SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 22, 1998
ALLIANCE ENTERTAINMENT CORP.
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(Exact name of registrant as specified in its charter)
Delaware 1-13054 13-3645913
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(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
352 Park Avenue, 10th Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 935-6662
<PAGE>
Item 5. Other Events
On January 22, 1998, Alliance Entertainment Corp. (the "Company") filed a
motion (the "Motion") with the United States Bankruptcy Court Southern District
of New York requesting a further extension of the exclusive periods for filing a
plan or plans of reorganization and soliciting acceptances thereto. The Motion
was filed by the Company, and fourteen of its direct and indirect subsidiaries
(collectively, with the Company, the "Debtors") that, with the Company, filed
voluntary petitions for relief under chapter 11 of title 11 of the United States
Code (the "Bankruptcy Code") on July 14, 1997. If approved, the exclusive period
within which each Debtor may file a plan of reorganization shall be extended
from February 17, 1998, to April 30, 1998, and the exclusive period during which
each Debtor may solicit acceptances of such plan of reorganization shall be
extended from April 17, 1998, to June 30, 1998. The hearing on the motion is
scheduled for February 11, 1998, at 10:00 a.m.
Certain matters discussed in the Motion are forward-looking statements
intended to qualify for the safe harbors from liability established by 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" or words
of similar import. Similarly, statements that describe the Company's future
plans, objectives, estimates or goals are also forward-looking statements. Such
statements address future events and conditions concerning capital expenditures,
earnings, sales, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements, by reason of factors such as future economic conditions,
including changes in customer demand, legislative, regulatory and competitive
developments in markets in which the Company operates; and other circumstances
affecting anticipated revenues and costs.
Item 7. Financial Statements and Exhibits
(c) Exhibits
Exhibit 99.1 Motion for Order Pursuant to Section 1121(d) of the Bankruptcy
Code to Extend the Exclusive Periods during which the Debtors
May File a Plan or Plans of Reorganization and Solicit
Acceptances of Such Plan or Plans.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIANCE ENTERTAINMENT CORP.
By:/s/Christopher J. Joyce
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Name: Christopher J. Joyce
Title: Executive Vice President,
General Counsel and
Assistant Secretary
Date: February 2, 1998
<PAGE>
EXHIBIT INDEX
Exhibit 99.1 Motion for Order Pursuant to Section 1121(d) of the Bankruptcy
Code to Extend the Exclusive Periods during which the Debtors
May File a Plan or Plans of Reorganization and Solicit
Acceptances of Such Plan or Plans.
HEARING DATE: FEBRUARY 11, 1998
TIME: 10:00 A.M.
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
)
)
In re ) Chapter 11
) Case No. 97 B 44673 (BRL)
ALLIANCE ENTERTAINMENT )
CORP., et al., ) (Jointly Administered)
)
Debtors. )
)
MOTION FOR ORDER PURSUANT TO SECTION 1121(d) OF THE BANKRUPTCY
CODE TO EXTEND THE EXCLUSIVE PERIODS DURING WHICH THE DEBTORS
MAY FILE A PLAN OR PLANS REORGANIZATION AND SOLICIT
ACCEPTANCES OF SUCH PLAN OR PLANS
The above-captioned debtors and debtors in possession (collectively, the
"Debtors"), by their attorneys, Willkie Farr & Gallagher, respectfully
represent:
BACKGROUND
1. On July 14, 1997 (the "Petition Date"), Alliance Entertainment Corp.
("Alliance") and fourteen of its direct and indirect subsidiaries (collectively,
with Alliance, the "Debtors") filed voluntary petitions for relief under chapter
11 of title 11 of the United States Code (the "Bankruptcy Code"). The Debtors
intend to continue in the possession of their respective properties and in the
management and operation of their respective businesses as debtors in possession
pursuant to sections 1107 and 1108 of the Bankruptcy Code. These chapter 11
cases have been consolidated for procedural purposes only and are being jointly
administered pursuant to an order of this Court.
