranties of the Company, CMI and
the Selling Shareholders contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company
and the Selling Shareholders hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the U.S.
Representatives shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such
Date of Delivery, of the Chief Executive Officer or President
of each of the Company and CMI and of the chief financial or
chief accounting officer of each of the Company and CMI
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(e) hereof remains true and correct as of
such Date of Delivery.
(ii) CERTIFICATE OF SELLING SHAREHOLDERS. A
certificate, dated such Date of Delivery, of an
Attorney-in-Fact on behalf of each Selling Shareholder
confirming that the certificate delivered at Closing Time
pursuant to Section 5(f) remains true and correct as of such
Date of Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable
opinions of Calfee, Halter & Griswold, L.L.P., counsel for the
Company, and Obermayer
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<PAGE> 29
Rebmann Maxwell & Hippel LLP, Pennsylvania counsel for CMI, in
form and substance satisfactory to counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the
U.S. Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinions
required by Section 5(b) hereof.
(iv) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS.
The favorable opinions of Simpson Thacher & Bartlett, counsel
for the Selling Shareholders, and of other counsel for the
Selling Shareholders as counsel for the U.S. Underwriters may
deem necessary, in form and substance satisfactory to counsel
for the Underwriters, dated such Date of Delivery, relating to
the U.S. Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(v) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. The
favorable opinion of Fried, Frank, Harris, Shriver & Jacobson,
counsel for the U.S. Underwriters, dated such Date of
Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same
effect as the opinion required by Section 5(d) hereof.
(vi) BRING-DOWN COMFORT LETTERS. Letters from Coopers
& Lybrand L.L.P. and Deloitte & Touche LLP, in form and
substance satisfactory to the U.S. Representatives and dated
such Date of Delivery, substantially in the same form and
substance as the letter furnished to the U.S. Representatives
pursuant to Section 5(g) hereof, except that the "specified
date" in the letter furnished pursuant to this paragraph shall
be a date not more than five days prior to such Date of
Delivery.
(o) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished
with such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company
and the Selling Shareholders in connection with the issuance and sale
of the Securities as herein contemplated shall be satisfactory in form
and substance to the U.S. Representatives and counsel for the U.S.
Underwriters.
(p) Termination of Agreement. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of U.S. Option Securities, on a Date of Delivery which is
after the Closing Time, the obligations of the several U.S.
Underwriters to purchase the relevant Option Securities, may be
terminated by the U.S. Representatives
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by notice to the Company at any time at or prior to Closing Time or
such Date of Delivery, as the case may be, and such termination shall
be without liability of any party to any other party except as provided
in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any
such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a)(1) Indemnification of U.S. Underwriters. (1) The Company and CMI,
jointly and severally, agree to indemnify and hold harmless each U.S.
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the
extent and in the manner set forth in clauses (i), (ii), (iii) and (iv) below
and in Section 6(a)(2). In addition, each Selling Shareholder, severally and not
jointly, agrees to indemnify and hold harmless each Underwriter and each person,
if any, who controls any U.S. Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set
forth in clauses (i), (iii) and (iv) below and in Section 6(a)(2):
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of
any applicable laws or regulations of foreign jurisdictions where
Reserved Securities have been offered and (B) any untrue statement or
alleged untrue statement of a material fact included in the supplement
or prospectus wrapper material distributed in connection with the
reservation and sale of the Reserved Securities to eligible employees
of the Company and other persons or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein,
when considered in conjunction with the Prospectuses or preliminary
prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, or in
connection with any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof, provided that (subject
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<PAGE> 31
to Section 6(d) below) any such settlement is effected with the written
consent of the Company and the Selling Shareholders; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof,
to the extent that any such expense is not paid under (i), (ii), or
(iii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not (i) apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by any U.S. Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto) or
(ii) inure to the benefit of any U.S. Underwriter from whom the person asserting
any loss, liability, claim, damage or expense purchased Securities, or any
person controlling such U.S. Underwriter, if it shall be established that a copy
of the Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or on
behalf of such U.S. Underwriter to such person, if required by law to have been
so delivered, at or prior to the confirmation of the sale of such Securities to
such person in any case where the Company complied with its obligations under
Sections 3(a), 3(b) and 3(d), and if the Prospectus (as so amended or
supplemented) would have cured any defect giving rise to such loss, liability,
claim damage, or expense; PROVIDED, FURTHER, with respect to each Selling
Shareholder, the indemnification provision in this paragraph (1) shall be only
with respect to the information furnished in writing by or on behalf of such
Selling Shareholder expressly for use in the Registration Statement (or any
amendment thereto), including Rule 430A Information, if applicable, or any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto) and each Selling Shareholder severally confirms, and each U.S.
Underwriter agrees, that the information (other than the percentage of shares
owned) pertaining to each Selling Shareholder under the caption "Principal and
Selling Stockholders" in the U.S. Prospectus constitutes the only information
furnished in writing by or on behalf of such Selling Shareholder expressly for
use in the Registration Statement and U.S. Prospectus; PROVIDED, FURTHER, that
the aggregate liability of any Selling Shareholder pursuant to this paragraph
(1) shall be limited to the net proceeds (after deducting the underwriting
discount but before deducting expenses) received by such Selling Shareholder
from the Securities purchased by the Underwriters from such Selling Shareholder
pursuant to this Agreement and the International Purchase Agreement.
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<PAGE> 32
(2) In addition to and without limitation of the Company's, CMI's and
each Selling Shareholder's obligation to indemnify McDonald & Company
Securities, Inc. as an Underwriter, the Company, CMI and each Selling
Shareholder also, severally and not jointly, agree to indemnify and hold
harmless the Independent Underwriter and each person, if any, who controls the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, as a result of the Independent
Underwriter's participation as a "qualified independent underwriter" within the
meaning of Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. in connection with the offering of the U.S. Securities;
PROVIDED, the aggregate liability of any Selling Shareholder pursuant to this
paragraph (2) shall be limited to the net proceeds (after deducting the
underwriting discount but before deducting expenses) received by such Selling
Shareholder from the Shares purchased by the Underwriters from such selling
Shareholder pursuant to this Agreement and the International Purchase Agreement.
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders. Each U.S. Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and
each Selling Shareholder and each person, if any, who controls any Selling
Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a)(1) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any U.S. preliminary prospectus or the U.S.
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such U.S.
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto) or such U.S. preliminary prospectus or the
U.S. Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company and the Selling
Shareholders. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the
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<PAGE> 33
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances; provided, that, if indemnity is sought pursuant to
Section 6(a)(2), then, in addition to the fees and expenses of such counsel for
the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one counsel (in addition to any
local counsel) separate from its own counsel and that of the other indemnified
parties for the Independent Underwriter in its capacity as a "qualified
independent underwriter" and all persons, if any, who control the Independent
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
1934 Act in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances if, in the reasonable judgment of the Independent Underwriter,
there may exist a conflict of interest between the Independent Underwriter and
the other indemnified parties. Any such separate counsel for the Independent
Underwriter and such control persons of the Independent Underwriter shall be
designated in writing by the Independent Underwriter. No indemnifying party
shall, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(iii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Indemnification for Reserved Securities. In connection with the
offer and sale of the Reserved Securities, the Company and CMI, jointly and
severally, agree, promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and expenses incurred by them as a result of the failure of
eligible employees of the Company and its subsidiaries and other persons to pay
for and accept delivery of Reserved Securities which, by the end of the first
business day following the date of this Agreement, were subject to a properly
confirmed agreement to purchase.
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<PAGE> 34
(f) Other Agreements with Respect to Indemnification. The provisions of
this Section shall not affect any agreement among the Company, CMI and the
Selling Shareholders with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, CMI and
the Selling Shareholders on the one hand and the U.S. Underwriters on the other
hand from the offering of the U.S. Securities pursuant to this Agreement or (ii)
if the allocation provided by clause (i) is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, CMI
and the Selling Shareholders on the one hand and of the U.S. Underwriters on the
other hand in connection with the statements or omissions, or in connection with
any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof, which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company, CMI and the Selling
Shareholders on the one hand and the U.S. Underwriters on the other hand in
connection with the offering of the U.S. Securities pursuant to this Agreement
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the U.S. Securities pursuant to this Agreement
(before deducting expenses) received by the Company and the Selling Shareholders
and the total underwriting discount received by the U.S. Underwriters, in each
case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the U.S. Securities as set forth on such cover.
The relative fault of the Company, CMI and the Selling Shareholders on
the one hand and the U.S. Underwriters on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company, CMI or the Selling
Shareholders or by the U.S. Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission or any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof.
The Company, CMI, the Selling Shareholders and the U.S. Underwriters
agree that McDonald & Company Securities, Inc. will not receive any additional
benefits hereunder for serving as the Independent Underwriter in connection with
the offering and sale of the Securities.
The Company, CMI, the Selling Shareholders and the U.S. Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the U.S. Underwriters
were treated as one entity for such purpose) or by
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<PAGE> 35
any other method of allocation which does not take account of the equitable
considerations referred to above in this Section 7. The aggregate amount of
losses, liabilities, claims, damages and expenses incurred by an indemnified
party and referred to above in this Section 7 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such U.S. Underwriter has otherwise been required to pay by reason of any such
untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company or any Selling Shareholder within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act shall have the same rights to contribution as
the Company or such Selling Shareholder, as the case may be. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the
Company, CMI and the Selling Shareholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company, any of its subsidiaries
or the Selling Shareholders submitted pursuant hereto, shall remain operative
and in full force and effect, regardless of any investigation made by or on
behalf of any U.S. Underwriter or controlling person, or by or on behalf of the
Company or the Selling Shareholders, and shall survive delivery of the
Securities to the U.S. Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company and the Attorney-in-Fact on behalf of the
Selling Shareholders, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this
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<PAGE> 36
Agreement or since the respective dates as of which information is given in the
U.S. Prospectus, any material adverse change in the condition (financial or
otherwise), earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Global Coordinator, impracticable to market the Securities or to enforce
contracts for the sale of the Securities, or (iii) if trading in any securities
of the Company has been suspended or materially limited by the Commission or the
New York Stock Exchange, or if trading generally on the American Stock Exchange
or the New York Stock Exchange or in the Nasdaq National Market has been
suspended or materially limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS. If one or
more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery
to purchase the U.S. Securities which it or they are obligated to purchase under
this Agreement (the "Defaulted Securities"), the Global Coordinator shall have
the right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting U.S. Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the Global
Coordinator shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of U.S. Securities to be purchased on such date, each of
the non-defaulting U.S. Underwriters shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions
that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of U.S. Securities to be purchased on such date, this Agreement
or, with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the U.S. Underwriters to purchase and of the
Company to sell the Option Securities to be purchased and sold on
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<PAGE> 37
such Date of Delivery shall terminate without liability on the part of
any non-defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
U.S. Underwriters to purchase and the Company to sell the relevant U.S. Option
Securities, as the case may be, either (i) the U.S. Representatives or (ii) the
Company and the Attorney-in-Fact on behalf of the Selling Shareholders shall
have the right to postpone Closing Time or the relevant Date of Delivery, as the
case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectuses or in any other
documents or arrangements. As used herein, the term "U.S. Underwriter" includes
any person substituted for a U.S. Underwriter under this Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS. If a
Selling Shareholder shall fail at Closing Time or at a Date of Delivery to sell
and deliver the number of Securities which such Selling Shareholder is obligated
to sell hereunder, and the remaining Selling Shareholders do not exercise the
right hereby granted to increase, pro rata or otherwise, the number of
Securities to be sold by them hereunder to the total number to be sold by all
Selling Shareholders as set forth in Schedule B hereto, then the Underwriters
may, at the option of the U.S. Representatives, by notice from the U.S.
Representatives to the Company and the Attorney-in-Fact on behalf of the
non-defaulting Selling Shareholders, either (a) terminate this Agreement without
any liability or fault of any non-defaulting party except that the provisions of
Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to
purchase the Securities which the non-defaulting Selling Shareholders have
agreed to sell hereunder. No action taken pursuant to this Section 11 shall
relieve any Selling Shareholder so defaulting from liability, if any, in respect
of such default.
In the event of a default by any Selling Shareholder as referred to in
this Section 11, the Global Coordinator, the Company and the non-defaulting
Selling Shareholders shall have the right to postpone Closing Time or Date of
Delivery for a period not exceeding seven days in order to effect any required
change in the Registration Statement or Prospectuses or in any other documents
or arrangements.
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Scott Lemone, with
a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New
York, New York 10004, attention of Valerie Ford Jacob; and notices to the
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<PAGE> 38
Company and CMI shall be directed to it at Camelot Music Holdings, Inc., 8000
Freedom Avenue N.W., North Canton, Ohio 44720-0169, attention of Jack K. Rogers,
with a copy to Calfee, Halter & Griswold L.L.P., 1400 McDonald Investment
Center, 800 Superior Avenue, Cleveland, Ohio 44114-2688, attention of Thomas F.
McKee. Notices to the Selling Shareholders shall be directed to
___________________.
SECTION 13. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the U.S. Underwriters, the Company, CMI and the Selling
Shareholders and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the U.S. Underwriters, the Company, CMI and the Selling
Shareholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the U.S. Underwriters, the Company, CMI, the Selling
Shareholders and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any U.S. Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
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<PAGE> 39
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorney-in-Fact for
the Selling Shareholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement among the U.S.
Underwriters, the Company, CMI and the Selling Shareholders in accordance with
its terms.
Very truly yours,
CAMELOT MUSIC HOLDINGS, INC.
CAMELOT MUSIC, INC.
By:_____________________________________
Title:
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE B HEREOF
By:_____________________________________
Title:
As Attorney-in-Fact acting on behalf of
the Selling Shareholders named in
Schedule B hereto
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<PAGE> 40
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
MCDONALD & COMPANY SECURITIES, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By _____________________
Authorized Signatory
For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.
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<PAGE> 41
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................
Morgan Stanley & Co. Incorporated........................................
McDonald & Company Securities, Inc....................................... _________
Total....................................................................
=========
</TABLE>
Sch A-1
<PAGE> 42
SCHEDULE B
<TABLE>
<CAPTION>
Maximum Number
Number of Initial U.S. of U.S. Option
Securities to be Sold Securities to Be Sold
--------------------- ---------------------
[Selling Shareholders]
<S> <C> <C>
Total....................
</TABLE>
Sch B - 1
<PAGE> 43
SCHEDULE C
CAMELOT MUSIC HOLDINGS, INC.
__________ Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the U.S. Securities to be paid by
the several U.S. Underwriters shall be $__________, being an amount equal to the
initial public offering price set forth above less $__________ per share;
provided that the purchase price per share for any U.S. Option Securities
purchased upon the exercise of the over-allotment option described in Section
2(b) shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial U.S. Securities
but not payable on the U.S. Option Securities.
Sch C - 1
<PAGE> 44
SCHEDULE D
Van Kampen-Merritt Prime Rate Income Trust
Fernwood Associates, L.P.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Oaktree Capital Management, LLC
Daystar Partners LLC
First Union National Bank
Yale University
James E. Bonk
Jack K. Rogers
William H. Scott
Lee Ann Thorn
Charles R. Rinehimer III
Lewis S. Garrett
Charles Marsh
George R. Zoffinger
Stephen H. Baum
Roger D. Marks
Herbert J. Marks
Marc L. Luzzatto
Michael B. Solow
Larry K. Mundorf
Kenneth B. Quick
Bridget Y. Jones
Susan M. Craven
Douglas A. Holder
David L. Sayre
Michael J. Terlecky
Vern V. Benke
Michael P. Sheldon
Gregory V. Bass
Colin S. Harley
Lee B. Negip
Kenneth R. Chance
Robert T. Roberts
James R. Dismukes
David F. Henry
Elizabeth A. Palumbo
John P. Daristotle
Other Selling Shareholders
Sch D - 1
<PAGE> 45
Exhibit A-1
FORM OF OPINION OF CALFEE, HALTER & GRISWOLD
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under the U.S. Purchase Agreement, the International
Purchase Agreement, the Merger Agreement and the Credit Facility
Amendment.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in
which it owns or leases real property, except where the failure so to
qualify or to be in good standing would not result in a Material
Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectuses under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities or
options referred to in the Prospectuses); the shares of issued and
outstanding capital stock of the Company, including the Securities to
be purchased by the Underwriters from the Selling Shareholders, have
been duly authorized and validly issued and are fully paid and
non-assessable; and none of the outstanding shares of capital stock of
the Company was issued in violation of statutory preemptive rights,
preemptive rights under the Company's charter and by-laws or, to the
best of our knowledge, other similar contractual rights of any
securityholder of the Company by which the Company is bound.
(v) The sale of the Securities by the Selling Shareholders is
not subject to statutory preemptive rights, preemptive rights under the
Company's charter and by-laws or, to the best of our knowledge, other
similar contractual rights of any securityholder of the Company by
which the Company is bound. No holder of the Securities is or will be
subject to personal liability solely by reason of being such a holder.
(vi) Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which it owns or leases real property, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock
of each Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and, to the best of our knowledge, is
owned by the Company, directly
A-1
<PAGE> 46
or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity.
(vii) The U.S. Purchase Agreement and the International
Purchase Agreement have been duly authorized, executed and delivered by
the Company and CMI.
(viii) The Merger Agreement has been authorized, executed and
delivered by the Company. The Credit Facility Amendment has been
authorized, executed and delivered by the Company and constitutes a
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency, moratorium, stay and other laws affecting
creditors rights generally and to general principles of equity.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectuses pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule
424(b); and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectuses and each amendment or
supplement to the Registration Statement and Prospectuses as of their
respective effective or issue dates (other than the financial
statements and supporting schedules included therein or omitted
therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the
1933 Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectuses were
not "materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it
became effective.
(xii) The form of certificate used to evidence the Common
Stock complies in all material respects with all applicable statutory
requirements and with any applicable requirements of the charter and
by-laws of the Company and the requirements of the Nasdaq National
Market.
(xiii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company, CMI or any of their respective subsidiaries is a
party, or to which the property of the Company, CMI or any of their
respective subsidiaries is subject, before or brought by any federal or
state court or governmental agency or body, which is required to be
described in the Registration Statement pursuant to Item 103 of
Regulation S-K promulgated under the 1933 Act, which is not described
as required, or which might reasonably be expected to materially and
adversely affect the consummation of the transactions contemplated in
the U.S. Purchase Agreement, the International Purchase
A-2
<PAGE> 47
Agreement, the Merger Agreement and the Credit Facility Amendment or
the performance by the Company or CMI of its obligations thereunder.
(xiv) The information in the Prospectuses under "Risk
Factors--Internal Revenue Service Claim," "Description of Capital
Stock," "Description of Certain Indebtedness," "Shares Eligible for
Future Sale," "Business--Properties," "Business--Legal Proceedings,"
and "Certain Federal Income Tax Considerations" and in the Registration
Statement under Item 14, to the extent that it constitutes matters of
law, summaries of legal matters, the Company's charter and by-laws or
legal proceedings, or legal conclusions, has been reviewed by us and is
correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that
are not described as required.
(xvi) All descriptions in the Registration Statement of
contracts and other documents to which the Company or its subsidiaries
are a party are accurate in all material respects; to the best of our
knowledge, there are no franchises, contracts, indentures, mortgages,
loan agreements, notes, leases or other instruments required to be
described or referred to in the Registration Statement or to be filed
as exhibits thereto other than those described or referred to therein
or filed or incorporated by reference as exhibits thereto, and the
descriptions thereof or references thereto are correct in all material
respects.
(xvii) To the best of our knowledge, neither the Company nor
any subsidiary is in violation of its charter or by-laws and no default
by the Company or any subsidiary exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument that is described or referred to
in the Registration Statement or the Prospectuses or filed or
incorporated by reference as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any federal,
Ohio or Delaware court or governmental authority or agency (other than
under the 1933 Act and the 1933 Act Regulations, which have been
obtained, or as may be required under the securities or blue sky laws
of the various states, as to which we need express no opinion) is
necessary or required in connection with the due authorization,
execution and delivery of the U.S. Purchase Agreement, the
International Purchase Agreement, the Merger Agreement and the Credit
Facility Amendment or for the offering, issuance, sale or delivery of
the Securities.
(xix) The execution, delivery and performance of the U.S.
Purchase Agreement, the International Purchase Agreement, the Merger
Agreement and the Credit Facility Amendment and the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the
International Purchase Agreement, the Merger Agreement and the Credit
Facility Amendment and in the Registration Statement and compliance by
the Company with its obligations under the U.S. Purchase Agreement, the
International Purchase Agreement, the Merger Agreement and the Credit
Facility Amendment do not and will not, whether with or without the
giving of notice or lapse of time or both, conflict with or constitute
a breach of, or default or Repayment Event (as defined in Section
1(a)(x) of the Purchase Agreements) under or result in the creation or
A-3
<PAGE> 48
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any subsidiary pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or any other agreement or instrument, to which the Company or any
subsidiary is a party or by which it or any of them may be bound or to
which any of the property or assets of the Company or any subsidiary is
subject and which is filed or incorporated by reference as an exhibit
to the Registration Statement [or included on Exhibit A to this
opinion], nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary,
or any applicable federal, Ohio or Delaware law, statute, rule or
regulation or, to the best of our knowledge, any judgment, order, writ
or decree, of any federal or state government, government
instrumentality or court having jurisdiction over the Company or any
subsidiary or any of their respective properties, assets or operations.
(xx) To the best of our knowledge, except as disclosed in the
Registration Statement, there are no persons with registration rights
or other similar rights to have any securities registered pursuant to
the Registration Statement or otherwise registered by the Company under
the 1933 Act which have not otherwise been waived in connection
therewith.
(xxi) Neither Company nor CMI is, or upon the issuance and
sale of the Securities as contemplated by the U.S. Purchase Agreement
and the International Purchase Agreement will be an "investment
company," as such term is defined in the 1940 Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable) (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectuses or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectuses
were issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of the laws of Pennsylvania, upon the opinion of
Obermayer Rebmann Maxwell & Hippel LLP, special counsel to CMI (which opinion
shall be dated and furnished to the Representatives at the Closing Time, shall
be satisfactory in form and substance to counsel for the Underwriters and shall
expressly state that Calfee, Halter & Griswold LLP may rely on such opinion as
if it were addressed to them), provided that Calfee, Halter & Griswold LLP shall
state in their opinion that they believe that they and the Underwriters are
justified in relying upon such opinion and (B) as to matters of fact (but not as
to legal conclusions), to the extent they deem proper, on certificates of
responsible officers of the Company and public officials. Such counsel may limit
such opinion to the federal laws of the United States and the laws of the States
of Delaware and Ohio. Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written policy
or other document relating to legal opinions, including, without limitation, the
Legal Opinion Accord of the ABA Section of Business Law (1991).
A-4
<PAGE> 49
Exhibit A-2
FORM OF OPINION OF OBERMAYER REBMANN MAXWELL & HIPPEL LLP
TO BE DELIVERED PURSUANT TO SECTION 5(b)
(i) Camelot Music, Inc. ("CMI") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
Pennsylvania, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectuses and to
enter into and perform its obligations under the U.S. Purchase Agreement and the
International Purchase Agreement and is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a material adverse effect on the
CMI's financial condition and results of operations.
(ii) All of the issued and outstanding shares of capital stock of CMI
have been duly authorized and validly issued and are fully paid and
non-assessable and, to the best of our knowledge, is owned by Camelot Music
Holdings, Inc., directly or indirectly, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity, and none of the
outstanding shares of capital stock of CMI was issued in violation of the
preemptive or similar rights of any securityholder of CMI.
(iii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by CMI.
(iv) The Credit Facility Amendment has been duly authorized, executed
and delivered by CMI and constitutes the valid and binding obligation of CMI,
enforceable against CMI in accordance with its terms.
A-6
<PAGE> 50
Exhibit B-1
FORM OF OPINION OF SIMPSON THACHER & BARTLETT
TO BE DELIVERED PURSUANT TO SECTION 5(c)
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
McDonald & Company Securities, Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Merrill Lynch International
Morgan Stanley & Co. International Limited
McDonald & Company Securities, Inc.
as Lead Managers for the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
We have acted as counsel to certain selling stockholders (the
"Selling Stockholders") of Camelot Music Holdings, Inc., a Delaware corporation
(the "Company") named in Schedule B to each of the Underwriting Agreements (as
defined below) in connection with the purchase by you from the Selling
Stockholders of an aggregate of ________ shares of Common Stock, par value $.01
per share (the "Shares"), of the Company pursuant to the (i) the U.S. Purchase
Agreement dated July __, 1998 (the "U.S. Purchase Agreement") among you, the
Company and the Selling Stockholders and (ii) the International Purchase
Agreement dated July ___, 1998 (the "International Purchase Agreement"; together
with the U.S. Purchase Agreement, the "Underwriting Agreements") among you, the
Company and the Selling Stockholders.
B-1
<PAGE> 51
We have examined each Underwriting Agreement and each
Irrevocable Power of Attorney and Custody Agreement (collectively, the "Custody
Agreements") between each of the Selling Stockholders, the Company, _________,
as custodian (the "Custodian"), and the attorneys-in-fact named therein (each,
an "Attorney-in-Fact"), relating to the Shares to be sold to you by such Selling
Stockholders. In addition, we have examined, and have relied as to matters of
fact upon, the documents delivered to you at the closing, and upon originals or
copies, certified or otherwise identified to our satisfaction, of such corporate
records, agreements, documents and other instruments and such certificates or
comparable documents of public officials and of officers and representatives of
the Company, and have made such other and further investigations, as we have
deemed relevant and necessary as a basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents. In addition, in
connection with our opinion set forth in paragraph 1 below, we have assumed that
the Underwriters do not have notice of any adverse claim (within the meaning of
the Uniform Commercial Code as in effect in the State of New York) to the
Shares.
For purposes of this opinion we have assumed the following:
1. Each Selling Stockholder is the sole registered owner of
Shares to be sold by such Selling Stockholder and has full corporate,
partnership, or trust, as applicable, power, right and authority to
sell such Shares;
2. Each Underwriting Agreement has been duly authorized by
each Selling Stockholder and the Custody Agreement to be executed by
each Selling Stockholder has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder;
3. The sale of the Shares by each Selling Stockholder and the
compliance by such Selling Stockholder with all of the provisions of
the Underwriting Agreements will not breach or result in a default
under any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party or
by which such Selling Stockholder is bound or to which any of the
property or assets of such Selling Stockholder is subject, nor will
such action violate the Certificate of Incorporation, By-laws or other
organizational documents of such Selling Stockholder or, except to the
extent addressed in paragraph 3 below, any statute, law, rule or
regulation, or any order issued pursuant to any statute, law, rule or
regulation by any court or governmental agency or body or court having
jurisdiction over such Selling Stockholder or any of its properties.
Based upon the foregoing, and subject to the qualifications
and limitations stated herein, we are of the opinion that:
B-2
<PAGE> 52
1. Upon registration of the Shares in the name of the
Underwriters (or their nominee) and payment for the Shares in
accordance with the Underwriting Agreement, the Underwriters will
acquire all of the rights of each Selling Stockholder in the Shares and
will also acquire their interest in such Shares free of any adverse
claim.
2. Each Underwriting Agreement has been duly executed and
delivered by or on behalf of each Selling Stockholder.
3. No consent, approval, authorization, order, registration or
qualification of or with any Federal or New York governmental agency or
body or any Delaware governmental agency or body acting pursuant to the
Delaware General Corporation Law or, to our knowledge, any Federal or
New York court or any Delaware court acting pursuant to the Delaware
General Corporation Law is required for the issue and sale of the
Shares by the Selling Stockholders and the compliance by the Selling
Stockholders with all of the provisions of the Underwriting Agreements,
except for the registration under the Act of the Shares, and such
consents, approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters.
We are members of the Bar of the State of New York, and we do
not express any opinion herein concerning any law other than the law of the
State of New York, the Federal law of the United States and the Delaware General
Corporation Law.
This opinion letter is rendered to you in connection with the
above described transactions. The opinion letter may not be relied upon by you
for any other purpose, or relied upon by, or furnished to, any other person,
firm or corporation without our prior written consent.
Very truly yours,
B-3
<PAGE> 53
Exhibit B-2
FORM OF OPINION OF COUNSEL FOR EACH SELLING SHAREHOLDER
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than the issuance of the order
of the Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state securities
laws, as to which we need express no opinion) is necessary or required to be
obtained by any of the Selling Shareholders for the performance by any Selling
Shareholder of its obligations under the U.S. Purchase Agreement, the
International Purchase Agreement or in the Power of Attorney and Custody
Agreement, or in connection with the offer, sale or delivery of the Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly
executed and delivered by the respective Selling Shareholders named therein and
constitutes the legal, valid and binding agreement of such Selling Shareholder.
(iii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by or on behalf of
each Selling Shareholder.
(iv) The Attorney-in-Fact has been duly authorized by the Selling
Shareholder(s) to deliver the Securities on behalf of the Selling Shareholder(s)
in accordance with the terms of the U.S. Purchase Agreement and the
International Purchase Agreement.
(v) The execution, delivery and performance of the U.S. Purchase
Agreement, the International Purchase Agreement and the Power of Attorney and
Custody Agreement and the sale and delivery of the Securities and the
consummation of the transactions contemplated in the U.S. Purchase Agreement,
the International Purchase Agreement and in the Registration Statement and
compliance by each Selling Shareholder with its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement have been duly
authorized by all necessary action on the part of the Selling Shareholders and
do not and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default under or
result in the creation or imposition of any tax, lien, charge or encumbrance
upon the Securities or any property or assets of the Selling Shareholders
pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, license, lease or other instrument or agreement to which any
Selling Shareholder is a party or by which they may be bound, or to which any of
the property or assets of any of the Selling Shareholders may be subject nor
will such action result in any violation of the provisions of the charter or
by-laws of the Selling Shareholders, if applicable, or any law, administrative
regulation, judgment or order of any governmental agency or body or any
administrative or court decree having jurisdiction over the Selling Shareholders
or any of its properties.
B-4
<PAGE> 54
(vi) To the best of our knowledge, each Selling Shareholder has valid
and marketable title to the Securities to be sold by such Selling Shareholder
pursuant to the U.S. Purchase Agreement and the International Purchase
Agreement, free and clear of any pledge, lien, security interest, charge, claim,
equity or encumbrance of any kind, and has full right, power and authority to
sell, transfer and deliver such Securities pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement. By delivery of a certificate
or certificates therefor the Selling Shareholders will transfer to the
Underwriters who have purchased such Securities pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement (without notice of any defect
in the title of the Selling Shareholders and who are otherwise bona fide
purchasers for purposes of the Uniform Commercial Code) valid and marketable
title to such Securities, free and clear of any pledge, lien, security interest,
charge, claim, equity or encumbrance of any kind.
B-5
<PAGE> 55
Exhibit C
_____________, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
MORGAN STANLEY & CO. INCORPORATED
MCDONALD & COMPANY SECURITIES, INC.
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
MCDONALD & COMPANY SECURITIES, INC.
as Lead Managers for the several
International Managers to be named in the
within-mentioned International Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Camelot Music Holdings, Inc.
---------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder of Camelot Music Holdings, Inc., a
Delaware corporation (the "Company"), understands that Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan
Stanley & Co. Incorporated and McDonald & Company Securities, Inc. propose to
enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the
Company, Camelot Music, Inc. ("CMI") and the Selling Shareholders identified in
Schedule B thereto, and that Merrill Lynch International, Morgan Stanley & Co.
International Limited and McDonald & Company Securities, Inc. propose to enter
into an International Purchase Agreement (the "International Purchase
Agreement") with the Company, CMI and the Selling Shareholders, providing for
the public offering of shares (the "Securities") of the Company's common stock,
par value $.01 per share (the "Common Stock"). In recognition of the benefit
that such an offering will confer upon the undersigned as a stockholder of the
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
U.S. Underwriter to be named
C-1
<PAGE> 56
in the U.S. Purchase Agreement and with each International Manager to be named
in the International Purchase Agreement that, during a period of 180 days from
the date of the U.S. Purchase Agreement and the International Purchase
Agreement, the undersigned will not, without the prior written consent of
Merrill Lynch, 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 the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, 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.
Nothing contained in this letter shall be construed to prohibit the
undersigned, to the extent the undersigned is a natural person, from making a
bona fide gift of any shares of the Company's Common Stock, provided that the
transferee agrees in writing to be bound by the terms and conditions of this
letter.
This letter shall be binding on the undersigned and the heirs, legal
representatives, successors and assigns of the undersigned. This letter shall be
construed in accordance with the laws of the State of New York.
Very truly yours,
Signature: __________________________________
Print Name: __________________________________
C-2
<PAGE> 57
Exhibit D-1
COOPERS & LYBRAND L.L.P.
FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(g)
(i) We are independent public accountants with respect to the
Company within the meaning of the 1933 Act and the applicable published
1933 Act Regulations.
(ii) In our opinion, the audited financial statements and the
related financial statement schedules included in the Registration
Statement and the Prospectuses comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder.
(iii) On the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim consolidated financial statements of
the Company for the three month period ended May ____, 1998 and May
____, 1997, included in the Registration Statement and the Prospectuses
(collectively, the "Quarterly Financials"), a reading of the latest
available unaudited interim consolidated financial statements of the
Company, a reading of the minutes of all meetings of the stockholders
and directors of the Company and its subsidiaries and the committees of
the Company's Board of Directors and any subsidiary committees since
February 28, 1998, inquiries of certain officials of the Company and
its subsidiaries responsible for financial and accounting matters, a
review of interim financial information in accordance with standards
established by the American Institute of Certified Public Accountants
in Statement on Auditing Standards No. 71, Interim Financial
Information ("SAS 71"), with respect to the Quarterly Financials and
such other inquiries and procedures as may be specified in such letter,
nothing came to our attention that caused us to believe that:
(1) the Quarterly Financials included in the
Registration Statement and the Prospectuses do not comply as
to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act
Regulations or any material modifications should be made to
the Quarterly Financials included in the Registration
Statement and the Prospectuses for them to be in conformity
with generally accepted accounting principles;
(2) at June _____, 1998 and at a specified date not
more than five days prior to the date of this Agreement, there
was any change in the total shareholder equity of the Company
and its subsidiaries or any decrease in the working capital,
total current assets, total assets or stockholders' equity of
the Company and its subsidiaries or any increase in the total
current liabilities or total liabilities of the Company and
its subsidiaries, in each case as compared with amounts shown
in
D-1
<PAGE> 58
the latest balance sheet included in the Registration
Statement, except in each case for changes, decreases or
increases that the Registration Statement discloses have
occurred; or
(3) for the period from May ___, 1998 to June ___,
1998 and for the period from May ____, 1998 to a specified
date not more than five days prior to the date of this
Agreement, there was any decrease in total net sales,
operating income, income before reorganization expense and
income taxes, income before income tax expense, in each case
as compared with the comparable period in the preceding year,
except in each case for any decreases that the Registration
Statement discloses have occurred or may occur;
(iv) Based upon the procedures set forth in clause (ii) above
and a reading of the Selected Financial Data included in the
Registration Statement and a reading of the financial statements from
which such data were derived, nothing came to our attention that caused
us to believe that the Selected Financial Data included in the
Registration Statement do not comply as to form in all material
respects with the disclosure requirements of Item 301 of Regulation S-K
of the 1933 Act, that the amounts included in the Selected Financial
Data are not in agreement with the corresponding amounts in the audited
consolidated financial statements for the respective periods or that
the financial statements not included in the Registration Statement
from which certain of such data were derived are not in conformity with
generally accepted accounting principles.
(v) We have compared the information in the Registration
Statement under selected captions with the disclosure requirements of
Regulation S-K of the 1933 Act and on the basis of limited procedures
specified herein nothing came to our attention that caused us to
believe that this information does not comply as to form in all
material respects with the disclosure requirements of Items 302, 402
and 503(d), respectively, of Regulation S-K.
