SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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 1-13054
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 year (or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing required for the past
90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
As of February 20, 1997, the number of shares outstanding of the issuer's common
stock was 44,764,853. The aggregate market value of the voting stock held by the
non-affiliates of the Registrant as of February 20, 1997 was $45,079,797.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of the
Stockholders scheduled to be held on June 27, 1997 is incorporated herein by
reference into Part III.
<PAGE>
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ALLIANCE ENTERTAINMENT CORP.
PART I
Page No.
<S> <C>
Item 1. Business 5
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes In and Disagreements with Accountants 56
PART III
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 56
Item 12. Security Ownership Of Certain Beneficial Owners
And Management 56
Item 13. Certain Relationships and Related Transactions 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 57
Signatures 71
</TABLE>
<PAGE>
Item 1. BUSINESS
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 through traditional as well as
emerging retail channels. In August 1996, Alvin N. Teller (the former Chairman
and Chief Executive Officer of MCA Music Entertainment Group) became
Co-Chairman, Chief Executive Officer and President of Alliance in order to
expand the Company's proprietary content business and to consolidate and focus
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 will release its
first full lenght projects in 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, Iron Maiden,
and the Small Faces. Castle Communications together with The St. Claire
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;
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 and CD Now.
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.
<PAGE>
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") total
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
music consumption demographics to adversely impact the music industry in general
and the Company's customers in particular. The adverse conditons 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 or are in the
process of being 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 1997) 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. For the
year ended December 31, 1996, the Company recorded certain charges (the
"Consolidation and Other Charges") totaling $118.9 million which in large part
contributed to the Company's net loss of approximately $148.7 million for the
year ended December 31, 1996. These Consolidation and Other Charges consisted
of: (i) $33.6 million in non-recurring charges relating to the Consolidation
Plan; (ii) $53.9 million in non-recurring charges relating to the disposition of
certain Non-Core Businesses; (iii) $29.4 million of charges relating to current
industry conditions; and (iv) $2.0 million in non-recurring charges related to
the termination of a merger agreement with Metromedia International Group, Inc.
The $118.9 million is inclusive of $20.0 million which will be required to be
expended in future periods.
Music Industry Overview
The Major Labels produce and supply retailers and distributors with the
majority of the industry's pre-recorded music. In addition to the Major Labels,
the Independent Labels produce recordings for artists and enter into
distribution arrangements with the Major Labels or with non-captive (i.e., not
affiliated with a Major Label) distribution companies. Generally, Independent
Labels focus on new or emerging artists or on genres of music which have smaller
audiences than those genres distributed by the Major Labels. Included within the
category of Independent Labels are companies whose primary business is the
exploitation of existing catalogs of pre-recorded music. According to Billboard
Magazine, Major Labels held a market share of 78.8% of total albums sold
domestically during 1996 (down from 79.4% in 1995) while Independent Labels held
approximately a 21.2% market share of albums sold domestically in 1996 (which
exceeded the market share in 1996 of any single Major Label and increased from
approximately 20.6% in 1995).
In the United States, the pre-recorded music product of Major Labels and
Independent Labels are supplied to full service distributors (such as the
Company) as well as to retail customers on a "returnable" basis which allows
such full service distributors and retail customers to return unsold merchandise
for credit (subject in the case of Major Labels to certain re-stocking
penalties) on future purchases.
<PAGE>
Each of the Major Labels (in addition to owning several music labels) owns
a distribution company that exclusively distributes its labels as well as
recordings for certain Independent Labels. These captive distribution companies
principally distribute a limited number of high volume, hit-driven stock keeping
units ("SKUs") manufactured by production companies also owned by the Major
Label to full service distributors (such as the Company) as well as to a
relatively limited number of large retail customers. Although the Major Labels
distribute their products directly to these retailers, a significant portion of
such distribution is on fairly inflexible terms (i.e., significant minimum order
quantities and restrictive credit policies) and as a result only the largest
retail customers can do business directly with the distribution arms of the
Major Labels on an economical basis. Unlike these captive distribution
companies, a full service distributor like the Company will ship both large and
small quantities of product manufactured by all Major Labels and most
Independent Labels on a 24-hour turn-around basis to thousands of individual
store locations, as well as to central warehouses of large retail chains. As a
full service distributor, the Company is also able to perform a warehousing
function for retailers that wish to avoid the fixed costs associated with
storing product in quantity, provide more flexible terms for order quantity and
can deliver product to retailers more quickly.
The retail customers of full service music distributors such as the
Company include international and national retail chains, multi-store and
single-store retailers, as well as non-traditional retail music outlets, such as
home entertainment superstores, bookstore merchandisers, consumer electronics
retailers and discount retailers. Most recently, on-line services and internet
"world wide web" sites have also become active music outlets. While most large
store-based music retailers have their own internal distribution operations to
supply high-volume "hit" titles to their numerous branch locations, they
increasingly rely on full service distributors who can supply smaller quantities
of comparatively low-volume "catalog" titles, frequently on a "just-in-time"
basis, thereby avoiding the cost of warehousing lower-volume titles. In
addition, alternative retail music outlets such as bookstore chains and
electronic equipment retailers (and especially the new on-line and internet
retailers) frequently rely on full service distributors to supply much or all of
their music inventory.
General
Segments. The Company currently operates in two business segments: (i) the
creation, acquisition and exploitation of proprietary rights with respect to
recorded music; and (ii) the sale and distribution of pre-recorded music and
music and entertainment related products. With the acquisition of Red Ant, the
Company anticipates that it will increase the application of available resources
to the enhancement of its proprietary content rights revenues beyond those
historically achieved by the Company. The following table reflects the Company's
segment revenues for 1994, 1995 and 1996, giving effect on a pro forma basis to
all significant acquisitions completed since 1994 as if such acquisitions had
been made on January 1, 1994:
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Pro Forma Revenues by
Business Segment
(Dollars in Thousands)
Year Ended December 31,
1994 1995 1996
------------------------- --------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
% of % of % of
Amount Total Amount Total Amount Total
Distribution Revenue $645,922 92% $721,416 92% $617,885 89%
Proprietary Rights and Service
Revenue 59,960 8% 63,014 8% 72,933 11%
------ ---- ------ ---- ------- ---
$705,882 100% $784,430 100% $690,818 100%
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(1) Does not include $281,000 of revenues related to corporate services.
Proprietary Products
The Company's Proprietary Products Group creates, licenses, markets and
promotes both newly recorded and catalog proprietary content rights. The
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. Red Ant (which commenced operations in 1996 and will release its
first full length projects in 1997) specializes in the release of 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. Among the new artists signed to Red Ant are Symposium, Naked and
Salmon. In addition to new artist signings, Red Ant also enhanced its artist
roster by entering into a joint venture agreement in March 1997 with Delicious
Vinyl (the "Delicious Vinyl Joint Venture"), a successful Independent Label with
established artists such as the Brand New Heavies, Pharcyde and Born Jamericans.
Under the Delicious Vinyl Joint Venture, Red Ant and Delicious Vinyl will
jointly release, market and promote Delicious Vinyl proprietary product.
Including releases under the Delicious Vinyl Joint Venture, Red Ant expects to
release approximately 35 full-length recordings in 1997.
Concord Jazz. Concord Jazz, acquired by the Company in 1994, is a label
which specializes in the production and marketing of traditional and
contemporary jazz by well-known jazz artists such as Mel Torme, Rosemary
Clooney, Chick Corea and Maynard Ferguson. Concord Jazz estimates that it will
augment its catalog of over 700 recordings with approximately 80 new releases in
1997. While Concord Jazz has recently signed a number of young artists to
exclusive recording agreements, it also records new works by "catalog" artists
(i.e., established artists with an established base of fans but that are
unlikely to produce a "platinum" or "gold" hit), such as Rosemary Clooney, Mel
Torme and Chick Corea. A recent example of such a recording was Clooney's "White
Christmas" which was released in 1996 and reached number one on the Billboard
Magazine Jazz Album chart.
<PAGE>
Castle Communications. Castle Communications, which was acquired by the
Company in 1994, owns or controls through licenses thousands of copyrighted
master recordings and 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, Black Sabbath, Iron Maiden and the Small
Faces. Castle Communications together with The St. Claire 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.
Sales, Marketing and Promotion. The staff of Red Ant is responsible for the
development, production, sales, marketing and promotion of all Proprietary
Product Group as well as Delicious Vinyl releases. Its staff consists of 116
persons consisting of artist repertoire personnel, manufacturing and production
personnel, sales personnel, marketing and radio promotion personnel. Although
Red Ant was recently formed, its personnel generally have significant experience
in the music industry, including several with extensive experience working for
Major Labels.
Database Services - The Company (through its Matrix Software subsidiary)
provides databased services to cyber-retailers selling pre-recorded music over
the internet. Matrix maintains an extensive music product database as well as
two proprietary web sites ("www.allmusic.com" and "www.allmovie.com") on the
world wide web promoting the All-Music Guide and the All-Movie Guide. See,
"Business - New Distribution Channels."
Distribution. The Proprietary Products Group is distributed by the
Company's Independent Distribution Group in the United States. The Company
contracts with a number of sources on a non-exclusive basis with respect to the
international distribution of its proprietary products. For example, the Company
has an agreement with BMG Records (UK) (Ltd.) ("BMG (UK)") pursuant to which BMG
(UK) distributes Castle's products throughout the United Kingdom, other than
sales to major retail chains, which are made directly by Castle from its
warehouse located near London, England. Castle's budget product is handled by
specialist distributors who service non-traditional retail outlets. Castle's
proprietary product is distributed by the Company, as well as by Edel Gmbh in
Germany. Castle's proprietary product is distributed under license in Japan by
Victor Entertainment, Inc. and in the rest of Asia by a subsidiary of BMG.
Foreign Operations. During 1996, approximately 74% of the Company's
revenues from proprietary products were derived from Europe, approximately 20%
were derived from the United States and the balance was derived from the Pacific
Rim, South America and the Caribbean. During 1996, the United Kingdom and
Germany accounted for approximately 42% and 16%, respectively, of such revenues.
No other foreign country provided more than 5% of the Company's proprietary
product revenues during the periods indicated.
<PAGE>
The Company attempts to conduct its operations so that foreign currency
generated by sales are sufficient to pay expenses denominated in such foreign
currency. Therefore, the Company does not believe that there is a significant
foreign currency risk with respect to such operations.
Copyright. Certain of the catalogs and titles which the Company
exploits were acquired from third parties who in some cases are part of a chain
of ownership. The various assignments and licenses of copyright, exploitation
and other rights with respect to these catalogs and titles are governed by the
laws of numerous jurisdictions. As with any rights related business,
uncertainties may exist as to the terms and scope of some of these assignments.
From time to time there are claims by artists, producers, managers or others
seeking to assert an interest in the Company's proprietary products. In
addition, laws regarding copyright are subject to change. Recently, the European
Economic Community adopted new legislation designed to harmonize the copyright
laws of its member states. The Company does not believe that these changes will
have a significant effect the Company.
Distribution Operations
The Company is a full-service music distribution company which
maintains a broad based inventory of pre-recorded music and entertainment
related products, which includes product manufactured by the Major Labels and
many Independent Labels, including the Company's Proprietary Products Group. The
Company ships both large and small quantities of product on a 24-hour
turn-around basis to thousands of individual store locations, as well as to
central warehouses of large retail chains. As a full service distributor, the
Company is also able to perform a warehousing function for retailers that wish
to avoid the fixed costs associated with storing product in quantity, provide
more flexible terms for order quantity and can deliver product to retailers more
quickly.
The Company also distributes a broad range of music accessories and
related products, including professional and consumer blank tapes, blank
cassettes, music storage products, batteries, headphones and various other
ancillary products. The Company's video products include a large selection of
laser discs and a smaller selection of video tapes, video CDs, CD-ROM and
publications. The Company also distributes selected items from substantially all
of the major suppliers of music related merchandise, such as music related
apparel, including T-shirts and caps, bearing entertainment related designs and
logos. The Company's range of products enables the Company's customers to order
a wide variety of products from a single source while maintaining one small
minimum purchase order with the Company.
<PAGE>
The following table reflects the Company's revenues by: (i) major
product category; and (ii) geographic regions for 1994, 1995 and 1996, giving
effect on a pro forma basis to all significant acquisitions completed since 1994
as if they had been made on January 1, 1994.
PRO FORMA DISTRIBUTION REVENUES BY GEOGRAPHIC REGIONS
(Dollars in Thousands)
<TABLE>
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Year Ended December 31,
==========================================================================================
1994 1995 1996
------------------------- ---------------------------- ---------------------------
Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
United States $485,726 75% $513,336 71% $438,618 71%
South America and
the Caribbean 71,261 11 79,136 11 59,777 10
Pacific Rim 57,643 9 104,332 15 79,511 13
Europe and Others 31,292 5 24,612 3 39,979 6
=========== ============= ============ ============ ========== =============
$645,922 100% $721,416 100% $617,885 100%
=========== ============= ============ ============= =========== =============
</TABLE>
PRO FORMA DISTRIBUTION REVENUES BY MAJOR PRODUCT CATEGORY
(Dollars in Thousands)
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Year Ended December 31,
==========================================================================================
1994 1995 1996
------------------------- --------------------------- ---------------------------
Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Pre-Recorded Music:
Major Label $321,982 50% $346,556 48% $361,365 58%
Independent Label 260,993 40 303,232 42 218,680 35
Accessories 29,502 5 30,709 4 15,554 3
Video Products and
Publications 32,054 5 31,249 5 10,141 2
Licensed Merchandise 1,391 - 9,670 1 12,145 2
=========== ============= =========== ============== =========== =============
$645,922 100% $721,416 100% 617,885 100%
=========== ============= =========== ============== ============= =============
</TABLE>
<PAGE>
Sales, Marketing and Customer Service
One Stop Group. The Company believes that it is the largest full service
distributor of music product in the United States. As a full service
distributor, the Company's One Stop Group maintains a telemarketing staff that
solicits sales on a regular basis from over 18,000 retail accounts. The One Stop
Group has the ability to ship both large and small quantities of product on a
24-hour turn-around basis to thousands of individual store locations as well as
to central warehouses. The depth and breadth of the inventory stocked by the
Company's One Stop Group provides the ability to maintain high order fill rates
with its customer base allowing such customers to manage their inventory on a
"just-in-time" basis and avoid the fixed costs associated with storing product
in quantity. In addition to high fill rates and rapid delivery, the Company also
provides other warehousing services to its customers that do not maintain their
own centralized physical inventories. These services range from applying the
customers' pricing and inventory information to stickers on each individual
piece of product to arranging product in the shipping container as it will
appear on the retailers shelves. These services can be individually tailored to
the customers' requirements. The Company also provides a number of marketing
related programs to its customer base including a monthly new release guide and
semi-annual product catalog.
Independent Distribution Group. The Company believes that it is the largest
non-captive distributor of Independent Label product in the United States. The
Company's Independent Distribution Group focuses on obtaining exclusive rights
from Independent Labels with respect to distribution of urban, rock/alternative,
dance, jazz and other music genres which are usually hit-driven, have high sales
volume and require constant feedback from and responsiveness to retail customers
on a national basis. The Independent Distribution Group has distribution
relationships with many of the largest Independent Labels in the United States
including ILS (the Independent Label affiliate of PolyGram). In addition, the
Company has entered into a distribution agreement with EMI-Capitol Music Group
North America ("EMI-Capitol")(the "EMI-Capitol Distribution Agreement"),
pursuant to which the Company's Independent Distribution Group will market, and
sell over 450 selected EMI-Capitol catalog titles, on an exclusive basis in the
United States. The Company provides the Independent Labels it distributes with
many services that such labels would be unable to perform on their own behalf
including sales and marketing assistance and radio promotion. Such services are
critical to maximizing the sales success of the labels' products and provide
them with a strong incentive for maintaining their relationships with the
Company going forward.
The national scope of the Company's Independent Label distribution
operations creates certain economies of scale that are not available for
distributors possessing only regional exclusive rights. The Company believes
that the efficiencies that it brings to the distribution of Independent Label
product can give it a competitive advantage in signing new exclusive
distribution contracts with Independent Labels.
<PAGE>
New Distribution Channels
On October 11, 1996, the Company acquired Matrix Software, Inc.
("Matrix"), a leading provider of music product databases to cyber-retailers
selling prerecorded music over the internet. Matrix is the creator of the
All-Music and All-Movie Guides, print and software encyclopedic databases widely
used by music retailers and the key element of search engines for most
on-line/web sites that sell prerecorded music and video. Matrix also maintains
two proprietary web sites ("www.allmusic.com" and "www.allmovie.com") on the
world wide web promoting the All-Music Guide and the All-Movie Guide. The
acquisition of Matrix is part of the Company's strategy to create a full service
music distribution company serving existing as well as future internet-based
retailers by combining its music distribution expertise with an extensive music
software database. 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 and CD Now.
Distribution Revenues
The Company generated approximately 71% of its distribution revenue
during 1996 from the United States, with the balance coming from South
America/the Caribbean and the Pacific Rim.
All of the Company's foreign sales, other than those made in the United
Kingdom and Germany, are denominated in United States dollars. The Company
attempts to conduct its operations so that foreign currency generated by sales
are sufficient to pay expenses denominated in such foreign currency. Therefore,
the Company does not believe that there is a significant foreign currency risk
with respect to its operations.
Purchasing
The Company purchases the products that it sells from each of the Major
Labels, many Independent Labels and other domestic and foreign wholesalers and
manufacturers. The volume of purchases from individual vendors fluctuates from
year to year based on the demand for the selections being offered by such
vendors. No Major or Independent Label accounted for more than 10% of the
Company's distribution revenues for the years ended December 31, 1995 and 1996,
except for The Warner Music Group, which accounted for approximately 14% of 1995
distribution revenues and 11% of 1996 distribution revenues. Sales by any single
label fluctuate based on the current popularity of its titles; consequently,
such percentages can vary significantly. The Company is not subject to any
minimum purchase commitment with respect to any vendor, except that pursuant to
the EMI-Capitol Distribution Agreement, the Company has agreed to purchase an
annual minimum of $16 million worth of titles.
<PAGE>
Except for ILS and EMI-Capitol, the Company does not have distribution
contracts with the Major Labels or with many Independent Labels from which it
purchases product. Purchases are generally made by individual purchase orders
and are subject to the Company's right to return unsold merchandise for credit
(subject in the case of Major Labels to certain re-stocking penalties) on future
purchases. The Major Labels typically provide distributors with 60-day terms and
a 2% discount for timely payment (within 60 days). The Major Labels and many
Independent Labels also offer various incentives, including advertising
allowances. Extended payment terms and additional discounts are also commonly
available under seasonal and promotional programs. The Company endeavors to make
purchases during these seasonal and promotional programs. Payment terms vary
considerably among Independent Labels and other independent distributors,
ranging from advances to labels to be recouped against future sales in the case
of exclusive distribution products to payment on consignment. The Company is
often able to negotiate favorable pricing and discount programs with Independent
Labels for which it acts as a distributor or supplier based upon a number of
factors, including amount of funds advanced, volume of purchases, prompt payment
and other value-added customer services.
Each of the Major Labels has adopted policies regarding the
distribution of its merchandise, including restrictions on the export of its
merchandise by domestic distributors and on the premature release of recordings.
Over the past several years, the Major Labels have sent various notifications to
a number of domestic distributors (including the Company) with respect to
alleged violations of one or more of such policies. Such notifications have
contained express warnings that the Major Labels would refuse to supply product
to distributors who continue to violate such policies. Refusal by any Major
Label to ship product on a timely basis to the Company could have a material
adverse effect on the Company's operations. While the Major Labels have, at
times, temporarily suspended shipments to certain distributors for violations of
such policies, the Company has never been subjected to any such suspension of
shipments. The Company believes that its relationships with the Major Labels are
good, and that none of its current sales activities will result in the loss of
any major supplier of product to the Company.
Substantially all of the pre-recorded music and video products sold by
the Company are subject to copyrights, which, among other things, limit the
manner and geographic area in which such products can be sold. Sales made in
violation of copyright restrictions by any person in the chain of distribution
of a copyrighted product may subject others in the chain of distribution, such
as the Company, to infringement penalties. Such penalties may include monetary
damages, injunctive relief on such terms as may be deemed reasonable to prevent
or restrain further copyright infringement, or the impoundment or destruction of
all copies or phono records claimed to have been made or used in violation of
the copyright owner's exclusive rights. The Company distributes a multiplicity
of labels and products and relies on its suppliers to comply with applicable
copyright laws, as is customary in the industry. The Company also buys and sells
product over a wide geographical area and is subject to the copyright laws of
numerous jurisdictions, some of which may be conflicting and as a result, the
Company's exposure to copyright infringement penalties may be heightened.
The Company purchases its other product lines, including music accessories
and related products, from a variety of manufacturers and distributors. With
respect to the Company's various other product lines, inventory is not
returnable in all instances; therefore, the Company attempts to maintain a more
conservative stocking and payable position for these items.
<PAGE>
Shipping Policies
The Company offers 24-hour delivery throughout the continental United
States via overnight delivery services. Taking advantage of favorable volume
arrangements, the Company is able to provide such service at competitive prices.
The majority of the Company's international orders emanating from the United
States are shipped using air carriers that will guarantee timely delivery of
music products to the Company's foreign customers. These air carriers provide
volume discounts that allow the Company to supply foreign customers at
competitive prices.
