As filed with the Securities and Exchange Commission on February 13, 1998.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
CAMELOT MUSIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3735306
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8000 FREEDOM AVENUE, N.W.
NORTH CANTON, OHIO 44720
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 494-2282
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
FORWARD LOOKING AND CAUTIONARY STATEMENTS
This Registration Statement contains certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward looking statements include statements in "Business -- The
Business Restructuring" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company's actual financial condition
and results of operation could differ materially from those anticipated
depending upon, among other things, changes in the competitive environment for
the Company's products, technological changes affecting the pre-recorded music
industry, the continued availability of customary trade terms from the Company's
suppliers, the successful completion of the acquisition of the stores of The
Wall Music, Inc. and the integration of such stores into the Company, the
release by the music industry of "hit releases" and general economic factors in
markets where the Company's products are sold.
ITEM 1. BUSINESS
General
Camelot Music Holdings, Inc. ("CMH" or "Registrant") was incorporated
under Delaware law on September 30, 1993. CMH acquired all of the outstanding
common stock of Camelot Music, Inc., a Pennsylvania corporation ("Camelot"), on
November 12, 1993 (the "Acquisition"). CMH and Camelot, collectively with their
subsidiaries, are hereinafter referred to as the "Company". The Company is one
of the largest retailers of pre-recorded music in the United States, with
revenues of approximately $396.5 million in its fiscal year ended March 1, 1997
and 305 stores. The Company also sells pre-recorded videocassettes, blank audio
and videocassettes and related products. Camelot was founded in 1956 as a music
rack jobber and opened its first retail store in 1965. The Company grew to 200
stores by 1987 and to 400 stores by 1994. On December 10, 1997, the Company
entered into a definitive agreement to purchase substantially all of the assets
and assume certain liabilities of The Wall Music, Inc., a Pennsylvania
corporation ("The Wall"), which is also a retailer of pre-recorded music. Upon
consummation of such acquisition, the Company will operate approximately 450
stores throughout the United States. All of these stores are leased, and the
vast majority are located in shopping malls.
The principal executive offices of CMH are located at 8000 Freedom
Avenue, N.W., North Canton, Ohio, 44720, and its telephone number is (330)
494-2282.
Background
On November 12, 1993, Investcorp S.A. arranged for certain
institutional investors and Camelot senior management to purchase the stock of
Camelot for $420 million (the "Camelot Acquisition"). This purchase price was
funded with $80 million in cash, $240 million of borrowings from institutional
lenders (the "Camelot Acquisition Lenders"), $50 million of subordinated
debentures (the "Subordinated Debentures") and $50 million of Camelot's
preferred stock held by CMH. Camelot's repayment obligations to the Camelot
Acquisition Lenders were governed by the provisions of a certain Credit
Agreement dated as of November 12, 1993 (the "Credit Agreement") and were
collateralized by Camelot's real property and certain of its other assets. CMH
guaranteed these obligations and pledged its equity interest in Camelot in
support of its guarantee.
Throughout much of the 1980s, the Company, and the music retail
industry in general, enjoyed rapid growth in sales and earnings fueled by the
introduction of new products and the release of extremely popular records. The
most important new product was the compact disc ("CD"). The popularity of the CD
format caused many consumers to replace their old vinyl album and cassette
collections with CDs.
Subsequent to the Camelot Acquisition, the expansion of the retail
music business attracted new entrants into the industry, and competition
increased dramatically. Camelot was forced to compete not only with its
traditional mall-based rivals, but also with music clubs offering, for example,
eight CDs for a penny, and with large, off-mall electronics retailers that began
to use low-priced CDs and cassettes to attract customers. At approximately the
same time, the replacement CD market contracted as more and more consumers
completed the replacement of their old vinyl record and cassette collections
with CDs.
This increased competition and contraction of the replacement CD
market together with the absence of new "mega hits" and a lack of new technology
formats combined to depress profit margins for pre-recorded music retailers
generally in the mid-1990s. Traditional mall-based music retailers, such as
Camelot, saw their share of pre-recorded audio and video revenues decrease as
new competitors attracted by the growth in the industry in the 1980s
proliferated. Several music retailers such as Wherehouse Entertainment, Inc.,
Peaches Entertainment, Peppermint Records, Strawberries, Inc. and Kemp Mill
Music, filed for bankruptcy; others underwent out-of-court financial
restructurings.
These industry conditions, combined with Camelot's substantial
obligations to service its debt, impaired Camelot's business and caused Camelot
to violate several covenants in the Credit Agreement. In December 1995, Camelot
could no longer meet the requirements for further borrowings under the Credit
Agreement. This inability to borrow severely restricted Camelot's ability to pay
its major inventory suppliers.
Chapter 11 Petitions; Plan of Reorganization
Throughout the first half of 1996, the Company attempted to resolve
its difficulties in the context of an out-of-court restructuring. While Camelot
made substantial progress in obtaining concessions from certain creditor
constituencies, the Company determined that bankruptcy filings would provide the
best means of achieving the required restructuring of Camelot's obligations.
On August 9, 1996 (the "Petition Date"), CMH and Camelot (as well as
Camelot's wholly owned inactive subsidiaries, G.M.G. Advertising, Inc. ("GMG")
and Grapevine Records and Tapes, Inc. ("Grapevine" and, collectively with CMH,
Camelot and GMG, the "Debtors") filed voluntary petitions for relief under
Chapter 11 of title 11 of the United States Code, as amended (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). As of the Petition Date, Camelot had, among other
obligations, total debt outstanding under the Credit Agreement and pursuant to
the Subordinated Debentures of approximately $354 million and trade payables of
approximately $55 million net of goods returned. As of the Petition Date, CMH
had total debt of approximately $108 million, relating to debentures that it had
issued in connection with the Camelot Acquisition, and approximately $296
million relating to its guaranty of Camelot's obligations under the Credit
Agreement.
The Debtors' Second Amended Joint Plan of Reorganization, dated
November 7, 1997 (the "Plan of Reorganization") was confirmed by the Bankruptcy
Court on December 12, 1997 and became effective on January 27, 1998 (the
"Effective Date"). The Plan of Reorganization was the product of negotiations
among the Debtors, the Camelot Acquisition Lenders, Camelot's major inventory
suppliers and the Official Committee of Unsecured Creditors appointed in the
bankruptcy case.
The Financial Restructuring
Under the Plan of Reorganization, substantially all of the claims
against Camelot existing as of the Petition Date were exchanged for shares of
Common Stock of CMH, par value $0.01 per share (the "Common Stock").
Specifically, approximately $380.1 million of unsecured claims against Camelot
were exchanged for approximately 7,600,000 shares of Common Stock at the ratio
of one share of Common Stock for each $47.95 of claim, and approximately $41.5
million of secured claims received approximately 2,200,000 shares of Common
Stock, at the ratio of one share of Common Stock for each $18.75 of claim. An
additional 560,000 shares of Common Stock could be issued in the event that
certain disputed claims against Camelot are ultimately allowed. Furthermore,
under the Plan of Reorganization, all prepetition interests in CMH have been
cancelled.
The Company's obligations under the Credit Agreement were fully
satisfied through the distributions of Common Stock described above. During the
bankruptcy proceedings, the Company entered into an agreement with various
lenders to obtain debtor-in-possession financing (the "DIP Agreement"). The DIP
Agreement was terminated in connection with the consummation of the Plan of
Reorganization. At the time of its termination, there were no outstanding
borrowings thereunder. On the Effective Date, the Company entered into a new
revolving credit facility (the "New Working Capital Facility") with a syndicate
of financial institutions providing advances of up to $50 million during peak
periods and $35 million during non-peak periods. Such amounts likely will be
reduced, however, to $35 million and $20 million respectively, if the
acquisition of The Wall is not consummated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - - Liquidity and
Capital Resources."
The Business Restructuring
In 1995 and 1996 the intense competition among existing retailers and
new entrants, combined with a lack of new hit releases, had an adverse impact on
certain of the Company's retail markets. In conjunction with the financial
restructuring, the Company responded by restructuring its business. The
Company's restructuring included closing underperforming stores, improving
operating efficiencies and identifying and eliminating unproductive inventory
through returns to suppliers or liquidation sales. To reduce its portfolio of
stores to a strong core of profitable locations in desirable geographic markets,
the Company focused on improving profitability of existing stores and closing
unprofitable stores.
The table below sets forth the store openings and closings over the
past two fiscal years and the first three quarters of fiscal 1997. Store
closings were not concentrated in a particular geographic region.
39 WEEKS ENDED
NOVEMBER 29, 1997 FISCAL 1996 FISCAL 1995
-------- ----------- -----------
Beginning of the Period 315 388 401
Openings 0 0 14
Closings (8) (73) (27)
---- ---- ----
End of the Period 307 315 388
==== ==== ====
In addition to the store closings detailed above, the Company obtained
temporary rent concessions on approximately one-half of the remaining stores in
the portfolio. The effect of these concessions is anticipated to reduce store
occupancy expense by approximately $4 million over a four year period. The
concessions will be renegotiated at the end of their terms.
The Company currently operates 305 stores and expects that it will
acquire approximately 145 additional stores through the acquisition of The Wall
(See "The Wall Acquisition" below).
The Wall Acquisition
The Company has entered into a definitive agreement whereby a
subsidiary of Camelot will purchase substantially all of the assets and assume
certain liabilities (related to hired employees and customer obligations
aggregating approximately $3 million) of The Wall for approximately $26 million,
plus net working capital delivered at closing which is estimated to be $47
million (the "Wall Acquisition"). The Wall is a specialty music retailer
operating 150 stores in ten (10) states. The Wall sells CDs, cassettes,
pre-recorded videocassettes and other entertainment products and related
accessories. The purchase price will be funded with cash from operations and, to
the extent necessary, through a drawing on a letter of credit to be issued under
the New Working Capital Facility. The Company believes that the operations of
The Wall will complement the Company's operations by providing entry into
important markets in the Northeast and Middle Atlantic regions, where the
Company has relatively few locations. The Wall Acquisition will also enable the
Company to capitalize on synergies through the elimination of duplicative
corporate overhead expenses and the more productive utilization of the Company's
distribution center. The Company does not intend to renew the lease of The
Wall's distribution center when it expires in August 1998 and will operate the
distribution activity of the combined companies from the Company's existing
facility. All severance obligations resulting from the closing of The Wall's
facility will be borne by The Wall. If The Wall is unable to convey the leases
to all of its stores, the purchase price will be decreased accordingly. The
Company anticipates that the number of non-transferred leases will not be
material.
Products
The Company's stores focus on providing a broad selection of
pre-recorded music, but also carry a limited selection of pre-recorded
videocassettes, blank audio and videocassettes, and related products. During the
past several years, sales of pre-recorded music have accounted for approximately
90% of the Company's revenues. The Company seeks to establish itself as the
mall-based music specialist. Its motto is "No One Knows Music Better".
The Company's stores offer a wide array of compact discs and
pre-recorded audio cassettes. Sales of CDs are expected to continue to become a
larger portion of total pre-recorded music sales, while sales of pre-recorded
audio cassettes are expected to decline as a proportion of such sales. The
Company's strategy is to provide a greater number of titles to choose from than
its mall-based rivals. The Company's stores typically carry between
approximately 19,000 and 25,000 titles of pre-recorded music depending on store
size and location. These titles include "hits," which represent the best selling
newer releases, and catalog items, which represent older but still popular
releases that customers purchase to build their collections.
The Company insures the availability of the most popular hits while
maximizing the selection of popular catalog titles. Store management works with
corporate merchandise allocators to tailor product offering to local customer
tastes and to maximize the availability of the most popular items at each store
relative to store size and location.
The Company also offers pre-recorded video cassettes, blank audio and
videocassettes, music and tape care products, carrying cases, storage units,
sheet music and personal electronics for sale in its stores. Typically, the
Company's stores carry approximately 750 to 1,000 titles of pre-recorded
videocassettes depending on the size and location of each store. The Company has
discontinued sales of lower margin laser and computer software products in an
effort to focus on its higher margin pre-recorded music business.
Distribution
Central to the Company's strategy of providing broad merchandise
selection to its customers is its ability to distribute product quickly and
cost-effectively to its stores. The Company's distribution center, located
adjacent to the corporate headquarters in North Canton, Ohio, receives and ships
the vast majority of merchandise (although many new releases are shipped
directly to the stores from suppliers). Distribution center employees pick, pack
and ship over 37 million units annually. The Company's sophisticated inventory
management systems link together store point-of-sale merchandising and
distribution systems, enabling the distribution center to replenish inventory in
stores within 2 to 4 days of sale, depending upon geographic proximity to the
distribution facility.
The distribution center currently operates at approximately 35% of
total capacity, providing sufficient excess capacity to support significant
future store growth, including through the Wall Acquisition.
Inventory is shipped to every store at least once a week via several
common carriers, supplemented with expedited shipments as required by individual
store sales velocity analysis. All carriers are "less-than-load" carriers
enabling the Company to maximize transportation efficiencies while minimizing
costs.
Marketing
The Company employs marketing and advertising programs to increase
customer awareness of Camelot as the mall music specialist. The programs include
regular use of local, regional and national media outlets such as radio,
television, newspaper, magazines, freestanding inserts, direct mail and the
Company's site on the World Wide Web. While emphasizing Camelot's music
specialist position, the Company's marketing programs also promote the immediate
availability of new "hit" music releases as well as the Company's extensive
catalog selection.
In the retail entertainment industry, music and video companies
generally provide funds on a title-by-title basis to promote new releases and,
occasionally, on a label-wide basis. When the Company runs pre-authorized
advertising with respect to a specific title or label, the related supplier
generally reimburses the Company for 100% of the cost of such advertising as
well as the associated costs of production and development of the creative
concept. A significant portion of the Company's total advertising costs have
been funded by suppliers through these programs.
Camelot discontinued the manual "punch card" version of its "Repeat
Performer" frequent buyer program in mid-1997, thereby reducing expenses. In
place of the manual version of the Repeat Performer program, the Company
initiated a limited chainwide roll-out of an electronic, automated frequent
buyer program to its most frequent and highest spending customers. The manual
version of the program was not capable of tracking sales or providing
customer-specific or transaction-specific data. The automated Repeat Performer
program captures demographic and music preference data upon customer sign-up as
well as item-specific transaction data each time Repeat Performer customers make
a purchase. Customers are rewarded for attaining specific purchase levels by
receiving discounts on merchandise. The rewards encourage loyalty and promote
use of the bar-coded Repeat Performer card at each transaction. The Company
thereby obtains valuable information about the buying preferences of its most
loyal customers. The collected data is used to develop customer-specific direct
mail programs which are designed to generate increased sales levels and purchase
frequency. The direct mail programs generally are funded by music and video
companies who wish to promote their products directly to Camelot customers who
are known to purchase items similar to the advertised titles.
Suppliers
The Company purchases its pre-recorded music directly from a large
number of manufacturers. Approximately 75% of purchases are made from six
suppliers. Approximately 20 other vendors account for an additional 18% of
purchases. Historically, Camelot has enjoyed trade terms that have generally
included (a) the ability to return unsold current releases at invoice cost less
customary merchandise return charges, (b) a 2% discount for payments made within
60 days of invoice and (c) credit limits sufficient to permit at least 60 days
dating on inventory purchases. Return privileges enable the Company to ensure
that it will have sufficient product in stock to meet customer demand without
subjecting the Company to extensive risk that a particular item will not meet
sales expectations. During the bankruptcy proceedings, the Company's access to
these customary trade terms was severely limited. In connection with its
emergence from bankruptcy, the Company obtained commitments from approximately
40 suppliers, including its six largest vendors, to provide the Company with
customary trade terms. The Company believes that the resumption of customary
trade terms and the enjoyment of positive vendor relations, are fundamental to
its success in the marketplace.
Employees
As of January 23, 1998, the Company employed approximately 1,130
full-time employees and 2,790 part-time employees. As of such date, the Company
employed approximately 160 individuals at its corporate headquarters, 250 at its
distribution center, and 3,510 at its stores. None of the Company's employees is
represented by a union. The Company believes that its employee relations are
good.
Competition
The pre-recorded music market remains competitive. Consumers have
numerous options through which to purchase pre-recorded music and other home
entertainment products, including chain retailers specializing in pre-recorded
music, consumer electronic superstores, non-mall multimedia superstores,
discount stores, grocery, convenience and drug stores, direct-mail programs via
telephone, the Internet or television and local music retailers. Additionally,
consumers have more home entertainment options available with the increasing
penetration of personal computers into homes. The impact of these trends in
recent years has been a reduction in customer traffic and revenues for
mall-based music retailers such as the Company.
While several major retail chains have recently opened and expanded
their store presence in the markets in which the Company operates, there has
been some easing in the competitive environment in 1997 as a result of the
closing of under-performing stores by several mall-based competitors and the
downsizing of music departments within certain non-mall competitors. Pricing
pressures have also eased as a result of less near- or below-cost pricing by
certain non-mall competitors. Several major suppliers of pre-recorded music have
begun to enforce minimum advertised pricing ("MAP") programs, which provide
incentives for retailers to comply with the terms of the programs. Enforcement
of the MAP programs has contributed to stabilizing retail prices of pre-recorded
music in 1997.
The Company expects that the retail sales environment will continue to
present challenges into the foreseeable future. In response to these challenges,
the Company will focus on (a) securing and maintaining the most desirable
locations within quality regional malls, (b) efficient inventory management, and
(c) offering broad, market-specific merchandise selections at competitive
prices.
Seasonality
The Company's business is seasonal in nature, with approximately 35%
of annual revenues, and 67% of annual operating cash flow, generated in the
Company's fiscal fourth quarter. Quarterly results are affected by, among other
things, new product offerings, store openings and closings, and sales
performance of existing stores. Consumer spending in the peak retail season may
be affected by factors outside the Company's control, including consumer demand,
weather that affects consumer traffic and general economic conditions. A failure
to generate substantial holiday season sales could have a material adverse
effect on the Company.
ITEM 2. FINANCIAL INFORMATION
Selected Historical Financial Information
The following table sets forth selected financial information for the
Company as of and for the fiscal years ended March 1, 1997, March 2, 1996,
February 25, 1995 and for the period October 1, 1993 (inception) to February 26,
1994, and as of November 29, 1997 and for the 39 weeks ended November 29, 1997
and November 30, 1996, respectively. For the period prior to inception, selected
financial information of the predecessor entity is included for the period
August 31, 1993 to September 30, 1993 and for the fiscal years ended August 31,
1993 and August 31,1992. Such selected financial information should be read in
conjunction with the audited and unaudited historical consolidated financial
statements of the Company, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
appear elsewhere in this Registration Statement.
