SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Amendment No. 1
Current Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 13, 1998
ALLIANCE ENTERTAINMENT CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-13054 13-3645913
- -------------------------------------------------------------------------------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
352 Park Avenue South, New York, New York 10010
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 685-6303
The Registrant's Form 8-K dated April 13, 1998, is hereby amended to
include the audited financial statements for the year ended December 31, 1997,
set forth in Exhibit 99.1 hereto.
<PAGE>
Item 7. Financial Statements and Exhibits
(c) Exhibits
Exhibit 99.1 Audited Financial Statements for the Year Ended December 31,
1997
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/David E. Hawthorne
----------------------------
Name: David E. Hawthorne
Title: Executive Vice President,
Chief Financial Officer
Date: April 23, 1998
<PAGE>
EXHIBIT INDEX
Exhibit 99.1 Audited Financial Statements for the Year
Ended December 31, 1997
Report of Independent Accountants
The Board of Directors and Stockholders of
Alliance Entertainment Corp.
We have audited the accompanying consolidated balance sheets of Alliance
Entertainment Corp. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' (deficit) equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 disclosure 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, 1996 and 1997, and the
consolidated result of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 3 to the
consolidated financial statements, on July 14, 1997, the Company, together with
fourteen of its wholly-owned subsidiaries, filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. The Company is currently
operating its business as a Debtor-in-Possession under the jurisdiction of the
Bankruptcy Court, and continuation of the Company as a going concern is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of requisite parties under the United
States Bankruptcy Code and confirmation of the Bankruptcy Court, the ability to
comply with its debtor-in-possession financing agreement, and the Company's
ability to generate sufficient cash from operations and obtain financing sources
to meet its future obligations. In addition, the Company has experienced
recurring operating losses, working capital deficiencies, negative operating
cash flows and is currently in default under substantially all of its debt
agreements. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans to address these matters are
described in Note 3. In the event a plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Company's ability to
achieve sufficient cash flow to meet its restructured debt obligations. As
discussed in Note 5, in the absence the approval and confirmation of the
Company's plan of reorganization within the time frame contemplated by the
Company's operating plan (i.e., by August 1, 1998), as a result of the
seasonality of the Company's business and attendant liquidity constraints, it
will be likely that the Company will not be able to met the requirements of its
debtor-in-possession financing agreement and that the Company will need to seek
additional sources of financing to continue as a going concern. The accompanying
financial statements not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification
of liabilities that might result from the outcome of these uncertainties.
Coopers & Lybrand L.L.P.
April 3, 1998
Miami, Florida
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(Amounts in Thousands, Except Share Data)
<S> <C> <C>
1996 1997
---------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,669 $ 6,592
Accounts receivable, less allowance for doubtful
accounts of 1996 $15,538; 1997 $44,079 173,619 96,659
Inventory 164,380 67,044
Advances and other prepaid expenses 22,739 9,215
Refundable income taxes 11,260 2,159
Deferred income taxes 5,798 557
---------- -----------
Total current assets 386,465 182,226
---------- -----------
INVESTMENTS, at cost 1,100 1,144
PROPERTY AND EQUIPMENT 33,793 27,888
COPYRIGHTS, less accumulated amortization 62,917 45,956
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED,
less accumulated amortization 93,727 53,378
COVENANTS NOT TO COMPETE, less accumulated
amortization 8,366 3,661
DEFERRED INCOME TAXES 9,798 9
OTHER ASSETS, less accumulated amortization 16,916 5,517
-------- ---------
TOTAL ASSETS $ 613,082 $ 319,779
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $ 72,671 $ 61,681
Current maturities of long-term debt 8,305 3,790
Current obligations under capital leases 582 348
Accounts payable and accrued expenses 267,187 61,698
Income taxes payable 826 328
---------- -----------
Total current liabilities 349,571 127,845
---------- -----------
LONG-TERM DEBT 236,215 20,265
OBLIGATIONS UNDER CAPITAL LEASES 1,133 896
DEFERRED INCOME TAXES 9,109 5,457
LIABILITIES SUBJECT TO SETTLEMENT
UNDER THE REORGANIZATION CASE - 430,763
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, $.01 par value,
886,240 shares authorized, shares issued and
outstanding 1996 and 1997 422,500
($47,185 liquidation preference) 4 4
Series B convertible preferred stock, $.01 par value,
300,000 shares authorized, shares issued and
outstanding 1996 and 1997 57,500 1 1
($6,109 liquidation preference)
Common stock, $.0001 par value, 100,000,000
shares authorized, shares issued and outstanding
1996 44,764,853; 1997 44,995,205 4 4
Additional paid-in capital 146,665 146,965
Employee notes for stock purchases (67) (52)
Accumulated deficit (131,286) (413,743)
Foreign currency translation adjustment 1,733 1,374
---------- -----------
Total stockholders' equity (deficit) 17,054 (265,447)
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 613,082 $ 319,779
(DEFICIT)
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
(Amounts in Thousands, Except Share Data)
<S> <C> <C> <C>
1995 1996 1997
---------- ----------- -----------
Net sales $ 720,325 $ 691,099 $ 411,097
Cost of sales 575,552 603,721 385,677
---------- ------------- -----------
Gross profit 144,773 87,378 25,420
Selling, general and
administrative expenses 97,496 144,402 112,569
Restructuring and asset
impairment charges - 62,498 109,194
Amortization of intangible assets 10,500 12,568 29,522
---------- ------------- -----------
107,996 219,468 251,285
---------- ------------- -----------
36,777 (132,090) (225,865)
---------- ------------- -----------
Reorganization items - - 14,476
Other income (expense)