Customers and Credit Policies
The Company services thousands of retail locations worldwide, including
retail chains and wholesale distributors, multi-store retailers, and
single-store retailers. No one customer accounted for more than 10% of the
Company's sales in 1995 or 1996. The Company requires substantially all new
domestic customers to pay C.O.D. and all new international customers to prepay
orders for an initial screening period until a credit history can be
established. New customers are then gradually provided credit over time as a
satisfactory payment record is demonstrated.
Competition
The Company believes it is the largest full service distributor of
pre-recorded music and music related products in the United States. In addition,
the Company believes it is the leading non-captive distributor of Independent
Label product in the United States. Its principal competitors among non-captive
distributors of Major Labels include Valley Distributors, Universal Distributors
and Pacific Coast One-Stop and its principal competitors among distributors of
Independent Labels include RED, MS Distributors and Navarre Corp. The Company
believes that the primary competitive factors in the music distribution business
include: technological capabilities, breadth of owned and exclusively
distributed products and depth of inventory, "fill rate," timeliness of
delivery, geographic coverage, marketing capability and financial resources.
The Company's competitors in the acquisition and exploitation of
proprietary products include the Major Labels, each of whom has significantly
greater financial resources than does the Company.
Employees
As of December 31, 1996, the Company had approximately 1,850 employees,
none of whom was represented by an employee union. Of such employees, 498 were
engaged in management and administrative functions, 402 were engaged in sales
and marketing, and 950 were engaged in inventory control/warehouse and
distribution. Management believes that its employee relations are good.
<PAGE>
Item 2. PROPERTIES
As of December 31, 1996, the Company conducted its distribution
operations from the following locations:
<TABLE>
<CAPTION>
Approximate
Location Square Footage Leased or Owned
<S> <C> <C>
Coral Springs, Florida 240,000 Owned
Santa Fe Springs, California 130,000 Leased
Los Angeles, California 13,000 Leased
Chessington, England 33,000 Leased
Albany, New York 120,000 Leased
Montreal, Canada 18,000 Leased
Miami, Florida* 100,000 Leased
Miami, Florida* 47,000 Leased
Miami, Florida* 24,000 Leased
Miami, Florida* 16,000 Leased
Denver, Colorado** 36,000 Leased
Bethel, Connecticut** 86,000 Leased
San Fernando, California** 30,000 Leased
Secaucus, New Jersey** 26,000 Leased
Dallas, Texas** 36,000 Leased
Sao Paulo, Brazil** 40,000 Leased
Sao Paulo, Brazil** 4,000 Leased
- ---------------
</TABLE>
* Closed on or before March 31, 1997.
** To be closed pursuant to the Consolidation Plan. See "Management's
Discussion and Analysis of Financial Condition-Consolidation and Other
Charges."
Item 3. LEGAL PROCEEDINGS
Not Applicable
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE BY THE
SECURITY HOLDERS
A Special Meeting of Stockholders of the Company was held on October
29, 1996 (the "Special Meeting"). Of the 44,724,845 shares of Common Stock of
the Company entitled to be voted at the Special Meeting, 30,110,467 shares of
Common Stock were voted in person or by proxy, constituting a quorum.
The following matters were considered and voted at the Special Meeting:
1. The Stockholders approved the issuance of shares of Common Stock upon
conversion of the Company's Series A Convertible Preferred Stock.
Votes cast for 29,733,778
Votes cast against 320,256
Abstentions 62,774
Broker non-votes 14,614,378
2. The Stockholders ratified the acquisition of Red Ant L.L.C. pursuant to the
Stock Acquisition and Merger Agreement dated as of August 15,1996, (the "Merger
Agreement") so as to approve the issuance of the Contingent Stock contemplated
thereby. Before adjustments required by rules promulgated by the New York Stock
Exchange:
Votes cast for 29,688,984
Votes cast against 358,709
Abstentions 62,774
Broker non-votes 14,614,378
After adjustments to vote the shares of Common Stock acquired by Mr.
Alvin N. Teller and by Wasserstein & Co., Inc. and affiliates pursuant to the
Merger Agreement (6,718,751 shares) in the same proportion as shares of Common
Stock voted for approval of this Proposal 2 by unaffiliated Stockholders.
Votes cast for 26,454,577
Votes cast against 412,459
Abstentions 62,774
Broker non-votes 17,795,035
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S SECURITIES
AND RELATED MATTERS
The Common Stock is listed and traded on the NYSE under the symbol "CDS". The
following table sets forth for the periods indicated, the high and low sales
prices per share for Alliance Common Stock as reported on the New York Stock
Exchange Composite Tape.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the NYSE under the symbol "CDS." The
following table sets forth, for the periods indicated, the high and low sales
prices per share for the Common Stock as reported on the New York Stock Exchange
Composite Tape:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1995
First quarter .................................... 7 4 3/8
Second quarter ................................... 10 1/8 5 3/4
Third quarter .................................... 9 5/8 6 7/8
Fourth quarter ................................... 11 1/4 6 1/8
1996
First quarter .................................... 10 1/2 7 5/8
Second quarter ................................... 9 1/2 4 7/8
Third quarter ................................... 7 4 3/4
Fourth quarter ................................... 5 3/4 1 7/8
1997
First quarter (through March 21, 1997) .......... 2 1/4 1 3/8
</TABLE>
On March 21, 1997, the closing price per share for the Common Stock was
$1 1/2. As of March 21, 1997, there were approximately 314 record holders of
Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company
intends to retain all working capital and earnings, if any, for use in the
Company's operations and in the expansion of its business. Any future
determination with respect to the payment of dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Company's results of operations, financial condition and capital requirements,
the terms of any then existing indebtedness, general business conditions and
such other factors as the Board of Directors deems relevant. The indenture
governing the Company's 11 1/4% Senior Subordinated Notes, the Company's Credit
Agreement and the Certificates of Designation of the Company's outstanding
Convertible Preferred Stock restrict the Company's ability to pay dividends.
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected historical financial data have been derived from the
consolidated financial statements of Alliance. The following data should be read
in conjunction with Alliance's consolidated financial statements and related
notes, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operation Data:
Net sales............................ $ 131,397 $ 200,537 $ 535,195 $720,325 $691,099
Cost of sale......................... 109,386 168,276 442,004 575,552 603,7219(1)
---------- ----------- --------- -------- -------
Gross profit......................... 22,011 32,261 93,191 144,773 87,378
Selling; general and
administrative expenses........... 12,359 20,461 56,714 97,496 144,402(1)
Restructuring and asset
impairment charges................ -- -- -- -- 62,498(1)
Amortization of intangible assets.... 1,545 3,294 6,315 10,500 12,568
---------- ----------- --------- -------- -------------
8,107 8,506 30,162 36,777 (132,090)
Other, primarily interest expense.... (3,246) (4,058) (7,892) (24,685) (32,465)
---------- ----------- --------- -------- -------------
Income (loss) before income
taxes and extraordinary loss...... 4,861 4,448 22,270 12,092 (164,555)(1)
Provision (benefit) for income
taxes............................. 1,829 1,804 9,427 6,820 (15,900)
Income (loss) before
extraordinary loss................ 3,032 2,644 12,843 5,272 $(148,655)(1)
----- ----------- --------- -------- -------------
Extraordinary loss................... 630 3,539 -- -- --
--- ----------- --------- -------- ------------
Net income (loss).................... $ 2,402 $ (895) $ 12,843 $ 5,272 $(148,655)(1)
========= ========= ======== ======= =============
Earnings (loss) per common share and
common share equivalents:
Income (loss) before
extraordinary (loss).............. $ .10 $.06 $ .38 $ .16 $(3.82)
Extraordinary loss, net.............. (.05) (.22) -- -- --
---- ---------- --------- --------- ------------
Net income (loss).................... $ .05 $ (.16) $ .38 $ .16 $(3.82)
========= ========= ========= ======== =============
Net income (loss) applicable to
common stock used in
computing earnings (loss) per
common share...................... $ 752 $ (2,556) $ 12,843 $ 5,272 $(150,877)
========= ========= ======== ======= ==========
Weighted average number of
shares of common stock and
equivalents outstanding........... 13,848,911 15,838,278 34,214,304 39,099,500 39,540,216
========== ========== ========== ========== ==========
<PAGE>
Other Data:
EBITDA(1)(2)......................... $ 10,117 $ 12,592 $ 38,833 $ 51,097 $(113,999)
Interest Expense..................... 3,207 3,624 7,533 22,142 33,760
Depreciation and amortization(3)..... 2,010 4,086 8,671 14,320 18,091
Capital Expenditures(4).............. 783 1,284 3,594 17,965 16,215
Ratio of EBITDA to interest
expense(5)........................ 3.2x 3.5x 5.2x 2.3x *
Ratio of earning to fixed
charges(6) ....................... 2.5x 2.0x 3.6x 1.5x *
Balance Sheet Data (as of end of
period):
Working capital...................... $ 866 $ 32,490 $ 48,630 $ 121,057 $ 36,894
Total assets......................... 81,683 150,218 402,619 645,408 613,082
Long-term debt, net of current.......
portion.............................. 14,733 34,986 115,581 234,989 237,348
Stockholders' equity................. 4,332 41,618 68,431 88,827 17,054
</TABLE>
(1) Contributing to the loss of $148.7 miliion for the year December 31,
1996, were Consolidation and Other Charges of $118.9 million. Of the $118.9
million in charges, $40.9 million was charged to cost of sales and $15.4 million
was charged to selling, general and administrative expenses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Consolidation and Other Charges."
(2) EBITDA (earnings before extraordinary items, interest, taxes,
depreciation and amortization) is presented here not as a substitute for
operating income, net income or cash flow from operating activities determined
in accordance with generally accepted accounting principles, but rather as a
measure of the Company's operating performance and ability to service debt.
Certain restrictive covenants in the Indenture and the Credit Agreement are
based on or related to the Company's EBITDA.
(3) Excludes amortization of deferred financing costs.
(4)Excludes capital expenditures incurred by acquired companies prior to
acquisition.
(5) For purposes of computing the ratio of EBITDA to interest expense,
interest expense does not include amortization of deferred financing costs.
(6) For purposes of computing the ratio of earnings to fixed charges,
earnings consist of income (loss) before income taxes and extraordinary items
plus fixed charges. Fixed Charges consist of interest on all indebtedness,
amortization of deferred financing costs, preferred stock dividends on a pre-tax
basis and that portion of rental expense (approximately one-third) that
management believes to be representative of interest.
* Due to ratios being less than zero, no amounts are presented herein.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Financial Data
(Unaudited)
(Amounts in Thousands, Except Share Data)
First Quarter Second Quarter Third Quarter
Fourth Quarter
1995 1996(1) 1995 1996(2) 1995 1996 1995 1996(3)
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 150,249 176,188 158,768 163,168 182,516 160,636 228,792 191,107
Gross profit 28,675 32,794 30,922 21,096 36,820 28,233 48,356 5,255
Net Income (Loss) 1,696 (4,628) 2,588 (21,897) 984 (9,445) 4 (112,685)
Income (loss) per common share .05 (.13) .07 (.59) .03 (.23) .01 (2.87)
</TABLE>
(1) Included in the First Quarter loss were Consolidation and Other
Charges totalling $2.9 million. See "Management's Discussion and Analysis of
Financial Condition and Result of Operations - Consolidation and Other Charges"
and "Results of Operations Year Ended December 31, 1996 vs. Year Ended December
31, 1995."
(2) Included in the Second Quarter loss were Consolidation and Other
Charges totalling $17.5 million. See "Management's Discussion and Analysis of
Financial Condition and Result of Operations - Consolidation and Other Charges"
and "Results of Operations Year Ended December 31, 1996 vs. Year Ended December
31, 1995."
(3) Included in the Fourth Quarter loss were Consolidation and Other
Charges totalling $98.5 million. See "Management's Discussion and Analysis of
Financial Condition and Result of Operations - Consolidation and Other Charges"
and "Results of Operations Year Ended December 31, 1996 vs. Year Ended December
31, 1995."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Alliance 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
through traditional as well as emerging retail channels. In August 1996, Alvin
N. Teller (the former Chairman and Chief Executive Officer of MCA Music
Entertainment Group) became Co-Chairman, Chief Executive Officer and President
of Alliance in order to expand the Company's proprietary content business and to
consolidate and focus the operations of the Company.
<PAGE>
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 will release its
first full lenght projects in 1997)specializes in the release of 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. Claire 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 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
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 and CD Now.
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
music consumption demographics to adversely impact the music industry in general
and the Company's customers in particular. The adverse conditons 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.
<PAGE>
Consolidation and Other Charges
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 or are in the
process of being 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 1997) 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. For the
year ended December 31, 1996, the Company recorded certain charges (the
"Consolidation and Other Charges") totaling $118.9 million which in large part
contributed to the Company's net loss of approximately $148.7 million for the
year ended December 31, 1996. These Consolidation and Other Charges consisted
of: (i) $33.6 million in non-recurring charges relating to the Consolidation
Plan; (ii) $53.9 million in non-recurring charges relating to the disposition of
certain Non-Core Businesses; (iii) $29.4 million of charges relating to current
industry conditions; and (iv) $2.0 million in non-recurring charges related to
the termination of a merger agreement with Metromedia International Group, Inc.
The $118.9 million is inclusive of $20.0 million which will be required to be
expended in future periods.
In connection with costs to be incurred pursuant to completion of the
Consolidation Plan, the Company recorded charges in fiscal year 1996 of $33.6
million, $30.6 million of which was recorded by the Company in the fourth
quarter. These Consolidation Plan charges included: (i) $8.9 million of
severance and benefits for employees to be terminated; (ii) $4.0 million of
lease termination costs; and (iii) $20.7 million relating to adjustments to
carrying value of certain assets such as inventory of labels which the Company's
Independent Distribution Group no longer anticipates distributing and leasehold
improvements.
<PAGE>
In connection with costs to be incurred pursuant to the divestiture or
discontinuation of the Company's Brazilian operations, Premier Artist Services,
Inc. subsidiary, German sales office, and video rights exploitation business
(these businesses are hereinafter referred to as the "Non-Core Business"), the
Company recorded charges in the fourth quarter in the amount of $53.9 million,
which represented: (i) a reduction in the carrying value of the Company's
investment in the Non-Core Businesses to their respective net realizable values;
(ii) the elimination of the unamortized costs in excess of net assets acquired
with respect to the Non-Core Businesses; and (iii) results of operations of the
Non-Core Businesses during the fourth quarter of 1996.
In addition to the charges related to the Consolidation Plan and the
Non-Core Businesses, the Company recorded additional charges for the year ended
December 31, 1996 of $ 29.4 million relating to certain adverse factors
affecting the United States recorded music industry including (a) over expansion
of retail outlets selling music products, (b) substantial discount pricing of
product by both major and alternative retailers, (c) higher than expected
product returns from customers, (d) the bankruptcy of several significant
customers and (e) changes in demographics and other factors slowing the growth
of demand for pre-recorded music product. These industry-related charges
significantly impacted the Company's distribution segment and include increased
reserves for doubtful or uncollectable accounts and customer returns. While the
industry conditions described above were a fundamental consideration in the
Company's decision to implement the Consolidation Plan, these provisions would
have been recognized even if management had not adopted a formal restructuring
plan.
Results of Operations
The following discussion and analysis should be read in conjunction with
the audited financial statements of the Company and the notes thereto included
elsewhere in this Annual Report.
The following table sets forth certain operating data as a percentage of
net sales for the years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
Percentage of Sales
--------------------------------------------------------------
Year Ended December 31, 1996 Pre-Consolidation
-------------------------------------
1994 1995 1996 and Other Charges(1)
---- ---- ---- --------------------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Gross Profit 17.4 20.1 12.6 18.6
Selling, General and Administrative Expenses 10.6 13.5 20.9 18.7
Restructuring and Asset Impairment Charges -- -- 9.0 --
Amortization of Intangible Assets 1.2 1.5 1.8 1.8
Other Income (Expense) primarily Interest Expense (1.5) (3.4) (4.7) (4.7)
Provision (Benefit) for Income Tax 1.7 1.0 (2.3) (1.5)
Net Income (Loss) 2.4 0.7 (21.5) (5.1)
- ---------------------------
</TABLE>
(1) Cost of sales, selling general and administrative expenses, and
restructuring and asset impairment charges for the year ended December 31, 1996
include Consolidation and Other Charges of $41.0 million, $15.4 million, and
$62.5 million, respectively.
<PAGE>
The following table sets forth certain operating data by business segment,
excluding corporate related expenses and assets, for the years ended December
31, 1994, 1995 and 1996 (in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
------------------------------------------------------------------------------
Proprietary Proprietary Proprietary
Distribution Products Distribution Products Distribution Products
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales................... $511,236 $23,869 $653,981 $66,157 $617,885 $72,933
Depreciation and
Amortization................ 2,454 378 3,112 7,225 3,913 8,357
Operating Income (Loss)
- - Pre-Consolidation
and Other Charges (1)..... 39,305 2,832 45,419 3,639 6,120 (2,728)
Operating Income (Loss)
- - Post-Consolidation
and Other Charges (1)..... 39,305 2,832 45,419 3,639 (48,527) (25,737)
Capital Expenditures........ 1,844 2,633 5,312 1,795 5,277 2,231
Identifiable Assets......... 222,046 99,364 393,304 119,594 326,085 133,191
- ---------------------------
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Consolidation and Other Charges" and "Results of
Operations - Year Ended December 31, 1996 vs.
Year Ended December 31, 1995."
<PAGE>
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
Net sales decreased from $720.3 million for the year ended December 31,
1995 to $691.1 million for the year ended December 31, 1996 or 4.1%. Net sales
attributable to the Company's distribution segment for the year ended December
31, 1996 were approximately $617.9 million compared to $654.0 million for the
year ended December 31, 1995. During the year ended December 31, 1996, the
Company's distribution segment continued to experience lower than anticipated
net sales to its customers in part due to: (i) decreased export sales; (ii)
higher than expected product returns from customers as a result of weak retail
sales and store closings, especially with respect to traditional music
retailers; (iii) limited budgets allocated to the purchase of new product by
certain of the Company's customers; and (iv) the reduction in successful new
product released by the industry during 1996. Additionally, net sales in the
distribution segment were negatively impacted by the downsizing of the Company's
Brazilian operations in anticipation of their disposition. Net sales
attributable to the Company's proprietary product segment for the year ended
December 31, 1996, were approximately $72.9 million, compared to $66.2 million
for the year ended December 31, 1995. Net sales for the period in the
proprietary products segment were positively impacted by the exploitation of
newly-acquired catalogs and the expansion of domestic label groups, but this
positive impact was partially offset by a reduced demand by the Company's
customers for deep catalog (as opposed to front-line or new release) product.
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 12.6% for the year ended December
31, 1996 from 20.1% for the year ended December 31, 1995. The impact of the
Consolidation and Other Charges on gross margin resulted in a gross margin
reduction of approximately 6% for the year ended December 31, 1996. For the year
ended December 31, 1996, the gross margin of the distribution segment was 9.1%,
compared to 17.6% for the year ended December 31, 1995. The impact of the
Consolidation and Other Charges on gross margin for this segment resulted in a
gross margin reduction of approximately 6.5% for the year ended December 31,
1996. The reduction in gross margin prior to the impact of the Consolidation and
Other Charges for the distribution segment was primarily related to: (i) return
disincentive penalties associated with higher than expected product return
during the period; (ii) increased proportion of sales of the One Stop Group
attributable to new release product as opposed to higher margin, deep catalog
product; (iii) a reduction in discount buying and advertising programs offered
by the six Major Labels; and (iv) the impact of the downsizing of the Brazilian
operations in anticipation of their disposition. For the year ended December 31,
1996, the gross margin of the proprietary products segment was 42.7% compared to
44.8% for the year ended December 31, 1995. The impact of the Consolidation and
Other Charges on gross margins for the proprietary products segment resulted in
a gross margin reduction of approximately 1.0% for the year ended December 31,
1996.
Selling, general and administrative expenses increased from $97.5
million, or 13.5% of net sales, for the year ended December 31, 1995 to $144.4
million, or 20.9% of net sales, for the year ended December 31, 1996. The
Company's selling, general and administrative expenses as a percentage of net
sales increased on an overall basis in the period for several reasons including:
(i) non-recurring charges of approximately $15.4 million associated with the
Consolidation and Other Charges; (ii) the incremental costs of processing higher
than anticipated customer returns during the period; (iii) costs associated with
the duplication of certain overhead related to the Consolidation Plan; and (iv)
the inclusion of a full year of results for Independent National Distributors,
Inc. ("INDI") and One Way Records, Inc. ("One Way") in 1996 as compared to five
months of results for INDI and four month of results for One Way for the year
ended December 31, 1995.
<PAGE>
Net income for the year ended December 31, 1995 was $5.3 million compared
to a net loss for the year ended December 31, 1996 of $148.7 million primarily
due to the impact of the Consolidation and Other Charges discussed above. The
impact of the Consolidation and Other Charges on the net loss for the year ended
December 31, 1996, was $113.4 million. The remaining reduction from the year
ended December 31, 1995 was primarily related to losses from operations
discussed above as well as increased interest expense of $11.6 million resulting
from: (i) higher interest rates associated with the Company's borrowings under
the 11 1/4% Senior Subordinated Notes, the proceeds of which were utilized to
finance strategic acquisitions; (ii) increased working capital requirements
related to the companies acquired in 1995; (iii) higher interest rates
associated with working capital borrowings by the Company's Brazilian
operations; and (iv) an on-going timing difference between investing in
copyright acquisitions by the Proprietary Products Group and the generation of
sales associated with products produced pursuant to such acquired rights. For
the year ended December, 1996, the Company recognized tax benefits of
approximately $15.9 million representing the effect of net operating loss carry
forwards and other frontline deductible amounts which management believes will
be recognized in future periods although no assurance can be given with respect
to the realization of such benefits.