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR STORE DATA)
CM Holdings, Inc.
39 Weeks Ended (2)
INCOME STATEMENT DATA: Nov 29, Nov 30,
----------------------------
1997 1996
---- ----
(Unaudited)
Sales $ 260,340 $ 264,436
Costs and Expenses:
Cost of sales.......................................... 170,966 174,593
Selling, general and administrative expenses........... 80,573 88,769
Depreciation and amortization.......................... 16,842 17,402
Write-down of long-lived assets........................ - 4,920
Expiration of put agreements........................... - -
Restructuring charge................................... - -
----------- -------------
Total costs and expenses............................... 268,381 285,684
----------- -------------
Loss before interest and other expenses,
reorganization items and income taxes.................. (8,041) (21,248)
Interest and other (income) expense, net............... (3,442) 18,113
----------- -------------
Loss before reorganization items and income taxes...... (4,599) (39,361)
Reorganization expense................................. 6,072 26,552
----------- -------------
Loss before income tax expense (benefit)............... (10,671) (65,913)
Provision for income taxes............................. - -
----------- -------------
Net loss .............................................. $ (10,671) $ (65,913)
=========== =============
BALANCE SHEET DATA: (END OF PERIOD)
Working capital........................................ $ 127,001 $135,975
Total assets........................................... 279,161 283,059
Current portion of long-term debt...................... - -
Long-term obligations.................................. 7,920 22,836
Liabilities subject to compromise...................... 485,296 490,470
Stockholders' equity (deficit)......................... (278,975) (269,853)
Store Count:
Number of Stores Open at the End of Period ............ 307 319
CM Holdings, Inc.
Oct. 1 1993
Fiscal Year Ended (3) (Inception) to
INCOME STATEMENT DATA: Mar 1, Mar 2, Feb 25, Feb. 26,
------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Audited)
Sales $ 396,502 $ 455,652 $ 459,077 $ 206,246
Costs and Expenses:
Cost of sales.......................................... 263,072 302,481 289,887 123,227
Selling, general and administrative expenses........... 117,558 135,441 128,158 53,249
Depreciation and amortization.......................... 23,290 26,570 21,146 7,465
Write-down of long-lived assets........................ 6,523 202,869 - -
Expiration of put agreements........................... - 3,413 - -
Restructuring charge................................... - 5,238 - 8,330
----------- ----------- ---------- ----------
Total costs and expenses............................... 410,443 676,012 439,191 192,271
----------- ----------- ---------- ----------
Income (loss) before interest and other expenses,
reorganization items and income taxes.................. (13,941) (220,360) 19,886 13,975
Interest and other expenses, net....................... 18,578 43,297 35,681 12,241
----------- ----------- ---------- ----------
Loss before reorganization items and income taxes...... (32,519) (263,657) (15,795) 1,734
Reorganization expense................................. 31,845 - - -
----------- ----------- ---------- ----------
(Loss) income before income tax expense (benefit)...... (64,364) (263,657) (15,795) 1,734
Provision (benefit) for income taxes................... - 474 3,070 2,678
----------- ----------- ---------- ----------
Net loss ............................................... $ (64,364) $ (264,131) $ (18,865) $ (944)
=========== =========== ========== ==========
BALANCE SHEET DATA: (END OF PERIOD)
Working capital........................................ $ 125,329 $ (167,129) $ 58,127 $ 30,448
Total assets........................................... 258,648 308,670 551,370 545,484
Current portion of long-term debt...................... - 285,878 12,565 2,555
Long-term obligations.................................. 7,407 179,118 381,382 342,202
Liabilities subject to compromise...................... 484,811 - - -
Stockholders' equity (deficit)......................... (268,304) (203,940) 56,778 75,643
Store Count:
Number of Stores Open at the End of Period ............ 315 388 401 392
Predecessor Entity (1)
30 Days
Ended Fiscal Year Ended (3)
INCOME STATEMENT DATA: Sept 30,(2) Aug 31, Aug 31,
-----------------------------------------------
1993 1993 1992
---- ---- ----
(Unaudited) (Audited) (Audited)
Sales $ 28,958 $ 421,467 $ 366,098
Costs and Expenses:
Cost of sales.......................................... 17,737 256,773 219,107
Selling, general and administrative expenses........... 9,611 116,174 102,561
Depreciation and amortization.......................... 1,135 13,110 9,180
Write-down of long-lived assets........................ - - -
Expiration of put agreements........................... - - -
Restructuring charge................................... - - -
---------- ---------- ----------
Total costs and expenses............................... 28,483 386,057 330,848
---------- ---------- ----------
Income before interest and other expenses
and income taxes....................................... 475 35,410 35,250
Interest and other expenses, net....................... 281 3,232 794
---------- ---------- ----------
Income before income tax expense (benefit)............. 194 32,178 34,456
Provision for income taxes............................. 34 10,949 11,724
---------- ---------- ----------
Net income ............................................ $ 160 $ 21,229 $ 22,732
========== ========== ==========
BALANCE SHEET DATA: (END OF PERIOD)
Working capital........................................ $ 73,329 $ 73,263 $ 73,121
Total assets........................................... 236,052 227,720 202,149
Current portion of long-term debt...................... 9,202 578 523
Long-term obligations.................................. 25,802 25,786 22,445
Liabilities subject to compromise...................... - - -
Stockholders' equity .................................. 130,578 130,418 109,750
Store Count:
Number of Stores Open at the End of Period ............ 366 365 324
<FN>
(1) The financial statements for the predecessor entity relate to Camelot
Music, Inc. which was acquired by CM Holdings, Inc. effective September 30,
1993.
(2) In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been recorded in the interim
financial statements presented. The Company's business is seasonal, and
therefore, the interim results are not indicative of the results for a full
year.
(3) Each fiscal year consisted of 52 weeks except the fiscal year ended March
2, 1996 which consisted of 53 weeks.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company's fiscal year ends on the Saturday closest to February 28
of each year. References herein to "Interim 1997" and "Interim 1996" relate to
the 39 weeks ended November 29, 1997 and November 30, 1996, respectively.
References herein to "Fiscal 1996", "Fiscal 1995" and "Fiscal 1994" relate to
the 52 weeks ended March 1, 1997, the 53 weeks ended March 2, 1996 and the 52
weeks ended February 25, 1995, respectively.
In connection with the consummation of the Plan of Reorganization, the
Company will adopt "fresh-start" accounting in accordance with AICPA Statement
of Position 90-7, "Financial Reporting by Entities Under the Bankruptcy Code"
effective for financial reporting purposes on January 31, 1998. Financial
statements for periods subsequent to the Effective Date are not yet available
for inclusion in this Registration Statement. Therefore, the Company has
provided unaudited pro forma financial statements incorporating fresh-start
accounting as of November 29, 1997 and for the thirty-nine week period ended
November 29, 1997 and for the fifty-two week period ended March 1, 1997. See
pages F-25 through F-29.
As a result of the implementation of fresh-start accounting, the financial
statements of the Company after consummation of the Plan of Reorganization are
not comparable to the Company's financial statements for prior periods. The pro
forma effect of the consummation of the Plan of Reorganization, including the
gain on extinguishment of prepetition debt of approximately $479.7 million and
adjustments to record assets at their estimated fair values, was an overall
reduction in total assets of approximately $13.9 million, a reduction in total
liabilities of approximately $487.3 million and an improvement in stockholders'
equity of approximately $473.4 million.
The market for pre-recorded music and related products continues to be
competitive. Consumers have numerous options through which to purchase these
products including chain retailers specializing in pre-recorded music, consumer
electronic superstores, non-mall multimedia superstores, discount stores,
grocery, convenience and drug stores, direct mail programs via telephone, the
Internet or television and local music retailers. The low prices offered by many
of these outlets created price competition that, together with the lack of hit
releases in those periods, adversely impacted the Company's revenues and results
of operations in 1995 and 1996. The Company believes that this price competition
eased somewhat in 1997 because, like the Company, many other pre-recorded music
retailers closed underperforming stores or downsized their operations.
Additionally, several major suppliers have begun to enforce MAP programs. See
"Business--Competition."
The decrease in cash flow from operations caused in part by the
competitive environment described above caused the Company to increase its
borrowings under the Credit Agreement to maintain a level of inventory
sufficient to operate its business. At the Petition Date, the principal amount
of the Company's outstanding borrowings under the Credit Agreement totalled
$285.8 million. In connection with its emergence from bankruptcy, the Company
issued approximately 9.8 million shares of Common Stock in satisfaction of
substantially all of its prepetition debt and other liabilities. In addition,
the Company expended approximately $8.6 million for administrative claims upon
emergence and expects to fully satisfy (within 6 years of the Effective Date)
priority tax claims of between $1.6 million and $7.9 million. See "Legal
Proceedings."
RESULTS OF OPERATIONS
Interim 1997 Compared to Interim 1996
Sales. Total sales for Interim 1997 decreased 1.5% to $260.3 million
compared to $264.4 million for Interim 1996. The decrease in total sales for
Interim 1997 was primarily due to the net decrease in the store count which was
partially offset by comparable store sales increases. Comparable store sales
increased 6% as a result of a stronger new release schedule and retail price
increases on selected catalog titles partly due to decreased competition in the
marketplace. The Company operated 307 stores at the end of Interim 1997 compared
to 319 stores at the end of Interim 1996.
Profit Margin. Gross profit as a percentage of sales improved to 34.3% in
Interim 1997 from 34.0% in Interim 1996. The increase in gross margin was the
result of increases in retail selling prices and the greater weighting of higher
margin catalog sales, offset in part by lower margins earned on non-music
products such as laser and software products that the Company was in the process
of discontinuing. The Company recorded a charge of $2.0 million in Interim 1997
for the discontinuance of product lines.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $8.2 million to $80.6 million in Interim 1997
from $88.8 million in Interim 1996. Selling, general and administrative
expenses, as a percentage of sales, were 30.9 % for Interim 1997 compared to
33.6% in Interim 1996. The improvement in expense ratio was principally due to
operating efficiencies such as temporary rent concessions which have reduced
store occupancy costs as a percentage of sales, and the replacement of the
expensive manual "punch card" version of the repeat customer reward program with
a more limited, cost effective automated program.
Depreciation and Amortization. Depreciation and amortization decreased $0.6
million to $16.8 million in Interim 1997 from $17.4 million in Interim 1996. The
reduction was primarily attributable to store closings.
As a result of the Company's financial performance and the bankruptcy
proceedings, management reevaluated the carrying amount of its property, plant
and equipment during Interim 1996. Based on this evaluation, the Company
determined that certain property was impaired, resulting in a write-down of $4.9
million to estimated fair value.
Interest and other Income (Expense). In Interim 1997 the Company's net
interest and other income was $3.4 million compared to an expense of $18.1
million in Interim 1996. Net interest and other income (expense) includes the
Company's financing charges, offset by other non-operating income earned by the
Company. As required by bankruptcy law, the Company ceased accruing interest on
all prepetition obligations as of the Petition Date. As a result, financing
costs decreased $18.5 million to $0.5 million in Interim 1997, compared to $19.0
million in Interim 1996. This expense was offset by income recorded as a result
of a reversal of $3.0 million in frequent buyer reward redemption reserves no
longer required.
Reorganization Expense. Reorganization expense, net of interest income,
decreased $20.5 million to $6.1 million in Interim 1997 compared to $26.6
million in Interim 1996. During Interim 1997, the reorganization expense related
principally to professional fees incurred in connection with the bankruptcy
proceedings. During Interim 1996, the reorganization expense primarily reflected
a provision for store closings (including related lease rejection damage claims)
as well as professional fees.
Income Taxes. There was no income tax provision (benefit) recorded in
either Interim 1997 or Interim 1996. Differences between the effective tax rate
and the statutory tax rate are due to the recording of valuation allowances
against deferred tax assets.
Fiscal 1996 Compared to Fiscal 1995
Sales. Sales in Fiscal 1996 decreased 13.0% to $396.5 million from
$455.7 million in Fiscal 1995. The decrease in total sales was primarily due to
the closing of 73 stores in Fiscal 1996, a decrease in comparable store sales of
3.2% and the impact of one less week in Fiscal 1996. Comparable store sales
declined in Fiscal 1996 due to the lack of strong product releases and the
challenging retail sales environment.
Profit Margin. Gross profit as a percentage of sales remained constant
at 33.6%. The Company was unable to increase its gross margin percentage year
over year due to significant price competition and lack of strong product
releases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $17.8 million to $117.6 million in Fiscal
1996 from $135.4 million in Fiscal 1995. Selling, general and administrative
expenses, as a percentage of sales, were 29.6% and 29.7%, respectively. The
decrease was principally due to the reduction in the number of stores operated
by the Company from 388 to 315 and the implementation of programs to reduce
corporate and store operating costs such as payroll, supplies and other
controllable expenses
Depreciation and Amortization. Depreciation and amortization decreased
$3.3 million to $23.3 million in Fiscal 1996 from $26.6 million in Fiscal 1995.
The decrease was a result of store closings.
Goodwill Write-Downs and Adoption of New Accounting Standards. During
Fiscal 1995, the Company adopted Financial Accounting Standards Board Statement
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("Statement 121"), issued in March 1995.
In connection with the adoption of Statement 121, the Company recorded
an impaired asset write-down of $202.9 million for Fiscal 1995, including $201.1
million associated with the write-down of goodwill, principally related to the
1993 Camelot Acquisition. Additional impaired asset write-downs of $6.5 million
were recorded in Fiscal 1996.
Management identified significant adverse changes in the Company's
business climate late in the third quarter of Fiscal 1995 that persisted into
Fiscal 1996. These changes were largely due to increasing competition which led
to operating results and projections that were less than expected. As a result,
management reviewed the carrying values of long-lived assets, primarily goodwill
and property for recoverability and possible impairment, particularly in light
of sales declines that began in 1995 and continued during 1996. These sales
declines resulted from general declines in customer traffic in malls, the
increase in non-mall, high-volume, low-priced superstores and the lack of strong
music product releases. While the Company's mall-based music stores reacted with
increased promotional pricing, the Company's higher cost structure relative to
these non-mall superstores, which was principally related to occupancy costs,
limited the Company's ability to compete effectively.
Other Expenses. In Fiscal 1995, the Company incurred a charge of $3.4
million for the expiration of put agreements, which had been issued in November
1993.
Additionally, due to the increasingly competitive retail environment,
the Company incurred a restructuring charge of $5.2 million, primarily related
to store closings prior to the Petition Date.
Reorganization expense, net of interest income, was $31.8 million in Fiscal
1996 as a result of the bankruptcy proceedings, including professional fees of
$4.9 million, the write-off of financing fees from the Camelot Acquisition of
$16.0 million, a provision for store closing costs of $4.9 million and related
lease rejection claims of $7.6 million.
Interest and Other Expenses (Net). In connection with the bankruptcy
proceedings, the Company did not record interest on its prepetition debt
subsequent to the Petition Date. After the Petition Date, borrowings under the
DIP Agreement were significantly lower than the prepetition debt obligations.
Therefore, the Company's financing costs in Fiscal 1996 were $19.3 million,
compared to $41.8 million in Fiscal 1995. Other expenses included the net costs
of corporate owned life insurance programs of $1.3 million in Fiscal 1996 and
$1.5 million in Fiscal 1995. The Fiscal 1996 expenses also reflect the receipt
of $2 million upon the termination of a business development agreement.
Fiscal 1995 Compared to Fiscal 1994
Sales. Total sales in Fiscal 1995 decreased 0.7% to $455.7 million
compared to $459.1 for Fiscal 1994. The decrease in total sales was due to the
closing of 13 stores and a 5.5% decline in comparable store sales, partially
offset by an additional week in Fiscal 1995.
Comparable store sales decreased in Fiscal 1995 due to increased
competition in the marketplace from new non-mall competitors, lower retail
prices in response to competition and a general downturn in music industry
overall unit sales as a result of the lack of significant new releases.
Profit Margin. Gross profit as a percentage of sales decreased to
33.6% in Fiscal 1995 from 36.9% in Fiscal 1994. Increasing competition in the
marketplace reduced the Company's ability to raise prices and diminished gross
margins. Also, the shift in sales mix from higher margin pre-recorded
audiocassettes to lower margin CDs, increased inventory shrink, and increased
penalties incurred because of an increase in product returned to vendors, all
contributed to declining gross profit percentages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $7.2 million to $135.4 million in Fiscal
1995 from $128.2 million in Fiscal 1994. As a percentage of sales, such expenses
increased to 29.7% from 27.9%. The increase was primarily the result of
increased store occupancy costs due to increased charges and payroll costs
associated with strengthening corporate management and the impact of one extra
week in Fiscal 1995.
Depreciation and Amortization. Depreciation and amortization increased
$5.5 million to $26.6 million in Fiscal 1995 from $21.1 million in Fiscal 1994.
The increase was due to the impact of depreciation on significant store
expansion and remodeling projects completed in Fiscal 1994 and Fiscal 1995.
Goodwill Write-Down. During Fiscal 1995, the Company experienced
adverse business conditions resulting principally from increased competition in
its marketplace, which led to diminished operating results and downward
revisions to forecasted future results. Accordingly, as described above,
management determined that certain long-lived assets were impaired and wrote
those assets down by $202.9 million.
Other Expenses. In Fiscal 1995, the Company incurred a restructuring
charge of $5.2 million. Financing costs in Fiscal 1995 increased to $41.8
million, from $34.2 million in Fiscal 1994, principally due to increased
borrowings by the Company in Fiscal 1995 under the Credit Agreement. Other
expenses included the net cost of corporate owned life insurance programs of
$1.5 million in Fiscal 1995 and Fiscal 1994.
Liquidity and Capital Resources
Prior to the Petition Date, the Company's primary sources of funds
were cash flows from operations and borrowings under the Credit Agreement. The
Company's cash needs fluctuate during the course of the year. During the first
three quarters, cash flow typically is consumed by payments to suppliers and
store maintenance or renovation expenditures. Historically, the Company relied
on borrowings under the Credit Agreement to provide it with liquidity to
purchase inventory for sale during the December holiday season, after which the
Company's cash position provided sufficient cash to repay all such outstanding
borrowings.