2. On July 23, 1997, the United States Trustee for the Southern District of
New York (the "United States Trustee") appointed an official committee of
unsecured creditors (the "Creditors' Committee") in these cases. The Chase
Manhattan Bank ("Chase"), as Agent Bank for the Debtors' prepetition secured
bank lenders (the "Prepetition Lenders") and as Agent Bank for the lenders (the
"DIP Lenders") under the Debtors' debtor-in-possession financing facility (the
"DIP Facility"), also has assumed an active role in these cases. An unofficial
committee of Alliance's secured trade vendors also has been formed in these
cases (the "Unofficial Committee"). No trustee or examiner has been appointed in
these cases.
3. The Debtors are a fully integrated independent music company which
create, market and distribute their proprietary content rights consisting of
both new artist and catalog product in several genres. The Debtors are also the
largest domestic full service distributor of pre-recorded music and music
related products through traditional as well as emerging retail channels.
<PAGE>
4. The Debtors' proprietary products group consists of two primary labels:
Concord Jazz and Castle Communications. Each of these labels specializes in
particular genres of music and releases records under a number of label
imprints. The Debtors' distribution operation is now conducted largely through
the one stop group which specializes in the wholesale distribution of
substantially all available pre-recorded music product as well as music
manufactured by independent labels.
5. This Court has jurisdiction over this application pursuant to 28 U.S.C.
157 and 1334 and the "Standing Order of Referral of Cases to Bankruptcy Judges,"
dated July 10, 1984, issued by District Court Judge Robert T. Ward. Venue of
these cases and the within application in this district is proper pursuant to 28
U.S.C. 1408 and 1409. The statutory predicates for the relief sought herein is
section 1121(d) of the Bankruptcy Code.
RELIEF REQUESTED
6. Section 1121(b) of the Bankruptcy Code provides for an initial period of
120 days after the commencement of a chapter 11 case during which a debtor has
the exclusive right to propose and file a plan of reorganization. Section
1121(c)(3) of the Bankruptcy Code provides that if the debtor proposes and files
a plan within the initial 120-day exclusive period, it has until the end of the
period ending on the 180th day after the chapter 11 case was commenced, to
solicit and obtain acceptances of such plan. Section 1121(d) of the Bankruptcy
Code allows a bankruptcy court to extend these periods for cause:
On request of a party in interest made within the respective periods
specified in subsections (b) and (c) of this section and after notice and
hearing, the court may for cause reduce or increase the 120-day period or the
180-day period referred to in this section.
11 U.S.C. Section 1121(d). The bankruptcy court's decision to extend a
debtor's exclusive period is based upon the facts and circumstances of each
particular case. See, e.g., First American Bank of New York v. Southwest Gloves
and Safety Equip., Inc., 64 B.R. 963, 965 (D. Del. 1986) ; In re Texaco Inc., 76
B.R. 322, 326 (Bankr. S.D.N.Y. 1987). By design, Congress gave the bankruptcy
court broad flexibility in determining whether cause exists to extend the
Exclusive Periods. See H.R. Rep. No. 595, 95th Cong., lst Sess. 406 (1977),
Reprinted in, 1978 U.S. Code Cong. & Admin. News 6362; In re Public Serv. Co. of
New Hampshire,88 B.R. 521, 534 (Bankr. D.N.H. 1988); Gains v. Perkins (In re
Perkins) ,71 B.R. 294, 297 (W.D. Tenn. 1987) ("The hallmark of section [1121(d)]
is flexibility.") (citation omitted). 7. Courts have identified certain factors
as relevant in determining whether cause exists to extend the exclusive periods.
These factors include:
(a) The size and complexity of the chapter 11 case. See, e.g., In re McLean
Indus., Inc., 87 B.R. 830, 834 (Bankr. S.D.N.Y. 1987);In re Texaco, 76 B.R. at
326-27 (Bankr. S.D.N.Y. 1987)("The large size of the debtor and the consequent
difficulty in formulating a plan of reorganization for a huge debtor with a
complex financial structure are important factors which generally constitute
cause for extending the exclusivity periods.") (citations omitted);
(b) Whether the debtor has shown progress in attempting in good faith to
formulate a viable plan of reorganization. See In re Public Serv. Co. of New
Hampshire, 88 B.R.521, 524 (Bankr. D.N.H. 1988), In re McLean Indus., 87 B.R.