Year Ended December 31, 1995 vs. Year Ended December 31, 1994
Net sales increased from $535.2 million for the year ended December 31, 1994 to
$720.3 million for the year ended December 31, 1995, or 34.6%, as a result of
(i) inclusion of five months of net sales of INDI ($38.8 million); (ii)
inclusion of four months of net sales of One Way ($16.3 million); (iii)
increased domestic net sales to existing as well as new customers; and (iv) a
$26.2 million increase in net sales by the Company's Brazilian operations,
despite relatively flat sales in the industry during this period (See
"Business-Music Industry Overview"). Net sales attributable to the Company's
distribution segment for the year ended December 31, 1995 were approximately
$654.0 million compared to $511.3 million for the year ended December 31, 1994.
Sales attributable to the Company's proprietary product segment for the year
ended December 31, 1995 were approximately $66.2 million, compared to $23.9
million for the year ended December 31, 1994. Sales for the year ended December
31, 1994 included only four months of sales of Castle and only one month of
sales for Concord. 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 increased to 20.1% for the year ended December 31,
1995 from 17.4% for the year ended December 31, 1994. For the year ended
December 31, 1995, the gross margin of the distribution segment was 17.6%,
compared to 16.3% for the year ended December 31, 1994. The increase was due in
part to the relatively higher gross margin associated with sales of independent
label product and budget product by the Company's Independent Distribution Group
pursuant to exclusive and regional distribution agreements. For the year ended
December 31, 1995, the gross margin of the proprietary products segment was
44.8% compared to 45.2% for the year ended December 31, 1994. The Company
believes that gross margins as a percent of sales of the proprietary products
segment may decline in the future as the Company implements its plan to
distribute directly rather than license more of its proprietary products. The
Company believes that the increase in expected sales as a result of the strategy
to distribute directly rather than license its proprietary product will be
sufficient to offset the adverse effect resulting from the possible decrease in
gross margins.
Selling, general and administrative expenses increased from $56.7 million or
10.6% of net sales for the year ended December 31, 1994 to $97.5 million or
13.5% of net sales for the year ended December 31, 1995. While selling, general
and administrative expenses as a percentage of net sales of the One Stop Group
was relatively unchanged, the Company's selling, general and administrative
expenses as a percentage of net sales increased on an overall basis in the
period for several reasons including (i) less than anticipated sales (especially
in the fourth quarter); (ii) the inclusion in 1995 of acquired companies with
higher marginal marketing and promotional expenses in both the Proprietary
Products Group and Independent Distribution Group, (iii) increases in corporate
overhead and expenses related to legal, accounting, information systems and
other services provided to the Company's operating units to assist them in
integrating acquired companies and implementing the Company's modernization
program and (iv) higher than expected selling, general and administrative
expenses incurred in connection with the relocation of a distribution facility
to Santa Fe Springs, California.
<PAGE>
Net income for the year ended December 31, 1995 decreased $7.6 million or
59.0% from that of the year ended December 31, 1994 primarily as a result of (i)
the increase in selling, general and administrative expenses discussed above,
(ii) increased amortization of intangible assets associated with acquisitions
($5.0 million for the year ended December 31, 1994 to $6.4 million for the year
ended December 31, 1995); (iii) the Company's higher effective income tax rate
(42% for the year ended December 31, 1994 to 56.4% for the year ended December
31, 1995); and (iv) increased interest expense of $14.6 million resulting from:
(a) higher interest rates associated with the Company's borrowings under the 11
1/4% Senior Subordinated Notes; (b) increased effective interest rates on the
Company's borrowings under its Credit Agreement from 7.3% for the year ended
December 31, 1994 to 8.8% for the year ended December 31, 1995; (c) increased
borrowings to finance higher than expected inventory levels related to, among
other things, purchases of extra inventory in connection with the relocation
into a new warehouse facility in Santa Fe Springs, California; (d) additional
borrowings to finance acquisitions; (e) increased working capital requirements
related to the increase in sales; and (f) an on-going timing difference between
the financing of copyright acquisitions by the Proprietary Products Group and
the generation of sales associated with products produced pursuant to such
acquired rights.
Liquidity and Capital Resources
Cash Used in Operations
Cash used in operations for the year ended December 31, 1996 was $38.1
million compared to $67.3 million for the year ended December 31, 1995. Accounts
receivable for the period decreased by $20.2 million or 10%, primarily as a
result of the Company's decrease in net sales and the impact of Consolidation
and Other Charges of $26.9 million related to increased reserves for doubtful or
uncollectible accounts. Inventory for the period decreased $28.2 million or 15%
as a result of (i) the Company's decrease in net sales, (ii) Consolidation and
Other Charges of $17.7 million relating to the write-down to its net-realizable
value of inventory of labels which the Company's Independent Distribution Group
no longer anticipates distributing and (iii) an on-going inventory reduction
initiative implemented as part of the Consolidation Plan. Accounts payable and
accrued expenses increased by $38.2 million or 17%, primarily as a result of
Consolidation and Other Charges of $20.0 million.
Cash Used in Investing Activities
The Company's capital expenditures for the year ended December 31,
1996, were $16.2 million compared to $18.0 million for the year ended December
31, 1995. The capital spending during the year ended December 31, 1996 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. Total capital expenditures related to these two activities
were $14.1 million for 1996.
The Company spent $18.5 million for the acquisition of proprietary
music rights in the year ended December 31, 1996, compared to $20.9 million for
the year ended December 31, 1995. 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.
<PAGE>
Consolidation Plan
The Company anticipates cash requirements of approximately $20.0 million to
fully complete its Consolidation Plan.
Cash Provided from Financing Activities
During the year ended December 31, 1996, the Company generated net proceeds
from financing activities of $61.5 million consisting primarily of: (i) $42.25
million of Series A Convertible Preferred Stock issued on July 16, 1996, and
(ii) $15 million of Series B Convertible Preferred Stock and 6% Exchangeable
Notes due 2001.
On March 31, 1997, 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 (the "Credit Agreement") agreed to amended the Credit Agreement
to waive covenant defaults in existence prior to December 31, 1996, and to
modify the financial covenants for future periods. Additionally, the amended
Credit Agreement requires that the Company raise at least $35 million in equity
capital (the "Equity Condition") before July 1, 1997. Although management
believes that the Company will be able to raise such equity, the failure to
complete such financing prior to the specified date will constitute an event of
default under the Credit Agreement. There can be no assurance that the Company
will be in compliance with the modified convenants in future periods or satisfy
the Equity Condition prior to July 1, 1997. In the event that the Company fails
to meet its covenants or does default in its obligations under the Credit
Agreement, the Senior Lenders would have the right to terminate the 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 various 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; and (iii) a rights offering of $35 million of
convertible preferred stock in which Wasserstein & Co. has agreed, to act as a
stand-by purchaser for up to $17.5 million of rights, subject to certain
conditions, including, other shareholders subscribe for not less than $17.5
milion in rights. Although no assurances can be given, the Company believes that
it will be successful in obtaining the financing necessary to satisfy the Equity
Condition through one of the foregoing alternatives or other alternatives which
should provide it with adequate working capital to achieve its business plans
though the remainder of 1997.
<PAGE>
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 sumilar 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.
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 8. Index
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants 32
Consolidated Balance Sheets 33
Consolidated Statements of Operations 34
Consolidated Statement of Stockholders' Equity 35
Consolidated Statements of Cash Flow 36
Notes to Consolidated Financial Statements 38
<PAGE>
Report of Independent Accountants
The Board of Directors and Stockholders of
Alliance Entertainment Corp.
We have audited the accompanying balance sheets of Alliance Entertainment
Corp. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Alliance
Entertainment Corp. and subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
February 28, 1997, except for the
information in Note 4, as to which
the date is March 31, 1997
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
1995 1996
----------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,852 $ 8,669
Accounts receivable, less allowance for doubtful
accounts of 1995 $4,964; 1996 $15,558 193,785 173,619
Inventory 192,604 164,380
Advances and other prepaid expenses 24,609 22,739
Refundable income taxes 783 11,260
Deferred income taxes 9,061 5,798
----------------- --------------
Total current assets 433,694 386,465
----------------- --------------
INVESTMENTS, at cost 782 1,100
PROPERTY AND EQUIPMENT 24,826 33,793
COPYRIGHTS, less accumulated amortization 64,150 62,917
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED,
less accumulated amortization 97,262 93,727
COVENANTS NOT TO COMPETE, less accumulated
amortization 10,586 8,366
DEFERRED INCOME TAXES 1,894 9,798
OTHER ASSETS, less accumulated amortization 12,214 16,916
--------------- ------------
TOTAL ASSETS $ 645,408 $ 613,082
================= ============
CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 73,700 $ 72,671
Current maturities of long-term debt 8,983 8,305
Current obligations under capital leases 432 582
Accounts payable and accrued expenses 229,088 267,187
Income taxes payable 434 826
----------------- --------------
Total current liabilities 312,637 349,571
----------------- --------------
LONG-TERM DEBT 234,622 236,215
OBLIGATIONS UNDER CAPITAL LEASES 367 1,133
DEFERRED INCOME TAXES 8,955 9,109
COMMITMENTS
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $.01 par value,
886,240 shares authorized, shares issued and
outstanding 1995 0; 1996 422,500 ( $43,812
liquidation preference) - 4
Series B convertible preferred stock, $.01 par value,
300,000 shares authorized, shares issued and
outstanding 1995 0; 1996 57,500 ( $5,760
liquidation preference) - 1
Common stock, $.0001 par value, 100,000,000
shares authorized, shares issued and outstanding
1995 35,638,331; 1996 44,764,853 3 4
Additional paid-in capital 71,276 146,665
Employee notes for stock purchases (67) (67)
Retained earnings (deficit) 17,369 (131,286)
Foreign currency translation adjustment 246 1,733
----------------- --------------
Total stockholders' equity 88,827 17,054
----------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 645,408 $ 613,082
================= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
1994 1995 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 535,195 $ 720,325 $ 691,099
Cost of sales 442,004 575,552 603,721
----------------- -------------- --------------
Gross profit 93,191 144,773 87,378
Selling, general and administrative expenses 56,714 97,496 144,402
Restructuring and asset impairment charges - - 62,498
Amortization of intangible assets 6,315 10,500 12,568
----------------- -------------- --------------
63,029 107,996 219,468
----------------- -------------- --------------
30,162 36,777 (132,090)
----------------- -------------- --------------
Other income (expense)
Amortization of deferred financing costs (599) (1,325) (1,903)
Other income (expense) - net 240 (1,218) 3,198
Interest expense (7,533) (22,142) (33,760)
----------------- -------------- --------------
(7,892) (24,685) (32,465)
----------------- -------------- --------------
Income (loss) before income taxes 22,270 12,092 (164,555)
Provision (benefit) for income taxes 9,427 6,820 (15,900)
----------------- -------------- --------------
Net income (loss) $ 12,843 $ 5,272 $ (148,655)
================= ============== ==============
Earnings (loss) per common share and
common share equivalents $ .38 $ .16 $ (3.82)
================= ============== ==============
Net income (loss) applicable to common stock used in
computing earnings (loss) per common share $ 12,843 $ 5,272 $ (150,877)
================= ============== ==============
Weighted average number of shares of
common stock and equivalents outstanding 34,214,304 39,099,500 39,540,216
================= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in Thousands, Except Share Data)
Capital Stock Issued
------------------------------------------------------
Employee Foreign
Series A Series B Additional Notes for Retained Currency
Preferred Preferred Common Paid-In Stock Earnings Translation
Stock Stock Stock Capital Purchases (Deficit) Adjustment
---------- ------------ ---------- ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ - $ - $ 3 $ 42,397 $ (36) $ (746) $ -
Issuance of 2,273,223 shares of
common stock
for purchase of companies - - - 13,707 - - -
Exercise of options for 262,500
shares of commonstock in exchange
for employee notes - - - 31 (31) - -
Exercise of options for 249,500
shares of common stock - - - 51 - - -
Exercise of warrants for 100 shares
of common stock - - - 1 - - -
Adjustment for costs incurred in
connection with Trinity Merger - - - (224) - - -
Net income - - - - - 12,843 -
Translation adjustment - - - - - - 435
---------- ------------ ---------- ---------- ---------- --------- -----------
Balance at December 31, 1994 - - 3 55,963 (67) 12,097 435
Issuance of 147,309 shares of common
stock for purchase of company - - - 1,300 - - -
Exercise of options for 125,000
shares of common stock in
exchange for employee notes - - - 15 (15) - -
Payment of employee note - - - - 15 - -
Exercise of options and warrants
for 1,502,287 shares of common stock - - - 4,614 - - -
Tax benefit related to exercise of
employee stock options - - - 1,602 - - -
Exchange of 4,347,095 A Warrants
and 4,393,064 B Warrants for 543,387
and 337,928 shares of common stock,
respectively, and costs of exchange
offer, including the issuance of
66,375 shares of common stock - - - (518) - - -
Exchange of $8,000,000 of preferred
stock and accumulated dividends of
subsidiary for 1,518,972 shares
of common stock - - - 8,300 - - -
Net income - - - - - 5,272 -
Translation adjustment - - - - - - (189)
---------- ------------ ---------- ------------- ------------ ------------ ---------
Balance at December 31, 1995 - - 3 71,276 (67) 17,369 246
Exercise of options and warrants
for 2,372,563 shares of common stock - - - 2,969 - - -
Issuance of 6,753,959 shares of
common stock for purchase
of companies - - 1 27,074 - - -
Issuance of 422,500 shares of series A
convertible preferred stock 4 - - 40,761 - - -
Issuance of 57,500 shares of series B
convertible preferred stock - 1 - 6,807 - - -
Deemed dividend on issuance of series B
convertible preferred stock - - - (2,222) - - -
Net loss - - - - - (148,655) -
Translation adjustment - - - - - - 1,487
========== ============ ========== ============= ============ ============ =========
Balance at December 31, 1996 $ 4 $ 1 $ 4 $ 146,665 $ (67) $ (131,286) $ 1,733
========== ============ ========== ============= ============ ============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(Amounts in Thousands)
<TABLE>
<CAPTION>
1994 1995 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 12,843 $ 5,272 (148,655)
Adjustments to reconcile net income (loss) to net cash
used in operating
activities:
Depreciation and amortization 9,270 15,645 19,994
Restructuring and asset impairment charges - - 55,908
Other non cash charges - - 27,037
Change in assets and liabilities: net of effect of acquisitions
(Increase) in accounts receivable (42,038) (44,987) (9,865)
(Increase) decrease in inventory (33,783) (46,399) 825
(Increase) decrease in prepaid expenses and other 5,054 (5,786) (2,979)
(Increase) in deferred income taxes (1,113) - (5,505)
Increase in accounts payable and
accrued expenses 50,631 12,656 34,488
Increase (decrease) in income taxes payable 1,834 (3,694) (10,038)
----------------- -------------- --------------
Net cash provided by (used in) operating activities 2,698 (67,293) (38,790)
----------------- -------------- --------------
Cash Flows From Investing Activities
Purchase of property and equipment, net (3,594) (17,965) (16,215)
(Increase) in copyrights - (20,863) (18,462)
(Increase) in other assets (1,260) (336) (5,676)
Purchase of businesses including costs,
net of cash acquired (74,080) (40,909) 11,149
----------------- -------------- --------------
Net cash used in investing activities (78,934) (80,073) (29,204)
----------------- -------------- --------------
Cash Flows From Financing Activities
Increase (decrease) in excess of outstanding
checks over bank balance (48) 5,874 2,093
Proceeds from issuance of stock (172) 12,024 48,321
Proceeds from borrowings 240,000 489,649 313,664
Payments on borrowings (155,109) (347,636) (301,336)
Payments for financing costs (3,021) (7,734) (1,250)
----------------- -------------- --------------
Net cash provided by financing activities 81,650 152,177 61,492
----------------- -------------- --------------
Effect of foreign currency translation 435 (189) 2,319
Net increase (decrease) in cash and cash equivalents 5,849 4,622 (4,183)
Cash and cash equivalents
Beginning of period 2,381 8,230 12,852
----------------- -------------- --------------
End of period $ 8,230 $ 12,852 $ 8,669
================= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
YEAR ENDED DECEMBER 31,
(Amounts in Thousands)
<TABLE>
<CAPTION>
1994 1995 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 6,997 $ 14,092 $ 30,921
Cash payments for income taxes $ 7,711 $ 10,217 $ 2,690
Supplemental Disclosure of Noncash Investing
and Financing Activities
Common stock issued to employees for notes $ 31 $ 15 $ -
Acquisition of subsidiary
Cash purchase price, net of cash acquired $ 74,080 $ 40,909 $ (11,149)
Working Capital acquired, net of cash
and cash equivalents $ (3,345) $ 133 $ 2,813
Fair value of other assets acquired, principally
property and equipment 2,277 5,652 1,267
Copyrights 51,236 - -
Cost in excess of net assets of business acquired 39,360 38,594 11,856
Covenant not to compete 5,000 2,528 -
Long-term debt assumed (1,741) (81) (10)
Long-term debt incurred (5,000) (4,600) -
Common stock issued (13,707) (1,317) (27,075)
----------------- -------------- --------------
$ 74,080 $ 40,909 $ (11,149)
================= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business and Significant Accounting Policies:
Nature of Business:
Alliance Entertainment Corp. (the "Company"), through its wholly-owned
subsidiaries, is a fully integrated independent music company which operates in
two segments of the music industry, the distribution of music and music related
products through traditional as well as emerging retail channels (the
"Distribution Segment") and the creation and marketing of proprietary content
rights consisting of both new artists and catalog product in several genres
(the "Proprietary Segment"). The Company's operations are located in the United
States, United Kingdom and Canada. The Company has disposed of its Brazilian and
German Operations (see Note 3).
Management Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of future cash
flows used as a basis to assess recoverability of intangible assets such as
copyrights and cost in excess of net assets acquired. Sales in the music
industry generally give certain customers the right to return product. The
Company provides reserves for inventory, accounts receivable and artists
advances. In addition, the Company's suppliers generally permit the Company to
return products that are in the suppliers current product listing. Management
periodically reviews its significant accounting estimates, and it is reasonably
possible that reserves may change based on actual results and other factors.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned domestic and foreign subsidiaries. All material intercompany
accounts and transactions are eliminated in consolidation.
Inventories:
Inventories consisting of primarily distributed products are stated at the lower
of cost or market with cost determined principally on the average cost basis.
Foreign Currency Translation:
The Company accounts for translation of foreign currency in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation". For operating subsidiaries where the functional currency is the
local currency rather than the U.S. dollar, cumulative translation adjustments
are reflected as a separate component of Stockholder's Equity. The Company's
Brazilian subsidiaries which are under contract for sale are considered by the
terms of SFAS No. 52 to be in a "highly inflationary" economy and accordingly
the U.S. dollar has been used as the functional currency. Therefore, certain
assets of these operations are translated at historical exchange rates and all
translation adjustments have been reflected in the consolidated statement of
operations.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business and Significant Accounting Policies, (Continued):
Revenue Recognition:
Revenue from the sale and distribution of pre-recorded music, music accessories
and other related products is recognized when the products are shipped. Income
from the sale or licensing of media rights is recognized when the sale has been
completed or obligations of the licensor have been performed, including delivery
of the master of such rights to the licensee.
Property and Depreciation:
Property and equipment is carried at cost. Depreciation, including amortization
of equipment held under capital leases, is computed using straight-line and
accelerated methods over the estimated useful lives of the various classes of
depreciable assets or, in the case of equipment held under capital leases, over
the lesser of the useful life or the lease term. Maintenance and repairs are
expensed as incurred. Upon the sale or disposition of property and equipment,
the related costs and accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income. Major renewals and
betterments are capitalized.
Intangibles and Other Long-Lived Assets:
Copyrights and masters are carried at cost and are amortized on a straight line
basis over the estimated useful lives of the copyrights and masters, generally
five to twenty years. The cost in excess of net assets of businesses acquired at
the respective acquisition dates is amortized on a straight line basis
principally over 20 years. Covenants not to compete are carried at cost and are
amortized on a straight line basis over the respective terms of the covenants,
ranging from five to ten years. Deferred loan costs, amounting to $10,923,000 in
1995 and $10,188,000 in 1996 are included in other assets and are amortized over
the terms of the related loans. The Company evaluates the recoverability of
intangibles at the operating group level through analysis of operating results
and consideration of other significant events or changes in the business
environment. The determination of whether impairment exists is made on the basis
of undiscounted expected future cash flows from operations before interest for
the remaining amortization period. If undiscounted expected future cash flows
are not sufficient to support the recorded asset, an impairment is recognized to
reduce the carrying value of the related intangibles based on the expected
discounted cash flows of the related operating group. Substantial intangibles
have been written off as of December 31, 1996 in connection with certain
management restructuring initiatives which has resulted in, among other things,
decisions to exit or dispose of certain foreign activities for nominal
consideration (see Note 3).