During the bankruptcy proceedings, the Company entered into the DIP
Agreement with a syndicate of financial institutions that provided maximum
availability of $35 million. Funds borrowed under the DIP Agreement, together
with cash provided by operations, were sufficient to finance the Company's
operating needs during the bankruptcy proceedings.
The Company's obligations under the Credit Agreement were fully
satisfied through distributions of Common Stock under the Plan of
Reorganization. The DIP Agreement was terminated in connection with the
consummation of the Plan of Reorganization. At such time, there were no
outstanding borrowings thereunder.
On the Effective Date, the Company entered into the New Working
Capital Facility with a syndicate of financial institutions providing advances
of up to $50 million during peak periods and $35 million during non-peak periods
(although such amounts will likely be reduced to $35 million and $20 million,
respectively, if the Wall Acquisition is not consummated), bearing interest at
floating rates and maturing on the fourth anniversary of the Effective Date. The
aggregate availability under the New Working Capital Facility is limited to a
borrowing base equal to 35% of inventory during peak periods and 30% of
inventory during non-peak periods. Funds advanced pursuant to the New Working
Capital Facility will be collateralized by a first priority lien on
substantially all assets of the Company. The Company is subject to certain
negative covenants under the New Working Capital Facility, including
restrictions on (i) creation of indebtedness, liens, or contingent obligations,
(ii) mergers or fundamental change in the business of the Company, (iii)
transfers of property, business or assets, (iv) extensions of credit or capital
contributions or investments (v) capital expenditures, (vi) minimum consolidated
EBITDA levels, (vii) dividends, and other customary covenants.
As of the Effective Date the Company had cash and working capital of
approximately $60 million and $120 million, respectively. The Company's primary
sources of funds are expected to be cash from operations supplemented by
borrowings under the New Working Capital Facility. The Company's primary ongoing
cash requirements will be to finance working capital, primarily inventory
purchases, and to make capital expenditures for store and information system
improvements. Management believes that cash flows from its restructured
operations, anticipated normalized trade terms from major suppliers and
available working capital, supplemented by the borrowings under the New Working
Capital Facility, will allow the Company to meet its working capital and capital
expenditure needs in the fiscal year ending February 27, 1999 ("Fiscal 1998") as
well as to fund its acquisition of The Wall.
The Company's capital expenditures for Fiscal 1996 were $4.3 million,
which were primarily attributable to store remodeling, maintenance and
expansions. The Company currently anticipates that capital expenditures
aggregating approximately $10.1 million will be incurred in the fiscal year
ending February 28, 1998, of which $4.2 million relates primarily to store
remodeling, maintenance and expansions, and the balance of which relates to
enhanced information systems (including anticipated integration of The Wall's
operations). Management has implemented a plan to reconfigure the Company's
information systems to address the Year 2000 problems, and believes that the
costs associated with correcting the remaining issues will total approximately
$1 million to be expended over the next two years.
Recently Issued Accounting Pronouncements
Financial Accounting Standards Board Statement No. 128 "Earnings per
Share" ("Statement No. 128"), issued in February 1997 and effective for fiscal
years ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share ("EPS"). The Company will comply
with Statement No. 128 as it begins to report earnings per share in the future.
Financial Accounting Standards Board Statement No. 130 "Reporting
Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective
for fiscal years ending after December 15, 1997, establishes standards for
reporting and display of the total net income and the components of all other
nonowner changes in equity, or comprehensive income (loss) in the statement of
operations, in a separate statement of comprehensive income (loss) or within the
statement of changes of stockholder's equity. The Company has had no significant
items of other comprehensive income.
Inflation
The Company believes that the moderate inflation environment in the
Company's markets in the past several years has not had a material impact on the
Company's revenues or results of operations. Borrowings under the New Working
Capital Facility, however, will be at variable rates of interest and increases
in such interest rates, if not mitigated by other Company actions, could
adversely impact the Company's results of operations.
ITEM 3. PROPERTIES
Retail Stores
As of January 31, 1998, the Company operated 305 leased retail music
stores. Lease terms generally range between two to ten years. Approximately 296
of these stores are located in regional shopping malls and the balance are
located in strip centers or free standing buildings. The Company's store sizes
and formats vary depending on the demographics and competitive conditions in
each location, as well as on site access and visibility, traffic patterns and
the availability of real estate. The large majority of the Company's stores are
less than 5,000 square feet in size, the average being 3,841 square feet,
although the Company does have nine stand-alone "super stores." The Company
believes that none of its store leases is individually material to the Company.
Substantially all of the Company's leases provide for the payment of
(i) fixed monthly rentals, (ii) a percentage of gross revenues of the store in
excess of specified sales levels, and (iii) operating expenses for maintenance,
property taxes, insurance and utilities. The following table lists the number of
leases due to expire in each of the fiscal years shown:
YEAR LEASES YEAR LEASES
1998 28 2002 39
1999 37 2003 29
2000 26 2004 35
2001 41 2005 & Beyond 70
The Company expects that as these leases expire, it will be able to
either obtain lease renewals, if desired, or to obtain leases for other suitable
locations. No assurances can be given, however, that such renewals or new leases
will be on terms and conditions, including rental rates, comparable to those of
the expiring leases. Included as leases expiring in Fiscal 1998 are several
leases that have expired pursuant to their terms but that are occupied by the
Company on a month to month basis and are under negotiation for renewal.
The Company's stores are located in 34 states, with a concentration in
the Midwestern and Southern states. The following table lists the number of
stores by state.
STATE LEASES STATE LEASES
Texas 34 California 9
Florida 33 South Carolina 9
Ohio 26 Indiana 8
North Carolina 18 Alabama 8
Georgia 14 Michigan 8
Pennsylvania 14 Kentucky 7
Tennessee 13 Virginia 7
Missouri 11 Oklahoma 6
Washington 11 Other states - each 59
fewer than 6 stores
Illinois 10
Corporate Offices and Distribution Center
The Company owns its corporate office facility and distribution center
located in North Canton, Ohio. The facility consists of approximately 228,000
square feet of distribution and 68,000 square feet of office space.
The Company-owned facilities have been either newly constructed or
substantially upgraded within the past six years and are maintained on a
continuing basis. The Company believes that the facilities are adequate for the
Company's ongoing operating needs. Further, the Company estimates that its
distribution facility is large enough to support approximately 1,000 retail
stores. The building is located on 21 acres of land of which approximately 10
acres are currently unused and available for future expansion.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following chart sets forth the name and address of any person or
group known to CMH to be a beneficial owner as of the Effective Date of more
than five percent of the Common Stock, the number of shares held by such
beneficial owner, and the percentage of the total shares of the Common Stock
owned by such beneficial owner. The information contained in the chart is based
on the distributions of Common Stock made by the Company on the Effective Date
in connection with the consummation of the Plan of Reorganization.
NAME AND ADDRESS AMOUNT PERCENT OF
OWNED CLASS
Van Kampen-Merritt Prime Rate Income Trust 1,994,718 20.28%
1 Parkview Plaza
Oakbrook Terrace, Illinois
60180
Fernwood Associates, L.P. 1,549,595 15.76%
667 Madison Avenue
20th Floor
New York, New York 10021
Merrill Lynch, Pierce, Fenner & Smith 1,466,362 14.91%
Incorporated
Debt & Equity Market Group
World Financial Center
North Tower
New York, New York 10281-1307
Oaktree Capital Management, LLC 961,740 8.76%
(in its capacity as general partner and
investment manager of OCM Opportunities
Fund, L.P. and Columbia/HCA Master
Retirement Trust (separate account I))
550 South Hope Street
22nd Floor
Los Angeles, California 90071
First Union National Bank 652,952 6.64%
301 South Cole Street BC-5
Charlotte, North Carolina 28258
Yale University 549,944 5.59%
c/o Daystar Partners LLC
411 Theodore Fremd Avenue
Rye, New York 10580
The Company believes that the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
Security Ownership of Management
The following table sets forth the number of shares of Common Stock
that are deemed to be beneficially owned by the Directors of CMH, the Named
Executive Officers (as defined below) and all Directors and executive officers
of CMH as a group. The Company is reporting beneficial ownership of shares
subject to options assuming that the per share trading price of the Company's
Common Stock exceeds certain thresholds which will cause 50% of the options
issued to become immediately exercisable.
AMOUNT AND NATURE OF PERCENT OF
NAME BENEFICIAL OWNERSHIP (1) CLASS
- ---- ------------------------ ----------
James E. Bonk 55,000 (2)
Jack K. Rogers 40,000 (2)
Lee Ann Thorn 20,000 (2)
Lewis S. Garrett 20,000 (2)
Charles R. Rinehimer III 20,000 (2)
All Directors and executive 155,000 1.53%
officers as a group
- --------------
(1) All shares reported as beneficially owned are subject to options issued on
the Effective Date which may be exercisable within 60 days if the per share
trading price of the Common Stock exceeds certain thresholds. See
"Executive Compensation."
(2) Amount is less than one percent (1%).
The persons named in the table have sole voting and investment powers
with respect to all shares of Common Stock shown as beneficially owned by them.
Changes in Control
The Company is not aware of any arrangements the operation of which
may at a subsequent date result in a change in control of CMH.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Executive Officers and Directors
The following table sets forth information regarding those persons
currently serving as the executive officers and directors of CMH. Certain
biographical information regarding each of such persons is provided below the
table.
Name Age Position
- ---- --- --------
James E. Bonk 50 President and Chief Executive Officer,
Chairman of the Board of Directors
Jack K. Rogers 48 Executive Vice President, Chief Operating
Officer, Secretary, and Director
George R. Zoffinger 50 Director
Stephen H. Baum 56 Director
Herbert J. Marks 52 Director
Matthew S. Barrett 38 Director
Lewis S. Garrett 48 Vice President of Buying and Merchandising
Charles R. Rinehimer III 50 Vice President of Stores
Lee Ann Thorn 37 Chief Financial Officer, Treasurer
JAMES E. BONK, PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE
BOARD OF DIRECTORS, has served as President, Chief Executive Officer and
Chairman of the Board of CMH since January 1998, and as President, Chief
Executive Officer and Director of Camelot since November 1993. Prior to that
time he served as Executive Vice President, Chief Operating Officer and Director
of Camelot since June 1986. Mr. Bonk joined the Company as a store manager in
1968 and held various positions of increasing responsibility from 1968 through
1986.
JACK K. ROGERS, EXECUTIVE VICE PRESIDENT, SECRETARY, CHIEF OPERATING
OFFICER AND DIRECTOR, has served as Executive Vice President, Chief Operating
Officer and a Director of CMH since January 1998. He previously served Camelot
as Executive Vice President and Chief Financial Officer from November 1993 to
January 1998 and as Vice President Finance and Chief Financial Officer and
Director of Camelot from June 1988 to November 1993.
GEORGE R. ZOFFINGER, DIRECTOR, has served as a Director of CMH since
January 1998. He has been President and Chief Executive Officer of Value
Property Trust since 1995. Mr. Zoffinger served as Chairman of the Board of
CoreStates New Jersey National Bank from 1994 through its merger into CoreStates
Bank, N.A. in 1996. From 1991 through 1994, he served as President and Chief
Executive Officer of Constellation Bancorp and its principal subsidiary,
Constellation Bank, N.A.
STEPHEN H. BAUM, DIRECTOR, has served as a Director of CMH since
January 1998. He is a principal of The Mead Point Group, an advisor to senior
management of service enterprises. Mr. Baum is chief judge for the Connecticut
Award for Excellence and was a senior examiner with the Malcolm Baldridge
National Quality Award for several years. He co-founded The Mead Point Group in
1991. Prior to founding The Mead Point Group, Mr. Baum was a partner for 10
years with Booz, Allen & Hamilton, where he led the consumer services practice.
HERBERT J. MARKS, DIRECTOR, has served as a Director of CMH since
January 1998. He has served RBC Dominion Securities as Vice President and
Manager of the Merger Arbitrage Group since 1997. He has also served as Managing
Director of Tribeca Investments, L.L.C. (a subsidiary of the Travelers Group),
Director of Research for Kellner Dileo & Co. and Senior Vice President and
Manager of the Risk Arbitrage Department of Kidder Peabody & Co.
MATTHEW S. BARRETT, DIRECTOR, has served as a Director of CMH since
January 1998. He has served as Managing Director of Oaktree Capital Management,
LLC since April 1995. He previously served as a Senior Vice President of Trust
Company of the West, Asset Management from January 1991 to March 1995. Mr.
Barrett currently serves on the boards of directors of Acorn Products, Inc. and
Biocyphert Laboratories, Inc.
LEWIS S. GARRETT, VICE PRESIDENT OF BUYING AND MERCHANDISING, has
served as Vice President of Buying and Merchandising of CMH since January 1998.
He joined Camelot in 1972. Since 1986 he has served as Vice President of Buying
and Merchandising of Camelot, supervising all of the Company's buying and
allocation functions. In addition, Mr. Garrett is the Chairman of The National
Association of Recording Merchandisers Retailers' Advisory Committee.
CHARLES R. RINEHIMER III, VICE PRESIDENT OF STORES, has served as Vice
President of Stores of CMH since January 1998 and Vice President of Stores of
Camelot since May 1994. Previously, Mr. Rinehimer served as Vice President of
Store Operations for American Greetings (Summit Corporation) from 1989 to May
1994.
LEE ANN THORN, CHIEF FINANCIAL OFFICER AND TREASURER, has served as
Chief Financial Officer and Treasurer of CMH and Camelot since January 1998.
Prior to that time she served as Vice President of Finance and Treasurer of
Camelot from November 1993 to January 1998, and also served as Director of Taxes
and Payroll for Camelot from May 1988 to November 1993.
In accordance with Section 8.02 of the Plan of Reorganization, four
(4) members of the Board of Directors of CMH (Messrs. Zoffinger, Baum, Marks and
Barrett) were appointed by the Camelot Acquisition Lenders in their capacity as
the holders of a majority of the Common Stock. A fifth member of the Board of
Directors, also appointed pursuant to such arrangement, has resigned, and the
Company expects that the vacancy created thereby will be filled by the Board of
Directors as soon as possible.
The Directors of the Company are elected annually for one year terms.
ITEM 6. EXECUTIVE COMPENSATION
Directors' Compensation
Directors of CMH who are not also employees or officers of CMH will be
provided an annual retainer of $12,000, which will be paid in quarterly
installments. In addition, Directors who are not also employees or officers of
CMH will receive $1,000 per board meeting and $500 per committee meeting, as
well as expense reimbursement. Directors who are also employees or officers of
CMH will receive no additional compensation for their services as Directors.
Officers' Compensation
The compensation discussion that follows has been prepared based on
the actual compensation and benefits earned during Fiscal 1996, as well as
various employee retention and compensation arrangements which were entered into
in connection with the bankruptcy proceedings.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned by the Chief
Executive Officer and the other four most highly compensated executive officers
of CMH (collectively, the "Named Executive Officers") during Fiscal 1996.
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2)
- ------------------ ---- ------ ----- ------------
James E. Bonk 1996 $316,680 $200,000 $ 2,802
President and Chief
Executive Officer
Jack K. Rogers 1996 $208,360 $137,000 $ 2,708
Executive Vice
President, Chief
Operating Officer and
Secretary
Lee Ann Thorn 1996 $135,000 $100,000 $ 2,625
Chief Financial Officer
and Treasurer
Lewis S. Garrett 1996 $165,000 $102,500 $ 2,631
Vice President, Buying
and Merchandising
Charles R. Rinehimer III 1996 $165,000 $102,500 $ 2,625
Vice President, Stores
<FN>
- ------------
(1) Represents (a) a contractual bonus of $25,000 paid to each of James E.
Bonk, Jack K. Rogers and Lee Ann Thorn, (b) a contractual bonus of $20,000
paid to each of Lewis S. Garrett and Charles R. Rinehimer III and (c)
incentive bonuses earned by Messrs. Bonk and Rogers, Ms. Thorn and Messrs.
Garrett and Rinehimer of $175,000, $112,500, $75,000, $82,500 and $82,500,
respectively.
(2) Represents employer contributions to the Company's defined contribution
benefit plan on behalf of the Named Executive Officers.
</FN>
Severance and Employment Arrangements
The Company maintains written severance agreements with Mr. Bonk and
eight other members of senior management, including the other Named Executive
Officers. The severance arrangements with Mr. Bonk are a part of his employment
contract, described below. The contracts with the other eight members of senior
management provide severance benefits in the event the executive is terminated
without cause (as defined in such agreements). The benefits under these latter
contracts are for 12 months of salary continuation subject to mitigation, except
that the contract with Mr. Rogers provides for severance benefits of eighteen
months with only the final six months subject to mitigation.
As of the Effective Date, Camelot amended and extended its employment
agreement with Mr. Bonk. Under the terms of the agreement, which expires on
December 31, 2000, Mr. Bonk will receive a base salary of at least $400,000 per
year and is entitled to participate in the Company's option and bonus plans.
This agreement also provides Mr. Bonk with the following severance payments and
continued benefits: (i) a lump sum payment of one year's base salary (in the
event of Mr. Bonk's death or disability or upon the failure of the Company to
renew the agreement for an additional three-year term); and (ii) monthly base
salary payments and benefits continuation over the greater of (a) two years or
(b) the balance of the term of the agreement if the Company terminates him
without cause or in the event of constructive discharge (as defined in such
employment agreement) including a change of control of CMH. These payments are
subject to mitigation, but only for periods beyond 18 months in the case of the
salary payments. The agreement also contains a covenant not to compete with the
business of Camelot for a specified period of time in the event of termination.
Stock Option Plan
The Plan of Reorganization provided for the adoption of the Camelot
Music Holdings, Inc. 1998 Stock Option Plan (the "Option Plan") The Option Plan
became effective as of the Effective Date and is administered by the
Compensation Committee of the Board of Directors (or such other committee of the
Board of Directors as it may designate; hereinafter, the "Committee"). Executive
and other key salaried employees, including officers, and directors (whether or
not also employees) of CMH and its subsidiaries, including Camelot, are eligible
to receive stock option grants under the Option Plan, as described below.