Amortization of deferred
financing costs (1,325) (1,903) (2,350)
Other income (expense) - net (1,218) 3,198 (1,970)
Interest expense (22,142) (33,760) (26,771)
---------- ------------- -----------
(24,685) (32,465) (31,091)
---------- ------------- -----------
Income (loss) before
income taxes 12,092 (164,555) (271,432)
Provision (benefit) for income taxes 6,820 (15,900) 11,025
---------- ------------- -----------
Net income (loss) $ 5,272 $ (148,655) $ (282,457)
========== ============= ===========
Income (loss) per common share
Basic $ .16 $ (3.82) $ (6.37)
========== ============= ===========
Diluted $ .13 $ (3.82) $ (6.37)
========== ============= ===========
Net income (loss) applicable
to common stock used in
computing earnings (loss)
per common share $ 5,272 $ (150,877) $ (286,180)
========== ============= ===========
Weighted average number of shares of
common stock outstanding 39,099,500 39,540,216 44,940,256
=========== ============= ===========
Supplemental information
Additional interest expense,
absent the Chapter 11 filing $ - $ - $ 7,008
=========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31,
(Amounts in Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C>
Capital Stock Issued Employee Foreign
--------------------------------------------- Additional Notes for Retained Currency
Series A Series B Common Paid-In Stock Earningscit) Translation
Preferred Stock Preferred Stock Stock Capital Purchase (Deficit) Adjustment
----------------------------------------------- ------------ --------- ------------- -------------
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
Issuance of 225,352
shares of
common stock for
adjustment to purchase
price of subsidiary - - - 366 - - -
Adjustment for costs
incurred in connection
with issuance of
preferred stock - - - (66) - - -
Payment of employee note - - - - 15 - -
Net loss - - - - - (282,457) -
Translation adjustment - - - - - - (359)
----------------------------------------------- ------------ --------- ------------- -------------
Balance at
December 31, 1997 $ 4 $ 1 $ 4 $ 146,965 $ (52) $ (413,743) $ 1,374
=============================================== ============ ========== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(Amounts in Thousands)
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ----------
Cash Flows From Operating Activities
Net loss $ 5,272 $(148,655) $(282,457)
Adjustments to reconcile net loss to net
cash
used in operating activities:
Depreciation and amortization 15,645 19,994 37,139
Restructuring and asset impairment
charges - 55,908 109,194
Other non cash charges - 27,037 -
Change in assets and liabilities:
(Increase) decrease in accounts
receivable (44,987) (9,865) 62,143
(Increase) decrease in
inventory (46,399) 825 85,002
Increase in prepaid expenses and other (5,786) (2,979) (577)
(Increase) decrease in deferred income - (5,505) 11,378
taxes
Increase (decrease) in
accounts payable and
accrued expenses 12,656 34,488 (64,412)
Increase (decrease) in
income taxes payable (3,694) (10,038) 8,611
Reorganization items:
Write-off of debt issuance - - 4,688
---------- ---------- ----------
Net cash provided by (used in)
operating activities (67,293) (38,790) (29,291)
---------- ---------- ----------
Cash Flows From Investing Activities
Purchase of property and equipment, net (17,965) (16,215) (2,175)
(Increase) decrease in copyrights (20,863) (18,462) 2,756
Increase in other assets (336) (5,676) (8,822)
Purchase of businesses including costs,
net of cash acquired (40,909) 11,149 (490)
---------- ---------- ----------
Net cash used in investing activities (80,073) (29,204) (8,731)
---------- ---------- ----------
Cash Flows From Financing Activities
Increase (decrease) in excess of
outstanding
checks over bank balance 5,874 2,093 (7,930)
Proceeds from issuance of stock 12,024 48,321 (66)
Proceeds from borrowings 489,649 313,664 256,452
Payments on borrowings (347,636) (301,336) (210,934)
Payments for financing costs (7,734) (1,250) (1,218)
---------- ---------- ----------
Net cash provided by
financing activities 152,177 61,492 36,304
---------- ---------- ----------
Effect of foreign currency (189) 2,319 (359)
translation
Net decrease in cash and cash equivalents 4,622 (4,183) (2,077)
Cash and cash equivalents
Beginning of period 8,230 12,852 8,669
---------- ---------- ----------
End of period $ 12,852 $ 8,669 $ 6,592
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
YEAR ENDED DECEMBER 31,
(Amounts in Thousands)
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ----------
Supplemental Disclosure
of Cash Flow Information
Cash payments for interest $ 14,092 $ 30,921 $ 21,658
Cash payments (received) for
income taxes $ 10,217 $ 2,690 $ 636
Reorganization costs, primarily $ - $ - $ 8,600
professional fees
Supplemental Disclosure of Noncash Investing
and Financing Activities
Common stock issued to
employees for notes $ 15 $ - $ -
Acquisition of subsidiary
Cash purchase price, net of cash $ 40,909 $ (11,149) $ (490)
acquired
Working Capital acquired, net of cash -
and cash equivalents $ 133 $ 2,813 $ -
Fair value of other assets acquired, -
principally
property and equipment 5,652 1,267 -
Cost in excess of net assets of business 38,594 11,856 856
acquired
Covenant not to compete 2,528 - -
Long-term debt assumed (81) (10) -
Long-term debt incurred (4,600) - -
Common Stock issued (1,317) (27,075) (366)
---------- ---------- ----------
$ 40,909 $ (11,149) $ 490
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business and Basis of Presentation:
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 numerous genres
(the "Proprietary Segment"). The Company's operations are located in the United
States, United Kingdom and Canada.
Basis of Presentation:
On July 14, 1997, the Company and fourteen of its wholly-owned subsidiaries
filed voluntarily under Chapter 11 of the Bankruptcy Code in order to facilitate
the reorganization of the Company's core businesses and the restructuring of the
Company's long-term debt, revolving credit and trade and other obligations. The
Company continues to operate as a debtor-in-possession subject to the Bankruptcy
Court's supervision and orders. Excluded from the filing were certain businesses
in the Company's Proprietary Products Group, including: Castle Communications
plc (and its related affiliates); The St. Clair Entertainment Group, Inc.; and
Red Ant Entertainment LLC ("Red Ant") (and its related affiliates). The filing
was made in the U.S. District Court for the Southern District of New York in
Manhattan.