Income Taxes:
Income taxes are computed in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." The statement applies
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities based on the difference between the financial statement
and the tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. A valuation
allowance reduces deferred tax assets when it is deemed more likely than not
that some portion or all of the deferred tax assets will not be realized.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be cash equivalents.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business and Significant Accounting Policies, (Continued):
Per Share Data:
Primary earnings (loss) per common share is computed by dividing net earnings
(loss) available to common stockholders by the weighted average number of common
shares and, as appropriate, dilutive common stock equivalents outstanding for
the period. The treasury stock method for determining the dilutive effect of
common stock equivalents is modified to limit the application of funds derived
from the exercise of options and warrants to the repurchase of common stock to
20% of the common stock outstanding at the end of each fiscal period. In the
application of the modified treasury stock method, funds derived in excess of
the 20% limitation were assumed to have been used to reduce interest bearing
debt. The application of the modified treasury stock method in fiscal year 1995
resulted in an adjustment to net income of approximately $ 858,000, for the
purpose of earnings per share computations, to reflect reduced interest expense,
net of the related income tax benefit. In determining net loss per share in
fiscal year 1996, net loss applicable to common shareholders was increased by a
deemed dividend of approximately $2.2 million recognized upon the issuance of
the Company's Series B convertible preferred stock in December 1996. Fully
diluted earnings per share have not been presented because the effect is
anti-dilutive.
Stock Options:
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation," encourages but does not require companies to record
compensation cost for stock based employee compensation plans at fair value. The
Company has chosen to continue to account for stock based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured based on the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the exercise price of the option. Any current income tax benefit
from the exercise and early disposition of stock options is accounted for as a
credit to additional paid-in-capital.
Change in Accounting Standards:
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 mad 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.
Reclassifications:
Certain amounts appearing in the 1994 and 1995 consolidated financial statements
have been reclassified to conform with the 1996 presentation.
Note 2 - Business Combinations:
On February 4, 1994, the Company acquired all of the outstanding shares of
Airlie, Inc. ("Abbey Road") and entered into a covenant not to compete with its
majority shareholder and chief executive officer. The consideration for the
acquisition and covenant not to compete of $30,766,000 and $5,000,000,
respectively, consisted of (1) $17,690,000 in cash, (2) 1,897,778 shares of
common stock valued at $12,810,000, (3) a $5,000,000 note to sellers, and (4)
other acquisition costs of $266,000.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Business Combinations, (Continued):
During September 1994, the Company, through AEC Holdings (UK) Limited, its
wholly owned subsidiary, acquired the issued and outstanding share capital of
Castle Communications, plc ("Castle"). The purchase price, paid in cash, was
approximately $38,570,000, with other acquisition costs of approximately
$2,561,000.
During 1994, the Company acquired Premiere Artist Services, Inc., Disquemusic
Ltda., Brasison Ltda., ExecuSoft Inc., Concord Jazz, Inc. and certain assets of
Nova Distributors and Fiebra Latina for an aggregate initial stock and cash
consideration of approximately $13,447,000, including other acquisition costs of
$267,000. In connection with an acquisition made in 1994, the Company agreed to
issue additional shares of its common stock to the selling shareholders upon the
occasion of specified events. During 1995, the Company made cash payments to the
selling shareholders in the amount of $1,475,000 in lieu of the issuance of
additional shares. These payments have been included as an element of the cost
of the acquisition.
On July 26, 1995, the Company acquired through merger INDI Holdings, Inc.
("INDI") for a total consideration of $25,525,000 in cash and notes, as
adjusted. In connection with the acquisition of INDI, the Company refinanced
substantially all existing INDI indebtedness, in the amount of approximately
$19,300,000.
On September 5, 1995, the Company acquired 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. In
connection with the acquisition of One Way, the Company refinanced substantially
all existing One Way indebtedness in the amount of approximately $4,700,000. The
merger agreement among the Company, One Way and the One Way selling shareholders
provided for the payment of additional consideration to the selling shareholders
based on the operating profit of One Way for fiscal year 1995, as defined. This
additional consideration was paid in March 1997 through the issuance of 225,352
shares of Alliance common stock to the selling shareholders.
On August 27, 1996, the Company acquired Red Ant L.L.C., ("Red Ant"), from
Companies owned by Mr. Alvin N. Teller and Wasserstein & Co., Inc., ("WCI"), in
exchange for (i) 760,823 shares of the Company's common stock issued to Mr.
Teller and 5,957,928 shares of Common Stock issued to WCI and its affiliates and
(ii) the right for Mr. Teller and WCI affiliates to receive additional shares of
common stock contingent upon the market price of the Common Stock achieving
defined target prices or upon certain events. The acquisition of Red Ant for
shares of the Company's Common Stock with an aggregate value of approximately
$26,875,000 and other acquisition costs of $1,109,000 resulted in the
recognition of costs in excess of net assets acquired in the amount of
$8,720,000. Mr. Teller has become Co-Chairman, Chief Executive Officer and
President of Alliance.
Also, in October, 1996 the Company acquired Matrix Software, Inc. for an
aggregate initial stock and cash consideration of approximately $400,000, plus
other acquisition costs of $149,000. In connection with the acquisition, the
Company agreed to the payment of additional cash and stock consideration upon
the occasion of specified events in the maximum amount of $3,100,000.
The acquisitions have been accounted for as purchases and accordingly, the
acquired assets and liabilities have been recorded at their estimated fair
values at the respective acquisition dates. The results of operations of these
acquired entities are included in the consolidated results of operations for the
periods subsequent to their respective acquisition dates.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Business Combinations, (Continued)
Unaudited pro forma data giving effect to the purchases of significant
subsidiaries in 1995 as if they had been consummated as of the beginning of 1995
are shown below. The pro forma data has been prepared for comparative purposes
only and does not purport to be indicative of what would have occurred had the
acquisitions been made at that date or the results which may occur in the
future.
1995
-------------------
Net Sales $784,430,000
Net Loss (535,000)
Net Loss Per Share $(.02)
Pro-forma financial information has not been presented by the Company with
respect to the 1996 acquisitions because such information would not be
materially different from the historical information presented herein.
Note 3 - Restructuring and Other Charges:
On November 14, 1996, the Company announced a significant Consolidation
Plan (the "Consolidation Plan") involving its North American operations.
Pursuant to the Consolidation Plan the Company anticipates the closure of five
of the Company's remaining eight domestic distribution facilities (one facility
was closed in February 1996) and the centralization of all administrative
functions for the Company's One Stop Group and Independent Distribution Group.
Additionally, under the Consolidation Plan, the administrative functions of the
Company's three domestic proprietary labels (Red Ant, Castle (US) and Concord
Jazz) will 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. The eliminated positions are principally comprised of
warehouse, sales, management and administrative employees.
The Company recorded a $33.6 million restructuring charge in fiscal year 1996,
$30.6 million of which was recorded in the fourth quarter, to account for the
cost incurred as a result of adopting the Consolidation Plan. Restructuring and
asset impairment charges reported in fiscal year 1996 included $21.9 million
while the remainder was charged to cost of sales. The restructuring charge
recorded included severance and benefits for employees to be terminated ($8.9
million), lease termination costs ($4.0 million) and adjustments to the carrying
value of certain assets such as inventory and leasehold improvements ($20.7
million).
In the fourth quarter of 1996, management finalized its evaluation of the
possible divestiture of the Company's Brazilian operations and Premier Artists
Services (PAS) subsidiary and committed to a plan of divestiture. The
divestiture is expected to be completed in the first quarter of 1997 and will
result in the disposal of the subsidiaries for nominal consideration. The
Company recorded losses in the fourth quarter in the amount of $33.7 million
reflecting the results of operations of these subsidiaries and the reduction of
the carrying value of its investment in these operations to their respective net
realizable values. Restructuring and asset impairment charges reported in fiscal
year 1996 included charges for the impairment of goodwill in the amount of $11.7
million and the write-down of the residual net assets in the amount of $8.7
million as a result of the divestiture of these operations.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Restructuring and Other Charges,(Continued):
Also, during the fourth quarter, the Company made a decision to discontinue the
exploitation of video rights in the United Kingdom and close the Company's
German operation. Restructuring and asset impairment charges reported in fiscal
year 1996 included charges of $17.8 million to write-down the carrying value of
video intangibles and $2.4 million to recognize exit costs, incurred in
connection with this decision.
In addition to the restructuring charges recorded in connection with the
adoption of the Consolidation Plan, the Company recorded additional provisions
in fiscal year 1996 for uncollectable accounts and the write-down of inventory
to net realizable value in the amount of $29.4 million. These amounts reflect
the Company's experience with a number of adverse factors pervasive throughout
the recorded music industry including a) over expansion of the retail sector
serving the industry, b) discounting of product by both major and alternative
retailers, and c) changes in demographics and other factors effecting the demand
for pre-recorded music product. While these industry conditions were a
fundamental consideration in the Company's decision to implement the
Consolidation Plan, these provisions and write-downs would have been recognized
even if management had not adopted a formal restructuring plan.
Lastly, the Company recorded non-recurring charges of approximately $2.0 million
related to the termination of a merger agreement with Metromedia International
Group, Inc.
The total liabilities established during the year to account for all
restructuring and other non-recurring charges were approximately $23.4 million
of which $20.0 million were still unpaid as of December 31, 1996. The following
table summarizes the impact of charges described above by financial line:
Financial Line Amount
Cost of Sales $40,948,000
Selling, General and Administrative Expenses 15,435,000
Restructuring and Asset Impairment Charges 62,498,000
------------------
Total $118,881,000
==================
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Debt:
Borrowings under long-term credit facilities as of December 31, 1995 and 1996
are comprised of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Long Term Portion of Revolving Credit Agreement $60,000,000 $60,000,000
Term Loan with Banking Syndicate 47,000,000 41,000,000
6% Exchangeable Notes, net of unamortized discount of $4,444,000 - 10,000,000
11 1/4% Series B Senior Subordinated Notes due 2005 125,000,000 125,000,000
Mortgage Bond Payable 6,975,000 6,650,000
Promissory Notes Payable to former stockholders of acquired businesses, bearing
interest primarily at 7% with varying principal and interest
payments made semi-annually through July 1, 1998 2,900,000 1,734,000
Other Obligations Payable through 2002 1,730,000 136,000
----------------- -----------------
243,605,000 244,520,000
Less Current Maturities 8,983,000 8,305,000
----------------- -----------------
$234,622,000 $236,215,000
================= =================
</TABLE>
The term loan and revolving credit agreements (the "Agreement") entered into
with a syndicate of banks, and as amended at various dates through March 1997,
provide for borrowings of up to $150 million under the revolving credit
agreement and a term loan of $50 million. The term loan is payable in quarterly
installments through June 2001 and provides for interest at the Company's option
ranging from 0.25% - 1.5% over the Chase Manhattan Bank prime rate or 1.75% - 3%
over the LIBOR rate, subject to adjustment under certain circumstances. The
interest rate on the borrowings under the term loan was 8.69% as of December 31,
1996 and ranged from 8.75% to 10% as of December 31, 1995. Borrowings are
available under the revolving credit facility based on eligible accounts
receivable and inventory balances and bear interest at The Chase Manhattan Bank
prime rate (8.25% at December 31, 1996 and 8.5% at December 31, 1995) plus a
spread (1.25% at December 31, 1996) ranging from 0% to 1.25% or at the LIBOR
Interest Rate plus a spread (2.75% at December 31, 1996) ranging from 1.5% to
2.75% depending upon the maintenance of certain financial ratios. Interest rates
on the borrowings under the revolving credit facility ranged from 8.38% to 9.5%
and 8.5% to 9.75% as of December 31, 1996 and 1995, respectively. The credit
agreement provides for a commitment fee of .5% on the unused portion of the
line.
The Agreement places certain restrictions on the Company and certain of its
subsidiaries, including restrictions on payment of dividends and requires the
maintenance of net worth (as defined), and certain liquidity, debt coverage and
other financial ratios.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Debt, (Continued):
In addition, the Agreement provides the banks the ability to terminate the
revolving credit facility and declare all outstanding loans, interest and other
amounts payable under the Agreement, immediately due and payable, upon a change
in control of the Company, as defined. The term of the revolving credit facility
expires on July 25,1999 subject to renewal under certain conditions. The Company
considers $60 million of borrowings under the revolving credit facility as of
December 31, 1995 and 1996, to be long term which amounts have been included in
long-term debt. The unused portion of the revolving credit facility at December
31, 1996 was approximately $14,400,000 million. The borrowings, under the
agreement, are collateralized by substantially all of the assets of the Company
and its subsidiaries.
On March 31, 1997, 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 (the "Credit Agreement") agreed to amended the Credit Agreement
to waive covenant defaults in existence prior to December 31, 1996, and to
modify the financial covenants for future periods. Additionally, the amended
Credit Agreement requires that the Company raise at least $35 million in equity
capital (the "Equity Condition") before July 1, 1997. Although management
believes that the Company will be able to raise such equity, the failure to
complete such financing prior to the specified date will constitute an event of
default under the Credit Agreement. There can be no assurance, that the Company
will be in compliance with the modified convenants in future periods or satisfy
the Equity Condition prior to July 1, 1997. In the event that the Company fails
to meet its covenants or does default in its obligations under the Credit
Agreement, the Senior Lenders would have the right to terminate the 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 various 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; and (iii) a rights offering of $35 million of
convertible preferred stock in which Wasserstein & Co. has agreed, to act as a
stand-by purchaser for up to $17.5 million of rights, that subject to certain
conditions, including other shareholders subscribe for not less than $17.5
milion in rights. Although no assurances can be given, the Company believes that
it will be successful in obtaining the financing necessary to satisfy the
conditions of the Credit Agreement through one of the foregoing alternatives or
other alternatives to provide it with adequate working capital to achieve its
business plans though the remainder of 1997.
On December 20, 1996, the Company entered into a Purchase Agreement among
WCI, Cypress Ventures Inc., ("CVI") a wholly owned subsidiary of WCI, and BT
Capital Partners, Inc. ("BTC"), pursuant to which the Company issued 57,500
shares of its Series B Convertible Preferred Stock, par value $0.01 per share
(the "Series B Preferred Stock"), for $5 million to CVI, as well as $2.5 million
and $7.5 million aggregate principal amount of the Company's 6% Exchangeable
Notes due 2001 ("Exchangeable Notes") issued to CVI and BTC, respectively. The
preferred stock has a cumulative dividend rate of 6% per annum, payable in
additional shares of preferred stock and shall rank pari passu with the
Company's Series A Convertible Preferred Stock. Subject to prior approval by the
holders of the outstanding common stock of the Company of the issuance of
sufficient shares of common stock, both the Series B Preferred Stock and the
Notes are convertible into shares of common stock of the Company at an initial
conversion price of $1.25 per share. The Series B Preferred Shares and
Exchangeable Notes were recorded based on estimates of each instruments fair
value at the time of issuance. The difference between the estimate of fair value
of each instrument and the proceeds received from its issuance was accounted for
as a deemed dividend on the preferred stock and unamortized discount on the
issuance of debt. The fair value of each of these securities was estimated based
on the number of shares of underlying common stock that the instruments are
ultimately convertible into, the quoted market price of the Company's common
stock at the time of the issuance of the securities and a marketability discount
taking into account limits on the transferability of the common shares which may
be acquired upon conversion.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Debt, (Continued):
In addition, the Purchase Agreement provides for a second stage of
financing which is anticipated to occur in the first half of 1997, consisting of
a rights offering (the "Rights Offering") of $35 million of Series C Convertible
Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock") of
the Company. Completion of the Rights Offering is subject to further amendments
to the Company's credit facilities satisfactory to WCI, CVI and BTC and other
customary conditions. The Series C Preferred Stock that is proposed to be issued
by the Company pursuant to the Rights Offering will be similar to the Series B
Preferred Stock, but, subject to prior approval by the holders of the
outstanding common stock of the Company of the issuance of sufficient shares of
common stock, will convert into the Company's common stock at a conversion price
equal to the lesser of $2.25 or 75% of the market price per share of common
stock at the time of conversion, subject to adjustment.
On July 25, 1995, the Company issued $ 125,000,000 of 11 1/4% Senior
Subordinated Notes due 2005 (the "Notes") under an indenture among the Company,
certain guarantor subsidiaries and Bankers Trust Company as trustee. In November
1995, the Notes were registered pursuant to the Securities Act of 1933. Interest
on the Subordinated Notes is payable semi-annually. The indenture includes a
number of restrictive covenants, including a limit on the payment of dividends
by the Company or its guarantor subsidiaries in certain circumstances. In
addition, the indenture provides that upon a change in control, as defined, the
Company is obligated to make an offer to purchase all outstanding notes at a
purchase price equal to 101% of the principal balance plus accrued and unpaid
interest. The Notes are redeemable by the Company beginning on July 8, 2000 at
redemption price of 106% of the principal balance. The redemption premium is
reduced to 100% beginning on July 15, 2003.
Pursuant to the terms of the indenture, the Company's payment obligations under
the Notes are jointly and severally guaranteed by certain subsidiaries of the
Company which are parties to the indenture. The subsidiary guarantors'
obligations under their guarantee are subordinated, to the same extent as the
obligation of the Company in respect of the Notes, to the prior payment in full
of all senior indebtedness of such subsidiary, which include any guarantee
issued by such subsidiary that constitutes senior indebtedness.
The obligations of each subsidiary under its guarantee are only limited to the
maximum amount that would not result in the obligation of such subsidiary under
its guarantee constituting a fraudulent conveyance or fraudulent transfer under
applicable law.
On July 27, 1995, the Company received $6,975,000 from the City of Coral
Springs, Florida (the "City") which represented the proceeds of a taxable bond
offering by the City in connection with the Company's purchase of land and
building. The bonds are payable in annual installments through the year 2005 and
bear interest based on a floating rate (5.9% at December 31, 1996). The bonds
are collateralized by letters of credit issued by Sun Trust Bank. The letters of
credit carry an annual fee of 0.75% and are collateralized by a mortgage on the
acquired land and building. The letter of credit was approximately $7,149,000
and $6,816,000 at December 31, 1995 and 1996, respectively.
Aggregate maturities of long-term debt including the portion of the revolving
credit facility the Company considers to be long-term are as follows:
Year ended December 31,
1997 $8,305,000
1998 9,296,000
1999 69,604,000
2000 11,659,000
2001 6,718,000
After 2001 138,938,000
-------------
$244,520,000
=============
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Debt, (Continued):
Interest on selling stockholder promissory notes in 1994, 1995 and 1996 was,
$425,000, $331,000, and $139,000 respectively.
The fair value of the Company's debt exclusive of the Notes approximates
its carrying value, and was determined with reference to the stated rates, terms
and maturities of existing debt as compared to current market conditions. The
fair value of the Company's Notes as of December 31, 1996 and 1995 was
$91,250,000 and $125,000,000, respectively.
Included in accounts payable at December 31, 1995 and 1996 are $7,327,000 and
$9,420,000 respectively, of uncleared checks which were subsequently funded from
borrowings under the revolving credit agreement.
Note 5 - Capital Stock:
In addition to the issuance of Series B Preferred Stock described in Note 4, on
July 16, 1996, the Company entered into a Preferred Stock Purchase Agreement
with BTC and BCI Growth IV, LP ("BCI") pursuant to which the Company issued a
total of $42.25 million of new preferred stock (Series A Convertible Preferred
Stock), the proceeds of which were used to fund the purchase of catalog and
other proprietary rights and for general corporate purposes. BTC and BCI
purchased $35 and $7.25 million of the preferred stock, respectively. The
preferred stock has a cumulative dividend rate of 7 7/8% per annum, payable in
additional shares of preferred stock, and is convertible into shares of the
Company's common stock at a conversion rate equal to $6.10 per share of Common
Stock subject to anti-dilution adjustments. 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.
In May 1995, AEC Americas, Inc. ("AEC Americas"), a wholly-owned subsidiary of
the Company, issued $8.0 million of convertible preferred stock which during
December 1995, together with accumulated and unpaid dividends, was exchanged
pursuant to its terms, for 1,518,972 shares of the Company's common stock.
Pursuant to an exchange offer, which was completed in March 1995, the Company
issued 881,315 shares of its common stock upon the tender of 4,347,096 Class A
Warrants and 4,393,064 Class B Warrants, previously outstanding. Costs of this
exchange offer of approximately $916,000 and the issuance of 66,675 shares of
common stock were charged to additional paid in capital.
In 1993, in connection with the extinguishment of certain debt, the redemption
of certain preferred stock and a merger, the Company issued warrants to purchase
727,950 and 657,500 shares of common stock at $5 and $8, respectively. In each
1995 and 1996, 10,000 shares were issued upon the exercise of 10,000 warrants at
$5 per share. These warrants will expire in February 1998. Also in 1993,
warrants to purchase 250,000 shares of common stock at $.02 were issued as
consideration for financing arrangements. These warrants were exercised in 1996.
