SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
- ------------------------------------ -----------------------------------
Commission File Number 1-1354
ALLIANCE ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3645913
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 East 59th Street, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 935-6662
(Registrant s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No _____
As of May 7, 1997, the number of shares outstanding of the Company's common
stock was 44,990,205
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP.
PART I--FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statement of Stockholder's Equity (Deficit) 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II--OTHER INFORMATION
Item 2. Change In Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,669 $ 7,222
Accounts receivable, less allowance for
doubtful
accounts 173,619 118,712
Inventory 164,380 144,328
Advances and other prepaid expenses 22,739 30,016
Refundable income taxes 11,260 10,677
Deferred income taxes 5,798 6,640
----------------- ---------------
Total current assets 386,465 317,595
----------------- ---------------
INVESTMENTS, at cost 1,100 1,073
PROPERTY AND EQUIPMENT 33,793 34,835
COPYRIGHTS, less accumulated amortization 62,917 60,759
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED,
less accumulated amortization 93,727 94,276
COVENANTS NOT TO COMPETE, less accumulated
amortization 8,366 7,811
DEFERRED INCOME TAXES 9,798 9,254
OTHER ASSETS, less accumulated amortization 16,916 16,110
--------------- -------------
TOTAL ASSETS $ 613,082 $ 541,713
================= ===============
CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable $ 72,671 $ 89,688
Current maturities of long-term debt 8,305 9,476
Current obligations under capital leases 582 522
Accounts payable and accrued expenses 267,187 202,517
Income taxes payable 826 334
----------------- ---------------
Total current liabilities 349,571 302,537
----------------- ---------------
LONG-TERM DEBT 236,215 234,640
OBLIGATIONS UNDER CAPITAL LEASES 1,133 1,123
DEFERRED INCOME TAXES 9,109 8,930
MINORITY INTEREST - 618
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, $.01 par value,
886,240 shares authorized, shares issued and
outstanding 422,500 ( $44,644 liquidation preference) 4 4
Series B convertible preferred stock, $.01 par value,
300,000 shares authorized, shares issued and
outstanding 57,500 ( $5,846 liquidation preference) 1 1
Common stock, $.0001 par value, 100,000,000
shares authorized, shares issued and outstanding
1996 44,764,853; 1997 44,990,205 4 4
Additional paid-in capital 146,665 146,972
Employee notes for stock purchases (67) (67)
Accumulated deficit (131,286) (154,376)
Foreign currency translation adjustment 1,733 1,327
----------------- ---------------
Total stockholders' equity (deficit) 17,054 (6,135)
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 613,082 $ 541,713
================= ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1996 1997
----------------- --------------
<S> <C> <C>
Net sales $ 176,188 $ 126,322
Cost of sales 143,394 105,169
----------------- --------------
Gross profit 32,794 21,153
Selling, general and administrative expenses 30,741 31,536
Restructuring and asset impairment charges 428 -
Amortization of intangible assets 2,848 3,918
----------------- --------------
34,017 35,454
----------------- --------------
(1,223) (14,301)
----------------- --------------
Other income (expense)
Amortization of deferred financing costs (469) (515)
Other income (expense) - net 204 (1,151)
Interest expense (8,256) (8,013)
----------------- --------------
(8,521) (9,679)
----------------- --------------
Loss before income taxes (9,744) (23,980)
Benefit for income taxes (5,116) (890)
----------------- --------------
Net loss $ (4,628) $ (23,090)
================= ==============
Loss per common share $ (.13) $ (.52)
================= ==============
Weighted average number of shares of
common stock outstanding 35,837,493 44,767,357
================= ==============
The accompanying notes are an integral part of these financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
(Amounts in Thousands, Except Share Data)
Capital Stock Issued Notes for Foreign
----------------------------------- Additional Employee Currency
Series A Series B Common Paid-In Stock Accumulated Translation
Preferred Preferred Stock Capital Purchases Deficit Adjustment
Stock Stock
----------------------------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, $ 4 $ 1 $ 4 $ 146,665 $ (67) $ (131,286) $ 1,733
1996
Issuance of 225,352 shares
of common stock for
adjustment to purchase
price of subsidiary - - - 366 - -
Adjustment for costs
incurred in connection with
issuance of preferred stock - - - (59) - - -
Net Loss - - - - - (23,090) -
Translation Adjustment - - - - - - (406)
---------- ------------ ---------- ------------- ------------ ------------- --------------
Balance at March 31, 1997 $ 4 $ 1 $ 4 $ 146,972 $ (67) $ (154,376) $ 1,327
========== ============ ========== ============= ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Three Months Ended
March 31,
--------------------------------
1996 1997
----------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (4,628) $ (23,090)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,772 6,060
Change in assets and liabilities:
Decrease in accounts receivable 34,157 54,899
(Increase) decrease in inventory (11,687) 20,053
Increase in prepaid expenses and other (349) (6,794)
Increase in deferred income taxes (1,122) (477)
Decrease in accounts payable and
accrued expenses (21,452) (59,921)
Increase (decrease) in income taxes payable (4,294) 91
----------------- --------------
Net cash used in operating activities (4,603) (9,179)
----------------- --------------
Cash Flows From Investing Activities
Purchase of property and equipment, net (1,525) (2,365)
(Increase) decrease in copyrights (1,946) 1,386
(Increase) decrease in other assets 27 (1,564)
Purchase of businesses including costs,
net of cash acquired (747) (135)
----------------- --------------
Net cash used in investing activities (4,191) (2,678)
----------------- --------------
Cash Flows From Financing Activities
Decrease in excess of outstanding
checks over bank balance (7,327) (4,888)
Proceeds from issuance of stock 458 (59)
Proceeds from borrowings 74,324 18,420
Payments on borrowings (70,246) (2,598)
Payments for financing costs (337) (59)
----------------- --------------
Net cash provided by (used in) financing activities (3,128) 10,816
----------------- --------------
Effect of foreign currency translation 62 (406)
Net decrease in cash and cash equivalents (11,860) (1,447)
Cash and cash equivalents
Beginning of period 12,852 8,669
----------------- --------------
End of period $ 992 $ 7,222
================= ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Interim Financial Information
The unaudited balance sheet as of March 31, 1997 and the unaudited
statements of operations, cash flows and stockholders' equity (deficit) for the
three month periods ended March 31, 1996 and 1997 (interim financial
information), are unaudited and have generally been prepared on the same basis
as the audited financial statements. In the opinion of the Company, the interim
financial information includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of the results of the
interim periods.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial information. The
results of operations for the three months' ended March 31, 1997, may not be
indicative of the operating results for the full year or any interim period.
Certain amounts have been reclassified to conform with the presentation in
the current period.
Restructuring and Other Charges
During the three months ended March 31, 1997, approximately $5.1 million
was paid and charged against a liability established by the Company at December
31, 1996, for restructuring and other non-recurring charges. As of March
31,1997, approximately $12.9 million remains to be paid in future periods.
Credit Agreement Amendment
The Company and Chase Manhattan Bank, as agent for the banks (the "Senior
Lenders") who are parties to the Third Amended and Restated Credit Agreement, as
subsequently amended (the "Credit Agreement"), agreed to amend the Credit
Agreement to revise certain financial covenants for the period ended March 31,
1997 and provide the Company with an overadvance facility of $10 million for a
period of sixty days commencing on May 7, 1997. There can be no assurance that
the Company will be in compliance with the financial covenants under the Credit
Agreement in future periods or satisfy the Company's obligation to raise at
least $35 million in equity capital (the "Equity Condition") before July 1, 1997
under the terms of an amendment to the Credit Agreement entered into on March
27, 1997. In the event that the Company is unable to meet such obligations, the
Senior Lenders would have the right to terminate the term loan and revolving
credit facility and declare all outstanding loans, interest and other amounts
payable under the Credit Agreement, immediately due and payable. In the event of
such termination and acceleration, the Company would be unable to satisfy its
obligations under the Credit Agreement without obtaining additional financing
from third parties.
In order to satisfy the Equity Condition, the cash requirements of the
Consolidation Plan, enhance the Company's working capital position and provide
needed capital for the expansion of the Company's proprietary content business,
the Company is actively pursuing one or a combination of the following financing
alternatives, including: (i) an investment, subject to certain conditions, from
a group including its existing investors to acquire newly-issued securities of
the Company or one of its subsidiaries; (ii) an investment proposal from a third
party, subject to a due diligence investigation and other conditions, to make a
significant capital commitment to the Company in connection with a general
recapitalization of the Company; (iii) the sale of certain assets of the
<PAGE>
Company; and (iv) forebearance by certain of the Company's trade creditors
with respect to certain amounts due and payable with respect to inventory
purchases by the Company. Although the Company has not ruled out a rights
offering of $35 million of convertible preferred stock as previously
contemplated, it is not actively pursuing such an offering. There can be no
assurances that the Company will be successful in obtaining the financing
necessary to satisfy the Equity Condition or provide it with adequate working
capital to achieve its business plan through the remainder of 1997 through one
of the foregoing alternatives.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (FAS
128). FAS 128 specifies new standards designed to improve the EPS information
provided in financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. Some of the changes made to
simplify the EPS computations include: (a) eliminating the presentation of
primary EPS and replacing it with basic EPS, with the principal difference being
that common stock equivalents are not considered in computing basic EPS, (b)
eliminating the modified treasury stock method and the three percent materiality
provision, and (c) revising the contingent share provisions and the supplemental
EPS data requirements. FAS 128 also makes a number of changes to existing
disclosure requirements. FAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. The
Company has not yet determined the impact of the implementation of FAS 128.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Alliance Entertainment Corp. ("Alliance" or the "Company") is a fully integrated
independent music company which creates, markets and distributes its proprietary
content rights consisting of both new artist and catalog product in several
genres. It is also the largest domestic full service distributor of pre-recorded
music and music related products to traditional as well as through emerging
retail channels. Under Alvin N. Teller, the Company's Co-Chairman, Chief
Executive Officer and President, the Company is expanding its proprietary
content business as well as consolidating and focusing the operations of the
Company.
The Company's Proprietary Products Group consists of three primary labels: Red
Ant, Concord Jazz and Castle Communications. Each of these labels specializes in
particular genres of music and releases records under a number of label
imprints. Red Ant (which commenced operations in 1996 and released its first
full length projects in the first quarter of 1997) specializes in new product
primarily in the alternative rock and urban genres, with particular focus on the
identification and development of new talent. It has succeeded in acquiring
rights to certain groups also sought by labels of greater size and financial
resources. Concord Jazz is a label specializing in traditional and contemporary
jazz by well-known jazz artists such as Mel Torme, Rosemary Clooney, Chick Corea
and Maynard Ferguson. Castle Communications is primarily a catalog and re-issue
label which specializes in exploiting proprietary content rights to 1960's and
1970's British rock groups such as The Kinks, Iron Maiden, Black Sabbath, and
the Small Faces. Castle Communications together with The St. Clair Entertainment
Group (the Company's wholly-owned Canadian subsidiary) are also engaged in the
creation of budget product utilizing both the Company's proprietary products and
rights licensed from others.
The Company's distribution operation is conducted through two groups: the One
Stop Group specializing in the wholesale distribution of substantially all
available pre-recorded music product (i.e., pre-recorded music manufactured by
the six major music companies: Sony Music, Time Warner, Polygram, MCA, EMI and
BMG (the "Major Labels")), as well as music manufactured by independent labels
("Independent Labels"), and the Independent Distribution Group (specializing in
the marketing, promotion and distribution of pre-recorded music manufactured by
certain Independent Labels, including the Proprietary Products Group, on an
exclusive and regional basis). While the Company's distribution operation
services primarily store-based retail customers currently, the Company is
actively seeking distribution and fulfillment opportunities with music retailers
operating on-line or through the internet. The Company is the exclusive music
supplier to several on-line music retail sites and also provides music database
services to many cyber-retailers, including Music Boulevard.
The Company believes that its position as the largest full service distributor
of music product in the United States provides certain competitive advantages to
its Proprietary Products Group over other labels with respect to identifying and
attracting new talent for the Proprietary Products Group and that this advantage
will enhance its growth and commercial success.