830, 834 (Bankr. S.D.N.Y. 1987).
(c) The degree of progress that has been achieved by the debtor in the
chapter 11 process and whether a viable plan of reorganization can be reasonably
expected to be filed by the debtor in the foreseeable future. See Jasik v.
Conrad (In re Jasik), 727 F.2d 1379, 1382 (5th Cir. 1984).
<PAGE>
8. In these cases, pursuant to an Order of this Court extending the
exclusive periods during which the Debtors may file a plan or plans of
reorganization and solicit acceptances of such plan or plans, entered on
November 25, 1997(1) (the "Initial Extension") the Debtors' exclusive period to
propose a plan or plans of reorganization under section 1121(b) is scheduled to
expire on February 17, 1998 (the "Exclusive Proposal Period") and the related
solicitation period under section 1121(c)(3) is scheduled to expire on April 17,
1998 (the "Exclusive Solicitation Period" and together with the Exclusive
Proposal Period, the "Exclusive Periods").
9. By this motion and pursuant to section 1121(d) of the Bankruptcy Code,
the Debtors request the entry of an order extending their respective Exclusive
Proposal Period and Exclusive Solicitation Period for seventy-two (72) days, to
and including April 30, 1998 and June 30, 1998, respectively. The facts and
circumstances of these cases demonstrate that the requested extensions are both
appropriate and necessary to afford the Debtors sufficient time to complete
negotiations with an equity sponsor or, in the alternative, negotiate a
stand-alone structure. Furthermore, the additional time permits the Debtors to
complete key asset sale transactions. A. Cause Exists to Extend the Exclusive
Periods in these Cases (i) Size and Complexity of These Cases
10. The sheer size and complexity of these cases supports a finding of
cause to extend the Exclusive Periods. The Debtors' Exclusive Proposal Period is
scheduled to expire on February 17, 1998. Although the Debtors have made
significant strides toward restructuring their businesses since the Initial
Extension, as with other large and complex cases, the Initial Extension did not
provide the Debtors with adequate time to stabilize fully their businesses,
implement fully their operational downsizing and restructuring, complete key
asset sale transactions and develop and negotiate a plan or plans of
reorganization.
11. The Debtors are the largest domestic full service distributor of
pre-recorded music and music related products through traditional as well as
emerging retail channels. The Debtors sell their products worldwide, and for the
year ended December 31, 1997, the Debtors had approximately $425 million in net
sales.(2) The Debtors' petitions reflect assets in excess of $512 million and
known liabilities in excess of $523 million. In addition, the Debtors own and
operate a number of related businesses, including a prominent record label. The
Debtors have filed their schedules and statements of financial affairs and a bar
date for filing claims has been set in these cases for February 27, 1998. The
Debtors anticipate having more than 25,000 unsecured creditors, located
throughout the country. The Debtors also anticipate that a substantial amount of
additional claims may be asserted against them, including claims arising from
the rejection of leases and executory contracts, and other types of contingent
claims. The Debtors submit that these claims must be reviewed, analyzed and
assessed before a feasible plan or plans can be finalized. Finally, prior to and
since the Petition Date the Debtors have implemented a massive downsizing and
restructuring of all of their domestic and international operations.
Notwithstanding the size and complexity of these cases, the Debtors have begun
the process of negotiating a plan of reorganization. It would be premature to
terminate exclusivity given all of the progress the Debtors have made in
restructuring their businesses and given the fact that the Debtors are now in
the midst of plan negotiations. (ii) Progress Made in the Debtors'
Reorganization Cases.
12. As shown below, since the Initial Extension, the Debtors have taken
significant additional steps toward restructuring their businesses, including
completing their confidential business plan, liquidating Independent National
Distributors, Inc. and continuing to market potential key asset sales.