The following is a summary of outstanding warrants to acquire the Company's
common stock at December 31, 1996:
Number of Exercise Expiration
Shares Price Date
305,323 $5.20 1997
707,950 5.00 1998
657,500 8.00 1998
----------
Outstanding at
December 31, 1996: 1,670,773
==========
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Property and Equipment:
Property and equipment at December 31, 1995 and 1996, is comprised of the
following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Land $ 2,149,000 $ 1,845,000
Buildings 8,605,000 7,191,000
Building improvements 5,063,000 9,892,000
Machinery and equipment 3,877,000 4,854,000
Furniture and fixtures 12,242,000 22,268,000
Transportation equipment 1,805,000 1,567,000
------------- -------------
33,741,000 47,617,000
Less accumulated depreciation and ( 8,915,000) (13,824,000)
amoritization -------------- -------------
$ 24,826,000 $ 33,793,000
============ ===========
</TABLE>
Included in Property and Equipment at December 31, 1996 is certain equipment
held under capital leases, with an original cost of $3,283,000 and accumulated
amortization of $1,454,000 at December 31, 1996.
Depreciation expense was $2,275,000; $3,820,000 and $5,523,000 for the years
ended December 31, 1994, 1995, and 1996, respectively.
Note 7 - Income Taxes:
Income tax expense (benefit) is comprised of the following components:
1994 1995 1996
---- ---- ----
Current:
Federal $ 8,647,000 $ 4,243,000 $(10,440,000)
State 1,360,000 971,000 -
Foreign 755,000 2,158,000 321,000
--------------- --------------- ----------------
10,762,000 7,372,000 (10,119,000)
--------------- --------------- ----------------
Deferred:
Federal (1,416,000) (129,000) 779,000
State (259,000) 111,000 -
Foreign 340,000 (534,000) (6,560,000)
--------------- --------------- ----------------
(1,335,000) (552,000) (5,781,000)
--------------- --------------- ----------------
Total:
Federal 7,231,000 4,114,000 (9,661,000)
State 1,101,000 1,082,000 -
Foreign 1,095,000 1,624,000 (6,239,000)
=============== =============== ================
$ 9,427,000 $ 6,820,000 $(15,900,000)
=============== =============== ================
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Income Taxes, (Continued):
The differences between the U.S. federal statutory tax rate and the
Company's effective rate are as follows:
1994 1995 1996
---- ---- ----
Tax at Statutory Rate 35.0% 35.0% (35.0)%
State Taxes, Net 3.2 5.8 -
Non-Deductible Amortization 3.6 9.6 1.0
Foreign Taxes at Differing Rates - 5.6 1.9
Other - Net 0.5 0.4 0.4
Change in Valuation Allowance - - 22.0
--------- ---------- -----
42.3% 56.4% (9.7)%
========= ========== ========
Income (loss) before income taxes in 1995 and 1996 included approximately
$2,719,000 and $(27,991,000) respectively, of income from foreign operations.
The financial reporting bases of investments in the United Kingdom and Canada is
different than their tax bases. In accordance with SFAS 109, a deferred tax
liability is not recorded for the excess because the investments are essentially
permanent. A reversal of the Company's plans to permanently invest in these
operations would cause the excess to become taxable. On December 31, 1995 and
1996, these cumulative temporary differences were approximately $2,606,000 and
$(16,465,000) respectively.
The significant components of the net deferred tax asset and liability as
of December 31, 1995 and 1996 were as follows:
1995 1996
---- ----
Current Deferred Tax Assets:
Inventory $2,447,000 $2,385,000
Accounts Receivable 1,768,000 6,106,000
Accrued Liabilities 4,846,000 22,936,000
--------- ----------
Current Deferred Tax Assets 9,061,000 31,427,000
--------- ----------
Long-Term Deferred Tax Assets:
Advances 1,180,000 -
Net Operating Loss & Capital Loss - 28,424,000
Other 714,000 948,000
----------- -----------
Long-Term Deferred Tax Assets 1,894,000 29,372,000
---------- ----------
Total Deferred Tax Assets 10,955,000 60,799,000
---------- ----------
Long-Term Deferred Tax Liabilities:
Masters (1,656,000) (1,587,000)
Copyrights (7,287,000) (7,522,000)
Other (12,000) -
------------ -----------
Total Deferred Tax Liabilities (8,955,000) (9,109,000)
----------- -----------
Deferred Income Taxes, Net 2,000,000 51,690,000
Less Valuation Allowance - (45,203,000)
---------------- ------------
Net Deferred Tax Asset $2,000,000 $6,487,000
========== ==========
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Income Taxes, (Continued):
At December 31, 1996, the Company had available net operating loss carryforwards
for federal, state and foreign income tax reporting purposes in the approximate
amount of $53,000,000, $80,000,000 and $17,500,000, respectively. The losses
expire at various dates for state and foreign purposes while the federal losses
expire in 2011. Capital loss carryforwards exist at December 31, 1996 in the
approximate amount of $7,000,000 expiring in 2001. The utilization of certain
loss carryforwards is subject to limitations under U.S. Federal Income Tax Laws.
At December 31, 1996, the Company had $60,799,000 of unrecognized net
deferred tax assets available to offset future taxable income. A valuation
allowance has been provided against these deferred tax assets as it is presently
deemed to be more likely than not that the benefits generated by these tax
assets will not be fully utilized. Management believes that the Company will
generate sufficient taxable earnings to recover net deferred tax assets of
$15,596,000. Determination of future taxable earnings is based on the Company's
historical earnings performance, expected cost savings relating to the
Consolidation Plan and projected industry growth. The Company continues to
evaluate the realizability of its deferred tax assets and its estimate is
subject to change.
Note 8 - Stock Option Plans:
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. SFAS No. 123 "Accounting for Stock-Based Compensation"
was issued by the FASB in 1995 and, if fully adopted, changes the methods for
recognition of cost on plans similar to those of the Company. Adoption of SFAS
No. 123 is optional; however, pro forma disclosures as if the Company adopted
the cost recognition requirements under SFAS No. 123 in 1996 are presented
below.
The Company generally offers fixed stock option plans which provide for the
granting of non-qualified and incentive stock options to certain employees and
members of the Board of Directors of the Company. Generally, options outstanding
under the Company's stock option plans: (i) are granted at prices which equate
to or are above the market value of the stock on the date of grant, (ii) vest
ratably over a three, four or five year service vesting period, and (iii) expire
either five or ten years subsequent to award.
A summary or the status of the Company's fixed stock options as of December 31,
1994, 1995 and 1996 and changes during the year ended
on those dates is presented below:
1994
------------------------------
Weighted Average
Shares Exercise Price
Outstanding at beginning of year 5,614,550 $2.43
Granted 2,946,300 5.86
Exercised (512,000) .16
Canceled (176,659) 5.42
----------------
Outstanding at end of year 7,872,191 3.82
----------------
Options exercisable at year-end 4,488,000
----------------
Options available for future grant 5,124,709
----------------
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Stock Option Plans, (Continued):
1995
------------------------------
Weighted Average
Shares Exercise Price
Outstanding at beginning of year 7,872,191 $3.82
Granted 1,939,500 6.39
Exercised (1,131,775) 2.06
Canceled (157,589) 5.77
--------------
Outstanding at end of year 8,522,327 4.62
--------------
Options exercisable at year-end 4,272,009
--------------
Options available for future grant 10,215,432
--------------
Weighted average fair value
of options granted during the year $2.52
--------------
1996
-----------------------------
Weighted Average
Shares Exercise Price
Outstanding at beginning of year 8,522,327 $4.62
Granted 7,271,250 5.89
Exercised (2,029,355) 1.26
Canceled (105,354) 5.56
--------------
Outstanding at end of year 13,658,868 5.78
--------------
Options exercisable at year-end 7,339,267
--------------
Options available for future grant 3,205,502
--------------
Weighted average fair value
of options granted during the year $2.76
--------------
The fair value of each option granted during 1995 and 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
1995 1996
------------------- -------------------
Expected Life (Years) 5 8
Risk-Free Interest Rate 6.72% 6.47%
Expected Volatility 30.84% 29.07%
Dividend Yield 0% 0%
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Stock Option Plans, (Continued):
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------------
<C> <C> <C> <C> <C> <C>
Number Number
Range of Exercise Outstanding at Wtgd. Avg. Remaining Wtgd. Avg. Exercisable at Wtgd. Avg.
Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
- -------------------- ------------------- ------------------------ ----------------- ------------------- -----------------
$.82 150,000 6.0 $ .82 150,000 $ .82
$4.88 to $7.26 12,812,868 5.8 $5.70 6,635,272 $5.57
$7.38 to $9.31 696,000 3.4 $8.34 553,995 $8.39
- -------------------- ------------------- ------------------------ ----------------- ------------------- -----------------
$.82 to $9.31 13,658,868 5.6 $5.78 7,339,267 $5.69
- -------------------- ------------------- ------------------------ ----------------- ------------------- -----------------
</TABLE>
Had compensation cost for the Company's 1995 and 1996 grants for
stock-based compensation plans been determined consistent with SFAS No. 123, the
Company's net income (loss), net income (loss) applicable to common stock, and
net income (loss) per common share for 1995 and 1996 would approximate the pro
forma amounts below:
<TABLE>
<CAPTION>
1995 1995 1996 1996
As Reported Pro Forma As Reported Pro Forma
---------------- ---------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,272,000 $ 2,918,000 $ (148,655,000) $ (157,088,000)
---------------- ---------------- ---------------------- ----------------------
Net income (loss) applicable to
common stock $ 5,272,000 $ 2,918,000 $ (150,877,000) $ (159,310,000)
---------------- ---------------- ---------------------- ----------------------
Net income (loss) per common share $ .16 $ .10 $ (3.82) $ (4.03)
---------------- ---------------- ---------------------- ----------------------
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
Note 9 - Leases:
The Company has certain equipment leases, which have been accounted for as
capital leases. In addition, the Company also leases facilities, computer and
other equipment under various operating leases.
Rent expense under all operating leases was $1,600,000, $3,369,000 and
$4,339,000 for the years ended December 31, 1994, 1995, and 1996, respectively.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Leases, (Continued):
Future minimum payments under operating leases with terms of one year or more
consisted of the following at December 31, 1996:
Year Ending Operating
December 31, Leases
------------ ------
1997 $3,663,000
1998 3,340,000
1999 2,888,000
2000 2,713,000
2001 1,916,000
Thereafter 9,309,000
-----------
$23,829,000
===========
Note 10 - Business Activities:
The Company makes a substantial amount of its sales to large customers,
primarily retail chain stores. At December 31, 1995 and 1996, the ten largest
customer accounts receivable balances represented $79,072,000 and $81,929,000
respectively. In addition, at December 31, 1995 and 1996, unsecured foreign
accounts represented approximately 11% and 12% respectively, of accounts
receivable. The Company conducts ongoing credit evaluations of its customers and
requires all new customers to prepay orders or to pay COD until the customer
establishes a credit history with the Company.
The Company's operations by business segment for the years ended December 31,
1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Proprietary
1994 Distribution Product Corporate Consolidated
<S> <C> <C> <C> <C>
Revenues $511,326,000 $23,869,000 $ - $535,195,000
Operating Income (Loss) 39,305,000 2,832,000 (11,975,000)* 30,162,000
Identifiable Assets 222,046,000 99,364,000 81,209,000 402,619,000
Depreciation and amortization 1,844,000 2,633,000 4,793,000 9,270,000
Capital Expenditures 2,454,000 378,000 762,000 3,594,000
1995
Revenues 657,124,000 63,014,000 187,000 720,325,000
Operating Income (Loss) 45,419,000 3,639,000 (12,281,000)* 36,777,000
Identifiable Assets 392,889,000 120,426,000 132,093,000 645,408,000
Depreciation and
Amortization 3,112,000 7,225,000 5,308,000 15,645,000
Capital Expenditures 5,312,000 1,795,000 10,858,000 17,965,000
</TABLE>
All amounts for 1996 are presented after Restructuring and Other Charges (see
Note 3).
<TABLE>
<CAPTION>
1996
<S> <C> <C> <C> <C>
Revenues 617,885,000 72,933,000 281,000 691,099,000
Operating Income (Loss) (48,527,000) (25,737,000) (57,826,000)* (132,090,000)
Identifiable Assets 326,085,000 133,191,000 153,806,000 613,082,000
Depreciation and
Amortization 3,913,000 8,357,000 7,724,000 19,994,000
Capital Expenditures 5,277,000 2,231,000 8,707,000 16,215,000
</TABLE>
* Includes $4.1 $6.4 and $7.2 million of amortization associated with
acquisition of companies in 1994, 1995 and 1996 respectively.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Business Activities, (Continued):
Information about the Company's foreign operations and geographic sales for the
year ended December 31, 1994, 1995 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Foreign Operations:
1994 Brazil United Kingdom & Europe Canada
---- ------ ----------------------- ------
<S> <C> <C> <C>
Sales $11,935,000 $20,782,000 $ -
Operating Income 2,233,000 1,758,000 -
Identifiable Assets 13,365,000 93,591,000 -
1995 Brazil United Kingdom & Europe Canada
---- ------ ----------------------- ------
Sales $35,684,000 $58,645,000 $4,065,000
Operating Income 5,309,000 2,755,000 109,000
Identifiable Assets 41,003,000 112,220,000 3,458,000
1996 Brazil United Kingdom & Europe Canada
---- ------ ----------------------- ------
Sales $18,308,000 $58,885,000 $6,986,000
Operating Income (Loss) (6,247,000) (19,441,000) 825,000
Identifiable Assets - 0 - 110,080,000 5,733,000
</TABLE>
The Company's approximate sales by geographic region excluding its foreign
operations, presented above, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
United States $361,183,000 $451,754,000 $448,136,000
South America and the Caribbean 58,465,000 43,632,000 41,682,000
Pacific Rim 52,744,000 103,515,000 79,605,000
Europe and Other 30,086,000 23,030,000 37,497,000
-------------- -------------- -------------
$502,478,000 $621,931,000 $606,920,000
============ ============ ============
</TABLE>
No individual customer accounted for 10% or more of the Company's consolidated
sales in 1994, 1995 and 1996.
Note 11 - Related Party Transactions:
The Company has employed law firms which directors are either member of, or of
counsel. In each instance the law firms are compensated on the normal hourly
rate for services rendered. The Company periodically makes loans to officers and
directors. At December 31, 1996 and 1995, the Company had loans to officers
outstanding in an aggregate amount of approximately $1,187,000 and $480,000
respectively
In September 1995, the Company entered into a lease for a warehouse and office
building in Albany, New York, with a partnership owned by certain of the One Way
selling shareholders, one of whom is an officer of the Company. The amount of
rent charged to expense, relating to this lease in fiscal year 1995 and 1996 was
approximately $108,000 and $347,000 respectively.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Related Party Transactions, (Continued):
In connection with the acquisition of INDI in July 1995, the Company assumed an
obligation under an operating lease for a warehouse and office building in
Dallas, Texas which are owned by one of the INDI selling shareholders. The
amount of rent charged to expense, relating to this lease in fiscal year 1995
and 1996 was approximately $40,000 and $107,000 respectively.
In May 1995, the Company entered into a management agreement with Bain Capital,
Inc. (Bain), pursuant to which the Company retained Bain as a consultant in
connection with various financial transactions for a three year term. The
management agreement provides for the payment of a consulting fee of $ 200,000
during the initial year of the agreement and a minimum of $ 150,000 for each
year thereafter. The Company paid Bain a fee of $ 550,000 for services rendered
in connection with the issuance of its Senior Subordinated Notes in July 1995.
This amount was capitalized as an element of deferred financing costs. Certain
affiliates of Bain are principal holders of the Company's common stock.
In connection with the acquisition of Red Ant, the Company paid a $300,000
fee to WCI. Also, in connection with the Purchase Agreement in December 1996,
the Company paid a fee of $250,000 each to WCI and BTC. Pursuant to the Rights
Offering the Company paid to WCI a fee of 7,500 shares of Series B Preferred
Stock in consideration of WCI entering into a standby purchase commitment
to purchase $17.5 million worth of rights provided that, among other things,
shareholders subscribe for at least $17.5 million of rights in the Rights
Offering. In addition, the Company has agreed to a financing fee to WCI
and BTC on the closing date of the Rights Offering in an aggregate amount of
$1,050,000.
Note 12 - Retirement Plan:
During 1995, the Company implemented a qualified contributory savings plan (the
"Plan") as allowed under Section 401(K) of the Internal Revenue Code. The Plan
permits participant contributions and allows elective Company contributions
based on each participants contribution. Participants may elect to defer up to
15% of their annual compensation subject to an annual cap by contributing
amounts to the Plan. The Company approved contributions of approximately
$118,000 and $143,000 for the years ended December 31, 1995 and 1996,
respectively.
Note 13 - Contingencies:
The Company is party to ordinary routine litigation incidental to its business.
The Company believes that the ultimate resolution of pending litigation will not
have a material effect on the Company's financial position, results of
operations or cash flows.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Items 10, 11, 12 and 13 have been omitted from this report inasmuch as Alliance
intends to file with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report a definitive Proxy Statement for the Annual Meeting of Stockholders of
Alliance scheduled to be held on June 27, 1997 at which such meeting the
Stockholders will vote upon the election of directors. The information under the
caption "Election of Directors" in such Proxy Statement is incorporated herein
by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Financial Statements
Financial Statements are included in Item 8, "Financial Statements and
Supplementary Data." See "Index to Financial Statements" set in Item 8.
(b) Reports on Form 8-K
The Company's current report on Form 8-K, dated November 14, 1996, was
filed by the Company as an Item 5 Form 8-K to announce the implementation of a
significant Consolidation Plan. Furthermore, a Form 8-K dated December 20, 1996
was filed to report under Item 5 that the Company entered into a Purchase
Agreement with Wasserstein & Co., Inc. ("WCI"), Cypress Ventures, Inc. a wholly
owned subsidiary of WCI, ("CVI") and BT Capital Partnership, Inc. ("BT")
pursuant to which the Company issued 57,500 shares of Series B Preferred Stock
as well as $2.5 million and $7.5 million aggregate principal amount of the
Company's 6% Exchangeable Notes due 2001 to CVI and BT. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Cash
Provided From Financing Activities."
<PAGE>
(c) Exhibits:
Exhibit
Number Description of Exhibit
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).)
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).)
<PAGE>
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).)
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).)
<PAGE>
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).)
10.7* Employment Agreement dated as of November 1, 1995,
between the Company and Timothy J. Dahltorp.
<PAGE>
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.
10.10 Lease 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).)
10.12 Stock 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).)
10.13 Merger 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).)
10.14 Engagement 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).)
10.15 Amendment 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).)
10.16 Form 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).)
10.17 Form 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).)
<PAGE>
10.18 Form 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).)
10.19 Engagement 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).)
10.20 Engagement 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).)
10.21 Asset 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).)
10.22 Merger 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).)
10.23* Extention Agreement to Employment Agreement dated
July 31,1996, between the Company and Eric Weisman.
10.25 Offer 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).)
10.26 Lease 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).)
<PAGE>
10.27 Third 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).)
10.28 Merger 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).)
10.29 Merger 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).)
10.30 Management 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).)
10.31 Merger 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).)
10.33 Quota 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).)
10.34 Distribution 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).)
10.35 Letter 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).)
<PAGE>
10.36 First 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).)
10.37 Second 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).)
10.38 Third 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).)
10.39 Stock 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).)
10.40 The 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).)
10.41 Amendment 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).)
10.42 Employment 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).)
10.43 Stock 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).)
<PAGE>
10.44 Engagement 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).)
10.45 Right 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).)
10.46 Fourth 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).)
10.47 Purchase 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).)
11.1* Statement Re: Computation of Earnings (Loss) per
Share.
21.1* Amended List of Subsidiaries of the Registrant.
23.1* Consent of Coopers & Lybrand L.L.P.
27.1* Financial Data Schedule
*Filed herewith.
(d) Financial Statement Schedules
Item Page
Schedule I - Condensed Financial Information of Registrant. 66
Schedule II - Valuation and Qualifying Accounts. 70
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or not applicable; and therefore have been eliminated.
<PAGE>
Report of Independent Accountants
---------------------------------
The Board of Directors and Stockholders of
Alliance Entertainment Corp.
Our report on the consolidated financial statements of Alliance
Entertainment Corp. is included on page 32 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index of this Form 10-K.
In our opinion, the financial statements schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly. in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Miami, Florida
March 31, 1997
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I -
ALLIANCE ENTERTAINMENT CORP.