Options granted under the Option Plan may be either "incentive stock options"
("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or stock options other than ISOs. Subject to
certain limitations prescribed by the Option Plan, the Board of Directors may
amend, alter, suspend or terminate the Option Plan, and the Committee may amend
options outstanding under the Option Plan.
As of the Effective Date, 7.5% of the total issued and outstanding shares
of Common Stock were reserved for issuance upon exercise of stock options under
the Option Plan. As further shares of Common Stock are issued in respect of the
ongoing bankruptcy claims reconciliation process, the number of shares reserved
for the Option Plan will be adjusted so that at all times the number of shares
of Common Stock reserved for issuance upon exercise of options will equal 7.5%
of the total shares of Common Stock outstanding on a fully diluted basis. In
addition, the Option Plan provides that the Committee shall adjust the shares
available under the Option Plan and subject to outstanding options to preserve
the benefits intended under the Option Plan or with respect to any options upon
certain changes in the outstanding Common Stock, such as by reason of a stock
dividend or stock split or a recapitalization, reorganization, merger, issuance
of rights to purchase Common Stock or other securities of the Company (other
than under the Option Plan), or an extraordinary dividend, spin-off, liquidation
or other substantial distribution of Company assets. The Option Plan provides
that in the event of a change in control of the Company, as defined in the Plan
of Reorganization, all outstanding options shall become fully exercisable, and
the Committee shall have discretion, either by the terms of the option or by a
resolution adopted prior to the occurrence of such event, to substitute for
Common Stock covered by any outstanding options, cash or other stock or
securities or other consideration issuable by another party to, or receivable by
Company shareholders in connection with, such transaction, adjusted for the
exercise price of the option and as otherwise provided in the Option Plan.
Pursuant to the Option Plan, as of the Effective Date, options to
purchase 689,000 shares of Common Stock (representing approximately 82% of the
total shares of Common Stock reserved for issuance under the Option Plan) were
granted to 80 members of Camelot's management with an exercise price of $20.75
per share. Both the number of shares subject to such options granted on the
Effective Date and the exercise price thereof are subject to adjustment as
further shares of Common Stock are issued in respect of the ongoing bankruptcy
claims reconciliation process, and in accordance with the Option Plan's
provisions regarding changes in capital of the Company, referred to above. All
such options granted on the Effective Date are intended to qualify as ISOs and
will become exercisable no later than four years from the Effective Date;
however, up to 50% of these options may become exercisable prior to the second
anniversary of the Effective Date, with the balance becoming exercisable at any
time thereafter, if the fair market value of the Common Stock exceeds certain
thresholds established at the time such options were granted. On the Effective
Date, Mr. Bonk and Mr. Rogers were granted options under the Option Plan to
purchase 110,000 and 80,000 shares of Common Stock, respectively, and Messrs.
Garrett and Rinehimer and Ms. Thorn were each granted options under the Option
Plan to purchase 40,000 shares of Common Stock. In the aggregate, the number of
options granted to these five senior executives represents 45% of the total
number of shares for which options were granted as of the Effective Date under
the Option Plan.
Options to purchase the balance of the shares of Common Stock reserved
under the Option Plan may be granted by the Committee subsequent to the
Effective Date, and such options will have exercise prices and shall be
exercisable at such times (not extending beyond 10 years from the grant date of
the option) and subject to such conditions as determined by the Committee, in
accordance with the Option Plan, at the time such options are granted. However,
ISOs may not be granted under the Plan after the expiration of 10 years
following the Effective Date, to the extent required by the Code, and may not
have an exercise price less than 100% of the fair market value of the stock
covered thereby on the ISO's date of grant. Options granted under the Option
Plan generally may not be exercised after 10 years from the date granted and are
subject to earlier termination upon termination of the optionee's employment
with CMH or its subsidiaries under certain circumstances specified in the Option
Plan and the optionee's option. The Option Plan provides that the exercise price
of an option may be paid in any manner permitted by applicable law and
prescribed by the Committee in the option, including, in the Committee's
discretion, a broker-assisted exercise program. Options granted as of the
Effective Date provide that the option exercise price may be paid by personal
check, bank draft or money order; through delivery of a full recourse promissory
note with the consent of, and upon such payment and other terms and conditions
as prescribed by, the Committee; or using such a broker-assisted exercise
program.
Stock Options and Stock Appreciation Rights
No stock options or stock appreciation rights were granted or
exercised in Fiscal 1996. The following table sets forth all options held by the
Named Executive Officers at the end of Fiscal 1996 under CMH's prepetition stock
option plan. All of such options related to shares of Class C CMH common stock
and were unexercisable at such time. Pursuant to the terms of the Plan of
Reorganization, all shares of Class C CMH common stock were cancelled on the
Effective Date.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED
NAME OPTIONS/SARS AT FISCAL YEAR-END
James E. Bonk 12,500
Jack K. Rogers 5,000
Lee Ann Thorn 900
Lewis S. Garrett 5,000
Charles R. Rinehimer III 0
Compensation Committee Interlocks and Insider Participation
Shortly before December 12, 1997, the date on which the Plan of
Reorganization was confirmed by the Bankruptcy Court, Jon P. Hedley and Charles
J. Philippin, two of CMH's three Directors, resigned. Messrs. Hedley and
Philippin had been the only members of CMH's Compensation Committee.
Accordingly, upon their resignations, such Committee was effectively dissolved.
Mr. Philippin had also been President of CMH until his resignation, and Mr.
Hedley had been the Vice President, Secretary and Treasurer of CMH until his
resignation. Messrs. Hedley and Philippin were also both members of senior
management of Investcorp S.A. which the Company believes held, through various
affiliates, the vast majority of the outstanding equity interests in, and the
direct debt obligations of, CMH.
CMH expects to appoint a Compensation Committee consisting of a
majority of Directors who are not also employees of the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of the end of Fiscal 1996, the Company was indebted to Oaktree
Capital Management, LLC ("Oaktree") in the principal amount of $31.4 million
plus accrued interest of $1.1 million. Such amounts were owed under the Credit
Agreement. Under the Plan of Reorganization, the claims of Oaktree were
discharged in exchange for shares of Common Stock. See "Business--The Financial
Restructuring." Matthew S. Barrett is a Managing Director of Oaktree, and he has
served as a Director of CMH since January 1998.
ITEM 8. LEGAL PROCEEDINGS
For a description of the voluntary Chapter 11 bankruptcy proceedings
commenced by the Company, see "Business--Chapter 11 Petitions; Plan of
Reorganization."
The Internal Revenue Service ("IRS") has asserted in the bankruptcy
proceedings a priority tax claim against CMH and Camelot of approximately $7.9
million (the "IRS Claim"). Under the Plan of Reorganization, the allowed
priority tax claim of the IRS will be paid over six years, with quarterly
amortization of interest and principal, at an interest rate of 9%. The Company
acknowledges a priority tax obligation to the IRS of approximately $0.8 million,
and disputes the validity of the balance of the IRS Claim, the large majority of
which relates to a proposed disallowance by the IRS of certain deductions for
interest payments made by Camelot in connection with its corporate-owned life
insurance program (the "COLI Deductions"). The Debtors have filed an objection
(the "COLI Objection") to the IRS Claim to the extent that the IRS seeks to
disallow the COLI Deductions. In response to the COLI Objection, the IRS has
filed a motion (the "Withdrawal Motion") with the United States District Court
for the District of Delaware (the "District Court") seeking to have the COLI
Objection resolved by the District Court rather than the Bankruptcy Court. The
Company is contesting the Withdrawal Motion. The IRS also has filed a motion
with the Bankruptcy Court seeking a stay of any hearing on the COLI Objection
pending resolution of the Withdrawal Motion.
In addition, from time to time, the Company is a party to various
legal actions arising in the normal course of its business. The Company does not
believe that such actions, if adversely determined, would individually or in the
aggregate have a material adverse effect on the Company.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
In February 1998, an application was made to list the Common Stock for
quotation on the OTC Bulletin Board. As of the date of this filing, the
application is still pending. There is currently no established public trading
market for any class of equity securities of CMH. The Company expects to apply
for listing or admission to trading of the Common Stock on the Nasdaq Stock
Market. Notwithstanding the foregoing, the Company is unable to predict whether
or not an active trading market for the Common Stock will develop. Even if such
a market does develop, due to industry and other conditions beyond the control
of the Company, there can be no assurance that such a market would continue to
exist.
As of the Effective Date, 689,000 shares of Common Stock were subject
to outstanding options held by employees of the Company. No options are held by
any individuals other than employees of the Company. See "Security Ownership of
Certain Beneficial Owners and Management." As of the Effective Date, there were
730 record holders of Common Stock.
CMH has not declared any cash dividends on any class of common equity
since the beginning of Fiscal 1995 and does not anticipate paying cash dividends
on the Common Stock in the foreseeable future. Furthermore, the New Working
Capital Facility imposes certain limitations on CMH's ability to pay cash
dividends.
The Common Stock issued on the Effective Date was issued pursuant to
the exemption from the registration requirements of the Securities Act of 1933,
as amended (the "Securities Act") (and of any state or local laws) provided by
Section 1145(a)(1) of the Bankruptcy Code. The Common Stock may be resold by the
holders thereof without registration unless, as more fully described below, any
such holder is deemed to be an "underwriter" with respect to such securities, as
defined in Section 1145(b)(1) of the Bankruptcy Code. Generally, Section
1145(b)(1) defines an "underwriter" as any person who (a) purchases a claim
against, interest in, or claim for an administrative expense in the case
concerning, the debtor, if such purchase is with a view to distribution of any
security received or to be received in exchange for such claim or interest, (b)
offers to sell securities offered or sold under the plan for the holders of such
securities, (c) offers to buy securities offered or sold under the plan from the
holders of such securities, if such offer to buy is made with a view to
distribution of such securities and under an agreement made in connection with
the plan, with the consummation of the plan or with the offer or sale of
securities under the plan or (d) is an "issuer" as such term is used in Section
2(11) of the Securities Act with respect to the securities. Although the
definition of the term "issuer" appears in Section 2(4) of the Securities Act,
the reference (contained in Section 1145(b)(1)(D) of the Bankruptcy Code) to
Section 2(11) of the Securities Act, purports to include as "underwriters" all
persons who directly or indirectly, through one or more intermediaries, control,
are controlled by or are under common control with, an issuer of securities.
"Control" (as such term is defined in Rule 405 of Regulation C under the
Securities Act) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise. The
following holders (the "Securities Holders") of Common Stock who, due to the
magnitude of their holdings as of the Effective Date, may be deemed to be
"underwriters" pursuant to Section 1145(b) of the Bankruptcy Code, are parties
with CMH to a Registration Rights Agreement, dated as of January 27, 1998 (the
"Registration Rights Agreement") affording them certain demand and piggyback
registration and other rights, all as more fully set forth therein and as
described below: Van Kampen - Merritt Prime Rate Income Trust; Fernwood
Associates, L.P.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; and
Oaktree.
In general, under Rule 144 under the Securities Act as currently in
effect, a person (or persons whose shares must be aggregated), including a
person who may be deemed an "affiliate" of the Company, who has beneficially
owned "restricted securities" for at least one year, may sell within any three
month period that number of shares that does not exceed the greater of 1% of the
then outstanding shares of the Common Stock or the reported average weekly
trading volume of the then outstanding shares of Common Stock for the four weeks
preceding each such sale. The sales under Rule 144 also are subject to certain
manner of sale restrictions and notice requirements and to the availability of
current public information about the Company. In addition, a person (or persons
whose shares must be aggregated) who owns restricted securities, who is not
deemed an "affiliate" of the Company at any time during the 90 days preceding a
sale and who acquired such shares at least two years prior to their resale, is
entitled to sell such shares under Rule 144(k) without regard to the foregoing
requirements. Sales of restricted securities by affiliates of the Company, even
after the two year holding period, must continue to be made in broker's
transactions subject to the volume limitations described above. As defined in
Rule 144, an "affiliate" of an issuer is a person that directly, or indirectly
through the use of one or more intermediaries, controls, or is controlled by, or
is under common control with, such issuer.
As noted above, there is no active trading market for the Common
Stock, and no prediction can be made of the effect, if any, that sales of shares
of Common Stock under Rule 144 or the availability of shares for sale will have
on the market price of the Common Stock prevailing from time to time after the
date of this Registration Statement on Form 10. The Company is unable to
estimate the number of shares that may be sold in the public market under Rule
144, because such amount will depend on the trading volume in and the market
price for the Common Stock and other factors. Nevertheless, sales of substantial
amounts of shares in the public market, or the perception that such sales could
occur, could adversely affect the market price of the Common Stock.
Pursuant to the Registration Rights Agreement, any Securities Holder
or Securities Holders may, subject to certain limitations, require CMH to file a
registration statement with respect to some or all of the Common Stock held by
such Securities Holder or Holders (subject to minimum threshold requirements);
provided, that no more than two demands may be made during the First Phase (a
period of approximately 15 months from the Effective Date); and provided,
further, that if, during the First Phase, the initial demand registration is a
shelf registration, no further demands may be made during the First Phase. In
the event of a demand registration, the non-requesting Securities Holders and
CMH would enjoy "piggy-back" rights with respect to such demand registration,
allowing them to participate in the registration on the same terms and
conditions as the initiating Securities Holder or Holders; provided, that if
marketing factors require a limitation on the number of shares offered, first
shares being offered by CMH and then shares offered by piggy-backing
stockholders would be reduced. In addition, if CMH offers Common Stock pursuant
to a registration statement (other than a registration on Form S-4 or S-8), the
Securities Holders would enjoy similar piggy-back rights; provided, that if
marketing factors require a limitation on the number of shares offered, the
shares being offered by the piggy-backing stockholders would be reduced. The
Securities Holders also enjoy the right to participate in private sales of
Common Stock by CMH; provided, that if marketing factors require a limitation on
the number of shares offered, the shares being offered by the piggy-backing
stockholders would be reduced. Subject to certain exceptions, CMH will bear all
of its own expenses, and certain expenses incurred by the Securities Holders
(including reasonable fees and disbursements of counsel) in connection with any
registration of Common Stock pursuant to the Registration Rights Agreement. In
addition, CMH will indemnify the Securities Holders for certain liabilities,
including liabilities under the Securities Act, in connection with any such
registration.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
No equity interests in CMH exist other than those represented by the
shares of the Common Stock. The Common Stock was issued pursuant to the Plan of
Reorganization in satisfaction of certain allowed claims against Camelot in
reliance on the exemption provided by Section 1145 of the Bankruptcy Code. Aside
from the issuance of shares of Common Stock under the Plan of Reorganization,
there have been no recent sales of unregistered securities by CMH. See
"Business--Chapter 11 Petitions; Plan of Reorganization" and "--The Financial
Restructuring."
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Common Stock
On the Effective Date, CMH issued 9,835,559 shares of Common Stock in
satisfaction of allowed claims against Camelot. As much as an additional 560,000
shares of Common Stock could be issued to the holders of disputed claims in the
event that such claims are ultimately allowed in the amounts asserted by the
holders thereof. Except as required by law, the respective holders of Common
Stock will vote on all matters as a single class, and each holder of Common
Stock will be entitled to one vote for each share of Common Stock that it owns.
Holders of Common Stock will not have cumulative voting rights. All outstanding
shares of the Common Stock are fully paid and nonassessable. The holders of
Common Stock will be entitled to such dividends (whether payable in cash,
property or capital stock) as may be declared from time to time by the Board of
Directors of CMH from funds, property or stock legally available therefor, and
will be entitled after payment of all prior claims, to receive pro rata all
assets of CMH upon the liquidation, dissolution or winding up of CMH. Generally,
holders of Common Stock have no conversion or preemptive rights to purchase or
subscribe for securities of CMH. There are no redemption or sinking fund
provisions available to the Common Stock.
The transfer agent and registrar for the Common Stock is The Bank of
New York.
Certain Provisions of Delaware Law
CMH is subject to Section 203 ("Section 203") of the Delaware General
Corporation Law (the "DGCL"). In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer, or (iii) on or subsequent to
such date the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66-2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Section 203 defines business combination broadly to
include mergers or sales, stock issuances, transactions that would result in
disproportionate benefit to the interested stockholder and similar arrangements.
In general, Section 203 defines an interested stockholder as any entity or
person who, together with affiliates and associates, beneficially owns 15% or
more of the outstanding voting stock of a corporation. The statute could
prohibit or delay mergers or other takeover or change in control attempts with
respect to CMH and, accordingly, may discourage attempts to acquire CMH.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Existing Indemnification Obligations
Section 145 of the DGCL permits CMH to indemnify its directors,
officers, employees and agents (each an "Insider") against liability for each
such Insider's acts taken in his or her capacity as an Insider in a civil
action, suit or proceeding if such actions were taken in good faith and in a
manner which the Insider believed to be in or not opposed to the best interests
of CMH, and in a criminal action, suit or proceeding, if the Insider had no
reasonable cause to believe his or her conduct was unlawful, including under
certain circumstances, suits by or in the right of CMH for any expenses,
including attorneys' fees, and for any liabilities which the Insider may have
incurred in consequence of such action, suit or proceeding under conditions
stated in said Section 145; provided, that CMH may modify the extent of such
indemnification by individual contracts with its directors and executive
officers.
CMH's Second Amended and Restated Certificate of Incorporation (the
"Certificate") provides that, to the fullest extent permitted by the DGCL, CMH
will indemnify all present or former directors or officers (and their respective
heirs, executors or administrators) of CMH from any pending, threatened or
completed action, suit or proceeding (brought in the right of CMH or otherwise),
by reason of the fact that such person is or was serving as an officer or
director of CMH, or at the request of CMH as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, for and against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person (or such heirs, executors or administrators) in
connection with such action, suit or proceeding, including appeals.
As permitted by Section 102(b)(7) of the DGCL, the Certificate
provides that a director of CMH will not be personally liable to CMH or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of a director's duty of loyalty to a
company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, as amended, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit.
The Certificate permits CMH to secure insurance on behalf of any
director, officer, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether CMH would have the power
to indemnify such person against such liability under the DGCL. CMH's directors
and officers are covered under a liability insurance policy. Such policy affords
CMH's directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, error and other wrongful acts.