(vi) We are unable to and do not express any opinion on the
Pro Forma Condensed Consolidated Statement of Income (the "Pro Forma
Statement") included in the Registration Statement or on the pro forma
adjustments applied to the historical amounts included in the Pro Forma
Statement; however, for purposes of this letter we have:
(1) read the Pro Forma Statement;
(2) performed an audit of the Company's financial
statements to which the pro forma adjustments were applied;
(3) made inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters about the basis for their determination of the pro
forma adjustments and whether the Pro Forma Statement complies
as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X; and
D-2
<PAGE> 59
(4) proved the arithmetic accuracy of the application
of the pro forma adjustments to the historical amounts in the
Pro Forma Statement;
and on the basis of such procedures and such other inquiries and
procedures as specified herein, with respect to the fresh start
adjustments, nothing came to our attention that caused us to believe
that the Pro Forma Statement included in the Registration Statement
does not comply as to form in all material respects with the applicable
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of those statements, and with respect to The Wall
adjustments, certain officials of the Company and of The Wall who have
responsibility for financial and accounting matters have informed us
that all significant assumptions regarding the business combination
have been reflected in the pro forma adjustments and the unaudited Pro
Forma Statement complies as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X.
(vii) In addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit,
with respect to certain amounts, percentages, numerical data and
financial information appearing in the Registration Statement, which
are specified herein, and have compared certain of such items with, and
have found such items to be in agreement with, the accounting and
financial records of the Company.
D-3
<PAGE> 60
Exhibit D-2
FORM OF COMFORT LETTER OF
DELOITTE & TOUCHE LLP PURSUANT TO SECTION 5(f)
(i) We are independent public accountants with respect to The Wall
Music, Inc. within the meaning of the 1933 Act and the applicable published 1933
Act Regulations.
(ii) In our opinion, the audited financial statements and the related
financial statement schedules of The Wall Music, Inc. included in the
Registration Statement and the Prospectuses comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder.
(iii) With respect to the nine-month periods ended February 28, 1998
and March 1, 1997, we have:
(1) Performed the procedures specified by the
American Institute of Certified Public Accountants for a
review of interim financial information as described in their
Statement on Auditing Standards No. 71, Interim Financial
Information ("SAS 71"), on the unaudited combined statements
of operations of The Wall Music, Inc.; and
(2) Inquired of certain officials of The Wall Music,
Inc. who have responsibility for financial and accounting
matters whether (A) the unaudited statements of income
referred to in (iii)(1) above are in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements of The Wall Music, Inc. included in the
Registration Statement, and (B) comply as to form in all
material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations
thereunder. Those officials stated that the unaudited
statements of income (a) are in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements of The Wall Music, Inc. included in the
Registration Statement, and (b) comply as to form in all
material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations
thereunder.
(iv) On the basis of procedures described in paragraph (iii) above,
nothing came to our attention that caused us to believe that:
(1) Any material modifications should be made to the
unaudited financial statements described in paragraph (iii)(1)
above for them to be in conformity with generally accepted
accounting principles applied on a basis substantially
consistent with that of the audited financial statements of
The Wall Music, Inc. included in the Registration Statement,
and
D-4
<PAGE> 61
(2) the unaudited financial statements described in
(iii)(1) above do not comply as to form in all material
respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder.
(v) With respect to the three-month periods ended June 1, 1998 and June
1, 1997, we have:
(1) Performed the procedures specified by the
American Institute of Certified Public Accountants for a
review of interim financial information as described their
Statement on Auditing Standards No. 71, Interim Financial
Information ("SAS 71"), on the unaudited combined statements
of operations of The Wall Music, Inc.; and
(2) Inquired of certain officials of The Wall Music,
Inc. who have responsibility for financial and accounting
matters whether (A) the unaudited statements of income
referred to in (v)(1) above are in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements of The Wall Music, Inc. included in the
Registration Statement, and (B) comply as to form in all
material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations
thereunder. Those officials stated that the unaudited
statements of income (a) are in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements of The Wall Music, Inc. included in the
Registration Statement, and (b) comply as to form in all
material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations
thereunder.
(vi) On the basis of procedures described in paragraph (v) above,
nothing came to our attention that caused us to believe that:
(1) Any material modifications should be made to the
unaudited financial statements described in paragraph (v)(1)
above for them to be in conformity with generally accepted
accounting principles applied on a basis substantially
consistent with that of the audited financial statements of
The Wall Music, Inc. included in the Registration Statement,
and
(2) the unaudited financial statements described in
(v)(1) above do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder.
(vii) In addition, we have performed other procedures, not constituting
an audit, with respect to certain amounts, percentages, numerical data and
financial information appearing in the Registration Statement, which are
specified herein, and have compared certain of such items with, and have found
such items to be in agreement with, the accounting and financial records of The
Wall Music, Inc.
D-5
<PAGE> 62
D-6
<PAGE> 1
Exhibit 1.2
DRAFT 5/15/98
-------------
___________ Shares
CAMELOT MUSIC HOLDINGS, INC.
(a Delaware corporation)
Common Stock
(Par Value $.01 Per Share)
INTERSYNDICATE AGREEMENT
------------------------
Agreement, dated July ______, 1998, among (A) Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co.
Incorporated and McDonald & Company Securities, Inc. (together, the "U.S.
Representatives") for the U.S. Underwriters (the "U.S. Underwriters") listed in
Schedule A to the U.S. Purchase Agreement (the "U.S. Purchase Agreement"), dated
July ______, 1998, among Camelot Music Holdings, Inc., a Delaware corporation
(the "Company"), Camelot Music, Inc., a Pennsylvania corporation ("CMI"), the
persons listed in Schedule B of the U.S. Purchase Agreement (the "Selling
Shareholders") and the U.S. Underwriters, and (B) Merrill Lynch International
("MLI"), Morgan Stanley & Co. International Limited and McDonald & Company
Securities, Inc. (collectively, the "Lead Managers") for the managers (the
"Managers") listed in Schedule A to the International Purchase Agreement (the
"International Purchase Agreement"), dated July ______, 1998, among the Company,
CMI, the Selling Shareholders and the Managers. The U.S. Purchase Agreement and
the International Purchase Agreement are together referred to herein as the
"Purchase Agreements." Terms not defined herein are used as defined in the
Purchase Agreements referred to above.
The U.S. Underwriters, pursuant to the U.S. Purchase
Agreement, have agreed to purchase the Initial U.S. Securities and have been
granted an option by the Company and the Selling Shareholders to purchase the
U.S. Underwriters' pro rata portion of the U.S. Option Securities to cover
over-allotments, and the Managers, pursuant to the International Purchase
Agreement, have agreed to purchase the Initial International Securities and have
been granted an option by the Company and the Selling Shareholders to purchase
the Managers' pro rata portion of the International Option Securities to cover
over-allotments. In connection with the foregoing, the U.S. Underwriters and the
Managers deem it necessary and advisable that certain of the activities of the
U.S. Underwriters and the Managers be coordinated pursuant to this Agreement.
<PAGE> 2
1. The U.S. Underwriters, acting through Merrill Lynch, and
the Managers, acting through MLI, agree that they will consult each other as to
the availability of the Initial U.S. Securities and the U.S. Option Securities
(the Initial U.S. Securities and the U.S. Option Securities are collectively
hereinafter called the "U.S. Securities") pursuant to the U.S. Purchase
Agreement and as to the availability of the Initial International Securities and
the International Option Securities (the Initial International Securities and
the International Option Securities are collectively hereinafter called the
"International Securities") pursuant to the International Purchase Agreement, in
either case, from time to time until the termination of the selling restrictions
applicable to the respective offerings by the U.S. Representatives and MLI.
Based upon information received from the Managers and the U.S. Underwriters,
respectively, MLI agrees to advise Merrill Lynch and Merrill Lynch agrees to
advise MLI from time to time upon request during the consultation period
contemplated above, of the respective number of International Securities
purchased pursuant to the International Purchase Agreement and U.S. Securities
purchased pursuant to the U.S. Purchase Agreement remaining unsold. From time to
time as mutually agreed upon between MLI and Merrill Lynch, (a) MLI will sell
for the account of one or more Managers to Merrill Lynch, for the account of one
or more U.S. Underwriters, such number of International Securities purchased
pursuant to the International Purchase Agreement and remaining unsold; and (b)
Merrill Lynch will sell for the account of one or more U.S. Underwriters to MLI
for the account of one or more Managers, such number of U.S. Securities
purchased pursuant to the U.S. Purchase Agreement and remaining unsold.
Unless otherwise determined by mutual agreement of Merrill
Lynch and MLI, the price of any shares of Common Stock so purchased or sold
shall be the initial public offering price less the selling concession in each
case as set forth in the U.S. Prospectus. Settlement between Merrill Lynch and
MLI with respect to any Common Stock transferred hereunder at least three
business days prior to the Closing Time shall be made at Closing Time and, in
the case of purchases and sales made thereafter, as promptly as practicable but
in no event later than three business days after the transfer date. Certificates
representing the Common Stock so purchased shall be delivered on or about the
respective settlement dates. The liability for payment to the Company and the
Selling Shareholders of the purchase price of the Common Stock being purchased
by the U.S. Underwriters and the Managers under the Purchase Agreements shall
not be affected by the provisions of this Agreement.
Each U.S. Underwriter, acting through the U.S.
Representatives, agrees that, except for purchases and sales pursuant to this
Agreement and stabilization transactions contemplated hereunder conducted by it,
it will offer, sell or deliver Common Stock, directly or indirectly, only to
persons whom it believes may be a United States Person or a Canadian Person (as
such terms are defined below) and persons
- 2 -
<PAGE> 3
whom it believes intend to reoffer, resell or deliver directly or indirectly the
same to a United States Person or a Canadian Person, and any dealer to whom such
U.S. Underwriter may sell Common Stock will agree that it will only offer,
resell or deliver Common Stock directly or indirectly to persons whom such
dealer believes may be a United States Person or a Canadian Person or at a
reallowance only to other dealers who so agree.
Each International Manager, acting through MLI, agrees that,
except for purchases and sales pursuant to this Agreement and stabilization
transactions contemplated hereunder, it will not offer, sell or deliver Common
Stock, directly or indirectly, to any person whom it believes may be a United
States Person or a Canadian Person or any person whom it believes may intend to
reoffer, resell or deliver directly or indirectly the same to any United States
Person or any Canadian Person, and any dealer, bank or broker to whom such
International Manager may sell Common Stock will agree that it will not offer,
resell or deliver any Common Stock directly or indirectly to any person whom
such dealer, bank or broker believes may be a United States Person or a Canadian
Person nor at a reallowance to other dealers, bankers or brokers who do not so
agree.
For purposes of this Agreement, "United States Person" shall
mean any individual who is resident in the United States, or any corporation,
pension, profit-sharing or other trust or entity organized under or governed by
the laws of the United States or any political subdivision thereof (other than
the foreign branch or office of any United States Person), and shall include any
United States branch of a person other than a United States Person. "United
States" shall mean the United States of America, its territories, its
possessions and all areas subject to its jurisdiction. "Canadian Person" shall
mean any individual who is resident in Canada, or any corporation, pension,
profit-sharing or other trust or entity organized under or governed by the laws
of Canada or any political subdivision thereof (other than the foreign branch or
office of any Canadian Person), and shall include any Canadian branch or office
of a person other than a Canadian Person. "Canada" shall mean Canada, its
territories, its possessions and all areas subject to its jurisdiction.
2. All stabilization transactions shall be conducted at the
direction and subject to the control of Merrill Lynch as hereinafter provided,
so that stabilization activities worldwide shall be coordinated and conducted in
compliance with any applicable laws and regulations. From time to time upon the
request of MLI, Merrill Lynch will inform MLI of stabilization transactions
effected pursuant to this Section.
a. The Lead Managers undertake, and agree to cause all
Managers to undertake, that in connection with the distribution of Common Stock
they will comply: with the applicable rules and regulations of the United States
National
- 3 -
<PAGE> 4
Association of Securities Dealers, Inc.; with the prohibitions against trading
by persons interested in a distribution; and with the requirements for the
filing of all notices and reports relating thereto set forth in Regulation M and
Rule 17a-2 under the United States Securities Exchange Act of 1934 and the
Agreement Among Managers entered into by the Managers (the "AAM"). The Lead
Managers will cause each dealer which has agreed to participate or is
participating in the distribution to give a similar undertaking.
b. Merrill Lynch shall have sole responsibility with
respect to any action which they may take to make over-allotments in arranging
for sales of U.S. Option Securities and International Option Securities and
shall have direction and control of any action taken for stabilizing the market
price of the Common Stock, whether in the United States or on European stock
exchanges or otherwise. All stabilization transactions by Merrill Lynch shall be
for the respective accounts of the several U.S. Underwriters and Managers in the
proportions set forth in Section 4 hereof. The net commitment for long or short
accounts of the U.S. Underwriters or the Managers pursuant to such over
allotment and stabilization transactions shall not exceed 20% of the number of
U.S. Securities or International Securities, as the case may be, to be purchased
by the U.S. Underwriters, or the Managers, respectively, as set forth in the
U.S. Purchase Agreement or the International Purchase Agreement, respectively.
The exercise by the U.S. Underwriters and the Managers of their respective
options to purchase U.S. Option Securities and International Option Securities
shall be at the direction of Merrill Lynch.
3. Merrill Lynch and MLI shall consult with each other as to
the reservations for sale of the Common Stock made under the AAM, and upon
reaching agreement with respect thereto, MLI shall reserve for sale and sell to
the U.S. Underwriters, dealers, bankers, brokers and others indicated by Merrill
Lynch, for the account of the respective Managers, International Securities to
be purchased by such Managers, in the manner and at the price contemplated by
Section 1 hereof.
4. Merrill Lynch and MLI shall agree as to the expenses which
will constitute expenses of the underwriting and distribution of the Common
Stock to the U.S. Underwriters and the Managers, which expenses, as well as any
stabilizing profits or losses, shall be allocated among the U.S. Underwriters
and the Managers in the same proportion as the number of U.S. Securities
purchased under the U.S. Purchase Agreement, and the number of International
Securities purchased under the International Purchase Agreement bear to the
aggregate number of shares of Common Stock purchased under the Purchase
Agreements. Except with respect to such common expenses, the Managers will pay
the aggregate expenses incurred in connection with the purchase, carrying or
sale of the International Securities purchased by the Managers from the Company
and the Selling Shareholders and the U.S. Underwriters will pay the aggregate
expenses incurred in connection with the purchase, carrying or sale of the
- 4 -
<PAGE> 5
U.S. Securities purchased by the U.S. Underwriters from the Company and the
Selling Shareholders.
5. The U.S. Representatives and MLI agree that:
a. if the Closing Time is not on the day provided in the
Purchase Agreements, Merrill Lynch and MLI will mutually agree on a postponed
date within the time permitted by the Purchase Agreements and the settlement
dates herein provided shall be adjusted accordingly;
b. changes in the offering price to the public or in the
concession and reallowance to dealers, bankers or brokers will be made only
after consultation, but in accordance with the direction of Merrill Lynch,
during the consultation period specified in the first sentence of Section 1
hereof;
c. Merrill Lynch and MLI will each keep the other fully
informed of the progress of the offering and distribution of the Common Stock;
d. MLI agrees that it will cause the termination of the AAM
at such time as Merrill Lynch shall determine; and
e. advertising with respect to the offering shall be as
mutually agreed upon by Merrill Lynch and MLI.
6. This Agreement may be amended prior to the Closing Time by
mutual written consent.
7. This Agreement may be signed in various counterparts, which
together shall constitute one and the same instrument.
8. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
9. The U.S. Underwriters and MLI hereby (a) submit to the
jurisdiction of any New York State or Federal court sitting in the City of New
York with respect to any actions and proceedings arising out of or relating to
this Agreement, (b) agree that all claims with respect to such actions or
proceedings may be heard and determined in such New York State or Federal court,
(c) waive the defense of an inconvenient forum, (d) consent to the service of
process upon it by mailing or delivering such service to it by registered mail
addressed as specified pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, as the case may be, and (e) agree that a final
judgment in any such action or proceeding shall be
- 5 -
<PAGE> 6
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, this Agreement has been executed as of the
date and year first above written.
Acting on behalf of themselves and the other U.S. Underwriters:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
McDonald & Company Securities, Inc.
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:___________________________________________
Acting on behalf of themselves and the other Managers:
Merrill Lynch International
Morgan Stanley & Co. International Limited
McDonald & Company Securities, Inc.
By: Merrill Lynch International
By:___________________________________________
- 7 -
<PAGE> 1
Exhibit 2.4
EXECUTION COPY
--------------
AGREEMENT AND PLAN OF MERGER
among
CAMELOT MUSIC HOLDINGS, INC.,
SM ACQUISITION, INC.
and
SPEC's MUSIC, INC.
Dated as of June 3, 1998
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I THE MERGER.............................................................................................2
1.1 The Merger...........................................................................................2
1.2 Closing..............................................................................................2
1.3 Effective Time.......................................................................................2
1.4 Effects of the Merger................................................................................2
1.5 Articles of Incorporation; Bylaws....................................................................2
1.6 Directors............................................................................................3
1.7 Officers.............................................................................................3
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS.............................3
2.1 Effect on Capital Stock..............................................................................3
2.2 Stock Option Plans; Other Stock Options..............................................................4
2.3 Exchange of Certificates.............................................................................5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................7
3.1 Organization, Standing and Corporate Power...........................................................7
3.2 Subsidiaries.........................................................................................7
3.3 Capital Structure....................................................................................8
3.4 Authority; Noncontravention; Consents and Approvals..................................................9
3.5 SEC Documents; Undisclosed Liabilities..............................................................10
3.6 Information Supplied................................................................................11
3.7 Absence of Certain Changes or Events................................................................11
3.8 Litigation; Labor Matters; Compliance with Laws.....................................................11
3.9 Employee Matters....................................................................................12
3.10 Taxes...............................................................................................15
3.11 Environmental matters...............................................................................16
3.12 Material Contracts..................................................................................18
3.13 Brokers; Legal Counsel..............................................................................19
3.14 Opinion of Financial Advisor........................................................................20
3.15 Board Recommendation................................................................................20
3.16 Required Company Vote...............................................................................20
3.17 State Takeover Statutes.............................................................................20
3.18 Intellectual Property; Software.....................................................................20
3.19 Related Party Transactions..........................................................................22
3.20 Permits.............................................................................................22
3.21 Insurance Policies..................................................................................23
3.22 Good Title to and Condition of Assets...............................................................23
3.23 Real Estate.........................................................................................24
3.24 Certain Business Practices..........................................................................26
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
3.25 Suppliers and Customers............................................................................26
3.26 Product Warranties.................................................................................26
3.27 Sole Representations...............................................................................26
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGERCO.................................................26
4.1 Organization, Standing and Corporate Power..........................................................26
4.2 Subsidiaries........................................................................................27
4.3 Capital Structure...................................................................................27
4.4 Authority; Noncontravention; Consents and Approvals.................................................27
4.5 Brokers.............................................................................................28
4.6 Financing...........................................................................................28
4.7 Information Supplied................................................................................28
4.8 Absence of Certain Changes or Events................................................................28
4.9 Litigation; Labor Matters; Compliance with Laws.....................................................29
4.10 Sole Representations................................................................................29
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER.............................................29
5.1 Conduct of Business of the Company..................................................................29
5.2 Changes in Employment Arrangements..................................................................31
5.3 Severance...........................................................................................32
5.4 WARN................................................................................................32
ARTICLE VI ADDITIONAL AGREEMENTS................................................................................33
6.1 Preparation of Proxy Statement; Stockholders Meeting................................................33
6.2 Access to Information, Confidentiality..............................................................34
6.3 Reasonable Best Efforts.............................................................................34
6.4 Indemnification.....................................................................................36
6.5 Public Announcements................................................................................37
6.6 No Solicitation.....................................................................................37
6.7 Resignation of Directors............................................................................38
6.8 Employee Benefits...................................................................................39
6.9 Notification of Certain Matters....................................................................39
6.10 State Takeover Laws.................................................................................40
6.11 Physical Inventory..................................................................................40
6.12 Repayment of Indebtedness...........................................................................40
6.13 Severance...........................................................................................40
6.14 Access for Point of Sale Installation...............................................................40
ARTICLE VII CONDITIONS PRECEDENT.................................................................................41
7.1 Conditions to Each Party's Obligation...............................................................41
7.2 Conditions to Obligations of the Buyer and MergerCo.................................................41
7.3 Conditions to Obligation of the Company.............................................................43
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER..................................................................44
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
8.1 Termination.........................................................................................44
8.2 Effect of Termination...............................................................................45
8.3 Amendment...........................................................................................45
8.4 Extension; Waiver...................................................................................45
8.5 Procedure for Termination, Amendment, Extension or Waiver...........................................46
ARTICLE IX GENERAL PROVISIONS....................................................................................46
9.1 Nonsurvival of Representations and Warranties.......................................................46
9.2 Fees and Expenses...................................................................................46
9.3 Notices.............................................................................................47
9.4 Definitions.........................................................................................48
9.5 Interpretation......................................................................................49
9.6 Counterparts........................................................................................50
9.7 Entire Agreement; No Third-Party Beneficiaries......................................................50
9.8 Governing Law.......................................................................................50
9.9 Assignment..........................................................................................50
9.10 Enforcement.........................................................................................50
</TABLE>
<TABLE>
<CAPTION>
TABLE OF DEFINITIONS
DEFINITION PAGE
<S> <C>
affiliate........................................................................................................48
Agreement.........................................................................................................1
Articles of Merger................................................................................................2
Benefit Plans....................................................................................................13
business day.....................................................................................................48
Buyer.............................................................................................................1
Camelot Music.....................................................................................................1
Camelot Southeast.................................................................................................1
Certificates......................................................................................................5
Closing...........................................................................................................2
Closing Date......................................................................................................2
COBRA............................................................................................................15
Code.............................................................................................................13
Common Stock......................................................................................................1
Company...........................................................................................................1
Company Intellectual Property....................................................................................20
Company Legal Counsel............................................................................................20
Company Stockholder Approval......................................................................................1
Consolidated Group...............................................................................................15
Consultant.......................................................................................................35
Consulting Agreement.............................................................................................35
Contracts........................................................................................................18
Costs............................................................................................................36
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
D&O Policy.......................................................................................................36
Diligent Inquiry.................................................................................................17
Disclosure Schedule...............................................................................................7
Dissenting Shares.................................................................................................3
Effective Time....................................................................................................2
Environmental Claim..............................................................................................17
Environmental Laws...............................................................................................18
Environmental Permits............................................................................................18
ERISA............................................................................................................12
ERISA Affiliate..................................................................................................15
Exchange Act.....................................................................................................10
Exchange Agent....................................................................................................5
Exchange Fund.....................................................................................................6
Excluded Shares...................................................................................................3
FBCA..............................................................................................................2
Form 10..........................................................................................................28
GAAP.............................................................................................................10
Governmental Entity...............................................................................................9
Hazardous Materials..............................................................................................18
HSR Act..........................................................................................................10
Indemnified Parties..............................................................................................36
Intellectual Property............................................................................................20
Inventory........................................................................................................23
knowledge........................................................................................................48
Landlord.........................................................................................................35
Lease Amendment..................................................................................................35
Leasehold Premises...............................................................................................24
Leases...........................................................................................................24
Liens.............................................................................................................8
Material.........................................................................................................49
Material Adverse Change..........................................................................................49
Material Adverse Effect..........................................................................................49
Material Contract................................................................................................19
Material Contracts...............................................................................................19
Material Permits.................................................................................................22
Materially.......................................................................................................49
Merger............................................................................................................1
Merger Consideration..............................................................................................3
MergerCo..........................................................................................................1
NASDAQ...........................................................................................................35
Owned Properties.................................................................................................24
Permits..........................................................................................................18
Permitted Changes................................................................................................30
Permitted Encumbrances...........................................................................................25
person...........................................................................................................49
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
Proceeding.......................................................................................................36
Proprietary Information..........................................................................................21
Proxy Statement..................................................................................................10
Recent SEC Documents.............................................................................................10
SEC..............................................................................................................49
SEC Documents....................................................................................................10
SEC Financial Statements.........................................................................................10
Section 6.8 Plans................................................................................................39
Securities Act....................................................................................................9
Selling Supplies.................................................................................................23
Software.........................................................................................................22
Spread............................................................................................................5
Stock Option Plans................................................................................................4
Stock Options.....................................................................................................4
Stockholders Meeting.............................................................................................33
Subsidiaries......................................................................................................7
subsidiary.......................................................................................................49
Surrender Agreement...............................................................................................4
Surviving Corporation.............................................................................................2
Tax Return.......................................................................................................16
Taxes............................................................................................................16
Termination Fee..................................................................................................46
Transaction Proposal.............................................................................................38
Voting Agreement..................................................................................................1
WARN.............................................................................................................32
Written..........................................................................................................16
Year End Balance Sheet...........................................................................................10
</TABLE>
v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as
of this 3rd day of June, 1998 by and among Camelot Music Holdings, Inc., a
Delaware corporation (the "Buyer"), SM Acquisition, Inc., a Florida corporation
and wholly owned indirect subsidiary of the Buyer ("MergerCo"), and Spec's
Music, Inc., a Florida corporation (the "Company").
WHEREAS, MergerCo is a wholly owned direct subsidiary of Camelot
Southeast Region, Inc., a Delaware corporation ("Camelot Southeast"), Camelot
Southeast is a wholly owned direct subsidiary of Camelot Music, Inc., a
Pennsylvania corporation ("Camelot Music"), and Camelot Music is a wholly owned
direct subsidiary of the Buyer;
WHEREAS, the respective Boards of Directors of the Company, the Buyer
and MergerCo have determined that the merger of MergerCo with and into the
Company (the "Merger"), upon the terms and subject to the conditions set forth
in this Agreement, would be advisable and in the best interests of their
respective companies and stockholders, and such Boards of Directors have
approved the Merger, pursuant to which each share of common stock, par value
$.01 per share, of the Company ("Common Stock") issued and outstanding
immediately prior to the Effective Time (as defined in Section 1.3) will be
converted into the right to receive cash, other than (a) shares of Common Stock
owned, directly or indirectly, by the Buyer or any subsidiary (as defined in
Section 9.4) of the Buyer and (b) Dissenting Shares (as defined in Section 2.
l(d));
WHEREAS, the Merger and this Agreement require the affirmative vote of
a majority of the issued and outstanding shares of Common Stock for the approval
thereof (the "Company Stockholder Approval");
WHEREAS, simultaneously with the execution hereof, certain stockholders
of the Company have executed and delivered to the Buyer and MergerCo a Voting
Agreement of even date herewith (the "Voting Agreement") pursuant to which such
stockholders have agreed to vote for the Merger and the adoption of this
Agreement, and which Voting Agreement has been relied upon by the Buyer and
MergerCo in their decision to execute this Agreement; and
WHEREAS, the Buyer, MergerCo and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various terms of and conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
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ARTICLE I
THE MERGER
1.1 THE MERGER.
(a) Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Florida Business Corporation Act (the
"FBCA"), MergerCo shall be merged with and into the Company at the Effective
Time. At the Effective Time, the separate existence of MergerCo shall cease, and
the Company shall thereafter continue as the surviving corporation (the
"Surviving Corporation") and shall be a wholly owned indirect subsidiary of the
Buyer.
(b) At the Effective Time, the corporate existence of the Company,
with all its rights, privileges, powers and franchises, shall continue
unaffected and unimpaired by the Merger.
1.2 CLOSING. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section 8.1 and subject to the satisfaction or waiver of the conditions set
forth in Article VII, the closing of the Merger (the "Closing") shall take place
at 10:00 a.m., local time, on the second business day after satisfaction or
waiver of the conditions set forth in Article VII (the "Closing Date"), at the
offices of Holland & Knight LLP, 701 Brickell Avenue, Miami, Florida 33131,
unless another date, time or place is agreed to in writing by the parties
hereto.
1.3 EFFECTIVE TIME. On the Closing Date, the parties shall cause
articles of merger in substantially the form attached hereto as Exhibit A (the
"Articles of Merger"), executed in accordance with the relevant provisions of
the FBCA, to be delivered to the Department of State of the State of Florida for
filing by the Department as provided in Sections 607.0125 and 607.1105 of the
FBCA. Upon the completion of such filing, or at such other time as may be
specified in such filing, the Merger shall become effective in accordance with
the FBCA. The time and date on which the Merger becomes effective is herein
referred to as the "Effective Time."
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects specified
in the FBCA.
1.5 ARTICLES OF INCORPORATION; BYLAWS.
(a) At the Effective Time and without any further action on the
part of the Company or MergerCo, the Articles of Incorporation of MergerCo, as
in effect immediately prior to the Effective Time, shall be amended to change
the name of the Surviving Corporation to "Spec's Music, Inc.", and, as so
amended, until thereafter further amended as provided therein and under the
FBCA, shall become the Articles of Incorporation of the Surviving Corporation.
(b) At the Effective Time and without any further action on the
part of the Company or MergerCo, the Bylaws of MergerCo, as in effect
immediately prior to the Effective Time, shall become the Bylaws of the
Surviving Corporation until thereafter amended or repealed in
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accordance with their terms and the Articles of Incorporation of the Surviving
Corporation and as provided under the FBCA.
1.6 DIRECTORS. The directors of MergerCo at the Effective Time
shall, from and after the Effective Time, be the directors of the Surviving
Corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
1.7 OFFICERS. The officers of MergerCo at the Effective Time
shall, from and after the Effective Time, be the officers of the Surviving
Corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue
of the Merger and without any action on the part of any holder of shares of
Common Stock or shares of capital stock of MergerCo:
(a) Common Stock of MergerCo. Each share of common stock of
MergerCo issued and outstanding immediately prior to the Effective Time shall be
converted into one share of the common stock, par value $.01 per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Common Stock
that is owned by the Company or by any wholly owned subsidiary of the Company
shall automatically be canceled and retired and shall cease to exist, and no
cash or other consideration shall be delivered or deliverable in exchange
therefor.
(c) Conversion of Common Stock. Except as otherwise provided
herein and subject to Section 2.3, each issued and outstanding share of Common
Stock, other than shares owned by the Buyer, MergerCo or any other direct or
indirect subsidiary of the Buyer (collectively, the "Excluded Shares"), and
other than Dissenting Shares (as defined in Section 2.1(d)) and treasury stock,
shall be converted into the right to receive in cash from the Company following
the Merger an amount equal to $3.30 (the "Merger Consideration"). Contextually,
the term "Merger Consideration" shall mean the per share amount in reference to
the consideration designated on a per share basis, and otherwise shall refer to
the aggregate consideration represented by the per share amount multiplied by
the total number of shares of Common Stock then outstanding, including
Dissenting Shares.
(d) Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Common Stock issued and outstanding immediately prior
to the Effective Time with respect to which the holder has and exercises the
right to dissent from the Merger and demand payment for such shares in
accordance with Section 607.1302 of the FBCA (or any successor provision)
("Dissenting Shares") shall not be converted into the right to receive the
Merger
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Consideration unless such holder fails to perfect or otherwise withdraws,
forfeits or loses such holder's right to such dissent and demand, if any. Such
holder of Dissenting Shares shall have the rights set forth in Sections
607.1301, 607.1302 and 607.1320 of the FBCA, subject to the failure to perfect,
withdrawal, forfeiture or loss of such rights under such sections. If, after the
Effective Time, such holder fails to perfect or withdraws, forfeits or loses any
such right to dissent and demand payment with respect to any such shares of
Common Stock, each such share shall be treated as a share that had been
converted as of the Effective Time into the right to receive the Merger
Consideration in accordance with this Section 2.1. The Company shall give prompt
notice to MergerCo of any notices of election to dissent and demand payment
received by the Company, and MergerCo shall have the right to participate in
and, at MergerCo's reasonable discretion, to direct all communications,
negotiations and proceedings with respect to such demands. At or before the
Effective Time, the Company shall not, except with the prior written consent of
MergerCo, make any payment with respect to, or settle or offer to settle, any
such demands.
(e) Cancellation and Retirement of Excluded Shares. Each Excluded
Share issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder thereof,
cease to be outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(f) Cancellation and Retirement of Common Stock. As of the
Effective Time, all shares of Common Stock (other than shares referred to in
Section 2.1(b)) issued and outstanding immediately prior to the Effective Time,
shall no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist, and each holder of a certificate representing any such
shares of Common Stock shall, to the extent such certificate represents such
shares, cease to have any rights with respect thereto, except the right to
receive the Merger Consideration applicable thereto, upon surrender of such
certificate in accordance with Section 2.3, and subject to Section 2.1(d).
2.2 STOCK OPTION PLANS; OTHER STOCK OPTIONS.
(a) As soon as practicable following the date of this Agreement,
the Board of Directors of the Company (or, if appropriate, any committee
administering the Stock Option Plans (as defined below)) shall adopt such
resolutions or take such other actions as may be required to cause all
outstanding unexpired options to purchase shares of Common Stock ("Stock
Options") that were granted under the Company's 1986 Incentive Stock Plan, as
amended, 1993 Incentive Stock Plan, 1993 Non-Employee Directors Stock Option
Plan and 1996 Non-Employee Directors Stock Option Plan (collectively, the "Stock
Option Plans") to become fully vested and exercisable immediately prior to, but
contingent upon, the Effective Time. Each Stock Option Plan shall be terminated,
cancelled and discontinued effective at the Effective Time.
(b) The Company shall use its best efforts to obtain prior to the
Effective Time from each holder of any unexpired outstanding Stock Option
(whether granted under a Stock Option Plan or otherwise) an agreement, in
substantially the form attached hereto as Exhibit B (a "Surrender Agreement"),
to surrender as of the Effective Time all Stock Options held by such
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holder and outstanding immediately prior to the Effective Time, regardless of
the exercise price thereof, in exchange for payment (subject to any applicable
withholding taxes), with respect to each such Stock Option having an exercise
price less than the per share Merger Consideration, in an amount (the "Spread")
equal to the product of (i) the total number of shares of Common Stock subject
to such Stock Option and (ii) the excess of the per share Merger Consideration
over the exercise price per share of Common Stock subject to such Stock Option.
Subject to the terms of the applicable Surrender Agreement, the Spread shall be
payable in cash at the Effective Time to each Stock Option holder who has
executed a Surrender Agreement covering all such holder's Stock Options and
delivered such Surrender Agreement to MergerCo prior to the Effective Time. The
Spread shall thereafter be payable in cash to any remaining holder of Stock
Options upon execution of a Surrender Agreement and delivery thereof to the
Company, provided, however, that this sentence shall not be deemed a waiver of
any of the conditions to the obligations of the Buyer and MergerCo set forth in
Section 7.2(i) hereof.
(c) Except as otherwise agreed to in writing by the parties, the Stock
Option Plans and any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of the
Company or any of its subsidiaries shall terminate as of the Effective Time, and
the Company shall ensure that following the Effective Time no holder of a Stock
Option nor any participant in any Stock Option Plan nor any holder of any other
interest in respect of the capital stock of the Company or any of its
subsidiaries shall have any right thereunder to acquire equity securities of the
Company or its subsidiaries.
(d) The Company hereby represents and warrants that upon taking of the
actions specified above, immediately following the Effective Time, and after
giving effect to the payments described in this Section 2.2, no holder of a
Stock Option nor any participant in any Stock Option Plan nor the holder of any
warrant or option to purchase Common Stock (including, without limitation, Barry
J. Gibbons and Jeffrey J. Fletcher) shall have the right thereunder to acquire
equity securities of the Company, any subsidiary of the Company or any other
benefit.
2.3 EXCHANGE OF CERTIFICATES.
(a) Exchange Agent. At or before the Effective Time, the Buyer
shall deposit the aggregate Merger Consideration, or cause the aggregate Merger
Consideration to be deposited, with The Bank of New York, which shall act as
exchange agent (the "Exchange Agent") for the benefit of the holders of shares
of Common Stock to be exchanged in accordance with this Article II. Within four
business days after the Effective Time, the Exchange Agent shall mail to each
record holder (other than holders of Excluded Shares), as of the Effective Time,
of an outstanding certificate or certificates that immediately prior to the
Effective Time represented shares of Common Stock (the "Certificates"), a letter
of transmittal and instructions, in substantially the form attached hereto as
Exhibit C, for use in effecting the surrender of the Certificates for payment.
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(b) Exchange Procedures.
(i) After the Effective Time, each holder of an outstanding
Certificate or Certificates shall, upon surrender to the Exchange Agent
of such Certificate or Certificates and acceptance thereof by the
Exchange Agent, be entitled to receive, and the Buyer shall cause the
Exchange Agent to promptly pay, the amount of cash into which such
Certificate or Certificates shall have been converted pursuant to this
Agreement.