(Parent Company Only)
BALANCE SHEETS
DECEMBER 31,
(Amounts in Thousands, Except Share Data)
1995 1996
----------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,036 $ 1,523
Accounts receivable, less allowance for doubtful accounts 945 (5,189)
Due from affiliates 127,948 106,219
Prepaid expenses (1,983) 446
Refundable income taxes 3,642 11,096
Deferred income taxes 6,840 5,491
----------------- --------------
Total current assets 138,428 119,586
----------------- --------------
INVESTMENT IN SUBSIDIARIES 111,734 84,022
OTHER INVESTMENTS, at cost 109 299
PROPERTY AND EQUIPMENT 3,693 1,980
COPYRIGHTS, less accumulated amortization 5,892 5,581
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED,
less accumulated amortization 84,189 81,354
COVENANTS NOT TO COMPETE, less accumulated amortization 10,108 8,028
DEFERRED INCOME TAXES 847 2,175
OTHER ASSETS, less accumulated amortization 11,536 15,119
--------------- ------------
--
TOTAL ASSETS $ 366,536 $ 318,144
================= ============
CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 52,000 $ 47,001
Current maturities of long-term debt 4,180 4,744
Accounts payable and accrued expenses 10,742 34,826
----------------- --------------
Total current liabilities 66,922 86,571
----------------- --------------
LONG-TERM DEBT 209,365 214,635
DEFERRED INCOME TAXES 1,668 1,617
COMMITMENTS
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $.01 par value,
886,240 shares authorized, shares issued and
outstanding 1995 0; 1996 422,500 ( $43,812
liquidation preference) - 4
Series B convertible preferred stock, $.01 par value,
300,000 shares authorized, shares issued and
outstanding 1995 0; 1996 57,500 ( $5,760
liquidation preference) - 1
Common stock, $.0001 par value, 100,000,000
shares authorized, shares issued and outstanding
1995 35,638,331; 1996 44,764,853 3 4
Additional paid-in capital 71,276 146,665
Employee notes for stock purchases (67) (67)
Retained earnings (deficit) 17,369 (131,286)
----------------- --------------
Total stockholders' equity 88,581 15,321
----------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 366,536 $ 318,144
================= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(Parent Company Only)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
(Amounts in Thousands)
1994 1995 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Cost of Sales $ - $ (126) $ -
Selling, general and administrative expenses (7,881) (8,597) (43,331)
Restructuring and asset impairment charges - - (30,730)
Equity in income (loss) of subsidiaries 23,771 22,753 (41,297)
Amortization of intangible assets (4,094) (3,672) (4,919)
Amortization of deferred financing costs (593) (1,293) (1,860)
Other income (expense) - net 107 (437) (341)
Interest expense (4,672) (12,922) (20,119)
----------------- -------------- --------------
Income (loss) before income taxes 6,638 (4,294) (142,597)
Provision (benefit) for income taxes (6,205) (9,566) 6,058
----------------- -------------- --------------
Net income (loss) $ 12,843 $ 5,272 $ (148,655)
================= ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
(Parent Company Only)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(Amounts in Thousands)
1994 1995 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) $ 12,843 $ 5,272 $ (148,655)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 4,793 5,269 7,147
Undistributed (earnings) loss of subsidiaries (23,771) (22,753) 41,297
Restructuring and asset impairment charges - - 35,680
Other non cash charges - - 6,505
Change in assets and liabilities, net of effect of acquisitions:
(Increase) in accounts receivable (348) (428) (371)
Decrease in inventory - 268
(Increase) decrease in prepaid expenses (63) (267) 509
(Increase) in deferred income taxes (449) - (30)
Increase in accounts payable and
accrued expenses 8,912 8,060 22,966
Increase (decrease) in income taxes payable 883 (5,531) (7,453)
----------------- -------------- --------------
Net cash provided by (used in) operating activities 2,800 (10,110) (42,405)
----------------- -------------- --------------
Purchase of property and equipment, net (762) (1,774) 1,345
(Increase) in other assets (201) (626) (5,019)
Purchase of businesses including costs,
net of cash acquired (37,454) (41,226) (1,993)
----------------- -------------- --------------
Net cash used in investing activities (38,417) (43,626) (5,667)
----------------- -------------- --------------
Increase in excess of outstanding
checks over bank balance - 1,010
Net financing proceeds to subsidiaries (17,457) (94,755) (355)
Proceeds from issuance of stock (172) 12,024 48,321
Proceeds from borrowings 222,287 487,712 192,000
Payments on borrowings (161,268) (347,636) (191,165)
Payments for financing costs (3,119) (7,507) (1,252)
----------------- -------------- --------------
Net cash provided by financing activities 40,271 49,838 48,559
----------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 4,654 (3,898) 487
Cash and Cash Equivalents:
Beginning of period 280 4,934 1,036
----------------- -------------- --------------
End of period $ 4,934 $ 1,036 $ 1,523
================= ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
(Parent Company Only)
STATEMENTS OF CASH FLOWS - Continued
YEAR ENDED DECEMBER 31,
(Amounts in Thousands)
1994 1995 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Cash payments for interest $ 5,385 $ 10,949 $ 25,667
Cash payments for income taxes $ 7,382 $ 8,748 $ 1,451
and Financing Activities
Common stock issued to employees for notes $ 31 $ 15 $ -
Acquisition of subsidiary
Cash purchase price $ 37,454 $ 41,226 $ 1,993
Investment in equity of subsidiaries $ 25,721 $ 3,949 $ 17,212
Cost in excess of net assets of business acquired 25,440 38,594 11,856
Common Stock issued (13,707) (1,317) (27,075)
----------------- -------------- --------------
$ 37,454 $ 41,226 $ 1,993
================= ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLIANCE ENTERTAINMENT CORP.
AND SUBSIDIARIES
(Dollars in Thousands)
- --------------------- --------------------- --------------------------- ---------------------- ----------------------
Col A Col B Col C Col D Col E
Additions
- --------------------- --------------------- --------------------------- ---------------------- ----------------------
- --------------------- --------------------- ------------ -------------- ---------------------- ----------------------
Description (2) Balance at Beginning Charged to Charged to Deductions (1) Balance at End
of Period Costs and Other of Period
Expenses Accounts
- --------------------- --------------------- ------------ -------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Year Ended December
31, 1996:
Deducted from asset
accounts:
Allowance for
doubtful accounts $4,964 $14,528 $3,934 $15,558
</TABLE>
(1) Principally represents write off of bad debts.
(2) Allowance for doubtful accounts includes reserves for trade and other
receivables.
Amounts for the Years Ended December 31, 1995, and 1994 have not been
included herein as the balances were not individually significant.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ALLIANCE ENTERTAINMENT CORP.
By: /s/Alvin N. Teller
-------------------------------------------------
Co-Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/Alvin N. Teller
__________________________ Co-Chairman, Chief Executive Officer March 25, 1997
Alvin N. Teller and President (Principal Executive
Officer); Director
__________________________ Co-Chairman; Director March , 1997
Randall J. Weisenburger
/s/Timothy Dahltorp
__________________________ Executive Vice President, Chief March 31, 1997
Timothy Dahltorp Financial Officer (Principal
Financial and Accounting Officer)
and Treasurer
/s/Joseph J. Bianco
__________________________ Vice Chairman; Director March 25, 1997
Joseph J. Bianco
__________________________ Vice Chairman; Director March , 1997
Anil K. Narang
__________________________ Director March , 1997
Elliot B. Newman
/s/W. Townsend Ziebold, Jr.
__________________________ Deputy Vice Chairman; Director March 27, 1997
W. Townsend Ziebold, Jr.
/s/Douglas B. Brent
__________________________ Director March 31, 1997
Douglas B. Brent
/s/Robert C. Gay
__________________________ Director March 28, 1997
Robert C. Gay
/s/ Robert Marakovits
__________________________ Director March 31, 1997
Robert Marakovits
</TABLE>
EMPLOYMENT AGREEMENT dated as of the 1st day of November, 1995, by and between
Alliance Entertainment Corp., a Delaware corporation having its principal office
at 110 East 59th Street, New York, NY 10022, (the "Company"), and Timothy J.
Dahltorp, residing at 12 Old Farm Hill Road, Newtown, Connecticut 06470 (the
"Executive").
RECITALS:
The Company desires to employ the Executive, and the Executive desires to accept
such employment by the Company, upon the terms and conditions hereinafter set
forth.
In consideration of the mutual covenants and agreements set forth herein, the
parties agree as follows:
1. Employment and Duties.
The Company agrees to employ the Executive as Senior Vice President / Deputy
Chief Financial Officer and Treasurer from the date hereof until February 2,
1996, and from and after February 2, 1996 as the Executive Vice President /
Chief Financial Officer and Treasurer of the Company, and the Executive accepts
such employment and agrees to perform all duties and services consistent with
the Executive's position. The Executive agrees to devote substantially all of
the Executive's business time, attention and energy to perform the Executive's
duties and services hereunder.
2. Term of Employment.
This Agreement shall commence on the date hereof and end on December 31, 2000,
unless sooner terminated as provided in Section 5 hereof (the "Employment
Period").
3. Consideration and Benefits.
3.1 Base Salary and Percentage Salary.
The Company shall pay the Executive a base salary per annum (the "Base Salary")
equal to the Executive's Base Salary being paid as of the date hereof. Beginning
on January 1, 1996, the Company shall pay the Executive a Base Salary of Two
Hundred Seventy Thousand Dollars ($270,000) per annum. The Base Salary for each
year after the year commencing January 1, 1996 may be increased from time to
time in the sole discretion of the Board and in any event will be increased
annually to reflect corresponding increases in the United States Department of
Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers,
United States City Average, all items (1982-88 = 100). Base Salary shall be
payable at such intervals as salaries are paid by the Company to its other
executive employees.
3.2 Bonus.
In addition to the Base Salary, with respect to each fiscal year during the
Employment Period, the Company shall pay the Executive a bonus (the "Bonus") in
an amount to be determined by the Board of Directors in its sole discretion.
3.3 Benefit Plans.
During the Employment Period, the Executive shall be entitled to participate in
all plans adopted for the general benefit of the Company's employees or
executive employees, such as pension plans, medical plans, investment plans and
group or other insurance plans and benefits (including disability and life
insurance plans), to the extent that the Executive is and remains eligible to
participate therein and subject to the eligibility provisions of such plans in
effect from time to time. The Executive shall be reimbursed for his reasonable
out-of-pocket expenses incurred in the performance of his duties upon submission
of appropriate evidence thereof in conformity with normal Company policy.
<PAGE>
3.4 Officer Loan.
The Company agrees to forgive an officer loan in the amount of $12,500 over the
first two years of the employment period, at a rate of $6,250 per annum.
4. Vacation.
For each year during the Employment Agreement, the Executive shall be entitled
to paid vacation as follows: the greater of (a) three (3) weeks or (b) the
number of weeks vacation provided to executives pursuant to Company policy.
5. Automobile.
In order to enable Executive to carry out his duties, the Executive shall
receive an automobile allowance of Six Hundred Dollars ($600.00) per month for
every month during the Employment Period, in lieu of the use of a Company-owned
or leased vehicle.
6. Termination.
6.1 Death.
This Agreement shall automatically terminate upon the death of the Executive,
whereupon the Company shall be obligated to pay to the Executive's estate any
unpaid Base Salary through the date of death, and the Bonus, if any, as
determined by the Board of Directors. Amounts payable under this Section 6.1
shall be payable at the times and intervals set forth in Sections 3.1 and 3.2
hereof.
6.2 Disability.
The Company shall have the right to terminate this Agreement during the
continuance of any Disability of the Executive, as hereinafter defined, upon
fifteen (15) days prior notice to the Executive during the continuance of the
Disability. "Disability" for purposes of this Section 6.2 shall mean an
inability by the Executive to perform a substantial portion of the Executive's
duties hereunder by reason of physical or mental incapacity or disability for a
total of one hundred eighty (180) days or more in any consecutive period of
three hundred and sixty-five (365) days, as determined by the Board of Directors
in its good faith judgment. In the event of a termination by reason of the
Executive's Disability, the Company shall be obligated to pay the Executive any
unpaid Base Salary through the date of termination, and Bonus, if any, as
determined by the Board of Directors. Amounts payable under this Section 6.2
shall be payable at the times and intervals set forth in Sections 3.1 and 3.2
hereof.
6.3 Termination for Cause.
The Company may terminate this Agreement for cause. As used herein, cause shall
mean (i) the Executive shall have committed an act of fraud, embezzlement or
misappropriation against the Company or committed a material breach of fiduciary
duty owed to the Company; or (ii) the Executive shall have been convicted by a
court of competent jurisdiction of any felony or crime involving moral
turpitude, other than (a) violations of federal, state or local obscenity laws
relating to the distribution of prerecorded music, video cassettes and other
media products, or (b) criminal violations of federal antitrust or securities
laws arising out of the performance of the Executive's duties hereunder; or
(iii) the Executive shall have breached his obligations under Sections 7 and 8
of this Agreement; or (iv) the Executive's willful failure or refusal to timely
comply with a written directive of the Board of Directors of the Company,
provided that such directive is consistent with the Executive's position; and
provided further that such directive does not require the commission by the
Executive of an illegal act. Upon such termination, the Company shall only be
obligated to pay the Executive his Base Salary pre-rated to the date of
termination and any then accrued benefits.
<PAGE>
6.4 Termination for Other Reason.
If the Executive's employment is terminated other than by reason of (i) death,
(ii) Disability, (iii) for cause, or (iv) the Executive's voluntary termination
of employment, then the Company shall pay the Executive severance pay equal to
the balance of the Base Salary payable hereunder for the term of this Agreement.
Such amount shall be payable at the times and intervals set forth in Sections
3.1 and 3.2 hereof. The Company's obligation to make payments hereunder to the
Executive shall immediately cease upon the Executive's subsequent death or
disability. In addition, the Company shall continue to provide Executive's
disability insurance coverage. The obligation of the Company to provide
disability insurance shall cease on the fifth anniversary of the date hereof.
7. Restrictions.
7.1 Confidentiality.
(i) The Executive recognizes that the Executive's position with the Company is
one of trust and confidence. The Executive acknowledges that, during the course
of the Executive's employment with the Company, the Executive will necessarily
become acquainted with confidential information relating to the customers
(including names, addresses and telephone numbers) of the Company, and trade
secrets, processes, methods of operation and other information, which the
Company regards as confidential and in the nature of trade secrets (collectively
"Confidential Information"). The Executive acknowledges and agrees that the
Confidential Information is of incalculable value to the Company and that the
Company would suffer damage if any of the Confidential Information was
improperly disclosed.
(ii) The Executive covenants and agrees that the Executive will not, at any time
during or after the termination of the Executive's relationship with the
Company, reveal, divulge, or make known to any person, firm or corporation, any
Confidential Information made known to the Executive or of which the Executive
has become aware, regardless of whether developed, prepared, devised or
otherwise created in whole or in part by the efforts of the Executive, except
and to the extent that such disclosure is necessary to carry out the Executive's
duties for the Company. The Executive further covenants and agrees that the
Executive shall retain all Confidential Information in trust for the sole
benefit of the Company, and will not divulge or deliver or show any Confidential
Information to any unauthorized person including, without limitation, any other
employer of the Executive, and the Executive will not make use thereof in an
independent business related to the business of the Company.
(iii) The Executive agrees that, upon termination of the Executive's employment
with the Company, for any reason whatsoever, or for no reason, and at any time,
the Executive shall return to the Company all papers, documents and other
property of the Company employment which relate to Confidential Information, and
the Executive will not retain copies of any such papers, documents or other
property for any purpose whatsoever.
<PAGE>
7.2 Non-Competition.
The Executive agrees that during the Employment Period, and for a period of one
(1) year following the termination thereof, either voluntarily or by the Company
for any reason or no reason, the Executive shall not, (i) engage, directly or
indirectly, in North America, alone or as a shareholder, partner, officer,
director, employee or consultant of any other business organization, in the
business of the wholesale or independent distribution of prerecorded music,
music videos and accessories, including, without limitation, the development of
software, the sale, licensing or leasing of software and hardware and the
rendering of services in connection with such distribution business (the
"Business"), (ii) divert to any organization in the Business any customer of the
Company or any of its subsidiaries or business units, or (iii) hire, solicit or
encourage any officer, employee or consultant of the Company or any of its
subsidiaries to leave its employ for employment by or with any organization in
the Business; provided, however, that the Executive may own less than five (5%)
percent of the outstanding capital stock of any other corporation in the
Business and provided further that nothing herein contained shall prevent the
Executive from purchasing or otherwise beneficially owning, without restriction
on amount, any securities issued by the Company. If at any time the provisions
of this Section 7.2 shall be determined to be invalid or unenforceable, by
reason of being vague or unreasonable as to area, duration or scope of activity,
this Section 7.2 shall be considered divisible and shall become and be
immediately amended to only such area, duration and scope of activity as shall
be determined to be reasonable and enforceable by the court or other body having
jurisdiction over the matter; and the Executive agrees that this Section 7.2 as
so amended shall be valid and binding as though any invalid or unenforceable
provision had not been included herein.
<PAGE>
8. Work Product.
The Executive agrees that all innovations, inventions, improvements,
developments, methods, designs, analyses, drawings, reports, and all similar or
related information which relates to the Company's actual business or product
lines or any business or product lines which the Company has taken significant
action to pursue, and which are conceived, developed or made by the Executive
while employed by the Company (any of the foregoing, hereinafter "Work
Product"), belong to the Company. The Executive will promptly disclose all such
Work Product to the Board of Directors and perform all actions reasonably
requested by the Board to establish and confirm such ownership (including,
without limitation, assignments, consents, powers of attorney and other
instruments).
9. Enforcement.
The Executive acknowledges that the Company will suffer substantial and
irreparable damages not readily ascertainable or compensable in terms of money
in the event of the breach of any of the Executive's obligations under Sections
7 and 8 hereof. The Executive therefore agrees that the provisions of Sections 7
and 8 shall be construed as an agreement independent of the other provisions of
this Agreement and any other agreement and that the Company, in addition to any
other remedies (including damages) provided by law, shall have the right and
remedy to have such provisions specifically enforced by any court having equity
jurisdiction thereof. The rights and remedies (including damages) provided by
law, shall have the right and remedy to have such provisions specifically
enforced by any court having equity jurisdiction thereof. The rights and
remedies set forth in this Section 9 shall be in addition to, and not in lieu
of, any other rights and remedies available to the Company under law or equity.
10. Miscellaneous Provisions.
10.1 Entire Agreement.
This Agreement sets forth the entire agreement and understanding between the
parties with respect to the subject matter hereof and supersedes all prior
agreements, arrangements, and understandings between the parties with respect to
the subject matter hereof.
10.2 Modification.
This Agreement may be amended, modified, superseded, canceled, renewed or
extended, and the terms or covenants hereof may be waived, only by a written
instrument executed by both of the parties or in the case of a waiver, by the
party waiving compliance.
10.3 Waiver.
The failure of either party at any time or times to require performance of any
provision hereof in no manner shall affect the right at a later time to enforce
the same. No waiver by either party of a breach of any term or covenant
contained in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such breach or a waiver of any other term or covenant contained in this
Agreement.
<PAGE>
10.4 Notices.
All notices, demands, consents or other communications hereunder shall be in
writing and shall be given (and shall be deemed to have been duly given) upon
the earlier of receipt, one business day after being sent by telecopier or three
business days after being sent by registered or certified mail to the parties at
the addresses set forth above or to such other address as either party shall
hereafter specify by notice to the other party. Irrespective of the foregoing,
notice of change of address shall be effective only upon receipt.
10.5 Governing Law.
This Agreement shall be construed in accordance with and governed by the laws of
the State of New York applicable to contracts made and to be performed wholly
within such state.
10.6 Arbitration.
Any controversy or claim arising out of or relating to this Agreement, the
making, interpretation or the breach thereof, other than a claim solely for
injunctive relief for any alleged breach of the provisions of Sections 7 or 8 as
to which the parties shall have the right to apply for specific performance to
any court having equity jurisdiction, shall be resolved by arbitration in New
York, New York, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof and any
party to the arbitration may, if such party so elects, institute proceedings in
any court having jurisdiction for the specific performance of any such award.
The powers for the arbitrator or arbitrators shall include, but not be limited
to, the awarding of injunctive relief. The arbitrator shall include in any award
in the prevailing party's favor the amount of his or its reasonable attorney's
fees and expenses and all other reasonable costs and expenses of the
arbitration. In the event the arbitrator does not rule in favor of the
prevailing party in respect of all the claims alleged by such party, the
arbitrator shall include in any award in favor of the prevailing party the
amount of his or its reasonable costs and expenses of the arbitration as he
deems just and equitable under the circumstances. Except as provided above, each
party shall bear his or its own attorney's fees and expenses and the parties
shall bear equally all other costs and expenses of the arbitration.
10.7 Assignability.
This Agreement, and the Executive's rights and obligations hereunder, may not be
assigned by the Executive. The Company may assign its rights, together with its
obligations hereunder, only to a successor by merger or by the purchase of all
or substantially all of the assets and business of the Company and such rights
and obligations shall inure to, and be binding upon, any such successor.
10.8 Binding Effect.
This Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective legal representatives, heirs, permitted successors
and permitted assigns.
10.9 Headings and Word Meanings.
Headings and titles in this Agreement are for convenience of reference only and
shall not control the construction or interpretation of any provisions hereof.
The words "herein," "hereof," "hereunder" and words of similar import, when used
anywhere in this Agreement, refer to this Agreement as a whole and not merely to
a subdivision in which such words appear, unless the context otherwise requires.
The singular shall include the plural unless the context otherwise requires.
<PAGE>
10.10 Separability.
Any term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
THE EXECUTIVE THE COMPANY
Alliance Entertainment Corp.
/s/Timothy Dahltorp By:
- -------------------------------------- -------------------------------
Timothy J. Dahltorp
EMPLOYMENT AGREEMENT, dated as of the 5th of September, 1995, by and
between Alliance Entertainment Corp., a Delaware corporation having its
principal office at 110 East 59th Street New York, NY 10022, (the "Company") and
David H. Schlang, residing at 433 Ridgehill Road, Schenectady, New York 12303
(the "Executive").
The Company desires to employ the Executive, and the Executive desires to accept
such employment by the Company, upon the terms and conditions hereinafter-set
forth.