Treatment of Indemnification Obligations Under the Plan of Reorganization
Under the Plan of Reorganization, all obligations of CMH to indemnify
or to pay contribution or reimbursement to individuals who served as directors
or officers of CMH at any time during the bankruptcy proceedings were expressly
assumed and affirmed by the Company. All other indemnity, contribution or
reimbursement obligations of CMH were rejected and terminated under the Plan of
Reorganization.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item appear in this
Registration Statement on Form 10 commencing on page F-1. See "Financial
Statements and Exhibits."
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements of the Company are included in this
Registration Statement on Form 10 at the page indicated below:
Condensed Consolidated Balance Sheet (Unaudited) as of
November 29, 1997...........................................................F-2
Condensed Consolidated Statements of Operations (Unaudited)
for the 39 weeks ended November 29, 1997 and the 39 weeks
ended November 30, 1996.....................................................F-3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the 39 weeks ended November 29, 1997 and the 39 weeks
ended November 30, 1996.....................................................F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)............F-5
Report of Independent Accountants...........................................F-8
Consolidated Balance Sheets as of March 1, 1997 and March 2, 1996...........F-9
Consolidated Statements of Operations for the 52 weeks ended
March 1, 1997, the 53 weeks ended March 2, 1996
and the 52 weeks ended February 25, 1995...................................F-10
Consolidated Statements of Stockholders' (Deficit) Equity for
the 52 weeks ended March 1, 1997, the 53 weeks ended March 2, 1996
and the 52 weeks ended February 25, 1995...................................F-11
Consolidated Statements of Cash Flows for the 52 weeks ended
March 1, 1997, the 53 weeks ended March 2, 1996
and the 52 weeks ended February 25, 1995...................................F-12
Notes to Consolidated Financial Statements.................................F-13
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
as of November 29, 1997....................................................F-26
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited) for the 39 weeks ended November 29, 1997.......................F-27
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
for the 52 weeks ended March 1, 1997.......................................F-28
Notes to Pro Forma Condensed Consolidated Financial Statements.............F-29
(b) Exhibits
2.1 Second Amended Joint Plan of Reorganization, dated November 7, 1997.
2.2 Asset Purchase Agreement by and among Camelot Music, Inc., The Wall Music,
Inc., and WH Smith Group Holdings (USA), Inc., dated as of December 10,
1997.
2.3 Assignment of Purchase Agreement.
3.1 Second Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Specimen certificate of Common Stock.
10.1 Revolving Credit Agreement, dated as of January 27, 1998, among Camelot
Music, Inc., the several lenders named therein and The Chase Manhattan
Bank, as agent for the lenders.
10.2 Registration Rights Agreement, dated as of January 27, 1998, by and among
the Registrant and the security holders named therein.
10.3 Second Amended and Restated Employment Agreement, dated as of January 1,
1998, between Camelot Music, Inc. and James E. Bonk.
10.4 Camelot Music Holdings, Inc. 1998 Stock Option Plan.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
INDEX TO FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheet (Unaudited) as of
November 29, 1997...........................................................F-2
Condensed Consolidated Statements of Operations (Unaudited)
for the 39 weeks ended November 29, 1997 and the 39 weeks
ended November 30, 1996.....................................................F-3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the 39 weeks ended November 29, 1997 and the 39 weeks
ended November 30, 1996.....................................................F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)............F-5
Report of Independent Accountants...........................................F-8
Consolidated Balance Sheets as of March 1, 1997 and March 2, 1996...........F-9
Consolidated Statements of Operations for the 52 weeks ended
March 1, 1997, the 53 weeks ended March 2, 1996
and the 52 weeks ended February 25, 1995...................................F-10
Consolidated Statements of Stockholders' (Deficit) Equity for
the 52 weeks ended March 1, 1997, the 53 weeks ended March 2, 1996
and the 52 weeks ended February 25, 1995...................................F-11
Consolidated Statements of Cash Flows for the 52 weeks ended
March 1, 1997, the 53 weeks ended March 2, 1996
and the 52 weeks ended February 25, 1995...................................F-12
Notes to Consolidated Financial Statements.................................F-13
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
as of November 29, 1997....................................................F-26
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited) for the 39 weeks ended November 29, 1997.......................F-27
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
for the 52 weeks ended March 1, 1997.......................................F-28
Notes to Pro Forma Condensed Consolidated Financial Statements.............F-29
F-1
CM HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
November 29, 1997
(in thousands of dollars)
ASSETS
FISCAL
1997
------
Current assets:
Cash and cash equivalents $ 45,689
Accounts receivable 3,099
Inventories 141,106
Other current assets 2,027
---------
Total current assets 191,921
---------
Property, plant and equipment, net 46,671
---------
Other non-current assets:
Goodwill, net of accumulated amortization 39,693
Other assets 876
---------
Total other non-current assets 40,569
---------
Total assets $279,161
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable, trade $ 42,024
Accrued expenses and other liabilities 22,896
---------
Total current liabilities 64,920
---------
Long-term liabilities 7,920
Liabilities subject to compromise 485,296
---------
Total liabilities 558,136
---------
Stockholders' deficit:
Common stock 10
Additional paid-in capital 79,990
Accumulated deficit (358,975)
---------
Total stockholders' deficit (278,975)
---------
Total liabilities and stockholders' deficit $279,161
=========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
CM HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
for the 39 weeks ended November 29, 1997
and the 39 weeks ended November 30, 1996
(in thousands of dollars)
FISCAL FISCAL
1997 1996
--------- ---------
Net sales $260,340 $264,436
-------- --------
Cost and expenses:
Cost of sales 170,966 174,593
Selling, general and administrative 80,573 88,769
Depreciation and amortization 16,842 17,402
Write-down of long-lived assets - 4,920
--------- ---------
Total cost and expenses 268,381 285,684
--------- ---------
Loss before interest and other (income)
expenses (net) and reorganization expense (8,041) (21,248)
--------- ---------
Interest and other (income) expenses, net:
Interest expense 186 17,297
Amortization of financing fees 344 1,741
Other (3,972) (925)
--------- ---------
Total interest and other (income) expenses, net (3,442) 18,113
--------- ---------
Loss before reorganization expense (4,599) (39,361)
--------- ---------
Reorganization expense 6,072 26,552
--------- ---------
Loss before income taxes (10,671) (65,913)
--------- ---------
Provision for income taxes - -
--------- ---------
Net loss $(10,671) $(65,913)
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
CM HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the 39 weeks ended November 29, 1997 and the 39 weeks
ended November 30, 1996 1996 (in thousands of dollars)
Fiscal Fiscal
1997 1996
------ ------
Cash flows from operating activities:
Net loss $(10,671) $(65,913)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization excluding financing fees 16,842 17,402
Amortization of financing fees 344 1,741
Write-down of long-lived assets - 4,920
Other, net - 901
Changes in assets and liabilities:
Accounts receivable (2,120) (3,562)
Inventories (29,724) (31,813)
Other current assets 2,978 (2,903)
Accounts payable, trade 30,626 (424)
Accrued expenses and other liabilities 523 20,711
Changes due to reorganization activities:
Accrued professional fees 1,193 442
Write-off of financing costs - 12,214
Provision for store closing costs - 3,285
Provision for lease rejection damages - 7,474
Employment termination costs - 764
Write-off of capital lease obligation - (1,677)
Other expenses directly related to bankruptcy - 262
--------- ---------
Net cash provided by (used in) operating activities 9,991 (36,176)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (5,348) (2,282)
Proceeds from sale of equipment 6 239
Other assets (145) 4
--------- ---------
Net cash used in investing activities (5,487) (2,039)
--------- ---------
Cash flows from financing activities:
Payment of financing fees (75) (590)
Proceeds from lines of credit and other short-term borrowings - 24,000
Payment of lines of credit and other short-term borrowings - (8,600)
Payment on long-term debt - (27)
--------- ---------
Net cash (used in) provided by financing activities (75) 14,783
--------- ---------
Increase (decrease) in cash and cash equivalents 4,429 (23,432)
Cash and cash equivalents at beginning of year 41,260 29,619
--------- ---------
Cash and cash equivalents at end of year $45,689 $ 6,187
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for:
Interest $ 78 $ 2,378
Income taxes 32 99
Reorganization expense 3,569 3,928
Non-cash reorganization activities:
Reclassification of liabilities subject to compromise $ - $482,996
Decrease in accounts payable, accrued expenses and other liabilities - (86,236)
Reduction of debt - (396,760)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
CM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except where otherwise indicated)
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements include the
accounts of CM Holdings, Inc. ("Holdings") and its wholly owned subsidiary,
Camelot Music, Inc. ("Camelot") and Camelot's wholly owned subsidiaries after
elimination of all intercompany accounts and transactions. Holdings, together
with Camelot is herein referred to as the Company.
The accompanying interim condensed consolidated financial statements are
unaudited, however in the opinion of management, all adjustments necessary
for a fair presentation of such consolidated financial statements have been
recorded in the interim financial statements presented. The Company's
business in seasonal and therefore the interim results are not indicative
of the results for a full year. The significant accounting policies and
certain financial information which is required for financial statements in
accordance with generally accepted accounting principles, but not for
interim financial statement reporting purposes, have been condensed or
omitted. The accompanying condensed consolidated financial statements of
the Company should be read in conjunction with the audited financial
statements of the Company for the fiscal year ended March 1, 1997.
2. CHAPTER 11 PROCEEDINGS:
On December 12, 1997, the Bankruptcy Court entered an order confirming the
Company's Plan of Reorganization (the "Plan") which was submitted by the
Company on October 1, 1997 and amended on November 7, 1997. The Company
expects the effective date of the Plan to be on or about January 27, 1998.
Pursuant to the Plan, administrative claims of approximately $6,800 will be
fully paid in cash upon emergence and the priority claims of approximately
$1,600 will be fully satisfied within six years of the effective date. The
remaining prepetition claims will be settled principally with the issuance
of equity in the reorganized company to the claim holders. The stockholders
in the Company will receive no recovery nor will they be issued any shares
in the reorganized company under the Plan. Under the Plan, approximately 10
million common shares in the reorganized company are expected to be issued
to the claim holders. The reorganized company expects to register the
common shares on the NASDAQ "over the counter market" with the filing of a
Form 10 with the Securities and Exchange Commission on or about January 31,
1998.
As of the effective date of the Plan, the Company will adopt "fresh-start"
accounting as prescribed by AICPA Statement of Position ("SOP") 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code". Under the provisions of fresh-start accounting:
The reorganization value of the Company will be allocated to the Company's
assets in conformity with the procedures specified by Accounting Principles
Board ("APB") Opinion No. 16, "Business Combinations", for transactions
reported on the basis of the purchase method. If any portion of the
reorganization value cannot be attributed to specific tangible assets of
the Company, such amounts will be reported as the intangible asset
identified as "reorganization value in excess of amounts allocable to
identifiable assets". This excess will be amortized in conformity with APB
Opinion No. 17, "Intangible Assets", over a twenty year period. Each
liability existing at the plan confirmation date, other than deferred
income taxes, will be stated at present value of amounts to be paid
determined at appropriate current interest rates. Deferred income taxes
will be reported in conformity with the liability method of accounting for
income taxes. Benefits, if any, realized from preconfirmation net operating
loss carryforwards will first reduce reorganization value in excess of
amounts allocable to identifiable assets and other intangibles until
exhausted and thereafter be reported as a direct addition to paid-in
capital. Additionally, the effects of the adjustments on the reported
amounts of individual assets and liabilities resulting from the adoption of
fresh-start reporting and the effects of the forgiveness of debt will be
reflected in the predecessor Company's final consolidated statement of
operations. Forgiveness of debt, if any, will be reported as an
extraordinary item. Adopting fresh-start reporting will result in a new
reporting entity with no beginning retained earnings or deficit.
F-5
3. LIABILITIES SUBJECT TO COMPROMISE:
In the accompanying consolidated balance sheet as of November 29, 1997,
liabilities subject to compromise are comprised of the following:
FISCAL
1997
------------
Bank debt and related interest $295,617
Subordinated debentures and related interest 58,489
Senior debentures and related interest 57,651
Trade claims 54,992
Lease claims 14,479
Priority tax claims 1,311
Other claims 2,757
------------
Total $485,296
============
These amounts represent management's best estimate of all known or
potential claims. Such claims were subject to future adjustments with
respect to disputed claims depending on negotiations with creditors and
actions of the Bankruptcy Court in the Chapter 11 case. In connection with
the confirmation of the Plan, the Company resolved substantially all
outstanding disputed claims and therefore believes that any future
adjustments required will not be significant.
4. REORGANIZATION EXPENSE:
Reorganization expense for the 39 weeks ended November 29, 1997 and
November 30, 1996 are comprised of the following:
FISCAL FISCAL
1997 1996
------------- ---------------
Professional fees $ 4,122 $ 3,562
Write-off of financing costs - 12,214
Provision for store closing costs - 4,125
Lease rejection damages - 7,688
Employment termination costs 16 764
Employment retention and stay bonuses 2,800 -
Write-off of capital lease obligation - (1,677)
Other expenses (net) directly related
to bankruptcy 758 385
Interest income (1,624) (509)
------------- ---------------
Total $ 6,072 $26,552
============= ===============
5. FINANCING ARRANGEMENTS:
On the Effective Date, the debtor-in-possession facility ("DIP") was
canceled pursuant to its original terms. There were no amounts outstanding
under the DIP facility on the Effective Date.
Also, on the Effective Date, the Company entered into a revolving credit
facility with a syndicate of financial institutions providing advances of up to
$50,000 during peak periods and $35,000 during non-peak periods, subject to
reduction if the Wall acquisition does not close (see Note 7). The aggregate
availability under the New Working Capital Facility is limited to a borrowing
base equal to 35% of inventory during peak periods and 30% of inventory during
non-peak periods. The new facility matures 4 years from the Effective Date and
borrowings bear interest at the Alternate Base Rate, as defined or LIBOR plus
1.75%. Borrowings under the facility are secured by substantially all of the
Company's assets. The facility contains certain covenants including limitations
on capital expenditures, dividends and require the Company to maintain certain
minimum EBITDA levels.
6. COMMITMENTS AND CONTINGENCIES:
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of its business, including proposed
assessments by the Internal Revenue Service aggregating approximately
$7,800 of which the Company has accrued $800. In the opinion of management,
all such matters not accrued for are without merit or involve such amounts
that unfavorable disposition will not have a material impact on the
consolidated financial position or results of operations of the Company.
F-6
7. ACQUISITION:
On December 10, 1997 the Company signed an Asset Purchase Agreement to
acquire The Wall Music, Inc. ("The Wall") for $26,000 plus net working
capital assets transferred at the date of closing which are projected to be
approximately $47,000. The Wall is a mall-based music store chain that
operates over 150 stores in the Mid-Atlantic region of the United States.
This transaction is anticipated to close in late Fiscal 1997. The
acquisition will be accounted for by the purchase method of accounting.
F-7
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
CM Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of CM Holdings,
Inc. and Subsidiary as of March 1, 1997 and March 2, 1996 and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the fifty-two and fifty-three week periods ended March 1,
1997, respectively. 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 the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and the significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
On August 9, 1996, CM Holdings, Inc. and its Subsidiary filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code. On October 1, 1997, the Company submitted its plan of reorganization to
the Bankruptcy Court which was amended on November 7, 1997 and subsequently
confirmed on December 12, 1997. The Company expects the effective date of the
plan to be on or about January 27, 1998. As discussed in Note 2 to the
consolidated financial statements, as of the effective date of the plan, the
Company will adopt "Fresh-Start" accounting as prescribed by AICPA Statement of
Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code".
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CM Holdings, Inc.
and Subsidiary as of March 1, 1997 and March 2, 1996, and the consolidated
results of their operations and their cash flows for each of the fifty-two and
fifty-three week periods ended March 1, 1997, respectively, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in fiscal 1995
the Company changed its method of accounting for the impairment of long-lived
assets.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
July 18, 1997, except as to the
information presented in the
first paragraph of Note 19, for
which the date is December 10, 1997
and the information presented
in Notes 2, 7, 8, 9, 10, 16, and 19
dated as of December 12, 1997,
for which the date is December 12, 1997
F-8
CONSOLIDATED BALANCE SHEETS
March 1, 1997 and March 2, 1996
(in thousands of dollars)
ASSETS FISCAL FISCAL
1996 1995
---------- ----------
Current assets:
Cash and cash equivalents $ 41,260 $ 29,619
Accounts receivable 979 1,349
Inventories 112,537 131,741
Other current assets 5,287 3,654
---------- ----------
Total current assets 160,063 166,363
---------- ----------
Property, plant and equipment, net 56,738 80,124
---------- ----------
Other non-current assets:
Goodwill, net of accumulated amortization of
$4,025 in 1996 and $2,032 in 1995 41,188 43,181
Intangible assets, net 350 18,017
Other assets 309 985
---------- ----------
Total other non-current assets 41,847 62,183
---------- ----------
Total assets $ 258,648 $ 308,670
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable, trade $ 11,398 $ 21,164
Accrued expenses and other liabilities 23,336 26,450
Current portion of long-term debt - 285,878
---------- ----------
Total current liabilities 34,734 333,492
---------- ----------
Long-term liabilities:
Long-term trade accounts payable - 57,393
Long-term debt, less current portion - 112,586
Other long-term liabilities 7,407 9,139
---------- ----------
Total long-term liabilities 7,407 179,118
Liabilities subject to compromise 484,811 -
Commitments and contingencies (Notes 2, 8, 15 and 17) - -
---------- ----------
Total liabilities 526,952 512,610
Stockholders' deficit:
Common stock 10 10
Additional paid-in capital 79,990 79,990
Accumulated deficit (348,304) (283,940)
---------- ----------
Total stockholders' deficit (268,304) (203,940)
---------- ----------
Total liabilities and stockholders' deficit $ 258,648 $308,670
========== ==========
The accompanying notes are an integral part of these financial statements.