(ii) After the Effective Time, there shall be no further
transfer on the records of the Company or its transfer agent of
Certificates, and if Certificates are presented to the Company for
transfer, they shall be canceled against delivery of cash. If cash is
to be remitted to a person in a name other than that in which the
Certificate surrendered for exchange is registered, it shall be a
condition of such exchange that the Certificate so surrendered be
properly endorsed, with signature guaranteed, or otherwise in proper
form for transfer and that the person requesting such exchange pay to
the Company or its transfer agent any transfer or other taxes required
or establish to the reasonable satisfaction of the Company or its
transfer agent that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.3(b), and subject to
Section 2.1(d), each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such
surrender the Merger Consideration applicable thereto as contemplated
by Section 2.1. No interest shall be paid or shall accrue on any cash
payable as Merger Consideration or in lieu of any fractional shares of
Common Stock.
(iii) In the event that any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed
and, if required by the Buyer, the posting by such person of a bond in
such amount as the Buyer may reasonably direct as indemnity against any
claim that may be made against the Buyer, MergerCo or the Company with
respect to such Certificate, or the provision of other reasonable
assurances requested by the Buyer, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificate the Merger
Consideration deliverable in respect thereof pursuant to this
Agreement.
(c) No Further Ownership Rights in Common Stock Exchanged for Cash.
All cash paid upon the surrender for exchange of Certificates in accordance
with the terms of this Article II shall be deemed to have been issued and paid
in full satisfaction of all rights pertaining to the shares of Common Stock
represented by such Certificates.
(d) Termination of Exchange Fund. Any portion of the Merger
Consideration deposited with the Exchange Agent pursuant to this Section 2.3
(the "Exchange Fund") that remains undistributed to the holders of the
Certificates six months after the Effective Time shall be delivered to the
Company, upon demand, and any holders of shares of Common Stock prior to the
Effective Time who have not theretofore complied with this Article II shall
thereafter look only to the Company and only as general creditors thereof for
payment of their claim for cash, if any, to which such holders may be entitled.
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(e) Merger Consideration for Dissenting Shares. Any portion of the
aggregate Merger Consideration deposited with the Exchange Agent to pay for
Dissenting Shares for which the right to dissent and demand payment pursuant to
Sections 607.1302 and 607.1320 of the FBCA shall have been perfected shall be
returned to the Surviving Corporation, upon demand.
(f) No Liability. None of the Buyer, MergerCo, the Company or the
Exchange Agent shall be liable to any person in respect of any cash from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates have not been
surrendered prior to the earlier of (i) three years after the Effective Time and
(ii) immediately prior to such date on which any cash, if any, in respect of
such Certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.4), any such cash, dividends or
distributions in respect of such Certificate shall, to the extent permitted by
applicable law, become the property of the Company, free and clear of all claims
or interest of any person previously entitled thereto.
(g) Investment of Exchange Fund. The Exchange Agent shall invest
any cash included in the Exchange Fund as directed by the Company on a daily
basis. Any interest and other income resulting from such investments shall be
paid to the Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Buyer and MergerCo
that:
3.1 Organization, Standing and Corporate Power. Each of the
Company and each of its Subsidiaries (as defined in Section 3.2) is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the requisite corporate power
and authority to carry on its business as now being conducted. Each of the
Company and each of its Subsidiaries is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed (individually or in the aggregate) would not have a
Material Adverse Effect (as defined in Section 9.4) with respect to the Company.
Attached as Section 3.1 of the disclosure schedule (the "Disclosure Schedule")
delivered to MergerCo by the Company at the time of execution of this Agreement
are complete and correct copies of the Articles of Incorporation and By-Laws of
the Company, as in effect on the date of this Agreement. The Company has
delivered to MergerCo complete and correct copies of the articles of
incorporation and bylaws (or other comparable organizational documents) of each
of its Subsidiaries, in each case as amended to the date of this Agreement.
3.2 Subsidiaries. The only direct or indirect subsidiaries of the
Company are those listed in Section 3.2 of the Disclosure Schedule (the
"Subsidiaries"). All the outstanding shares of capital stock of each such
Subsidiary have been validly issued and are fully paid and nonassessable and are
owned (of record and beneficially) by the Company, by another wholly
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owned Subsidiary of the Company or by the Company and another such wholly owned
Subsidiary, free and clear of all pledges, claims, liens, charges, encumbrances,
mortgages, adverse claims, restrictions and security interests of any kind or
nature whatsoever (collectively, "Liens"), except as set forth in Section 3.2 of
the Disclosure Schedule. Except for the ownership interests set forth in Section
3.2 of the Disclosure Schedule, the Company does not own, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, business association, joint venture or other entity.
3.3 Capital Structure. The authorized capital stock of the Company
consists of (i) 10,000,000 shares of Common Stock, par value $.01 per share, and
(ii) 5,635 shares of preferred stock, par value $1.00 per share. Subject to any
Permitted Changes (as defined in Section 5.1(d)) there are, as of the close of
business on May 29, 1998: (i) 5,300,469 shares of Common Stock issued and
outstanding; (ii) 8,239 shares of Common Stock held in the treasury of the
Company; and (iii) 824,266 shares of Common Stock issuable upon exercise of
outstanding Stock Options. Section 3.3 of the Disclosure Schedule sets forth the
following information with respect to each unexpired outstanding Stock Option:
(1) the number of shares of Common Stock for which such Stock Option is
exercisable; (2) the holder of such Stock Option; (3) the exercise price; (4)
the grant date; and (5) the expiration date. Except as set forth above or in
Section 3.3 of the Disclosure Schedule, no shares of capital stock or other
equity securities of the Company are issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are, and all
shares that may be issued pursuant to the Stock Option Plans, including any
increases pursuant to existing contractual obligations, and the other Stock
Options will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. Except as set forth on
Section 3.3 of the Disclosure Schedule, there are no outstanding bonds,
debentures, notes or other indebtedness or other securities of the Company
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which stockholders of the Company
may vote. Except as set forth above or in Section 3.3 of the Disclosure
Schedule, there are no outstanding securities, options, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which the
Company or any of its Subsidiaries is a party or by which any of them is bound
obligating the Company or any of its Subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock or
other equity or voting securities of the Company or of any of its Subsidiaries
or obligating the Company or any of its Subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. Except as disclosed in Section 3.3 of the
Disclosure Schedule, (i) there are no outstanding contractual obligations,
commitments, understandings or arrangements of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire or make any payment in
respect of any shares of capital stock of the Company or any of its Subsidiaries
and (ii) to the knowledge of the Company, there are no irrevocable proxies with
respect to shares of capital stock of the Company or any subsidiary of the
Company. Section 3.3 of the Disclosure Schedule sets forth the record and, to
the knowledge of the Company, beneficial ownership of, and voting power in
respect of, the capital stock of the Company held by the Company's directors,
officers and stockholders owning 5% or more of the outstanding Common Stock.
Except as set forth on Section 3.3 of the Disclosure Schedule, there are no
agreements or arrangements pursuant to which the Company is or could be required
to register
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shares of Common Stock or other securities under the Securities Act of 1933, as
amended (the "Securities Act") or other agreements or arrangements with, between
or among any security holders of the Company with respect to securities of the
Company.
3.4 Authority; Noncontravention; Consents and Approvals. The
Company has the requisite corporate and other power and authority to enter into
this Agreement and, subject to the Company Stockholder Approval with respect to
the consummation of the Merger, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have been
duly authorized by the Company's Board of Directors, which constitutes all
necessary corporate action on the part of the Company, subject, in the case of
the Merger, to the Company Stockholder Approval. This Agreement has been duly
executed and delivered by the Company and, subject to the Company Stockholder
Approval in the case of the Merger, constitutes a valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms
subject, as to enforceability, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors' rights
and to general principles of equity. Except as disclosed in Section 3.4 of the
Disclosure Schedule, the execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated by this Agreement and
compliance with the provisions hereof will not, conflict with, or result in (a)
any breach or violation of, or default (with or without notice or lapse of time,
or both) under, or right of termination, cancellation, acceleration or "put",
with respect to any obligation or (b) the loss of a benefit or other right or
(c) the creation of any Lien upon any of the properties or assets of the Company
or any of its Subsidiaries, under (i) the Articles of Incorporation or Bylaws of
the Company or the comparable organizational documents of any of its
Subsidiaries, (ii) any loan or credit agreement, note, note purchase agreement,
bond, mortgage, indenture, Lease (as defined in Section 3.23) or other
agreement, instrument, permit, concession, franchise or license applicable to
the Company or any of its Subsidiaries or their respective properties or assets
or (iii) subject to the governmental filings and other matters referred to in
the following sentence, any judgment, order, decree, statute, law, ordinance,
rule, regulation or arbitration award applicable to the Company or any of its
Subsidiaries or their respective properties or assets, other than, in the case
of clauses (i), (ii) and (iii), any such conflicts, breaches, violations,
defaults, rights, losses or Liens that individually or in the aggregate would
not have a Material Adverse Effect with respect to the Company or would not
prevent, hinder or materially delay the ability of the Company and/or MergerCo
to consummate the transactions contemplated by this Agreement if not cured or
waived by the Closing Date. No consent, approval, order or authorization of, or
registration, declaration or filing with, or notice to, any federal, state,
territorial, commonwealth or local government or governmental authority or
agency or any court, administrative agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity"), or any other
person under any Lease, Contract (as defined in Section 3.12) or other
instrument to which the Company or any Subsidiary is a party or to which any of
its properties is subject, is required by or with respect to the Company or any
of its Subsidiaries in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the transactions
contemplated hereby, except for (i) the filing of a pre-merger notification and
report form by the Company under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the
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"HSR Act"), (ii) the filing with the SEC of (x) a proxy statement relating to
the Company Stockholder Approval (such proxy statement as amended or
supplemented from time to time, the "Proxy Statement"), and (y) such reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as
may be required in connection with this Agreement and the transactions
contemplated by this Agreement, (iii) the filing of the Articles of Merger by
the Department of State of the State of Florida and appropriate documents with
the relevant authorities of other states in which the Company is qualified to do
business, and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations, filings or notices as are set forth in Section 3.4
of the Disclosure Schedule.
3.5 SEC Documents; Undisclosed Liabilities. The Company has timely
filed all required reports, schedules, forms, statements and other documents
with the SEC since August 1, 1992 (collectively, and in each case including all
exhibits and schedules thereto and documents incorporated by reference therein,
as amended, the "SEC Documents"). As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act, or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC Documents,
and none of the SEC Documents (including any and all financial statements
included therein) as of such dates contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Except to the extent
revised or superseded by a subsequent filing with the SEC (a copy of which has
been provided to MergerCo prior to the date of this Agreement), none of the SEC
Documents filed by the Company since August 1, 1997 and prior to the date of
this Agreement (the "Recent SEC Documents"), as of their respective dates,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The consolidated financial statements of the Company
included in the SEC Documents (the "SEC Financial Statements"), as of their
respective dates, complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, were prepared in accordance with generally accepted accounting
principles ("GAAP") (except, in the case of unaudited consolidated quarterly
statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto)
and fairly presented the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited quarterly statements, to normal year-end audit adjustments,
none of which, individually or in the aggregate is material). Except as provided
for in the balance sheet contained in the most recent audited financial
statements of the Company included in the Recent SEC Documents (the "Year End
Balance Sheet") or except as disclosed in Section 3.5 of the Disclosure
Schedule, neither the Company nor any Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
except (x) liabilities incurred in the ordinary and usual course of business and
consistent with past practice, (y) liabilities specifically incurred in
connection with the transactions contemplated by this Agreement (including,
without limitation, liabilities to
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the holders of Dissenting Shares), and (z) other liabilities which do not exceed
$250,000 in the aggregate, exclusive of obligations under Section 9.2 hereof.
3.6 Information Supplied. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement will, at the date it is first mailed to the Company's
stockholders or at the time of the Stockholders Meeting (as defined in Section
6.1), contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading, except that no representation or warranty is made by the Company
with respect to the information supplied by MergerCo or any affiliate of
MergerCo specifically for inclusion in the Proxy Statement. The Proxy Statement
will comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder.
3.7 Absence of Certain Changes or Events. Except as disclosed in
the Recent SEC Documents or on Section 3.7 of the Disclosure Schedule, since the
date of the Year End Balance Sheet, the Company has conducted its business only
in the ordinary course consistent with past practice and there is not and has
not been: (a) any Material Adverse Change with respect to the Company; (b) any
condition, event or occurrence which, either individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect or give rise to a
Material Adverse Change with respect to the Company; (c) any event that, if it
had taken place following the execution of this Agreement, would not have been
permitted by Section 5.1 without the prior consent of MergerCo; (d) to the
Company's knowledge, any theft with respect to the Company or its Subsidiaries,
other than shrinkage of Inventory (as defined in Section 3.22) occurring in the
ordinary course of business at a rate consistent with the Company's experience
in the previous 24 months; or (e) any condition, event or occurrence that would
reasonably be expected to prevent, hinder or delay the ability of the Company to
consummate the transactions contemplated by this Agreement.
3.8 Litigation; Labor Matters; Compliance with Laws.
(a) Except as set forth in Section 3.8 of the Disclosure Schedule
or as disclosed in the Recent SEC Documents, there is (i) no suit, action or
proceeding or investigation pending of which the Company has notice or knowledge
and, (ii) to the knowledge of the Company, no suit, action or proceeding or
investigation threatened against the Company, any of its Subsidiaries, their
business or properties that, either individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect with respect to the
Company or prevent, hinder or delay the ability of the Company to consummate the
transactions contemplated by this Agreement nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against the Company, any of its Subsidiaries, their business or properties
having, or which in the future could have, any such effect.
(b) Except as disclosed in Section 3.8 of the Disclosure Schedule,
(i) neither the Company nor any of its Subsidiaries is a party to, or bound by,
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor
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organization; (ii) neither the Company nor any of its Subsidiaries is the
subject of any proceeding, of which the Company has notice or knowledge,
asserting that it or any Subsidiary has committed an unfair labor practice or
seeking to compel it to bargain with any labor organization as to wages or
conditions of employment; (iii) there is no strike, work stoppage or other labor
dispute involving the Company or any of its Subsidiaries pending or, to its
knowledge, threatened; (iv) each of the Company and its Subsidiaries is in
compliance with all federal, state or other applicable laws, domestic or
foreign, including the laws of Puerto Rico, respecting employment and employment
practices, terms and conditions of employment and wages and hours, except for
violations or failures so to comply, if any, that, either individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
with respect to the Company; and (v) except with respect to liabilities incurred
at the written request of the Buyer, neither the Company nor any of its
Subsidiaries is liable for any severance pay, change-of-control payments, or
other payments to any employee or former employee, or any other person, arising
from the termination of employment, or as a result of or in connection with the
transactions contemplated hereunder, or other change in the legal relationship
with such person, or otherwise arising, under any benefit or severance policy,
practice, agreement, plan, or program of the Company or any Subsidiary, nor will
the Company or any Subsidiary have any such liability that exists or arises, or
may be deemed to exist or arise, under any applicable law or otherwise, as a
result of or in connection with the transactions contemplated hereunder or as a
result of the termination by the Company or any Subsidiary of any persons
employed by the Company or any of its Subsidiaries at or prior to the Effective
Time.
(c) The ownership and leasing of the assets of and the conduct of
the business of the Company and each of its Subsidiaries have not been in
violation of and comply with all statutes, laws, regulations, ordinances, rules,
judgments, orders, decrees or arbitration awards applicable thereto (including,
without limitation, statutes, laws, regulations and rules relating to
immigration, employment, labor relations and export controls), except for
violations or failures so to comply, if any, that, either individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
with respect to the Company.
3.9 Employee Matters.
(a) Set forth in Section 3.9 of the Disclosure Schedule is an
accurate and complete list showing the names of all persons employed by the
Company or any Subsidiary who received more than $50,000 in cash compensation in
1997 or who are expected to receive more than $50,000 in cash compensation in
1998 (including, without limitation, salary, commission and bonus). Such list
sets forth the present salary or hourly wage, 1997 cash compensation (including,
without limitation, salary, commission and bonus) and fringe benefits, of each
such person.
(b) Section 3.9 of the Disclosure Schedule contains a true and
complete list of each "employee benefit plan" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all
other employee benefit plans, contracts, agreements, practices, policies or
arrangements, written or, to the Company's knowledge, oral and whether or not
subject to ERISA, which the Company, or any ERISA Affiliate (as defined
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below) sponsors, maintains, contributes to, is a party to or otherwise has or
could have any obligation under, with respect to any current or former officer,
director, employee, leased employee or independent contractor of the Company or
its ERISA Affiliates, as of the Closing Date. Employee benefit plans and all
other employee benefit plans, contracts, agreements, practices, policies or
arrangements, written or oral, are collectively referenced by the term "Benefit
Plans." Without limiting the generality of the foregoing, the term Benefit Plans
includes all employment, noncompetition, management, agency, severance,
incentive, bonus, retention bonus, change-in-control, fringe benefit plans or
consulting arrangements and other similar plans; all stock option, stock
ownership, stock bonus, incentive stock option, stock purchase plans and other
similar plans, policies, or arrangements; all deferred compensation, profit
sharing, gain sharing, retirement, pension and other similar plans; medical
plans, retiree medical plans, cafeteria plans, disability insurance plans, life
insurance plans, dependent care assistance plans, educational assistance plans,
group legal services plans and other similar plans.
With respect to the Benefit Plans, except as requested in writing by an
officer of the Buyer after the date of this Agreement or as set forth in Section
3.9 of the Disclosure Schedule:
(i) none of the Benefit Plans is a "multiemployer plan" within
the meaning of ERISA nor has the Company ever maintained, contributed
to, or been obligated to contribute to such a Plan;
(ii) none of the Benefit Plans promises or provides retiree
medical or life insurance benefits to any person;
(iii) none of the Benefit Plans or any other agreement with
any employee of the Company or its Subsidiaries provides for payment of
a benefit, the increase of a benefit amount, the payment of a
contingent benefit, or the acceleration of the payment or vesting of a
benefit by reason of the execution of this Agreement or the
consummation of the transactions contemplated by this Agreement;
(iv) each Benefit Plan that is an "employee pension benefit
plan" (within the meaning of Section 3(2) of ERISA), except for plans
relating to deferred compensation which are exempt under sections 201,
301 and 401 of ERISA, has received a favorable determination letter
from the Internal Revenue Service that it is so qualified under section
401(a) of the Internal Revenue Code of 1986, as amended ("Code"), each
Benefit Plan subject to Section 1065 of the Puerto Rican Tax Act is
qualified under such section, and no event has occurred that will or
could give rise to disqualification or loss of tax exempt status of any
such Benefit Plan or trust;
(v) each Benefit Plan has been operated in all respects in
accordance with its terms and the requirements of all applicable laws
and regulations except where the failure to do so would not have a
Material Adverse Effect with respect to the Company, the Company and
each ERISA Affiliate have performed all of their material obligations
that have become due under all Benefit Plans including the reporting
and disclosure requirements of ERISA, and all premiums due and payable
to the Pension Benefit Guaranty Corporation have been paid in full;
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(vi) neither the Company nor any ERISA Affiliate has liability
under Title IV of ERISA in connection with the termination of, or
withdrawal from, any Benefit Plan;
(vii) the Company has provided to the Buyer or MergerCo (x)
true and complete copies of all Benefit Plans, (y) the most recent
annual actuarial valuation, if any, prepared for each Benefit Plan, and
(z) the most recent annual report (Form 5500), if any, required under
ERISA with respect to each Benefit Plan;
(viii) no payment that is owed or may become due to any
director, officer, employee, or agent of the Company will be
non-deductible to the Company or subject to tax under Section 280G or
Section 4999 of the Code, respectively, nor will the Company be
required to "gross up" or otherwise compensate any such person because
of the imposition of any excise tax on a payment to such person;
(ix) as of the date hereof, subject to the requirements of
Section 412 of the Code or Section 302 of ERISA, no Pension Plan has
incurred an accumulated funding deficiency nor has any sponsor of such
a Pension Plan obtained a funding waiver (as such terms are defined in
such applicable sections and any regulations thereunder) with respect
thereto;
(x) neither the Company nor any ERISA Affiliate has engaged
in, and neither the Company nor any Affiliate knows of any other person
who or which has engaged in, any "prohibited transaction" (within the
meaning of Section 406 of ERISA or Section 4975 of the Code, excluding
any transactions which are exempt under Section 408 of ERISA or Section
4975 of the Code) with respect to any Benefit Plan, which could
reasonably be expected to have a Material Adverse Effect with respect
to the Company or to subject the Buyer or MergerCo to any material
liability, and no event has occurred that will or could subject any
Benefit Plan to tax under Section 511 of the Code;
(xi) no reportable event (as defined in ERISA and the
regulations thereunder, but excluding any such event for which the 30
day notice requirement has been waived) has occurred or is continuing
with respect to any Benefit Plan;
(xii) there are no actions, suits or claims pending (other
than routine claims for benefits) of which the Company has notice or
knowledge, or, to the knowledge of the Company, any actions, suits or
claims (other than routine claims for benefits) which can reasonably be
expected to be asserted, against the Company with respect to any
Benefit Plan or other plan or arrangement, or against any such Benefit
Plan or other plan or the assets thereof;
(xiii) the Company and each ERISA Affiliate is, and at all
relevant times has been, in compliance with the provisions of COBRA (as
defined below);
(xiv) except as contemplated in Sections 6.8 and 6.13 of this
Agreement, the Company has not taken any action or made any statement,
promise or representation to, or agreement with, any of its employees,
officers or directors that after the Closing the Buyer
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will continue or establish any Benefit Plan or other plan or
arrangement or provide any particular benefits or compensation to
employees;
(xv) all insurance premiums relating to any Benefit Plan that
are due and payable as of the date of this Agreement have been paid, no
insurance policy or other insured funding medium through which benefits
are provided under any Benefit Plan is subject to any retroactive rate
adjustment, loss sharing arrangement, the payment of additional
premiums, or other actual or contingent liability with respect to any
periods prior to the date of this Agreement, and, to the knowledge of
the Company, no insurance company that provides an insurance or annuity
policy or other insured funding medium is insolvent or has been taken
over by any governmental agency that regulates insurance companies;
(xvi) the Company has the right to amend or terminate, without
the consent of any other person, any Benefit Plan which it maintains
and each Benefit Plan can be amended or terminated after the Closing
without any additional contribution to the Benefit Plan or the payment
of any additional compensation or amount, additional vesting, or the
acceleration of any benefits, except as proscribed by applicable laws
or regulations;
(xvii) the Company has never maintained nor ever contributed
to a "defined benefit pension plan" as defined in Section 3(35) of
ERISA; and
(xviii) each "welfare benefit plan" (as defined in Section
3(1) of ERISA) intended to meet the requirements for tax favored
treatment under Subchapter B of Chapter 1 of the Code meets such
requirements and no welfare benefit plan provides or has provided a
"disqualified benefit" (as such term is defined in Section 4976(b) of
the Code).
For purposes of this Agreement, "ERISA Affiliate" shall mean any corporation,
trade or business which controls, is controlled by, or is under common control
with, the Company within the meaning of Sections 414(b), 414(c), 414(m) or
414(o) of the Code or Section 4001(a)(14) of ERISA and "COBRA" shall mean Part 6
of Subtitle B of Title I of ERISA and Section 4980B(f) of the Code.
3.10 Taxes. Except as disclosed in Section 3.10 of the Disclosure
Schedule, the Company and each of its Subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which the Company or
any of its Subsidiaries is or has been a member (a "Consolidated Group") has
timely filed (within permitted extension periods, if applicable) all Tax Returns
required to be filed by it, has paid all Taxes shown thereon to be due and has
provided adequate reserves in its financial statements for any Taxes that have
not been paid, whether or not shown as being due on any Tax Returns. Except as
disclosed in Section 3.10 of the Disclosure Schedule, (i) no claim for Taxes
that are due and payable has become a Lien against the property of the Company
or any of its Subsidiaries or is being asserted against the Company or any of
its Subsidiaries; (ii) no audit of any Tax Return of the Company or any of its
Subsidiaries is being conducted by a Tax authority; (iii) no extension of the
statute of limitations on the assessment of any Taxes has been granted by the
Company or any of its Subsidiaries and is currently in effect and there are no
agreements for the extension or waiver of the time for assessment of any
non-income Taxes relating to the Company or its Subsidiaries and neither the
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Company nor any Subsidiary has been requested to enter into any such agreement
or waiver; (iv) all Taxes that the Company or any Subsidiary is (or was)
required by law to withhold or collect have been duly withheld or collected, and
have been timely paid over to the proper authorities to the extent due and
payable; (v) there is no tax sharing arrangement that will require any payment
by the Company or any of its Subsidiaries after the date of this Agreement; and
(vi) neither the Company nor any member of the Consolidated Group (1) has filed
a consent pursuant to Section 341(f) of the Code or agreed to have Section
341(f)(2) apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f) of the Code) owned by a member of the Consolidated
Group, (2) has agreed, or is required, to make any adjustment under Section
481(a) of the Code by reason of a change in accounting method or otherwise that
will affect the liability of the Consolidated Group for Taxes, (3) has made an
election, or is required, to treat any asset of the Consolidated Group as owned
by another person pursuant to the provisions of former Section 168(f)(8) of the
Code, (4) has participated in an international boycott as defined in Section 999
of the Code, (5) is now or has ever been a "foreign person" within the meaning
of Section 1445(b)(2) of the Code, (6) is now or ever been a United States real
property holding corporation within the meaning of Section 897(c)(1)(A)(ii) of
the Code, or (7) has made any of the foregoing elections or is required to apply
any of the foregoing rules under any comparable state or local tax provision.
The Company has delivered or otherwise made available to MergerCo true and
complete copies of all Tax Returns filed by the Company or any Subsidiary in the
past three years. As used herein, "Taxes" shall mean all taxes of any kind,
including, without limitation, those on or measured by or referred to as income,
gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, back-up withholding, payroll, employment, excise, severance, stamp,
occupation, premium, value added, property or windfall profits taxes, customs,
duties or similar fees, assessments or charges of any kind whatsoever, together
with any interest and any penalties, additions to tax or additional amounts
imposed by any Governmental Entity. As used herein, "Tax Return" shall mean any
return, report or statement required to be filed with any Governmental Entity
with respect to Taxes. Except as set forth on Schedule 3.10, there are no
written or, to its knowledge, oral proposed assessments of Taxes against the
Company or any of its Subsidiaries or written or, to its knowledge, oral
proposed adjustments to any Tax Return filed, pending against the Company or any
of its Subsidiaries, or written or, to its knowledge, oral proposed adjustments
to the manner in which any Tax of the Company or any of its Subsidiaries is
determined. For purposes of this Section 3.10, "written" means the Company or
any Subsidiary has received notice in writing of such assessment or adjustments
or has knowledge of such notice.
3.11 Environmental Matters. Except as disclosed in Section 3.11 of
the Disclosure Schedule, which discloses items of non-compliance that could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect with respect to the Company:
(a) The Company and its Subsidiaries hold and formerly held, and
are, and have been, in material compliance with, all Environmental Permits, and
the Company and its Subsidiaries are, and have been, otherwise in material
compliance with all applicable Environmental Laws;
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(b) None of the Company or its Subsidiaries has received any
Environmental Claim, and none of the Company or its Subsidiaries has knowledge,
after Diligent Inquiry, of any threatened Environmental Claim or of any
circumstances, conditions or events that could reasonably be expected to give
rise to an Environmental Claim, against the Company or any of its Subsidiaries;
(c) To the knowledge of the Company, after Diligent Inquiry, there
are no (i) underground storage tanks, (ii) polychlorinated biphenyls, (iii)
asbestos or asbestos-containing materials, (iv) urea-formaldehyde insulation,
(v) sumps, (vi) surface impoundments, (vii) landfills, (viii) sewers or septic
systems or (ix) Hazardous Materials present at any facility currently owned,
leased, operated or otherwise used or, to the knowledge of the Company, formerly
owned, leased, operated or otherwise used, by the Company or any of its
Subsidiaries that could reasonably be expected to give rise to liability of the
Company or any of its Subsidiaries under any Environmental Laws;
(d) No modification, revocation, reissuance, alteration, transfer,
or amendment of the Environmental Permits, or any review by, or approval of, any
third party of the Environmental Permits is required in connection with the
execution or delivery of this Agreement or the consummation of the transactions
contemplated hereby or the continuation of the business of the Company or its
Subsidiaries following such consummation;
(e) To the knowledge of the Company, after Diligent Inquiry,
Hazardous Materials have not been generated, transported, treated, stored,
disposed of, released or threatened to be released at, on, from or under any of
the properties or facilities currently owned, leased or otherwise used or, to
the knowledge of the Company, formerly owned, leased, operated or otherwise
used, including without limitation for receipt of the Company's wastes, by the
Company or any of its Subsidiaries, in violation of or in a manner or to a
location that could give rise to liability under any Environmental Laws;
(f) The Company and its Subsidiaries have not assumed, contractually
or by operation of law, any liabilities or obligations under any Environmental
Laws that, based on facts and circumstances of which the Company has knowledge,
might reasonably be expected to have a Material Adverse Effect with respect to
the Company.
(g) For purposes of this Agreement, the following terms shall have
the following meanings:
"Diligent Inquiry" means inquiry of (i) the employees of the Company
and each Subsidiary in charge of environmental matters and (ii) such other
individuals or entities whom the officers of the Company reasonably expect, upon
exercise of the degree of diligence that would have been exercised by a
reasonable person in such position, to have knowledge of material environmental
matters affecting the Company or any Subsidiary.
"Environmental Claim" means any written or oral notice, claim, demand,
action, complaint, proceeding, request for information or other communication by
any person alleging liability or potential liability (including without
limitation liability or potential liability
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for investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damage, personal injury, fines or penalties) arising
out of, relating to, based on or resulting from (i) the presence, discharge,
emission, release or threatened release of any Hazardous Materials at any
location, currently owned, leased, operated or otherwise used, or, to the
knowledge of the Company, formerly owned, leased, operated or otherwise used, by
the Company or any of its Subsidiaries or (ii) circumstances forming the basis
of any violation or alleged violation of any Environmental Law or Environmental
Permit or (iii) otherwise relating to obligations or liabilities under any
Environmental Laws.
"Environmental Permits" means all Permits required under Environmental
Laws.
"Environmental Laws" means all applicable domestic and foreign federal,
state and local statutes, rules, regulations, ordinances, orders, decrees and
common law relating in any manner to contamination, pollution or protection of
human health or the environment, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, the Solid Waste Disposal
Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act,
the Occupational Safety and Health Act, the Emergency Planning and
Community-Right-to-Know Act, and the Safe Drinking Water Act, all as amended,
and similar state and local laws.
"Hazardous Materials" means all hazardous or toxic substances, wastes,
materials or chemicals, petroleum (including crude oil or any fraction thereof)
and petroleum products, asbestos and asbestos-containing materials, pollutants,
contaminants and all other materials, substances and forces, including but not
limited to electromagnetic fields, regulated pursuant to, or that could form the
basis of liability under, any Environmental Law.
"Permits" means all permits, licenses, registrations, permissions,
certificates and other authorizations, approvals and consents issued or granted
by any Governmental Entity and obtained by the Company or any of its
Subsidiaries or otherwise required in connection with the conduct or operation
of the Company's or any Subsidiary's business or facilities or the ownership,
lease or possession by the Company or any Subsidiary of any real, personal or
intangible property.
3.12 Material Contracts. Except as set forth in Section 3.12 of the
Disclosure Schedule or in another Section of the Disclosure Schedule and other
than employee compensation (except for written employment agreements) in the
ordinary course of business consistent with past practice, neither the Company
nor any Subsidiary is a party to or bound by (a) any agreement (including, but
not limited to, employment, advertising, distribution and licensing agreements),
contract, commitment, arrangement, lease (including with respect to real and
personal property), policy, indenture, mortgage, or other instrument
(collectively, "Contracts") that involves the performance of services or the
delivery of goods and/or materials by or to it in an amount or value in excess
of $50,000, (b) any Contract not in the ordinary course of business relating to
expenditures or liabilities in excess of $25,000, (c) any Contract relating to
capital expenditures in excess of $25,000 in the aggregate, (d) any Contract
relating to indebtedness, liability for borrowed money or the deferred purchase
price of property (excluding trade payables in the ordinary course of business),
(e) any loan or advance to (other than
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advances to employees in the ordinary course of business in amounts of $1,000 or
less to any individual and $10,000 or less in the aggregate), or investment in,
any person, any Contract relating to the making of any such loan, advance or
investment or any Contract involving a sharing of profits, (f) any guarantee or
other contingent liability in respect of any indebtedness or obligation of any
person, (g) any management service, consulting or any other similar type of
Contract, (h) any Contract limiting the ability of the Company or any Subsidiary
to engage in any line of business or to compete with any person, (i) any
warranty, guaranty or other similar undertaking with respect to a contractual
performance extended by the Company or any Subsidiary, (j) any Contract whereby
the Company or any Subsidiary shares services with any third party, (k) any
capital lease or lease of personal property, (l) any Contract that is or was
required to be filed as an exhibit to the SEC Documents or (m) any amendment,
modification or supplement in respect of any of the foregoing ((a)-(m),
collectively, the "Material Contracts," provided that the term "Material
Contract" shall not be deemed to include any Contract under which the Company
and each Subsidiary have both no obligation to perform in the future and no
right to the benefits of the future performance of any other person). Except as
otherwise set forth in Section 3.12 of the Disclosure Schedule, each Material
Contract is valid and binding and in full force and effect in accordance with
its terms and there exists no default, breach or event of default thereunder or
event, occurrence, condition or act (including the consummation of the
transactions contemplated hereby) on the part of the Company, any Subsidiary or,
to the knowledge of the Company, any other person that, with the giving of
notice, the lapse of time or the happening of any other event or condition,
would become a default, breach or event of default thereunder. The Company or
its Subsidiaries have duly performed their respective obligations under each
Material Contract in all material respects to the extent such obligations have
occurred. The Company has provided or made available to MergerCo true and
complete copies of each Material Contract. Except as set forth in Section 3.12
of the Disclosure Schedule, no Material Contract relating to borrowed money
indebtedness imposes on the Company or any Subsidiary any penalty, fee or
service charge in connection with the prepayment, repayment or early payment of
any indebtedness thereunder. Other than as disclosed in the most recent balance
sheet of the Company included in the SEC Documents or as set forth in Section
3.12 of the Disclosure Schedule, no indebtedness for borrowed money of the
Company or its Subsidiaries contains any restriction upon the incurrence of
indebtedness for borrowed money by the Company or any of its Subsidiaries or
restricts the ability of the Company or any of its Subsidiaries to grant any
Liens on its properties or assets.
3.13 Brokers; Legal Counsel.
(a) No broker, investment banker, financial advisor or other
person, other than PaineWebber Incorporated, the fees and expenses of which will
be paid by the Company (pursuant to a fee agreement, a copy of which has been
provided to MergerCo), is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The aggregate fees payable to PaineWebber Incorporated pursuant to
such arrangement shall not exceed $250,000 (plus reasonable expenses).
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(b) No legal counsel, other than Holland & Knight LLP, Broad and
Cassel and such other legal counsel as the Company may engage from time to time
in good faith ("Company Legal Counsel"), the fees and expenses of which will be
paid by the Company (pursuant to one or more fee agreements, copies of which
have been provided to MergerCo), is entitled to any legal fees and expenses,
whether contingent or otherwise, in connection with the transaction contemplated
by this Agreement based upon arrangements made by or on behalf of the Company.
3.14 Opinion of Financial Advisor. The Board of Directors of the
Company has received the opinion of PaineWebber Incorporated dated the date
hereof, that as of such date "the Merger Consideration to be received in the
Merger is fair from a financial point of view, to the holders of Common Stock,"
a signed copy of which opinion has been delivered to the Company. The opinion of
the PaineWebber Incorporated is subject to various conditions and assumptions
contained therein.