The accompanying financial statements have been prepared on a going concern
basis, which, except as disclosed, contemplates continuity of operations,
realization of assets and discharge of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filing and circumstances
relating to these events, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. These conditions raise
substantial doubt as to the Company's ability to continue as a going concern. In
addition, the Company may have to sell or otherwise dispose of assets and
discharge or settle liabilities for amounts other than those reflected in the
financial statements. Further, a plan of reorganization could materially change
the amounts currently recorded in the financial statements. The financial
statements do not give effect to all adjustments to the carrying value of
assets, or amounts and classification of liabilities that might be necessary as
a consequence of the proceeding. The appropriateness of using the going concern
basis is dependent upon, among other things, confirmation of a plan of
reorganization, success of future operations and the ability to generate
sufficient cash from operations and financing sources to meet obligations.
The Company's ability to continue as a going concern is dependent upon the
confirmation of a plan of reorganization by the Bankruptcy Court, the ability to
maintain compliance with debt covenants under the Revolving Credit and Guarantee
Agreement ("DIP Financing Agreement"), achievement of profitable operations, and
the resolution of the uncertainties of the reorganization case discussed below.
Note 2 - Summary of Significant Accounting Policies:
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.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies, Continued:
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 long-lived assets, including
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 reflects cumulative translation adjustments as a separate
component of Stockholders' Equity for operating subsidiaries which utilize local
currencies as their functional currency rather than the U.S. dollar. The
Company's Brazilian subsidiaries which were sold in 1997 were considered to be
in a "highly inflationary" economy and accordingly the U.S. dollar was used as
the functional currency. Certain assets of those operations were translated at
historical exchange rates and all translation adjustments were reflected in the
consolidated statement of operations.
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 is computed using
straight-line and accelerated methods over the estimated useful lives of the
various classes of depreciable assets. 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:
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 2 years.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies, Continued:
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 $10,188,000 in 1996 and
$4,353,000 in 1997, 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 and 1997 in connection with
restructuring initiatives described in Note 4.
Income Taxes:
Income taxes are computed under an asset and liability approach whereby
deferred tax assets and liabilities are recognized 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.
Per Share Data:
Basic net income (loss) per share is calculated by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per share is calculated by dividing net income by the
weighted average number of common and potential common shares outstanding during
the period. Potential common shares reflect the dilutive effect of outstanding
options calculated using the treasury stock method.
Stock Options:
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 income tax benefit from the exercise
and early disposition of stock options is accounted for as a credit to
additional paid-in-capital.
Reorganization Items
Reorganization items include: (a) professional fees relating to legal,
accounting and consulting services provided in connection with the Chapter 11
proceedings, (b) estimated liabilities for the expected allowed claims related
to rejected executory contracts, (c) the write off of unamortized financing
costs and debt discount in order to record debt subject to the Chapter 11
proceedings at par value and (d) United States trustee fees and other costs of
the Chapter 11 proceedings.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies, Continued:
Restructuring and Other Charges:
Restructuring and other charges include asset impairment charges and exit
costs incurred in connection with restructuring of the Company's various
business units and operating subsidiaries.
New Accounting Pronouncements:
In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS 130 establishes standards for reporting and display
of comprehensive income. The purpose of reporting comprehensive income is to
present a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than the transactions
with owners in their capacity as owners. SFAS 130 requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. Adoption of this
pronouncement is not expected to have a material effect on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS 131 specifies revised guidelines
for determining an entity's operating segments and the type and level of
financial information to be disclosed. Once operating segments have been
determined, SFAS 131 provides for a two-tier test for determining those
operating segments that would need to be disclosed for external reporting
purposes. In addition to providing the required disclosures for reportable
segments, SFAS 131 also requires disclosure of certain "second level"
information by geographic area and for products/services. SFAS 131 also makes a
number of changes to existing disclosure requirements. Management believes that
the adoption of this pronouncement will not have a material effect on the
Company's financial statement disclosures.
Reclassifications:
Certain amounts appearing in the 1995 and 1996 consolidated financial
statements have been reclassified to conform with the 1997 presentation.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Reorganization Under Chapter 11:
Certain significant and long-term changes in market conditions associated
with the Company's business have significantly and adversely affected the
Company's operating results in recent periods.
The Company experienced significant operating losses during 1996 and 1997,
and failed to satisfy certain financial covenants contained in the Credit
Agreements (as defined below, see Note 5) beginning in fiscal year 1996. The
Company commenced discussions in the Spring of 1997 with The Chase Manhattan
Bank, agent bank for the Credit Agreements, regarding a restructuring of the
Credit Agreements and with certain potential new equity investors.
On June 30, 1997, the Company failed to make the full amortization payment
of $1.5 million on its senior secured credit facility (the "Pre-petition Credit
Agreement") and additionally failed to satisfy a financial covenant requiring
the Company to raise $35 million of equity prior to July 1, 1997 and as a result
was in default under the provisions of its Pre-petition Credit Agreement. Under
the terms of its Pre-petition Credit Agreement and as a result of the existing
defaults, the Company's banks had the right to accelerate the maturity of
approximately $187 million of outstanding indebtedness.
Additionally, as a result of the defaults under the Pre-petition Credit
Agreement, the Company was unable to make a July 15, 1997 interest payment due
and payable on the Company's $125 million of 11.25% Senior Subordinated Notes
due 2005.
On July 14, 1997, as a result of the defaults under the Pre-petition Credit
Agreement, the pending payment default on the Company's Senior Subordinated
Notes and an overall inability to operate the Company's business under the
existing liquidity restraints, the Company and fourteen of its wholly-owned
subsidiaries filed voluntarily under Chapter 11 of the Bankruptcy Code (such
event herein after being referred to as the "Filing").
Pursuant to the provisions of the Bankruptcy Code, all of the Company's
liabilities as of July 14, 1997, were automatically stayed upon the Company's
filing of its petition for reorganization. In addition, absent approval from the
Bankruptcy Court, the Company is prohibited from paying any pre-petition
obligations. In hearings held on July 14 and 16, 1997, the Bankruptcy Court
approved the Company's request for payment of certain pre-petition wages and
benefits, use of the Company's cash management system and retention of legal and
financial professionals.