F-9
CONSOLIDATED STATEMENTS OF OPERATIONS
for the 52 weeks ended March 1, 1997, the 53 weeks ended March 2, 1996, and the
52 weeks ended February 25, 1995
(in thousands of dollars)
FISCAL FISCAL FISCAL
1996 1995 1994
----------- ---------- -------------
Net sales $ 396,502 $ 455,652 $ 459,077
----------- ---------- -------------
Cost and expenses:
Cost of sales 263,072 302,481 289,887
Selling, general and administrative 117,558 135,441 128,158
Depreciation and amortization 23,290 26,570 21,146
Write-down of long-lived assets 6,523 202,869 -
Expiration of put agreements - 3,413 -
Restructuring charge - 5,238 -
----------- ---------- -------------
Total cost and expenses 410,443 676,012 439,191
----------- ---------- -------------
(Loss) income before interest and other expenses
(net), reorganization expense and income taxes (13,941) (220,360) 19,886
----------- ---------- -------------
Interest and other expenses, net:
Interest expense, net 17,418 38,056 30,655
Amortization of financing fees 1,856 3,738 3,544
Other (696) 1,503 1,482
----------- ---------- -------------
Total interest and other expenses, net 18,578 43,297 35,681
----------- ---------- -------------
Loss before reorganization expense and income taxes (32,519) (263,657) (15,795)
Reorganization expense 31,845 - -
----------- ---------- --------------
Loss before income taxes (64,364) (263,657) (15,795)
Provision (benefit) for income taxes:
Current - 376 (3,889)
Deferred - 98 6,959
----------- ---------- --------------
Total provision (benefit) for income taxes - 474 3,070
----------- ---------- -------------
Net loss $ (64,364) $ (264,131) $ (18,865)
=========== ========== ==============
The accompanying notes are an integral part of these financial statements.
F-10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
for the 52 weeks ended March 1, 1997, the 53 weeks ended March 2, 1996, and the
52 weeks ended February 25, 1995
(in thousands of dollars)
COMMON ADDITIONAL
STOCKS PAID-IN PUT ACCUMULATED
------------------------
SHARES DOLLARS CAPITAL OPTIONS DEFICIT TOTAL
----------- ------------ ------------ ------------ ------------- -----------
Balances at February 26, 1994 1,000 $ 10 $ 79,990 $ (3,413) $ (944) $ 75,643
Net loss - - - - (18,865) (18,865)
----------- ------------ ------------ ------------ ------------- -----------
Balances at February 25, 1995 1,000 10 79,990 (3,413) (19,809) 56,778
Net loss - - - - (264,131) (264,131)
Expiration of put agreements - - - 3,413 3,413
----------- ------------ ------------ ------------ ------------- -----------
Balances at March 2, 1996 1,000 10 79,990 - (283,940) (203,940)
Net loss - - - - (64,364) (64,364)
----------- ------------ ------------ ------------ ------------- -----------
Balances at March 1, 1997 1,000 $ 10 $ 79,990 $ - $ (348,304) $(268,304)
=========== ============ ============ ============ ============= ===========
The accompanying notes are an integral part of these financial statements.
F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the 52 weeks ended March 1, 1997, the 53 weeks ended March 2, 1996, and the
52 weeks ended February 25, 1995
(in thousands of dollars)
FISCAL FISCAL FISCAL
1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities:
Net loss $ (64,364) $ (264,131) $ (18,865)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization excluding financing fees 23,290 26,570 21,146
Amortization of financing fees 1,856 3,738 3,544
Noncash portion of restructuring charges - 4,345 -
Write-down of long-lived assets 6,523 202,869 -
Expiration of put agreements - 3,413 -
Other, net 451 607 -
Restructuring charge - 893 91
Deferred income taxes - 98 7,543
Changes in assets and liabilities:
Accounts receivable and refundable income taxes 2,578 3,437 (3,611)
Inventories 15,216 28,418 (21,588)
Other current assets (2,197) (283) (292)
Other assets 131 427 (130)
Accounts payable, trade (12,540) 20,149 3,985
Accrued expenses and other liabilities 17,509 (8,414) (5,660)
Accrued income taxes 647 5,401 -
Changes due to reorganization activities:
Accrued professional fees 1,717 - -
Write-off of financing costs 15,953 - -
Provision for store closing costs 3,988 - -
Provision for lease rejection damages 7,658 - -
Employment termination costs 803 - -
Write-off of capital lease obligation (1,677) - -
Other expenses directly related to bankruptcy (1,261) - -
---------- ----------- -----------
Net cash provided by (used in) operating activities 16,281 27,537 (13,837)
---------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (4,330) (20,873) (20,418)
Proceeds from sale of equipment 239 137 37
Other assets and liabilities, net 93 409 1,606
---------- ----------- -----------
Net cash used in investing activities (3,998) (20,327) (18,775)
---------- ----------- -----------
Cash flows from financing activities:
Payment of financing fees (615) - (175)
Proceeds from lines of credit and other short-term borrowings 25,000 195,500 258,950
Payments of lines of credit and other short-term borrowings (25,000) (174,000) (221,050)
Payments on long-term debt ( 27) (2,560) (2,555)
Other - - (255)
---------- ----------- -----------
Net cash (used in) provided by financing activities (642) 18,940 34,915
---------- ----------- -----------
Net increase in cash and cash equivalents $ 11,641 $ 26,150 $ 2,303
Cash and cash equivalents at beginning of year 29,619 3,469 1,166
---------- ----------- -----------
Cash and cash equivalents at end of year $ 41,260 $ 29,619 $ 3,469
========== =========== ===========
Supplemental disclosures of cash flow information: Cash paid
(received) during the fiscal year for:
Interest $ 2,585 $ 32,136 $ 23,194
Income taxes paid (refunded), net 129 (3,221) (850)
Reorganization items 5,956 - -
Non-cash reorganization activities:
Reclassification of liabilities subject to compromise $ 477,153 $ - $ -
Decrease in accounts payable, accrued expenses and
other liabilities (80,393) - -
Reduction of debt (396,760) - -
The accompanying notes are an integral part of these financial statements.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
1. ORGANIZATION AND BUSINESS:
CM Holdings, Inc. ("Holdings") was incorporated on September 30, 1993, and
acquired all of the outstanding common stock of Camelot Music, Inc. (the
"Camelot Acquisition") on November 12, 1993. Holdings, together with
Camelot Music, Inc. ("Camelot"), is herein referred to as the Company. The
Company is a specialty music retailer and operates in thirty-five states
across the United States. The Company sells compact discs, cassettes,
pre-recorded video cassettes and other entertainment products and related
accessories.
INVESTCORP International Inc. ("III"), acted as the investment advisor in
the Camelot Acquisition. Companies affiliated with INVESTCORP S.A.
("INVESTCORP") own all of the currently outstanding voting stock of
Holdings. INVESTCORP owns indirectly less than 10% of Holdings' total
voting stock and total outstanding stock.
2. STATUS OF REORGANIZATION UNDER CHAPTER 11:
On August 9, 1996 (the "petition date"), Holdings and Camelot filed
voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the
United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The Chapter 11 proceedings are being jointly
administered, with the Company managing the business in the ordinary course
as debtors-in-possession subject to the control and supervision of the
Bankruptcy Court.
Under Chapter 11 proceedings, litigation and actions by creditors to
collect certain claims in existence at the petition date (prepetition) are
stayed, absent specific Bankruptcy Court authorization to pay such claims.
The Company believes that appropriate provisions have been made in the
accompanying financial statements for the prepetition claims that could be
estimated at the date of these financial statements. Such claims are
reflected in the March 1, 1997 balance sheet as "liabilities subject to
compromise" (See Note 8). Additional claims (liabilities subject to
compromise) may arise subsequent to the petition date resulting from the
rejection of executory contracts, including leases, and from the
determination of the Bankruptcy Court (or agreed to by parties-in-interest)
of allowed claims for contingencies and disputed amounts. Claims
collateralized against the Company's assets (secured claims) are stayed,
although holders of such claims have the right to move the Bankruptcy Court
for relief from the stay. Secured claims are collateralized by a pledge of
stock of Camelot as well as certain non-store properties.
Under the Bankruptcy Code, a creditor's claim is treated as secured only to
the extent of the value of such creditor's collateral, and the balance of
such creditor's claim is treated as unsecured.
The Company received approval from the Bankruptcy Court to pay or otherwise
honor employee wages and benefits and certain other prepetition obligations
necessary for the continuing existence of the Company prior to a plan of
reorganization. Generally, unsecured debt does not accrue interest after
the petition date. In addition, the Company has determined that there is
insufficient collateral to cover the interest portion of scheduled payments
on most prepetition debt obligations. Therefore, the Company has
discontinued accruing interest on these obligations. Contractual interest
on these obligations amounts to $41,329, which is $26,334 in excess of
reported interest expense. Refer to Note 7 for a discussion of the credit
arrangements entered into subsequent to the Chapter 11 filings.
As debtor-in-possession, the Company has the right, subject to Bankruptcy
Court approval and certain other limitations, to assume or reject certain
executory contracts, including unexpired leases. In this context,
"assumption" means that the Company agrees to perform its obligations and
cure certain existing defaults under the contract or lease, and "rejection"
means that the Company is relieved from its obligations to perform further
on the contract or lease and is subject only to a claim for damages for the
breach thereof. Any claim for damages resulting from the rejection of an
executory contract or an unexpired lease is treated as a general unsecured
claim in the Chapter 11 proceedings. The Company has been reviewing its
executory contracts and has assumed 3 leases and rejected 88 leases to
date. An estimate of the allowed claims related to the rejected leases of
$14,349 has been provided for and included in liabilities subject to
compromise.
F-13
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. However,
as a result of the Chapter 11 filings, such realization of assets and
liquidation of liabilities is subject to uncertainty. While under the
protection of Chapter 11, in the normal course of business, the Company may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the financial statements. Further, a
plan of reorganization could materially change the amounts and
classifications reported in the historical financial statements, which do
not give effect to any adjustments to the carrying value of assets or
amounts of liabilities that might be necessary as a consequence of a plan
of reorganization.
An official committee of unsecured creditors (the "Committee") was formed
to act in the Chapter 11 proceedings. The Committee has the right to review
and object to certain business transactions. Pursuant to the order of the
Bankruptcy Court, the Committee retained counsel and other professionals at
the expense of the Company.
On December 12, 1997, the Bankruptcy Court entered an order confirming the
Company's Plan of Reorganization (the "Plan") which was submitted by the
Company on October 1, 1997 and amended on November 7, 1997. The Company
expects the effective date of the Plan to be on or about January 27, 1998.
Pursuant to the Plan, administrative claims of approximately $6,800 will be
fully paid in cash upon emergence and the priority claims of approximately
$1,600 will be fully satisfied within six years of the effective date. The
remaining prepetition claims will be settled principally with the issuance
of equity in the reorganized company to the claim holders. The stockholders
in the Company will receive no recovery nor will they be issued any shares
in the reorganized company under the Plan. Under the Plan, approximately 10
million common shares in the reorganized company are expected to be issued
to the claim holders. The reorganized company expects to register the
common shares on the NASDAQ "over the counter market" with the filing of a
Form 10 with the Securities and Exchange Commission on or about January 31,
1998.
As of the effective date of the Plan, the Company will adopt "fresh-start"
accounting as prescribed by AICPA Statement of Position ("SOP") 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code". Under the provisions of fresh-start accounting:
The reorganization value of the Company will be allocated to the
Company's assets in conformity with the procedures specified by
Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations", for transactions reported on the basis of the purchase
method. If any portion of the reorganization value cannot be
attributed to specific tangible assets of the Company, such amounts
will be reported as the intangible asset identified as "reorganization
value in excess of amounts allocable to identifiable assets". This
excess will be amortized in conformity with APB Opinion No. 17,
"Intangible Assets", over a twenty year period. Each liability
existing at the plan confirmation date, other than deferred income
taxes, will be stated at present value of amounts to be paid
determined at appropriate current interest rates. Deferred income
taxes will be reported in conformity with the liability method of
accounting for income taxes. Benefits, if any, realized from
preconfirmation net operating loss carryforwards will first reduce
reorganization value in excess of amounts allocable to identifiable
assets and other intangibles until exhausted and thereafter be
reported as a direct addition to paid-in capital. Additionally, the
effects of the adjustments on the reported amounts of individual
assets and liabilities resulting from the adoption of fresh-start
reporting and the effects of the forgiveness of debt will be reflected
in the predecessor Company's final consolidated statement of
operations. Forgiveness of debt, if any, will be reported as an
extraordinary item. Adopting fresh-start reporting will result in a
new reporting entity with no beginning retained earnings or deficit.
3. SUMMARY OF SIGNICIANT ACCOUNTING POLICIES:
The significant accounting policies used in the preparation of the
consolidated financial statements are as follows:
F-14
A. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS: In Fiscal 1996,
the Company has accounted for all transactions related to the
Chapter 11 proceedings in accordance with SOP 90-7 for entities
reporting during reorganization proceedings before filing of a
reorganization plan. Accordingly, liabilities subject to
compromise under the Chapter 11 proceedings have been segregated
on the consolidated balance sheet and are recorded at the amounts
that have been or are expected to be allowed on known claims
rather than estimates of consideration those claims may receive
in a plan of reorganization. In addition, the consolidated
statements of operations and cash flows separately disclose
expenses and cash transactions, respectively, related to the
Chapter 11 proceedings.
B. PRINCIPLES OF CONSOLIDATION AND RECLASSIFICATIONS: The
accompanying consolidated financial statements include the
accounts of Holdings and its wholly owned subsidiary Camelot and
its currently inactive subsidiaries - G.M.G. Advertising, Inc.
and Grapevine Records and Tapes, Inc. (collectively, the
"Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Certain amounts in the Fiscal 1994 and Fiscal 1995 consolidated
financial statements have been reclassified to conform to Fiscal
1996 presentation.
C. FISCAL PERIODS: The Company's fiscal year ends on the Saturday
closest to February 28. Fiscal years or period ends are
designated in the consolidated financial statements and the
related notes by the calendar year in which the fiscal year
commences.
D. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
E. CASH AND CASH EQUIVALENTS: The Company considers all highly
liquid investments with a maturity of three months or less when
purchased to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.
F. CONCENTRATION OF CREDIT RISK: The Company maintains a centralized
cash management program whereby its excess cash balances are
invested in short term funds and are considered cash equivalents.
Certain cash balances are insured by the Federal Deposit
Insurance Corporation up to $100. As of March 1, 1997 and March
2, 1996 uninsured bank cash balances were $40,725 and $24,119,
respectively.
G. INVENTORIES: Inventories are valued at the lower of cost or
market. Cost is determined principally by the average cost
method. Inventory consists primarily of resaleable prerecorded
music, video cassettes, video games and other products.
H. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is
stated at cost. Significant additions and improvements are
capitalized while expenditures for maintenance and repairs are
charged to operations as incurred. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation
are eliminated from the accounts in the year of disposal. Gains
and losses resulting from disposals are included in operations.
Depreciation is computed using the straight-line method based on
the following ranges of estimated useful lives:
Buildings and improvements 10-40 years
Leasehold improvements Shorter of life of
lease or 5 years
Furniture, fixtures and equipment 5-7 years
F-15
I. FAIR VALUE OF LONG-LIVED ASSETS: The Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS No. 121") in the fifty-three weeks ended
March 2, 1996. Accordingly, the Company records impairment losses
on long-lived assets used in operations, and the related
goodwill, when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of
those assets.
J. GOODWILL: Goodwill which represents the adjusted amount of the
cost of acquisitions in excess of fair value was amortized using
the straight-line method over a 40 year period until March 2,
1996. The remaining amount is being amortized using the
straight-line method over a 22 year period (See Note 12).
K. FINANCING COSTS: Financing costs are amortized over the terms of
the related financings, which vary with the terms of the related
agreements. As a result of the Chapter 11 proceedings, the net
book value of the financing costs related to prepetition
financing was written off during the fifty-two weeks ended March
1, 1997.
L. OTHER INTANGIBLE ASSETS: Favorable lease values and non-compete
agreements acquired in connection with store acquisitions were
being amortized using the straight-line method over estimated
useful lives. Primarily as a result of store closings, the net
book value of these assets was written off during the fifty-two
weeks ended March 1, 1997.
Costs incurred to internally develop software are charged to
operations.
M. LONG TERM TRADE ACCOUNTS PAYABLE: Long term trade accounts
payable consist of amounts with extended terms greater than one
year.
N. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS: It was not
practicable to estimate the fair market value of the Company's
prepetition debt obligations as the Company is currently in
Chapter 11 proceedings. The ultimate plan of reorganization could
significantly impact the estimated fair value of these
obligations.
O. ADVERTISING COSTS: The Company expenses nonreimbursable
advertising costs as costs are incurred. The amount charged to
advertising expense during Fiscal 1996, 1995 and 1994 was $6,128,
$6,458 and $6,767, respectively.
P. INCOME TAXES: The Company uses the liability method of accounting
for income taxes. Deferred tax assets and liabilities are
determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The effect on deferred taxes
of a change in tax rates is recognized in the period that
includes the enactment date.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
FISCAL FISCAL
1996 1995
-------- --------
Land and buildings $ 12,365 $ 12,941
Leasehold improvements 31,643 35,989
Office furniture and fixtures 1,899 1,889
Store furniture and fixtures 41,175 44,514
Machinery and equipment 13,139 12,894
Remodeling in-progress 1,499 1,207
Property under capital lease - 950
-------- --------
101,720 110,384
Less accumulated depreciation and amortization (44,982) (30,260)
-------- --------
Total $ 56,738 $ 80,124
======== ========
F-16
5. OTHER INTANGIBLE ASSETS:
Other intangible assets consisted of the following:
FISCAL FISCAL
1996 1995
-------- --------
Financing costs $ 615 $ 25,883
Favorable lease values - 475
Non-compete agreements - 2,731
-------- --------
615 29,089
Less accumulated amortization (265) (11,072)
-------- --------
Total $ 350 $ 18,017
======== ========
6. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consisted of the following:
FISCAL FISCAL
1996 1995
-------- --------
Payroll and related costs $ 6,775 $ 5,371
Frequent Shopper program liability 6,101 6,724
Taxes other than income 3,892 4,298
Gift certificate liability 2,456 2,585
Other 4,112 7,472
-------- --------
Total $ 23,336 $ 26,450
======== ========
7. FINANCING ARRANGEMENTS:
As of March 2, 1996, $285,878 of debt covered by the terms of the loan
agreements was reclassified as a current liability due to the violation of
loan covenants and anticipated future violations under loan agreements.
In addition, as a result of Chapter 11 proceedings, all remaining
indebtedness of the Company as of the petition date became immediately due
and payable in accordance with the terms of the instruments governing such
indebtedness.