3.15 Board Recommendation. The Board of Directors of the Company,
at a meeting duly called and held, has unanimously (a) determined that the
Merger and the other transactions contemplated by this Agreement, taken
together, are fair to, and in the best interests of, the Company and the holders
of the Common Stock, (b) authorized and approved this Agreement, the Merger and
the other transactions contemplated hereby, and (c) resolved to recommend that
the holders of shares of Common Stock approve this Agreement, the Merger and the
other transactions contemplated hereby.
3.16 Required Company Vote. The Company Stockholder Approval, being
the affirmative vote of a majority of the issued and outstanding shares of the
Common Stock, is the only vote of the holders of any class or series of the
Company's securities necessary to approve this Agreement, the Merger and the
other transactions contemplated hereby.
3.17 State Takeover Statutes. No state "fair price," "moratorium,"
"control share acquisition" or other similar takeover statute or regulation of
Florida (and, to the knowledge of the Company after due inquiry, of Puerto Rico)
applies or purports to apply to the Company or any of its Subsidiaries, or to
this Agreement, the Merger, or any of the other transactions contemplated
hereby, except any such statutes or regulations that are no longer applicable in
any respect upon the execution of this Agreement. Neither the Company nor any of
its Subsidiaries has any rights plan or agreement, preferred stock or similar
arrangement that has, or could have, any of the aforementioned consequences in
respect of the transactions contemplated hereby.
3.18 Intellectual Property; Software.
(a) Except as set forth in Section 3.18 of the Disclosure
Schedule, all trademarks, service marks, trade names, logos and other
designations of goods or services, copyrights, registrations for any of the
foregoing, patents, and applications for registration or issuance of or any of
the foregoing (collectively, "Intellectual Property") in which the Company or
any of its Subsidiaries has any ownership interest or right, whether direct,
indirect, contractual or otherwise ("Company Intellectual Property"), and all
information relating to the business of the Company or its Subsidiaries,
including but not limited to information relating to products, services,
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strategies, pricing, customers, representatives, suppliers, distributors,
technology, finances, employee compensation, computer software and hardware,
inventions, developments, or trade secrets, in which the Company or any of its
Subsidiaries has any ownership interest or right, whether direct, indirect,
contractual or otherwise, or which is in the possession of the Company or its
Subsidiaries or used in connection with or required for the Company's business
or any Subsidiary's business, to the extent such information is not intended to
be disseminated to the public or is otherwise not generally known to competitors
of the Company or its Subsidiaries (collectively "Proprietary Information") is
owned by or licensed to the Company or its Subsidiaries, free and clear of all
Liens. Except as set forth in Section 3.18 of the Disclosure Schedule, the
Company and its subsidiaries have the right to use and transfer all Company
Intellectual Property and Proprietary Information without the consent of or any
payment to any other person. The Company Intellectual Property, Proprietary
Information and intellectual property rights expressly or impliedly licensed to
the Company and its Subsidiaries by suppliers and other parties are sufficient,
to the Company's knowledge, for the conduct of the business of the Company and
its Subsidiaries as now operated.
(b) Section 3.18 of the Disclosure Schedule sets forth a complete
and accurate list of all Company Intellectual Property (including any
Intellectual Property subject to any license or other agreement to which the
Company is a party), and a complete and accurate list of all licenses and
contracts relating to Intellectual Property or Proprietary Information to which
the Company or any of its Subsidiaries is a party or by which the Company, any
of its Subsidiaries or any of their assets is bound. Except as set forth in
Section 3.18 of the Disclosure Schedule, (i) all of the Company Intellectual
Property listed in Section 3.18 of the Disclosure Schedule has been duly
registered or issued by or filed with the appropriate domestic or foreign
Governmental Entity; (ii) all payments and actions required to apply for,
obtain, maintain and renew such Company Intellectual Property in accordance with
all applicable laws and regulations of the appropriate Governmental Entity have
been duly and promptly made and taken; (iii) all Company Intellectual Property
issued by any Governmental Entity and registrations of Company Intellectual
Property remain in full force and effect, and all applications for registration
or issuance of Company Intellectual Property are pending; and (iv) the Company
has not received notice of any event, inquiry, investigation or proceeding
threatening the validity or enforceability of any such Company Intellectual
Property.
(c) Except as set forth in Section 3.18 of the Disclosure
Schedule, (i) no other person has an interest in or right or license to use, or
the right to license any other person to use, any of the Company Intellectual
Property or Proprietary Information, (ii) there are no claims or demands of any
other person pertaining to Company Intellectual Property or Proprietary
Information; (iii) no proceedings have been instituted or are pending (with
notice served on the Company) or, to the knowledge of the Company, threatened
that challenge the Company's or any Subsidiary's rights in or to Company
Intellectual Property or Proprietary Information; and (iv) to the knowledge of
the Company, none of the Company Intellectual Property or Proprietary
Information is subject to any outstanding order, decree, ruling, charge,
injunction, judgment or stipulation or is being infringed, misappropriated or
misused by another person.
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(d) Neither the activities of, actions of or services performed by
the Company or its Subsidiaries nor, to the knowledge or the Company, the goods
or services currently manufactured, used, sold or otherwise transferred by the
Company or its Subsidiaries, infringe any intellectual property right of any
other person. Except as set forth in Section 3.18 of the Disclosure Schedule,
(i) no action, suit or proceeding is pending (with notice served on the Company)
or, to the knowledge of the Company, threatened that accuses the Company or any
Subsidiary of misappropriating proprietary information or otherwise infringing
the intellectual property rights of any other person; and (ii) the Company has
not received, and is not aware of, any allegation, charge or claim that any
products, processes, activities or apparatus manufactured, sold, owned or used
by the Company or its Subsidiaries infringe any Intellectual Property of any
other party or entity, or any allegation, charge or claim that the Company or
its Subsidiaries have misappropriated or misused any Proprietary Information of
any other person.
(e) Except as set forth in Section 3.18 of the Disclosure
Schedule, all computer programs and software currently being used in the
business of the Company and its Subsidiaries (the "Software") is owned by the
Company and its Subsidiaries or held under valid license agreements. Neither the
Company nor any Subsidiary has licensed anyone to use any of the Software and
the Company has no knowledge of any infringing use of the Software or claim of
infringing use. The Software is sufficient for the conduct of the business of
the Company and its Subsidiaries as now operated.
3.19 Related Party Transactions. Except as set forth in Section
3.19 of the Disclosure Schedule hereto, no director, officer, partner, employee,
"affiliate" or "associate" (as such terms are defined in Rule 12b-2 under the
Exchange Act) of the Company or any of its Subsidiaries (a) has borrowed any
monies from or has outstanding any indebtedness or other similar obligations to
the Company or any of its Subsidiaries; (b) to the knowledge of the Company,
owns any direct or indirect interest of any kind in, or is a director, officer,
employee, partner, affiliate or associate of, or consultant or lender to, or
borrower from, or has the right to participate in the management, operations or
profits of, any person or entity that is (i) a competitor, supplier, customer,
distributor, lessor, tenant, creditor or debtor of the Company or any of its
Subsidiaries, (ii) engaged in a business related to the business of the Company
or any of its Subsidiaries, or (iii) participating in any transaction to which
the Company or any of its Subsidiaries is a party; or (c) is otherwise a party
to any contract, arrangement or understanding with the Company or any of its
Subsidiaries.
Section 3.20 Permits. The Company and its Subsidiaries have all Permits
(as defined in Section 3.11), except for those Permits the failure of which to
have would not, individually or in the aggregate, have a Material Adverse Effect
with respect to the Company ("Material Permits"). Schedule 3.20 of the
Disclosure Schedule contains a complete list of the Material Permits, indicating
which Material Permits require the consent or approval of any third party as a
result of the transactions contemplated by this Agreement. All of the Permits
are in full force and effect. No outstanding written notice or, to the knowledge
of the Company, oral notice of cancellation or termination has been delivered to
the Company or any Subsidiary in connection with any such Permit nor has any
such cancellation or termination been threatened. No application, action or
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proceeding for the modification of any such Permits is pending or, to the
knowledge of the Company, threatened that may result in the revocation of such
Permit.
Section 3.21 Insurance Policies. Schedule 3.21 of the Disclosure
Schedule contains a list of all policies of property, fire and casualty, product
liability, workers compensation and other forms of insurance owned or held by
the Company or its Subsidiaries, together with a list of all outstanding
material claims against any insurer and the amount of the annual premium payable
with respect to each such policy. Each such policy is in full force and effect.
All premiums with respect to the insurance policies listed on Schedule 3.21 that
are due and payable prior to the Effective Time have been paid or will be paid
prior to the Effective Time, and no notice of cancellation or termination has
been received by the Company with respect to any such policy. Except as set
forth in Section 3.21 of the Disclosure Schedule, to the Company's knowledge,
there are no pending claims against such insurance by the Company or any
Subsidiary as to which the insurers have denied coverage or otherwise reserved
rights and no issuer of such insurance has filed for protection under applicable
insolvency laws or is otherwise in the process of liquidating or has been
liquidated. To the Company's knowledge, neither the Company nor any Subsidiary
has been refused any insurance with respect to its assets or operations during
the past five years. Except as set forth in Section 3.21 of the Disclosure
Schedule, as of the date of this Agreement, since the last renewal date of any
insurance policy, there has not been any increase in the premiums payable
pursuant to such policy in an amount in excess of 10%.
Section 3.22 Good Title to and Condition of Assets.
(a) The Company and each Subsidiary has good and marketable title
to all of its properties and assets, whether real, personal or mixed, tangible
or intangible, wherever located, free and clear of any Liens other than
Permitted Encumbrances (as defined in Section 3.23).
(b) Subject to the expiration of useful lives, all machinery,
equipment, tools, supplies, leasehold improvements, furniture and fixtures of
the Company and its Subsidiaries currently in use or necessary for its business
are in good operating condition, normal wear and tear and ordinary repair
requirements excepted.
(c) Except for items that are in the possession or control of
suppliers, (i) the Company's and each Subsidiary's inventory located in their
stores, returns warehouse, distribution center or in transit or otherwise (the
"Inventory") and (ii) the supplies bought for use in the Company's or any
Subsidiary's stores in connection with the operation of their business in the
ordinary course, including, but not limited to, printed material, security tags
and shopping bags ("Selling Supplies"), are in the physical possession of the
Company or a Subsidiary, in transit to or from suppliers of the Company or a
Subsidiary or in transit to the Company's or Subsidiary's stores. Except for
products that are returned or determined to be defective or obsolete in the
ordinary course of business as to which appropriate reserves have been
established, the Inventory and Selling Supplies consist of items that are in
good and merchantable condition and are of a quality presently usable, salable
and rentable consistent with past practice in the ordinary course of business.
Except as set forth in Section 3.22 of the
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Disclosure Schedule, all of the Inventory and Selling Supplies is owned by the
Company or a Subsidiary and none of the Inventory or Selling Supplies is held or
sold on consignment.
(d) Except as set forth in Section 3.22 of the Disclosure Schedule
with respect to particular suppliers, the Company and its Subsidiaries have the
right to return to their suppliers for refund or credit in accordance with
standard practice in the industry any compact discs, audio tapes, phonograph
records or videocassettes held for sale and constituting Inventory.
Section 3.23 Real Estate.
(a) Except as set forth in Section 3.23 of the Disclosure
Schedule, neither the Company nor any Subsidiary owns any real property or any
interest therein (the "Owned Properties").
(b) Neither the Company nor any Subsidiary holds any leasehold
interest in any real property except as set forth in Section 3.23 of the
Disclosure Schedule (the "Leasehold Premises"). Section 3.23 of the Disclosure
Schedule lists each of the leases and subleases with respect to the Leasehold
Premises or other real property to which the Company or any Subsidiary is a
party ("Leases"), and with respect to each Lease sets forth the term thereof,
the base rent payable with respect thereto, any security deposit relating
thereto, the termination date thereof and whether the Company or a Subsidiary
has subleased any part of the leasehold interest thereunder or assigned such
Lease. The Company and each Subsidiary are parties to no leases or subleases of
real property other than the Leases. The Company has heretofore delivered or
made available to the Buyer and MergerCo true and complete copies of all such
Leases including all amendments, modifications and waivers with respect thereto.
Except as otherwise set forth in Section 3.23 of the Disclosure Schedule: each
Lease is in full force and effect; all rents and additional rents due to date on
each Lease have been paid; neither the Company nor any Subsidiary has received
any notice that it is in default under any Lease and, to the knowledge of the
Company, neither the Company nor any Subsidiary is in default under any Lease;
to the knowledge of the Company, no landlord is in default of any of its
obligations under any Lease; and, to the knowledge of the Company, there exists
no event, occurrence, condition or act (including the consummation of the
transactions contemplated by this Agreement) that, with the giving of notice,
the lapse of time or the happening of any further event or condition, would
become a default by the Company or any Subsidiary under any Lease. Except as set
forth in Section 3.23 of the Disclosure Schedule, the Company or a Subsidiary is
currently the lessee under each of the Leases and may exercise all rights of a
lessee under each of the Leases. Each Lease under which the Company or a
Subsidiary was not the original lessee was validly assigned to the Company or
such Subsidiary and any party that has a right of consent to such assignment and
of which the Company has knowledge after due review of the applicable Lease has
consented to such assignment and any other party having a right of consent to
such assignment has either consented to such assignment or has taken no action
inconsistent with the granting of such consent.
(c) Except as set forth in Section 3.23 of the Disclosure
Schedule, the Company and its Subsidiaries own the Owned Properties and have
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valid leasehold interests in the Leasehold Premises, free and clear of any
Liens, covenants and easements or title defects of any nature whatsoever, except
for (i) liens for taxes, and assessments and other governmental charges in the
nature of taxes, not yet due and payable; (ii) liens in respect of taxes,
assessments and other governmental charges being contested in good faith as
disclosed in Section 3.23 of the Disclosure Schedule; (iii) mechanics',
carriers', workmen's, repairmen's and other like liens arising or incurred in
the ordinary course of business as to which any related liability or obligation
is reflected in the Year End Balance Sheet or is otherwise disclosed on the
Disclosure Schedule; (iv) inchoate statutory liens that apply generally in favor
of commercial landlords; (v) liens arising from actions or inactions of the
landlords of the Leasehold Premises; and (vi) such imperfections of title,
easements, covenants, rights-of-way, restrictions and encumbrances and zoning,
building and other similar restrictions, if any, as do not interfere with the
present use of such properties or otherwise impair business operations, as used
or conducted on the date hereof (such exceptions referred to in clauses (i)
through (vi) above being collectively referred to herein as "Permitted
Encumbrances").
(d) Except as set forth in Section 3.23 of the Disclosure
Schedule, the portions of the buildings located on the Leasehold Premises that
are used in the Company's or any Subsidiary's business and the buildings located
on the Owned Properties are each in good repair and condition, normal wear and
tear excepted, and are in the aggregate sufficient to satisfy the Company's and
its Subsidiaries' business activities as conducted thereat.
(e) Each of the Leasehold Premises and Owned Properties: (i) has
direct access to public roads or access to public roads by means of an access
easement (which access easement is perpetual, in the case of each of the Owned
Properties, and for at least the remaining term of the Lease and any renewal
periods, in the case of each of the Leasehold Premises), such access being
sufficient to satisfy the current normal day-to-day transportation requirements
of the Company's and its Subsidiaries' businesses as presently conducted at such
parcel; and (ii) is served by all utilities in such quantities as are sufficient
to satisfy the current business activities as conducted at such parcel.
(f) Except as set forth in Section 3.23 of the Disclosure
Schedule, neither the Company nor any Subsidiary has received notice of (i) any
condemnation proceeding with respect to any portion of the Leasehold Premises or
Owned Properties or any access thereto or that any such proceeding is
contemplated by any Governmental Entity; or (ii) any special assessment which
may affect any of the Leasehold Premises or Owned Properties, or that any such
special assessment is contemplated by any Governmental Entity.
(g) Other than the Leasehold Premises and the Owned Properties, no
owned or leased real property is used in connection with the Business.
(h) Except as set forth in Section 3.23 of the Disclosure Schedule,
neither the Company nor any Subsidiary owns or holds, or is obligated under or a
party to, any option, right of first refusal or other contractual right to
purchase, acquire, sell, lease or dispose of the Owned Properties or Leasehold
Premises or any portion thereof or interest therein or in any other real
property, including, without limitation, under any Lease.
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Section 3.24 Certain Business Practices. Neither the Company, any of
its Subsidiaries, nor to the Company's knowledge any directors, officers, agents
or employees of the Company or any of its Subsidiaries in their capacities as
such (a) has used any funds for unlawful contributions, gifts, entertainment or
other unlawful expenses related to political activity; (b) has made any unlawful
payment to foreign or domestic government officials or employees or to foreign
or domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; (c) has made any other
payment prohibited by applicable law; or (d) except as set forth in Section 3.24
of the Disclosure Schedule, in the case of the Company, any of its Subsidiaries
or any of its or their officers or any employee listed in Section 3.9 of the
Disclosure Schedule in response to Section 3.9(a) hereof, is a party to or bound
by any noncompetition or similar agreement or obligation with any third party,
which restricts its or his or her business practices or ability to conduct any
business in any geographic area.
Section 3.25 Suppliers and Customers. As of the date hereof, the
Company has received no written or, to its knowledge, oral notice from any
significant supplier to or customer of the Company's or any Subsidiary's
business indicating such supplier's or customer's intention to materially and
adversely alter its existing business relationship with the Company or any
Subsidiary.
Section 3.26 Product Warranties. Section 3.26 of the Disclosure
Schedule sets forth complete and accurate copies of the written, and
descriptions of all oral, product warranties and guaranties by the Company or
any of its Subsidiaries currently in effect. None of the salesmen, employees,
distributors or agents of the Company or any of its Subsidiaries is authorized
to undertake obligations to any customer or to other third parties in excess of
such warranties or guaranties and, to the knowledge of the Company, there have
not been any material deviations from such warranties and guaranties.
Section 3.27 Sole Representations. The representations and warranties
contained in this Agreement are the sole representations and warranties that the
Company is making in connection with the transactions contemplated herein.
Except as set forth in the Disclosure Schedule, any matter that is set forth in
any Section of this Agreement or the Disclosure Schedule shall be deemed to be
set forth in all Sections of the Disclosure Schedule to which it may be
applicable.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGERCO
Each of Buyer and MergerCo hereby represents and warrants to the
Company that:
4.1 Organization, Standing and Corporate Power. Buyer and MergerCo are
corporations duly organized, validly incorporated and in good standing in the
States of Delaware and Florida, respectively, and each has the requisite
corporate power and authority to carry on its business as now being conducted.
Each of Buyer and MergerCo is duly qualified or licensed to
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do business and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or licensing necessary.
4.2 Subsidiaries. MergerCo has no direct or indirect subsidiaries. As
of the date of this Agreement, neither the Buyer nor any subsidiary of the Buyer
owns, directly or indirectly, any shares of Common Stock.
4.3 Capital Structure. The authorized capital stock of MergerCo
consists of 1,000 shares of common stock, par value $.01 per share, 100 shares
of which have been validly issued and are fully paid and nonassessable.
4.4 Authority; Noncontravention; Consents and Approvals. Each of Buyer
and MergerCo has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement by each of Buyer and MergerCo and the
consummation by each of Buyer and MergerCo of the transactions contemplated by
this Agreement have been duly authorized by all necessary corporate action on
the part of each of Buyer and MergerCo. This Agreement has been duly executed
and delivered by and constitutes a valid and binding obligation of each of Buyer
and MergerCo, enforceable against each of them in accordance with its terms
subject, as to enforceability, to bankruptcy, insolvency, reorganization and
other laws of general application relating to or affecting creditors' rights and
to general principles of equity. Except as disclosed on Section 4.4 of the
Disclosure Schedule, the execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated by this Agreement and
compliance with the provisions of this Agreement will not, conflict with, or
result in (a) any breach or violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration or "put" with respect to any obligation or (b) the
loss of a benefit, or other right or the creation of any Lien upon any of the
properties or assets of either Buyer or MergerCo, under (i) the certificate of
incorporation or bylaws of either the Buyer or MergerCo, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to either the
Buyer or MergerCo or its properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any judgment, order, decree, statute, law, ordinance, rule, regulation or
arbitration award applicable to either the Buyer or MergerCo or its properties
or assets, other than, in the case of clauses (ii) and (iii), any such
conflicts, breaches, violations, defaults, rights, losses or Liens that
individually or in the aggregate could not have a Material Adverse Effect with
respect to the Buyer or MergerCo or could not prevent, hinder or materially
delay the ability of MergerCo to consummate the transactions contemplated by
this Agreement. No consent, approval, order or authorization of, or
registration, declaration or filing with, or notice to, any Governmental Entity
or any other person under any agreement, indenture or other instrument to which
the Buyer or MergerCo is a party or to which any of its properties is subject,
is required by or with respect to either the Buyer or MergerCo in connection
with the execution and delivery of this Agreement by either the Buyer or
MergerCo or the consummation by the Buyer and MergerCo of any of the
transactions contemplated by this Agreement, except for (i) the filing of a
pre-merger notification and report form under the HSR Act, (ii) the filing with
the SEC of (y) the Proxy Statement and (z) such reports under the Exchange Act
as may be required
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in connection with this Agreement and the transactions contemplated hereby,
(iii) the filing of the Articles of Merger by the Department of State of
the State of Florida and appropriate documents with the relevant authorities of
other states in which the Company is qualified to do business and (iv) such
other consents, approvals, orders, authorizations, registrations, declarations,
filings or notices (y) as may be required under the "takeover" or "blue sky"
laws of various states and (z) as are set forth in Section 4.4 of the Disclosure
Schedule.
4.5 Brokers. No broker, investment banker, financial advisor or other
person, other than Policano & Manzo, L.L.C., the fees and expenses of which will
be paid by the Buyer or MergerCo, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
an behalf of MergerCo to its affiliates.
4.6 Financing. As of the date of this Agreement, the Buyer and MergerCo
have, and at all times through the Effective Time, Buyer and MergerCo will have,
available all the funds necessary to perform their respective obligations under
this Agreement, including without limitation payment in full for all shares of
Common Stock outstanding at the Effective Time, the payment of all amounts
payable under Section 2.2, and the payment of all fees and expenses payable by
the Buyer and Merger Co. The Buyer and MergerCo have provided to the Company a
letter from Camelot Music's lender, dated as of May 29, 1998, indicating the
amount, as of such date, of available funds under Camelot Music's credit
facility, including for purposes of financing the transactions contemplated by
this Agreement. The Buyer has been informed by Camelot Music's lender that the
lender is prepared to consent, subject to definitive documentation, to the
transactions contemplated by this Agreement. The Buyer and MergerCo agree not
take any action, and the Buyer agrees to cause its subsidiaries not to take any
action, that would impair the availability at any time through the Effective
Time of the amount of funds necessary to perform their respective obligations
under this Agreement.
4.7 Information Supplied. None of the information supplied or to be
supplied by MergerCo or its affiliates in writing specifically for inclusion or
incorporation by reference in the Proxy Statement will, at the time the Proxy
Statement is first mailed to the Company's stockholders or at the time of the
Stockholders Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
4.8 Absence of Certain Changes or Events. Except as disclosed in the
Buyer's Registration Statement on Form 10 filed by the Buyer with the SEC as of
February 13, 1998 (the "Form 10"), since January 27, 1998 there is not and has
not been: (i) any Material Adverse Change with respect to the Buyer; (ii) any
condition, event or occurrence which, either individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect or give rise to a
Material Adverse Change with respect to the Buyer; or (iii) any condition, event
or occurrence that would reasonably be expected to prevent, hinder or delay the
ability of the Buyer to consummate the transactions contemplated by this
Agreement.
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4.9 Litigation; Compliance with Laws.
(a) Except as disclosed in the Form 10, there is (i) no suit, action or
proceeding or investigation pending of which the Buyer has notice or knowledge
and, (ii) to the knowledge of the Buyer, no suit, action or proceeding or
investigation threatened against the Buyer, any of its subsidiaries, their
business or properties that, either individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect with respect to the
Buyer or prevent, hinder or delay the ability of the Buyer to consummate the
transactions contemplated by this Agreement nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against the Buyer, any of its subsidiaries, their business or properties having,
or which in the future could have, any such effect.
(b) The conduct of the business of the Buyer and each of its
subsidiaries has not been in violation of and complies with all statutes, laws,
regulations, ordinances, rules, judgments, orders, decrees or arbitration awards
applicable thereto, except for violations or failures so to comply, if any,
that, either individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect with respect to the Buyer.
4.10 Sole Representations. The representations and warranties contained
in this Agreement are the sole representations and warranties that the Buyer and
MergerCo are making in connection with the transactions contemplated herein.
Except as set forth in the Disclosure Schedule, any matter that is set forth in
any Section of this Agreement or the Disclosure Schedule shall be deemed to be
set forth in all Sections of the Disclosure Schedule to which it may be
applicable.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER
5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as provided in this
Agreement or as set forth in Section 5.1 of the Disclosure Schedule (without
reference to any matters deemed to be set forth therein under Sections 3.27 or
4.10 of this Agreement) or with the written consent of MergerCo, which consent
shall not be unreasonably withheld, during the period from the date of this
Agreement to the Effective Time (except as otherwise specifically required by
the terms of this Agreement), the Company shall, and shall cause its
Subsidiaries to, act and carry on their respective businesses in the usual,
regular and ordinary course of business consistent with past practice
(including, without limitation, in connection with the collection of accounts
receivable and the incurrence and payment of accounts payable, and with pricing
and marketing practices and the maintenance of Inventory levels) and use its and
their respective reasonable best efforts to preserve intact their current
business organizations, keep available the services of their current officers
and employees and preserve their relationships with landlords, customers,
suppliers, licensors, licensees, advertisers, distributors, lenders and others
having business dealings with them and to preserve goodwill. Without limiting
the generality of the foregoing, during the period from the date of this
Agreement to the Effective Time, the Company shall not, and shall not permit any
of its Subsidiaries to, without the prior written consent of MergerCo (which
shall not be unreasonably withheld) or except as provided in this Agreement or
as set forth in Section
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5.1 of the Disclosure Schedule (without reference to any matters deemed to be
set forth therein under Sections 3.27 or 4.10 of this Agreement):
(a) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends and
distributions by a direct or indirect wholly owned subsidiary of the Company to
its parent in accordance with applicable law;
(b) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock;
(c) purchase, redeem or otherwise acquire any shares of capital stock
of the Company or any of its Subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities,
except for the acquisition of shares of Common Stock from holders of Stock
Options in full or partial payment of the exercise price payable by such holders
upon exercise of Stock Options outstanding on the date of this Agreement;
(d) authorize for issuance, issue, grant, deliver, sell, pledge or
otherwise encumber any shares of its capital stock or the capital stock of any
of its Subsidiaries, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities or any other securities or equity
equivalents (including without limitation stock appreciation rights and Stock
Options) (other than the issuance of Common Stock upon the exercise of Stock
Options outstanding on the date of this Agreement and in accordance with their
present terms (such issuances, together with the acquisitions of shares of
Common Stock permitted under clause (c) above, being referred to herein as
"Permitted Changes"));
(e) in the case of the Company, amend its Articles of Incorporation,
By-Laws or other comparable charter or organizational documents;
(f) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the stock or assets of, or by any other
manner, any business or any corporation, partnership, joint venture, association
or other business organization or division thereof material to the Company;
(g) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets, except for
sales of inventory or the use of supplies, in either case in the ordinary course
of business consistent with past practice;
(h) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or any of its
Subsidiaries, guarantee any debt securities of another person, enter into any
"keep well" or other agreement to maintain any financial statement condition of
another person or enter into any arrangement having the economic effect of any
of the foregoing, except for short-term borrowings and for lease obligations, in
each case incurred in the ordinary course of business consistent with past
practice;
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(i) make any loans, advances or capital contributions to, or
investments in, any other person, other than to the Company or any direct or
indirect wholly owned subsidiary of the Company;
(j) pay, discharge or satisfy any claims (including claims of
stockholders), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction of (i) liabilities or obligations in the ordinary course of
business consistent with past practice or in accordance with their terms as in
effect on the date hereof or (ii) claims settled or compromised to the extent
permitted by Section 5.1(p), or waive, write-off, release, grant, or transfer
any rights of material value or modify or change in any material respect any
existing license, lease, Permit, contract or other document, other than in the
ordinary course of business consistent with past practice;
(k) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(l) enter into any collective bargaining agreement;
(m) amend, negotiate the terms of, enter into or renew any lease of
real property, including any Lease, or fail to renew in a timely fashion any
Lease or other lease of real property to which the Company or any Subsidiary is
a party, except after consulting with and in cooperation with the Buyer and on
such terms as the Buyer has approved, which approval shall not be unreasonably
withheld;
(n) enter into any new Material Contract or, except in the ordinary
course of business consistent with past practice, any other Contract;
(o) change any material accounting principle used by it, except to the
extent required by GAAP;
(p) settle or compromise any litigation (whether or not commenced prior
to the date of this Agreement) other than settlements or compromises of
litigation where the amount paid (after giving effect to insurance proceeds
actually received) in settlement or compromise is not material to the Company;
(q) make any capital expenditures outside the ordinary course of
business consistent with past practice;
(r) delay or postpone the payment of accounts payable or any other
liabilities outside the ordinary course of business consistent with past
practice; or
(s) authorize any of, or commit or agree to take any of, the foregoing
actions.
5.2 CHANGES IN EMPLOYMENT ARRANGEMENTS. Neither the Company nor any of
its Subsidiaries shall adopt or amend (except as may be required by law) any
bonus, profit sharing,
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compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or other
arrangement (including any Benefit Plan or Stock Option Plan) for the benefit or
welfare of any employee, director, independent contractor or former director,
independent contractor or employee (other than increases for individuals other
than officers and directors in the ordinary course of business consistent with
past practice) or increase the compensation or fringe benefits of any director,
employee, independent contractor or former director, independent contractor or
employee (other than increases for individuals other than officers and directors
in the ordinary course of business consistent with past practice) or pay any
benefit not required by any existing plan, arrangement or agreement.
5.3 SEVERANCE. Except as requested in writing by the Buyer or MergerCo
or as disclosed in Sections 3.8 or 3.9 of the Disclosure Schedule (without
reference to any matters deemed to be disclosed therein under Sections 3.27 or
4.10 of this Agreement), neither the Company nor any of its Subsidiaries shall
grant any new or modified severance, change-of-control or termination
arrangement or increase or accelerate any benefits payable under its severance,
change-of-control or termination pay policies in effect on the date hereof.
5.4 WARN. (a) Neither the Company nor any of its Subsidiaries shall
effectuate a "plant closing" or "mass layoff," as those terms are defined in the
Worker Adjustment and Retraining Notification Act of 1988 or similar state law
("WARN"), affecting in whole or in part any site of employment, facility,
operating unit or employee of the Company or any Subsidiary, without the prior
written consent of MergerCo or the Buyer in advance and without complying with
the notice requirements and other provisions of WARN.
(b) Between the date hereof and the Closing Date, the Company,
within five business days of receipt of a written request from the Buyer, shall
provide required notice of the planned discontinuation of operations (a "plant
closing" for purposes of WARN and the Regulations promulgated thereunder),
subject to the occurrence of the Merger, of the Company's headquarters and/or
distribution center, both located in Miami, Florida, as specified in the written
request from the Buyer, effective as of the time specified in the written
request from the Buyer. The Buyer shall deliver to the Company a form of such
notice within one business day after such written request and shall cooperate
with the Company in preparing such notice. The Company shall provide such
notice, as required by WARN, to the following:
(i) each local AND international representative(s) of
affected employees or, if there is no such
representative at that time, to each affected
employee; and
(ii) the State Dislocated Worker Unit (designated or
created under Title III of the Job Training
Partnership Act); and
(iii) the chief elected official of the unit of local
government within which such closing/layoff is to
occur.
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Notwithstanding any other provision of this Section 5.4(b), the parties
agree that the Company shall not be required to provide the notice described in
this Section 5.4(b) before June 11, 1998. The parties acknowledge that the
Company's failure to provide the notice described in this Section 5.4(b) would
materially adversely affect the ability of the Buyer and the Company to
consummate the transactions contemplated hereby.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 PREPARATION OF PROXY STATEMENT; STOCKHOLDERS MEETING.
(a) As promptly as practicable following the date of this Agreement,
the Company shall prepare and file with the SEC the Proxy Statement. The Company
shall use its best efforts to cause the Proxy Statement to be mailed to the
Company's stockholders as promptly as practicable after clearance thereof with
the SEC. If, at any time prior to the Stockholders Meeting, any event, with
respect to the Company, its Subsidiaries, directors, officers, and/or the Merger
or the other transactions contemplated hereby, shall occur, that is required to
be described in the Proxy Statement, the Company shall so describe such event
and, to the extent required by applicable law, shall cause it to be disseminated
to the Company's stockholders.
(b) The Company shall immediately notify MergerCo and its affiliates of
(i) the receipt of any comments from the SEC regarding the Proxy Statement and
(ii) the approval of the Proxy Statement by the SEC. MergerCo shall be given a
reasonable opportunity to review and comment on all filings with the SEC and all
mailings to the Company's stockholders in connection with the Merger prior to
the filing or mailing thereof, and the Company shall , subject to the advice of
counsel, use its best efforts to reflect all such reasonable comments.
(c) The Company shall, as promptly as practicable following the date of
this Agreement and in consultation with MergerCo, duly call, give notice of,
convene and hold a meeting of its stockholders (the "Stockholders Meeting") for
the purpose of approving this Agreement and the transactions contemplated by
this Agreement. The Company shall, through its Board of Directors, recommend to
its stockholders approval of the foregoing matters and seek to obtain all votes
and approvals thereof by the stockholders (which undertaking shall not require
the Company to engage an outside proxy solicitor), as set forth in Section 3.15;
PROVIDED, HOWEVER; that the obligations contained herein shall be subject to the
provisions of Section 6.6 of this Agreement. Subject to the foregoing, such
recommendation, together with a copy of the opinion referred to in Section 3.14,
shall be included in the Proxy Statement. The Company shall use its best efforts
to hold such meeting as soon as practicable after the date hereof.
(d) The Company shall cause its transfer agent to make stock transfer
records relating to the Company available to the extent reasonably necessary to
effectuate the intent of this Agreement.
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6.2 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) The Company shall, and shall cause its Subsidiaries, officers,
employees, counsel, financial advisors and other representatives to, afford to
MergerCo, its representatives and its potential financing sources reasonable
access during normal business hours, in a manner initially coordinated with
Donald A. Molta and/or Ann S. Lieff, and thereafter coordinated with those
persons designated by the chief executive officer of the Company, during the
period prior to the Effective Time to its properties, books, contracts,
commitments, personnel and records (including, without limitation, to the extent
available, the work papers of the Company's independent public accountants) and,
during such period, the Company shall, and shall cause its Subsidiaries,
officers, employees and representatives to, furnish promptly to MergerCo (i) a
copy of each report, schedule, registration statement and other document filed
by it during such period pursuant to the requirements of federal or state
securities laws and (ii) all other information concerning its business,
properties, financial condition, operations and personnel as MergerCo may from
time to time reasonably request.
(b) The Company shall, and shall cause its Subsidiaries and its and
their officers, employees, counsel, financial advisors and other representatives
to, afford to Buyer and MergerCo and their authorized representatives (including
counsel, environmental and other consultants) full access during normal business
hours to all properties or facilities currently owned, leased or otherwise used
by the Company or any of its Subsidiaries, their respective personnel,
operations and records as may be necessary to facilitate the consummation of the
transactions contemplated herein, including access to perform engineering,
environmental and workplace surveys and such other physical inspections as Buyer
and MergerCo may reasonably require, including, without limitation,
environmental assessments, air, water or soil testing or sampling and compliance
audits. In furtherance of this Section 6.2(b), the Company shall provide Buyer
and MergerCo access to all environmental reports and/or data in its possession
or control (including reports and/or data maintained or retained by its
environmental consultants), which reports are relevant to the matters set forth
in Section 3.11.
(c) Except as required by law, each of the Company, the Buyer and
MergerCo shall hold, and shall cause its respective directors, officers,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to hold, any nonpublic information in confidence to the extent
required by and in accordance with that certain Confidentiality Agreement, dated
February 16, 1998, by and between the Company and the Buyer, as amended by that
certain letter agreement dated April 6, 1998 between the Company and the Buyer.