Industry Conditions
After sustaining significant growth from 1990 to 1995, the domestic music
industry has gone through a period of little or no growth since 1995. Estimated
United States retail sales volume for pre-recorded music and music videos, as
published by the Recording Industry Association of America ("RIAA") totaled
approximately $12.5 billion in 1996, representing a 1.5% increase from
approximately $12.3 billion in 1995. This current slow down in the growth of
domestic music sales has combined with (i) an over-expansion of retail outlets
selling music products, (ii) substantial discount pricing on pre-recorded music
by certain traditional and alternative music retailers; and (iii) changes in
<PAGE>
music consumption demographics to adversely impact the music industry in general
and the Company's customers in particular. The adverse conditions have resulted
in, among other things, product returns to the Company well in excess of
historical levels as well as the bankruptcy of several significant customers.
While the Company believes that these adverse factors are temporary in nature,
no assurances can be given as to when such conditions will be alleviated.
Consolidation Plan
In November 1996, the Company announced a comprehensive consolidation plan (the
"Consolidation Plan") pursuant to which Alliance's operations are in the process
of being streamlined and non-core businesses have been sold or discontinued.
Pursuant to the Consolidation Plan, the Company will close five of the Company's
eight domestic distribution facilities by the first quarter of 1998 (a ninth
facility was closed in February 1996) and centralize all administrative
functions for the Company's One Stop Group and Independent Distribution Group.
Additionally, the Consolidation Plan calls for the administrative functions of
the Company's three domestic proprietary labels (Red Ant, Castle US and Concord
Jazz) to be consolidated under Red Ant. The Consolidation Plan is expected to be
completed by March 1998 and includes the elimination of approximately 851
employee positions comprised principally of warehouse, sales, management and
administrative employees.
When fully implemented, the Company believes that the Consolidation Plan will
result in annual savings to Alliance of approximately $25 million. As of
December 31, 1996, the Company recorded charges for costs and expenses to be
incurred pursuant to the Consolidation Plan of $33.6 million, $12.9 million of
which will be required to be expended after March 31, 1997.
Results of Operations
The following discussion and analysis should be read in conjunction
with the unaudited financial statements of the Company and the notes thereto
included elsewhere in this report.
The following table sets forth, for the three months ended March 31,
certain operating data as a percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1997
<S> <C> <C>
Net Sales 100.0% 100.0%
Gross Profit 18.6 16.8
Selling, General & Administrative Expenses 17.5(1) 25.0
Restructuring and Asset Impairment Charges .2 ---
Amortization of Intangible Assets 1.6 3.1
Other income (expense) primarily
interest expense (4.8) (7.7)
Benefit for income tax (2.9) (.7)
Net Loss (2.6) (18.3)
<PAGE>
<FN>
(1) Selling, general & administrative expenses for the three months ended
March 31, 1996 include certain non-recurring charges of approximately $2.5
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Three Months Ended March 31, 1997 vs. Three Months Ended
March 31, 1996."
</FN>
</TABLE>
The following table sets forth, for the three months ended March 31,
1997, certain operating data by business segment, excluding corporate related
expenses and assets.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
(in thousands)
Proprietary
Distribution Products
<S> <C> <C>
Net Sales $ 114,423 $ 11,436
Depreciation & Amortization 672 1,973
Operating Loss (3,488) (5,220)
Capital Expenditures 937 84
Identifiable Assets 272,532 124,969
</TABLE>
Three Months Ended March 31, 1997 vs. Three Months Ended March 31, 1996
Net sales decreased from $176.2 million for the three months ended
March 31, 1996 to $126.3 million for the three months ended March 31, 1997, or
28.3%. Net sales attributable to the Company's distribution segment for the
three months ended March 31, 1997 were approximately $114.4 million compared to
$157.1 million for the three months ended March 31, 1996. During the three
months ended March 31, 1997, sales in the Company's distribution segment were
negatively impacted by: (i) decreased export sales; (ii) an increase in the
number of unfilled orders due to inventory shortages resulting from a reduction
in vendor credit with certain suppliers; (iii) the divestiture of the Company's
Brazilian operations; and (iv) limited budgets allocated to the purchase of deep
catalog product by certain of the Company's customers. Net sales attributable to
the Company's proprietary product segment for the three months ended March 31,
1997 were approximately $11.4 million, compared to approximately $19.0 million
for the three months ended March 31, 1996. Net sales in this segment were lower
than the comparable period in 1996 due in part to: (i) the elimination of sales
from the Company's video business that was discontinued in the fourth quarter of
1996; and (ii) a reduced number of product releases during the quarter due to
the timing of release schedules. The Company's business is seasonal with the
smallest percentage of sales typically occurring in the first quarter and the
largest percentage of annual sales typically occurring in the fourth quarter.
The Company's gross margin decreased to 16.8% for the three months ended
March 31, 1997 from 18.6% for the three months ended March 31, 1996. For the
three months ended March 31, 1997, the gross margin of the distribution segment
was 13.1%, compared to 15.9% for the three months ended March 31, 1996. The
reduction in gross margin for the distribution segment was primarily related to:
(i) increased proportion of sales of the One Stop Group attributable to new
release product as opposed to higher margin, deep catalog product; (ii) the
Company's inability to take advantage of discount buying and advertising
programs offered by vendors due to working capital constraints; and (iii) the
impact of the disposition of the Brazilian operations. For the three months
ended March 31, 1997, the gross margin of the proprietary products segment was
50.1% compared to 40.8% for the three months ended March 31, 1996. The increase
in the Company's gross margin for the proprietary product segment resulted from
a higher level of licensing revenue for the quarter, which typically carries a
higher gross margin, versus the sale of finished goods.
<PAGE>
Selling, general and administrative expenses increased from $30.7 million,
or 17.5% of net sales, for the three months ended March 31, 1996 (including
non-recurring charges during the period of approximately $2.5 million relating
to the termination of the Company's proposed merger with Metromedia
International Group, Inc.) to $31.5 million, or 25.0% of net sales, for the
three months ended March 31, 1997. The Company's selling, general and
administrative expenses increased on an overall basis in the period primarily
due to the inclusion of the operations of Red Ant for a full three months. This
increase was partially offset by: (i) the divestiture of the Company's Brazilian
operations; and (ii) the non-recurring charge of $2.5 million included in
selling, general and administrative expenses in 1996.
Net loss for the three months ended March 31, 1996 was $4.6 million
compared to a net loss in the three months ended March 31, 1997 of $23.1 million
which primarily resulted from: (i) the results of operations discussed above;
(ii) increased depreciation and amortization of intangible assets associated
with acquisitions ($4.8 million for the three months ended March 31, 1996
compared to $5.8 million for the three months ended March 31, 1997); and (iii)
reduced tax benefits recorded in the first quarter of 1997 due to a net
operating loss carryforward at December 31, 1996.
Liquidity and Capital Resources
Cash Used in Operations
Cash used in operations for the three months ended March 31, 1997 was $9.2
million compared to $4.6 million for the three months ended March 31, 1996.
Accounts receivable for the period decreased by $54.9 million or 32%, primarily
as a result of the Company's decrease in net sales during the three months ended
March 31, 1997, and the collection of receivables with respect to seasonal
dating programs offered by the Company during the fourth quarter of 1996.
Inventory for the period decreased $20.1 million or 12% as a result of: (i) the
Company's decrease in net sales during the three months ended March 31, 1997;
and (ii) an on-going inventory reduction initiative implemented as part of the
Consolidation Plan. Accounts payable and accrued expenses decreased by $64.7
million or 24%, primarily as a result of: (i) the Company's decrease in net
sales during the three months ended March 31, 1997; (ii) payments to vendors
with respect to seasonal dating programs offered to the Company in the fourth
quarter of 1996; and (iii) the payment of charges accrued in 1996 related
to the Consolidation Plan.
Cash Used in Investing Activities
The Company's capital expenditures for the three months ended March 31, 1997
were $2.4 million compared to $1.5 million for the three months ended March 31,
1996. The capital spending during the three months ended March 31, 1997 was
primarily focused on the modernization of the Company's Coral Springs, Florida
facility and the acquisition of computer hardware to enable the execution of the
Consolidation Plan.
During the three months ended March 31, 1997, the Company expended $1.5 million
to enter into a joint venture agreement with Delicious Vinyl Records Inc., in
order to expand the Company's proprietary music rights. The Company's
investments in copyrights decreased at March 31, 1997 by $1.4 million primarily
due to a foreign currency translation adjustment by its UK subsidiary. The
Company anticipates continued expenditures related to the acquisition of
proprietary music rights as opportunities are presented that are consistent with
the Company's long term objectives.
Consolidation Plan
When fully implemented, the Company believes that the Consolidation Plan will
result in annual savings to Alliance of approximately $25 million. As of
December 31, 1996, the Company recorded charges for costs and expenses to be
incurred pursuant to the Consolidation Plan of $33.6 million, $12.9 million of
which will be required to be expended after March 31, 1997.
<PAGE>
Cash Provided from Financing Activities
The Company and Chase Manhattan Bank, as agent for the banks (the "Senior
Lenders") who are parties to the Third Amended and Restated Credit Agreement, as
subsequently amended (the "Credit Agreement"), agreed to amend the Credit
Agreement to revise certain financial covenants for the period ended March 31,
1997 and provide the Company with an overadvance facility of $10 million for a
period of sixty days commencing on May 7, 1997. There can be no assurance that
the Company will be in compliance with the financial covenants under the Credit
Agreement in future periods or satisfy the Company's obligation to raise at
least $35 million in equity capital (the "Equity Condition") before July 1, 1997
under the terms of an amendment to the Credit Agreement entered into on March
27, 1997. In the event that the Company is unable to meet such obligations, the
Senior Lenders would have the right to terminate the term loan and revolving
credit facility and declare all outstanding loans, interest and other amounts
payable under the Credit Agreement, immediately due and payable. In the event of
such termination and acceleration, the Company would be unable to satisfy its
obligations under the Credit Agreement without obtaining additional financing
from third parties.
In order to satisfy the Equity Condition, the cash requirements of the
Consolidation Plan, enhance the Company's working capital position and provide
needed capital for the expansion of the Company's proprietary content business,
the Company is actively pursuing one or a combination of the following financing
alternatives, including: (i) an investment, subject to certain conditions, from
a group including its existing investors to acquire newly-issued securities of
the Company or one of its subsidiaries; (ii) an investment proposal from a third
party, subject to a due diligence investigation and other conditions, to make a
significant capital commitment to the Company in connection with a general
recapitalization of the Company; (iii) the sale of certain assets of the
Company; and (iv) forebearance by certain of the Company's trade creditors with
respect to certain amounts due and payable with respect to inventory purchases
by the Company. Although the Company has not ruled out a rights offering of $35
million of convertible preferred stock as previously contemplated, it is not
actively pursuing such an offering . There can be no assurances that the
Company will be successful in obtaining the financing necessary to satisfy
the Equity Condition or provide it with adequate working capital to achieve its
business plan through the remainder of 1997 through one of the foregoing
alternatives.
Forward-Looking Statements
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"expects," "anticipates," or words of similar import. Similarly, statements that
describe the Company's future plans, objectives, estimates or goals are
forward-looking statements. There are certain important factors that could cause
results to differ materially from those anticipated by forward-looking
statements made herein. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. In addition to the factors discussed
above, among the factors that could cause actual results to differ materially
are the following: availability of new release product, pricing strategies of
competitors, public demand for various styles of recorded music, product returns
from customers and overall economic conditions.
<PAGE>
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128
specifies new standards designed to improve the EPS information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents are not considered in computing basic EPS, (b) eliminating the
modified treasury stock method and the three percent materiality provision, and
(c) revising the contingent share provisions and the supplemental EPS data
requirements. FAS 128 also makes a number of changes to existing disclosure
requirements. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company has not
yet determined the impact of the implementation of FAS 128.
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGE IN SECURITIES
The Company entered into a merger agreement dated as of September 5, 1995,
(the "Merger Agreement"), to acquire One Way Records, Inc., and an affiliated
Independent Label (together, "One Way"), for a total consideration of
$16,500,000 in cash, notes and 147,309 shares of Alliance common stock. The
Merger Agreement provided for the payment of additional consideration to the One
Way selling shareholders based on the operating profit of One Way for fiscal
year 1995, as defined. The additional consideration was paid in March 1997
through the issuance of 225,352 shares of Alliance common stock to the selling
shareholders which issuance was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Merger Agreement dated December 20, 1995 by and among Metromedia
International Group, Inc., Alliance Merger Corp. and the Registrant.