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1 The Debtors' original exclusive period expired on November 12, 1997.
Judge Lifland, however, signed a bridge order extending the period to November
25, 1997 to provide the Debtors with an opportunity to have a hearing on their
first requested extension.
2 The Debtors' net sales figures for 1997 include estimates for the months
of November and December.
<PAGE>
Business Plan. During the first week of December 1997, the Debtors
delivered their confidential business plan to the creditor constituencies. The
business plan forms the basis for the Debtors' restructuring and provides the
starting point from which the Debtors are attempting to formulate a plan of
reorganization.
Cost Cutting Initiatives. The Debtors' management has directed enormous
efforts to stabilizing operations, reduce overhead expenditures and
affirmatively reaching out to the vendor community to re-establish (or in some
cases, establish) terms for the supply of critical products and related
materials. Moreover, in addition to the management compensation reduction plan
discussed below, the Debtors have commenced a head-count reduction plan which
will yield annualized savings of more than $25 million and implemented a
reduction of other non-essential SG&A throughout their organization in order to
create a more rational cost structure.
Marketing of Key Assets. The Debtors have retained Salomon Brothers, Inc.
("Salomon") to market Concord Records, Inc. and Castle Communications.
Subsequent to Salomon's engagement, Salomon announced a merger with Smith
Barney. The merger created concerns for the Debtors' Board of Directors which
caused the Debtors to reevaluate the retention of Salomon. Accordingly, the
Debtors have determined to replace Salomon with The Blackstone Group
("Blackstone") to continue the marketing process. This has resulted in an
unfortunate but necessary delay of several weeks in the marketing of these
assets. The Debtors anticipate that after a brief initial period to permit
Blackstone to enter the process, the marketing of these key assets will proceed
expeditiously.
Management Compensation Reduction. On January 7, 1998, the Debtors filed a
motion seeking approval of a management compensation reduction and incentive
plan (the "Compensation Reduction Plan"). Prior to filing the motion, the
Debtors had reduced base compensation to management by approximately $3.5
million in the aggregate on an annual basis. The Debtors now propose
approximately $1 million in additional cuts through implementation of the
Compensation Reduction Plan. The Compensation Reduction Plan also contemplates
incentives designed to induce key management employees to remain through the
restructuring process. The participation of these key management employees is
essential to a successful reorganization. The hearing is scheduled for January
27, 1998.
Independent Directors. From the commencement of these cases, the Debtors
endured substantial criticism from the creditor constituencies regarding the
lack of independent outside directors on the Board of Alliance. As of November
10, 1997, the Debtors have appointed two independent directors to the Board of
Alliance. The Debtors continue to seek a third independent director.
Standstill with Prepetition Lenders. Prior to the Petition Date, each of
the Debtors' subsidiaries organized in United Kingdom (the "UK Entities")
guaranteed the Debtors' obligations to their Prepetition Lenders. Further, in
July 1995, the UK Entities acted as guarantors on $125,000,000 of 11.25% Senior
Subordinated Notes due 2005 issued by Alliance (the "Notes"). Prior to or
immediately after the Petition Date, the Debtors sought, negotiated and obtained
a standstill agreement with the Prepetition Lenders. The Debtors determined that
due to a lack of a cohesive, organized group and inadequate time, they would be
unable to obtain a standstill agreement with the holders of the Notes (the
"Noteholders") or Bankers Trust Company, predecessor to Marine Midland Bank,
N.A., as indenture trustee for the Notes (the "Trustee"). Instead, the Debtors
sought and obtained a temporary restraining order and preliminary injunction
restraining the Noteholders and the Trustee from taking any action to collect on
the Notes from the UK Entities. The preliminary injunction has enabled the
Debtors to effectively stabilize and begin the process of evaluating, marketing
and, if appropriate, selling Castle, thus preserving this valuable asset.