6.3 REASONABLE BEST EFFORTS.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this
Agreement. The Buyer, MergerCo and the Company shall use their reasonable best
efforts and cooperate with one
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another (i) in promptly determining whether any filings are required to be made
or consents, approvals, waivers, licenses, Permits or authorizations are
required to be obtained (or, which if not obtained, would result in a breach or
violation, or an event of default, termination or acceleration of any agreement
or any put right under any agreement) under any applicable law or regulation or
from any governmental authorities or third parties, including parties to leases,
loan agreements or other debt instruments, in connection with the transactions
contemplated by this Agreement, including the Merger, and (ii) in promptly
making any such filings, in furnishing information required in connection
therewith and in timely seeking to obtain any such consents, approvals, permits
or authorizations. Notwithstanding the foregoing, or any other covenant herein
contained, in connection with the receipt of any necessary approvals under the
HSR Act, neither the Company nor any of its Subsidiaries shall be entitled to
divest or hold separate or otherwise take or commit to take any action that
limits the Company's freedom of action with respect to, or its ability to
retain, the business of the Company or any of its Subsidiaries or any material
portions thereof or any of the businesses, product lines, properties or assets
of the Company or any of its Subsidiaries, without MergerCo's prior written
consent.
(b) The Company shall make, subject to the condition that the
transactions contemplated herein actually occur, any undertakings (including
undertakings to make divestitures, provided, in any case, that such divestitures
need not themselves be effective or made until after the transactions
contemplated hereby actually occur) required in order to comply with the
antitrust requirements or laws of any Governmental Entity, including the HSR
Act, in connection with the transactions contemplated by this Agreement;
provided that no such divestiture or undertaking shall be made unless acceptable
to MergerCo.
(c) Each of the parties agrees to cooperate with each other in taking,
or causing to be taken, all actions necessary to delist the Common Stock from
The NASDAQ SmallCap Stock Market ("NASDAQ"), provided that, subject to NASDAQ
rules and regulations, such delisting shall not be effective until after the
Effective Time. The parties also acknowledge that it is MergerCo's intent that
Common Stock following the Merger will not be quoted on NASDAQ or listed on any
national securities exchange.
(d) Each of the parties agrees to cooperate with each other in
connection with the Company's negotiation of the terms of, entering into and
renewal of any lease of real property, in accordance with Section 5.1(m).
(e) The Company shall use its reasonable best efforts to enter into a
lease amendment at or prior to the Closing, in substantially the form attached
hereto as Exhibit D, with the landlord (the "Landlord") under that certain Lease
Agreement, dated March 1, 1996, by and between the Martin W. Spector Irrevocable
Trust and the Company (such amendment, the "Lease Amendment").
(f) The Buyer shall use its reasonable best efforts to enter into at
the Closing a consulting and noncompetition agreement with Ann S. Lieff (the
"Consultant"), in substantially the form attached hereto as Exhibit E (such
agreement, the "Consulting Agreement").
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6.4 INDEMNIFICATION.
(a) For six years after the Effective Time, the Company and the Buyer
shall indemnify and hold harmless all present and former directors and officers
of the Company and its Subsidiaries ("Indemnified Parties") against all costs,
expenses, judgments, fines, penalties, losses, claims, damages or liabilities,
amounts paid in settlement with the approval of the indemnifying party (which
approval shall not be unreasonably withheld) and reasonable attorneys' fees
(collectively, "Costs") incurred in connection with any threatened, pending or
completed claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative, investigative, governmental or regulatory, or whether
involving an alternative dispute resolution proceeding, or any appeal from any
of the foregoing proceedings (collectively, a "Proceeding") arising out of or
pertaining to matters existing or occurring at or prior to the Effective Time,
whether threatened, asserted or claimed prior to, at or after the Effective
Time, in each of the above cases to the fullest extent permitted by their
respective articles of incorporation or bylaws and to the fullest extent
permitted by applicable law to the extent such Costs have not been paid by
insurance.
(b) For six years after the Effective Time, the Company and the Buyer
shall pay expenses incurred by any Indemnified Party with respect to any
Proceeding for which indemnification is available under this Section 6.4, as
they are incurred, in advance of the final disposition of any such Proceeding to
the fullest extent permitted by their respective articles of incorporation or
bylaws and to the fullest extent permitted by the FBCA or other applicable law
upon receipt of an undertaking to repay as contemplated by the FBCA. Without
limiting the foregoing, if any Proceeding for which indemnification is available
under this Section 6.4 is brought against any Indemnified Party after the
Effective Time (i) the Indemnified Parties may retain counsel satisfactory to
them and the Buyer; (ii) the Company and the Buyer shall promptly pay all
reasonable fees and expenses of such counsel for the Indemnified Parties as
statements therefor are received; and (iii) the Company and the Buyer shall use
all reasonable efforts to assist in the vigorous defense of any such matter;
provided, however, that neither the Company nor the Buyer shall be liable for
any settlement of any Proceeding effected without their written consent, which
consent shall not be unreasonably withheld. The Indemnified Parties as a group
shall retain only one law firm to represent them with respect to each Proceeding
unless there is, under applicable standards of professional conduct, a conflict
on any issue between the positions of any two or more Indemnified Parties, in
which case the Indemnified Parties may retain more than one law firm.
(c) For six years after the Effective Time, the Company shall maintain,
at no cost to the individual insureds thereunder, its current directors' and
officers' liability insurance policy (or a policy providing substantially
similar coverage) ("D&O Policy") to the extent that it provides coverage for
events or acts occurring prior to the Effective Time for all persons who are
past, present or future duly elected or appointed directors or officers of the
Company on the date of this Agreement; provided that the Company shall not be
required to spend as an aggregate premium for such D&O Policy more than 175% of
the annual premium for the Company's D&O Policy in effect as of the date of this
Agreement; and provided further that the Company shall nevertheless be obligated
to provide insurance with such policy limit as may be obtained for such
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maximum aggregate premium. The failure of the Company to maintain the D&O Policy
contemplated by this Section 6.4(c) for any reason shall not relieve the Company
or the Buyer of any other obligation under this Section 6.4.
(d) The provisions of this Section 6.4 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
6.5 PUBLIC ANNOUNCEMENTS. Neither MergerCo or the Buyer, on the one
hand, nor the Company, on the other hand, shall issue any press release or
public statement with respect to the transactions contemplated by this
Agreement, including the Merger, without the other party's prior consent, except
as may be required by applicable law, court process or by obligations pursuant
to any listing agreement with NASDAQ. In addition to the foregoing, MergerCo and
the Company shall consult with each other before issuing, and provide each other
the opportunity to review and comment upon, any such press release or other
public statements with respect to such transactions. The parties agree that the
initial press release or releases to be issued with respect to the transactions
contemplated by this Agreement shall be in substantially the form attached
hereto as Exhibit F.
6.6 NO SOLICITATION. From and after the date hereof until the
termination of this Agreement neither the Company or any of its Subsidiaries,
nor any of their respective officers, directors, employees, agents or affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or any of its affiliates) shall directly or indirectly
initiate, solicit or knowingly encourage (including by way of furnishing
non-public information or assistance), or take any other action to facilitate
knowingly, any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to any Transaction Proposal (as defined below),
or enter into or maintain or continue discussions or negotiate with any person
or entity in furtherance of any such inquiries or to obtain a Transaction
Proposal or agree to or endorse any Transaction Proposal or authorize or permit
any of its officers, directors or employees or any of its Subsidiaries or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its Subsidiaries to take any such
action, provided, however, that nothing contained in this Agreement shall
prohibit the Company from (i) furnishing information to or otherwise responding
to any person or entity that makes an unsolicited, bona fide Transaction
Proposal, if, in the written opinion of outside counsel to the Company, after
consulting with outside counsel to the Buyer and MergerCo, such action is
required for the Board of Directors of the Company to comply with its fiduciary
duties under applicable law, (ii) failing to make or withdrawing or modifying
its recommendation referred to in Section 3.15 if there exists a Transaction
Proposal and in the written opinion of outside counsel to the Company, after
consulting with outside counsel to the Buyer and MergerCo, such action is
required for the Board of Directors of the Company to comply with its fiduciary
duties under applicable law in connection with such Transaction Proposal or
(iii) making to the Company's stockholders any recommendation and related filing
with the SEC as required by Rules 14e-2 and 14d-9 under the Exchange Act, with
respect to any tender offer, or taking any other legally required action with
respect to such tender offer (including, without limitation, the making of
public disclosures as may be necessary or reasonably advisable under applicable
securities laws) if in the written opinion of outside counsel to the Company,
after consulting with
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outside counsel to the Buyer and MergerCo, such action is required for the Board
of Directors of the Company to comply with its fiduciary duties under applicable
law; and PROVIDED FURTHER, HOWEVER, that, in the event of an exercise of the
Company's or its Board of Director's rights under clauses (i), (ii) or (iii)
above and subject to compliance with the next three sentences hereof,
notwithstanding anything contained in this Agreement to the contrary, such
exercise of rights shall not constitute a breach of this Agreement by the
Company. The Company shall promptly advise MergerCo orally and in writing of any
request for nonpublic information from, or discussions or negotiations with, any
person or entity or of any Transaction Proposal known to it, the material terms
and conditions of such request or Transaction Proposal, and the identity of the
person or entity making such request or Transaction Proposal. The Company shall
promptly inform MergerCo of any material change in the details (including
amendments or proposed amendments) of any such request for nonpublic
information, the contents of any discussions or negotiations or any material
change in such Transaction Proposal. Neither the Board of Directors of the
Company nor any committee thereof shall take any action pursuant to clauses (ii)
or (iii) above until a time that is after the later of (x) the fourth business
day following MergerCo's receipt of written notice advising MergerCo that the
Board of Directors of the Company has received a Transaction Proposal,
specifying the material terms of such Transaction Proposal and identifying the
person making such Transaction Proposal and (y) in the event of any amendment to
the price or any material term of a Transaction Proposal, two business days
following MergerCo's receipt of written notice containing the material terms of
such amendment, including any change in price (it being understood that each
such further amendment to the price or any material terms of a Transaction
Proposal shall necessitate an additional written notice to MergerCo and an
additional two business day period prior to which the Company can take any
action set forth in clauses (ii) or (iii) above). For purposes of this
Agreement, "Transaction Proposal" shall mean any of the following (other than
the transactions between the Company and MergerCo contemplated by this
Agreement) involving the Company or any of its Subsidiaries: (i) any merger,
consolidation, share exchange, recapitalization, business combination, or other
similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of 10% or more of the assets of the Company and its
Subsidiaries, taken as a whole, in a single transaction or series of related
transactions (unless consented to by MergerCo, which consent shall not be
unreasonably withheld); (iii) any tender offer or exchange offer for, or the
acquisition (or right to acquire) of "beneficial ownership" by any person,
"group" or entity (as such terms are defined under Section 13(d) of the Exchange
Act) of 10% or more of the outstanding shares of Common Stock or the filing of a
registration statement under the Securities Act in connection therewith; or (iv)
any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
6.7 RESIGNATION OF DIRECTORS. Prior to the Effective Time, the Company
shall deliver to MergerCo evidence satisfactory to MergerCo of the resignation
of all directors of the Company, effective at the Effective Time.
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6.8 EMPLOYEE BENEFITS.
The Buyer agrees that, for a period of twelve (12) months following
the Effective Time, the Surviving Corporation shall maintain employee benefit
plans and arrangements (directly or in conjunction with the Buyer) that, in the
aggregate, will provide a level of benefits to continuing employees of the
Company and its Subsidiaries substantially comparable in the aggregate to those
provided under the Benefit Plans set forth in Section 6.8 (without reference to
any matters deemed to be set forth therein under Sections 3.27 or 4.10 of this
Agreement) of the Disclosure Schedule ("Section 6.8 Plans") as in effect
immediately prior to the Effective Time (other than discretionary benefits);
provided, however, that the Buyer may cause modifications to be made to the
employee benefit plans and arrangements to the extent necessary to comply with
applicable law or to reflect widespread adjustments in benefits (or costs
thereof) provided to employees under compensation and benefit plans of the Buyer
and its subsidiaries. In addition, the Buyer may change, substitute or terminate
insurance companies, third party administrators, or other providers of benefits
or services associated with the employee benefit plans and may offer a benefit
plan or arrangement which it sponsors in place of a benefit plan or arrangement
which is set forth in Section 6.8 of the Disclosure Schedule (without reference
to any matters deemed to be set forth therein under Sections 3.27 or 4.10 of
this Agreement) including the offering of its cafeteria plan in place of the
cafeteria plan set forth in Section 6.8 of the Disclosure Schedule. No specific
compensation or benefit plans, however, need be provided. For purposes of
determining eligibility and vesting with respect to all Section 6.8 Plans
(except with respect to any defined benefit plans), the Buyer shall use the
employee's hire date with the Company or Subsidiary or such other date as has
been previously determined by the Company or Subsidiary for credit for prior
employment with any ERISA Affiliate of the Company. Employee benefit plans that
provide medical, dental, or life insurance benefits after the Effective Time to
any individual who is an active employee of the Company or any of its
Subsidiaries as of the Effective Time or a dependent of such an employee shall,
with respect to such individuals, waive any waiting periods, any pre-existing
conditions, and any actively-at-work exclusions to the extent so waived under
present policy and shall provide that any expenses incurred on or before the
Effective Time by such individuals shall be taken into account under such plans
for purposes of satisfying applicable deductible, coinsurance, and maximum
out-of-pocket provisions to the extent taken into account under present policy.
Nothing in this Section 6.8 shall prohibit the Company from terminating the
employment of any employee at any time with or without cause (subject to, and in
accordance with the terms of any existing employment agreements), or shall be
construed or applied to restrict the ability of the Buyer or Surviving
Corporation and its Subsidiaries to establish such types and levels of
compensation and benefits as they determine to be appropriate.
6.9 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to the Buyer and MergerCo and the Buyer and MergerCo shall give prompt
notice to the Company of: (i) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which does or would be likely to cause (A) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect, or (B) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied; and (ii) any
failure of the
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Company on the one hand, or the Buyer or MergerCo on the other hand, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by the respective party hereunder; provided, however, that the
delivery of any notice pursuant to this Section 6.9 shall not limit or otherwise
affect the remedies available hereunder to the party receiving such notice.
6.10 STATE TAKEOVER LAWS. If any "fair price," "control share
acquisition" or other takeover statute or other similar statute or regulation
shall become applicable to the transactions contemplated hereby, including the
Merger, the Company and the Buyer, and their respective Boards of Directors,
shall use their reasonable best efforts to grant such approvals and to take such
other actions as are necessary so that the transactions contemplated hereby may
be consummated as promptly as practicable on the terms contemplated hereby and
shall otherwise use their reasonable best efforts to eliminate the effects of
any such statute or regulation on the transactions contemplated hereby.
6.11 PHYSICAL INVENTORY. The Company shall cooperate with the Buyer, at
the Buyer's written request, in arranging and scheduling, prior to the Closing
Date, for a nationally recognized inventory service (or such other person as
reasonably requested by the Buyer) to perform one or more physical counts of the
Inventory after the Closing Date at the locations and times requested by the
Buyer.
6.12 REPAYMENT OF INDEBTEDNESS. The Buyer agrees to cause the
outstanding indebtedness of the Company to (a) General Electric Capital
Corporation under the Credit Agreement, dated as of May 22, 1996, between the
Company and General Electric Capital Corporation, as modified by the First
Modification of Credit Agreement, dated October 3, 1997, and (b) to Music
Funding I, LLC under the Credit Agreement, dated as of October 3, 1997, between
the Company and Music Funding I, LLC, to be repaid at the Effective Time,
conditioned upon the occurrence of the Effective Time and the satisfaction or
waiver on or prior to the Closing Date of the conditions set forth in Sections
7.1 and 7.2.
6.13 SEVERANCE. The Company, the Buyer and MergerCo agree that in the
event any headquarters or distribution center employees of the Company are
terminated by the Surviving Corporation without cause within 12 months following
the Effective Time, severance payments shall be made to such employees in
accordance with the severance policy of the Company outlined in the severance
policy term sheet and attachment exchanged between the Buyer and the Company and
dated June 3, 1998, as subsequently formalized in accordance with this Section
6.13. Within 10 business days of the date of this Agreement, the Company, the
Buyer and MergerCo shall formalize such severance policy on substantially the
terms contained in such term sheet and attachment. The Buyer and MergerCo agree
to comply with such policy, including with the payment of the severance and
transition payments described in such policy.
6.14 ACCESS FOR POINT OF SALE INSTALLATION. Commencing on the date 30
calendar days prior to the anticipated Closing Date, the Company shall, and
shall cause its Subsidiaries and its and their officers, employees and other
representatives to, afford to the Buyer and its authorized representatives and
employees (including information systems consultants and engineers) full
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access during normal business hours to all properties or facilities currently
owned, leased or otherwise used by the Company or any of its Subsidiaries in the
retail sale or rental of Inventory as may be necessary to facilitate the Buyer's
installation of cables and other hardware necessary for the introduction and
support of the Buyer's point of sale systems. The parties agree that (a) such
access shall not unreasonably interfere with the Company's regular conduct of
its business at such properties and facilities, (b) such installation shall be
at the Buyer's cost and (c) promptly after the termination of this Agreement in
accordance with its terms, the Buyer shall cause such properties and facilities
to be restored to substantially the same physical state in which they would have
been absent such installation.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective obligation of
each party to effect the Merger is subject to the satisfaction or waiver on or
prior to the Closing Date of the following conditions:
(a) Company Stockholder Approval. The Company Stockholder Approval
shall have been obtained.
(b) HSR Act. The waiting period (and any extension thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have
expired.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any Governmental
Entity or other legal restraint or prohibition shall be in effect preventing or
prohibiting the consummation of the Merger or the other transactions
contemplated by this Agreement; provided, however, that the parties hereto
shall, subject to the last sentence of Section 6.3(a) hereof, use their best
efforts to have any such injunction, order, restraint or prohibition vacated.
7.2 CONDITIONS TO OBLIGATIONS OF THE BUYER AND MERGERCO. The
obligations of the Buyer and MergerCo to effect the Merger are further subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Company and its Subsidiaries contained in this Agreement shall
have been true and correct in all material respects when made and, except to the
extent such representations and warranties speak to an earlier date, shall be
true and correct in all material respects at and as of the Effective Time, as if
made at and as of such time, in each case except as contemplated or permitted by
this Agreement.
(b) Performance of Obligations of the Company. The Company shall have
performed and fulfilled each of its obligations, covenants and agreements under
this Agreement, including but not limited to its obligations pursuant to Section
6.6 hereof, except for such failures to perform or fulfill as have not had and
would not, either individually or in the aggregate, have a
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<PAGE> 48
Material Adverse Effect with respect to the Company or materially adversely
affect the ability of the Company to consummate the transactions contemplated
hereby.
(c) Consents, etc. MergerCo shall have received evidence, in form and
substance reasonably satisfactory to it, that the Permits, consents, approvals,
authorizations, qualifications and orders of Governmental Entities and all other
third parties identified in Section 3.4 and Section 7.2(c) of the Disclosure
Schedule have been obtained.
(d) No Litigation. There shall not be instituted, pending or threatened
by any Governmental Entity any suit, action or proceeding (or by any other
person any suit, action or proceeding that has a reasonable likelihood of
success in the good faith opinion of the Buyer) (i) challenging or seeking to
restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement or, in the good faith opinion of the
Buyer, materially and adversely affecting the contemplated economic or business
benefits of the transactions contemplated hereby, (ii) seeking to prohibit or
limit the ownership or operation by the Company, any Subsidiary, the Buyer or
any of the Buyer's subsidiaries of a material portion of the business or assets
of the Company and its Subsidiaries or the Buyer and its subsidiaries, taken as
a whole, or to compel the Company or the Buyer to dispose of or hold separate
any material portion of the business or assets of the Company and its
Subsidiaries or the Buyer and its subsidiaries, taken as a whole, in each case
as a result of the Merger or any of the other transactions contemplated by this
Agreement, (iii) seeking to impose limitations on the ability of the Buyer or
MergerCo to acquire or hold, or exercise full rights of ownership of, any shares
of Common Stock, including, without limitation, the right to vote such shares of
Common Stock on all matters properly presented to the stockholders of the
Company or (iv) seeking to prohibit the Buyer or any of its subsidiaries from
effectively controlling in any respect any material portion of the business or
operations of the Company or its Subsidiaries.
(e) No Material Adverse Change. There shall not have occurred any
Material Adverse Change with respect to the Company since January 31, 1998.
(f) Absence of Certain Rules and Orders. There shall not be any
statute, rule, regulation, judgment, order or injunction enacted, entered,
enforced, promulgated or deemed applicable to the Merger by any Governmental
Entity that would result in any of the consequences referred to in clauses (i)
through (iv) of Section 7.2(d).
(g) Consulting Agreement. The Company and the Consultant shall have
entered into the Consulting Agreement.
(h) Lease Amendment. The Company and the Landlord shall have entered
into the Lease Amendment.
(i) Surrender Agreements. Each holder of any unexpired outstanding
Stock Option (whether granted under a Stock Option Plan or otherwise) shall have
executed a Surrender Agreement and delivered such Surrender Agreement to
MergerCo.
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(j) Dissenter Claims. The Company shall not have received notice of
election to dissent and demand payment from the holders of more than 10% of the
issued and outstanding shares of the Common Stock in connection with the Merger.
(k) Opinion of Counsel. The Company's legal counsel shall have
delivered to the Buyer and MergerCo a written opinion of counsel with respect to
(i) the effectiveness of the Merger, (ii) the due incorporation, valid existence
and good standing of the Company and its Subsidiaries, (iii) the validity,
binding effect and enforceability of this Agreement, the Consulting Agreement
and the Surrender Agreements, and (iv) such other matters as MergerCo may
reasonably request.
(l) Company Certificate. The Company shall have delivered to the Buyer
and MergerCo a certificate, dated as of the Closing Date and signed on its
behalf by its Chief Executive Officer and its Chief Financial Officer, as to the
satisfaction by it of the conditions set forth in subsections 7.2(a), 7.2(b),
7.2(d), 7.2(e) and 7.2(j).
7.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the
Company to effect the Merger is further subject to the satisfaction or waiver on
or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Buyer and MergerCo contained in this Agreement shall have been
true and correct in all material respects when made and, except to the extent
such representations and warranties speak to an earlier date, shall be true and
correct in all material respects at and as of the Effective Time, as if made at
and as of such time, in each case except as contemplated or permitted by this
Agreement.
(b) Performance of Obligations of the Buyer and MergerCo. The Buyer and
MergerCo shall have performed and fulfilled each of their respective
obligations, covenants and agreements under this Agreement, except for such
failures to perform or fulfill as have not and would not, either individually or
in the aggregate, have a Material Adverse Effect with respect to the Buyer or
materially adversely affect the ability of the Buyer or MergerCo to consummate
the transactions contemplated hereby.
(c) No Litigation. There shall not be instituted, pending or threatened
by any Governmental Entity any suit, action or proceeding (or by any other
person any suit, action or proceeding that has a reasonable likelihood of
success in the good faith opinion of the Company) challenging or seeking to
restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement.
(d) Opinion of Counsel. The Buyer's and MergerCo's legal counsel shall
have delivered to the Company a written opinion of counsel with respect to (i)
the validity, binding effect and enforceability of this Agreement and (ii) such
other matters as the Company may reasonably request.
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<PAGE> 50
(e) Buyer and MergerCo Certificate. The Buyer and MergerCo shall have
delivered to the Company certificates, dated as of the Closing Date and signed
on their behalf by their respective Chief Executive Officers and Chief Financial
Officers, as to the satisfaction by them of the conditions set forth in
subsections 7.3(a), 7.3(b) and 7.3(c).
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. This Agreement may be terminated and abandoned at any
time prior to the Effective Time, whether before or after approval of matters
presented in connection with the Merger by the stockholders of the Company:
(a) by mutual written consent of MergerCo and the Company; or
(b) by either MergerCo or the Company if any Governmental Entity shall
have issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting, or if there shall be in effect
any other legal restraint or prohibition preventing or prohibiting, the
consummation of the Merger and such order, decree, ruling or other action shall
have become final and nonappealable (other than due to the failure of the party
seeking to terminate this Agreement to perform its obligations under this
Agreement required to be performed at or prior to the Effective Time); or
(c) by either MergerCo or the Company if the Merger shall not have been
consummated on or before October 15, 1998 (other than due to the failure of the
party seeking to terminate this Agreement to perform its obligations under this
Agreement required to be performed at or prior to the Effective Time); or
(d) by either MergerCo or the Company, if any required approval of the
stockholders of the Company shall not have been obtained by reason of the
failure to obtain the required vote upon a vote held at a duly held meeting of
stockholders or at any adjournment thereof; provided, however, that unless
MergerCo shall otherwise notify the Company within two weeks after such failure
to obtain the required vote, this Agreement shall be deemed to have been
terminated by MergerCo upon the expiration of such two-week period; or
(e) by MergerCo, if the Board of Directors of the Company or any
committee thereof shall have (i) withdrawn, modified or amended in any respect
adverse to the Buyer or MergerCo its approval or recommendation of the Merger,
(ii) failed as soon as practicable to mail the Proxy Statement to its
stockholders or failed to include in such statement such recommendation, (iii)
recommended or approved any Transaction Proposal from a person other than the
Buyer, MergerCo or any of their respective affiliates, (iv) failed to publicly
announce, within 10 business days after the occurrence of any publicly announced
Transaction Proposal from a person other than the Buyer, its opposition to such
Transaction Proposal, or amended, modified, or withdrawn its opposition to any
Transaction Proposal in any manner adverse to the Buyer or MergerCo; or (v)
resolved to do any of the foregoing; or
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<PAGE> 51
(f) by MergerCo, (i) if the Company shall enter into any agreement with
a third party with respect to a Transaction Proposal or (ii) if a person, group
or entity has acquired after the date hereof 20% or more of the issued and
outstanding shares of Common Stock; or
(g) by the Company upon its entering into a binding agreement with a
third party with respect to a Transaction Proposal, provided that it has
complied with all provisions of this Agreement, including the notice provisions
herein, and that it pays the Termination Fee as provided by and defined in
Section 9.2; or
(h) by MergerCo in the event of a material breach or failure to perform
in any material respect by the Company of any representation, warranty, covenant
or other agreement contained in this Agreement that cannot be or has not been
cured within 20 days after the giving of written notice to the Company; or
(i) by the Company in the event of a material breach or failure to
perform in any material respect by MergerCo or the Buyer of any representation,
warranty, covenant or other agreement contained in this Agreement that cannot be
or has not been cured within 20 days after the giving of written notice to
MergerCo or Buyer.
8.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or MergerCo as provided in Section 8.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of the Buyer, MergerCo or the Company, other than
under the provisions of Section 3.13, Section 4.5, Section 6.2(c), Section
6.14(c), this Section 8.2, Section 9.2 and Section 9.7. Nothing contained in
this Section 8.2 shall relieve any party of any breach of the representations,
warranties, covenants or agreements set forth in this Agreement.
8.3 AMENDMENT. This Agreement way be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the stockholders of the Company; provided, however, that after any
such approval, there shall be made no amendment that by law requires further
approval by such stockholders without the further approval of such stockholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
8.3, waive compliance with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.
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8.5 PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of MergerCo or the
Company, action by its Board of Directors or the duly authorized designee of its
Board of Directors.
ARTICLE IX
GENERAL PROVISIONS
9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time and all such
representations and warranties shall be extinguished on consummation of the
Merger and none of the Company, the Buyer and MergerCo nor any officer, director
or employee or shareholder thereof shall be under any liability whatsoever with
respect to any such representation or warranty after such time. This Section 9.1
shall not limit any covenant or agreement of the parties that by its terms
contemplates performance after the Effective Time.
9.2 FEES AND EXPENSES.
(a) If any person (other than MergerCo or any of its affiliates) shall
have made, proposed, communicated or disclosed a Transaction Proposal in a
manner that is or otherwise becomes public and this Agreement is terminated,
after such Transaction Proposal shall have been made, proposed, communicated or
disclosed to the Company, pursuant to any of the following provisions:
(i) by the Company pursuant to Section 8.1(g);
(ii) by MergerCo pursuant to Section 8.1(e) or
(f)(i); or
(iii) by MergerCo pursuant to Section 8.1(h) due
to a breach of or failure to perform a
covenant or agreement, if the breach or
failure to perform that forms the basis of
the termination under Section 8.1(h) was
caused or effected by any action, or any
omission where this Agreement would require
action, of the Company or its Subsidiaries
or their agents, affiliates or
representatives in connection with such
Transaction Proposal;
then the Company shall, within five business days after such termination of this
Agreement, pay MergerCo a fee of $2,000,000 in cash (the "Termination Fee"),
which amount shall be payable in same day funds. No termination of this
Agreement at a time when a fee is reasonably expected to be payable pursuant to
this Section 9.2(a) shall be effective until such fee is paid. The Company
acknowledges and agrees that a termination of this Agreement under any of the
circumstances referred to in the first sentence of this paragraph would cause
the Buyer and
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<PAGE> 53
MergerCo to suffer direct and substantial damages, which damages cannot be
determined with reasonable certainty. To compensate the Buyer and MergerCo for
such damages, the Company shall pay MergerCo the Termination Fee, in the manner
referred to above, as liquidated damages. It is specifically agreed that the
amount to be paid pursuant to this Section 9.2(a) represents liquidated damages
and not a penalty.
(b) Except as provided otherwise in paragraph (a) above, all costs and
expenses incurred in connection with this Agreement, and the transactions
contemplated hereby shall be paid by the party incurring such expenses, except
that the Company shall pay all costs and expenses (i) in connection with
printing and mailing the Proxy Statement as well as all SEC filing fees relating
to the transactions contemplated herein and (ii) of obtaining any consents of
any third party, provided that the Buyer shall reimburse the Company in the
amount of such costs and expenses if this Agreement is terminated as a result of
the Buyer's or MergerCo's material breach of this Agreement. The parties agree
that the Buyer shall pay the filing fee required for the filing of the
pre-merger notification and report under the HSR Act and the fees of the
Exchange Agent incurred prior to the Effective Time.
9.3 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been effectively given when delivered personally, when dispatched by
electronic facsimile transmission (with receipt thereof electronically
confirmed) or one day after having been sent by overnight courier to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to MergerCo or the Buyer, to
Camelot Music Holdings, Inc.
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Facsimile: 330-494-8535
Attn: Mr. James E. Bonk
President and Chief Executive Officer
with a copy to:
Calfee, Halter & Griswold LLP
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114
Facsimile: 216-241-0816
Attn: Thomas F. McKee, Esq.
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(b) if to the Company, to
Spec's Music, Inc.
1666 N.W. 82d Avenue
Miami, Florida 33126
Facsimile: 305-592-9343
Attn: Ms. Ann S. Lieff
President and Chief Executive Officer
with a copy to:
Holland & Knight LLP
701 Brickell Avenue
Miami, Florida 33131
Facsimile: 305-789-7799
Attn: Bruce Jay Colan, Esq.
9.4 DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person;
(b) "business day" shall have the meaning assigned such term in Rule
14d-1(e)(6) under the Exchange Act;
(c) "knowledge", with respect to the Company, means (i) the actual
knowledge of the following officers and employees (as well as any of their
successors) of the Company and its Subsidiaries: Ann S. Lieff, Rosalind S. Zacks
and Donald A. Molta, with respect to all matters, and, without duplication, Beth
Fath, with respect to purchasing, marketing and merchandising matters, Patricia
Walker, with respect to human resources, employee benefits and labor matters,
and Melvin Noreiga, with respect to all matters relating to the Company's
Subsidiary D S Latino, Inc., or any of the foregoing (with respect to a matter
within such individual's designated area of knowledge), (ii) the constructive
knowledge of any facts or events of which such officers and employees, or any of
them (with respect to a matter within such individual's designated area of
knowledge), should have been aware had such officers or employees, or any of
them, exercised the degree of diligence that would have been exercised by a
reasonable person in such position, and (iii) for purposes of this definition,
any such officer or employee (with respect to a matter within such individual's
designated area of knowledge) having knowledge of any occurrence, nonoccurrence,
existence or nonexistence of material facts, circumstances or events that have
significance under any law, standard, requirement or agreement shall be deemed
to have actual knowledge of such significance;
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(d) "Material Adverse Change" or "Material Adverse Effect" means, when
used in connection with the Company, any change or effect that either
individually or in the aggregate with all other such changes or effects is
materially adverse to the business, financial condition, prospects or results of
operations of the Company and its Subsidiaries taken as a whole, and the terms
"material" and "materially" shall have correlative meanings; provided, however,
that no Material Adverse Change or Material Adverse Effect shall be deemed to
have occurred as a result solely of any one or more of (i) those matters
described in a separate writing dated the date of this Agreement and
specifically referencing this Section delivered by the Company to the Buyer,
(ii) general conditions affecting generally the industry in which the Company
competes and general market conditions in the United States, or (iii) changes
after the date hereof in the relationship between the Company and any customer
or supplier, so long as any such change is not attributable to or does not arise
from a breach by the Company of any of its representations, warranties or
covenants contained in this Agreement;
(e) "Material Adverse Change" or "Material Adverse Effect" means, when
used in connection with the Buyer, any change or effect that either individually
or in the aggregate with all other such changes or effects is materially adverse
to the business, financial condition, prospects or results of operations of the
Buyer and its subsidiaries taken as a whole, and the terms "material" and
"materially" shall have correlative meanings; provided, however, that no
Material Adverse Change or Material Adverse Effect shall be deemed to have
occurred as a result solely of any one or more of (i) those matters described in
a separate writing dated the date of this Agreement and specifically referencing
this Section delivered by the Buyer to the Company, (ii) general conditions
affecting generally the industry in which the Buyer competes and general market
conditions in the United States, or (iii) changes after the date hereof in the
relationship between the Buyer and any customer or supplier, so long as any such
change is not attributable to or does not arise from a breach by the Buyer of
any of its representations, warranties or covenants contained in this Agreement;
(f) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity;
(g) "SEC" means the United States Securities and Exchange Commission;
and
(h) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors (or
other governing body) or, if there are no such voting interests, 50% or more of
the equity interests of which is owned directly or indirectly by such first
person.
9.5 INTERPRETATION. When a reference is made in this Agreement to a
Section, Exhibit or Schedule, such reference shall be to a Section of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
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9.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
9.7 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement and
the other agreements referred to herein constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement. This
Agreement, other than Sections 6.4, 6.8 and 6.13 is not intended to confer upon
any person other than the parties any rights or remedies.
9.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF FLORIDA,
REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES
OF CONFLICTS OF LAWS.
9.9 ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties; provided, however, that the Buyer or MergerCo may,
without the Company's prior written consent, assign their respective rights
under this Agreement to any financial institution that requires such assignment
in connection with such financial institution's agreement to provide financing
to either the Buyer or MergerCo; provided, further, that this provision does not
create a financing contingency that may relieve the Buyer or MergerCo of their
obligations under this Agreement. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
9.10 ENFORCEMENT. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, in addition to any other remedy at
law or in equity to which the parties may be entitled.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Buyer, MergerCo and the Company have caused
this Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
SM ACQUISITION, INC.
By: /s/ James E. Bonk
--------------------------------------------
Name: James E. Bonk
Title: President and Chief Executive Officer
SPEC'S MUSIC, INC.
By: /s/ Ann S. Lieff
--------------------------------------------
Name: Ann S. Lieff
Title: President and Chief Executive Officer
CAMELOT MUSIC HOLDINGS, INC.
By: /s/ James E. Bonk
--------------------------------------------
Name: James E. Bonk
Title: President and Chief Executive Officer
51
<PAGE> 1
Exhibit 10.13
1998 OUTSIDE DIRECTORS' STOCK OPTION PLAN
Camelot Music Holdings, Inc. (the "Company") hereby adopts this stock
option plan (the "Plan") for eligible Directors of the Company pursuant to the
following terms and provisions:
1. PURPOSE OF THE PLAN. The purpose of the Plan is to provide
additional incentives to those Directors of the Company who are not officers or
employees of the Company or any of its subsidiaries or affiliates (the "Outside
Directors") by encouraging them to acquire a new or an additional share
ownership in the Company, thus increasing their proprietary interest in the
Company's business and providing them with an increased personal interest in the
Company's continued success and progress. These objectives will be promoted
through the grant of options to acquire the Company's Common Stock, par value
$.01 per share (the "Common Stock"), pursuant to the terms of the Plan. Only
Outside Directors are eligible for and shall receive options under this Plan.