(Incorporated by reference from Exhibit 1 filed in the Registrant's Form
8-K dated December 21, 1995 (File No. 0-20182).)
2.2 Termination and Release Agreement dated April 29, 1996.(Incorporated by
reference from Exhibit 1 filed in the Registrant's Form 8-K dated April 29,
1996 (File No. 1-13054).)
3.1 Certificate of Incorporation, as amended. (Incorporated by reference from
Exhibit 3.1 filed in the Registrant's Amendment No. 1 to Registration
Statement on Form S-4 filed September 22, 1995 (Registration No.
33-95386).)
3.2 Revised and Restated By-Laws. (Incorporated by reference from Exhibit 3.2
filed in the Registrant's Form 10-Q for the period ended September 30,
1996, (File No. 1-13054).)
3.3 Certificate of Designations.(Incorporated by reference from Exhibit 3.3
filed in the Registrants Form 10-Q for the period ended September 30,1996.
(File No. 1-13054).)
3.4 Certificate of Designations.*
4.1 Restated Stockholders' Agreement dated as of November 30, 1993.
(Incorporated by reference from Exhibit 4.1 filed in the Registrant's
Registration Statement on Form S-3 dated September 22, 1995 (Registration
No. 33-97280).)
4.2 Amendment to Restated Stockholders' Agreement dated as of May 18, 1995.
(Incorporated by reference from Exhibit 4.2 filed in the Registrant's
Registration Statement on Form S-3 dated September 22, 1995 (Registration
No. 33-97280).)
4.3 Indenture dated July 25,1995 among the Company, the Subsidiary Guarantors
and Bankers Trust Company, as trustee. (Incorporated by reference from
Exhibit 4.1 filed in the Registrant's Registration Statement on Form S-4
filed August 3, 1995 (Registration No. 33-95386).)
4.4 First Supplemental Indenture dated July 26, 1995 among the Company, the
Subsidiary Guarantors and Bankers Trust Company, as trustee. (Incorporated
by reference from Exhibit 4.2 filed in the Registrant's Amendment No. 1 to
Registration Statement on Form S-4 filed September 22, 1995 (Registration
No. 33-95386).)
4.5 Registration Rights Agreement dated July 25, 1995 among the Company, the
Subsidiary Guarantors and the Initial Purchasers. (Incorporated by
reference from Exhibit 4.3 filed in the Registrant's Registration Statement
on Form S-4 filed August 3, 1995 (Registration No. 33-95386).)
<PAGE>
4.6 Purchase Agreement dated July 18, 1995 among the Company, the Guarantors
and the Initial Purchasers. (Incorporated by reference from Exhibit 4.4
filed in the Registrant's Registration Statement on Form S-4 filed August
3, 1995 (Registration No. 33-95386).)
4.7 Second Supplemental Indenture dated September 6, 1995 among the Company,
the Subsidiary Guarantors and Bankers Trust Company, as trustee.
(Incorporated by reference from Exhibit 4.5 filed in the Registrant's
Amendment No. 1 to Registration Statement on Form S-4 filed September 22,
1995 (Registration No. 33-95386).)
4.8 Purchase Agreement made as of May 18, 1995, between AEC Americas Inc. and
Bain Capital Fund IV L.P., Bain Capital Fund IV-B L.P., BCIP Associates and
BCIP Trust Associates, L.P. (Incorporated by reference from Exhibit 4.5
filed in the Registrant's Form 10-Q for the period ended June 30, 1995
(File No. 1-13054).)
4.9 Parent Covenant Agreement dated as of May 18, 1995, by and between Alliance
Entertainment Corp., AEC Americas, Inc., and Bain Capital Fund IV L.P.,
Bain Capital Fund IV-B L.P., BCIP Associates and BCIP Trust Associates,
L.P. (Incorporated by reference from Exhibit 4.6 filed in the Registrant's
Form 10-Q for the period ended June 30, 1995 (File No. 1-13054).)
4.10 Third Supplemental Indenture dated February 26, 1996, among the Company,
the Subsidiary Guarantors and Bankers Trust Company as Trustee.
(Incorporated by reference from Exhibit 4.10 filed in the Registrant's Form
10-Q for the period ended March 31, 1996 (File No. 1-13054).)
4.11 Preferred Stock Purchase Agreement dated July 16,1996, between the Company,
BT Capital Partners, Inc. and BCI Growth IV, L.P. (Incorporated by
reference from Exhibit 4.11 filed in the Registrant's Form 8-K dated july
16, 1996. (File No. 1-13054).)
4.12 Voting Agreement dated as of August 15, 1996, among Joseph Bianco, John
Friedman, Peter Kaufmann, Elliot Newman, Robert Marx, Alvin Teller, Bain
Capital, Inc., BT Capital Partners Inc., U.S. Equity Partners, L.P., U.S.
Equity Partners (Offshore) L.P. and Wasserstein & Co., Inc. (Incorporated
by reference from Exhibit 1 (E) filed in the Registrant's Form 8-K dated
August 15, 1996 (File No. 1-13054).)
10.1 Incentive Stock Option Plan for Executives of Jerry Bassin, Inc.
(Incorporated by reference from Exhibit 10.1 filed as part of the Proxy and
Prospectus in connection with the Special Meeting held on November 30, 1993
(File No. 33-68816).)
10.2 1992 Non-Qualified Stock Option Plan. (Incorporated by reference from
Exhibit 10.2 filed as part of the Proxy and Prospectus in connection with
the Special Meeting held on November 30, 1993 (File No. 33-68816).)
10.3 1993 Stock Option Plan.(Incorporated by reference from Exhibit 10.3 filed
as part of the Proxy and Prospectus in connection with the Special Meeting
held on November 30, 1993 (File No. 33-68816).)
10.4 1993 Stock Option Incentive Plan.(Incorporated by reference from Exhibit
10.4 filed as part of the Proxy and Prospectus in connection with the
Special Meeting held on November 30, 1993 (File No. 33-68816).)
10.5 Amendment and Restated Employment Agreement dated as of August 15, 1996,
between the Company and Joseph J. Bianco. (Incorporated by reference from
Exhibit 10.5 filed in the Registrant's Form 10-Q for the period ended
September 30, 1996 (File No. 1-13054).)
10.6 Amended and Restated Employment Agreement dated as of August 15, 1996,
between the Company and Anil K. Narang. (Incorporated by reference from
Exhibit 10.6 filed in the Registrant's Form 10-Q for the period ended
September 30, 1996 (File No. 1-13054).)
<PAGE>
10.7 Employment Agreement dated as of November 1, 1995, between the Company and
Timothy J. Dahltorp.(Incorporated by reference from Exhibit 10.7 filed with
the Registrant's Form 10-K for the year ended December 31, 1996 (File No.
1-13054).)
10.8 Amended and Restated Employment Agreement dated as of August 15, 1996
between the Company and Elliot B. Newman. (Incorporated by reference from
Exhibit 10.8 filed in the Registrant's Form 10-Q for the period ended
September 30, 1996 (File No. 1-13054).)
10.9 Employment Agreement dated as of September 5, 1995 between the Company and
David H. Schlang. (Incorporated by reference from Exhibit 10.9 filed with
the Registrant's Form 10-K for the year ended December 31, 1996 . (File No
1-13054).)
10.10Lease dated March 25, 1993 between Howard L. Bellowe and E. James Judd (as
Landlord) and Encore Distributors, Inc., relating to the premises located
at 2345 Delgany Street, Denver, Colorado. (Incorporated by reference from
Exhibit 10.11 filed as part of the Proxy and Prospectus in connection with
the Special Meeting held on November 30, 1993 (File No. 33-68816).)
10.12Stock Sale Agreement dated December 11, 1992 between R. Tobias Knobel and
the Registrant. (Incorporated by reference from Exhibit 10.20 filed as part
of the Proxy and Prospectus in connection with the Special Meeting held on
November 30, 1993 (File No. 33-68816).)
10.13Merger Agreement dated August 11, 1993 among the Registrant, CD
Acquisition Corp., Titus Oaks Records, Inc., Alan Meltzer and Diana
Meltzer. (Incorporated by reference from Exhibit 10.21 filed as part of the
Proxy and Prospectus in connection with the Special Meeting held on
November 30, 1993 (File No. 33-68816).)
10.14Engagement Letter dated October 29, 1992 between the Registrant and Tucker
Anthony Incorporated. (Incorporated by reference from Exhibit 10.22 filed
in the Registrant's Form 10-K for the year ended December 31, 1993 (File
No. 1-13054).)
10.15Amendment of Stock Sale Agreement and Employment Agreement dated as of
September 30, 1993 between R. Tobias Knobel and the Registrant.
(Incorporated by reference from Exhibit 10.23 filed in the Registrant's
Form 10-K for the year ended December 31, 1993 (File No. 1-13054).)
10.16Form of Employment Agreement dated as of March 14, 1994 between the
Registrant and Eric S. Weisman. (Incorporated by reference from Exhibit
10.28 filed in the Registrant's Form 10-K for the year ended December 31,
1993 (File No. 1-13054).)
10.17Form of 1994 Long-Term Incentive and Share Award Plan. (Incorporated by
reference from Exhibit 10.29 filed in the Registrant's Form 10-K for the
year ended December 31, 1993 (File No. 1-13054).)
10.18Form of Amendment to the 1994 Long-Term Incentive and Share Award Plan.
(Incorporated by reference from Exhibit 10.18 filed in the Registrant's
Form 10-K for the year ended December 31, 1995 (File No 1-13054).)
<PAGE>
10.19Engagement Letter dated September 9, 1993 between the Registrant and
PaineWebber Incorporated. (Incorporated by reference from Exhibit 10.30
filed in the Registrant's Form 10-K for the year ended December 31, 1993
(File No. 1-13054).)
10.20Engagement Letter dated May 27, 1993 between the Registrant and Bear,
Stearns & Co. Inc. (Incorporated by reference from Exhibit 10.31 filed in
the Registrant's Form 10-K for the year ended December 31, 1993 (File No.
1-13054).)
10.21Asset Purchase Agreement dated December 16, 1993 between the Registrant
and Nova Distributing Corp. (Incorporated by reference from Exhibit 10.32
filed in the Registrant's Form 10-K for the year ended December 31, 1993
(File No. 1-13054).)
10.22Merger Agreement dated as of February 4, 1994 between the Registrant and
Airlie, Inc. (Incorporated by reference from Exhibit 10.35 filed in the
Registrant's Form 8-K dated February 4, 1994 (File No. 1-13054).)
10.23Extention Agreement to Employment Agreement dated July 31,1996, between
the Company and Eric Weisman. (Incorporated by reference from Exhibit 10.23
filed with the Registrant's Form 10-K for the year ended December 31, 1996
(File No. 1-13054).)
10.25Offer Document dated July 28, 1994 from AEC Holdings (UK) Limited to the
Shareholders of Castle and press release issued in the United Kingdom in
connection therewith. (Incorporated by reference from Exhibit 10.41 filed
in the Registrant's Form 10-Q for the quarterly period ended June 30, 1994
(File No. 1-13054).)
10.26Lease between the Registrant and The Northwestern Mutual Life Insurance
Company dated January 12, 1995, relating to the premises located at 15050
Shoemaker Avenue, Santa Fe Springs, California. (Incorporated by reference
from Exhibit 10.45 filed in the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 (File No. 1-13054).)
10.27Third Amended and Restated Credit Agreement and Guaranty dated as of July
25, 1995 among the Company, the Guarantors, the Banks and The Chase
Manhattan Bank, N.A., as Agent. (Incorporated by reference from Exhibit
10.50 filed in the Registrant's Registration Statement on Form S-4 filed
August 3, 1995 (Registration No. 33-95386).)
10.28Merger Agreement dated as of September 1, 1995 relating to One Way
Records, Inc. (Incorporated by reference from Exhibit 10.51 filed in the
Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed
September 22, 1995 (Registration No. 33-95386).)
10.29Merger Agreement dated as of September 1, 1995 relating to Deja Vu Music,
Inc. (Incorporated by reference from Exhibit 10.52 filed in the
Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed
September 22, 1995 (Registration No. 33-95386).)
10.30Management Consulting Agreement dated as of May 10, 1995, among Alliance
Entertainment and Bain Capital, Inc. (Incorporated by reference from
Exhibit 10.51 filed in the Registrant's Form 10-Q for the period ended June
30, 1995 (File No. 1-13054).)