<PAGE>
Filed Schedules and Statements of Financial Affairs. The Debtors filed the
schedules of creditors and statements of financial affairs for all Debtors
except Castle (U.S.), Inc. on November 11 & 12, 1997. The Debtors filed the
schedules of creditors and statement of financial affairs for Castle (U.S.),Inc.
on January 6, 1998. A bar date for filing claims in these cases has been set for
February 27, 1998.
Liquidation of INDI. On December 3, 1997, the Court approved the Debtors'
decision to liquidate Independent National Distributors, Inc. ("INDI"), a debtor
and debtor in possession in these cases. Pursuant to the order to liquidate
INDI, the process for completing the liquidation will take several months. The
amount of the proceeds received from the liquidation of INDI, which is yet to be
determined, may be pivotal in determining the structure of a plan of
reorganization.
(iii) The Debtors' Efforts to Formulate A Plan Of Reorganization
13. The Debtors have developed a comprehensive, three (3) year business
plan, which has been distributed to the various creditor constituencies. This
long range business plan forms the foundation upon which the Debtors intend to
build a stand-alone or assisted plan or plans of reorganization. Given the
Debtors' overleveraged position, in addition to a traditional stand-alone plan
of reorganization, the Debtors must explore alternatives, including the
possibility of a third party equity investor which would infuse new value into
the business to further a reorganization or an outright sale of the Debtors or
their businesses. The Debtors require additional time to explore each
alternative in order to determine which of these options would best benefit
these estates, their creditors and other parties in interest.
14. The Debtors delivered the business plan to creditor constituencies
during the first week of December 1997 and have held several meetings and
telephone conferences with such constituencies to address the content of the
business plan and other financial aspects of these cases, including structure
and formulation of a plan or plans of reorganization. Therefore, as the business
plan, other financial issues and plan of reorganization structure have not yet
been fully vetted, it would be premature to expect the Debtors to be in
position, at this time, to file a plan or plans of reorganization. The
extensions of the Exclusive Periods as requested herein are expected to provide
the Debtors with an adequate opportunity to complete these tasks and develop a
consensus around a feasible plan or plans of reorganization. To terminate the
Exclusive Periods before a plan can be negotiated would defeat the very purpose
of section 1121 of the Bankruptcy Code -- to afford the debtor a meaningful and
reasonable opportunity to negotiate with creditors and propose a plan of
reorganization.
B. The Debtors Are Justified In Seeking an Extension of Exclusivity; No
Circumstances Exist that Justify Denial of the Debtors I Request and the
Granting of Such Request will Facilitate the Plan Process
<PAGE>
15. This is the Debtors' second request for an extension of the Exclusive
Periods. Since the filing of these chapter 11 cases, the Debtors have taken
great strides in stabilizing their operations, identifying profitable and
unprofitable businesses and commencing the sale or liquidation of non-core
operations. Moreover, the Debtors are in the nascent stage of plan development.
This requested extension is not unreasonable given the facts and circumstances
of these cases, as discussed above(3). The Debtors are not seeking this
extension to delay their reorganization for some speculative event or to
pressure creditors to accede to a plan that is unsatisfactory to them. The
Debtors expect that any plan or plans of reorganization which they propose will
provide value to creditors. Creditors will not be prejudiced by an extension of
the Exclusive Periods.
16. If this Court were to deny the Debtors' request for an extension of the
Exclusive Periods, any party in interest would be free to propose a plan of
reorganization for each of the Debtors. Termination of the Debtors' exclusivity
would no doubt have an adverse impact on the Debtors, business operations and
the progress of these cases would be adversely affected, creating an environment
with no central focus.
17. These concerns are not abstract or theoretical -- they are real. The
Debtors expect delay, increased costs and reduced reorganization value if these
cases become involved in litigation over competing plans for each of the
Debtors. Conversely, a further extension of exclusivity now, during the early
stages of plan development, will enable the Debtors to attempt to harmonize
diverse and competing interests and resolve conflicts in a reasoned and balanced
manner. This neutral and independent role is precisely what Congress envisioned
for a debtor in possession in the chapter 11 process.