2. EFFECTIVE DATE OF THE PLAN. The Plan is effective as of June 4,
1998, the date the Plan was adopted by the Board of Directors of the Company
(the "Board of Directors" or the "Board").
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to adjustment as provided in this Section 3, the aggregate
number of shares of Common Stock for which options may be granted under the Plan
is One Hundred Twenty-Five Thousand (125,000) shares of Common Stock or any
security into which such shares of Common Stock may be changed by reason of any
transaction or event of the type referred to in Section 3(c) of the Plan. Either
treasury shares or shares of initial issuance, or both, as the Board of
Directors shall from time to time determine, may be issued.
(b) The number of shares available in Section 3(a) shall be increased
to account for shares relating to awards that expire or are terminated or
forfeited.
(c) In the event that subsequent to June 4, 1998, the Common Stock
should, as a result of a stock split, stock dividend, combination or exchange of
shares, exchange for other securities, reclassification, reorganization,
redesignation, merger, consolidation, recapitalization or other such change, be
increased or decreased or changed into or exchanged for a different number or
kind of shares of stock or other securities of the Company or of another
corporation, then (i) there shall automatically be substituted for each share of
Common Stock subject to an unexercised option (in whole or in part) granted
under the Plan, each share of Common Stock available for additional grants of
options under the Plan and each share of Common Stock to be granted to each
eligible Outside Director pursuant to Section 4 hereof, the number and kind of
shares of stock or other securities into which each outstanding share of Common
Stock shall be changed or for which each such share of Common Stock shall be
exchanged, (ii) the option price per share of Common Stock or unit of securities
subject to an unexercised option (in whole or in part) shall be increased or
decreased proportionately so that the aggregate purchase price for the
<PAGE> 2
securities subject to the option shall remain the same as immediately prior to
such event and (iii) the Board shall make such other adjustments as may be
appropriate and equitable to prevent enlargement or dilution of option rights.
Any such adjustment shall provide for the elimination of fractional shares. The
number of shares automatically granted in accordance with Sections 4(a)(ii),
4(a)(iii) and 4(a)(iv) hereof shall not be adjusted pursuant to this Section
3(c) to increase the number of shares of Common Stock to be granted to an
eligible Outside Director to reflect any stock dividend occurring on or prior to
the date on which the offerings described in the Company's Registration
Statement on Form S-1 (No. 333-56811) (the "Registration Statement") are
consummated (the "IPO Date").
4. GRANT OF OPTIONS.
(a) AUTOMATIC GRANTS. Subject to the terms of the Plan each eligible
Outside Director shall be granted a non-qualified stock option for the number of
shares of Common Stock set forth in this Section 4(a):
(i) a one-time grant of Two Thousand Five Hundred (2,500) shares
of Common Stock on the date of the adoption of the Plan by
the Board of Directors, provided that the Outside Director
is an Outside Director on that date, subject to the option
price and vesting conditions as set forth in paragraphs (b)
and (d) below;
(ii) a one-time grant of Seven Thousand Five Hundred (7,500)
shares of Common Stock on the IPO Date, provided that the
Outside Director is an Outside Director on the IPO Date,
subject to the option price and vesting conditions as set
forth in paragraphs (b) and (d) below;
(iii) a one-time grant of Ten Thousand (10,000) shares of Common
Stock on the date that an individual is first elected an
Outside Director, which date is after the IPO Date, subject
to the option price and vesting conditions as set forth in
paragraphs (b) and (d) below; and
(iv) an annual grant of One Thousand Five Hundred (1,500) shares
of Common Stock each year on the date immediately after the
date of the annual meeting of stockholders of the Company
commencing with the annual meeting of stockholders of the
Company held in 1999 to each individual who is an Outside
Director on such date subject to the option price and
vesting conditions set forth in paragraphs (b) and (d)
below.
All such grants shall occur automatically without any further action by the
Board of Directors. Options granted under the Plan shall be subject to the
further terms and provisions of an Option Agreement, the execution of which by
each Outside Director shall be a condition to the receipt of an option.
2
<PAGE> 3
(b) OPTION PRICE. The price at which each share of Common Stock may be
purchased pursuant to an option granted above is set forth in this Section 4(b):
(i) with respect to the options granted pursuant to subparagraph
(i) of paragraph (a) above, Twenty and Three-Fourths Dollars
($20.75) per share of Common Stock;
(ii) with respect to the options granted pursuant to subparagraph
(ii) of paragraph (a) above, the price per share of Common
Stock at which the Offerings described in the Registration
Statement are consummated; and
(iii) with respect to the options granted pursuant to
subparagraphs (iii) or (iv) of paragraph (a) above, the fair
market value for each such share as of the date on which the
option is granted (the "Date of Grant").
Anything contained in this paragraph (b) to the contrary notwithstanding, in the
event that the number of shares of Common Stock subject to any option is
adjusted pursuant to Section 3, a corresponding adjustment shall be made in the
price at which the shares of Common Stock subject to such option may thereafter
be purchased.
(c) DURATION OF OPTIONS. Unless otherwise terminated as provided
herein, each option granted under the Plan shall expire and all rights to
purchase shares of Common Stock pursuant thereto shall cease on the tenth
anniversary of the Date of Grant of such option date (the "Expiration Date").
(d) VESTING OF OPTIONS. Each option granted under the Plan shall become
fully vested and exercisable as follows:
(i) with respect to the options granted pursuant to subparagraph
(i) of paragraph (a) above, on the Date of Grant;
(ii) with respect to the options granted pursuant to
subparagraphs (ii) and (iii) of paragraph (a) above,
one-third of the Common Shares shall be fully vested and
exercisable on the first anniversary of the Date of Grant,
one-third of the Common Shares shall be fully vested and
exercisable on the second anniversary of the Date of Grant
and one-third of the Common Shares shall be fully vested and
exercisable on the third anniversary of the Date of Grant;
and
(iii) with respect to the options granted pursuant to subparagraph
(iv) of paragraph (a) above, on the first anniversary of the
Date of Grant.
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<PAGE> 4
5. OPTION PROVISIONS.
(a) LIMITATION ON EXERCISE AND TRANSFER OF OPTIONS. Except as otherwise
provided in this Section 5, only the Outside Director to whom an option is
granted is permitted to exercise it. No option granted hereunder shall be
transferable otherwise than by the Last Will and Testament of the Outside
Director to whom it is granted or, if the Outside Director dies intestate, by
the applicable laws of descent and distribution. No option granted hereunder may
be pledged or hypothecated, nor shall any such option be subject to execution,
attachment or similar process.
(b) EXERCISE OF OPTION. Each option granted hereunder may be exercised
in whole or in part (to the maximum extent then exercisable) from time to time
during the option period after the option or a portion of the option becomes
vested under paragraph (d) of Section 4 above, but this right of exercise shall
be limited to whole shares. Options shall be exercised by the holder or his or
her duly appointed guardian or other legal representative (i) giving written
notice to the Secretary of the Company at its principal business office, by
certified mail, return receipt requested, of his or her intention to exercise
the same and the number of shares with respect to which the Option is being
exercised (the "Notice of Exercise of Option") accompanied by full payment of
the purchase price in cash and (ii) making appropriate arrangements with the
Company with respect to income tax withholding. Such Notice of Exercise of
Option shall be deemed delivered upon deposit into the mails.
(c) TERMINATION OF OUTSIDE DIRECTORSHIP. If the holder of an option
under the Plan ceases to be an Outside Director of the Company, his or her
option shall terminate three (3) months after the effective date of termination
of his or her directorship and neither he or she nor any other person shall have
any right after such date to exercise all or any part of such option. If the
termination of the directorship is due to death, then the option may be
exercised within three (3) months after the holder's death by the option
holder's estate or by the person designated in such holder's Last Will and
Testament or to whom transferred by the applicable laws of descent and
distribution (the "Personal Representative"). Notwithstanding the foregoing, in
no event shall any option be exercisable after the expiration of the option
period and not to any greater extent than the option holder would have been
entitled to exercise the option at the time of death.
(d) ACCELERATION OF EXERCISE OF OPTIONS IN CERTAIN EVENTS.
Notwithstanding anything in the foregoing to the contrary, in the event of a
"change in control" the eligible Outside Director shall have the immediate right
and option (notwithstanding the provisions of Section 4) to exercise the option
with respect to all shares of Common Stock covered by the option, which
exercise, if made, shall be irrevocable. The term "change in control" means the
time at which any of the following events shall have occurred: (i) the first
purchase of shares pursuant to a tender offer or exchange (other than a tender
offer or exchange by the Company) for all or part of the Company's shares of any
class of common stock or any securities convertible into such common stock; (ii)
the receipt by the Company of a Schedule 13D or other advice indicating that a
person is the "beneficial owner" (as that term is defined in Rule 13d-3 or any
successor rule or regulation promulgated under the Securities Exchange Act of
1934) of twenty percent (20%) or more of the Company's shares of capital stock
calculated as provided in paragraph (d) of said Rule 13d-3; (iii) the date of
approval by stockholders of the Company of an agreement providing
4
<PAGE> 5
for any consolidation or merger of the Company in which the Company will not be
the continuing or surviving corporation or pursuant to which shares of capital
stock, of any class or any securities convertible into such capital stock, of
the Company would be converted into cash, securities, or other property, other
than a merger of the Company in which the holders of shares of all classes of
the Company's capital stock immediately prior to the merger would have the same
proportion of ownership of common stock of the surviving corporation immediately
after the merger; (iv) the date of the approval by stockholders of the Company
of any sale, lease, exchange, or other transfer (in one transaction or a series
of related transactions) of all or substantially all the assets of the Company;
or (v) the adoption of any plan or proposal for the liquidation (but not a
partial liquidation) or dissolution of the Company.
6. INVESTMENT REPRESENTATION; APPROVALS AND LISTING. The options to be
granted hereunder shall be further conditioned upon receipt of the following
investment representation from the Outside Director:
"I further agree that any shares of Common Stock of Camelot Music
Holdings, Inc. which I may acquire by virtue of this option shall
be acquired for investment purposes only and not with a view to
distribution or resale; provided, however, that this restriction
shall become inoperative in the event the said shares of Common
Stock subject to this option shall be registered under the
Securities Act of 1933, as amended, or in the event Camelot Music
Holdings, Inc. is otherwise satisfied that the offer or sale of the
shares of Common Stock subject to this option may be lawfully made
without registration of the said shares of Common Stock under the
Securities Act of 1933, as amended."
The Company shall not be required to issue any certificate or certificates for
shares of Common Stock upon the exercise of an option granted under the Plan
prior to (i) the obtaining of any approval from any governmental agency which
the Company shall, in its sole discretion, determine to be necessary or
advisable, (ii) the admission of such shares of Common Stock to listing on any
national securities exchange on which the Common Stock may be listed, (iii) the
completion of any registration or other qualification of the shares of Common
Stock under any state or federal law or ruling or regulations of any
governmental body which the Company shall, in its sole discretion, determine to
be necessary or advisable or the determination by the Company, in its sole
discretion, that any registration or other qualification of the shares of Common
Stock is not necessary or advisable and (iv) the obtaining of an investment
representation from the Outside Director in the form stated above or in such
other form as the Company, in its sole discretion, shall determine to be
adequate.
7. GENERAL PROVISIONS. For all purposes of this Plan the fair market
value of a share of Common Stock shall be determined as follows: (i) so long as
the Common Stock of the Company is listed upon an established stock exchange or
the NASDAQ National Market System such fair market value shall be determined to
be the highest closing price of a share of such Common Stock on such stock
exchange or the NASDAQ National Market System on the day the
5
<PAGE> 6
option is granted or if no sale of such Common Stock shall have been made on any
stock exchange on that day, then on the next preceding day on which there was a
sale of such Common Stock; (ii) during any period of time as such Common Stock
is not listed upon an established stock exchange, the fair market value per
share shall be the mean between dealer "Bid" and "Ask" prices of such Common
Stock in the over-the-counter bulletin board on the day the option is granted,
as reported by the National Association of Securities Dealers, Inc.; or (iii) if
clause (i) and (ii) do not apply, the fair market value of the Common Stock as
determined by the Board.
The liability of the Company under the Plan and any distribution of
Common Stock made hereunder is limited to the obligations set forth herein with
respect to such distribution and no term or provision of the Plan shall be
construed to impose any liability on the Company in favor of any person with
respect to any loss, cost or expense which the person may incur in connection
with or arising out of any transaction in connection with the Plan, including,
but not limited to, any liability to any federal, state, or local tax authority
and/or any securities regulatory authority.
Nothing in the Plan or in any option agreement shall confer upon any
option holder any right to continue as an Outside Director of the Company, or to
be entitled to any remuneration or benefits not set forth in the Plan or such
option.
Nothing contained in the Plan or in any option agreement shall be
construed as entitling any option holder to any rights of a stockholder as a
result of the grant of an option until such time as shares of Common Stock are
actually issued to such holder pursuant to the exercise of his or her option.
The Plan may be assumed by the successors and assigns of the Company.
The Plan shall not be amended more than once every six (6) months,
other than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder.
The cash proceeds received by the Company from the issuance of Common
Stock pursuant to the Plan will be used for general corporate purposes or in
such other manner as the Board of Directors deems appropriate.
The expense of administering the Plan shall be borne by the Company.
The captions and section numbers appearing in the Plan are inserted
only as a matter of convenience. They do not define, limit, construe or describe
the scope or intent of the provisions of the Plan.
8. TERMINATION OF THE PLAN. The Plan shall terminate on June 4, 2008
and thereafter no options shall be granted hereunder. All options outstanding at
the time of termination of the Plan shall continue in full force and effect in
accordance with and subject to their terms and the terms and conditions of the
Plan.
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<PAGE> 7
9. TAXES. Appropriate provisions shall be made for all taxes required
to be withheld and/or paid in connection with the options or the exercise
thereof, and the transfer of shares of Common Stock pursuant thereto, under the
applicable laws or other regulations of any governmental authority, whether
federal, state, or local and whether domestic or foreign.
10. GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of Ohio and any applicable federal law.
11. VENUE. The venue of any claim brought hereunder by an eligible
Outside Director shall be North Canton, Ohio.
12. CHANGES IN GOVERNING RULES AND REGULATIONS. All references herein
to the Internal Revenue Code, or sections thereof, or to rules and regulations
of the Department of Treasury or of the Securities and Exchange Commission,
shall mean and include the Code sections thereof and such rules and regulations
as are now in effect or as they may be subsequently amended, modified,
substituted or superseded.
IN WITNESS WHEREOF, CAMELOT MUSIC HOLDINGS, INC., by its appropriate
officers duly authorized, has executed this instrument as of the fourth day of
June, 1998.
CAMELOT MUSIC HOLDINGS, INC.
By:
--------------------------------
And:
--------------------------------
7
<PAGE> 1
Exhibit 10.14
FIRST AMENDMENT AND WAIVER
FIRST AMENDMENT AND WAIVER, dated as of June 12, 1998 (this
"AMENDMENT"), to the Revolving Credit Agreement dated as of January 27, 1998 (as
heretofore amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"),
among Camelot Music, Inc., a Pennsylvania corporation (the "BORROWER"), the
several lenders from time to time parties to the Credit Agreement (the
"LENDERS") and The Chase Manhattan Bank, a New York banking corporation, as
agent for the Lenders (in such capacity, the "AGENT").
WITNESSETH:
-----------
WHEREAS, the Borrower, the Lenders and the Agent are parties to the
Credit Agreement;
WHEREAS, the Borrower has advised the Agent and the Lenders that Camelot
Southeast Region, Inc., a wholly-owned Subsidiary of the Borrower ("CAMELOT
SOUTHEAST"), has formed a new wholly-owned Subsidiary, SM Acquisition, Inc., a
Florida corporation (the "NEW SUBSIDIARY"), to acquire all of the Capital Stock
of (a) Spec's Music, Inc., a Florida corporation ("SPEC'S"), (b) DS Latino Inc.,
a Florida corporation and wholly-owned Subsidiary of Spec's ("DS LATINO"), and
(c) Sobe Music Fest, Inc., a Florida corporation which is currently inactive,
has no assets and is a wholly-owned Subsidiary of Spec's ("SOBE MUSIC"), for an
aggregate cash purchase price of approximately $28,000,000 (including certain
Indebtedness of Spec's to be repaid in connection with such acquisition), in
accordance with the terms of an Agreement and Plan of Merger dated as of June 3,
1998 (as amended, the "SPEC'S MERGER AGREEMENT"), among Camelot Music Holdings,
Inc. ("HOLDINGS"), the New Subsidiary and Spec's;
WHEREAS, pursuant to the Spec's Merger Agreement, Spec's will be the
surviving corporation of a merger with the New Subsidiary, Spec's will become a
wholly-owned Subsidiary of Camelot Southeast and DS Latino and Sobe Music will
remain wholly-owned Subsidiaries of Spec's (the "SPEC'S TRANSACTION"), and the
Borrower has requested that the Lenders waive the applicable provisions of the
Credit Agreement to permit the consummation of the Spec's Transaction;
WHEREAS, in order to finance the Spec's Transaction, the Borrower has
requested that the Lenders agree to amend the Credit Agreement to, among other
things, provide a $25,000,000 term loan facility under the Credit Agreement;
WHEREAS, pursuant to subsection 6.7 of the Credit Agreement, in
connection with the formation of the New Subsidiary and the consummation of the
Spec's Transaction (a) Camelot Southeast would be obligated to pledge all of the
Capital Stock of the New
<PAGE> 2
2
Subsidiary (Spec's after giving effect to the Spec's Transaction) to secure
Camelot Southeast's obligations to the Agent and the Lenders under the
Subsidiaries Guarantee and the other Loan Documents to which Camelot Southeast
is a party and (b) the New Subsidiary (Spec's after giving effect to the Spec's
Transaction), DS Latino and Sobe Music would each become a Loan Party obligated
to (i) guarantee repayment of the Loans and all of the Borrower's other
obligations under the Credit Agreement and the other Loan Documents, (ii) grant
a security interest in substantially all of its personal property (including, in
the case of Spec's, all of the Capital Stock of DS Latino and Sobe Music) to
secure its obligations to the Agent and the Lenders under its guarantee and the
other Loan Documents to which it is a party and (iii) to the extent the New
Subsidiary (Spec's after giving effect to the Spec's Transaction), DS Latino or
Sobe Music has any interest in real property with a fair market value greater
than $500,000, grant a mortgage in such real property to secure such obligations
under its guarantee and the other Loan Documents to which it is a party;
WHEREAS, the Borrower has advised the Agent and the Lenders that Spec's
intends to sell certain real property currently owned by Spec's located at West
Hillsborough Boulevard, Tampa, Florida 33615 and Collins Avenue, Miami Beach,
Florida 33139 (collectively, the "SPEC'S PROPERTY"), and the Borrower has
requested that the Lenders waive compliance with subsection 6.7 of the Credit
Agreement so as not to require the execution and delivery of a mortgage with
respect to the Spec's Property;
WHEREAS, the Borrower has also requested that the Lenders agree to amend
subsection 7.7 (Capital Expenditures) of the Credit Agreement; and
WHEREAS, the Lenders are willing to agree to (a) amend the Credit
Agreement to provide for a term loan facility and modify subsection 7.7, (b)
waive certain provisions of the Credit Agreement to permit the consummation of
the Spec's Transaction and (c) waive compliance with subsection 6.7 of the
Credit Agreement with respect to the Spec's Property; but in each case only upon
the terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the premises, and for other good and
valuable consideration the receipt of which is hereby acknowledged, the
Borrower, the Lenders and the Agent hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
which are defined in the Credit Agreement (including after giving effect to this
Amendment) are used herein as therein defined.
2. AMENDMENT TO SUBSECTION 1.1 (DEFINITIONS). Subsection 1.1 of the
Credit Agreement is hereby amended as follows:
(a) Deleting in their entirety the definition of the terms "AVAILABLE
COMMITMENT", "BORROWING BASE", "COMMITMENT", "COMMITMENT PERCENTAGE", "LOANS",
"NOTE" and "REQUIRED LENDERS" contained therein.
(b) Adding in their proper alphabetical order the following definitions:
<PAGE> 3
3
"AVAILABLE REVOLVING CREDIT COMMITMENT": as to any Revolving
Credit Lender, at a particular time, an amount equal to the excess, if
any, of (a) such Revolving Credit Lender's Revolving Credit Commitment
over (b) the sum of (i) the outstanding Revolving Credit Loans made by
such Revolving Credit Lender and (ii) such Revolving Credit Lender's
Commitment Percentage of the L/C Obligations then outstanding.
"BORROWING BASE": means, as at any date of determination, an
amount equal to sixty percent (60%) of Eligible Inventory MINUS the
amount shown as "gift certificate liabilities" on the books and records
of the Loan Parties determined in a manner consistent with the
Borrower's historic practices. The Borrowing Base shall be computed
using the Borrowing Base Certificate most recently provided by the
Borrower to the Agent pursuant to subsection 6.1(i); PROVIDED, HOWEVER,
the Agent shall have the right to review and adjust, in its reasonable
judgment, any computation of the Borrowing Base (but not the
percentages set forth above) to the extent such computation of the
Borrowing Base pursuant to such Borrowing Base Certificate is not in
accordance with this Agreement.
"COMMITMENT PERCENTAGE": at any time, as to any Revolving
Credit Lender, the percentage of the aggregate Revolving Credit
Commitments then constituted by such Revolving Credit Lender's
Revolving Credit Commitment, and as to any Term Loan Lender, the
percentage of the aggregate Term Loan Commitments then constituted by
such Term Loan Lender's Term Loan Commitment.
"COMMITMENTS": the collective reference to the Revolving
Credit Commitments and the Term Loan Commitments; individually as
applicable, a "COMMITMENT".
"FIRST AMENDMENT": the First Amendment and Waiver, dated as of
June 12, 1998, to this Agreement.
"FIRST AMENDMENT EFFECTIVE DATE": the date on which the
conditions precedent to the effectiveness of the First Amendment are
satisfied.
"LOANS": the collective reference to the Revolving Credit
Loans and the Term Loans; individually as applicable, a "LOAN".
"NOTES": the collective reference to the Revolving Credit
Notes and the Term Loan Notes; individually as applicable, a "NOTE".
"Required Lenders": Lenders holding in the aggregate at least
51% of the sum of (a) the aggregate Revolving Credit Commitments in
effect at such time (or, if the Revolving Credit Commitments have then
terminated or are no longer in effect, the sum of (i) the Revolving
Credit Loans outstanding at such time made by such Revolving Credit
Lender and (ii) such Revolving Credit Lender's Commitment Percentage of
the L/C Obligations outstanding at such time), plus (b) the aggregate
<PAGE> 4
4
Term Loan Commitments in effect at such time (or, after the making of
the Term Loans, the aggregate outstanding Term Loans at such time).
"REVOLVING CREDIT COMMITMENT": as to any Revolving Credit
Lender at any time, during the Non-Peak Period, its Non-Peak Period
Commitment, or during the Peak Period, its Peak Period Commitment, as
the case may be.
"REVOLVING CREDIT LENDERS": the collective reference to the
Lenders with Revolving Credit Commitments.
"REVOLVING CREDIT LOANS": as defined in subsection 2.1(a).
"REVOLVING CREDIT NOTES": as defined in subsection 2.2.
"SPEC'S": Spec's Music, Inc., a Florida corporation.
"SPEC'S MERGER AGREEMENT": the Agreement and Plan of Merger
dated as of June 3, 1998, by and among Holdings, SM Acquisition, Inc.
and Spec's, as the same may be amended, supplemented or otherwise
modified from time to time.
"SPEC'S TRANSACTION": the merger of SM Acquisition, Inc., a
wholly-owned Subsidiary of Camelot Southeast, Inc., into Spec's (which
will become a wholly-owned Subsidiary of Camelot Southeast, Inc.)
pursuant to the Spec's Merger Agreement and the other Spec's
Transaction Documents.
"SPEC'S TRANSACTION DOCUMENTS": the collective reference to
the Spec's Merger Agreement and any other instrument or agreement
executed and delivered in connection with the Spec's Merger Agreement,
as each of the foregoing may be amended, supplemented or otherwise
modified from time to time.
"TERM LOAN COMMITMENT": as to any Term Loan Lender, its
obligation to make a Term Loan to the Borrower pursuant to subsection
2A. 1 in an aggregate amount not to exceed the amount set forth under
such Term Loan Lender's name opposite the caption "Term Loan
Commitment" on Schedule I hereto or on Schedule 1 to the Assignment and
Acceptance by which such Term Loan Lender acquired its Term Loan
Commitment.
"TERM LOAN LENDERS": the collective reference to the Lenders
with Term Loan Commitments.
"TERM LOAN NOTES" as defined in subsection 2A.2.
"TERM LOANS": as defined in subsection 2A.1(a).
<PAGE> 5
5
(c) Adding the phrase "or subsection 2A.3, as the case may be,"
immediately after the reference to "subsection 2.5" contained in the definition
of the term "BORROWING DATE".
(d) Deleting the phrase "and (g) reserve for shrink" contained in the
definition of the term "ELIGIBLE INVENTORY" and by substituting in lieu thereof
the phrase "(g) reserve for shrink; and (h) reserve for non-defective Inventory
which is not returnable to the applicable vendors".
(e) Deleting the phrase "acquired its Commitment" in the definition of
the terms "NON-PEAK PERIOD COMMITMENT" and "PEAK PERIOD COMMITMENT" and by
substituting in lieu thereof the phrase "acquired its Revolving Credit
Commitment".
3. WAIVER.
(a) The Lenders hereby waive compliance with subsections 7.2
(Limitations on Liens), 7.4 (Prohibition on Fundamental Changes) and 7.6
(Limitations on Investments, Loans and Advances) of the Credit Agreement, but
solely to the extent necessary to permit the New Subsidiary to consummate the
Spec's Merger (it being understood that the investments made to consummate the
Spec's Merger shall not be included in the calculation of the maximum permitted
investments under subsection 7.6(g) of the Credit Agreement), PROVIDED that:
(i) the aggregate cash purchase price to be paid to consummate
the Spec's Merger, including the Indebtedness of Spec's described in
clause (iv) below to be repaid in connection with the Spec's Merger,
does not exceed $28,500,000;
(ii) the Agent is reasonably satisfied with the Spec's Merger
Agreement and the other Spec's Transaction Documents executed and
delivered by the Borrower, Holdings and the New Subsidiary in
connection with, and to implement, the Spec's Transaction, and no
material provision of any of the Spec's Transaction Documents shall
have been amended, supplemented, waived or otherwise modified without
the prior written consent of the Agent and the Lenders, which consent
shall not be unreasonably withheld;
(iii) the New Subsidiary consummates the Spec's Transaction on
or before August 31, 1998 in accordance with the terms of the Spec's
Merger Agreement and the other Spec's Transaction Documents;
(iv) the Indebtedness of Spec's to General Electric Capital
Corporation and Music Funding I, L.L.C. in the aggregate amount of
approximately $8,000,000 is repaid in full upon consummation of the
Spec's Transaction and any Liens granted to secure such Indebtedness
are released upon such repayment;
(v) the New Subsidiary has become a Loan Party and has complied
with all of the requirements of subsection 6.7 of the Credit Agreement,
and subject to
<PAGE> 6
6
clause (b) below, Spec's will timely comply with all of the
requirements of subsection 6.7 of the Credit Agreement, including
without limitation, within five Business Days after consummation of the
Spec's Transaction, the requirement to pledge all of the Capital Stock
of DS Latino and Sobe Music to secure the obligations of Spec's to the
Agent and the Lenders under the Subsidiaries Guarantee and the other
Loan Documents to which Spec's is a party;
(vi) unless DS Latino and Sobe Music have merged or otherwise
consolidated into a Loan Party, within 60 days after the consummation
of the Spec's Transaction DS Latino and Sobe Music become Loan Parties
and comply with all of the requirements of subsection 6.7 of the Credit
Agreement:
(vii) the waiver of subsection 7.2 (Limitations on Liens) of the
Credit Agreement is limited to the Liens set forth on Schedule 1 to
this Amendment; and
(viii) the Agent receives a written legal opinion of outside
counsel to the applicable Loan Parties, addressed to the Agent and the
Lenders, to the effect that the New Subsidiary has been duly organized
and the Spec's Transaction Documents, and the transactions contemplated
thereby, have been duly authorized by the applicable Loan Parties and
constitute the valid, binding and enforceable obligations of such Loan
Parties and covering such other matters as reasonably requested by the
Agent.
(b) The Lenders hereby waive compliance with the provision of
subsection 6.7 of the Credit Agreement which would require the execution and
delivery of a mortgage with respect to the Spec's Property, PROVIDED that if
either parcel of the Spec's Property has not been sold on or before the date
referenced in clause (i) or (ii) below (as applicable) Spec's shall comply with
subsection 6.7 of the Credit Agreement, including without limitation, by
executing a mortgage, substantially in the form of the Camelot Distribution
Mortgage, with respect to such parcel or parcels (as applicable) of the Spec's
Property within five Business Days after the earlier to occur of (i) the six
month anniversary of the consummation of the Spec's Transaction or (ii) upon the
request of the Agent or the Required Lenders after the occurrence of a Default
or an Event of Default under the Credit Agreement.
4. AMENDMENTS TO SECTION 2 (AMOUNT AND TERMS OF COMMITMENT) AND SECTION
3 (LETTERS OF CREDIT). Sections 2 and 3 of the Credit Agreement are hereby
amended as follows:
(a) Deleting all references in subsections 2.1(a), 2.1(c), 2.2, 2.3,
2.4, 2.5, 2.7, 2.8(b), 2.8(d), 2.18 and 3.1(a) to the terms "AVAILABLE
COMMITMENT", "COMMITMENT", "COMMITMENTS", "LENDER", "LENDERS", "LOAN", "LOANS"
and "NOTE" and by substituting in lieu thereof the terms "AVAILABLE REVOLVING
CREDIT COMMITMENT", "REVOLVING CREDIT COMMITMENT", "REVOLVING CREDIT
COMMITMENTS", "REVOLVING CREDIT LENDER", "REVOLVING CREDIT LENDERS", "REVOLVING
CREDIT LOAN", "REVOLVING CREDIT LOANS" AND "REVOLVING CREDIT NOTE",
respectively.
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7
(b) Amending subsection 2.8(a) by (i) adding the phrase "(i) of Term
Loans or Revolving Credit Loans, or a combination thereof, and (ii)" immediately
after the phrase "and whether the prepayment is" contained in the 14th line of
said subsection, (ii) adding the word "affected" immediately after the phrase
"shall promptly notify each" contained in the 17th line of said subsection,
(iii) adding the phrase "and, in the case of prepayments of the Term Loans only,
accrued interest to such date on the amount prepaid" immediately before the
period at the end of the third sentence of said subsection and (iv) adding the
following sentence at the end of said subsection: "Any prepayment of the Term
Loans pursuant to subsection 2.8(a) or (b) shall be applied FIRST, to prepay the
next succeeding installment of principal of the Term Loans until paid in full
and SECOND, to prepay the Term Loans PRO RATA based upon the remaining
installments of principal thereof set forth in subsection 2A.2(b) until paid in
full. Amounts prepaid on account of the Term Loans may not be reborrowed."
(c) Amending subsection 2.8(b) by (i) deleting the following from said
subsection: (A) the reference to "(i)", (B) the phrase '", or (ii) the Borrowing
Base" and (C) the phrase "in each such case" and (ii) adding the following
sentence at the end of said subsection: "To the extent the sum of the
outstanding Revolving Credit Loans, Term Loans and L/C Obligations on any
Business Day exceeds the Borrowing Base, the Borrower shall on the next Business
Day pay in frill an amount equal to such excess in accordance with clauses FIRST
SECOND and THIRD of the immediately preceding sentence and FOURTH, to payment in
frill of "all outstanding Term Loans."
(d) Deleting subsection 2.8(c) in its entirety and by substituting in
lieu thereof the following:
"(c) If any Loan Party shall receive in excess of $750,000 of
Net Proceeds from Asset Sales during any fiscal year then, unless Term
Loan Lenders holding a majority of the aggregate amount of Term Loans
then outstanding (or the Required Lenders if no Term Loans are then
outstanding) shall otherwise agree, within five Business Days of the
receipt by such Loan Party of such excess Net Proceeds the amount of
such Net Proceeds in excess of $750,000 shall be applied FIRST to
prepay the Term Loans PRO RATA based upon the remaining installments of
principal thereof set forth in subsection 2A.2(b) until paid in frill
and SECOND to reduce permanently the Revolving Credit Commitments."
(e) Amending subsection 2.11 by (i) deleting the reference to "$50,000"
contained therein and by substituting in lieu thereof a reference to "$75,000"
and (ii) deleting the phrase "be termination of the Commitments" contained
therein and by substituting in lieu thereof the phrase "the Termination Date".
(f) Amending subsection 2.13 by (i) deleting the word "respective"
contained in the 4th line of said subsection and by substituting in lieu thereof
the word "relevant" and (ii) deleting the second sentence of said subsection in
its entirety and by substituting in lieu thereof the following: "Each payment
(including each prepayment) by the Borrower on account of principal of and
interest on any Revolving Credit Loans shall be allocated by the Agent PRO RATA
according to the respective outstanding principal amounts of such Revolving
<PAGE> 8
8
Credit Loans then held by the Revolving Credit Lenders. Each payment (including
each prepayment) by the Borrower on account of principal of and interest on any
Term Loans shall be allocated by the Agent PRO RATA according to the respective
outstanding principal amounts of such Term Loans then held by the Term Loan
Lenders."
(g) Adding at the end of Section 2 a new Section 2A as follows:
"SECTION 2A. AMOUNT AND TERMS OF TERM LOAN
2A.1 TERM LOAN COMMITMENT. Subject to the terms and conditions
hereof, each Term Loan Lender severally agrees to make a single term
loan (a "TERM LOAN") to the Borrower after satisfaction or waiver of
the conditions precedent contained in subsections 5.2(a) through (e)
and (g) in an amount equal to the amount of the Term Loan Commitment of
such Term Loan Lender. The Term Loans may from time to time be (a)
Eurodollar Loans, (b) ABR Loans or (c) a combination thereof, as
determined by the Borrower and notified to the Agent in accordance with
subsections 2A.3 and 2.6.
2A.2 TERM NOTES. (a) The Term Loan made by each Term Loan
Lender shall be evidenced by a promissory note of the Borrower,
substantially in the form of Exhibit N hereto (each a "TERM LOAN
NOTE"), with appropriate insertions, payable to the order of such Term
Loan Lender and representing the obligations of the Borrower to pay the
principal amount equal to the Term Loan Commitment of such Term Loan
Lender, with interest thereon as prescribed in subsection 2.9. Each
Term Loan Lender is hereby authorized to record the date, the Type and
the amount of the Term Loan made by such Term Loan Lender, each
continuation thereof, each conversion of all or a portion thereof to
another Type, the date and amount of each payment or prepayment of
principal thereof, and, in the case of Eurodollar Loans, the length of
the Interest Period with respect thereto on the schedule annexed to and
constituting a part of its Term Loan Note, and any such recordation
shall constitute PRIMA FACIE evidence of the accuracy of the
information so recorded, PROVIDED that the failure of any Term Loan
Lender to make such recordation (or any error in such recordation)
shall not affect the obligations of the Borrower hereunder or under
such Term Loan Note. Each Term Loan Note shall (i) be dated the First
Amendment Effective Date, (ii) be payable as provided in subsection
2A.2(b) and (iii) provide for the payment of interest in accordance
with subsection 2.9.