<PAGE>
10.31Merger Agreement by and between the Company, INDI Acquisition Corp. and
INDI Holdings Inc., dated July 17, 1995. (Incorporated by reference from
Exhibit 2.3 filed in the Registrant's Form 10-Q for the period ended June
30, 1995 (File No. 1-13054).)
10.33Quota Purchase Agreement dated October 11, 1995, relating to the
acquisition of Distribuidora de Discos E Fitas Canta Brasil Ltda.
(Incorporated by reference from Exhibit 10.33 filed in the Registrant's
Form 10-Q for the period ended March 31, 1996. (File No. 1-13054).)
10.34Distribution Agreement dated June 21, 1996, between the Company and
EMI-Capitol Music Group. (Incorporated by reference from Exhibit 2 filed
with the Registrant's Form 8-K dated June 21, 1996. (File No. 1-13054).)
10.35Letter of Intent dated July 1, 1996, between the Company and Matrix
Software, Inc. (Incorporated by reference from Exhibit 10.35 filed with the
Registrant's Form 10-Q for the period ended June 30, 1996 (File No.
1-13054).)
10.36First Amendment to Third Amended and Restated Credit Agreement and
Guaranty dated as of September 30, 1995, among the Company, AEC Holdings
(UK) Limited, the Guarantors, the Banks and The Chase Manhattan Bank, N.A.,
as Agent. (Incorporated by reference from Exhibit 10.36 filed with the
Registrant's Form 10-Q for the period ended June 30, 1996 (File No.
1-13054).)
10.37Second Amendment to Third Amended and Restated Credit Agreement and
Guaranty dated as of December 31, 1995, among the company, AEC Holdings
(UK) Limited, the Guarantors, the Banks and The Chase Manhattan Bank, N.A.,
as Agent. (Incorporated by reference from Exhibit 10.37 filed with the
Registrant's Form 10-Q for the period ended June 30, 1996 (File No.
1-13054).)
10.38Third Amendment to Third Amended and Restated Credit Agreement and
Guaranty dated as of June 30, 1996, among the Company, AEC Holdings (UK)
Limited, Castle Communication Limited, the Guarantors, the Banks and The
Chase Manhattan Bank, N.A., as Agent. (Incorporated by reference from
Exhibit 10.38 filed with the Registrant's Form 10-Q for the period ended
June 30, 1996 (File No. 1-13054).)
10.39Stock Acquisition and Merger Agreement dated as of August 15, 1996, by and
among the Company, Alvin N. Teller, Wasserstein & Co. Inc., U.S. Equity
Partners L.P. and others. (Incorporated by reference from Exhibit 1 filed
with the Registrant's Form 8-K dated August 15, 1996 (File No. 1-13054).)
10.40The 1994 Long Term Incentive and Share Award Plan. (Incorporated by
reference from the Registrant's Registration Statement on Form S-8 filed on
June 10, 1994. (File No. 33-80134).)
10.41Amendment No. 1 to the 1994 Long Term Incentive and Share Award Plan.
(Incorporated by reference from the Registrant's Registration Statement on
Form S-8 filed on September 5, 1995. (File No. 33-96592).)
10.42Employment Agreement dated as of August 15, 1996, between Alliance
Entertainment Corp. and Alvin N. Teller. (Incorporated by reference from
Exhibit 10.42 filed with the Registrant's Form 10-Q for the period ended
September 30, 1996. (File No. 1-13054).)
10.43Stock Option Agreement between Alliance Entertainment Corp. and Alvin N.
Teller dated August 15, 1996. (Incorporated by reference from Exhibit 10.43
filed with the Registrant's Form 10-Q for the period ended September 30,
1996. (File No. 1-13054).)
10.44Engagement Letter Agreement among the Company and Wasserstein Perella &
Co., Inc. dated as of August 15, 1996. (Incorporated by reference from
Exhibit 10.44 filed with the Registrant's Form 10-Q for the period ended
September 30, 1996. (File No. 1-13054).)
<PAGE>
10.45Right of First Refusal Agreement dated as of August 15,1996, by and among
Alvin N. Teller, Joe Bianco and Anil Narang. (Incorporated by reference
from Exhibit 10.45 filed with the Registrant's Form 10-Q for the period
ended September 30, 1996. (File No. 1-13054).)
10.46Fourth Amendment to Third Amended and Restated Credit Agreement and
Guaranty among the Company, AEC Holdings (UK) Limited, Castle
Communications Limited, The Guarantors, the Banks, and The Chase Manhattan
Bank, N.A., as Agent. (Incorporated by reference from Exhibit 10.46 filed
with the Registrant's Form 10-Q for the period ended September 30, 1996.
(File No. 1-13054).)
10.47Purchase Agreement among Wasserstein & Co. Inc., Cypress Ventures, Inc.,
and BT Capital Partners, Inc. dated December 20, 1996, including exhibits
thereto. Incorporated by reference from Exhibit 10.47 filed with the
Registrant's Form 8-K dated December 20, 1996. (File No. 1-13054).)
10.48Settlement Agreement dated as of March 10, 1997, among the Company, David
H. Schlang, Jack Rosenbloom and Peter Hyman.*
11.1 Statement Re: Computation of Earnings (Loss) per Share. (Incorporated by
reference from Exhibit 11.1 filed with the Registrant's Form 10-K for the
year ended December 31, 1996. (File No. 1-13054).)
27.1 Financial Data Schedule.*
(b) Reports on Form 8-K
None
*Filed herewith
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIANCE ENTERTAINMENT CORP.
Date: May 15, 1997 By: /s/ Timothy Dahltorp
-----------------------------
Timothy Dahltorp
Executive Vice President,
Chief Financial Officer and
Treasurer
CERTIFICATE OF DESIGNATIONS
OF
ALLIANCE ENTERTAINMENT CORP.
Pursuant to Section 151 of the Delaware General Corporation Law (the "GCL"),
ALLIANCE ENTERTAINMENT CORP., a Delaware corporation (the "Corporation"),
certifies as follows:
FIRST: Under the authority contained in Article FOURTH of the Certificate of
Incorporation, as amended, of the Corporation, the Board of Directors of the
Corporation has classified an aggregate of three hundred thousand (300,000)
shares of the authorized but unissued shares of preferred stock of the
Corporation into a series which shall be designated Series B Convertible
Preferred Stock.
SECOND: The following resolution was adopted by the Board of Directors on
December 19, 1996 and such resolution has not been modified and is in full force
and effect on the date hereof:
RESOLVED, that the Board of Directors hereby creates, from the authorized but
unissued shares of preferred stock of the Corporation, a series of convertible
preferred stock designated as Series B Convertible Preferred Stock, par value
$0.01 per share (the "Preferred Stock"), and hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series, as follows:
<PAGE>
Section 1. Preferred Stock Dividends.
1.1 General Dividend Obligation. When, as and if declared by the Board of
Directors of the Corporation, the Corporation shall pay to the holders of record
of the Preferred Stock, out of the assets of the Corporation available for the
payment of dividends under the General Corporation Law of the State of Delaware,
preferential dividends at the times and in the amounts provided for in this
Section 1.
1.2 Payments of Dividends; Payments in Additional Shares.
(a) When declared by the Board of Directors of the Corporation, dividends on the
Preferred Stock shall be payable on whole shares of Preferred Stock on each
Dividend Payment Date (capitalized terms not otherwise defined herein being used
in this Certificate of Designations with the definitions set forth in Section
11).
(b) Dividends shall be paid only in additional whole shares of Preferred Stock,
having a Liquidation Value (exclusive of any accrued unpaid dividends) equal in
amount to the dividends payable, by mailing certificates for such shares to each
holder of record of Preferred Stock at such holder's address as it appears on
the Corporation's stock register at least five days prior to the due date of
each dividend or otherwise delivering such shares so as to be received by such
holder on the due date of such dividend. If any portion of a dividend would
result in the issuance of a fraction of a share of Preferred Stock, such
fraction shall be carried forward and accumulated with other fractions and shall
be paid on a subsequent Dividend Payment Date when such accumulated fractions
equal at least one whole share of Preferred Stock.
(c) If at any time dividends on the outstanding Preferred Stock at the rate set
forth herein shall not have been fully paid or declared and set aside for
payment, no dividends or other distributions shall be declared or paid upon or
set apart for payment on the shares of any other class of Junior Securities.
1.3 Calculation of Dividends. Dividends on each share of Preferred Stock shall
be calculated cumulatively at the rate and in the manner prescribed herein from
and including the date of issuance of such share of Preferred Stock, whether or
not such dividends shall have been declared and whether or not there shall be
(at the time such dividends are calculated or become payable or at any other
time) profits, surplus or other funds or assets of the Corporation legally
available for the payment of dividends. For purposes of this Section 1.3, the
date on which the Corporation shall initially issue any share of Preferred Stock
shall be deemed to be its "date of issuance" regardless of the number of times
transfer of such share of Preferred Stock shall be made on the stock register
maintained by or for the Corporation and regardless of the number of
certificates which may be issued to evidence such share of Preferred Stock
(whether by reason of transfer of such share or for any other reason).
<PAGE>
1.4 Dividend Rates. Dividends shall be cumulative, and shall accrue on a daily
basis on each Outstanding share of Preferred Stock at the rate per annum
(computed on the basis of a 360-day year having twelve thirty-day months) of six
percent (6%) of the Liquidation Value of each share of Preferred Stock. To the
extent not paid, on a Dividend Payment Date all unpaid dividends accrued on each
share of Preferred Stock Outstanding during such quarter (or from and including
the original date of issuance of such share in the case of the initial
quarter-end after the date of issuance) shall be added to the Liquidation Value
of such share and shall remain a part thereof until such dividends are paid.
Section 2 Liquidation Preferences.
Subject to the holders' conversion rights provided below herein, upon any
liquidation (complete or partial), dissolution or winding up of the Corporation,
or any similar distribution of its assets to its stockholders which results in a
return of capital, whether voluntary or involuntary, the holders of the
Preferred Stock shall be entitled, before any distribution or payment is made
upon any Junior Securities of the Corporation, to be paid out of the assets of
the Corporation available for distribution to its stockholders (whether from
capital, surplus or earnings) an amount in cash equal to the sum of (i) the
aggregate Liquidation Value of all shares of Preferred Stock then Outstanding,
plus (ii) all accrued unpaid dividends on such shares, and shall not be entitled
to any further payment. Written notice of such liquidation, dissolution, winding
up or other distribution of assets, stating a payment date, the amount of the
payment and the place where the amounts distributable shall be payable, shall be
mailed by certified or registered mail, return receipt requested, not less than
60 days prior to the payment date stated therein, to each record holder of any
share of Preferred Stock entitled thereto at the address for such record holder
shown on the Corporation's records. Neither the consolidation nor merger of the
Corporation into or with any other corporation or corporations, nor the sale or
transfer by the Corporation of all or any part of its assets, shall be deemed to
be a liquidation, dissolution, winding up or similar distribution of the
Corporation within the meaning of any of the provisions of this Section 2. The
Preferred Stock shall rank pari passu with the Corporation's Series A
Convertible Preferred Stock.
<PAGE>
Section 3. Redemptions of Preferred Stock.
3.1 Redemption Price. For each share of Preferred Stock which is to be redeemed
by the Corporation at any time and for any reason in a redemption pursuant to
this Section 3, the Corporation shall be obligated on the Redemption Date,
regardless of whether the Corporation shall be able or legally permitted to make
such payment on the Redemption Date, to pay to the holder thereof (upon
surrender by such holder at the Corporation's principal office of the
certificate representing such share of Preferred Stock duly endorsed in blank or
accompanied by an appropriate form of assignment) the Redemption Price for such
share of Preferred Stock, payable in cash.
3.2 Redeemed or Otherwise Acquired Shares Not to Be Reissued. Any shares of
Preferred Stock redeemed pursuant to this Section 3 or otherwise acquired by the
Corporation shall not be reissued, sold or transferred by the Corporation and
shall be retired.
3.3 Determination of Number of Each Holder's Shares to Be Redeemed. The number
of shares of Preferred Stock to be redeemed from each holder thereof in each
redemption under this Section 3 shall be determined by multiplying the total
number of shares of Preferred Stock to be redeemed times a fraction, the
numerator of which shall be the total number of shares of Preferred Stock then
held by such holder and the denominator of which shall be the total number of
shares of Preferred Stock then Outstanding, rounded if the result is fractional
to the nearest whole number of shares.