While the Chapter 11 proceedings are pending, however, the Company is
prohibited from making any payments of obligations owing as of the petition
date, except as permitted by the Bankruptcy Court and contractual terms of
debt obligations have been suspended subject to settlement. Furthermore,
the Company is not able to borrow additional funds under any of its
prepetition credit arrangements.
The Company has obtained debtor-in-possession financing with a syndicate of
financial institutions whereby a maximum of $35 million revolving credit
facility (DIP facility), which includes a letter of credit sub-facility of
$10 million, is available to fund working capital, issue letters of credit
and make other payments during the Chapter 11 proceedings. The DIP facility
is available through the earlier of February 9, 1998 or the effective date
of the plan of reorganization. The maximum amount available under the DIP
facility is subject to a borrowing base limitation equal to 35% of eligible
inventory (as defined) during the peak period (as defined) and 30% of
eligible inventory during the non-peak period, plus cash and investments
held at the Company's cash management bank less the Company's cash
collateral. Borrowings under the DIP facility bear interest, at the
Company's option, at the Base Rate (defined as the higher of the Prime Rate
or the base CD rate plus 1% or the Federal Funds Effective Rate plus 1/2%)
plus 1% (9.25% at March 1, 1997).
F-17
Interest on Base Rate loans is payable monthly in arrears. The Company pays
a commitment fee of 1/2% on the average daily unused portion of the DIP
facility. The Company had no outstanding borrowings against the DIP
facility at March 1, 1997. At March 1, 1997, the Company had $3,270 of
letters of credit outstanding.
Long-term debt, in accordance with its contracted terms, is summarized as
follows:
FISCAL FISCAL
1996 1995
-------- --------
Senior credit facility:
Tranche A Term Loan $ 57,000 $ 57,000
Tranche B Term Loan 78,000 78,000
Tranche C Term Loan 60,000 60,000
Revolving Credit Commitment 90,800 90,800
Subordinated Debentures 55,748 55,748
Senior Debentures 55,212 55,212
Capital Lease Obligation - 1,704
-------- ---------
396,760 398,464
-------- ---------
Less long-term debt classified as current - (285,878)
Less amounts included as liabilities
subject to compromise (396,760) -
-------- ---------
$ - $ 112,586
======== =========
As a result of the uncertainties relating to the Chapter 11 proceedings,
future minimum repayments of long-term debt have not been presented.
Currently, the Company is permitted to make principal and interest payments
on the DIP facility. No other principal or interest may be paid without the
approval of the Bankruptcy Court. The Company accrued interest on its
unsecured and undersecured obligations through the petition date; however,
due to the uncertainties relating to a final plan of reorganization, the
Company ceased accruing interest on such obligations effective on the
petition date.
Set forth in the following paragraphs is a description of the terms of the
Company's various long-term debt agreements as in effect on the petition
date. Such provisions do not necessarily presently govern the respective
rights of the Company and the various lenders. Instead, the rights of the
parties will likely be determined in connection with the Chapter 11
proceedings currently pending in the Bankruptcy Court.
SENIOR CREDIT FACILITY: In connection with the Camelot Acquisition, the
Company entered into a Credit Agreement with a group of financial
institutions which provided for a $325 million Credit Facility, proceeds of
$244 million of which were used to finance a portion of the Camelot
Acquisition. The Senior Credit Facility was comprised of the following
instruments:
THE TRANCHE A TERM LOAN: Principal was payable in semi-annual
installments ranging from $2 to $12 million commencing August 31, 1994
through February 28, 1999. Interest payments were due quarterly based
upon (i) the prime rate plus 1%; or (ii) the eurodollar rate plus
2.5%.
THE TRANCHE B TERM LOAN: Principal was payable in semi-annual
installments ranging from $0.5 to $20 million commencing August 31,
1994 through February 28, 2001. Interest payments were due quarterly
based upon (i) the prime rate plus 1.5%; or (ii) the eurodollar rate
plus 3%.
THE TRANCHE C TERM LOAN: Principal was payable in two installments of
$30 million due on August 31, 2001 and February 28, 2002. Interest
payments were due quarterly based upon (i) the prime rate plus 2%; or
(ii) the eurodollar rate plus 3.5%.
F-18
THE REVOLVING CREDIT COMMITMENT: This commitment of $125 million
extended through February 28, 1999. Borrowings under this commitment
were made at prime rate plus 1% or the eurodollar rate plus 2.5%. The
Company was obligated to pay a commitment fee of 1/2 of 1% per annum
on the average daily amount of the available revolving credit
commitment. Such fees were payable quarterly, in arrears. The Company
had $34.2 million available under the commitment at March 2, 1996.
Additionally, the Revolving Credit Commitment is reduced by the
issuance of Standby or Commercial Letters of Credit for the benefit of
third parties. At March 2, 1996, no Standby Letters of Credit were
outstanding.
The Senior Credit Facility was collateralized by a pledge of the stock of
Camelot as well as certain non-store properties. Holdings had guaranteed
the payment of principal and interest. Financing costs of $15,196 were
incurred in connection with the Senior Credit Facility of which $3,500 was
paid to III.
Borrowings outstanding at March 1, 1997 of $285,800, and related accrued
interest of $9,817, were classified as liabilities subject to compromise
because the principal balance is undersecured.
Subordinated Debentures: In connection with the Camelot Acquisition,
Camelot issued subordinated debentures to AIBC Investcorp Finance B.V.
("AIBC"), an affiliate of INVESTCORP. AIBC purchased $50 million of 11%
subordinated debentures which are due March 1, 2004. The subordinated
debentures were issued at a discount of $5.3 million. Other financing costs
of $70 were also incurred in connection with the debentures. Interest on
the debentures required semiannual payments on March 1 and September 1 in
each year.
On December 19, 1994, Holdings acquired $43 million of the total $50
million, 11% debentures from AIBC and the note representing such amount was
registered in the name of Holdings.
The Company was required to redeem 25% of the debentures on March 1, 2003,
an additional 25% of the debentures on September 1, 2003, and the remaining
50% of the debentures on March 1, 2004. The debentures were subject to
optional redemption on September 1 and March 1 of any year at prices
ranging from 105% to 100% of outstanding principal.
On September 1, 1995 and March 1, 1996 the total amount of interest due,
$2,811 and $2,937, respectively, were paid through issuance of payment in
kind ("PIK") notes. These amounts have been classified as liabilities
subject to compromise.
The agreement contains various financial covenants which are similar to
those contained in the Senior Credit Facility.
Senior Debentures: In connection with the Camelot Acquisition, Holdings
issued senior debentures to AIBC. AIBC purchased $50 million of 10% senior
debentures which are due March 1, 2004. The debentures were purchased at a
discount of $5.1 million. Interest on the debentures require semiannual
payments on March 1 and September 1 in each year, commencing March 1, 1994.
Holdings was required to redeem 25% of the debentures on March 1, 2003, an
additional 25% of the debentures on September 1, 2003, and the remaining
50% of the debentures March 1, 2004. The debentures were subject to
optional redemption on September 1 and March 1 of any year at prices
ranging from 105% to 100% of outstanding principal.
On September 1, 1995 and March 1, 1996 the total amounts of interest due,
$2,556 and $2,656, respectively, were paid through issuance of PIK notes.
These amounts have been classified as liabilities subject to compromise.
The agreement contains various covenants which are similar to those
contained in the Senior Credit Facility.
The Company's various prepetition loan agreements had covenants which,
among other things, limited the payment of dividends and capital
expenditures, specified levels of consolidated net worth and minimum
consolidated adjusted operating profit as well as maintenance of specified
ratios including interest coverage and current ratios. However, as a result
of the automatic stay resulting from the Chapter 11 proceedings, the
Company's lenders may not enforce any rights, exercise any remedies or
realize on any claims in the event that the Company fails to comply with
any of the covenants contained in the various prepetition loan agreements.
F-19
The Company is subject to various financial and other covenants under the
terms of the DIP facility including, among other things, minimum EBITDA (as
defined in the DIP facility) and limitations on indebtedness, investments,
payments of indebtedness and capital expenditures. The Company is in
compliance with the DIP facility covenants at March 1, 1997 or has obtained
appropriate waivers.
On December 12, 1997 as described in Note 2, the Plan was confirmed.
Pursuant to the terms of the Plan all of the prepetition debt will be
settled with the issuance of common stock to the prepetition debt claim
holders.
8. LIABILITIES SUBJECT TO COMPROMISE:
Liabilities subject to compromise at March 1, 1997 include the following:
Bank debt and related interest $295,617
Subordinated debentures and related interest of $2,741 58,489
Senior debentures and related interest of $2,439 57,651
Trade claims 54,675
Lease claims 14,349
Priority tax claims 1,219
Other claims 2,811
-------
Total $484,811
========
Liabilities subject to compromise under the Chapter 11 proceedings include
substantially all current and long-term debt and trade and other payables
as of the petition date. As discussed in Note 2, payment of these
liabilities, including the maturity of debt obligations, is stayed while
the Company continues to operate as a debtor-in-possession.
As part of the Chapter 11 proceedings, the Company has notified all known
or potential claimants for the purpose of identifying all prepetition
claims against the Company. The Bankruptcy Court entered an order setting
January 30, 1997 as the bar date (the "Bar Date") for submission of proofs
of claim in the Chapter 11 proceedings. With certain exceptions, a creditor
who fails to submit on or before the Bar Date a proof of Claim in respect
of a claim against the Company is forever barred from asserting such claim
against the Company. Additional bankruptcy claims and prepetition
liabilities may arise by termination of various contractual obligations and
as certain contingent and/or potentially disputed bankruptcy claims are
settled for amounts which differ from those shown on the balance sheet.
On December 12, 1997, as described in Note 2, the Company's Plan was
confirmed whereby substantially all claims arising in connection with the
Chapter 11 proceedings have been resolved. Accordingly, management believes
that the amount of liabilities subject to compromise as reported are fairly
stated.
F-20
9. STOCKHOLDERS' (DEFICIT) EQUITY:
The following is a summary of the capitalization of Holdings at March 1,
1997 and March 2, 1996:
Class A Stock: 910 shares authorized; 850 shares issued and outstanding
Class C Stock: 557 shares authorized; 143.75 shares issued and outstanding
Class D Voting Stock: 6.25 shares authorized, issued and outstanding
Class E Stock: 375.01 shares authorized; no shares issued and outstanding
Common Stock: 1,848.26 shares authorized; no shares issued or outstanding
The Class A Stock, Class C Stock, Class D Stock and Common Stock have $.01
par values per share. The Class E Stock has a $1.00 par value per share.
The transfer of any shares of stock are restricted as specified in
Holdings' Certificate of Designation (the "Certificate").
Conversion of Stock: In the event of an initial public offering or sale of
the Company, as defined in the Certificate, all issued and outstanding
shares of Class A, Class C, Class D and Class E Stock not otherwise
redeemed by the Company shall automatically convert into shares of Common
Stock on a one-for-one basis.
VOTING RIGHTS: Holders of shares of Class D Stock are entitled to one vote
for each share of such stock held. Until a change of control of the
Company, as defined in the Certificate, holders of Class A, Class C and
Class E Stock have no voting rights, except that the holders of these
shares shall have the right to one vote for each share held as to the
approval of any change to the Certificate of Incorporation that would
increase or decrease the par value of such stock, or change the powers,
preferences, or special rights of such stock, so as to have a material
adverse effect on such holders. Effective upon a change of control, holders
of shares of Class A, Class C and Class E Stock shall be entitled to one
vote for each share of stock held.
LIQUIDATION RIGHTS: In the event of liquidation of the Company, each holder
of Class E Stock shall be entitled to receive $133.33 per share before any
payment or distribution shall be made or set aside for payment on the Class
A, Class C or Class D Stock, and each holder of Class A and Class C Stock
shall be entitled to receive $.001 per share before any payment or
distribution shall be made or set aside for payment on the Class D Stock.
Any remaining assets or proceeds therefrom are to be distributed to all
stockholders on a pro rata basis.
DIVIDEND RIGHTS: Dividends are payable to all stockholders on a pro rata
basis upon declaration of such dividends by the Board of Directors.
On December 12, 1997, the Company's Plan was confirmed in Bankruptcy Court
whereby the reorganized company will emerge and issue approximately 10
million common shares of stock to the various claim holders pursuant to the
terms of the Plan. The stockholders in the Company will receive no recovery
nor will they be issued any shares in the reorganized company under the
Plan.
10. STOCK OPTION AND PURCHASE AGREEMENTS:
STOCK OPTION AGREEMENTS: Holdings established a Management Stock Incentive
Plan (the "Incentive Plan") for key employees of the Company ("Eligible
Employees"). The Incentive Plan provides for the grant of options that
qualify as incentive stock options ("ISO's") under the Internal Revenue
Code, as amended, as well as options that do not qualify as ISO's
("Non-qualified Options") (collectively referred to as the "Options").
Additionally, the Incentive Plan provides for the grant of stock
appreciation rights and for the sale or grant of restricted stock.
Grants under the Incentive Plan can generally occur over a ten year period.
Shares purchased under the Incentive Plan are subject to certain
transferability restrictions. Also, in the event an eligible employee
ceases to be employed by Camelot, Holdings has the option to repurchase the
shares. If this option is not exercised, and if the employee's termination
is due to death or disability, then the employee may require Holdings to
purchase such shares.
Under the terms of the Incentive Plan, a total of 52.632 shares have been
reserved for the issuance of stock options and restricted shares. As of
February 25, 1995, the Board of Directors of the Company granted Options
for 47.7 shares. During the Fiscal 1996 and Fiscal 1995, 0.5 and 14.7
Options, respectively were forfeited and no Options were issued. These
Options become exercisable on the tenth anniversary of the date of grant.
The right to exercise is accelerated in annual installments of 20% provided
that the Company meets certain annual or cumulative performance criteria.
Through Fiscal 1996 this performance criteria has not been met.
Exercisability also will be accelerated upon the earlier to occur of an
initial public offering or sale of the Company. The exercise price of all
Options granted was at the estimated market value of $80.00 per share.
F-21
STOCK PURCHASE AGREEMENTS: Holdings and its shareholders have entered into
various stock purchase agreements with certain key employees of the
Company. Under the terms of the agreements, certain shareholders of
Holdings may sell their Class C Stock in Holdings to certain key employees
for $80.00 per share. The shares have certain transferability restrictions.
In the event an employee ceases to be employed by Camelot, Holdings has the
option to repurchase the shares. If this option is not exercised, and if
the employee's termination is due to death or disability, then the employee
may require Holdings to purchase such shares for $80.00 per share until
August 31, 1995 and at a fair market value thereafter. At March 1, 1997,
45.0 shares were issued and outstanding under stock purchase agreements.
On December 12, 1997, the Company's Plan was confirmed in Bankruptcy Court
whereby the reorganized company will emerge and issue approximately 10
million common shares of stock to the various claim holders pursuant to the
terms of the Plan. The stockholders in the Company will receive no recovery
nor will they be issued any shares in the reorganized company under the
Plan.
11. PUT AGREEMENTS:
Effective November 12, 1993 Holdings entered into Put Agreements ("Put")
with four existing shareholders. The Put provided Holdings an option to
sell 375.01 shares of its Class E preferred stock at an aggregate purchase
price of $50.0 million. In consideration for the Put, Holdings paid fees of
$3.4 million to the four shareholders. The Put was exercisable upon the
execution by the Company of a purchase agreement to acquire a company in a
business similar to Camelot. The Put, pursuant to its original terms,
expired on December 31, 1995.
12. FAIR VALUE OF LONG-LIVED ASSETS:
Management identified significant adverse changes in the Company's business
climate late in the 3rd quarter of the fifty-three weeks ended March 2,
1996 that persisted subsequent to year end. These changes were largely due
to increasing competition in the Company's marketplace, which led to
operating results and forecasted future results that were less than
previously planned. These factors led to the conclusion that there was a
potential impairment in the recorded value of goodwill and certain
property, plant and equipment.
Management performed an analysis of the recoverability of its long-lived
assets based upon a variety of valuation methods including discounted cash
flow and EBITDA multiples. In management's judgment, there was an
impairment of certain of the Company's property, plant and equipment and
the carrying value of the Company's goodwill should be reduced resulting in
an impairment loss of $202,869 which is included in the accompanying fiscal
1995 statement of operations.
As a result of the Company's financial performance and the Chapter 11
proceedings, the Company closed 73 locations during fiscal 1996. In
addition, the Company has re-evaluated the carrying amount of its property,
plant and equipment. Based on this evaluation, the Company determined that
property, plant and equipment with a carrying amount of $17,152 was
impaired, resulting in a write-down of $6,523 to estimated fair value,
which amount is included in the Fiscal 1996 consolidated statement of
operations.
13. RESTRUCTURING CHARGE:
In response to an increasingly competitive retail environment, the Company
began a "reengineering" project during fiscal 1995 in order to lower costs
through corporate overhead reductions and the identification of under
performing stores. As part of this project, the Company identified required
changes in corporate and retail operations and, therefore, assessed the
realizable value of certain assets and the cost of restructuring measures.
As a result, in Fiscal 1995, restructuring charges of $5,238 were recorded.
14. REORGANIZATION EXPENSE:
The net expense resulting from the Company's Chapter 11 filing has been
segregated from expenses related to ordinary operations in the accompanying
consolidated financial statements and includes the following for the
fifty-two weeks ended March 1, 1997:
Professional fees $ 4,866
Write-off of financing costs 15,953
Provision for store closing costs 4,917
Lease rejection damages 7,573
Employment termination costs 803
Write-off of capital lease obligation (1,677)
Other expenses (net) directly related to bankruptcy 253
Interest income (843)
---------
Total $ 31,845
========
Interest income is attributable to the accumulation of cash and cash
equivalents subsequent to the petition date.
F-22
15. LEASES:
The Company leases its retail stores under noncancelable leases expiring in
various years through fiscal 2007. Several of the leases are subject to
renewal options under various terms.
Minimum rental commitments are summarized as follows:
FISCAL YEARS
1997 $ 24,001
1998 22,869
1999 21,103
2000 19,381
2001 17,217
Thereafter 37,979
---------
Total minimum payments $ 142,550
=========
Rental expense totaled $29,361, $33,404 and $30,189 for Fiscal years 1996,
1995 and 1994, respectively. Rental expense included contingent rentals of
$2,187, $2,813 and $2,820 for Fiscal years 1996, 1995 and 1994,
respectively. The contingent rentals are based on sales volume.