(b) The aggregate Term Loans of all the Term Loan Lenders
shall be payable in six (6) consecutive semi-annual installments on the
dates and in the principal amounts set forth below (together with all
accrued interest thereon) opposite the applicable installment date (or,
if less, the aggregate amount of the Term Loans then outstanding):
<PAGE> 9
9
<TABLE>
<CAPTION>
Dates Amount
----- ------
<S> <C>
January 31, 1999 $3,000,000
July 31,1999 2,000,000
January 31, 2000 6,000,000
July 31, 2000 4,000,000
January 31, 2001 6,000,000
July 31, 2001 4,000,000
</TABLE>
2A.3 PROCEDURE FOR TERM LOAN BORROWING. The Borrower may only
borrow under the Term Loan Commitments in a single drawing on a
Business Day after satisfaction or waiver of the conditions precedent
contained in subsections 5.2(a) through (e) and (g), PROVIDED that the
Borrower shall give the Agent a Borrowing Notice, which notice must be
received by the Agent prior to (a) 12:00 noon, New York City time,
three Business Days prior to the requested Borrowing Date if all or any
part of the Term Loans are to be Eurodollar Loans and (b) 10:00 a.m.,
New York City time, on the requested Borrowing Date if the borrowing is
solely of ABR Loans, and specifying (i) the amount of the borrowing,
(ii) whether such Term Loans are initially to be Eurodollar Loans or
ABR Loans or a combination thereof and (iii) if the borrowing is to be
entirely or partly Eurodollar Loans, the length of the Interest Period
-for such Eurodollar Loans. Not later than 1:00 p.m., New York City
time, on the Borrowing Date specified in such notice, each Term Loan
Lender shall make available to the Agent at the office of the Agent
specified in subsection 10.2 (or at such other location as the Agent
may direct) an amount in immediately available funds equal to the
amount of the Term Loan to be made by such Term Loan Lender. Term Loan
proceeds received by the Agent hereunder shall promptly be made
available to the Borrower by the Agent crediting the account of the
Borrower on the books of such office with the aggregate of the amounts
made available to the Agent by the Term Loan Lenders and in like funds
as received by the Agent.
2A.4 USE OF PROCEEDS OF TERM LOANS. The proceeds of the Term
Loans hereunder shall be used by the Borrower solely to finance the
Spec's Transaction."
5. AMENDMENT TO SECTION 4 (REPRESENTATIONS AND WARRANTIES).
Section 4 of the Credit Agreement is hereby amended as follows:
(a) Adding the phrase "and the Spec's Transaction Documents"
immediately after the phrase "the Wall Transaction Documents" each time such
phrase appears in subsections 4.5, 4.7 and 4.18.
(b) Adding the phrase "and each Spec's Transaction Document"
immediately after the phrase "each Wall Transaction Document" contained in
subsection 4.6.
(c) Adding the phrase "any Spec's Transaction Document"
immediately after the phrase "any Wall Transaction Document" contained in
subsection 4.7.
<PAGE> 10
10
(d) Adding the phrase "and the Spec's Transaction" immediately
after the phrase "the Wall Transaction" contained in subsection 4.13.
(e) Adding the following new subsection 4.20 at the end of said
Section 4:
"4.20 YEAR 2000 MATTERS. Any reprogramming required to permit the
proper functioning (but only to the extent that such proper
functioning would otherwise be impaired by the occurrence of the year
2000) in and following the year 2000 of computer Systems and other
equipment containing embedded microchips, in either case owned or
operated by any Loan Party or used or relied upon in the conduct of
its business (including any such Systems and other equipment supplied
by others or with which the computer systems of any Loan Party
interface), and the testing of all such systems and other equipment as
so reprogrammed, will be completed by February 27, 1999. The costs to
the Loan Parties that have not been incurred (as of any date on which
this representation and warranty is made) for such reprogramming and
testing and for the other reasonably foreseeable consequences to them
of any improper functioning of other computer systems and equipment
containing embedded microchips due to the occurrence of the year 2000
could not reasonably be expected to result in a Default or Event of
Default or to have a Material Adverse Effect. Except for any
reprogramming referred to above, the computer systems of the Loan
Parties are and, with ordinary course upgrading and maintenance, will
continue during the period prior to the Maturity Date to be,
sufficient for the conduct of their business as currently conducted."
6. AMENDMENT OF SUBSECTION 5.2 (CONDITIONS TO EACH LOAN AND LETTER
OF CREDIT). Subsection 5.2 of the Credit Agreement is hereby amended by adding
immediately after clause (f) thereof a new clause (g) as follows:
"(g) ADDITIONAL CONDITIONS PRECEDENT TO TERM LOANS. In the case
of such Lender's Term Loan only, in addition to the satisfaction of the
conditions precedent contained in subsections 5.2(a) through (e) above,
(i) The Agent shall have received for each Lender, a copy
of the Spec's Merger Agreement and any of the other Spec's
Transaction Documents reasonably requested by the Agent.
(ii) (A) The Spec's Transaction shall have been consummated
pursuant to the Spec's Transaction Documents on or before August
31, 1998 for an aggregate cash purchase price not to exceed
$28,500,000 (including the Indebtedness of Spec's to be repaid in
connection with the Spec's Transaction), (B) the Indebtedness of
Spec's to General Electric Capital Corporation and Music Funding
I, L.L.C. in the aggregate amount of approximately $8,000,000
shall have been repaid in full and any Liens granted to secure
such Indebtedness shall have been released upon such repayment,
(C) all of the conditions precedent set forth in the Spec's
Merger Agreement shall have been
<PAGE> 11
11
satisfied, and (D) no material provision of the Spec's
Transaction Documents shall have been amended, supplemented,
waived or otherwise modified without the prior written consent of
the Agent and the Lenders, which consent shall not be
unreasonably withheld. The Agent shall be reasonably satisfied
with the Spec's Transaction Documents in all respects.
(iii) The Agent shall have received the unaudited
consolidated balance sheet of Spec's and its consolidated
Subsidiaries as at the end of the most recent fiscal quarter
ended and the related unaudited consolidated statements of income
and cash flows of Spec's and its consolidated Subsidiaries for
such quarterly period, which, in each case, shall be in form and
substance reasonably satisfactory to the Agent.
(iv) The Agent shall have received, with a copy for each
Lender, (A) a new Schedule 4.12 (Fee and Leased Properties) and a
new Schedule 4.14 (Trademarks and Copyrights) to this Agreement
and (B) new Schedules to the Subsidiaries Security Agreement, in
each case, giving effect to the Spec's Transaction; upon
satisfaction of the conditions precedent contained in this
subsection 5.2(g) this Agreement and the Subsidiaries Security
Agreement shall each be deemed amended to substitute the
Schedules delivered pursuant to this paragraph (iv) for the
corresponding Schedules delivered on the Closing Date.
(v) The Agent shall have received evidence in form and
substance reasonably satisfactory to it that any farther filings,
recordings, registrations and any other actions, including
without limitation, the filing of duly executed financing
statements on form UCC-1, necessary or, in the reasonable opinion
of the Agent, desirable to perfect the Liens created by the
Security Documents, after giving effect to the Spec's
Transaction, shall have been completed.
(vi) The Agent shall have received (A) for each Loan Party,
a certificate executed by the President or any Vice President and
the Secretary or Assistant Secretary of such Loan Party dated the
Borrowing Date with respect to the Term Loans and certifying (x)
that the by-laws and the certificate of incorporation of such
Loan Party have not been amended since the Closing Date, (y) in
the case of the Borrower, that attached thereto is a true and
complete copy of the resolutions adopted by the Board of
Directors of the Borrower authorizing (1) the borrowing of the
Term Loans, (2) the execution, delivery and performance in
accordance with its terms of this Agreement, as amended by the
First Amendment, and the Term Loan Notes and (3) any other
matters as reasonably requested by the Agent and (z) as to the
incumbency and specimen signature of each officer of such Loan
Party executing the First Amendment and the Term Loan Notes and
(B) with a counterpart for each Lender, the executed legal
opinion of outside counsel to the Borrower to the effect that the
First Amendment and the Term Loan Notes have been duly authorized
by the Borrower and the First Amendment, this Agreement, as
amended by the First Amendment, and the Term Loan Notes
constitute the
<PAGE> 12
12
valid, binding and enforceable obligations of the Borrower, and covering such
other matters incident to the transactions contemplated by the First Amendment
as reasonably requested by the Agent.".
7. AMENDMENTS TO SECTION 7 (NEGATIVE COVENANTS). Section 7 of the
Credit Agreement is hereby amended as follows:
(a) Deleting the references to "$17,000,000", "$19,400,000",
"$21,400,000" and "$22,500,000" contained in clause (b) subsection 7.7 (Capital
Expenditures) and by substituting in lieu thereof "$20,000,000", "$25,000,000",
"$27,500,000" and "$30,000,000", respectively.
(b) Deleting the reference to "Available Commitments" contained
in clause (c) of subsection 7.9 (Limitation on Dividends) and by substituting in
lieu thereof a reference to the term "Available Revolving Credit Commitments".
8. AMENDMENTS TO SECTION 10 (MISCELLANEOUS). Section 10 of the
Credit Agreement is hereby amended as follows:
(a) Amending subsection 10.1 (Amendments and Waivers) by (i)
adding the phrase "or any scheduled installment thereof" after the phrase
"maturity date of any Note" in clause (a)(i) of said subsection and (ii) adding
at the end of clause (a) of said subsection the phrase "or (iii) amend, modify
or waive any provision of subsection 2.8(c) without the written consent of Term
Loan Lenders holding a majority of the aggregate amount of Term Loans then
outstanding; or (iv) amend, modify or waive any provision of subsection 2.8(d)
without the written consent of all of the Revolving Credit Lenders".
(b) Adding a reference to "2A.3 ," immediately before the
reference to "2.5" contained in subsection 10.2 (Notices).
(c) (i) Adding the phrase "or Term Loan Commitment, as
applicable," immediately after each reference to "Peak Period Commitment"
contained in the second sentence of clause (e) of subsection 10.6 (Successors
and Assigns; Participations and Assignments) and (ii) adding the phrase "(in the
case of Revolving Credit Notes) or the First Amendment Effective Date (in the
case of Term Loan Notes)" immediately after the reference to "Closing Date"
contained in the last sentence of clause (e) of said subsection of 10.6.
(d) Amending subsection 10.7 (Adjustments; Set-off) by deleting
all references in said subsection to "Loans" and by substituting in lieu thereof
the phrase "Revolving Credit Loans, Term Loans".
9. AMENDMENT TO SCHEDULE I AND ADDITION OF EXHIBIT N. The Credit
Agreement is hereby further amended by (a) deleting Schedule I attached thereto
in its entirety and by substituting in lieu thereof a new Schedule I in the form
attached hereto as Schedule 2 and (b) adding a new Exhibit N thereto in the form
attached hereto as Exhibit A.
<PAGE> 13
13
10. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants that, after giving effect to the amendments and waivers
effected hereby, the representations and warranties contained in Section 4 of
the Credit Agreement are true and correct in all material respects as of the
date hereof.
11. LIMITED EFFECT. Except as expressly amended or waived hereby,
all the terms and provisions of the Credit Agreement are and shall remain in
full force and effect. The amendments and waivers provided for herein are
limited to the specific subsections of the Credit Agreement specified herein and
shall not constitute an amendment or waiver of, or an indication of the Agent's
or the Lenders' willingness to amend or waive, any other provisions of the
Credit Agreement or the same subsections for any other purpose, date or time
period.
12. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall
become effective on the date on which the following conditions precedent have
been satisfied: (a) receipt by the Agent of counterparts of (i) this Amendment,
duly executed and delivered by the Borrower and the Lenders, and (ii) the
attached Acknowledgement and Consent, duly executed and delivered by the
Guarantors, (b) receipt by the Agent, for the account of the Term Loan Lenders
allocated based upon their respective Term Loan Commitments, of a Term Loan
Commitment fee in immediately available funds equal to $125,000 and (c) receipt
by the Agent, for the account of each Term Loan Lender, of a Term Loan Note in
the form attached hereto as Exhibit A and executed by a duly authorized officer
of the Borrower.
13. MISCELLANEOUS. (a) This Amendment may be executed by the
parties hereto and delivered by facsimile transmission on any number of separate
counterparts and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
(b) The Borrower agrees to pay or reimburse the Agent for all of
its out-of-pocket costs and expenses incurred in connection with the
development, preparation and execution of this Amendment including, without
limitation, the fees and disbursements of counsel to the Agent.
(c) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 14
14
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be duly executed and delivered by its proper and duly authorized
officers as of the day and year first above written.
CAMELOT MUSIC, INC.
By: /s/ Jack K. Rogers
-------------------------------
Name: Jack K. Rogers
Title: Executive Vice President/COO
THE CHASE MANHATTAN BANK,
as Agent and as a Lender
By: /s/ William P. Rindfuss
-------------------------------
Name: William P. Rindfuss
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Charels W. A. Hagel
-------------------------------
Name: Charles W. A. Hagel
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/ T. L. James
-------------------------------
Name: T. L. James
Title: Senior Vice President
<PAGE> 15
15
SOCIETE GENERALE
By: /s/ Antoine Broustra
-------------------------------
Name: Antoine Broustra
Title: Vice Presidnet
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By: /s/ Jeffrey W. Maillet
-------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
<PAGE> 16
ACKNOWLEDGEMENT AND CONSENT
Dated as of June 12, 1998
Reference is made to the attached First Amendment and Waiver, dated as
of June 12, 1998 (the "AMENDMENT"), to the Credit Agreement dated as of January
27, 1998 (as heretofore amended, supplemented or otherwise modified, the "CREDIT
AGREEMENT"; unless otherwise defined herein, capitalized terms appearing herein
shall have the meanings specified in the Credit Agreement), among the Borrower,
the Lenders and the Agent. Each of the undersigned hereby (i) acknowledges and
consents to the terms and provisions of the Amendment, (ii) agrees, acknowledges
and affirms that each Guarantee executed by it and each other Loan Document to
which it is a party shall remain in full force and effect and shall apply to the
Credit Agreement as amended by the Amendment and (iii) agrees, acknowledges and
affirms that any reference to the Credit Agreement appearing in each Guarantee
executed by it and each other Loan Document to which it is a party shall be
deemed to include the Credit Agreement as amended by the Amendment.
IN WITNESS WHEREOF, each of the undersigned has caused this
Acknowledgement and Consent to be duly executed and delivered as of the date
first above written.
CAMELOT MUSIC HOLDINGS, INC.
CAMELOT DISTRIBUTION CO., INC
CAMELOT MIDWEST REGION, INC.
CAMELOT NORTHEAST REGION, INC.
CAMELOT SOUTHEAST REGION, INC.
CAMELOT WESTERN REGION, INC.
GRAPEVINE RECORDS AND TAPES, INC.
SM ACQUISITION, INC.
By: /s/ Jack K. Rogers
-------------------------------
Name: Jack K. Rogers
Title: Executive Vice President/COO
<PAGE> 17
Schedule 1
to First Amendment
SPEC'S PROPERTY SUBJECT TO PERMITTED LIENS
------------------------------------------
1. AT&T Credit Corporation, secured party, to secure obligations under one
or more operating leases in respect of office equipment.
2. NCR Credit Corporation, secured party, to secure obligations under one
or more operating leases in respect of office equipment.
<PAGE> 18
Schedule 2
to First Amendment
Schedule I
to Credit Agreement
LIST OF ADDRESSES FOR NOTICES TO LENDERS,
COMMITMENT AMOUNTS
THE CHASE MANHATTAN BANK
Address for Notice:
-------------------
270 Park Avenue
New York, New York 10017
Attn: Margaret Lane
Telecopy: 212-270-5646
<TABLE>
<CAPTION>
REVOLVING CREDIT COMMITMENT:
----------------------------
<S> <C>
NON-PEAK PERIOD: $10,500,000.00
----------------
PEAK PERIOD: $15,000,000.00
------------
COMMITMENT PERCENTAGE: 30.00%
----------------------
TERM LOAN COMMITMENT: $7,500,000.00
---------------------
COMMITMENT PERCENTAGE: 30.00%
----------------------
</TABLE>
<PAGE> 19
2
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
Address for Notice:
-------------------
Bank of America
231 South LaSalle Street
Suite 614
Chicago, IL 60697
Attn: Charles Hagel
Telecopy: 312-828-1974
<TABLE>
<CAPTION>
REVOLVING CREDIT COMMITMENT:
----------------------------
<S> <C>
NON-PEAK PERIOD: $7,000,000.00
----------------
PEAK PERIOD: $10,000,000.00
------------
COMMITMENT PERCENTAGE: 20.00%
----------------------
TERM LOAN COMMITMENT: $5,000,000.00
---------------------
COMMITMENT PERCENTAGE: 20.00%
----------------------
</TABLE>
FIRST UNION NATIONAL BANK
Address for Notice:
-------------------
First Union National Bank
301 S. College Street DC-S
Charlotte, NC 28288-0737
Attn: Jorge Gonzalez
Telecopy: (704) 374-3300
<TABLE>
<CAPTION>
REVOLVING CREDIT COMMITMENT:
----------------------------
<S> <C>
NON-PEAK PERIOD: $7,000,000.00
----------------
PEAK PERIOD: $10,000,000.00
------------
COMMITMENT PERCENTAGE: 20.00%
----------------------
TERM LOAN COMMITMENT: $5,000,000.00
---------------------
COMMITMENT PERCENTAGE: 20.00%
----------------------
</TABLE>
<PAGE> 20
3
SOCIETE GENERALE
Address for Notice:
-------------------
1221 Avenue of the Americas
New York, New York 10020
Attn: Antoine Broustra
Telecopy: (212) 278-7463
<TABLE>
<CAPTION>
REVOLVING CREDIT COMMITMENT:
----------------------------
<S> <C>
NON-PEAK PERIOD: $7,000,000.00
----------------
PEAK PERIOD: $10,000,000.00
------------
COMMITMENT PERCENTAGE: 20.00%
----------------------
TERM LOAN COMMITMENT: $5,000,000.00
---------------------
COMMITMENT PERCENTAGE: 20.00%
----------------------
</TABLE>
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
Address for Notice:
-------------------
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Attn: Jeffrey Maillet
Telecopy: (630) 684-6740
<TABLE>
<CAPTION>
REVOLVING CREDIT COMMITMENT:
----------------------------
<S> <C>
NON-PEAK PERIOD: $3,500,000.00
----------------
PEAK PERIOD: $5,000,000.00
------------
COMMITMENT PERCENTAGE: 10.00%
----------------------
TERM LOAN COMMITMENT: $2,500,000.00
---------------------
COMMITMENT PERCENTAGE: 10.00%
----------------------
</TABLE>
<PAGE> 21
Exhibit A
to First Amendment
Exhibit N
to Credit Agreement
FORM OF TERM LOAN NOTE
----------------------
$_______________ New York, New York
June __, 1998
FOR VALUE RECEIVED, the undersigned, Camelot Music, Inc., a
Pennsylvania corporation (the "BORROWER"), hereby unconditionally promises to
pay to the order of _____________________________________ (the "LENDER") at the
office of The Chase Manhattan Bank, located at 270 Park Avenue, New York, New
York 10017, in lawful money of the United States of America and in immediately
available funds, the principal amount of (a) _______________________________
($___________), or, if less, (b) the aggregate unpaid principal amount of all
Term Loans made by the Lender to the Borrower pursuant to subsection 2A. 1 of
the Credit Agreement, as hereinafter defined. The principal amount shall be paid
in the amounts and on the dates specified in subsection 2A.2(b) of the Credit
Agreement. The Borrower farther agrees to pay interest in like money at such
office on the unpaid principal amount hereof from time to time outstanding at
the rates and on the dates specified in subsection 2.9 of the Credit Agreement.
The holder of this Term Loan Note is authorized to endorse on the
schedules annexed hereto and made a part hereof or on a continuation thereof
which shall be attached hereto and made a part hereof the date, the Type and the
amount of each Term Loan made by such holder pursuant to the Credit Agreement
and the date and amount of each payment or prepayment of principal thereof, each
continuation thereof, each conversion of all or a portion thereof to another
Type and, in the case of Eurodollar Loans, the length of each Interest Period
with respect thereto. Each such endorsement shall constitute PRIMA FACIE
evidence of the accuracy of the information endorsed. The failure to make any
such endorsement or any error in any such endorsement shall not affect the
obligations of the Borrower in respect of any Term Loan.
This Term Loan Note (a) is one of the Term Loan Notes referred to in the
Revolving Credit Agreement, dated as of January 27, 1998 (as amended,
supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"),
among the Borrower, the several lenders from time to time parties thereto (the
"LENDERS") and The Chase Manhattan Bank, as agent for the Lenders (in such
capacity, the "AGENT"), (b) is subject to the provisions of the Credit Agreement
and (c) is subject to optional and mandatory prepayment in whole or in part as
provided in the Credit Agreement. This Term Loan Note is secured and guaranteed
as provided in the Loan Documents. Reference is hereby made to the Loan
Documents for a
<PAGE> 22
2
description of the properties and assets in which a security interest has been
granted, the nature and extent of the security and guarantees, the terms and
conditions upon which the security interests and each guarantee were granted and
the rights of the holder of this Term Loan Note in respect thereof.
Upon the occurrence of any one or more Events of Default, all amounts
then remaining unpaid on this Term Loan Note shall become, or may be declared to
be, immediately due and payable, all as provided in the Credit Agreement.
All parties now and hereafter liable with respect to this Term Loan
Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby
waive presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, capitalized terms defined in the Credit
Agreement and used herein shall have the meanings given to them in the Credit
Agreement.
THIS TERM LOAN NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
CAMELOT MUSIC, INC.
By:
-------------------------------
Jack K. Rogers
Executive Vice President and
Chief Operating Officer
<PAGE> 23
Schedule A
to Term Loan Note
LOANS, CONVERSIONS AND REPAYMENTS OF ABR LOANS
<TABLE>
<CAPTION>
Amount Amount of ABR Loans
Converted to Amount of Principal of Converted to Unpaid Principal Balance
Date Amount of ABR Loans ABR Loans ABR Loans Repaid Eurodollar Loans of ABR Loans Notation Made By
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 24
Schedule B
to Term Loan Note
LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS
<TABLE>
<CAPTION>
Interest Period and Amount of Principal Amount of Eurodollar Unpaid Principal
Amount of Amount Converted Eurodollar Rate with of Eurodollar Loans Loans Converted to Balance of Notation
Date Eurodollar Loans to Eurodollar Loans Respect Thereto Repaid ABR Loans Eurodollar Loans Made By
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 1
Exhibit 10.18
EMPLOYMENT AND SEVERANCE AGREEMENT
----------------------------------
THIS EMPLOYMENT AND SEVERANCE AGREEMENT (this "Agreement") is
made, entered into and effective as of the 20th day of July, 1998, by and
between Camelot Music Holdings, Inc., a Delaware corporation ("Employer"), and
Larry K. Mundorf ("Employee").
R E C I T A L S:
WHEREAS, Employer believes that Employee's services are
especially critical to its success, and desires to assume certain obligations
relating to Employee's employment, as more fully described herein.
NOW, THEREFORE, in consideration of the foregoing, Employer
and Employee hereby agree to the following terms of this Agreement:
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
1
<PAGE> 2
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, 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
2
<PAGE> 3
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. 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.
4. AMENDMENT. This Agreement may be amended only by written
agreement signed by each of the parties hereto.
5. CHOICE OF Law. This Agreement shall be construed and
interpreted in accordance with the laws of the State of Ohio.
6. 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.
7. 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.
8. 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
3
<PAGE> 4
Agreement shall be construed and enforced as if said illegal, invalid or
unenforceable provisions had never been inserted herein.
9. EFFECTIVENESS. Employer hereby represents and warrants to
Employee that execution and performance of this Agreement shall become a valid
and binding obligation of Employer.
10. 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 HOLDINGS, INC.
By /s/ Jack K. Rogers
-------------------------------
Jack K. Rogers
For Notices:
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: President
EMPLOYEE:
/s/ Larry K. Mundorf
------------------------------
Larry K. Mundorf
4
<PAGE> 5
SCHEDULE A
----------
to
Employment and Severance Agreement
Name of Employee: Larry K. Mundorf
Amount of Monthly Salary Payment as of date of this Agreement: $16,667.00
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
5
<PAGE> 1
Exhibit 10.19
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998, by
and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Stephen H. Baum ("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
-2-
<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
-4-
<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
-5-
<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 /s/ Jack K. Rogers
---------------------------------
Its Executive Vice President
---------------------------------
"INDEMNITEE"
/s/ Stephen H. Baum
------------------------------------
Stephen H. Baum
-7-
<PAGE> 1
Exhibit 10.20
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998, by
and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and George R. Zoffinger ("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 /s/ Jack K. Rogers
---------------------------------
Its Executive Vice President
---------------------------------
"INDEMNITEE"
/s/ George R. Zoffinger
------------------------------------
George R. Zoffinger
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<PAGE> 1
Exhibit 10.21
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998, by
and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Michael B. Solow ("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
-5-
<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 /s/ Jack K. Rogers
---------------------------------
Its Executive Vice President
---------------------------------
"INDEMNITEE"
/s/ Michael B. Solow
------------------------------------
Michael B. Solow
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<PAGE> 1
Exhibit 10.22
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998, by
and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Marc L. Luzzatto ("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 /s/ Jack K. Rogers
---------------------------------
Its Executive Vice President
---------------------------------
"INDEMNITEE"
/s/ Marc L. Luzzatto
------------------------------------
Marc L. Luzzatto
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<PAGE> 1
Exhibit 10.23
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998, by
and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Herbert J. Marks ("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
-5-
<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 /s/ Jack K. Rogers
---------------------------------
Its Executive Vice President
---------------------------------
"INDEMNITEE"
/s/ Herbert J. Marks
------------------------------------
Herbert J. Marks
-7-
<PAGE> 1
Exhibit 10.24
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998,
by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and James E. Bonk ("Indemnitee"), an Officer and 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 an Officer and 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
-2-
<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
-5-
<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 /s/ Jack K. Rogers
---------------------------------
Its Corporate Secretary
---------------------------------
"INDEMNITEE"
/s/ James E. Bonk
------------------------------------
James E. Bonk
-7-
<PAGE> 1
Exhibit 10.25
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998,
by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Jack K. Rogers ("Indemnitee"), an Officer and 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 an Officer and 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
-2-
<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
-3-
<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
-4-
<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 /s/ Lee Ann Thorn
---------------------------------
Its Chief Financial Officer
---------------------------------
"INDEMNITEE"
/s/ Jack K. Rogers
------------------------------------
Jack K. Rogers
-7-
<PAGE> 1
Exhibit 10.26
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998,
by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Lee Ann Thorn ("Indemnitee"), an Officer 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 an Officer 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
-2-
<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
-3-
<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
-4-
<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
-5-
<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 /s/ Jack K. Rogers
---------------------------------
Its Corporate Secretary
---------------------------------
"INDEMNITEE"
/s/ Lee Ann Thorn
------------------------------------
Lee Ann Thorn
-7-
<PAGE> 1
Exhibit 10.27
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998,
by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Charles R. Rinehimer III ("Indemnitee"), an Officer 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 an Officer 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 /s/ Jack K. Rogers
---------------------------------
Its Corporate Secretary
---------------------------------
"INDEMNITEE"
/s/ Charles R. Rinehimer III
------------------------------------
Charles R. Rinehimer III
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<PAGE> 1
Exhibit 10.28
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998,
by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Lewis S. Garrett ("Indemnitee"), an Officer 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 an Officer 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 /s/ Jack K. Rogers
---------------------------------
Its Corporate Secretary
---------------------------------
"INDEMNITEE"
/s/ Lewis S. Garrett
------------------------------------
Lewis S. Garrett
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<PAGE> 1
Exhibit 10.29
CAMELOT MUSIC HOLDINGS, INC.
----------------------------
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 4th day of June, 1998,
by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the
"Corporation"), and Larry K. Mundorf ("Indemnitee"), an Officer 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 an Officer 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 /s/ Jack K. Rogers
---------------------------------
Its Corporate Secretary
---------------------------------
"INDEMNITEE"
/s/ Larry K. Mundorf
------------------------------------
Larry K. Mundorf
-7-
<PAGE> 1
Exhibit 10.30
CAMELOT MUSIC HOLDINGS, INC.
DEFERRED COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
EFFECTIVE: JUNE 30, 1998
<PAGE> 2
DEFERRED COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
This Plan is hereby adopted on this 4th day of June, 1998,
effective June 30, 1998, by CAMELOT MUSIC HOLDINGS, INC.(the "Company").
I. NAME AND PURPOSE
1.1. NAME. The name of this Plan shall be the CAMELOT MUSIC
HOLDINGS, INC. DEFERRED COMPENSATION PLAN FOR OUTSIDE
DIRECTORS.
1.2. PURPOSE. This Plan is hereby established to provide unfunded
deferred compensation to Directors under certain conditions
specified herein.
1.3. NOT A FUNDED PLAN. It is the intention and purpose of the
Company that this Plan shall be deemed to be "unfunded" for
tax purposes as well as any other purpose. This Plan shall be
administered in such a manner, notwithstanding any contrary
provision of this Plan, that it will be so deemed and would be
so described.
II. DEFINITIONS
2.1. "ACCOUNTS" mean the Participants' Elective Accounts maintained
on the books of the Company for Participants under this Plan.
A Participant's Account shall not constitute or be treated as
a trust fund of any kind.
2.2. "ADMINISTRATOR" means the person, persons, corporation,
partnership or other entity designated as Administrator under
Section 7.6.
2.3. "AGREEMENT" means the Deferred Compensation Deferral
Agreement(s) executed between a Participant and the Company,
whereby a Participant agrees to defer a portion of his
Compensation in accordance with the provisions of the Plan.
2.4. "APPEALS COMMITTEE" means the Appeals Committee established
pursuant to Article VI.
2.5. "BENEFICIARY" means the person, persons or entity so
designated, or deemed to be so designated, by a Participant
pursuant to Section 4.9.
1
<PAGE> 3
2.6. "BOARD OF DIRECTORS" means the Board of Directors of the
Company.
2.7. "CODE" means the Internal Revenue Code of 1986, as amended and
any lawful regulations or other pronouncements promulgated
thereunder.
2.8. "COMPANY" means Camelot Music Holdings, Inc. and any successor
corporation or business organization which shall assume the
duties and obligations of Camelot Music Holdings, Inc. under
this Plan.
2.9. "COMPENSATION" means for any Participant the retainer and
meeting fees paid to him for his services as a Director.
2.10. "DETERMINATION DATE" means the last day of each calendar
quarter.
2.11. "DIRECTOR" shall mean a member of the Board of Directors of
the Company or any of its subsidiaries or affiliated
companies, who is not otherwise employed by the Company or any
of its subsidiaries or affiliated companies.
2.12. "DISABILITY" shall mean a physical or mental condition of a
Participant resulting from bodily injury, disease or mental
disorder which renders him incapable of continuing his usual
and customary duties as a Director.
2.13. "EFFECTIVE DATE" means the date this Plan shall become
effective which date shall be June 30, 1998.
2.14. "ELECTION YEAR" means the period from the Effective Date
through December 31, 1998 and any calendar year thereafter.
2.15. "ELECTIVE AMOUNT" means for each Participant an amount equal
to the amount by which his Compensation is reduced pursuant to
Section 3.4 hereof.
2.16. "ENTRY DATE" means, with respect to any Participant with
respect to any Election Year, the beginning of such Election
Year or, if, pursuant to Section 3.2, such Participant first
becomes eligible to participate in the Plan on a date
following the commencement of an Election Year, then the first
day of the month coincident with or next following the date he
first
2
<PAGE> 4
meets the eligibility requirements in such Election Year.
2.17. "NORMAL RETIREMENT DATE" means the date a Participant attains
age 65.
2.18. "PARTICIPANT" means any Director who elects to participate in
the Plan in accordance with Section 3.1 hereof and who enters
into an Agreement and who has commenced Compensation
reductions pursuant to such Agreement. A Participant shall
cease to be a Participant, and shall become a former
Participant, upon his Termination of Service. However, the
word Participant may also include, where the context
indicates, any former Participant in this Plan.
2.19. "PARTICIPANT ELECTIVE ACCOUNT" means for each Participant the
bookkeeping account maintained by the Company on his behalf to
reflect his Elective Amounts for an Election Year and all
earnings, gains and losses thereon.
2.20. "PLAN" means the Camelot Music Holdings, Inc. Deferred
Compensation Plan for Outside Directors, as set forth in this
instrument, as amended from time to time.
2.21. "TERMINATION OF SERVICE" means the Participant's cessation of
his service as a Director for any reason whatsoever, whether
voluntarily or involuntarily, including by reason of
retirement, death, or Disability.
III. PARTICIPATION, COMPENSATION REDUCTIONS AND ACCOUNTS
3.1. ELIGIBILITY. A Director shall be eligible to participate in
the Plan for any Election Year as of the first date that the
Director has been elected a Director of the Company.
3.2. PARTICIPATION. Each Director who has satisfied the eligibility
requirements set forth in Section 3.1 shall become a
Participant and actively participate for an Election Year by
completing and filing an Agreement described in Section 3.3
with the Company prior to the first day of the Election Year
or the Effective Date, in the case of the initial Election
Year. In the event a Director first meets such eligibility
requirements after the beginning of an Election Year, such
Director may become a Participant and actively participate for
3
<PAGE> 5
the period commencing on the first day of the month coincident
with or after which he meets the eligibility requirements
until the end of such Election Year by completing and filing
an Agreement described in Section 3.3 with the Company prior
to the first day of such month. Such Agreement shall contain
such provisions as the Company shall require and shall
otherwise be in such form as the Administrator shall
determine.
3.3. DEFERRAL ELECTIONS UNDER AN AGREEMENT. With respect to each
Election Year, each eligible Director may elect, under his
Agreement for such Election Year, to make a deferral of his
Compensation at least a reasonable time, as determined by the
Company in its sole discretion, prior to the time any such
deferred amounts would otherwise be payable to such
Participants. Any such deferral shall be evidenced by an
Agreement in a form acceptable to the Administrator.
3.4. COMPENSATION REDUCTIONS AND DEFERRAL AMOUNTS. A Participant's
election to defer in accordance with 3.3 shall cause an
equivalent reduction in the Participant's Compensation at the
time such amounts would otherwise be payable.
An amount equal to such reductions in a Participant's
Compensation shall constitute an Elective Amount hereunder and
shall be credited to such Participant's Elective Account as of
the time of such reductions.
3.5. ALTERATION OF DEFERRALS. A Participant's deferral election
made pursuant to Section 3.3 above shall be irrevocable.
3.6. ESTABLISHMENT OF ACCOUNTS. The Company shall establish a
Participant Elective Account in the name of each Participant.
All amounts so credited to the Accounts of any Participant or
former Participant shall constitute a general, unsecured
liability of the Company to such person.
3.7. ALLOCATION OF ELECTIVE AMOUNTS. At the time a Participant's
Compensation is reduced pursuant to Section 3.4 hereof, the
Company shall credit the Participant Elective Account of such
Participant with the Participant's Elective Amount with
respect to such Compensation.
3.8. CREDITING OF EARNINGS. The Company shall credit the Account of
each Participant with earnings at the rate of interest on such
Account as if an amount equal to
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<PAGE> 6
the Participant's Account balance had been advanced under the
Revolving Credit Agreement, dated as of January 27, 1998 and
amended as of June 12, 1998, by and among Camelot Music, Inc.,
the several lenders named therein and The Chase Manhattan
Bank, N.A., as agent as such agreement may be amended,
supplemented or otherwise modified from time to time,
including replacement of such agreement with another credit
agreement of like kind and tenor. In the event that no such
agreement is extant, the Company shall credit the Account of
each Participant with earnings calculated in such other manner
as the Company may determine.
3.9. DETERMINATION OF ACCOUNT. The balance of each Participant's
Account as of each Determination Date shall be calculated as
follows, using the terms and methods in the order defined
below:
(a) Earnings, gains and losses determined pursuant to
Section 3.8 shall be allocated based on the
Participant's Adjusted Account. A Participant's
Adjusted Account is equal to the Participant's
Account as of the prior Determination Date, plus 50%
of Elective Amounts, less forfeitures, and less
distributions, which occurred after the prior
Determination Date and up through and including the
current Determination Date.