In the Company's Chapter 11 case, substantially all liabilities as of the
date of the Filing are subject to settlement under a plan of reorganization to
be voted upon by the Company's creditors and stockholders and confirmed by the
Bankruptcy Court. Schedules have been filed by the Company with the Bankruptcy
Court setting forth the assets and liabilities of the Company as of the date of
the Filing as shown by the Company's accounting records. Differences between
amounts shown by the Company and claims filed by creditors are being
investigated and resolved. The ultimate amount and settlement terms for
pre-petition liabilities are subject to a plan of reorganization, and
accordingly, are not presently determinable.
Under the Bankruptcy Code, the Company may elect to assume or reject real
estates leases, employment contracts, personal property leases, service
contracts and other executory pre-petition leases and contracts, subject to
Bankruptcy Court approval. The Company cannot presently determine or reasonably
estimate the ultimate liability which may result from the filing of claims for
any rejected contracts or from leases which may be rejected at a future date.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Reorganization Under Chapter 11, Continued:
The principal categories of claims classified as "Liabilities subject to
settlement under the reorganization case" are identified below. All amounts
presented below may be subject to future adjustments depending on Bankruptcy
Court actions, further developments with respect to disputed claims,
determination as the security of certain claims, the value of any collateral
securing such claims, or other events.
Liabilities Subject to Settlement (000's)
Under the Reorganization Case December 31, 1997
-------------------
Accounts payable and accrued expenses $149,459
Term Loan 20,900
Revolving Credit 123,200
11.25% Senior Subordinated Notes due 2005 125,000
6% Exchangeable Notes 10,805
Other Promissory Notes 1,395
Obligations under capital leases 4
-------------------
$430,763
-------------------
Management recently developed and implemented a business plan which
contemplates approval of a formal plan of reorganization and resumption of
normal trade relationships with the Company's key suppliers by August 1, 1998.
The business plan, which has been presented to and reviewed by key creditor
constituencies, is predicated, in part, upon the resumption of customary payment
terms and normal inventory return privileges with the Company's key suppliers.
The business plan also reflects the plans of on-going cost reduction initiatives
in the Company's core distribution operations. Management has begun to negotiate
the elements of the formal plan of reorganization with key creditor
constituencies. Due to the seasonality of the Company's business and related
working capital requirements, the timely approval of and confirmation of a plan
of reorganization will effect the Company's ability to successfully implement
its business plan. In absence of approval and confirmation of the plan of
reorganization within the time frame contemplated, the Company may not be able
to meet the requirements of its DIP Financing Agreement or continue as a going
concern.
The Company intends to present a plan of reorganization to the Bankruptcy
Court to reorganize the Company's core business and restructure the Company's
long-term debt, revolving credit and trade obligations. Under provisions of the
Bankruptcy Code, the Company has the exclusive right to file a plan at any time
prior to April 30, 1998 and to solicit acceptance of a plan of reorganization
until June 30, 1998, each subject to possible extension as approved by the
Bankruptcy Court.
The accompanying financial statements have been prepared on a going concern
basis, which, except as disclosed, contemplates continuity of operations,
realization of assets and discharge of liabilities in the ordinary course of
business. As a result of the Chapter 11 filing, the Company may have to sell or
otherwise dispose of assets and discharge or settle liabilities for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. The financial statements do not give effect to all
adjustments to the carrying value of assets, or amounts and classification of
liabilities that might be necessary as a consequence of the proceeding. The
appropriateness of using the going concern basis is dependent upon, among other
things, confirmation of a plan of reorganization, success of future operations
and the ability to generate sufficient cash from operations and financing
sources to meet obligations.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Restructuring and Other Charges:
Management identified significant adverse changes in the Company's business
climate late in fiscal year 1996, that persisted in fiscal year 1997. These
changes were due to 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, and led to operating results and forecasted results
that were less than previously planned. As a result, management has undertaken a
number of measures to restructure the Company's operations and focus on core
business units. These measures as well as actions taken by management in
response to conditions arising from the bankruptcy filing are described in the
following paragraphs.
In response to these changes, on November 14, 1996, the Company announced a
significant consolidation plan (the "Consolidation Plan") involving its North
American Distribution operations. Pursuant to the Consolidation Plan management
authorized and committed the Company to 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) were to be
consolidated under Red Ant. The Consolidation Plan was substantially complete by
March 1998 and provided for 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. Related
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 was completed in the first quarter of 1997 and resulted in the
disposal of the subsidiaries for nominal consideration. The Company recorded
losses in the fourth quarter of 1996 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.
Also, during the fourth quarter of 1996, 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.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Restructuring and Other Charges, Continued:
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 provisions and
write-downs would have been recognized even if management had not adopted a
formal restructuring plan and reflect the adverse effect of changes in the
Company's business climate described previously.
On August 15, 1997, the court approved the sale of 90% of the Company's
interest in Red Ant and its affiliates to Cypress Ventures, Inc. an affiliate of
Wasserstein Perella & Co. ("CVI"), for aggregate cash consideration of $625,000,
a twelve month promissory note in the amount of $425,000 bearing interest at 8%
and an additional commitment from CVI to provide new working capital for Red Ant
(in the form of mezzanine indebtedness senior in priority to the equity interest
holders of Red Ant) up to an amount of approximately $11 million with $3 million
to be provided upon consummation of the sale to CVI. The sale was completed on
August 19, 1997. The Company has taken a non-cash charge of $19.5 million
related to the write-off of the goodwill and its underlying investment on its
Red Ant subsidiary, including $1,050,000 of funding provided under the DIP
Financing Agreement.