3.4 Optional Redemption by Corporation. (a) The Preferred Stock may be redeemed
in whole (but not in part), at the Redemption Price, at the Corporation's option
at any time after the seventh (7th) anniversary of the date of original issuance
of the Preferred Stock, on at least 30 days' notice.
3.5 Mandatory Redemption Based on Failure of Stockholders' Vote. (a) In the
event that the Preferred Stock has not become convertible in accordance with
Section 4.1(a) on or before July 26, 2005, then at any time after such date (i)
any holder of shares of Preferred Stock may require the Corporation to redeem
all or any portion of the Preferred Stock owned by such holder, at the
Redemption Price (as determined pursuant to this Section 3.5), upon written
notice to the Corporation requesting such redemption, or (ii) the Corporation
may, at its option, redeem the Preferred Stock then Outstanding in whole (but
not in part), at the Redemption Price (as determined pursuant to this Section
3.5), upon written notice to the holders thereof. Notice of any such election by
the Corporation to redeem shall specify a redemption date not less than 10 nor
more than 30 days after the date of such notice.
<PAGE>
(b) The Redemption Price for each holder's shares of Preferred Stock redeemed
pursuant to this Section 3.5 shall be the lesser of
(i) the amount which, on receipt by the holder, will cause the holder to realize
an Internal Rate of Return of thirty-five percent (35%) with respect to its
investment in such shares being redeemed, and
(ii) seventy-five percent (75%) of the Corporation's cumulative EBITDA, for the
period from the date of original issuance of the Preferred Stock to the date of
such redemption, multiplied by a fraction, the numerator of which is the number
of shares of Preferred Stock to be redeemed from such holder and the denominator
of which is the aggregate number of shares of Preferred Stock issued by the
Corporation, provided that the Redemption Price per share of Preferred Stock
calculated pursuant to this paragraph (ii) shall in no event be less than the
Liquidation Value thereof.
3.6 Redemptions or Purchase by Corporation's Designee(s). In lieu of any
redemption of Preferred Stock by the Corporation permitted hereunder, the
Corporation may designate one or more purchasers who shall be entitled to
purchase the Preferred Stock from the holders thereof at the applicable
Redemption Price. Any such designee(s) shall have the rights and obligations of
the Corporation specified herein with respect to the redemption of such shares.
3.7 Notice of Redemption. Except as otherwise expressly provided herein, notice
of any redemption of Preferred Stock, specifying the time and place of
redemption, the Redemption Price (in the case of a redemption under Section 3.5,
showing the computation thereof in reasonable detail) and the Section and
paragraph pursuant to which such redemption is being made, shall be mailed by
certified or registered mail, return receipt requested, to each holder of record
of shares of Preferred Stock to be redeemed, at the address for such holder
shown on the Corporation's records, not more than sixty (60) nor less than
thirty (30) days prior to the date on which such redemption is to be made. The
notice shall also specify the number of shares of Preferred Stock and the
certificate numbers thereof which are to be redeemed. With respect to
redemptions made pursuant to Section 3.4, upon mailing any such notice of
redemption the Corporation shall become obligated to redeem at the time of
redemption specified therein all shares of Preferred Stock therein specified. In
case less than all the shares of Preferred Stock represented by any certificate
are redeemed, a new certificate representing the unredeemed shares of Preferred
Stock shall be issued to the holder thereof without cost to such holder.
Notwithstanding any other provision of this Section 3, the Corporation shall not
be entitled to redeem any shares of Preferred Stock in respect of which the
holder of such Preferred stock has delivered to Corporation a Conversion Notice
after the delivery of notice by the Corporation as provided in this paragraph
but prior to the Redemption Date.
<PAGE>
3.8 Rights After Redemption Date. Provided that the Redemption Price is paid in
full on the applicable Redemption Date, no share of Preferred Stock shall be
entitled to any dividends accrued after its Redemption Date, and on such
Redemption Date, except as otherwise provided herein or by law, all rights of
the holder of such share of Preferred Stock as a stockholder of the Corporation,
by reason of the ownership of such share, shall cease, except the right to
receive the Redemption Price of such share upon presentation and surrender of
the certificate representing such share, and such share shall not after such
Redemption Date be deemed to be Outstanding.
3.9 Other Redemptions. The Corporation shall neither redeem nor otherwise
acquire any shares of any class of Preferred Stock except (i) as expressly
authorized in this Certificate of Designations, or (ii) pursuant to any offer of
redemption made to the holders of Preferred Stock of such class pro rata
according to the shares held by them.
3.10 Deposit of Redemption Price. If on or before the date of redemption
specified in any notice of redemption of any share of Preferred Stock, the
Corporation shall irrevocably deposit the amount of the Redemption Price thereof
with a bank or trust company having an office in the City of New York,
designated in such notice of redemption, in trust for the benefit of the holder
of such share of Preferred Stock, such share of Preferred Stock shall be deemed
to have been redeemed on the date so specified, whether or not the certificate
for such share shall be surrendered for redemption and canceled.
Section 4. Conversion of Preferred Stock.
4.1 Conversion Procedures. (a) The Preferred Stock shall be convertible into
shares of Common Stock, in accordance with the terms of this Section 4 after the
receipt by the Corporation of a Conversion Notice as defined in Section 4.1(c)
hereof received at any time after the date that the issuance of Common Stock
upon such conversion is approved by the holders of outstanding Common Stock, in
compliance with Rule 312.03 of the New York Stock Exchange Listed Company Manual
(or such approval otherwise is not required) subject to the requirements of
Section 4.1(b) hereof.
<PAGE>
(b) A holder of shares of Preferred Stock may, at any time after the
requirements of Section 4.1(a) are satisfied, convert pursuant to this Section 4
all or any part (in whole numbers of shares only) of the shares of Preferred
Stock held by such holder into such number of fully paid and non-assessable
whole shares of Common Stock as is obtained by multiplying the number of shares
of Preferred Stock so to be converted by the Liquidation Value thereof and
dividing the result by the Conversion Price then in effect. Such right as to any
particular share shall terminate at the close of business on the day immediately
prior to the date fixed for payment on the Preferred Stock upon any liquidation,
dissolution, winding up or similar distribution of the Corporation.
(c) Each conversion of Preferred Stock shall be effected by the surrender of the
certificate or certificates representing the shares to be converted at the
principal office of the Corporation (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holder
or holders of the Preferred Stock) at any time during its usual business hours,
which shall be accompanied by a written notice by the holder of such Preferred
Stock (a "Conversion Notice") stating that such holder desires to convert
shares, or a stated number of shares, represented by a certificate or
certificates specifically described therein. Such Conversion Notice shall also
specify the name or names (with addresses) and denominations in which the
certificate or certificates for Common Stock shall be issued and shall include
instructions for delivery thereof. The Conversion Price shall be determined as
of the close of business on the date the certificate representing the Preferred
Stock and the Conversion Notice is received by the Corporation. Such conversion
shall be deemed to have been effected as of the close of business on the date on
which the certificate representing the Preferred Stock and the Conversion Notice
for such shares shall have been received by the Corporation, and as of such date
(the "Conversion Date") the rights of the holder of such Preferred Stock (or
specified portion thereof) as such holder shall cease and the person or persons
in whose name or names any certificate or certificates for shares of Common
Stock are to be issued upon such conversion shall be deemed to have become the
holder or holders of record of the shares of Common Stock represented thereby.
(d) As soon as possible after the Conversion Date (and in no event more than 30
days after the Conversion Date), subject to Section 4.2(c), with respect to the
certificate(s) specified in (i) and (ii) below, the Corporation shall deliver to
the converting holder or, with respect to the certificate(s) specified in (i)
below, as specified by such converting holder:
<PAGE>
(i) a certificate or certificates representing the number of shares of Common
Stock issuable by reason of such conversion registered in such name or names and
such denomination or denominations as the converting holder shall have
specified;
(ii) a certificate representing any shares of Preferred Stock which shall have
been represented by the certificate or certificates which shall have been
delivered to the Corporation in connection with such conversion but which shall
not have been converted; and
(iii) a payment of cash in an amount equal to the value of any fractional share
of Common Stock that otherwise would be issuable in connection with the
Preferred Stock converted.
4.2 Authorization and Issuance of Common Stock. The Corporation covenants and
agrees that:
(a) The Corporation will at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
issuing upon the conversion of the Preferred Stock as provided in this Section
4, such number of shares of Common Stock as shall then be issuable upon the
conversion of all Outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Common Stock which shall be so issuable shall, when
issued, be duly and validly issued, fully paid and non-assessable and free from
all taxes, liens, and charges. The Corporation will take all such action as may
be necessary to assure that all shares of Common Stock may be so issued without
violation of any applicable law or regulation or any requirements of any
domestic stock exchange upon which any shares of Common Stock may be listed.
(b) The Corporation will not take any action which results in any adjustment of
the number of shares of Common Stock acquirable upon conversion of a share of
Preferred Stock if after such action the total number of shares of Common Stock
issuable upon conversion of the Preferred Stock then Outstanding, together with
the total number of shares of Common Stock then Outstanding and the total number
of shares of Common Stock reserved for any purpose other than issuance upon
conversion of Common Stock, would exceed the total number of shares of Common
Stock then authorized by the Corporation's Certificate of Incorporation, as
amended.
<PAGE>
(c) If any shares of Common Stock required to be reserved for purposes of
conversions of shares of Preferred Stock under this Certificate of Designations
require registration with, or approval of, any governmental authority under any
federal or state law (other than any registration under the Securities Act of
1933, as then in effect, or any similar federal statute then in force, or any
state securities law, required by reason of any transfer involved in such
conversion), or listing on any domestic securities exchange, before such shares
may be issued upon conversion, the Corporation will, at its expense and as
expeditiously as possible, use its best efforts to cause such shares to be duly
registered or approved for listing or listed on such domestic securities
exchange, as the case may be.
(d) The issuance of certificates for shares of Common Stock upon conversion of
shares of the Preferred Stock shall be made without charge to the holders of
such shares for any issuance tax in respect thereof, or other cost incurred by
the Corporation in connection with such conversion and the related issuance of
shares of Common Stock, provided that the Corporation shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the holder
of the Preferred Stock converted.
(e) The Corporation will not close its books against the transfer of any share
of Preferred Stock or of any share of Common Stock issued or issuable upon the
conversion of such shares in any manner which interferes with the timely
conversion of such shares.
4.3 Conversion Price. (a) The initial Conversion Price shall be one dollar and
twenty-five cents ($1.25). In order to prevent dilution of the conversion rights
granted hereunder, the Conversion Price shall be subject to adjustment from time
to time pursuant to this Section 4.
(b) If and whenever the Corporation shall issue or sell, or shall in accordance
with Section 4.4 be deemed to have issued or sold, any shares of Common Stock
for a consideration per share that is less than 95% of the Market Price on the
date of such issue or sale, then, forthwith upon such issue or sale, the
Conversion Price shall, subject to Section 4.4, be reduced to the price
(calculated to the nearest $0.001) determined by multiplying the Conversion
Price in effect immediately prior to the time of such issue or sale by a
fraction, the numerator of which shall be the sum of (i) the number of shares of
Common Stock Deemed Outstanding immediately prior to such issue or sale
multiplied by the Market Price immediately prior to such issue or sale plus (ii)
the consideration received by the Corporation upon such issue or sale, and the
denominator of which shall be the product of (iii) the total number of shares of
Common Stock Deemed Outstanding immediately after such issue or sale, multiplied
by (iv) the Market Price immediately prior to such issue or sale.
<PAGE>
Notwithstanding the foregoing, no adjustment of the Conversion Price shall be
made in an amount less than $0.001 per share, but any such lesser adjustment
shall be carried forward and shall be made at the time of and together with the
next subsequent adjustment which together with any adjustments so carried
forward shall amount to $0.001 per share or more.
(c) Notwithstanding the provisions of this Section 4.3 and Section 4.4, no
adjustment of the Conversion Price shall be required as a result of the sale or
issuance of Common Stock, at prices less than 95% of the Market Price then in
effect, (i) upon conversion of any of the Preferred Stock or the Corporation's
Series C Convertible Preferred Stock, par value $0.01 per share (the "Series C
Preferred Stock") or the exchange of the Corporation's 6% Exchangeable Notes due
December 31, 2001, (ii) in connection with Excluded Securities, or (iii) the
issuance of the Series C Preferred Stock.