In consideration of the mutual covenants and agreements set forth herein the
parties agree as follows:
1. Employment and Duties.
(a) The Company agrees to employ the Executive as President and Chief Operating
Officer of each of One Way Records, Inc. ("One Way") and Deja Vu Music,
Inc.("Deja Vu"), subsidiaries of the Company, and as Senior Vice President of
the Company, and the Executive accepts such employment and agrees to perform all
duties and services consistent with the Executive's positions. The Executive
agrees to devote substantially all of the Executive's business time, attention
and energy to perform the Executive's duties and services hereunder; provided,
however, the foregoing shall not prohibit the Executive from engaging in passive
investments (including real estate investments) and activities supervising his
own investments, serving as a director of a corporation whose business is not
related to the business of Alliance, One Way or Deja Vu, or acting as a partner
in One Prospect Avenue Partners, a New York partnership.
(b) Executive's duties are set forth in Exhibit A, which is attached hereto
and made a plan hereof
2. Term of Employment
This Agreement shall commence on the date hereof and end on the fifth
anniversary of the date hereof unless sooner terminated as provided in Section 7
hereof (the "Employment Period"). For purposes hereof, the one year period
commencing on the date hereof and ending on the first anniversary of the date
hereof and each one year period thereafter ending on an anniversary of the date
hereof shall be referred to herein as a "Contract Year."
3. Consideration and Benefits.
3.1 Base Salary and Percentage Salary.
The Company shall pay the Executive a base salary of Three Hundred Twenty Five
Thousand Dollars ($325,000) per annum ("Base Salary'), commencing in the first
Contract Year. The Base Salary for each Contract Year after the first Contract
Year may be increased from time to time in the sole discretion of the Board of
Directors of the Company (sometimes hereinafter referred to as the "Board" or
the "Board of Directors" and in any event will be increased annually to reflect
corresponding increases in the United States Department of Labor, Bureau of
Lab-or Statistics, Consumer Price Index, All Urban Consumers, United States City
Average, all items (1982-88 = 100). . Ease Salary shall be payable at such
intervals as salaries are paid by the Company to its other executive employees.
<PAGE>
3.2 Bonus.
With respect to each fiscal year of the Company during the Employment Period,
the Company shall pay the Executive a bonus (the "Bonus") in an amount to be
determined by the Board of Directors in its sole discretion. Any such Bonus
shall be paid at such times as bonuses are paid by the Company to its other
executive employees. The Bonus shall be pro rated for the year ended December
31, 1995 and for the last partial fiscal year of the Employment Period.
3.3 [Intentionally Omitted.]
3.4 Benefit Plans.
(a) During the Employment Period, the Executive s hall be entitled to
participate in all plans adopted for the general benefit of the Company's
employees or executive employees, such as pension plans, medical plans,
investment plans and group or other insurance plans and benefits (including
disability and life insurance plans). to the extent that the Executive is and
remains eligible to participate therein and subject to the eligibility
provisions of such plans in effect from time to time. Anything in the foregoing
to the contrary notwithstanding, the Company will maintain health insurance for
the Executive and his daughter comparable to the coverage the Executive now has
for himself and his daughter. In the event that the Executive's employment with
the Company is terminated hereunder for any reason whatsoever (including, but
not limited to, expiration of the term hereof or voluntary resignation by the
Executive), the Company shall, to the extent permitted by the applicable
insurance carrier, include the Executive and each member of his family in the
group health insurance plan offered by the Company or its subsidiaries to its
full-time salaried employees; provided that the Executive sbal.1, at bis, sole
cost and expense, pay all health insurance premiums and any other expenses in
Connection therewith as they become due or reimburse the Company therefor, as
the case may be.
(b) The Executive shall be reimbursed for his reasonable out-of pocket expenses
incur-red in the performance of his duties upon submission of appropriate
evidence thereof in conformity with normal Company policy.
4. Vacation.
For each Contract Year during the Employment Period, the Executive shall be
entitled to paid vacation as follows: the greater of (a) four (4) weeks or (b)
the number of weeks' vacation provided to executives similarly situated pursuant
to Company Policy.
5. Automobile.
The Company shall assume the lease of the automobile currently leased by One Way
for the exclusive use and benefit of the Executive. Upon termination of the
current lease, the Company sham enter into a lease for the benefit of the
Executive for a luxury automobile chosen by Executive and comparable to the
automobile currently leased for Executive, on terms consistent with the
Company's policy with respect to automobiles. The lease shall contain a clause
allowing the Executive to purchase the automobile at the termination of the term
of the lease.
6. Place of Employment.
The Executive's principal place of employment with the Company shall be the
current premises of One Way at 15 Industrial Park Road, Albany, New York or the
Company's offices In New York, New York.
7. Termination.
7.1 Death.
This Agreement shall automatically terminate upon the death of the Executive,
whereupon the Company shall be obligated to pay to the Executive's estate any
unpaid Base Salary through the date of death, and the Bonus, if any, as
determined by the Board of Directors. Amounts payable under this Section 7A
shall be payable at the times and intervals set forth in Sections 3.1 and 3.2
hereof.
<PAGE>
7.2 Disability.
The Company shall have the right to terminate this Agreement during the
continuants of any Disability of the Executive, as hereinafter defined, upon
fifteen (15) days prior notice to the Executive during the continuance of the
Disability. "Disability for purposes of this Section 7.2 shall mean an inability
by the Executive to perform a substantial portion of the Executive's duties
hereunder by reason of physical or mental incapacity or disability for a total
of one honored eighty (180) days or more in any consecutive period of three
hundred and sixty-five (365) days, as determined by the Board of Directors in
its good faith judgment. In order to enable the Board of Directors to determine
whether the Executive has a physical or mental incapacity, at the Company's
request and expense, the Executive agrees to submit to an examination by a
physician to be agreed upon between the Company and the Executive; provided,
however, that if the Company and the Executive are unable to agree as to a
physician within ten (10) days of the date of the Company's request then the
Company's good faith decision as to the physician shall bc binding on the
Executive. In the event of a termination by reason of the Executive's
Disability, the Company shall be obligated to pay the Executive any unpaid Base
Salary through the date of termination, and the Bonus, if any, as determined by
the Board of Directors. Amounts payable under this Section 7.2 shall be payable
at the times and intervals set forth in Section 3.1 hereof.
7.3 Termination for Cause.
The Company may terminate this Agreement for cause. As used herein, cause. shall
mean (i) the Executive shall have committed an act of fraud, embezzlement or
intentional misappropriation against the Company or committed a material breach
of fiduciary duty owed to the Company, or (ii) the Executive shall have been
convicted by a court of competent jurisdiction of any felony or crime involving
moral turpitude, other than (a) violations of federal, state or local obscenity
laws relating to the distribution of prerecorded music, video cassettes and
other media products or (b) criminal violations of federal antitrust or
securities laws arising out of the performance of the Executive's duties
hereunder (provided that in the event such conviction is reversed on appeal, the
Executive shall be reinstated to his former position and paid all back pay); or
(iii) the Executive shall have breached his obligations under Section 8 and 9 of
this Agreement; or (iv) the Executive's willful failure or refusal to timely
comply with a written directive of the Board of Directors of the Company,
provided that such directive is consistent with the Executive's position; and
provided further that such directive does not require the commission by the
Executive of an illegal act. In the event of a termination for cause, the
Company shall be obligated to pay the Executive any unpaid Base Salary through
the date of termination, and the Bonus, if any, as determined by the Board of
Directors. Amounts payable under this Section 73 shall be payable at the times
and intervals set forth in Sections 3.1 and 3.2 hereof.
7.4 Voluntary Termination.
The Executive may terminate this Agreement upon delivery to the Company of not
less than thirty (30) days' written notice of the Executives desire to so
terminate. In the event of a voluntary termination by the Executive, in addition
to any amounts payable to the Executive as provided in Section 11.7 herein, the
Company shall be obligated to pay the Executive any unpaid Base Salary through
the date of termination and the Bonus, if any, as determined by the Board of
Directors. Amounts payable under this Section 7.4 shall be payable at the times
and intervals set forth in Sections 3.1 and 3.2 hereof.
<PAGE>
7.5 Termination for Other Reason.
If the Executive's employment is terminated other than by reason of (i) death,
(ii) disability, (iii) for cause, or (iv) the Executive's voluntary termination
of employment other than for good reason, then the Company shal1 pay the
Executive severance pay equal to the balance of the Base Salary and the Bonus
payable hereunder for the term of this Agreement. Such amount shall he payable
at the times and intervals set forth in Sections 3.1 and 3.2 hereof the
Company's obligation to make payments hereunder to the Executive shall
immediately cease upon the Executive's sub sequent death or Disability. In
addition the Company shall continue to provide Executive disability and health
Insurance coverage. Subject to the third sentence of Section 3.4 4 hereof, the
obligation of the Company to provide disability and health insurance shall cease
on the fifth anniversary of the date hereof Further, the following obligations
of the Company to the Executive, if any exist at the time, of such termination,
shall immediately vest and otherwise become due and payable upon such
termination: (i) a unexercised stock options previously granted to the Executive
shall vest; and (ii) the Executive shall have the right at any time following
such termination to demand that the Company effect the registration under the
Securities Act of 1933, as amended, and any applicable state securities laws of
the shares of common stock of the Company then owned by the Executive and not
previously registered, if any, for disposition by the Executive in an
underwritten offering upon terms and under procedures no less favorable to the
Executive than those provided In any agreement between the Company and any other
shareholder of the Company respecting the registration of shares of such other
shareholder.
8. Restrictions
8.1 Confidentiality.
(i) The Executive recognizes that the Executive's position with the Company is
one of trust and confidence. The Executiva acknowledges that, during the course
of the Executive's employment with the Company, the Executive will necessarily
become acquainted with confidential information relating to the customers
(including names, addresses and telephone numbers) of the Company, and trade
secrets, processes, methods of operation and other information, which the
Company regards as confidential and in the nature of trade secrets (collectively
"Confidential Information.") The Executive acknowledges and agrees that the
Confidential Information is of incalculable value to the Company and that the
Company would suffer damage if any of the Confidential Information was
improperly disclosed.
(ii) The Executive covenants and agrees that the Executive will not at any time
during or after the termination of the Executive's relationship with the
Company, reveal, divulge, or make known to any person, firm or corporation, any
confidential Information made known to the Executive or of which the Executive
has become aware, regardless of whether developed, prepared, devised or
otherwise created In whole or in pan by the efforts of the Executive, except and
to the extent that such disclosure is necessary to carry out the Executive's
duties for the Company as determined by the Executive in the good faith exercise
of the Executive's discretion. The Executive further covenants and agrees that
the Executive shall retain all Confidential Information in trust for the sole
benefit of the Company, and will not divulge or deliver or show any Confidential
Information to any unauthorized person including, without limitation, any other
employer of the Executive, and the Executive will not make use thereof in an
independent business related to the business of the Company.
(iii) The Executive agrees that, upon termination of the Executive employment
with the Company. for any reason whatsoever, or for no reason, and at any time,
the Executive shall return to the Company all papers, documents and other
property of the Corn any placed in the Executive custody or obtained by the
Executive during the course of the Executive employment which relate to
Confidential Information, and the Executive will not retain copies of any such
papers, documents or other property for any purpose whatsoever.
<PAGE>
(iv) Notwithstanding anything herein to the contrary, Confidential Information
shall not include any such information which is publicly available, was
previously known to the Executive or was provided to the Executive by a third
party with a legal right to disclose same.
8.2 No-Competition.
(a) The Executive agrees that during the Employment Period, the Executive shall
not: (i) engage, directly or indirectly, in North America, alone or as a
shareholder, partner, officer, director, employee or consultant of any other
business organization, in the business of the wholesale or independent
distribution of prerecorded music, music Videos and accessories (the
'Business'), (ii) divert to any organization In the Business any customer of the
Company or any of its subsidiaries or business units, or (iii) hire, solicit or
encourage any officer, employee or consultant of the Company or any of its
subsidiaries to leave its employ for employment by or with any organization in
the Business. Notwithstanding the forego4 however, nothing contained herein
shall prohibit the Executive from (1) being employed by any of Warner Elecktra
Atlantic, Polygram Group Distribution, Cema Distribution, UNI Distribution
Corp., BMG Distribution, or Sony Music Entertainment, Inc.; (2) engaging in the
business of manufacturing or producing recorded music; (3) owning less than five
(5%) percent of the outstanding capital stock of any other corporation in the
Business, including, without restriction, SPJ Music, Inc.; (4) purchasing or
otherwise beneficially-owning, without restriction on amount, any securities
issued by the Company; or (5) otherwise pursuing a passive investment strategy
other than in the Business.
(b) The Executive further agrees to the "Restrictions", as hereinafter defined,
for the periods and on The conditions hereinafter set forth. Clauses (ii) and
(iii) of Section 8.2(a) and the following Additional Restriction, all as
modified by Clauses (1) through (5) of Section 8.2(a), shall hereinafter be
referred to as the "Restrictions." The "Additional Restriction" shall mean that:
the Executive shall not engage, directly or indirectly, in North America, alone
or as a shareholder, partner, officer, director, employee or consultant of any
other business organization, in the wholesale distribution of prerecorded budget
music:
(i) In the event the Executive's employment by the Company terminates during the
First Contract year, then the Executive agrees to be bound by the Restrictions
for a period of two (2) years from the date of such termination, provided that
the Company continues to pay to the Executive the then-applicable Base Salary
during such two-year period;
(ii) In the event the Executive's employment by the Company terminates during
the Second Contract year, then the Executive agrees to be bound by the
Restrictions for a period of one (1) year from the date of such termination,
provided that the Company continues to pay to the Executive the then-applicable
Base Salary during such one-year period;
(iii) In the event the Executive's employment by the Company terminates during
the Third Contract year, then the Executive agrees to be bound by the
Restrictions for a period of six (6) months from the date of such termination,
provided that the Company continues to pay to the Executive the then-applicable
Base Salary during such six-month period.
Base Salary amounts payable under this Section 8.2(b) shall be payable at the
time and intervals set forth in Section 3.1 hereof.
(c) If at any time the provisions of this Section 8.2 shall be determined to be
invalid or unenforceable, by reason of being vague or unreasonable as to area,
duration or scope of activity, this Section 81 shall be considered divisible and
. shall become and be immediately amended to only such area, duration and scope
of activity as shall be determined to be reasonable and enforceable by the court
or other body having jurisdiction over the matter; and the Executive agrees that
this Section 8.2 as so amended shall be valid and binding as though any invalid
or unenforceable provision bad not been included herein.
<PAGE>
9. Work Product.
The Executive agrees that all innovations, inventions, improvements
developments, methods, designs, analyses, drawings, reports, and all similar or
related information which relates to the Company's actual business or product
lines or any business or product lines which the Company has taken significant
fiction to pursue, and which are conceived, developed or made by the Executive
while employed by the Company (any of the foregoing, hereinafter "Work
Product"), belong to the Company. The Executive will promptly disclose all such
Work Product to the Board of Directors and perform all actions reasonably
requested by the Board to establish and confirm such ownership (including
without limitation, assignments, consents, powers of attorney and other
instruments).
10. Enforcement.
The Executive acknowledges that the Company will suffer substantial and
irreparable damages not readily ascertainable or compensable in terms of money
In the event of the breach of any of the Executive's obligations under Sections
8 and 9 hereof. The Executive therefore agrees that the provisions of Sections 8
and 9 shall be, construed as an agreement independent of the other provisions of
this Agreement and any other agreement and that the Company, in addition to any
other remedies (including damages) provided by law, shall have the right and
remedy to have such provisions specifically enforced by any court having equ4
jurisdiction thereto the rights and remedies Set forth in this Section 10 shall
be in addition to, and not in lieu of, any other rights and remedies available
to the Company under law and equity.
11. Miscellaneous Provisions.
11.1 Entire Agreement.
This Agreement sets forth the entire agreement and understanding between the
par-ties with respect to the subject matter hereof and supersedes all prior
agreements, arrangements, and understandings between the parties with respect to
the subject matter hereof. -
11.2 Modification.
This Agreement may be amended, modified, superseded, canceled, renewed or
extended, and the terms of covenants hereof may be waived, only by a written
instrument executed by both of the parties or in the case of a waiver, by the
party waiving compliance.
11.3 Waiver.
The failure of either party at any time or times to require performance of any
provision hereof in no manner shall affect the right at a later time to enforce
the same. No waiver by either party of a breach of any term or covenant
contained in this Agreement whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such breach or a waiver of any other term or covenant contained in this
Agreement.
<PAGE>
11.4 Notices.
All notices, demands consents or other communications hereunder shall be in
writing and shall be given (and shall be deemed to have been duly given) upon
the earlier of receipt, one business day after being sent by telecopier or five
(5).business days after being sent by registered or certified mail to the
parties at the addresses set forth above or to such other address as either
party shall hereafter specify by notice to the other party. Irrespective of the
foregoing notice of change of address shall be effective only upon receipt.
11.5 Governing Law
This Agreement Shall be construed in accordance with and governed by laws of the
State of New York applicable to contracts made and to be performed wholly within
such state.
11.6 Arbitration.
Any controversy or claim arising out of or relating to this Agreement, the
making, interpretation or breach thereof other than a claim solely for
injunctive relief for any alleged breach of the provisions of Sections 8 or 9 as
to which the parties shall have the right to apply for specific performance to
any court having equity jurisdiction, shall be resolved by arbitration in New
York, New York, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof and any
party to the arbitration may, if such party so elects, institute proceedings in
any court having jurisdiction for the specific performance of any such award.
Toe powers of the arbitrator or arbitrators shall include, but not be limited
to, the awarding of injunctive relief. The arbitrator shall include in any award
in the prevailing party's, favor the amount of his or its reasonable attorney's
fees and expenses and all other reasonable costs and expenses of the
arbitration. In the event the arbitrator does not rule in favor of the
prevailing party in respect of all the claims alleged by such party, the
arbitrator shall include in any award In favor of the prevailing party the
amount of his or its reasonable costs and expenses of the arbitration as be
deems just and equitable under the circumstances. Except as provided above, each
party shall bear his or its own attorneys fees and expenses, and the parties
shall bear equally all other costs and expenses of the arbitration.
11.7 Assignability.
This Agreement, and the Executive's rights and obligations hereunder, may not be
assigned by the Executive. The Company may assign its rights, together with its
obligations hereunder, only to a successor by merger or by the purchase of all
or substantially all of the assets and business of the Company, and such rights
and obligations shall inure to, and be binding upon, any such successor;
provided, however, upon the occurrence of any such assignment (i) all
unexerci5ed stock options previously granted to the Executive shall vest; and
(U) the Executive shall have the right to demand registration of the shares of
common stock of the Company or the Company's successor, as applicable, then
owned by the Executive and not previously registered, if any, as set forth in
paragraph 7-5 hereof.
<PAGE>
11.8 Binding Effect.
This Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective legal representatives, heirs, permitted successors
and permitted assigns.
11.9 Headings and Word Meanings.
Headings and titles in this Agreement are for convenience of reference only and
shall not control the construction or interpretation of any provisions hereof.
The words "herein," "hereof," "hereunder" and words of similar import, when used
anywhere in this Agreement, refer to this Agreement as a whole and not merely to
a subdivision in which such words appear, unless the context otherwise requires.
The singular shall include the plural unless the context otherwise requires.
11.10 Separability.
Any term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering -invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
ALLIANCE ENTERTAINMENT CORP. THE EXECUTIVE
By /s/Joseph J. Bianco By /s/David H. Schlang
- -------------------------------------- -----------------------------
Joseph J. Bianco David H. Schlang
Chairman and Chief Executive Officer
ACKNOWLEDGED AND AGREED as of the date first written above:
ONE WAY RECORDS, INC.
By /s/Joseph J. Bianco
----------------------------------------
DEJA VU MUSIC, INC.
By/s/Joseph J. Bianco
----------------------------------------
<PAGE>
EXHIBIT A
Executive's Duties
The Executive shall perform such duties, consistent with the Executive's
position, as shall be from time to time directed by the Board of Directors of
the Company.
The Executive may buy surplus or "cut-out" audio and video products from the
suppliers he chooses, in his sole discretion, subject only to the Executive's
fiduciary duty to the Company.
EXTENSION AGREEMENT
TO
EMPLOYMENT AGREEMENT
EXTENSION AGREEMENT TO EMPLOYMENT AGREEMENT dated July 31, 1996 (this
"Agreement") between ALLIANCE ENTERTAINMENT CORP., a Delaware corporation (the
"Company) and ERIC S. WEISMAN (the "Executive").
RECITALS:
The Company and the Executive entered into an Employment Agreement dated April,
1994 (the "1994 Agreement"), pursuant to which the Company employed the
Executive, and the Executive accepted such employment by the Company, on the
terms and conditions set forth therein and;
The Company desires to extend the term of employment of the Executive, and the
Executive desires to accept such extension of his employment by the Company,
upon the terms and conditions hereinafter set forth.
In consideration of the mutual covenants and agreements set forth herein, the
parties agree as follows:
1. Employment and Duties.
The Company agrees to extend the term of employment of the Executive as Senior
Executive Vice President / Strategic Planning and New Business Development of
the Company, and the Executive accepts such extension of his employment and
agrees to perform all duties and services consistent with the Executive's
position. The Executive agrees to devote substantially all of the Executive's
business time, attention and energy to perform the Executive's duties and
services hereunder.