On September 22, 1997, the Company announced plans to close operations of
Independent National Distributors, Inc. ("INDI"), the Company's independent
distribution subsidiary by the end of the first quarter 1998. In September 1997,
the Company recorded a $42.5 million restructuring and asset impairment charge
in connection with the closure and liquidation of these operations. Included in
the $42.5 million was a non-cash charge of $21.9 million related to the
write-off of goodwill. In December 1997, the Company recorded an additional
$18.5 million restructuring and asset impairment charge in connection with the
closure and liquidation of these operations.
In addition, in recognition of continued adverse factors relating to the
Company's business climate which exacerbated subsequent to the Filing, the
Company recorded provisions of approximately $43 million related to writedowns
of inventory to net realizable value and additional bad debt expense related to
accounts receivable. The Company also recorded a charge of $25 million for asset
impairment charges due to an anticipated discontinuance of certain business
units and the planned closure of the Santa Fe Springs facility. This amount
includes impairment in the recorded value of goodwill and certain other
long-lived assets.
Liabilities provided for restructuring and other non-recurring charges for
the aforementioned items were approximately $23.4 million and $31.5 in fiscal
year 1996 and 1997, respectively, of which $11.2 were paid and $9.5 million were
still unpaid as of December 31, 1997. The following table summarizes the impact
of charges described above by financial line:
Financial Line 1996 1997
------------- --------------
Net Sales $ - $ 6,225,000
Cost of Sales 40,948,000 23,053,000
Selling, General and Administrative Expenses 15,435,000 10,031,000
Restructuring and Asset Impairment Charges 62,498,00 109,196,000
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt:
Borrowings under long-term credit facilities as of December 31, 1996 and
1997 are comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1997
--------------------- ----------------------
Long Term Portion of Revolving Credit Agreement $ 60,000,000 $ -
Term Loan with Banking Syndicate:
Castle UK 18,450,000 17,775,000
Other 22,550,000 20,900,000
6% Exchangeable Notes, net of unamortized discount of $4,444,000
10,000,000 10,000,000
11 1/4% Series B Senior Subordinated Notes due 2005 125,000,000 125,000,000
Mortgage Bond Payable 6,650,000 6,280,000
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
1,734,000 1,300,000
Other Obligations Payable through 2002 136,000 95,000
------------------ -------------------
244,520,000 181,350,000
Less Current Maturities 8,305,000 3,790,000
Obligation reclassified to liabilities subject to settlement 0 157,295,000
------------------ -------------------
$ 236,215,000 $ 20,265,000
--------------------- ----------------------
</TABLE>
Reorganization under Chapter 11
The filing of the petition under Chapter 11 of the Bankruptcy Code resulted
in the occurrence of an Event of Default under the Company's: (i) Indenture
relating to its 11.25% Senior Subordinated Notes due 2005; (ii) Credit
Agreement; (iii) 6% Exchangeable Notes; and (iv) Mortgage Bond for its
distribution facility in Coral Springs, Florida.
As a result of the Filing, substantially all debt (exclusive of the DIP
Financing Agreement and the Mortgage Bond Payable described below) outstanding
at July 14, 1997, was classified as liabilities subject to settlement. No
principal or interest payments are made on any pre-petition debt (excluding
interest payments on the Pre-petition Credit Agreement with Chase Manhattan
Bank) without Bankruptcy Court approval or until a reorganization plan defining
the repayment terms has been approved.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt, Continued:
Generally, interest on pre-petition debt ceases accruing upon the filing of
a petition under the Bankruptcy Code. However, if debt is collateralized by an
interest in property whose value (minus the cost of preserving such property)
exceeds the amount of the debt, post-petition interest may be payable. Other
than those noted above, no other determinations have yet been made regarding the
value of the property interests which collateralize various debts. Although
interest may be paid pursuant to an order of the Bankruptcy Court, other than
interest on the Pre-petition Credit Agreement, it is uncertain whether any other
post-petition interest will be payable or paid. The Company believes at this
time that it is unlikely that such interest will be paid. Contractual interest
expense not recorded on certain pre-petition debt (11.25% Senior Subordinated
Notes due 2005, 6% Exchangeable Notes and other promissory notes) totaled
approximately $7.0 million for the year ended December 31, 1997.
DIP Financing
In connection with the Company's Chapter 11 filing, on July 16, 1997, the
Company entered into an agreement providing for debtor-in-possession ("DIP")
financing (the "DIP Financing Agreement") with Chase Manhattan Bank providing
for a maximum of $50 million DIP financing. The DIP Financing Agreement is
intended to address the Company's immediate working capital needs and to support
the Company's operations during its Chapter 11 proceedings. The Company's use of
the full DIP Financing Agreement was approved by the Court.
The DIP Financing Agreement provides for borrowings under a revolving
credit and a letter of credit facility. Loans under the revolving credit
facility bear interest at either the Alternate Base Rate (as defined in the DIP
Financing Agreement) plus 1.5% or at the Adjusted LIBOR Rate (as defined in the
DIP Financing Agreement) plus 2.75%. The interest rate on the borrowings under
the DIP Financing Agreement ranged from 9.0% to 10.0% at December 31, 1997.
Loans under the letter of credit facility bear interest at the Alternate Base
Rate plus 1.5%. The terms of the DIP Financing Agreement contain certain
restrictive covenants including: limitations on the incurrence for additional
guarantees, liens, and indebtedness; limitations on the sales of assets and
capital expenditures. The DIP Financing Agreement also requires that the Company
meet certain minimum earnings before taxes and other expenses as defined through
the end of 1998. As of December 31, 1997, $37 million was borrowed under the DIP
facility.
Under the DIP Financing Agreement, Chase Manhattan Bank has been given a
perfected first priority lien on all property and assets of the Company and its
fourteen wholly-owned debtor-in-possession subsidiaries. The banks who are
parties to the Pre-Petition Credit Agreement, as well as certain other secured
creditors of the Company, have been granted replacement liens on the Company's
assets (junior to the lien granted under the DIP Financing Agreement) to
adequately protect such creditors' secured claims against the Company prior to
its Chapter 11 filing.