4.4 Effect of Certain Events on Conversion Price. For purposes of determining
the adjusted Conversion Price under Section 4.3, the following shall be
applicable:
(a) Issuance of Rights or Options. In case at any time the Corporation shall in
any manner grant (whether directly or by assumption in a merger or otherwise)
any rights to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or other securities convertible into or exchangeable
for Common Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Options or the rights to convert or exchange
such Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities (determined by dividing
(i) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than 95% of the Market
Price, determined as of the date of granting of such Options), then the total
maximum number of shares of Common Stock issuable upon the exercise of such
<PAGE>
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall (as of
the date of grant of such Options) be deemed to be outstanding and to have been
issued for such price per share. No adjustment of the Conversion Price shall be
made upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such Options or upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible Securities, except as
otherwise provided in Section 4.4(c).
(b) Issuance of Convertible Securities. In case the Corporation shall in any
manner issue (whether directly or by assumption in a merger or otherwise) or
sell any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon such conversion or exchange (determined by
dividing (i) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than 95% of the Market Price,
determined as of the date of such issue or sale of such Convertible Securities,
then the total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall (as of the date of the
issue or sale of such Convertible Securities) be deemed to be outstanding and to
have been issued for such price per share. Except as otherwise provided in
Section 4.4(c), no adjustment of the Conversion Price shall be made upon the
actual issue of such Common stock upon conversion or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Conversion Price have been made or are to be made pursuant to other provisions
of this Section 4.4, no further adjustment of the Conversion Price shall be made
by reason of such issue or sale.
(c) Change in Option or Conversion Price. If the purchase price provided for in
any Option referred to in Section 4.4(a), the additional consideration, if any,
payable upon conversion or exchange of any Convertible Securities referred to in
Section 4.4(a) or (b), or the rate at which any Convertible Securities referred
to in Section 4.4(a) or (b) are convertible into or exchangeable for Common
Stock, shall change at any time (other than under or by reason of provisions
designed to protect against dilution of the type set forth in this Section 4.4
<PAGE>
or in Sections 4.3 and 4.5), then the Conversion Price in effect at the time of
such change shall forthwith be adjusted to the Conversion Price which would have
been in effect at such time had such Option or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold. If the purchase price provided for in any Option referred to in Section
4.4(a), the additional consideration, if any, payable upon conversion or
exchange of any Convertible Securities referred to in Section 4.4(a) or (b), or
the rate at which any Convertible Securities referred to in Section 4.4(a) or
(b), are convertible into or exchangeable for Common Stock, shall be reduced at
any time under or by reason of provisions with respect thereto designed to
protect against dilution of the type set forth in this Section 4.4 or Sections
4.3 and 4.5, then in case of the delivery of Common Stock upon the exercise of
any such Option or upon conversion or exchange of any such Convertible Security,
the Conversion Price then in effect hereunder shall forthwith be adjusted to
such respective amount as would have been obtained had such Option or
Convertible Security never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common Stock delivered
as aforesaid, but only if as a result of such adjustment the Conversion Price
then in effect hereunder would be reduced.
(d) Treatment of Expired Options and Unexercised Convertible Securities. Upon
the expiration of any Option or the termination of any right to convert or
exchange any Convertible Securities (without any exercise of such Option or
right), the Conversion Price then in effect hereunder shall forthwith be
adjusted to the Conversion Price which would have been in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination, never
been issued, and the Common Stock issuable thereunder shall no longer be deemed
to be outstanding.
(e) Calculation of Consideration Received.
(i) In case any shares of Common Stock, Options or Convertible Securities shall
be issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor shall be deemed to be the aggregate proceeds
payable to the Corporation therefor, prior to deduction of any expenses incurred
and any underwriting commission or concessions paid or allowed by the
Corporation in connection therewith.
<PAGE>
(ii) In case any shares of Common Stock, Options or Convertible Securities shall
be issued or sold for a consideration other than cash, the amount of
consideration other than cash received by the Corporation shall be deemed to be
the fair value, determined in good faith by the Board of Directors.
(iii) In case any Options shall be issued in connection with the issue or sale
of other securities of the Corporation, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued without
consideration.
(iv) In case any shares of Common Stock, Options or Convertible Securities shall
be issued in connection with any merger in which the Corporation is the
surviving corporation, the amount of consideration therefor shall be deemed to
be the fair value, determined in good faith by the Board of Directors, of such
portion of the net assets and business of the non-surviving corporation as shall
be attributable to such Common Stock, Options or Convertible Securities, as the
case may be.
(v) In the event of any consolidation or merger of the Corporation in which
stock or other securities of any corporation are issued in exchange for Common
Stock of the Corporation or in the event of any sale of all or substantially all
of the assets of the Corporation for stock or other securities of any
corporation, the Corporation shall be deemed to have issued a number of shares
of its Common Stock for stock or securities of the other corporation computed on
the basis of the actual exchange ratio on which the transaction was predicated
and for a consideration equal to the fair market value on the date of such
transaction of such stock or securities of the other corporation, and if any
such calculation results in adjustment of the Conversion Price the determination
of the number of shares of Common Stock receivable upon conversion of the
Preferred Stock immediately prior to such merger, consolidation or sale, for
purposes of Section 4.7, shall be made after giving effect to such adjustment of
the Conversion Price.
<PAGE>
(vi) In case the Corporation shall declare a dividend or make any other
distribution upon any stock of the Corporation payable in Common Stock, Options
or Convertible Securities, any Common Stock, Options or Convertible Securities,
as the case may be, issuable in payment of such dividend or distribution shall
be deemed to have been issued or sold without consideration.
(f) Record Date. For purposes of Sections 4.3 and 4.4, in case the Corporation
shall take a record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities, or (ii) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock deemed
to have been issued or sold upon the declaration of such dividend or the making
of such other distribution or the date of granting of such right or subscription
or purchase, as the case may be.
4.5 Subdivisions and Combinations. Except to the extent Section 4.4(e)(vi) above
applies, in the event that the Corporation shall at any time subdivide (by any
stock split, stock dividend or otherwise) one or more classes of its outstanding
Common Stock into a greater number of shares of Common Stock, the Conversion
Price in effect immediately prior to such subdivision forthwith shall be
proportionately reduced. Conversely, in the event the outstanding shares of one
or more classes of the Common Stock shall be combined into a smaller number of
shares (by reverse stock split or otherwise), the Conversion Price in effect
immediately prior to such combination shall be proportionately increased.
4.6 Dividends. In the event that the Corporation declares a dividend (other than
a dividend payable in Common Stock, Options or Convertible Securities, or a cash
dividend payable out of earnings or earned surplus) upon Common Stock, then at
the option of the holders of a majority of the outstanding shares of Preferred
Stock,
(1) the Corporation shall pay over to each holder, on the dividend payment date,
the cash, stock or other securities and other property which holder would have
received if such holder had converted all of his or its shares of Preferred
Stock into Common Stock and had been the record holder of such Common Stock on
the date on which a record is taken for the purpose of such dividend, or, if a
record is not taken, the date as of which the holders of Common Stock of record
entitled to such dividend are to be determined, or
<PAGE>
(2) the Conversion Price in effect immediately prior to the declaration of such
dividend shall be reduced by an amount equal to the amount of such dividend
payable per share of Common Stock, in the case of a cash dividend, or by the
fair value of such dividend per share (as reasonably determined by the Board of
Directors of the Corporation), in the case of any other dividend, such reduction
to be effective on the date as of which a record is taken for purposes of such
dividend, or if a record is not taken, the date as of which holders of record of
Common Stock entitled to such dividend are determined, or
(3) in the case of a dividend consisting of stock or securities (other than
Common Stock, Options or Convertible Securities) or other property distributable
to holders of Common Stock, the holder of Preferred Stock may elect that, in
lieu of (1) or (2) above, lawful and adequate provisions shall be made
(including without limitation any necessary reduction in the Conversion Price)
whereby such holder of Preferred Stock shall thereafter have the right to
purchase and/or receive, on the terms and conditions specified in this
Certificate of Designations and in addition to the shares of Common Stock
receivable immediately prior to the declaration of such dividend upon conversion
of his or its shares of Preferred Stock, such shares of stock, securities or
property as are distributable with respect to outstanding shares of Common Stock
equal to the number of shares of Common Stock receivable immediately prior to
such declaration upon conversion of his or its shares of Preferred Stock, to the
end that the provisions hereof (including without limitation provisions for
adjustments of the Conversion Price and of the number of shares receivable upon
such conversion) shall thereafter be applicable, as nearly as may be, in
relation to such shares of stock, securities or property.
For the purposes of this Section 4.6, "dividend" shall mean any distribution to
the holders of Common Stock as such, and a dividend shall be considered payable
out of earnings or earned surplus (other than revaluation or paid-in surplus)
only to the extent that such earnings or earned surplus are charged an amount
equal to the fair value of such dividend as reasonably determined by the Board
of Directors of the Corporation.
<PAGE>
4.7 Reorganization, Reclassification, Consolidation, Merger or Sale. If any
capital reorganization or reclassification of the capital stock of the
Corporation, or any consolidation or merger of the Corporation with or into
another corporation, or any sale of all or substantially all of the
Corporation's assets to another corporation shall be effected in such a way that
holders of Common Stock shall be entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
(as determined reasonably and in good faith by the Board of Directors of the
Corporation) shall be made whereby each of the holders of the Preferred Stock
shall thereafter have the right to acquire and receive upon the basis and upon
the terms and conditions specified herein and in lieu of the shares of Common
Stock of the Corporation immediately theretofore acquirable and receivable upon
the conversion of such holder's shares, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of Common Stock equal to the number of shares of Common
Stock immediately theretofore acquirable and receivable upon conversion of such
shares had such reorganization, reclassification, consolidation, merger or sale
not taken place, and in any such case appropriate provision shall be made with
respect to such holder's rights and interests to the end that the provisions of
this Section 4 (including without limitation provisions for adjustments of the
Conversion Price and of the number of shares of Common Stock acquirable and
receivable upon the exercise of the conversion rights granted in this Section 4)
shall thereafter be applicable in relation to any shares of stock, securities or
assets thereafter deliverable upon the conversion of such holder's shares
(including, in the case of any such consolidation, merger or sale in which the
successor corporation or purchasing corporation is other than the Corporation,
an immediate adjustment of the Conversion Price to the value for the Common
Stock reflected by the terms of such consolidation, merger or sale if the value
so reflected is less than the Conversion Price in effect immediately prior to
such consolidation, merger or sale). The Corporation shall not effect any
consolidation, merger or sale, unless the successor corporation (if other than
the Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume the obligation to deliver to each such
holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire or receive.
4.8 Notice of Adjustment. Immediately upon any adjustment of the Conversion
Price, the Corporation shall send written notice thereof to all holders of
Preferred Stock, which notice shall state the Conversion Price resulting from
such adjustment and the increase or decrease, if any, in the number of shares of
Common Stock acquirable and receivable upon conversions of all shares of
Preferred Stock held by each such holder, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
<PAGE>
4.9 Other Adjustment-Related Notices. In the event that at any time:
(a) the Corporation shall declare a dividend (or any other distribution) upon
its Common Stock payable otherwise than in cash out of earnings or earned
surplus;
(b) the Corporation shall offer for subscription pro rata to the holders of any
class of its Common Stock any additional shares of stock of any class or other
rights;
(c) there shall be any capital reorganization, or reclassification of the
capital stock of the Corporation, or consolidation or merger of the Corporation
with, or sale of all or substantially all of its assets to, another corporation;
or
(d) there shall be any voluntary or involuntary dissolution, liquidation,
winding up or similar distribution of the Corporation;
then, in connection with any such event, the Corporation shall give by first
class mail, postage prepaid, addressed to the holders of Preferred Stock at the
address for each such holder as shown on the books of the Corporation:
(i) at least 30 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date on which the
holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, winding up or similar distribution; and
(ii) in the case of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, winding up or similar distribution, at
least 30 days' prior written notice of the date when the same shall take place
(and specifying the date on which the holders of Common Stock shall be entitled
to exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or similar distribution).
<PAGE>
4.10 Certain Events. If any event occurs as to which the other provisions of
this Section 4 are not strictly applicable or if strictly applicable would not
fairly protect the conversion rights of the Preferred Stock in accordance with
the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
conversion rights as aforesaid.