IV. BENEFITS
4.1. IN-SERVICE DISTRIBUTION. A Participant who is an active
Director of the Company may request to withdraw all or a
portion of his Accounts, provided that any such amounts have
been credited to his Accounts for two (2) or more calendar
years at the time of distribution. Such request shall be made
in writing in a form and manner specified by the Company and
must specify the amounts to be withdrawn and the date upon
which such amounts shall be paid which must be as soon as
administratively possible following a Determination Date that
is at least one (1) year after the date on which the request
is made. Any such request shall be irrevocable unless, prior
to payment, the Participant has a Termination of Service,
dies, or becomes disabled, at which time the request shall
become null and void and the Participant's Accounts shall be
paid as provided in Section 4.3, 4.4, 4.5 or 4.6 hereof,
whichever shall be applicable.
4.2. PARTICIPANT CALL PROVISION. A Participant (or the
Participant's Beneficiary in the case of the death of
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<PAGE> 7
the Participant) at any time may request an accelerated
distribution of all or a portion of the amounts credited to
his Accounts except those amounts that have been contributed
during the Election Year when such request is made, subject to
the forfeiture of an amount equal to ten percent (10%) of such
accelerated amount. Such request shall be made in writing in a
form and manner specified by the Company. The Company shall
distribute to the Participant or Beneficiary such accelerated
amount in the form of a lump sum as soon as administratively
possible after the Determination Date that coincides with or
is immediately after the date on which the Company receives
the request. Such distribution shall completely discharge the
Company from all liability with respect to the Participant's
or Beneficiary's Accounts or portion thereof that is either
distributed or forfeited as set forth herein. Further, if the
Participant is a Director at the time of the distribution, the
Participant may not make any further deferrals into the Plan
until January 1 of the second calendar year following the
calendar year in which the Participant receives the
distribution.
4.3. TERMINATION BENEFIT. Upon the Termination of Service of a
Participant, for reasons other than death or Disability, he
shall be entitled to receive a distribution of the balance of
his Accounts. Such distribution shall be in the form of
benefit provided in Section 4.7 and shall be paid or commence
to be paid as soon as administratively possible after a
Determination Date that is at least one (1) year after the
date on which such a Participant makes a written request for
distribution; provided, however, that such payment or
commencement date shall in no event be later than a date which
is as soon as administratively possible after the January 1st
coinciding with or immediately after the later of either the
Participant's Normal Retirement Date or his date of actual
retirement.
4.4. DEATH PRIOR TO BENEFIT COMMENCEMENT. Upon the Participant's
death prior to commencement of benefits hereunder, the
Beneficiary of the deceased Participant shall be entitled to a
death benefit equal to the balance of the Participant's
Accounts. Such distribution shall be in the form of benefit
determined under Section 4.7 shall commence as of the date
determined under Section 4.8 and shall be in lieu of all other
benefits under this Plan.
4.5. DEATH SUBSEQUENT TO BENEFIT COMMENCEMENT. Upon the death of a
Participant subsequent to commencement of
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<PAGE> 8
his benefits, the Beneficiary of the deceased Participant
shall be entitled to receive a distribution of the
Participant's remaining Accounts. Such distribution shall be
in the form of benefit determined under Section 4.7, shall
commence as of the date determined under Section 4.8 and shall
be in lieu of all other benefits under this Plan.
4.6. DISABILITY. In the event the Administrator has determined that
the Participant has incurred a Termination of Service due to a
Disability of at least six months duration which first
manifests itself after the Effective Date and prior to his
Normal Retirement Date, a disabled Participant shall be
entitled to receive a distribution of the balance of his
Accounts. Such distribution shall be in the form of benefit
determined under Section 4.7 and shall commence as of the date
determined under Section 4.8; provided, however, that the
payment or commencement date shall not be later than a date
which is as soon as administratively possible after the
Determination Date coinciding with or immediately following
the Participant's Normal Retirement Date.
4.7. FORM AND AMOUNT OF BENEFIT PAYMENT.
(a) Subject to such rules, procedures, limits and
restrictions as the Administrator may establish from
time to time, a Participant, may elect that
distributions payable under Sections 4.3, 4.4, 4.5
and 4.6 shall be made in a single sum or in the form
of annual installments over a period of no less than
two (2) calendar years and no more than ten (10)
calendar years.
(b) Initially, the amount of any installments under any
installment form of payment shall be equal to the
balance of the Accounts to be distributed divided by
the number of installments to be paid. The amount of
the installment payments shall be recomputed annually
and the installment payments shall be increased or
decreased to reflect any changes in the Accounts due
to fluctuations in earnings, gains and losses on the
remaining balance and the number of remaining
installments.
(c) In the event of the death of the Participant, as
described in Sections 4.4 or 4.5, the Participant's
Beneficiary may, with the consent of the
Administrator, request an alternative form of benefit
payment, such as a lump-sum payment or an installment
form with an installment period of
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<PAGE> 9
less than ten (10) years. Such request shall be made
in accordance with such procedures as the
Administrator may establish. Any such procedures
shall either require such request be made a
reasonable period of time, as determined by the
Company in its sole discretion, before the amounts
affected by such a request shall be distributable, or
require a forfeiture of a significant portion of such
amounts. The Administrator may, but is not required
to, grant any such requests.
(d) The Administrator, with the consent of the Company,
may establish procedures to permit some or all
Participants to request to change their prior
elections regarding the form of their benefit
payments hereunder, provided that any such procedures
shall either require such request be made a
reasonable period of time, as determined by the
Company in its sole discretion, before the amounts
affected by such request shall be distributable, or
require a forfeiture of a significant portion of such
amounts. The Administrator may, but is not required
to, grant any such requests.
(e) Notwithstanding anything in this Section IV to the
contrary, in no event shall any distribution under
Section 4.1 or 4.2 hereunder be less than the lesser
of One Thousand Dollars ($1,000.00) or the entire
balance of the Participant's Accounts hereunder.
4.8. COMMENCEMENT OF PAYMENTS.
(a) Except as otherwise provided, commencement of
payments under this Plan shall be as soon as
administratively possible following receipt of notice
by the Administrator of an event which entitles a
Participant or a Beneficiary to payments under this
Plan. All payments shall be made as of the first day
of the month.
(b) Subject to such rules, procedures, limits and
restrictions as the Administrator may establish from
time to time, a Participant may elect that any single
sum distributions payable under this Article IV be
made as soon as administratively possible after the
start of any calendar year after the event permitting
payment.
(c) In the event of the death of the Participant, as
described in Sections 4.4 or 4.5, the
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<PAGE> 10
Participant's Beneficiary may, with the consent of
the Administrator, request to change the time of
commencement of benefits hereunder. Such request
shall be made in accordance with such procedures as
the Administrator may establish. Any such procedures
shall either require such request be made a
reasonable period of time, as determined by the
Company in its sole discretion, before the amounts
affected by such a request shall be distributable, or
require a forfeiture of a significant portion of such
amounts. The Administrator may, but is not required
to, grant any such requests.
(d) The Administrator, with the consent of the Company,
may establish procedures to permit some or all
Participants to request to change their prior
elections regarding the time of commencement of
benefits hereunder, provided that any such procedures
shall either require that the request be made a
reasonable period of time, as determined by the
Company in its sole discretion, before the amounts
affected by such request shall be distributable, or
require a forfeiture of a significant portion of such
amounts. The Administrator may, but is not required
to, grant any such requests.
4.9. DESIGNATION OF BENEFICIARY. Subject to rules and procedures
promulgated by the Administrator, a Participant may sign a
document designating a Beneficiary or Beneficiaries. In the
event that a Participant fails to designate any Beneficiary in
accordance with the provisions of this Section, he shall be
deemed to have designated his spouse, or if no spouse is then
living, his estate, as his Beneficiary.
4.10. TAX WITHHOLDING. The Company may withhold from any payment
made by it under the Plan of such amount or amounts as may be
required for purposes of complying with the tax withholding or
other provisions of the Code or the Social Security Act or any
state or local income or employment tax act or for purposes of
paying any estate, inheritance or other tax attributable to
any amounts payable hereunder.
V. RIGHTS OF PARTICIPANTS
5.1. CREDITOR STATUS OF PARTICIPANTS. The Elective Amounts of a
Participant shall be merely unfunded, unsecured promises of
the Company to make benefit payments in the
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<PAGE> 11
future and shall be liabilities solely against the general
assets of the Company. The Company shall not be required to
segregate, set aside or escrow the Elective Amounts nor any
earnings, gains and losses credited thereon. With respect to
amounts credited to any Accounts hereunder and any benefits
payable hereunder, a Participant and his or her Beneficiary
shall have the status of general unsecured creditors of the
Company, and may look only to the Company and its general
assets for payment of such Accounts and benefits.
VI. ADMINISTRATION AND CLAIMS PROCEDURE
6.1. ADMINISTRATOR. The Company shall be the Administrator unless
and until the Board shall appoint some other person, persons,
committee, corporation, partnership or other entity as
Administrator.
6.2. GENERAL RIGHTS, POWERS, AND DUTIES OF ADMINISTRATOR. The
Administrator shall be responsible for the general
administration of the Plan and shall have all powers as may be
necessary to carry out the provisions of the Plan and may,
from time to time, establish rules for the administration of
the Plan and the transaction of the Plan's business. In
addition to any powers, rights and duties set forth elsewhere
in the Plan, it shall have the following powers and duties:
(a) To enact such rules, regulations, and procedures and
to prescribe the use of such forms as it shall deem
advisable;
(b) To appoint or employ such agents, attorneys,
actuaries, accountants, assistants or other persons
(who may also be Participants in the Plan or be
employed by or represent the Company or any of it
subsidiaries or affiliated companies) at the expense
of the Company, as it may deem necessary to keep its
records or to assist it in taking any other action
authorized or required hereunder;
(c) To interpret the Plan, and to resolve ambiguities,
inconsistencies and omissions, to determine any
question of fact, to determine the right to benefits
of, and the amount of benefits, if any, payable to,
any person in accordance with the provisions of the
Plan and resolve all questions arising under the
Plan;
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<PAGE> 12
(d) To administer the Plan in accordance with its terms
and any rules and regulations it establishes;
(e) To maintain such records concerning the Plan as it
deems sufficient to prepare reports, returns and
other information required by the Plan or by law; and
(f) To direct the Company to pay benefits under the Plan,
and to give such other directions and instructions as
may be necessary for the proper administration of the
Plan.
6.3. INFORMATION TO BE FURNISHED TO ADMINISTRATOR. The Company
shall furnish the Administrator with such data and information
as it may reasonably require. The records of the Company shall
be determinative of each Participant's period of service as a
Director, Termination of Service and the reason therefor,
leave of absence, years of service, personal data, and data
regarding Compensation and all reductions thereof under this
Plan. Participants and their Beneficiaries shall furnish to
the Administrator such evidence, data or information and
execute such documents as the Administrator requests.
6.4. CLAIM FOR BENEFITS. Any claim for benefits under the Plan
shall be made in writing to the Administrator in such a manner
as the Administrator shall prescribe. The Administrator shall
process each such claim and determine entitlement to benefits
within ninety (90) days following its receipt of a completed
application for benefits unless special circumstances require
an extension of time for processing the claim. If such an
extension of time for processing is required, written notice
of the extension shall be furnished to the claimant prior to
the termination of the initial ninety (90) day period. In no
event shall such extension exceed a period of ninety (90) days
from the end of such initial period. The extension notice
shall indicate the special circumstances requiring an
extension of time and the date as of which the Administrator
expects to render the final decision.
If such claim is wholly or partially denied by the
Administrator, the Administrator shall notify the claimant of
the denial of the claim in writing, delivered in person or
mailed by first class mail to the claimant's last known
address. Such notice of denial shall be in writing and shall
contain:
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<PAGE> 13
(a) the specific reason or reasons for denial of the
claim;
(b) a reference to the relevant Plan provisions upon
which the denial is based;
(c) a description of any additional material or
information necessary for the claimant to perfect the
claim, together with an explanation of why such
material or information is necessary; and
(d) an explanation of the Plan's claim review procedure.
If no such notice is provided, the claim shall be
deemed denied. The interpretations, determinations and
decisions of the Administrator shall be final and binding upon
all persons with respect to any right, benefit and privilege
hereunder, subject to the review procedures set forth in this
Article.
6.5. REQUEST FOR REVIEW OF A DENIAL OF A CLAIM FOR BENEFITS. Any
claimant or any authorized representative of such claimant
whose claim for benefits under this Plan has been denied or
deemed denied, in whole or in part, by the Administrator may
upon written notice to the Appeals Committee request a review
by the Appeals Committee of such denial of her or his claim
for benefits. Such claimant shall have sixty (60) days from
the date the claim is deemed denied, or sixty (60) days from
receipt of the notice denying the claim, as the case may be,
in which to request a review by written application delivered
to the Appeals Committee, which must specify the relief
requested and the reason such claimant believes the denial
should be reversed.
6.6. APPEALS PROCEDURE. The Appeals Committee is hereby authorized
to review the facts and relevant documents as well as this
Plan, to interpret this Plan and other relevant documents and
to render a decision on the claim of the claimant. Such review
may be made by written briefs submitted by the claimant and
the Administrator or at a hearing, or by both as shall be
deemed necessary by the Appeals Committee. Any such hearing
shall be held in the main offices of the Company or such other
location as the Appeals Committee shall select on such date
and at such time as the Appeals Committee shall designate upon
not less than fifteen (15) days notice to the claimant and the
Administrator unless both of them accept shorter notice. The
notice shall specify that such claimant must indicate in
writing, at least five (5) days in
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<PAGE> 14
advance of the time established for such hearing, his
intention to appear at the appointed time and place, or the
hearing will be automatically canceled. The reply shall
specify any other persons who will accompany him to the
hearing, or such other persons will not be admitted to the
hearing. The Appeals Committee shall make every effort to
schedule the hearing on a day and at a time which is
convenient to both the claimant and the Administrator. The
claimant, or his duly authorized representative, may review
all pertinent documents relating to the claim in preparation
for the hearing and may submit issues and comments in writing
prior to or during the hearing.
6.7. DECISION UPON REVIEW OF DENIAL OF CLAIM FOR BENEFITS. After
the review has been completed, the Appeals Committee shall
render a decision in writing, a copy of which shall be sent to
both the applicant and the Administrator. In making its
decision the Appeals Committee shall have full power and
discretion to interpret the Plan, and to resolve ambiguities,
inconsistencies and omissions, to determine any question of
fact, to determine the right to benefits of, and the amount of
benefits, if any, payable to, any person in accordance with
the provisions of the Plan. The Appeals Committee shall render
a decision on the claim review promptly, but no more than
sixty (60) days after the receipt of the claimant's request
for review, unless special circumstances (such as the need to
hold a hearing) require an extension of time, in which case
the sixty (60) day period shall be extended to one hundred
twenty (120) days. Such decision shall include specific
reasons for the decision and contain specific references to
the relevant Plan provisions upon which the decision is based.
The decision on review shall be furnished to the claimant
within the appropriate time described above. If the decision
on review is not furnished within such time, the claim shall
be deemed denied on review. The decision of the Appeals
Committee shall be final and binding in all respects on the
Administrator and the Company and claimant involved. The
review procedures of this Article shall be the sole and
exclusive remedy and shall be in lieu of all actions at law,
in equity, pursuant to arbitration or otherwise.
6.8. ESTABLISHMENT OF APPEALS COMMITTEE. The Company shall
appoint the members of an Appeals Committee which shall
consist of three (3) or more members. The Company may appoint
one Appeals Committee to hear all appeals of denied benefits
that may arise under the Plan or a number of Appeals
Committees with different members to
13
<PAGE> 15
hear the appeals of denied benefits. The members of the
Appeals Committee shall remain in office at the will of the
Company and the Company, from time to time, may remove any of
said members with or without cause. A member of the Appeals
Committee may resign upon written notice to the remaining
member or members of the Appeals Committee and to the Company,
respectively. The fact that a person is a Participant or a
former Participant or a prospective Participant shall not
disqualify him from acting as a member of the Appeals
Committee, nor shall any member of the Appeals Committee be
disqualified from acting on any question because of his
interest therein, except that no member of the Appeals
Committee may act on any claim which such member has brought
as a Participant, former Participant, or Beneficiary under
this Plan. In case of the death, resignation or removal of any
member of the Appeals Committee, the remaining members shall
act until a successor-member shall be appointed by the
Company. At the Administrator's request, the Secretary of the
Company shall notify the Administrator in writing of the names
of the original members of the Appeals Committee, of any and
all changes in the membership of the Appeals Committee, of the
member designated as Chairman, and the member designated as
Secretary, and of any changes in either office. Until notified
of a change, the Administrator shall be protected in assuming
that there has been no change in the membership of the Appeals
Committee or the designation of Chairman or of Secretary since
the last notification was filed with it. The Administrator
shall be under no obligation at any time to inquire into the
membership of the Appeals Committee or its officers. All
communications to the Appeals Committee shall be addressed to
its Secretary at the address of the Company.
6.9. OPERATIONS OF APPEALS COMMITTEE. On all matters and questions,
the decision of a majority of the members of the Appeals
Committee shall govern and control; but a meeting need not be
called or held to make any decision. The Appeals Committee
shall appoint one of its members to act as its Chairman and
another member to act as Secretary. The terms of office of
these members shall be determined by the Appeals Committee,
and the Secretary and/or Chairman may be removed by the other
members of the Appeals Committee for any reason which such
other members may deem just and proper. The Secretary shall do
all things directed by the Appeals Committee. Although the
Appeals Committee shall act by decision of a majority of its
members as above provided, nevertheless in the absence of
written notice
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<PAGE> 16
to the contrary, every person may deal with the Secretary and
consider his acts as having been authorized by the Appeals
Committee. Any notice served or demand made on the Secretary
shall be deemed to have been served or made upon the Appeals
Committee.
6.10. LIMITATION OF DUTIES. The Company, the Administrator, the
Appeals Committee, and their respective officers, members,
employees and agents shall have no duty or responsibility
under the Plan other than the duties and responsibilities
expressly assigned to them herein or delegated to them
pursuant hereto. None of them shall have any duty or
responsibility with respect to the duties or responsibilities
assigned or delegated to another of them.
6.11. EXPENSES OF ADMINISTRATION AND THE APPEALS COMMITTEE. No fee
or compensation shall be paid to the Administrator or any
member of the Appeals Committee for his or its services as
such, but the Administrator and Appeals Committee may be
reimbursed for its expenses from any Trust established by the
Company in connection herewith, or, if no funds exist therein
or if the Company determines that they should not be paid by
such Trust, by the Company. The Appeals Committee and the
Administrator may hire such attorneys, accountants, actuaries,
agents, clerks, and secretaries as it may deem desirable in
the performance of its functions, any of whom may also be
advisors to the Company or any affiliated company, and the
expense associated with the hiring or retention of any such
person or persons shall be paid directly by the Company or
from such Trust, as directed by the Company.
6.12. INDEMNIFICATION. In addition to whatever rights of
indemnification any individual who serves as a delegate of the
Administrator, Company and the members of the Appeals
Committee may be entitled to under the articles of
incorporation, regulations or bylaws of the Company, under any
provision of law or under any other agreement, the Company
shall satisfy any liability actually incurred by any such
individual including reasonable expenses and attorneys' fees,
and any judgments, fines, and amounts paid in settlement, in
connection with any threatened, pending or completed action,
suit or proceeding which is related to the exercise or failure
to exercise by such individual of any powers, authority,
responsibilities or discretion provided under this Plan or
reasonably believed by such member to be provided hereunder,
and any action taken by such individual in connection
therewith. This indemnification for all such acts taken or
omitted is
15
<PAGE> 17
intentionally broad, but shall not provide indemnification for
embezzlement or diversion of Plan funds for the benefit of any
such individual. Such indemnification will not be provided to
any person who is not a present or former employee the Company
or a subsidiary or affiliated company thereof nor shall it be
provided for any claim by the Company or a subsidiary or
affiliated company thereof against any such person. No
indemnification shall be provided to any person who is not an
individual.
6.13. LIMITATION OF ADMINISTRATIVE LIABILITY. Neither the
Administrator nor the Appeals Committee while acting on behalf
of the Administrator, nor any of their respective officers,
members, employees, agents and delegates shall be liable for
any act taken by such person or entity pursuant to any
provision of the Plan except for gross abuse of the discretion
given it and them hereunder. No member of the Appeals
Committee shall be liable for the act of any other member. No
member of the Board of Directors of the Company shall be
liable to any person for any action taken or omitted in
connection with the administration of this Plan.
6.14. LIMITATION OF SPONSOR LIABILITY. Any right or authority
exercisable by the Company or Board pursuant to any provision
of this Plan shall be exercised in the Company's capacity as
sponsor of the Plan, or on behalf of the Company in such
capacity, and not in a fiduciary capacity, and may be
exercised without the approval or consent of any person in a
fiduciary capacity. Neither the Company, nor the Board, nor
any of their respective officers, members, employees, agents
and delegates, shall have any liability to any party for its
exercise of any such right or authority.
VII. AMENDMENT AND TERMINATION
7.1. AMENDMENT, MODIFICATION AND TERMINATION. This Plan may be
amended, modified or terminated by the Company at any time, or
from time to time, by a document executed on behalf of the
Company by an officer thereof, which amendment, modification
or termination is authorized or ratified by the Board. No such
amendment, modification or termination shall reduce the
amounts credited to any Participant's Accounts, all determined
as of the date of such amendment, modification or termination.
7.2. DISTRIBUTIONS ON TERMINATION. In the event this Plan is
terminated, the amounts then credited to all Participants'
Accounts may, in the Company's sole
16
<PAGE> 18
discretion, (i) be distributed to the Participants in
quarterly installments over such period not more than fifteen
(15) years as the Company may determine, (ii) be distributed
to the Participants in a lump sum, or (iii) continue to be
credited with earnings, gains and losses pursuant to Article
III and be distributed pursuant to Article IV.
VII. MISCELLANEOUS
8.1. NO IMPLIED RIGHTS. Neither the establishment of the Plan nor
any amendment thereof shall be construed as giving any
Participant, Beneficiary or any other person any legal or
equitable right unless such right shall be specifically
provided for in the Plan or conferred by specific action of
the Company in accordance with the terms and provisions of the
Plan. Except as expressly provided in this Plan, the Company
shall not be required or be liable to make any payment under
the Plan.
8.2. NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any
other person shall acquire by reason of the Plan any right in
or title to any assets, funds or property of the Company
whatsoever including, without limiting the generality of the
foregoing, any specific funds, assets or other property which
the Company, in its sole discretion, may set aside in
anticipation of a liability hereunder. Any benefits which
become payable hereunder shall be paid from the general assets
of the Company. The Participant shall have only a contractual
right to the amounts, if any, payable hereunder unsecured by
any asset of the Company. Nothing contained in the Plan
constitutes a guarantee by the Company that the assets of the
Company shall be sufficient to pay any benefit to any person.
8.3. NO RIGHTS TO CONTINUE AS DIRECTOR CREATED. This Plan shall not
be deemed to constitute a contract for services between the
Company and any Participant, nor confer upon any Participant
the right to be retained in the service of Director for any
period of time. Nothing herein shall be construed as fixing or
regulating the Compensation payable to any Participant.
8.4. OFFSET. If, at the time payments or installments of payments
are to be made hereunder, the Participant or the Beneficiary
or both are indebted or obligated to the Company, then the
payments remaining to be made to the Participant or the
Beneficiary or both may, at the discretion of the Company, be
reduced by the amount of
17
<PAGE> 19
such indebtedness or obligation, provided, however, that an
election by the Company not to reduce any such payment or
payments shall not constitute a waiver of its claim for such
indebtedness or obligation.
8.5. NON-ASSIGNABILITY. Neither the Participant nor any other
person shall have any voluntary or involuntary right to
commute, sell, assign, pledge, anticipate, mortgage or
otherwise encumber, transfer, hypothecate or convey in advance
of actual receipt the amounts, if any, payable hereunder, or
any part thereof, and any attempt to do so shall be void. All
benefits or amounts credited to Accounts under this Plan are
expressly declared to be unassignable and non-transferable. No
part of the benefits or amounts credited to Accounts under
this Plan shall be, prior to actual payment, subject to
seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by the
Participant or any other person, or be transferable by
operation of law in the event of the Participant's or any
other person's bankruptcy or insolvency.
8.6. NOTICE. Any notice required or permitted to be given under the
Plan shall be sufficient if in writing and hand delivered, or
sent by registered or certified mail, and if given to the
Company, delivered to the principal office of the Company,
directed to the attention of the Vice President of Human
Resources. Such notice shall be deemed given as of the date of
delivery or, if delivery is made by mail, as of the date shown
on the postmark or the receipt for registration or
certification.
8.7. GOVERNING LAWS. The Plan shall be construed and administered
according to the laws of the State of Ohio to the extent not
preempted by the laws of the United States of America.
8.8. INCAPACITY. If the Administrator determines that any
Participant or Beneficiary entitled to payments under the Plan
is incompetent by reason of physical or mental disability and
is consequently unable to give a valid receipt for payments
made hereunder, or is a minor, the Administrator may order the
payments becoming due to such Participant or Beneficiary to be
made to another person for the benefit of such Participant or
Beneficiary, without responsibility on the part of the
Administrator to follow the application of amounts so paid.
Payments made pursuant to this Section shall completely
discharge the Plan, any Trust, the
18
<PAGE> 20
Administrator, the Company and the Appeals Committee with
respect to such payments.
8.9. ADMINISTRATIVE FORMS. All applications, elections and
designations in connection with the Plan made by a Participant
or Beneficiary shall become effective only when duly executed
on forms provided by the Administrator and filed with the
Administrator.
8.10. RESPONSIBILITY FOR LEGAL EFFECT. Neither the Company, the
Administrator, the Appeals Committee, nor any officer, member,
delegate or agent of any of them, makes any representations or
warranties, express or implied, or assumes any responsibility
concerning the legal, tax, or other implications or effects of
this Plan.
8.11. SUCCESSORS. The terms and conditions of this Plan shall inure
to the benefit of and bind the Company, the Administrator, the
Appeals Committee and its members, the Participants, their
beneficiaries, and the successors, assigns, and personal
representatives of any of them.
8.12. HEADINGS AND TITLES. The Section headings and titles of
Articles used in this Plan are for convenience of reference
only and shall not be considered in construing this Plan.
8.13. GENERAL RULES OF CONSTRUCTION. The masculine gender shall
include the feminine and neuter, and vice versa, as the
context shall require. The singular number shall include the
plural, and vice versa, as the context shall require. The
present tense of a verb shall include the past and future
tenses, and vice versa, as the context may require.
8.14. SEVERABILITY. In the event that any provision or term of this
Plan, or any agreement or instrument required by the
Administrator hereunder, is determined by a judicial,
quasi-judicial or administrative body to be void or not
enforceable for any reason, all other provisions or terms of
this Plan or such agreement or instrument shall remain in full
force and effect and shall be enforceable as if such void or
nonenforceable provision or term had never been a part of this
Plan, or such agreement or instrument.
8.15. ACTIONS BY THE COMPANY. Except as otherwise provided herein,
all actions of the Company under this Plan shall be taken by
the Board, by any officer of the
19
<PAGE> 21
Company, or by any other person designated by any of the
foregoing.
IN WITNESS WHEREOF, the Company, by two of its appropriate officers duly
authorized, has executed this Deferred Compensation Plan for Outside Directors
as of the date first above written.
CAMELOT MUSIC HOLDINGS, INC.
("Company")
By
-----------------------------
Title
--------------------------
And
----------------------------
Title
--------------------------
20
<PAGE> 1
Exhibit 10.31
STOCK OPTION AGREEMENT
(OUTSIDE DIRECTORS)
THIS AGREEMENT, entered into as of the _____ day of
__________, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware
corporation (the "Company"), and ________________ (the "Optionee").
W I T N E S S E T H
-------------------
WHEREAS, the Board of Directors of the Company has established
the Camelot Music Holdings, Inc. 1998 Outside Directors' Stock Option Plan (the
"Plan"); and
WHEREAS, the Plan provides that the Optionee, as an eligible
director of the Company shall be granted an option to purchase the number of
shares of Common Stock, par value $.01 per share ("Shares"), of the Company set
forth in Section 1 hereof, upon the terms and subject to the conditions of the
Plan and this Agreement.
NOW, THEREFORE, the Company and the Optionee hereby agree with
respect to such stock options as follows:
1. Effective as of the date of this Agreement, the Company
grants to the Optionee, upon the terms and subject to the conditions hereinafter
set forth, the right and option to purchase all or any part of an aggregate of
____________ (_______) Shares (such collective right and option being
hereinafter referred to as the "Option"), at a price of $_________ per share
("Option Price").
2. The term of the Option shall be for a period of ten (10)
years from the date hereof, and the Option shall expire at 5:00 p.m., North
Canton, Ohio time on the last day of the term of the Option, which date is
_____________ or, if earlier, on the applicable expiration date provided for in
paragraphs 4 and 5 hereof.
3. Except as provided in paragraph 6 hereof, the Option shall
not be exercisable to any extent until one (1) year from the date hereof. The
Optionee shall be entitled to exercise the Option with respect to the number of
Shares indicated below on or after the date indicated opposite such number
below:
(a) Number of Shares That Date as of Which Option
May be Exercised May Be Exercised
__________ ____________, 19___
__________ ____________, 19___
__________ ____________, 19___
<PAGE> 2
To the extent that the Option has become exercisable with respect to a number of
Shares, as provided above, the Option may thereafter be exercised by the
Optionee either as to all or part of such whole Shares at any time or from time
to time prior to expiration of the Option, pursuant to paragraph 2 hereof.
Except as provided in paragraphs 4 and 5 hereof, the Option may not be exercised
at any time unless the Optionee shall continue to be at the time of exercise an
eligible Outside Director of the Company.
4. If the Optionee ceases to be an eligible Outside Director,
the Option shall terminate upon the earlier of the date which is three (3)
months after the date of the cessation of his directorship or the last day of
the term of the Option. Nothing contained in this Agreement shall confer upon
the Optionee any right to continue as an Outside Director of the Company.
5. If the Optionee dies while an eligible Outside Director,
such person or persons as shall have acquired, by will or by the laws of descent
and distribution, the right to exercise the Option (the "Personal
Representative") may exercise the Option to the extent of the purchase rights,
if any, which had accrued as of the date of the Optionee's death pursuant to
paragraph 3 hereof and which have not theretofore been exercised. Such accrued
purchase rights shall in any event terminate upon the earlier of the date which
is three (3) months after the date of the Optionee's death or the last day of
the term of the Option.
6. In the event of a "change in control" the eligible Outside
Director shall have the immediate right and option (notwithstanding the
provisions of paragraph 3) to exercise the Option with respect to all Shares
covered by the Option, which exercise, if made, shall be irrevocable. The term
"change in control" shall include, but not be limited to: (i) the first purchase
of shares pursuant to a tender offer or exchange (other than a tender offer or
exchange by the Company) for all or part of the Company's shares of any class of
common stock or any securities convertible into such common stock; (ii) the
receipt by the Company of a Schedule 13D or other advice indicating that a
person is the "beneficial owner" (as that term is defined in Rule 13d-3 under
the Securities Exchange Act of 1934) of twenty percent (20%) or more of the
Company's shares of capital stock calculated as provided in paragraph (d) of
said Rule 13d-3; (iii) the date of approval by stockholders of the Company of an
agreement providing for any consolidation or merger of the Company in which the
Company will not be the continuing or surviving corporation or pursuant to which
shares of capital stock, of any class or any securities convertible into such
capital stock, of the Company would be converted into cash, securities, or other
property, other than a merger of the Company in which the holders of shares of
all classes of the Company's capital stock immediately prior to the merger would
have the same proportion of ownership of common stock of the surviving
corporation immediately after the merger; (iv) the date of the approval by
stockholders of the Company of any sale, lease, exchange, or other transfer (in
one transaction or a series of related transactions) of all or substantially all
the assets of the Company; or (v) the adoption of any plan or proposal for the
liquidation (but not a partial liquidation) or dissolution of the Company.
7. In the event of any change in the number of outstanding
Shares through the declaration of share dividends, share splits, or
consolidations, through recapitalization, or by reason of any other increase or
decrease in the number of outstanding Shares effected without
2
<PAGE> 3
receipt of consideration by the Company, the number of Shares then covered by
the Option and the Option Price shall be appropriately adjusted consistent with
such change. The determination of the Board of Directors of the Company as to
any such adjustment shall be conclusive and binding upon the Optionee and upon
the Personal Representative.
8. The Option may be exercised by delivery to the Secretary of
the Company at its corporate office, 8000 Freedom Avenue, N.W., North Canton,
Ohio 44720, of a completed Notice of Exercise of Option (obtainable from the
Secretary of the Company) setting forth the number of whole Shares with respect
to which the Option is being exercised together with a certified or cashier's
check payable to the Company in the amount of the total purchase price for such
Shares.
9. Upon receipt by the Company prior to the expiration of the
Option of a duly completed Notice of Exercise of Option accompanied by a
certified or cashier's check, as provided in paragraph 8 hereof, in full payment
for the Shares being purchased pursuant to such Notice (and, with respect to any
Option exercised pursuant to paragraph 5 hereof by the Personal Representative,
accompanied in addition by proof satisfactory to the Board of Directors of the
Company as to the right of the Personal Representative, to exercise the Option),
the Company shall cause to be mailed or otherwise delivered to the Optionee or
the Personal Representative, as the case may be, within thirty (30) days of such
receipt, a certificate or certificates for the number of Shares so purchased.
Notwithstanding the foregoing, the delivery of such certificates is hereby
expressly conditioned upon obtaining an investment representation from the
Optionee or the Personal Representative in the form set forth at Section 6 of
the Plan or in such other form as the Company, in its sole discretion, shall
determine to be adequate. The Optionee or the Personal Representative shall not
have any of the rights of a shareholder with respect to the Shares covered by
the Option unless and until one or more certificates representing such Shares
shall be issued to the Optionee or the Personal representative.
10. This Agreement shall be binding upon and inure to the
benefit of any successor or successors of the Company and the heirs, estate and
Personal Representative of the Optionee. The Option shall not be transferrable
other than by will or the laws of descent and distribution. The Option may be
exercised during the lifetime of the Optionee only by the Optionee.
11. This Agreement is subject to all of the terms, conditions,
and provisions of the Camelot Music Holdings, Inc. 1998 Outside Directors' Stock
Option Plan, as it may be amended from time to time, and to such rules,
regulations, and interpretations of the Plan as may be adopted by the Board of
Directors of the Company and in effect from time to time. In the event and to
the extent that this Agreement conflicts with or is inconsistent with the terms,
conditions, and provisions of the Plan, the Plan shall control, and this
Agreement shall be deemed to be modified accordingly.
3
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed on its behalf by its undersigned officer thereunto duly authorized,
and the Optionee has hereunto set his hand, all as of the day and year first
above written.
CAMELOT MUSIC HOLDINGS, INC.
By:
------------------------------
Its:
------------------------------
------------------------------
"Optionee"
4
<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.
PricewaterhouseCoopers LLP
Cleveland, Ohio
August 11, 1998
II-5
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Amendment Number One to the
Registration Statement Number 333-56811 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
August 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
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE SUCCESSOR AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-30-1998
<CASH> 15,680<F1>
<SECURITIES> 0
<RECEIVABLES> 2,922<F2>
<ALLOWANCES> 0
<INVENTORY> 176,659<F3>
<CURRENT-ASSETS> 204,915
<PP&E> 40,519
<DEPRECIATION> 0
<TOTAL-ASSETS> 303,894
<CURRENT-LIABILITIES> 90,398
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 197,590
<TOTAL-LIABILITY-AND-EQUITY> 303,894
<SALES> 113,456
<TOTAL-REVENUES> 113,456
<CGS> 71,147
<TOTAL-COSTS> 36,213
<OTHER-EXPENSES> 1,765
<LOSS-PROVISION> (350)
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 4,158
<INCOME-TAX> 1,603
<INCOME-CONTINUING> 2,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,555
<EPS-PRIMARY> $.25
<EPS-DILUTED> $.24
<FN>
<F1>DEPRECIATION AND AMORTIZATION EXPENSE
<F2>SPECIAL ITEMS. SEE FOOTNOTE 4 TO THE COMPANY'S INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
<F3>INTEREST EXPENSE AND AMORTIZATION OF FINANCING FEES.
</FN>
</TABLE>