The DIP Financing Agreement expires on January 31, 1999, or earlier upon
the occurrence of certain events, including confirmation of a plan of
reorganization by the Bankruptcy Court, a sale of substantially all of the
assets of the Company, or failure by the Company to receive a final order
confirming a plan of reorganization.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt, Continued:
On March 18, 1998, the Company and Chase Manhattan agreed to an amendment
to the DIP Financing Agreement to modify certain covenants. The terms of the
amendment modify the covenants related to (1) permitted capital expenditures,
(2) the amount of cumulative minimum earnings before interest, taxes,
depreciation and amortization, as defined, (3) minimum carrying value of
inventories, and (4) the amount of permitted selling, general and administrative
expenses. The amendments were approved by the Bankruptcy Court on April 1, 1998.
Management believes that the amendments will allow the Company to comply with
the DIP Financing Agreement and allow for operating flexibility on a short term
basis. However, in the absence the approval and confirmation of the Company's
plan of reorganization within the time frame contemplated by the Company's
operation plan (i.e., by August 1, 1998), as a result of the seasonality of the
Company's business and attendant liquidity constraints, it will be likely that
the Company will not be able to meet the requirements of the DIP Financing
Agreement and that the Company will need to seek additional sources of financing
to continue as a going concern. However, no assurance can be provided in this
regard.
Term Loan and Revolving Credit Facility
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 ranged from 8.69% to 9.75%
and was 8.69% as of December 31, 1997 and 1996, respectively. 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 (8.5% at December 31, 1997 and 8.25% at December 31, 1996) plus a
spread ranging from 0% to 1.25% or at the LIBOR Interest Rate plus a spread
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 8.82% to 10% and 8.38% to 9.5% as of December 31, 1997 and 1996,
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 certain liquidity, debt coverage and other financial
ratios.
In addition, the Agreement and the DIP Financing Agreement provide 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 considered $60 million
of borrowings under the revolving credit facility as of December 31, 1996, to be
long term which amounts were 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 amend the Credit Agreement
to waive covenant defaults in existence prior to December 31,1996, and to modify
the financial covenants for future periods. The Company and Chase Manhattan Bank
have also agreed to a standstill and consent agreement relating to amounts
borrowed under the Agreement by the Company's UK subsidiaries which are not
included in the Chapter 11 filing.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt, Continued:
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 ranks pari passu with the Company's
Series A Convertible Preferred 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.
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 the 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 (6.15% and 5.9% at December 31, 1997 and
1996, respectively). 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 $6,816,000 and $6,437,000 at December 31, 1996 and
1997, respectively.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt, Continued:
Aggregate maturities of long-term debt not subject to settlement under
reorganization, are as follows:
Year ended December 31,
1998 $3,790,000
1999 4,640,000
2000 5,595,000
2001 3,405,000
2002 770,000
After 2002 5,855,000
$24,055,000
The above schedule of maturities include the Mortgage Bond Payable and
Castle's portion of the Term Loan with Banking Syndicate, as Castle was not a
party to the Chapter 11 Filing. Such maturity schedule includes, in the periods
subsequent to 2002, principal payments scheduled to be paid on the Term Loan in
1997 but which were not paid pursuant to the standstill and consent agreements.
Aggregate maturities of long-term debt which is subject to settlement under
reorganization, are as follows:
Year ended December 31,
1998 $5,281,000
1999 4,964,000
2000 6,063,000
2001 13,314,000
2002 13,000
After 2002 127,660,000
$157,295,000
Interest on selling stockholder promissory notes in 1995, 1996 and 1997
was, $331,000, $139,000, and $49,000, respectively.
Included in accounts payable at December 31, 1996 and 1997 are $9,420,000
and $1,494,000, respectively, of uncleared checks which were subsequently funded
from borrowings under the revolving credit agreement.
Due to the extenuating circumstances involving the term loan and revolving
credit facilities and other debt as a result of the Chapter 11 filing, it is not
practicable to estimate the fair value of these obligations as of December 31,
1997.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Business Combinations:
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.
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. 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
its principal unit holders, 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.
Also, in October, 1996 the Company acquired Matrix Software, Inc. for an
aggregate initial stock and cash consideration of approximately $549,000,
including 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.
Pro-forma financial information, giving effect to these acquisitions as if
they had been consummated as of the beginning of fiscal year 1995, has not been
presented herein because such information would not be materially different from
the historical information presented herein.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Capital Stock:
In addition to the issuance of Series B Preferred Stock described in Note
5, 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 is 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.