4.11 Disputes. In the event that there is any dispute as to (a) the computation
of the price or the number of shares of Common Stock required to be issued upon
conversion of Preferred Stock, or (b) the computation of the Redemption Price
under Section 3.6, in either case in which holders of 50 percent or more of the
Preferred Stock shall join, the holders and the Corporation will retain an
independent and nationally recognized accounting firm to conduct at the expense
of the Corporation an audit of the computations pursuant to the terms hereof
involved in such dispute, including the financial statements or other
information upon which such computations were based. The determination of such
nationally recognized accounting firm shall, in the absence of manifest error,
be binding upon the holders of the Preferred Stock and the Corporation. If there
shall be a dispute as to the selection of such nationally recognized accounting
firm, such firm shall be appointed by the American Institute of Certified Public
Accountants ("AICPA") if willing, otherwise the American Arbitration Association
("AAA"), upon application by the Corporation or any holder or holders of at
least 50 percent of the outstanding Preferred Stock with notice to the others.
If the price, number of shares of Common Stock or Redemption Price as determined
by such accounting firm is five percent (5%) or more higher or lower than the
price, number of shares of Common Stock or Redemption Price computed by the
Corporation, the expenses of such accounting firm and, if any, AICPA and AAA,
shall be borne completely by the Corporation. In all other cases, they shall be
borne by the disputing holders of Preferred Stock.
Section 5. Purchase Rights.
If at any time or from time to time the Corporation shall grant, issue or sell
any Options, Convertible Securities or rights to purchase property (any
"Purchase Rights") pro rata to the record holders of Common Stock and such
grant, issuance or sale does not result in an adjustment of the Conversion Price
under Section 4.4, then each holder of Preferred Stock shall be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if it had held the number
of shares of Common Stock acquirable and receivable (directly or upon subsequent
conversion, assuming unrestricted convertibility) upon conversion immediately
prior to the time or times at which the Corporation, granted issued or sold such
Purchase Rights.
<PAGE>
Section 6. Voting Rights of Preferred Stock. (a) Except as otherwise provided by
law, by agreement among the stockholders, or as otherwise provided in this
Certificate of Designations, Preferred Stock shall entitle the holders thereof
to no voting rights.
(b) The Preferred Stock shall be entitled to vote with the holders of Common
Stock on any and all matters presented to the holders of Common Stock for a
stockholders' vote at any time after the satisfaction of the conditions set
forth in Section 4.1(a) hereof. After the Preferred Stock is entitled to vote on
matters presented to holders of Common Stock, a share of Preferred Stock shall
possess that number of votes equal to the number of shares of Common Stock that
such share of Preferred Stock is convertible into on the applicable record date.
Section 7. Registration of Transfer.
The Corporation shall keep at its principal office (or such other place as the
Corporation reasonably designates) a register for the registration of shares of
Preferred Stock. Upon the surrender of any certificate representing Preferred
Stock at such place, the Corporation shall, at the request of the registered
holder of such certificate, execute and deliver (at the Corporation's expense) a
new certificate or certificates in exchange therefor representing the aggregate
number of shares represented by the surrendered certificate, subject to the
requirements of applicable securities laws. Each such new certificate shall be
registered in such name and shall represent such number of shares as shall be
requested by the holder of the surrendered certificate, shall be substantially
identical in form to the surrendered certificate, and the holders of the shares
represented by such new certificate shall be entitled to receive all theretofore
payable but unpaid dividends on the shares represented by the surrendered
certificate.
Section 8. Replacement.
Upon receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder shall be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate evidencing one or
more shares of the Preferred Stock and, in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the registered holder is an institutional investor
its own agreement of indemnity, without bond, shall be satisfactory), or, in the
case of any such mutilation, upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares represented by such
lost, stolen, destroyed or mutilated certificate, and the shares represented by
such new certificate shall be entitled, among other things, to receive all
theretofore payable but unpaid dividends on the shares represented by the lost,
stolen, destroyed or mutilated certificate.
<PAGE>
Section 9. Restrictions on Corporate Action.
So long as any shares of the Preferred Stock remain outstanding and in addition
to any other approvals or consents required by law, without the prior
affirmative vote or written consent of the holders of at least a majority of all
shares of the Preferred Stock Outstanding at the time:
(a) The Corporation shall not increase the number of shares of the Preferred
Stock which the Corporation is authorized to issue, or issue additional shares
of Preferred Stock except pursuant to Section 1.2(b).
(b) Unless the dividend payment and redemption obligations of the Corporation
with respect to the Preferred Stock have, at such time, been fully satisfied,
the Corporation shall not declare or pay any dividend or make any other
distribution on any Junior Securities other than dividends or distributions
payable solely in Junior Securities, or purchase, redeem, or otherwise acquire
for any consideration, or set aside as a sinking fund or other fund for the
redemption or repurchase of any Junior Securities or any warrants, rights or
options to purchase the same.
Section 10. Closing Books.
The Corporation will not close its books against the transfer of any share of
Preferred Stock.
Section 11. Definitions.
As used in this Certificate of Designations the following terms shall have the
following meanings, which meanings shall be equally applicable to the singular
and plural forms of such terms: "Business Day" means any day which is not a
Saturday or a Sunday or a day on which banks are permitted to close in New York,
New York.
"Common Stock" means the Common Stock, par value $0.0001 per share, of the
Corporation, and any capital stock of any class of the Corporation hereafter
authorized which shall not be limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution,
winding up or similar distribution of the Corporation.
<PAGE>
"Common Stock Deemed Outstanding" means, at any given time, the sum of (a) the
number of shares of Common Stock actually outstanding at such time (exclusive of
any shares of Common Stock owned or held by or for the account of the
Corporation), plus (b) the number of shares of Common Stock into which
Outstanding shares of Preferred Stock are convertible at such time, plus (c) the
number of other shares of Common Stock deemed to be outstanding under Section 4
at such time.
"Consolidated Interest Expense" means (without duplication), for any period, the
sum of:
(i) the interest expense of the Corporation and its Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP;
(ii) all fees, commissions, discounts and other charges of the Corporation and
its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP, with respect to letters of credit and bankers' acceptances
and the costs (net of benefits) associated with interest hedging obligations;
(iii) amortization or write-off of debt discount and deferred financing costs
(other than deferred financing costs incurred on or prior to the Closing Date)
in connection with any Long Term Debt of the Corporation and its Subsidiaries
for such period, determined on a consolidated basis in accordance with GAAP; and
(iv) interest capitalized by the Corporation and its Subsidiaries during such
period determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the aggregate net
income for such period, on a consolidated basis, determined in accordance with
GAAP ("Net Income"), of the Corporation and its Subsidiaries; provided, however,
that (i) the Net Income (if positive) of any person that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the Corporation or a Subsidiary by
such person during such period, (ii) the Net Income (if positive) of any person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, (iii) extraordinary gains, losses and
non-cash restructuring charges shall be excluded, (iv) the Net Income (if
positive) of any Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by such Subsidiary of such Net
Income is not at the time of determination permitted by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary, (v) net after tax
gains (but not net after tax losses) from sales of assets other than current
<PAGE>
assets or from the disposition of any property or assets other than in the
ordinary course of business shall be excluded, (vi) any after tax gains (but not
losses) from currency exchange transactions not in the ordinary course of
business consistent with past practice shall be excluded, and (vii) the
cumulative effect of any change in accounting principles shall be excluded.
"Conversion Price" means one dollar and twenty-five cents ($1.25), as such price
may be adjusted from time to time pursuant to the provisions of Section 4.
"Dividend Payment Date" means, with respect to Preferred Stock, the last day of
March, June, September and December in each year (or if any such day is not a
Business Day the immediately preceding Business Day).
"EBITDA" shall mean, with respect to any period, Consolidated Net Income of the
Corporation for such period plus, in each case to the extent deducted in
computing such Consolidated Net Income, the sum of (without duplication) (i)
Consolidated Interest Expense for such period, (ii) the provision for taxes
based on net income of the Corporation and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, and (iii) the
depreciation and amortization expense of such the Corporation and its
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP.
"Excluded Securities" means (a) Options or Convertible Securities issued and
outstanding on the date of original issuance of the Preferred Stock, and Common
Stock issued upon exercise or conversion thereof, (b) Common Stock, Options or
Common Stock issued upon exercise of such Options, issued to employees of the
Corporation or any of its Subsidiaries pursuant to the stock option plans or
other incentive plans adopted by the Board of Directors and submitted for
approval by the Corporation's stockholders at its 1996 annual meeting of
stockholders, and (c) any Common Stock, Options, or Common Stock issued upon
exercise of such Options, issued to employees of the Corporation or any of its
Subsidiaries pursuant to the provisions of any other stock bonus or stock option
or other incentive plan or plans subsequently adopted by the Board of Directors.
"GAAP" means generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board.
<PAGE>
"Internal Rate of Return" means the annual rate (assuming quarterly compounding)
which if used to discount to present value the payments in cash or cash
equivalents made or received by the holder of Preferred Stock, during the period
from the date of calculation back to the initial issuance of such shares, would
cause the net present value (on such date) of such investment to equal zero (0).
In calculating an Internal Rate of Return:
(A) each payment received in cash or cash equivalents by a holder (or its
predecessors in interest) of shares attributable to such shares or any sale
thereof for cash shall be treated as a cash inflow with a positive value, and
each cash disbursement made by the holder (or its predecessors in interest)
directly attributable to such shares shall be treated as a cash outflow with a
negative value;
(B) each such payment or disbursement shall be discounted from the date actually
made to the date of the holder's initial investment in shares; and
(C) indemnity payments, financing fees (including without limitation the
financing fee paid in connection with the original issuance of Preferred Stock)
and payments in reimbursement of out-of-pocket expenses received by the holders
of shares shall not be treated as cash inflows and therefore shall be
disregarded.
"Junior Security" means the Series C Convertible Preferred Stock, the
Corporation's Common Stock and any other equity security of any kind which the
Corporation or any Subsidiary shall at any time issue or be authorized to issue
other than preferred stock.
"Liquidation Value" of any share of Preferred Stock as of any particular date
means an amount equal to the sum of $100.00 plus any accrued and unpaid
dividends on such share of Preferred Stock.
"Long-Term Debt" shall mean (without duplication) (A) all indebtedness for
borrowed money or evidenced by notes, bonds, debentures or similar evidences of
indebtedness, all obligations for the deferred and unpaid purchase price of any
property, service or business (other than trade accounts payable and accrued
liabilities incurred in the ordinary course of business and constituting current
liabilities), (B) all capitalized lease obligations, (C) letters of credit and
all obligations of relating thereto, (D) all obligations in respect of interest
rate swap agreements, currency swap agreements and other similar agreements
designed to hedge against fluctuations in interest rates or foreign exchange
rates, and (E) all Preferred Stock (and convertible preferred stock of any other
class) if and so long as the Market Price of Common Stock is less than the
Conversion Price (or conversion price of any such other class of convertible
preferred stock) from time to time in effect; in each case determined on a
consolidated basis in accordance with GAAP.
<PAGE>
"Market Price" means as to any security the average of the closing prices of
such security's sales on such day on all domestic exchanges on which such
security may at the time be listed, or, if there shall have been no sales on any
such exchange on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on such day such
security shall not be so listed or trading thereon or on such exchange shall be
suspended, the closing price on such day of any such security traded on the
NASDAQ System or, if no such closing price is available, (i) the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time, on such day, or (ii) if on such day such security shall not be
quoted in the NASDAQ System, the average of the high and low bid and asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in the case of (i) or (ii) averaged over a period of 21 business days consisting
of the day as of which "Market Price" is being determined and the 20 consecutive
business days prior to such day (unless otherwise provided herein). If at any
time such security is not listed on any domestic exchange or quoted in the
NASDAQ System or the domestic over-the-counter market, the "Market Price" shall
be the fair market value per share of Common Stock, which shall be reasonably
determined by the Board of Directors of the Corporation as of a date which is
within 15 days of the date as of which the determination is to be made.
"Outstanding" when used with reference to shares of Preferred Stock as of any
particular time shall mean shares thereof issued and outstanding at such time
and shall not include any shares of Preferred Stock represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Corporation in accordance with Section 7 or Section 8, but shall include
only those shares represented by such new certificate.
"Person" means and includes an individual, a partnership, a corporation, a
trust, a joint venture, an unincorporated organization and a government or any
department or agency thereof.