2. Term of Employment.
This Agreement shall commence on the date hereof and end on the third
anniversary of the date hereof, unless sooner terminated as provided in Section
5 hereof (the "Employment Period").
3. Consideration and Benefits.
3.1 Base Salary and Percentage Salary.
The Company shall pay the Executive the base salary of $235,000 (the 'Base
Salary). The Base Salary shall be increased to $270,000 on January 1, 1997, and
may be further increased from time to time in the sole discretion of the Board;
and in any event the Base Salary will be increased annually to reflect
corresponding increases in the United States Department of Labor, Bureau of
Labor Statistics, Consumer Price Index, All Urban Consumers, United States City
Average, all items (1982-88 = 100). Base Salary shall be payable at such
intervals as salaries are paid by the Company to its other executive employees.
<PAGE>
3.2 Bonus.
With respect to each fiscal year during the Employment Period, the Company shall
pay the Executive a bonus (the 'Bonus') in an amount to be determined by the
Board of Directors in its sole discretion.
3.3 Benefit Plans.
During the Employment Period, the Executive shall be entitled to participate in
all plans adopted for the general benefit of the Company's employees or
executive employees, such as pension plans, medical plans, investment plans and
group or other insurance plans and benefits, (including disability and life
insurance plans) to the extent that the Executive is and remains eligible to
participate therein and subject to the eligibility provisions of such plans in
effect from time to time. The Executive shall be reimbursed for his reasonable
out-of-pocket expenses incurred in the performance of his duties upon submission
of appropriate evidence thereof in conformity with normal Company policy.
4. Vacation.
For each year during the Employment Agreement, the Executive shall be entitled
to paid vacation as follows: the greater of (a) three (3) weeks or (b) the
number of weeks' vacation provided to executives pursuant to Company policy.
5. Automobile.
The provisions of the 1994 Agreement with respect to a luxury automobile
provided for the benefit of the Executive shall continue through the Employment
Period. The Executive shall be entitled to the benefits of the Company's policy
with respect to incidental automobile expense reimbursements, including the
costs of insurance.
6. Termination.
6.1 Death.
This Agreement shall automatically terminate upon the death of the Executive,
whereupon the Company shall be obligated to pay to the Executive's estate any
unpaid Base Salary through the date of death, and the Bonus, if any, as
determined by the Board of Directors. Amounts payable under this Section 6.1
shall be payable at the times and intervals set forth in Section 3.1 hereof
6.2 Disability.
The Company shall have the right to terminate this Agreement during the
continuance of any Disability of the Executive, as hereinafter defined, upon
fifteen (15) days prior notice to the Executive during the continuance of the
Disability. 'Disability" for purposes of this Section 6.2 shall mean an
inability by the Executive to perform a substantial portion of the Executive's
duties hereunder by reason of physical or mental incapacity or disability for a
total of one hundred eighty (180) days or more in any consecutive period of
three hundred and sixty-five (365) days, as determined by the Board of Directors
in its good faith judgment. In the event of a termination by reason of the
Executive's Disability, the Company shall be obligated to pay the Executive any
unpaid Base Salary through the date of termination, and Bonus, if any, as
determined by the Board of Directors. Amounts payable under this Section 6.2
shall be payable at the times and intervals set forth in Section 3.1 hereof
<PAGE>
6.3 Termination for Cause.
The Company may terminate this Agreement for cause. As used herein, cause shall
mean (i) the Executive shall have committed an act of fraud, embezzlement or
misappropriation against the Company or committed a material breach of fiduciary
duty owed to the Company; or (ii) the Executive shall have been convicted by a
court of competent jurisdiction of any felony or crime involving moral
turpitude, other than (a) violations of federal, state or local obscenity laws
relating to the distribution of prerecorded music, video cassettes and other
media products, or (b) criminal violations of federal antitrust or securities
laws arising out of the performance of the Executive's duties hereunder; or
(iii) the Executive shall have breached his obligations under Section 8 and 9 of
this Agreement; or (iv) the Executive's willful failure or refusal to timely
comply with a written directive of the Board of Directors of the Company,
provided that such directive is consistent with the Executive's position; and
provided further that such directive does not require the commission by the
Executive of an illegal act. Upon such termination, the Company shall only be
obligated to pay the Executive his Base Salary pre-rated to the date of
termination and any then accrued benefits.
6.4 Termination for Other Reason.
If the Executive's employment is terminated other than by reason of death, (ii)
Disability, (iii) for cause, or (iv) the Executive's voluntary termination of
employment, then the Company shall pay the Executive severance pay equal to the
balance of the Base Salary payable hereunder for the term of this Agreement.
Such amount shall be payable at the times and intervals set forth in Sections
3.1 and 3.2 hereof. The Company's obligation to make payments hereunder to the
Executive shall immediately cease upon the Executive's subsequent death or
disability. In addition the Company shall continue to provide Executive's
disability insurance coverage. The obligation of the Company to provide
disability insurance shall cease on the fifth anniversary of the date hereof.
7. Restrictions.
7.1 Confidentiality.
(i) The Executive recognizes that the Executive's position with the Company is
one of trust and confidence. The Executive acknowledges that, during the course
of the Executive's employment with the Company, the Executive will necessarily
become acquainted with confidential information relating to the customers
(including names, addresses and telephone numbers) of the Company, and trade
secrets, processes, methods of operation and other information, which the
Company regards as confidential and in the nature of trade secrets (collectively
"Confidential Information'". The Executive acknowledges and agrees that the
Confidential Information is of incalculable value to the Company and that the
Company would suffer damage if any of the Confidential Information was
improperly disclosed.
(ii) The Executive covenants and agrees that the Executive will not, at any time
during or after the termination of the Executive's relationship with the
Company, reveal, divulge, or make known to any person, firm or corporation, any
Confidential Information made known to the Executive or of which the Executive
has become aware, regardless of whether developed, prepared, devised or
otherwise created in whole or in part by the efforts of the Executive, except
and to the extent that such disclosure is necessary to carry out the Executive's
duties for the Company. The Executive further covenants and agrees that the
Executive shall retain all Confidential Information in trust for the sole
benefit of the Company, and will not divulge or deliver or show any Confidential
Information to any unauthorized person including, without limitation, any other
employer of the Executive, and the Executive will not make use thereof in an
independent business related to the business of the Company.
(iii) The Executive agrees that, upon termination of the Executive's employment
with the Company, for any reason whatsoever, or for no reason, and at any time,
the Executive shall return to the Company all papers, documents and other
property of the Company employment which relate to Confidential Information, and
the Executive will not retain copies of any such paper, documents or other
property for any purpose whatsoever.
<PAGE>
7.2 Non-Competition.
The Executive agrees that during the Employment Period, and for a period of one
(1) year following the termination thereof, either voluntarily or by the Company
for any reason or no reason, the Executive shall not, (i) engage, directly or
indirectly, in North America, alone or as a shareholder, partner, officer,
director, employee or consultant of any other business organization, in the
business of the wholesale or independent distribution of prerecorded music,
music videos and accessories, including, without limitation, the development of
software, the sale, licensing or leasing of software and hardware and the
rendering of services in connection with such distribution business (the
'Business'), (ii) divert to any organization in the Business any customer of the
Company or any of its subsidiaries or business units, or (iii) hire, solicit or
encourage any officer, employee or consultant of the Company or any of its
subsidiaries to leave its employ for employment by or with any organization in
the Business; provided, however, that the Executive may own less than five (5%)
percent of the outstanding capital stock of any other corporation in the
Business and provided further that nothing herein contained shall prevent the
Executive from purchasing or otherwise beneficially owning, without restriction
on amount, any securities issued by the Company. If at any time the provisions
of this Section 7.2 shall be determined to be invalid or unenforceable, by
reason of being vague or unreasonable as to area, duration or scope of activity,
this Section 7.2 shall be considered divisible and shall become and be
immediately amended to only such area, duration and scope of activity as shall
be determined to be reasonable and enforceable by the court or other body having
jurisdiction over the matter; and the Executive agrees that this Section 7.2 as
so amended shall be valid and binding as though any invalid or unenforceable
provision had not been included herein.
8. Work Product.
The Executive agrees that all innovations, inventions, improvements,
developments, methods, designs, analyses, drawings, reports, and all similar or
related information which relates to the Company's actual business or product
lines or any business or product lines which the Company has taken significant
action to pursue, and which are conceived, developed or made-by the Executive
while employed by the Company (any of the foregoing, hereinafter 'Work
Product'), belong to the Company. The Executive will promptly disclose all such
Work Product to the Board of Directors and perform all actions reasonably
requested by the Board to establish and confirm such ownership (including,
without limitation, assignments, consents, powers of attorney and other
instruments).
9. Enforcement.
The Executive acknowledges that the Company will suffer substantial and
irreparable damages not readily ascertainable or compensable in terms of money
in the event of the breach of any of the Executive's obligations under Sections
7 and 8 hereof The Executive therefore agrees that the provisions of Sections 7
and 8 shall be construed as an agreement independent of the other provisions of
this Agreement and any other agreement and that the Company, in addition to any
other remedies (including damages) provided by law, shall have the right and
remedy to have such provisions specifically enforced by any court having equity
jurisdiction thereof. The rights and remedies (including damages) provided by
law, shall have the right and remedy to have such provisions specifically
enforced by any court having equity jurisdiction thereof The rights and remedies
set forth in this Section 9 shall be in addition to, and not in lieu of, any
other rights and remedies available to the Company under law or equity.
<PAGE>
10. Miscellaneous Provisions.
10.1 Entire Agreement.
This Agreement sets forth the entire agreement and understanding between the
parties with respect to the subject matter hereof and supersedes all prior
agreements, arrangements, and understandings between the parties with respect to
the subject matter hereof
10.2 Modification.
This Agreement may be amended, modified, superseded, canceled renewed or
extended, and the terms or covenants hereof may be waived, only by a written
instrument executed by both of the par-ties or in the case of a waiver, by the
party waiving compliance.
10.3 Waiver.
The failure of either party at any time or times to require performance of any
provision hereof in no manner shall affect the right at a later time to enforce
the same. No waiver by either party of a breach of any term or covenant
contained in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such breach or a waiver of any other term or covenant contained in this
Agreement.
<PAGE>
10.4 Notices.
All notices, demands, consents or other communications hereunder shall be in
writing and shall be given (and shall be deemed to have been duly given) upon
the earlier of receipt, one business day after being sent by telecopier or three
business days after being sent by registered or certified mail to the parties at
the addresses set forth above or to such other address as either party shall
hereafter specify by notice to the other party. Irrespective of the foregoing,
notice of change of address shall be effective only upon receipt.
10.5 Governing Law.
This Agreement shall be construed in accordance with and governed by the laws of
the State of New York applicable to contracts made and to be performed wholly
within such state.
10.6 Arbitration.
Any controversy or claim arising out of or relating to this Agreement, the
making, interpretation or the breach thereof, other than a claim solely for
injunctive relief for any alleged breach of the provisions of Sections 7 or 8 as
to which the parties shall have the right to apply for specific performance to
any court having equity jurisdiction, shall be resolved by arbitration in New
York, New York, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof and any
party to the arbitration may, if such party so elects, institute proceedings in
any court having jurisdiction for the specific performance of any such award.
The powers for the arbitrator or arbitrators shall include, but not be limited
to, the awarding of injunctive relief The arbitrator shall include in any award
in the prevailing party's favor the amount of his or its reasonable attorney's
fees and expenses and all other reasonable costs and expenses of the
arbitration. In the event the arbitrator does not rule in favor of the
prevailing party in respect of all the claims alleged by such party, the
arbitrator shall include in any award in favor of the prevailing party the
amount of his or its reasonable costs and expenses of the arbitration as he
deems just and equitable under the circumstances. Except as provided above, each
party shall bear his or its own attorney's fees and expenses and the parties
shall bear equally all other costs and expenses of the arbitration.
10.7 Assignability.
This Agreement, and the Executive's rights and obligations hereunder, may not be
assigned by the Executive. The Company may assign its rights, together with its
obligations hereunder, only to a successor by merger or by the purchase of all
or substantially all of the assets and business of the Company and such fights
and obligations shall inure to, and be binding upon, any such successor.
10.8 Binding Effect.
This Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective legal representatives, heirs, permitted successors
and permitted assigns.
10.9 Headings and Word Meanings
Headings and titles in this Agreement are for convenience of reference only and
shall not control the construction or interpretation of any provisions hereof.
The words "herein," hereof," "hereunder" and words of similar import, when used
anywhere in this Agreement, refer to this Agreement as a whole and not merely to
a subdivision in which such words appear, unless the context otherwise requires,
The singular shall include the plural unless the context otherwise requires.
<PAGE>
10.10 Separability.
Any term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
ALLIANCE ENTERTAINMENT CORP. ERIC S. WEISMAN
/s/Joseph J. Bianco /s/Eric S. Weisman
- -------------------------------- ------------------------
Joseph J. Bianco
Chief Executive Officer
<TABLE>
<CAPTION>
Exhibit 11 - Statement Re: Computation of Earnings (Loss) Per Share
- --------------------------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) $ 12,843,000 $ 5,272,000 $ (148,655,000)
Preferred Stock Dividends - - (2,222,000)
Assumed interest reduction, net of taxes,
under the modified treasury stock method
(3) - 857,630 -
----------------- ---------------- ------------------
Net Income (Loss) Applicable to Common
Stock $ 12,843,000 $ 6,129,630 $ (150,877,000)
----------------- ---------------- ------------------
Weighted average common stock outstanding 30,866,332 33,201,559 39,540,216
Common stock Equivalents (2) 3,347,972 5,897,941 -
----------------- ---------------- ------------------
Number of Shares Used in Per Share
Calculation 34,214,304 39,099,500 39,540,216
----------------- ---------------- ------------------
Net Income (Loss) $ .38 $ .16 $ (3.82)
================= ================ ==================
</TABLE>
(1) Fully diluted per share data is not presented because the computation
is the same as the primary per share data and involves only incremental
common stock equivalent shares resulting from differences in average
and period ending market prices under the treasury method.
(2) Common stock equivalents represent the incremental shares outstanding
of stock options and warrants granted in excess of one year prior to
the Company's S-4 registration statement as well as periods subsequent
to the merger using the "if converted treasury stock" method for 1994.
For 1995, common stock equivalents represent the incremental shares
outstanding of stock options and warrants using the "modified treasury
stock" method. This method was applied due to the number of shares of
common stock obtainable upon exercise of outstanding warrants in the
aggregate exceeding 20% of the number of common shares outstanding.
(3) Due to the application of the "modified treasury stock" method the
assumed proceeds from the outstanding options and warrants were applied
to repurchase 20% of the common shares outstanding. The remaining
proceeds were applied towards the reduction of debt and the assumed
interest reduction, net of taxes, is added to net income (loss)
applicable to common stock.
EXHIBIT 21
<TABLE>
<CAPTION>
U.S. Employer
State of Date of Identification
Name of Corporation Incorporation Incorporation Number Ownership
<S> <C> <C> <C> <C>
U.S. Corporations
Alliance Entertainment Corp. Delaware 11/22/91 13-3645913 Publicly Traded
f/k/a Trinity Capital
Opportunity Corp.
Passport Music Distributors, Inc. Colorado 1/29/85 84-0975592 Alliance Entertainment
f/k/a Encore Distributors, Corp.
Incorporated
AEC Americas, Inc. Delaware 6/1/94 13-3781117 Alliance Entertainment
Corp.
Alliance Ventures, Inc. Delaware 12/14/93 13-3781118 Alliance Entertainment
f/k/a ARD Acquisition Corp. Corp.
f/k/a Nova Acquisition Corp.
Premier Artist Services, Inc. Florida 11/23/83 59-2351475 Alliance Ventures, Inc.
Alliance Talent Florida 10/15/93 13-3737846 Alliance Ventures, Inc.
f/k/a Alliance Latin, Inc.
Premier Signatures, Inc. Florida 6/17/93 36-3913889 Premier Artists
Services, Inc.
FL Acquisition Corp. California 4/12/94 33-0626613 Alliance Entertainment
Corp.
Corporate Entertainment Florida 10/1/88(A) 13-3487033 Alliance Ventures, Inc.
Productions Partnership
Execusoft, Inc. Florida 9/1/84 59-2447808 Alliance Entertainment
Corp.
Castle Communications (U.S), Inc. Delaware 11/15/94 13-3796175 Alliance Entertainment
Corp.
Concord Jazz, Inc. California 6/7/74 94-2268761 Alliance Ventures, Inc.
The Jazz Alliance California 3/27/78 94-2618544 Alliance Ventures, Inc.
AEC Acquisition Corp. Delaware 11/30/94 13-3798622 Alliance Entertainment
Corp.
Passport Music Worldwide, Inc. Delaware 2/23/95 13-3810616 Alliance Entertainment
Corp.
Independent National Delaware 4/13/92 13-3680377 Alliance Entertainment
Distributors, Inc. Corp.
One Way Records, Inc. New York 8/28/95 14-1787267 Alliance Entertainment
Corp.
Deja Vu Music, Inc. New York 8/28/95 14-1787268 Alliance Entertainment
Corp.
AEC One Stop Group, Inc. Delaware 8/8/95 13-3863787 Alliance Entertainment
f/k/a One Way Records, Inc. Corp.
A.E. Land Corp. Delaware 4/18/95 13-3796175 Alliance Entertainment
Corp.
Alliance Acquisition Corp. Delaware 8/8/95 13-3903521 Alliance Entertainment
Corp.
Matrix Software, Inc. Delaware 10/8/96 13/3911523 Alliance Entertainment
Corp.
Red Ant Holdings, Inc. Delaware 10/17/94 13-3794457 Alliance Entertainment
Corp.
Red Ant Box, Inc. Delaware 5/31/96 95-4587231 Alliance Entertainment
Corp.
Red Ant LLC Delaware 6/21/96 95-4590016 Red Ant Holdings, Inc.
&
Red Ant Box, Inc.
(A) Date Partnership Formed
<PAGE>
U.S. Employer
State of Date of Identification
Name of Corporation Incorporation Incorporation Number Ownership
Foreign Corporations
Disquemusic Comercial Brazil 1983 AEC Americas - 99%
Importadora Ltda. Alliance Ventures, Inc. -
1%
Brasison Distribuidora de Discos Brazil AEC Americas - 99%
Ltda. Alliance Ventures, Inc. -
1%
Distribuidora de Discos E Fitas Brazil AEC Americas
Canta Brasil Ltda.
AEC Holdings (UK) Limited United Kingdom 4/94 Alliance Entertainment
Corp.
Castle Communications PLC United Kingdom 7/26/87 99-0119503 AEC Holdings (UK) Limited
DOJO Limited United Kingdom 7/16/90 Castle Communications PLC
- 80%
Castle Home Video Limited United Kingdom 8/13/85 Castle Communications
PLC- (Dormant)
Hendring Limited United Kingdom 4/17/84 Castle Communications PLC
- 99.5%
Masterpiece Music Productions United Kingdom 3/15/84 Castle Communications
Limited PLC- (Dormant)
Knight Records Limited United Kingdom 6/4/88 Castle Communications
PLC- (Dormant)
Castle Target International United Kingdom 11/27/89 Castle Communications
Limited PLC- (Dormant)
Eastern Light Productions Limited United Kingdom 10/30/89 Castle Communications PLC
- 80%
White Metal Music Limited United Kingdom 5/11/88 Castle Communications PLC
- 80%
Remaining 20% acquired
10/9/95
Castle Copyrights Limited United Kingdom 6/12/92 Castle Communications PLC
Kaz Records Limited United Kingdom 9/20/83 Castle Communications PLC
Castle Communications Germany 1990 Castle Communications PLC
(Deutschland) Gmbh
Castle Entertainment Om Finland 1986 Castle Communications PLC
The St. Clair Entertainment Canada 11/22/94 Alliance Entertainment
Group Inc. Corp.
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
-------------
We consent to the incorporation by reference in the registration statements
of Alliance Entertainment Corp. and subsidiaries on Form S-3 (No. 33-97280) and
Form S-8 (No. 33-80134) of our reports dated February 28, 1997, except for the
information in Note 4, as to which the date is March 31, 1997, on our audits of
the consolidated financial statements and financial statement schedules of
Alliance Entertainment Corp. and subsidiaries as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, which
reports are included in this Annual Report on form 10-K.
Coopers & Lybrand L.L.P.
Miami, Florida
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Consolidated
Balance Sheets as of December 31, 1996, and Consolidated Statements of
Operations for the Year Ended December 31, 1996, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,669
<SECURITIES> 0
<RECEIVABLES> 173,619
<ALLOWANCES> 15,291
<INVENTORY> 164,380
<CURRENT-ASSETS> 386,465
<PP&E> 33,793
<DEPRECIATION> 13,824
<TOTAL-ASSETS> 613,082
<CURRENT-LIABILITIES> 349,571
<BONDS> 237,348
0
5
<COMMON> 4
<OTHER-SE> 17,045
<TOTAL-LIABILITY-AND-EQUITY> 613,082
<SALES> 691,099
<TOTAL-REVENUES> 691,099
<CGS> 603,721
<TOTAL-COSTS> 603,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,528
<INTEREST-EXPENSE> 35,663
<INCOME-PRETAX> (164,555)
<INCOME-TAX> (15,900)
<INCOME-CONTINUING> (148,655)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (148,655)
<EPS-PRIMARY> (3.82)
<EPS-DILUTED> (3.82)
</TABLE>