The following is a summary of outstanding warrants to acquire the Company's
common stock at December 31, 1997:
Number of Exercise Expiration
Shares Price Date
707,950 5.00 1998
657,500 8.00 1998
Outstanding at December 31, 1997: 1,365,450
Note 8 - Property and Equipment:
Property and equipment at December 31, 1996 and 1997, is comprised of the
following:
1996 1997
Land $ 1,845,000 $ 1,815,000
Buildings 7,191,000 6,885,000
Building improvements 9,892,000 6,987,000
Machinery and equipment 4,854,000 6,726,000
Furniture and fixtures 22,268,000 15,585,000
Transportation equipment 1,567,000 1,050,000
47,617,000 39,048,000
Less accumulated depreciation and amortization (13,824,000) (11,160,000)
$ 33,793,000 $27,888,000
Depreciation expense was $3,820,000, $5,523,000 and $5,368,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Income Taxes:
Income tax expense (benefit) is comprised of the following components:
1995 1996 1997
Current:
Federal $ 4,243,000 $ (10,440,000) $ (1,549,000)
State 971,000 - (746,000)
Foreign 2,158,000 321,000 432,000
-------------- ----------------- -------------------
7,372,000 (10,119,000) (1,863,000)
-------------- ----------------- ------------------
Deferred:
Federal (129,000) 779,000 9,158,000
State 111,000 - -
Foreign (534,000) (6,560,000) 3,731,000
-------------- ----------------- ------------------
(552,000) (5,781,000) 12,889,000
-------------- ----------------- ------------------
Total:
Federal 4,114,000 (9,661,000) 7,609,000
State 1,082,000 - (746,000)
Foreign 1,624,000 (6,239,000) 4,162,000
-------------- ----------------- ------------------
$ 6,820,000 $ (15,900,000) $ 11,025,000
-------------- ----------------- -------------------
The differences between the U.S. federal statutory tax rate and the
Company's effective rate are as follows:
1995 1996 1997
Tax at Statutory Rate 35.0% (35.0)% (35.0)%
State Taxes, Net 5.8 - (0.2)
Non-Deductible Amortization 9.6 1.0 16.6
Foreign Taxes at Differing Rates 5.6 1.9 1.5
Other - Net 0.4 0.4
Change in Valuation Allowance - 22.0 21.3
56.4% (9.7)% 4.2%
Income (loss) before income taxes in 1995, 1996 and 1997 included
approximately $2,719,000, $(27,991,000) and $(20,358,000) respectively, of
income (losses) from foreign operations.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Income Taxes, Continued:
The significant components of the net deferred tax asset and liability as
of December 31, 1996 and 1997 were as follows:
1996 1997
Current Deferred Tax Assets:
Inventory $ 2,385,000 $ 2,299,000
Accounts Receivable 6,106,000 10,526,000
Accrued Liabilities 22,936,000 36,413,000
Current Deferred Tax Assets 31,427,000 49,238,000
Long-Term Deferred Tax Assets:
Net Operating Loss & Capital Loss 28,424,000 95,343,000
Other 918,000 1,509,000
Long-Term Deferred Tax Assets 29,342,000 96,852,000
Total Deferred Tax Assets 60,769,000 146,090,000
Long-Term Deferred Tax Liabilities:
Masters (1,557,000) -
Copyrights (7,522,000) (5,457,000)
Other - (837,000)
Total Deferred Tax Liabilities (9,079,000) (6,294,000)
Deferred Income Taxes, Net 51,690,000 139,796,000
Less Valuation Allowance (45,203,000) (139,230,000)
Net Deferred Tax Asset $ 6,487,000 $ 566,000
At December 31, 1997, the Company had available net operating loss
carryforwards for Federal and foreign income tax reporting purposes in the
approximate amount of $253,000,000 and $35,000,000, respectively. The losses
expire at various dates for state and foreign purposes while the Federal losses
expire beginning in 2011. Capital loss carry-forwards exist at December 31, 1997
in the approximate amount of $19,500,000 expiring in 2002. The utilization of
certain loss carryforwards is subject to limitations under U.S. Federal Income
Tax Laws. The loss carryforwards may be reduced or eliminated as a result of the
bankruptcy.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Income Taxes, Continued:
Taxing authorities are currently examining various income tax returns of
the company. No accrual has been made in the accounts for potential adjustments.
The ultimate findings are not expected to be material to the consolidated
results of operations or financial position of the Company.
Note 10 - Basic and Diluted Net Income (loss) Per Share:
The calculation of basic and diluted net income (loss) per share for the
years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Years Ended December 31,
(in thousands, except for per share)
------------------------------------------------------
1995 1996 1997
-------------- --------------- ----------------
Basic net income (loss) per share:
Net Income (loss) $ 5,272 $ (148,655) $ (282,457)
Preferred Stock Dividends - (2,222) (3,723)
------------------------------------------------------
Income (loss) applicable to common shareholders $ 5,272 $ (150,877) $ (286,180)
------------------------------------------------------
Weighted average common shares outstanding 33,202 39,540 44,940
------------------------------------------------------
Basic net (loss) income per share $ 0.16 $ (3.82) $ (6.37)
------------------------------------------------------
Diluted net income (loss) per share:
Weighted average common shares outstanding 33,202 39,540 44,940
Preferred Stock
Stock Options 5,898
------------------------------------------------------
Weighted average common and potential common 39,100 39,540 44,940
shares outstanding
------------------------------------------------------
Income (loss) applicable to common shareholders 5,272 (150,877) (282,457)
------------------------------------------------------
Diluted net (loss) income per share $ .13 $ (3.82) $ (6.37)
------------------------------------------------------
</TABLE>
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Option Plans:
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. At December 31,1995, 1996 and
1997, 10,215,432, 3,205,502, and 2,799,935 were available for future grants.
A summary or the status of the Company's fixed stock options as of December
31, 1995, 1996 and 1997 and changes during the year ended on those dates is
presented below:
Number of Weighted Avg.
Shares Exercise Price
---------------- ----------------
Outstanding at December 31,1994 7,872,191 $ 3.82
Granted 1,939,500 $ 6.39
Canceled (157,589) $ 5.77
Exercised (1,131,775) $ 2.06
---------------- ----------------
Outstanding at December 31, 1995 8,522,327 $ 4.62
Granted 7,271,250 $ 5.89
Canceled (105,354) $ 5.56
Exercised (2,029,355) $ 1.26
---------------- ----------------
Outstanding at December 31, 1996 13,658,868 $ 5.78
Granted 70,000 $ 1.61
Canceled (4,030,333) $ 5.86
Exercised - -
---------------- ----------------
Outstanding at December 31, 1997 9,698,535 $ 5.71
---------------- ----------------
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Option Plans, Continued:
The fair value of each option granted during 1995, 1996 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
1995 1996 1997
------------ -------------- -----------
Expected Life (Years) 5.00 8.00 5.00
Risk-Free Interest Rate 6.72% 6.47% 6.84%
Expected Volatility 30.84% 29.07% 1225.00%
Dividend Yield 0% 0% 0%
Weighted average fair value of $ 2.52 $ 2.76 1.02%
options granted during the year
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for stock options
granted under the stock options plan. Had compensation expense been determined
based on the fair value consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts below:
Years Ended December 31,
1995 1996
------------------------------------
(in thousands, except per share data)
Net Income (loss) $ 2,918.00 $ (157,088.00)
Net Income (loss) per share:
Basic $ .09 $ (3.97)
Diluted $ .07 $ (3.97)
Proforma net income (loss) and net income (loss) per share have not been
presented for fiscal year 1997 as the effects would not be materially different
from historical results presented herein.