The Company has received extensions of its time to assume or reject these
leases from the Bankruptcy Court. The Company is in the process of
negotiating lease term revisions with its landlords and evaluating each
lease in terms of its ongoing operations.
16. INCOME TAXES:
The provision (benefit) for income taxes includes current and deferred
income taxes as follows:
FISCAL FISCAL FISCAL
1996 1995 1994
----------- ----------- -----------
Current taxes:
Federal $ - $ 538 $ (3,465)
State and local - (162) (424)
----------- ----------- -----------
- 376 (3,889)
Deferred taxes:
Federal - - 6,081
State and local - 98 878
----------- ----------- -----------
- 98 6,959
----------- ----------- -----------
Total $ - $ 474 $ 3,070
=========== ========== ===========
The effective rate of the provision for income taxes reconciles to the U.S.
statutory rate as follows:
FISCAL FISCAL FISCAL
1996 1995 1994
------------- ------------- -------------
Statutory tax rate 35.0% 35.0% (35.0)%
Goodwill amortization - - 15.8
Corporate owned life insurance - - (6.7)
State taxes, net of federal benefits - - (1.7)
Valuation allowance - - 48.1
Due to uncertainty of utilization of net operating
loss carryforwards, no current federal income
tax expense (benefit) was recorded (35.0) (34.9) -
Other adjustments, net - 0.1 (1.1)
------------- ------------- -------------
Effective tax rate 0.0% 0.2% 19.4%
============= ============= =============
F-23
The Company had total deferred tax assets, prior to valuation allowance, of
$55,989 and $39,141 and deferred tax liabilities of $192 and $1,802 at
March 1, 1997 and March 2, 1996, respectively. Included in such amount, at
March 1, 1997, the Company had net operating loss carryforwards of $76
million for federal and state income tax purposes that expire in years 2010
through 2012. For financial reporting purposes, a valuation allowance of
$28 million has been recognized to offset the deferred tax assets related
to the net operating loss carryfowards. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes.
On December 12, 1997, as described in Note 2, the Plan was confirmed.
Accounting for the emergence from bankruptcy will result in a reduction in
net operating loss carryforwards and the related deferred tax assets and a
corresponding reduction in the valuation allowance. These reductions will
have no impact on current or future earnings or on cash flows.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
FISCAL FISCAL
1996 1995
-------- --------
Net current deferred income tax assets:
Inventory reserves $ 2,775 2,207
Reorganization costs 4,967 -
Other, net 3,986 3,163
-------- --------
11,728 5,370
Net long-term deferred income tax assets:
Depreciation differences 4,361 2,022
Amortization of financing fees 5,749 287
Net federal and state operating
loss carryforwards 28,306 23,860
Leases 2,265 2,418
Other, net 3,388 3,382
-------- --------
44,069 31,969
-------- --------
Valuation allowance (55,797) (37,339)
-------- --------
Net deferred tax assets on consolidated
balance sheet $ - $ -
========= ========
17. COMMITMENTS AND CONTINGENCIES:
The Company's contingencies are generally subject to the effects of the
Chapter 11 proceedings, which are discussed in Note 2. The following
discussion does not purport to reflect or provide for all the consequences
of the ongoing Chapter 11 proceedings. Primarily due to the uncertainty
concerning the ultimate outcome of the Chapter 11 proceedings, the ultimate
liability and effect on the financial statements from such matters cannot
currently be determined.
OTHER CLAIMS AND LEGAL ACTION: The Company is a party to various other
claims, legal actions and complaints arising in the ordinary course of its
business, including proposed assessments by the Internal Revenue Service
aggregating approximately $7.9 million of which the Company has accrued
$0.8. In the opinion of management, all such matters not accrued for are
without merit or involve such amounts that unfavorable disposition will not
have a material impact on the financial position or results of operations
of the Company.
SELF-INSURANCE COMMITMENTS: The Company is self-insured with respect to
workers' compensation benefits within the State of Ohio and medical
benefits for all of its employees. The Company maintains insurance coverage
for workers' compensation claims in excess of $300 per incident and for
annual medical claims in excess of $75 per employee.
MANAGEMENT CONSULTING AGREEMENT: The Company entered into a five year
management consulting agreement with INVESTCORP. Fees under this agreement
are $500 per year payable annually, in advance, with the first three years
paid on November 12, 1993. The final two year payment has not been paid to
INVESTCORP as a result of the Chapter 11 proceedings.
18. ELECTIVE SAVINGS AND PROFIT SHARING PLAN:
The Company sponsors an Elective Savings 401(k) and Profit Sharing Plan.
The Plan covers substantially all employees and provides for a 22.5% to 50%
matching contribution of employee elective contributions up to a maximum of
10% of wages, not to exceed the statutory limit. Such matching
contributions were approximately $309, $266 and $334 in Fiscal 1996, 1995
and 1994, respectively. The Company may, at the discretion of the Board of
Directors, contribute additional funds to the Plan as deemed appropriate.
No such contributions were made during Fiscal 1996 and 1995, respectively,
and $200 were made in Fiscal 1994.
19. SUBSEQUENT EVENTS:
ACQUISITION OF THE WALL: On December 10, 1997 the Company signed an Asset
Purchase Agreement to acquire The Wall Music, Inc. ("The Wall") for $26,000
plus net working capital assets transferred at the date of closing which
are projected to be approximately $47,000. The Wall is a mall-based music
store chain that operates over 150 stores in the Mid-Atlantic region of the
United States. This transaction is anticipated to close in late Fiscal
1997. The acquisition will be accounted for by the purchase method of
accounting.
CONFIRMATION OF PLAN OF REORGANIZATION: See Note 2 to the consolidated
financial statements.
F-24
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Plan of Reorganization was confirmed on December 12, 1997 and
became effective on January 27, 1998. The following unaudited Pro Forma
Financial Information is based on the Consolidated Financial Statements of the
Company as of November 29, 1997, for the thirty-nine week period ended November
29, 1997 and for the fifty-two week period ended March 1, 1997. The Pro Forma
Condensed Consolidated Balance Sheet has been adjusted to give effect to the
Plan of Reorganization which became effective on January 27, 1998 as if it had
become effective on November 29, 1997. The Pro Forma Condensed Consolidated
Statements of Operations have been adjusted to give effect to the Plan of
Reorganization as if it became effective on March 2, 1996. The unaudited pro
forma consolidated financial statements include certain adjustments, which
management believes are reasonable, to the historical consolidated financial
statements of the Company to give effect to certain assumptions described in
Notes to Pro Forma Financial Information. The assumptions do not purport to
reflect all of the effects that would have occurred had the Plan of
Reorganization become effective on March 2, 1996. The pro forma adjustments were
made to reflect the Company's adoption of "fresh-start" accounting as prescribed
by AICPA Statement of Position ("SOP") 90-7, "Financial Reporting by Entities
Under the Bankruptcy Code."
The unaudited Pro Forma Condensed Consolidated Statements of
Operations do not purport to be indicative of the results of operations of the
Company had the Plan of Reorganization become effective on March 2, 1996 nor of
the future results of operations of the Company. The unaudited pro forma
condensed consolidated statements should be read in conjunction with the audited
Consolidated Financial Statements and the unaudited Interim Condensed
Consolidated Financial Statements, in each case including the Notes thereto,
included elsewhere herein.
F-25
CAMELOT MUSIC HOLDINGS, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
November 29, 1997
(in thousands of dollars)
ASSETS
PREDECESSOR PRO FORMA
HISTORICAL DEBIT CREDIT AS ADJUSTED
---------- ---------- ---------- ------------
Current assets:
Cash and cash equivalents $ 45,689 $ (8,116)(a)(b)(c)(d)(k) 37,573
Accounts receivable 3,099 3,099
Inventories 141,106 141,106
Deferred income taxes - $ 7,800(f)(g) 7,800
Other current assets 2,027 2,027
---------- ---------- ---------- ----------
Total current assets 191,921 7,800 (8,116) 191,605
---------- ---------- ---------- ----------
Property, plant and equipment, net 46,671 (1,500)(e)(f) 45,171
---------- ---------- ---------- ----------
Other non-current assets:
Goodwill, net of accumulated amortization 39,693 (39,693)(e)(f)(g)(h) -
Other intangible assets, net - 16,372(d)(e)(f)(g)(h)(k) 16,372
Deferred income taxes - 11,200(f)(g) 11,200
Other assets 876 876
---------- ---------- ---------- ---------
Total other non-current assets 40,569 27,572 (39,693) 28,448
---------- ---------- ---------- ---------
Total assets $ 279,161 $ 35,372 $ (49,309) $ 265,224
========== ========== ========== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable, trade $ 42,024 $ 42,024
Accrued expenses and other liabilities 22,896 $ (908)(a)(b) 21,988
---------- ---------- ---------- ---------
Total current liabilities 64,920 (908) 64,012
---------- ---------- ---------- ---------
Long-term liabilities:
Other long-term liabilities 7,920 (1,150)(a)(c) 6,770
---------- ---------- ---------- ---------
Total long-term liabilities 7,920 (1,150) 6,770
---------- ---------- ---------- ---------
Liabilities subject to compromise 485,296 (485,296) (d) -
---------- ---------- ---------- ---------
Total liabilities 558,136 (487,354) 70,782
Stockholders' (deficit) equity:
New common stock - $ 102(f)(h) 102
Common stock 10 (10)(f)(h) -
Additional paid-in capital 79,990 114,350(a)(f)(h) 194,340
Accumulated deficit (358,975) (120,763)(f)(h) 479,738 (a)(d) -
---------- ---------- ---------- ----------
Total stockholders' (deficit) equity: (278,975) (120,773) 594,190 194,442
---------- ---------- ---------- ----------
Total liabilities and stockholders'
(deficit) equity $ 279,161 $(608,127) $ 594,190 $ 265,224
========== ========== ========== ==========
See notes to pro forma consolidated financial statements.
F-26
CAMELOT MUSIC HOLDINGS, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
for the 39 weeks ended November 29, 1997
(in thousands of dollars, except per share data)
PREDECESSOR PRO-FORMA
HISTORICAL DEBIT CREDIT AS ADJUSTED
Net sales $ 260,340 $ (3,861)(i) $ 256,479
---------- --------- --------- ----------
Cost and expenses:
Cost of sales 170,966 $ (3,644)(i) 167,322
Selling, general and administrative 80,573 (1,079)(i) 79,494
Depreciation and amortization 16,842 595 (l) (1,854)(i)(l) 15,583
---------- --------- --------- ----------
Total cost and expenses 268,381 595 (6,577) 262,399
---------- --------- --------- ----------
Loss before interest and other
expenses (net) and reorganization expense (8,041) (4,456) 6,577 (5,920)
---------- --------- --------- ----------
Interest and other expenses, net:
Interest expense 186 (186)(n) -
Amortization of financing fees 344 94(k) (344)(j) 94
Other (3,972) (3,972)
---------- --------- --------- ----------
Total interest and other expenses, net (3,442) 94 (530) (3,878)
---------- --------- --------- ----------
Loss before reorganization expense (4,599) (4,550) 7,107 (2,042)
Reorganization expense 6,072 (6,072)(o) -
---------- --------- ----------
Loss before income taxes (10,671) 13,179 (6,072)(o) (2,042)
Provision for income taxes - -
---------- --------- --------- ----------
Net loss $ (10,671) $ 3,266 $ 5,957 $ (2,042)
========== ========= ========= ==========
Net loss per common share:
Basic $( 0.21)(p)
===========
Diluted $( 0.21)(p)
===========
Average-weighted number of
shares outstanding 9,835,559
===========
See notes to pro forma consolidated financial statements.
F-27
CAMELOT MUSIC HOLDINGS, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
for the 52 weeks ended March 1, 1997
(in thousands of dollars, except per share data)
PREDECESSOR PRO FORMA
HISTORICAL DEBIT CREDIT AS ADJUSTED
---------- ---------- --------- ------------
Net sales $ 396,502 $ (25,241)(m) $ 371,261
---------- ---------- --------- ----------
Cost and expenses:
Cost of sales 263,072 $(16,799)(m) 246,273
Selling, general and administrative 117,558 (8,731)(m) 108,827
Depreciation and amortization 23,290 793(l) (3,468)(l)(m) 20,615
Write-down of long-lived assets 6,523 (4,194)(m) 2,329
---------- ---------- --------- ----------
Total cost and expenses 410,443 793 (33,192) 378,044
---------- ---------- --------- ----------
Loss before interest and other expenses (net),
reorganization expense and income taxes (13,941) (26,034) 33,192 (6,783)
---------- ---------- --------- ----------
Interest and other expenses, net:
Interest expense 17,418 (17,418)(n) -
Amortization of financing fees 1,856 125(k) (1,856)(j) 125
Other (696) (696)
---------- ---------- --------- ----------
Total interest and other expenses, net 18,578 125 (19,274) (571)
---------- ---------- --------- ----------
Loss Before Reorganization Expense (32,519) (26,159) 52,466 (6,212)
Reorganization expense 31,845 (31,845)(o) -
---------- ---------- --------- ----------
(Loss) before income taxes 64,364 (26,159) 84,311 (6,212)
Provision for income taxes - -
---------- ---------- --------- ----------
Net loss $ (64,364) $ (26,159) $ 84,311 $ (6,212)
========== ========== ========= ==========
Net loss per common share:
Basic $( 0.63)(p)
===========
Diluted $( 0.63)(p)
===========
Average-weighted number of
shares outstanding 9,835,559
===========
See notes to pro forma consolidated financial statements.
F-28
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
As of the effective date of the Plan of Reorganization, the Company
will adopt "fresh-start" accounting as prescribed by AICPA Statement of Position
("SOP") 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code". Under the provisions of fresh-start accounting:
The reorganization value of the Company will be allocated to the
Company's assets in conformity with the procedures specified by Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations", for
transactions reported on the basis of the purchase method. Each liability
existing at the plan confirmation date, other than deferred income taxes, will
be stated at present value of amounts to be paid determined at appropriate
current interest rates. Deferred income taxes will be reported in conformity
with the liability method of accounting for income taxes. Additionally, the
effects of the adjustments on the reported amounts of individual assets and
liabilities resulting from the adoption of fresh-start reporting and the effects
of the forgiveness of debt will be reflected in the predecessor company's final
consolidated statement of operations. Forgiveness of debt, if any, will be
reported as an extraordinary item. Adopting fresh-start reporting will result in
a new reporting entity with no beginning retained earnings or deficit.
(a) To reflect cash payments made upon emergence from bankruptcy pursuant to the
Plan of Reorganization.
(b) To reflect cash payments made upon emergence from bankruptcy for retention
and emergence bonuses. An additional $543 retention bonus and $435 emergence
bonus will be paid out in the future pursuant to the Plan of Reorganization.
(c) To reflect cash payment for Supplemental Employee Retirement Plan liability
pursuant to the Plan of Reorganization.
(d) To reflect extraordinary gain on discharge of debt.
(e) To reflect estimated adjustment to property plant and equipment based on
preliminary assessment of fair market value.
(f) To eliminate predecessor goodwill and reflect identified intangible assets.
It should be noted that the final allocation of the reorganization value may be
significantly different based on final analysis of fair market value of
inventories, property, plant and equipment, other intangible assets and lease
obligations.
(g) To establish deferred income tax assets using the liability method of
accounting for income taxes related to the basis differences created by
fresh-start accounting. Based upon the level of projected future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the benefits
of deductible differences.
(h) To reflect elimination of predecessor common stock and accumulated deficit
and issuance of new common stock and additional paid in capital in the
reorganized company.
(i) To reflect adjustment for results of 10 stores closed in conjunction with
the Plan of Reorganization. The adjustment to cost of sales reflects $1,150 of
lost vendor discounts due to several vendors disallowing discounts during the
reorganization.
(j) To reflect elimination of predecessor financing costs amortization expense.
(k) To reflect financing costs paid upon emergence from bankruptcy for the New
Working Capital Facility and to amortize these costs on a straight-line basis
over four years.
(l) To reflect elimination of amortization on predecessor goodwill and to
amortize other intangible assets on a straight-line basis over 20 years.
(m) To reflect adjustment for results of 83 stores closed in conjunction with
the reorganization. The adjustment to cost of sales also reflects $731 of lost
vendor discounts due to several vendors disallowing discounts during the
reorganization.
(n) To reflect elimination of interest expense. Management has estimated that
had the restructuring occurred on March 2, 1996, no borrowings would have been
necessary during fiscal 1996.
(o) To eliminate the net expense resulting from the Company's Chapter 11 filing.
(p) Basic earnings per share is computed by dividing the loss available to
common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing the loss
available to common shareholders by the weighted average number of common shares
outstanding plus the number of additional common shares that would have been
outstanding if options for the Company's stock would have been exercised.
F-29
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 13, 1998
CAMELOT MUSIC HOLDINGS, INC.
(Registrant)
By: /s/ Jack K. Rogers
----------------------------
Name: Jack K. Rogers
Title: Executive Vice President,
Chief Operating Officer and Secretary
EXHIBIT INDEX
PAGE
----
2.1 Second Amended Joint Plan of Reorganization, dated November 7, 1997............. 62
2.2 Asset Purchase Agreement by and among Camelot Music, Inc., The Wall Music,
Inc., and WH Smith Group Holdings (USA), Inc., dated as of December 10,
1997............................................................................. 88
2.3 Assignment of Purchase Agreement................................................. 123
3.1 Second Amended and Restated Certificate of Incorporation of the Registrant....... 124
3.2 Amended and Restated Bylaws of the Registrant.................................... 128
4.1 Specimen certificate of Common Stock............................................. 135
10.1 Revolving Credit Agreement, dated as of January 27, 1998, among Camelot
Music, Inc., the several lenders named therein and The Chase Manhattan
Bank, as agent for the lenders.................................................... 138
10.2 Registration Rights Agreement, dated as of January 27, 1998, by and among
the Registrant and the security holders named therein............................. 186
10.3 Second Amended and Restated Employment Agreement, dated as of January 1,
1998, between Camelot Music, Inc. and James E. Bonk............................... 216
10.4 Camelot Music Holdings, Inc. 1998 Stock Option Plan............................... 224
21.1 Subsidiaries of the Registrant.................................................... 239
27.1 Financial Data Schedule........................................................... 240