"Redemption Date" as to any share of Preferred Stock means the date specified in
the notice of redemption delivered pursuant to Section 3.7; provided that for
purposes of Section 3.8, the Redemption Date shall be the date on which the
applicable Redemption Price is actually paid to the holder of such share of
Preferred Stock or deposited in trust for the benefit of such holder pursuant to
Section 3.10.
<PAGE>
"Redemption Price" as to any share of Preferred Stock means (a) for purposes of
Section 3.5, the Redemption Price specified therein, and (b) in all other cases,
the Liquidation Value of such share.
"Subsidiary" means any corporation at least 50% of the Voting Stock of every
class of which is, at the time as of which any determination is being made,
owned by the Corporation either directly or through one or more Subsidiaries.
"Voting Stock" means any shares of stock having general voting power in electing
the board of directors (irrespective of whether or not at the time stock of any
other class or classes has or might have voting power by reason of the happening
of any contingency).
Section 12. Miscellaneous.
(a) The unenforceability or invalidity of any provision or provisions of this
Certificate of Designations shall not render invalid or unenforceable any other
provision or provisions herein contained. (b) Section and paragraph headings
herein are for convenience only and shall not be construed as a part of this
Certificate of Designations.
(c) All notices to holders of Preferred Stock required or permitted hereunder
shall be sent by overnight courier service, prepaid, addressed to each such
holder at the address for such holder shown on the books of the Corporation.
<PAGE>
IN WITNESS WHEREOF, this Certificate has been signed on this 20th day of
December, 1996, and the signature of the undersigned shall constitute the
affirmation and acknowledgment of the undersigned, under penalties of perjury,
that this Certificate is the act and deed of the undersigned and that the facts
stated in the Certificate are true.
ALLIANCE ENTERTAINMENT CORP.
By: /s/ Joseph J. Bianco
--------------------------
Joseph J. Bianco, Co-Chairman
ATTEST:
/s/ Christopher J. Joyce
- ------------------------------
Christopher J. Joyce,
Assistant Secretary
SETTLEMENT AGREEMENT AND RELEASE
SETTLEMENT AGREEMENT AND RELEASE made as of the 10th day of
March, 1997 by and between ALLIANCE ENTERTAINMENT CORP., a Delaware corporation
(hereinafter referred to herein as "Alliance"), on the one hand, and DAVID H.
SCHLANG, JACK ROSENBLOOM and PETER HYMAN (hereinafter sometimes referred to
collectively as the "Shareholders"), on the other hand,
WHEREAS, Alliance and the Shareholders are parties to a merger
agreement dated as of September 1, 1995 (the "Merger Agreement") among Alliance,
One Way Acquisition, Inc., a New York corporation, One Way Records, Inc., a New
York corporation, and the Shareholders;
WHEREAS, pursuant to Section 2.2 of the Merger Agreement,
Alliance agreed to pay to the Shareholders certain additional consideration in
certain circumstances specified in the Merger Agreement (the "Additional One Way
Merger Consideration" as defined in Section 2.2 of the Merger Agreement), but a
dispute has arisen between Alliance and the Shareholders as to the amount, if
any, of Additional One Way Merger Consideration that is owed by Alliance to the
Shareholders; and
WHEREAS, after good faith negotiations between the parties with
respect to the amount, if any, of Additional One Way Merger Consideration that
is owed by Alliance to the Shareholders, the parties have agreed to settle the
amount due and payable under Section 2.2 of the Merger Agreement and provide for
payment to the Shareholders of the settlement amount, upon terms and conditions
set forth herein;
NOW THEREFORE, in consideration of the agreements and covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned hereby covenant
and agree as follows:
<PAGE>
1. Settlement
1.1 Delivery of Shares. The Shareholders agree that Alliance's
obligation to pay the Additional One Way Merger Consideration shall be fulfilled
to the Shareholders' full satisfaction by the transfer and delivery to the
Shareholders or their designees of 225,352 shares of Alliance Common Stock (the
"Settlement Shares") upon the execution and delivery of this Agreement. The
Settlement Shares shall be transferred and delivered to the individual
Shareholders or their designees in the amounts set forth in a letter of
instruction to Alliance signed by the Shareholders. Any such Shareholder
designees shall be considered to be third-party beneficiaries of this Settlement
Agreement and shall exchange appropriate releases with Alliance.
1.2 Issuance of Common Stock. Alliance represents and warrants
that the Settlement Shares of Alliance Common Stock which will be issued to the
Shareholders pursuant to this Agreement will be duly and validly issued and
fully paid and nonassessable, and good and valid title thereto shall be vested
in the Shareholders, free and clear of liens, encumbrances, claims and other
commitments. Alliance shall include such shares of Alliance Common Stock in the
next Registration Statement on Form S-3 filed by Alliance, and take such further
actions as are necessary to effect the registration of such shares of Alliance
Common Stock under the Securities Act of 1933, as amended, and under any
applicable state securities laws.
1.3 Restriction on Transfer. The Shareholders acknowledge that
the certificates representing the Settlement Shares shall bear the following
legend, and agree to abide by the terms thereof:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933. The shares
have been acquired for investment and may not be sold,
transferred of assigned in the absence of an effective
registration statement for these shares under the Securities
Act of 1933 or an opinion of the Corporation's counsel that
registration is not required under said Act."
1.4 Compliance with Securities Laws. Alliance represents and
warrants that the issuance to the Shareholders of the Settlement Shares of the
Alliance Common Stock, and the consummation of the transactions contemplated
hereby, are in compliance with all applicable federal and state securities laws.
<PAGE>
2. Mutual Releases.
2.1 Upon the execution and delivery of this Agreement and
delivery of the Settlement Shares, each of the parties hereto: (a) individually
and for each of its direct and. indirect parent corporations, subsidiaries,
affiliates, directors, officers, employees, successors and assigns, forever
releases, remises, and discharges the other parties hereto and any of the other
parties' parent corporations, subsidiaries and affiliates, officers, directors,
shareholders, agents, employees, predecessors, successors, and assigns, from and
against any and all claims, demands, debts, damages, liabilities, costs and
expenses (including attorneys fees), actions, causes of action, suits, sums of
money accounts, covenants, agreements, contracts and promises in law or in
equity of every nature whatsoever, which the releasing party now has, has had or
at any time may have against the other parties (and/or against any of the other
parties' parent corporations, subsidiaries and affiliates, officers, directors,
shareholders, agents, employees, predecessors, successors and assigns) arising
out of, or in connection with Section 2.2 of the Merger Agreement, whether or
not they have been subject to dispute and whether or not known or unknown or
suspected or unsuspected, by reason of any matter, cause or thing whatsoever
from the beginning of the world to the date of these presents; and (b) hereby
covenants and agrees that he or it shall not initiate, institute, reinstitute,
maintain, prosecute or voluntarily aid in the initiation, institution,
reinstitution, maintenance or prosecution of, any action, claim, suit,
proceeding, arbitration or cause of action of any kind whatsoever, in any court,
administrative agency or other forum, against any person or entity released
pursuant to subsection 2.1(a) hereof, to recover damages, attorneys fees,
expenses of any type or any other losses allegedly sustained as a result of
Section 2.2 of the Merger Agreement or the transactions contemplated thereby.
2.2 The foregoing provisions shall not bar any claims arising
out of or relating to a breach of this Agreement.
<PAGE>
3. No Admissions. This Agreement, and the payments and other consideration
delivered hereunder, are solely for the purpose of compromising and settling
disputed claims, and do not constitute any admission of liability or of the
truth or validity of any claims or assertions.
4. Notices. All notices given to the parties hereunder and all statements
and payments hereunder shall be addressed to the parties at the address set
forth below or at such other addresses as shall be designated in writing from
time to time:
If to the Shareholders or their designees: David H. Schlang
One Way Records, Inc.
15 Industrial Park Road
P.O. Box 6429
Albany, New York 12206
with a copy to: Paul A. Feigenbaum, Esq.
Couch, White, Brenner, Howard
& Feigenbaum, LLP
540 Broadway, Box 22222
Albany, New York 12201-2222
If to Alliance: Alliance Entertainment Corp.
110 East 59th Street
New York, New York 10022
Attn: Timothy J. Dahltorp
with a copy to: Alliance Entertainment Corp.
110 East 59th Street
New York, New York 10022
Attn: General Counsel
<PAGE>
All notices shall be in writing and shall be personally delivered, or sent by
certified mail, return receipt requested, or by overnight mail service such as
Federal Express, all charges pre-paid. Except as otherwise provided herein, such
notices shall be deemed given upon personal delivery, five (5) days after
mailing or one (1) day after delivery to an overnight mail service, as
applicable, except that notices of change of address shall be effective only
after actual receipt thereof. The failure of the recipient to accept or receive
notice given by certified mail, return receipt requested, postage pre-paid, or
by overnight mail service does not affect the validity of the notice.
5. Authority. The parties hereto represent and warrant to each
other that they have the authority to enter into and perform this Agreement;
that they comprehend the effect of this Agreement; and that they have executed
this Agreement and consented to its contents under the exercise of their own
free will without the coercion, duress or undue influence or the part of any
person or entity.
6. Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto relating to the subject matter hereof. No
modification, amendment, waiver, termination or discharge of this Agreement or
any of the terms or provisions hereof shall be binding upon either party unless
confirmed by a written instrument signed by the parties hereto. No waiver by any
party of any term or provision of this Agreement or any default hereunder shall
affect the parties' respective rights thereafter to enforce such term or
provision or to exercise any right or remedy in the event of any other default,
whether or not similar. Except as expressly modified herein, the Merger
Agreement shall remain in full force and effect and binding according to its
terms, and nothing in Section 2 hereof shall constitute a release of any party
or any obligation under the Merger Agreement beyond that which is expressly
stated in Section 2 hereof.
7. Governing Law. This Agreement shall be subject to and
interpreted under the laws of the State of New York without regard to the
conflict of laws provisions related thereto. If any provision of the Agreement
shall be held void, invalid or inoperative, no other provision of this Agreement
shall be affected as a result thereof, and accordingly, the remaining provisions
of this Agreement shall remain in full force and effect as though such void,
invalid or inoperative provisions had not been contained herein, provided that
the commercial purpose of this Agreement is not materially altered. The parties
hereby consent to the sole jurisdiction of the New York State or Federal counts
for the adjudication of any disputes hereunder.
<PAGE>
8. Confidentiality. The parties acknowledge that the terms of this
Agreement and the circumstances giving rise thereto will remain of a
confidential nature. Accordingly, the parties agree that no information
pertaining to this Agreement or the circumstances giving rise thereto shall be
disclosed, except to their respective Settlement Share recipient designees and
to their respective attorneys, accountants and business advisors on a "need to
know" basis, or to the extent required by applicable law or legal process.
9. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
ALLIANCE ENTERTAINMENT CORP.
By: /s/ Christopher J. Joyce
------------------------------------------------
Name: Christopher J. Joyce
Title: Executive Vice President/General Counsel
DAVID H. SCHLANG
By: /s/ David H. Schlang
-------------------------------------------
JACK ROSENBLOOM
By: /s/ Jack Rosenbloom
-------------------------------------------
PETER HYMAN
By: /s/ Peter Hyman
-------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Consolidated
Balance Sheets as of March 31, 1997, Consolidated Statements of Operations for
the three months ended March 31, 1997, Consolidated Statements of Stockholders
Equity (Deficit) for the three months ended March 31, 1997, and Consolidated
Statements of Cash Flow for the three months ended March 31, 1997, and is
qualified in its entirety be reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,222
<SECURITIES> 0
<RECEIVABLES> 118,712
<ALLOWANCES> 0
<INVENTORY> 144,328
<CURRENT-ASSETS> 317,595
<PP&E> 34,835
<DEPRECIATION> 0
<TOTAL-ASSETS> 541,713
<CURRENT-LIABILITIES> 302,537
<BONDS> 235,763
0
5
<COMMON> 4
<OTHER-SE> (6,144)
<TOTAL-LIABILITY-AND-EQUITY> 541,713
<SALES> 126,322
<TOTAL-REVENUES> 126,322
<CGS> 105,169
<TOTAL-COSTS> 105,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,528
<INCOME-PRETAX> (23,980)
<INCOME-TAX> (890)
<INCOME-CONTINUING> (23,090)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,090)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