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.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Leases:
The Company leases facilities, computer and other equipment under various
operating leases.
Rent expense under all operating leases was $3,369,000, $4,339,000 and
$2,775,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
Future minimum payments under operating leases with terms of one year or
more consisted of the following at December 31, 1997:
Year Ending Operating
December 31, Leases
1998 2,172,000
1999 1,492,000
2000 1,186,000
2001 946,000
2002 851,000
Thereafter 5,492,000
$12,139,000
Note 13 - Business Activities:
The Company makes a substantial amount of its sales to large customers,
primarily retail chain stores. At December 31, 1996 and 1997, the ten largest
customer accounts receivable balances represented $81,929,000 and $65,731,000
respectively. In addition, at December 31, 1996 and 1997, unsecured foreign
accounts represented approximately 12% and 20% 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
1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Proprietary
1995 Distribution Product Corporate Consolidated
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>
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Business Activities, Continued:
All amounts for 1996 and 1997 are presented after Restructuring and Other
Charges (see Note 4).
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Proprietary
1996 Distribution Product Corporate Consolidated
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
Proprietary
1997 Distribution Product Corporate Consolidated
Revenues 368,633,000 42,430,000 34,000 411,097,000
Operating Income (Loss) (113,662,000) (30,396,000) *(81,807,000) (225,865,000)
Identifiable Assets 160,749,000 68,541,000 90,489,000 319,779,000
Depreciation and amortization 2,442,000 16,843,000 17,907,000 37,139,000
Capital Expenditures 150,000 (205,000) (2,120,000) (2,175,000)
</TABLE>
* Includes $6.4, $7.2 and $6.3 million of amortization associated with
acquisition of companies in 1995, 1996 and 1997 respectively.
Information about the Company's foreign operations and geographic sales for
the year ended December 31, 1995, 1996 and 1997 is summarized as follows:
Foreign Operations:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1995 Brazil United Kingdom & Canada
Europe
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 & Canada
Europe
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
1997 United Kingdom & Canada
Europe
Sales $33,398,000 $8,678,000
Operating Income (Loss) (15,007,000) 416,000
Identifiable Assets 70,808,000 6,599,000
</TABLE>
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Business Activities, Continued:
The Company's approximate sales by geographic region excluding its foreign
operations, presented above, are as follows:
1995 1996 1997
United States $451,754,000 $448,136,000 $283,823,000
South America and the Caribbean 43,632,000 41,682,000 34,792,000
Pacific Rim 103,515,000 79,605,000 26,585,000
Europe and Other 23,030,000 37,497,000 23,821,000
------------ ------------ ------------
$621,931,000 $606,920,000 $369,021,000
============ ============ ============
No individual customer accounted for 10% or more of the Company's
consolidated sales in 1995, 1996 and 1997, except for one customer in which
accounted for 17%.
Note 14 - 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,
1996 and 1997 was approximately $108,000, $347,000 and $327,000, respectively.
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, 1996 and 1997 was approximately $40,000, $107,000 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 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 as consideration for 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 a proposed rights
offering.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - 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 by contributing amounts to the Plan. The
Company approved contributions of approximately $118,000, $143,000 and $124,000
for the years ended December 31, 1995, 1996 and 1997 respectively.
Note 16 - 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.
Note 17 - Condensed Financial Information of Entities Operating Under
Chapter 11:
Combined condensed balance sheet information as of December 31, 1997 of the
debtor companies is as follows:
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Note 17 - Condensed Financial Information of Entities Operating Under
Chapter 11, Continued:
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,018
Accounts receivable, net 83,188
Inventory 63,499
Prepaid expenses and advances 3,382
Refundable income taxes 2,071
-------------------
Total current assets 156,158
INVESTMENTS IN AND ADVANCES TO AFFILIATES 6,049
PROPERTY AND EQUIPMENT 26,170
COPYRIGHTS 3,724
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED 46,076
COVENANTS NOT TO COMPETE 3,661
OTHER ASSETS 5,439
-------------------
$ 247,277
===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Excess of outstanding checks over bank balances $ 1,494
Notes payable 37,000
Current maturities of long-term debt 633
Accounts payable and accrued expenses 37,491
-------------------
Total current liabilities 76,618
LONG-TERM DEBT 6,642
LIABILITIES SUBJECT TO SETTLEMENT UNDER THE REORGANIZATION CASE 430,838
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 4
Preferred stock 5
Additional paid-in capital 146,965
Employee notes for stock purchases (52)
Retained earnings (deficit) (413,743)
-------------------
(266,821)
-------------------
$ 247,277
===================
</TABLE>
* The following subsidiaries do not have any operating activity:
AEC Americas, Inc., FL Acquisition Corp. and AEC Acquisition Corp.
<PAGE>
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Condensed Financial Information of Entities Operating Under
Chapter 11, Continued:
Included in investments and advances are amounts due from affiliates
aggregating $27,444,000.
Combined condensed statement of operations information for the year ended
December 31, 1997 of the debtor companies is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net sales $ 373,193
Cost of sales 365,464
------------------
Gross profit 7,729
Selling, general and administrative expenses 87,708
Asset impairment charge 108,855
Amortization of intangible assets 14,109
------------------
210,672
------------------
(202,943)
------------------
Reorganization items 14,476
Other income (expenses)
Equity in net loss of unconsolidated entities (32,482)
Amortization of deferred financing costs (2,326)
Other expenses - net (357)
Interest expense (23,011)
------------------
(58,176)
------------------
Loss before income taxes (275,595)
Provision for income taxes 6,862
------------------
Net loss $ (282,457)
==================
</TABLE>
* The following subsidiaries do not have any operating activity:
Alliance Ventures Inc., AEC Americas, Inc., FL Acquisition Corp.
and AEC Acquisition Corp.