18. Accordingly, at this juncture, before the Debtors have had a meaningful
opportunity to complete the negotiations over a plan of reorganization, it is
essential that the Exclusive Periods remain in place.
C. Section 1121(d) of the Bankruptcy Code Affords the Court the Discretion
to Grant the Requested Extensions
19. Governing law strongly supports the relief sought by the Debtors in
this motion. The legislative history of section 1121(d) reflects that Congress
intended to provide for flexibility in the fixing of the exclusive periods:
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3 At the time of the Initial Extension, the debtors had requested
extensions of the Exclusive Periods to March 31, 1998, and June 1, 1998,
respectively. As an accommodation to the creditor constituencies, the Debtors
consented to the reduction of such requested extensions to those dates of the
Exclusive Periods set forth herein, with the understanding, and indeed, the
expectation that the Debtors would make this additional request if necessary.
<PAGE>
In most cases, 120 days will give the debtor the adequate time to negotiate
a settlement without unduly delaying creditors. The court is given the power,
though, to increase . . . the 120 day period depending on the circumstances of
the case. [T]he bill allows the flexibility for individual cases that is not
available today.
18. H.R. Rep. No. 595, 95th Cong., lst Sess. 232 (1977),See also In re
Perkins, 71 B.R. 294, 297 (W.D. Tenn. 1987) ("The hallmark of [section 1121(d)]
is flexibility").
20. More specifically, the legislative history to section 1121 notes that
"if an unusually large company were to seek reorganization under chapter 11, the
court would probably need to extend the time in order to allow the debtor to
reach an agreement." H.R. Rep. No. 595, 95th Cong., 2d Sess. 231-32 (1978)
(footnotes omitted). The legislative history has been interpreted as a virtual
mandate for extension in unusually large cases, and courts have routinely
granted extensions in such cases. See, e.g., In re Woodward & Lothrop Holdings,
Inc., Case No. 94-B-40222 (SME) (Bankr. S.D.N.Y.) (debtor retained exclusivity
for two years); In re R.H. Macy & Co., Inc., Jointly Administered Case No. 92 B
40477 (BRL) (Bankr. S.D.N.Y.) (debtor retained exclusivity for over two and
one-half years). The facts and circumstances of these cases and the express
terms of section 1121(d) amply support the seventy-two (72) day extension of the
Exclusive Periods.
NOTICE
21. Notice of this Motion has been provided to the United States Trustee),
counsel for the Official Committee of Unsecured Creditors appointed by the
United States Trustee, counsel to the Unofficial Committee of Secured Trade
Vendors, counsel to The Chase Manhattan Bank as agent for the Debtors'
prepetition and postpetition secured vendors, the United States Trustee for the
Southern District of New York and all parties entitled to notice pursuant to
this Court's August 13, 1997, Order establishing administrative procedures in
these cases. The Debtors submit that such notice constitutes good and sufficient
notice of the Motion, and that no other or further notice need be given. 22.
Because this Motion raises no novel issues of law and the authorities relied
upon are set forth above, the Debtors respectfully request that the Court
dispense with the requirement pursuant to Local Bankruptcy Rule 9013-1(b) that a
memorandum of law be submitted herewith.
CONCLUSION
WHEREFORE, the Debtors respectfully request that the Court enter the order
extending the Exclusive Periods to April 30, 1998 and June 30, 1998,
respectively, without prejudice to the rights of the Debtors and other parties
in interest under section 1121(d) of the Bankruptcy Code, and granting the
Debtors such other and further relief as is just and proper.
Dated: New York, New York
January 22, 1998
WILLKIE FARR & GALLAGHER
Attorneys for Debtors and
Debtors in Possession
By: /s/Matthew Feldman
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Myron Trepper (MT-2636)
Marc Abrams (MA-0735)
Matthew A. Feldman (MF-8961)
(A Member of the Firm)
One Citicorp Center
153 East 53rd Street
New York, New York 10022
(212) 821-8000
